sv1za
As filed with the Securities and Exchange Commission on
August 13, 2008
Registration No. 333-150876
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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Steven D. Pidgeon, Esq.
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Mark A. Stegemoeller, Esq.
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David P. Lewis, Esq.
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Steven B. Stokdyk, Esq.
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DLA Piper US LLP
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Latham & Watkins LLP
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2415 East Camelback Road, Suite 700
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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,
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)
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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 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
Dated August 13, 2008
Shares
Grand Canyon Education, Inc.
Common Stock
This is the initial public offering of common stock of Grand
Canyon Education, Inc. We are
offering shares
of our common stock.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price of our common
stock is expected to be between $
and $ per share. We have applied
to list our common stock on the Nasdaq Global Market under the
symbol LOPE.
percent
of the gross proceeds from the sale of stock in this offering,
before underwriting discounts and commissions and estimated
offering expenses, will be paid to our existing shareholders as
a special distribution.
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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We have granted the underwriters a
30-day
option to purchase up
to
additional shares of common stock from us at the public offering
price, less the underwriting discounts and commissions, 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 ,
2008.
Joint Book-Running Managers
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Credit
Suisse |
Merrill Lynch & Co.
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BMO Capital Markets William
Blair & Company Piper Jaffray
The date of this prospectus
is ,
2008
TABLE OF
CONTENTS
ABOUT
THIS PROSPECTUS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
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
this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. Our business,
financial condition, results of operations, and prospects may
have changed since that date.
Until ,
2008 (25 days after the date of this prospectus), all
dealers, whether or not participating in this offering, that
effect transactions in these securities may be required to
deliver a prospectus. This is in addition to the dealers
obligation to deliver a prospectus when acting as an underwriter
in this offering and when selling previously unsold allotments
or subscriptions.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
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 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, and Grand Canyon
refer to Grand Canyon Education, Inc. and our predecessor as
context requires.
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 working adults. 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
16,500 students at June 30, 2008, representing a compound
annual growth rate of approximately 46%. At December 31,
2007, our enrollment was approximately 14,800, 85% of our
students were enrolled in our online programs, and 62% of our
students were pursuing masters degrees.
Our three core disciplines of education, business, and
healthcare represent large markets with attractive employment
opportunities. According to a March 2008 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
2005-06
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.
Furthermore, the BLS has projected that the education, business,
and healthcare fields will generate approximately six million
new jobs between 2006 and 2016.
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, 2008, approximately
92% 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, 2007 was approximately 14,800,
representing an increase of approximately 38% over our
enrollment at December 31, 2006. Our net revenue and
operating income for the year ended December 31, 2007 were
$99.3 million and $4.3 million, respectively,
representing increases of 37.7% and 42.8%, respectively, over
the year ended December 31, 2006. Our enrollment at
June 30, 2008 was approximately 16,500, representing an
increase of approximately 60% over our enrollment at
June 30, 2007. Our net revenue and operating income for the
six months ended June 30, 2008 were $70.3 million, and
$6.3 million, respectively, representing increases of 59.5% and
172.2%, respectively, over the six months ended June 30,
2007. 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.
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
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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 a marketing and branding
effort to further differentiate us in the markets in which we
operate and support our continued growth.
Industry
The United States market for postsecondary education represents
a large and growing opportunity. According to the
March 2008 NCES report, total revenue for all
degree-granting postsecondary institutions was over
$385 billion for the
2004-05
school year. Approximately 18.0 million students were
projected to be enrolled in postsecondary institutions in 2007
and the number was projected to grow to 18.8 million by
2010. 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 is growing more
rapidly than the overall postsecondary market. A 2007 study by
Eduventures, LLC, an education consulting and research firm,
projected that from 2002 to 2007 enrollment in online
postsecondary programs increased from approximately
0.5 million to approximately 1.8 million, representing
a compound annual growth rate of approximately 30.4%. In
comparison, in December 2007 the NCES projected a compound
annual growth rate of 1.6% 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
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.
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.
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
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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.
Complementary online capabilities and
campus-based
tradition. We believe that our online
capabilities, combined with our nearly
60-year
heritage as a traditional campus-based university, differentiate
us in the for-profit postsecondary market and enhance the
reputation of our degree programs among prospective students and
employers.
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 continue to increase the number of
our enrollment counselors and marketing and student services
personnel to drive enrollment growth and enhance student
retention.
Expand online program and degree offerings. We
develop and offer new programs that we believe have attractive
demand characteristics. We launched 17 new online program
offerings in 2007 and intend to launch a total of 12 new
online programs in 2008, seven of which were launched in the
first six months of 2008, including our first doctoral degree
program. Our new program offerings typically build on existing
programs and offer our students the opportunity to pursue their
specific educational objectives while allowing us to expand our
program offerings with only modest incremental investment.
Further enhance our brand recognition. We
continue to enhance our brand recognition by pursuing online and
offline marketing campaigns, establishing strategic branding
relationships with recognized industry leaders, and developing
complementary resources in our core disciplines that increase
the overall awareness of our offerings.
Expand relationships with private sector and government
employers. We seek additional relationships with
health care systems, school districts, emergency services
providers, 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.
Leverage infrastructure and drive earnings
growth. We have made significant investments in
our people, processes, and technology infrastructure since 2004.
We believe these investments have prepared us to deliver our
academic programs to a much larger student population with only
modest incremental investment. We intend to leverage our
historical investments as we increase our enrollment, which we
believe will allow us to increase our operating margins over
time.
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 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 graduate degree offerings, from
which we currently derive a significant portion of our revenues;
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we experience damage to our reputation or other adverse effects
in connection with any compliance audit, regulatory action, or
negative publicity 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. Prior to
completion of this offering, we intend to effect a
reorganization pursuant to which we will transfer substantially
all of our operations to a newly created wholly-owned
subsidiary. 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.
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 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, 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.
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OFFERING
SUMMARY
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Common stock offered by us |
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shares |
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Common stock outstanding after this offering |
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shares |
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Use of proceeds |
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We estimate that the net proceeds to us from this offering will
be approximately $ million,
or approximately $ million if
the underwriters exercise their over-allotment option in full,
based on the midpoint of the price range set forth on the cover
page of this prospectus. |
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As described in Use of Proceeds and Special
Distribution, we intend to use the proceeds of this
offering to pay a special distribution to our stockholders of
record as
of ,
2008, in an amount equal to % of
the gross proceeds received by us from the sale of stock in this
offering, including any proceeds we receive from the
underwriters exercise of their over-allotment option,
before underwriting discounts and commissions and estimated
offering expenses. We also intend to use up to
$16.0 million of the proceeds of this offering to redeem an
outstanding warrant to purchase shares of our common stock. We
intend to use the remaining proceeds to pay the expenses of this
offering and for general corporate purposes. |
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The payment of the special distribution in the amount described
above permits a return of capital to all of our stockholders as
of the record date, and does so without significantly decreasing
our capital resources or requiring these stockholders to sell
their shares. Of the estimated aggregate amount of the special
distribution of $ million
(exclusive of any amounts that may be received from the
underwriters exercise of the over-allotment option),
assuming an initial public offering price of
$ per share, which is the midpoint
of the price range set forth on the cover page of this
prospectus, $ million will be
paid in respect of shares of our capital stock over which our
directors and executive officers are deemed to exercise sole or
shared voting or investment power. These proceeds will be
allocated as set forth in the following table. |
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Special Distribution
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Directors
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Chad N.
Heath(1)
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$
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D. Mark
Dorman(1)
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$
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Executive Officers
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Brent D. Richardson
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$
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John E. Crowley
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$
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Christopher C. Richardson
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$
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All directors and executive officers as a group
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$
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(1)
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Represents shares owned by Endeavour Capital Fund IV, L.P.
and certain affiliated funds. D. Mark Dorman and Chad N. Heath,
two of our directors, are managing directors of Endeavour
Capital IV, LLC, the general partner of such funds.
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See Special Distribution and Certain
Relationships and Related Transactions Special
Distribution for additional information regarding the
beneficiaries of the special distribution. |
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Dividend policy |
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Except with respect to the special distribution, we do not
anticipate declaring or paying any cash dividends on our common
stock in the foreseeable future. |
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Risk factors |
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You should carefully read and consider the information set forth
under the heading titled Risk Factors and all other
information set forth in this prospectus before deciding to
invest in shares of our common stock. |
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Proposed 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 shares
of our common stock outstanding as
of ,
2008, and
excludes shares
of common stock reserved for future issuance under our
stock-based compensation plans.
Unless otherwise indicated, this prospectus reflects and assumes
the following:
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no exercise by the underwriters of their option to purchase up
to
additional shares from us;
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a for split
of our outstanding common stock to be effected immediately prior
to the effectiveness of this offering;
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the automatic conversion of all outstanding shares of
Series A convertible preferred stock into 5,953 shares
of common stock upon the closing of the offering;
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the filing of an amendment to our certificate of incorporation
to provide for the automatic conversion of all outstanding
shares of Series C preferred stock
into shares
of common stock upon the closing of the offering based on a
conversion price equal to the initial public offering price per
share, assuming an initial public offering price of
$ per share, which is the midpoint
of the range set forth on the cover page of this prospectus;
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the repurchase by us of an outstanding warrant to purchase
common stock for up to $16.0 million in cash, as described
under Use of Proceeds;
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the filing of our amended and restated certificate of
incorporation and the adoption of our amended and restated
bylaws immediately prior to the effectiveness of this
offering; and
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the rounding of all fractional share amounts to the nearest
whole number.
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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, 2007, have been derived from our audited
financial statements, which are included elsewhere in this
prospectus. The statement of operations and other data,
excluding period end enrollment, for each of the six month
periods ended June 30, 2007 and 2008, and the balance sheet
data as of June 30, 2008, have been derived from our
unaudited financial statements, which are presented elsewhere in
this prospectus and include, in the opinion of management, 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 included elsewhere in
this prospectus.
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Year Ended December 31,
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Six Months Ended June 30,
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2005
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2006
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2007
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2007
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2008
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(Restated)(1)
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(Unaudited)
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(In thousands, except enrollment, share,
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and per share data)
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Statement of Operations Data:
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Net revenue
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$
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51,793
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$
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72,111
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$
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99,326
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$
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44,071
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$
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70,275
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Costs and expenses:
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Instructional costs and services
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28,063
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31,287
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39,050
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17,555
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24,028
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Selling and promotional
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14,047
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20,093
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35,148
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14,186
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27,473
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General and administrative
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12,968
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15,011
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17,001
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8,377
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|
|
10,960
|
|
Royalty to former owner
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
1,629
|
|
|
|
1,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
56,697
|
|
|
|
69,069
|
|
|
|
94,981
|
|
|
|
41,747
|
|
|
|
63,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(4,904
|
)
|
|
|
3,042
|
|
|
|
4,345
|
|
|
|
2,324
|
|
|
|
6,326
|
|
Interest expense
|
|
|
(3,098
|
)
|
|
|
(2,827
|
)
|
|
|
(2,975
|
)
|
|
|
(1,515
|
)
|
|
|
(1,507
|
)
|
Interest income
|
|
|
276
|
|
|
|
912
|
|
|
|
1,172
|
|
|
|
692
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(7,726
|
)
|
|
|
1,127
|
|
|
|
2,542
|
|
|
|
1,501
|
|
|
|
5,251
|
|
Income tax expense
(benefit)(2)
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
600
|
|
|
|
2,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,286
|
)
|
|
|
598
|
|
|
|
1,526
|
|
|
|
901
|
|
|
|
3,224
|
|
Preferred dividends
|
|
|
|
|
|
|
(527
|
)
|
|
|
(349
|
)
|
|
|
(167
|
)
|
|
|
(521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available (loss attributable) to common stockholders
|
|
$
|
(4,286
|
)
|
|
$
|
71
|
|
|
$
|
1,177
|
|
|
$
|
734
|
|
|
$
|
2,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(424
|
)
|
|
$
|
7
|
|
|
$
|
114
|
|
|
$
|
71
|
|
|
$
|
259
|
|
Diluted
|
|
$
|
(424
|
)
|
|
$
|
4
|
|
|
$
|
61
|
|
|
$
|
38
|
|
|
$
|
151
|
|
Shares used in computing earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,115
|
|
|
|
10,325
|
|
|
|
10,363
|
|
|
|
10,325
|
|
|
|
10,454
|
|
Diluted
|
|
|
10,115
|
|
|
|
20,185
|
|
|
|
19,246
|
|
|
|
19,196
|
|
|
|
17,866
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
817
|
|
|
$
|
2,387
|
|
|
$
|
7,406
|
|
|
$
|
3,234
|
|
|
$
|
3,983
|
|
Depreciation and amortization
|
|
$
|
1,879
|
|
|
$
|
2,396
|
|
|
$
|
3,300
|
|
|
$
|
1,473
|
|
|
$
|
2,269
|
|
Adjusted
EBITDA(3)
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
5,551
|
|
|
$
|
10,294
|
|
Period end
enrollment:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
6,212
|
|
|
|
8,406
|
|
|
|
12,497
|
|
|
|
9,032
|
|
|
|
14,847
|
|
Ground
|
|
|
2,210
|
|
|
|
2,256
|
|
|
|
2,257
|
|
|
|
1,300
|
|
|
|
1,663
|
|
7
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
|
|
|
|
|
Pro Forma,
|
|
|
|
|
|
|
as
|
|
|
|
Actual
|
|
|
Adjusted(5)
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,206
|
|
|
$
|
|
|
Total assets
|
|
|
80,548
|
|
|
|
|
|
Capital lease obligations (including short-term)
|
|
|
29,420
|
|
|
|
|
|
Other indebtedness (including short-term indebtedness)
|
|
|
1,894
|
|
|
|
|
|
Preferred stock
|
|
|
32,469
|
|
|
|
|
|
Total stockholders
deficit(2)
|
|
|
(8,440
|
)
|
|
|
|
|
|
|
|
(1) |
|
Our financial statements at December 31, 2006 and 2007 and
for each of the three years in the period ended
December 31, 2007 have been restated. See Note 3,
Restatement of Financial Statements, in our
financial statements that are included elsewhere in this
prospectus. |
|
|
|
(2) |
|
On August 24, 2005, we converted from a limited liability
company to a taxable corporation. For all periods subsequent to
such date, we have been subject to corporate-level U.S.
federal and state income taxes. |
|
|
|
(3) |
|
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 and
Note 2 to our financial statements that are included
elsewhere in this prospectus, and (ii) management fees and
expenses that are no longer paid or that will no longer be
payable following completion of this offering. |
|
|
|
|
|
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. See
Compensation Discussion and Analysis Impact of
Performance on Compensation. 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 and
royalty expenses paid to our former owner 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; 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
U.S. generally accepted accounting principles, or 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 |
8
|
|
|
|
|
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 Results of
Operations Non-GAAP Discussion. |
|
|
|
|
|
The following table provides a reconciliation of net income
(loss) to Adjusted EBITDA, which is a non-GAAP measure, for the
periods indicated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Six Months Ended June 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
2008
|
|
|
(Restated)(1)
|
|
(Unaudited)
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
(4,286
|
)
|
|
$
|
598
|
|
|
$
|
1,526
|
|
|
$
|
901
|
|
|
$
|
3,224
|
|
Plus: interest expense net of interest income
|
|
|
2,822
|
|
|
|
1,915
|
|
|
|
1,803
|
|
|
|
823
|
|
|
|
1,075
|
|
Plus: income tax expense (benefit)
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
600
|
|
|
|
2,027
|
|
Plus: depreciation and amortization
|
|
|
1,879
|
|
|
|
2,396
|
|
|
|
3,300
|
|
|
|
1,473
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(3,025
|
)
|
|
|
5,438
|
|
|
|
7,645
|
|
|
|
3,797
|
|
|
|
8,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: royalty to former
owner(a)
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
1,629
|
|
|
|
1,488
|
|
Plus: management fees and
expenses(b)
|
|
|
511
|
|
|
|
958
|
|
|
|
296
|
|
|
|
125
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
5,551
|
|
|
$
|
10,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 our 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 and Note 2 to our financial statements, which
are included elsewhere in this prospectus. |
|
|
|
(b) |
|
Reflects management fees and expenses of $0.1 million,
$0.3 million, and $0.3 million for the years ended
December 31, 2005, 2006, and 2007, respectively, and
$0.1 million and $0.2 million for the six month
periods ended June 30, 2007 and 2008, respectively, to the
general partner of Endeavour Capital, and an aggregate of
$0.4 million and $0.7 million for the years ended
December 31, 2005 and 2006, respectively, 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 or will terminate by their terms upon the closing of
this offering. See Certain Relationships and Related
Transactions. |
|
|
|
(4) |
|
The decrease in the number of ground students on June 30,
2007 and 2008 in comparison to December 31, 2006 and 2007
is attributable to the fact that a portion of our ground
students typically do not enroll in classes during the summer
months. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Seasonality. |
|
|
|
(5) |
|
For a description of the offering and pro forma adjustments, see
Capitalization. |
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 this prospectus, including our financial statements
and related notes, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and Regulation. 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 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, 2006 and 2007, we
derived approximately 63.8% and 65.5%, respectively, of our net
revenue from tuition financed under federal student financial
aid programs, referred to in this prospectus as the
Title IV programs, which are administered by the
U.S. Department of Education, or 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 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,
10
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 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. However, we remain certified on a provisional
basis, which means that the Department of Education may more
closely review our applications for recertification, new
locations, new educational programs, acquisitions of other
schools, or other significant changes, and it may revoke its
certification of us without advance notice if it determines we
are not fulfilling material Title IV requirements. 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 participation in the Title IV programs
has been automatically extended on a month-to-month basis until
the Department of Education makes its decision. There can be no
assurance that the Department of Education will recertify us, or
that it will not impose restrictions as a condition to 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. Any of these
outcomes would have a material adverse effect on our enrollments
and us.
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. Congress must periodically reauthorize
the Higher Education Act, which is the federal law that governs
the Title IV programs. The last full reauthorization of the
Higher Education Act occurred in 1998, which was followed by
numerous temporary extensions. In July 2008, Congress passed the
first full reauthorization of the Higher Education Act in ten
years, which the President is expected to sign. It 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 could
require us to seek to arrange for other sources of financial aid
for our students and could materially decrease our student
enrollment. Such a decrease in our enrollment could have a
material adverse effect on us. Congressional action could also
require us to modify our practices in ways that could increase
our administrative and regulatory costs.
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
11
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 following the change in control that occurred in February
2004, the Department of Education reviewed our fiscal year 2004
audited financial statements and advised us that our composite
score, which is a standard of financial responsibility derived
from a formula established by the Department of Education,
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 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. 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 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 the
Department of Education delivers Title IV funds to us,
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. When we were
recertified by the Department of Education to participate in the
Title IV programs in May 2005 following the change in
control that occurred in February 2004, 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, due to the Department of Educations concerns
about our administrative capability combined with our financial
weakness under the Department of Educations standards of
financial responsibility.
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 for the maximum term of 10 years. While
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 must file a monitoring report with the Higher Learning
Commission addressing our progress in resolving these
deficiencies. If we fail to resolve the Higher Learning
Commissions concerns, the Higher Learning Commission could
ask for another monitoring report, send a team to confirm
progress in addressing the deficiencies, or determine that we
are not making adequate progress in addressing the Higher
Learning Commissions concerns. If we fail to satisfy any
of the Higher
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Learning Commissions standards, or fail to address the
deficiencies noted in our last review, 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, 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 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 has caused some lenders to cease
providing Title IV loans to students, including some
lenders that have 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 provide.
We and other schools have had to modify student loan practices
in ways that could 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 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.
Among other things, the new legislation:
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authorizes 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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permits 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 will be required to make Title IV loans to all
otherwise eligible students at those institutions.
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We cannot predict if this legislation will be effective in
ensuring students access to Title IV loans. If a
substantial number of lenders cease to participate in the
Title IV loan programs, increase the costs of student
access to such programs, or reduce the benefits available under
such programs, our students may not have access to such loans,
which could cause our enrollments to decline and have a material
adverse effect on us.
An
increase in interest rates could adversely affect our ability to
attract and retain students.
For our fiscal years ended December 31, 2006 and 2007 we
derived approximately 63.8% and 65.5%, 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. 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
13
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 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. 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.
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Increased
scrutiny by various governmental agencies regarding
relationships between student loan providers and educational
institutions and their employees have produced significant
uncertainty concerning restrictions applicable to the
administration of the Title IV 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, 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. The Attorney
General of the State of Arizona has requested extensive
documentation and information from us and other institutions in
Arizona concerning student loan practices, and we recently
provided testimony in response to a subpoena from the Attorney
General of the State of Arizona about such practices. While no
penalties have been assessed against us, we do not know what the
results of that investigation will be. As a result of this
scrutiny, 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 loans to students in exchange for
Title IV loan volume from schools, 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. The environment surrounding access
to and cost of student loans remains in a state of flux, with
reviews of many institutions and lenders still pending and with
additional legislation and regulatory changes being actively
considered at the federal and state levels. 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, 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 require 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, 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. 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 in
our core disciplines, could cause us to experience lower
enrollment at our schools, which could negatively impact our
future growth.
According to a December 2007 report from the NCES,
enrollment in degree-granting, postsecondary institutions is
projected to grow 15.5% over the ten-year period ending fall
2015 to approximately
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20.2 million. This growth is slower than the 22.6%
increase reported in the prior ten-year period ended in fall
2005, when enrollment increased from 14.3 million in 1995
to 17.5 million in 2005. 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,
including since the 2007 BLS report predicting strong job growth
in these disciplines was completed, 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
increasing reliance on such lenders as a source of net
revenue.
During the fiscal year ended December 31, 2007 and the six
months ended June 30, 2008, private loans to students at
our school represented approximately 5.0% and 4.9%,
respectively, of our revenue (calculated on a cash basis) as
compared to 3.1% of revenue in fiscal 2006 and 1.8% of revenue
in fiscal 2005. 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. Recent adverse market
conditions for consumer and federally guaranteed student loans
(including lenders increasing 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.
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 Arizona State Board for Private
Postsecondary Education, the Higher Learning Commission, or any
other applicable state education agency or accrediting
commission, we must notify 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 Arizona State Board for Private Postsecondary
Education, or the Higher Learning Commission could impair our
ability to operate or participate in the Title IV programs,
which could have a material adverse effect on our business and
financial condition. 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.
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We have submitted a description of the offering to the
Department of Education, including a description of a voting
agreement that certain of our stockholders will enter into in
connection with this offering. See Certain Relationships
and Related Transactions Voting Agreement. The
Department of Education has informed us that the offering will
not trigger a change in ownership resulting in a change in
control under the Department of Educations regulations.
The Higher Learning Commission has informed us that it will
consider the offering to be a change in control under its
policies, which will require us to obtain the Higher Learning
Commissions approval prior to consummating the offering.
We have filed additional correspondence with the Higher Learning
Commission regarding the information needed to obtain such
approval. As a result of its determination that the offering
will be a change in control, the Higher Learning Commission is
likely to conduct a site visit within six months of consummation
of the offering to confirm the appropriateness of the approval
and to evaluate whether we continue to meet the Higher Learning
Commissions eligibility criteria. In addition, based on
our communications with the Arizona State Board for Private
Postsecondary Education, we believe the offering will be a
change in control under Arizona law. Accordingly, following the
consummation of the offering, we will be required to file an
application with the Arizona State Board for Private
Postsecondary Education in order to obtain such approval. We
cannot predict whether the Higher Learning Commission or the
Arizona State Board for Private Postsecondary Education will
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
or authorization by such agency, as applicable. Any such loss of
accreditation or authorization 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 intend to seek confirmation from other accrediting
commissions and state agencies, as we believe necessary, that
this offering will not constitute a change in control under
their respective standards, or to determine what is required if
any such commission or agency does consider the offering to
constitute a change in control.
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 laws and regulations related to this requirement do
not establish clear criteria for compliance in all
circumstances, and in recent years several
for-profit
education companies have been faced with whistleblower lawsuits
by former employees alleging violations of this prohibition. If
we or any third parties we have engaged or engage in the future
violate this law, we could be fined or sanctioned by the
Department of Education, or subjected to other monetary
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 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 U.S. Securities and Exchange Commission, or
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 larger 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.
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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 any fiscal year. The period of ineligibility is at
least the next succeeding fiscal year, and any Title IV
funds already received by the institution and its students in
that succeeding year would have to be returned to the applicable
lender or the Department of Education. Using the Department of
Educations formula for this test, we have calculated that,
for our 2006 and 2007 fiscal years, we derived approximately
71.5% and 74.0%, respectively, of our revenue from the
Title IV programs. Under the Higher Education Act
reauthorization, which Congress passed in July 2008 and which
the President is expected to sign, an institution would be
subject to loss of eligibility to participate in the
Title IV programs only if it exceeded the 90% threshold for
two consecutive years, the period of ineligibility would be
extended to at least two years, and an institution whose rate
exceeded 90% for any single year would be placed on provisional
certification. 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 this requirement.
Exceeding the 90% threshold 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.
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 reauthorization of
the Higher Education Act, which Congress passed in July 2008 and
which the President is expected to sign, would extend by one
year the period for which students defaults on their loans
would be included in the calculation of an institutions
default rate, a change that is expected to increase most
institutions default rates. The new law would also
increase the threshold for an institution to lose its
eligibility to participate in the relevant Title IV
programs from 25% to 30%. These changes to the law would take
effect for institutions cohort default rates for federal
fiscal year 2009, which would be expected to be calculated and
issued by the Department of Education in 2012. Although our
cohort default rates have historically been significantly below
these levels, we cannot assure you that this will continue to be
the case. Any increase 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,
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.
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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 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 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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adverse publicity regarding us, our competitors, or online or
for-profit education generally;
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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.
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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
will incur 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.
As a public company, we will be 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 of 2002, or Sarbanes-Oxley Act and
the listing standards of Nasdaq. These requirements will cause
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 year
commencing with our 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 will
be 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. Furthermore, we might not
be able to retain our independent directors or attract new
independent directors for our committees.
We have material weaknesses in our internal control over
financial reporting. If we fail to develop or maintain an
effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud. As a
result, current and potential stockholders could lose confidence
in our financial reporting, which would harm our business and
the trading price of our common stock.
During the preparation of our financial statements for 2005,
2006, and 2007, and for the six month period ended June 30,
2008, our management identified material weaknesses in our
internal control over financial reporting, as defined in the
standards established by the American Institute of Certified
Public Accountants, that affected our financial statements for
each of the periods covered by such statements. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Internal Control
Over Financial Reporting. We have restated our financial
statements as of December 31, 2006 and 2007 and for the
years ended December 31, 2005, 2006, and 2007. See
Note 3, Restatement of Financial Statements, to
our financial statements.
We are in the process of remediating these material weaknesses,
but have not yet been able to complete our remediation efforts.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Internal Control
Over Financial Reporting. It will take additional time to
design, implement, and test the controls and procedures required
to enable our management to conclude that our internal control
over financial reporting is effective. We cannot at this time
estimate how long it will take to complete our remediation
efforts. We cannot assure you that measures we plan to take will
be effective in mitigating or preventing significant
deficiencies or material weaknesses in our internal control over
financial reporting. Any failure to maintain or implement
required new or improved controls, or any difficulties we
encounter in their implementation, could result in additional
material weaknesses, cause us to fail to meet our periodic
reporting obligations or result in material misstatements in our
financial statements. Any such failure could also adversely
affect the results of periodic management evaluations and annual
auditor attestation reports regarding the effectiveness of our
internal control over financial reporting that will be required
when the
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SECs rules under Section 404 of the Sarbanes-Oxley
Act of 2002 become applicable to us beginning with our Annual
Report on
Form 10-K
for the year ending December 31, 2009, to be filed in early
2010. The existence of a material weakness could result in
errors in our financial statements that could result in further
restatements of our financial statements, cause us to fail to
meet our reporting obligations and cause investors to lose
confidence in our reported financial information, leading to a
decline in our stock price.
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. 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 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. See Business Competition for
further information.
Capacity
constraints or system disruptions to 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 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 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.
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. As of June 30, 2008, we offered 74 fully online
programs, 17 of which we introduced in 2007, seven of which we
introduced in the first six months of 2008, and many of which
were 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
21
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.
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. If we are unable to
develop new relationships, or if our existing relationships
deteriorate or end, 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.
22
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 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.
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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 notification of data
breaches and restrict our use of personal information, and a
violation of any laws or regulations relating to the collection
or use of personal information 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
operate in a highly competitive market with rapid technological
change, and we may not have the resources needed to compete
successfully.
Online education is a highly competitive market that is
characterized by rapid changes in students technological
requirements and expectations and evolving market standards. Our
competitors vary in size and organization, and 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.
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, that are superior to the platform and technology
we use, and these differences may affect our ability to recruit
and retain students. We may not have the resources necessary to
acquire or compete with technologies being developed by our
competitors, which may render our online delivery format less
competitive or obsolete.
At
present we derive a significant portion of our revenues and
operating income from our graduate programs.
As of June 30, 2008, approximately 61% of our students were
graduate students. Although we anticipate that this percentage
will decline over time due as a result of our planned 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.
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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.
We use
third-party software for our online classroom, and if the
provider of that software were to cease to do business or was
acquired by a competitor, 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. We rely on ANGEL Learning, Inc. for
administrative support of the ANGEL system and, if ANGEL
Learning, 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. 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.
We
only recently began operating as a for-profit company and have a
limited operating history as a
for-profit
company. Accordingly, our historical and recent financial and
business results may not necessarily be representative of what
they will be in the future.
We have only operated as a for-profit company with private
ownership interests since February 2004. We have a limited
operating history as a for-profit business on which you can
evaluate our management decisions, business strategy, and
financial results. Moreover, until October 2006, we operated
under various Department of Education limitations on our growth
and activities. As a result, our historical and recent financial
and business results may not necessarily be representative of
what they will be in the future. We are subject to risks,
uncertainties, expenses, and difficulties associated with
changing and implementing our business strategy that are not
typically encountered by established for-profit companies. As a
result, we may not be able to operate effectively as a
for-profit corporation. It is possible that we may incur
significant operating losses in the future and that we may not
be able to achieve or sustain long-term profitability.
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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.
A
reclassification of our online faculty by federal or state
authorities from independent contractor to employee status could
materially increase our costs.
A majority of our faculty at June 30, 2008 were online
faculty, whom we treat as independent contractors. Because we
classify our online faculty as independent contractors, we do
not withhold federal or state income or other employment-related
taxes, make federal or state unemployment tax or Federal
Insurance Contributions Act, or FICA, payments or provide
workers compensation insurance with respect to our online
faculty. The determination of whether online faculty members are
properly classified as independent contractors or as employees
is based upon the facts and circumstances of our relationship
with our online faculty members. Federal or state authorities
may challenge our classification as incorrect and assert that
our online faculty members must be classified as employees. In
the event that we were to reclassify our online faculty as
employees, we would be required to withhold the appropriate
taxes, make unemployment tax and FICA payments, and pay for
workers compensation insurance and additional payroll
processing costs. If we had reclassified our online faculty
members as employees for 2007, we estimate our additional tax,
workers compensation insurance, and payroll processing
payments would have been approximately $1.2 million for
that year. The amount of additional tax and insurance payments
would increase in the future as the total amount we pay to
online faculty increases. In addition to these known costs, we
could be subject to retroactive taxes and penalties, which may
be significant, by federal and state authorities, which could
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
26
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 the proceeds from this offering being retained
by us, funds from operations, cash, and investments will be
adequate to fund our current operating and growth plans for the
foreseeable future. However, we may need additional financing in
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.
|
If we complete one or more acquisitions and are unable to
integrate acquired operations successfully, our business could
suffer.
Risks
Related to the Offering
There
is no existing market for our common stock, and we do not know
if one will develop to provide you with adequate
liquidity.
Immediately prior to this offering, there has been no public
market for our common stock. An active and liquid public market
for our common stock may not develop or be sustained after this
offering. The price of our common stock in any such market may
be higher or lower than the price you pay. If you purchase
shares
27
of common stock in this offering, you will pay a price that was
not established in a competitive market. Rather, you will pay
the price that we negotiated with the representatives of the
underwriters and such price may not be indicative of prices that
will prevail in the open market following this offering.
The
price of our common stock may fluctuate significantly, and you
could lose all or part of your investment.
Volatility in the market price of our common stock may prevent
you from being able to sell your shares at or above the price
you paid for your shares. 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 laws or regulations or new interpretations of laws or
regulations applicable to our business;
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seasonal variations in our student population;
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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; 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.
Our
executive officers, directors, and principal existing
stockholders will continue to own a large percentage of our
voting stock after this offering, 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.
Our directors, executive officers, and principal existing
stockholders will beneficially own
approximately shares,
or %, of our common stock upon the
completion of this offering. Our directors and executive
officers will beneficially own in the aggregate
approximately shares,
or %, of our common stock after the
offering, including
approximately shares,
or %, of our common stock that will
be beneficially owned by Brent Richardson and Chris Richardson
and their family members. In addition, pursuant to a voting
agreement entered into among the Richardsons and certain of our
existing stockholders, the Richardsons will have voting control
over approximately % or our common stock effective
upon completion of the offering. See Certain Relationships
and Related Transactions Voting Agreement.
Accordingly, the Richardsons 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
28
large ownership position to address their own interests, which
may be different from those of our other stockholders, including
investors in this offering.
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.
Following the completion of this offering, 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.
The
sale of a substantial number of shares of our common stock after
this offering may cause the market price of shares of our common
stock to decline.
Sales of our common stock by existing investors may begin
shortly after the completion of this offering. Sales of a
substantial number of shares of our common stock in the public
market following this offering, or the perception that these
sales could occur, could cause the market price of our common
stock to decline. The shares of our common stock outstanding
prior to this offering will be eligible for sale in the public
market at various times in the future. All of our directors,
executive officers, and stockholders agreed with the
underwriters, subject to certain exceptions, not to dispose of
or hedge any of their common stock or securities convertible
into or exchangeable for shares of common stock until
180 days after the date of this prospectus, except with the
prior written consent of the representatives identified in the
section of this prospectus entitled Underwriting.
Upon expiration of this
lock-up
period, up to
approximately additional
shares of common stock may be eligible for sale in the public
market without restriction, and up to
approximately shares
of common stock held by affiliates may become eligible for sale,
subject to the restrictions under Rule 144 of the
Securities Act of 1933, as amended, or the Securities Act.
You
will incur immediate and substantial dilution in the net
tangible book value of your shares.
If you purchase shares in this offering, the value of your
shares based on our actual book value will immediately be less
than the price you paid. This reduction in the value of your
equity is known as dilution. This dilution occurs in large part
because our earlier investors paid substantially less than the
initial public offering price when they purchased their shares
of our common stock. Based upon the issuance and sale
of shares
of our common stock by us in this offering at an assumed initial
public offering price of $ per
share, the midpoint of the price range set forth on the cover
page of this prospectus, you will incur immediate dilution of
$ in the net tangible book value
per share. A $1.00 increase or decrease in the assumed initial
public offering price of $ per
share would increase or decrease, as applicable, our as adjusted
net tangible book value per share of common stock by
$ , and increase or decrease, as
applicable, the dilution per share of common stock to new
investors by $ , assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same, after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us and after payment of the special
distribution to our existing stockholders. If the underwriters
exercise their over-allotment option, or if outstanding options
to purchase our common stock are exercised, investors will
experience additional dilution. For more information, see
Dilution.
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
29
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. See Description of
Capital Stock for further information.
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.
After we make the special distribution to our existing
stockholders using the proceeds of this offering as described
under Use of Proceeds, 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.
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 intend to use a substantial
portion of the proceeds that we receive from the sale of stock
in this offering to fund the special distribution payable to our
existing stockholders and to use the remainder to redeem an
outstanding warrant to purchase shares of our common stock and
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.
30
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements,
which include information relating to future events, future
financial performance, strategies, expectations, competitive
environment, regulation, and availability of resources. These
forward-looking statements include, without limitation,
statements regarding: proposed new programs; expectations that
regulatory developments or other matters will not have a
material adverse effect on our financial position, results of
operations, or liquidity; statements concerning projections,
predictions, expectations, estimates, or forecasts as to our
business, financial and operational results, and future economic
performance; and statements of 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 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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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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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, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Business, and Regulation.
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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.
31
USE OF
PROCEEDS
The net proceeds from the sale
of shares
of our common stock offered by us in this offering will be
approximately $ million (or
approximately $ million if
the underwriters exercise their
over-allotment
option in full), assuming an initial public offering price of
$ per share, which is the midpoint
of the range set forth on the cover page of this prospectus, and
after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.
We will declare a special distribution equal
to % of the gross proceeds of this
offering, including any proceeds we receive from the
underwriters exercise of their over-allotment option, that
will be payable promptly upon the completion of this offering
(and following the exercise of the
over-allotment
option, if applicable) to our stockholders of record as
of ,
2008. We will make this distribution upon completion of the
offering. See Special Distribution for further
information.
In 2004, we issued a warrant to purchase shares of our common
stock in connection with a sale-leaseback transaction we entered
into relating to our ground campus. Under the original terms of
the warrant, we were entitled to repurchase the warrant for an
aggregate price of $16.0 million. Under an amendment to the
warrant that was effected in connection with our 2005 conversion
from a limited liability company to a corporation, the right to
repurchase the warrant, as well as a right to repurchase any
shares issued upon exercise of the warrant, in each case for
$16.0 million, was transferred to a holding company whose
sole purpose was to hold the equity interests of all of our
members at the time of conversion. In connection with this
offering, if such investors do not exercise such right, then we
may exercise the right to repurchase the warrant or the
underlying shares. We intend to use up to $16.0 million of
the gross proceeds of this offering to repurchase any portion of
the warrant or the underlying shares not purchased by such
investors.
We intend to use the remaining proceeds that we receive from
this offering and from the underwriters exercise of their
over-allotment option to pay the expenses of this offering and
for general corporate purposes.
Each $1.00 increase or decrease in the assumed public offering
price of $ per share would
increase or decrease, as applicable, the aggregate amount of the
special distribution by
$ million, the per share
amount of the special distribution by
$ on an as-if converted basis and
the net proceeds to us by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and, with respect to the
net proceeds to us, after deducting estimated underwriting
discounts and commissions and estimated offering expenses
payable by us. Similarly, any increase or decrease in the number
of shares that we sell in the offering will increase or decrease
the special distribution and our net proceeds in proportion to
such increase or decrease, as applicable, multiplied by the
offering price per share, with respect to our net proceeds, less
underwriting discounts and commissions and offering expenses.
32
SPECIAL
DISTRIBUTION
We intend to declare a special distribution equal
to % of the gross proceeds of this
offering, including any proceeds we receive from the
underwriters exercise of their over-allotment option, that
will be paid promptly upon the completion of this offering (and
following the exercise of the
over-allotment
option, if applicable) to our stockholders of record as
of , 2008. Of the estimated
aggregate amount of the special distribution of
$ million (exclusive of any
amounts that may be received from the underwriters
exercise of the over-allotment option), assuming an initial
public offering price of $ per
share, which is the midpoint of the price range set forth on the
cover of this prospectus,
$ million will be paid in
respect of shares of our capital stock over which our directors
and executive officers are deemed to exercise sole or shared
voting or investment power. These proceeds will be allocated
among our directors and executive officers as set forth in the
following table.
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|
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|
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Date of Acquisition
|
|
Original Acquisition
|
|
|
|
|
|
|
of Shares to Which
|
|
Cost of Shares to Which
|
|
|
Amount of
|
|
|
|
Special Distribution
|
|
Special Distribution
|
|
|
Special
|
|
Name of Beneficial Owner
|
|
Relates
|
|
Relates(1)
|
|
|
Distribution(2)
|
|
|
|
|
|
(In thousands)
|
|
|
5% Stockholders
|
|
|
|
|
|
|
|
|
|
|
Endeavour Capital Fund IV, L.P. and
affiliates(3)
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
August 24, 2005
|
|
$
|
16,000
|
|
|
$
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
5,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
21,863
|
|
|
|
|
|
220 GCU, L.P. and
affiliates(4)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
3,042
|
|
|
|
|
|
Series A convertible preferred stock
|
|
August 24, 2005
|
|
|
3,250
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
3,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
9,563
|
|
|
|
|
|
Staci L.
Buse(5)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
3,038
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
3,972
|
|
|
|
|
|
Significant Ventures, LLC
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
276
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
1,499
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
Chad N.
Heath(3)
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
August 24, 2005
|
|
|
16,000
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
5,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
21,863
|
|
|
|
|
|
D. Mark
Dorman(3)
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
August 24, 2005
|
|
|
16,000
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
5,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
21,863
|
|
|
|
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
Brent D.
Richardson(5)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
3,038
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
3,972
|
|
|
|
|
|
John E.
Crowley(6)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
164
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
281
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Acquisition
|
|
Original Acquisition
|
|
|
|
|
|
|
of Shares to Which
|
|
Cost of Shares to Which
|
|
|
Amount of
|
|
|
|
Special Distribution
|
|
Special Distribution
|
|
|
Special
|
|
Name of Beneficial Owner
|
|
Relates
|
|
Relates(1)
|
|
|
Distribution(2)
|
|
|
|
|
|
(In thousands)
|
|
|
Christopher C.
Richardson(5)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
3,043
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
3,977
|
|
|
|
|
|
All directors and executive officers as a group
|
|
|
|
$
|
30,093
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
|
|
|
(2) |
|
The special distribution is being paid in respect of our common
stock, Series A convertible preferred stock, and
Series C preferred stock, in each case on an as-converted
basis. Upon the closing of this offering, shares of the
Series A convertible preferred stock will convert into
shares of common stock on a one-for-one basis and shares of the
Series C preferred stock will convert into shares of common
stock at a rate equal to their liquidation preference per share
divided by the initial public offering price per share, which is
estimated to be $ per share, which
is the midpoint of the range set forth on the cover page of this
prospectus. |
|
|
|
(3) |
|
Represents shares held of record by Endeavour Capital
Fund IV, L.P., Endeavour Associates Fund IV, L.P., and
Endeavour Capital Parallel Fund IV, L.P., which we refer to
as the Endeavour Entities. Messrs. Chad N. Heath and D.
Mark Dorman, each of whom is a managing director of Endeavor
Capital IV, LLC, the general partner for each of the Endeavour
Entities, are members of our board of directors. |
|
|
|
(4) |
|
Represents shares held of record by 220 GCU, L.P., 220
Education, L.P., 220-SigEd, L.P., and SV One, L.P. |
|
|
|
(5) |
|
Represents shares held of record by Rich Crow Enterprises, LLC
and Masters Online, LLC, of which Brent Richardson, Chris
Richardson, and Staci Buse are members and, in each case, which
are attributable to, and beneficially owned by, Brent
Richardson, Chris Richardson, or Staci Buse, as applicable. |
|
|
|
(6) |
|
Represents shares held of record by Rich Crow Enterprises, LLC,
of which John Crowley is a member, which are attributable to,
and beneficially owned by, John Crowley. |
See Certain Relationships and Related
Transactions Special Distribution and
Beneficial Ownership of Common Stock for additional
information regarding the beneficiaries of the special
distribution and share ownership.
DIVIDEND
POLICY
Except as described under Special Distribution
above, 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.
34
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2008:
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis, giving effect to:
|
|
|
|
|
(i)
|
the automatic conversion of all outstanding shares of Series A
convertible preferred stock into 5,953 shares of common
stock upon the closing of the offering; and
|
|
|
|
|
(ii)
|
the automatic conversion of all outstanding shares of Series C
preferred stock
into shares
of common stock upon the closing of the offering at a conversion
rate equal to their liquidation preference per share divided by
the initial public offering price per share, which is estimated
to be $ per share, which is the
midpoint of the range set forth on the cover page of this
prospectus; and
|
|
|
|
|
|
on a pro forma, as adjusted basis, giving effect to the pro
forma adjustments above, as well as:
|
|
|
|
|
(i)
|
our sale
of shares
of our common stock in this offering (at an assumed initial
public offering price of $ per
share, which is the midpoint of the range set forth on the cover
page of this prospectus and after deducting underwriting
discounts and commissions and estimated offering expenses
payable by us);
|
|
|
|
|
(ii)
|
the payment of a special distribution to our existing
stockholders in the amount of % of
the gross proceeds from the sale of common stock by us in this
offering, including any proceeds we receive from the
underwriters exercise of their over-allotment option,
which is expected to occur promptly upon the consummation of
this offering (and the closing of the exercise of the
over-allotment option, if applicable);
|
|
|
|
|
(iii)
|
the repurchase by us of an outstanding warrant to purchase
common stock for up to $16.0 million in cash as described
in Use of Proceeds; and
|
|
|
|
|
(iv)
|
the amendment and restatement of our certificate of
incorporation in connection with the closing of this offering,
which will increase our authorized capital stock.
|
35
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 financial
statements and related notes included elsewhere in this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
|
|
|
|
|
|
|
|
Pro Forma,
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
as Adjusted
|
|
|
|
(In thousands, except share data)
|
|
|
Cash and cash
equivalents(1)
|
|
$
|
7,206
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
29,420
|
|
|
$
|
|
|
|
$
|
|
|
Other indebtedness
|
|
|
1,894
|
|
|
$
|
|
|
|
$
|
|
|
Series A convertible preferred stock: $0.01 par value;
9,700 shares authorized, 5,953 shares issued and
outstanding, actual; no shares authorized, issued, and
outstanding, pro forma and pro forma, as adjusted
|
|
|
18,610
|
|
|
|
|
|
|
|
|
|
Series B preferred stock: $0.01 par value;
2,200 shares authorized, no shares issued and outstanding,
actual; no shares authorized, issued, and outstanding, pro forma
and pro forma, as adjusted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Series C preferred stock: $0.01 par value;
3,900 shares authorized, 3,829 shares issued and
outstanding, actual; no shares authorized, issued, and
outstanding, pro forma and pro forma, as adjusted
|
|
|
13,859
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undesignated preferred stock: $0.01 par value;
no shares authorized, issued and outstanding, actual and
pro
forma; shares
authorized, no shares issued and outstanding, pro forma, as
adjusted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Common stock: $0.01 par value; 30,000 shares
authorized, 10,525 shares issued and outstanding, actual;
30,000 shares
authorized, shares
issued and outstanding, pro
forma; shares
authorized, shares
issued and outstanding pro forma, as adjusted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Additional paid-in
capital(1)
|
|
|
6,700
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Accumulated equity (deficit)
|
|
|
(15,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(8,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
55,343
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A $1.00 increase or decrease in the assumed initial public
offering price per share would increase or decrease cash, cash
equivalents, and short-term marketable securities by
$ million, would increase or
decrease additional paid-in capital by
$ million, and would increase
or decrease total stockholders equity and total
capitalization by $ million,
after deducting the underwriting discount, the repurchase of the
warrant described in the introductory paragraph to this table,
the payment of a special distribution to our existing
stockholders in the amount of % of
the aggregate proceeds from the sale of common stock by us in
this offering, and the estimated offering expenses payable by
us. Similarly, any increase or decrease in the number of shares
that we sell in the offering will increase or decrease our net
proceeds in proportion to such increase or decrease, as
applicable, multiplied by the offering price per share, less
underwriting discounts and commissions and offering expenses. |
36
DILUTION
Purchasers of the common stock in the offering will suffer an
immediate and substantial dilution in net tangible book value
per share. Dilution is the amount by which the initial public
offering price paid by purchasers of shares of our common stock
exceeds the net tangible book value per share of our common
stock after the offering.
As of June 30, 2008, our pro forma net tangible book value
would have been $ million or,
$ per share. Pro forma net tangible
book value per share represents the amount of our total tangible
assets reduced by our total liabilities, divided by the number
of shares of common stock outstanding after giving effect to the
conversion of all outstanding classes of preferred stock into
common stock.
Pro forma as adjusted net tangible book value per share
represents the amount of total tangible assets reduced by our
total liabilities, divided by the number of shares of common
stock outstanding after giving effect to the conversion of all
outstanding classes of preferred stock into common stock, the
repurchase of our outstanding warrant, the payment of the
estimated amount of the special distribution to certain of our
existing stockholders and the sale
of shares of common stock in
the offering at an initial public offering price of
$ ,
the midpoint of the price range set forth on the cover page of
this prospectus. Our pro forma as adjusted net tangible book
value as of June 30, 2008 would have been
$ million, or
$ per share. This represents an
immediate decrease in net tangible book value of
$ per share to existing
stockholders and an immediate dilution of
$ per share to new investors
purchasing shares in the offering. The following table
illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share of common stock
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share of common stock as
of
June 30, 2008
|
|
$
|
|
|
|
|
|
|
Increase per share of common stock attributable to new investors
|
|
|
|
|
|
|
|
|
Decrease per share of common stock after payment of underwriting
discounts and commission and estimated offering expenses by us
|
|
|
|
|
|
|
|
|
Decrease per share of common stock after repurchase of warrant
|
|
|
|
|
|
|
|
|
Decrease per share of common stock after payment of the special
distribution to certain of our existing stockholders
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share of
common stock after this offering
|
|
|
|
|
|
|
|
|
Dilution per share of common stock to new investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Our pro forma as adjusted net tangible book value, and the
dilution to new investors in the offering, will change from the
amounts shown above if the underwriters over-allotment
option is exercised.
A $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, as applicable, our as pro forma
adjusted net tangible book value per share of common stock by
$ , and increase or decrease, as
applicable, the dilution per share of common stock to new
investors by $ , assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same, after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us. Similarly, any increase or
decrease in the number of shares that we sell in the offering
will increase or decrease our net proceeds in proportion to such
increase or decrease, as applicable, multiplied by the offering
price per share, less underwriting discounts and commissions and
offering expenses.
37
The following table sets forth, as of June 30, 2008, on the
pro forma as-adjusted basis described above, the differences
between existing stockholders and new investors with respect to
the total number of shares of common stock purchased from us,
the total consideration paid, and the average price per share
paid before deducting underwriting discounts and commissions and
estimated offering expenses payable by us, at an assumed initial
public offering price of $ per
share of common stock, which is the midpoint of the range set
forth on the cover page of this prospectus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price Per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
|
(Dollars in thousands)
|
|
|
Existing stockholders
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, as applicable, total consideration
paid by new investors, total consideration paid by all
stockholders and average price per share paid by all
stockholders by $ million,
$ million and
$ , respectively, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same. Similarly, any increase or
decrease in the number of shares that we sell in the offering
will increase or decrease our net proceeds in proportion to such
increase or decrease, as applicable, multiplied by the offering
price per share, less underwriting discounts and commissions and
offering expenses. This table does not give effect to the
payment of the special distribution to existing stockholders.
If the underwriters over-allotment option is exercised in
full, the number of shares held by existing stockholders after
this offering would be , or %, and
the number of shares held by new investors would increase
to ,
or %, of the total number of shares
of our common stock outstanding after this offering.
38
SELECTED
FINANCIAL AND OTHER DATA
The following table sets forth selected 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
the years ended December 31, 2005, 2006, and 2007, and the
balance sheet data as of December 31, 2006 and 2007, have
been derived from our audited financial statements, which are
included elsewhere in this prospectus. The selected statement of
operations and other data for the period from February 2,
2004 (date of inception) through December 31, 2004, and the
selected balance sheet data as of December 31, 2004 and
2005 have been derived from our unaudited financial statements,
which are not included in this prospectus. The statement of
operations and other data, excluding period end enrollment, for
each of the six month periods ended June 30, 2007 and 2008,
and the balance sheet data as of June 30, 2008, have been
derived from our unaudited financial statements, which are
presented elsewhere in this prospectus and include, in the
opinion of management, 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 selected financial and other data
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our financial statements and related notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2004
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
to December 31,
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2004(2)
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Restated)(1)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except enrollment, share, and per share
data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
25,629
|
|
|
$
|
51,793
|
|
|
$
|
72,111
|
|
|
$
|
99,326
|
|
|
$
|
44,071
|
|
|
$
|
70,275
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
19,705
|
|
|
|
28,063
|
|
|
|
31,287
|
|
|
|
39,050
|
|
|
|
17,555
|
|
|
|
24,028
|
|
Selling and promotional
|
|
|
9,735
|
|
|
|
14,047
|
|
|
|
20,093
|
|
|
|
35,148
|
|
|
|
14,186
|
|
|
|
27,473
|
|
General and administrative
|
|
|
10,828
|
|
|
|
12,968
|
|
|
|
15,011
|
|
|
|
17,001
|
|
|
|
8,377
|
|
|
|
10,960
|
|
Royalty to former owner
|
|
|
448
|
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
1,629
|
|
|
|
1,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
40,716
|
|
|
|
56,697
|
|
|
|
69,069
|
|
|
|
94,981
|
|
|
|
41,747
|
|
|
|
63,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(15,087
|
)
|
|
|
(4,904
|
)
|
|
|
3,042
|
|
|
|
4,345
|
|
|
|
2,324
|
|
|
|
6,326
|
|
Interest expense
|
|
|
(1,135
|
)
|
|
|
(3,098
|
)
|
|
|
(2,827
|
)
|
|
|
(2,975
|
)
|
|
|
(1,515
|
)
|
|
|
(1,507
|
)
|
Interest income
|
|
|
10
|
|
|
|
276
|
|
|
|
912
|
|
|
|
1,172
|
|
|
|
692
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(16,212
|
)
|
|
|
(7,726
|
)
|
|
|
1,127
|
|
|
|
2,542
|
|
|
|
1,501
|
|
|
|
5,251
|
|
Income tax expense
(benefit)(3)
|
|
|
|
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
600
|
|
|
|
2,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(16,212
|
)
|
|
|
(4,286
|
)
|
|
|
598
|
|
|
|
1,526
|
|
|
|
901
|
|
|
|
3,224
|
|
Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
(527
|
)
|
|
|
(349
|
)
|
|
|
(167
|
)
|
|
|
(521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available (loss attributable) to common stockholders
|
|
$
|
(16,212
|
)
|
|
$
|
(4,286
|
)
|
|
$
|
71
|
|
|
$
|
1,177
|
|
|
$
|
734
|
|
|
$
|
2,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A
|
|
|
$
|
(424
|
)
|
|
$
|
7
|
|
|
$
|
114
|
|
|
$
|
71
|
|
|
$
|
259
|
|
Diluted
|
|
|
N/A
|
|
|
$
|
(424
|
)
|
|
$
|
4
|
|
|
$
|
61
|
|
|
$
|
38
|
|
|
$
|
151
|
|
Shares used in computing earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A
|
|
|
|
10,115
|
|
|
|
10,325
|
|
|
|
10,363
|
|
|
|
10,325
|
|
|
|
10,454
|
|
Diluted
|
|
|
N/A
|
|
|
|
10,115
|
|
|
|
20,185
|
|
|
|
19,246
|
|
|
|
19,196
|
|
|
|
17,866
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
24,376
|
|
|
$
|
817
|
|
|
$
|
2,387
|
|
|
$
|
7,406
|
|
|
$
|
3,234
|
|
|
$
|
3,983
|
|
Depreciation and amortization
|
|
$
|
1,136
|
|
|
$
|
1,879
|
|
|
$
|
2,396
|
|
|
$
|
3,300
|
|
|
$
|
1,473
|
|
|
$
|
2,269
|
|
Adjusted
EBITDA(4)
|
|
$
|
(13,503
|
)
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
5,551
|
|
|
$
|
10,294
|
|
Period end
enrollment:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
3,141
|
|
|
|
6,212
|
|
|
|
8,406
|
|
|
|
12,497
|
|
|
|
9,032
|
|
|
|
14,847
|
|
Ground
|
|
|
1,852
|
|
|
|
2,210
|
|
|
|
2,256
|
|
|
|
2,257
|
|
|
|
1,300
|
|
|
|
1,663
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Restated)(1)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,476
|
|
|
$
|
2,579
|
|
|
$
|
14,361
|
|
|
$
|
23,210
|
|
|
$
|
7,206
|
|
Total assets
|
|
|
30,892
|
|
|
|
51,859
|
|
|
|
61,232
|
|
|
|
88,568
|
|
|
|
80,548
|
|
Capital lease obligations (including short-term)
|
|
|
24,055
|
|
|
|
24,056
|
|
|
|
29,728
|
|
|
|
29,228
|
|
|
|
29,420
|
|
Other indebtedness (including short-term indebtedness)
|
|
|
4,295
|
|
|
|
2,193
|
|
|
|
2,462
|
|
|
|
2,408
|
|
|
|
1,894
|
|
Preferred stock
|
|
|
|
|
|
|
25,590
|
|
|
|
21,390
|
|
|
|
31,948
|
|
|
|
32,469
|
|
Total stockholders/members
deficit(2)
|
|
|
(7,645
|
)
|
|
|
(12,111
|
)
|
|
|
(11,723
|
)
|
|
|
(10,386
|
)
|
|
|
(8,440
|
)
|
|
|
|
(1) |
|
Our financial statements at December 31, 2006, and 2007 and
for each of the three years in the period ended
December 31, 2007 have been restated. See Note 3,
Restatement of Financial Statements, in our
financial statements that are included elsewhere in this
prospectus. |
|
|
|
(2) |
|
On February 2, 2004, we acquired the assets of Grand Canyon
University from a non-profit foundation and converted its
operations from non-profit to for-profit status. While the
university has continuously operated since 1949, for accounting
and financial statement reporting purposes, we treat the date of
acquisition and conversion to for-profit status as the date of
inception of our business. |
|
|
|
(3) |
|
On August 24, 2005, we converted from a limited liability
company to a taxable corporation. For all periods subsequent to
such date, we have been subject to corporate-level U.S.
federal and state income taxes. |
|
|
|
(4) |
|
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 and
Note 2 to our financial statements that are included
elsewhere in this prospectus, and (ii) management fees and
expenses that are no longer paid or that will no longer be
payable following completion of this offering. |
|
|
|
|
|
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. See
Compensation Discussion and Analysis Impact of
Performance on Compensation. 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 and
royalty expenses paid to our former owner 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; 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.
|
40
|
|
|
|
|
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 Results of
Operations Non-GAAP Discussion. |
|
|
|
|
|
The following table presents data relating to Adjusted EBITDA,
which is a non-GAAP measure, for the periods indicated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
Restated(1)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(4,286
|
)
|
|
$
|
598
|
|
|
$
|
1,526
|
|
|
$
|
901
|
|
|
$
|
3,224
|
|
Plus: interest expense net of interest income
|
|
|
2,822
|
|
|
|
1,915
|
|
|
|
1,803
|
|
|
|
823
|
|
|
|
1,075
|
|
Plus: income tax expense (benefit)
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
600
|
|
|
|
2,027
|
|
Plus: depreciation and amortization
|
|
|
1,879
|
|
|
|
2,396
|
|
|
|
3,300
|
|
|
|
1,473
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(3,025
|
)
|
|
|
5,438
|
|
|
|
7,645
|
|
|
|
3,797
|
|
|
|
8,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: royalty to former
owner(a)
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
1,629
|
|
|
|
1,488
|
|
Plus: management fees and
expenses(b)
|
|
|
511
|
|
|
|
958
|
|
|
|
296
|
|
|
|
125
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
5,551
|
|
|
$
|
10,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and Note 2 to our financial statements that are
included elsewhere in this prospectus.
|
|
|
|
|
(b)
|
Reflects management fees and expenses of $0.1 million,
$0.3 million, and $0.3 million for the years ended
December 31, 2005, 2006, and 2007, respectively, and
$0.1 million and $0.2 million for the six month
periods ended June 30, 2007 and 2008, respectively, to the
general partner of Endeavour Capital, and an aggregate of
$0.4 million and $0.7 million for the years ended
December 31, 2005 and 2006, respectively, 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 or will terminate by their terms upon the closing of
this offering. See Certain Relationships and Related
Transactions.
|
|
|
|
(5) |
|
The decrease in the number of ground students on June 30,
2007 and 2008 in comparison to December 31, 2006 and 2007
is attributable to the fact that a portion of our ground
students typically do not enroll in classes during the summer
months. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Seasonality. |
41
MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our financial statements and related notes that
appear elsewhere in this prospectus. In addition to historical
financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed
below and elsewhere in this prospectus, particularly in
Risk Factors and Forward-Looking
Statements.
Overview
General
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. At
June 30, 2008, we had approximately 16,500 students. At
December 31, 2007 we had approximately 14,800 students, 85%
of whom were enrolled in our online programs, with 62% pursuing
masters degrees. Since we acquired Grand Canyon University
in February 2004, we have enhanced our senior management team,
expanded our online platform, increased our program offerings,
and initiated a marketing and branding effort to further
differentiate us in the markets in which we operate. We have
also made investments to enhance our student and technology
support services. We believe the changes we have instituted,
combined with our management expertise, provide a platform that
will support continued enrollment and revenue growth.
In 2003, the Board of Trustees of the former owner initiated a
process to evaluate alternatives as a result of the
schools poor financial condition and, in February 2004,
several of our current stockholders acquired the assets of the
school and converted it to a for-profit institution. In May
2005, following this change in control, the Department of
Education recertified us to continue participating in the
Title IV programs on a provisional basis, subject to
certain restrictions and requirements, including requirements 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
(pursuant to which an institution is required to credit students
with Title IV funds prior to obtaining those funds from the
Department of Education). In October 2006, based on our
significantly improved financial condition and performance since
the change in control, the Department of Education eliminated
the letter of credit requirement and allowed the growth
restrictions to expire. In 2007, the Department of Education
eliminated the heightened cash monitoring restrictions and
returned us to the advance payment method (pursuant to which an
institution receives Title IV funds from the Department of
Education in advance of disbursement to students).
Regulatory
For our fiscal years ended December 31, 2006 and 2007, we
derived approximately 63.8% and 65.5%, respectively, of our net
revenue from tuition financed through federal student financial
aid programs authorized by Title IV of the Higher Education Act.
The following trends and uncertainties may affect the
availability of or our participation in the Title IV programs.
During 2007 and 2008, 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, including with respect to lending practices
related to such programs and potential conflicts of interest
between educational institutions and their lenders. The Attorney
General of the State of Arizona has requested extensive
documentation and information from us and other institutions in
Arizona concerning student loan practices, and we recently
provided testimony in response to a subpoena from the Attorney
General of the State of Arizona about such practices. As a
result of this nationwide scrutiny, 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. The effect of
42
such actions may be to increase the cost of participating in
the Title IV programs and other student loan programs, although
we are unable to calculate such potential costs at this time.
In addition, recent adverse market conditions for consumer loans
in general have affected the student lending marketplace,
causing some lenders to cease providing Title IV loans to
students and causing others to reduce the benefits and increase
the fees for the Title IV loans they provide. While some of the
lenders we regularly engage with have announced decisions to
stop participating in the Title IV loan market generally, to
date there have been no material disruptions in the availability
of Title IV loans to our students. The conditions in the market,
including the effect of recent legislation aimed at broadening
access to Title IV loans, are continuing to evolve and the
ultimate impact of such market conditions on our business, if
any, cannot be predicted. See Regulation
Regulation of Federal Student Financial Aid Programs.
Key
financial metrics
Net
revenue
Net revenue consists principally of tuition, room and board
charges attributable to students residing on our ground campus,
application and graduation fees, and commissions we earn from
bookstore and publication sales, less scholarships. Factors
affecting our net revenue include: (i) the number of
students who are enrolled and who remain enrolled in our
courses; (ii) the number of credit hours per student;
(iii) our degree and program mix; (iv) changes in our
tuition rates; (v) the amount of the scholarships that we
offer; (vi) the number of students housed in, and the rent
charged for, our on-campus student apartments and dormitories;
and (vii) the number of students who purchase books from
our bookstore.
We define enrollments for a particular time period as the number
of students registered in a course on the last day of classes
for each program within that financial reporting period. We
offer three 16-week semesters in a calendar year, with two
starts available per semester for our online students and for
students who typically take evening courses on-campus or onsite
at the facilities of their employer, whom we refer to as
professional studies ground students, and one start available
per semester for our traditional ground students. Enrollments
are a function of the number of continuing students at the
beginning of each period and new enrollments during the period,
which are offset by graduations, withdrawals, and inactive
students during the period. Inactive students for a particular
period include students who are not registered in a class and,
therefore, are not generating net revenue for that period, but
who have not withdrawn from Grand Canyon University.
We believe that the principal factors that affect our
enrollments and net revenue are the number and breadth of the
programs we offer; the attractiveness of our program offerings
and learning experience, particularly for career-oriented adults
who are seeking pay increases or job opportunities that are
directly tied to higher educational attainment; the
effectiveness of our marketing, recruiting and retention
efforts, which is affected by the number and seniority of our
enrollment counselors and other recruiting personnel; the
quality of our academic programs and student services; the
convenience and flexibility of our online delivery platform; the
availability and cost of federal and other funding for student
financial aid; the seasonality of our net revenue, which is
enrollment driven and is typically lowest in our second fiscal
quarter and highest in our fourth fiscal quarter; and general
economic conditions, particularly as they might affect job
prospects in our core disciplines.
The following is a summary of our student enrollment at
December 31, 2005, 2006, and 2007 and June 30, 2007
and 2008 (which included less than 100 students pursuing
non-degree certificates in each period) by degree type and by
instructional delivery method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
Masters degree
|
|
|
6,204
|
|
|
|
73.7
|
|
|
|
7,812
|
|
|
|
73.3
|
|
|
|
9,156
|
|
|
|
62.1
|
|
|
|
7,641
|
|
|
|
74.0
|
|
|
|
10,051
|
|
|
|
60.9
|
|
Bachelors degree
|
|
|
2,218
|
|
|
|
26.3
|
|
|
|
2,850
|
|
|
|
26.7
|
|
|
|
5,598
|
|
|
|
37.9
|
|
|
|
2,691
|
|
|
|
26.0
|
|
|
|
6,459
|
|
|
|
39.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,422
|
|
|
|
100.0
|
|
|
|
10,662
|
|
|
|
100.0
|
|
|
|
14,754
|
|
|
|
100.0
|
|
|
|
10,332
|
|
|
|
100.0
|
|
|
|
16,510
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
#
|
|
|
%
|
|
|
Online
|
|
|
6,212
|
|
|
|
73.8
|
|
|
|
8,406
|
|
|
|
78.8
|
|
|
|
12,497
|
|
|
|
84.7
|
|
|
|
9,032
|
|
|
|
87.4
|
|
|
|
14,847
|
|
|
|
89.9
|
|
Ground*
|
|
|
2,210
|
|
|
|
26.2
|
|
|
|
2,256
|
|
|
|
21.2
|
|
|
|
2,257
|
|
|
|
15.3
|
|
|
|
1,300
|
|
|
|
12.6
|
|
|
|
1,663
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,422
|
|
|
|
100.0
|
|
|
|
10,662
|
|
|
|
100.0
|
|
|
|
14,754
|
|
|
|
100.0
|
|
|
|
10,332
|
|
|
|
100.0
|
|
|
|
16,510
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Includes our traditional on-campus
students, as well as our professional studies ground students.
|
For the
2008-09
academic year (the academic year that began in May 2008), our
prices per credit hour are $395 for undergraduate online and
professional studies courses, $420 for graduate online courses
(other than graduate nursing), $510 for graduate online nursing
courses, and $645 for undergraduate courses for ground students.
The overall price of each course varies based upon the number of
credit hours per course (with most courses representing three
credit hours), the degree level of the program, and the
discipline. In addition, we charge a fixed $7,740 block
tuition for undergraduate ground students taking between
12 and 18 credit hours per semester, with an additional $645 per
credit hour for credits in excess of 18. A traditional
undergraduate degree typically requires a minimum of 120 credit
hours. The minimum number of credit hours required for a
masters degree and overall cost for such a degree varies
by program, although such programs typically require
approximately 36 credit hours. Our new doctoral program in
education, which is first being offered in the
2008-09
academic year, costs $770 per credit hour and requires
approximately 60 credit hours.
Based on current tuition rates, tuition for a full program would
equate to approximately $15,000 for an online masters
program, approximately $47,000 for a full four-year online
bachelors program, and approximately $62,000 for a full
four-year bachelors program taken on our ground campus.
The tuition amounts referred to above assume no reductions for
transfer credits or scholarships, which many of our students
utilize to reduce their total program costs. The amount of
tuition received from our students for a full program is reduced
to the extent credits are transferred from other institutions.
Additionally, tuition is reduced for some of our students by
scholarships. For the years ended December 31, 2006 and
2007, we offered scholarships with a total value of
approximately $8.2 million and $10.3 million, respectively.
For the six months ended June 30, 2007 and 2008, we offered
scholarships with a total value of approximately
$4.8 million and $7.7 million, respectively.
