G
R
A
N
D
C
A
N
Y
O
N
E
D
U
C
A
T
I
O
N
|
2
0
1
7
A
N
N
U
A
L
R
E
P
O
R
T
A N N U A L R E P O R T
2017
F I N D Y O U R P U R P O S E
D E A R S H A R E H O L D E R S,
Grand Canyon University experienced yet
another groundbreaking year in 2017, setting the
stage for what promises to be the dawn of a new
era in 2018.
During the past year:
• Enrollment hit record levels, increasing 10.2
percent to 90,297 as of Dec. 31, 2017. That
includes a ground enrollment increase of 9.2
percent to 18,842 and an online enrollment
increase of 10.5 percent to 71,455. We
attribute much of that to the continued
growth of our academic offerings, as 25 new
degree programs, emphases and certificates
were launched during the calendar year.
In particular, students are drawn to new
academic programs in STEM areas such as
engineering, computer science, information
technology and cybersecurity.
• It was announced that tuition on the ground
campus will remain frozen for the 10th
straight year as we continue our efforts to
keep high-quality, private, Christian higher
education affordable to all socioeconomic
classes of Americans. Online tuition has
increased only once, by 1 percent, in the last
five years.
• The burgeoning Phoenix campus expanded
to 275 acres, with the start or completion of
10 construction projects: the new Colangelo
College of Business building; Jerry
Colangelo Museum; three residence halls;
stadiums for baseball, softball and beach
volleyball; a basketball practice facility; and
club sports facility.
• The University’s first year as a postseason-
eligible NCAA Division I institution drew
national attention. The men’s basketball
team and the highly acclaimed Havocs
student section were the talk of the town
as they reached the Western Athletic
Conference Tournament championship
game in Las Vegas.
• Other performance areas also excelled as
the speech and debate team achieved a
No. 14 national ranking in parliamentary
debate, we had five highly acclaimed theater
performances, dozens of music and dance
productions, and approximately 10,000
students participated in intramural and club
sports programs.
All of these remarkable achievements are the
result of GCU’s truly innovative approach to
higher education, which will become even more
transformational in the coming year as we look to
complete a transaction that will create a nonprofit
university that is supported by a multi-billion
dollar education services company.
The sale of certain academic assets to a nonprofit
entity – “New GCU” – cleared its biggest hurdle
in February 2018 when it was approved by the
Higher Learning Commission. The transaction
would allow New GCU to conduct itself as a
traditional nonprofit university, consistent with
its history and on a level playing field with other
traditional universities with regard to tax status
and, among other things, the ability to accept
philanthropic contributions, pursue research
grant opportunities and participate in NCAA
governance.
Grand Canyon Education (GCE), meanwhile,
would operate in the fast-growing education
services industry and provide services to New
GCU and, potentially, in the future, to other
universities. While this space is very competitive,
GCE has built a state-of-the-art learning platform
to deliver high-quality education surrounded by
world-class service, and, just as important, has
a management team with more than 20 years of
experience effectively delivering education in
an online environment. That combination, we
believe, gives GCE a distinct advantage and the
ability to not only develop and deliver curriculum
in instructor-led, collaborative, small-group
classes that focus on writing and critical thinking
skills, but also the ability to assess those learning
outcomes to ensure students are graduating with
the knowledge, competencies and skills necessary
to succeed in the workplace.
The transaction, which is expected to be
completed by the second quarter of 2018, will
put the institution in an even stronger position
and ensure the long-term legacy of both Grand
Canyon Education and the New GCU.
Brian Mueller, CEO and Chairman
G R A N D C A N Y O N E D U C A T I O N
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2017
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from [ ] to [ ]
Commission file number: 001-34211
GRAND CANYON EDUCATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
20-3356009
(I.R.S. Employer
Identification No.)
3300 W. CAMELBACK ROAD, PHOENIX, ARIZONA 85017
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (602) 639-7500
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class)
Grand Canyon Education, Inc.
Common stock, $.01 par value
(Name of Each Exchange on Which Registered)
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Emerging growth company ☐
Accelerated filer
☐
Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes ☐ No ☒
The total number of shares of common stock outstanding as of February 16, 2018 was 48,292,274.
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the registrant’s common stock was listed on the
NASDAQ Global Market. As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $3.7 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Definitive Proxy Statement for its 2018 Annual Meeting of Stockholders (which is expected to be filed with the
Commission within 120 days after the end of the registrant’s 2017 fiscal year) are incorporated by reference into Part III of this Report.
GRAND CANYON EDUCATION, INC.
FORM 10-K
INDEX
PART I
Special Note Regarding Forward-Looking Statements
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Consolidated Financial and Other Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Consolidated Financial Statement Schedules
SIGNATURES
Exhibit Index
Page
4
3
4
24
37
37
37
37
37
37
40
43
55
56
81
81
83
83
83
83
83
83
83
84
84
87
85
2
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including Item 1, Business; Item 1A, Risk Factors; and Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, contains certain “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;
statements as to whether regulatory developments or other matters may or may not have a material adverse effect on our financial
position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, or forecasts as to
our business, financial and operational results, and future economic performance; and statements of management’s goals and
objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,”
“would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar
expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be
accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based
on information available at the time those statements are made or management’s good faith belief as of that time with respect to future
events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those
expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not
limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our announced intention to sell our academic and related operations and assets to a non-profit entity and become a
services company;
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;
the ability of our students to obtain federal Title IV funds, state financial aid, and private financing;
potential damage to our reputation or other adverse effects as a result of negative publicity in the media, in the
industry or in connection with governmental reports or investigations or otherwise, affecting us or other companies
in the for-profit post-secondary education sector;
risks associated with changes in applicable federal and state laws and regulations and accrediting commission
standards, including pending rulemaking by the Department of Education;
competition from other universities in our geographic region and market sector, including competition for
students, qualified executives and other personnel;
our ability to properly manage risks and challenges associated with strategic initiatives, including the expansion of
our campus, potential acquisitions or divestitures of, or investments in, new businesses, acquisitions of new
properties, or the development of new campuses;
our expected tax payments and tax rate, including the effect of the Tax Cuts and Jobs Act of 2017;
our ability to hire and train new, and develop and train existing employees and faculty;
the pace of growth of our enrollment;
our ability to convert prospective students to enrolled students and to retain active students to graduation;
our success in updating and expanding the content of existing programs and developing new programs in a cost-
effective manner or on a timely basis;
industry competition, including competition for qualified executives and other personnel;
risks associated with the competitive environment for marketing our programs;
failure on our part to keep up with advances in technology that could enhance the online experience for our
students;
the extent to which obligations under our credit agreement, including the need to comply with restrictive and
financial covenants and to pay principal and interest payments, limits our ability to conduct our operations or seek
new business opportunities;
our ability to manage future growth effectively;
general adverse economic conditions or other developments that affect the job prospects of our students; and
3
•
other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Business,” and “Regulation.”
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.
Item 1.
Business
Overview
Part I
Grand Canyon Education, Inc., a Delaware corporation, operates Grand Canyon University a comprehensive regionally
accredited university that offers over 225 graduate and undergraduate degree programs, emphases and certificates across nine colleges
both online and on ground at our over 275 acre campus in Phoenix, Arizona, at leased facilities and at facilities owned by third party
employers of our students. References herein to “we,” “our,” “us,” the “Company” and “University” refer to Grand Canyon
Education, Inc.; references to “Grand Canyon University” or “GCU” refer to the accredited academic institution that we operate.
We are committed to providing an academically rigorous educational experience with a focus on professionally relevant
programs that meet the objectives of our students. Our undergraduate programs are designed to be innovative and meet the future
needs of employers, while providing students with the needed critical thinking and effective communication skills developed through
a Christian-oriented, liberal arts foundation. We offer master’s and doctoral degrees in contemporary fields that are designed to
provide students with the capacity for transformational leadership in their chosen industry, emphasizing the immediate relevance of
theory, application, and evaluation to promote personal and organizational change. We believe the growing brand of the University
and the value proposition for both traditional aged students attending on our campus in Phoenix, Arizona and working adult students
attending on our campus or at off-site locations in cohorts (referred to by us as professional studies students) or online, has enabled us
to increase enrollment to approximately 90,300 students at December 31, 2017. At December 31, 2017, 79.1% of our students were
enrolled in our online programs, and, of our working adult students (online and professional studies students), 50.5% were pursuing
master’s or doctoral degrees.
We define working adults as students age 25 or older who are pursuing a degree while employed. As of December 31, 2017,
86.1% of our online and professional studies 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, particularly those who have some college experience, represent an attractive
student population because they are better able to more readily recognize the benefits of a post-secondary degree, have higher
persistence and completion rates than other students, and to finance their education generally.
In 2017, we continued to increase the number of students in attendance at our expanding traditional ground campus. We
attribute the significant growth in our enrollment to our increasing brand recognition and the value proposition that our ground
traditional campus affords to traditional-aged students and their parents. After scholarships, our ground traditional students pay for
tuition, room, board, and fees, often half to a third of what it costs to attend a private, traditional university in another state and an
amount comparable to what it costs to attend a public university. Our online students pay tuition and fees in an amount that is often
less than the cost of other high service online programs such as ours. For example, one of our largest competitor’s undergraduate
tuition for online programs ranges from $510 to $718 per credit hour and its graduate tuition for online programs ranges from $512 to
$1,312 per credit hour while our online tuition per credit hour ranges from $355 to $470 for undergraduate programs and $330 to $640
for graduate programs. There are online programs that are less expensive than ours but those programs generally do not provide the
full level of support services that we provide to our students. Although our online enrollment continues to grow, as the proportion of
traditional colleges and universities providing alternative learning modalities increases, we will face increasing competition for
working adult students from such institutions, including those with well-established reputations for excellence. We plan to continue
increasing enrollment growth for our traditional campus over the next few years, and seek to have more than 20,500 ground students
in attendance at the beginning of our 2018-2019 academic year. In November 2012, we accepted an invitation to become a member of
the Division I Western Athletic Conference beginning with the 2013-2014 academic year, and in 2013 we began the four-year process
to reclassify our NCAA membership from Division II to Division I and we began playing full Division I schedules. In July 2017, the
University successfully completed all “year four” requirements and is now a full member of Division I Western Athletic Conference
and is eligible for post-season play.
We continue to experience growth in enrollment, net revenue, and operating income over the last several years. Our enrollment
at December 31, 2017 was approximately 90,300, representing an increase of approximately 10.2% over our enrollment at
4
December 31, 2016. Our net revenue and operating income for the year ended December 31, 2017 were $974.1 million and
$282.8 million, respectively, representing increases of 11.5% and 19.2%, respectively, over the year ended December 31, 2016. Our
net revenue and operating income for the year ended December 31, 2016 were $873.3 million and $237.2 million, respectively,
representing increases of 12.2% and 12.8%, respectively, over the year ended December 31, 2015. We seek to achieve continued
growth in a manner that reinforces our reputation for providing academically rigorous, professionally relevant educational programs
that advance the educations and careers of our students.
We have been regionally accredited by the Higher Learning Commission (“HLC”) and its predecessor since 1968. We were
reaccredited in 2017 by the HLC for the maximum term of ten years after a comprehensive review of the institution’s academic
offerings, governance and administration, mission, finances and resources that occurred during 2016, with no requirement for any
monitoring or interim reports. The comprehensive review occurs every 10 years, along with a mid-term report in year four. We believe
that our regional accreditation, together with appropriate specialized programmatic accreditations, reflect the quality of our programs,
enhance their marketability to students, and improve the employability of our graduates.
Potential Change in the Structure of Our Operations
On January 5, 2018, we filed a Current Report on Form 8-K in which we disclosed that in December 2017 Grand Canyon
University (“GCU”) had submitted to the HLC an application for approval to effect the sale of GCU to a nonprofit entity. This
application updated the application filed by GCU during 2015-2016 seeking approval of a similar transaction as a means of enabling
GCU to conduct itself as a traditional nonprofit university, consistent with its history and on a level playing field with other traditional
universities with regard to tax status and, among other things, the ability to accept philanthropic contributions, pursue research grant
opportunities, and participate in NCAA governance. The prior application proposed a transaction that would have involved the sale of
the Company’s academic-related assets, real estate and related intangibles to a newly-formed nonprofit corporation (“New GCU”).
Following this sale, the nonprofit corporation would have operated the university while the Company would have continued to operate
as a third-party provider of services to New GCU and potentially, in the future, to other universities. The HLC Board of Trustees
denied this application, in part, based on its view that its accreditation requirements did not allow for the type of shared services
arrangement that GCU had proposed.
In May 2017, the Company became aware that the HLC was considering adopting new accreditation guidelines that, if complied
with, would allow for HLC-accredited institutions to engage in shared services arrangements. Following further engagement with the
HLC, and the HLC’s adoption in November 2017 of these new guidelines (the “2017 HLC Guidelines”), GCU submitted to the HLC
the updated application seeking approval to effect the sale of the GCU assets to a nonprofit entity in the manner described above and,
thereafter, for New GCU to enter into a shared services agreement with the Company. The final form of this application was filed on
December 18, 2017. The Company currently expects the HLC to act on this application as soon as the next HLC Board meeting in
February 2018.
As currently contemplated, the proposed transaction would involve the following (the “Proposed Transaction”):
•
•
The Company would sell to New GCU academic and related operations and assets sufficient for New GCU to
achieve status as an HLC-accredited institution. The purchase price for the transferred assets would be determined
following receipt of third party appraisals and subsequent negotiation and would be paid in the form of a long-term
note between the Company and New GCU subject to customary commercial credit terms. GCU’s current faculty,
academic leadership and related staff and other employees in departments such as student and spiritual life,
athletics, and facilities, would become employed by New GCU and New GCU would be governed by the current
institutional board of trustees of GCU. The Company would retain all other employees and assets necessary to
perform the third-party services contemplated by the sale, including an office complex where most services-related
personnel are currently located.
The Company and New GCU would enter into a long-term master services agreement pursuant to which the
Company would provide identified technological, marketing, promotional, financial aid and other support services
to New GCU in return for an agreed upon share of New GCU’s tuition and fee revenue. The revenue share
between the two entities remains subject to completion of a transfer pricing study and subsequent negotiation, but
is expected to be comparable to other shared services arrangements currently in place in the higher education
marketplace and to reflect the level of services that the Company would be providing to new GCU. The terms of
the master services agreement would comply with the 2017 HLC Guidelines.
It is very important to note the following:
• While an application for approval of the proposed sale has been submitted to both the HLC and Department of Education,
along with draft documents that, if the application is approved, would govern the terms of the sale and the shared services
arrangement, definitive agreements between the Company and New GCU have not been signed and key terms remain
subject to analysis, negotiation and final agreement between the Company and New GCU. As such, neither the Company
5
nor New GCU is bound to move forward with the sale and neither party will move forward unless and until definitive
agreements are executed. The Company does not expect to execute any definitive agreements until the HLC and
Department of Education processes have concluded.