Tuition increases for students in our online and professional
studies ground programs range from 5.0% to 5.3% for our
2008-09
academic year as compared to 2.6% to 4.2% in the prior academic
year. Tuition increases have not historically been, and may not
in the future be, consistent across our programs due to market
conditions and differences in operating costs of individual
programs. Tuition for our traditional ground programs increased
11.2% for our
2008-09
academic year, as compared to 16.0% for the prior academic year.
The larger increases for our traditional ground programs
generally reflect recovery from a significant decrease in ground
tuition rates that we implemented shortly after the 2004
acquisition in an effort to stabilize enrollments and revenues.
We derive a majority of our net revenue from tuition financed by
the Title IV programs. For the years ended
December 31, 2006 and 2007, 63.8%, and 65.5%, respectively,
of our net revenue was derived from the Title IV programs.
Our students also rely on scholarships, personal savings,
private loans, and employer tuition reimbursements to pay a
portion of their tuition and related expenses. During fiscal
2007 and the first six months of 2008, payments derived from
private loans constituted less than 5.0% of our net revenue.
Third party lenders independently determine whether a loan to a
student is classified as subprime, and, based on these
determinations, payments derived from subprime loans have
historically constituted less than 0.2% of our net revenue. Our
future revenues could be affected if and to the extent the
Department of Education restricts our participation in the
Title IV programs, as it did during the period between 2005
and 2007. Current conditions in the credit markets have
adversely affected the environment surrounding access to and
cost of student loans. The legislative and regulatory
environment is also changing, and new federal legislation was
recently enacted pursuant to which the Department of Education
is authorized to buy Title IV loans and implement a
lender of last resort program in certain
circumstances. See Risk
44
Factors and Regulation Regulation of
Federal Student Financial Aid Programs. We do not believe
these market and regulatory conditions have adversely affected
us to date, but we cannot predict whether the new legislation
will improve access to Title IV funding or the impact of
any of these developments on future performance.
Costs
and expenses
Instructional cost and services. Instructional
cost and services consist primarily of costs related to the
administration and delivery of our educational programs. This
expense category includes salaries and benefits for full-time
and adjunct faculty and administrative personnel, costs
associated with online faculty, information technology costs,
curriculum and new program development costs, and costs
associated with other support groups that provide service
directly to the students. This category also includes an
allocation of depreciation, amortization, rent, and occupancy
costs attributable to the provision of educational services.
Classroom facilities are leased or, in some cases, are provided
by the students employers at no charge to us. We expect
instructional costs and services as a percentage of tuition and
other net revenue to continue to decline as we leverage our
support services that are in place over a larger tuition and
enrollment base.
Selling and promotional. Selling and
promotional expenses include salaries and benefits of personnel
engaged in the marketing, recruitment, and retention of
students, as well as advertising costs associated with
purchasing leads, hosting events and seminars, and producing
marketing materials. Our selling and promotional expenses are
generally affected by the cost of advertising media and leads,
the efficiency of our marketing and recruiting efforts,
salaries, and benefits for our enrollment personnel, and
expenditures on advertising initiatives for new and existing
academic programs. This category also includes an allocation of
depreciation, amortization, rent, and occupancy costs
attributable to selling and promotional activities. Selling and
promotional costs are expensed as incurred. As a result of the
removal of our growth restrictions in October 2006, we more than
quadrupled the number of our enrollment counselors between
December 31, 2006 and June 30, 2008 in an effort to
increase our recruiting activities and enroll prospective
students. We also leased new enrollment centers in Arizona and
Utah, and we intend to continue to increase the number of our
enrollment counselors in these centers to increase enrollment
and enhance student retention. We incur immediate expenses in
connection with hiring new enrollment counselors while these
individuals undergo training, and typically do not achieve full
productivity or generate enrollments from these enrollment
counselors until four to six months after their dates of hire.
Selling and promotional costs also include revenue share
arrangements with related parties pursuant to which we pay a
percentage of the net revenue that we actually receive from
applicants recruited by those entities that matriculate at Grand
Canyon University. The related party bears all costs associated
with the recruitment of these applicants. For the years ended
December 31, 2005, 2006, and 2007, and for the six month
periods ended June 30, 2007 and 2008, we expensed
approximately $2.8 million, $3.7 million,
$4.3 million, $2.1 million, and $2.9 million, respectively,
pursuant to these arrangements. As we increase our internal
recruiting, marketing, and enrollment staff, we expect this
revenue share as a proportion of total revenue to decline.
General and administrative. General and
administrative expenses include salaries and benefits of
employees engaged in corporate management, finance, human
resources, facilities, compliance, and other corporate
functions. General and administrative expenses also include bad
debt expense and an allocation of depreciation, amortization,
rent and occupancy costs attributable to general and
administrative functions.
Royalty to former owner. In connection with
our February 2004 acquisition of the assets of Grand Canyon
University by several of our current stockholders, we entered
into a royalty fee arrangement with the former owner in which we
agreed to pay a stated percentage of cash revenue generated by
our online programs. For the years ended December 31, 2005,
2006, and 2007, and for the six month periods ended
June 30, 2007 and 2008, we expensed $1.6 million,
$2.7 million, $3.8 million, $1.6 million, and $1.5
million, respectively, in connection with this arrangement. This
arrangement has been terminated, as discussed below.
Interest expense. Interest expense consists
primarily of interest charges on our capital lease obligations
and on the outstanding balances of our notes payable and line of
credit.
45
Factors
affecting comparability
We have set forth below selected factors that we believe have
had, or can be expected to have, a significant effect on the
comparability of recent or future results of operations:
Conversion to corporate status. On
August 24, 2005, we converted from a Delaware limited
liability company to a Delaware corporation pursuant to
Section 265 of the DGCL. As a limited liability company, we
were treated as a partnership for U.S. federal and state
income tax purposes and, as such, we were not subject to
taxation. For all periods subsequent to such date, we have been
and will continue to be subject to
corporate-level U.S. federal and state income taxes.
Public company expenses. Upon
consummation of our initial public offering, we will become a
public company, and we intend to have our shares listed for
trading on the Nasdaq Global Market. As a result, we will need
to comply with laws, regulations, and requirements that we did
not need to comply with as a private company, including certain
provisions of the Sarbanes-Oxley Act of 2002, related SEC
regulations, and the requirements of Nasdaq. Compliance with the
requirements of being a public company will require us to
increase our general and administrative expenses in order to pay
our employees, legal counsel, and accountants to assist us in,
among other things, external reporting, instituting and
monitoring a more comprehensive compliance and board governance
function, establishing and maintaining internal control over
financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002, and preparing and distributing
periodic public reports in compliance with our obligations under
the federal securities laws. In addition, being a public company
will make it more expensive for us to obtain director and
officer liability insurance. We estimate that incremental annual
public company costs will be between $3.0 million and
$4.0 million.
Settlement with former owner. To
resolve a dispute with our former owner arising from our
acquisition of Grand Canyon University and subsequent lease of
our campus, we entered into a standstill agreement in September
2007 pursuant to which we agreed with the former owner to stay
all pending legal proceedings through April 15, 2008. In
accordance with the terms of the standstill agreement, we made
an initial non-refundable $3.0 million payment to the
former owner in October 2007 and made an additional
$19.5 million payment to the former owner in
April 2008, with these amounts serving as consideration
for: (i) the satisfaction in full of all past and future
royalties due to the former owner under a royalty agreement;
(ii) the acquisition by us of a parcel of real estate owned
by the former owner on our campus; (iii) the termination of
a sublease agreement pursuant to which the former owner leased
office space on our campus; (iv) the assumption by us of
all future payment obligations in respect of certain gift
annuities made to the school by donors prior to the acquisition;
(v) the cancellation of a warrant we issued to the former
owner in the lease transaction; and (vi) the satisfaction
in full of a $1.25 million loan made by the former owner to
us in the lease transaction (including all accrued and unpaid
interest thereon). Most of the amounts payable to the former
owner under the royalty arrangement in 2005, and all of the
amounts payable in 2006 and 2007, were accrued and not paid due
to the dispute. A portion of the settlement payments has been
treated as a prepaid royalty asset that will be amortized over
20 years at approximately $0.3 million per year, which
differs from the historical royalty expense.
Management fees and expenses. In
connection with an August 2005 investment led by Endeavour
Capital, we entered into a professional services agreement with
Endeavour Capitals general partner. Concurrent with the
closing of this offering, the professional services agreement
will terminate by its terms. For the years ended
December 31, 2005, 2006, and 2007, and for the six month
periods ended June 30, 2007 and 2008, we incurred
$0.1 million, $0.3 million, $0.3 million,
$0.1 million, and $0.2 million, respectively, in fees
and expenses under this agreement. In addition, through
December 31, 2006, we were party to two additional
professional services agreements, one with an entity affiliated
with a former director and another affiliated with a significant
stockholder, both of which terminated in accordance with their
respective terms in 2006. For the years ended December 31,
2005 and 2006, we paid an aggregate of $0.4 million and
$0.7 million, respectively, under these agreements. See
Certain Relationships and Related Transactions
located elsewhere in this prospectus for additional information.
Stock-based and other executive
compensation. Prior to this offering, we have
not granted or issued any stock-based compensation. Accordingly,
we have not recognized any stock-based compensation expense.
46
Upon the consummation of this offering, we intend to make
substantial awards to our directors, officers, and employees,
including certain grants to our new Chief Executive Officer and
to other employees that will be fully vested upon grant. As a
result, we expect to incur non-cash, stock-based compensation
expenses in future periods, including expenses of approximately
$10 million in the second half of 2008.
In July 2008, we hired a new Chief Executive Officer, Chief
Financial Officer, and Executive Vice President, as well as
other financial and accounting personnel. Accordingly,
compensation expenses, as reflected in our general and
administrative expenses, will be higher beginning in the third
quarter of 2008.
License agreement. In June 2004, we
entered into a license agreement with Blanchard Education, LLC
(Blanchard) relating to our use of the Ken Blanchard
name for our College of Business. The license agreement remains
in effect (unless terminated earlier) until February 6,
2016. Under the terms of that agreement, we agreed to pay
Blanchard royalties and to issue to Blanchard up to
498 shares of common stock, with the actual number of
shares to be issued to be contingent upon our achievement of
stated enrollment levels in the College of Business programs
during the term of the agreement. On December 31, 2006, it
became probable that Blanchard would earn 100 shares under
this agreement associated with the first enrollment threshold
and, during the third quarter 2007, those 100 shares were
earned due to the enrollment threshold being met. On May 9,
2008, the terms of the agreement were amended, pursuant to which
Blanchard was issued a total of 200 shares of common stock
in full settlement of all shares owed and contingently owed
under this agreement. Thus, an additional 100 shares became
earned on that date and all remaining performance conditions
based on enrollment thresholds were terminated. The shares
issued were valued at the date the shares were earned and have
been treated as a prepaid royalty asset that will be amortized
over the remaining term of the license agreement. We will
recognize approximately $0.4 million per year in amortization
expense related to the issuance of the common stock through
February 2016.
Internal
Control Over Financial Reporting
Overview. We have material weaknesses
in internal control over financial reporting. In connection with
the preparation of our 2005, 2006, and 2007 financial
statements, and our financial statements for the six month
period ended June 30, 2008, we identified matters involving
our internal control over financial reporting that constituted
material weaknesses as defined under the standards of the
American Institute of Certified Public Accountants and caused us
to conclude that there was more than a remote likelihood that a
material misstatement of our annual or interim financial
statements would not be prevented or detected on a timely basis
by our employees in the normal course of performing their
assigned functions. We have restated our financial statements as
of December 31, 2006 and 2007 and for the years ended
December 31, 2005, 2006, and 2007. See Note 3,
Restatement of Financial Statements, to our
financial statements, which are included elsewhere in this
prospectus.
Material weaknesses. In connection with
the preparation of our 2005, 2006, and 2007 financial
statements, and our financial statements for the six month
period ended June 30, 2008, we identified errors regarding
our accounting for the following transactions:
|
|
|
|
|
In connection with our formation in February 2004, an entity
owned in part by our Executive Chairman and our General Counsel
contributed certain intangible assets to us, and we improperly
recorded these contributed assets at our estimate of their fair
value rather than at their carryover basis.
|
|
|
|
|
|
In connection with our acquisition of Grand Canyon University
from the former owner in February 2004, we improperly
accounted for a perpetual royalty arrangement between us and the
former owner as goodwill rather than as a current period
expense. Later, in connection with a settlement agreement we
entered into with the former owner in 2007 that provided for a
termination of this royalty arrangement, we improperly accounted
for a partial settlement payment as a current period expense
rather than as a prepaid royalty subject to amortization.
|
47
|
|
|
|
|
In connection with our entry into a lease agreement for our
ground campus and buildings in June 2004, we improperly
accounted for the arrangement as an operating lease rather than
accounting for certain components of the lease as a capital
lease.
|
|
|
|
In 2004 and 2005, we failed to properly capitalize the issuance
of certain common stock and equity linked instruments to third
parties.
|
|
|
|
|
|
During the six month period ended June 30, 2008, we
concluded that a significant increase in our allowance for
doubtful accounts was required. A portion of the increase has
been determined to be the correction of an error from prior
periods and thus the accompanying financial statements have been
restated to reflect this increase.
|
We believe the control deficiencies related to these errors
constitute material weaknesses in our internal control over
financial reporting. The material weakness related to our lack
of processes and controls that would ensure the proper recording
of assets, expenses, leases, and equity instruments in
accordance with GAAP.
Management is committed to remediating the control deficiencies
that constitute the material weaknesses described herein by
implementing changes to our internal control over financial
reporting. We have implemented a number of significant changes
and improvements in our internal control over financial
reporting during the second and third quarters of fiscal year
2008. Our Chief Financial Officer has taken responsibility for
implementing changes and improvements in the internal control
over financial reporting and remediate the control deficiencies
that gave rise to the material weaknesses. Specifically, these
changes include:
|
|
|
|
|
engaging a new Chief Financial Officer and hiring additional
financial and accounting personnel, all of whom have experience
managing or working in the corporate accounting department of a
large publicly traded education company;
|
|
|
|
|
|
making numerous process changes in the financial reporting area,
including additional oversight and review; and
|
|
|
|
|
|
conducting training of our accounting staff for purposes of
enabling them to recognize and properly account for transactions
of the type described above.
|
Management plans to continue to implement further changes and
improvements during the remainder of the current fiscal year. We
cannot assure you that the measures we have taken to date and
plan to take will remediate the material weaknesses we have
identified. Our current independent registered public accounting
firm has not evaluated the measures we have taken or plan to
take in order to address the material weaknesses described above.
Critical
Accounting Policies and Estimates
The discussion of our financial condition and results of
operations is based upon our financial statements, which have
been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. During the preparation of these
financial statements, we are required to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses, and related
disclosures. On an ongoing basis, we evaluate our estimates and
assumptions, including those discussed below. We base our
estimates on historical experience and on various other
assumptions that we believe are reasonable under the
circumstances. The results of our analysis form the basis for
making assumptions about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions, and the impact of such differences
may be material to our financial statements.
48
We believe that the following critical accounting policies
involve our more significant judgments and estimates used in the
preparation of our financial statements:
Revenue recognition. Tuition revenue is
recognized monthly over the applicable period of instruction.
Deferred revenue and student deposits in any period represent
the excess of tuition, fees, and other student payments received
as compared to amounts recognized as revenue on the statement of
operations and are reflected as current liabilities on our
balance sheet. Our educational programs have starting and ending
dates that differ from our fiscal quarters. Therefore, at the
end of each fiscal quarter, a portion of our revenue from these
programs is not yet earned in accordance with the SECs
Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements. If a student withdraws
prior to the end of the third week of a semester, we refund all
or a portion of tuition already paid pursuant to our refund
policy, which generally results in a reduction in deferred
revenue and student deposits.
Allowance for doubtful accounts. Bad
debt expense is recorded as a general and administrative
expense. We record an allowance for doubtful accounts for
estimated losses resulting from the inability, failure, or
refusal of our students to make required payments. We determine
the adequacy of our allowance for doubtful accounts based on an
analysis of our aging of our accounts receivable and historical
bad debt experience. We generally write off accounts receivable
balances deemed uncollectible at the time the account is
returned by an outside collection agency. However, we continue
to reflect accounts receivable with offsetting allowances as
long as management believes there is a reasonable possibility of
collection. As a result, our allowance for doubtful accounts has
increased on an annual basis as bad debt expense has exceeded
amounts written off. During the second half of 2008, we expect
to begin to write off existing and new doubtful accounts no
later than one year after the revenue is generated, which will
likely result in a significant reduction in our accounts
receivable and related allowances. We believe our reserves are
adequate to cover any write offs we may make.
Long-Lived Assets. We evaluate the
recoverability of our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
Income taxes. On August 24, 2005,
we converted from a limited liability company to a corporation.
For all periods subsequent to such date, we have been and will
continue to be subject to corporate-level U.S. federal
and state income taxes. Effective January 1, 2008, we
adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48).
FIN 48 prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. We
account for income taxes as prescribed by Statement of Financial
Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes
(SFAS No. 109). SFAS No. 109
prescribes the use of the asset and liability method to compute
the differences between the tax basis of assets and liabilities
and the related financial amounts using currently enacted tax
laws. We have deferred tax assets, which are subject to periodic
recoverability assessments. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amount that more likely than not will be realized.
Realization of the deferred tax assets is principally dependent
upon achievement of projected future taxable income offset by
deferred tax liabilities. We evaluate the realizability of the
deferred tax assets annually. Since becoming a taxable
corporation, we have not recorded any valuation allowances to
date on our deferred income tax assets.
49
Results
of Operations
The following table sets forth statements of operations data as
a percentage of net revenue for each of the periods indicated:
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(Restated)(1)
|
|
|
(Unaudited)
|
|
|
Net revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional cost and services
|
|
|
54.2
|
|
|
|
43.4
|
|
|
|
39.3
|
|
|
|
39.8
|
|
|
|
34.2
|
|
Selling and promotional
|
|
|
27.1
|
|
|
|
27.9
|
|
|
|
35.4
|
|
|
|
32.2
|
|
|
|
39.1
|
|
General and administrative
|
|
|
25.0
|
|
|
|
20.8
|
|
|
|
17.1
|
|
|
|
19.0
|
|
|
|
15.6
|
|
Royalty to former owner
|
|
|
3.2
|
|
|
|
3.7
|
|
|
|
3.8
|
|
|
|
3.7
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
109.5
|
|
|
|
95.8
|
|
|
|
95.6
|
|
|
|
94.7
|
|
|
|
91.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(9.5
|
)
|
|
|
4.2
|
|
|
|
4.4
|
|
|
|
5.3
|
|
|
|
9.0
|
|
Interest expense
|
|
|
(5.9
|
)
|
|
|
(3.9
|
)
|
|
|
(3.0
|
)
|
|
|
(3.5
|
)
|
|
|
(2.1
|
)
|
Interest income
|
|
|
0.5
|
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
1.6
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(14.9
|
)
|
|
|
1.5
|
|
|
|
2.6
|
|
|
|
3.4
|
|
|
|
7.5
|
|
Income tax expense (benefit)
|
|
|
(6.6
|
)
|
|
|
0.7
|
|
|
|
1.0
|
|
|
|
1.4
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8.3
|
)
|
|
|
0.8
|
|
|
|
1.6
|
|
|
|
2.0
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our financial statements at December 31, 2006 and 2007 and
for each of the three years in the period ended
December 31, 2007 have been restated. See Note 3,
Restatement of Financial Statements, included in our
financial statements, which are presented elsewhere in this
prospectus. |
Six
Months Ended June 30, 2008 Compared to Six Months Ended
June 30, 2007
Net revenue. Our net revenue for the six
months ended June 30, 2008 was $70.3 million, an
increase of $26.2 million, or 59.5%, as compared to net
revenue of $44.1 million for the six months ended
June 30, 2007. This increase was primarily due to increased
enrollment and, to a lesser extent, increases in the average
tuition per student caused by tuition price increases and an
increase in the average credits per student, partially offset by
an increase in institutional scholarships. End-of-period
enrollment increased 59.8% between June 30, 2007 and 2008,
as we were able to continue our growth and increase our
recruitment, marketing, and enrollment operations following the
elimination of the Department of Educations growth
restrictions in October 2006.
Instructional cost and services expenses. Our
instructional cost and services expenses for the six months
ended June 30, 2008 were $24.0 million, an increase of
$6.4 million, or 36.9%, as compared to instructional cost
and services expenses of $17.6 million for the six months
ended June 30, 2007. This increase was primarily due to
increases in instructional compensation and related expenses,
faculty compensation, depreciation and amortization, and other
miscellaneous instructional costs and services of
$2.2 million, $2.0 million, $0.7 million, and
$1.2 million, respectively. These increases are all
attributable to the increased headcount (both staff and faculty)
needed to provide student instruction and support services we
consider necessary as a result of the increase in enrollments.
Our instructional cost and services expenses as a percentage of
net revenue decreased by 5.6% to 34.2% for the six months ended
June 30, 2008, as compared to 39.8% for the six months
ended June 30, 2007. This decrease was a result of the
continued shift of our student population to online programs and
our ability to leverage the relatively fixed cost structure of
our campus-based facilities and ground faculty across an
increasing revenue base.
Selling and promotional expenses. Our selling
and promotional expenses for the six months ended June 30,
2008 were $27.5 million, an increase of $13.3 million,
or 93.7%, as compared to selling and
50
promotional expenses of $14.2 million for the six months
ended June 30, 2007. This increase was primarily due to
increases in selling and promotional employee compensation and
related expenses, advertising, revenue sharing expense, and
other selling and promotional costs of $8.2 million,
$3.5 million, $0.9 million, and $0.6 million,
respectively. These increases were driven by a substantial
expansion in our marketing efforts following the removal of our
growth restrictions by the Department of Education, which
resulted in an increase in recruitment, marketing, and
enrollment staffing, the opening of new enrollment facilities in
Arizona and Utah, and expenses related to our revenue sharing
arrangement. Our selling and promotional expenses as a
percentage of net revenue increased by 6.9% to 39.1% for the six
months ended June 30, 2008, from 32.2% for the six months
ended June 30, 2007. This increase occurred as a result of
a significant increase in the number of our enrollment
counselors to increase our efforts to enroll prospective
students and also increased marketing and retention staffing. In
this regard, we incur immediate expenses in connection with
hiring new enrollment counselors while these individuals undergo
training, and typically do not achieve full productivity or
generate enrollments from these enrollment counselors until four
to six months after their dates of hire. We plan to continue to
add additional enrollment counselors in the future, although the
number of additional hires as a percentage of the total
headcount should decrease, and we therefore plan to reduce
selling and promotional expenses as a percentage of net revenue
in the future.
General and administrative expenses. Our
general and administrative expenses for the six months ended
June 30, 2008 were $11.0 million, an increase of
$2.6 million, or 30.8%, as compared to general and
administrative expenses of $8.4 million for the six months
ended June 30, 2007. This increase was primarily due to
increases in bad debt expense; legal, audit, and corporate
insurance; and other general and administrative expenses of
$0.9 million, $0.8 million, and $0.8 million,
respectively. Bad debt expense increased to $4.1 million
for the six months ended June 30, 2008 from
$3.2 million for the six months ended June 30, 2007 as
a result of a proportional increase in net revenue. The increase
in legal, audit, and corporate insurance is primarily related to
legal costs associated with the Sungard matter, which went to
arbitration in the second quarter of fiscal 2008. See
Business Legal Proceedings. The other
general and administrative expense increase was attributable to
expenditures made to continue to support the growth of our
business. Our general and administrative expenses as a
percentage of net revenue decreased by 3.4% to 15.6% for the six
months ended June 30, 2008, from 19.0% for the six months
ended June 30, 2007, primarily due to a decrease in our bad
debt expense and employee compensation and related benefits as a
percentage of revenue between periods from 7.2% and 4.7% of
revenue during the first six months of 2007, respectively, to
5.8% and 3.0% of revenue during the first six months of 2008,
respectively. The improvement in bad debt expense as a
percentage of revenue is primarily due to an improvement in our
aging between periods and an increased revenue base. The
decrease in employee compensation and related benefits as a
percentage of revenue is the result of us leveraging our current
staffing over a larger revenue base.
Royalty to former owner. In connection with
our royalty fee arrangement with the former owner related to
online revenue, we incurred royalty expenses for the six months
ended June 30, 2008 of $1.5 million, a decrease of
$0.1 million, or 8.7%, as compared to royalty expenses
incurred of $1.6 million for the six months ended
June 30, 2007 as a result of the elimination of the
obligation to pay royalties to the former owner effective
April 15, 2008. In the future the only expense that will be
recorded will be the amortization of the prepaid royalty asset
that was established as a result of payments made to eliminate
this future obligation. Our royalty expense as a percentage of
net revenue decreased to 2.1% for the six months ended
June 30, 2008 from 3.7% for the six months ended
June 30, 2007.
Interest expense. Our interest expense for
both the six month periods ended June 30, 2008 and 2007 was
$1.5 million as the average level of borrowings remained
fairly consistent between periods.
Interest income. Our interest income for the
six months ended June 30, 2008 was $0.4 million, a
decrease of $0.3 million from $0.7 million for the six
months ended June 30, 2007, as a result of decreased levels
of cash and cash equivalents.
Income tax expense. Income tax expense for the
six months ended June 30, 2008 was $2.0 million, an
increase of $1.4 million from $0.6 million for the six
months ended June 30, 2007. This increase was
51
primarily attributable to increased income before income taxes,
partially offset by a slight decrease in our effective income
tax rate to 38.6% from 40.0%.
Net income. Our net income for the six months
ended June 30, 2008 was $3.2 million, an increase of
$2.3 million, or 257.8%, as compared to net income of
$0.9 million for the six months ended June 30, 2007,
due to the factors discussed above.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Net revenue. Our net revenue for the year
ended December 31, 2007 was $99.3 million, an increase
of $27.2 million, or 37.7%, as compared to net revenue of
$72.1 million for the year ended December 31, 2006.
This increase was primarily due to increased enrollment and, to
a lesser extent, increases in tuition rates, including a 2.6% to
4.2% tuition increase for students in our online programs that
took effect in May 2007, partially offset by an increase in
institutional scholarships. End-of-period enrollment increased
38.4% in 2007 compared to 2006, as we were able to continue our
growth and increase our recruitment, marketing, and enrollment
operations following the elimination of the Department of
Educations growth restrictions in October 2006.
Instructional cost and services expenses. Our
instructional cost and services expenses for the year ended
December 31, 2007 were $39.1 million, an increase of
$7.8 million, or 24.8%, as compared to instructional cost
and services expenses of $31.3 million for the year ended
December 31, 2006. This increase was primarily due to
increases in instructional compensation expense and student
support services as a result of the increase in enrollments and
the addition of certain academic support services, such as the
establishment of our Office of Assessment and Institutional
Research. Our instructional cost and services expenses as a
percentage of net revenue decreased by 4.1% to 39.3% for the
year ended December 31, 2007, as compared to 43.4% for the
year ended December 31, 2006. This decrease was a result of
the continued shift of our student population to online programs
and our ability to leverage the relatively fixed cost structure
of our campus-based facilities and ground faculty across an
increasing revenue base.
Selling and promotional expenses. Our selling
and promotional expenses for the year ended December 31,
2007 were $35.1 million, an increase of $15.1 million,
or 74.9%, as compared to selling and promotional expenses of
$20.1 million for the year ended December 31, 2006.
This increase was driven by a substantial expansion in our
marketing efforts following the removal of our growth
restrictions by the Department of Education, which resulted in
an increase in recruitment, marketing, and enrollment staffing,
the opening of new enrollment facilities in Arizona and Utah,
and expenses related to our revenue sharing arrangement. Our
selling and promotional expenses as a percentage of net revenue
increased by 7.5% to 35.4% for the year ended December 31,
2007, from 27.9% for the year ended December 31, 2006. This
increase occurred as a result of a significant increase in the
number of our enrollment counselors to increase our efforts to
enroll prospective students and also increased marketing and
retention staffing. In this regard, we incur immediate expenses
in connection with hiring new enrollment counselors while these
individuals undergo training, and typically do not achieve full
productivity or generate enrollments from these enrollment
counselors until four to six months after their dates of hire.
General and administrative expenses. Our
general and administrative expenses for the year ended
December 31, 2007 were $17.0 million, an increase of
$2.0 million, or 13.3%, as compared to general and
administrative expenses of $15.0 million for the year ended
December 31, 2006. Bad debt expense increased to
$6.3 million for the year ended December 31, 2007 from
$4.7 million for the year ended December 31, 2006
primarily as a result of a proportional increase in net revenue.
The general and administrative expense increase was also
attributable to expenditures made to continue to support the
growth of our business. Our general and administrative expenses
as a percentage of net revenue decreased by 3.7% to 17.1% for
the year ended December 31, 2007, from 20.8% for the year
ended December 31, 2006, as we benefited from leveraging
our prior infrastructure investments over a larger enrollment
and revenue base.
Royalty to former owner. In connection with
our royalty fee arrangement with the former owner related to
online revenue, we incurred royalty expenses for the year ended
December 31, 2007 of $3.8 million, an
52
increase of $1.1 million, or 41.2%, as compared to royalty
expenses incurred of $2.7 million for the year ended
December 31, 2006. Our royalty expense as a percentage of
net revenue remained relatively steady for the years ended
December 31, 2007 and 2006, increasing to 3.8% from 3.7%.
Interest expense. Interest expense for the
year ended December 31, 2007 was $3.0 million, an
increase of $0.2 million, from $2.8 million for the
year ended December 31, 2006 due to a higher average level
of borrowings in 2007.
Interest income. Interest income for the year
ended December 31, 2007 was $1.2 million, an increase
of $0.3 million, or 28.5%, from $0.9 million for the
year ended December 31, 2006, as a result of increased
levels of cash and cash equivalents, offset by slightly lower
interest rates.
Income tax expense. Income tax expense for the
year ended December 31, 2007 was $1.0 million, an
increase of $0.5 million, or 92.1%, from $0.5 million
for the year ended December 31, 2006. This increase was
primarily attributable to increased income before income taxes,
partially offset by a decrease in our effective income tax rate
to 40.0% from 46.9%.
Net income. Our net income for the year ended
December 31, 2007 was $1.5 million, an increase of
$0.9 million, or 155.2%, as compared to net income of
$0.6 million for the year ended December 31, 2006, due
to the factors discussed above.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Net revenue. Our net revenue for the year
ended December 31, 2006 was $72.1 million, an increase
of $20.3 million, or 39.2%, as compared to net revenue of
$51.8 million for the year ended December 31, 2005.
This increase was primarily due to increased enrollment,
increases in tuition rates, including a 8.3% to 12.5% tuition
increase for students in our online programs that took effect in
May 2006, and reduced levels of institutional scholarships.
End-of-period enrollment increased 26.6% in 2006 compared to
2005, as a result of improved productivity in our recruitment,
marketing, and enrollment operations and the launch of many of
our ground programs in an online delivery format, as limited by
the growth restrictions imposed by the Department of Education,
which were eliminated in October 2006.
Instruction cost and services expenses. Our
instructional cost and services expenses for the year ended
December 31, 2006 were $31.3 million, an increase of
$3.2 million, or 11.5%, as compared to instructional cost
and services expenses of $28.1 million for the year ended
December 31, 2005. This increase was primarily due to
increases in instructional compensation expense and student
support services as a result of the increase in enrollments. Our
instructional cost and services expenses as a percentage of net
revenue decreased by 10.8% to 43.4% for the year ended
December 31, 2006, as compared to 54.2% for the year ended
December 31, 2005. This decrease in 2006 was a result of
the continued shift of our student population to online
programs, our ability to leverage the relatively fixed cost
structure of our campus-based facilities and ground faculty
across an increasing revenue base, and more efficient course
scheduling and faculty utilization.
Selling and promotional expenses. Our selling
and promotional expenses for the year ended December 31,
2006 were $20.1 million, an increase of $6.0 million,
or 43.0%, as compared to selling and promotional expenses of
$14.0 million for the year ended December 31, 2005. As
a percentage of net revenue, our selling and promotional
expenses remained relatively steady for the years ended
December 31, 2006 and 2005, increasing to 27.9% from 27.1%.
General and administrative expenses. Our
general and administrative expenses for the year ended
December 31, 2006 were $15.0 million, an increase of
$2.0 million, or 15.8%, as compared to general and
administrative expenses of $13.0 million for the year ended
December 31, 2005. Bad debt expense increased to
$4.7 million for the year ended December 31, 2006 from
$2.6 million for the year ended December 31, 2005 due
to an increase in net revenue and managements assessment
of our rapidly growing student base and changes in payment
trends. Our general and administrative expenses as a percentage
of net revenue decreased by 4.2% to 20.8% for the year ended
December 31, 2006, from 25.0% for the year ended
December 31, 2005,
53
as we benefited from leveraging our prior infrastructure
investments over a larger enrollment and revenue base.
Royalty to former owner. In connection with
our royalty fee arrangement with our former owner, we incurred
royalty expenses for the year ended December 31, 2006 of
$2.7 million, an increase of $1.1 million, or 65.4%,
as compared to royalty expenses incurred of $1.6 million
for the year ended December 31, 2005. Our royalty expense
as a percentage of net revenue increased by 0.6% to 3.7% for the
year ended December 31, 2006, from 3.1% for the year ended
December 31, 2005. These increases were attributable to the
increase in our net revenue derived from our online programs,
which grew at a faster rate than other revenue sources.
Interest expense. Interest expense for the
year ended December 31, 2006 was $2.8 million, a
decrease of $0.3 million, or 8.7%, from $3.1 million
for the year ended December 31, 2005. The decrease was
primarily due to a lower average level of borrowings in 2006.
Interest income. Interest income for the year
ended December 31, 2006 was $0.9 million, an increase
of $0.6 million, from $0.3 million for the year ended
December 31, 2005 as a result of increased levels of cash
and cash equivalents earning interest.
Income tax expense (benefit). Income tax
expense for the year ended December 31, 2006 was
$0.5 million, an increase of $4.0 million from income
tax benefit of $3.4 million for the year ended
December 31, 2005. This increase was primarily attributable
to our net income before income taxes and a change in our
effective income tax rate to 46.9% from 44.5%.
Net income (loss). Our net income for the year
ended December 31, 2006 was $0.6 million, an increase
of $4.9 million as compared to net loss of
$4.3 million for the year ended December 31, 2006 due
to the factors discussed above.
Seasonality
Our net revenue and operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to changes in enrollment. Student population varies as a result
of new enrollments, graduations, and student attrition. A
portion of our ground students do not attend courses during the
summer months (June through August), which affects our results
for our second and third fiscal quarters. Because a significant
amount of our campus costs are fixed, the lower revenue
resulting from the decreased enrollment has historically
contributed to operating losses during those periods. As we
increase the relative proportion of our online students, we
expect this summer effect to lessen. Partially offsetting this
summer effect in the third quarter has been the sequential
quarterly increase in enrollments that has occurred as a result
of the traditional fall school start. This increase in
enrollments also has occurred in the first quarter,
corresponding to calendar year matriculation. In addition, we
typically experience higher net revenue in the fourth quarter
due to its overlap with the semester encompassing the
traditional fall school start and in the first quarter due to
its overlap with the first semester of the calendar year. A
portion of our expenses do not vary proportionately with
fluctuations in net revenue, resulting in higher operating
income in the first and fourth quarters relative to other
quarters. We expect quarterly fluctuations in operating results
to continue as a result of these seasonal patterns.
Liquidity
and Capital Resources
Liquidity. We financed our operating
activities and capital expenditures during the years ended
December 31, 2005, 2006, and 2007 and the first six months
of 2008 primarily through cash provided by operating activities
and several private placements of securities. Our unrestricted
cash, cash equivalents, and marketable securities were
$14.4 million, $23.2 million, and $7.2 million at
December 31, 2006 and 2007 and June 30, 2008,
respectively.
54
During 2007, we entered into a line of credit arrangement with a
bank for $6.0 million. As of December 31, 2007, the
entire $6.0 million was drawn. We repaid this line in full
in February 2008 and we terminated the facility in May 2008.
A significant portion of our net revenue is derived from tuition
financed by the Title IV programs. Federal regulations
dictate the timing of disbursements under the Title IV
programs. Students must apply for new loans and grants each
academic year, which starts July 1 for Title IV purposes.
Loan funds are generally provided by lenders in multiple
disbursements for each academic year. The disbursements are
usually received by the start of the second week of the
semester. These factors, together with the timing of our
students beginning their programs, affect our operating cash
flow. We believe we have a favorable working capital profile as
these Title IV funds and a significant portion of other tuition
and fees are typically received by the start of the second week
of a semester and the revenue is recognized and the related
expenses are incurred over the duration of the semester, which
reduces the impact of the growth in our accounts receivables
associated with our enrollment growth.
Based on our current level of operations and anticipated growth,
we believe that our cash flow from operations and other sources
of liquidity, including cash, and cash equivalents, will provide
adequate funds for ongoing operations, planned capital
expenditures, and working capital requirements for at least the
next 24 months.
Operating Activities. Net cash used by
operating activities for the six months ended June 30, 2008
was $1.3 million. This reduction from the cash provided by
operating activities during the year ended December 31,
2007 is due to the payment of $19.5 million made to our
former owner in April 2008 to satisfy in full all past royalties
due under the royalty agreement and the elimination of the
existing obligation to pay royalties for online student revenues
in perpetuity. Excluding this payment, net cash provided by
operating activities for the six months ended June 30, 2008
would have been $10.8 million. Net cash provided by
operating activities for the year ended December 31, 2007
was $7.1 million. Our operating cash flows were affected by
our dispute with our former owner; as previously discussed,
during 2007 we accrued $3.8 million of royalties payable to
our former owner and funded a $3.0 million deposit in
connection with a preliminary settlement of that dispute with
our former owner. Excluding the accrual and payment to our
former owner, net cash provided by operating activities would
have been $6.3 million. Our tax payments exceeded our tax
expense as our $5.0 million of income taxes paid
represented a majority of our 2006 and 2007 tax obligations.
Net cash provided by operating activities for the year ended
December 31, 2006 was $6.8 million. As previously
discussed, we accrued $2.7 million of royalties payable to
our former owner during fiscal year 2006. Excluding the accrued
royalties to our former owner, net cash provided by operating
activities would have been $4.1 million. Our tax expense
exceeded our income taxes paid as a significant portion of our
income tax payable for fiscal year 2006 was paid in early 2007.
Net cash used in operating activities for the year ended
December 31, 2005 was $7.0 million which was primarily
driven by our net loss. During the period, we accrued
$1.0 million of royalties payable to our former owner.
Excluding the accrued royalties to our former owner, net cash
used in operating activities would have been $8.0 million.
Investing Activities. Net cash provided by
(used in) investing activities was $(10.0) million,
$6.7 million, and $(7.6) million for the years ended
December 31, 2005, 2006, and 2007, respectively, and $(4.0)
million for the six months ended June 30, 2008. Our cash
used in investing activities is primarily related to the
purchase of property, plant, and equipment and leasehold
improvements. In 2005, we purchased $9.2 million of investments
related to a letter of credit required by the Department of
Education and associated with our growth restrictions. This
letter of credit was released in 2006, resulting in investment
proceeds of $9.0 million. Capital expenditures were
$0.8 million, $2.4 million and $7.4 million for
the years ended December 31, 2005, 2006, and 2007,
respectively, and $4.0 million for the six months ended
June 30, 2008. A majority of our historical capital
expenditures are related to our ground campus in Phoenix,
Arizona. Our online business does not require significant
capital expenditures and we expect capital expenditures to
represent a decreasing percentage of net revenue in the future.
However, we will continue to invest in computer equipment and
office furniture and fixtures to support our increasing employee
headcounts.
55
Financing Activities. Net cash provided by
(used in) financing activities was $16.0 million,
$(1.7) million, and $9.3 million for the years ended
December 31, 2005, 2006, and 2007, respectively, and
$(10.7) million for the six months ended June 30,
2008. During these periods, principal payments on notes payable,
capital lease obligations and our line of credit were offset by
private placements of securities by our stockholders and amounts
drawn on our line of credit. Net cash used in financing
activities for the six months ended June 30, 2008 also
included the $6.0 million related to the repurchase of a
warrant from our former owner pursuant to the standstill
agreement.
Contractual
Obligations
The following table sets forth, as of December 31, 2007,
the aggregate amounts of our significant contractual obligations
and commitments with definitive payment terms due in each of the
periods presented (in millions):
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Payments Due by Period
|
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Less than
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Years
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Years
|
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More than
|
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Total
|
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1 Year
|
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2-3
|
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4-5
|
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5 Years
|
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Long term
debt(1)
|
|
$
|
2.4
|
|
|
$
|
0.6
|
|
|
$
|
1.3
|
|
|
$
|
0.5
|
|
|
$
|
0.0
|
|
Capital lease
obligations(1)
|
|
|
52.5
|
|
|
|
3.7
|
|
|
|
7.0
|
|
|
|
6.8
|
|
|
|
35.0
|
|
Tenant improvement
obligations(1)
|
|
|
2.3
|
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
Operating lease
obligations(2)
|
|
|
30.4
|
|
|
|
2.2
|
|
|
|
4.2
|
|
|
|
3.7
|
|
|
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
87.6
|
|
|
$
|
6.5
|
|
|
$
|
14.8
|
|
|
$
|
11.0
|
|
|
$
|
55.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 8, Notes Payable and Capital Lease
Obligations, to our financial statements, which are
included elsewhere in this prospectus, for a discussion of our
long term debt and capital lease obligations. |
|
|
|
(2) |
|
See Note 9, Commitments and Contingencies, to
our financial statements, which are included elsewhere in this
prospectus, for a discussion of our operating lease obligations. |
The foregoing obligations exclude potential royalty payments to
Blanchard Education, LLC under our license agreement, the
amounts of which are contingent on tuition revenue from certain
of our business programs.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a material current or future
effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources.
Impact of
Inflation
We believe that inflation has not had a material impact on our
results of operations for the years ended December 31,
2005, 2006, or 2007 and the six months ended June 30, 2008.
There can be no assurance that future inflation will not have an
adverse impact on our operating results and financial condition.
Non-GAAP Discussion
In addition to our GAAP results, we use Adjusted EBITDA as a
supplemental measure of our operating performance and as part of
our compensation determinations. Adjusted EBITDA is not required
by or presented in accordance with GAAP and should not be
considered as an alternative to net income, operating income, or
any other performance measure derived in accordance with GAAP,
or as an alternative to cash flow from operating activities or
as a measure of our liquidity.
In this prospectus, 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
56
April 15, 2008, as discussed above and in Note 2 to
our financial statements, which are included elsewhere in this
prospectus, and (ii) management fees and expenses that are
no longer paid or that will no longer be payable following
completion of this offering.
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. See
Compensation Discussion and Analysis Impact of
Performance on Compensation. 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 and
royalty expenses paid to our former owner are not considered
reflective of our core performance. We believe Adjusted EBITDA
allows us to compare our current operating results with
corresponding historical periods and with the operational
performance of other companies in our industry because it does
not give effect to potential differences caused by variations in
capital structures (affecting relative interest expense,
including the impact of write-offs of deferred financing costs
when companies refinance their indebtedness), tax positions
(such as the impact on periods or companies of changes in
effective tax rates or net operating losses), the book
amortization of intangibles (affecting relative amortization
expense), and other items that we do not consider reflective of
underlying operating performance. We also present Adjusted
EBITDA because we believe it is frequently used by securities
analysts, investors, and other interested parties as a measure
of performance.
In evaluating Adjusted EBITDA, you should be aware that in the
future we may incur expenses similar to the adjustments
described above. Our presentation of Adjusted EBITDA should not
be construed as an inference that our future results will be
unaffected by expenses that are unusual, non-routine, or
non-recurring. Adjusted EBITDA has limitations as an analytical
tool, and you should not consider it in isolation, or as a
substitute for analysis of our results as reported under GAAP.
Some of these limitations are that it does reflect:
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|
|
|
|
cash expenditures for capital expenditures or contractual
commitments;
|
|
|
|
changes in, or cash requirements for, our working capital
requirements;
|
|
|
|
interest expense, or the cash requirements necessary to service
interest or principal payments on our indebtedness;
|
|
|
|
the cost or cash required to replace assets that are being
depreciated or amortized; and
|
|
|
|
|
|
the impact on our reported results of earnings or charges
resulting from (i) royalties to our prior owner, including
amortization of royalties prepaid in connection with our
settlement, or (ii) management fees and expenses that were
payable until completion of this offering.
|
In addition, other companies, including other companies in our
industry, may calculate these measures differently than we do,
limiting the usefulness of Adjusted EBITDA as a comparative
measure. Because of these limitations, Adjusted EBITDA should
not be considered as a substitute for net income, operating
income, or any other performance measure derived in accordance
with GAAP, or as an alternative to cash flow from operating
activities or as a measure of our liquidity. We compensate for
these limitations by relying primarily on our GAAP results and
using Adjusted EBITDA only supplementally. For more information,
see our financial statements and the notes to those statements
included elsewhere in this prospectus.
57
The following table presents data relating to Adjusted EBITDA,
which is a non-GAAP measure, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
Restated(a)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(4,286
|
)
|
|
$
|
598
|
|
|
$
|
1,526
|
|
|
$
|
901
|
|
|
$
|
3,224
|
|
Plus: interest expense net of interest income
|
|
|
2,822
|
|
|
|
1,915
|
|
|
|
1,803
|
|
|
|
823
|
|
|
|
1,075
|
|
Plus: income tax expense (benefit)
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
600
|
|
|
|
2,027
|
|
Plus: depreciation and amortization
|
|
|
1,879
|
|
|
|
2,396
|
|
|
|
3,300
|
|
|
|
1,473
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(3,025
|
)
|
|
|
5,438
|
|
|
|
7,645
|
|
|
|
3,797
|
|
|
|
8,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: royalty to former
owner(b)
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
1,629
|
|
|
|
1,488
|
|
Plus: management fees and
expenses(c)
|
|
|
511
|
|
|
|
958
|
|
|
|
296
|
|
|
|
125
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(895
|
)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
5,551
|
|
|
$
|
10,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Our financial statements at December 31, 2006 and 2007 and
for each of the three years in the period ended
December 31, 2007 have been restated. See Note 3,
Restatement of Financial Statements in our financial
statements that are included elsewhere in this prospectus. |
|
|
|
(b) |
|
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 Note 2 to our
financial statements included with this prospectus. |
|
|
|
(c) |
|
Reflects management fees and expenses of $0.1 million,
$0.3 million, and $0.3 million for the years ended
December 31, 2005, 2006, and 2007, respectively, and
$0.1 million and $0.2 million for the six month
periods ended June 30, 2007 and 2008, respectively, to the
general partner of Endeavour Capital, and an aggregate of
$0.4 million and $0.7 million for the years ended
December 31, 2005 and 2006, respectively, to an entity
affiliated with a former director and another affiliated with a
significant stockholder following their investment in us. The
agreements relating to these arrangements have all terminated or
will terminate by their terms upon the closing of this offering.
See Certain Relationships and Related Transactions. |
To date, we have not granted or issued any stock-based
compensation. Prior to this offering, we intend to adopt and
implement a stock incentive plan pursuant to which we will
periodically grant awards to our directors, officers, employees,
and other eligible participants. Upon the consummation of this
offering and pursuant to this plan, we intend to make
substantial awards to our new Chief Executive Officer and to
other employees, a significant portion of which will be fully
vested upon grant. As a result, we expect to incur non-cash,
stock-based compensation expenses in future periods, including
expenses of approximately $10 million in the second half of
2008. Although we believe that equity-plan related compensation
will be a key element of our employee relations and long-term
incentives, we intend to exclude it as an expense when
evaluating our core operating performance in any particular
period. Accordingly, following this offering, we intend to
include stock-based compensation expenses, along with management
fees and expenses, royalty expenses to our former owner, and any
other expenses and income that we do not consider reflective of
our core operating performance, as adjustments when calculating
Adjusted EBITDA.
Quantitative
and Qualitative Disclosure About Risk
Market risk. We have no derivative financial
instruments or derivative commodity instruments. We invest cash
in excess of current operating requirements in short term
certificates of deposit and money market instruments.
Interest rate risk. We manage interest rate
risk by investing excess funds in cash equivalents and
marketable securities bearing variable interest rates, which are
tied to various market indices. Our future
58
investment income may fall short of expectations due to changes
in interest rates or we may suffer losses in principal if we are
forced to sell securities that have declined in market value due
to changes in interest rates. At December 31, 2007 and
June 30, 2008, a 10% increase or decrease in interest rates
would not have a material impact on our future earnings, fair
values, or cash flows. All of our notes payable and capital
lease obligations are fixed rate instruments and are not subject
to fluctuations in interest rates.
Recent
Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48). This interpretation, among other
things, creates a two step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise
concludes that a tax position, based solely on its technical
merits, is more-likely-than-not to be sustained upon
examination. Measurement (step two) determines the amount of
benefit that more-likely-than-not will be realized upon
settlement. Derecognition of a tax position that was previously
recognized would occur when a company subsequently determines
that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN 48 specifically prohibits
the use of a valuation allowance as a substitute for
derecognition of tax positions, and it has expanded disclosures.
We adopted FIN 48 on January 1, 2008, and our adoption
did not have a material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157) which provides enhanced
guidance for using fair value to measure assets and liabilities.
SFAS No. 157 establishes a common definition of fair
value, provides a framework for measuring fair value under GAAP
and expands disclosure requirements about fair value
measurements. SFAS No. 157 is effective for financial
statements issued in fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We adopted SFAS No. 157 on January 1,
2008, and its adoption did not will have a material impact on
our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115
(SFAS No. 159). This standard permits
entities to choose to measure financial instruments and certain
other items at fair value and is effective for the first fiscal
year beginning after November 15, 2007.
SFAS No. 159 must be applied prospectively, and the
effect of the first re-measurement to fair value, if any, should
be reported as a cumulative - effect adjustment to the opening
balance of retained earnings. We adopted of
SFAS No. 159 on January 1, 2008 and its adoption
did not have a material impact on our financial position or
results of operations.
59
BUSINESS
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 working adults. 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
16,500 students at June 30, 2008, representing a compound
annual growth rate of approximately 46%. At December 31,
2007, our enrollment was approximately 14,800, 85% of our
students were enrolled in our online programs, and 62% of our
students were pursuing masters degrees.
Our three core disciplines of education, business, and
healthcare represent large markets with attractive employment
opportunities. According to a March 2008 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
2005-06
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.
Furthermore, the BLS has projected that the education, business,
and healthcare fields will generate approximately six million
new jobs between 2006 and 2016.
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, 2008, approximately
92% 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, 2007 was approximately 14,800,
representing an increase of approximately 38% over our
enrollment at December 31, 2006. Our net revenue and
operating income for the year ended December 31, 2007 were
$99.3 million and $4.3 million, respectively,
representing increases of 37.7% and 42.8%, respectively, over
the year ended December 31, 2006. Our enrollment at
June 30, 2008 was approximately 16,500, representing an
increase of approximately 60% over our enrollment at
June 30, 2007. Our net revenue and operating income for the
six months ended June 30, 2008 were $70.3 million and
$6.3 million, respectively, representing increases of 59.5%
and 172.2%, respectively, over the six months ended
June 30, 2007. We believe our growth is the result of a
combination of factors, including our:
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|
|
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focus on our core disciplines of education, business, and
healthcare;
|
|
|
|
convenient and flexible online delivery platform targeted at
working adults;
|
|
|
|
innovative marketing, recruitment, and retention
approach; and
|
|
|
|
expanding portfolio of academically rigorous, career-oriented
program offerings.
|
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. As part of our efforts to ensure that our students
graduate with the knowledge, competencies, and skills that will
enable them to succeed following graduation, we have established
an Office of Assessment and Institutional Research to monitor
student and faculty performance and improve student satisfaction.
We have been regionally accredited by the Higher Learning
Commission and its predecessor since 1968, and we were
reaccredited in 2007 for the maximum term of ten years. We are
regulated by the Department of Education as a result of our
participation in the federal student financial aid programs
authorized by Title IV of the Higher Education Act, and, at
the state level, we are licensed to operate and offer our
programs by the
60
Arizona State Board for Private Postsecondary Education. 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 institution-wide state authorization and
regional accreditation, together with these specialized
accreditations, reflect the quality of our programs, enhance
their marketability, and improve the employability of our
graduates.
History
Grand Canyon College was founded in Prescott, Arizona in 1949 as
a traditional, private, non-profit college and moved to its
existing campus in Phoenix, Arizona in 1951. Established as a
Baptist-affiliated institution with a strong emphasis on
religious studies, the school initially focused on offering
bachelors degree programs in education. Over the years,
the school expanded its curricula to include programs in the
sciences, nursing, business, music, and arts. The college
obtained regional accreditation in 1968 from the Commission on
Institutions of Higher Education, North Central Association of
Colleges and Schools, the predecessor to the Higher Learning
Commission, and began offering nursing programs in the 1970s and
masters degree programs in education and business in the
1980s. In 1989, it achieved university status and became Grand
Canyon University. The university introduced its first distance
learning programs in 1997, and launched its first online
programs in 2003 in business and education. In early 2000, it
discontinued its Baptist affiliation and became a
non-denominational Christian university.
In late 2003, the schools Board of Trustees initiated a
process to evaluate alternatives as a result of the
schools poor financial condition and, in February 2004,
several of our current stockholders acquired the assets of the
school and converted its operations to a for-profit institution.
In May 2005, following this change in control, the Department of
Education recertified us to continue participating in the
Title IV programs on a provisional basis, subject to
certain restrictions and requirements. In its review, the
Department of Education concluded that we did not satisfy its
standards of financial responsibility and identified other
concerns about our administrative capability. As a result, 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. At this time, our lead institutional
investor, Endeavour Capital, invested in us and provided the
capital to support the letter of credit requirement as well as
other working capital needs. In October 2006, based on our
significantly improved financial condition and performance, the
Department of Education eliminated the letter of credit
requirement and allowed the growth restrictions to expire. In
2007, the Department of Education eliminated the heightened cash
monitoring restrictions and returned us to the advance payment
method.
Since February 2004, we have enhanced our senior management
team, expanded our online platform, increased our program
offerings, and initiated a marketing and branding effort to
further differentiate us in the markets in which we operate. We
have also made investments to enhance our student and technology
support services. We believe these investments, combined with
our management expertise, provide a platform that will support
continued enrollment and revenue growth. Many of our ground
programs continue to include Christian study requirements. While
our online programs do not have such requirements, many include
ethics requirements and offer religious courses as electives.
Industry
Postsecondary education. The United States
market for postsecondary education represents a large and
growing opportunity. According to the March 2008 NCES report,
total revenue for all degree-granting postsecondary institutions
was over $385 billion for the
2004-05
school year. In addition, the number of students enrolled in
postsecondary institutions was projected to be approximately
18.0 million in 2007 and the number was projected to grow
to 18.8 million by 2010. We believe that future growth in
this market will be driven, in part, by an increasing number of
job openings in occupations that require bachelors or
masters degrees. A November 2007 report based on BLS data
has projected the number of such jobs to grow approximately 17%
and 19%, respectively, between 2006 and 2016, or nearly double
the growth rate the BLS projects for occupations that do not
require postsecondary degrees. Moreover, individuals with a
postsecondary degree are able to obtain a significant wage
premium relative to individuals without a degree. According to
the
61
U.S. Census Bureau, in 2006, the median income for
individuals age 25 years or older with a
bachelors or masters degree was approximately 70% or
102% higher, respectively, than for a high school graduate of
the same age with no college education.
According to the March 2008 NCES report, as of 2007 71% of
adults age 25 years or older did not possess a
bachelors or higher degree. In a December 2007
report, the NCES estimated that, as of 2005, adults
age 25 years or older represented 39% of total
U.S. postsecondary enrollments, or approximately
6.8 million students. We believe many of these students are
pursuing a postsecondary degree while employed in order to
increase their compensation or enhance their opportunities for
career advancement, often with their current employer. We
further believe that working adult students 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 expect that adults
age 25 years or older will continue to represent a
large and growing segment of the postsecondary education market.
Online postsecondary education. The market for
online postsecondary education is growing more rapidly than the
overall postsecondary market. A 2007 study by Eduventures, LLC,
an education consulting and research firm, projected that from
2002 to 2007 enrollment in online postsecondary programs
increased from approximately 0.5 million to approximately
1.8 million, representing a compound annual growth rate of
approximately 30.4%. In comparison, in December 2007 the
NCES projected a compound annual growth rate of 1.6% 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.
Education, business, and healthcare. The
education, business, and healthcare sectors represent a large
and growing market for postsecondary education. According to the
March 2008 NCES report, these fields ranked as three of the
four most popular fields of postsecondary education, based on
degrees conferred in the
2005-06
school year. We believe the popularity of these fields is driven
by the number and growth of employment opportunities. According
to its 2008-09 Career Guide, the BLS estimates that in 2006
these three fields employed more than 40 million people in
jobs that often require a postsecondary degree. Furthermore, the
BLS has projected that these sectors will generate approximately
six million incremental jobs between 2006 and 2016, not
including job openings resulting from natural attrition. We
believe there is a significant opportunity for education
providers that focus on offering students a career-focused
education in sectors of the workforce with strong job prospects,
particularly where demand for employees is growing but supply is
limited. In a 2007 report, the BLS stated that:
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|
|
Education services was the second largest industry in the United
States and accounted for approximately 13 million jobs.
Nearly half of these jobs were teaching positions that require
at least a bachelors degree, and some required a
masters or doctoral degree. The BLS projected that job
openings in the education services sector will grow by
1.4 million between 2006 and 2016 as a result of overall
population growth and a nationwide focus on improving education
and access to education.
|
|
|
|
|
|
Management, business, and financial occupations comprised
15 million jobs across all industries. The BLS projected
that job opportunities in this field will grow 10% between 2006
and 2016, adding a total of 1.6 million jobs during that
period.
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Healthcare was the largest industry in the United States,
accounting for approximately 14 million jobs and
encompassing seven of the 20 fastest growing occupations. The
BLS projected that employment growth in the healthcare sector
will increase by 3.0 million jobs between 2006 and 2016
principally due to increased demand for healthcare services as a
result of growth in the population in older age groups, rising
life expectancy, and advances in medical technology.
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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, which, according to the March 2008 NCES report,
ranked as three of the four most popular fields of postsecondary
education, based on degrees conferred in the
2005-06
school year. We offer our students career-oriented, academically
rigorous educational programs, supported by specialized courses
within their select disciplines, which enable them to advance
their career prospects in these sectors. We seek to leverage our
historical presence in these disciplines with key branding
relationships, such as our relationship with business author and
industry leader Ken Blanchard, to differentiate our reputation
in the market place. We believe our focused approach enables us
to 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. We believe that working adults are
attracted to the convenience and flexibility of our online
delivery platform 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. At June 30, 2008,
approximately 68.6% of our online students were enrolled in
graduate degree programs.
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 utilize Internet
marketing, seminar and event-based marketing, referrals, and
employer relationships to reach our targeted students. We
provide our enrollment counselors, who serve as our primary
contact with prospective students during the recruitment
process, with career advancement opportunities that promote
longevity and an entrepreneurial drive. We believe that our
enrollment counselors help project a consistent message
regarding our programs and increase the success rate of
converting leads to new enrollments. Finally, we have
implemented a detailed process for recruiting, enrolling, and
retaining new students through which we 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.
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. We continually review and
assess our programs and faculty to ensure that our programs
provide the knowledge and skills that lead to successful student
outcomes. We provide extensive student support services,
including administrative, library, career, and technology
support services, to help maximize the success of our students.
Our Office of Assessment and Institutional Research manages our
efforts to track student and faculty performance by monitoring
student outcomes and developing transparent, measurable
outcomes-based education programs.
Complementary online capabilities and campus-based
tradition. We believe that our online
capabilities, combined with our nearly
60-year
heritage as a traditional campus-based university, differentiate
us in the for-profit postsecondary market and enhance the
reputation of our degree programs among students and employers.
Our online students benefit from our flexible, interactive
online platform, which we believe offers a highly effective
delivery medium for our programs, yet are enrolled in a
university with a traditional campus, faculty, facilities, and
athletic programs. We require our online faculty to undergo
training in the delivery of online programs before teaching
their initial course, while our full-time ground faculty help
maintain the consistency and quality of our online programs by
supervising and conducting peer reviews of our online faculty,
and participating as subject matter experts in the development
of our online curricula. Our campus also offers our ground
students, faculty, and staff an opportunity to participate in a
traditional college experience.
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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. Our Executive Chairman and former Chief
Executive Officer, Brent Richardson, and our Chief
Operating Officer, John Crowley, have each worked in the
education services sector for more than 20 years and have
extensive experience in content development and prospective
student identification and recruitment. Dr. Kathy Player,
our President, has been with Grand Canyon University for
10 years, has played a key role in developing our
reputation for academic rigor and quality, and has been
instrumental in developing our Office of Assessment and
Institutional Research.
Effective July 1, 2008, we hired Brian Mueller, Stan Meyer,
and Dan Bachus to serve as our Chief Executive Officer,
Executive Vice President, and Chief Financial Officer,
respectively. Mr. Mueller has been involved in the
education industry for over 25 years, most recently as the
president of Apollo Group, Inc., a for-profit, postsecondary
education company and the parent company of the University of
Phoenix. Mr. Meyer, who also has over 25 years of
experience in the education industry, most recently served as
the executive vice president of marketing and enrollment for
Apollo Group, Inc. Mr. Bachus, who is a certified public
accountant, has worked in the education industry for
approximately seven years, including as the chief
accounting officer and controller for Apollo Group, Inc.
Growth
Strategies
We intend to pursue the following growth strategies:
Increase enrollment in existing programs. We
continue to increase enrollment in our three core disciplines by
identifying, enrolling, and retaining students seeking careers
in the education, business, and healthcare fields. We believe,
due to the depth of the market in our core disciplines, that our
existing programs, some of which were only recently launched,
provide ample opportunity for growth. Our three core disciplines
serve markets that currently comprise over 40 million jobs,
many of which require postsecondary education, and the BLS has
projected in its 2008-09 Career Guide that these sectors will
continue to grow. In 2007, we increased the number of our
enrollment counselors by 217 to increase our efforts to enroll
prospective students in these fields. We intend to continue to
increase the number of our enrollment counselors and our
marketing personnel, and to provide these individuals with the
training and resources necessary to effectively and efficiently
drive enrollment growth and student retention.
Expand online program and degree offerings. We
develop and offer new programs that we believe have attractive
demand characteristics. We launched 17 new online program
offerings in 2007, including the Ken Blanchard Executive MBA
program, and intend to launch a total of 12 new online programs
in 2008, seven of which were launched in the first six months of
2008. We recently launched our first doctoral degree program, a
Doctorate of Education in Organizational Leadership. Our new
program offerings typically build on existing programs and
incorporate additional specialized courses, which offers our
students the opportunity to pursue programs that address their
specific educational objectives while allowing us to expand our
program offerings with only modest incremental investment. We
also seek to add new programs in additional targeted
disciplines, such as our recently launched programs in
psychology and digital media.
Further enhance our brand recognition. We
continue to enhance our brand recognition by pursuing online and
offline marketing campaigns, establishing strategic branding
relationships with recognized industry leaders, and developing
complementary resources in our core disciplines that increase
the overall awareness of our offerings. In our marketing
efforts, we emphasize the academic rigor and career orientation
of our programs. We seek to promote our brand by establishing
relationships with industry leaders, such as Ken Blanchard, who
have recognizable identities with potential students and further
validate the quality and relevance of our program offerings.
Expand relationships with private sector and government
employers. We seek additional relationships with
health care systems, school districts, emergency services
providers, and other employers through which we can market our
offerings to their employees. As evidence of our success in
these initiatives to date, in the first six months of 2008, we
taught courses at 29 hospitals and had direct billing
arrangements
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with 24 employers covering programs being pursued by over 1,000
of their employees. We recently established a national account
sales team, consisting of professionals with significant sales
and marketing experience, that seeks to develop strategic
relationships on a regional, national, and international basis
across a wide range of employers. 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.
Leverage infrastructure and drive earnings
growth. We have made significant investments in
our people, processes, and technology infrastructure since 2004.
We believe these investments have prepared us to deliver our
academic programs to a much larger student population with only
modest incremental investment. Our current infrastructure is
capable of supporting a significantly larger number of
enrollment counselors, and we intend to expand this group in
order to continue to drive enrollment growth. We implemented a
new learning management system in 2007 to better serve the
demands of our growing student population and have expanded our
student and technology support capabilities to support a larger
student base. We have also invested in administrative and
management personnel and systems to prepare for our anticipated
growth. We intend to leverage our historical investments as we
increase our enrollment, which we believe will allow us to
increase our operating margins over time.
Our
Approach to Academic Quality
Some of the key elements that we focus on to promote a high
level of academic quality include:
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Academically rigorous, career oriented
curricula. We create academically rigorous
curricula that are designed to enable all students to gain the
foundational knowledge, professional competencies, and
demonstrable skills required to be successful in their chosen
fields. Our curriculum is designed and delivered by faculty that
are committed to delivering a high quality, rigorous education.
We design our curricula to address specific career-oriented
objectives that we believe working adult students in the
disciplines we serve are seeking. Through this combination, we
believe that we produce graduates that can compete and become
leaders in their chosen fields.
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Qualified faculty. We demonstrate our
commitment to high quality education by hiring and contracting
qualified faculty with relevant practical experience.
Substantially all of our current faculty members hold at least a
masters degree in their respective field and approximately
38% of our faculty members hold a doctoral degree. Many of our
faculty members are able to integrate relevant, practical
experiences from their professional careers into the courses
they teach. We invest in the professional development of our
faculty members by providing training in ground and online
teaching techniques, hosting events and discussion forums that
foster sharing of best practices, and continually assessing
teaching effectiveness through peer reviews and student
evaluations.
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Standardized course design. We employ a
standardized curriculum development process to ensure a
consistent learning experience with frequent faculty-student
interaction in our courses. We thereafter continuously review
our programs in an effort to ensure that they remain consistent,
up-to-date,
and effective in producing the desired learning outcomes. We
also regularly review student surveys to identify opportunities
for course modifications and upgrades.
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Effective student services. We establish teams
comprised of academic and administrative personnel that act as
the primary support contact point for each of our students,
beginning at the application stage and continuing through
graduation. In recent years, we have also concentrated on
improving the technology used to support student learning,
including enhancing our online learning platform and further
improving student services through the implementation of online
interfaces. As a result, many of our support services, including
academic, administrative, library, and career services, are
accessible online, generally allowing users to access these
services at a time and in a manner that is generally convenient
to them.
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Continual academic oversight. We have
centralized the academic oversight and assessment functions for
all of our programs through our Office of Assessment and
Institutional Research, which continuously evaluates the
academic content, delivery method, faculty performance, and
desired learning outcomes for each of our programs. We
continuously assess outcomes data to
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determine whether our students graduate with the knowledge,
competencies, and skills that are necessary to succeed in the
workplace. The Office and Assessment and Institutional Research
also initiates and manages periodic examinations of our
curricula by internal and external reviewers to evaluate and
verify program quality and workplace applicability. Based on
these processes and student feedback, we determine whether to
modify or discontinue programs that do not meet our standards or
market needs, or to create new programs. The Office and
Assessment and Institutional Research also oversees regular
reviews of our programs conducted by accrediting commissions.
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We also offer, for both our online and ground programs, the
following features in an effort to enrich the academic
experience of current and prospective students:
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Flexibility in program delivery. We also seek
to meet market demands by providing students with the
flexibility to take courses exclusively online or to combine
online coursework with various campus and onsite options. For
example, based on market demand, particularly in connection with
our nursing programs, we have established satellite locations at
multiple hospitals that allow nursing students to take clinical
courses onsite while completing other course work online. We
have established similar onsite arrangements with other major
employers, including schools and school districts through which
students can pursue student teaching opportunities. This
flexibility raises our profile among employers, encourages
students to take and complete courses and eliminates
inconveniences that tend to lessen student persistence.
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Small class size. Over 90% of our online
classes had 25 or fewer students, with no classes exceeding 40
students, and over 80% of our ground classes had 25 or fewer
students. These class sizes provide each student with the
opportunity to interact directly with course faculty and to
receive individualized feedback and attention while also
affording our faculty with the opportunity to engage proactively
with a manageable number of students. We believe this
interaction enhances the academic quality of our programs by
promoting opportunities for students to participate actively and
thus build the requisite knowledge, competencies, and skills.
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Accreditation
and Program Approvals
We believe that the quality of our academic programs is
evidenced by the college- and program-specific accreditations
and approvals that we have pursued and obtained. Grand Canyon
University has been continually accredited by the Higher
Learning Commission and its predecessor since 1968, obtaining
its most recent
ten-year
reaccreditation in 2007. We are licensed in Arizona by the
Arizona State Board for Private Postsecondary Education. In
addition, we have obtained the following specialized
accreditations and approvals for our core program offerings:
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College
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Specialized Accreditations and Program Approvals
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Current Period
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College of Education
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The Arizona State Board of Education
approves our College of Education to offer Institutional
Recommendations for the certification of elementary, secondary,
and special education teachers and school administrators.
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2006 - 2008*
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Ken Blanchard College of Business
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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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2007 - 2017
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College of Nursing and Health Sciences
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The Commission on Collegiate Nursing
Education accredits our Bachelor of Science (B.S.) in Nursing
and Master of Science (M.S.) Nursing degree programs.
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2006 - 2016 (B.S.)
2006 - 2011 (M.S.)
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The Arizona State Board of Nursing
approves our Bachelor of Science (B.S.) in Nursing and Master of
Science (M.S.) Nursing degree programs.
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2006 - 2016 (B.S.)
2006 - 2011 (M.S.)
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The Commission on Accreditation of
Athletic Training Education accredits our Athletic Training
Program.
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2002 - 2008*
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We have had our site visits related
to the renewal of this specialized accreditation or program
approval and are not aware of any factors that could cause this
specialized accreditation or program approval not to be renewed
in the ordinary course.
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Our regional accreditation with the Higher Learning Commission,
and our specialized accreditations and approvals for our core
programs, reflect the quality of, and standards we set for, our
programs, enhance their marketability, and improve the
employability of our graduates.
Curricula
We offer the degrees of Master of Arts in Teaching, Master of
Education, Master of Business Administration, Master of Science,
Bachelor of Arts, and Bachelor of Science and a variety of
programs leading to each of these degrees. Many of our degree
programs also offer the opportunity to obtain one or more
emphases. We require students to take a minimum of three
designated courses to achieve a given emphasis. We also offer
certificate programs, which consist of a series of courses
focused on a particular area of study, for students who seek to
enhance their skills and knowledge. In addition, we recently
were approved to offer our first doctoral program in education,
which began in May 2008.
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We offer our academic programs through our four distinct
colleges:
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the College of Education, which has a nearly
60-year
history as one of Arizonas leading teachers colleges
and consistently graduates teachers who meet or exceed state
averages on the Arizona Educator Proficiency Assessment exams;
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the Ken Blanchard College of Business, which has a well-known
brand among our target student population, an advisory board
that includes nationally recognized business leaders, and a
reputation for offering career-oriented degree programs,
including an Executive MBA and programs in leadership,
innovation, and entrepreneurship;
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the College of Nursing and Health Sciences, which has a strong
reputation within the Arizona healthcare community and is the
second largest nursing program in Arizona; and
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the College of Liberal Arts, which develops and provides many of
the general education course requirements in our other colleges
and also serves as one of the vehicles through which we offer
programs in additional targeted disciplines.
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We license the right to utilize the name of Ken Blanchard in
connection with our business school and Executive MBA Programs.
See Intellectual Property.
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Under the overall leadership of our senior academic affairs
personnel and the deans of the individual colleges, each of the
colleges organizes its academic programs through various
departments and schools. At December 31, 2007, we offered
82 academic degree programs and emphases, as follows:
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College of Education
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Ken Blanchard College of Business
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Degree Program
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Emphasis
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Degree Program
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Emphasis
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Master of Arts in Teaching
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Ken Blanchard Executive MBA
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Master of Education
Bachelor of Science
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Education Administration
Institutional Recommendation (IR)
Education Administration
Organizational Leadership
Education Administration
School Leadership
Elementary Education IR
Elementary Education
Non-IR
Curriculum and Instruction: Reading
Curriculum and Instruction:
Technology
Secondary Education IR
Secondary Education Non-IR
Special Education for Certified Special
Educators
Teaching English to Speakers of Other
Languages
Special Education IR
Special Education Non-IR
School Counseling K-12*
Elementary/Special Education*
Elementary Education Early
Childhood Education
Elementary Education
English
Elementary Education
Math
Elementary Education
Science
Secondary Education
Biology*
Secondary Education
Business Education
and Technology
Secondary Education
Chemistry*
Secondary Education
Mathematics
Secondary Education
Social Studies
Secondary Education
Physical Education
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Master of Business Administration
Master of Science
Bachelor of Science
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General Management
Health Systems Management
Leadership
Management of Information Systems
Marketing
Six Sigma
Leadership Leadership Disaster Preparedness Crisis Management Executive Fire Leadership
Accounting Business Administration Business Administration Healthcare Management Business
Administration Management of Information Systems Marketing Applied Management Accounting Finance Entrepreneurial Studies Public Safety Administration
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Bachelor of Arts
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English for Secondary Teachers*
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Indicates program was offered on
ground only.
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College of Nursing and Health Sciences
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College of Liberal Arts
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Degree Program
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Emphasis
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Degree Program
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Emphasis
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Master of Science Nursing
Bachelor of Science in Nursing
Bachelor of Science
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Family Nurse Practitioner*
Nursing Leadership in Healthcare
Systems
Clinical Nurse Specialist*
Clinical Nurse Specialist (Education
Focus)*
Nursing Education
Biology Basic Science*
Biology Pre-Medicine*
Biology Pre-Pharmacy*
Biology Pre-Physician
Assistant*
Biology Pre-Physical Therapy*
Biology Pre-Occupational
Therapy*
Biology Pre-Veterinary*
Health Science: Professional Development
and Advanced Patient Care
Medical Imaging Sciences
Athletic Training*
Corporate Fitness and Wellness*
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Bachelor of Arts in History*
Bachelor of Science
Bachelor of Arts
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Justice Studies*
Psychology
Sociology*
Communications Digital Media*
Communications Graphic Design*
Communications Public
Relations*
English Literature*
Interdisciplinary Studies
Communication
Christian Leadership
Intercultural Studies
Christian Studies
Biblical/Theological Studies
Christian Studies Pastoral
Ministry
Christian Studies Worship
Ministry
Christian Studies Youth
Ministry
Christian Leadership
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Physical Education*
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Recreation*
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Undergraduate Minors
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Athletic Coaching*
Behavioral Sciences* Business
Critical Thinking and Expression*
Exercise Science* Family Studies Health Education* History*
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Justice Studies*
Physical Education*
Political Science*
Psychology*
Recreation*
Social Sciences*
Sociology*
Spanish*
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Indicates program was offered on
ground only.
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We have established relationships with health care systems,
school districts, emergency services providers, and other
employers through which we offer programs onsite to provide
flexibility and convenience to students and their employers. For
example, for our nursing programs, we offer clinical courses
onsite at hospitals and other healthcare centers with which we
have relationships, and also arrange to allow these students to
complete their clinical work onsite. We refer to students
attending a program with us through such relationships as
professional studies ground students.
We offer our programs through three 16-week semesters in a
calender year, with two starts available per semester for our
online students and our professional studies ground students and
one start available per semester for our traditional ground
students. During each semester, classes may last for five,
eight, or 16 weeks. Depending on the program, students generally
enroll in one to three courses per semester. We require online
students to complete two courses of three credits hours each
during a 16-week semester, with each student concentrating on
one course during each eight-week period. While there is no
explicit requirement, we communicate to our online students our
expectation that they access their online student classroom at
least four times each week in order to maintain an active
dialogue with their professors and classmates. Our online
programs provide a digital record of student interactions for
the course instructor to assess students levels of
engagement and demonstration of required competencies.
New
Program Development
We typically identify a potential new degree program or emphasis
area through market demand or from proposals developed by
faculty, staff, students, alumni, or partners, and then perform
an analysis of the
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development cost and the long-term demand for the program. If,
following this analysis, we decide to proceed with the program,
our Curriculum Design and Development Team designates a subject
matter expert who works with other faculty and our curriculum
development personnel to design a program that is consistent
with our academically rigorous, career-oriented program
standards. The program is then reviewed by the dean of the
applicable college, the Academic Affairs Committee, our
President, and our provost and chief academic officer and,
finally, presented for approval to our Program Standards and
Evaluation Committee. Upon approval, the subject matter expert
develops a course syllabus and our Marketing Department creates
a marketing plan to publicize the new program. Our average
program development process is six months from proposal to
course introduction. The development process is typically longer
if we are expanding into a new field or offering a new type of
degree.
Assessment
In 2007, we established our Office of Assessment and
Institutional Research to serve as our central resource for
assessing and continually improving our curricula, student
satisfaction and learning outcomes, and overall institutional
effectiveness. Among other things, the assessment team reviews
student course satisfaction surveys, analyzes archived student
assignments to assess whether a given program is developing
students foundational knowledge, professional
competencies, and skills to achieve the expected learning
outcomes, supervises and analyzes faculty peer reviews, and
monitors program enrollment and retention data. Based on this
data and the conclusions of the assessment team, we modify
programs as necessary to meet our student satisfaction and
educational development standards and make recommendations as to
adding or modifying programs.
Faculty
Our faculty includes full-time, ground-based faculty who teach
under a nine-month or twelve-month teaching contract, as well as
adjunct ground-based faculty and online faculty who we contract
to teach on a
course-by-course
basis for a specified fee. As of June 30, 2008, we employed
452 ground-based faculty members, of which 53 were full-time and
399 were part-time adjuncts, and maintained a pool of over 1,000
online faculty members, all of whom had completed our required
training and 753 of which taught at least one course during the
first six months of 2008. Substantially all of our current
faculty members hold at least a masters degree in their
respective field and approximately 38% of our faculty members
hold a doctoral degree. On occasion, we engage a limited number
of faculty members who may not hold a graduate degree, but who
evidence significant professional experience and achievement in
their respective subject areas.
We establish full-time, adjunct and online positions based on
program and course enrollment. As enrollment increases, we
expect to continue to increase our online faculty pool. We
manage faculty workload by limiting our faculty to a maximum of
four courses per semester and by restricting the number of
students per class.
We attract faculty through referrals by current faculty members
and advertisements in education and trade association journals,
as well as from direct inquiries through our website. We require
each new online faculty member to complete an online orientation
and training program that leads to certification and assignment.
We believe that potential faculty members are attracted to us
because of the opportunity to teach academically rigorous,
career-oriented material to motivated working adult students.
We believe that the quality of our faculty is critical to our
success, particularly because faculty members have more
interaction with our students than any other university
employee. Accordingly, we regularly review the performance of
our faculty, including by engaging our full-time ground faculty
and other specialists to conduct peer reviews of our online
faculty, monitoring the amount of contact that faculty have with
students in our online programs, reviewing student feedback, and
evaluating the learning outcomes achieved by students. If we
determine that a faculty member is not performing at the level
that we require, we work with the faculty member to improve
performance, including by assigning him or her a mentor or
through other means. If the faculty members performance
does not improve, we terminate the faculty members
contract or employment.
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Student
Support Services
Encouraging students that enter Grand Canyon University to
complete their degree programs is critical to the success of our
business. We focus on developing and providing resources that
support the student educational experience, simplify the student
enrollment process, acclimate students to our programs and our
online environment, and track student performance toward degree
completion. Many of our support services, including academic,
administrative, and library services, are accessible online and
are available to our online and ground students, allowing users
to access these services at a time and in a manner that is
generally convenient to them. The student support services we
provide include:
Academic services. We provide students with a
variety of services designed to support their academic studies.
Our Center for Academic and Professional Success offers new
student orientation, academic advising, technical support,
research services, writing services, and other tutoring to all
our online and campus students.
Administrative services. We provide students
with the ability to access a variety of administrative services
both telephonically and via the Internet. For example, students
can register for classes, apply for financial aid, pay their
tuition and access their transcripts online. We believe this
online accessibility provides the convenience and self-service
capabilities that our students value. Our financial aid
counselors provide personalized online and telephonic support to
our students.
Library services. We provide a mix of online
and ground resources, services, and instruction to support the
educational and research endeavors of all students, faculty, and
staff, including ground and online libraries and a qualified
library staff that is available to help faculty and students
with research, teaching, and library resource instruction.
Collectively, our library services satisfy the criteria
established by the Higher Learning Commission and other
accrediting and approving bodies for us to offer undergraduate,
masters and doctoral programs.
Career services. For those students seeking to
change careers or explore new career opportunities, we offer
career services support, including resume review and evaluation,
career planning workshops, and access to career services
specialists for advice and support. Other resources that we
offer include a Job Readiness Program, which advises students on
matters such as people skills, resumes and cover letters, mock
interviews, and business etiquette; a job board, which
advertises employment postings and career exploration
opportunities; career counseling appointments and consultations;
and career fairs.
Technology support services. We provide online
technical support 16 hours per day during the week and
14 hours per day on weekends to help our students remedy
technology-related issues. We also provide online tutorials and
Frequently Asked Questions for students who are new
to online coursework.
Marketing,
Recruitment, and Retention
Marketing. We engage in a range of marketing
activities designed to position us as a provider of academically
rigorous, career-oriented educational programs, build strong
brand recognition in our core disciplines, differentiate us from
other educational providers, raise awareness among prospective
students, generate enrollment inquiries, and stimulate student
and alumni referrals. Our online target market includes working
adults focused on program quality, convenience, and career
advancement goals. Our ground target market includes traditional
college students, working adults seeking a high quality
education in a traditional college setting, and working adults
seeking to take classes with a cohort onsite at their
employers facility. In marketing our programs to
prospective students, we emphasize the value of the educational
experience and the academic rigor and career orientation of the
programs, rather than the cost or speed to graduation. We
believe this approach reinforces the qualities that we want
associated with our brand and also attracts students who tend to
be more persistent in starting and finishing their programs.
We have established dedicated teams, consisting of both
marketing and enrollment personnel, at each of our colleges to
lead our efforts to attract new students. We believe that these
blended groups, organized around each core discipline, promote
more effective internal communication within our sales and
marketing functions, allow deeper penetration within our target
markets due to each teams singular focus on a core
discipline, and
72
enable us to gain a better understanding of the attributes of
our students who ultimately enroll and graduate so that we can
target our marketing and enrollment processes accordingly.
To generate student leads, our marketing and enrollment
personnel employ an integrated marketing approach that utilizes
a variety of lead sources to identify prospective students.
These lead generation sources include:
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Internet and affiliate advertising, which generates the majority
of our leads and which includes purchasing leads from
aggregators and also engaging in targeted, direct email
advertising campaigns, and coordinated campaigns with various
affiliates;
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search engine optimization techniques, through which we seek to
obtain high placement in search engine results in response to
key topic and word searches and drive traffic to our website;
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seminar and event marketing, in which our marketing and
enrollment personnel host group events at various venues,
including community colleges, corporations, and hospitals;
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referrals from existing students, alumni, and employees;
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a national accounts program that seeks to develop relationships
with employers in our core disciplines, including healthcare
providers, school districts, emergency services providers, and
large corporations, that may be interested in providing
dedicated and customized online and onsite educational
opportunities to their employees, and to encourage senior
executives to participate in executive training
programs; and
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print and direct mail advertising campaigns, and other public
relations and communications efforts, including promoting our
athletic programs and student and alumni events.
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Recruitment. Once a prospective student has
indicated an interest in enrolling in one of our programs, our
lead management system identifies and directs an enrollment
counselor to initiate immediate communication. The enrollment
counselor serves as the primary, direct contact for the
prospective student and the counselors goal is to help
that individual gain sufficient knowledge and understanding of
our programs so that he or she can assess whether there is a
good match between our offerings and the prospective
students goals. Upon the prospective students
submission of an application, the enrollment counselor, together
with our student services personnel, works with the applicant to
gain acceptance, arrange financial aid, if needed, register for
courses, and prepare for matriculation.
Our enrollment counselors typically have prior education
industry or sales experience. Each counselor undergoes a
standardized three-week training program that involves both
classroom and supervisor-monitored fieldwork and provides the
counselor with training in financial aid, regulatory
requirements, general sales skills, and our history and
heritage, mission, and academic programs. As of June 30,
2008, we employed over 450 enrollment counselors at facilities
in Arizona and Utah and have capacity at our existing locations
to support approximately 700 enrollment counselors, which we
expect to be sufficient to handle our growth plans through 2009.
We believe we can obtain additional capacity to accommodate our
growth plans beyond 2009 on terms acceptable to us.
Retention. We employ a retention team whose
purpose is to support the student in advancing from
matriculation through graduation. At June 30, 2008, our
retention team consisted of 19 retention
specialists, whom, among other things, monitor
triggering events, such as the failure to buy books
for a registered course or to participate in online orientation
exercises, which signal that a student may be at-risk for
dropping out. Upon identifying an at-risk student, specialists
proactively interact with the student to resolve any issues and
encourage the student to continue with his or her program. In
2006, we developed and introduced our concierge
system, which is a software program that monitors and manages
the resolution of student issues, such as financial aid or
technology problems, that, if left unresolved, may lead to
dissatisfaction and lower student persistence. Under this
system, each reported problem is issued a ticket
that is accessible by all functional groups within Grand Canyon
University and remains outstanding until the problem is
resolved. The system directs the ticket to personnel best able
to resolve the problem, and escalates the ticket to higher
levels if not resolved within appropriate time periods. We have
found that personally involving our employees in the student
educational process, and proactively seeking to resolve issues
before they become larger problems, can
73
significantly increase retention rates among students. The
concierge system also provides our marketing and enrollment
personnel with greater insight into the qualities exhibited by
successful students, which enables our enrollment team to
recruit and enroll higher quality applicants.
Admissions
Admission is available to qualified students who are at least
16 years of age. Applicants to our graduate programs must
generally have an undergraduate degree from an accredited
college, university, or program with a grade point average of
2.8 or greater, or a graduate degree from such a college,
university, or program. Undergraduate applicants may qualify in
various ways, including by having a high school diploma and an
unweighted grade point average of 2.25 or greater or a composite
score of 920 or greater on the Scholastic Aptitude Test, or a
passing score of 520 or greater on the General Education
Development (GED) tests. Some of our programs require a higher
grade point average
and/or other
criteria to qualify for admission. In addition, some students
who do not meet the qualifications for admission may be admitted
at our discretion. A student being considered for admission with
specification may be asked to submit additional information such
as personal references and an essay addressing academic history.
Students may also need to schedule an interview to help clarify
academic goals and help us make an informed decision.
Enrollment
At June 30, 2008, we had 16,531 students enrolled in our
courses, of which 14,814, or 89.6%, were enrolled in our online
programs, and 1,717, or 10.4%, were enrolled in our ground
programs. Of our online students, which were geographically
distributed throughout all 50 states of the United States, and
Canada, 91.7% were age 25 or older. Of our ground students,
which, although we draw students from throughout the United
States, were predominantly comprised of students from Arizona,
82.1% were age 25 or older.
The following is a summary of our student enrollment at
June 30, 2008 and December 31, 2007 (which included
less than 100 students pursuing non-degree certificates) by
degree type and by instructional delivery method:
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June 30, 2008
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December 31, 2007
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# of Students
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% of Total
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# of Students
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% of Total
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Masters
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10,051
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60
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.9
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9,156
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62
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.1
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%
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Bachelors
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6,459
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39
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.1
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5,598
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37
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.9
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%
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Total
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16,510
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100
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.0
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14,754
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100
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.0
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%
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June 30, 2008
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December 31, 2007
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# of Students
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% of Total
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# of Students
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% of Total
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Online
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14,847
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89
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.9
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12,497
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84
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.7
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%
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Ground*
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1,663
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10
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.1
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2,257
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15
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.3
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%
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Total
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16,510
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100
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.0
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14,754
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100
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.0
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%
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*
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Includes our traditional ground
students, as well as our professional studies ground students.
Enrollment of our ground students is typically lower at
June 30 as compared to December 31 because a portion
of our ground students are not enrolled in classes during the
summer months.
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Tuition
and Fees
Our tuition rates vary by type and length of program and by
degree level. For all graduate and undergraduate programs,
tuition is determined by the number of courses taken by each
student. For our
2008-09
academic year (the academic year that began in May 2008), our
prices per credit hour are $395 for undergraduate online and
professional studies courses, $420 for graduate online courses
(other than graduate nursing), $510 for graduate online nursing
courses, and $645 for undergraduate courses for ground students.
The overall price of each course varies based upon the number of
credit hours per course (with most courses representing three
credit hours), the degree level of the program, and the
discipline of the course. In addition, we charge a fixed $7,740
block tuition for undergraduate ground students
taking between 12 and 18 credit
74
hours per semester, with an additional $645 per credit hour for
credits in excess of 18. A traditional undergraduate degree
typically requires a minimum of 120 credit hours. The minimum
number of credit hours required for a masters degree and
overall cost for such a degree varies by program although such
programs typically require approximately 36 credit hours. Our
new doctoral program in education, which is first being offered
in the 2008-09 academic year, costs $770 per credit hour and
requires approximately 60 credit hours.
We offer tuition scholarships to select students, including
online students, athletes, employees, and participants in
programs we offer through relationships with employers. For the
years ended December 31, 2006 and 2007 and the six months
ended June 30, 2008, we offered tuition scholarships
representing a total value of approximately $8.2 million,
$10.3 million and $7.7 million, respectively.
We have established a refund policy for tuition and fees based
upon semester start dates. If a student drops or withdraws from
a course during the first week of the semester, 100% of the
charges for tuition and fees are refunded, while during the
second and third weeks of a semester 75% and 50%, respectively,
of the tuition charges are refunded but none of the fees.
Following the third week of the semester, tuition and fees are
not refunded. Fees charged by us include application and
graduation fees of $100 and $150, respectively, as well as fees
for dropping or withdrawing from courses after the beginning of
the semester. This tuition and fees refund policy is different
from, and applies in addition to, the return of Title IV
funds policy we are required to use as a condition of our
participation in the Title IV programs.
Sources
of Student Financing
Our students finance their education through a combination of
methods, as follows:
Title IV programs. The federal government
provides for grants and loans to students under the
Title IV programs, and students can use those funds at any
institution that has been certified as eligible by the
Department of Education. Student financial aid under the
Title IV programs is primarily awarded on the basis of a
students financial need, which is generally defined as the
difference between the cost of attending the institution and the
amount the student and the students family can reasonably
contribute to that cost. All students receiving Title IV
program funds must maintain satisfactory academic progress
toward completion of their program of study. In addition, each
school must ensure that Title IV program funds are properly
accounted for and disbursed in the correct amounts to eligible
students.
During fiscal 2007, we derived approximately 74.0% of our
revenue (calculated on a cash basis in accordance with
Department of Education standards) from tuition financed under
the Title IV programs. The primary Title IV programs
that our students receive funding from are the Federal Family
Education Loan, or FFEL, Program, and the Federal Pell Grant, or
Pell, Program, which are described below:
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FFEL. Under the FFEL Program, banks and other
lending institutions make loans to students. The FFEL Program
includes the Federal Stafford Loan Program, the Federal PLUS
Program (which provides loans to graduate and professional
studies students as well as parents of dependent undergraduate
students), and the Federal Consolidation Loan Program. If a
student defaults on an FFEL loan, payment to the lender is
guaranteed by a federally recognized guaranty agency, which is
then reimbursed by the Department of Education. Students who
demonstrate financial need may qualify for a subsidized Stafford
loan. With a subsidized Stafford loan, the federal government
pays the interest on the loan while the student is in school and
during grace periods and any approved periods of deferment,
until the students obligation to repay the loan begins.
Unsubsidized Stafford loans are not based on financial need, and
are available to students who do not qualify for a subsidized
Stafford loan or, in some cases, in addition to a subsidized
Stafford loan. Loan funds are disbursed to us, and we in turn
disburse the amounts in excess of tuition and fees to students.
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Effective July 1, 2008, under the Federal Stafford Loan
Program, a dependent undergraduate student can borrow up to
$5,500 for the first academic year, $6,500 for the second
academic year, and $7,500 for each of the third and fourth
academic years. Students classified as independent, and
dependent students whose parents were denied a parent loan for
undergraduate students, can
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obtain up to an additional $4,000 for each of the first and
second academic years and an additional $5,000 for each of the
third and fourth academic years. Students enrolled in graduate
programs can borrow up to $20,500 per academic year. Students
enrolled in certain graduate-level health programs can receive
an additional $12,500 per academic year.
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Pell. Under the Pell Program, the Department
of Education makes grants to undergraduate students who
demonstrate financial need. Effective July 1, 2008, the
maximum annual grant a student can receive under the Pell
Program is $4,731. Under the Higher Education Act
reauthorization, which Congress passed in July 2008 and which
the President is expected to sign, students would be able for
the first time to receive Pell Grant funds for attendance on a
year-round basis, which means that the amount a student could
receive in a given year would be more than the traditionally
defined maximum annual amount.
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Our students also receive funding under other Title IV
programs, including the Federal Perkins Loan Program, the
Federal Supplemental Educational Opportunity Grant Program, the
Federal Work-Study Program, the National Science and Mathematics
Access to Retain Talent Grant Program, and the Academic
Competitiveness Grant Program.
Other financial aid programs. In addition to
the Title IV programs listed above, eligible students may
participate in several other financial aid programs or receive
support from other governmental sources. These include veterans
educational benefits administered by the U.S. Department of
Veterans Affairs and state financial aid programs. During fiscal
2007 and the first six months of 2008, we derived an immaterial
amount of our net revenue from tuition financed by such programs.
Private loans. Some of our students also use
private loan programs to help finance their education. Students
can apply to a number of different lenders for private loans at
current market interest rates. Private loans are intended to
fund a portion of students cost of education not covered
by the Title IV programs and other financial aid. During
fiscal 2007 and the first six months of 2008, payments derived
from private loans constituted approximately 5.0% and 4.9%,
respectively, of our cash revenue. Third-party lenders
independently determine whether a loan to a student is
classified as subprime, and, based on these determinations,
payments to us derived from subprime loans constituted
approximately 0.2% of our cash revenue.
Other sources. We derived the remainder of our
net revenue from tuition that is self-funded or attributable to
employer tuition reimbursements.
Technology
Systems and Management
We believe that we have established a secure, reliable, scalable
technology system that provides a high quality online
educational environmental and gives us the capability to
substantially grow our online programs and enrollment.
Online course delivery and management. In
2007, we implemented the ANGEL Learning Management Suite, which
is a web-based system and collaboration portal that stores,
manages, and delivers course content; provides interactive
communication between students and faculty; enables assignment
uploading; and supplies online evaluation tools. The system also
provides centralized administration features that support the
implementation of policies for content format and in-classroom
learning tools. We continually seek to develop and implement
features that enhance the online classroom experience, such as
delivering course content through streaming video, which we
expect to begin for selected courses in the fall of 2008.
Internal administration. We utilize a
commercial customer relations management package to distribute,
manage, track, and report on all prospective student leads
developed, both internally and externally. We also utilize a
commercial software package to track Title IV funds,
student records, grades, accounts receivable, and accounts
payable. Each of these packages is scalable to capacity levels
well in excess of current requirements.
Infrastructure. We operate two data centers,
one at our campus and one at a third party co-location facility.
All of our servers are networked and we have redundant data
backup. We manage our technology
76
environment internally. Our wide area network uses
multi-protocol label switching technology for maximum
availability and flexibility. Student access is provided through
redundant data carriers in both data centers and is load
balanced for maximum performance. Real-time monitoring provides
current system status across server, network, and storage
components.
Ground
Campus
Our ground campus is located on approximately 90 acres in
the center of the Phoenix, Arizona metropolitan area, near
downtown Phoenix. Our campus facilities currently consist of 43
buildings with more than 500,000 square feet of space,
which include 63 classrooms, three lecture halls, a 500-seat
theater, three student computer labs with 150 computers that are
available to students 18 hours per day, a 68,000-volume
physical library, and a media arts complex that provides
communications students with audio and video equipment. We house
our ground students in on-campus student apartments and
dormitories that can collectively hold up to 800 students.
We have 18 athletic teams that compete in Division II of
the National Collegiate Athletic Association. Our athletic
facilities include two gymnasiums, which accommodate basketball,
volleyball, and wrestling, as well as facilities for our
baseball, softball, tennis, lacrosse, and swimming programs. Our
baseball program has produced more than ten Major League
Baseball players.
We believe our ground-based programs and traditional campus not
only offers our ground students, faculty, and staff an
opportunity to participate in a traditional college experience,
but also provides our online students, faculty, and staff with a
sense of connection to a traditional university. Additionally,
our full-time ground faculty play an important role in
integrating online faculty into our academic programs and
ensuring the overall consistency and quality of the ground and
online student experience. We believe our mix of a rapidly
growing online program, anchored by a traditional ground-based
program with a nearly
60-year
history and heritage, differentiates us from most other
for-profit postsecondary education providers.
Employees
In addition to our faculty, as of June 30, 2008, we
employed 979 staff and administrative personnel in university
services, academic advising and academic support, enrollment
services, university administration, financial aid, information
technology, human resources, corporate accounting, finance, and
other administrative functions. None of our employees is a party
to any collective bargaining or similar agreement with us. We
consider our relationships with our employees to be good.
Competition
There are more than 4,000 U.S. colleges and universities
serving traditional and adult students. Competition is highly
fragmented and varies by geography, program offerings, modality,
ownership, quality level, and selectivity of admissions. No one
institution has a significant share of the total postsecondary
market.
Our ground program competes with Arizona State University,
Northern Arizona University, and the University of Arizona, the
in-state public universities, as well as two-year colleges
within the state community college system. To a limited extent,
our ground program also competes with geographically proximate
universities with similar religious heritages, including Azusa
Pacific University, Baylor University, and Seattle Pacific
University. Our online programs compete with local, traditional
universities geographically located near each of our prospective
students, and with other for-profit postsecondary schools that
offer online degrees, particularly those schools that offer
online graduate programs within our core disciplines, including
Capella University, University of Phoenix, and Walden
University. In addition, many public and private schools,
colleges, and universities, including most major colleges and
universities, offer online programs.
Non-profit institutions receive substantial government
subsidies, and have access to government and foundation grants,
tax-deductible contributions and other financial resources
generally not available to
for-profit
schools. Accordingly, non-profit institutions may have
instructional and support resources that are superior to those
in the for-profit sector. In addition, some of our competitors,
including both traditional
77
colleges and universities and other for-profit schools, have
substantially greater name recognition and financial and other
resources than we have, which may enable them to compete more
effectively for potential students. We also expect to face
increased competition as a result of new entrants to the online
education market, including established colleges and
universities that had not previously offered online education
programs.
We believe that the competitive factors in the postsecondary
education market include:
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availability of career-oriented and accredited program offerings;
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the types of degrees offered and marketability of those degrees;
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reputation, regulatory approvals, and compliance history of the
school;
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convenient, flexible and dependable access to programs and
classes;
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qualified and experienced faculty;
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level of student support services;
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cost of the program;
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marketing and selling effectiveness; and
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the time necessary to earn a degree.
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Property
Our ground campus occupies approximately 90 acres in
Phoenix, Arizona. We lease the campus under a lease that expires
in 2024. Renewal terms under this lease allow for us to extend
the current lease for up to four additional five-year terms. We
also lease two additional enrollment facilities, one in Utah and
one in Arizona. We believe our existing facilities are adequate
for current requirements and that additional space can be
obtained on commercially reasonable terms to meet future
requirements.
Intellectual
Property
We rely on a combination of copyrights, trademarks, service
marks, trade secrets, domain names and agreements with third
parties to protect our proprietary rights. In many instances,
our course content is produced for us by faculty and other
subject matter experts under work for hire agreements pursuant
to which we own the course content in return for a fixed
development fee. In certain limited cases, we license course
content from a third party on a royalty fee basis.
We are parties to an exclusive license agreement with Blanchard
Education, LLC pursuant to which we license the right to name
our business school The Ken Blanchard College of
Business and to use the name of Ken Blanchard to promote
our business school and business degree programs. In return, we
pay royalties to the licensor equal to a fixed percentage of our
net tuition received in respect of our upper level business
courses. The agreement expires in June 2011, and is
automatically renewable for an additional five years unless
terminated by either party within six months prior to such
expiration date.
We rely on trademark and service mark protections in the United
States for our name and distinctive logos, along with various
other trademarks and service marks related to our specific
offerings. We also own domain name rights to
www.gcu.edu, as well as other words and
phrases important to our business.
Legal
Proceedings
On February 28, 2007, we filed a complaint against SunGard
Higher Education Managed Services, Inc. in the Maricopa County
Superior Court, Case
No. CV2007-003492,
for breach of contract, breach of implied covenant of good faith
and fair dealing, breach of warranty, breach of fiduciary duty,
tortious interference with business expectancy, unjust
enrichment, and consumer fraud related to a technology services
agreement between the parties. In response, SunGard moved to
stay the litigation and compel arbitration. The court granted
the motion to stay, and compelled the parties to arbitrate.
SunGard has also counterclaimed alleging
78
breach of contract relating to the parties technology
services agreement. Following discovery, the arbitration
occurred in late May 2008 and final arguments were heard in July
2008. We are seeking approximately $1.4 million from
SunGard, and SunGard has counterclaimed for approximately
$1.7 million.
From time to time, we are a party to various other lawsuits,
claims, and other legal proceedings that arise in the ordinary
course of our business. We are not at this time a party, as
plaintiff or defendant, to any legal proceedings which,
individually or in the aggregate, would be expected to have a
material adverse effect on our business, financial condition, or
results of operation.
79
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 programs of student financial
assistance for our students, 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, which we refer to in this prospectus as the
Title IV programs. The 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
full-time director of compliance who is knowledgeable about
regulatory matters relevant to student financial aid programs
and our Chief Financial Officer, Chief Administrative 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 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 recruiting students
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. Although we believe we are licensed or
authorized in those jurisdictions where a license or
authorization is currently required, because we enroll students
in all 50 states and the District of Columbia, we expect that
other state regulatory authorities will request that we seek
licensure or authorization in their states 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. 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.
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 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.
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Accreditation
We have been institutionally 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 for the
maximum term of 10 years as part of a regularly scheduled
reaffirmation process. 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.
In connection with our reaccreditation by the Higher Learning
Commission in 2007, the Higher Learning Commission did identify
certain deficiencies in the areas of library staffing and
resources, assessment, and resources for our on-ground
operations. We are addressing these deficiencies and expect to
provide a monitoring report regarding our progress in these
areas to the Higher Learning Commission in February 2009.
In addition to institution-wide accreditation, 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 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.
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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 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 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. Congress most recent
comprehensive reauthorization of the Higher Education Act was in
1998, and it has been temporarily extended several times since
then. In July 2008, Congress passed the full reauthorization of
the Higher Education Act, which the President is expected to
sign. It would reauthorize all of the Title IV programs in
which we participate, but would make 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. We are not in a
position to predict with certainty whether any of the pending
legislation will be enacted. The elimination of certain
Title IV programs, material changes in the requirements for
participation in such programs, or the substitution of
materially different programs could increase our costs of
compliance and could reduce the ability of some students to
finance their education at our institution.
In addition, Congress must determine the funding levels for the
Title IV programs on an annual basis through the budget and
appropriations process. 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.
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
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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.
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.
In the May 2005 recertification, the Department of Education
placed us on provisional certification status and 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 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 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. However, we remain
certified 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 participation in the Title IV programs has been
automatically extended on a month-to-month basis until the
Department of Education makes its decision. There can be no
assurance that the Department of Education will recertify us, 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.
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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If we are found not to have satisfied the Department of
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 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
subsequently submitted our fiscal year 2006 and 2007 financial
statements to the Department of Education as required, and we
calculated that our composite score for those years
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/or
complying with or accepting
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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
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 then
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
for either of our two most recent fiscal years.
The 90/10 Rule. A requirement of
the Higher Education Act commonly referred to as the 90/10
Rule 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 any fiscal year from
Title IV program funds. This rule applies only to
for-profit postsecondary educational institutions, including us.
Any institution that violates the rule becomes ineligible to
participate in the Title IV programs as of the first day of
the fiscal year following the fiscal year in which it exceeds
the 90% threshold, and it is unable to apply to regain its
eligibility until the next fiscal year. If an institution
exceeds the 90% threshold for a fiscal year and it and its
students have received Title IV funds for the next fiscal
year, it will be required to return those funds to the
applicable lender or the Department of Education. In July 2008,
Congress passed the reauthorization of the Higher Education Act,
which the President is expected to sign and which includes
significant revisions to the 90/10 Rule. Under the
revised law, an institution would be subject to loss of
eligibility to participate in the Title IV programs only if
it exceeded the 90% threshold for two consecutive years, the
period of ineligibility would be extended to at least two years,
and an institution whose rate exceeded 90% for any single year
would be placed on provisional certification. Using the
Department of Educations formula under the 90/10
Rule, for our 2006 and 2007 fiscal years we derived
approximately 71.5 % and 74.0%, respectively, of our revenues
(calculated on a cash basis) from Title IV program funds.
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. However, such effects may be mitigated by other
provisions of the recent Higher Education Act reauthorization
that would 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 starting in July 2008, and to
include more non-Title IV revenues, such as revenues from
institutional loans under certain circumstances.
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 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 FFEL cohort
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default rate for a federal fiscal year is calculated by
determining the rate at which borrowers who became subject to
their repayment obligation in that federal fiscal year defaulted
by the end of the following federal fiscal year.
If the Department of Education notifies an institution that its
FFEL cohort default rates for each of the three most recent
federal fiscal years are 25% or greater, the institutions
participation in the FFEL program and 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 ends
30 days after notification by the Department of Education
that its most recent FFEL cohort default rate 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 FFEL cohort default rate equals or
exceeds 25% in any single year, the institution may be placed on
provisional certification status. Provisional certification does
not limit an institutions access to Title IV program
funds, but an institution on provisional status is subject to
closer review by the Department of Education 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, and the Department of Education may revoke
such institutions certification without advance notice if
it determines that the institution is not fulfilling material
Title IV program requirements. Our cohort default rates on
FFEL program loans for the 2003, 2004, and 2005 federal fiscal
years, the three most recent years for which such rates have
been calculated, were 1.2%, 1.4%, and 1.8%, respectively. The
FFEL cohort default rates for federal fiscal year 2006 are
expected to be released by the Department of Education in
September 2008, but the Department of Education advised us in
February 2008 that our estimated FFEL cohort default rate for
federal fiscal year 2006 was 1.6%. In July 2008, Congress passed
the reauthorization of the Higher Education Act, which the
President is expected to sign and which includes significant
revisions to the requirements concerning FFEL cohort default
rates. Under the revised law, the period for which
students defaults on their loans would be included in the
calculation of an institutions cohort default rate would
be extended by one additional year, which is expected to
increase the cohort default rates for most institutions. That
change would be effective with the calculation of
institutions cohort default rates for federal fiscal year
2009, which would be expected to be calculated and issued by the
Department of Education in 2012. However, the revised law would
also increase the threshold for ending an institutions
participation in the relevant Title IV programs from 25% to
30%, effective in 2012.
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 describe payments and arrangements that do
not violate the incentive compensation rule, but the law and
regulations governing this requirement do not establish clear
criteria for compliance in all circumstances. 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 former employees alleging that their
institution had made impermissible incentive payments. The
employees bringing such lawsuits typically seek, for themselves
and for the federal government, substantial financial penalties
against the subject company. If we or any third parties we have
engaged or engage in the future violate the incentive
compensation rule, we could be fined or sanctioned by the
Department of Education, or subjected to other monetary
penalties that could be substantial. Although there can be no
assurance that the Department of Education or a court would not
find deficiencies in our present or former compensation
practices for employees and third parties, we believe that our
employee compensation and third-party contractual arrangements
comply with the incentive compensation rule.
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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 Department of
Veterans Affairs, 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 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 Federal Trade Commission, or 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.
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. 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
88
funding for our students, would be expected to 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. During 2007 and 2008, 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. The Attorney General of the State of Arizona
has requested extensive documentation and information from us
and other institutions in Arizona concerning student loan
practices, and we recently provided testimony in response to a
subpoena from the Attorney General of the State of Arizona about
such practices. While no penalties have been assessed against
us, we do not know what the results of that investigation will
be. As a result of this scrutiny, 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 begun to
affect 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 have 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 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. Among other things, the new
legislation:
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authorizes 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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permits 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 will be required to make Title IV loans to all
otherwise eligible students at those institutions.
|
We cannot predict whether this legislation will be effective in
ensuring students access to Title IV loan funding.
The environment surrounding access to and cost of student loans
remains in a state of flux, with reviews of many institutions
and lenders still pending and with additional legislative and
regulatory changes being actively considered at the federal and
state levels. 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.
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.
89
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
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 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
90
participation agreement with the Department of Education.
Students attending provisionally certified institutions remain
eligible to receive Title IV program funds, but 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 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.
We are currently certified to participate in the Title IV
programs on a provisional 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. However, we remain certified on a
provisional basis, which means that the Department of Education
may more closely review our applications for recertification,
new locations, new educational programs, acquisitions of other
schools, or other significant changes, and it may revoke its
certification of us without advance notice if it determines we
are not fulfilling material Title IV requirements. 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 participation in the Title IV
programs has been automatically extended on a
month-to-month
basis until the Department of Education makes its decision.
There can be no assurance that the Department of Education will
recertify us, 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. Many states and accrediting commissions
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
states and accrediting commissions. The Higher Learning
Commission provides that an institution must obtain its approval
in advance of a change in ownership in order for the institution
to retain its accredited status, but the Higher Learning
Commission does not set specific standards for determining when
a transaction constitutes a change in ownership. In addition, in
the event of a change in ownership, the Higher Learning
Commission requires an onsite evaluation within six months in
order to continue the institutions accreditation. Our
other specialized accrediting commissions also require an
institution to obtain similar approval before or after the event
that constitutes the change in control under their standards.
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
undergoes a change in control if there is a transfer of 50% or
more of its voting stock over a five-year period. In our case,
we believe the five-year period to apply this standard would
begin after our prior change in control in February 2004 and
therefore would include the acquisition of voting stock by the
Endeavour Entities in 2005, as well as the issuance and sale of
voting stock in connection with the offering. 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.
Under Department of Education regulations, an institution that
undergoes a change in control loses its eligibility to
participate in the Title IV programs and must apply to the
Department of Education in order to reestablish such
eligibility. If an institution files the required application
and follows other procedures, the Department of Education may
temporarily certify the institution on a provisional basis
following the change in control, so that the institutions
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 the institution timely files other
required materials, including the approval of the
91
change in control by its state authorizing agency and
accrediting commission and an audited balance sheet showing the
financial condition of the institution or its parent corporation
as of the date of the change in control. If the institution
fails to meet any of these application and other deadlines, its
certification will expire and its 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 the application after a change in control, it
will certify the institution on a provisional basis for a period
of up to approximately three years.
For corporations that are neither publicly traded nor closely
held, such as us prior to this offering, Department of Education
regulations describe some transactions that constitute a change
in control, including the transfer of a controlling interest in
the voting stock of the corporation or its parent corporation.
For such a corporation, the Department of Education will
generally find that a transaction results in a change in control
if a person acquires ownership or control of 25% or more of the
outstanding voting stock and control of the corporation, or a
person who owns or controls 25% or more of the outstanding
voting stock and controls the corporation ceases to own or
control at least 25% of the outstanding voting stock or ceases
to control the corporation. With respect to this offering, the
Richardson family will continue to own or control more than 25%
of the outstanding voting stock of the corporation following the
offering.
We have submitted a description of the offering to the
Department of Education, which has informed us that the proposed
offering will not trigger a change in ownership resulting in a
change in control under the Department of Educations
regulations.
The Higher Learning Commission has informed us that it will
consider the offering to be a change in control under its
policies, which will require us to obtain the Higher Learning
Commissions approval prior to consummating the offering.
We have filed additional correspondence with the Higher Learning
Commission regarding the information needed to obtain such
approval. As a result of its determination that the offering
will be a change in control, the Higher Learning Commission is
likely to conduct a site visit within six months of consummation
of the offering to confirm the appropriateness of the approval
and to evaluate whether we continue to meet the Higher Learning
Commissions eligibility criteria. In addition, based on
our communications with the Arizona State Board for Private
Postsecondary Education, we believe the offering will be a
change in control under Arizona law. Accordingly, following the
consummation of the offering, we will be required to file an
application with the Arizona State Board for Private
Postsecondary Education in order to obtain such approval. Any
failure to comply with the requirements of either the Higher
Learning Commission or the Arizona State Board for Private
Postsecondary Education, or a failure to obtain their approval
of the change in control, could result in our loss of
accreditation or authorization by such agency, as applicable,
which, in turn, 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 intend to seek confirmation from other accrediting
commissions and state agencies, as we believe necessary, that
this offering will not constitute a change in control under
their respective standards, or to determine what is required if
any such commission or agency does consider the offering to
constitute a change in control. We do not expect that this
offering will result in a change in control for any of those
agencies, or that any of those agencies will require us to
obtain their approval in connection with this offering. If any
of those agencies deemed this offering to be a change in
control, we would have to apply for and obtain approval from
that agency, in some cases in advance of this offering,
according to its procedures.
A change in control also could occur as a result of future
transactions in which we are involved following the consummation
of this offering. Some corporate reorganizations and some
changes in the board of directors are examples of such
transactions. In addition, Department of Education regulations
provide that a change in control occurs for a publicly traded
corporation, which we will be after this offering, 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 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
92
own at least 25% of such stock or ceases to be the largest
stockholder. These standards are subject to interpretation by
the Department of Education. A significant purchase or
disposition of our voting stock in the future, including a
disposition of voting stock by the Richardson family, could be
determined by the Department of Education to be a change in
control under this standard. 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. In addition, the adverse regulatory
effect of a change in control also could discourage bids for
shares of our common stock and could have an adverse effect on
the market price of our common stock.
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 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. 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 constitute a presence or
otherwise require licensure or authorization by the respective
state education agencies. 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. 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.
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MANAGEMENT
Executive
Officers and Directors
The following table sets forth information regarding our
executive officers, directors, and
director-nominees.
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Name
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Age
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Position
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Brent D. Richardson
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46
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Executive Chairman
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Brian E. Mueller
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51
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Chief Executive Officer
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John E. Crowley
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52
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Chief Operating Officer
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Christopher C. Richardson
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35
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General Counsel and Director
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Daniel E. Bachus
|
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38
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Chief Financial Officer
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W. Stan Meyer
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47
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Executive Vice President
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Timothy R. Fischer
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59
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Chief Administrative Officer
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Michael S. Lacrosse
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53
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Chief Information Officer
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Dr. Kathy Player
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|
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45
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Grand Canyon University President
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Chad N. Heath
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|
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34
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Director
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D. Mark Dorman
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47
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Director
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David J. Johnson
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62
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Director-Nominee
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Jack A. Henry
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64
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Director-Nominee
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Brent D. Richardson has been serving as our Executive
Chairman since July 1, 2008. Mr. Richardson previously
served as our Chief Executive Officer from 2004 to
July 2008. From 2000 to 2004, Mr. Richardson served as
chief executive officer of Masters Online, LLC, a company that
provided online educational programs and marketing services to
several regionally and nationally accredited universities. Prior
to 2000, Mr. Richardson served as director of sales and
marketing and later general manager of the Educational Division
of Private Networks, a company that produced customized distance
learning curricula for the healthcare and automotive industries.
Mr. Richardson has over 20 years of experience in the
education industry. Mr. Richardson earned his Bachelor of
Science degree in Finance from Eastern Illinois University.
Brent Richardson and Chris Richardson are brothers.
Brian E. Mueller has been serving as our Chief Executive
Officer since July 1, 2008. From 1987 to 2008,
Mr. Mueller was employed by Apollo Group, Inc., a
for-profit, postsecondary education company and the parent
company of the University of Phoenix, serving since January 2006
as its president and a director. Mr. Mueller previously
served as the chief operating officer of Apollo Group from
December 2005 to January 2006, as chief executive officer of the
University of Phoenix Online, a unit of the University of
Phoenix, from March 2002 to November 2005, and as chief
operating officer and senior vice president of the University of
Phoenix Online from May 1997 to March 2002. From 1987 to May
1997, Mr. Mueller held several positions in operations
management for Apollo Group. From 1983 to 1987, Mr. Mueller
was a professor at Concordia University. Mr. Mueller earned
his Master of Arts in Education degree and his Bachelor of Arts
degree in Education from Concordia University.
John E. Crowley has been serving as our Chief Operating
Officer since 2004. Prior to 2004, Mr. Crowley served as
the President of Educational Resources, a national distributor
of educational software, technology solutions, and related
services, and as president of Youth In Motion, Inc., a
distributor of educational materials. Mr. Crowley earned
his Bachelor of Finance degree and Master of Business
Administration degree from Western New England College.
Christopher C. Richardson has been serving as our General
Counsel since 2007 and as a director since 2004. From 2004 to
2007, Mr. Richardson served as legal counsel in our Office
of General Counsel. Prior to 2004, Mr. Richardson served as
the chief operating officer for Masters Online, LLC, a company
that provided online educational programs and marketing services
to several regionally and nationally accredited universities.
Mr. Richardson earned his Bachelor of Arts degree in
Political Science from Brigham Young
94
University, and Juris Doctor from the University of Arizona
College of Law, where he graduated summa cum laude. Brent
Richardson and Chris Richardson are brothers.
Daniel E. Bachus has been serving as our Chief Financial
Officer since July 1, 2008. From January 2007 until June
2008, Mr. Bachus served as chief financial officer for Loreto
Bay Company, a real estate developer. From 2000 to 2006, Mr.
Bachus served as the chief accounting officer and controller of
Apollo Group, Inc., a for-profit, postsecondary education
company and the parent company of the University of Phoenix.
From 1992 to 2000, Mr. Bachus was employed by Deloitte
& Touche LLP, most recently as an audit senior manager. Mr.
Bachus earned his Bachelor of Science degree in Accountancy from
the University of Arizona and his Master in Business
Administration degree from the University of Phoenix. Mr. Bachus
is also a certified public accountant.
W. Stan Meyer has been serving as our Executive Vice
President since July 1, 2008. From August 2002 to June
2008, Mr. Meyer was employed by Apollo Group, Inc., a
for-profit, postsecondary education company and the parent
company of the University of Phoenix, serving since June 2006 as
its executive vice president of marketing and enrollment.
Mr. Meyer previously served as a regional vice president of
the University of Phoenix Online, a unit of the University of
Phoenix, and division director of Axia College and of the School
of Advanced Studies. From 1983 to 2002, Mr. Meyer held
several positions with the Concordia University system,
including director for Concordia Universitys education
network. Mr. Meyer earned a Doctor of Education in
Institutional Management degree and a Master of Business
Administration degree from Pepperdine University and a Bachelor
of Arts in Communications degree from Concordia University.
Timothy R. Fischer has been serving as our Chief
Administrative Officer since July 1, 2008. Mr. Fischer
previously served as our Chief Financial Officer from 2005 until
July 2008. Prior to 2005, Mr. Fischer served as an
independent management and financial consultant to both public
and private companies in the Phoenix, Arizona area.
Mr. Fischer is a member of the American Institute of
Certified Public Accountants and is licensed as a certified
public accountant by the New Mexico State Board of Public
Accountancy. Mr. Fischer earned his Bachelor of Business
Administration degree from Eastern New Mexico University.
Michael S. Lacrosse has been serving as our Chief
Information Officer since August 2006. From February 2001 to
August 2006, Mr. Lacrosse served as chief information
officer of Trax Technology, a global transportation management
firm, and 21st Century Learning, an educational technology
company which provides supplemental curriculum to K-12 students,
professional development opportunities for teachers and
administrators, as well as programs for parents.
Dr. Kathy Player has been serving as Grand Canyon
University President since July 31, 2008. From 2007 to July
2008 she served as our Provost and Chief Academic Officer. From
1998 to 2007, Dr. Player served in several other leadership
roles at Grand Canyon University, including most recently
as Dean of the Ken Blanchard College of Business.
Dr. Player earned her Doctorate of Education degree in
Counseling Psychology from the University of Sarasota, a Master
of Business Administration degree and a Master of Science degree
in Nursing Leadership from Grand Canyon University, a Master of
Science degree in Counseling from Nova Southeastern University,
and a Bachelor of Science degree in Nursing from St.
Josephs College.
Chad N. Heath has been serving as a director of Grand
Canyon University since 2005. Mr. Heath is a managing
director of Endeavour Capital, a private equity firm based in
Portland, Oregon that currently manages over $925 million
in equity capital. Prior to joining Endeavour Capital,
Mr. Heath served as a principal at Charterhouse Group
International, a New York-based private equity firm focused on
middle-market transactions. Prior to Charterhouse,
Mr. Heath worked in the investment banking division of
Merrill Lynch. Mr. Heath currently sits on the board of
directors of Barrett-Jackson Holdings, LLC (dba: Barrett-Jackson
Auction Company) and Skagit Northwest Holdings, Inc. (dba:
Dri-Eaz Products). Mr. Heath received a Bachelor of Science
in Business Administration degree, magna cum laude, from
Georgetown University.
D. Mark Dorman has been serving as a director of
Grand Canyon University since 2005. Mr. Dorman is a
managing director of Endeavour Capital. Prior to joining
Endeavour Capital, Mr. Dorman served as an investment
banker at Green Manning & Bunch, a Denver-based
investment banking firm focused on merger and acquisition
transactions and advisory work for middle-market clients across
the West. He also served in the investment banking groups of
Boettcher & Company and Morgan Stanley.
Mr. Dorman currently sits on the boards of directors of PSI
Services Holding Inc. (dba: Policy Studies); SpeeCo, Inc.;
Skagit Northwest
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Holdings, Inc. (dba: Dri-Eaz Products); and Barrett-Jackson
Holdings, LLC (dba: Barrett-Jackson Auction Company).
Mr. Dorman received a Bachelor of Science degree from
Lewis & Clark College and a Master of Business
Administration degree from Harvard Business School.
David J. Johnson has been nominated and has agreed to
serve as a member of our board of directors effective upon the
closing of the offering. From 1997 to 2006, Mr. Johnson
served as chief executive officer and chairman of the board of
KinderCare Learning Centers, Inc., a for-profit provider of
early childhood education and care services, and from 1991 to
1996, he served as president, chief executive officer, and
chairman of the board of Red Lion Hotels, Inc., a hotel company,
each of which were portfolio companies of Kohlberg Kravis
Roberts & Co. Prior to that time, Mr. Johnson
served as a general partner of Hellman & Friedman, a
private equity investment firm, from 1989 to 1991, as president,
chief operating officer and director of Dillingham Holdings, a
diversified company, from 1986 to 1988, and as president and
chief executive officer of Cal Gas Corporation, a principal
subsidiary of Dillingham Holdings, which was also a portfolio
company of Kohlberg Kravis Roberts & Co., from 1984 to
1987. Mr. Johnson holds a Bachelor of Arts degree from the
University of Oregon and a Master of Business Administration
degree from the University of Southern California.
Jack A. Henry has been nominated and has agreed to serve
as a member of our board of directors effective upon the closing
of the offering. Mr. Henry began his career with Arthur
Andersen in 1966, and in 2000 retired as the managing partner of
the Phoenix office. In 2000, Mr. Henry formed Sierra Blanca
Ventures LLC, a private investment and advisory firm. He
currently serves on the boards of directors of White Electronics
Design Corporation and Point Blank Solutions, both of which are
public reporting companies, and several other private companies.
Mr. Henry previously served on the boards of directors of
Simula, Inc., SOS Staffing Services, Inc., Vodavi
Technology, Inc., Tickets.com, and VistaCare, Inc., all public
reporting companies. Mr. Henry currently serves as
President of the Arizona Chapter of the National Association of
Corporate Directors. Mr. Henry holds a Bachelor of Business
Administration degree and a Master of Business Administration
degree from the University of Michigan.
Other than Brent Richardson and Chris Richardson, who are
brothers, there are no family relationships among any of our
directors or executive officers.
Apollo Group, Inc. and certain of its current and former
officers and directors, including Messrs. Mueller and
Bachus, are named as defendants in various litigation matters
relating to alleged misconduct in connection with Apollos
stock option grant practices and related financial statement
reporting. As disclosed in Apollo Groups most recent
Quarterly Report on
Form 10-Q,
one of these cases, a derivative action, has been settled
subject to final Court approval. A related securities class
action is ongoing. In addition, Mr. Bachus was originally
named as a defendant in a securities class action relating to
Apollos disclosures regarding a preliminary Department of
Education program review report. Mr. Bachus was dismissed as a
defendant in this matter prior to trial. A subsequent jury
verdict in plaintiffs favor in that action has been
overturned by the trial court, although the trial courts
decision is expected to be appealed. Mr. Bachus also was
originally named as a defendant in a related, ongoing derivative
action, but was not named in the current, amended complaint.
Board
Composition
Our board of directors currently consists of four persons,
including two independent directors, Messrs. Heath and
Dorman. Effective upon consummation of this offering, our board
will consist of at least six directors, our four current
directors and our two director-nominees, four of whom will be
independent.
Our board of directors has affirmatively determined that each
director other than Brent D. Richardson and Christopher C.
Richardson, and each director nominee, is
independent, as defined by the Marketplace Rules of
the Nasdaq Stock Market. Under the Marketplace Rules, a director
can be independent only if the director does not trigger a
categorical bar to independence and our board of directors
affirmatively determines that the director does not have a
relationship which, in the opinion of our board of directors,
would interfere with the exercise of independent judgment by the
director in carrying out the responsibilities of a director.
With respect to Messrs. Dorman and Heath, our board of
directors considered their roles as managing directors of
Endeavour Capital IV, LLC, which is the general partner of the
Endeavour Entities, and the fact that the Endeavour Entities own
a significant, although non-controlling, number of shares of our
capital stock.
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See Beneficial Ownership of Common Stock. In
addition, the board of directors considered the fact that we are
a party to a professional services agreement with Endeavour
Capital IV, LLC, which will terminate by its terms upon the
closing of this offering, pursuant to which Endeavour Capital
IV, LLC serves as a consultant to our board of directors on
business and financial matters in exchange for a consulting fee.
See Certain Relationships and Related
Transactions Endeavour Professional Services
Agreement. The board of directors also considered the fact
that we are a party to a stockholders agreement with the
Endeavour Entities, which will terminate by its terms upon the
closing of this offering, and an investor rights agreement with
the Endeavour Entities, among others, in connection with their
ownership of our capital stock, portions of which will survive
the closing of this offering. See Certain Relationships
and Related Transactions Stockholders
Agreement and Investor Rights
Agreement. After reviewing the existing relationships
between us and the Endeavour Entities, and considering that the
affiliation between Messrs. Dorman and Heath and the
Endeavour Entities will positively align their interests with
those of our public stockholders, our board of directors has
affirmatively determined (with Messrs. Dorman and Heath
abstaining) that, in its judgment, Messrs. Dorman and Heath
meet the applicable independence standards established by the
Nasdaq Stock Market.
At each annual meeting, our stockholders elect our full board of
directors. Directors may be removed at any time for cause by the
affirmative vote of the holders of a majority of the voting
power then entitled to vote.
Board
Committees
Our board of directors directs the management of our business
and affairs, as provided by Delaware law, and conducts its
business through meetings of the board of directors. Effective
upon the closing of this offering, our board of directors will
establish three standing committees: an audit committee; a
compensation committee; and a nominating and governance
committee. In addition, from time to time, special committees
may be established under the direction of the board of directors
when necessary to address specific issues. The composition of
the board committees will comply, when required, with the
applicable rules of Nasdaq and applicable law. Our board of
directors will adopt a written charter for each of the standing
committees. These charters will be available on our website
following the completion of the offering.
Audit Committee. Our audit committee will
consist of Messrs. Henry (chair) and Johnson, each of whom will
be independent, as defined under and required by the
rules of Nasdaq and the federal securities laws. Mr. Henry
also qualifies as an audit committee financial
expert, as defined by the federal securities laws and
required by Nasdaq. Our audit committee will be directly
responsible for, among other things, the appointment,
compensation, retention, and oversight of our independent
registered public accounting firm. The oversight includes
reviewing the plans and results of the audit engagement with the
firm, approving any additional professional services provided by
the firm and reviewing the independence of the firm. Commencing
with our first report on internal controls over financial
reporting, the committee will be responsible for discussing the
effectiveness of the internal controls over financial reporting
with the firm and relevant financial management.
Compensation Committee. Our compensation
committee will consist of Messrs. Johnson (chair), Heath, and
Dorman, each of whom is or will be independent, as
defined under and required by the rules of Nasdaq, a
non-employee director under Section 16 of the
Exchange Act, and an outside director for purposes
of Section 162(m) of the Internal Revenue Code of 1986, as
amended, or the Code. The compensation committee will be
responsible for, among other things, supervising and reviewing
our affairs as they relate to the compensation and benefits of
our executive officers. In carrying out these responsibilities,
the compensation committee will review all components of
executive compensation for consistency with our compensation
philosophy and with the interests of our stockholders.
Nominating and Governance Committee. Our
nominating and governance committee will consist of Messrs.
Heath (chair) and Dorman, each of whom is
independent, as defined under and required by the
rules of Nasdaq. The nominating and governance committee will be
responsible for, among other things, identifying individuals
qualified to become board members; selecting, or recommending to
the board, director nominees for each election of directors;
developing and recommending to the board criteria for selecting
qualified director candidates; considering committee member
qualifications, appointment and removal; recommending
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corporate governance principles, codes of conduct and compliance
mechanisms; and providing oversight in the evaluation of the
board and each committee.
Compensation
Committee Interlocks and Insider Participation
There are no interlocking relationships requiring disclosure
under the applicable rules promulgated under the
U.S. federal securities laws.
Limitation
of Liability and Indemnification
For information concerning limitation of liability and
indemnification applicable to our directors, executive officers
and, in certain cases, employees, please see Description
of Capital Stock located elsewhere in this prospectus.
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COMPENSATION
DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in
conjunction with Compensation of Named Executive
Officers and the related tables that follow.
Overview
The purpose of this compensation discussion and analysis is to
provide information about each material element of compensation
that we pay or award to, or that is earned by, our named
executive officers, who consist of our principal executive
officer, principal financial officer, and our three other most
highly compensated executive officers. For our 2007 fiscal year,
our named executive officers were:
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Brent D. Richardson, our Chief Executive Officer;
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John E. Crowley, our Chief Operating Officer;
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Christopher C. Richardson, our General Counsel;
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Timothy R. Fischer, currently our Chief Administrative Officer
and formerly our Chief Financial Officer; and
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Michael S. Lacrosse, our Chief Information Officer.
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This compensation discussion and analysis addresses and explains
the compensation practices we followed in 2007, the numerical
and related information contained in the summary compensation
and related tables presented below, and actions we have taken
regarding executive compensation since the end of our 2007
fiscal year, including in connection with our hiring of
additional senior management personnel.
Compensation
Determinations
Prior to this offering, we have been a private company with a
relatively small number of stockholders, including our lead
outside investor, Endeavour Capital, and we have not been
subject to exchange listing requirements requiring us to have a
majority independent board or to exchange or SEC rules relating
to the formation and functioning of board committees, including
audit, nominating, and compensation committees. As such, most,
if not all, of our compensation policies, and determinations
applicable to our named executive officers, have been the
product of negotiation between our named executive officers and
Endeavour Capital. For additional information regarding the
compensation committee of our board of directors that will
oversee our compensation program following the completion of
this offering, please see Management Board
Committees.
Objectives
of Compensation Programs
We pay our executive officers based on business performance and
individual performance, and, in setting compensation levels, we
take into consideration our past practices and our current and
anticipated future needs, and the relative skills and experience
of each individual executive. To date, we have not utilized the
services of a compensation consultant and have not engaged in
any benchmarking when making policy-level or individual
compensation determinations. Rather, compensation decisions to
date have been the product of negotiations between
Messrs. Heath and Dorman, who constitute all of our
non-employee directors, and our named executive officers.
Compensation philosophy. Under our
compensation philosophy, a named executive officers total
compensation will vary based on our overall performance and with
the particular named executive officers personal
performance and contribution to overall results. This philosophy
generally applies to all of our employees, with a more
significant level of variability and compensation at risk
depending upon an employees function and level of
responsibility. Our overall goals in implementing this
philosophy are to attract, motivate, and retain highly qualified
individuals responsible for guiding us and creating value for
our investors.
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Compensation objectives. We believe that the
compensation program we follow helps us achieve the following
objectives:
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Compensation should be related to
performance. We believe that the
performance-based portion of an individuals total
compensation should increase as the individuals business
responsibilities increase. Thus, a material portion of executive
compensation should be linked to our and the individuals
performance, which also serves to align the named executive
officers interests with those of our investors.
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Compensation should be competitive and cost effective. We
believe that our compensation programs should foster an
innovative, high integrity, and performance-oriented culture
that serves to attract, motivate, and retain executives and
other key employees with the appropriate skill sets to lead us
through expected future growth in a dynamic and competitive
environment. Accordingly, we should provide compensation in
amounts necessary to achieve these goals and which is of fair
value relative to other positions in Grand Canyon University.
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Company compensation policies. A named
executive officers total in-service compensation consists
of base salary, a cash bonus, and limited perquisites. With
regard to these components, we have in the past adhered to the
following compensation policies:
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Founders with significant equity stakes require limited
incentives. As founders of our company, Brent Richardson and
Chris Richardson have significant equity ownership in Grand
Canyon University. We believe that the Richardsons
ownership stake provides a level of motivation that would not be
appreciably enhanced through material cash bonus opportunities
or the grant of further equity incentives. Accordingly, in 2007,
the Richardsons were compensated solely through base salary and
limited perquisites.
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Base salaries should be the largest component of
compensation. Our compensation programs should reflect base
salaries as being compensation for the named executive officers
to perform the essential elements of their respective jobs, and
cash bonuses as a reward for superior company and individual
performance. In this regard, base salary should be the largest
component of cash compensation, with cash bonuses being
significantly less than base salaries.
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Compensation should be paid in cash. As a
private company whose equity securities were not publicly traded
prior to completion of this offering, we believed that the true
compensatory value to be accorded to equity-based incentives
would be difficult for both us and a recipient to determine.
Accordingly, we have not in the past utilized equity-based
incentives and have instead focused entirely on providing the
opportunity for our named executive officers to earn total cash
compensation at levels that enable us to achieve the motivation
and retention goals described above.
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We believe our policies have helped us achieve our compensation
objectives of motivation and retention, as evidenced by the
limited turnover in our executive officer ranks over the past
several years.
Compensation
Programs Design and Elements of Compensation
We choose to pay each element of compensation to further the
objectives of our compensation program, which, as noted,
includes the need to attract, retain, and reward key leaders
critical to our success by providing competitive total
compensation.
Elements of In-Service Compensation. For our
2007 fiscal year, our executive compensation mix included base
salary, discretionary cash bonuses, and other benefits generally
available to all employees. Perquisites were not a significant
component of executive compensation. We generally determine the
nature and amount of each element of compensation as follows:
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Base salary. We typically agree upon a base
salary with a named executive officer at the time of initial
employment, which may or may not be reflected in an employment
agreement. The amount of base salary agreed upon, which is not
at risk, reflects our views as to the individual
executives
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past experience, future potential, knowledge, scope of
anticipated responsibilities, skills, expertise, and potential
to add value through performance, as well as competitive
industry salary practices. Although minimum base salaries for
Brent Richardson, John Crowley, and Chris Richardson are set by
their respective employment agreements, as described below, we
review executive salaries annually and may adjust them based on
an evaluation of the companys performance for the year and
the performance of the functional area(s) under an
executives scope of responsibility. For example, base
salaries for each of Brent Richardson, John Crowley, and Chris
Richardson were increased from $250,000 in fiscal 2006 to
$292,019 in fiscal 2007 as a result of the growth in our net
revenue and Adjusted EBITDA for 2006, which was driven, in part,
by the leadership and execution of our strategy by these named
executive officers. We also consider qualitative criteria, such
as education and experience requirements, complexity, and scope
or impact of the position compared to other executive positions
internally.
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Bonuses. We provide cash bonuses, which are
at-risk, to recognize and reward our named executive officers
with cash payments above base salary based on our success in a
given year. In the past, we have awarded bonuses on a
discretionary basis, and we have not implemented or followed a
formal bonus plan tied to specific financial and non-financial
objectives.