•
•
The Company and GCU are continuing to review various federal and state regulatory issues that could impact the viability
of the transaction. That review is not completed at this time. The Company does not expect to execute any definitive
agreements until these issues have been resolved and any necessary regulatory approvals have been received.
The HLC previously denied the application for the similar transaction that was made in 2015-2016. While the Company
believes that the current proposal addresses any concerns noted by the HLC in its denial and complies with the new 2017
HLC Guidelines, no assurance can be given that the HLC will approve this application, that the parties will agree on the
final key terms of the sale, or that the sale will be consummated.
While the outcomes of the HLC application and Department of Education pre-approval processes, and other regulatory
processes, is not known at this time, to prepare for the possibility of the transaction being approved, the Company intends to continue
its preparation to take various steps – including allocation of employees to New GCU, financial modeling, and asset transfer processes
– that would be necessary to complete the transaction.
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 bachelor’s 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 and master’s 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 an interdenominational Christian university.
In late 2003, the school’s Board of Trustees initiated a process to evaluate alternatives as a result of the school’s poor financial
condition and, in February 2004, a group of investors acquired the assets of the school and converted the school into a for-profit
institution.
Our Approach to Academic Quality
Some of the key elements that we focus on to promote a high level of academic quality include:
•
Academically rigorous, professionally relevant curricula. We prepare learners to become global citizens, critical
thinkers, effective communicators and responsible leaders by providing an academically challenging, values-based
curriculum from the context of our Christian heritage. 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 and industry-
specific subject-matter experts who are committed to high quality, rigorous education and professional
preparedness. We design our curricula to address specific objectives that pre-career and working-adult students
need and are seeking. Through this combination, we believe that we produce graduates that can compete with
integrity and become leaders in their chosen fields.
• Qualified faculty. We demonstrate our commitment to high quality education by hiring qualified faculty with
relevant practical experience. Substantially all of our current faculty members hold at least a master’s degree in
their respective fields and approximately 50% of our faculty members of record are doctorate prepared. Further,
the University has implemented a full time faculty model for online course instruction. In 2017, almost all of the
online first year courses were taught by an online, full time faculty member. We believe the presence of a full time
faculty member in the classroom for the first year students results in increased student retention. We invest in the
professional development of our faculty members by providing online and ground pedagogical training along with
hosting events that encourage the development and sharing of best practices. Additionally, we also monitor and
evaluate teaching effectiveness through assessment content reviews, peer reviews, and student evaluations.
• Centralized program design and curriculum development. We employ a college driven highly collaborative
designed curriculum development process to ensure a consistent learning experience. We continuously review our
programs at least every 3 years in an effort to ensure that they remain consistent, up-to-date, relevant, and effective
in producing the desired learning outcomes. We also annually review programmatic assessment results, mission
based competency results, graduation rates, retention rates and constituency surveys to identify opportunities for
course modifications and upgrades.
6
•
Effective student services. We establish teams comprised of admissions and student services counselor personnel
that act as the primary support contact point for each of our students, beginning at the application stage and
continuing through graduation. We also continually focus on improving the technology used to support student
learning, including delivering a new 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,
financial, library, and career services, are accessible online, generally allowing users to access these services at a
time and in a manner that is convenient to them.
• Continual academic oversight. We have centralized the support functions of assessment for all of our programs
through our Office of Assessment. While each of our colleges continuously evaluates the desired learning
outcomes for each of their programs, the Office of Assessment provides data collection and analysis support. We
continuously assess outcomes data to determine whether our students graduate with the knowledge, competencies,
and skills that are necessary to succeed in the workplace. The Office of Assessment also initiates and manages
periodic examinations of the mission-based competencies in our curricula by full-time and adjunct reviewers to
evaluate and verify mission-based competency attainment. Based on these processes and student feedback from
both programmatic and mission-based assessment, we determine whether to modify or discontinue programs that
do not meet our standards or market needs, or to create new programs.
We also offer the following features in an effort to enrich the academic experience of current and prospective students:
•
•
Flexibility in program delivery. We 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. We have
established onsite arrangements with 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.
Small class size. At December 31, 2017, 94.5% of our online and professional studies classes had 25 or fewer
students. Our average, class size on our ground traditional campus is 25 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.
Curricula
We offer the degrees of Doctor of Education, Doctor of Business Administration, Doctor of Nursing Practice, Doctor of
Philosophy, Education Specialist, Master of Divinity, Master of Arts, Master of Education, Master of Business Administration, Master
of Public Administration, Master of Public Health, 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 a selection of emphases. We also offer certificate
programs, which consist of a series of courses focused on a particular area of study, for both the post-baccalaureate and post-graduate
students who seek to enhance their skills and knowledge or achieve additional licensure.
We offer over 225 graduate and undergraduate degree programs, emphases and certificates through our nine distinct colleges:
•
•
•
•
•
the Colangelo College of Business, which has a well-known brand among our target student population, an
advisory board that includes recognized business leaders, and a reputation for offering professionally relevant
degree programs;
the College of Doctoral Studies, which utilizes innovative technology, collaboration, and learning communities to
develop expert practitioners and researchers who can become leaders in the disciplines and communities they
serve;
the College of Education, which has greater than a 60-year history as one of Arizona’s leading teacher’s colleges
and consistently graduates teachers who meet or exceed state averages on the Arizona Educator Proficiency
Assessment exams;
the College of Fine Arts and Production, which continues the long and highly regarded tradition that the
University has in the Fine Arts;
the Honors College, which serves to develop our most ambitious students across any of our programs and many of
these students participate in the Honors Research Fellowship program, which partners students with faculty or
industry partners on scientific and applied research projects;
7
•
•
•
•
the College of Humanities and Social Sciences, 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;
the College of Nursing and Health Care Professions, which has a strong reputation within the Arizona nursing
community and is the largest nursing program in Arizona when considering total college enrollment (bachelor and
master’s degree students);
the College of Science, Engineering, and Technology, which with science, engineering, technology, and
mathematics professions in extremely high demand, driving our economy, continuously evolving, and redefining
modern day life is focused on preparing exceptionally competent graduates to enter the dynamic and highly
competitive workforce of the 21st century; and
the College of Theology, which serves as one of the many vehicles through which the University affirms its
Christian heritage.
Under the overall leadership of our senior academic affairs vice presidents and the deans of the individual colleges, each of the
colleges organizes its academic programs through various departments and schools.
We have established relationships with community colleges, health-care systems, school districts, and other employers through
which we offer programs to provide flexibility and convenience to students and their employers.
We currently offer our ground-based programs to traditional students through three 15-week semesters in a calendar year and to
online students in courses that generally range from five to sixteen weeks throughout the calendar year. Traditional students generally
enroll in three or four courses per semester while online students typically concentrate on one course at a time. We require our online
students to be actively engaged in their online student classroom at least three or four times each week, depending on the content and
degree level of the class, 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
To aid us in the identification of potentially new degree programs or emphasis areas, we investigate market demand and review
proposals developed by faculty, staff, students, alumni, college specific advisory boards comprised of leaders in their field or other
partners. We then perform an analysis of the consistency of the proposed program or emphasis with our mission, long-term demand,
and development costs. If, following this analysis, the University Development Committee decides to proceed with a new program,
our college faculty and administrators approve subject-matter experts with whom our Curriculum Design and Development Team
members, including instructional designers, curriculum developers, librarians, and editors, work to design the program competencies
so that it is consistent with our academically rigorous, professionally oriented program standards. The program is then reviewed by the
dean of the applicable college, the Program Standards and Evaluation Faculty Committee, the Academic Affairs Committee, and
finally, our Provost and Chief Academic Officer. Upon accreditation and regulatory approval, the subject matter experts develop
course syllabi, 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 level of degree.
Assessment
The University fosters a culture of student assessment and improvement by establishing a strong foundation for assessment of
student learning and implementing institutional goals and benchmarks. Essential to the institutionalization of assessment and our
commitment to continuous improvement is the development of a culture of assessment among faculty, staff and students. The resulting
establishment of widespread reflective practice and acquired evaluative expertise characterizes our community and commitment to a
culture of student assessment. All stakeholders are involved in student learning and institutional experience and, therefore, are part of
the ongoing collaboration and effort to promote a culture of assessment among faculty, staff and students. The University’s faculty-
driven, course-embedded and performance-based approach to assessment is ongoing, intentional, thorough and applicable so that it
will have the most significant possible impact on improvement of student learning and university functions and processes. Our
ultimate goal is to improve student learning and the total university experience by enhancing instructional effectiveness, removing
obstacles to learning, facilitating student persistence toward completion of an academic program and demonstrating purposeful effort
toward institutional effectiveness.
The Office of Assessment, as part of the Office of Institutional Effectiveness, functions to facilitate continuous improvement of
student learning and is responsible for management, analysis and informational reporting of assessment data collected by the
University.
8
Faculty
Our faculty includes full-time faculty, as well as adjunct faculty with relevant practical experience whom we employ to teach on
a course-by-course basis for a specified fee. Our current faculty members hold at least a master’s degree in their respective fields and
approximately 50% of our teaching faculty of record hold doctorate degrees.
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, but
not limited to, engaging our full-time faculty and other specialists to conduct peer reviews of our adjunct faculty, monitoring the
amount of contact and the quality of feedback that faculty have with students in our online programs, reviewing student feedback,
conducting content reviews 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, among other things,
assigning him or her a mentor or through other means. If the faculty member’s performance does not improve, we terminate the
faculty member’s contract and employment.
Student Support Services
Encouraging students that enter Grand Canyon University to complete their degree programs is critical to our success. We focus
on developing and providing resources that simplify the student enrollment process, acclimate students to our programs and our online
environment, support the student educational experience, 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 Learning
Lounges offer research services, writing services, and other tutoring services. Learning sessions are offered on a one-on-one basis and
group sessions.
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 apply for financial aid, pay their tuition, order their transcripts online, and apply for
graduation. We believe this online accessibility provides the convenience and self-service capabilities that our students value. Our
student services 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 meet, or exceed,
the requirements set by relevant accrediting bodies for us to offer undergraduate, master’s, 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 18 hours per day during the week and 17 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, Admissions and Retention
Marketing. We engage in a range of marketing activities designed to position us as a provider of academically rigorous,
professionally relevant 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. We target our online programs to working adults focused on program quality, convenience, and career advancement goals.
We target our ground programs to 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 our leased facilities or at their employer’s facility. In
marketing our programs to prospective students, we emphasize the value of the educational experience and the academic rigor and
professional relevancy of the programs, as well as the cost of the program. 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.
9
Recruitment. Once a prospective student has indicated an interest in enrolling in one of our programs, our lead management
system identifies and directs a university counselor to initiate immediate communication. The university counselor serves as the
primary, direct contact for the prospective student and the counselor’s 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
student’s goals. Upon the prospective student’s submission of an application, the university 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.
Admissions. Admission to Grand Canyon University is available to qualified students who are at least 16 years of age.
Undergraduate applicants may qualify in various ways, including by having a high school diploma, certain minimum grade point
average levels, certain minimum composite scores on the Scholastic Aptitude Test or on the ACT test, or certain minimum scores 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. 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 an accredited college, university, or
program. In addition, some students who do not meet the qualifications for admission may be accepted with specification. A student
being considered for such admission 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.
Retention. A key component in retaining our students is providing an outstanding learning experience. We feel that our team-
based, proactive approach to recruitment and enhanced student services results in increased retention due to our systematic approach
to contacting students at key milestones during their enrollment, providing encouragement and highlighting their achievements. Our
student services counselors proactively assist each student with the student’s selection of an appropriate payment option, and monitor
the student’s progress and account balance to ensure a smooth financial aid experience and to help ensure our students are well
prepared for the financial obligations they incur. These counselors also assist students with their academic schedules and regularly
monitor “triggering events,” such as the failure to participate in the classroom or failure to matriculate in a timely manner, which
signal that a student may be at-risk for dropping out. Upon identifying an at-risk student, these counselors proactively interact with the
student to resolve any issues and encourage the student to continue with his or her program. 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
significantly increase retention rates among students. These frequent interactions between student services counselors and students are
a key component to our retention strategy.
Enrollment
At December 31, 2017, we had 90,297 students enrolled in our courses, of which 71,455, or 79.1%, were enrolled in our online
programs, and 18,842, or 20.9%, were enrolled in our ground programs. Of our students in online programs, which were
geographically distributed throughout all 50 states of the United States, and Canada, and in professional studies programs, 86.1% were
age 25 or older. Of our traditional on-campus students, 95.6% were under age 25 and, although we draw students from throughout the
United States, a majority were from Arizona.
10
The following is a summary of our student enrollment at December 31, 2017 and 2016 by degree type and by instructional
delivery method:
Graduate degree(2)
Undergraduate degree
Total
Online(3)
Ground(4)
Total
December 31, 2017(1)
December 31, 2016(1)
# of Students % of Total
# of Students
% of Total
37,339
52,958
90,297
41.4%
58.6%
33,215
48,693
40.6%
59.4%
100.0%
81,908
100.0%
December 31, 2017(1)
December 31, 2016(1)
# of Students % of Total
# of Students
% of Total
71,455
18,842
90,297
79.1%
20.9%
64,646
17,262
78.9%
21.1%
100.0%
81,908
100.0%
(1) Enrollment at December 31, 2017 and 2016 represents individual students who attended a course during the last two months of
the calendar quarter. Includes 886 and 847 students pursuing non-degree certificates at December 31, 2017 and 2016,
respectively.
Includes 7,703 and 7,084 students pursuing doctoral degrees at December 31, 2017 and 2016, respectively.
(2)
(3) As of December 31, 2017 and 2016, 50.5% and 49.5%, respectively, of our working adult students (online and professional
studies students) were pursuing graduate or doctoral degrees.
Includes our traditional on-campus students, as well as our professional studies students.
(4)
Tuition and Fees
For the 2017-18 academic year (the academic year begins in May), our prices per credit hour range from $355 to $470 for
undergraduate online and professional studies courses, $330 to $630 for graduate online courses, $640 for doctoral online programs,
and $688 for undergraduate courses for ground students. For our active duty military and active reserve online and professional studies
students, our prices per credit hour are $250 for undergraduate, $400 for graduate courses and $608 for doctoral courses. The overall
price of each course varies based upon the number of credit hours per course (with most courses representing four credit hours), the
degree level of the program, and the discipline. In addition, we charge a fixed $8,250 “block tuition” for undergraduate ground
students taking between 12 and 18 credit hours per semester, with an additional $688 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 master’s degree and overall cost for such a degree varies by program, although such programs typically require approximately 36
credit hours. The doctoral program requires approximately 60 credit hours and since program inception, on average, doctoral students
who graduated required 5.2 dissertation continuation courses to complete their degree. The University did not raise tuition for any of
its programs for its 2016-2017 and 2017-2018 academic years and has not raised tuition for its traditional ground programs in nine
years.
Based on current tuition rates, tuition for a full program would generally equate to between $15,450 and $37,000 for an online
master’s program, between $42,600 and $56,400 for a full four-year online bachelor’s program, approximately $66,000 for a full four-
year bachelor’s program taken on our ground campus, and $48,000 for a full doctoral program including five dissertation continuation
courses. Students requiring dissertation continuation courses in excess of five are only charged $500 per course. 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. For example, the average student on our ground traditional campus will pay approximately $8,700 in tuition for the
2017-18 school year after scholarships. Thus, based on the number of transfer credits and the scholarships a student receives it is
likely that a student will pay less than $35,000 in tuition for a bachelor’s degree on our ground campus. For the fiscal years ended
December 31, 2017, 2016 and 2015, our revenue was reduced by approximately $196.3 million, $179.2 million and $163.9 million,
respectively, as a result of scholarships that we offered to our students. The increase in scholarships reflects our increasing use of
academic scholarships to attract high performing students to our ground traditional campus.
We have established a refund policy for tuition and fees based upon individual course start dates. Under our policy, for courses
offered through a working adult modality, generally if a student drops or withdraws from a course before the course begins, 100% of
the charges for tuition and fees are refunded. If a student drops or withdraws from a course during the first week of the course, 75% of
the charges for tuition are refunded. If a student drops or withdraws from a course during or after the second week of a course, tuition
charges and fees are not refunded. Most fees, including materials fees, are non-refundable for non-traditional students after the start of
a course. We will refund tuition and fees according to the above policy unless a student attending courses online is a resident of a state
11
that requires us to comply with different, state specific guidelines. For traditional students attending 15-week courses, generally if a
student withdraws before the course begins, 100% of the charges for tuition and fees are refunded. If a student withdraws during the
first week of the course, 90% of the charges for tuition are refunded and instructional fees and ground campus-related fees are
refunded. If a student drops or withdraws from a course during the second week of a course, 75% of the tuition charges are refunded
but most fees are non-refundable. If a student drops during the third week of a course, 50% of the tuition charges are refunded and
during or after the fourth week, there are no refunds for tuition charges. Fees charged by us include graduation fees as well as fees for
access to certain educational resources such as online materials. 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 follow 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 student’s financial need, which is generally defined as the difference
between the cost of attending the institution and the amount the student and the student’s 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 2017 and 2016, we derived approximately 71.5% and 72.3%, respectively, of our net revenues (calculated on a
cash basis in accordance with Department of Education standards currently in effect) from tuition financed under the Title IV
programs. The primary Title IV programs that our students receive funding from are the Federal Direct Loan program or FDL
Program, and the Federal Pell Grant, or Pell, Program.
Student loans administered through the FDL Program are currently the most significant source of U.S. federal student aid. There
are two types of federal student loans: subsidized loans, which are based on the U.S. federal statutory calculation of student need, and
unsubsidized loans, which are not need-based. Neither type of student loan is based on creditworthiness although annual and aggregate
loan limits apply based on a student’s grade level. Students are generally not responsible for interest on subsidized loans while the
student is enrolled in school. Students are responsible for the interest on unsubsidized loans while enrolled in school, but have the
option to defer payment while enrolled. Repayment on federal student loans begins six months after the date the student ceases to be
enrolled. The loans are repayable over the course of 10 years and, in some cases, longer. Both graduate and undergraduate students are
eligible for loans. During fiscal 2017, federal student loans (both subsidized and unsubsidized) represented approximately 81.4% of
the gross Title IV funds that we received.
Grants under the Pell Program (Pell Grants) are awarded based on need and only to undergraduate students who have not earned
a bachelor’s or professional degree. Unlike loans, Pell Grants are not repayable. During fiscal year 2017, Pell Grants represented
approximately 13.8% of the gross Title IV funds that we received. For the 2016-2017 award year, the maximum amount available
under Pell Grants was $5,815 and the maximum income that makes an applicant to Title IV Program funds eligible for an automatic
zero Expected Family Contribution was $25,000. For the 2017-18 award year, the maximum amount available under Pell Grants is
$5,920 and the maximum income that makes an applicant for Title IV Program funds eligible for an automatic zero Expected Family
Contribution stayed the same at $25,000.
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, and the Teacher Education Assistance for
College and Higher Education 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 2017 and 2016, 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 2017 and 2016, payments derived from
private loans constituted less than 1% of our net revenues for each year, respectively.
Other sources. We derived the remainder of our net revenue from tuition that is self-funded or attributable to employer tuition
reimbursements.
12
Technology Systems and Management
We believe that we have established secure, reliable and scalable technology systems that provide a high quality educational
environment and that give us the capability to substantially grow our online and traditional programs and enrollment.
Online course delivery and management. Our online delivery platform was developed in partnership with a third party and put
into full production in 2011. We have a prepaid license for this platform for the foreseeable future as well as full source code rights.
Because of its modular implementation, this platform can easily and reliably scale as our student population increases. The platform
provides in depth analytics that allows us to closely monitor student success and the quality of our instructional resources. All ground
and online students receive online course delivery and resources through this learning management platform.
Internal administration. We utilize a commercial customer relations management development platform to distribute, manage,
track, and report on all interactions with prospective student leads as well as all active and inactive students. This software is scalable
to capacity levels well in excess of current requirements. We also utilize a commercial software package to track Title IV funds,
student records, grades, accounts receivable, accounts payable and general ledger.
Infrastructure. We operate two data centers, one at our campus and one at another Phoenix-area location. All of our servers are
networked and we have redundant data backup. We manage our technology environment internally. Our wide area network is fully
redundant to ensure maximum uptime, bandwidth capacity and network performance. Student access is load balanced for maximum
performance. Real-time monitoring provides current system status across network, server, and storage components.
Ground Campus
We own our ground campus, which is located on over 275 acres in the center of the Phoenix, Arizona metropolitan area, near
downtown Phoenix. Our on-campus facilities currently consist of classroom buildings, lecture halls, a 300-seat theater, a 29,000
square foot newly renovated library, a media arts complex that provides communications students with audio and video equipment, a
55,000 square foot recreation center that has state of the art training facilities for our over 400 student-athletes and students, a 140,000
square foot/ 7,500 seat basketball and entertainment arena, a stadium that hosts NCAA men’s and women’s soccer as well as several
club sports programs, newly renovated baseball and softball stadiums, a basketball practice facility, on-campus tennis courts, beach
volleyball courts, a competition/practice gymnasium, an activity center that contains a food court, a bowling alley and other student
services, a student union, residence halls, apartments, campus pools, athletic facilities and parking garages. Additionally, we have
several office buildings used for administration and we recently completed a large student services center and parking garage in close
proximity to our ground campus. Employees that worked in two leased office buildings in the Phoenix area were consolidated into this
new building upon completion in late 2016. In late 2015, we revitalized the Maryvale Golf Course under a partnership agreement with
the City of Phoenix and in 2016 the Grand Canyon University Championship Golf Course was opened to the public. In order to
accommodate the continued growth of our traditional ground population, we completed construction on three apartment style
residence halls, an additional 170,000 square foot classroom building for our College of Science, Engineering and Technology, a
student service center and a fourth parking structure prior to the 2016/2017 academic year and prior to the 2017/2018 academic year
we completed construction on an additional dormitory and other ground campus building projects.
We have 21 intercollegiate athletic teams that currently compete in Division I of the National Collegiate Athletic Association
(“NCAA”). Our athletic facilities include the University Arena (a 7,500 seat venue for all men’s and women’s basketball games plus
select other GCU athletic competitions, concerts, speakers and other events); a stadium that hosts NCAA men’s and women’s soccer
as well as several club sports programs; a basketball practice facility; on-campus tennis courts; beach volleyball courts; and a
competition/practice gymnasium, which accommodates men’s and women’s volleyball and competitive events. In addition, the
University’s 55,000 square foot student recreation center has state of the art training facilities for our over 400 student-athletes plus
practice space. Early in 2018 we completed upgrades to our baseball and softball stadiums. Our track and field program utilizes on-
campus practice and competition sites. In January 2016 the Grand Canyon University Championship golf course opened to the public.
The men’s and women’s golf teams have dedicated practice facilities, a team room and coaches offices at the course. The cross-
country and swimming programs utilize off-campus sites for practice and competition. In November 2012, we accepted an invitation
to be a member of the NCAA Division I Western Athletic Conference beginning with the 2013-14 academic year and in September
2013 we began playing full Division I schedules. In July 2017, the University successfully completed all “year four” requirements and
is now a full member of Division I Western Athletic Conference and we are eligible for post-season play. During the 2016-2017
academic year, baseball, softball, men’s golf, women’s tennis and the men’s and women’s indoor track and field teams won Western
Athletic conference championships. GCU televises home athletic events in multiple sports highlighted by the men’s basketball games
that have averaged approximately 7,000 fans per night.
We believe our ground-based programs and traditional campus not only offer our ground students, faculty, and staff an
opportunity to participate in a traditional college experience, but also provide 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
13
the mix of our online program with our traditional ground-based program with a greater than 60-year history and heritage
differentiates us from other for-profit post-secondary education providers.
We intend to continue to expand the size and enhance the profile and reputation of our ground campus by, among other things,
adding faculty, excelling in the performance areas such as athletics, debate, theatre, music and dance, expanding upon our campus
infrastructure and technological capabilities, and potentially adding additional locations in the Southwest United States. These
activities will require significant capital expenditures.
Employees
As of December 31, 2017, we employed approximately 4,000 full-time faculty, 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. In addition, we employ
approximately 6,000 part-time/adjunct and student workers. 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.
Community Involvement and the Public Good
The University has embarked on a five-point plan to revitalize its West Phoenix neighborhood through the following initiatives.
We believe these initiatives reflect well on the University and its employees, make the University more appealing to students and
prospective students, help us develop strong working relationships with local government bodies, and continue to build the Grand
Canyon University brand.
Significant support for K-12 education. We have expanded our free tutoring/mentoring program to 73 Phoenix-area high
schools. This program, which is served by over 1,200 University students, operates in partnership with Phoenix-area businesses to
provide 100 full-tuition scholarships to attend Grand Canyon University each year for students from inner-city schools who have
sought academic assistance at GCU’s Learning Lounge. Increased home values. Together with Habitat for Humanity, we participated
in the largest home renovation project in the country in the West Phoenix area. As of December 31, 2017, 346 different projects have
been completed. These efforts, combined with the University’s expanded presence in the community, has resulted in a significant
increase in home values in the 85017 zip code.
Improved safety. We are in the sixth year of a $1.6 million partnership with City of Phoenix Police Department that focuses on
improving safety and reducing crime in the communities surrounding our campus. Since the initiation of this program, crime has
decreased substantially in the two-mile radius surrounding the University.
Job creation on the campus. We have tripled the number of our full-time employees from 1,219 in 2008 to nearly 4,000 by the
end of 2017. The total number of full-time, part-time/adjunct and student worker positions is approximately 10,000.
Job creation off campus. We are launching a number of new business enterprises that reduce costs for the University, provide
management opportunities for recent graduates and employment opportunities for current students and neighborhood residents, while
spurring economic growth in the area.
The University is also involved in countless community events and projects throughout the year, helping organizations such as
the Phoenix Rescue Mission, Feed My Starving Children, Arizona Foster Care, Boy/Girl Scouts, Goodwill Arizona, St. Vincent de
Paul, Young Life, Elevate Phoenix, Back to School Clothing Drive and St. Mary’s Food Bank. Our faculty, staff and students also go
out into our surrounding neighborhoods to participate in University-sponsored programs such as Serve the City, Canyon Kids, Salute
Our Troops, Colter Commons senior home visits and the Run to Fight Children’s Cancer.
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 post-secondary market.
Our ground program competes with regionally accredited state universities, both inside Arizona and outside of the state, as well
as regionally accredited private universities, as well as two-year colleges within the state community college system. Our ground
program also competes with geographically proximate universities with similar religious heritages, including Azusa Pacific
University, Baylor University, and Pepperdine University. Our online programs compete with local, traditional universities
geographically located near each of our prospective students, and with other for-profit post-secondary schools that offer online
degrees, particularly those schools that offer online graduate programs within our core disciplines.
14
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 colleges and universities, have substantially greater name recognition and financial 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 post-secondary education market include:
•
•
•
•
•
•
•
•
•
•
availability of professionally relevant and accredited program offerings;
the types of degrees offered and the marketability of those degrees;
reputation, regulatory approvals, and compliance history of the school;
convenient, flexible and dependable access to programs and classes;
qualified and experienced faculty;
quality of the ground campus facilities;
level of student support services;
cost of the program;
the effectiveness of marketing and sales efforts; and
the time necessary to earn a degree.
Proprietary Rights
We own or are licensed to use various intellectual property rights, including copyrights, trademarks, service marks, trade secrets
and domain names. We license the right to utilize the name of Jerry Colangelo in connection with our business school and our
Colangelo School of Sports Business that we operate within our business school, and we have spent significant resources in related
branding efforts. While such intellectual property rights are important to us, we do not believe that the loss of any individual property
right or group of related rights would have a material adverse effect on our overall business.
Available Information
Our Internet address is www.gcu.edu. We make available free of charge on our website our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Forms 3, 4, and 5 filed on behalf of directors and executive officers,
and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably
practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (hereafter, the
SEC). In addition, our earnings conference calls are web cast live via our website. In addition to visiting our website, you may read
and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F. Street NE, Washington, D.C. 20549 or at
www.sec.gov. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room.
15
REGULATION
We are subject to extensive regulation by state post-secondary, licensure, and certification 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, athletics and financial condition.
As an institution of higher education that grants degrees and certificates, we are required to be authorized by appropriate state
post-secondary, licensure, and certification authorities. In addition, in order to participate in the federal student financial aid programs,
we must be accredited by an accrediting commission recognized by the Department of Education. Accreditation is a 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.
The Higher Education Act requires accrediting commissions recognized by the Department of Education to review and monitor many
aspects of an institution’s operations and to take appropriate action if the institution fails to meet the accrediting commission’s
standards.