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Perquisites. We seek to compensate our named
executive officers at levels that eliminate the need for
perquisites and enable each individual officer to provide for
his or her own needs. Accordingly, in 2007, the only perquisite
we provided to any of our named executive officers was allowing
Brent Richardson to utilize a car leased by Grand Canyon
University.
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Other. We offer other employee benefits to key
executives for the purpose of meeting current and future health
and security needs for the executives and their families. These
benefits, which we generally offer to all eligible employees,
include medical, dental, and life insurance benefits; short-term
disability pay; long-term disability insurance; flexible
spending accounts for medical expense reimbursements; and a
401(k) retirement savings plan. The 401(k) retirement savings
plan is a defined contribution plan under Section 401(a) of
the Code. Employees may make pre-tax contributions into the
plan, expressed as a percentage of compensation, up to
prescribed IRS annual limits.
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Elements of Post-Termination Compensation and
Benefits. We are a party to written agreements
that provide certain of our named executive officers with
post-termination salary and benefit continuation while the
officer searches for new employment. We believe that the amounts
of these payments and benefits and the periods of time during
which they would be provided are fair and reasonable, and we
have not historically taken into account any amounts that may be
received by a named executive officer following termination when
establishing current compensation levels. The elements of
post-termination compensation that we provide consist of the
following:
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Salary continuation. Each of Brent Richardson,
John Crowley, and Chris Richardson has a written employment
agreement under which he will receive continuing salary payments
for a stated period of time following termination of employment,
unless such termination constitutes termination for cause. Under
these agreements, Brent Richardson would continue to receive his
then-current base salary for a period of 12 months
following termination of employment, while John Crowley and
Chris Richardson would receive such salary continuation for a
period of six months following termination of employment,
subject to an option by us to extend the period to
12 months if we seek to extend their post-termination
non-compete and related covenants.
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Benefits continuation. Under their agreements,
Brent Richardson, John Crowley, and Chris Richardson would
also receive continuation of benefits during the applicable
salary continuation period.
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Impact
of Performance on Compensation
In the past, we have reviewed overall company and individual
performance in connection with our review of named executive
officer compensation.
Company performance. In reviewing our
performance, we focus principally on the achievement of net
revenue and Adjusted EBITDA levels, and on maintaining
regulatory compliance. We presently define Adjusted EBITDA 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 herein
and in Note 2 to our financial statements included with
this prospectus, and (ii) management fees and expenses that
are no longer paid or that will no longer be payable following
completion of this offering. We focus on Adjusted EBITDA in
connection with our compensation decisions because we believe
that it provides useful information regarding our operating
performance and executive performance as it does not give effect
to items that management does not consider to be reflective of
our core operating performance. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations
Non-GAAP Discussion.
As such, we believe it is fair and reasonable to our executives
to assess their individual performance on the same basis as our
performance is assessed by our board of directors and investors.
Individual performance. In reviewing
individual performance, we also look at an executives
achievement of non-financial objectives that, with respect to a
given named executive officer, may include achieving objectives
related to some or all of the following:
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enrollment growth;
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program development and expansion; and
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regulatory compliance.
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Conclusion
We believe that the compensation amounts paid to our named
executive officers for their service in 2007 were reasonable and
appropriate and in our best interests.
Actions
Taken in Current Fiscal Year
Equity Plans. As discussed above, we have
historically relied upon base salaries and cash bonuses to
attract, motivate and retain our named executive officers.
Effective upon the completion of this offering, we intend to
adopt a 2008 Equity Incentive Plan, or our Incentive Plan, and a
2008 Employee Stock Purchase Plan, or our ESPP, to enhance the
link between the creation of stockholder value and executive
incentive compensation and to give our directors, executive
officers, and other employees appropriate motivation and rewards
for achieving increases in share value. Although Brent
Richardson and Chris Richardson are eligible to participate in
the Incentive Plan, as a result of their significant ownership
stake in us, we do not believe that their motivation will be
appreciably enhanced through participation in the Incentive Plan
and, at this time, we do not anticipate granting any material
awards under the Incentive Plan to them. These plans, the
intended terms of which are described below, will be effective
upon the approval of our stockholders, which will occur
immediately prior to the closing of the offering.
Incentive Plan. We will initially authorize
and reserve a total
of shares
of our common stock for issuance under the Incentive Plan. This
reserve will automatically increase on a cumulative basis on
January 1, 2009 and each subsequent anniversary through
2017, by an amount equal to the smaller of
(a) % of the number of shares of
common stock issued and outstanding on the immediately preceding
December 31, or (b) a lesser amount determined by our
board of directors. We will make appropriate adjustments in the
number of authorized shares and other numerical limits in the
Incentive Plan and in outstanding awards to prevent dilution or
enlargement of participants rights in the event of a stock
split or other change in our capital structure. Shares subject
to awards that expire or are cancelled or forfeited will
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again become available for issuance under the Incentive Plan.
The shares available will not be reduced by awards settled in
cash or by shares withheld to satisfy tax withholding
obligations. Only the net number of shares issued upon the
exercise of stock appreciation rights or options exercised by
means of a net exercise or by tender of previously owned shares
will be deducted from the shares available under the Incentive
Plan.
We may grant awards under the Incentive Plan to our employees,
officers, directors, or consultants, or those of any future
parent or subsidiary corporation or other affiliated entity.
While we may grant incentive stock options only to employees, we
may grant nonstatutory stock options, stock appreciation rights,
restricted stock purchase rights or bonuses, restricted stock
units, performance shares, performance units, and cash-based
awards or other stock-based awards to any eligible participant.
Only members of the board of directors who are not employees at
the time of grant will be eligible to participate in the
non-employee director awards component of the Incentive Plan.
The board of directors or the compensation committee will set
the amount and type of non-employee director awards to be
awarded on a periodic, non-discriminatory basis. Non-employee
director awards may be granted in the form of nonstatutory stock
options, stock appreciation rights, restricted stock awards and
restricted stock unit awards.
In the event of a change in control, as described in the
Incentive Plan, the acquiring or successor entity may assume or
continue all or any awards outstanding under the Incentive Plan
or substitute substantially equivalent awards. Any awards that
are not assumed or continued in connection with a change in
control or are not exercised or settled prior to the change in
control will terminate effective as of the time of the change in
control. The compensation committee may provide for the
acceleration of vesting of any or all outstanding awards upon
such terms and to such extent as it determines, except that the
vesting of all non-employee director awards will automatically
be accelerated in full. The Incentive Plan also authorizes the
compensation committee, in its discretion and without the
consent of any participant, to cancel each or any outstanding
award denominated in shares upon a change in control in exchange
for a payment to the participant with respect to each share
subject to the cancelled award of an amount equal to the excess
of the consideration to be paid per share of common stock in the
change in control transaction over the exercise price per share,
if any, under the award.
In conjunction with adoption of the Incentive Plan, our board of
directors will approve a comprehensive policy relating to the
granting of stock options and other equity-based awards. Under
this policy:
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all stock option grants, restricted stock awards, and other
equity based awards, which we collectively refer to as
stock-based grants, must be approved by the compensation
committee;
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all stock-based grants will be approved at formal meetings
(including telephonic) of the compensation committee;
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the date for determining the strike price and similar
measurements will be the date of the meeting (or a date shortly
after the meeting) or, in the case of an employee, director, or
consultant not yet hired, appointed, or retained, respectively,
the subsequent date of hire, appointment, or retention, as the
case may be;
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if our board of directors implements an annual stock-based
grant, the grant will be approved at a regularly scheduled
meeting of the compensation committee during the first part of
the year, but after the annual earnings release, if any. We
believe that coordinating any annual award grant after our
annual earnings release, if any, will generally result in this
grant being made at a time when the public is in possession of
all material information about us;
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the annual grant to executive officers and directors, if any,
will occur at the same time as the annual grant to other
employees;
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we will not intentionally grant stock-based awards before the
anticipated announcement of materially favorable news or
intentionally delay the grant of stock-based awards until after
the announcement of materially unfavorable news; and
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the compensation committee will approve stock-based grants only
for persons specifically identified at the meeting by management.
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ESPP. We will initially authorize and reserve
a total
of shares
of our common stock for sale under the ESPP. In addition, the
ESPP will provide for an automatic annual increase in the number
of shares available for issuance under the plan on January 1 of
each year beginning in 2009 and continuing through and including
January 1, 2017 equal to the lesser of
(a) % of our then issued and
outstanding shares of common stock on the immediately preceding
December 31, (b) shares, or
(c) a number of shares as our board of directors may
determine. We will make appropriate adjustments in the number of
authorized shares and in outstanding purchase rights to prevent
dilution or enlargement of participants rights in the
event of a stock split or other change in our capital structure.
Shares subject to purchase rights which expire or are canceled
will again become available for issuance under the ESPP.
Our employees, and the employees of any future parent or
subsidiary corporation or other affiliated entity, will be
eligible to participate in the ESPP if they are customarily
employed by us, or such other entity, if applicable, for more
than 20 hours per week and more than five months in any
calendar year. However, an employee may not be granted a right
to purchase stock under the ESPP if: (a) the employee
immediately after such grant would own stock possessing 5% or
more of the total combined voting power or value of all classes
of our capital stock, or (b) the employees rights to
purchase stock under the ESPP and Incentive Plan would accrue at
a rate that exceeds $25,000 in value for each calendar year of
participation in such plans.
The ESPP will be implemented through a series of sequential
offering periods, generally three months in duration beginning
on the first trading days of February, May, August, and November
each year. However, the administrator may establish an offering
period to commence on the effective date of the ESPP that will
end on September 30, 2008. The administrator is authorized
to establish additional or alternative sequential or overlapping
offering periods and offering periods having a different
duration or different starting or ending dates, provided that no
offering period may have a duration exceeding 27 months.
Amounts accumulated for each participant, generally through
payroll deductions, will be credited toward the purchase of
shares of our common stock at the end of each offering period at
a price generally equal to 95% of the fair market value of our
common stock on the purchase date. Prior to commencement of an
offering period, the administrator will be authorized to change
the purchase price discount for that offering period, but the
purchase price may not be less than 85% of the lower of the fair
market value of our common stock at the beginning of the
offering period or at the end of the offering period.
The maximum number of shares a participant may purchase in any
three-month offering period will be the lesser of (a) that
number of shares determined by multiplying
(i) shares
by (ii) the number of months (rounded to the nearest whole
month) in the offering period and rounding to the nearest whole
share, or (b) that number of whole shares determined by
dividing (i) the product of $
and the number of months (rounded to the nearest whole month) in
the offering period and rounding to the nearest whole dollar by
(ii) the fair market value of a share of our common stock
at the beginning of the offering period. Prior to the beginning
of any offering period, the administrator may alter the maximum
number of shares that may be purchased by any participant during
the offering period or specify a maximum aggregate number of
shares that may be purchased by all participants in the offering
period. If insufficient shares remain available under the plan
to permit all participants to purchase the number of shares to
which they would otherwise be entitled, the administrator will
make a pro rata allocation of the available shares. Any amounts
withheld from participants compensation in excess of the
amounts used to purchase shares will be refunded.
In the event of a change in control, an acquiring or successor
corporation may assume our rights and obligations under the
ESPP. If the acquiring or successor corporation does not assume
such rights and obligations, then the purchase date of the
offering periods then in progress will be accelerated to a date
prior to the change in control, and the number of shares of
stock subject to outstanding purchase rights will not be
adjusted.
Executive Employment Agreements. Effective
July 1, 2008, we entered into employment agreements with
Brian E. Mueller, Daniel E. Bachus, and W. Stan Meyer that
govern the terms of their service as our Chief Executive
Officer, Chief Financial Officer, and Executive Vice President,
respectively. Each agreement has a four-year term and
automatically renews for one year periods after the initial
four-year term unless either party provides written notice that
it does not wish to renew the respective agreement. Except with
respect to
104
certain items of compensation, as described below, the terms of
each agreement are similar in all material respects.
The agreement with Mr. Mueller provides for a base salary
of $500,000 per year and a fixed bonus of $250,000 for 2008. It
also entitles Mr. Mueller to earn incentive compensation
for future years targeted at 100% of his base salary, subject to
the satisfaction of criteria to be established by our
compensation committee. Subject to the approval of the
compensation committee and immediately prior to the completion
of this offering, Mr. Mueller is also entitled to receive
(i) a grant of an option to
purchase shares
of our common stock, which will vest ratably, on an annual
basis, over a five-year period, and (ii) a grant
of shares
of our common stock which shares shall be fully vested on the
grant date. The shares subject to the foregoing grants will have
a grant or exercise price equal to the initial public offering
price.
The agreement with Mr. Bachus provides for a base salary of
$275,000 per year and a fixed bonus of $68,750 for 2008. It also
entitles Mr. Bachus to earn incentive compensation for
future years targeted at 50% of his base salary, subject to the
satisfaction of criteria to be established by our compensation
committee. Subject to the approval of the compensation committee
and immediately prior to the completion of this offering,
Mr. Bachus is also entitled to receive a grant of an option
to
purchase shares
of our common stock, which will vest ratably, on an annual
basis, over a five-year period and will have an exercise price
equal to the initial public offering price.
The agreement with Mr. Meyer provides for a base salary of
$300,000 per year and a fixed bonus of $75,000 for 2008. It also
entitles Mr. Meyer to earn incentive compensation for
future years targeted at 50% of his base salary, subject to the
satisfaction of criteria to be established by our compensation
committee. Subject to the approval of the compensation committee
and immediately prior to the completion of this offering,
Mr. Meyer is also entitled to receive a grant of an option
to
purchase shares
of our common stock, which will vest ratably, on an annual
basis, over a five-year period and will have an exercise price
equal to the initial public offering price.
Each agreement entitles the executive to receive customary and
usual fringe benefits generally available to our senior
management, and to be reimbursed for reasonable out-of-pocket
business expenses.
The agreements prohibit the executives from engaging in any work
that creates an actual conflict of interest with us, and include
customary non-competition and non-solicitation covenants that
prohibit the executives, during their employment with us and for
12 months thereafter, from (i) owning (except
ownership of less than 1% of any class of securities which are
listed for trading on any securities exchange or which are
traded in the over the counter market), managing, controlling,
participating in, consulting with, rendering services for, or in
any manner engaging in the operation of a for-profit,
postsecondary education institution or any other business that
is in the same line of business as us; (ii) soliciting
funds on behalf of, or for the benefit of, any for-profit,
postsecondary education institution (other than us) or any other
entity that competes with us; (iii) soliciting our current
or prospective students to be students for any other for-profit,
postsecondary education institution; (iv) inducing or
attempting to induce any of our employees to leave our employ,
or in any way interfering with the relationship between us and
any of our employees; or (v) inducing or attempting to
induce any of our students, customers, suppliers, licensees, or
other business partners to cease doing business with, or modify
its business relationship with, us, or in any way interfere with
or hinder the relationship between any such student, customer,
supplier, licensee, or business partner and us. Each of the
executives has separately entered into a confidentiality
agreement with us.
The agreements also entitle the executives to certain benefits
upon their respective separations from us. If the executives are
terminated for cause (as defined in the agreement) or resign
without good reason (as defined in the agreement), the
executives are entitled only to their respective base salary,
pro rated to the date of separation. If the executives are
terminated without cause or resign for good reason, subject to
their respective compliance with the covenants described above
and execution of a full release of all claims against us, the
executives will be entitled to receive 12 months of base
salary, as in effect at the time of separation, payable in
accordance with our payroll cycle and in compliance with
Section 409A of the Code, 12 months of COBRA premiums,
and partial acceleration of the vesting of their stock options
to the next vesting date. If, within the 12 months after a
change in control (as defined in the agreement), the executives
are terminated
105
other than for cause or they resign for good reason, they shall
be entitled to the same severance package as described above for
similar separation reasons, plus the full vesting of all stock
options held by the executives.
Named Executive Officer Salary
Adjustments. Effective January 1, 2008, the
base salary of each of Brent Richardson, John Crowley, and Chris
Richardson was increased by $5,000 per year to $297,500.
Other than as described above, there have been no other material
changes to items of compensation applicable to our named
executive officers or directors for fiscal 2008.
Compensation
of Named Executive Officers
The following table sets forth the total compensation earned for
services rendered during fiscal year 2007 by our named executive
officers.
2007
SUMMARY COMPENSATION TABLE
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All Other
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Name and Position
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Year
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Salary(1)
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Bonus(2)
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Compensation
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Total
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Brent D. Richardson
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2007
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$
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292,019
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$
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$
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15,312
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(3)
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$
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307,331
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Chief Executive Officer
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John E. Crowley
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2007
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292,019
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14,000
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306,019
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Chief Operating Officer
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Christopher C. Richardson
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2007
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292,019
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292,019
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General Counsel
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Timothy R.
Fischer(4)
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2007
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194,500
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25,000
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219,500
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Chief Administrative Officer
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Michael S. Lacrosse
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2007
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160,385
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25,000
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185,385
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Chief Information Officer
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For Brent Richardson, John Crowley, and Chris Richardson,
represents the minimum base salary payable under their
respective employment agreements of $250,000, as adjusted for
fiscal year 2007 by the board of directors. |
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(2) |
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Represents cash bonuses awarded to the recipients by the board
of directors on a discretionary basis. |
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(3) |
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Represents the value of lease payments made by Grand Canyon
University on a vehicle utilized by Mr. Richardson. |
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(4) |
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Mr. Fischer was appointed our Chief Administrative Officer
effective July 1, 2008. During 2007, he served as our Chief
Financial Officer. |
Employment
Agreements
We have entered into an employment agreement with each of Brent
D. Richardson, John E. Crowley, and Christopher C. Richardson
relating to 2007 compensation. In 2008, we entered into an
employment agreement with each of Brian E. Mueller, Daniel
E. Bachus, and W. Stan Meyer. Our board of directors
approved the terms of each agreement. The material terms of the
agreements with Messrs. Richardson, Crowley, and Richardson,
which governed their 2007 compensation, are summarized below.
See Actions Taken in Current Fiscal Year
Executive Employment Agreements for a summary of the terms
of the agreements with Messrs. Mueller, Bachus,
and Meyer.
Agreement with Brent D. Richardson. Effective
August 24, 2005, we and Brent Richardson entered into an
employment agreement. The agreement remains in effect until
Mr. Richardsons death, disability, separation from
Grand Canyon as a result of a determination of the board of
directors that separation is in our best interests, or a
voluntary resignation by Mr. Richardson. The agreement
provides for a minimum base salary of $250,000 per year, which
may be increased in the discretion of the board of directors.
Mr. Richardson may also receive a discretionary performance
bonus, which may be awarded by the board of directors based upon
the achievement of performance, budgetary, or other objectives
that may, from time to time, be set by the
106
board of directors. Mr. Richardson is also entitled to
insurance, vacation, holidays, and other benefits that are
consistent with those that we provide to our practices for our
employees generally.
The agreement provides for certain benefits upon separation, as
further described in the Severance and Change of Control
Payments section below. The agreement also contains
customary covenants requiring Mr. Richardson to maintain
the confidentiality of information obtained in his capacity as
an owner and member of our senior management team and
prohibiting Mr. Richardson from, for a period of
24 months following any separation event,
(i) competing with us, (ii) soliciting funds on behalf
of or for the benefit of another regionally accredited higher
education institution, (iii) soliciting current or
prospective students, (iv) inducing or attempting to induce
our employees to leave employment with us, and
(v) interfering with our business relationships generally.
Mr. Richardson is also prohibited from making any
disparaging remarks about us.
Agreement with John E. Crowley. Effective
August 24, 2005, we and John Crowley entered into an
employment agreement. The agreement remains in effect until
Mr. Crowleys death, disability, separation from us as
a result of a determination of the board of directors that
separation is in our best interests, or a voluntary resignation
by Mr. Crowley. The agreement provides for a minimum base
salary of $250,000 per year, which may be increased in the
discretion of the board of directors. Mr. Crowley may also
receive a discretionary performance bonus, which may be awarded
by the board of directors based upon the achievement of
performance, budgetary, or other objectives that may, from time
to time, be set by the board of directors. Mr. Crowley is
also entitled to insurance, vacation, holidays, and other
benefits that are consistent with those that we provide to our
practices for our employees generally. The agreement provides
for certain benefits upon separation, as further described in
the Severance and Change of Control Payments section
below. The agreement also contains substantially similar
covenants as those in the agreements with Brent Richardson, as
described above.
Agreement with Christopher C.
Richardson. Effective August 24, 2005, we
and Chris Richardson entered into an employment agreement. The
agreement with Chris Richardson contains substantially the same
terms as the agreement with John Crowley. The agreement also
provides for certain benefits upon separation as further
described in the Severance and Change of Control
Payments section below.
107
Severance and Change of Control Payments. The
employment agreements with Brent Richardson, John Crowley, and
Chris Richardson entitle them to certain severance payments and
other benefits in the event of certain types of terminations,
which are summarized below. The table below reflects the amount
of compensation to be paid to each of them in the event of
termination of such executives employment. The amounts
shown assume that such termination was effective as of
December 31, 2007, and thus includes amounts earned through
such time and are estimates of the amounts that would be paid
out to the executives upon their termination. All payments will
comply with Section 409A of the Code, to the extent Section 409A
applies. The actual amounts to be paid out can only be
determined at the time of such executives separation from
the company.
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Named Executive
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Officer
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Triggering
Event(1)(2)
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Payment/Benefit
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Material Conditions
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Potential
Value(3)
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Brent Richardson
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Separation by Mr. Richardson for Good Reason or
termination by us without Cause
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Continued payment of base salary and provision of benefits for
12 months following separation
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Mr. Richardson must abide by the confidentiality,
non-competition, non-solicitation and non-disparagement
covenants discussed above for 24 months
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$
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300,373
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Termination by us for Cause, death or disability of
Mr. Richardson, separation by Mr. Richardson without Good
Reason, or sale of Grand Canyon University
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No severance payments, but Mr. Richardson will receive benefits
as determined in accordance with the plans or programs providing
for such benefits
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See above
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8,354
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John Crowley
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Separation by Mr. Crowley for Good Reason or
termination by us without Cause
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Continued payment of base salary and provision of benefits for
six months following separation, with the option by us to extend
such payments (and related benefits) for up to 12 months
following separation
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Mr. Crowley must abide by the confidentiality, non-competition,
non-solicitation and non-disparagement covenants discussed above
for 12 months (subject to extension to 24 months)
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295,004
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Termination by us for Cause, death or disability of
Mr. Crowley, separation by Mr. Crowley without Good
Reason, or sale of Grand Canyon University
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No severance payments, but Mr. Crowley will receive benefits as
determined in accordance with the plans or programs providing
for such benefits
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See above
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2,985
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Chris Richardson
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Separation by Mr. Richardson for Good Reason or
termination by us without Cause
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Continued payment of base salary and provision of benefits for
six months following separation, with the option by us to extend
such payments (and related benefits) for up to 12 months
following separation
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Mr. Richardson must abide by the confidentiality,
non-competition, non-solicitation and non-disparagement
covenants discussed above for 12 months (subject to extension to
24 months)
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300,373
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Termination by us for Cause, death or disability of
Mr. Richardson, separation by Mr. Richardson without Good
Reason, or sale of Grand Canyon University
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No severance payments, but Mr. Richardson will receive benefits
as determined in accordance with the plans or programs providing
for such benefits
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See above
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8,354
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Good Reason is generally defined in the employment
agreements to include a resignation within 30 days after
the occurrence of any one of the following: (a) the failure
by us to pay amounts owed to the executive following
15 days prior written notice of such failure; (b) the
assignment to the executive of duties materially inconsistent
with the executives title or the failure to elect or
reelect the executive to his position; or (c) a requirement
by us that the executive perform services at a location that is
more than 50 miles from our main campus. |
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Cause is generally defined in the employment
agreements to include: (a) the executives commission
of a felony or crime involving moral turpitude, any other
willful act or omission involving dishonesty or fraud with
respect to us or our customers or suppliers, misappropriation of
our funds or assets for personal use or engaging in conduct
bringing substantial public disgrace or disrepute to us;
(b) the executives neglect of duties following
notice, gross misconduct in performance of duties or material
and repeated failure to perform duties; (c) the
executives engaging in conduct that constitutes cause for
separation under applicable law, and (d) the
executives breaching the confidentiality, non-competition,
non-solicitation,
and
non-disparagement
covenants applicable to him. |
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Assumes that, in the case of Chris Richardson and John Crowley,
we exercise our option to extend severance payments beyond the
required six month period, as described in the table above. Also
assumes health insurance premiums of $696.20 per month, $248.74
per month, and $696.20 per month for Brent Richardson, John
Crowley, and Chris Richardson, respectively, over the periods
indicated. |
Compensation
of Directors
To date, we have not paid our directors any compensation for
their services in that capacity. We do reimburse our
non-employee directors for all reasonable expenses incurred by
them to attend board and committee meetings.
Beginning upon the completion of this offering, we intend to pay
our non-employee directors an annual cash retainer of $30,000
for their board service and a per meeting fee of $2,000 for each
meeting of the board attended. We also intend to pay the members
of our audit, compensation, and nominating and corporate
governance committees an additional annual cash retainer of
$5,000, with the chair of the audit committee receiving an
additional annual cash retainer of $5,000, and the chairs of the
other committees each receiving an additional annual cash
retainer of $2,500. In addition, non-employee directors will be
eligible to receive awards under our Incentive Plan valued at
$35,000 per year. We will reimburse all directors for reasonable
expenses incurred to attend our board and board committee
meetings.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Policies
and Procedures for Related Person Transactions
In connection with this offering, we intend to adopt a written
code of business conduct and ethics, or code of conduct,
effective as of the date of and applicable to transactions on or
after the offering, pursuant to which our executive officers,
directors, and principal stockholders, including their immediate
family members and affiliates, will not be permitted to enter
into a related person transaction with us without the prior
consent of our audit committee, or other independent committee
of our board of directors in the event it is inappropriate for
our audit committee to review such transaction due to a conflict
of interest. 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, will first be
presented to our audit committee for review, consideration, and
approval. All of our directors, executive officers, and
employees will be required to report to our audit committee any
such related person transaction. In approving or rejecting the
proposed agreement, our audit committee shall consider the facts
and circumstances available and deemed relevant to the audit
committee, including, but not limited to, the risks, costs and
benefits to us, the terms of the transaction, the availability
of other sources for comparable services or products, and, if
applicable, the impact on a directors independence. Our
audit committee shall approve only those agreements that, in
light of known circumstances, are in, or are not inconsistent
with, our best interests, as our audit committee determines in
the good faith exercise of its discretion. Under the policy, if
we should discover related person transactions that have not
been approved, the audit committee will be notified and will
determine the appropriate action, including ratification,
rescission, or amendment of the transaction. This policy has not
been and will not be applied to the transactions described below.
Stockholders
Agreement
In connection with our conversion from a limited liability
company to a corporation and the related investment in us by the
Endeavour Entities, 220 GCU, L.P. and certain of its affiliates,
and certain other investors on August 24, 2005, we entered
into a stockholders agreement with the Endeavour Entities and
certain other parties. The stockholders agreement, as amended,
contains agreements among the parties with respect to the
election of our directors and restrictions on the issuance or
transfer of shares, including special corporate governance
provisions. Each of our current directors was appointed pursuant
to the terms of the stockholders agreement. Upon the completion
of this offering, the stockholders agreement will terminate in
accordance with its terms.
Investor
Rights Agreement
In connection with the August 24, 2005 transaction referred
to above, we also entered into an investor rights agreement with
the Endeavour Entities, 220 GCU, L.P. and certain of its
affiliates, and certain other named parties. The investor rights
agreement, as amended, contains agreements among the parties
with respect to registration rights, information rights and
certain operating covenants that we must comply with during the
term of the agreement. Upon the completion of this offering, the
investor rights agreement will terminate with respect to the
information rights and other covenants, but will remain in
effect with respect to the registration rights provisions. See
Description of Capital Stock Registration
Rights for a description of the registration rights that
will remain in effect following the closing of this offering.
Voting
Agreement
As discussed in Regulation Regulatory
Standards that May Restrict Institutional Expansion or Other
Changes Change in Ownership Resulting in a Change in
Control, the Department of Education and many states and
accrediting commissions 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. In connection with this offering, certain of our
stockholders have entered into a proxy and voting agreement,
which will become effective upon the closing of the offering,
pursuant to which such persons will grant to Brent D.
Richardson, our Executive Chairman, and Christopher C.
Richardson, our General Counsel and director, a five-year
irrevocable proxy to exercise voting
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authority with respect to all shares of our common stock on an
as-converted basis held by such persons, excluding shares of
common stock issued upon conversion of the Series A
convertible preferred shares held by 220 GCU, L.P., with the
result that, upon the closing of this offering, the Richardsons
will have voting authority with respect to
approximately % of our outstanding
shares of capital stock. See Beneficial Ownership of
Common Stock.
Endeavour
Professional Services Agreement
In connection with the August 24, 2005 transaction referred
to above, 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. The fees
paid by us to Endeavour Capital IV, LLC in 2005, 2006, and 2007
constituted less than 5% of Endeavour Capital IV, LLCs
consolidated gross revenues for each such year. The professional
services agreement will terminate by its terms upon the closing
of this offering.
Financing
Transactions
The following summarizes sales by us of our capital stock to
certain of our directors, executive officers, holders of more
than 5% of our voting securities, and their affiliates and
immediate family members in private placement financing
transactions since 2005.
Series A Convertible Preferred Stock
Issuance. On March 31, 2005, we sold
$14.0 million aggregate principal amount of notes to the
Endeavour Entities. On August 24, 2005, we sold
5,953 shares of our newly designated Series A
convertible preferred stock at a purchase price of $3,233.67 per
share, or $19.3 million in total gross proceeds, of which
4,948 shares were sold to the Endeavour Entities and
1,005 shares were sold to 220 GCU, L.P. A substantial
portion of the purchase price paid by the Endeavour Entities was
paid through the contributions to us of the notes that were
previously issued to the Endeavour Entities. The general partner
of the Endeavour Entities is Endeavour Capital IV, LLC, of which
Mr. D. Mark Dorman and Mr. Chad N. Heath, two of our
directors, are managing directors. Mr. Charles M. Preston
III, one of our former directors, is an affiliate of
220 Management, LLC, which is the general partner of 220
GCU GP, L.P., the general partner of 220 GCU, L.P.
Series B Convertible Preferred Stock
Issuance. On December 31, 2005, we issued
2,163 shares of our newly designated Series B
preferred stock and received gross proceeds of approximately
$7.0 million, or $3,236.25 per share, in the form of a
stock subscription receivable. The receivable was subsequently
paid in April 2006. Of these shares, 1,298 were sold to the
Endeavour Entities and 865 were sold to Rich Crow Enterprises,
LLC. Rich Crow Enterprises, LLC is a limited liability company
whose members include Brent Richardson, our Executive Chairman,
John Crowley, our Chief Operating Officer, and Chris Richardson,
our General Counsel and a director. Later in 2006, the shares of
Series B preferred stock sold to the Endeavour Entities
were redeemed for cash at their stated repurchase price.
Series C Preferred Stock Issuance. On
December 18, 2007 and January 11, 2008, we sold an
aggregate of 3,829 shares of our newly designated
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, 834 shares were sold to Rich Crow Enterprises,
LLC, and 935 shares were sold to the 220 Entities. 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.
111
Special
Distribution
We intend to declare a special distribution equal
to % of the gross proceeds of this
offering, including any proceeds we receive from the
underwriters exercise of their over-allotment option, that
will be paid promptly upon the completion of this offering (and
following the exercise of the over-allotment option, if
applicable) to our stockholders of record as
of ,
2008. The payment of the special distribution with the gross
proceeds of this offering permits a return of capital to all of
our stockholders of record as of the record date, and does so
without significantly decreasing our capital resources or
requiring these stockholders to sell their shares. Assuming an
initial public offering price of $
per share, which is the midpoint of the price range set forth on
the cover page of this prospectus, we estimate that the amount
of the special distribution will be
$ million, or
$ per common share on an as-if
converted basis (exclusive of any amounts that may be received
from the underwriters exercise of the over-allotment
option).
Each $1.00 increase or decrease in the assumed public offering
price of $ per share would
increase or decrease, as applicable, the aggregate amount of the
special distribution by
$ million and the per share
amount of the special distribution by
$ , assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same. Similarly, any increase or
decrease in the number of shares that we sell in the offering
will increase or decrease the special distribution and our net
proceeds in proportion to such increase or decrease, as
applicable, multiplied by the offering price per share, with
respect to our net proceeds, less underwriting discounts and
commissions and offering expenses.
Of the estimated aggregate amount of the special distribution,
$ million will be paid in
respect of shares of our capital stock over which our directors
and executive officers are deemed to exercise sole or shared
voting or investment power. These proceeds will be allocated
among our directors and executive officers as set forth in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Acquisition
|
|
Original Acquisition
|
|
|
|
|
|
|
of Shares to Which
|
|
Cost of Shares to Which
|
|
|
Amount of
|
|
|
|
Special Distribution
|
|
Special Distribution
|
|
|
Special
|
|
Name of Beneficial Owner
|
|
Relates
|
|
Relates(1)
|
|
|
Distribution(2)
|
|
|
|
|
|
(In thousands)
|
|
|
5% Stockholders
|
|
|
|
|
|
|
|
|
|
|
Endeavour Capital Fund IV, L.P. and
affiliates(3)
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
August 24, 2005
|
|
$
|
16,000
|
|
|
$
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
5,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
21,863
|
|
|
|
|
|
220 GCU, L.P. and
affiliates(4)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
3,042
|
|
|
|
|
|
Series A convertible preferred stock
|
|
August 24, 2005
|
|
|
3,250
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
3,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
9,563
|
|
|
|
|
|
Staci L.
Buse(5)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
3,038
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
3,972
|
|
|
|
|
|
Significant Ventures, LLC
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
276
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
1,499
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
Chad N.
Heath(3)
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
August 24, 2005
|
|
|
16,000
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
5,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
21,863
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Acquisition
|
|
Original Acquisition
|
|
|
|
|
|
|
of Shares to Which
|
|
Cost of Shares to Which
|
|
|
Amount of
|
|
|
|
Special Distribution
|
|
Special Distribution
|
|
|
Special
|
|
Name of Beneficial Owner
|
|
Relates
|
|
Relates(1)
|
|
|
Distribution(2)
|
|
|
|
|
|
(In thousands)
|
|
|
D. Mark
Dorman(3)
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
August 24, 2005
|
|
|
16,000
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
5,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
21,863
|
|
|
|
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
Brent D.
Richardson(5)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
3,038
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
3,972
|
|
|
|
|
|
John E.
Crowley(6)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
164
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
281
|
|
|
|
|
|
Christopher C.
Richardson(5)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
February 2, 2004
|
|
|
3,043
|
|
|
|
|
|
Series C preferred stock
|
|
December 18, 2007
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
3,977
|
|
|
|
|
|
All directors and executive officers as a group
|
|
|
|
$
|
30,093
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
|
|
|
(2) |
|
The special distribution is being paid in respect of our common
stock, Series A convertible preferred stock, and
Series C preferred stock, in each case on an as-converted
basis. Upon the closing of this offering, shares of the
Series A convertible preferred stock will convert into
shares of common stock on a one-for-one basis and shares of the
Series C preferred stock will convert into shares of common
stock at a rate equal to their liquidation preference per share
divided by the initial public offering price per share, which is
estimated to be $ per share, which
is the midpoint of the range set forth on the cover page of this
prospectus. |
|
|
|
(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 Endeavor Capital IV, LLC., the general
partner of each of the Endeavour Entities, are members of our
board of directors. |
|
|
|
(4) |
|
Represents shares held of record by 220 GCU, L.P., 220
Education, L.P., 220-SigEd, L.P., and SV One, L.P. |
|
|
|
(5) |
|
Represents shares held of record by Rich Crow Enterprises, LLC
and Masters Online, LLC, of which Brent Richardson, Chris
Richardson, and Staci Buse are members and, in each case, which
are attributable to, and beneficially owned by, Brent
Richardson, Chris Richardson, or Staci Buse, as applicable. |
|
|
|
(6) |
|
Represents shares held of record by Rich Crow Enterprises, LLC,
of which John Crowley is a member, which are attributable to,
and beneficially owned by, John Crowley. |
For additional information regarding share ownership, see
Beneficial Ownership of Common Stock.
113
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
Richardson, our Executive Chairman, and Chris Richardson,
our General Counsel and a 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. We
previously were a party to an agreement with 21st Century
Learning, which was owned by Gail Richardson, Brent Richardson,
and Chris Richardson, providing for a similar revenue sharing
arrangement. This agreement was terminated in 2005 when we
entered into the agreement with Mind Streams. For the years
ended December 31, 2005, 2006 and 2007, and for the six
months ended June 30, 2008, we expensed $2.8 million,
$3.7 million, $4.3 million, and $2.9 million,
respectively, to these parties pursuant to this arrangement for
students enrolled and expenses reimbursed.
Arrowhead
Management
We previously had a non-cancelable operating lease agreement for
administrative facilities with Arrowhead Holdings Management
Co., LLC, which is owned by, among others, irrevocable trusts
for the benefit of Brent Richardson and Chris Richardson. We
paid approximately $0.2 million to Arrowhead for services
and reimbursements during the year ended December 31, 2005.
This agreement was terminated at the end of 2005.
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 Chief Operating Officer,
is a member of The Center for Educational Excellence, LLC. For
the year ended December 31, 2007 and the six months ended
June 30, 2008, we paid approximately $0.6 million and
$0.2 million, respectively, of expenses incurred by The
Center for Educational Excellence, LLC, of which
$0.3 million and $0, respectively, were reimbursed to us.
Arrangement
with Vergo Marketing
From time to time we obtain marketing services from Vergo
Marketing, Inc., of which the sister-in-law of Brent Richardson,
our Executive Chairman, is a significant stockholder and chief
executive officer. For the year ended December 31, 2007, we
paid Vergo Marketing, Inc. $0.5 million for such services.
Youth in
Motion Consulting Arrangement
Youth in Motion, Inc. is owned by John Crowley, our Chief
Operating Officer. For the years ended December 31, 2005,
2006, and 2007 and the six months ended June 30, 2008, we
paid to Youth in Motion, Inc. $0.2 million,
$0.1 million, $0, and $0, respectively, for consulting
services rendered.
Significant
Ventures Consulting Agreement
Significant Ventures, LLC held approximately 9.3% of our common
stock immediately prior to this offering. On January 8,
2004, we entered into a consulting agreement with Significant
Ventures, Inc., predecessor to Significant Ventures, LLC. This
consulting agreement terminated by its terms on
December 31, 2006. For the years ended December 31,
2005, 2006, and 2007 and the six months ended June 30,
2008, we paid $0.1 million, $0.4 million, $0, and $0,
respectively, to Significant Ventures for services rendered and
expenses reimbursed pursuant to this arrangement.
114
220
Consulting Agreement
On January 8, 2004, we entered into a consulting agreement
with 220 Partners, LLC, which is affiliated with Charles M.
Preston III, one of our former directors who is an affiliate of
certain of our significant stockholders. This consulting
agreement terminated by its terms on December 31, 2006. For
the years ended December 31, 2005, 2006, and 2007 and the
six months ended June 30, 2008, we paid $0.3 million,
$0.3 million, $0, and $0, respectively, to 220 Partners,
LLC for services rendered and expenses reimbursed pursuant to
this arrangement.
115
BENEFICIAL
OWNERSHIP OF COMMON STOCK
The following table sets forth information regarding the
beneficial ownership of our common stock as of June 30,
2008, and as adjusted to reflect the sale of common stock being
offered in this offering, for:
|
|
|
|
|
each person, or group of affiliated persons, known to us to own
beneficially 5% or more of our outstanding common stock;
|
|
|
|
each of our directors and director-nominees;
|
|
|
|
|
|
each of our executive officers; and
|
|
|
|
|
|
all of our directors and executive officers as a group.
|
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. 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.
For purposes of calculating beneficial ownership, we have
assumed that, as of June 30, 2008:
|
|
|
|
|
The outstanding shares of our Series A convertible
preferred stock are converted into an equal number of shares of
common stock;
|
|
|
|
|
|
The outstanding shares of our Series C preferred stock,
which will convert into common stock upon the closing of the
offering based on a conversion price equal to the initial public
offering price per share, are converted into an equal number of
shares of common stock; and
|
|
|
|
We will
issue shares
of common stock in the offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
|
Owned Prior to the
|
|
|
Owned After
|
|
|
Owned After
|
|
|
|
Offering(1)
|
|
|
Offering
|
|
|
Over-Allotment(2)
|
|
|
|
Shares
|
|
|
Percent
|
|
|
Shares
|
|
|
Percent
|
|
|
Shares
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endeavour Capital Fund IV, L.P. and
affiliates(3)
|
|
|
6,623
|
|
|
|
32.6
|
%
|
|
|
6,623
|
|
|
|
|
%
|
|
|
6,623
|
|
|
|
|
%
|
220 GCU, L.P. and
affiliates(4)
|
|
|
4,544
|
|
|
|
23.4
|
%
|
|
|
4,544
|
|
|
|
|
%
|
|
|
4,544
|
|
|
|
|
%
|
Staci L.
Buse(5)
|
|
|
2,100
|
|
|
|
10.3
|
%
|
|
|
2,100
|
|
|
|
|
%
|
|
|
2,100
|
|
|
|
|
%
|
Significant Ventures,
LLC(6)
|
|
|
1,865
|
|
|
|
9.2
|
%
|
|
|
1,865
|
|
|
|
|
%
|
|
|
1,865
|
|
|
|
|
%
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brent D.
Richardson(7)(10)
|
|
|
2,100
|
|
|
|
10.3
|
%
|
|
|
12,154
|
|
|
|
|
%
|
|
|
12,154
|
|
|
|
|
%
|
Brian E. Mueller
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John E.
Crowley(8)
|
|
|
243
|
|
|
|
1.2
|
%
|
|
|
243
|
|
|
|
|
%
|
|
|
243
|
|
|
|
|
%
|
Christopher C.
Richardson(9)(10)
|
|
|
2,101
|
|
|
|
10.4
|
%
|
|
|
12,154
|
|
|
|
|
%
|
|
|
12,154
|
|
|
|
|
%
|
Daniel E. Bachus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W. Stan Meyer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy N. Fischer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael S. Lacrosse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chad N.
Heath(11)
|
|
|
6,623
|
|
|
|
32.6
|
%
|
|
|
6,623
|
|
|
|
|
%
|
|
|
6,623
|
|
|
|
|
%
|
D. Mark
Dorman(11)
|
|
|
6,623
|
|
|
|
32.6
|
%
|
|
|
6,623
|
|
|
|
|
%
|
|
|
6,623
|
|
|
|
|
%
|
David J. Johnson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack A. Henry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors, director-nominees, and executive officers as a
group (12 persons)
|
|
|
10,824
|
|
|
|
53.3
|
%
|
|
|
18,777
|
|
|
|
|
%
|
|
|
18,777
|
|
|
|
|
%
|
116
|
|
|
* |
|
Represents beneficial ownership of less than 1% |
|
(1) |
|
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 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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Amounts presented assume that the over-allotment option is
exercised in full. |
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(3) |
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Consists of: |
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4,213 shares of common stock issuable upon the conversion
of shares of Series A convertible preferred stock and
approximately 1,426 shares of common stock issuable upon
the conversion of shares of Series C preferred stock, in
each case held of record by Endeavour Capital Fund IV, L.P.;
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258 shares of common stock issuable upon the conversion of
shares of Series A convertible preferred stock and
approximately 87 shares of common stock issuable upon the
conversion of shares of Series C preferred stock, in each case
held of record by Endeavour Associates Fund IV, L.P.; and
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477 shares of common stock issuable upon the conversion of
shares of Series A convertible preferred stock and
approximately 161 shares of common stock issuable upon the
conversion of shares of Series C preferred stock, in each
case held of record by Endeavour Capital Parallel Fund IV,
L.P.
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Endeavour Capital IV, LLC is the general partner of the
Endeavour Entities, and 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 his respective pecuniary
interest. The address for these entities is 920 SW Sixth Avenue,
Suite 1400, Portland, Oregon 97204.
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1,005 shares of common stock issuable upon the conversion
of shares of Series A convertible preferred stock and
approximately 340 shares of common stock issuable upon the
conversion of shares of Series C preferred stock, in each
case held of record by 220 GCU, L.P.;
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710 shares of common stock and approximately
162 shares of common stock issuable upon the conversion of
shares of Series C preferred stock, in each case held of record
by 220 Education, L.P.;
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568 shares of common stock and approximately
130 shares of common stock issuable upon the conversion of
shares of Series C preferred stock, in each case held of record
by 220-SigEd, L.P.; and
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1,326 shares of common stock and approximately
303 shares of common stock issuable upon the conversion of
shares of Series C preferred stock, in each case held of
record by SV One, L.P.
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220 Management, LLC is the general partner of 220 GCU GP,
L.P. and SV One GP, L.P., which are the general partners of 220
GCU, L.P. and SV One L.P., respectively. 220 Management, LLC is
also the general partner of 220 Education, L.P., which is the
general partner of 220 SigEd, L.P. 220 Management, LLC has
dispositive power with respect to the shares held by 220 GCU,
L.P., 220 Education, L.P., 220 SigEd, L.P., and SV One, L.P.,
which we collectively refer to as the 220 Entities, and is
affiliated with Charles M. Preston III, one of our former
directors who directly or indirectly controls 220 Education,
L.P. The address for these entities is
c/o 220
Partners, LLC, One American Center, 600 Congress Avenue,
Suite 200, Austin, Texas 78701. Pursuant to a proxy and
voting agreement to be effective upon the closing of this
offering, Messrs. Brent Richardson and Chris Richardson
have voting power over the shares beneficially owned by the 220
Entities other than the shares of common stock issuable upon
conversion of the Series A convertible preferred
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stock. Each of Messrs. Brent Richardson and Chris
Richardson disclaim beneficial ownership of such shares, except
to the extent of such voting interest.
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(5) |
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Consists of 1,833 shares of common stock held of record by
Rich Crow Enterprises, LLC and Masters Online, LLC and
267 shares of common stock issuable upon the conversion of
Series C preferred stock held of record by Rich Crow
Enterprises, LLC, in each case which are attributable to, and
beneficially owned by, Ms. Staci L. Buse, who is the sister
of Brent Richardson and Chris Richarson. Pursuant to a proxy and
voting agreement to be effective upon the closing of this
offering, Messrs. Brent Richardson and Chris Richardson
have voting power over the shares beneficially owned by
Ms. Buse. Each of Messrs. Brent Richardson and Chris
Richardson disclaims beneficial ownership of such shares, except
to the extent of such voting interest. |
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(6) |
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Consists of 1,516 shares of common stock and approximately
349 shares of common stock issuable upon the conversion of
shares of Series C preferred stock. Michael Clifford is the
managing director of and has dispositive power with respect to
the shares held by Significant Ventures, LLC. The address for
Significant Ventures, LLC is 243 North Highway 101,
Suite 11, Solana Beach, California 92075. Pursuant to a
proxy and voting agreement to be effective upon the closing of
this offering, Messrs. Brent Richardson and Chris
Richardson have voting power over the shares beneficially owned
by Significant Ventures, LLC. Each of Messrs. Brent
Richardson and Chris Richardson disclaim beneficial ownership of
such shares, except to the extent of such voting interest. |
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(7) |
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Prior to this offering, the total for Brent D. Richardson
consists of 1,833 shares of common stock held of record by
Rich Crow Enterprises, LLC and Masters Online, LLC and
267 shares of common stock issuable upon the conversion of
Series C preferred stock held of record by Rich Crow
Enterprises, LLC, in each case which are attributable to, and
beneficially owned by, Mr. Richardson. |
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(8) |
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Consists of 209 shares of common stock and approximately
33 shares of common stock issuable upon the conversion of
Series C preferred stock, in each case held of record by
Rich Crow Enterprises, LLC, in each case which are attributable
to, and beneficially owned by, Mr. John Crowley. Pursuant
to a proxy and voting agreement to be effective upon the closing
of this offering, Messrs. Brent Richardson and
Chris Richardson have voting power over the shares
beneficially owned by Mr. Crowley. Each of
Messrs. Brent Richardson and Chris Richardson disclaim
beneficial ownership of such shares, except to the extent of
such voting interest. |
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(9) |
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Prior to this offering, the total for Christopher C. Richardson
consists of 1,834 shares of common stock held of record by
Rich Crow Enterprises, LLC and Masters Online, LLC and
267 shares of common stock issuable upon conversion of
Series C preferred stock held of record by Rich Crow
Enterprises, LLC, in each case which are attributable to, and
beneficially owned by, Mr. Richardson. |
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(10) |
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Following this offering, the total for Brent D. Richardson and
Christopher C. Richardson consists of: |
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1,833 shares of common stock held of record by Rich Crow
Enterprises, LLC and Masters Online, LLC and 267 shares of
common stock issuable upon the conversion of Series C
preferred stock held of record by Rich Crow Enterprises, LLC, in
each case which are attributable to, and beneficially owned by,
Mr. Brent D. Richardson.
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1,834 shares of common stock held of record by
Rich Crow Enterprises, LLC and Masters Online, LLC and
267 shares of common stock issuable upon conversion of
Series C preferred stock held of record by Rich Crow
Enterprises, LLC, in each case which are attributable to, and
beneficially owned by, Mr. Christopher C. Richardson.
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1,833 shares of common stock held of record by Rich Crow
Enterprises, LLC and Masters Online, LLC and 267 shares of
common stock issuable upon the conversion of Series C
preferred stock held of record by Rich Crow Enterprises, LLC, in
each case which are attributable to, and beneficially owned by,
the sister of Messrs. Brent Richardson and Chris Richardson.
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209 shares of common stock held of record by Rich Crow
Enterprises, LLC and approximately 33 shares of common
stock issuable upon the conversion of Series C preferred
stock held of record by Rich Crow Enterprises, LLC, in each case
which are attributable to, and beneficially owned by,
Mr. John Crowley.
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The shares held by the 220 Entities and the shares
held by Significant Ventures, as described in Notes (4) and (5)
above.
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170 shares of common stock and 35 shares of common
stock issuable upon the conversion of Series C preferred stock
held of record by other stockholders.
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Pursuant to a proxy and voting agreement to be effective upon
the closing of this offering, Messrs. Brent Richardson and
Chris Richardson have voting power over the shares beneficially
owned by their sister and by Mr. Crowley, as well as those
covered by the 220 Entities (except as noted in
note (4) above), Significant Ventures, and the other
stockholders. Each of Messrs. Brent Richardson and Chris
Richardson disclaims beneficial ownership of such shares, except
to the extent of such voting interest.
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(11) |
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Consists of 4,948 shares of common stock issuable upon
conversion of Series A convertible preferred stock and
1,675 shares of common stock issuable upon the conversion
of Series C preferred stock, in each case held of record by
the Endeavour Entities (see note (3) 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 his respective pecuniary interest. |
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DESCRIPTION
OF CAPITAL STOCK
General
The following description of our capital stock summarizes
provisions of our certificate of incorporation and bylaws as
they will be in effect upon completion of the offering. As of
the date of this prospectus, our authorized capital stock
consists
of shares
of common stock, $0.01 par value per share,
and shares
of preferred stock, $0.01 par value per share, of
which
are designated as Series A convertible preferred stock
and
are designated as Series C preferred stock. Immediately
after completion of this offering, after giving effect to the
conversion of our outstanding Series A convertible
preferred stock and Series C preferred stock into common
stock and the effectiveness of our amended and restated
certificate of incorporation, our authorized capital stock will
consist
of shares
of common stock, $0.01 par value per share,
and shares
of undesignated preferred stock, $0.01 par value per share.
The following description of the material provisions of our
capital stock and our charter and bylaws is only a summary, does
not purport to be complete and is qualified by applicable law
and the full provisions of our charter and bylaws. You should
refer to our charter and bylaws as in effect upon the closing of
this offering, which are included as exhibits to the
registration statement of which this prospectus is a part.
Common
Stock
As of June 30, 2008, there were 20,307 shares of our
common stock outstanding and held of record by seven
stockholders, assuming conversion of all outstanding shares of
preferred stock into an equal number of shares of 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
the 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 charter, which will be effective upon the completion
of this offering, the board of directors has authority to issue
undesignated preferred stock without stockholder approval. The
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. The 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.
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Warrants
As of June 30, 2008, we had outstanding a warrant to
purchase an aggregate of 498 shares of our common stock at
exercise prices of approximately $1,057 per share, subject to
adjustments to the exercise price and number of shares of common
stock underlying these warrants upon the occurrence of specified
events, including any recapitalization, consolidation or merger,
or sale of all assets. Under the original terms of the warrant,
we were entitled to repurchase the warrant for an aggregate
price of $16.0 million. Under an amendment to the warrant
that was effected in connection with our 2005 conversion from a
limited liability company to a corporation, the right to
repurchase the warrant, as well as a right to repurchase any
shares issued upon exercise of the warrant, in each case for
$16.0 million, was transferred to a holding company owned
by our original investors. In connection with this offering, if
such investors do not exercise such right, then we may exercise
the right to repurchase the warrant or the underlying shares. We
intend to use up to $16.0 million of the gross proceeds of
this offering to repurchase any portion of the warrant or the
underlying shares not purchased by such investors. See Use
of Proceeds for further information.
Registration
Rights
We are a party to an amended investor rights agreement with the
Endeavour Entities, the 220 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 Capital funds the right, beginning 90 days
following the completion of this offering, to cause us, at our
expense, to use our reasonable commercial efforts to register
such securities held by the Endeavour Capital funds 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 following completion of this
offering, the Endeavour Capital funds and the 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 the account of other security holders exercising
registration rights. In addition, after we have completed our
initial public offering, these entities 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 charter and bylaws will, upon completion of this offering,
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 will 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 will provide 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.
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Meetings of Stockholders. Our bylaws will
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 will 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 will
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 less than 120 days
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.
Blank Check Preferred Stock. Our charter will
provide
for 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
Upon completion of this offering, we will be 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
122
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
that will be in effect at the closing of this offering will
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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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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Contemporaneous with the completion of this offering, we intend
to enter 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 also intend to 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 University, we
have been
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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
Before the date of this prospectus, there has been no public
market for the common stock. We intend to apply to have our
common stock approved for listing on the Nasdaq Global Market,
subject to notice of issuance, under the symbol LOPE.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
Computershare Trust Company, N.A.
124
SHARES
ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, we will have outstanding an
aggregate of
approximately shares
of common stock. Of these
shares, shares
of common stock to be sold in this offering,
or shares
if the underwriters exercise their over-allotment option in
full, will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are
held by any of our affiliates, as that term is defined in
Rule 144 of the Securities Act. All remaining shares were
issued and sold by us in private transactions and are eligible
for public sale only if registered under the Securities Act or
sold in accordance with Rule 144 or Rule 701, each of
which is discussed below. In addition, upon completion of this
offering, we will have outstanding stock options held by
employees and directors for the purchase
of shares
of common stock.
The holders of all of our currently outstanding stock and
holders of substantially all of our currently outstanding stock
options are subject to
lock-up
agreements under which they have agreed not to transfer or
dispose of, directly or indirectly, any shares of common stock
or any securities convertible into or exercisable or
exchangeable for shares of common stock, for a period of
180 days after the date of this prospectus, which is
subject to extension in some circumstances, as discussed below.
As a result of the
lock-up
agreements described below and the provisions of Rule 144
and Rule 701 under the Securities Act, the shares of our
common stock (excluding the shares to be sold in this offering)
will be available for sale in the public market as follows:
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shares will be eligible for sale on the date of this prospectus;
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shares will be eligible for sale under Rule 144 or
Rule 701 beginning 90 days after the date of this
prospectus; and
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shares will be eligible for sale upon the expiration of the
lock-up
agreements, as more particularly and except as described below,
beginning after expiration of the
lock-up
period pursuant to Rule 144 or Rule 701.
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We expect the
remaining shares
to become eligible for future sale in the public market pursuant
to Rule 144 at varying times after six months from the date
of this prospectus.
Rule 144
In general, under Rule 144, beginning 90 days after
the date of this prospectus, a person who is not our affiliate,
has not been our affiliate for the previous three months, and
who has beneficially owned shares of our common stock for at
least six months may sell all such shares. An affiliate or a
person who has been our affiliate within the previous
90 days, and who has beneficially owned shares of our
common stock for at least six months, may sell within any
three-month period a number of shares that does not exceed the
greater of:
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one percent of the number of shares of common stock then
outstanding, which will equal
approximately shares
immediately after this offering; and
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the average weekly trading volume of our common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
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All sales under Rule 144 are subject to the availability of
current public information about us. Sales under Rule 144
by affiliates or persons who have been affiliates within the
previous 90 days are also subject to manner of sale
provisions and notice requirements. Upon expiration of the
180-day
lock-up
period, subject to any extension of the
lock-up
period under circumstances described below,
approximately shares
of our outstanding restricted securities will be eligible for
sale under Rule 144.
Registration
Statement on
Form S-8
We intend to file one or more registration statements on
Form S-8
under the Securities Act covering up
to shares
of common stock reserved for issuance under our Incentive Plan
and our ESPP. These registration statements are expected to be
filed soon after the date of this prospectus and will
automatically
125
become effective upon filing. Accordingly, shares registered
under such registration statements will be available for sale in
the open market, unless such shares are subject to vesting
restrictions with us or are otherwise subject to the
lock-up
agreements and manner of sale and notice requirements that apply
to affiliates under Rule 144 described above.
Lock-Up
Agreements
For a description of the
lock-up
agreements with the underwriters that restrict sales of shares
by us, or directors, executive officers, and stockholders, see
the information under the heading Underwriting.
Registration
Rights
For a description of registration rights with respect to our
common stock, see the information under the heading titled
Description of Capital Stock Registration
Rights.
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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 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, except in
connection with our special distribution, 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.
127
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 as to,
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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.
129
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement
dated ,
2008, we 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 the
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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Total
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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.
We have granted to the underwriters a
30-day
option to purchase on a pro rata basis up
to
additional shares from us at the initial 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.
After the initial public offering, the representative may change
the public offering price and concession.
The following table summarizes the compensation and estimated
expenses we 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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Expenses payable by us
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The representatives have informed us that they do not expect
sales to accounts over which the underwriters have discretionary
authority to exceed 5% of the shares of common stock being
offered.
We have agreed that we 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, or publicly disclose the intention to make
any offer, sale, pledge, disposition, or filing, without the
prior written consent of Credit Suisse Securities (USA) LLC and
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
for a period of 180 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 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.
Our directors, executive officers, and stockholders have agreed
that they will not offer, sell, contract to sell, pledge, or
otherwise dispose of, directly or indirectly, any shares of our
common stock or securities
130
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,
or disposition, 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
180 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 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 underwriters have reserved for sale at the initial public
offering price up
to shares
of the common stock for employees, directors, and other persons
associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for
sale to the general public in the offering will be reduced to
the extent these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the
other shares.
We 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.
We intend to apply to list the shares of common stock on the
Nasdaq Global Market under the symbol LOPE.
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.
Prior to the offering, there has been no market for our common
stock. The initial public offering price will be determined by
negotiation between us and the underwriters and will not
necessarily reflect the market price of the common stock
following the offering. The principal factors that will be
considered in determining the initial public offering price will
include:
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the information presented in this prospectus and otherwise
available to the underwriters;
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the history of and the prospects for the industry in which we
will compete;
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the ability of our management;
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the prospects for our future earning;
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the present state of our development and our current financial
condition;
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the recent market prices of, and the demand for, publicly traded
common stock of generally comparable companies; and
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the general condition of the securities markets at the time of
the offering.
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We offer no assurances that the initial public offering price
will correspond to the price at which the common stock will
trade in the public market subsequent to the offering or that an
active trading market for the common stock will develop and
continue after the offering.
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 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.
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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, each underwriter represents and
agrees that 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, it
has not made and will not make an offer of shares of common
stock to the public 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 it may, with effect from and
including the Relevant Implementation Date, make an offer of
shares of common stock to the public in that Relevant Member
State at any time,
(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;
(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; or
(d) in any other circumstances which do not require the
publication by us 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
Each of the underwriters severally represents, warrants and
agrees as follows:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of section 21 of the Financial Services
and Markets Act of 2000, or FSMA) to persons who have
professional experience in matters relating to investments
falling with Article 19(5) of the FSMA (Financial
Promotion) Order 2005 or in circumstances in which
section 21 of FSMA does not apply to the company; and
(b) it has complied with, and will comply with all
applicable provisions of FSMA with respect to anything done by
it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom.
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 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
133
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 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 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 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. 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 will have
no liability. In the case of an action for damages, we 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 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.
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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 US LLP, Phoenix, Arizona. The underwriters have been
represented by Latham & Watkins LLP, Los Angeles,
California.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our financial statements as of
December 31, 2006 and 2007, and for each of the three years
in the period ended December 31, 2007, as set forth in
their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLPs report, given on
their authority 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. You
may read and copy the registration statement, including exhibits
and schedules filed with it, and reports or other information we
may 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.
Upon completion of this offering, we will become subject to
information and periodic reporting requirements of the Exchange
Act and we will file annual, quarterly and current reports,
proxy statements and other information with the SEC.
135
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Grand Canyon Education, Inc.
We have audited the accompanying balance sheets of Grand Canyon
Education, Inc. (the Company) as of
December 31, 2006 (restated) and 2007 (restated), and the
related statements of operations, preferred stock and
stockholders deficit, and cash flows for each of the three
years in the period ended December 31, 2007 (as restated).
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Grand Canyon Education, Inc. at December 31, 2006
(restated) and 2007 (restated), and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2007 (as restated), in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the
accompanying financial statements as of December 31, 2006
and 2007 and the three years in the period ended
December 31, 2007 have been restated for corrections of
errors in the Companys calculations of estimated
uncollectible accounts, nonemployee share-based payments, and
deferred taxes upon conversion to a taxpaying entity.
Ernst & Young LLP
Phoenix, Arizona
May 12, 2008, except for Note 3, as to which the date is
August 11, 2008, and Note 17(a), as to which the date
is
[ l ],
2008
The foregoing report is in the form that will be signed upon the
determination of the special distribution to stockholders
described in Note 17(a) to the financial statements.
Phoenix, Arizona
August 11, 2008
F-2
Grand
Canyon Education, Inc.
Balance
Sheets
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
June 30,
|
|
|
Pro forma
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
June 30, 2008
|
|
|
|
(Restated)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,361
|
|
|
$
|
23,210
|
|
|
|
|
|
|
$
|
7,206
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$7,380 and $12,158 at December 31, 2006 and 2007, and
$15,442 at June 30, 2008.
|
|
|
4,798
|
|
|
|
7,114
|
|
|
|
|
|
|
|
6,930
|
|
|
|
|
|
Due from related parties
|
|
|
|
|
|
|
6,001
|
|
|
|
|
|
|
|
455
|
|
|
|
|
|
Deferred income taxes
|
|
|
2,984
|
|
|
|
4,640
|
|
|
|
|
|
|
|
4,640
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
893
|
|
|
|
1,349
|
|
|
|
|
|
|
|
2,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
23,036
|
|
|
|
42,314
|
|
|
|
|
|
|
|
21,548
|
|
|
|
|
|
Property and equipment, net
|
|
|
29,017
|
|
|
|
33,849
|
|
|
|
|
|
|
|
36,460
|
|
|
|
|
|
Restricted cash and investments
|
|
|
3,074
|
|
|
|
3,298
|
|
|
|
|
|
|
|
3,370
|
|
|
|
|
|
Prepaid royalties
|
|
|
250
|
|
|
|
317
|
|
|
|
|
|
|
|
8,409
|
|
|
|
|
|
Goodwill
|
|
|
2,941
|
|
|
|
2,941
|
|
|
|
|
|
|
|
2,941
|
|
|
|
|
|
Deferred income taxes
|
|
|
2,835
|
|
|
|
2,806
|
|
|
|
|
|
|
|
5,308
|
|
|
|
|
|
Deposit with former owner
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
79
|
|
|
|
43
|
|
|
|
|
|
|
|
2,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
61,232
|
|
|
$
|
88,568
|
|
|
|
|
|
|
$
|
80,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,181
|
|
|
$
|
3,434
|
|
|
|
|
|
|
$
|
4,532
|
|
|
|
|
|
Accrued liabilities
|
|
|
3,044
|
|
|
|
6,893
|
|
|
|
|
|
|
|
6,582
|
|
|
|
|
|
Income taxes payable
|
|
|
2,535
|
|
|
|
241
|
|
|
|
|
|
|
|
1,646
|
|
|
|
|
|
Deferred revenue and student deposits
|
|
|
6,133
|
|
|
|
10,369
|
|
|
|
|
|
|
|
10,973
|
|
|
|
|
|
Royalty payable to former owner
|
|
|
3,646
|
|
|
|
7,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related parties
|
|
|
836
|
|
|
|
1,005
|
|
|
|
|
|
|
|
1,472
|
|
|
|
|
|
Line of credit
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of capital lease obligations
|
|
|
949
|
|
|
|
1,150
|
|
|
|
|
|
|
|
1,132
|
|
|
|
|
|
Current portion of notes payable
|
|
|
374
|
|
|
|
646
|
|
|
|
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
20,698
|
|
|
|
37,166
|
|
|
|
|
|
|
|
26,749
|
|
|
|
|
|
Capital lease obligations, less current portion
|
|
|
28,779
|
|
|
|
28,078
|
|
|
|
|
|
|
|
28,288
|
|
|
|
|
|
Notes payable, less current portion
|
|
|
2,088
|
|
|
|
1,762
|
|
|
|
|
|
|
|
1,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
51,565
|
|
|
|
67,006
|
|
|
|
|
|
|
|
56,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 7,500 shares at December 31,
2006, and 9,700 shares at December 31, 2007 and
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding 5,953 shares at
December 31, 2006, 2007 and June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation value $57,750 at December 31, 2007
and June 30, 2008
|
|
|
18,610
|
|
|
|
18,610
|
|
|
|
|
|
|
|
18,610
|
|
|
|
|
|
Series B 12% preferred stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 2,200 shares at December 31,
2006, 2007 and June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding 865 shares at
December 31, 2006, and 0 shares at December 31,
2007 and June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation value $0 at December 31, 2007 and
June 30, 2008
|
|
|
2,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C 8% preferred stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 0 shares at December 31, 2006,
and 3,900 shares at December 31, 2007 and
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding 0 shares at
December 31, 2006, and 3,829 shares at
December 31, 2007 and June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation value $26,829 at December 31, 2007
and June 30, 2008
|
|
|
|
|
|
|
13,338
|
|
|
|
|
|
|
|
13,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 30,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding 10,325 shares at
December 31, 2006, 10,425 shares at December 31,
2007, and 10,525 shares at June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
8,142
|
|
|
|
7,909
|
|
|
|
|
|
|
|
6,700
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
35
|
|
|
|
79
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Accumulated deficit
|
|
|
(19,900
|
)
|
|
|
(18,374
|
)
|
|
|
|
|
|
|
(15,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(11,723
|
)
|
|
|
(10,386
|
)
|
|
|
|
|
|
|
(8,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, preferred stock and stockholders deficit
|
|
$
|
61,232
|
|
|
$
|
88,568
|
|
|
|
|
|
|
$
|
80,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-3
Grand
Canyon Education, Inc.