Our operations are also subject to regulation by the Department of Education due to our participation in the federal student
financial aid programs under Title IV of the Higher Education Act. Those Title IV programs include educational loans with below-
market interest rates that are issued by the federal government under the Federal Direct Loan program (the “FDL Program”), as well
as 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 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
Vice President of Student Financial Aid Compliance who is knowledgeable about regulatory matters relevant to student financial aid
programs and our Chief Financial Officer, Chief Risk Officer, Senior Vice President of Academic Affairs and General Counsel also
provide oversight designed to ensure that we meet the requirements of our regulated operating environment.
State Post-Secondary Education Regulation
We are authorized to offer our programs by the Arizona State Board for Private Postsecondary Education, the regulatory agency
governing private post-secondary educational institutions in the State of Arizona, where we are located. We do not presently have
campuses in any states other than Arizona, although we do have one location in Albuquerque, New Mexico. 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. Our 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 could force us to cease operations. Alternatively, the Arizona State Board for Private
Postsecondary Education could restrict our ability to offer certain degree and non-degree programs.
The Department of Education released a final rule on state authorizations of distance learning programs, which will become
effective on July 1, 2018, unless repealed or overruled. As written, the rule provides that programs may be authorized pursuant to
certain reciprocity agreements among states. We are an approved institutional participant in the State Authorization Reciprocity
Agreement (“SARA”). SARA is an agreement among member states, districts and territories that establishes comparable national
standards for interstate offering of post-secondary distance education courses and programs. It is intended to make it easier for
students to take online courses offered by post-secondary institutions based in another state. SARA is overseen by a national council
(NC-SARA) and administered by four regional education compacts, for which Arizona is a W-SARA member. There is a yearly
renewal for participating in NC-SARA and AZ-SARA and institutions must agree to meet certain requirements to participate. As of
December 31, 2017, 48 states are members of SARA.
Some states that do not participate in SARA impose regulatory requirements on out-of-state higher education institutions
operating within their boundaries, such as those having a physical facility or conducting certain academic activities within the state.
We currently enroll students in all 50 states and the District of Columbia. Although we are currently licensed, authorized, in-process,
or exempt in all non-SARA jurisdictions in which we operate, 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 license or authorization by that state or be
subject to other sanctions, including restrictions on our activities in, and fines and penalties imposed by, that state, as well as fines,
penalties, and sanctions imposed by the Department of Education. The loss of licensure or authorization in any non-SARA state could
prohibit us from recruiting prospective students or offering services to current students in that state, which could significantly reduce
our enrollments.
16
Individual 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 may require the posting of surety bonds.
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, and counseling. These requirements vary by state and by field. A student’s
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:
• whether the institution and the program were approved by the state in which the graduate seeks licensure, or by a
professional association;
• whether the program from which the student graduated meets all requirements for professional licensure in that
state;
• whether the institution and the program are accredited and, if so, by what accrediting commissions; and
• whether the institution’s degrees are recognized by other states in which a student may seek to work.
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 Department of Education to offer Institutional Recommendations
(credentials) for the certification of early childhood, elementary, secondary, and special education teachers and school administrators.
Our College of Nursing and Health Care Professions is approved by the Arizona State Board of Nursing for the Bachelor of Science in
Nursing and advanced practice Master of Science in Nursing degrees for Family Nurse Practitioner and Acute Care Nurse Practitioner.
Due to varying requirements for professional licensure and certification in states other than Arizona, we inform students of the risks
associated with obtaining professional licensure or certification and that it is each student’s responsibility to determine what state,
local or professional licensure and certification requirements are necessary in his or her individual state.
Accreditation
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.
Grand Canyon University has been regionally accredited by the Higher Learning Commission and its predecessor since 1968,
most recently obtaining reaccreditation in 2017 for the ten-year period through 2027. Following a comprehensive review of the
institution’s academic offerings, teaching, assessment, governance and administration, mission, finances and resources that occurred
during 2016, the University’s accreditation was reaffirmed by the HLC’s Institutional Actions council at its meeting on February 28,
2017 with no requirements for any monitoring or interim reports. The comprehensive review occurs every 10 years, along with a mid-
term report in year four. 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 institution’s
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.
In addition to our institutional accreditation, we have specialized accreditations for certain programs, including from the
National Addiction Studies Accreditation Commission (NASAC), the Accreditation Council for Business Schools and Programs
(ACBSP), the Commission on Collegiate Nursing Education (CCNE), and the Commission on Accreditation of Athletic Training
Education (CAATE). In addition, Grand Canyon Theological Seminary is an Associate Member of the Association of Theological
Schools in the United States and Canada (ATS). We believe that our institution-wide regional accreditation, together with these
specialized accreditations, reflect the quality of our programs, enhance their marketability to students, and improve the employability
of our graduates.
17
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 (in our case, the Higher
Learning Commission).
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 regulations and other factors relating to the Title IV programs that could adversely affect us include the following:
Congressional action. Congress must reauthorize the Higher Education Act on a periodic basis, usually every five to six years,
and the most recent reauthorization occurred in August 2008. The reauthorized Higher Education Act reauthorized all of the Title IV
programs in which we participate, but made numerous revisions to the requirements governing the Title IV programs, including
provisions relating to student loan default rates and the formula for determining the maximum amount of revenue that institutions are
permitted to derive from the Title IV programs. In addition, members of Congress periodically introduce legislation that would impact
Title IV programs and our industry generally. Because a significant percentage of our revenue is derived from the Title IV programs,
any action by Congress that significantly reduces Title IV program funding or our ability or the ability of our students to participate in
the Title IV programs could increase our costs of compliance, reduce the ability of some students to finance their education at our
institution, require us to seek to arrange for other sources of financial aid for our students and materially decrease our student
enrollment.
Regulatory changes. Pursuant to the Higher Education Act and following negotiated rulemaking, on November 1, 2016, the
Department published final regulations that, inter alia, would have specified the acts or omissions of an institution that a borrower may
assert as a defense to repayment of a loan made under the Direct Loan Program. Although the regulations were scheduled to become
effective on July 1, 2017, on June 16, 2017, the Department delayed indefinitely the effective date of selected provisions of the
regulations and announced its intention to conduct negotiated rulemaking proceedings to revise the regulations. Those proceedings
took place from November 13-15, 2017; January 8-11, 2018; and February 12-15, 2018. These proceedings did not end in consensus
and, as such, the Department will have the opportunity to write regulations as it sees fit. In addition, on October 24, 2017, the
Department published an interim final rule to delay until July 1, 2018 the effective date of the selected provisions. On February 14,
2018, the Department also published a notice of proposed rulemaking to delay until July 1, 2019 the effective date of the selected
provisions.
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
Education’s 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 school’s program participation
agreement with the Department of Education. In addition, the Department of Education may more closely review an institution that is
provisionally certified if it applies for recertification or approval to open a new location, add an educational program, acquire another
school, or make any other significant change. If the Department of Education determines that a provisionally certified institution is
unable to meet its responsibilities under its program participation agreement, it may seek to revoke the institution’s 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.
In August 2017, the University received a new program participation agreement with full certification from the Department of
Education, which gives the University the ability to participate in the Title IV programs through December 31, 2020.
18
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:
•
•
•
•
•
•
•
•
•
•
•
comply with all applicable Title IV program requirements;
have an adequate number of qualified personnel to administer the Title IV programs;
have acceptable standards for measuring the satisfactory academic progress of its students;
not have student loan cohort default rates above specified levels;
have various procedures in place for awarding, disbursing and safeguarding Title IV funds and for maintaining
required records;
administer the Title IV programs with adequate checks and balances in its system of internal controls;
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;
provide financial aid counseling to its students;
refer to the Department of Education’s 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;
submit all required reports and consolidated financial statements in a timely manner; and
not otherwise appear to lack administrative capability.
If an institution fails to satisfy any of these criteria, the Department of Education may:
•
•
•
•
require the institution to repay Title IV funds its students previously received;
transfer the institution from the advance method of payment of Title IV funds to heightened cash monitoring status
or the reimbursement system of payment;
place the institution on provisional certification status; or
commence a proceeding to impose a fine or to limit, suspend or terminate the institution’s participation in the Title
IV programs.
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 institution’s
annual audited consolidated 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 institution’s
composite score, which is derived from a formula established by the Department of Education based on three financial ratios:
•
•
•
equity ratio, which measures the institution’s capital resources, financial viability and ability to borrow;
primary reserve ratio, which measures the institution’s ability to support current operations from expendable
resources; and
net income ratio, which measures the institution’s ability to operate at a profit or within its means.
The Department of Education assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to
positive 3.0, with negative 1.0 reflecting financial weakness and positive 3.0 reflecting financial strength. The Department of
Education then assigns a weighting percentage to each ratio and adds the weighted scores for the three ratios together to produce a
composite score for the institution. The composite score for an institution’s most recent fiscal year must be at least 1.5 for the
institution to be deemed financially responsible without the need for further Department of Education oversight. Our composite scores
for our fiscal years ended December 31, 2016, 2015 and 2014 were 2.5, 2.6 and 3.0, respectively, and, therefore, we are considered
financially responsible for purposes of these regulations. We have not yet submitted our consolidated financial statements to the
Department of Education for our 2017 fiscal year, but have calculated that our composite score for the 2017 fiscal year will be 3.0. We
have modeled our composite score for future years using, among other estimates, our estimated ground campus capital expenditures
and believe that our composite score will remain at a financially responsible level for the foreseeable future.
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
19
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 consolidated financial statements. 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
Department of Education’s 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 Education’s standard advance funding arrangement, such as the reimbursement system of payment or heightened cash
monitoring, and complying with or accepting other limitations on our ability to increase the number of programs we offer or the
number of students we enroll.
Return of Title IV funds for students who withdraw. When a student who has received Title IV program funds withdraws from
school, the institution must determine the amount of Title IV program funds the student has “earned” and then must return the
unearned Title IV program funds (a “return to Title IV”) 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, the letter of credit requirement is triggered by late returns of Title IV program funds for 5% or more of the
withdrawn students (and involving more than two student refunds) in the audit sample in the institution’s annual Title IV compliance
audit for either of the institution’s two most recent fiscal years or in a Department of Education program review. We did not exceed
this 5% threshold in our annual Title IV compliance audits for 2016 (the most recent year for which we have completed a Title IV
compliance audit), 2015 or 2014.
The “90/10 Rule.” A requirement of the Higher Education Act, commonly referred to as the “90/10 Rule,” that is applicable
only to for-profit, post-secondary educational institutions like us, provides that an institution loses its eligibility to participate in the
Title IV programs if the institution derives more than 90% of its revenue for each of two consecutive fiscal years from Title IV
program funds. For purposes of the 90/10 Rule, revenue is calculated under a complex regulatory formula that requires cash basis
accounting and other adjustments to the calculation of an institution’s revenue under generally accepted accounting principles that
appears in its consolidated financial statements. Under the 90/10 Rule, an institution becomes ineligible to participate in the Title IV
programs as of the first day of the fiscal year following the second consecutive fiscal year in which it exceeds the 90% threshold, and
its period of ineligibility extends for at least two consecutive fiscal years. If an institution exceeds the 90% threshold for two
consecutive fiscal years and it and its students have received Title IV funds during the subsequent period of ineligibility, the institution
will be required to return those Title IV funds to the applicable lender or the Department of Education. If an institution’s rate exceeds
90% for any single fiscal year, it will be placed on provisional certification for at least two fiscal years.
Using the Department of Education’s cash-basis, regulatory formula under the 90/10 Rule as currently in effect, for our 2017,
2016, and 2015 fiscal years, we derived approximately 71.5%, 72.3%, and 74.8%, respectively, of our 90/10 Rule revenue from Title
IV program funds.
As a result of the continuing increase in the number of students attending our ground campus, who typically finance a greater
percentage of their educational costs with non-Title IV sources of funds, we expect the percentage of our revenue that we receive from
Title IV programs to remain stable or to continue to decrease in the future, although this may be impacted by recent changes in federal
law that increased Title IV grant and loan limits, as well as the ongoing economic environment, which has adversely affected the
employment circumstances of our students and their parents and increased their reliance on Title IV programs.
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 federal 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”). The reauthorization of the Higher Education Act in 2008 extended the measurement period for cohort default rates so that the
rate is calculated by determining the rate at which borrowers who became subject to their repayment obligation in one federal fiscal
year default in that same year or by the end of the second year following the first federal fiscal year (the “three-year method”).
The Department of Education applies legal thresholds to measure an institution’s compliance. If the Department of Education
notifies an institution that its cohort default rates exceeded 30%, for each of its three most recent federal fiscal years, the institution’s
participation in the FDL Program and the Pell grant program would end 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 institution’s
participation in the FDL Program would end 30 days after notification by the Department of Education that its most recent 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 or for the next two fiscal years. If an
20
institution’s cohort default rate for any single federal fiscal year equals or exceeds 30%, the Department of Education may place the
institution on provisional certification status.
Our cohort default rates on federal student loans for the 2014, 2013 and 2012 federal fiscal years, the latest years for which such
rates are available, were 8.5%, 9.2% and 10.3%, respectively.
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. Prior to July 1, 2011, Department of Education
regulations included 12 “safe harbors” that described payments and arrangements that did not violate the incentive compensation rule.
Under new rules effective July 1, 2011, the 12 safe harbors were eliminated. The restrictions of the incentive compensation rule,
which extend to any third-party companies that an educational institution contracts with for student recruitment, admissions, or
financial aid awarding services, increase the uncertainty about what constitutes incentive compensation and which employees are
covered by the regulation. This makes the development of effective and compliant performance metrics more difficult to establish. As
such, these changes limit our ability to compensate our employees based on their performance of their job responsibilities, which
could make it more difficult to attract and retain highly-qualified employees.
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, the applicable state
approving agencies for financial assistance to veterans, and accrediting commissions. As part of the Department of Education’s
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 institution’s financial responsibility, each institution must annually submit audited financial
statements prepared in accordance with Department of Education regulations.
Gainful employment rules. Under the Higher Education Act, proprietary schools are eligible to participate in Title IV programs
in respect of educational programs that lead to “gainful employment in a recognized occupation,” with the limited exception of
qualified programs leading to a bachelor’s degree in liberal arts. Historically, this concept has not been defined in detail. In
October 2014, the Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether
an academic program prepares students for gainful employment in a recognized occupation. This rule establishes requirements related
to the debt to earnings ratio of graduates of our programs, and sets additional disclosure requirements for students. Under the final
regulations, which apply on a program-by-program basis, students enrolled in a program will be eligible for Title IV student financial
aid only if that program satisfies at least one of two tests relating to student debt service-to-earnings ratios. The two tests specify
minimum debt service-to-earnings ratios calculated on the basis of the earnings of program graduates. One test measures student loan
debt service as a percentage of total earnings, and is calculated by comparing (1) the annual loan payment required on the median
student loan debt incurred by students receiving Title IV funds who completed a particular program and (2) the higher of the mean or
median of those graduates’ annual earnings two to four years after graduation. The other test measures student loan debt service as a
percentage of discretionary earnings and is calculated by comparing (1) the annual loan payment required on the median student loan
debt incurred by students receiving Title IV funds who completed a particular program and (2) the higher of the mean or median
annual earnings of those graduates two to four years after graduation, less 1.5 times the government issued Poverty Guideline. Under
the new gainful employment regulation, a program would pass if:
•
•
the annual loan payment required on the median student loan debt is less than or equal to 8% of the higher of the
mean or median annual earnings of graduates in the relevant period; or
the annual loan payment required on the median student loan debt is less than or equal to 20% of the discretionary
income of graduates in the relevant period.
In addition, a program that does not pass either of the debt-to-earnings metrics, and that has an annual earnings rate between 8%
and 12%, or a discretionary income rate between 20% and 30%, would be considered to be in the “Zone”. A program would fail if the
annual loan payment on the median student loan debt is greater than 12% of the mean or median annual earnings of the graduates or
the annual loan payment on the median student debt is greater than 30% of the discretionary income of the graduates. A program
would become Title IV-ineligible for three years if it fails both metrics for two out of three consecutive years, or is in the Zone (or
fails) for four consecutive award years. In the first four years that the debt-to-earnings metrics are calculated under the rule (award
years 2014-15, 2015-16, 2016-17, and 2017-18), if a program would be failing or in the Zone based on the typical approach to
calculating debt-to-earnings metrics, transitional debt-to-earnings rates would be calculated using the most currently available yearly
earnings two years after graduation and the annual loan payments of students who completed the program in the most recently
completed award year. Transitional rates will be used to assess the program if they are lower than what the rates would be under the
normal calculation. This allows programs that promptly lower tuition and fees to realize the benefit of their changes.
21
If an institution is notified by the Secretary of Education that a program could become ineligible, based on its final rates, for the
next award year:
•
•
The institution must provide a warning with respect to the program to students and prospective students indicating,
among other things, that students may not be able to use Title IV funds to attend or continue in the program; and
The institution must not enroll, register or enter into a financial commitment with a prospective student until a
specified time after providing the warning to the prospective student.
On October 20, 2016, the Department issued to institutions draft debt-to-earnings rates for the first gainful employment debt
measurement year and certain underlying data used to calculate those rates. According to the Department’s draft rates, none of the
University’s programs fail. The draft rates did indicate that four current degree programs are in the Zone, including three
undergraduate education programs and the Masters in Theology. The University is currently analyzing the data for these programs to
determine what changes, if any, should be made.
Schools are also required to certify to the Department the following for each Title IV eligible program:
•
•
•
•
The program is included in the schools’ accreditation;
The program is programmatically accredited, if required by a federal government entity, or by a government entity in any
state in which the school is located or is required to obtain state approval;
The program satisfies any applicable state licensing and certification requirements for the occupations for which the
program prepares students to enter; and
The program is not substantially similar to a program offered by the school that became ineligible due to the student debt
service-to-earnings ratios.
We believe we successfully submitted the certifications required for all pre-existing programs prior to the December 31, 2015
deadline for doing so. We continue to follow this protocol on an ongoing basis.
These regulations went into effect on July 1, 2015, with the exception of the new disclosure requirements that were originally
scheduled to go into effect January 1, 2017, but which have now been delayed, to some extent, until July 1, 2018. Additionally, the
Department announced, on June 16, 2017, its intention to conduct negotiated rulemaking proceedings to revise the gainful
employment regulations. Those negotiated rulemaking proceedings began in December 2017 and continued February 5-8, 2018 and
will end in March 12-15, 2018. Management is following this rulemaking, as it does with all rulemakings, but does not have a view at
this time about how it will affect the University.
Substantial misrepresentation. The Higher Education Act prohibits an institution that participates in Title IV programs from
engaging in “substantial misrepresentation” of the nature of its educational program, its financial charges, or the employability of its
graduates. The Department of Education has defined a misrepresentation as any statement made by the institution or a third party that
provides educational programs, marketing, advertising, recruiting, or admissions services to the institution that is false, erroneous or
has the likelihood or tendency to deceive. A substantial misrepresentation is any misrepresentation on which the person to whom it
was made could reasonably be expected to rely, or has reasonably relied, to that person’s detriment. Considering the breadth of the
definition of “substantial misrepresentation,” it is possible that despite our efforts to prevent such misrepresentations, our employees
or service providers may make statements that could be construed as substantial misrepresentations. As a result, we may face
complaints from students and prospective students over statements made by us and our agents throughout the enrollment, admissions
and financial aid process, as well as throughout attendance at the University, which would expose us to increased risk of enforcement
action and applicable sanctions or other penalties and increased risk of private qui tam actions under the Federal False Claims Act.
Under the new rules, if the Department of Education determines that an institution has engaged in substantial misrepresentation, the
Department of Education may revoke an institution’s program participation agreement, impose limitations on the institution’s
participation in Title IV programs, deny applications from the institution for approval of new programs or locations or other matters,
or initiate proceedings to fine the institution or limit, suspend, or terminate its eligibility to participate in Title IV programs. If the
Department of Education determines that statements made by us or on our behalf are in violation of the regulations, we could be
subject to sanctions and other liability, which could have a material adverse effect on our business.
Clery Act Compliance. We must comply with the campus safety and security reporting requirements as well as other
requirements in the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act (the “Clery Act”). In
addition, the Department has interpreted Title IX to categorize sexual violence as a form of prohibited sex discrimination and to
require institutions to follow certain disciplinary procedures with respect to such offenses. Failure by the University to comply with
the Clery Act or Title IX requirements or regulations thereunder could result in action by the Department including fining us, or
limiting or suspending its participating in Title IV programs, could lead to litigation, and could harm our reputation. We believe that
we are in compliance with these requirements.
22
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. In addition to those matters described in detail below, most state post-secondary
approval agencies impose regulatory requirements on post-secondary institutions operating within their boundaries.
Adding teaching locations, implementing new educational programs, and increasing enrollment. The requirements and
standards of state post-secondary 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
pre-licensure 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.
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 institution’s Title IV eligibility. However, a degree-granting institution, like
Grand Canyon University, that is fully certified to participate in the Title IV programs is not required to obtain the Department of
Education’s approval of additional programs that lead to a bachelor’s, professional, or graduate degree at the same degree level as
programs previously approved by the Department of Education, and, similarly, 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.
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 post-secondary 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 post-secondary 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
and others only considering approval after the acquisition has occurred. The Higher Learning Commission would require us to obtain
its advance approval of such an acquisition. The approval of the applicable state 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.
Change in ownership resulting in a change in control. The Department of Education, as well as many accrediting commissions
and states, require institutions of higher education to report or obtain approval of certain changes in control and changes in other
aspects of institutional organization or control. With respect to publicly traded corporations, like us, Department of Education
regulations provide that a change in control occurs if, among other things, the corporation has a stockholder that owns, or has voting
control over, at least 25% of the total outstanding voting stock of the corporation and is the largest stockholder of the corporation
(defined in the regulations as a “controlling shareholder”), and that controlling shareholder ceases to own, or have voting control over,
at least 25% of such stock or ceases to be the largest stockholder. Under Department of Education regulations, an institution that
undergoes a change in control as defined by the Department of Education loses its eligibility to participate in the Title IV programs
and must apply to the Department of Education in order to reestablish such eligibility.
The Higher Learning Commission provides that an institution must obtain its approval in advance of a change in ownership,
corporate control or structure in order for the institution to retain its accredited status. In certain circumstances that process may
require several weeks or several months or more to complete. In addition, following a change in control, the Higher Learning
Commission will conduct an onsite evaluation within six months in order to continue the institution’s accreditation.
Many states include the sale of a controlling interest of common stock in the definition of a change in control requiring
approval, but their thresholds for determining a change in control vary widely. The standards of the Arizona State Board for Private
Postsecondary Education provide that an institution that is owned by a publicly traded company whose control is vested in the voting
members of the board of directors, such as Grand Canyon Education, undergoes a change in control if 50% or more of the voting
members of the board of directors change within a 12-month period or the chief executive officer of the corporation changes. A
change in control under the definition of one of the other state agencies that regulate us might require us to obtain approval of a
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. If we were to undergo a change in control under the standards of the Arizona State
23
Board of Private Post-secondary Education at any time in the future, we would be required to file an application with the Arizona
State Board for Private Postsecondary Education in order to obtain approval for such change in control. We cannot predict whether the
Arizona State Board for Private Postsecondary Education would impose any limitations or conditions on us, or identify any
compliance issues related to us in the context of the change in control process, that could result in our loss of authorization in Arizona.
Any such loss would result in our loss of eligibility to participate in the Title IV programs which would cause a significant decline in
our student enrollment.
Item 1A.
Risk Factors
You should carefully consider the risks and uncertainties described below and all other information contained in this Annual
Report on Form 10-K. In order to help assess the major risks in our business, we have identified many, but not all, of these risks. Due
to the scope of our operations, a wide range of factors could materially affect future developments and performance.
If any of the following risks, or risks that we do not anticipate, are realized, our business, financial condition, cash flow or
results of operations could be materially and adversely affected, and as a result, the trading price of our common stock could be
materially and adversely impacted. These risk factors should be read in conjunction with other information set forth in this Annual
Report, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8,
Consolidated Financial Statements and Supplementary Data, including the related Notes to Consolidated Financial Statements.
Risks Related to the Proposed Change in the Structure of Our Operations
If the Proposed Transaction is consummated, we will be subject to various risks and uncertainties arising out of the changes in the
structure of our operations, any of which could materially and adversely affect our business and operations, and our stock price.
As discussed above under “Item 1. Business – Proposed Change in the Structure of Our Operations,” we are seeking approval of the
Proposed Transaction. If the necessary approvals are obtained, financial and other terms between us and New GCU are agreed upon,
definitive agreements are executed, and the Proposed Transaction is ultimately consummated, then various aspects of our operations
would change in important ways. These changes include, but are not limited to, the following:
• Our academic and related operations and assets, as well as approximately 35% of our full-time employees and
substantially all of our part-time employees and student workers, would transfer to New GCU. Following this transfer, we
would no longer own and operate a regulated institution of higher education, but would instead provide a host of services
in support of New GCU’s operations. While the services we would provide are services that we currently provide as part
of our business today, we have limited to no experience operating as a service provider to third parties.
• New GCU would be a separate non-profit entity under the control of an independent board of trustees and independent
management. Accordingly, our relationship with New GCU, both pursuant to the shared services arrangement and
operationally, would no longer be as owner and operator, but as a third party contract party. While we believe this
relationship would remain strong, New GCU’s board of trustees and management would have fiduciary and other duties
that would require them to focus on the best interests of New GCU and over time those interests could diverge from ours.
•
•
Initially, all of our revenue would be derived pursuant to the shared services arrangement with New GCU. Accordingly,
New GCU’s ability to continue to increase its enrollment and tuition and fee revenue, and our ability to continue to
perform the services necessary to enable New GCU to do so, would be critical to the success of our services business.
It is anticipated that the consideration payable by New GCU for the acquired assets, which will be material, will be in the
form of a long-term secured note. While the terms of this note remain subject to negotiation, our ability to realize the
negotiated value of the acquired assets would be subject to New GCU’s performance and its ability to pay amounts due
under the secured note as they come due.
If the Proposed Transaction is consummated, but we are unable to successfully re-focus our business to providing services to third
parties, or if the contemplated shared services arrangement with New GCU fails to achieve the anticipated levels of performance, then
our business, financial condition and results of operations, as well as our stock price, could be materially and adversely affected.
Risks Related to the Extensive Regulation of Our Industry
Our failure to comply with the extensive regulatory requirements governing our school could result in financial penalties,
restrictions on our operations or growth, or loss of external financial aid funding for our students.
To participate in the Title IV programs, a school must be authorized by the appropriate state post-secondary 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
24
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. The Department of Education and other regulators have increased the
frequency and severity of their enforcement actions against post-secondary schools. In some cases, these enforcement actions have
resulted in material sanctions, letter of credit requirements, loss of Title IV eligibility, or closure in schools. 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.
Rulemaking by the U.S. Department of Education could materially and adversely affect our business.
Over the past few years, the U.S. Department of Education has regularly promulgated new regulations that impact our business.
These regulations have increased our operating costs and in some cases required us to change the manner in which we operate our
business. In addition, because certain of these regulations have been vacated or blocked as a result of litigation challenging the
regulations, there remains substantial uncertainty regarding their present or future effectiveness or enforcement. New or amended
regulations in the future, particularly regulations focused on the proprietary sector, could further negatively impact our business.
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.
In August 2017, the University received a new program participation agreement with full certification from the Department of
Education, which gives the University the ability to participate in the Title IV programs through December 31, 2020. There can be no
assurance that the Department of Education will recertify us at that time or that it will not impose conditions or other restrictions on us
as a condition of approving our application 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. Alternatively, 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, or it could delay
our recertification after our program participation agreement expires on December 31, 2020, in which case our certification would
continue on a month-to-month basis. Any of these outcomes could have a material adverse effect on our enrollments and us.
We would lose our ability to participate in the Title IV programs if we fail to maintain our institutional accreditation, and our
student enrollments could decline if we fail to maintain any of our accreditations or approvals.
An institution must be accredited by an accrediting commission recognized by the Department of Education in order to
participate in the Title IV programs. We have institutional accreditation by the Higher Learning Commission, which is an accrediting
commission recognized by the Department of Education. To remain accredited, we must continuously meet accreditation standards
relating to, among other things, performance, institutional control, institutional integrity, educational quality, faculty, administrative
capability, resources, and financial stability. We most recently obtained reaccreditation in 2017 for the ten-year period through 2027.
Following a comprehensive review of the institution’s academic offerings, governance and administration, mission, finances and
resources that occurred during 2016, the University’s accreditation was reaffirmed by the HLC’s Institutional Actions council at its
meeting on February 28, 2017 with no requirements for any monitoring or interim reports. The comprehensive review occurs every 10
years, along with a mid-term report in year four. If we fail to satisfy any of the Higher Learning Commission’s standards, however, we
could lose our accreditation by the Higher Learning Commission, which would cause us to lose our eligibility to participate in the
25
Title IV programs, could cause a significant decline in our total student enrollments, and could 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 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 requirement of the Higher Education Act, commonly referred to as the “90/10 Rule,” that is applicable only to for-profit, post-
secondary educational institutions like us provides that an institution loses its eligibility to participate in the Title IV programs if the
institution derives more than 90% of its revenue for each of two consecutive fiscal years from Title IV program funds. For purposes of
the 90/10 Rule, revenue is calculated under a complex regulatory formula that requires cash basis accounting and other adjustments to
the calculation of an institution’s revenue under generally accepted accounting principles that appears in its consolidated financial
statements. Under the 90/10 Rule, an institution becomes ineligible to participate in the Title IV programs as of the first day of the
fiscal year following the second consecutive fiscal year in which it exceeds the 90% threshold, and its period of ineligibility extends
for at least two consecutive fiscal years. If an institution exceeds the 90% threshold for two consecutive fiscal years and it and its
students have received Title IV funds during the subsequent period of ineligibility, the institution will be required to return those Title
IV funds to the applicable lender or the Department of Education. If an institution’s rate exceeds 90% for any single fiscal year, it will
be placed on provisional certification for at least two fiscal years.