Statements
of Operations
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(Restated)
|
|
|
(Unaudited)
|
|
|
Net revenue
|
|
$
|
51,793
|
|
|
$
|
72,111
|
|
|
$
|
99,326
|
|
|
$
|
44,071
|
|
|
$
|
70,275
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
28,063
|
|
|
|
31,287
|
|
|
|
39,050
|
|
|
|
17,555
|
|
|
|
24,028
|
|
Selling and promotional, including $2,839 in 2005; $3,742 in
2006, and $4,293 in 2007, $2,064 and $2,925 for the six months
ended June 30, 2007 and 2008, to related parties
|
|
|
14,047
|
|
|
|
20,093
|
|
|
|
35,148
|
|
|
|
14,186
|
|
|
|
27,473
|
|
General and administrative
|
|
|
12,968
|
|
|
|
15,011
|
|
|
|
17,001
|
|
|
|
8,377
|
|
|
|
10,960
|
|
Royalty to former owner
|
|
|
1,619
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
1,629
|
|
|
|
1,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
56,697
|
|
|
|
69,069
|
|
|
|
94,981
|
|
|
|
41,747
|
|
|
|
63,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(4,904
|
)
|
|
|
3,042
|
|
|
|
4,345
|
|
|
|
2,324
|
|
|
|
6,326
|
|
Interest expense
|
|
|
(3,098
|
)
|
|
|
(2,827
|
)
|
|
|
(2,975
|
)
|
|
|
(1,515
|
)
|
|
|
(1,507
|
)
|
Interest income
|
|
|
276
|
|
|
|
912
|
|
|
|
1,172
|
|
|
|
692
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(7,726
|
)
|
|
|
1,127
|
|
|
|
2,542
|
|
|
|
1,501
|
|
|
|
5,251
|
|
Income tax expense (benefit)
|
|
|
(3,440
|
)
|
|
|
529
|
|
|
|
1,016
|
|
|
|
600
|
|
|
|
2,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,286
|
)
|
|
|
598
|
|
|
|
1,526
|
|
|
|
901
|
|
|
|
3,224
|
|
Preferred dividends
|
|
|
|
|
|
|
(527
|
)
|
|
|
(349
|
)
|
|
|
(167
|
)
|
|
|
(521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available (loss attributable) to common stockholders
|
|
$
|
(4,286
|
)
|
|
$
|
71
|
|
|
$
|
1,177
|
|
|
$
|
734
|
|
|
$
|
2,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss), per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(424
|
)
|
|
$
|
7
|
|
|
$
|
114
|
|
|
$
|
71
|
|
|
$
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(424
|
)
|
|
$
|
4
|
|
|
$
|
61
|
|
|
$
|
38
|
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,115
|
|
|
|
10,325
|
|
|
|
10,363
|
|
|
|
10,325
|
|
|
|
10,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
10,115
|
|
|
|
20,185
|
|
|
|
19,246
|
|
|
|
19,196
|
|
|
|
17,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per common share (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma earnings per common share
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-4
Grand
Canyon Education, Inc.
Statements
of Preferred Stock and Stockholders Deficit
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members/Stockholders Deficit
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A Convertible
|
|
Series B
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
|
|
|
|
|
Preferred Stock
|
|
Preferred Stock
|
|
Preferred Stock
|
|
|
Membership Interests
|
|
Common Stock
|
|
Paid-in
|
|
Comprehensive
|
|
Accumulated
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Units
|
|
Amount
|
|
Shares
|
|
Par Value
|
|
Capital
|
|
Income
|
|
Deficit
|
|
Total
|
Balance at December 31, 2004
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
1,000,000
|
|
|
$
|
8,567
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(16,212
|
)
|
|
$
|
(7,645
|
)
|
Distribution to members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
Exchange of membership interests for common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000,000
|
)
|
|
|
(8,327
|
)
|
|
|
10,000
|
|
|
|
|
|
|
|
8,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Promissory Notes into Series A Convertible
Preferred Stock
|
|
|
4,329
|
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
Issuance of Series A Convertible Preferred Stock for cash,
net of issuance costs of $639
|
|
|
1,624
|
|
|
|
4,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B Preferred Stock for cash, net of
issuance costs of $20
|
|
|
|
|
|
|
|
|
|
|
2,163
|
|
|
|
6,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,286
|
)
|
|
|
(4,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (Restated)
|
|
|
5,953
|
|
|
|
18,610
|
|
|
|
2,163
|
|
|
|
6,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,325
|
|
|
|
|
|
|
|
8,387
|
|
|
|
|
|
|
|
(20,498
|
)
|
|
|
(12,111
|
)
|
Net income (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
598
|
|
|
|
598
|
|
Unrealized gains on available-for-sale securities, net of taxes
of $23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
633
|
|
Redemption of Series B Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
(1,298
|
)
|
|
|
(4,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value assigned to Blanchard shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Dividend on Series B Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 (Restated)
|
|
|
5,953
|
|
|
|
18,610
|
|
|
|
865
|
|
|
|
2,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,325
|
|
|
|
|
|
|
|
8,142
|
|
|
|
35
|
|
|
|
(19,900
|
)
|
|
|
(11,723
|
)
|
Net income (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,526
|
|
|
|
1,526
|
|
Unrealized gains on available-for-sale securities, net of taxes
of $30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,570
|
|
Conversion of Series B Preferred Stock to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
(865
|
)
|
|
|
(2,780
|
)
|
|
|
800
|
|
|
|
2,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of amounts due to related party with Series C
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series C Preferred Stock for cash, net of
issuance costs of $36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,995
|
|
|
|
10,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Blanchard shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
Dividend on Series B Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
|
(320
|
)
|
Accretion of Series C Preferred Stock Dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 (Restated)
|
|
|
5,953
|
|
|
|
18,610
|
|
|
|
|
|
|
|
|
|
|
|
3,829
|
|
|
|
13,338
|
|
|
|
|
|
|
|
|
|
|
|
|
10,425
|
|
|
|
|
|
|
|
7,909
|
|
|
|
79
|
|
|
|
(18,374
|
)
|
|
|
(10,386
|
)
|
Net income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,224
|
|
|
|
3,224
|
|
Unrealized losses on available for-sale securities, net of taxes
of $49 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,155
|
|
Undeclared dividends on Series C Preferred Stock (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(521
|
)
|
|
|
|
|
|
|
|
|
|
|
(521
|
)
|
Issuance of Blanchard shares (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
2,996
|
|
|
|
|
|
|
|
|
|
|
|
2,996
|
|
Cancellation of IAS warrant, net of $2,316 deferred taxes
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,684
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 (unaudited)
|
|
|
5,953
|
|
|
$
|
18,610
|
|
|
|
|
|
|
$
|
|
|
|
|
3,829
|
|
|
$
|
13,859
|
|
|
|
|
|
|
|
$
|
|
|
|
|
10,525
|
|
|
$
|
|
|
|
$
|
6,700
|
|
|
$
|
10
|
|
|
$
|
(15,150
|
)
|
|
$
|
(8,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-5
Grand
Canyon Education, Inc.
Statements
of Cash Flows
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(Restated)
|
|
|
(Unaudited)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,286
|
)
|
|
$
|
598
|
|
|
$
|
1,526
|
|
|
$
|
901
|
|
|
$
|
3,224
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for bad debts
|
|
|
2,632
|
|
|
|
4,664
|
|
|
|
6,257
|
|
|
|
3,185
|
|
|
|
4,052
|
|
Depreciation and amortization
|
|
|
1,879
|
|
|
|
2,396
|
|
|
|
3,300
|
|
|
|
1,473
|
|
|
|
2,269
|
|
Deferred income taxes
|
|
|
(3,693
|
)
|
|
|
(2,148
|
)
|
|
|
(1,656
|
)
|
|
|
|
|
|
|
(186
|
)
|
Other
|
|
|
129
|
|
|
|
|
|
|
|
19
|
|
|
|
(17
|
)
|
|
|
(112
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,356
|
)
|
|
|
(5,974
|
)
|
|
|
(8,573
|
)
|
|
|
(4,139
|
)
|
|
|
(3,868
|
)
|
Prepaid expenses and other assets
|
|
|
(149
|
)
|
|
|
(451
|
)
|
|
|
(442
|
)
|
|
|
(230
|
)
|
|
|
(266
|
)
|
Due to/from related parties
|
|
|
51
|
|
|
|
202
|
|
|
|
(107
|
)
|
|
|
(257
|
)
|
|
|
288
|
|
Accounts payable
|
|
|
(727
|
)
|
|
|
1,663
|
|
|
|
253
|
|
|
|
(204
|
)
|
|
|
1,098
|
|
Accrued liabilities
|
|
|
(1,351
|
)
|
|
|
(646
|
)
|
|
|
3,802
|
|
|
|
1,639
|
|
|
|
576
|
|
Income taxes payable
|
|
|
253
|
|
|
|
2,280
|
|
|
|
(2,294
|
)
|
|
|
(2,353
|
)
|
|
|
1,405
|
|
Deferred revenue and student deposits
|
|
|
2,668
|
|
|
|
1,538
|
|
|
|
4,236
|
|
|
|
2,165
|
|
|
|
604
|
|
Prepaid royalties to former owner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,920
|
)
|
Royalty payable to former owner
|
|
|
978
|
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
1,629
|
|
|
|
(7,428
|
)
|
Deposit with former owner
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(6,972
|
)
|
|
|
6,800
|
|
|
|
7,103
|
|
|
|
3,792
|
|
|
|
(1,264
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(817
|
)
|
|
|
(2,387
|
)
|
|
|
(7,406
|
)
|
|
|
(3,234
|
)
|
|
|
(3,983
|
)
|
Purchases of investments
|
|
|
(9,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,499
|
)
|
Proceeds from sale or maturity of investments
|
|
|
|
|
|
|
9,045
|
|
|
|
(149
|
)
|
|
|
(62
|
)
|
|
|
2,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(9,969
|
)
|
|
|
6,658
|
|
|
|
(7,555
|
)
|
|
|
(3,296
|
)
|
|
|
(4,012
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on notes payable and capital lease obligations
|
|
|
(2,306
|
)
|
|
|
(1,179
|
)
|
|
|
(1,230
|
)
|
|
|
(623
|
)
|
|
|
(719
|
)
|
Repayment on line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,000
|
)
|
Proceeds from line of credit and other debt obligations
|
|
|
14,000
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
Repurchase of Institute Warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,000
|
)
|
Repayment of Institute Note Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,250
|
)
|
Net proceeds from issuances of preferred stock
|
|
|
4,590
|
|
|
|
|
|
|
|
4,684
|
|
|
|
|
|
|
|
|
|
Proceeds from related party payable on preferred stock
|
|
|
|
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
|
5,725
|
|
Redemptions of preferred stock
|
|
|
|
|
|
|
(4,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to members and dividends on preferred stock
|
|
|
(240
|
)
|
|
|
(497
|
)
|
|
|
(153
|
)
|
|
|
(125
|
)
|
|
|
|
|
Amounts paid related to initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
16,044
|
|
|
|
(1,676
|
)
|
|
|
9,301
|
|
|
|
(748
|
)
|
|
|
(10,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(897
|
)
|
|
|
11,782
|
|
|
|
8,849
|
|
|
|
(252
|
)
|
|
|
(16,004
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
3,476
|
|
|
|
2,579
|
|
|
|
14,361
|
|
|
|
14,361
|
|
|
|
23,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,579
|
|
|
$
|
14,361
|
|
|
$
|
23,210
|
|
|
$
|
14,109
|
|
|
$
|
7,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,994
|
|
|
$
|
2,523
|
|
|
$
|
2,645
|
|
|
$
|
1,318
|
|
|
$
|
2,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
|
|
|
$
|
397
|
|
|
$
|
4,964
|
|
|
$
|
3,000
|
|
|
$
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment through capital lease obligations
|
|
$
|
858
|
|
|
$
|
5,945
|
|
|
$
|
676
|
|
|
$
|
365
|
|
|
$
|
760
|
|
Issuance of Series B and Series C preferred stock for
notes receivable
|
|
|
7,000
|
|
|
|
|
|
|
|
5,725
|
|
|
|
|
|
|
|
|
|
Conversion of senior secured notes to Series A convertible
preferred stock
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of membership interest into common stock
|
|
|
8,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipt of marketable securities for Series B preferred
stock
|
|
|
|
|
|
|
2,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series C preferred stock for settlement of
balances owed
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
Accretion of dividends on Series C preferred stock
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
167
|
|
|
|
521
|
|
Value assigned to Blanchard shares
|
|
|
|
|
|
|
282
|
|
|
|
116
|
|
|
|
116
|
|
|
|
2,996
|
|
Assumption of future obligations under gift annuities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
887
|
|
Deferred tax on repurchase of Institute Warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,316
|
)
|
The accompanying notes are an integral part of these financial
statements.
F-6
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data)
Grand Canyon Education, Inc. (the Company) was
formed in Delaware in November 2003 as a limited liability
company, under the name Significant Education, LLC, for the
purpose of acquiring the assets of Grand Canyon University from
a non-profit foundation on February 2, 2004. On
August 24, 2005, the Company converted from a limited
liability company to a corporation and changed its name to
Significant Education, Inc. On May 9, 2008, the Company
changed its name to Grand Canyon Education, Inc. The Company is
a regionally accredited provider of online postsecondary
education services focused on offering graduate and
undergraduate degree programs in its core disciplines of
education, business, and healthcare. In addition to online
programs, the Company offers courses at its campus in Phoenix,
Arizona and onsite at the facilities of employers. The Company
is accredited by the Higher Learning Commission of the North
Central Association of Colleges and Schools.
All references in the notes to the financial statements
regarding per share information have been restated to their
equivalent based on the conversion of the membership units of
Significant Education, LLC into shares of common stock of
Significant Education, Inc.
The accompanying unaudited interim financial statements as of
June 30, 2008 and for the six month periods ended
June 30, 2007 and 2008 have been prepared in accordance
with U.S. generally accepted accounting principles,
consistent in all material respects with those applied in the
accompanying audited financial statements as of
December 31, 2006 and 2007 and for each of the three years
in the period ended December 31, 2007, except for certain
new accounting standards adopted on January 1, 2008 as
further described in Note 2, Summary of Significant
Accounting Policies, Income Taxes and New Accounting
Standards. Such interim financial information is unaudited
but reflects all adjustments that in the opinion of management
are necessary for the fair presentation of the interim periods
presented. Interim results are not necessarily indicative of
results for a full year.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Formation
and Transactions with Former Owner
On January 29, 2004, the Company entered into an asset
purchase agreement (the Purchase Agreement) with the
Grand Canyon University Institute for Advanced Studies (the
Institute or former owner), an Arizona
nonprofit corporation, pursuant to which the Company acquired
substantially all of the operating assets (excluding the ground
campus and related buildings) of Grand Canyon University (the
University), including all accreditations,
licensures, and approvals necessary to offer its ground and
online education programs. In consideration for the purchase of
such assets, the Company paid the Institute $500 in cash,
assumed certain liabilities, and agreed to pay the Institute a
royalty equal to 5% of the revenue generated by the Company
through its online education program for each year in the period
2004 through 2008 and 4% for each year thereafter, in perpetuity
(the Royalty Agreement). The consideration paid and
liabilities assumed exceeded the fair value of the assets
acquired by $2,941 which was recorded as goodwill. The
transaction closed on February 2, 2004 at which time the
Company commenced its operations.
On June 25, 2004, the Company entered into an ancillary
agreement (the Ancillary Agreement) with the
Institute, pursuant to which the Company agreed to purchase the
ground campus and related buildings (the Campus)
excluding one building and the underlying real estate, from the
Institute for the following consideration:
|
|
|
|
|
the assumption of a $1,500 note payable to a third party (the
Kirksville Note);
|
F-7
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
|
|
|
|
|
the issuance by the Company to the Institute of a warrant (the
Institute Warrant) to purchase a 10.0% non-dilutable
equity interest in the Company for an exercise price of $1
during a one month period beginning in July 1, 2011 subject
to a right for the Company to repurchase the warrant at any time
prior to its exercise for $6,000.
|
The value of the warrant was estimated at $420 which
approximates 10% of the estimated fair value of the Company at
the date of grant and was included as a component of the cost of
the campus and related buildings.
In connection with the Ancillary Agreement, (i) the Company
assigned its right to purchase the Campus to Spirit Finance
Acquisitions, LLC (Spirit), (ii) following such
assignment, Spirit acquired the Campus from the Institute for
cash, (iii) Spirit leased the Campus to the Company under a
long-term lease (the Spirit Lease) in connection
with which the Company issued to Spirit a warrant, and
(iv) the Institute loaned the Company $1,250 payable
over seven years (the Institute Loan).
Shortly after the completion of the acquisition, the Company and
the Institute became involved in certain disputes, with the
Company alleging breaches of representations and warranties
concerning the Universitys operations, its compliance with
Department of Education regulations, and the Institutes
failure to adequately disclose liabilities in the Purchase
Agreement and the Ancillary Agreement. In addition, the Company
withheld payment of amounts due under the Royalty Agreement and
the Institute Loan. At December 31, 2007, the Company had
withheld payment of approximately $7,428 in payments due under
the Royalty Agreement and approximately $840 of principal and
interest payments under the Institute Loan. As a result of these
disputes, the Company commenced legal proceedings in March 2006
and the Institute brought counterclaims.
In September 2007, the Company and the Institute entered into a
standstill agreement pursuant to which they agreed to stay all
legal proceedings through April 15, 2008. In accordance
with the terms of the standstill agreement, the Company made an
initial non-refundable, non-creditable $3,000 payment to the
Institute and received an option to pay an additional $19,500 to
the Institute by April 15, 2008, which would serve, in its
entirety, as consideration for:
|
|
|
|
|
the satisfaction in full of all past royalties due to the
Institute under the Royalty Agreement and the elimination of the
existing obligation to pay royalties for online student revenues
in perpetuity;
|
|
|
|
|
|
the repurchase of the Institute Warrant;
|
|
|
|
|
|
the acquisition by the Company of the real property and related
building located on the Campus that was owned by the Institute
and not transferred in connection with the Ancillary Agreement;
|
|
|
|
|
|
the termination of a sublease agreement pursuant to which the
Institute leased office space on the Campus;
|
|
|
|
the assumption by the Company of all future payment obligations
in respect to certain gift annuities made to the school by
donors prior to the acquisition; and
|
|
|
|
the satisfaction in full of the $1,250 Institute Loan (including
all accrued and unpaid interest thereon).
|
On April 15, 2008, the Company exercised its option and
paid the additional $19,500 to the Institute and the Institute
relinquished any and all rights it had to be involved in Grand
Canyon University, and all parties released any and all claims
they may have had against the other parties.
F-8
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
Accounting
for the April 15, 2008 Settlement of the Standstill
Agreement
The following table provides a tabular depiction of the
Companys allocation of the $22,500 total payment to the
Institute to each of the assets acquired, obligations settled,
and liabilities assumed, based on the Companys fair value
estimates.
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Initial Payment
|
|
$
|
3,000
|
|
Optional Payment
|
|
|
19,500
|
|
|
|
|
|
|
Total Payment to be allocated
|
|
$
|
22,500
|
|
|
|
|
|
|
1) Obligations settled
|
|
|
|
|
Accrued royalties due under Royalty Agreement (as of
April 15, 2008)
|
|
$
|
8,730
|
|
Repurchase of Institute Warrant
|
|
|
6,000
|
|
Repayment of Institute Loan, including accrued interest
|
|
|
2,257
|
|
Other amounts due to the Institute
|
|
|
327
|
|
2) Liabilities assumed
|
|
|
|
|
Assumption of gift annuities obligation, at fair value
|
|
|
(887
|
)
|
3) Cost to be allocated to assets acquired
|
|
|
|
|
Real property and prepaid royalty asset
|
|
|
6,073
|
|
|
|
|
|
|
Total fair value estimates
|
|
$
|
22,500
|
|
|
|
|
|
|
As indicated in the table above, the total payment was applied
to the following items, in the order indicated: (1) to
satisfy all past royalties due to the Institute; (2) to
redeem the Institute Warrant, based on the original terms of
such warrant; (3) to satisfy a loan provided by the
Institute, including all accrued and unpaid interest thereon;
and (4) to satisfy other amounts due to the Institute.
The standstill agreement also required the Company to assume
future payment obligations in respect of certain gift annuities
made to the school by donors prior to the acquisition, which
represents a liability assumed under the standstill agreement
and was recognized based on the fair value of such annuities at
the option exercise date.
The remaining $6,073 of the total payment was allocated to the
remaining acquired assets based on their individual fair value
relative to the total fair value of those assets. The Company
recognized the real property (i.e., land) and related
building acquired from the Institute in the transaction as an
asset at the option exercise date and these assets totalling
$129 and $24, respectively, have been classified within
Property and Equipment on our balance sheet at
June 30, 2008.
The $5,920 value of the settlement of future royalty payment
obligations to the Institute was determined based on its
relative fair value at the option exercise date and is included
in the accompanying balance sheet at June 30, 2008 as a
Prepaid Royalty, and will be amortized over a period
of 20 years.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
F-9
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
Reclassifications
Certain reclassifications of prior year amounts have been made
to the prior year balances to conform to the current period.
Cash
and Cash Equivalents
The Company invests cash in excess of current operating
requirements in short term certificates of deposit and money
market instruments. The Company considers all highly liquid
investments with maturities of three months or less at the time
of purchase to be cash equivalents.
Restricted
Cash and Investments
The Company owns certain marketable securities that are pledged
as collateral for a Standby Letter of Credit as further
described in Note 4. The Company considers its investments
in such marketable securities as available-for-sale securities,
in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. Available-for-sale investments are carried at
fair value as determined by quoted market prices, with
unrealized gains and losses, net of tax, reported as a separate
component of stockholders deficit. Unrealized losses
considered to be other-than-temporary are recognized currently
in earnings. The cost of securities sold is based on the
specific identification method. Amortization of premiums,
accretion of discounts, interest and dividend income and
realized gains and losses are included in investment income.
Because these investments are pledged as collateral, the Company
classifies all such amounts as long term assets.
Fair
Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts
receivable, accounts payable, and line of credit approximate
their fair value based on the liquidity or the short-term
maturities of these instruments. The carrying value of notes
payable and capital lease obligations approximate fair value
based upon market interest rates available to the Company for
debt of similar risk and maturities.
SFAS No. 157, Fair Value Measurements (SFAS
No. 157), establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. The fair value hierarchy
gives the highest priority to quoted prices in active markets
for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3).
At June 30, 2008 the fair value of municipal and
U.S. agency securities were determined using Level 1
of the hierarchy of valuation inputs, with the use of observable
market prices in the active market. The unit of account used for
valuation is the individual underlying security. The municipal
securities are comprised of city and county bonds related to
schools, water and sewer, and housing bonds. The
U.S. agency securities are comprised of Fannie Mae and
Federal Home Loan Bank bonds. Because these securities held by
the Company are investments, assessment of non-performance risk
is not applicable as such considerations are only applicable in
evaluating the fair value measurements for liabilities.
The fair value of the prepaid royalty asset related to the
settlement of future royalty payment obligations to the
Institute was determined using an income approach, based on
managements forecasts of revenue to be generated through
its online education program using Level 3 of the hierarchy
of valuation inputs. The rate utilized to discount net cash
flows to their present values is 35%. This discount rate was
determined after consideration of the Companys weighted
average cost of capital giving effect to estimates of the
Companys risk-free rate, beta coefficient, equity risk
premium, small size risk premium, and company-specific risk
premium.
F-10
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
Allowance
for Doubtful Accounts
The Company records an allowance for doubtful accounts for
estimated losses resulting from the inability, failure or
refusal of its students to make required payments. The Company
determines the adequacy of its allowance for doubtful accounts
based on an analysis of its historical bad debt experience and
the aging of the accounts receivable. The Company writes-off
account receivable balances deemed uncollectible on a regular
basis. However, the Company continues to reflect accounts
receivable with an offsetting allowance as long as management
believes there is a reasonable possibility of collection. Bad
debt expense is recorded as a general and administrative expense
in the statement of operations.
See also Note 3, Restatement of Financial
Statements, for the discussion of the restatement to the
allowance for doubtful accounts.
Property
and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method. Normal repairs and maintenance are expensed as incurred.
Expenditures that materially extend the useful life of an asset
are capitalized. Construction in progress represents items not
yet placed in service and are not depreciated. The Company
capitalizes interest pursuant to SFAS No. 34,
Capitalization of Interest Costs. The Company used its
interest rates on the specific borrowings used to finance the
improvements, which approximated 8.7% in 2006, 2007, and 2008
given the amount of the specific debt exceeded the in process
value of the project at all times. The Company did not have any
projects that required it to capitalize interest cost in 2005.
Interest cost capitalized and incurred in the years ended
December 31, 2005, 2006, and 2007 and the six months ended
June 30, 2007 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
Interest incurred
|
|
$
|
3,098
|
|
|
$
|
2,925
|
|
|
$
|
3,102
|
|
|
$
|
1,579
|
|
|
$
|
1,534
|
|
Interest capitalized
|
|
|
|
|
|
|
98
|
|
|
|
127
|
|
|
|
64
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
3,098
|
|
|
$
|
2,827
|
|
|
$
|
2,975
|
|
|
$
|
1,515
|
|
|
$
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Household improvements and
furniture and fixtures, computer equipment, and vehicles have
estimated useful lives of 10, four, and, five years,
respectively. Buildings are under 20 year capital leases.
Long-Lived
Assets
The Company evaluates the recoverability of its long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets.
Goodwill
Goodwill represents the excess of the cost over the fair market
value of net assets acquired, including identified intangible
assets. Goodwill is tested annually or more frequently if
circumstances indicate potential
F-11
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
impairment, by comparing its fair value to its carrying amount
as defined by SFAS No. 142, Goodwill and Other
Intangible Assets.
The determination of whether or not goodwill is impaired
involves significant judgment. Although the Company believes its
goodwill is not impaired, changes in strategy or market
conditions could significantly impact these judgments and may
require future adjustments to the carrying amount of goodwill.
Income
Taxes
On August 24, 2005, the Company converted from a limited
liability company to a corporation. For all periods subsequent
to such date, the Company has been and will continue to be
subject to corporate-level U.S. federal and state
income taxes. The Company accounts for income taxes as
prescribed by SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 prescribes the use of the
asset and liability method to compute the differences between
the tax basis of assets and liabilities and the related
financial amounts using currently enacted tax laws.
Effective January 1, 2008, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 prescribes a
more-likely-than-not threshold for financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. We recognize interest and penalties
related to uncertain tax positions in income tax expense.
The Company has deferred tax assets, which are subject to
periodic recoverability assessments. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amount that more likely than not will be realized.
Realization of the deferred tax assets is principally dependent
upon achievement of projected future taxable income offset by
deferred tax liabilities.
Revenue
Recognition
Revenues consist primarily of tuition and fees derived from
courses taught by the Company online, at its traditional campus
in Phoenix, Arizona, and onsite at facilities of employers.
Tuition revenue is recognized monthly over the applicable period
of instruction, net of scholarships provided by the Company. If
a student withdraws prior to the end of the third week of a
semester, the Company will refund all or a portion of tuition
already paid pursuant to its refund policy. Deferred revenue and
student deposits in any period represent the excess of tuition,
fees, and other student payments received as compared to amounts
recognized as revenue on the statement of operations and are
reflected as current liabilities in the accompanying balance
sheet. The Companys educational programs have starting and
ending dates that differ from its fiscal quarters. Therefore, at
the end of each fiscal quarter, a portion of revenue from these
programs is not yet earned in accordance with the SECs
Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements. Textbook sales and
other revenues are recognized as sales occur or services are
performed and represent less than 10% of total revenues.
Instructional
Costs and Services
Instructional cost and services consist primarily of costs
related to the administration and delivery of the Companys
educational programs. This expense category includes salaries
and benefits for full-time and adjunct faculty and
administrative personnel, costs associated with online faculty,
information technology costs, curriculum and new program
development costs (which are expensed as incurred) and costs
associated with other support groups that provide services
directly to the students. This category also includes an
allocation of depreciation, amortization, rent, and occupancy
costs attributable to the provision of educational services,
primarily at the Companys Phoenix, Arizona campus.
F-12
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
Selling
and Promotional
Selling and promotional expenses include salaries and benefits
of personnel engaged in the marketing, recruitment, and
retention of students, as well as advertising costs associated
with purchasing leads, hosting events and seminars, and
producing marketing materials. This category also includes an
allocation of depreciation, amortization, rent, and occupancy
costs attributable to selling and promotional activities at the
Companys facilities in Phoenix, Arizona and Orem, Utah.
Selling and promotional costs are expensed as incurred.
Advertising costs, which include marketing leads, events, and
promotional materials for the years ended December 31,
2005, 2006, and 2007 were $3,423, $4,674, and $10,213
respectively, and for the six months ended June 30, 2007
and 2008 were $3,575 and $7,070, respectively.
The Company is party to revenue share arrangements with related
parties pursuant to which it pays a percentage of the net
revenue that it actually receives from applicants recruited by
those entities that matriculate at Grand Canyon University. The
related party bears all costs associated with the recruitment of
these applicants. For the years ended December 31, 2005,
2006, and 2007, the Company expensed approximately $2,839,
$3,742, and $4,293, respectively, and for the six months ended
June 30, 2007 and 2008, $2,064 and $2,925, respectively,
pursuant to these arrangements. As of December 31, 2006 and
2007, and as of the six months ended June 30, 2008, $475,
$416, and $740, respectively, were due to these related parties.
General
and Administrative
General and administrative expenses include salaries and
benefits of employees engaged in corporate management, finance,
human resources, compliance, and other corporate functions.
General and administrative expenses also include bad debt
expense, as well as an allocation of depreciation, amortization,
rent, and occupancy costs attributable to the departments
providing general and administrative functions.
Royalty
to Former Owner
In connection with the February 2, 2004 acquisition of the
assets of Grand Canyon University from a non-profit foundation,
the Company entered into a royalty fee arrangement with the
former owner in which the Company agreed to pay a stated
percentage of cash revenue generated by its online programs. In
early 2005, in connection with a dispute with the former owner,
the Company continued to accrue but did not pay the royalty. As
of December 31, 2006 and 2007, the Company had accrued an
aggregate of $3,646 and $7,428, respectively, in such payments,
which amounts are included in royalty to former
owner in the accompanying balance sheets. The Company
settled all future royalty obligations with the former owner in
April 2008 as described above under Formation and
Transactions with Former Owner. The royalties accrued
through April 2008 were applied against the payments made to the
former owner.
Insurance/Self-Insurance
The Company uses a combination of insurance and self-insurance
for a number of risks, including claims related to employee
health care, workers compensation, general liability, and
business interruption. Liabilities associated with these risks
are estimated based on, among other things, historical claims
experience, severity factors, and other actuarial assumptions.
The Companys loss exposure related to self-insurance is
limited by stop loss coverage on a per occurrence and aggregate
basis. Expected loss accruals are based on estimates, and while
the Company believes the amounts accrued are adequate, the
ultimate loss may differ from the amounts provided.
F-13
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
Concentration
of Credit Risk
The Company may extend credit for tuition to some students. A
substantial portion is repaid through the students
participation in federally funded financial aid programs.
Transfers of funds from the financial aid programs to the
Company are made in accordance with the U.S. Department of
Education (Department of Education) requirements. A
majority of the Companys revenues are derived from tuition
financed under the Title IV programs of the Higher
Education Act of 1965, as amended (the Higher Education
Act). The financial aid and assistance programs are
subject to political and budgetary considerations and are
subject to extensive and complex regulations. The Companys
administration of these programs is periodically reviewed by
various regulatory agencies. Any regulatory violation could be
the basis for the initiation of potentially adverse actions
including a suspension, limitation, or termination proceeding,
which could have a material adverse effect on the Company.
Students obtain access to federal student financial aid through
a Department of Education prescribed application and eligibility
certification process. Student financial aid funds are generally
made available to students at prescribed intervals throughout
their predetermined expected length of study. Students typically
apply the funds received from the federal financial aid programs
first to pay their tuition and fees. Any remaining funds are
distributed directly to the student.
Accumulated
Other Comprehensive Income
The only item of accumulated other comprehensive income relates
to unrealized gains and losses on available-for-sale marketable
securities at December 31, 2006 and 2007, which totaled $35
(net of taxes of $23) and $79 (net of taxes of $52),
respectively, and which totaled $10 (net of taxes of $4) at
June 30, 2008.
Segment
Information
The Company operates as a single educational delivery operation
using a core infrastructure that serves the curriculum and
educational delivery needs of both its ground and online
students regardless of geography. The Companys chief
operating decision maker manages the Companys operations
as a whole and no expense or operating income information is
generated or evaluated on any component level.
New
Accounting Standards
In September 2006, the FASB issued SFAS No. 157, which
provides enhanced guidance for using fair value to measure
assets and liabilities. SFAS No. 157 establishes a
common definition of fair value, provides a framework for
measuring fair value under U.S. generally accepted
accounting principles and expands disclosure requirements about
fair value measurements. SFAS No. 157 is effective for
financial statements issued in fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Companys adoption of SFAS No. 157 had
no material impact on its financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115
(SFAS No. 159). This standard permits
entities to choose to measure financial instruments and certain
other items at fair value and is effective for the first fiscal
year beginning after November 15, 2007.
SFAS No. 159 must be applied prospectively, and the
effect of the first re-measurement to fair value, if any, should
be reported as a cumulative effect adjustment to the opening
balance of retained earnings. The adoption of
SFAS No. 159 had no material impact on the
Companys financial position or results of operations.
F-14
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
|
|
3.
|
Restatement
of Financial Statements
|
During the six month period ended June 30, 2008, the
Company concluded that a significant increase in its allowance
for doubtful accounts was required. A portion of the increase
has been determined to be the correction of an error from prior
periods and thus the accompanying financial statements have been
restated to reflect this increase. This error occurred in prior
years because the Company did not properly consider all
available information related to its actual collection and
write-off experience. Accordingly, the Company has restated its
allowances for doubtful accounts for all prior periods presented
to reflect the increase in bad debts for these prior periods
after additional analysis in 2008 of $1,933, $1,794, and $2,352
in each of the years ended December 31, 2005, 2006, and
2007 respectively. In addition, the Company made an error in the
accounting for the shares to be issued to Blanchard under the
License Agreement as discussed in Note 11 to the Financial
Statements. The correction of this error resulted in an increase
in prepaid royalties and paid-in capital of $282 and $116 in
2006 and 2007, respectively, and the recognition of $36 of
amortization expense in 2007. The Company also determined that
it had made an error in the accounting for deferred taxes at the
date of conversion from a limited liability company to a
corporation. The correction of this error resulted in an
increase in the income tax benefit for the year ended
December 31, 2005 of $761.
Below is a summary of the impact of the restatement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2007
|
|
|
|
As Reported
|
|
|
As Restated
|
|
|
As Reported
|
|
|
As Restated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
$
|
8,525
|
|
|
$
|
4,798
|
|
|
$
|
13,193
|
|
|
$
|
7,114
|
|
Deferred income taxes
|
|
|
1,592
|
|
|
|
2,984
|
|
|
|
2,338
|
|
|
|
4,640
|
|
Prepaid expenses and other current assets
|
|
|
861
|
|
|
|
893
|
|
|
|
1,304
|
|
|
|
1,349
|
|
Total current assets
|
|
|
25,339
|
|
|
|
23,036
|
|
|
|
46,046
|
|
|
|
42,314
|
|
Prepaid royalties
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
317
|
|
Deferred income taxes
|
|
|
2,027
|
|
|
|
2,835
|
|
|
|
1,986
|
|
|
|
2,806
|
|
Total assets
|
|
|
62,477
|
|
|
|
61,232
|
|
|
|
91,163
|
|
|
|
88,568
|
|
|
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS
DEFICIT
|
Additional paid-in capital
|
|
|
7,860
|
|
|
|
8,142
|
|
|
|
7,511
|
|
|
|
7,909
|
|
Accumulated deficit
|
|
|
(18,374
|
)
|
|
|
(19,900
|
)
|
|
|
(15,383
|
)
|
|
|
(18,374
|
)
|
Total stockholders deficit
|
|
|
(10,479
|
)
|
|
|
(11,723
|
)
|
|
|
(7,792
|
)
|
|
|
(10,386
|
)
|
Total liabilities, preferred stock and stockholders deficit
|
|
|
62,477
|
|
|
|
61,232
|
|
|
|
91,163
|
|
|
|
88,568
|
|
F-15
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2006
|
|
|
December 31, 2007
|
|
|
|
As Reported
|
|
|
As Restated
|
|
|
As Reported
|
|
|
As Restated
|
|
|
As Reported
|
|
|
As Restated
|
|
|
Total costs and expenses
|
|
$
|
54,760
|
|
|
$
|
56,697
|
|
|
$
|
67,279
|
|
|
$
|
69,069
|
|
|
$
|
92,499
|
|
|
$
|
94,981
|
|
Operating income (loss)
|
|
|
(2,967
|
)
|
|
|
(4,904
|
)
|
|
|
4,832
|
|
|
|
3,042
|
|
|
|
6,828
|
|
|
|
4,345
|
|
Interest expense
|
|
|
(3,016
|
)
|
|
|
(3,098
|
)
|
|
|
(2,909
|
)
|
|
|
(2,827
|
)
|
|
|
(3,070
|
)
|
|
|
(2,975
|
)
|
Income (loss) before income taxes
|
|
|
(5,707
|
)
|
|
|
(7,726
|
)
|
|
|
2,835
|
|
|
|
1,127
|
|
|
|
4,930
|
|
|
|
2,542
|
|
Income tax expense (benefit)
|
|
|
(1,894
|
)
|
|
|
(3,440
|
)
|
|
|
1,184
|
|
|
|
529
|
|
|
|
1,939
|
|
|
|
1,016
|
|
Net income (loss)
|
|
|
(3,813
|
)
|
|
|
(4,286
|
)
|
|
|
1,651
|
|
|
|
598
|
|
|
|
2,991
|
|
|
|
1,526
|
|
Earnings (loss), per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(377
|
)
|
|
$
|
(424
|
)
|
|
$
|
109
|
|
|
$
|
7
|
|
|
$
|
255
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(377
|
)
|
|
$
|
(424
|
)
|
|
$
|
82
|
|
|
$
|
4
|
|
|
$
|
159
|
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Restricted
Cash and Investments
|
The following is a summary of amounts included in Restricted
cash and investments. The Company considers all investments as
available for sale;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
Money Market Funds
|
|
$
|
108
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
108
|
|
Municipal Securities
|
|
|
550
|
|
|
|
10
|
|
|
|
|
|
|
|
560
|
|
U.S. Agency
|
|
|
2,358
|
|
|
|
48
|
|
|
|
|
|
|
|
2,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,016
|
|
|
$
|
58
|
|
|
$
|
|
|
|
$
|
3,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
Money Market Funds
|
|
$
|
258
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
258
|
|
Municipal Securities
|
|
|
550
|
|
|
|
18
|
|
|
|
(1
|
)
|
|
|
567
|
|
U.S. Agency
|
|
|
2,358
|
|
|
|
115
|
|
|
|
|
|
|
|
2,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,166
|
|
|
$
|
133
|
|
|
$
|
(1
|
)
|
|
$
|
3,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
Money Market Funds
|
|
$
|
2,804
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,804
|
|
Municipal Securities
|
|
|
549
|
|
|
|
18
|
|
|
|
(1
|
)
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,353
|
|
|
|
18
|
|
|
|
(1
|
)
|
|
$
|
3,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
The unrealized losses on the Companys investments in
Municipal Securities were caused by interest rate increases. The
cash flows of the Agency instruments are guaranteed by an agency
of the U.S. government while Municipal Securities are
backed by the issuing municipalitys credit worthiness.
Contractual maturities of the marketable securities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of
|
|
|
|
2006
|
|
|
2007
|
|
|
June 30, 2008
|
|
|
Due in one year or less
|
|
$
|
108
|
|
|
$
|
359
|
|
|
$
|
2,904
|
|
Due in one to five years
|
|
|
402
|
|
|
|
335
|
|
|
|
255
|
|
Due in five to ten years
|
|
|
997
|
|
|
|
1,032
|
|
|
|
211
|
|
Due after ten years
|
|
|
1,567
|
|
|
|
1,572
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,074
|
|
|
$
|
3,298
|
|
|
$
|
3,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains and losses resulting from the sale of
available-for-sale securities were $0 for the years ended
December 31, 2005, 2006, and 2007, and $112 for the six
months ended June 30, 2008. For the years ended
December 31, 2005, 2006, and 2007, respectively the net
unrealized gain (loss) on available-for-sale securities were $0,
$35, and $44, net of tax effect, respectively, and $(69), net of
tax effect, for the six months ended June 30, 2008.
|
|
5.
|
Property
and Equipment
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of
|
|
|
|
2006
|
|
|
2007
|
|
|
June 30, 2008
|
|
|
Buildings under capital lease
|
|
$
|
20,562
|
|
|
$
|
20,562
|
|
|
$
|
20,562
|
|
Equipment under capital leases
|
|
|
1,726
|
|
|
|
2,236
|
|
|
|
2,253
|
|
Leasehold improvements
|
|
|
3,369
|
|
|
|
8,073
|
|
|
|
9,583
|
|
Furniture, fixtures and equipment
|
|
|
5,225
|
|
|
|
9,515
|
|
|
|
11,464
|
|
Other
|
|
|
593
|
|
|
|
805
|
|
|
|
1,074
|
|
Construction in progress
|
|
|
2,757
|
|
|
|
1,020
|
|
|
|
1,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,232
|
|
|
|
42,211
|
|
|
|
46,927
|
|
Less accumulated depreciation and amortization
|
|
|
(5,215
|
)
|
|
|
(8,362
|
)
|
|
|
(10,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
29,017
|
|
|
$
|
33,849
|
|
|
$
|
36,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense associated with property
and equipment, including assets under capital lease, totaled
$1,849, $2,298, and $3,270 for the years ended December 31,
2005, 2006, and 2007, respectively, and $1,454 and $2,132 for
the six months ended June 30, 2007 and 2008.
F-17
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of
|
|
|
|
2006
|
|
|
2007
|
|
|
June 30, 2008
|
|
|
Accrued compensation and benefits
|
|
$
|
1,569
|
|
|
$
|
3,775
|
|
|
$
|
4,800
|
|
Accrued interest
|
|
|
671
|
|
|
|
1,096
|
|
|
|
221
|
|
Other accrued expenses
|
|
|
804
|
|
|
|
2,022
|
|
|
|
1,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,044
|
|
|
$
|
6,893
|
|
|
$
|
6,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Financing
Arrangements
|
At December 31, 2007, the Company had a line of credit with
a bank that provided for borrowings of up to $6,000. The line
was intended to provide funding for operations as needed and was
collateralized by equipment and fixtures owned by the Company.
The interest rate on the line was equal to LIBOR plus 2.0% (6.8%
as of December 31, 2007). As of December 31, 2007 the
amount outstanding under this line of credit was $6,000. The
line of credit was paid in full in February 2008 and terminated
in May 2008.
During 2004, the Company entered into the Spirit Lease. In
connection with the Spirit Lease, the Company is required to
maintain a $2,000 letter of credit in favor of Spirit. The
letter of credit is secured by a pledge of certain Company
assets that are included in Restricted cash and investments in
the accompanying balance sheet. In conjunction with the terms of
the Spirit Lease, Spirit provided the Company with funding to be
used for certain leasehold and other capital improvements. At
December 31, 2007 and June 30, 2008, the Company was
obligated to spend $2,287 and $1,258, respectively, by July 2010
on such improvements.
|
|
8.
|
Notes
Payable and Capital Lease Obligations
|
Notes payable and capital lease obligations consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of
|
|
|
|
2006
|
|
|
2007
|
|
|
June 30, 2008
|
|
|
Capital Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease for buildings (monthly payments of $277 at an
implicit interest rate of 8.7% through 2024)
|
|
$
|
29,161
|
|
|
$
|
28,451
|
|
|
$
|
28,814
|
|
Capital leases for equipment (various leases extending into
2012, with implicit interest rates ranging from 7.4% to 9.3%,
monthly payments totaling $35)
|
|
|
567
|
|
|
|
777
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,728
|
|
|
|
29,228
|
|
|
|
29,420
|
|
Less: Current portion of capital lease obligations
|
|
|
949
|
|
|
|
1,150
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,779
|
|
|
$
|
28,078
|
|
|
$
|
28,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of
|
|
|
|
2006
|
|
|
2007
|
|
|
June 30, 2008
|
|
|
Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Institute Loan; 8 quarterly payments of $60 through June 2006
and $120 for 20 quarters through June 2011; implicit interest at
23.6%
|
|
$
|
1,250
|
|
|
$
|
1,250
|
|
|
$
|
|
|
Kirksville Note; monthly payments of $20; interest at 3.9%
through September 2011
|
|
|
1,043
|
|
|
|
840
|
|
|
|
735
|
|
Various Gift Annuities; quarterly payments of $34 extending
through 2018; interest at 10%
|
|
|
|
|
|
|
|
|
|
|
884
|
|
Notes payable for vehicles requiring monthly payments with
interest rates ranging from 9.5% to 11.0% extending into January
2013
|
|
|
169
|
|
|
|
318
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,462
|
|
|
|
2,408
|
|
|
|
1,894
|
|
Less: Current portion
|
|
|
374
|
|
|
|
646
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,088
|
|
|
$
|
1,762
|
|
|
$
|
1,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Spirit Lease provides the Company with the use of the campus
land and buildings for a term of twenty years and provides the
Company with four options to extend the term of the lease term
for five year periods through 2044. In accordance with SFAS
No. 13, Accounting for Leases, the lease of the
campus land was treated as an operating lease and the lease of
the buildings was treated as a capital lease. The lease includes
scheduled
bi-annual
adjustments based on the lesser of 5.0% or 125% of the change in
the Consumer Price Index. Under the original lease terms, Spirit
provided an advance to make tenant improvements of $6,250 that
were received in 2004 and 2005. Through December 31, 2007
and June 30, 2008, the Company had expended $3,963 and
$4,992, respectively, of the amounts advanced for approved
capital improvement projects, and is required to spend the
remaining amounts through 2010. In June 2006, Spirit agreed to
provide an additional $5,800 of lease funding for tenant
improvements. Through December 31, 2007, the Company has
expended $4,555 and utilized $3,589 of the tenant improvement
funds. As of June 30, 2008, the Company has expended and
utilized an additional $1,157 and $761, respectively, leaving
$88 in available funding. The lease provides the Company with an
option to purchase the property at the greater of fair value or
Spirits total investment in the property.
F-19
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
Payments due under the notes payable and future minimum lease
payments under the capital lease obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Capital Lease
|
|
|
|
|
|
|
Obligations
|
|
|
Notes Payable
|
|
|
2008
|
|
$
|
3,744
|
|
|
$
|
646
|
|
2009
|
|
|
3,544
|
|
|
|
586
|
|
2010
|
|
|
3,471
|
|
|
|
671
|
|
2011
|
|
|
3,397
|
|
|
|
456
|
|
2012
|
|
|
3,355
|
|
|
|
49
|
|
Thereafter
|
|
|
34,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,462
|
|
|
$
|
2,408
|
|
|
|
|
|
|
|
|
|
|
Less: Portion representing interest
|
|
|
23,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
29,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Commitments
and Contingencies
|
Leases
The Company leases certain land, buildings and equipment under
non-cancelable operating leases expiring at various dates
through 2023. Future minimum lease payments under operating
leases due each year are as follows at December 31, 2007:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
$
|
2,203
|
|
2009
|
|
|
2,153
|
|
2010
|
|
|
2,003
|
|
2011
|
|
|
1,852
|
|
2012
|
|
|
1,852
|
|
Thereafter
|
|
|
20,326
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
30,389
|
|
|
|
|
|
|
Total rent expense and related taxes and operating expenses
under operating leases for the years ended December 2005, 2006
and 2007 and for the six months ended June 30, 2007 and
2008 was $2,052, $2,136, $2,260, $1,041 and $1,097,
respectively.
Legal
Matters
On February 28, 2007, the Company filed a complaint against
SunGard Higher Education Managed Services, Inc. in the Maricopa
County Superior Court, Case
No. CV2007-003492,
for breach of contract, breach of implied covenant of good faith
and fair dealing, breach of warranty, breach of fiduciary duty,
tortious interference with business expectancy, unjust
enrichment, and consumer fraud related to technology services
agreement between the parties. In response, SunGard moved to
stay the litigation and compel arbitration. The court granted
the motion to stay, and compelled the parties to arbitrate.
SunGard has also
F-20
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
counterclaimed alleging breach of contract relating to the
parties technology services agreement. Following
discovery, the arbitration occurred in late May 2008 and final
arguments were heard in July 2008.
From time to time, the Company is a party to various lawsuits,
claims, and other legal proceedings that arise in the ordinary
course of business, some of which are covered by insurance. When
the Company is aware of a claim or potential claim, it assesses
the likelihood of any loss or exposure. If it is probable that a
loss will result and the amount of the loss can be reasonably
estimated, the Company records a liability for the loss. If the
loss is not probable or the amount of the loss cannot be
reasonably estimated, the Company discloses the nature of the
specific claim if the likelihood of a potential loss is
reasonably possible and the amount involved is material. With
respect to the majority of pending litigation matters, the
Companys ultimate legal and financial responsibility, if
any, cannot be estimated with certainty and, in most cases, any
potential losses related to those matters are not considered
probable. The Company has reserved approximately $750 for losses
related to litigation and asserted claims where the
Companys ultimate exposure is considered probable and the
potential loss can be reasonably estimated, which is classified
within accrued liabilities on the accompanying December 31,
2007 and June 30, 2008 balance sheet. Upon resolution of
any pending legal matters, the Company may incur charges in
excess of presently established reserves. Management does not
believe that any such charges would, individually or in the
aggregate, have a material adverse effect on the Companys
financial condition, results of operations or cash flows.
Basic earnings (loss) per common share is calculated by dividing
net income available (loss attributable) to common stockholders
by the weighted average number of common shares outstanding for
the period. Diluted earnings (loss) per common share reflects
the assumed conversion of all potentially dilutive securities,
consisting of preferred stock and common stock warrants for
which the estimated fair value exceeds the exercise price, less
shares which could have been purchased with the related
proceeds, unless anti-dilutive. Contingently issuable stock,
such as issuances to Blanchard Education, LLC (as discussed in
Note 11), is also included in the diluted shares
computation if enrollment levels have been attained, unless
anti-dilutive. For 2005, diluted earnings (loss) per common
share is computed on the same basis as basic earnings (loss) per
common share, as the inclusion of potential common shares
outstanding would be anti-dilutive.
The table below reflects the calculation of the weighted average
number of common shares outstanding on an as if converted basis
used in computing basic and diluted earnings (loss) per common
share. For 2005, the basic and diluted common shares outstanding
is computed by the weighted average membership units outstanding
prior to the Companys conversion to a corporation, on a
converted basis as if the conversion to a
F-21
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
corporation occurred on January 1, 2005 combined with the
weighted number of shares of common stock outstanding after the
conversion to a corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding
|
|
|
10,115
|
|
|
|
10,325
|
|
|
|
10,363
|
|
|
|
10,325
|
|
|
|
10,454
|
|
Effect of dilutive preferred stock
|
|
|
|
|
|
|
7,938
|
|
|
|
6,787
|
|
|
|
6,818
|
|
|
|
5,953
|
|
Effect of dilutive warrants
|
|
|
|
|
|
|
1,922
|
|
|
|
2,084
|
|
|
|
2,053
|
|
|
|
1,438
|
|
Effect of contingently issuable common stock
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding
|
|
|
10,115
|
|
|
|
20,185
|
|
|
|
19,246
|
|
|
|
19,196
|
|
|
|
17,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average securities that could potentially dilute
earnings per share in the future that are not included above as
they are anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A contingently redeemable convertible preferred stock
|
|
|
2,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B contingently redeemable convertible preferred stock
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Preferred
Stock and Equity Transactions
|
Preferred
Stock
As of December 31, 2007 and June 30, 2008, the
following series of preferred stock have been authorized:
Series A
Convertible Preferred Stock
The Company entered into a Series A convertible preferred
stock (the Series A) purchase agreement on
August 24, 2005. The holders of Series A are entitled
to vote and to receive dividends, when and as declared by the
board of directors from time to time, in each case on an
as-converted to common stock basis. The shares of Series A
may convert into common stock at any time at the option of the
holder thereof at the then applicable conversion rate, and all
shares of Series A automatically convert into common stock
at the then applicable conversion rate upon the consummation of
a registered initial public offering that results in net cash
proceeds to the Company (after deducting applicable underwriting
discounts and commissions) of not less than $30,000 and that has
an offering price per share to the public of not less than $5
(as adjusted to reflect stock dividends, stock splits,
combinations and similar actions) (a qualified public
offering). In the event of liquidation, or a change in
control, as defined, the holders of the Series A are
entitled to receive in preference to holders, other than holders
of Series B preferred stock (the Series B) and
Series C preferred stock (the Series C), any
distributions of the assets of the Company equal to three times
the original purchase price of the shares, or $9,702 per share,
subject to certain adjustments.
On, or at any time, or from time to time, after
February 24, 2009 and before August 24, 2009, each
holder of the Series A may offer to the Company in writing
the opportunity to redeem all or a portion of such holders
outstanding shares of the Series A during the six month
period following the Companys receipt of such offer for
value greater than the then current liquidation value or fair
value as determined by an
F-22
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
independent appraisal or public market. A majority of the board
of directors (excluding the members of the board who are holders
of the Series A) may accept or reject the offer. If
the board of directors chooses not to redeem the Series A
during this optional redemption period, then the holders of a
majority of the Series A may, at their option, take voting
control of the Company, pursuant to which, in any vote by the
holders of the common stock, the holders of the Series A
shall be deemed to have that number of votes, on an as-converted
to common stock basis, necessary to comprise a majority of the
common stock entitled to vote on such matter.
During 2005, the Company issued 1,624 shares of
Series A and received net proceeds of $4,610. Additionally,
the Company converted $14,000 of principal on senior secured
promissory notes into 4,329 shares of Series A.
Series B
Preferred Stock
On December 31, 2005, the Company entered into a
Series B preferred stock purchase agreement. The holders of
Series B were entitled to receive, in preference to the
holders of Series A, when and as declared by the board of
directors, cumulative dividends at a rate of 12.0% per year,
less the amount of any dividends actually paid. Such dividends
accrued whether or not declared by the board of directors, and
whether or not there were funds legally available to pay
dividends. The Series B is non-voting.
On December 31, 2005 the Company issued 2,163 shares
Series B and received net proceeds of $6,980 in the form of
a stock subscription receivable. The receivable was subsequently
paid in April 2006. On November 6, 2006, the Company
redeemed 1,298 shares of the Series B for an aggregate
redemption price of $4,200 plus accrued and unpaid dividends of
$286. Dividends of $241 on the remaining shares of Series B
were declared by the board of directors of which $213 were paid
as of December 31, 2006. During 2007, the Company declared
$320 of dividends on the Series B of which $153 was paid
with the remaining balance accrued for as dividends payable. The
remaining 865 shares of Series B were exchanged for
800 shares of Series C on December 17, 2007. As
of December 31, 2007 and June 30, 2008, no shares of
Series B remain outstanding.
Series C
Preferred Stock
On December 18, 2007, the Company entered into a
Series C preferred stock purchase agreement and
subscription agreement. The holders of Series C are
entitled to receive, in preference to the holders of the all
other classes of stock, when and as declared by the board of
directors or upon a liquidation event, cumulative dividends at a
rate of 8.0% per year, less the amount of any dividends actually
paid. Such dividends accrue whether or not declared by the board
of directors, whether or not there are funds legally available
to pay dividends, and compound on an annual basis. In the event
of liquidation, or a change in control, as defined, the holders
of the Series C are entitled to receive, in preference to
all other shareholders, any distributions of the assets of the
Company equal to two times the original purchase price of the
shares, or $7,000 per share, subject to certain adjustments,
plus all accumulated but unpaid dividends. The Series C is
non-voting.
On December 18, 2007 the Company issued 1,359 shares
of Series C stock and received net proceeds of $4,720 in
cash and a subscription receivable of $5,725 for the remaining
1,636 shares, which were paid for and issued in January
2008. Additionally, the Company issued 34 shares of
Series C in consideration for amounts owed to one of the
Series B stockholders and converted 865 shares of
Series B for 800 shares of Series C as noted
above. Cumulative undeclared dividends on the Series C were
$29 at December 31, 2007.
In May 2008, the board of directors and stockholders of the
Company authorized an amendment to be made to the Companys
certificate of incorporation that provides for the Series C
preferred stock to convert automatically into common stock upon
the closing of a qualified public offering. The amendment is
F-23
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
anticipated to be filed, and would become effective, prior to
the effectiveness of the registration statement relating to the
qualified public offering. The number of shares of common stock
to be issued upon conversion will be equal to the aggregate
liquidation preference of the Series C preferred stock
divided by the public offering price of the common stock.
Common
Stock
On August 24, 2005, in connection with its conversion from
a limited liability company to a corporation, the Company issued
and exchanged one share of common stock to its membership
holders in exchange for each 100 of their previously outstanding
membership units in the limited liability company. Concurrently,
the Company also issued 325 shares of common stock to a
prospective investor in settlement of a legal action. Each share
of the Companys common stock is entitled to one vote. 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. Subject to the prior rights of
holders of preferred stock, the holders of common stock are
entitled to share ratably in any dividends and in any assets
remaining upon liquidation after satisfaction of the rights of
the holders of preferred stock.
In June 2004, the Company entered into a license agreement with
Blanchard relating to the Companys use of the Ken
Blanchard name for its College of Business. Under the terms of
that agreement the Company agreed to issue to Blanchard up to
498 shares of common stock with the actual number issued to
be contingent upon the Companys achievement of stated
enrollment levels in its College of Business during the term of
the agreement. As of December 31, 2006, the Company deemed
it probable that 100 shares would be earned and, as of
August 15, 2007, those 100 shares were earned and due
to Blanchard under this agreement, On May 9, 2008, the
Company and Blanchard amended the terms of the agreement
pursuant to which Blanchard was issued 200 shares of the
Companys common stock in full settlement of all shares
owed and contingently owed under this agreement. The fair value
of the shares issued to Blanchard as part of the license
agreement of $3,394 was determined at the date it became
probable that shares would then be earned and then adjusted
until the date the shares were earned. This amount is included
in the balance sheet as a component of Prepaid
Royalty and will be amortized through operations as an
expense over the remaining term of the license agreement.
Warrants
to Purchase Common Stock
On June 25, 2004, the Company issued a warrant to the
Institute (the Institute Warrant) to purchase a
10.0% non-dilutive membership interest (later amended to be
common stock), at an exercise price of $1. The Institute Warrant
was to have been exercisable for a one month period beginning on
July 1, 2011. The Company had the right to repurchase the
Institute Warrant prior to the exercise period for $6,000. On
April 15, 2008 the Institute Warrant was repurchased with
the execution of the settlement discussed in Note 2. The
repurchase was accounted for as a reduction of equity, net of
related tax benefit of $2,316.
On June 28, 2004, the Company issued to Spirit a warrant to
purchase a 5.0% membership interest in common stock of the
Company (the Spirit Warrant) for $526, as adjusted
to be 498 shares of common stock in conjunction with the
conversion to a corporation. The Spirit Warrant is exercisable
from January 1, 2005 through June 28, 2024 (the last
day of the Spirit lease term). The Spirit Warrant, and any
shares issuable upon exercise of the Spirit Warrant, are subject
to repurchase at a fixed price of $16,000 at any time prior to
the earlier of the expiration date of the Spirit Warrant or
three years after the Spirit Warrant is exercised. This
repurchase option may be exercised in whole or in part, first,
by the group of stockholders that constitute the former holders
of the Companys membership interests and, second, if they
do not exercise the option upon
F-24
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
the occurrence of certain liquidity transactions, including an
underwritten public offering that results in net cash proceeds
of not less than $30,000, by the Company. As of
December 31, 2007 and June 30, 2008, the warrant had
not been exercised nor had any of the repurchase rights been
executed.
Investor
Rights Agreement
The Company is a party to an investor rights agreement with
certain of its investors, pursuant to which the Company has
granted those persons or entities the right to register shares
of common stock held by them under the Securities Act of 1933,
as amended (the Securities Act). Certain of the
holders of these rights are entitled to demand that the Company
register their shares of common stock under the Securities Act,
while others are entitled to piggyback registration
rights in which they may require the Company to include their
shares of common stock in future registration statements that
may be filed, either for its own account or for the account of
other security holders exercising registration rights. In
addition, after an initial public offering, certain of these
holders have the right to request that their shares of common
stock be registered on a
Form S-3
registration statement so long as the anticipated aggregate
sales price of such registered shares as of the date of filing
of the
Form S-3
registration statement is at least $1,000. The foregoing
registration rights are subject to various conditions and
limitations, including the right of underwriters of an offering
to limit the number of registrable securities that may be
included in an offering. The registration rights terminate as to
any particular shares on the date on which the holder sells such
shares to the public in a registered offering or pursuant to
Rule 144 under the Securities Act. The Company is generally
required to bear all of the expenses of these registrations,
except underwriting commissions, selling discounts, and transfer
taxes.
The Company has deferred tax assets and liabilities that reflect
the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Deferred tax assets are subject to periodic recoverability
assessments. Realization of the deferred tax assets, net of
deferred tax liabilities is principally dependent upon
achievement of projected future taxable income. The Company has
no valuation allowance at December 31, 2006 and 2007, or at
June 30, 2008.
The components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
219
|
|
|
$
|
2,221
|
|
|
$
|
2,194
|
|
|
$
|
494
|
|
|
$
|
1,814
|
|
State
|
|
|
34
|
|
|
|
456
|
|
|
|
478
|
|
|
|
106
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253
|
|
|
|
2,677
|
|
|
|
2,672
|
|
|
|
600
|
|
|
|
2,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,024
|
)
|
|
|
(1,792
|
)
|
|
|
(1,358
|
)
|
|
|
|
|
|
|
(153
|
)
|
State
|
|
|
(669
|
)
|
|
|
(356
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,693
|
)
|
|
|
(2,148
|
)
|
|
|
(1,656
|
)
|
|
|
|
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,440
|
)
|
|
$
|
529
|
|
|
$
|
1,016
|
|
|
$
|
600
|
|
|
$
|
2,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
A reconciliation of income tax computed at the
U.S. statutory rate to the effective income tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
Statutory U.S. federal income tax rate (benefit)
|
|
|
(34.0
|
)%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
(2.5
|
)
|
|
|
5.5
|
|
|
|
4.7
|
|
|
|
4.7
|
|
|
|
4.6
|
|
Recognition of deferred taxes upon charter conversion
|
|
|
(24.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss prior to charter conversion not subject to tax
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non deductible expenses
|
|
|
0.2
|
|
|
|
6.0
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
Other
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate (benefit)
|
|
|
(44.5
|
)%
|
|
|
46.9
|
%
|
|
|
40.0
|
%
|
|
|
40.0
|
%
|
|
|
38.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Companys deferred income tax
assets and liabilities as of December 31, 2006 and 2007,
and at June 30, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Current deferred tax asset (liability):
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable allowance for doubtful accounts
|
|
$
|
3,023
|
|
|
$
|
4,981
|
|
|
$
|
4,981
|
|
State taxes
|
|
|
(194
|
)
|
|
|
(286
|
)
|
|
|
(286
|
)
|
Other
|
|
|
155
|
|
|
|
(55
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
|
2,984
|
|
|
|
4,640
|
|
|
|
4,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax asset (liability):
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,938
|
|
|
|
1,712
|
|
|
|
1,712
|
|
Unrealized gains on available for sale securities
|
|
|
(23
|
)
|
|
|
(52
|
)
|
|
|
(8
|
)
|
Redemption of Institute warrant
|
|
|
|
|
|
|
|
|
|
|
2,458
|
|
Intangibles
|
|
|
920
|
|
|
|
1,146
|
|
|
|
1,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax asset
|
|
|
2,835
|
|
|
|
2,806
|
|
|
|
5,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5,819
|
|
|
$
|
7,446
|
|
|
$
|
9,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2008, the Company adopted FASB
interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109, Accounting for
Income Taxes, which clarifies the accounting for uncertainty
in tax positions. FIN 48 requires that the Company
recognize the impact of a tax position in our financial
statements if that position is more-likely-than-not of being
sustained on audit, based on the technical merits of the
position.
The adoption of FIN 48 did not result in an adjustment to
opening retained earnings. The Company recognizes interest and
penalties related to uncertain tax positions in income tax
expense. As of June 30, 2008, the unrecognized tax benefit
recorded was approximately $52, which, if reversed, would impact
the effective tax rate. The Companys uncertain tax
positions are related to tax years that remain subject to
F-26
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
examination by tax authorities. As of June 30, 2008, the
earliest tax year still subject to examination for federal and
state purposes is 2005. During the second quarter ended
June 30, 2008, the Internal Revenue Service
(IRS) commenced an examination of our 2005 income
tax return.
The Company is subject to extensive regulation by federal and
state governmental agencies and accrediting bodies. In
particular, the Higher Education Act and the regulations
promulgated thereunder by the Department of Education subject
the Company to significant regulatory scrutiny on the basis of
numerous standards that schools must satisfy in order to
participate in the various federal student financial assistance
programs under Title IV of the Higher Education Act.
To participate in the Title IV programs, an institution
must be authorized to offer its programs of instruction by the
relevant agency of the state in which it is located, accredited
by an accrediting agency recognized by the Department of
Education and certified as eligible by the Department of
Education. The Department of Education will certify an
institution to participate in the Title IV programs only
after the institution has demonstrated compliance with the
Higher Education Act and the Department of Educations
extensive regulations regarding institutional eligibility. An
institution must also demonstrate its compliance to the
Department of Education on an ongoing basis. As of
December 31, 2007 and June 30, 2008, management
believes the Company is in compliance with the applicable
regulations in all material respects.
The Higher Education Act requires accrediting agencies to review
many aspects of an institutions operations in order to
ensure that the training offered is of sufficiently high quality
to achieve satisfactory outcomes, and that the institution is
complying with accrediting standards. Failure to demonstrate
compliance with accrediting standards may result in the
imposition of probation or Show Cause orders, or the
requirements of periodic reports, and ultimately the loss of
accreditation if deficiencies are not remediated.
Political and budgetary concerns significantly affect the
Title IV programs. Congress must reauthorize the student
financial assistance programs of the Higher Education Act
approximately every five to six years. The last comprehensive
reauthorization of the Higher Education Act took place in 1998,
and it has been temporarily extended several times since then.
Congress has been considering a comprehensive reauthorization of
the Higher Education Act.
A significant component of Congress initiative to reduce
abuse in the Title IV programs has been the imposition of
limitations on institutions whose former students default on the
repayment of their federally guaranteed or funded student loans
above specific rates (cohort default rate). Although the Company
is not obligated to repay any of its students or former
students defaults on payments of their federally
guaranteed student loans, if such default rates equal or exceed
25% for three consecutive years, the institution may lose its
eligibility to participate in, and its students will be denied
access to, the federally guaranteed and funded student loan
programs and the Federal Pell Grant program. An institution
whose cohort default rate for any federal fiscal year exceeds
40% may have its eligibility to participate in all of the
Title IV programs limited, suspended or terminated by the
Department of Education.
All institutions participating in the Title IV programs
must satisfy specific standards of financial responsibility. The
Department of Education evaluates institutions for compliance
with these standards each year, based on the institutions
annual audited financial statements, and also following a change
in ownership, as defined by the Department of Education.
The Department of Education calculates the institutions
composite score for financial responsibility based on its
(i) equity ratio, which measures the institutions
capital resources, ability to borrow and financial viability;
(ii) primary reserve ratio, which measures the
institutions ability to support current operations from
F-27
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
expendable resources; and (iii) net income ratio, which
measures the institutions ability to operate at a profit.
An institution that does not meet the Department of
Educations minimum composite score may demonstrate its
financial responsibility by posting a letter of credit in favor
of the Department of Education and possibly accepting other
conditions on its participation in the Title IV programs.
As of December 31, 2007, the Company satisfied each of the
Department of Educations standards of financial
responsibility. For the year ended December 31, 2007, the
Company received $69,696 of Title IV funds, out of total
eligible cash receipts of $94,216, resulting in a Title IV
percentage of 74.0%.
Because the Company operates in a highly regulated industry, it,
like other industry participants, may be subject from time to
time to investigations, claims of non-compliance, or lawsuits by
governmental agencies or third parties, which allege statutory
violations, regulatory infractions, or common law causes of
action. While there can be no assurance that regulatory agencies
or third parties will not undertake investigations or make
claims against the Company, or that such claims, if made, will
not have a material adverse effect on the Companys
business, results of operations or financial condition,
management believes it has materially complied with all
regulatory requirements.
|
|
14.
|
Employee
Benefit Plan
|
Effective February 1, 2004 the Company adopted a 401(k)
Defined Contribution Benefit Plan (the Plan). The
Plan provides eligible employees, upon date of hire, with an
opportunity to make tax-deferred contributions into a long-term
investment and savings program. All employees over the age of 21
are eligible to participate in the plan. The Plan allows
eligible employees to contribute to the Plan subject to Internal
Revenue Code restrictions and the Plan allows the Company to
make discretionary matching contributions. No employer
contributions were made for the years ended December 31,
2005 and 2006. The Company made discretionary matching
contributions to the plan of $250 for the year ended
December 31, 2007. No matching contribution was made to the
plan during the first six months of 2007 or 2008.
|
|
15.
|
Related
Party Transactions
|
Related party transactions include transactions between the
Company and certain of its shareholders and affiliates. The
following transactions were in the normal course of operations
and were measured at the exchange amount, which is the amount of
consideration established and agreed to by the parties.