Using the Department of Education’s cash-basis, regulatory formula under the 90/10 Rule as currently in effect, for our 2017,
2016, and 2015 fiscal years, we derived approximately 71.5%, 72.3%, and 74.8%, respectively, of our 90/10 Rule revenue from Title
IV program funds.
As a result of the continuing increase in the number of students attending our ground campus, who typically finance a greater
percentage of their educational costs with non-Title IV sources of funds, we expect the percentage of our revenue that we receive from
Title IV programs to remain stable or decrease in the future, although this may be impacted by recent changes in federal law that
increased Title IV grant and loan limits, as well as the ongoing economic environment, which has adversely affected the employment
circumstances of our students and their parents and increased their reliance on Title IV programs. If we were to exceed the 90%
threshold for two consecutive years such that we lost our eligibility to participate in the Title IV programs, or if Congress passed
legislation changing how certain funds are counted under this rule, revising the percentage of income that proprietary schools must
derive from non-federal sources, or both, it 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, 30% 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 second 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. While our cohort default rates have historically been significantly below these
levels, we cannot assure you that this will continue to be the case. Increases in interest rates or declines in income or job losses for our
students could contribute to higher default rates on student loans. Exceeding the student loan default rate thresholds and losing our
eligibility to participate in the Title IV programs would have a material adverse effect on our business, prospects, financial condition,
and results of operations. Any future changes in the formula for calculating student loan default rates, economic conditions, or other
factors that cause our default rates to increase, could place us in danger of losing our eligibility to participate in some or all of the Title
IV programs and materially adversely affect us.
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 institution’s audited consolidated 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 institution’s 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 program funds to either the reimbursement or the
heightened cash monitoring system, which could result in a significant delay in the institution’s receipt of those funds. If, in the future,
26
we fail to satisfy the Department of Education’s financial responsibility standards, we could experience increased regulatory
compliance costs or delays in our receipt of Title IV program 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 Education’s 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, the institution to have an adequate number of qualified
personnel to administer the Title IV programs, have adequate procedures for disbursing and safeguarding Title IV funds and for
maintaining records, submit all required reports and consolidated financial statements in a timely manner, and not have significant
problems that affect the institution’s ability to administer the Title IV programs. If we fail to satisfy any of these criteria, the
Department of Education may assess financial penalties against us, restrict the manner in which we receive Title IV funds, require us
to post a letter of credit, place us on provisional certification status, or limit or terminate our participation in the Title IV programs,
any of which could materially adversely affect us.
A finding that we violated the Department of Education’s substantial misrepresentation regulation could materially and adversely
affect our business.
The Higher Education Act prohibits an institution that participates in Title IV programs from engaging in “substantial
misrepresentation” of the nature of its educational program, its financial charges, or the employability of its graduates. Under these
rules, a misrepresentation is any statement made by the institution or a third party that provides educational programs, marketing,
advertising, recruiting, or admissions services to the institution that is false, erroneous or has the likelihood or tendency to deceive or
confuse. A substantial misrepresentation is any misrepresentation on which the person to whom it was made could reasonably be
expected to rely, or has reasonably relied, to that person’s detriment. Considering the breadth of the definition of “substantial
misrepresentation,” it is possible that despite our efforts to prevent such misrepresentations, our employees or service providers may
make statements that could be construed as substantial misrepresentations. As a result, we may face complaints from students and
prospective students over statements made by us and our agents throughout the enrollment, admissions and financial aid process, as
well as throughout attendance at the University, which would expose us to increased risk of enforcement action and applicable
sanctions or other penalties and increased risk of private qui tam actions under the Federal False Claims Act. Under the new rules, if
the Department of Education determines that an institution has engaged in substantial misrepresentation, the Department of Education
may revoke an institution’s program participation agreement, impose limitations on the institution’s participation in Title IV programs,
deny applications from the institution for approval of new programs or locations or other matters, or initiate proceedings to fine the
institution or limit, suspend, or terminate its eligibility to participate in Title IV programs. If the Department of Education determines
that statements made by us or on our behalf are in violation of the regulations, we could be subject to sanctions and other liability,
which could have a material adverse effect on our business.
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
program funds that should have been returned for such students in the prior fiscal year, we may be liable for repayment of Title IV
program funds and related interest and we could be fined or otherwise sanctioned by the Department of Education, which could
increase our cost of regulatory compliance and materially adversely affect us. Further, a failure to comply with these regulatory
requirements could result in termination of our ability to participate in the Title IV programs, which would materially affect us.
Increased disclosure and recordkeeping requirements could result in lower enrollment or growth rates in a manner that materially
and adversely affects our business.
Department of Education rules require that, for each program leading to “gainful employment” in a recognized occupation,
institutions must provide prospective students with information concerning the occupation that the program prepares students to enter,
the program’s on-time graduation rate, and the tuition and fees it charges a student for completing the program within normal time, as
well as the costs of books, supplies, room, and board, and the median loan debt incurred by students who completed the program.
27
Institutions must also provide the Department of Education with information that will allow determination of student debt levels and
incomes after program completion. These reporting and disclosure requirements have caused increased administrative burden and
costs and may have a negative effect on our growth and enrollments.
A reduction in funding or new restrictions on eligibility for the Federal Pell Grant Program, or the elimination of subsidized
Stafford loans, could make college less affordable for certain students at our institution, which could negatively impact our
enrollments, revenue and results of operations.
The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each
Title IV program. In 2008, the Higher Education Act was reauthorized through September 30, 2013 by the Higher Education
Opportunity Act. Changes to the Higher Education Act, including changes in eligibility and funding for Title IV programs, are likely
to occur in subsequent reauthorizations, but we cannot predict the scope or substance of any such changes.
In recent years, there has been increased focus by Congress on the role that proprietary educational institutions play in higher
education. Any action by Congress that significantly reduces Title IV program funding, whether through across-the-board funding
reductions, sequestration or otherwise, or materially impacts the eligibility of our institutions or students to participate in Title IV
programs would have a material adverse effect on our enrollment, financial condition, results of operations and cash flows.
Congressional action could also require us to modify our practices in ways that could increase our administrative costs and reduce our
operating income, which could have a material adverse effect on our financial condition, results of operations and cash flows.
If Congress significantly reduced the amount of available Title IV program funding, we would attempt to arrange for alternative
sources of financial aid for our students, which may include lending funds directly to our students, but private sources may not be able
to provide as much funding to our students on as favorable terms as is currently provided by Title IV. In addition, private
organizations could require us to guarantee all or part of this assistance and we might incur other additional costs. For these reasons,
private, alternative sources of student financial aid would only partly offset, if at all, the impact on our business of reduced Title IV
program funding.
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 post-secondary 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. In addition, if we were to
determine erroneously that a new program did not need approval or that we had all required approvals, we could be liable for
repayment of the Title IV program funds provided to students in that program or at that location.
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.
Our failure to comply with the regulatory requirements of states other than Arizona could result in actions taken by those
states or the Department of Education 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
state’s boundaries. Individual state laws 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. Several states have sought to assert jurisdiction over educational
institutions offering online degree programs that have no physical location in the state but that have some activity in the state, such as
28
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 have historically varied among the states. To address this issue and to meet
new Department of Education requirements we applied and have been approved to be an approved institutional participant in the State
Authorization Reciprocity Agreement (“SARA”). SARA is an agreement among member states, districts and territories that
establishes comparable national standards for interstate offering of post-secondary distance education courses and programs. It is
intended to make it easier for students to take online courses offered by post-secondary institutions based in another state. SARA is
overseen by a national council (NC-SARA) and administered by four regional education compacts, for which Arizona is a W-SARA
member. There is a yearly renewal for participating in NC-SARA and AZ-SARA and institutions must agree to meet certain
requirements to participate. As of December 31, 2017, 48 states are members of SARA.
Some states that do not participate in SARA impose regulatory requirements on out-of-state post-secondary institutions
operating within their boundaries, such as those having a physical facility or conducting certain academic activities within the state.
We currently enroll students in all 50 states and the District of Columbia. Although we are currently licensed, authorized, in-process,
or exempt in all non-SARA jurisdictions in which we operate, 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 license or authorization by that state or be
subject to other sanctions, including restrictions on our activities in, and fines and penalties imposed by, that state, as well as fines,
penalties, and sanctions imposed by the Department of Education. The loss of licensure or authorization in any non-SARA state could
prohibit us from recruiting prospective students or offering services to current students in that state, which could significantly reduce
our enrollments.
Laws, regulations, or interpretations related to doing business over the Internet could also 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.
Additionally, 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. If we fail to comply with state licensing or authorization requirements for a state in which we
operate, 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, and fines and penalties imposed by, that state, as well as fines,
penalties, and sanctions imposed by the Department of Education. 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.
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 student’s ability to obtain a professional license or certification depends on several factors,
including whether the institution and the student’s 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 student’s 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.
29
Government agencies, regulatory agencies, and third parties may conduct compliance reviews, bring claims, or initiate
litigation against us based on alleged violations of the extensive regulatory requirements applicable to us, which could cause us to
pay monetary damages, be sanctioned or limited in our operations, and expend significant resources to defend against those
claims.
Because we operate in a highly regulated industry, we are subject to program reviews, audits, investigations, claims of non-
compliance, and lawsuits by government agencies, regulatory agencies, students, employees, stockholders, and other third parties
alleging non-compliance with applicable legal requirements, many of which are imprecise and subject to interpretation. 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.
If any of the education regulatory agencies that regulate us do not approve or delay their approval of any transaction involving us
that constitutes a “change in control,” our ability to operate or participate in the Title IV programs may be impaired.
If we experience a change in control under the standards of the Department of Education, the Higher Learning Commission, the
Arizona State Board for Private Postsecondary Education, or any other applicable state agency or accrediting commission, we must
notify and/or seek the approval of each such agency. These agencies do not have uniform criteria for what constitutes a change in
control. Transactions or events that typically constitute a change in control include significant acquisitions or dispositions of the
voting stock of an institution or its parent company and significant changes in the composition of the board of directors of an
institution or its parent company. With respect to publicly traded corporations, like us, they also may include cases where a
corporation has a stockholder that owns, or has voting control over, at least 25% of the total outstanding voting stock of the
corporation and is the largest stockholder of the corporation (defined in the regulations as a “controlling shareholder”), and that
controlling shareholder ceases to own, or have voting control over, at least 25% of such stock or ceases to be the largest stockholder,
or other transactions or events may be beyond our control. Our failure to obtain, or a delay in receiving, approval of any change in
control from the Department of Education, the Higher Learning Commission, or the Arizona State Board for Private Postsecondary
Education could impair our ability to operate or participate in the Title IV programs, which could have a material adverse effect on our
business, prospects, financial condition, and results of operations. Our failure to obtain, or a delay in receiving, approval of any change
in control from any other state in which we are currently licensed or authorized, or from any of our specialized accrediting
commissions, could require us to suspend our activities in that state or suspend offering the applicable programs until we receive the
required approval, or could otherwise impair our operations. The potential adverse effects of a change in control could influence future
decisions by us and our stockholders regarding the sale, purchase, transfer, issuance, or redemption of our stock, which could
discourage bids for your shares of our stock and could have an adverse effect on the market price of your shares.
Proposed legislation, additional rulemaking or additional examinations from U.S. Congress may impact general public perception
of the industry in a negative manner resulting in a material and adverse impact on our business.
Criticisms of the overall student lending and post-secondary education sectors may impact general public perceptions of
educational institutions, including us, in a negative manner. Adverse media coverage regarding other educational institutions or
regarding us directly could damage our reputation. The environment surrounding access to and the costs of student loans remains in a
state of flux. The uncertainty surrounding these issues, and any resolution of these issues that increases loan costs or reduces students’
access to Title IV loans or to student extended payment plans such as the ones we make available to our students, could reduce student
demand for our programs, adversely impact our revenues and operating profit or result in increased regulatory scrutiny.
Our reputation and our stock price may be negatively affected by adverse publicity or by the actions of other post-secondary
educational institutions.
In addition to the Congressional and regulatory activities focused on for-profit educational institutions beginning in 2010 and
since, in recent years, regulatory proceedings and litigation have been commenced against various post-secondary educational
institutions relating to, among other things, deceptive trade practices, false claims against the government, and non-compliance with
Department of Education requirements, state higher education laws, and state consumer protection laws. These proceedings have been
brought by the Department of Education, the U.S. Department of Justice, the SEC, and state governmental agencies, among others.
These allegations have attracted adverse media coverage and have been the subject of legislative hearings and regulatory actions at
both the federal and state levels, focusing not only on the individual schools but in some cases on the for-profit post-secondary
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
30
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.
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the reduced availability of, or higher interest rates and other costs associated with, Title IV loan funds or other
sources of financial aid;
the emergence of more successful competitors;
factors related to our marketing, including the costs and effectiveness of Internet advertising and broad-based
branding campaigns and recruiting efforts;
performance problems with our online systems;
failure to maintain institutional and specialized accreditations;
the requirements of the education agencies that regulate us which restrict schools’ initiation of new programs and
modification of existing programs;
the requirements of the education agencies that regulate us which restrict the ways schools can compensate their
recruitment personnel;
increased regulation of online education, including in states in which we do not have a physical presence;
restrictions that may be imposed on graduates of online programs that seek certification or licensure in certain
states;
student dissatisfaction with our services and programs;
damage to our reputation or other adverse effects as a result of negative publicity in the media, in industry or
governmental reports, or otherwise, affecting us or other companies in the for-profit post-secondary education
sector;
price reductions by competitors that we are unwilling or unable to match;
a decline in the acceptance of online education;
an adverse economic or other development that affects job prospects in our core disciplines; and
a decrease in the perceived or actual economic benefits that students derive from our programs.
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.
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.
We have invested significant resources to develop and implement features that enhance the online classroom experience, such as
delivering course content through streaming video, simulations, and other interactive enhancements. Our information technology
systems and tools could become impaired or obsolete due to our action or failure to act. For instance, we could install new information
31
technology without accurately assessing its costs or benefits, or we could experience delayed or ineffective implementation of new
information technology. We could fail to respond in a timely manner for future technological developments in our industry. Should
our actions or failure to act impair or render our information technology less effective, this could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
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. 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 doctoral programs, 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.