As of and for the years ended December 31, 2005, 2006, and
2007, and as of and for the six months ended June 30, 2008,
related party transactions consisted of the following:
Shareholders
Significant Education Holding, LLC (Sig Ed)
At December 31, 2007 and June 30, 2008, Sig Ed holds
10,000 shares of the Companys common stock. The
Company has not engaged in any transactions with Sig Ed, but has
engaged in certain transactions with members of Sig Ed, as
discussed below.
220 Partners, LLC (220 Partners) 220
Partners, which is affiliated with several entities that hold
membership interests in Sig Ed and a former director of the
Company, received management, consulting fees, and reimbursed
expenses of $299, $299, $0 and $0 in the years ended
December 31, 2005, 2006, and 2007, and in the six months
ended June 30, 2008, respectively. There were no amounts
due from or payable to 220 Partners at December 31, 2006,
and 2007 or at June 30, 2008.
Affiliates of 220 Partners purchased 632 shares of
Series C for $2,212 in 2007, of which $1,409 was due as of
December 31, 2007 and was included in the due from related
parties on the accompanying balance
F-28
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
sheet. This amount was paid January 6, 2008. There were no
other amounts due from or payable to an affiliate of
220 Partners at December 31, 2006 and 2007 or at
June 30, 2008.
Rich Crow Enterprises, LLC (Rich Crow)
Members of Rich Crow include the Executive Chairman and General
Counsel of the Company who are also both Directors. Rich Crow
also is a member of Sig Ed. A member of Rich Crow is also
related to the owner of a company that provided marketing
services totaling $454, $115 and $218 in the year ended
December 31, 2007, and the six months ended June 30,
2007 and 2008, respectively, of which $72 and $20 were owed at
December 31, 2007, and June 30, 2008, respectively.
The Company had a non-cancelable operating lease agreement for
administrative facilities with Arrowhead Holdings Management
Co., LLC (Arrowhead), a management company owned by, among
others, irrevocable trust for the benefit of the Companys
Executive Chairman and General Counsel. The Company paid $155,
$0, $0 and $0 for services and reimbursements during the years
ended December 31, 2005, 2006, and 2007, and the six months
ended June 30, 2008, respectively.
Members of Rich Crow had a $2,000 irrevocable letter of credit
in favor of the Company as discussed further in Note 6.
During 2006, this letter of credit was transferred from Rich
Crow and collateralized by cash of the Company and secured by
the lease facilities of the Company.
Significant Ventures, LLC (Significant
Ventures) Significant Ventures is a member of
Sig Ed. In the years ended December 31, 2005, 2006, and
2007, and the six months ended June 30, 2008, the Company made
payments of $124, $390, $0, and $0, respectively, to Significant
Ventures for services and reimbursement of expenses. There were
no amounts due from or payable to Significant Ventures as of
December 31, 2006, and 2007 or June 30, 2008.
Endeavour Capital Fund IV, LP, Endeavour Associated Fund IV,
LP, and Endeavour Capital Parallel Fund IV, LP
(Endeavour) Members of the Companys Board
of Directors are also employees of Endeavour. In March 2005, the
Company obtained $14,000 from Endeavour in exchange for the
issuance of senior secured promissory notes. The Company paid
interest of $340 to Endeavour in relation to the notes. On
August 24, 2005, the principal balance on the promissory notes
was exchanged for Series A. The Company also paid Endeavour
management and reimbursed fees of $88, $269, $296, and $211 for
the years ended December 31, 2005, 2006 and 2007, and the six
months ended June 30, 2008, respectively. As of
December 31, 2006 and 2007 and June 30, 2008 there
were no amounts due from or payable to Endeavour.
Affiliates
Mind Streams, LLC (Mind Streams) and 21st Century, LLC (21st
Century) Mind Streams and 21st Century are
owned and operated, in part, by the father of the Companys
Executive Chairman and General Counsel. See further discussion
in Note 2, Summary of Significant Accounting
Policies Selling and Promotional.
Youth In Motion Youth In Motion is owned by
the Chief Operating Officer (COO) of the Company. The Company
paid consulting fees and expense reimbursements to Youth In
Motion of $188, $113, $0 and $0 in the years ended December 31,
2005, 2006, and 2007, and the six months ended June 30,
2008, respectively. There were no amounts due from or payable to
Youth In Motion at December 31, 2006 and 2007 or June 30,
2008.
The Center for Educational Excellence, LLC
(CEE) Members of CEE include the COO of the
Company. The Company paid $607 and $183 of expenses on
CEEs behalf during the year ended December 31, 2007 and
the six months ended June 30, 2008, respectively, and was
reimbursed $331, and $4,
F-29
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
respectively, and was owed $276 and $455, respectively, included
in due from related parties at December 31, 2007 and
June 30, 2008.
|
|
16.
|
Valuation
and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Charged to
|
|
|
|
|
|
End of
|
|
|
|
Year
|
|
|
Expense
|
|
|
Deductions(1)
|
|
|
Year
|
|
|
Allowance for doubtful accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
2,868
|
|
|
|
2,632
|
|
|
|
(1,132
|
)
|
|
$
|
4,368
|
|
Year ended December 31, 2006
|
|
$
|
4,368
|
|
|
|
4,664
|
|
|
|
(1,652
|
)
|
|
$
|
7,380
|
|
Year ended December 31, 2007
|
|
$
|
7,380
|
|
|
|
6,257
|
|
|
|
(1,479
|
)
|
|
$
|
12,158
|
|
Six months ended June 30, 2008
|
|
$
|
12,158
|
|
|
|
4,052
|
|
|
|
(768
|
)
|
|
$
|
15,442
|
|
|
|
|
(1) |
|
Deductions represent accounts written off, net of recoveries. |
(a) Initial Public Offering and Distribution of
Dividends: In 2008, the Company commenced
preparation for an initial public offering under the Securities
Act. On [ ], 2008 the Companys Board of
Directors approved the payment of a special distribution to its
stockholders of record as of [ ] to be
paid from the proceeds of the initial public offering, if and
when it is completed.
(b) Pro Forma Information
(Unaudited): As the special distribution
referred to in Note 17(a) represents distributions to
existing shareholders to be made from the proceeds of an initial
public offering the accompanying pro forma balance sheets as of
December 31, 2007 and June 30, 2008 reflecting the
distribution, but not giving effect to the offering proceeds,
are presented. In addition, as the amount of distribution
exceeds net income for the twelve-month period ended
June 30, 2008, pro forma earnings per common share, basic
and diluted, are presented in the accompanying statements of
operations for the year ended December 31, 2007 and for the
six-month period ended June 30, 2008, giving effect to the
number of shares that would be required to be issued at an
assumed initial public offering price of $[ ] per share to pay
F-30
Grand
Canyon Education, Inc.
Notes to 2005, 2006, and 2007 Financial Statements (Restated)
Notes to Unaudited Financial Statements for the Six Month
Periods Ended June 30, 2007 and 2008
(In thousands of dollars, except share and per share
data) (Continued)
the amount of dividends that exceeds net income for the
twelve-month period ended June 30, 2008. The calculations
of the pro forma earnings per common share, basic and diluted,
discussed above are as follows:
Calculation
of number of additional shares to be issued:
|
|
|
|
|
|
|
|
|
Net income available to common stockholders for the year ended
December 31, 2007
|
|
$
|
1,177
|
|
|
|
|
|
Less net income available to common stockholders for the
six-month period ended June 30, 2007
|
|
|
(734
|
)
|
|
|
|
|
Plus net income available to common stockholders for the
six-month period ended June 30, 2008
|
|
|
2,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders for the twelve-month
period ended June 30, 2008
|
|
$
|
3,146
|
|
|
|
|
|
Amount of dividends to be paid
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of dividends over earnings
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares required to be issued at
$[ l ]
per share to pay excess of dividends over earnings
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation
of pro forma earnings per common share, basic and
diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
1,177
|
|
|
$
|
2,703
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per common share
historical:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,363
|
|
|
|
10,454
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
19,246
|
|
|
|
17,866
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per common share
pro forma:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
[ l ]
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
[ l ]
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
[ l ]
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
[ l ]
|
|
|
|
[ l ]
|
|
|
|
|
|
|
|
|
|
F-31
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
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, Inc. filing fee. The following expenses
will be borne solely by the registrant.
|
|
|
|
|
SEC registration fee
|
|
$
|
9,039
|
|
FINRA filing fee
|
|
|
23,500
|
|
Nasdaq listing fee
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Printing expenses
|
|
|
*
|
|
Transfer agent fees and expenses
|
|
|
*
|
|
Miscellaneous expenses
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
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
II-1
not the corporation would have the power to indemnify the person
against such liability under Section 145 of the DGCL.
Section 8.1 of our bylaws that will be in effect upon
completion of this offering will provide that we will indemnify,
to the fullest extend 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 that will be in effect
upon completion of this offering will further provide for the
advancement of expenses to each of our officers and directors.
Article IX of our charter that will be in effect upon
completion of this offering will provide 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.
In connection with the sale of common stock being registered
hereby, we intend to enter into indemnification agreements with
each of our directors and our executive officers. These
agreements will 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.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
In the three years preceding the filing of this registration
statement, we have issued the following securities that were not
registered under the Securities Act:
Preferred
Stock
On March 31, 2005, we sold $14.0 million aggregate
principal amount of notes to the Endeavour Entities. On
August 24, 2005, we sold 5,953 shares of our newly
designated Series A convertible preferred stock at a
purchase price of $3,233.67 per share, or $19.3 million
total, of which 4,948 shares were sold to the Endeavour
Entities and 1,005 shares were sold to 220 GCU, L.P. A
substantial portion of the purchase price paid by the Endeavour
Entities was paid through the contributions to us of the notes
that were previously issued to the Endeavour Entities. The sales
were made in reliance on Section 4(2) of the Securities Act.
On December 31, 2005, we issued 2,163 shares of our
newly designated Series B preferred stock and received
gross proceeds of approximately $7.0 million, or
$3,236.25 per share, in the form of a stock subscription
receivable. The receivable was subsequently paid in April 2006.
Of these shares, 1,298 were sold to the Endeavour Entities and
865 were sold to Rich Crow Enterprises, LLC. The sales were made
in reliance on Section 4(2) of the Securities Act.
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
II-2
were sold to the Endeavour Entities, 834 shares were sold
to Rich Crow Enterprises, LLC, and 935 shares were sold to
the 220 Entities. 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.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits.
|
|
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation*
|
|
3
|
.2
|
|
Amended and Restated Bylaws*
|
|
4
|
.1
|
|
Specimen of Stock Certificate*
|
|
4
|
.2
|
|
Investor Rights Agreement, dated August 24, 2005, by and
among Significant Education, Inc. and the other parties named
therein*
|
|
5
|
.1
|
|
Opinion of DLA Piper US LLP*
|
|
10
|
.1
|
|
Senior Management Agreement, dated August 24, 2005, by and
between Significant Education, Inc. and Brent Richardson#
|
|
10
|
.2
|
|
Senior Management Agreement, dated August 24, 2005, by and
between Significant Education, Inc. and Christopher
Richardson#
|
|
10
|
.3
|
|
Senior Management Agreement, dated August 24, 2005, by and
between Significant Education, Inc. and John Crowley#
|
|
10
|
.4
|
|
Amendment to Senior Management Agreement, dated June 28,
2006, by and between Significant Education, Inc. and John
Crowley#
|
|
10
|
.5
|
|
2008 Equity Incentive Plan*
|
|
10
|
.6
|
|
2008 Employee Stock Purchase Plan*
|
|
10
|
.7
|
|
Lease Agreement, effective June 28, 2004, by and between
Spirit Finance Acquisitions, LLC and Significant Education, LLC#
|
|
10
|
.8
|
|
First Amendment to Lease Agreement, effective September 24,
2004, by and between Spirit Finance Acquisitions, LLC and
Significant Education, LLC#
|
|
10
|
.9
|
|
Second Amendment to Lease Agreement, effective August 23,
2005, by and between Spirit Master Funding, LLC and Significant
Education, LLC#
|
|
10
|
.10
|
|
Third Amendment to Lease Agreement, effective June 2006, by and
between Spirit Master Funding, LLC and Significant Education,
Inc.#
|
|
10
|
.11
|
|
Fourth Amendment to Lease Agreement, effective August 9,
2006, by and between Spirit Master Funding, LLC and Significant
Education, Inc.#
|
|
10
|
.12
|
|
Fifth Amendment to Lease Agreement, effective December 31,
2006, by and between Spirit Master Funding, LLC and Significant
Education, Inc.#
|
|
10
|
.13
|
|
Sixth Amendment to Lease Agreement, effective September 30,
2007, by and between Spirit Master Funding, LLC and Significant
Education, Inc.#
|
|
10
|
.14
|
|
Seventh Amendment to Lease Agreement, effective March 28,
2008, by and between Spirit Master Funding, LLC and Significant
Education, Inc.#
|
|
10
|
.15
|
|
License Agreement, dated June 30, 2004, by and between
Blanchard Education, LLC and Significant Education, LLC#
|
|
10
|
.16
|
|
Letter Agreement, dated February 6, 2006, by and between
The Ken Blanchard Companies and Grand Canyon University#
|
|
10
|
.17
|
|
Amendment to License Agreement, dated May 8, 2008, by and
between Blanchard Education, LLC and Grand Canyon Education,
Inc.#
|
|
10
|
.18
|
|
Collaboration Agreement, dated July 11, 2005, by and
between Mind Streams, LLC and Significant Education, LLC (as
supplemented by Project One and Project Two)
|
II-3
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.19
|
|
Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and Daniel E. Bachus
|
|
10
|
.20
|
|
Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and Brian E.
Mueller
|
|
10
|
.21
|
|
Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and W. Stan Meyer
|
|
23
|
.1
|
|
Consent of DLA Piper US LLP (included in Exhibit 5.1)*
|
|
23
|
.2
|
|
Consent of Independent Registered Public Accounting Firm
|
|
24
|
.1
|
|
Power of Attorney#
|
|
99
|
.1
|
|
Consent of David J. Johnson#
|
|
99
|
.2
|
|
Consent of Jack A. Henry#
|
Significant Education, LLC is the predecessor to Significant
Education, Inc., which is the former name of Grand Canyon
Education, Inc.
|
|
|
* |
|
To be filed by amendment. |
|
|
|
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-4
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
August 12, 2008.
GRAND CANYON EDUCATION, INC.
Brian E. Mueller
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this
registration statement and the Power of Attorney has been signed
by the following persons in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
*
Brent
D. Richardson
|
|
Executive Chairman
|
|
August 12, 2008
|
|
|
|
|
|
|
|
|
|
/s/ Brian
E. Mueller
Brian
E. Mueller
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
August 12, 2008
|
|
|
|
|
|
|
|
|
|
/s/ Daniel
E. Bachus
Daniel
E. Bachus
|
|
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
|
|
August 12, 2008
|
|
|
|
|
|
|
|
|
|
/s/ Christopher
C. Richardson
Christopher
C. Richardson
|
|
General Counsel and Director
|
|
August 12, 2008
|
|
|
|
|
|
|
|
|
|
*
D.
Mark Dorman
|
|
Director
|
|
August 12, 2008
|
|
|
|
|
|
|
|
|
|
*
Chad
N. Heath
|
|
Director
|
|
August 12, 2008
|
|
|
|
|
|
*By: /s/ Christopher
C. Richardson
Christopher
C. Richardson
Attorney-in-fact
|
|
|
|
|
II-5
EXHIBIT INDEX
|
|
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation*
|
|
3
|
.2
|
|
Amended and Restated Bylaws*
|
|
4
|
.1
|
|
Specimen of Stock Certificate*
|
|
4
|
.2
|
|
Investor Rights Agreement, dated August 24, 2005, by and
among Significant Education, Inc. and the other parties named
therein*
|
|
5
|
.1
|
|
Opinion of DLA Piper US LLP*
|
|
10
|
.1
|
|
Senior Management Agreement, dated August 24, 2005, by and
between Significant Education, Inc. and Brent Richardson#
|
|
10
|
.2
|
|
Senior Management Agreement, dated August 24, 2005, by and
between Significant Education, Inc. and Christopher
Richardson#
|
|
10
|
.3
|
|
Senior Management Agreement, dated August 24, 2005, by and
between Significant Education, Inc. and John Crowley#
|
|
10
|
.4
|
|
Amendment to Senior Management Agreement, dated June 28,
2006, by and between Significant Education, Inc. and John
Crowley#
|
|
10
|
.5
|
|
2008 Equity Incentive Plan*
|
|
10
|
.6
|
|
2008 Employee Stock Purchase Plan*
|
|
10
|
.7
|
|
Lease Agreement, effective June 28, 2004, by and between
Spirit Finance Acquisitions, LLC and Significant Education, LLC#
|
|
10
|
.8
|
|
First Amendment to Lease Agreement, effective September 24,
2004, by and between Spirit Finance Acquisitions, LLC and
Significant Education, LLC#
|
|
10
|
.9
|
|
Second Amendment to Lease Agreement, effective August 23,
2005, by and between Spirit Master Funding, LLC and Significant
Education, LLC#
|
|
10
|
.10
|
|
Third Amendment to Lease Agreement, effective June 2006, by and
between Spirit Master Funding, LLC and Significant Education,
Inc.#
|
|
10
|
.11
|
|
Fourth Amendment to Lease Agreement, effective August 9,
2006, by and between Spirit Master Funding, LLC and Significant
Education, Inc.#
|
|
10
|
.12
|
|
Fifth Amendment to Lease Agreement, effective December 31,
2006, by and between Spirit Master Funding, LLC and Significant
Education, Inc.#
|
|
10
|
.13
|
|
Sixth Amendment to Lease Agreement, effective September 30,
2007, by and between Spirit Master Funding, LLC and Significant
Education, Inc.#
|
|
10
|
.14
|
|
Seventh Amendment to Lease Agreement, effective March 28,
2008, by and between Spirit Master Funding, LLC and Significant
Education, Inc.#
|
|
10
|
.15
|
|
License Agreement, dated June 30, 2004, by and between
Blanchard Education, LLC and Significant Education, LLC#
|
|
10
|
.16
|
|
Letter Agreement, dated February 6, 2006, by and between
The Ken Blanchard Companies and Grand Canyon University#
|
|
10
|
.17
|
|
Amendment to License Agreement, dated May 8, 2008, by and
between Blanchard Education, LLC and Grand Canyon Education,
Inc.#
|
|
10
|
.18
|
|
Collaboration Agreement, dated July 11, 2005, by and
between Mind Streams, LLC and Significant Education, LLC (as
supplemented by Project One and Project Two)
|
|
10
|
.19
|
|
Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and Daniel E. Bachus
|
|
10
|
.20
|
|
Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and Brian E.
Mueller
|
|
10
|
.21
|
|
Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and W. Stan Meyer
|
|
23
|
.1
|
|
Consent of DLA Piper US LLP (included in Exhibit 5.1)*
|
|
23
|
.2
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Number
|
|
Description
|
|
|
24
|
.1
|
|
Power of Attorney#
|
|
99
|
.1
|
|
Consent of David J. Johnson#
|
|
99
|
.2
|
|
Consent of Jack A. Henry#
|
Significant Education, LLC is the predecessor to Significant
Education, Inc., which is the former name of Grand Canyon
Education, Inc.
|
|
|
* |
|
To be filed by amendment. |
|
|
|
Indicates a management contract or any compensatory plan,
contract or arrangement. |
exv1w1
Exhibit 1.1
GRAND CANYON EDUCATION, INC.
Common Stock
UNDERWRITING AGREEMENT
, 2008
Credit Suisse Securities (USA) LLC
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
4 World Financial Center
New York, N.Y. 10080
As Representatives of the Several Underwriters
Dear Sirs and Mesdames:
1. Introductory. Grand Canyon Education, Inc., a Delaware corporation (Company) agrees with
the several Underwriters named in Schedule A hereto (Underwriters) to issue and sell to
the several Underwriters shares of its Common Stock, $0.01 par value per share
(Securities) (such shares of Securities being hereinafter referred to as the
Firm Securities). The Company also agrees with the Underwriters to issue and sell to the
Underwriters, at the option of the Underwriters, an aggregate of not more than
additional outstanding shares (Optional Securities) of the Companys Securities, as set forth
below. The Firm Securities and the Optional Securities are herein collectively called the Offered
Securities. As part of the offering contemplated by this Agreement, (the
Designated Underwriter) has agreed to reserve out of the Firm Securities purchased by it under
this Agreement, up to shares, for sale to the Companys directors, officers,
employees and other parties associated with the Company (collectively, Participants), as set
forth in the Final Prospectus (as defined herein) under the heading Underwriting (the Directed
Share Program). The Firm Securities to be sold by the Designated Underwriter pursuant to the
Directed Share Program (the Directed Shares) will be sold by the Designated Underwriter pursuant
to this Agreement at the public offering price. Any Directed Shares not subscribed for by the end
of the business day on which this Agreement is executed will be offered to the public by the
Underwriters as set forth in the Final Prospectus.
2. Representations and Warranties of the Company. The Company represents and warrants to, and
agrees with, the several Underwriters that:
(a) Filing and Effectiveness of Registration Statement; Certain Defined Terms. The Company
has filed with the Commission a registration statement on Form S-1 (No. 333-150876) covering the
registration of the Offered Securities under the Act, including a related preliminary prospectus or
prospectuses. At any particular time, this initial registration statement, in the form then on
file with the Commission, including all information contained in the registration statement (if
any) pursuant to Rule 462(b) and then deemed to be a part of the initial registration statement,
and all 430A Information, that in any case has not then been superseded or modified, shall be
referred to as the Initial Registration Statement. The Company may also have filed, or may file
with the Commission, a Rule 462(b) registration statement covering the registration of Offered
Securities. At any particular time, this Rule 462(b) registration statement, in the form then on
file with the Commission, including the contents of the Initial Registration Statement incorporated
by reference therein and including all 430A Information, that in
any case has not then been superseded or modified, shall be referred to as the Additional
Registration Statement.
1
As of the time of execution and delivery of this Agreement, the Initial Registration Statement
has been declared effective under the Act and is not proposed to be amended. Any Additional
Registration Statement has or will become effective upon filing with the Commission pursuant to
Rule 462(b) and is not proposed to be amended. The Offered Securities all have been or will be
duly registered under the Act pursuant to the Initial Registration Statement and, if applicable,
the Additional Registration Statement.
For purposes of this Agreement:
430A Information, with respect to any registration statement, means information included in
a prospectus and retroactively deemed to be a part of such registration statement pursuant to Rule
430A(b).
Act means the Securities Act of 1933, as amended.
Applicable Time means :00 pm (Eastern time) on the date of this Agreement.
Closing Date has the meaning defined in Section 3 hereof.
Commission means the Securities and Exchange Commission.
Effective Date with respect to the Initial Registration Statement or the Additional
Registration Statement (if any) means the date of the Effective Time thereof.
Effective Time with respect to the Initial Registration Statement or, if filed prior to the
execution and delivery of this Agreement, the Additional Registration Statement means the date and
time as of which such Registration Statement was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c). If an Additional Registration Statement has not been
filed prior to the execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, Effective Time with respect to such Additional
Registration Statement means the date and time as of which such Registration Statement is filed and
becomes effective pursuant to Rule 462(b).
Exchange Act means the Securities Exchange Act of 1934, as amended.
Final Prospectus means the Statutory Prospectus that discloses the public offering price,
other 430A Information with respect to the Offered Securities and otherwise satisfies Section 10(a)
of the Act.
General Use Issuer Free Writing Prospectus means any Issuer Free Writing Prospectus that is
intended for general distribution to prospective investors, as evidenced by its being so specified
in Schedule B to this Agreement.
Issuer Free Writing Prospectus means any issuer free writing prospectus, as defined in
Rule 433, relating to the Offered Securities in the form filed or required to be filed with the
Commission or, if not required to be filed, in the form retained in the Companys records pursuant
to Rule 433(g).
Limited Use Issuer Free Writing Prospectus means any Issuer Free Writing Prospectus that is
not a General Use Issuer Free Writing Prospectus.
The Initial Registration Statement and the Additional Registration Statement are referred to
collectively as the Registration Statements and individually as a Registration Statement. A
Registration Statement with reference to a particular time means the Initial Registration
Statement and any Additional Registration Statement as of such time. A Registration Statement
without reference to a time means such Registration Statement as of its Effective Time. For
purposes of the foregoing definitions,
430A Information with respect to a Registration Statement shall be considered to be included
in such Registration Statement as of the time specified in Rule 430A.
Rules and Regulations means the rules and regulations of the Commission.
2
Securities Laws means, collectively, the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), the
Act, the Exchange Act, the Rules and Regulations, the auditing principles, rules, standards and
practices applicable to auditors of issuers (as defined in Sarbanes-Oxley) promulgated or
approved by the Public Company Accounting Oversight Board and, as applicable, the rules of the New
York Stock Exchange and the NASDAQ Stock Market (Exchange Rules).
Statutory Prospectus with reference to a particular time means the prospectus included in a
Registration Statement immediately prior to that time, including, if applicable any 430A
Information with respect to such Registration Statement. For purposes of the foregoing definition,
430A Information shall be considered to be included in the Statutory Prospectus as of the actual
time that form of prospectus is filed with the Commission pursuant to Rule 424(b) or Rule 462(c)
and not retroactively.
Unless otherwise specified, a reference to a rule is to the indicated rule under the Act.
(b) (i) At their respective Effective Times, on the date of this Agreement and on each Closing
Date, each of the Initial Registration Statement and the Additional Registration Statement (if any)
conformed and will conform in all respects to the requirements of the Act, (ii) on its date, at
the time of filing of the Final Prospectus pursuant to Rule 424(b) or (if no such filing is
required) at the Effective Time of the Additional Registration Statement in which the Final
Prospectus is included, and on each Closing Date, the Final Prospectus will conform in all respects
to the requirements of the Act and the Rules and Regulations and will not include any untrue
statement of a material fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) on the date of this Agreement,
at their respective Effective Times or issue dates and on each Closing Date, each Registration
Statement, the Final Prospectus, any Statutory Prospectus, any prospectus wrapper and any Issuer
Free Writing Prospectus complied or comply, and such documents and any further amendments or
supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions
in which the Final Prospectus, any Statutory Prospectus, any prospectus wrapper or any Issuer Free
Writing Prospectus, as amended or supplemented, if applicable, are distributed in connection with
the Directed Share Program. The preceding sentence does not apply to statements in or omissions
from any such document based upon written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being understood and agreed that the
only such information is that described as such in Section 8(c) hereof.
(c) (i) At the time of the initial filing of the Initial Registration Statement and (ii) at
the date of this Agreement, the Company was not and is not an ineligible issuer, as defined in
Rule 405, including (x) the Company or any other subsidiary in the preceding three years not having
been convicted of a felony or misdemeanor or having been made the subject of a judicial or
administrative decree or order as described in Rule 405 and (y) the Company in the preceding three
years not having been the subject of a bankruptcy petition or insolvency or similar proceeding, not
having had a registration statement be the subject of a proceeding under Section 8 of the Act and
not being the subject of a proceeding under Section 8A of the Act in connection with the offering
of the Offered Securities, all as described in Rule 405.
(d) As of the Applicable Time, neither (i) the General Use Issuer Free Writing Prospectus(es)
issued at or prior to the Applicable Time, the preliminary prospectus, dated , 2008
(which is the most recent Statutory Prospectus distributed to investors generally) and the other
information, if any, stated in Schedule B to this Agreement to be included in the General
Disclosure Package, all considered together (collectively, the General Disclosure Package), nor
(ii) any individual Limited Use Issuer Free Writing Prospectus, when considered together with the
General Disclosure Package, included any untrue statement of a material fact or omitted to state
any material fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The preceding sentence does not apply to
statements in or omissions from any Statutory Prospectus or any
Issuer Free Writing Prospectus in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information furnished by any Underwriter
consists of the information described as such in Section 8(c) hereof.
(e) Each Issuer Free Writing Prospectus, as of its issue date and at all subsequent times
through the completion of the public offer and sale of the Offered Securities or, if earlier, the
date the Company
3
notified or notifies the Representatives as described in the next sentence, did
not, does not and will not include any information that conflicted, conflicts or will conflict with
the information then contained in the Registration Statement. If at any time following issuance of
an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of
which such Issuer Free Writing Prospectus conflicted or would conflict with the information then
contained in the Registration Statement or as a result of which such Issuer Free Writing
Prospectus, if republished immediately following such event or development, would include an untrue
statement of a material fact or omitted or would omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which they were made, not
misleading, (i) the Company has promptly notified or will promptly notify the Representatives and
(ii) the Company has promptly amended or will promptly amend or supplement such Issuer Free Writing
Prospectus to eliminate or correct such conflict, untrue statement or omission.
(f) The Company has been duly incorporated and is existing and in good standing under the laws
of the State of Delaware, with power and authority (corporate and other) to own its properties and
conduct its business as described in the General Disclosure Package; and the Company is duly
qualified to do business as a foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its business requires such
qualification, except, in each case, where the failure to be in good standing or to be so qualified
would not, individually or in the aggregate, result in a material adverse effect on the condition
(financial or otherwise), results of operations, business, properties or prospects of the Company
and its subsidiaries taken as a whole (Material Adverse Effect).
(g) Each subsidiary of the Company has been duly incorporated and is existing and in good
standing under the laws of the jurisdiction of its incorporation, with power and authority
(corporate and other) to own its properties and conduct its business as described in the General
Disclosure Package; and each subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such qualification, except where the failure to be
in good standing or to be so qualified would not, individually or in the aggregate, result in a
Material Adverse Effect; all of the issued and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued and is fully paid and nonassessable; and the
capital stock of each subsidiary owned by the Company, directly or through subsidiaries, is owned
free from liens, encumbrances and defects.
(h) The Offered Securities and all other outstanding shares of capital stock of the Company
have been duly authorized; the authorized equity capitalization of the Company is as set forth in
the General Disclosure Package; all outstanding shares of capital stock of the Company are, and,
when the Offered Securities have been delivered and paid for in accordance with this Agreement on
each Closing Date, such Offered Securities will have been, validly issued, fully paid and
nonassessable, will conform to the information in the General Disclosure Package and to the
description of such Offered Securities contained in the Final Prospectus; the stockholders of the
Company have no preemptive rights with respect to the Offered Securities; and none of the
outstanding shares of capital stock of the Company have been issued in violation of any preemptive
or similar rights of any security holder.
(i) Except as disclosed in the General Disclosure Package, there are no contracts, agreements
or understandings between the Company and any person that would give rise to a valid claim against
the Company or any Underwriter for a brokerage commission, finders fee or other like payment in
connection with this offering.
(j) Except as disclosed in the General Disclosure Package, there are no contracts, agreements
or understandings between the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the Company to include such securities in
the offering registered pursuant to a Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company under the Act (collectively,
registration rights), and any person to whom the Company has granted registration rights has
agreed not to exercise such rights until after the expiration of the Lock-Up Period referred to in
Section 5(k) hereof.
(k) The Offered Securities have been approved for listing on the Nasdaq Stock Market, subject
to notice of issuance.
4
(l) No consent, approval, authorization, or order of, or filing or registration with, any
person (including any governmental agency or body or any court) is required to be obtained or made
by the Company for the consummation of the transactions contemplated by this Agreement in
connection with the sale of the Offered Securities, except such as have been obtained, or made and
such as may be required under state securities laws. No authorization, consent, approval, license,
qualification or order of, or filing or registration with any person (including any governmental
agency or body or any court) in any foreign jurisdiction is required for the consummation of the
transactions contemplated by this Agreement in connection with the offering, issuance and sale of
the Directed Shares under the laws and regulations of such jurisdiction except such as have been
obtained or made.
(m) Except as disclosed in the General Disclosure Package, the Company and its subsidiaries
have good and marketable title to all real properties and all other properties and assets owned by
them, in each case free from liens, charge, encumbrances and defects that would materially affect
the value thereof or materially interfere with the use made or to be made thereof by them and,
except as disclosed in the General Disclosure Package, the Company and its subsidiaries hold any
leased real or personal property under valid and enforceable leases with no terms or provisions
that would materially interfere with the use made or to be made thereof by them.
(n) The execution, delivery and performance of this Agreement, and the issuance and sale of
the Offered Securities, will not result in a breach or violation of any of the terms and provisions
of, or constitute a default or a Debt Repayment Triggering Event (as defined below) under, or
result in the imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of
its subsidiaries, (ii) any statute, rule, regulation or order of any governmental agency or body or
any court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or
any of their properties, including, without limitation, the Higher Education Act of 1965 (the
HEA), or (iii) any agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which any of the properties
of the Company or any of its subsidiaries is subject except, in the cases of clauses (ii) and (iii)
such breaches, defaults or impositions that would not, individually or in the aggregate, result in
a Material Adverse Effect.; a Debt Repayment Triggering Event means any event or condition that
gives, or with the giving of notice or lapse of time would give, the holder of any note, debenture,
or other evidence of indebtedness (or any person acting on such holders behalf) the right to
require the repurchase, redemption or repayment of all or a portion of such indebtedness by the
Company or any of its subsidiaries.
(o) Neither the Company nor any of its subsidiaries is (i) in violation of its respective
charter or by-laws, or (ii) in default (or with the giving of notice or lapse of time would be in
default) under any existing obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or instrument to which any of them is
a party or by which any of them is bound or to which any of the properties of any of them is
subject, except such defaults that would not, individually or in the aggregate, result in a
Material Adverse Effect.
(p) This Agreement has been duly authorized, executed and delivered by the Company.
(q) The Company and its subsidiaries possess, and are in compliance, in all material respects,
with the terms of all certificates, authorizations, franchises, licenses and permits (Licenses)
necessary to the conduct of the business now conducted by them, including, without limitation, all
authorizations required to participate in federal financial aid programs under Title IV of the HEA,
and have not received any notice of proceedings relating to the revocation or modification of any
Licenses that, if determined adversely to the Company or any of its subsidiaries, would,
individually or in the aggregate, result in a Material Adverse Effect.
(r) No labor dispute with the employees of the Company or any of its subsidiaries exists or,
to the knowledge of the Company, is imminent that would reasonably be expected to have a Material
Adverse Effect.
(s) None of the following events has occurred or exists: (i) a failure by the Company or any
of its subsidiaries to fulfill the material obligations, if any, under the minimum funding
standards of Section 302 of the United States Employee Retirement Income Security Act of 1974, as
amended, and the regulations and
5
published interpretations thereunder (ERISA) with respect to a
Plan (as defined below), determined without regard to any waiver of such obligations or extension
of any amortization period; (ii) an audit or investigation by the Internal Revenue Service, the
U.S. Department of Labor, the Pension Benefit Guaranty Corporation or any other federal or state
governmental agency or any foreign regulatory agency with respect to the employment or compensation
of employees by the Company that individually or in the aggregate would reasonably be expected to
have a Material Adverse Effect; or (iii) any breach of any contractual obligation, or any violation
of law or applicable qualification standards, with respect to the employment or compensation of
employees by the Company or any of its subsidiaries that, to the knowledge of the Company would
individually or in the aggregate would reasonably be expected to have a Material Adverse Effect.
None of the following events has occurred or, to the knowledge of the Company, is expected to
occur: (A) a material increase in the aggregate amount of contributions required to be made to all
Plans in the current fiscal year of the Company and its subsidiaries compared to the amount of such
contributions made in the most recently completed fiscal year of the Company and its subsidiaries;
(B) a material increase in the accumulated post-retirement benefit obligations (within the
meaning of Statement of Financial Accounting Standards 106) of the Company and its subsidiaries
compared to the amount of such obligations in the most recently completed fiscal year of the
Company; (C) any event or condition giving rise to a liability for the Company or any of its
subsidiaries under Title IV of ERISA that would individually or in the aggregate have a Material
Adverse Effect; or (D) the filing of a claim by one or more employees or former employees of the
Company or any of its subsidiaries related to their employment that individually or in the
aggregate have a Material Adverse Effect. For purposes of this paragraph, the term Plan means a
plan (within the meaning of Section 3(3) of ERISA) subject to Title IV of ERISA with respect to
which the Company or any of its subsidiaries may have any liability.
(t) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate
trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively, intellectual property rights)
necessary to conduct the business now operated by them, or presently employed by them, and have not
received any notice of infringement of or conflict with asserted rights of others with respect to
any intellectual property rights that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material Adverse Effect.
(u) Except as disclosed in the General Disclosure Package, neither the Company nor any of its
subsidiaries (A) is in violation of any statute, any rule, regulation, decision or order of any
governmental agency or body or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or relating to the protection or restoration of the
environment or human exposure to hazardous or toxic substances (collectively, environmental
laws), (B) owns or operates any real property that is contaminated with any substance that is
subject to any environmental laws, (C) is liable for any off-site disposal or contamination
pursuant to any environmental laws, or (D) is subject to any claim relating to any environmental
laws, which violation, contamination, liability or claim would
individually or in the aggregate have a Material Adverse Effect; and the Company is not aware
of any pending investigation which might lead to such a claim.
(v) The statements in the General Disclosure Package and the Final Prospectus under the
headings U.S. Federal Tax Considerations, Description of Capital Stock and Regulation,
insofar as such statements summarize legal matters, agreements, documents or proceedings discussed
therein, are accurate and fair summaries of such legal matters, agreements, documents or
proceedings and present the information required to be shown.
(w) The Company has not taken, directly or indirectly, any action that is designed to or that
has constituted or that would reasonably be expected to cause or result in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale or resale of the
Offered Securities.
(x) Any third-party statistical and market-related data included in a Registration Statement,
a Statutory Prospectus or the General Disclosure Package are based on or derived from sources that
the Company believes to be reliable and accurate.
(y) The Company maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with managements general or
specific authorizations, (ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity
6
with generally accepted accounting principles and to maintain
asset accountability, (iii) access to assets is permitted only in accordance with managements
general or specific authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with respect to any
differences. To the extent required by the applicable Rules and Regulations, the Company will
maintain disclosure controls and procedures (as such term is defined in Rule 13a-14 under the
Exchange Act) that are effective in ensuring that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the rules and forms of the
Commission, including, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the Companys management, including its
principal executive officer or officers and its principal financial officer or officers, as
appropriate to allow timely decisions regarding required disclosure.
(z) A member of the Companys audit committee (the Audit Committee) of the Companys Board
of Directors has confirmed to the Chief Executive Officer, Chief Financial Officer or General
Counsel that, except as set forth in the General Disclosure Package, the Audit Committee is not
reviewing or investigating, and neither the Companys independent auditors nor its internal
auditors have recommended that the Audit Committee review or investigate, (i) adding to, deleting,
changing the application of, or changing the Companys disclosure with respect to, any of the
Companys material accounting policies; (ii) any matter which could result in a restatement of the
Companys financial statements for any annual or interim period during the current or prior three
fiscal years; or (iii) a significant deficiency, material weakness, change in internal controls,
including, but not limited to, disclosure controls and procedures, internal controls over
accounting matters and financial reporting, an internal audit function and legal and regulatory
compliance controls, or fraud involving management or other employees who have a significant role
in internal controls.
(aa) The Company is in compliance with all applicable provisions of Sarbanes-Oxley and the
applicable rules and regulations thereunder.
(bb) Except as disclosed in the General Disclosure Package, there are no pending actions,
suits or proceedings (including any inquiries or investigations by any court or governmental agency
or body, domestic or foreign) against or affecting the Company, any of its subsidiaries or any of
their respective properties that, (i) if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would
materially and adversely affect
the ability of the Company to perform its obligations under this Agreement, or (ii) are
required to be disclosed in the Registration Statement and the General Disclosure Package; and no
such actions, suits or proceedings (including any inquiries or investigations by any court or
governmental agency or body, domestic or foreign) are, to the Companys knowledge, threatened or
contemplated.
(cc) The financial statements included in each Registration Statement and the General
Disclosure Package present fairly the financial position of the Company and its consolidated
subsidiaries as of the dates shown and their results of operations and cash flows for the periods
shown, and such financial statements have been prepared in conformity with the generally accepted
accounting principles in the United States (GAAP) applied on a consistent basis; all non-GAAP
financial information included in the Registration Statement and the General Disclosure Package
complies with the requirements of Regulation G and Item 10 of Regulation S-K under the Act; the
schedules included in each Registration Statement present fairly the information required to be
stated therein; and, except as disclosed in the General Disclosure Package, there are no material
off-balance sheet arrangements (as defined in Regulation S-K under the Act, Item 303(a)(4)(ii))
that would reasonably be expected to have a material current or future effect on the Companys
financial condition, results of operation, liquidity, capital expenditures or capital resources of
the Company and its subsidiaries, taken as a whole.
(dd) The Company and its subsidiaries have filed all federal, state, local and non-U.S. tax
returns that are required to be filed or have requested extensions thereof (except in any case in
which the failure so to file would not have a Material Adverse Effect); and, except as set forth in
the General Disclosure Package, the Company and its subsidiaries have paid all taxes (including any
assessments, fines or penalties) required to be paid by them, except for any such taxes,
assessments, fines or penalties currently being contested in good faith or as would not,
individually or in the aggregate, have a Material Adverse Effect.
7
(ee) The Company and its subsidiaries are insured by insurers with appropriately rated claims
paying abilities against such losses and risks and in such amounts as are prudent and customary for
the businesses in which they are engaged; all policies of insurance insuring the Company or any of
its subsidiaries or their respective businesses, assets, employees, officers and directors are in
full force and effect; the Company and its subsidiaries are in compliance with the terms of such
policies and instruments in all material respects; and there are no claims by the Company or any of
its subsidiaries under any such policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied for; neither the Company nor
any such subsidiary has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary at a cost that would not have a Material Adverse Effect, except as set
forth in or contemplated in the General Disclosure Package; and the Company currently has or will
obtain directors and officers insurance in such amounts as is appropriate for a public company in
its industry of comparable size.
(ff) Except as disclosed in the General Disclosure Package, since the end of the period
covered by the latest audited financial statements included in the General Disclosure Package (A)
there has been no change, nor any development or event involving a prospective change, in the
condition (financial or otherwise), results of operations, business, properties or prospects of the
Company and its subsidiaries, taken as a whole, that is material and adverse, (B) except as
disclosed in or contemplated by the General Disclosure Package, there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class of its capital stock
and (C) except as disclosed in or contemplated by the General Disclosure Package, there has been no
change in the capital stock, short-term indebtedness, long-term indebtedness, net current assets or
net assets of the Company and its subsidiaries that has had, or that would reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect.
(gg) The section entitled Managements Discussion and Analysis of Financial Condition and
Results of OperationCritical Accounting Policies and Estimates in the Registration Statement and
the General Disclosure Package accurately and fully describes (A) accounting policies which the
Company believes are the most important in the portrayal of the financial condition and results of
operations of the Company and its consolidated subsidiaries and which require managements most
difficult, subjective or complex judgments (Critical Accounting Policies), (B) judgments and
uncertainties affecting the application of Critical Accounting Policies, and (C) to the extent
required by the Rules and Regulations, explanations of the likelihood that materially different
amounts would be reported under different conditions or using different assumptions.
(hh) To the extent required by the Rules and Regulations, the section entitled Managements
Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
Resources in the Registration Statement and the General Disclosure Package accurately and fairly
describes material trends, demands, commitments, events, uncertainties and risks, and the potential
effects thereof, that the Company believes would materially affect its liquidity and are reasonably
likely to occur.
(ii) The Company is not and, after giving effect to the offering and sale of the Offered
Securities and the application of the proceeds thereof as described in the General Disclosure
Package, will not be required to register as an investment company under the Investment Company
Act of 1940, as amended (the Investment Company Act).
(jj) The execution, delivery and performance of this Agreement, and the issuance and sale of
the Offered Securities will not constitute a change in ownership resulting in a change of control
of the Company pursuant to the applicable regulations promulgated under the HEA or any applicable
statute or regulation.
(kk) The Company has not offered or sold, or caused the Underwriters to offer or sell, any
Offered Securities to any person pursuant to the Directed Share Program with the specific intent to
unlawfully influence (i) a customer or supplier of the Company to alter the customers or
suppliers level or type of business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
8
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations,
warranties and agreements and subject to the terms and conditions set forth herein, the Company
agrees to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $ per share, the respective number
of Firm Securities set forth opposite the name of such Underwriter in Schedule A hereto.
The Company will deliver the Firm Securities to or as instructed by the Representatives for
the accounts of the several Underwriters in a form reasonably acceptable to the Representatives
against payment of the purchase price in Federal (same day) funds by wire transfer to an account at
a bank acceptable to the Representatives drawn to the order of in the case
of shares of Firm Securities and in the case of shares
of Firm Securities, at the office of DLA Piper US LLP, in Phoenix, Arizona, at A.M.,
New York time, on , 2008 or at such other time not later
than seven full business days thereafter as the Representatives and the Company determine, such
time being herein referred to as the First Closing Date. For purposes of Rule 15c6-1 under the
Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable
settlement date) shall be the settlement date for payment of funds and delivery of securities for
all the Offered Securities sold pursuant to the offering. The Firm Securities so to be delivered or
evidence of their issuance will be made available for checking at the above office of DLA Piper US
LLP at least 24 hours prior to the First Closing Date.
In addition, upon written notice from the Representatives given to the Company from
time to time not more than 30 days subsequent to the date of the Final Prospectus, the Underwriters
may purchase all or less than all of the Optional Securities at the purchase price per Optional
Security to be paid for the Firm Securities. The Company agrees to sell to the Underwriters the
number of shares of Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such Optional Securities shall be
purchased from the Company for the account of each Underwriter in the same proportion as the number
of Firm Securities set forth opposite such Underwriters name bears to the total number of Firm
Securities (subject to adjustment by the Representatives to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering over-allotments made in connection
with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered. The right to
purchase the Optional Securities or any portion thereof may be exercised from time to time and to
the extent not previously exercised may be surrendered and terminated at any time upon notice by
the Representatives to the Company.
Each time for the delivery of and payment for the Optional Securities, being herein referred
to as an Optional Closing Date, which may be the First Closing Date (the First Closing Date and
each Optional Closing Date, if any, being sometimes referred to as a Closing Date), shall be
determined by the Representatives but shall be not later than five full business days after written
notice of election to purchase Optional Securities is given. The Company will deliver the Optional
Securities being purchased on each Optional Closing Date to or as instructed by the Representatives
for the accounts of the several Underwriters in a form reasonably acceptable to the
Representatives, against payment of the purchase price therefore in Federal (same day) funds by
wire transfer to an account at a bank acceptable to the Representatives drawn to the order of , at
the above office of DLA Piper US LLP. The Optional Securities being purchased on
each Optional Closing Date or evidence of their issuance will be made available for checking at the
above office of DLA Piper US LLP at a reasonable time in advance of such Optional Closing Date.
As compensation for the Underwriters commitments, the Company will pay to the Representatives
for the Underwriters proportionate accounts the sum of $ per share times
the total number of Offered Securities purchased by the Underwriters from the Company on each
Closing Date. Such payment will be made on each Closing Date with respect to the Offered Securities
purchased on such Closing Date.
4. Offering by Underwriters. It is understood that the several Underwriters propose to offer
the Offered Securities for sale to the public as set forth in the Final Prospectus.
5. Certain Agreements of the Company . The Company agrees with the several Underwriters that:
(a) Unless filed pursuant to Rule 462(c) as part of the Additional Registration Statement in
accordance with the next sentence, the Company will file the Final Prospectus, in a form approved
by the
9
Representatives, with the Commission pursuant to and in accordance with subparagraph (1) (or,
if applicable and if consented to by the Representatives, subparagraph (4)) of Rule 424(b) not
later than the earlier of (A) the second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Time of the Initial Registration
Statement. The Company will advise the Representatives promptly of any such filing pursuant to
Rule 424(b) and confirm such timely filing in writing to the Representatives. If an Additional
Registration Statement is necessary to register a portion of the Offered Securities under the Act
but the Effective Time thereof has not occurred as of the execution and delivery of this Agreement,
the Company will file the Additional Registration Statement or, if filed, will file a
post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b)
on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior
to the time the Final Prospectus is finalized and distributed to any Underwriter, or will make such
filing at such later date as shall have been consented to by the Representatives.
(b) The Company will promptly advise the Representatives of any proposal to amend or
supplement at any time the Initial Registration Statement, any Additional Registration Statement or
any Statutory Prospectus and will not effect such amendment or supplementation without the
Representatives consent, such consent not to be unreasonably refused or delayed; and the Company
will also advise the Representatives promptly of (i) the effectiveness of any Additional
Registration Statement (if its Effective Time is subsequent to the execution and delivery of this
Agreement), (ii) any amendment or supplementation of a Registration Statement or any Statutory
Prospectus, (iii) any request by the Commission or its staff for any amendment to any Registration
Statement, for any supplement to any Statutory Prospectus or for any additional information, (iv)
the institution by the Commission of any stop order proceedings in respect of a Registration
Statement or the threatening of any proceeding for that purpose, and (v) the receipt by the Company
of any notification with respect to the suspension of the qualification of the Offered Securities
in any jurisdiction or the institution or threatening of any proceedings for such purpose. The
Company will use its best efforts to prevent the issuance of any such stop order or the suspension
of any such qualification and, if issued, to obtain as soon as possible the withdrawal thereof.
(c) If, at any time when a prospectus relating to the Offered Securities is (or but for the
exemption in Rule 172 would be) required to be delivered under the Act by any Underwriter or
dealer, any event occurs as a result of which the Final Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Registration Statement or supplement the
Final Prospectus to comply with the Act, the Company will promptly notify the Representatives of
such event and will promptly prepare and file with the Commission and furnish, at its own expense,
to the Underwriters and the dealers and any other dealers upon request of the Representatives, an
amendment or supplement which will correct such statement or omission or an amendment which will
effect such compliance. Neither the Representatives consent to, nor the Underwriters delivery
of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth
in Section 7 hereof.
(d) As soon as practicable, but not later than the Availability Date (as defined below), the
Company will make generally available to its security holders an earnings statement covering a
period of at least 12 months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Time of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act and Rule 158 under the Act. For the purpose of
the preceding sentence, Availability Date means the day after the end of the fourth fiscal
quarter following the fiscal quarter that includes such Effective Time on which the Company is
required to file its Form 10-Q for such fiscal quarter except that, if such fourth fiscal quarter
is the last quarter of the Companys fiscal year, Availability Date means the day after the end
of such fourth fiscal quarter on which the Company is required to file its Form 10-K.
(e) The Company will furnish to the Representatives copies of each Registration Statement (4
of which will be signed and will include all exhibits), each related Statutory Prospectus, and, so
long as a prospectus relating to the Offered Securities is (or but for the exemption in Rule 172
would be) required to be delivered under the Act, the Final Prospectus and all amendments and
supplements to such documents, in each case in such quantities as the Representatives request. The
Final Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day
following the execution and delivery of this Agreement. All other such documents shall be so
furnished promptly after they are available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
10
(f) The Company will arrange for the qualification of the Offered Securities for sale under
the laws of such jurisdictions as the Representatives designate and will continue such
qualifications in effect so long as required for distribution.
(g) During the period of three years hereafter, the Company will furnish to the
Representatives and, upon request, to each of the other Underwriters, as soon as practicable after
the end of each fiscal year, a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the Exchange Act or
mailed to stockholders, and (ii) from time to time, such other information concerning the Company
as the Representatives may reasonably request. However, so long as the Company is subject to the
reporting requirements of either Section 13 or Section 15(d) of the Exchange Act and is timely
filing reports with the Commission on its Electronic Data Gathering, Analysis and Retrieval system
(EDGAR), it is not required to furnish such reports or statements to the Underwriters.
(h) The Company agrees with the several Underwriters that the Company will pay all expenses
incident to the performance of the obligations of the Company under this Agreement, including, but
not limited to, any filing fees and other expenses (including reasonable fees and disbursements of
counsel to the Underwriters) incurred in connection with qualification of the Offered Securities
for sale under the laws of such jurisdictions as the Representatives designate and the preparation
and printing of memoranda relating thereto, costs and expenses related to the review by the
Financial Institutions Regulatory Authority (FINRA) of the Offered Securities (including filing
fees and the fees and expenses of counsel for the Underwriters relating to such review), costs and
expenses of the Company relating to investor presentations or any road show in connection with
the offering and sale of the Offered Securities including, without limitation, any travel expenses
of the Companys officers and employees and any other expenses of the Company including 50 percent
of the costs of chartering of airplanes, fees and expenses incident to listing the Offered
Securities on the New York Stock Exchange, American Stock Exchange, NASDAQ Stock Market and other
national and foreign exchanges, fees and expenses in connection with the registration of the
Offered Securities under the Exchange Act, and expenses incurred in distributing preliminary
prospectuses and the Final Prospectus (including any amendments and supplements thereto) to the
Underwriters and for expenses incurred for preparing, printing and distributing any Issuer Free
Writing Prospectuses to investors or prospective investors.
(i) The Company will use the net proceeds received by it in connection with this offering in
the manner described in the Use of Proceeds section of the General Disclosure Package and, except
as disclosed in the General Disclosure Package, the Company does not intend to use any of the
proceeds from the sale of the Offered Securities hereunder to repay any outstanding debt owed to
any affiliate of any Underwriter.
(j) The Company will not take, directly or indirectly, any action designed to or that would
constitute or that might reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company to facilitate the sale or resale of the
Offered Securities.
(k) For the period specified below (the Lock-Up Period), the Company will not, directly or
indirectly, take any of the following actions with respect to its Securities or any securities
convertible into or exchangeable or exercisable for any of its Securities (Lock-Up Securities):
(i) offer, sell, issue, contract to sell, pledge or otherwise dispose of Lock-Up Securities, (ii)
offer, sell, issue, contract to sell, contract to purchase or grant any option, right or warrant to
purchase Lock-Up Securities, (iii) enter into any swap, hedge or any other agreement that
transfers, in whole or in part, the economic consequences of ownership of Lock-Up Securities, (iv)
establish or increase a put equivalent position or liquidate or decrease a call equivalent position
in Lock-Up Securities within the meaning of Section 16 of the Exchange Act or (v) file with the
Commission a registration statement under the Act relating to Lock-Up Securities, or publicly
disclose the intention to take any such action, without the prior written consent of the
Representatives. The initial Lock-Up Period will commence on the date hereof and continue for 180
days after the date of the Final Prospectus or such earlier date that the Representatives consent
to in writing; provided, however, that if (1) during the last 17 days of the initial Lock-Up
Period, the Company releases earnings results or material news or a material event relating to the
Company occurs or (2) prior to the expiration of the initial Lock-Up Period, the Company announces
that it will release earnings results during the 16-day period beginning on the last day of the
initial Lock-Up Period, then in each case the Lock-Up Period will be extended until the expiration
of the 18-day period beginning on the date of release of the earnings results or the
11
occurrence of the materials news or material event, as applicable, unless the Representatives
waive, in writing, such extension. The Company will provide the Representatives with notice of any
announcement described in clause (2) of the preceding sentence that gives rise to an extension of
the Lock-Up Period. Anything herein to the contrary not withstanding, the foregoing obligations
set forth in this paragraph will not apply to the offer, sale, issuance, or disposal by the Company
of the Offered Securities pursuant to this Agreement, or any other Securities of the Company, or
any securities convertible into or exchangeable or exercisable for any of its Securities, pursuant
to any equity compensation plan described in the Registration Statement or the General Disclosure
Package.
(l) In connection with the Directed Share Program, the Company will ensure that the Directed
Shares will be restricted to the extent required by FINRA or the FINRA rules from sale, transfer,
assignment, pledge or hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. The Designated Underwriter will notify the Company as
to which Participants will need to be so restricted. The Company will direct the transfer agent to
place stop transfer restrictions upon such securities for such period of time.
(m) The Company will pay all fees and disbursements of counsel (including non-U.S. counsel)
incurred by the Underwriters in connection with the Directed Share Program and stamp duties,
similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the
Directed Share Program.
(n) The Company will comply with all applicable securities and other laws, rules and
regulations in each foreign jurisdiction in which the Directed Shares are offered in connection
with the Directed Share Program.
6. Free Writing Prospectuses. The Company represents and agrees that, unless it obtains the
prior consent of the Representatives, and each Underwriter represents and agrees that, unless it
obtains the prior consent of the Company and the Representatives, it has not made and will not make
any offer relating to the Offered Securities that would constitute an Issuer Free Writing
Prospectus, or that would otherwise constitute a free writing prospectus, as defined in Rule 405,
required to be filed with the Commission. Any such free writing prospectus consented to by the
Company and the Representatives is hereinafter referred to as a Permitted Free Writing
Prospectus. The Company represents that it has treated and agrees that it will treat each
Permitted Free Writing Prospectus as an issuer free writing prospectus, as defined in Rule 433,
and has complied and will comply with the requirements of Rules 164 and 433 applicable to any
Permitted Free Writing Prospectus, including timely Commission filing where required, legending and
record keeping. The Company represents that is has satisfied and agrees that it will satisfy the
conditions in Rule 433 to avoid a requirement to file with the Commission any electronic road show.
7. Conditions of the Obligations of the Underwriters. The obligations of the several
Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional
Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the
representations and warranties of the Company herein (as though made on such Closing Date), to the
accuracy of the statements of Company officers made pursuant to the provisions hereof, to the
performance by the Company of its obligations hereunder and to the following additional conditions
precedent:
(a) The Representatives shall have received letters, dated, respectively, the date hereof and
each Closing Date, of Ernst & Young LLP confirming that they are a registered public accounting
firm and independent public accountants within the meaning of the Securities Laws and substantially
in the form of Schedule C hereto (except that, in any letter dated a Closing Date,
the specified date referred to in Schedule C hereto shall be a date no more than three days
prior to such Closing Date).
(b) If the Effective Time of the Additional Registration Statement (if any) is not prior to
the execution and delivery of this Agreement, such Effective Time shall have occurred not later
than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Final
Prospectus is finalized and distributed to any Underwriter, or shall have occurred at such later
time as shall have been consented to by the Representatives. The Final Prospectus shall have been
filed with the Commission in accordance with the Rules and Regulations and Section 5(a) hereof.
Prior to such Closing Date, no stop order suspending the effectiveness of a
12
Registration
Statement shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of, the Company or the Representatives, shall be contemplated by
the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there shall not have occurred
(i) any change, or any development or event involving a prospective change, in the condition
(financial or otherwise), results of operations, business, properties or prospects of the Company
and its subsidiaries taken as a whole which, in the judgment of the Representatives, is material
and adverse and makes it impractical or inadvisable to market the Offered Securities; (ii) any
change in U.S. or international financial, political or economic conditions or the effect of which
is such as to make it, in the judgment of the Representatives, impractical to market or to enforce
contracts for the sale of the Offered Securities, whether in the primary market or in respect of
dealings in the secondary market; (iii) any suspension or material limitation of trading in
securities generally on The Nasdaq Stock Market, or any setting of minimum or maximum prices for
trading on such exchange; (iv) or any suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market; (v) any banking moratorium declared by any U.S. federal
or New York authorities; (vi) any major disruption of settlements of securities, payment or
clearance services in the United States or any other country where such securities are listed, or
(vii) any attack on, outbreak or escalation of hostilities or act of terrorism involving the United
States, any declaration of war by Congress or any other national or international calamity or
emergency if, in the judgment of the Representatives, the effect of any such attack, outbreak,
escalation, act, declaration, calamity or emergency is such as to make it impractical or
inadvisable to market the Offered Securities or to enforce contracts for the sale of the Offered
Securities.
(d) The Representatives shall have received an opinion, dated such Closing Date, of DLA Piper
US LLP, counsel for the Company, to the effect set forth on Schedule D hereto.
(e) The Representatives shall have received an opinion, dated such Closing Date, of Dow Lohnes
PLLC, special regulatory counsel for the Company, to the effect set forth on Schedule E
hereto.
(f) The Representatives shall have received from Latham & Watkins LLP, counsel for the
Underwriters, such opinion or opinions, dated such Closing Date, with respect to such matters as
the Representatives may require, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such matters.
(g) The Representatives shall have received a certificate, dated such Closing Date, of an
executive officer of the Company and a principal financial or accounting officer of the Company in
which such officers shall state that: the representations and warranties of the Company in this
Agreement are true and correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no
stop order suspending the effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or, to the best of their knowledge and after
reasonable investigation, are contemplated by the Commission; the Additional Registration Statement
(if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was timely filed
pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule
111(a) or (b) of Regulation S-T of the Commission; and, subsequent to the dates of the most recent
financial statements in the General Disclosure Package, there has been no material adverse change,
nor any development or event involving a prospective material adverse change, in the condition
(financial or otherwise), results of operations, business, properties or prospects of the Company
and its subsidiaries taken as a whole except as set forth in the General Disclosure Package or as
described in such certificate.
(h) On or prior to the date hereof, the Representatives shall have received lock-up letters
from each of the executive officers and directors of the Company and from each stockholder of the
Company listed in Schedule F hereto.
The Representatives may in their sole discretion waive on behalf of the Underwriters compliance
with any conditions to the obligations of the Underwriters hereunder, whether in respect of an
Optional Closing Date or otherwise.
13
8. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each
Underwriter, its partners, members, directors, officers, employees, agents, affiliates and each
person, if any, who controls such Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act (each an Indemnified Party), against any and all losses, claims,
damages or liabilities, joint or several, to which such Indemnified Party may become subject, under
the Act, the Exchange Act, other Federal or state statutory law or regulation or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact contained in any
part of any Registration Statement at any time, any Statutory Prospectus as of any time, the Final
Prospectus or any Issuer Free Writing Prospectus, or arise out of or are based upon the omission or
alleged omission of a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each Indemnified Party for any legal or other
expenses reasonably incurred by such Indemnified Party in connection with investigating or
defending against any loss, claim, damage, liability, action, litigation, investigation or
proceeding whatsoever (whether or not such Indemnified Party is a party thereto), whether
threatened or commenced, and in connection with the enforcement of this provision with respect to
any of the above as such expenses are incurred; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written information furnished to
the Company by any Underwriter through the Representatives specifically for use therein, it being
understood and agreed that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below.
(b) The Company agrees to indemnify and hold harmless the Designated Underwriter and its
affiliates and each person, if any, who controls the Designated Underwriter within the meaning of
either Section 15 of the Act or Section 20 of the Exchange Act (the Designated Entities), from
and against any and all losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or investigating any such
action or claim) (i) arising out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in any material prepared by or with the consent of the Company for
distribution to Participants in connection with the Directed Share Program or arising out of or
based upon any omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) arising out of or based upon the
failure of any Participant to pay for and accept delivery of Directed Shares that the Participant
agreed to purchase; or (iii) arising out of, related to, or in connection with the Directed Share
Program, other than losses, claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the willful misconduct or gross negligence of
the Designated Entities.
(c) Each Underwriter will severally and not jointly indemnify and hold harmless the Company,
each of its directors and each of its officers who signs a Registration Statement and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act (each, an Underwriter Indemnified Party), against any losses, claims, damages or
liabilities to which such Underwriter Indemnified Party may become subject, under the Act, the
Exchange Act, or other Federal or state statutory law or regulation or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact contained in any
Registration Statement at any time, any Statutory Prospectus at any time, the Final Prospectus or
any Issuer Free Writing Prospectus or arise out of or are based upon the omission or the alleged
omission of a material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by such Underwriter through the
Representatives specifically for use therein, and will reimburse any legal or other expenses
reasonably incurred by such Underwriter Indemnified Party in connection with investigating or
defending against any such loss, claim, damage, liability, action, litigation, investigation or
proceeding whatsoever (whether or not such Underwriter Indemnified Party is a party thereto),
whether threatened or commenced, based upon any such untrue statement or omission, or any such
alleged untrue statement or omission as such expenses are incurred, it being understood and agreed
that the only such information furnished by any Underwriter consists of the following information
in the Final Prospectus furnished on behalf of each Underwriter: the concession figure appearing in
the fourth paragraph under the caption Underwriting, and the information relating to stabilizing
transactions, over-allotment
14
transactions, syndicate covering transactions and penalty bids contained in the fifteenth and
sixteenth paragraphs under the caption Underwriting.
(d) Promptly after receipt by an indemnified party under this Section of notice of the
commencement of any action, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party under subsection (a), (b) or (c) above, notify the indemnifying
party of the commencement thereof; but the failure to notify the indemnifying party shall not
relieve it from any liability that it may have under subsection (a), (b) or (c) above except to the
extent that it has been materially prejudiced (through the forfeiture of substantive rights or
defenses) by such failure; and provided further that the failure to notify the indemnifying party
shall not relieve it from any liability that it may have to an indemnified party otherwise than
under subsection (a), (b) or (c) above. In case any such action is brought against any indemnified
party and it notifies an indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof other than reasonable
costs of investigation. Notwithstanding anything contained herein to the contrary, if indemnity may
be sought pursuant to Section 8(b) hereof in respect of such action or proceeding, then in addition
to such separate firm for the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one separate firm (in addition to any local counsel)
for the Designated Underwriter for the defense of any losses, claims, damages and liabilities
arising out of the Directed Share Program, and all persons, if any, who control the Designated
Underwriter within the meaning of either Section 15 of the Act of Section 20 of the Exchange Act.
No indemnifying party shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such indemnified party
unless such settlement (i) includes an unconditional release of such indemnified party from all
liability on any claims that are the subject matter of such action and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an
indemnified party.
(e) If the indemnification provided for in this Section is unavailable or insufficient to hold
harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other from the offering of the Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages or liabilities as
well as any other relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by the Company bear
to the total underwriting discounts and commissions received by the Underwriters. The relative
fault shall be determined by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a material fact relates
to information supplied by the Company or the Underwriters and the parties relative intent,
knowledge, access to information and opportunity to correct or prevent such untrue statement or
omission. The amount paid by an indemnified party as a result of the losses, claims, damages or
liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this subsection (e).
Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters obligations in this subsection (e) to contribute are several in proportion to their
respective underwriting obligations and not joint. The Company and the Underwriters agree that it
would not be just
15
and equitable if contribution pursuant to this Section 8(e) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations referred to in
this Section 8(e).
9. Default of Underwriters. If any Underwriter or Underwriters default in their obligations
to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the
aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date, the
Representatives may make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such arrangements are
made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities with respect to
which such default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements
satisfactory to the Representatives and the Company for the purchase of such Offered Securities by
other persons are not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or the Company, except as provided
in Section 10 (provided that if such default occurs with respect to Optional Securities after the
First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional
Securities purchased prior to such termination). As used in this Agreement, the term Underwriter
includes any person substituted for an Underwriter under this Section. Nothing herein will relieve
a defaulting Underwriter from liability for its default.
10. Survival of Certain Representations and Obligations. The respective indemnities,
agreements, representations, warranties and other statements of the Company and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation, or statement as to the results thereof, made by or on behalf of
any Underwriter, the Company or any of their respective representatives, officers or directors or
any controlling person, and will survive delivery of and payment for the Offered Securities. If
the purchase of the Offered Securities by the Underwriters is not consummated for any reason other
than solely because of the termination of this Agreement pursuant to Section 9 hereof, the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the Offered Securities, and
the respective obligations of the Company and the Underwriters pursuant to Section 8 hereof shall
remain in effect.
11. Notices. All communications hereunder will be in writing and, if sent to the
Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives, c/o
Credit Suisse Securities (USA) LLC, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention:
LCD-IBD and Merrill Lynch, Pierce, Fenner & Smith Incorporated, 4 World Financial Center, New York,
N.Y. 10080, Attention: , or, if sent to the Company, will be mailed, delivered
or telegraphed and confirmed to it at Grand Canyon Education, Inc., 3300 West Camelback Road,
Phoenix, Arizona 85017, Attention: Christopher C. Richardson; provided, however, that any notice to
an Underwriter pursuant to Section 8 will be mailed, delivered or faxed and confirmed to such
Underwriter.
12. Successors. This Agreement will inure to the benefit of and be binding upon the parties
hereto and their respective personal representatives and successors and the officers and directors
and controlling persons referred to in Section 8, and no other person will have any right or
obligation hereunder.
13. Representation. The Representatives will act for the several Underwriters in connection
with the transactions contemplated by this Agreement, and any action under this Agreement taken by
the Representatives jointly will be binding upon all the Underwriters.
14. Counterparts. This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts shall together constitute one and the
same Agreement.
15. Absence of Fiduciary Relationship. The Company acknowledges and agrees that:
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(a) No Other Relationship. The Representatives have been retained solely to act as underwriters
in connection with the sale of the Offered Securities and that no fiduciary, advisory or agency
relationship between the Company, on the one hand, and the Representatives, on the other, has been
created in respect of any of the transactions contemplated by this Agreement or the Final
Prospectus, irrespective of whether the Representatives have advised or is advising the Company on
other matters;
(b) Arms Length Negotiations. The price of the Offered Securities set forth in this Agreement
was established by Company following discussions and arms-length negotiations with the
Representatives and the Company is capable of evaluating and understanding and understands and
accepts the terms, risks and conditions of the transactions contemplated by this Agreement;
(c) Absence of Obligation to Disclose. The Company has been advised that the Representatives and
their affiliates are engaged in a broad range of transactions which may involve interests that
differ from those of the Company and that the Representatives have no obligation to disclose such
interests and transactions to the Company by virtue of any fiduciary, advisory or agency
relationship; and
(d) Waiver. The Company waives, to the fullest extent permitted by law, any claims they may have
against the Representatives for breach of fiduciary duty or alleged breach of fiduciary duty and
agree that the Representatives shall have no liability (whether direct or indirect) to the Company
in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on
behalf of or in right of the Company, including stockholders, employees or creditors of the
Company.
16. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York.
The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts
in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby. The Company irrevocably and
unconditionally waives any objection to the laying of venue of any suit or proceeding arising out
of or relating to this Agreement or the transactions contemplated hereby in Federal and state
courts in the Borough of Manhattan in the City of New York and irrevocably and unconditionally
waives and agrees not to plead or claim in any such court that any such suit or proceeding in any
such court has been brought in an inconvenient forum.
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If the foregoing is in accordance with the Representatives understanding of our agreement,
kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a
binding agreement among the Company and the several Underwriters in accordance with its terms.
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Very truly yours,
GRAND CANYON EDUCATION, INC.
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The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
Acting on behalf of themselves and as
the Representatives of the
several Underwriters.
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By
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Credit Suisse Securities (USA) LLC |
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Name: |
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By
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Merrill Lynch, Pierce, Fenner & Smith
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Incorporated |
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18
exv10w18
Exhibit
10.18
COLLABORATION AGREEMENT
This Collaboration Agreement (the Agreement) is effective as of July 11, 2005 between Mind
Streams, LLC, a limited liability company (Mind Streams), and Significant Education, LLC, (d/b/a/
Grand Canyon University) a for-profit company (the University). Mind Streams and the University
are sometimes referred to individually as a Party and jointly as the Parties.
Agreement to Collaborate. Mind Streams and the University agree to work together in a cooperative
effort and in good faith to conduct certain projects (each, a Project) on a non-exclusive basis,
as may be agreed and the terms documented in an Exhibit to this Agreement (each, a Project
Description). Each Project Description to this Agreement (whether or not attached hereto) will
incorporate the terms of this Agreement and the terms thereof will be binding on the Parties. The
first Project of the Parties is described in the Project Description attached as Exhibit 1 (the
First Project). Each Party agrees to perform those duties of such Party as set forth in a
Project Description. For each Project, Mind Streams will contribute proprietary relationships,
business and technical developments, and know how, including, without limitation a management
system developed by it and specialized personnel, training, marketing and promotion activities.
The University will contribute specialized personnel for financial aid, enrollment, registration,
advisement, instruction, training and degree conferring coursework.
Consideration. The consideration to be received by each Party for each Project will be negotiated
and adjusted as mutually agreed by the Parties and will be set forth in the Project Description.
The consideration for the First Project is described in Exhibit 1.
Termination and Survival. This Agreement will terminate on December 31, 2010 (the Termination
Date), unless otherwise terminated for any reason by either Party, in its sole judgment, upon 45
days prior written notice to the other Party. The Parties may mutually agree, in writing, to
extend the Termination Date. Each Project will terminate upon the earlier of (i) its completion or
(ii) the termination of this Agreement, unless provided otherwise in the Project Description
relating to a Project. Any consideration described in the Project Description owed
under a Project but unpaid at the Termination Date will be paid within 30 days following the
Termination Date. The Parties agree that the students enrolled under a Project on the Termination
Date are attributed to Mind Streams efforts under such Project and any consideration described in
the Project Description related to those students, until their respective graduation or other
termination of enrollment, will be paid pursuant to the Project Description. The foregoing payment
obligations will survive the Termination Date.
Academic Responsibility. The University will have exclusive control over its academic programs.
The University is not delegating, and will not delegate, any of its institutional rights or
obligations. The University will make all academic and faculty employment judgments and decisions
consistent with its published policies and procedures. Non-delegated duties include course content
and the delivery of the instructional program; selection and approval of faculty; admission,
registration, and retention of students, calculation of prior learning; evaluation of student
progress and the awarding and recording of credit.
Authorization. Each of the Parties represents and warrants to the other Party that this Agreement
has been duly authorized by all necessary action and that it constitutes a valid and binding
obligation of each Party to the other Party.
Department of Education. The University has been approved for various programs sponsored by state
and federal governments, including without limitation, the approval by the U.S. Department of
Education to receive Title IV funds under Title IV of the Higher Education Act of 1965, as amended.
Mind Streams has provided the University with an April 20, 2005 memorandum from Dow, Lohnes &
Albertson addressing its activities described in this Agreement under the Higher Education Act and
regulations promulgated by the U.S. Department of Education. Mind Streams represents and warrants
that its compensation of its employees or other persons who perform any student recruitment or
admission activities for the University under this Agreement is and will continue to be in
compliance with Section 487(a)(20) of the Higher Education Act of 1965, as amended (20 U.S.C. §
1094(a)(20)), or any successor provision, and the regulations promulgated thereunder by the U.S.
Department of Education (currently located at 34 C.F.R. § 668.14(b)(22)). Mind Streams agrees to
indemnify and hold
2
harmless the University and its successors, assigns, agents, officers, directors and employees,
from and against any and all liabilities, obligations, claims, losses, damages, expenses and costs
(including, but not limited to, reasonable attorneys fees and litigation costs) which arise out of
or result from (i) any breach or alleged breach of the representations and warranties made by Mind
Streams in this paragraph, or (ii) any assertion by the U.S. Department of Education that Mind
Streams compensation of its employees or other persons who perform any student recruitment or
admission activities for the University under this Agreement does not comply with Section
487(a)(20) of the Higher Education Act of 1965, as amended (20 U.S.C. § 1094(a)(20)), or any
successor provision, or the regulations promulgated thereunder by the U.S. Department of Education.
The foregoing representation and warranties shall survive the Termination of this Agreement.
Records And Accounting. Each Party will maintain complete and accurate books and records for the
Agreement, including records reflecting billing, payments, students, and payroll. The records must
be maintained for at least three years after the termination of the Agreement. If the University
provides Notice to Mind Streams that the University is subject to an audit or other review by a
regulatory agency, or to any claim or litigation, relation to the Universitys compliance with the
statutory and regulatory provisions referenced in the paragraph of this Agreement titled
Department of Education, then Mind Streams will continue to maintain and retain complete records
relating to this Agreement and the compensation of its employees or other persons who perform any
student recruitment or admission activities for the University under this Agreement until the
University provides Notice to Mind Streams that such audit, review, claim or litigation has been
concluded. After Notice by either Party, the other Party will allow the requesting Party to have
access, during ordinary business hours, to the books and records as may be reasonably required to
verify services provided under the terms of the Agreement. Either Party may periodically, at its
expense, have the books and records of the other Party audited by a certified public accountant.
If the accountant determines that the requesting Party was overcharged or underpaid, the other
Party will refund the overage or underage and reimburse the requesting Party for the cost of the
audit within 20 days after Notice. If either Party disputes the accountants determination, and
good faith efforts to resolve the
3
dispute are unsuccessful, the dispute will be resolved through binding arbitration as provided in
this Agreement.
Confidential Information. Each Party will have access to confidential and proprietary information
owned by the other Party, including, without limitation, information about the business affairs,
finances, customer and supplier lists, marketing, sales, methods of operation, trade secrets,
designs, inventions, formulas, software programs, processes, techniques, research, technical data,
curriculum or other learning information. Each Party agrees not to disclose to any third-party,
whether directly or indirectly, confidential or proprietary information without the written
permission of the other Party, except as required by either Partys responsibilities under this
Agreement. After Notice by one Party or the termination of the Agreement, the other Party must
immediately return the confidential or proprietary information and comply with the instructions
regarding the return or disposition of the confidential or proprietary information, including any
copies or reproductions. This paragraph does not apply to information that: (a) is or becomes
available to the general public other than as a result of disclosure by the receiving Party; (b) is
known to a Party prior to the disclosure under this Agreement; (c) becomes available to a Party on
a nonconfidential basis from a source (other than the other Party) which is not known by the
receiving Party to be in breach of any nondisclosure obligations; or (d) is independently developed
by a Party without reference to confidential information. If a receiving Party believes that it is
required by law to disclose confidential information, it shall provide Notice to the disclosing
Party, to the greatest extent possible, prior to making such disclosure so as to allow the
disclosing Party to undertake action to prevent disclosure or otherwise obtain confidential
treatment of such disclosure.
Liability Insurance. Each Party will maintain in force at all times during the term of this
Agreement, with an insurance company acceptable to the other Party, workers compensation (the
amount required by statute), employers liability, comprehensive general liability and auto
liability, each in the amount of $3,000,000, and such additional insurance as may be necessary to
cover the Partys obligations under the Agreement.
4
Indemnification by Mind Streams. Mind Streams shall, to the fullest extent permitted by law,
defend, indemnify, and hold harmless the University and its members, shareholders, directors,
officers, employees, and agents for any and all liability, claims, litigation, judgments, causes of
action, losses, expenses, damages, and liabilities arising out of, or incurred in connection with
or arising directly or indirectly out of the obligations undertaken in connection with this
Agreement (Claims), except claims arising through the sole active negligence or willful
misconduct of the University. Claims include, without limitation, the following: (a) any willful
or negligent act, or failure to act by Mind Streams, its officers, directors, agents, employees or
representatives; (b) any inaccurate representation made by Mind Streams; (c) any default in
performance of any of the covenants or obligations that Mind Streams is to perform under the
Agreement, and (d) any investigations or actions taken by HLC or Department of Education against
the University as a result of the actions of Mind Streams in connection with this Agreement.
Indemnification by the University. The University shall, to the fullest extent permitted by law,
defend, indemnify, and hold harmless Mind Streams and its members, shareholders, directors,
officers, employees, and agents for any and all liability, claims, litigation, judgments, causes of
action, losses, expenses, damages, and liabilities arising out of the Claims, except claims arising
through the sole active negligence or willful misconduct of Mind Streams. Claims may arise from,
but are not limited to, the following: (a) any willful or negligent act, or failure to act by the
University, its officers, directors, agents, employees or representatives; (b) any inaccurate
representation made by the University; and (c) any default in performance of any of the covenants
or obligations that the University is to perform under the Agreement.
Indemnify means to hold harmless from and defend from loss or liability with respect to any
and all Claims (including costs and attorneys fees at both trial and appellate levels), arising
out of, or incurred in connection with, an identified circumstance, incident, condition,
relationship, time period, or other matter. These indemnity obligations shall apply for the
entire time that any third party can make a Claim against one of the Parties for liabilities under
this Agreement and shall survive the termination of this Agreement.
Compliance With Laws. During the performance of the obligations under the Agreement, neither Party
will unlawfully discriminate against any person. Both Parties will conduct their
5
activities under the Agreement in strict compliance with Laws. For the purpose of this Agreement,
Laws means all applicable laws, ordinances, regulations, and other requirements of any country,
federal, state, county, or municipal agency. Both Parties will obtain all required permits,
licenses, and bonds for the performance of their obligations under the Agreement. Both Parties
will certify and provide proof that they are in compliance with Laws and have obtained required
permits.
Binding Agreement. Upon execution by the signatories provided below, this Agreement shall be
binding on the Parties, and their respective successors, assignees, agents, affiliates,
representatives and attorneys.
Binding Arbitration.
Claims. Any controversy or claim between the Parties relating to or arising out of this
Agreement must be submitted to final and binding arbitration, including all controversies or claims
based on contract, tort, equity, and statute; provided, however, that if the controversy requires
provisional remedies, such as injunctive relief or attachment, any Party may elect to have the
matter determined by a court of competent jurisdiction; provided, however, thereafter the substance
of the claim will be subject to binding arbitration.
Waiver of Jury Trial. The Parties understand that they are waiving their rights to a jury
trial.
Procedures. (a) The arbitration will be conducted before the American Arbitration Association
at the location of the Party initiating the arbitration. Except as provided in this Section, the
arbitration will be governed by the Commercial Arbitration Rules. The demand for arbitration
setting forth the facts and issues must be in writing and submitted to the American Arbitration
Association within one year from the date the actions giving rise to the claims occur. The
American Arbitration Association shall select a single arbitrator. The responding Party may serve
a reply or cross demand within 20 days. The arbitrator will conduct a pre-arbitration hearing
within 30 days after the arbitrator is appointed and the arbitration will be completed within 120
days after the filing of the arbitration demand. The arbitrator will establish additional
deadlines reasonably required to facilitate the arbitration. (b) The arbitrator will provide for
discovery, including a Party may serve a document request for any document that would be
6
discoverable in a civil lawsuit no less than 30 calendar days before the arbitration hearing;
responses to such request must be delivered with the requested documents and any objections within
20 days; and each Party may take no more than two depositions unless additional depositions are
allowed by the arbitrator.
Powers of Arbitrator. The arbitrator will have the powers to: (a) issue subpoenas for the
attendance of witnesses for the production of books, records, documents, and other evidence; (b)
order depositions to be used as evidence; (c) resolve discover disputes as if the arbitration were
a civil action; (d) conduct a hearing on the arbitrable issues; and (e) rule on the question of
whether specified issues are subject to arbitration and issue an award after the arbitration
hearing is concluded.
Costs and Expenses. The Parties will bear equally the arbitrators expenses and fees,
including meeting room charges, administrative fees, travel expenses, and out-of-pocket expenses.
Unless otherwise ordered by the arbitrator, each Party will pay its own attorney fees, costs,
witness fees, and other expenses. The arbitrator may award the prevailing Party any expenses and
fees of arbitration, including reasonable attorney fees and costs, in such proportion as the
arbitrator decides.
Final Award. Within ten days after completion of the arbitration hearing, the arbitrator will
issue a tentative written decision, specifying the reasoning for the decision and any calculations
necessary to explain the award. The Parties will have five days in which to submit comments to the
tentative decision. The final award will be issued within ten days after the arbitrators receipt
of comments. The final award may be entered as a judgment in any court having jurisdiction.
Attorneys Fees. In the event either Party requests arbitration or files a lawsuit for the
interpretation, specific performance, or damages for the breach of the Agreement, the prevailing
Party is entitled to a judgment or award against the other in an amount equal to actual and
reasonable attorneys fees and costs incurred, together with all other appropriate legal or
equitable relief.
7
Expenses. Except as expressly provided in this Agreement or any Project Description, each Party
shall pay, or cause to be paid, all expenses in the performance of its obligations hereunder,
including attorneys fees.
Relationship. The Parties agree that the terms of the Agreement do not constitute the formation of
a partnership, joint venture, or other relationship and that no form of agency exists between the
Parties. Neither Party will hold itself, or its agents or employees out to be an agent of the
other Party, and neither Party will have authority to bind or obligate the other Party in any
manner whatsoever.
Name Seal and Logo. Neither Party may use the name, seal, or logo of the other Party without its
prior written consent. Each Party shall identify in writing to the other Party the person
designated who is responsible for making decisions regarding requests to use the Partys name, seal
or logo and to whom such requests should be made. Each Party will make available its brand for
the purposes related to the affiliation consistent with the terms of the Agreement.
Notices. When the Agreement requires that a Party give Notice to the other Party, including
specifically notices of default, termination, or a demand for arbitration, the Notice must comply
with the requirements in this Section. Notice will be effective when:
(a) personally delivered to the recipient, Notice is effective upon delivery; (b) mailed certified
mail, return receipt requested, Notice is effective on receipt, if a return receipt confirms
delivery; (c) delivered by overnight delivery (e.g., Federal Express/Airborne/United Parcel
Service/DHL WorldWide Express), charges prepaid or charged to the senders account. Notice is
effective on delivery, if delivery is confirmed by the delivery service; and, ((d) sent by
facsimile, Notice is effective on receipt, except that any Notice given by facsimile is deemed
received on the next business day if it is received after 5:00 p.m. or on a non-business day,
provided that a duplicate copy of the Notice is promptly sent by first-class or certified mail or
by overnight delivery or the receiving Party delivers a confirmation of receipt. Notice by
facsimile is permissible only if all the Parties and others to receive notice have provided a
facsimile number in accordance with this Section. Notices must be given to:
8
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If to Mind Streams, to:
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Dennis L. Little |
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Mind Streams, LLC |
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7227 N. 16th Street, Suite 190 |
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Phoenix, AZ 85020 |
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Telephone Number: (602) 906-6000 |
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Facsimile Number: (602) 906-6098 |
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If to University, to:
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Linda Rawles |
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Grand Canyon University |
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3300 W. Camelback Road |
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Phoenix, AZ 85017 |
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Telephone Number: (602) 589-2300 |
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Facsimile Number: (602) 589-2457 |
Either party may change either its address or facsimile number by giving the other party Notice.
All communications for which Notice is not required, including those provisions permitting or
requiring a party to approve, advise, or consent may be given by facsimile or other
electronic communications. In these circumstances only the contact person for each Party need
receive the communication.
Assignment. The Agreement may be assigned by either Party without the express written consent of
the other Party.
Entire Agreement/ Modification. This Agreement constitutes the entire agreement of the Parties and
supersedes any prior understandings or agreements of the Parties with respect to the subject matter
hereof. Except for the addition of Project Descriptions to this Agreement, provided that such
Project Descriptions are executed by both Parties, this Agreement cannot be modified except by
written agreement signed by both Parties.
Counterparts. This Agreement may be executed in any number of counterparts, all of which, when
taken together, shall constitute a fully executed agreement, provided, however, this Agreement
shall be of no force or effect until executed by both Parties.
9
Governing Law/Jurisdiction. The laws of the State of Arizona govern this Agreement. All
arbitration or legal action brought by either Party arising out of or relating to this Agreement
shall be filed in Maricopa County, Arizona, and all Parities consent to the jurisdiction and venue
of the courts located therein.
The undersigned have agreed to the forgoing provisions as of the date hereof and have caused this
Agreement to be executed by their duly authorized representatives as of the date at the beginning
of this Agreement.
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Mind Streams, LLC, an Arizona
limited liability company, |
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Significant Education, LLC, a Delaware
limited liability company, |
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By:
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/s/ Dennis L. Little
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By:
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/s/ Brent Richardson |
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Name: Dennis L. Little
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Name: Brent Richardson |
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Title: Vice President
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Title: Chief Executive Officer |
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10
Collaboration Agreement
Between Mind Streams, LLC and
Significant Education, LLC
Dated July 1, 2005
Exhibit 1
Project One
Project One, collaboration activity between Mind Streams and the University relating to the
development, promotion and marketing of the Universitys online masters programs in education and
leadership. The terms and conditions of the Collaboration Agreement referenced above are
incorporated herein by this reference.
Mind Streams Obligations:
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Actively work with the University in identifying appropriate courses, programs and
curriculum relating to online masters degrees in education and leadership; |
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Actively promote the University generally and its courses and degree conferring programs, |
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Develop and maintain key contracts and relationships with school corporations within the
United States catering to teachers and administrators interested in pursuing additional
education opportunities of a kind offered by the University, |
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Provide teams dedicated to the recruitment and retention of students for the Universitys
programs. |
University Obligations: The University shall provide the following services to students of the
Universitys online masters programs in education:
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Determine the curriculum to be offered to students, |
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Registration, |
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Enrollment, |
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Academic advisement, |
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Financial aid counseling, |
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Instruction, including selecting, hiring and compensating instructors, |
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Student academic record-keeping, and |
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Graduation and certification, if applicable. |
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Joint Obligations:
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The Parties will work in good faith to carry out their duties under this Project,
including establishing lines of communication and monitoring systems necessary to
effectuate such obligations. |
Consideration:
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During the term of this Project One, the University will pay
to Mind Streams 45% of
Net Revenue, defined below. For the purpose of this Agreement Net Revenue means tuition
actually received by the University from students recruited by Mind Streams minus any
discounts, refunds and allowances. |
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Within 30 calendar days following the start of each new enrollment period
during the term of this Project One, the University shall provide Mind Streams with a
report containing information regarding the number of eligible students enrolled, the date
a student dropped any course(s) and the tuition received. The parties will reconcile and
agree on the information in the report within 15 calendar days after the report is issued
and payment will be remitted to Mind Streams 15 calendard days after the reconciliation.
The University will provide Mind Streams with a similar report for the applicable
enrollment period at the end of each month thereafter until all tuition has been accounted
for and payment made to Mind Streams. |
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The form of such report shall be established jointly by the University and Mind
Streams. |
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Termination:
This Project One will terminate on July 31, 2007, unless terminated earlier by mutual agreement of
the Parties. In the event of early termination, the provisions of the Termination and Survival
paragraph in the Collaboration Agreement are applicable to any consideration owned to either Party
by the other.
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Mind Streams, LLC, an Arizona
limited liability company, |
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Significant Education, LLC, a Delaware
limited liability company, |
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By:
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/s/ Dennis L. Little
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By:
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/s/ Brent Richardson |
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Name: Dennis L. Little
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Name: Brent Richardson |
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Title: Vice President
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Title: Chief Executive Officer |
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13
Collaboration Agreement
Between Mind Streams, LLC and
Significant Education, Inc
Dated July 1, 2005
Exhibit 2
Project Two
Project Two, collaboration activity between Mind Streams and the University relating to the
promotion and marketing of the Universitys online programs. The terms and conditions of the
Collaboration Agreement referenced above are incorporated herein by this reference.
Mind Streams Obligations:
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Actively promote the University generally and its courses and degree conferring programs, |
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Develop and maintain key contracts and relationships with school corporations within the
United States catering to teachers and administrators interested in pursuing additional
education opportunities of a kind offered by the University, |
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Provide teams dedicated to the recruitment and retention of students for the Universitys
programs. |
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8. |
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Mind Streams represents and warrants that its compensation of its employees or other
persons who perform any student recruitment or admission activities for SigEd and/or GCU
under this Agreement is and will continue to be in compliance with Section 487(a)(20) of the
Higher Education Act of 1965, as amended (20 U.S.C. § 1094(a)(20)), or any successor
provision, and the regulations promulgated thereunder by the U.S. Department of Education
(currently located at 34 C.F.R. § 668.14(b)(22)). Mind Streams agrees to indemnify and hold
harmless SigEd and GCU and their successors, assigns, agents, officers, directors and
employees, from and against any and all liabilities, obligations, claims, losses, damages,
expenses and costs (including, but not limited to, reasonable attorneys fees and litigation
costs) which arise out of or result from (i) any breach or alleged breach of the
representations and warranties made by Mind Streams in this paragraph, or (ii) any assertion
by the U.S. Department of Education that Mind Streams compensation of its employees or
other persons who perform any student recruitment or admission |
Page 1 of 3
Collaboration Agreement
Between Mind Streams, LLC and
Significant Education, Inc
Dated July 1, 2005
Exhibit 2
Project Two
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activities for SigEd and/or GCU under this Agreement does not comply with Section 487(a)(20)
of the Higher Education Act of 1965, as amended (20 U.S.C. § 1094(a)(20)), or any successor
provision, or the regulations promulgated thereunder by the U.S. Department of Education. |
University Obligations: The University shall provide the following services to students of the
Universitys online masters programs in education:
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9. |
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Determine the curriculum to be offered to students, |
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10. |
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Registration, |
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11. |
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Enrollment, |
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12. |
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Academic advisement, |
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13. |
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Financial aid counseling, |
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14. |
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Instruction, including selecting, hiring and compensating instructors, |
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15. |
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Student academic record-keeping, and |
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Graduation and certification, if applicable. |
Joint Obligations:
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2. |
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The Parties will work in good faith to carry out their duties under this Project,
including establishing lines of communication and monitoring systems necessary to
effectuate such obligations. |
Consideration:
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1. |
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During the term of this Project One, the University will pay
to Mind Streams 45% of
Net Revenue, defined below. For the purpose of this Agreement Net Revenue means tuition
actually received by the University from students recruited by Mind Streams minus any
discounts, refunds and allowances. |
Page 2 of 3
Collaboration Agreement
Between Mind Streams, LLC and
Significant Education, Inc
Dated July 1, 2005
Exhibit 2
Project Two
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2. |
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Within 30 days following the end of each month during the term of this Project One,
the University shall provide Mind Streams with a report containing information regarding
the number of eligible students enrolled in the programs, the dates of enrollment and the
tuition received for the month. The form of such report shall be established jointly by
the University and Mind Streams. Payment to Mind Streams is due at time of receipt of the
report. |
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Mind Streams, LLC, an Arizona
limited liability company, |
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Significant Education, LLC, a Delaware
corporation |
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By:
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/s/ Dennis L. Little
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By:
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/s/ Chris Richardson |
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Name: Dennis L. Little
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Name: Chris Richardson |
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Title: Chief Financial Officer
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Title: Managing Director |
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Page 3 of 3
exv10w19
Exhibit 10.19
EXECUTIVE EMPLOYMENT AGREEMENT
(Chief Financial Officer)
This Executive Employment Agreement (the Agreement) is entered into on June 25,
2008, by and between Grand Canyon Education, Inc., a Delaware corporation (the Company),
and Daniel E. Bachus (Executive).
The parties agree as follows:
1. Employment. The Company hereby employs Executive, and Executive hereby accepts
such employment, upon the terms and conditions set forth herein.
2. Duties.
2.1 Position. Executive is employed as Chief Financial Officer and shall have the
duties and responsibilities assigned by the Companys Chief Executive Officer (CEO) both
upon initial hire and as may be reasonably assigned from time to time. Executive shall perform
faithfully and diligently all duties assigned to Executive. The Company reserves the right to
modify Executives position and duties at any time in its sole and absolute discretion, except that
any material diminution in Executives duties shall be subject to Section 7.3(ii) below.
2.2 Best Efforts/Full-time. Executive will expend Executives best efforts on behalf
of the Company, and will abide by all policies and decisions made by the Company, as well as all
applicable federal, state and local laws, regulations or ordinances. Executive will act in the
best interest of the Company at all times. Executive shall devote Executives full business time
and efforts to the performance of Executives assigned duties for the Company, unless Executive
notifies the CEO in advance of Executives intent to engage in other paid work and receives the
CEOs express written consent to do so. Notwithstanding the foregoing, Executive will be permitted
to serve as an outside director on the board of directors for corporate, civic, nonprofit or
charitable entities, so long as Executive obtains the consent of the Company and provided such
entities are not competitive with the Company and subject to the provisions of section 9 below.
2.3 Work Location. Executives principal place of work shall be located in Phoenix,
Arizona, or such other location as the Company may direct from time to time.
3. Term.
3.1 Initial Term. The employment relationship pursuant to this Agreement shall be for
an initial term commencing on July 1, 2008 (the Effective Date) and continuing for a
period of four (4) years following such date (Initial Term), unless sooner terminated in
accordance with section 7 below.
3.2 Renewal. On expiration of the Initial Term specified in subsection 3.1 above, this
Agreement will automatically renew for subsequent one (1) year terms (each a Renewal
Term) unless either party provides thirty (30) days advance written notice to the other that
the Company or Executive does not wish to renew the Agreement for subsequent Renewal Term. In the
event either party gives notice of nonrenewal pursuant to this subsection 3.2, this Agreement will
expire at the end of the then current term. The Initial Term and each subsequent Renewal Term are
referred to collectively as the Term.
1
4. Compensation.
4.1 Base Salary. As compensation for Executives performance of Executives duties
hereunder, the Company shall pay to Executive an initial Base Salary at the rate of Two-Hundred
Seventy-Five Thousand Dollars ($275,000.00) per year payable in accordance with the normal payroll
practices of the Company, less required deductions for state and federal withholding tax, social
security and all other employment taxes and payroll deductions. In the event Executives
employment under this Agreement is terminated by either party, for any reason, Executive will earn
the Base Salary prorated to the date of termination, except as otherwise set forth herein.
Executives Base Salary shall be reviewed annually by the Compensation Committee of the Companys
Board of Directors (the Compensation Committee).
4.2 Incentive Compensation. For the fiscal year of the Company ending December 31,
2008, and provided Executive remains employed with the Company as of such date, Executive will be
eligible to receive a bonus equal to Sixty-Eight Thousand Seven-Hundred Fifty Dollars ($68,750.00).
Thereafter, Executive will be eligible to earn incentive compensation in the form of an annual
bonus for each fiscal year of the Company with a target amount of fifty percent (50%) of
Executives Base Salary. The Compensation Committee will determine the actual amount of the bonus
earned for any year, which will be based upon both the Companys achievement of overall performance
metrics for the year and Executives achievement of individual performance metrics as agreed upon
by the Compensation Committee and the Executive. The Compensation Committee may, in its sole
discretion, increase the Executives annual bonus above fifty percent (50%) of Base Salary if it
determines that the performance of both the Executive and the Company significantly exceed the
predetermined metrics. Bonus amounts, if any, are to be awarded annually and payment shall be made
within two and one-half months following the end of the applicable Company fiscal year.
4.3 Stock Options. Upon approval by Compensation Committee, Executive will be granted
immediately prior to the Companys intended initial public offering (the IPO) an option
(the Option) to purchase shares of the Companys Common Stock under the Companys 2008
Equity Incentive Plan (the Plan) at an exercise price per share equal to the IPO offering
price per share. The number of shares subject to such Option shall be equal to 0.90% of the sum of
(a) the number of shares of Common Stock of the Company issued and outstanding as of the date of
grant of the Option, plus (b) the number of shares of Common Stock to be issued in connection with
the IPO as set forth in the agreement between the Company and the underwriters of the IPO (but
without giving effect to any Green Shoe or overallotment option that may become exercisable by
the underwriters), plus (c) the number of shares of Common Stock to be issued upon conversion of
the Companys outstanding shares of preferred stock in connection with the IPO. Subject to
Executives continued employment, the Option will vest and become exercisable in five equal annual
installments (each, an Annual Installment) over a five (5) year period beginning on the
grant date. The Option will be subject to the terms and conditions of the Plan and a form of stock
option agreement specified by the Compensation Committee, which Executive will be required to sign
as a condition of retaining the Option. Executive may be eligible for future grants at the sole
discretion of the Compensation Committee.
4.4 Directed Shares. Subject to its establishment, Executive shall be entitled to
participate in the Companys IPO directed share program in accordance with its terms and on
substantially the same basis as other executive officers of the Company.
2
5. Customary Fringe Benefits. Executive will be eligible for all customary and usual
fringe benefits generally available to senior management of the Company, subject to the terms and
conditions of the Companys benefit plan documents. The Company reserves the right to change or
eliminate fringe benefits on a prospective basis, at any time, effective upon notice to Executive.
6. Business Expenses. Executive will be reimbursed for all reasonable, out-of-pocket
business expenses incurred in the performance of Executives duties on behalf of the Company. To
obtain reimbursement, expenses must be submitted promptly with appropriate supporting documentation
and will be reimbursed in accordance with the Companys policies. Any reimbursement Executive is
entitled to receive shall (a) be paid no later than the last day of Executives tax year following
the tax year in which the expense was incurred, (b) not be affected by any other expenses that are
eligible for reimbursement in any tax year, and (c) not be subject to liquidation or exchange for
another benefit.
7. Termination of Executives Employment.
7.1 Termination for Cause by Company. Although the Company anticipates a mutually
rewarding employment relationship with Executive, the Company may terminate Executives employment
immediately at any time for Cause. For purposes of this Agreement, Cause is defined as:
(a) acts or omissions constituting gross negligence, recklessness or willful misconduct on the part
of Executive with respect to Executives obligations or otherwise relating to the business of the
Company; (b) Executives material breach of this Agreement, including, without limitation, any
breach of Section 8, Section 9, or Section 11; (c) Executives breach of the Companys Employee
Nondisclosure and Assignment Agreement; (d) Executives conviction or entry of a plea of nolo
contendere for fraud, misappropriation or embezzlement, or any felony or crime of moral turpitude;
(e) Executives inability to perform the essential functions of Executives position, with or
without reasonable accommodation, due to a mental or physical disability; (f) Executives willful
neglect of duties as determined in the sole and exclusive discretion of the Board of Directors,
provided that Executive has received written notice of the action or omission giving rise to such
determination and has failed to remedy such situation to the satisfaction of the Board of Directors
within thirty (30) days following receipt of such written notice, unless Executives action or
omission is not subject to cure, in which case no such notice shall be required, or (g) Executives
death. In the event Executives employment is terminated in accordance with this subsection 7.1,
Executive shall be entitled to receive only Executives Base Salary then in effect, prorated to the
date of termination, and all fringe benefits through the date of termination. All other Company
obligations to Executive pursuant to this Agreement will be automatically terminated and completely
extinguished. Executive will not be entitled to receive the Severance Package described in
subsection 7.2 below. Any termination pursuant to this subsection 7.1 shall be evidenced by a
resolution or written consent of the Board of Directors of the Company, and the Company shall
provide Executive with a copy of such resolution or written consent, certified by the Secretary of
the Company, upon Executives written request.
7.2 Termination Without Cause by Company/Severance. The Company may terminate
Executives employment under this Agreement without Cause at any time upon written notice to
Executive. In the event of such termination, Executive will receive Executives Base Salary then
in effect, prorated to the date of termination of employment. In addition, Executive will receive
a Severance Package that shall include (a) a severance payment equivalent to twelve
(12) months of Executives Base Salary then in effect on the date of termination, payable in
accordance with the Companys regular payroll cycle commencing with
3
the first payroll date occurring on or after the 60th day following the date of Executives
termination of employment, (b) payment by the Company of the premiums required to continue
Executives group health care coverage for a period of twelve (12) months following Executives
termination, under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act
(COBRA), provided that Executive timely elects to continue and remains eligible for these
benefits under COBRA, and does not become eligible for health coverage through another employer
during this period, and (c) acceleration of the vesting of the Annual Installment under the Option
that would otherwise have vested on the next vesting date following the termination of Executives
employment. Executive will only receive the Severance Package if Executive: (i) complies with all
surviving provisions of this Agreement as specified in subsection 14.8 below; and (ii) executes a
full general release, releasing all claims, known or unknown, that Executive may have against the
Company arising out of or any way related to Executives employment or termination of employment
with the Company, and such release has become effective in accordance with its terms prior to the
60th day following the termination date. All other Company obligations to Executive will be
automatically terminated and completely extinguished.
7.3 Voluntary Resignation by Executive for Good Reason/Severance. Executive may
voluntarily resign Executives position with the Company for Good Reason at any time on thirty
(30) days advance written notice to the Company. In the event of Executives resignation for Good
Reason, Executive will be entitled to receive Executives Base Salary then in effect, prorated to
the date of termination of employment, and the Severance Package described in subsection 7.2 above,
provided Executive complies with all of the conditions described in subsection 7.2 above. All
other Company obligations to Executive pursuant to this Agreement will be automatically terminated
and completely extinguished. Executive will be deemed to have resigned for Good Reason if
Executive voluntarily terminates his employment with the Company within ninety (90) days following
the first occurrence of a condition constituting Good Reason. Good Reason means the
occurrence of any of the following conditions without Executives written consent, which
condition(s) remain(s) in effect thirty (30) days after Executive provides written notice to the
Company of such condition(s): (i) a material reduction in Executives Base Salary as then in effect
prior to such reduction, other than as part of a salary reduction program among similar management
employees, (ii) a material diminution in Executives authority, duties or responsibilities as an
employee of the Company as they existed prior to such change, or (iii) a relocation of Executives
principal place of work which increases Executives one-way commute distance by more than fifty
(50) miles. Executive will be deemed to have given consent to any condition(s) described in this
subsection if Executive does not provide written notice to the Company of his intent to exercise
his rights pursuant to this subsection within thirty (30) days following the first occurrence of
such condition(s).
7.4 Voluntary Resignation by Executive Without Good Reason. Executive may voluntarily
resign Executives position with the Company without Good Reason at any time on thirty (30) days
advance written notice to the Company. In the event of Executives resignation without Good
Reason, Executive will be entitled to receive only Executives Base Salary, prorated to the date of
termination of employment, and all fringe benefits through the date of termination. All other
Company obligations to Executive pursuant to this Agreement will be automatically terminated and
completely extinguished. In addition, Executive will not be entitled to receive the Severance
Package described in subsection 7.2 above.
4
7.5 Termination After a Change in Control.
(a) Severance Payment; Option Vesting Acceleration. If, upon or within twelve
(12) months after a Change in Control (as that term is defined below), Executives employment is
terminated by the Company other than for Cause (as defined in subsection 7.1 above) or Executive
resigns for Good Reason (as defined in subsection 7.3 above), then (i) Executive shall be entitled
to receive (A) Executives Base Salary, prorated to the date of termination of employment, and (B)
the Severance Package described in subsection 7.2 above, provided Executive complies with all of
the conditions described in subsection 7.2 above, and (ii) to the extent not yet vested, the Option
and any other stock options granted to Executive by the Company shall vest in full as of the date
of such termination of employment, provided Executive complies with the conditions described in
subsection 7.2 above.
(b) Parachute Payments. If, due to the benefits provided under subsection 7.5(a) and
any other payments or benefits, Executive would be subject to any excise tax pursuant to
Section 4999 of the Internal Revenue Code of 1986, as amended (the Code) due to
characterization of any such amounts as excess parachute payments pursuant to Section 280G of the
Code, the amounts payable under subsection 7.5(a) will be reduced (to the least extent possible) in
order to avoid any excess parachute payment under Section 280G(b)(1) of the Code.
(c) Change in Control. A Change in Control is defined as any one of the following
occurrences:
(i) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934 (the Exchange Act)), becomes the beneficial owner (as such term is defined
in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the
Company representing more than fifty percent (50%) of the total fair market value or total combined
voting power of the Companys then-outstanding securities entitled to vote generally in the
election of directors; provided, however, that a Change in Control shall not be deemed to have
occurred if such degree of beneficial ownership results from any of the following: (A) an
acquisition of securities by any person who on the Effective Date is the beneficial owner of more
than fifty percent (50%) of such voting power, (B) any acquisition of securities directly from the
Company, including, without limitation, pursuant to or in connection with a public offering of
securities, (C) any acquisition of securities by the Company, (D) any acquisition of securities by
a trustee or other fiduciary under an employee benefit plan of the Company, or (E) any acquisition
of securities by an entity owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the voting securities of the Company; or
(ii) the sale or disposition of all or substantially all of the Companys assets (other than a
sale or disposition to one or more subsidiaries of the Company), or any transaction having similar
effect is consummated; or
(iii) the Company is party to a merger or consolidation that results in the holders of voting
securities of the Company outstanding immediately prior thereto failing to continue to represent
(either by remaining outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation; or
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(iv) the dissolution or liquidation of the Company.
7.6 Termination of Employment Upon Nonrenewal. In the event either party decides not
to renew this Agreement for a subsequent term in accordance with subsection 3.2 above, this Agreement
will expire, Executives employment with the Company will terminate and Executive will only be
entitled to Executives Base Salary then in effect paid through the last day of the then current
term. All other Company obligations to Executive pursuant to this Agreement will be automatically
terminated and completely extinguished. Executive will not be entitled to receive the Severance
Package described in subsection 7.2 above, but shall be subject to the surviving provisions of this
Agreement as set forth in section 14.8 below.
7.7 Resignation of Board or Other Positions. Executive agrees that should Executives
employment terminate for any reason, Executive will immediately resign all other positions
(including board membership) Executive may hold on behalf of the Company.
7.8 Application of Section 409A.
(a) Notwithstanding anything set forth in this Agreement to the contrary, no amount payable
pursuant to this Agreement on account of Executives termination of employment with the Company
which constitutes a deferral of compensation within the meaning of the Treasury Regulations
issued pursuant to Section 409A of the Code (the Section 409A Regulations) shall be paid
unless and until Executive has incurred a separation from service within the meaning of the
Section 409A Regulations. Furthermore, if Executive is a specified employee within the meaning
of the Section 409A Regulations as of the date of Executives separation from service, no amount
that constitutes a deferral of compensation which is payable on account of Executives separation
from service shall be paid to Executive before the date (the Delayed Payment Date) which
is first day of the seventh month after the date of Executives separation from service or, if
earlier, the date of Executives death following such separation from service. All such amounts
that would, but for this subsection, become payable prior to the Delayed Payment Date will be
accumulated and paid on the Delayed Payment Date.
(b) The Company intends that income provided to Executive pursuant to this Agreement will not
be subject to taxation under Section 409A of the Code. The provisions of this Agreement shall be
interpreted and construed in favor of satisfying any applicable requirements of Section 409A of the
Code. However, the Company does not guarantee any particular tax effect for income provided to
Executive pursuant to this Agreement. In any event, except for the Companys responsibility to
withhold applicable income and employment taxes from compensation paid or provided to Executive,
the Company shall not be responsible for the payment of any applicable taxes incurred by Executive
on compensation paid or provided to Executive pursuant to this Agreement.
8. No Violation of Rights of Third Parties. Executive represents and warrants to the
Company that Executive is not currently a party, and will not become a party, to any other
agreement that is in conflict with, or will prevent Executive from complying with, with this
Agreement. Executive further represents and warrants to the Company that Executives performance
of all of the terms of this Agreement as an employee of the Company does not and will not breach
any agreement to keep in confidence any proprietary information, knowledge, or data acquired by
Executive in confidence or trust prior to Executives employment with the Company. Executive
acknowledges and agrees that the representations and warranties in this Section 8 are a material
part of this Agreement.
6
9. Other Covenants. Executive hereby makes the following covenants, each of which
Executive acknowledges and agrees are a material part of this Agreement:
9.1 During the Term of Executives employment with the Company, Executive will not (a) breach
any agreement to keep in confidence any confidential or proprietary information, knowledge or data
acquired by Executive prior to Executives employment with Company, or (b) disclose to the Company,
or use or induce the Company to use, any confidential or proprietary information or material
belonging to any previous employer or any other third party. Executive acknowledges that the
Company has specifically instructed Executive not to breach any such agreement or make any such
disclosures to the Company.
9.2 During the Term of Executives employment with the Company, Executive will not engage in
any work or activity, paid or unpaid, that creates an actual conflict of interest with the Company.
Such work shall include, but is not limited to, directly or indirectly competing with the Company
in any way, or acting as an officer, director, employee, consultant, stockholder, volunteer,
lender, or agent of any business enterprise of the same nature as, or which is in direct
competition with, the business in which the Company is now engaged or in which the Company becomes
engaged during the term of Executives employment with the Company, as may be determined by the
Company in its sole discretion. If the Company believes such a conflict exists during the term of
this Agreement, the Company may ask Executive to choose to discontinue the other work or activity
or resign employment with the Company.
9.3 During the Term of Executives employment with the Company and after the termination
thereof, neither Executive nor the Company will disparage each other, or the Companys products,
services, agents or employees.
9.4 During the Term of Executives employment with the Company and after the termination
thereof, at the Companys expense and upon its reasonable request, Executive will cooperate and
assist the Company in its defense or prosecution of any disputes, differences, grievances, claims,
charges, or complaints between the Company and any third party, which assistance will include
testifying on the Companys behalf in connection with any such matter or performing any other task
reasonably requested by the Company in connection therewith.
10. Confidentiality and Proprietary Rights. Executive agrees to read, sign and abide
by the Companys Employee Nondisclosure and Assignment Agreement, which is provided with this
Agreement and incorporated herein by reference.
11. Non-Competition; Nonsolicitation of Companys Employees. Executive acknowledges
that in the course of his employment with the Company he will serve as a member of the Companys
senior management and will become familiar with the Companys trade secrets and with other
confidential and proprietary information and that his services will be of special, unique and
extraordinary value to the Company. Executive further acknowledges that the Companys business, a
substantial portion of which is conducted online, is national in scope and that the Company, in the
course of such business, recruits students and faculty throughout the United States, works with
vendors throughout the United States, and competes with other companies located throughout the
United States. Therefore, in consideration of the foregoing, Executive agrees that, during the
Term, and during the twelve-month (12) month period following the Term, he shall not directly or
indirectly anywhere within the United States of America (a) own (except ownership of less than 1%
of any class of securities which are listed
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for trading on any securities exchange or which are traded in the over-the-counter market),
manage, control, participate in, consult with, render services for, be employed by, or in any
manner engage in the operation of (i) a for-profit, post-secondary education institution, or (ii)
any other business of the Company in which Executive had significant involvement prior to
Executives separation; (b) solicit funds on behalf of, or for the benefit of, any for-profit,
post-secondary education institution (other than the Company) or any other entity that competes
with the Company; (c) solicit individuals who are current or prospective students of the Company to
be students for any other for-profit, post-secondary education institution; (d) induce or attempt
to induce any employee of the Company to leave the employ of the Company, or in any way interfere
with the relationship between the Company and any employee thereof, or (e) induce or attempt to
induce any student, customer, supplier, licensee or other business relation of the Company to cease
doing business with, or modify its business relationship with, the Company, or in any way interfere
with or hinder the relationship between any such student, customer, supplier, licensee or business
relation and the Company.
12. Injunctive Relief. Executive acknowledges that Executives breach of the
covenants contained in sections 9-11 hereof (collectively Covenants) would cause
irreparable injury to the Company and agrees that in the event of any such breach, the Company
shall be entitled to seek temporary, preliminary and permanent injunctive relief without the
necessity of proving actual damages or posting any bond or other security in addition to any other
relief to which the Company may be entitled and other remedies Company may exercise under this
Agreement or otherwise.
13. Insurance; Indemnification.
13.1 During the Term of Executives employment hereunder, Executive will be covered by the
Companys director and officer insurance policy to the same extent as all other senior executive
officers of the Company
13.2 Following the execution of this Agreement, the Company will execute and deliver a
director and officer indemnification agreement with Executive in a form approved by the Board of
Directors for the senior executive officers of the Company.
14. General Provisions.
14.1 Successors and Assigns. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the
Company. Executive shall not be entitled to assign any of Executives rights or obligations under
this Agreement.
14.2 Waiver. Either partys failure to enforce any provision of this Agreement shall
not in any way be construed as a waiver of any such provision, or prevent that party thereafter
from enforcing each and every other provision of this Agreement.
14.3 Attorneys Fees. In the event of a dispute involving the interpretation or
enforcement of this Agreement, a court shall award attorneys fees and costs to the prevailing
party.
14.4 Severability. In the event any provision of this Agreement is found to be
unenforceable by a court of competent jurisdiction, such provision shall be deemed modified to the
extent necessary to allow enforceability of the provision as so limited, it being intended that
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the parties shall receive the benefit contemplated herein to the fullest extent permitted by
law. If a deemed modification is not satisfactory in the judgment of such court, the unenforceable
provision shall be deemed deleted, and the validity and enforceability of the remaining provisions
shall not be affected thereby.
14.5 Interpretation; Construction. The headings set forth in this Agreement are for
convenience only and shall not be used in interpreting this Agreement. This Agreement has been
drafted by legal counsel representing the Company, but Executive has participated in the
negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an
opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired,
and, therefore, the normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation of this Agreement.
14.6 Governing Law; Forum. This Agreement will be governed by and construed in
accordance with the laws of the United States and the State of Arizona . Each party consents to
the jurisdiction and venue of the state or federal courts in Phoenix, Arizona, if applicable, in
any action, suit, or proceeding arising out of or relating to this Agreement, and agrees that the
state or federal courts in Phoenix, Arizona shall have exclusive jurisdiction over any dispute
arising between the parties related to this Agreement or Executives employment with the Company.
14.7 Notices. Any notice required or permitted by this Agreement shall be in writing
and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery
when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by
telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or
(d) by certified or registered mail, return receipt requested, upon verification of receipt.
Notice shall be sent to the addresses set forth under the signatures below, or such other address
as either party may specify in writing.
14.8 Survival. Sections 9 (Other Covenants), 10 (Confidentiality and Proprietary
Rights), 11 (Non-Competition; Nonsolicitation), 12 (Injunctive Relief), 13 (General
Provisions) and 14 (Entire Agreement) of this Agreement shall survive termination of Executives
employment with the Company.
15. Entire Agreement. This Agreement, including the Employee Nondisclosure and
Assignment Agreement incorporated herein by reference and the Companys 2008 Equity Incentive Plan
and related option documents described in Section 4.3 of this Agreement, constitutes the entire
agreement between the parties relating to this subject matter and supersedes all prior or
simultaneous representations, discussions, negotiations, and agreements, whether written or oral.
This agreement may be amended or modified only with the written consent of Executive and the Board.
No oral waiver, amendment or modification will be effective under any circumstances whatsoever.
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THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY
PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN
BELOW.
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DANIEL E. BACHUS
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Dated: June 25, 2008 |
By: |
/s/ Daniel E. Bachus
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Address: |
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GRAND CANYON EDUCATION, INC.
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Dated: June 27, 2008 |
By: |
/s/ Christopher C. Richardson
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Name: |
Christopher C. Richardson |
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Title: |
General Counsel and Director
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Address: |
3300 West Camelback Road
Phoenix, Arizona 85017 |
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10
exv10w20
Exhibit 10.20
EXECUTIVE EMPLOYMENT AGREEMENT
(Chief Executive Officer)
This Executive Employment Agreement (the Agreement) is entered into on June 25,
2008, by and between Grand Canyon Education, Inc., a Delaware corporation (the Company),
and Brian E. Mueller (Executive).
The parties agree as follows:
1. Employment. The Company hereby employs Executive, and Executive hereby accepts
such employment, upon the terms and conditions set forth herein.
2. Duties.
2.1 Position. Executive is employed as Chief Executive Officer and shall have the
duties and responsibilities assigned by the Companys Executive Chairman and Board of Directors
both upon initial hire and as may be reasonably assigned from time to time. Executive shall
perform faithfully and diligently all duties assigned to Executive. The Company reserves the right
to modify Executives position and duties at any time in its sole and absolute discretion, except
that any material diminution in Executives duties shall be subject to Section 7.3(ii) below.
2.2 Best Efforts/Full-time. Executive will expend Executives best efforts on behalf
of the Company, and will abide by all policies and decisions made by the Company, as well as all
applicable federal, state and local laws, regulations or ordinances. Executive will act in the
best interest of the Company at all times. Executive shall devote Executives full business time
and efforts to the performance of Executives assigned duties for the Company, unless Executive
notifies the Board of Directors in advance of Executives intent to engage in other paid work and
receives Board of Directors express written consent to do so. Notwithstanding the foregoing,
Executive will be permitted to serve as an outside director on the board of directors for
corporate, civic, nonprofit or charitable entities, so long as Executive obtains the consent of the
Company and provided such entities are not competitive with the Company and subject to the
provisions of section 9 below.
2.3 Work Location. Executives principal place of work shall be located in Phoenix,
Arizona, or such other location as the Company may direct from time to time.
3. Term.
3.1 Initial Term. The employment relationship pursuant to this Agreement shall be for
an initial term commencing on July 1, 2008 (the Effective Date) and continuing for a
period of four (4) years following such date (Initial Term), unless sooner terminated in
accordance with section 7 below.
3.2 Renewal. On expiration of the Initial Term specified in subsection 3.1 above, this
Agreement will automatically renew for subsequent one (1) year terms (each a Renewal
Term) unless either party provides thirty (30) days advance written notice to the other that
the Company or Executive does not wish to renew the Agreement for subsequent Renewal Term. In the
event either party gives notice of nonrenewal pursuant to this
1
subsection 3.2, this Agreement will expire at the end of the then current term. The Initial
Term and each subsequent Renewal Term are referred to collectively as the Term.
4. Compensation.
4.1 Base Salary. As compensation for Executives performance of Executives duties
hereunder, the Company shall pay to Executive an initial Base Salary at the rate of Five-Hundred
Thousand Dollars ($500,000.00) per year payable in accordance with the normal payroll practices of
the Company, less required deductions for state and federal withholding tax, social security and
all other employment taxes and payroll deductions. In the event Executives employment under this
Agreement is terminated by either party, for any reason, Executive will earn the Base Salary
prorated to the date of termination, except as otherwise set forth herein. Executives Base Salary
shall be reviewed annually by the Compensation Committee of the Companys Board of Directors (the
Compensation Committee).
4.2 Incentive Compensation. For the fiscal year of the Company ending December 31,
2008, and provided Executive remains employed with the Company as of such date, Executive will be
eligible to receive a bonus equal to Two-Hundred Fifty Thousand Dollars ($250,000.00). Thereafter,
Executive will be eligible to earn incentive compensation in the form of an annual bonus for each
fiscal year of the Company with a target amount of one hundred percent (100%) of Executives Base
Salary. The Compensation Committee will determine the actual amount of the bonus earned for any
year, which may be more than one hundred percent (100%) of Executives Base Salary, and will base
such determination upon both the Companys achievement of overall performance metrics for the year
and Executives achievement of individual performance metrics as agreed upon by the Compensation
Committee and the Executive. Bonus amounts, if any, are to be awarded annually and payment shall
be made within two and one-half months following the end of the applicable Company fiscal year.
4.3 Stock Options. Upon approval by Compensation Committee, Executive will be granted
immediately prior to the Companys intended initial public offering (the IPO) an option
(the Option) to purchase shares of the Companys Common Stock under the Companys 2008
Equity Incentive Plan (the Plan) at an exercise price per share equal to the IPO offering
price per share. The number of shares subject to such Option shall be equal to 2.5% of the sum of
(a) the number of shares of Common Stock of the Company issued and outstanding as of the date of
grant of the Option, plus (b) the number of shares of Common Stock to be issued in connection with
the IPO as set forth in the agreement between the Company and the underwriters of the IPO (but
without giving effect to any Green Shoe or overallotment option that may become exercisable by
the underwriters), plus (c) the number of shares of Common Stock to be issued upon conversion of
the Companys outstanding shares of preferred stock in connection with the IPO. Subject to
Executives continued employment, the Option will vest and become exercisable in five equal annual
installments (each, an Annual Installment) over a five (5) year period beginning on the
grant date. The Option will be subject to the terms and conditions of the Plan and a form of stock
option agreement specified by the Compensation Committee, which Executive will be required to sign
as a condition of retaining the Option. Executive may be eligible for future grants at the sole
discretion of the Compensation Committee.
4.4 Stock Grant. Upon approval by Compensation Committee, Executive will be granted
immediately prior to the Companys intended IPO shares of the Companys Common Stock under the Plan
(the Stock Grant). The number of shares subject to such Stock Grant
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shall be equal to 0.25% of the sum of (a) the number of shares of Common Stock of the Company
issued and outstanding as of the date of stock grant, plus (b) the number of shares of Common Stock
to be issued in connection with the IPO as set forth in the agreement between the Company and the
underwriters of the IPO (but without giving effect to any Green Shoe or overallotment option
that may become exercisable by the underwriters), plus (c) the number of shares of Common Stock to
be issued upon conversion of the Companys outstanding shares of preferred stock in connection with
the IPO. The shares subject to the Stock Grant shall be fully vested upon grant. The Stock Grant
will be subject to the terms and conditions of the Plan and a form of stock grant agreement
specified by the Compensation Committee, which Executive will be required to sign as a condition of
retaining the Stock Grant. Executive may be eligible for future stock grants at the sole
discretion of the Compensation Committee.
4.5 Directed Shares. Subject to its establishment, Executive shall be entitled to
participate in the Companys IPO directed share program in accordance with its terms and on
substantially the same basis as other executive officers of the Company.
5. Customary Fringe Benefits. Executive will be eligible for all customary and usual
fringe benefits generally available to senior management of the Company, subject to the terms and
conditions of the Companys benefit plan documents. The Company reserves the right to change or
eliminate fringe benefits on a prospective basis, at any time, effective upon notice to Executive.
6. Business Expenses. Executive will be reimbursed for all reasonable, out-of-pocket
business expenses incurred in the performance of Executives duties on behalf of the Company. To
obtain reimbursement, expenses must be submitted promptly with appropriate supporting documentation
and will be reimbursed in accordance with the Companys policies. Any reimbursement Executive is
entitled to receive shall (a) be paid no later than the last day of Executives tax year following
the tax year in which the expense was incurred, (b) not be affected by any other expenses that are
eligible for reimbursement in any tax year, and (c) not be subject to liquidation or exchange for
another benefit.
7. Termination of Executives Employment.
7.1 Termination for Cause by Company. Although the Company anticipates a mutually
rewarding employment relationship with Executive, the Company may terminate Executives employment
immediately at any time for Cause. For purposes of this Agreement, Cause is defined as:
(a) acts or omissions constituting gross negligence, recklessness or willful misconduct on the part
of Executive with respect to Executives obligations or otherwise relating to the business of the
Company; (b) Executives material breach of this Agreement, including, without limitation, any
breach of Section 8, Section 9, or Section 11; (c) Executives breach of the Companys Employee
Nondisclosure and Assignment Agreement; (d) Executives conviction or entry of a plea of nolo
contendere for fraud, misappropriation or embezzlement, or any felony or crime of moral turpitude;
(e) Executives inability to perform the essential functions of Executives position, with or
without reasonable accommodation, due to a mental or physical disability; (f) Executives willful
neglect of duties as determined in the sole and exclusive discretion of the Board of Directors,
provided that Executive has received written notice of the action or omission giving rise to such
determination and has failed to remedy such situation to the satisfaction of the Board of Directors
within thirty (30) days following receipt of such written notice, unless Executives action or
omission is not subject to cure, in which case no such notice shall be required, or (g) Executives
death. In the event Executives employment is terminated in accordance with this subsection 7.1,
Executive shall be entitled to receive only Executives
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Base Salary then in effect, prorated to the date of termination, and all fringe benefits
through the date of termination. All other Company obligations to Executive pursuant to this
Agreement will be automatically terminated and completely extinguished. Executive will not be
entitled to receive the Severance Package described in subsection 7.2 below. Any termination
pursuant to this subsection 7.1 shall be evidenced by a resolution or written consent of the Board
of Directors of the Company, and the Company shall provide Executive with a copy of such resolution
or written consent, certified by the Secretary of the Company, upon Executives written request.
7.2 Termination Without Cause by Company/Severance. The Company may terminate
Executives employment under this Agreement without Cause at any time upon written notice to
Executive. In the event of such termination, Executive will receive Executives Base Salary then
in effect, prorated to the date of termination of employment. In addition, Executive will receive
a Severance Package that shall include (a) a severance payment equivalent to twelve
(12) months of Executives Base Salary then in effect on the date of termination, payable in
accordance with the Companys regular payroll cycle commencing with the first payroll date
occurring on or after the 60th day following the date of Executives termination of employment,
(b) payment by the Company of the premiums required to continue Executives group health care
coverage for a period of twelve (12) months following Executives termination, under the applicable
provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA), provided that
Executive timely elects to continue and remains eligible for these benefits under COBRA, and does
not become eligible for health coverage through another employer during this period, and (c)
acceleration of the vesting of the Annual Installment under the Option that would otherwise have
vested on the next vesting date following the termination of Executives employment. Executive
will only receive the Severance Package if Executive: (i) complies with all surviving provisions
of this Agreement as specified in subsection 14.8 below; and (ii) executes a full general release,
releasing all claims, known or unknown, that Executive may have against the Company arising out of
or any way related to Executives employment or termination of employment with the Company, and
such release has become effective in accordance with its terms prior to the 60th day following the
termination date. All other Company obligations to Executive will be automatically terminated and
completely extinguished.
7.3 Voluntary Resignation by Executive for Good Reason/Severance. Executive may
voluntarily resign Executives position with the Company for Good Reason at any time on thirty
(30) days advance written notice to the Company. In the event of Executives resignation for Good
Reason, Executive will be entitled to receive Executives Base Salary then in effect, prorated to
the date of termination of employment, and the Severance Package described in subsection 7.2 above,
provided Executive complies with all of the conditions described in subsection 7.2 above. All
other Company obligations to Executive pursuant to this Agreement will be automatically terminated
and completely extinguished. Executive will be deemed to have resigned for Good Reason if
Executive voluntarily terminates his employment with the Company within ninety (90) days following
the first occurrence of a condition constituting Good Reason. Good Reason means the
occurrence of any of the following conditions without Executives written consent, which
condition(s) remain(s) in effect thirty (30) days after Executive provides written notice to the
Company of such condition(s): (i) a material reduction in Executives Base Salary as then in effect
prior to such reduction, other than as part of a salary reduction program among similar management
employees, (ii) a material diminution in Executives authority, duties or responsibilities as an
employee of the Company as they existed prior to such change, or (iii) a relocation of Executives
principal place of work which increases Executives one-way commute distance by more than fifty
(50) miles. Executive will
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be deemed to have given consent to any condition(s) described in this subsection if Executive
does not provide written notice to the Company of his intent to exercise his rights pursuant to
this subsection within thirty (30) days following the first occurrence of such condition(s).
7.4 Voluntary Resignation by Executive Without Good Reason. Executive may voluntarily
resign Executives position with the Company without Good Reason at any time on thirty (30) days
advance written notice to the Company. In the event of Executives resignation without Good
Reason, Executive will be entitled to receive only Executives Base Salary, prorated to the date of
termination of employment, and all fringe benefits through the date of termination. All other
Company obligations to Executive pursuant to this Agreement will be automatically terminated and
completely extinguished. In addition, Executive will not be entitled to receive the Severance
Package described in subsection 7.2 above.
7.5 Termination After a Change in Control.
(a) Severance Payment; Option Vesting Acceleration. If, upon or within twelve
(12) months after a Change in Control (as that term is defined below), Executives employment is
terminated by the Company other than for Cause (as defined in subsection 7.1 above) or Executive
resigns for Good Reason (as defined in subsection 7.3 above), then (i) Executive shall be entitled
to receive (A) Executives Base Salary, prorated to the date of termination of employment, and (B)
the Severance Package described in subsection 7.2 above, provided Executive complies with all of
the conditions described in subsection 7.2 above, and (ii) to the extent not yet vested, the Option
and any other stock options granted to Executive by the Company shall vest in full as of the date
of such termination of employment, provided Executive complies with the conditions described in
subsection 7.2 above.
(b) Parachute Payments. If, due to the benefits provided under subsection 7.5(a) and
any other payments or benefits, Executive would be subject to any excise tax pursuant to
Section 4999 of the Internal Revenue Code of 1986, as amended (the Code) due to
characterization of any such amounts as excess parachute payments pursuant to Section 280G of the
Code, the amounts payable under subsection 7.5(a) will be reduced (to the least extent possible) in
order to avoid any excess parachute payment under Section 280G(b)(1) of the Code.
(c) Change in Control. A Change in Control is defined as any one of the following
occurrences:
(i) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934 (the Exchange Act)), becomes the beneficial owner (as such term is defined
in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the
Company representing more than fifty percent (50%) of the total fair market value or total combined
voting power of the Companys then-outstanding securities entitled to vote generally in the
election of directors; provided, however, that a Change in Control shall not be deemed to have
occurred if such degree of beneficial ownership results from any of the following: (A) an
acquisition of securities by any person who on the Effective Date is the beneficial owner of more
than fifty percent (50%) of such voting power, (B) any acquisition of securities directly from the
Company, including, without limitation, pursuant to or in connection with a public offering of
securities, (C) any acquisition of securities by the Company, (D) any acquisition of securities by
a trustee or other fiduciary under an employee benefit plan of the Company, or (E) any acquisition
of securities by an entity owned directly or indirectly by the
5
stockholders of the Company in substantially the same proportions as their ownership of the
voting securities of the Company; or
(ii) the sale or disposition of all or substantially all of the Companys assets (other than a
sale or disposition to one or more subsidiaries of the Company), or any transaction having similar
effect is consummated; or
(iii) the Company is party to a merger or consolidation that results in the holders of voting
securities of the Company outstanding immediately prior thereto failing to continue to represent
(either by remaining outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation; or
(iv) the dissolution or liquidation of the Company.
7.6 Termination of Employment Upon Nonrenewal. In the event either party decides not
to renew this Agreement for a subsequent term in accordance with subsection 3.2 above, this Agreement
will expire, Executives employment with the Company will terminate and Executive will only be
entitled to Executives Base Salary then in effect paid through the last day of the then current
term. All other Company obligations to Executive pursuant to this Agreement will be automatically
terminated and completely extinguished. Executive will not be entitled to receive the Severance
Package described in subsection 7.2 above, but shall be subject to the surviving provisions of this
Agreement as set forth in section 14.8 below.
7.7 Resignation of Board or Other Positions. Executive agrees that should Executives
employment terminate for any reason, Executive will immediately resign all other positions
(including board membership) Executive may hold on behalf of the Company.
7.8 Application of Section 409A.
(a) Notwithstanding anything set forth in this Agreement to the contrary, no amount payable
pursuant to this Agreement on account of Executives termination of employment with the Company
which constitutes a deferral of compensation within the meaning of the Treasury Regulations
issued pursuant to Section 409A of the Code (the Section 409A Regulations) shall be paid
unless and until Executive has incurred a separation from service within the meaning of the
Section 409A Regulations. Furthermore, if Executive is a specified employee within the meaning
of the Section 409A Regulations as of the date of Executives separation from service, no amount
that constitutes a deferral of compensation which is payable on account of Executives separation
from service shall be paid to Executive before the date (the Delayed Payment Date) which
is first day of the seventh month after the date of Executives separation from service or, if
earlier, the date of Executives death following such separation from service. All such amounts
that would, but for this subsection, become payable prior to the Delayed Payment Date will be
accumulated and paid on the Delayed Payment Date.
(b) The Company intends that income provided to Executive pursuant to this Agreement will not
be subject to taxation under Section 409A of the Code. The provisions of this Agreement shall be
interpreted and construed in favor of satisfying any applicable requirements of Section 409A of the
Code. However, the Company does not guarantee any particular tax effect for income provided to
Executive pursuant to this
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Agreement. In any event, except for the Companys responsibility to withhold applicable
income and employment taxes from compensation paid or provided to Executive, the Company shall not
be responsible for the payment of any applicable taxes incurred by Executive on compensation paid
or provided to Executive pursuant to this Agreement.
8. No Violation of Rights of Third Parties. Executive represents and warrants to the
Company that Executive is not currently a party, and will not become a party, to any other
agreement that is in conflict with, or will prevent Executive from complying with, with this
Agreement. Executive further represents and warrants to the Company that Executives performance
of all of the terms of this Agreement as an employee of the Company does not and will not breach
any agreement to keep in confidence any proprietary information, knowledge, or data acquired by
Executive in confidence or trust prior to Executives employment with the Company. Executive
acknowledges and agrees that the representations and warranties in this Section 8 are a material
part of this Agreement.
9. Other Covenants. Executive hereby makes the following covenants, each of which
Executive acknowledges and agrees are a material part of this Agreement:
9.1 During the Term of Executives employment with the Company, Executive will not (a) breach
any agreement to keep in confidence any confidential or proprietary information, knowledge or data
acquired by Executive prior to Executives employment with Company, or (b) disclose to the Company,
or use or induce the Company to use, any confidential or proprietary information or material
belonging to any previous employer or any other third party. Executive acknowledges that the
Company has specifically instructed Executive not to breach any such agreement or make any such
disclosures to the Company.
9.2 During the Term of Executives employment with the Company, Executive will not engage in
any work or activity, paid or unpaid, that creates an actual conflict of interest with the Company.
Such work shall include, but is not limited to, directly or indirectly competing with the Company
in any way, or acting as an officer, director, employee, consultant, stockholder, volunteer,
lender, or agent of any business enterprise of the same nature as, or which is in direct
competition with, the business in which the Company is now engaged or in which the Company becomes
engaged during the term of Executives employment with the Company, as may be determined by the
Company in its sole discretion. If the Company believes such a conflict exists during the term of
this Agreement, the Company may ask Executive to choose to discontinue the other work or activity
or resign employment with the Company.
9.3 During the Term of Executives employment with the Company and after the termination
thereof, neither Executive nor the Company will disparage each other, or the Companys products,
services, agents or employees.