We are subject to rules and regulations as a result of our membership with the National Collegiate Athletic Association (NCAA)
and any violations of such rules or regulations could adversely affect our reputation and operations.
Strict observance of rules and regulations contribute to the success of our athletic program. It is the responsibility of the
University administration and the Athletic Department to adhere to all regulations created for the governance of intercollegiate
athletics as set forth by the Western Athletic Conference (“WAC”), NCAA, and Grand Canyon University. The move from Division II
to Division I was effective July 1, 2013 and demonstrated our commitment to athletic excellence and has enhanced our visibility. In
July 2017, the University successfully completed all “year four” requirements and is now a full Division I member of the NCAA and
the WAC. Any violations of such rules and regulations could adversely affect our reputation and operations.
A decline in the overall growth of enrollment in post-secondary institutions, or in the number of students seeking degrees online or
in our core disciplines, could cause us to experience lower enrollment, which could negatively impact our future growth.
Based on industry analyses, we believe that enrollment growth in degree-granting, post-secondary institutions is slowing and
that the number of high school graduates that are eligible to enroll in degree-granting, post-secondary institutions is expected to
decrease over the next few years. In order to maintain current growth rates, we will need to attract a larger percentage of students in
existing markets and expand our markets by creating new academic programs. In addition, if job growth in the fields related to our
core disciplines is weaker than expected, as a result of any regional or national economic downturn or otherwise, fewer students may
seek the types of degrees that we offer. Our failure to attract new students, or the decisions by prospective students to seek degrees in
other disciplines, would have an adverse impact on our future growth.
If students fail to pay their outstanding balances owed to us, our business may be harmed.
From time to time, students, including former students, may carry balances on portions of their education expense not covered
by financial aid programs. These balances are unsecured and not guaranteed. We have historically been successful in collecting our
accounts receivable, including those due from former students as a result of the return to Title IV requirement, because the amount
owed by a particular student that is in excess of the amount of financial aid that the student earned and that we are entitled to retain is
often quite small. We believe that the level of motivation that former students have to pay off their balances due to us, based on such
factors as being able to receive transcripts or protecting their credit, has lessened over time. As a result, losses related to unpaid
student balances in excess of our allowance for doubtful accounts, or the failure of students to repay their debt obligations, could have
a material adverse effect on our business, financial condition and results of operations.
32
Changes to tax law could affect our income taxes.
Our actual effective tax rate may vary from our expectation and that variance may be material. Tax interpretations, regulations
and legislation are subject to measurement uncertainty and the interpretations can impact net income, income tax expense or recovery,
and deferred income tax assets or liabilities. In addition, tax rules and regulations are subject to interpretation and require judgment by
us that may be challenged by the taxation authorities upon audit. On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was
signed into law. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The rate
reduction took effect on January 1, 2018. The reduced tax rate caused the University’s deferred tax assets and liabilities to be revalued
as of December 22, 2017. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted though income tax expense. Changes in our tax provision or an increase to our tax liabilities, whether due to the Tax Act or
interpretations of other tax regulations, or a final determination of tax audits, could have a material adverse effect on our financial
position, results of operations, and cash flows.
We operate in a highly competitive industry, and competitors with greater resources could harm our business.
The post-secondary education market is highly fragmented and competitive. We compete for students primarily with traditional
public and four-year degree-granting regionally accredited colleges and universities and other proprietary degree-granting regionally
accredited schools. An increasing number of traditional colleges and universities and community colleges are offering distance
learning and other online education programs, including programs that are geared toward the needs of working adult students. This
trend has been accelerated by private companies that provide and/or manage online learning platforms for traditional colleges and
universities. As the proportion of traditional colleges and universities providing alternative learning modalities increases, we will face
increasing competition for students from such institutions, including those with well-established reputations for excellence. In
addition, it is likely that we will begin to face competition from various emerging nontraditional, credit-bearing and noncredit-bearing
education programs, provided by both proprietary and not-for-profit providers, and other direct-to-consumer education services. Each
of these competitors may develop platforms or other technologies, including technologies that allow for greater levels of interactivity
between faculty and students and that are superior to the platform and technology we use, and these differences may affect our ability
to recruit and retain students. Public institutions receive substantial government subsidies, and public and private non-profit
institutions have access to government and foundation grants, tax-deductible contributions, and other financial resources generally not
available to for-profit schools. Accordingly, public and private non-profit institutions may have instructional and support resources
superior to those in the for-profit sector, and public institutions may be able to offer substantially lower tuition prices. Some of our
competitors in both the public and private sectors also have substantially greater financial and other resources than we do. We may not
be able to compete successfully against current or future competitors, including with respect to our ability to acquire or compete with
technologies being developed by our competitors, and may face competitive pressures that could adversely affect our business,
prospects, financial condition, and results of operations. These competitive factors could cause our enrollments, revenues, and
profitability to significantly decrease and could render our online delivery format less competitive or obsolete.
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 have
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. A
number of employers we work with have reduced the extent to which they reimburse their employees for participating in our
programs. If we are unable to develop new relationships, or if our existing relationships deteriorate or end as a result of current or
future economic conditions affecting employers or otherwise, our efforts to seek these sources of potential working adult students will
be impaired, and this could materially and adversely affect our business, prospects, financial condition, and results of operations.
33
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 University 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 faculty and 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 Jerry Colangelo in connection with our business school and our
Colangelo School of Sports Business that we operate within our business school, and we have spent significant resources in related
branding efforts. Nevertheless, these license agreements may terminate or expire, or otherwise 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.
Our credit agreement may restrict our operations and our ability to complete certain transactions.
Our credit agreement, which we entered into in December 2012, imposes certain operating restrictions on us, including
limitations on our ability to incur additional debt or make certain investments, and requires us to maintain compliance with certain
applicable regulatory standards. In addition, the credit agreement requires us to maintain a maximum leverage ratio, a minimum fixed
charge coverage ratio and a minimum tangible net worth, in each case as such terms are defined in the credit agreement. We cannot
assure you that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue
available business opportunities. A breach of any of these covenants or our inability to maintain the required financial ratios could
result in a default in respect of the related indebtedness. If a default occurs, the affected lenders could elect to declare the
indebtedness, together with accrued interest and other fees, to be immediately due and payable.
34
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.
The actions, errors, or instances of regulatory noncompliance of third party vendors upon which our institutions rely may
negatively impact our business.
We engage third party vendors to provide, among other services, marketing activities. Although we require that the work done
by such third parties maintains quality assurance and compliance with applicable regulations, we may be ultimately responsible for
any errors on instances of regulatory noncompliance, some of which could adversely impact our reputation, business, prospects,
financial condition, cash flows, and results of operations.
Risks Related to Our Business Technology Infrastructure
We are subject to laws and regulations as a result of our collection and use of personal information, and any violations of such
laws or regulations, or any breach, theft, or loss of such information, could adversely affect our reputation and operations.
Possession and use of personal information in our operations subjects us to risks and costs that could harm our business. We
collect, use, and retain large amounts of personal information regarding our applicants, students, faculty, staff, and their families,
including social security numbers, tax return information, personal and family financial data, and credit card numbers. We also collect
and maintain personal information of our employees in the ordinary course of our business. Our services can be accessed globally
through the Internet. Therefore, we may be subject to the application of national privacy laws in countries outside the U.S. from which
applicants and students access our services. Such privacy laws could impose conditions that limit the way we market and provide our
services.
Our computer networks and the networks of certain of our vendors that hold and manage confidential information on our behalf
may be vulnerable to unauthorized access, employee theft or misuse, computer hackers, computer viruses, and other security threats.
Confidential information may also inadvertently become available to third parties when we integrate systems or migrate data to our
servers following an acquisition of a school or in connection with periodic hardware or software upgrades.
Due to the sensitive nature of the personal information stored on our servers, our networks may be targeted by hackers seeking
to access this data. A user who circumvents security measures could misappropriate sensitive information or cause interruptions or
malfunctions in our operations. Although we use security and business controls to limit access and use of personal information, a third
party may be able to circumvent those security and business controls, which could result in a breach of student or employee privacy.
In addition, errors in the storage, use, or transmission of personal information could result in a breach of privacy for current or
prospective students or employees. Possession and use of personal information in our operations also subjects us to legislative and
regulatory burdens that could require us to implement certain policies and procedures, such as the procedures we adopted to comply
with the Red Flags Rule that was promulgated by the Federal Trade Commission (FTC) under the federal Fair Credit Reporting Act
and that requires the establishment of guidelines and policies regarding identity theft related to student credit accounts, and could
require us to make certain notifications of data breaches and restrict our use of personal information. A violation of any laws or
regulations relating to the collection or use of personal information 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.
Capacity constraints, system disruptions, or security breaches in our online computer networks and phone systems could have a
material adverse effect on our ability to attract and retain students.
The performance and reliability of the infrastructure of our computer networks and phone systems, including our online
programs, is critical to our operations, reputation and to our ability to attract and retain students. Any computer system disruption or
failure, or a sudden and significant increase in traffic on the servers that host our online operations, may result in our online courses
and programs being unavailable for a period of time. In addition, any significant failure of our computer networks or servers, whether
35
as a result of third-party actions or in connection with planned upgrades and conversions, could disrupt our on-campus operations.
Individual, sustained, or repeated occurrences could significantly damage the reputation of our online operations and result in a loss of
potential or existing students. Additionally, our online operations are vulnerable to interruption or malfunction due to events beyond
our control, including natural disasters and network and telecommunications failures. Our computer networks may also be vulnerable
to unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks 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.
A failure of our information systems to properly store, process and report relevant data may reduce our management’s
effectiveness, interfere with our regulatory compliance and increase our operating expenses.
We are dependent on the integrity of our data management systems. If these systems do not effectively collect, store and process
relevant data for the operation of our business, whether due to equipment malfunctions or constraints, software deficiencies, or human
error, our ability to effectively report, plan, forecast and execute our business plan and comply with applicable laws and regulations,
including the Higher Education Act, as reauthorized, and the regulations thereunder, will be impaired, perhaps materially. Any such
impairment could materially and adversely affect our financial condition, results of operations, and cash flows.
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.
Risks Related to Owning our Common Stock
Provisions in our charter documents and the Delaware General Corporation Law could make it more difficult for a third party to
acquire us and could discourage a takeover and adversely affect existing stockholders.
Anti-takeover provisions of our certificate of incorporation, bylaws, the Delaware General Corporation Law, or DGCL, and
regulations of state and federal education agencies could diminish the opportunity for stockholders to participate in acquisition
proposals at a price above the then-current market price of our common stock. For example, while we have no present plans to issue
any preferred stock, our Board of Directors, without further stockholder approval, may issue shares of undesignated preferred stock
and fix the powers, preferences, rights, and limitations of such class or series, which could adversely affect the voting power of your
shares. In addition, our bylaws provide for an advance notice procedure for nomination of candidates to our Board of Directors that
could have the effect of delaying, deterring, or preventing a change in control. Further, as a Delaware corporation, we are subject to
provisions of the DGCL regarding “business combinations,” which can deter attempted takeovers in certain situations. The approval
requirements of the Department of Education, our regional accrediting commission, and state post-secondary, licensure, and
certification 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 of Directors 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.
If securities analysts do not publish research or reports about our business or industry or if they downgrade their evaluations of
our stock, the price of our stock could decline.
The activity within the trading market for our common stock depends in part on the research and reports that industry or
financial analysts publish about us, our business and the for-profit education sector. In recent periods, a number of analysts have
dropped coverage of the sector. If analysts cease coverage of us or additional analysts cease coverage of our sector, we could lose
visibility in the market for our stock, which in turn could cause our stock price to decline. If one or more of the analysts covering us
downgrade their estimates or evaluations of our stock, the price of our stock could decline.
36
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
We own our ground campus, which is located on over 275 acres in the center of the Phoenix, Arizona metropolitan area, near
downtown Phoenix. Our on-campus facilities currently consist of classroom buildings, lecture halls, a 300-seat theater, a 29,000
square foot newly renovated library, a media arts complex that provides communications students with audio and video equipment, a
55,000 square foot recreation center that has state of the art training facilities for our 400 student-athletes and students, a 140,000
square foot/ 7,500 seat basketball and entertainment arena, a stadium that hosts NCAA men’s and women’s soccer as well as several
club sports programs, a basketball practice facility, newly renovated baseball and softball stadiums, on-campus tennis courts, beach
volleyball courts, and a competition/practice gymnasium, an activity center that contains a food court, a bowling alley and other
student services, a student union which was recently remodeled and expanded, residence halls, apartments, campus pools, athletic
facilities and parking garages. Additionally, we have several office buildings used for administration and we recently completed a
large student services center and parking garage in close proximity to our ground campus. Employees that worked in two leased office
buildings in the Phoenix area were consolidated into this new building upon completion in late 2016. In late 2015, we revitalized the
Maryvale Golf Course under a partnership agreement with the City of Phoenix and in 2016 the Grand Canyon University
Championship Golf Course was opened to the public. In order to accommodate the continued growth of our traditional ground
population, we completed construction on three apartment style residence halls, an additional 170,000 square foot classroom building
for its College of Science, Engineering and Technology, a student service center and a fourth parking structure prior to the 2016/2017
academic year and prior to the 2017/2018 academic year we completed construction on an additional dormitory, other ground campus
building projects and land acquisitions adjacent to our campus.
We lease three facilities in Arizona and one in New Mexico for classroom and labs for our nursing professional studies students.
Additionally, we lease five office locations in California and one in Colorado. We may add additional space in Arizona and in other
states in the southwest U.S. to accommodate our growth plans in 2018 and beyond.
Item 3.
Legal Proceedings
From time to time, we are subject to ordinary and routine litigation incidental to our business. While the outcomes of these
matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect
on our financial position, results of operations or cash flows.
Item 4.
Mine Safety Disclosures
None.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock trades on the Nasdaq Global Market under the symbol “LOPE.” The holders of our 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.
37
The table below sets forth the high and low sales prices for our common stock, as reported by the Nasdaq Global Market.
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 72.16 $ 56.52
$ 83.00 $ 68.77
$ 91.12 $ 71.01
$ 96.15 $ 83.52
$ 43.37 $ 31.12
$ 45.02 $ 37.94
$ 44.98 $ 38.81
$ 61.80 $ 39.68
Holders
As of December 31, 2017, there were approximately 200 registered holders of record of common stock. A substantially greater
number of holders of common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and
other financial institutions.