9.4 During the Term of Executives employment with the Company and after the termination
thereof, at the Companys expense and upon its reasonable request, Executive will cooperate and
assist the Company in its defense or prosecution of any disputes, differences, grievances, claims,
charges, or complaints between the Company and any third party, which assistance will include
testifying on the Companys behalf in connection with any such matter or performing any other task
reasonably requested by the Company in connection therewith.
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10. Confidentiality and Proprietary Rights. Executive agrees to read, sign and abide
by the Companys Employee Nondisclosure and Assignment Agreement, which is provided with this
Agreement and incorporated herein by reference.
11. Non-Competition; Nonsolicitation of Companys Employees. Executive acknowledges
that in the course of his employment with the Company he will serve as a member of the Companys
senior management and will become familiar with the Companys trade secrets and with other
confidential and proprietary information and that his services will be of special, unique and
extraordinary value to the Company. Executive further acknowledges that the Companys business, a
substantial portion of which is conducted online, is national in scope and that the Company, in the
course of such business, recruits students and faculty throughout the United States, works with
vendors throughout the United States, and competes with other companies located throughout the
United States. Therefore, in consideration of the foregoing, Executive agrees that, during the
Term, and during the twelve-month (12) month period following the Term, he shall not directly or
indirectly anywhere within the United States of America (a) own (except ownership of less than 1%
of any class of securities which are listed for trading on any securities exchange or which are
traded in the over-the-counter market), manage, control, participate in, consult with, render
services for, be employed by, or in any manner engage in the operation of (i) a for-profit,
post-secondary education institution, or (ii) any other business of the Company in which Executive
had significant involvement prior to Executives separation; (b) solicit funds on behalf of, or for
the benefit of, any for-profit, post-secondary education institution (other than the Company) or
any other entity that competes with the Company; (c) solicit individuals who are current or
prospective students of the Company to be students for any other for-profit, post-secondary
education institution; (d) induce or attempt to induce any employee of the Company to leave the
employ of the Company, or in any way interfere with the relationship between the Company and any
employee thereof, or (e) induce or attempt to induce any student, customer, supplier, licensee or
other business relation of the Company to cease doing business with, or modify its business
relationship with, the Company, or in any way interfere with or hinder the relationship between any
such student, customer, supplier, licensee or business relation and the Company.
12. Injunctive Relief. Executive acknowledges that Executives breach of the
covenants contained in sections 9-11 hereof (collectively Covenants) would cause
irreparable injury to the Company and agrees that in the event of any such breach, the Company
shall be entitled to seek temporary, preliminary and permanent injunctive relief without the
necessity of proving actual damages or posting any bond or other security in addition to any other
relief to which the Company may be entitled and other remedies Company may exercise under this
Agreement or otherwise.
13. Insurance; Indemnification.
13.1 During the Term of Executives employment hereunder, Executive will be covered by the
Companys director and officer insurance policy to the same extent as all other senior executive
officers of the Company
13.2 Following the execution of this Agreement, the Company will execute and deliver a
director and officer indemnification agreement with Executive in a form approved by the Board of
Directors for the senior executive officers of the Company.
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14. General Provisions.
14.1 Successors and Assigns. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the
Company. Executive shall not be entitled to assign any of Executives rights or obligations under
this Agreement.
14.2 Waiver. Either partys failure to enforce any provision of this Agreement shall
not in any way be construed as a waiver of any such provision, or prevent that party thereafter
from enforcing each and every other provision of this Agreement.
14.3 Attorneys Fees. In the event of a dispute involving the interpretation or
enforcement of this Agreement, a court shall award attorneys fees and costs to the prevailing
party.
14.4 Severability. In the event any provision of this Agreement is found to be
unenforceable by a court of competent jurisdiction, such provision shall be deemed modified to the
extent necessary to allow enforceability of the provision as so limited, it being intended that the
parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a
deemed modification is not satisfactory in the judgment of such court, the unenforceable provision
shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not
be affected thereby.
14.5 Interpretation; Construction. The headings set forth in this Agreement are for
convenience only and shall not be used in interpreting this Agreement. This Agreement has been
drafted by legal counsel representing the Company, but Executive has participated in the
negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an
opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired,
and, therefore, the normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation of this Agreement.
14.6 Governing Law; Forum. This Agreement will be governed by and construed in
accordance with the laws of the United States and the State of Arizona . Each party consents to
the jurisdiction and venue of the state or federal courts in Phoenix, Arizona, if applicable, in
any action, suit, or proceeding arising out of or relating to this Agreement, and agrees that the
state or federal courts in Phoenix, Arizona shall have exclusive jurisdiction over any dispute
arising between the parties related to this Agreement or Executives employment with the Company.
14.7 Notices. Any notice required or permitted by this Agreement shall be in writing
and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery
when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by
telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or
(d) by certified or registered mail, return receipt requested, upon verification of receipt.
Notice shall be sent to the addresses set forth under the signatures below, or such other address
as either party may specify in writing.
14.8 Survival. Sections 9 (Other Covenants), 10 (Confidentiality and Proprietary
Rights), 11 (Non-Competition; Nonsolicitation), 12 (Injunctive Relief),
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13 (General Provisions) and 14 (Entire Agreement) of this Agreement shall survive
termination of Executives employment with the Company.
15. Entire Agreement. This Agreement, including the Employee Nondisclosure and
Assignment Agreement incorporated herein by reference and the Companys 2008 Equity Incentive Plan
and related option and stock grant documents described in Section 4.2 and Section 4.4 of this
Agreement, constitutes the entire agreement between the parties relating to this subject matter and
supersedes all prior or simultaneous representations, discussions, negotiations, and agreements,
whether written or oral. This agreement may be amended or modified only with the written consent
of Executive and the Board. No oral waiver, amendment or modification will be effective under any
circumstances whatsoever.
THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY
PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN
BELOW.
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BRIAN E. MUELLER
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Dated: June 25, 2008 |
By: |
/s/ Brian E. Mueller
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Address: |
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GRAND CANYON EDUCATION, INC.
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Dated: June 27, 2008 |
By: |
/s/ Christopher C. Richardson
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Name: |
Christopher C. Richardson |
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Title: |
General Counsel and Director
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Address: |
3300 West Camelback Road
Phoenix, Arizona 85017 |
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exv10w21
Exhibit 10.21
EXECUTIVE EMPLOYMENT AGREEMENT
(Executive Vice President)
This Executive Employment Agreement (the Agreement) is entered into on June 25,
2008, by and between Grand Canyon Education, Inc., a Delaware corporation (the Company),
and W. Stan Meyer (Executive).
The parties agree as follows:
1. Employment. The Company hereby employs Executive, and Executive hereby accepts
such employment, upon the terms and conditions set forth herein.
2. Duties.
2.1 Position. Executive is employed as Executive Vice President and shall have the
duties and responsibilities assigned by the Companys Chief Executive Officer (CEO) both
upon initial hire and as may be reasonably assigned from time to time. Executive shall perform
faithfully and diligently all duties assigned to Executive. The Company reserves the right to
modify Executives position and duties at any time in its sole and absolute discretion, except that
any material diminution in Executives duties shall be subject to Section 7.3(ii) below.
2.2 Best Efforts/Full-time. Executive will expend Executives best efforts on behalf
of the Company, and will abide by all policies and decisions made by the Company, as well as all
applicable federal, state and local laws, regulations or ordinances. Executive will act in the
best interest of the Company at all times. Executive shall devote Executives full business time
and efforts to the performance of Executives assigned duties for the Company, unless Executive
notifies the CEO in advance of Executives intent to engage in other paid work and receives the
CEOs express written consent to do so. Notwithstanding the foregoing, Executive will be permitted
to serve as an outside director on the board of directors for corporate, civic, nonprofit or
charitable entities, so long as Executive obtains the consent of the Company and provided such
entities are not competitive with the Company and subject to the provisions of section 9 below.
2.3 Work Location. Executives principal place of work shall be located in Phoenix,
Arizona, or such other location as the Company may direct from time to time.
3. Term.
3.1 Initial Term. The employment relationship pursuant to this Agreement shall be for
an initial term commencing on July 1, 2008 (the Effective Date) and continuing for a
period of four (4) years following such date (Initial Term), unless sooner terminated in
accordance with section 7 below.
3.2 Renewal. On expiration of the Initial Term specified in subsection 3.1 above, this
Agreement will automatically renew for subsequent one (1) year terms (each a Renewal
Term) unless either party provides thirty (30) days advance written notice to the other that
the Company or Executive does not wish to renew the Agreement for subsequent Renewal Term. In the
event either party gives notice of nonrenewal pursuant to this
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subsection 3.2, this Agreement will expire at the end of the then current term. The Initial
Term and each subsequent Renewal Term are referred to collectively as the Term.
4. Compensation.
4.1 Base Salary. As compensation for Executives performance of Executives duties
hereunder, the Company shall pay to Executive an initial Base Salary at the rate of Three-Hundred
Thousand Dollars ($300,000.00) per year payable in accordance with the normal payroll practices of
the Company, less required deductions for state and federal withholding tax, social security and
all other employment taxes and payroll deductions. In the event Executives employment under this
Agreement is terminated by either party, for any reason, Executive will earn the Base Salary
prorated to the date of termination, except as otherwise set forth herein. Executives Base Salary
shall be reviewed annually by the Compensation Committee of the Companys Board of Directors (the
Compensation Committee).
4.2 Incentive Compensation. For the fiscal year of the Company ending December 31,
2008, and provided Executive remains employed with the Company as of such date, Executive will be
eligible to receive a bonus equal to Seventy-Five Thousand Dollars ($75,000.00). Thereafter,
Executive will be eligible to earn incentive compensation in the form of an annual bonus for each
fiscal year of the Company with a target amount of fifty percent (50%) of Executives Base Salary.
The Compensation Committee will determine the actual amount of the bonus earned for any year, which
will be based upon both the Companys achievement of overall performance metrics for the year and
Executives achievement of individual performance metrics as agreed upon by the Compensation
Committee and the Executive. The Compensation Committee may, in its sole discretion, increase the
Executives annual bonus above fifty percent (50%) of Base Salary if it determines that the
performance of both the Executive and the Company significantly exceed the predetermined metrics.
Bonus amounts, if any, are to be awarded annually and payment shall be made within two and one-half
months following the end of the applicable Company fiscal year.
4.3 Stock Options. Upon approval by Compensation Committee, Executive will be granted
immediately prior to the Companys intended initial public offering (the IPO) an option
(the Option) to purchase shares of the Companys Common Stock under the Companys 2008
Equity Incentive Plan (the Plan) at an exercise price per share equal to the IPO offering
price per share. The number of shares subject to such Option shall be equal to 1.0% of the sum of
(a) the number of shares of Common Stock of the Company issued and outstanding as of the date of
grant of the Option, plus (b) the number of shares of Common Stock to be issued in connection with
the IPO as set forth in the agreement between the Company and the underwriters of the IPO (but
without giving effect to any Green Shoe or overallotment option that may become exercisable by
the underwriters), plus (c) the number of shares of Common Stock to be issued upon conversion of
the Companys outstanding shares of preferred stock in connection with the IPO. Subject to
Executives continued employment, the Option will vest and become exercisable in five equal annual
installments (each, an Annual Installment) over a five (5) year period beginning on the
grant date. The Option will be subject to the terms and conditions of the Plan and a form of stock
option agreement specified by the Compensation Committee, which Executive will be required to sign
as a condition of retaining the Option. Executive may be eligible for future grants at the sole
discretion of the Compensation Committee.
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4.4 Directed Shares. Subject to its establishment, Executive shall be entitled to
participate in the Companys IPO directed share program in accordance with its terms and on
substantially the same basis as other executive officers of the Company.
5. Customary Fringe Benefits. Executive will be eligible for all customary and usual
fringe benefits generally available to senior management of the Company, subject to the terms and
conditions of the Companys benefit plan documents. The Company reserves the right to change or
eliminate fringe benefits on a prospective basis, at any time, effective upon notice to Executive.
6. Business Expenses. Executive will be reimbursed for all reasonable, out-of-pocket
business expenses incurred in the performance of Executives duties on behalf of the Company. To
obtain reimbursement, expenses must be submitted promptly with appropriate supporting documentation
and will be reimbursed in accordance with the Companys policies. Any reimbursement Executive is
entitled to receive shall (a) be paid no later than the last day of Executives tax year following
the tax year in which the expense was incurred, (b) not be affected by any other expenses that are
eligible for reimbursement in any tax year, and (c) not be subject to liquidation or exchange for
another benefit.
7. Termination of Executives Employment.
7.1 Termination for Cause by Company. Although the Company anticipates a mutually
rewarding employment relationship with Executive, the Company may terminate Executives employment
immediately at any time for Cause. For purposes of this Agreement, Cause is defined as:
(a) acts or omissions constituting gross negligence, recklessness or willful misconduct on the part
of Executive with respect to Executives obligations or otherwise relating to the business of the
Company; (b) Executives material breach of this Agreement, including, without limitation, any
breach of Section 8, Section 9, or Section 11; (c) Executives breach of the Companys Employee
Nondisclosure and Assignment Agreement; (d) Executives conviction or entry of a plea of nolo
contendere for fraud, misappropriation or embezzlement, or any felony or crime of moral turpitude;
(e) Executives inability to perform the essential functions of Executives position, with or
without reasonable accommodation, due to a mental or physical disability; (f) Executives willful
neglect of duties as determined in the sole and exclusive discretion of the Board of Directors,
provided that Executive has received written notice of the action or omission giving rise to such
determination and has failed to remedy such situation to the satisfaction of the Board of Directors
within thirty (30) days following receipt of such written notice, unless Executives action or
omission is not subject to cure, in which case no such notice shall be required, or (g) Executives
death. In the event Executives employment is terminated in accordance with this subsection 7.1,
Executive shall be entitled to receive only Executives Base Salary then in effect, prorated to the
date of termination, and all fringe benefits through the date of termination. All other Company
obligations to Executive pursuant to this Agreement will be automatically terminated and completely
extinguished. Executive will not be entitled to receive the Severance Package described in
subsection 7.2 below. Any termination pursuant to this subsection 7.1 shall be evidenced by a
resolution or written consent of the Board of Directors of the Company, and the Company shall
provide Executive with a copy of such resolution or written consent, certified by the Secretary of
the Company, upon Executives written request.
7.2 Termination Without Cause by Company/Severance. The Company may terminate
Executives employment under this Agreement without Cause at any time upon written notice to
Executive. In the event of such termination, Executive will receive Executives
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Base Salary then in effect, prorated to the date of termination of employment. In addition,
Executive will receive a Severance Package that shall include (a) a severance payment
equivalent to twelve (12) months of Executives Base Salary then in effect on the date of
termination, payable in accordance with the Companys regular payroll cycle commencing with the
first payroll date occurring on or after the 60th day following the date of Executives termination
of employment, (b) payment by the Company of the premiums required to continue Executives group
health care coverage for a period of twelve (12) months following Executives termination, under
the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA),
provided that Executive timely elects to continue and remains eligible for these benefits under
COBRA, and does not become eligible for health coverage through another employer during this
period, and (c) acceleration of the vesting of the Annual Installment under the Option that would
otherwise have vested on the next vesting date following the termination of Executives employment.
Executive will only receive the Severance Package if Executive: (i) complies with all surviving
provisions of this Agreement as specified in subsection 14.8 below; and (ii) executes a full
general release, releasing all claims, known or unknown, that Executive may have against the
Company arising out of or any way related to Executives employment or termination of employment
with the Company, and such release has become effective in accordance with its terms prior to the
60th day following the termination date. All other Company obligations to Executive will be
automatically terminated and completely extinguished.
7.3 Voluntary Resignation by Executive for Good Reason/Severance. Executive may
voluntarily resign Executives position with the Company for Good Reason at any time on thirty
(30) days advance written notice to the Company. In the event of Executives resignation for Good
Reason, Executive will be entitled to receive Executives Base Salary then in effect, prorated to
the date of termination of employment, and the Severance Package described in subsection 7.2 above,
provided Executive complies with all of the conditions described in subsection 7.2 above. All
other Company obligations to Executive pursuant to this Agreement will be automatically terminated
and completely extinguished. Executive will be deemed to have resigned for Good Reason if
Executive voluntarily terminates his employment with the Company within ninety (90) days following
the first occurrence of a condition constituting Good Reason. Good Reason means the
occurrence of any of the following conditions without Executives written consent, which
condition(s) remain(s) in effect thirty (30) days after Executive provides written notice to the
Company of such condition(s): (i) a material reduction in Executives Base Salary as then in effect
prior to such reduction, other than as part of a salary reduction program among similar management
employees, (ii) a material diminution in Executives authority, duties or responsibilities as an
employee of the Company as they existed prior to such change, or (iii) a relocation of Executives
principal place of work which increases Executives one-way commute distance by more than fifty
(50) miles. Executive will be deemed to have given consent to any condition(s) described in this
subsection if Executive does not provide written notice to the Company of his intent to exercise
his rights pursuant to this subsection within thirty (30) days following the first occurrence of
such condition(s).
7.4 Voluntary Resignation by Executive Without Good Reason. Executive may voluntarily
resign Executives position with the Company without Good Reason at any time on thirty (30) days
advance written notice to the Company. In the event of Executives resignation without Good
Reason, Executive will be entitled to receive only Executives Base Salary, prorated to the date of
termination of employment, and all fringe benefits through the date of termination. All other
Company obligations to Executive pursuant to this Agreement will be automatically terminated and
completely extinguished. In addition, Executive will not be entitled to receive the Severance
Package described in subsection 7.2 above.
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7.5 Termination After a Change in Control.
(a) Severance Payment; Option Vesting Acceleration. If, upon or within twelve
(12) months after a Change in Control (as that term is defined below), Executives employment is
terminated by the Company other than for Cause (as defined in subsection 7.1 above) or Executive
resigns for Good Reason (as defined in subsection 7.3 above), then (i) Executive shall be entitled
to receive (A) Executives Base Salary, prorated to the date of termination of employment, and (B)
the Severance Package described in subsection 7.2 above, provided Executive complies with all of
the conditions described in subsection 7.2 above, and (ii) to the extent not yet vested, the Option
and any other stock options granted to Executive by the Company shall vest in full as of the date
of such termination of employment, provided Executive complies with the conditions described in
subsection 7.2 above.
(b) Parachute Payments. If, due to the benefits provided under subsection 7.5(a) and
any other payments or benefits, Executive would be subject to any excise tax pursuant to
Section 4999 of the Internal Revenue Code of 1986, as amended (the Code) due to
characterization of any such amounts as excess parachute payments pursuant to Section 280G of the
Code, the amounts payable under subsection 7.5(a) will be reduced (to the least extent possible) in
order to avoid any excess parachute payment under Section 280G(b)(1) of the Code.
(c) Change in Control. A Change in Control is defined as any one of the following
occurrences:
(i) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934 (the Exchange Act)), becomes the beneficial owner (as such term is defined
in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the
Company representing more than fifty percent (50%) of the total fair market value or total combined
voting power of the Companys then-outstanding securities entitled to vote generally in the
election of directors; provided, however, that a Change in Control shall not be deemed to have
occurred if such degree of beneficial ownership results from any of the following: (A) an
acquisition of securities by any person who on the Effective Date is the beneficial owner of more
than fifty percent (50%) of such voting power, (B) any acquisition of securities directly from the
Company, including, without limitation, pursuant to or in connection with a public offering of
securities, (C) any acquisition of securities by the Company, (D) any acquisition of securities by
a trustee or other fiduciary under an employee benefit plan of the Company, or (E) any acquisition
of securities by an entity owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the voting securities of the Company; or
(ii) the sale or disposition of all or substantially all of the Companys assets (other than a
sale or disposition to one or more subsidiaries of the Company), or any transaction having similar
effect is consummated; or
(iii) the Company is party to a merger or consolidation that results in the holders of voting
securities of the Company outstanding immediately prior thereto failing to continue to represent
(either by remaining outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation; or
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(iv) the dissolution or liquidation of the Company.
7.6 Termination of Employment Upon Nonrenewal. In the event either party decides not
to renew this Agreement for a subsequent term in accordance with subsection 3.2 above, this Agreement
will expire, Executives employment with the Company will terminate and Executive will only be
entitled to Executives Base Salary then in effect paid through the last day of the then current
term. All other Company obligations to Executive pursuant to this Agreement will be automatically
terminated and completely extinguished. Executive will not be entitled to receive the Severance
Package described in subsection 7.2 above, but shall be subject to the surviving provisions of this
Agreement as set forth in section 14.8 below.
7.7 Resignation of Board or Other Positions. Executive agrees that should Executives
employment terminate for any reason, Executive will immediately resign all other positions
(including board membership) Executive may hold on behalf of the Company.
7.8 Application of Section 409A.
(a) Notwithstanding anything set forth in this Agreement to the contrary, no amount payable
pursuant to this Agreement on account of Executives termination of employment with the Company
which constitutes a deferral of compensation within the meaning of the Treasury Regulations
issued pursuant to Section 409A of the Code (the Section 409A Regulations) shall be paid
unless and until Executive has incurred a separation from service within the meaning of the
Section 409A Regulations. Furthermore, if Executive is a specified employee within the meaning
of the Section 409A Regulations as of the date of Executives separation from service, no amount
that constitutes a deferral of compensation which is payable on account of Executives separation
from service shall be paid to Executive before the date (the Delayed Payment Date) which
is first day of the seventh month after the date of Executives separation from service or, if
earlier, the date of Executives death following such separation from service. All such amounts
that would, but for this subsection, become payable prior to the Delayed Payment Date will be
accumulated and paid on the Delayed Payment Date.
(b) The Company intends that income provided to Executive pursuant to this Agreement will not
be subject to taxation under Section 409A of the Code. The provisions of this Agreement shall be
interpreted and construed in favor of satisfying any applicable requirements of Section 409A of the
Code. However, the Company does not guarantee any particular tax effect for income provided to
Executive pursuant to this Agreement. In any event, except for the Companys responsibility to
withhold applicable income and employment taxes from compensation paid or provided to Executive,
the Company shall not be responsible for the payment of any applicable taxes incurred by Executive
on compensation paid or provided to Executive pursuant to this Agreement.
8. No Violation of Rights of Third Parties. Executive represents and warrants to the
Company that Executive is not currently a party, and will not become a party, to any other
agreement that is in conflict with, or will prevent Executive from complying with, with this
Agreement. Executive further represents and warrants to the Company that Executives performance
of all of the terms of this Agreement as an employee of the Company does not and will not breach
any agreement to keep in confidence any proprietary information, knowledge, or data acquired by
Executive in confidence or trust prior to Executives employment with the Company. Executive
acknowledges and agrees that the representations and warranties in this Section 8 are a material
part of this Agreement.
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9. Other Covenants. Executive hereby makes the following covenants, each of which
Executive acknowledges and agrees are a material part of this Agreement:
9.1 During the Term of Executives employment with the Company, Executive will not (a) breach
any agreement to keep in confidence any confidential or proprietary information, knowledge or data
acquired by Executive prior to Executives employment with Company, or (b) disclose to the Company,
or use or induce the Company to use, any confidential or proprietary information or material
belonging to any previous employer or any other third party. Executive acknowledges that the
Company has specifically instructed Executive not to breach any such agreement or make any such
disclosures to the Company.
9.2 During the Term of Executives employment with the Company, Executive will not engage in
any work or activity, paid or unpaid, that creates an actual conflict of interest with the Company.
Such work shall include, but is not limited to, directly or indirectly competing with the Company
in any way, or acting as an officer, director, employee, consultant, stockholder, volunteer,
lender, or agent of any business enterprise of the same nature as, or which is in direct
competition with, the business in which the Company is now engaged or in which the Company becomes
engaged during the term of Executives employment with the Company, as may be determined by the
Company in its sole discretion. If the Company believes such a conflict exists during the term of
this Agreement, the Company may ask Executive to choose to discontinue the other work or activity
or resign employment with the Company.
9.3 During the Term of Executives employment with the Company and after the termination
thereof, neither Executive nor the Company will disparage each other, or the Companys products,
services, agents or employees.
9.4 During the Term of Executives employment with the Company and after the termination
thereof, at the Companys expense and upon its reasonable request, Executive will cooperate and
assist the Company in its defense or prosecution of any disputes, differences, grievances, claims,
charges, or complaints between the Company and any third party, which assistance will include
testifying on the Companys behalf in connection with any such matter or performing any other task
reasonably requested by the Company in connection therewith.
10. Confidentiality and Proprietary Rights. Executive agrees to read, sign and abide
by the Companys Employee Nondisclosure and Assignment Agreement, which is provided with this
Agreement and incorporated herein by reference.
11. Non-Competition; Nonsolicitation of Companys Employees. Executive acknowledges
that in the course of his employment with the Company he will serve as a member of the Companys
senior management and will become familiar with the Companys trade secrets and with other
confidential and proprietary information and that his services will be of special, unique and
extraordinary value to the Company. Executive further acknowledges that the Companys business, a
substantial portion of which is conducted online, is national in scope and that the Company, in the
course of such business, recruits students and faculty throughout the United States, works with
vendors throughout the United States, and competes with other companies located throughout the
United States. Therefore, in consideration of the foregoing, Executive agrees that, during the
Term, and during the twelve-month (12) month period following the Term, he shall not directly or
indirectly anywhere within the United States of America (a) own (except ownership of less than 1%
of any class of securities which are listed
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for trading on any securities exchange or which are traded in the over-the-counter market),
manage, control, participate in, consult with, render services for, be employed by, or in any
manner engage in the operation of (i) a for-profit, post-secondary education institution, or (ii)
any other business of the Company in which Executive had significant involvement prior to
Executives separation; (b) solicit funds on behalf of, or for the benefit of, any for-profit,
post-secondary education institution (other than the Company) or any other entity that competes
with the Company; (c) solicit individuals who are current or prospective students of the Company to
be students for any other for-profit, post-secondary education institution; (d) induce or attempt
to induce any employee of the Company to leave the employ of the Company, or in any way interfere
with the relationship between the Company and any employee thereof, or (e) induce or attempt to
induce any student, customer, supplier, licensee or other business relation of the Company to cease
doing business with, or modify its business relationship with, the Company, or in any way interfere
with or hinder the relationship between any such student, customer, supplier, licensee or business
relation and the Company.
12. Injunctive Relief. Executive acknowledges that Executives breach of the
covenants contained in sections 9-11 hereof (collectively Covenants) would cause
irreparable injury to the Company and agrees that in the event of any such breach, the Company
shall be entitled to seek temporary, preliminary and permanent injunctive relief without the
necessity of proving actual damages or posting any bond or other security in addition to any other
relief to which the Company may be entitled and other remedies Company may exercise under this
Agreement or otherwise.
13. Insurance; Indemnification.
13.1 During the Term of Executives employment hereunder, Executive will be covered by the
Companys director and officer insurance policy to the same extent as all other senior executive
officers of the Company
13.2 Following the execution of this Agreement, the Company will execute and deliver a
director and officer indemnification agreement with Executive in a form approved by the Board of
Directors for the senior executive officers of the Company.
14. General Provisions.
14.1 Successors and Assigns. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the
Company. Executive shall not be entitled to assign any of Executives rights or obligations under
this Agreement.
14.2 Waiver. Either partys failure to enforce any provision of this Agreement shall
not in any way be construed as a waiver of any such provision, or prevent that party thereafter
from enforcing each and every other provision of this Agreement.
14.3 Attorneys Fees. In the event of a dispute involving the interpretation or
enforcement of this Agreement, a court shall award attorneys fees and costs to the prevailing
party.
14.4 Severability. In the event any provision of this Agreement is found to be
unenforceable by a court of competent jurisdiction, such provision shall be deemed modified to the
extent necessary to allow enforceability of the provision as so limited, it being intended that
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the parties shall receive the benefit contemplated herein to the fullest extent permitted by
law. If a deemed modification is not satisfactory in the judgment of such court, the unenforceable
provision shall be deemed deleted, and the validity and enforceability of the remaining provisions
shall not be affected thereby.
14.5 Interpretation; Construction. The headings set forth in this Agreement are for
convenience only and shall not be used in interpreting this Agreement. This Agreement has been
drafted by legal counsel representing the Company, but Executive has participated in the
negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an
opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired,
and, therefore, the normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation of this Agreement.
14.6 Governing Law; Forum. This Agreement will be governed by and construed in
accordance with the laws of the United States and the State of Arizona . Each party consents to
the jurisdiction and venue of the state or federal courts in Phoenix, Arizona, if applicable, in
any action, suit, or proceeding arising out of or relating to this Agreement, and agrees that the
state or federal courts in Phoenix, Arizona shall have exclusive jurisdiction over any dispute
arising between the parties related to this Agreement or Executives employment with the Company.
14.7 Notices. Any notice required or permitted by this Agreement shall be in writing
and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery
when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by
telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or
(d) by certified or registered mail, return receipt requested, upon verification of receipt.
Notice shall be sent to the addresses set forth under the signatures below, or such other address
as either party may specify in writing.
14.8 Survival. Sections 9 (Other Covenants), 10 (Confidentiality and Proprietary
Rights), 11 (Non-Competition; Nonsolicitation), 12 (Injunctive Relief), 13 (General
Provisions) and 14 (Entire Agreement) of this Agreement shall survive termination of Executives
employment with the Company.
15. Entire Agreement. This Agreement, including the Employee Nondisclosure and
Assignment Agreement incorporated herein by reference and the Companys 2008 Equity Incentive Plan
and related option documents described in Section 4.3 of this Agreement, constitutes the entire
agreement between the parties relating to this subject matter and supersedes all prior or
simultaneous representations, discussions, negotiations, and agreements, whether written or oral.
This agreement may be amended or modified only with the written consent of Executive and the Board.
No oral waiver, amendment or modification will be effective under any circumstances whatsoever.
9
THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY
PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN
BELOW.
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W. STAN MEYER
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Dated: June 25, 2008 |
By: |
/s/ W. Stan Meyer
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Address: |
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GRAND CANYON EDUCATION, INC.
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Dated: June 27, 2008 |
By: |
/s/ Christopher C. Richardson
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Name: |
Christopher C. Richardson |
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Title: |
General Counsel and Director
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Address: |
3300 West Camelback Road
Phoenix, Arizona 85017 |
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10
exv23w2
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption Experts and to the use of our report
dated May 12, 2008 (except for Note 3, as to which the date is
August 11, 2008, and Note 17(a), as
to which the date is [ · ], 2008), in Amendment No. 1 to the Registration Statement (Form S-1
No. 333-150876) and related Prospectus of Grand Canyon Education, Inc. for the registration of [
· ] shares of its common stock.
Ernst
& Young LLP
Phoenix, Arizona
The
foregoing consent is in the form that will be signed upon the
determination of the special distribution to stockholders described in Note 17(a) to the financial statements.
/s/ Ernst & Young LLP
Phoenix, Arizona
August 11, 2008
corresp
August 13, 2008
Via EDGAR and by courier
Larry Spirgel
Assistant Director
United States Securities and Exchange Commission
Mail Stop 3720
100 F Street NE
Washington, D.C. 20549
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RE:
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Grand Canyon Education, Inc.
Registration Statement on Form S-1
Filed on May 13, 2008
File No. 333-150876 |
Dear Mr. Spirgel:
This letter responds to the letter of the staff of the Securities and Exchange Commission (the
Staff), dated June 10, 2008, to Grand Canyon Education, Inc. (the Company)
regarding the Registration Statement on Form S-1, File No. 333-150876 (the Registration
Statement), filed by the Company on May 13, 2008.
This letter sets forth each comment of the Staff in the comment letter (numbered in accordance
with the comment letter) and, following each comment, sets forth the Companys response. We are
enclosing a copy of Amendment No. 1 to the Registration Statement on Form S-1, together with a copy
that is marked to show the changes from the initial filing.
The Company has restated its financial statements as of December 31, 2006 and 2007 and for the
three-year period ended December 31, 2007. Please see new Note 3, Restatement of Financial
Statements, to the Companys audited financial statements included in Amendment No. 1 to the
Registration Statement.
General
Staff Comment:
1. Please be advised that you should include the price range, the size of the offering, and
all other required information in an amendment to your Form S-l prior to any distribution of
preliminary prospectuses so that we may complete our review. Note that we may have additional
Securities and Exchange Commission
Page 2
comments once you have provided this disclosure. Therefore, please allow us sufficient time
to review your complete disclosure prior to any distribution of preliminary prospectuses.
Company Response:
The Company acknowledges the Staffs comment. The Company will not be distributing a
preliminary prospectus in conjunction with this filing.
Staff Comment:
2. As soon as practicable, please furnish to us a statement as to whether or not the amount of
compensation to be allowed or paid to the underwriter(s) has been cleared with the FINRA. Prior to
the effectiveness of this registration statement, please provide us with a copy of the letter or a
call from the FINRA informing us that FINRA has no additional concerns.
Company Response:
The Company acknowledges the Staffs comment and will notify the Staff as soon as practicable
after FINRA so acts. As of the date of this letter, FINRA has supplied the underwriters with a
standard response letter, but has not cleared the amount of compensation to be paid to the
underwriters.
Staff Comment:
3. We encourage you to file all exhibits with your next amendment or otherwise furnish us
drafts of your legality opinion and underwriting agreement. We must review these documents before
the registration statement is declared effective, and we may have additional comments.
Furthermore, we remind you to provide us with sufficient time to review any requests for
confidential treatment you may be submitting in connection with the filing of your exhibits.
Company Response:
The Company acknowledges the Staffs comment and has filed the legality opinion and form of
underwriting agreement. Certain other exhibits consisting of material contracts that are not yet
in effect will be filed with a later amendment.
Staff Comment:
4. We note the extensive use of third-party statements, data, and statistics throughout the
prospectus, With respect to statements attributed to such parties, please provide us with support
for such statements. Please set forth the dates of all the reports cited. To expedite our review,
please clearly mark each source to highlight the applicable portion or section containing the
statistic and cross-reference it to the appropriate location in your prospectus. Also, tell us
whether you commissioned any of the referenced sources.
Securities and Exchange Commission
Page 3
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to add
the dates of all reports cited. In addition, the Company has delivered to the Staff, under
separate cover and in the manner requested by the Staff, support for all third-party statements
used in the Registration Statement. The Company requests that these materials be returned to it
upon completion of the Staffs review. The Company did not commission any of the referenced
sources.
Prospectus Summary, page 1
Staff Comment:
5. We note your statement that you are a leading ... provider of online postsecondary
education services. Please revise this statement to disclose that it is your belief and the basis
for your belief. In this regard, indicate the measure by which you determined that you are a
leading provider, be it based on revenues, market share, or some other standard.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to
remove the word leading when describing its business.
Offering Summary, page 5
Staff Comment:
6. We note your statement that the special distribution permits a return of capital to all of
our stockholders as of the record date, and does so without significantly decreasing our capital
resources or requiring these stockholders to sell their shares. Please revise your disclosure
under Special Distribution on page 32 to discuss when your principal stockholders, including your
directors and executive officers, directly or indirectly, acquired their shares, the amount paid
for those shares and the amount that will be paid to them in the special distribution. Provide
corresponding changes to your disclosure under Certain Relationships and Related Transactions
Special Distribution on page 100.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement in the
indicated sections to provide the information requested by the Staff.
Securities and Exchange Commission
Page 4
Summary Financial and Other Data, page 7
Selected Financial Data, page 37
Staff Comment:
7. Refer to Other Data. Revise to present net cash provided by (used in) investing and
financing activities.
Company Response:
The Company acknowledges the Staffs comment. Because the Company uses Adjusted EBITDA as a
performance measure, and not as a measure of liquidity, the Company has chosen instead to eliminate the
line item for Net cash provided by (used in) operating activities, and believes that the requested
line items are therefore not necessary.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview, page 40
Staff Comment:
8. Please revise to discuss in more detail the impact of any known trends and uncertainties
associated with your participation in, and continued availability of, federal student aid programs
under Title IV. For example, discuss and quantify the costs associated with administering the
programs and complying with the regulations associated with the programs.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to
discuss certain trends and uncertainties affecting companies, including the Company, that
participate in federal student aid programs under Title IV.
Staff Comment:
9. We note your statement on page 42 that you treat online faculty as independent contractors
in accordance with industry practice. Please remove this statement or revise to clarify the
basis for your belief that it is appropriate to treat your online faculty as independent
contractors rather than employees under applicable federal and state law.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to
remove the above-quoted clause.
Staff Comment:
10. We note your disclosure on page 42 that you do not expect to make substantial investments
in [y]our campus-based instructional costs and services, which include facilities and
Securities and Exchange Commission
Page 5
full-time adjunct faculty as you expect the mix of your student population to continue to
shift toward online students. However, we note on page 20 that you have vulnerable computer
networks and that you may be required to expend significant resources to protect against the threat
of security breaches. Additionally, on page 21, you stated that in the future, you may need to
develop course content solely or initially for online use. Please revise your disclosure
accordingly.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to
clarify the intent of the disclosure, which is that the Company expects its instructional costs and
services as a percentage of tuition and other net revenue to decline as it leverages its support
services that are in place over a larger tuition and enrollment base.
Staff Comment:
11. We note your disclosure on page 43 regarding the dispute with your former owner and the
related standstill agreement. We also note that the standstill agreement does not appear as an
exhibit to the registration statement. Please tell us why you believe it is not necessary to file
this agreement. Refer to Item 601(b)(10)(iii) of Regulation S-K.
Company Response:
The Companys material contractual obligations under the standstill agreement were fully
performed when the Company made its $19.5 million payment on April 15, 2008. Because the Company
no longer has any material obligations to be performed under the standstill agreement, it does not
believe that the standstill agreement is a material agreement that is required to be filed as an
exhibit under Item 601(b)(10) of Regulation S-K.
Seasonality, page 49
Staff Comment:
12. As disclosed herein, a portion of your on campus ground students do not attend courses
during the summer months, which historically has impacted your second quarter and third quarter
financial results. If true, please revise your disclosure to state that historically, you had
incurred losses during those quarters.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to
state that lower on-campus enrollment during the summer months has historically contributed
to operating losses during those periods.
Securities and Exchange Commission
Page 6
Liquidity and Capital Resources, page 49
Staff Comment:
13. We note your belief that your current cash flow from operating activities, and other
sources of liquidity, including cash, and cash equivalents will provide adequate funds for
ongoing operations, planned capital expenditures and working capital requirements for the
foreseeable future. Please provide a more detailed discussion of your ability to meet your short-
and long-term liquidity needs and provide greater insight into the length of time that the
sufficiency will extend. We consider long-term to be the period in excess of the next 12 months.
See Section III.C. of Release No. 33-6835 and footnote 43 of Release No. 33-8350. In addition,
revise to quantify your material short- and long-term liquidity requirements, to the extent
practicable.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to
clarify that cash flow from operations and other sources of liquidity, including cash and cash
equivalents, will provide adequate funds for ongoing operations, planned capital expenditures, and
working capital requirements for at least the next 24 months.
Regulation
State Education Licensure and Regulation, page 72
Staff Comment:
14. We note that you enroll students from all 50 states and the District of Columbia in your
online education programs. Please identify the states in which you operate and are subject to
state regulation. To the extent material, identity the states that have the particular laws and
regulations you discuss, or that have sought to assert jurisdiction over educational institutions
offering online degree programs, such as you. Discuss the extent to which you have not complied
with the applicable regulations in such states and whether any such regulations have had or may
have a material impact on your business.
Company Response:
As discussed in the section of the Registration Statement entitled Regulation State
Education Licensure and Regulation, the Company is authorized to offer its programs by the Arizona
State Board for Private Postsecondary Education, the regulatory agency governing private
postsecondary educational institutions in the state of Arizona, where the Company and its only
campus are located. As further discussed in this section, 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.
While Arizona is the location of the Companys business and only campus, the Company has
obtained licenses or authorizations in other states where it believes its activities require it to
Securities and Exchange Commission
Page 7
be licensed or authorized, as well as in certain states where the Company has determined that
licensure can facilitate the teaching certification process for graduates of its College of
Education. The Company does not believe that any of the states in which it is currently licensed
or authorized, other than Arizona, are material to its operations, and further believes that it
will be able to comply with additional state licensing or authorization requirements that may arise
or be asserted in the future. The Company does believe that, from an investors perspective, it is
important to understand that state regulations applicable to educational institutions generally,
and online education in particular, are continually evolving and unclear, and the disclosure in the
Registration Statement describes this state of affairs.
In response to the Staffs comment, the Company has amended the Registration Statement to
clarify the reasons why it may be licensed or authorized in states other than Arizona and also to
state that, although it believes it is licensed in those jurisdictions that are material to its
operations, because it enrolls students in all 50 states and the District of Columbia, it expects
that other state regulatory authorities will request that it seek licensure in their states in the
future.
Management Board Composition, page 87
Staff Comment:
15. Please revise your disclosure to discuss the matters considered by the board of directors
in making the affirmative determination that no relationship exists between Messrs. Heath and
Dorman and the company that would impair their independence under Nasdaq Marketplace Rule 4200. In
particular, discuss what consideration was given to Messrs. Heaths and Dormans association with
Endeavour Capital, the companys leading outside investor and financial advisor, and the business
relationship between both companies.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to
discuss the matters considered by the board of directors in making the affirmative determination
that no relationship exists between Messrs. Heath and Dorman and the Company that would impair
their independence under Nasdaq Marketplace Rule 4200.
Compensation Discussion and Analysis
Objectives of Compensation Programs, page 88
Staff Comment:
16. We note your disclosure on page 88 that in setting compensation levels you take into
consideration the marketplace for individuals that you wish to attract. Further, we note that you
have not engaged in any formal benchmarking, but rather compensation decisions have been made
based on the knowledge of the market possessed by your board of directors, as supplemented by
market knowledge of Endeavour Capital and your human resources department, and as negotiated with
your named executive officers. Please explain what you
Securities and Exchange Commission
Page 8
mean by formal benchmarking and how you determined the elements and levels of your executive
compensation relative to the other companies. Please identify any specific elements benchmarked,
including whether you benchmarked total compensation, So that investors may understand the kind of
benchmarking information you used in determining annual executive compensation, identify the
elements that were considered by the representatives of your lead outside investor. Identify any
companies and industries used for benchmarking. See Regulation S-K Item 402(b)(2)(xiv).
Company Response:
To date, the Company has not engaged in any benchmarking in setting the compensation levels
for any of the named executive officers or when making decisions to attract individuals to the
Company. In response to the Staffs comment, the Company has amended the Registration Statement to
clarify its compensation practices.
Compensation Programs Design and Elements of Compensation, page 89
Staff Comment:
17. Please clarify how you consider the companys and the individuals performance in setting
the compensation levels of your named executive officers. In this regard, we note that base
salaries, which are the largest component of compensation, are contractually agreed at the time of
initial employment, and are not at risk.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to
provide an example of how it considers the Companys and the individuals performance in setting
compensation levels for its named executive officers.
Actions Taken in Current Fiscal Year, page 91
Staff Comment:
18. We note that you will adopt an equity incentive plan and an employee stock purchase plan
in 2008. In light of your disclosure on page 89 regarding your view that the Richardsons
ownership in the company provides a level of motivation that would not be appreciably enhanced
through further equity incentives, please revise to clarify whether the Richardsons will be
eligible to participate in these plans. Also, please explain the purpose of this plan and how it
fits into your overall compensation philosophy and objectives. In addition, to the extent
material, describe any changes to your other forms of compensation, such as salary and bonus, that
will be undertaken for 2008.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement to (i)
clarify that although Brent Richardson and Chris Richardson are eligible to
Securities and Exchange Commission
Page 9
participate in the 2008 Equity Incentive Plan, the Company does not anticipate granting any
material awards under such plan to Brent Richardson or Chris Richardson, (ii) link the 2008 Equity
Incentive Plan and 2008 Employee Stock Purchase Plan to the Companys overall compensation
philosophy and objectives, and (iii) to describe material changes to other forms of compensation
for fiscal 2008.
Certain Relationships and Related Transactions
General, page 98
Staff Comment:
19. We note your disclosure on page F-26 regarding payments made to, and cash provided by,
Spirit Finance Acquisitions, LLC. Please describe the nature of any affiliation or common
ownership between you, or any of your affiliates, and Spirit.
Company Response:
There is no common ownership among the Company or any of its affiliates and Spirit Finance
Acquisitions, LLC (Spirit). Accordingly, we have removed any references to Spirit from
Note 15 to our audited financial statements.
Voting Agreement, page 98
Staff Comment:
20. We note that the proxy and voting agreement described in this section does not appear as
an exhibit to the registration statement; however, Item 601(b)(ii)(A) seems to require its filing
as a material agreement. Please file.
Company Response:
The Company acknowledges the Staffs comment and intends to file the proxy and voting
agreement as an exhibit to the Registration Statement with its next amendment.
Beneficial Ownership of Common Stock, page 102
Staff Comment:
21. Please disclose the natural person(s) who exercise investment and voting control over the
shares held by each entity or non-natural person listed as a principal shareholder, to the extent
it is not widely held.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement
disclose the natural person(s) who exercise investment and voting control over the
Securities and Exchange Commission
Page 10
shares held by each entity or non-natural person listed as a principal shareholder, to the
extent it is not widely held.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm, page F-2
Staff Comment:
22. Please be advised that you must amend the registration statement to provide an unqualified
report prior to its effectiveness.
Company Response:
The Company acknowledges the Staffs comment and will amend the Registration Statement to
provide an unqualified report prior to effectiveness of the Registration Statement.
Balance Sheets, page F-3
Staff Comment:
23. Revise your caption for Series A Preferred Stock to describe it as convertible.
Company Response:
In response to the Staffs comment, the Company has amended the Registration Statement,
including the balance sheet, to refer to the Series A preferred stock as the Series A convertible
preferred stock.
Balance Sheets, page F-3
Statements of Operations, page F-4
Staff Comment:
24. Provide a description of the nature and calculation of the pro forma information in the
notes to the financial statements. Per page 6, we note that the Series A and C Preferred Stocks
will be automatically converted to common shares upon the closing of the initial public offering.
We note your disclosure in Note 16 on page F-27.
Company Response:
In connection with the initial public offering, the Company anticipates declaring a special
distribution to its pre-IPO stockholders, including the holders of its common stock, Series A
convertible preferred stock and Series C preferred stock, equal to a stated percentage of the gross
proceeds of the offering. The special distribution would be payable upon the closing of the
offering (and upon the closing of the over-allotment option, if applicable) to such holders on an
as converted to common stock basis. The amount of the special distribution is not yet known at
Securities and Exchange Commission
Page 11
this time, as it is dependent upon the size of the offering, which itself is dependent upon
market conditions, but the Company anticipates that it will be significant in amount relative to
its reported equity as of December 31, 2007 and as of June 30, 2008. In accordance with Staff
Accounting Bulletin (SAB) Topic 1.B.3, management believes it is appropriate to present a
pro forma balance sheet as of December 31, 2007 and as of June 30, 2008 alongside the corresponding
historical balance sheets to reflect the accrual of the special distribution, but without giving
effect to the receipt and distribution of the anticipated offering proceeds. The Company further
anticipates that the special distribution will be in excess of its earnings for the twelve-month
period ended June 30, 2008. In accordance with SAB Topic 1.B.3, management believes it is
appropriate to present pro forma earnings per share data for the 2007 fiscal year, and the
six-month period ended June 30, 2008, giving effect to the number of shares the proceeds from the
sale of which would be necessary to pay the special distribution (to the extent that the special
distribution exceeds earnings for the twelve-month period ended June 30, 2008) in addition to the
historical earnings per share.
The Company intends to amend the Registration Statement to include the pro forma presentation
and calculations in a subsequent amendment to the Registration Statement that contains the proposed
price range.
Note 2. Summary of Significant Accounting Policies
Formation and Transactions with Former Owner, page F-7
Staff Comment:
25. As disclosed, you accounted for the value of the Institute Warrant as a component of the
cost of the Campus and related buildings. Considering that in 2004, you only acquired the right to
purchase the ground campus and related buildings, tell us why it was appropriate to allocate a
portion of the cost of the purchase right or option into the cost of the campus and related
buildings.
Company Response:
As described in the Registration Statement, on June 25, 2004, the Company and the Institute
entered into an agreement (the Ancillary Agreement) pursuant to which, among other
things, the Company agreed to purchase substantially all of the ground campus and related buildings
(the Campus) from the Institute. Concurrently, the Company assigned its rights to
purchase the Campus under the Ancillary Agreement (the Assignment Agreement) to Spirit
and, following Spirits purchase of the Campus from the Institute, simultaneously entered into a
long-term lease with Spirit for use of the Campus (the Lease Agreement), which was
accounted for as a capital lease transaction.
In connection with, and as a part of the transactions effected by, the Ancillary Agreement,
the Assignment Agreement, and the Lease Agreement, the Company issued to the Institute and Spirit
warrants to purchase common stock of the Company (the Institute Warrant and the
Spirit Warrant, respectively). In accordance with EITF Issue No. 96-18, Accounting
Securities and Exchange Commission
Page 12
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services
(EITF 96-18), the Company estimated the value
of the Institute Warrant and the Spirit Warrant ($420,000 and $127,000, respectively) and treated
the value of those warrants as part of the cost of the Campus and the related capital lease with
Spirit.
Staff Comment:
26. We further note from your disclosure that in connection with the standstill agreement, you
acquired certain real property located on the Campus from the Institute. Clarify, if true, that
this real property was included in the Ancillary Agreement. If not, tell us the nature of the
property and how it affected the assignment of your right to purchase the ground campus and related
buildings to Spirit.
Company Response:
The real property that was originally conveyed by the Institute to Spirit in connection with
the Ancillary Agreement excluded one campus building and certain related real property, which the
Institute continued to own. The Institute ultimately conveyed this building and related real
property to the Company in connection with the Standstill Agreement. In response to the Staffs
comment, the Company has amended the Registration Statement to clarify this point.
Staff Comment:
27. Tell us the nature of the consideration that you received from Spirit in connection with
your assignment of the right to purchase the ground campus and related buildings. Also, tell how
you accounted for this consideration and the basis for your accounting.
Company Response:
The Company entered into the Assignment Agreement with Spirit as a means of financing the
acquisition of the Campus from the Institute, and thereafter entered into the Lease Agreement with
Spirit. The Company did not receive any consideration from Spirit in connection with the
Assignment Agreement.
Staff Comment:
28. We note that you exercised your option related to your standstill agreement with the
Institute on April 15, 2008. Citing your basis in the accounting literature, tell us how you
accounted for this transaction including the initial $3 million payment and how the transaction is
reflected in the financial statements. We also note on page 44 that you will recognize a prepaid
royalty asset that will be amortized over future periods. Tell us how you determined the fair
value of this asset and its amortization period.
Securities and Exchange Commission
Page 13
Company Response:
Under the Standstill Agreement, the Company was required to make an initial $3 million payment
(the Initial Payment) upon execution of the Standstill Agreement, and it received the
unilateral right to make an incremental $19.5 million payment (the Optional Payment and
together with the Initial Payment, the Total Payment) on April 15, 2008, which would
serve to settle the various disputes between the Company and the Institute, as described in the
notes to the audited financial statements included in the Registration Statement. The terms of the
Standstill Agreement did not provide the Institute with an option to terminate such agreement.
The following table provides a tabular depiction of the Companys allocation of the Total
Payment to each of the assets acquired, obligations settled, and liabilities assumed (the
Acquired Net Assets), based on the Companys fair value estimates. The text following
the table provides additional information regarding the allocation methodologies and the
classifications of assets as qualifying or non-qualifying as defined by SFAS No. 141, Business
Combinations (SFAS No. 141).
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($ in millions) |
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Initial Payment |
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$ |
3.0 |
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Optional Payment |
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19.5 |
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Total Payment to be allocated |
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$ |
22.5 |
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1) Obligations settled |
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-Accrued royalties due under Royalty Agreement (as of
April 15, 2008) |
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$ |
8.7 |
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-Repurchase of Institute Warrant |
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6.0 |
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-Repayment of Institute Loan, including accrued interest |
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2.3 |
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-Other amounts due to Institute |
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0.3 |
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2) Liabilities assumed and Non-qualifying assets acquired |
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-Assumption
of Institutes gift annuities obligation, at fair value |
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(0.9 |
) |
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3) Cost to be allocated to assets acquired
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-Real property and prepaid royalty asset |
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6.1 |
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Total preliminary fair value estimates |
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$ |
22.5 |
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Although the Initial Payment was not refundable to the Company under any circumstances, as of
December 31, 2007, the Company had not yet exercised, or determined whether it would exercise, its
unilateral option to pay the Institute the Optional Payment to settle the disputes with the
Institute.
Securities and Exchange Commission
Page 14
Subsequent to the Companys Initial Payment to the Institute, and during the period that the
Companys option remained outstanding and exercisable, the Initial Payment represented, in
substance, a prepaid component of the Total Payment.
Given the uncertainty at December 31, 2007 as to the ultimate application of the Initial
Payment, the Company classified this payment as a non-current asset (deposit with former owner)
on its December 31, 2007 balance sheet. Given that the Company did not determine to exercise its
option until after year end and did not exercise the option and make the Optional Payment to the
Institute until April 15, 2008, management believes that the treatment of the Initial Payment as a
deferred asset at December 31, 2007 is appropriate.
The net assets acquired in connection with the Standstill Agreement do not constitute a
business, as defined by EITF Issue No. 98-3, Determining Whether a Nonmonetary Transaction
Involves Receipt of Productive Assets or of a Business, and the Company has accounted for the
Acquired Net Assets by allocating the cost of the Total Payment to the individual assets acquired
and liabilities assumed based on the relative fair value method, as discussed in paragraph 9 of
SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), as well
as in
paragraphs 4 8 of SFAS No. 141. Because the recognition of goodwill is precluded in such asset
acquisitions, goodwill was not recorded in connection with this transaction.
The fair value of the Acquired Net Assets exceeded the Total Payment, and this excess amount
was allocated on a relative fair value basis to the qualifying assets rather than to all assets
(as described in paragraph 44 of SFAS No. 141). After applying the Total Payment to the
obligations settled at the acquisition date, the assumed liabilities were recognized at fair value,
and the remaining acquired assets were recognized based on their fair value relative to the total
fair value of all qualifying assets.
Accordingly, as indicated in the table above, the Total Payment was applied to the following
items, in the order indicated: (1) to satisfy all past royalties due to the Institute; (2) to
redeem the Institute Warrant, based on the original terms of such warrant; (3) to satisfy a loan
provided by the Institute, including all accrued and unpaid interest thereon; and (4) to satisfy
other amounts due to the Institute as of the option exercise date.
The Standstill Agreement also requires the Company to assume future payment obligations in
respect of certain gift annuities made to the Institute by donors prior to the acquisition, which
represents a liability assumed under the Standstill Agreement and were recognized based on the
fair value of such annuities at the option exercise date in accordance with the guidance provided
in SFAS No. 157, Fair Value Measurements (SFAS No. 157).
None of the assets acquired in the transaction constitute non-qualifying assets, and after
the settlement of the obligations and the recognition of the gift annuity liability discussed
above, the remaining $6.1 million of the Total Payment was allocated to the remaining acquired
assets (qualifying assets), and recognized based on their individual fair value relative to the
total fair value of all qualifying assets. As a result, the Company recognized the real property
(i.e., land and a building) acquired from the Institute in the transaction as an asset at the
option exercise
Securities and Exchange Commission
Page 15
date classified within Property and equipment and the property will be recognized at its
relative fair value subject to impairment considerations under SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144).
The settlement of future royalty payment obligations to the Institute represents a settlement
of the future royalty payment stream and the fair value of such obligation (i.e., the exit price)
was determined at the option exercise date in accordance with the guidance provided in SFAS No. 157
and was recognized as a prepaid royalty asset at that date.
Subsequent
to the option exercise date, the prepaid royalty asset is being amortized as an
operating expense in a systematic and rational manner consistent with the underlying assumptions
utilized to calculate the fair value of the asset at the option exercise date. This amortization
will continue until the asset is fully amortized. The prepaid royalty asset will be amortized as an
operating expense over a 20-year period and not as contra-revenue given the considerations in EITF
Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, as the facts and
circumstances of the royalty arrangement closely resemble gross revenue reporting, and the
amortization of this asset arises only as a result of the Companys operations (thus operating
expense classification is appropriate versus classification in other income (expense)).
Revenue Recognition, page F-10
Staff Comment:
29. We note that when a student withdraws prior to the end of the third week of a semester,
you will refund all or a portion of the tuition already paid. Tell us and disclose how your refund
policy impacts your tuition revenue recognition policy.
Company Response:
The Companys refund policy allows for a student to receive a refund of 100%, 75%, or 50% of
the students tuition if the student withdraws during the first, second, or third week after the
start of a term, respectively. Under its revenue recognition policy, the Company recognizes
tuition revenue on a monthly basis evenly over the length of an academic term, typically four
months, so that no revenue is recognized prior to the start of a course and, by the end of the
first month, 25% of the revenue has been recognized. Accordingly, the Company does not recognize
tuition revenue in excess of amounts it is entitled to retain under its tuition refund policy.
Note 3. Restricted Cash and Investments, page F-13
Staff Comment:
30. Tell us the nature of the municipal securities and U.S. Agency instruments and your basis
for determining their fair value. Also, tell us if any of these instruments are considered auction
rate securities. Further, please revise your disclosure to provide the maturity dates and
redemption and interest rate provisions of all of your securities.
Securities and Exchange Commission
Page 16
Company Response:
In
response to the Staffs comment, the Company has amended the
Registration Statement to discuss the nature of the municipal
securities and U.S. Agency instruments owned by the Company and the
Companys basis for determining their fair value as required by
SFAS No. 157. None of the securities owned by the Company are
considered auction rate securities.
Note 4. Property and Equipment, page F-14
Staff Comment:
31. Please disclose the remaining estimated useful life of each major classification of
property and equipment.
Company Response:
In
response to the Staffs comment, the Company has amended the
Registration Statement to expand its disclosure under Note 2 concerning the
estimated useful life of each major classification of property and
equipment.
Note 7. Notes Payable and Capital Lease Obligations, page F-15
Staff Comment:
32. Tell us how you accounted for the amounts advanced by Spirit into the tenant improvement
funds. Include in your response how these funds are reflected in the balance sheets, statements of
operations and statements of cash flows.
Company Response:
Amounts advanced by Spirit as tenant improvement funds are recorded in the balance sheet as an
increase in the capital lease obligation upon the receipt of the funds from Spirit, and are
amortized along with the remainder of the capital lease obligation, in part through interest
expense and in part through depreciation in the statements of operations, over the remaining term of the lease. Amounts advanced by
Spirit as tenant improvement funds are recorded as a reduction of capital expenditures in the
Investing activities section of the statements of cash flows.
Note 10. Preferred Stock and Equity Transactions
Series B Preferred Stock, page F-19
Staff Comment:
33. Tell us your consideration of EITF D-42 in accounting for the conversion of the remaining
865 shares of Series B into 800 shares of Series C. Also, tell us whether the conversion was made
pursuant to the original terms of the Series B preferred stock. If so, tell us and disclose the
nature of the terms.
Securities and Exchange Commission
Page 17
Company Response:
The original terms of the Series B preferred stock did not contain any provision to allow for
the conversion of Series B preferred stock into Series C preferred stock and no amendment was made
to the Series B preferred stock to allow for conversion into Series C preferred stock.
The transaction in which certain holders of the Series B preferred stock received shares of
Series C preferred stock for such shares of Series B preferred stock is most appropriately
described as an exchange, and not a conversion. At December 17, 2007, the remaining 865 shares of
Series B preferred stock were exchanged for 800 shares of Series C preferred stock. In the
exchange, the fair value of the Series C preferred stock issued (i.e., fair value of the
consideration transferred to the preferred stockholders) was equal to the carrying amount of the
Series B preferred stock, net of issuance costs, at the exchange date. Contemporaneous with the
exchange, several additional investors purchased shares of Series C preferred stock for cash at the
same valuation as the exchange. No excess consideration was transferred to the holders of Series B
preferred stock and no discount was applicable to the Series B preferred stock holders at the time
of redemption. Management considered the guidance in EITF Issue No. D-42, The Effect on the
Calculation of Earnings per share for the Redemption or Induced Conversion of Preferred Stock
(EITF D-42), and concluded that the exchange therefore had no impact on net earnings
available to common shareholders for purposes of calculating earnings per share.
In response to the Staffs comment, the Company has revised its disclosure in Note 11 to the
audited financial statements included in the Registration Statement to describe the Series B
transaction as an exchange, rather than a conversion.
Series C Preferred Stock, page F-19
Staff Comment:
34. Per page 6, we understand that the Series C Preferred Stock will be automatically
converted to common shares upon the closing of the initial public offering through an amendment to
your certificate of incorporation. Tell us if the Series C Preferred Stock agreement was amended
to provide for this automatic conversion. If so, revise to disclose the date the agreement was
amended and terms of the provision. If not, tell us why these preferred stocks can be
automatically converted to common shares upon the closing of the initial public offering.
Company Response:
In May 2008, the board of directors and stockholders of the Company authorized an amendment to
be made to the Companys certificate of incorporation that provides for the Series C preferred
stock to convert automatically into common stock upon the closing of a Qualified Public Offering
(as defined in the Companys certificate of incorporation). It is anticipated that this offering
will constitute a Qualified Public Offering. The amendment is anticipated to be filed, and would
become effective, prior to the effectiveness of the Registration Statement. In
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response to the Staffs comment, the Company has amended the Registration Statement to
disclose this information and the terms of the conversion provision.
Warrants to Purchase Common Stock, page F-20
Staff Comment:
35. Citing your basis in the accounting literature, tell us whether you are accounting for the
Institute Warrant as a liability or equity component.
Company Response:
The Institute Warrant was accounted for as a component of equity. Management has reviewed the
December 1, 2006 Working Draft , Convertible Debt, Convertible Preferred Shares, Warrants, and
Other Equity-Related Financial Instruments, prepared by the Convertible Debt, Convertible Preferred
Shares, Warrants, and Other Equity-Related Financial Instruments Task Force and Staff of the
American Institute of Certified Public Accountants (the Roadmap), including Chapter 2:
Roadmap for Accounting for Freestanding Financial Instruments Indexed to, and Potentially Settled
in, a Companys Own Stock, which includes evaluation of the instrument under SFAS No. 150, EITF
D-98, EITF 00-19, and other applicable accounting literature. Based on this review, management
determined that the Institute Warrant was a written call option to purchase a variable number of
shares of the Company. The Institute Warrant provided for the delivery of a variable number of
shares based on the then-current number of shares outstanding and did not provide the holder with
any right to put the Institute Warrant to the Company. The monetary value of the shares delivered
varied directly with the value of the Companys common stock. The monetary value of the obligation
to deliver these shares was not based on a fixed monetary amount, variations in something other
than the fair value of the Companys shares, or variations inversely related to changes in the fair
value of the Companys shares. The monetary value of the shares delivered upon exercise of the
Institute Warrant was based solely on the variations in the fair value of the Companys common
stock and is therefore considered indexed solely to the Companys own common stock. Management
also concluded that the Institute Warrant was issued to a non-employee as a portion of the
consideration to acquire the Campus.
Based on the Roadmap, management determined that the Institute Warrant should be accounted for
under other applicable GAAP until performance occurred. The applicable guidance that was evaluated
by management and used to account for the Institute Warrant prior to performance occurring was EITF
96-18, whereby the Institute Warrant was accounted for as an equity instrument. Upon performance
occurring (i.e., the Campus acquisition transaction closed), management evaluated the Institute
Warrant under the provisions of EITF Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19).
The Institute Warrant only requires that the Company deliver shares as part of a physical
settlement, and since there are no net-cash or net-share settlement features to the Institute
Warrant, management concluded that it was appropriate to classify the Institute Warrant as equity.
In addition, the Company evaluated the call feature embedded in the Institute Warrant, which
permits the Company to redeem the Institute Warrant
Securities and Exchange Commission
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at its sole discretion for $6 million, and concluded that, because the call option was solely
within the Companys control, equity classification was appropriate.
Staff Comment:
36. Citing your basis in the accounting literature, tell us how you are accounting for the
Spirit Warrant.
Company Response:
The Spirit Warrant was accounted for as a component of equity and a capital lease asset as it
was issued in connection with the Spirit lease. Management reviewed Chapter 2 of the Roadmap and
determined that the Spirit Warrant is a written call option to purchase a fixed number of shares of
the Company and does not provide the holder with any right to put the Spirit Warrant to the
Company. The monetary value of the shares delivered varies directly with the value of the
Companys common stock. The monetary value of the obligation to deliver these shares is not based
on a fixed monetary amount, variations in something other than the fair value of the Companys
shares, or variations inversely related to changes in the fair value of the Companys shares. The
monetary value of the shares delivered upon exercise of the Spirit Warrant is based solely on the
variations in the fair value of the Companys common stock and is therefore considered indexed
solely to the Companys own common stock. Management concluded that the Spirit Warrant was issued
to a non-employee in connection with entering into a lease agreement.
Based on the Roadmap, management determined that the Spirit Warrant should be accounted for
under other applicable GAAP until performance has occurred. The applicable guidance that was
evaluated by management and used to account for the Spirit Warrant prior to performance occurring
was EITF 96-18, whereby the Spirit Warrant was accounted for as an equity instrument. Upon
performance occurring (i.e., the execution of the lease agreement), management evaluated the Spirit
Warrant under the provisions of EITF 00-19. The Spirit Warrant only requires that the Company
deliver shares as part of a physical settlement, and since there are no net-cash or net-share
settlement features, management concluded that it was appropriate to classify the Spirit Warrant as
equity. In addition, the Company evaluated its call feature embedded in the Spirit Warrant, which
permits the Company to redeem the Spirit Warrant at its sole discretion for $16 million, and
concluded that, because the call option was solely within its control, equity classification
remains appropriate.
Note 16. Subsequent Events
Blanchard Amendment, page F-26
Staff Comment:
37. Tell us your basis of measurement for the 200 shares of common stock issued to Blanchard.
Also, tell us and disclose the fair value assigned to these shares.
Securities and Exchange Commission
Page 20
Company Response:
Under the terms of the Companys agreement with Blanchard Education, LLC, Blanchard would earn
shares based upon specified levels of enrollment in business courses at the College of Business.
In accordance with FAS 123R and EITF 96-18, each tranche of shares corresponding to a stated
enrollment threshold set forth in the agreement has been treated as a share-based award subject to
performance conditions. Accordingly, the Company has applied variable accounting procedures that
have taken into account the value of each tranche of shares from the time it was deemed probable to
be earned and then fixed the value when such tranche was actually earned.
As of December 31, 2006, the Company determined that it had become probable that the first
enrollment threshold would be met and, therefore, that Blanchard would earn the first tranche of
100 shares. Based on a valuation of its common stock at that date, the Company determined that
$281,900 should have been set up as an asset and amortized between January 1, 2007 and February 6,
2016 (the expiration date of the license agreement). During the third quarter of 2007, this first
enrollment threshold was in fact met, and Blanchard earned the first tranche of 100 shares, by
which point the fair value of the award had increased to $398,400, and the related asset should
have been increased accordingly. The Company has restated its financial statements to properly
reflect the accounting for this transaction.
On May 9, 2008, the Company and Blanchard amended the terms of the agreement, pursuant to
which Blanchard was issued an additional 100 shares of the Companys common stock in full
settlement of all shares owed and contingently owed under this agreement. Thus, an additional 100
shares became earned on that date and all remaining performance conditions based on enrollment
thresholds were terminated. Although a valuation as of December 31, 2007 valued the shares at
$5,149 per share, because the Company filed its initial S-1 on May 13, 2008, the Company believes
that the most appropriate value to be placed on the additional 100 shares is one that reflects the
valuation placed on the Company in connection with its initial public offering. As the offering
has not yet priced, the Company is required to estimate this value,
and has valued the
additional 100 shares at $29,954 per share. The asset of $2,995,400
was recorded on May 9, 2008 and is being amortized between that
date and February 2016.
Updating
Staff Comment:
38. Update your financial statements and applicable sections under Rule 3-12 of
Regulation S-X.
Company Response:
The Company has amended the Registration Statement to update its financial statements and
applicable sections under Rule 3-12 of Regulation S-X.
Securities and Exchange Commission
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* * * *
If you require any additional information on these issues, or if we can provide you with any
other information that will facilitate your continued review of this filing, please advise us at
your earliest convenience. You may reach me at (602) 639-6820.
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Sincerely,
Grand Canyon Education, Inc.
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By: |
/s/ Christopher C. Richardson
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Name: Christopher C. Richardson |
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Its: |
General Counsel |
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Enclosures