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 our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters, “Equity Compensation Plan Information,” which is incorporated herein
by reference.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our Board of Directors has authorized the University to repurchase up to $175.0 million in aggregate of common stock, from
time to time, depending on market conditions and other considerations. The current expiration date on the repurchase authorization by
our Board of Directors is December 31, 2018. Repurchases occur at our discretion. Repurchases may be made in the open market or in
privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules. The amount and timing of
future share repurchases, if any, will be made as market and business conditions warrant. Since the approval of our share repurchase
plan, we have purchased 3.5 million shares of common stock at an aggregate cost of $77.3 million, which are recorded at cost in the
accompanying December 31, 2017 consolidated balance sheet and statement of stockholders’ equity. At December 31, 2017, there
remained $97.7 million available under our current share repurchase authorization. During the fourth quarter and the year ended
December 31, 2017, the University repurchased 17,230 shares of common stock at an aggregate cost of $1.5 million.
38
The following table sets forth our share repurchases of common stock and our share repurchases in lieu of taxes, which are not
included in the repurchase plan totals as they were effected in conjunction with the vesting of restricted share awards, during each
period in the fourth quarter of fiscal 2017:
Period
Share Repurchases
October 1, 2017 – October 31, 2017
November 1, 2017 – November 30, 2017
December 1, 2017 – December 31, 2017
Total
Tax Withholdings
October 1, 2017 – October 31, 2017
November 1, 2017 – November 30, 2017
December 1, 2017 – December 31, 2017
Total
University Stock Performance
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced
Program
Maximum Dollar
Value of Shares
That May Yet Be
Purchased Under
the Program
— $ —
10,000 $ 85.04
7,230 $ 91.16
— $
10,000 $
7,230 $
99,200,000
98,400,000
97,700,000
17,230 $ 87.61
17,230 $
97,700,000
1,500 $ 88.90
— $ —
— $ —
1,500 $ 88.90
— $
— $
— $
— $
—
—
—
—
The following graph compares the cumulative total return of our common stock with the cumulative total returns of the S&P
500 Index and our selected peer group of four companies that includes: Capella Education Company, American Public Education,
Inc., Strayer Education Inc. and Bridgepoint Education, Inc. This chart assumes that an investment of $100 was made in our common
stock, in the index, and in the peer group on December 31, 2012 and that all dividends paid by us and such companies were reinvested,
and tracks the relative performance of such investments through December 31, 2017.
39
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Grand Canyon Education, Inc., the S&P 500 Index,
and a Peer Group
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/12
12/13
12/14
12/15
12/16
12/17
Grand Canyon Education, Inc.
S&P 500
Peer Group
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.
Grand Canyon Education, Inc.
S&P 500
Peer Group
12/13
12/15
12/14
12/12
12/17
100.00 185.77 198.81 170.94 249.04 381.47
100.00 132.39 150.51 152.59 170.84 208.14
100.00 134.40 143.36 94.07 142.54 139.15
12/16
The information contained in the performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC nor
shall such information be deemed incorporated by reference into any future filing under the Securities Act or the Exchange Act,
except to the extent that we specifically incorporate it by reference into such filing.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Item 6.
Selected Consolidated Financial and Other Data
The following selected consolidated financial and other data should be read in conjunction with Item 8, Consolidated Financial
Statements and Supplementary Data, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations, to fully understand the information presented below. The selected consolidated income statement data and other data,
excluding period end enrollment, for the years ended December 31, 2017, 2016, and 2015, and the selected consolidated balance sheet
data as of December 31, 2017, and 2016, have been derived from our audited consolidated financial statements for such years, which
are included herein. The selected consolidated income statement data and other data, excluding period end enrollment, for the years
ended December 31, 2014 and 2013, and the selected consolidated balance sheet data as of December 31, 2015, 2014, and 2013, have
40
been derived from our audited consolidated financial statements for such years, which are not included herein. Our historical results
are not necessarily indicative of our results for any future period.
Income Statement Data:
Net revenue
Costs and expenses:
Instructional costs and services
Admissions advisory and related
Advertising
Marketing and promotional
General and administrative
Lease termination costs
Total costs and expenses
Operating income
Interest expense
Interest income and other
Income before income taxes
Income tax expense
Net income
Earnings per common share
Basic
Diluted
Shares used in computing earnings per common share
Basic
Diluted
Other Data:
Capital expenditures
Depreciation and amortization
Adjusted EBITDA(1)
Period end enrollment(2)
Online
Ground
Balance Sheet Data:
Cash and cash equivalents, and investments
Restricted cash, cash equivalents and investments
Total assets(3)
Notes payable (including short-term)
Total stockholders’ equity
Year Ended December 31,
2017
2016
2015
2014
2013
(In thousands, except per share data)
$ 974,134 $ 873,344 $ 778,200 $ 691,055 $ 598,335
410,840
128,544
98,608
9,629
43,759
—
373,101 329,651 288,791
119,286 112,572 108,567
88,152 76,229 65,808
8,860 7,287 7,439
43,219 42,100 39,635
3,523 — —
254,419
97,077
60,985
5,644
36,934
—
691,380
636,141 567,839 510,240
455,059
282,754
237,203 210,361 180,815
(2,169)
2,943
(1,328)
249
(1,248)
(106)
(1,801)
684
143,276
(2,244)
3,863
283,528
80,209
236,124 209,007 179,698
87,610 77,596 68,232
144,895
56,184
$ 203,319 $ 148,514 $ 131,411 $ 111,466 $ 88,711
$
$
4.31 $
4.22 $
3.22 $
3.15 $
2.86 $
2.78 $
2.45 $
2.37 $
1.98
1.92
47,140
48,235
46,083 45,975 45,538
47,121 47,281 47,006
44,731
46,131
$ 123,954 $ 239,019 $ 218,301 $ 168,646 $ 93,490
45,387 $ 35,379 $ 29,177 $ 25,141
$
$ 354,561 $ 304,071 $ 264,987 $ 227,812 $ 185,086
53,932 $
71,455
18,842
64,646 59,311 55,060
17,262 15,195 12,746
49,580
10,078
94,534 $
$ 242,745 $ 108,572 $ 106,400 $ 166,022 $ 164,244
$
84,931 $ 75,384 $ 67,840 $ 64,368
$1,303,573 $1,092,493 $ 891,982 $ 749,564 $ 610,941
$
98,252 $ 79,877 $ 86,493 $ 93,100
$ 985,951 $ 773,686 $ 610,251 $ 476,232 $ 344,844
66,616 $
(1) Adjusted EBITDA, a non-GAAP financial measure, is defined as net income plus interest expense, less interest income and
other gain (loss) recognized on investments, plus income tax expense, plus depreciation and amortization (EBITDA), as
adjusted for (i) the amortization of prepaid royalty payments recorded in conjunction with a settlement of a dispute with our
former owner; (ii) contributions to Arizona school tuition organizations in lieu of the payment of state income taxes; (iii) share-
based compensation; and (iv) one-time, unusual charges or gains, such as litigation and regulatory reserves, impairment charges
and asset write-offs, and exit or lease termination costs.
(2) Enrollment represents individual students who attended a course during the last two months of the calendar quarter.
(3) During the first quarter of 2016, the University made changes in its presentation of deferred tax assets and liabilities to comply
with a new accounting standard. Accordingly, we reclassified the current deferred taxes to net against noncurrent deferred tax
liabilities for all prior periods to conform to the current presentation.
We present Adjusted EBITDA, a non-GAAP financial measure, because we consider it to be an important supplemental
measure of our operating performance. We also make certain compensation decisions based, in part, on our operating performance, as
measured by Adjusted EBITDA, and our credit agreement requires us to comply with covenants that include performance metrics
substantially similar to Adjusted EBITDA. All of the adjustments made in our calculation of Adjusted EBITDA are adjustments to
41
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. Royalty expenses paid to our former
owner, contributions to Arizona school tuition organizations in lieu of the payment of state income taxes, share-based compensation,
one time unusual charges or gains, such as estimated litigation and regulatory reserves, impairment charges, exit costs, and lease
termination fees 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, investors 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 net income, operating income, or any other performance measure derived
in accordance with and reported under GAAP or as an alternative to cash flow from operating activities or as a measure of our
liquidity. Some of these limitations are that it does not reflect:
•
•
•
•
cash expenditures for capital expenditures or contractual commitments;
changes in, or cash requirements for, our working capital requirements;
interest expense, or the cash required to replace assets that are being depreciated or amortized; and
the impact on our reported results of earnings or charges resulting from the items for which we make adjustments
to our EBITDA, as described above and set forth in the table below.
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 use Adjusted EBITDA only as a supplemental performance measure. For more information, see
our consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K.
The following table reconciles Adjusted EBITDA to net income for the periods indicated:
Year Ended December 31,
(In thousands)
Net income
Plus: interest expense
Less: interest income and other(a)
Plus: income tax expense
Plus: depreciation and amortization
EBITDA
Plus: royalty to former owner(b)
Plus: fixed asset impairments(c)
Plus: contributions made in lieu of state income taxes(d)
Plus: transaction expenses(e)
Plus: estimated litigation and regulatory reserves(f)
Plus: lease termination costs(g)
Plus: share-based compensation(h)
Adjusted EBITDA
42
2017
2015
(249)
(2,943)
2016
$203,319 $ 148,514 $ 131,411
2,169 1,328 1,248
106
80,209 87,610 77,596
53,932 45,387 35,379
336,686 282,590 245,740
296
296
296
2,590
250 2,755
2,025 4,000 2,750
212 1,136 1,861
328
64 —
— 3,523 —
12,688 12,276 11,257
$354,561 $ 304,071 $ 264,987
(a) Represents a loss of $0.9 million in 2015 on a note receivable purchased in December 2012, net of interest income.
(b) Represents the amortization of prepaid royalty payments, as discussed in Note 2 to our consolidated financial statements that are
included in Item 8, Consolidated Financial Statements and Supplementary Data.
(c) Represents fixed asset impairments. Amounts represent the write-off of the remaining book value of on campus buildings
removed to make way for new dormitories and classroom buildings as well as internal use software write offs.
(d) Reflects contributions to various Arizona school tuition organizations to assist with funding for education. In connection with
such contributions made we received a dollar-for-dollar state income tax credit, which resulted in a reduction in our effective
income tax rate to 28.3%, 37.1% and 37.1% for the years ended December 31, 2017, 2016 and 2015, respectively. Had these
contributions not been made, our effective tax rate would have been 28.8%, 38.2% and 37.9%, for 2017, 2016 and 2015,
respectively. Such contributions are viewed by our management to be made in lieu of payments of state income taxes and are
therefore excluded from evaluation of our core operating performance.
(e) Reflects expenses incurred related to a proposed transaction under which Grand Canyon University would become a non-profit
entity.
(f) Reflects $0.1 million and $0.3 million for estimated litigation reserves in 2017 and 2015, respectively.
(g) Represents lease termination costs incurred related to the early termination of leased space.
(h) Reflects share-based compensation expense relating to restricted stock awards and option grants made to employees and
directors.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations for the years ended December 31,
2017 and 2016 should be read in conjunction with our consolidated financial statements and related notes that appear in Item 8,
Consolidated Financial Statements and Supplementary Data. In addition to historical 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 Annual Report on Form 10-K, particularly in Item 1A, Risk Factors and Forward-Looking Statements.
Executive Overview
We are a comprehensive regionally accredited university that offers over 225 graduate and undergraduate degree programs,
emphases and certificates across nine colleges both online and on ground at our over 275 acre campus in Phoenix, Arizona, and onsite
at facilities we lease and at facilities owned by third party employers. We are committed to providing an academically rigorous
educational experience with a focus on professionally relevant programs that meet the objectives of our students. Our undergraduate
programs are designed to be innovative and meet the future needs of employers, while providing students with the needed critical
thinking and effective communication skills developed through a Christian, liberal arts foundation. We offer master’s and doctoral
degrees in contemporary fields that are designed to provide students with the capacity for transformational leadership in their chosen
industry, emphasizing the immediate relevance of theory, application, and evaluation to promote personal and organizational change.
We believe the growing brand of the University and the value proposition for both traditional aged students attending on our campus
in Phoenix, Arizona and working adult students attending on our campus or at off-site locations in cohorts (referred to by us as
professional studies student) or online, has enabled us to increase enrollment to approximately 90,300 students at December 31, 2017.
At December 31, 2017, 79.1% of our students were enrolled in our online programs, and, of our working adult students (online and
professional studies students), 50.5% were pursuing master’s or doctoral degrees.
43
Key Trends, Developments and Challenges
The following circumstances and trends present opportunities, challenges and risks.
Proposed Change in the Structure of Our Operations. As discussed above under “Item 1. Business – Proposed Change in the
Structure of Our Operations,” we are seeking approval of the Proposed Transaction to effect the sale of GCU to a nonprofit entity as a
means of enabling GCU to conduct itself as a traditional nonprofit university, consistent with its history and on a level playing field
with other traditional universities with regard to tax status and, among other things, the ability to accept philanthropic contributions,
pursue research grant opportunities, and participate in NCAA governance. The transaction involves the sale of the Company’s
academic-related assets, real estate and related intangibles to a newly formed nonprofit corporation (“New GCU”). Following this
sale, the nonprofit corporation would operate the university while the Company would continue to operate as a third-party provider of
services to New GCU and potentially, in the future, to other universities. If the necessary approvals are obtained, financial and other
terms between us and New GCU are agreed upon, definitive agreements are executed, and the Proposed Transaction is ultimately
consummated, then various aspects of our operations would change in important ways. These changes include, but are not limited to,
the following:
• Our academic and related operations and assets, as well as approximately 35% of our full-time employees and
substantially all of our part-time employees and student workers, would transfer to New GCU. Following this
transfer, we would no longer own and operate a regulated institution of higher education, but would instead
provide a host of services in support of New GCU’s operations. While the services we would provide are services
that we currently provide as part of our business today, we have limited to no experience operating as a service
provider to third parties.
• New GCU would be a separate non-profit entity under the control of an independent board of trustees and
independent management. Accordingly, our relationship with New GCU, both pursuant to the shared services
arrangement and operationally, would no longer be as owner and operator, but as a third party contract party.
While we believe this relationship would remain strong, New GCU’s board of trustees and management would
have fiduciary and other duties that would require them to focus on the best interests of New GCU and over time
those interests could diverge from ours.
Initially, all of our revenue would be derived pursuant to the shared services arrangement with New GCU.
Accordingly, New GCU’s ability to continue to increase its enrollment and tuition and fee revenue, and our ability
to continue to perform the services necessary to enable New GCU to do so, would be critical to the success of our
services business.
It is anticipated that the consideration payable by New GCU for the acquired assets, which will be material, will be
in the form of a long-term secured note. While the terms of this note remain subject to negotiation, our ability to
realize the negotiated value of the acquired assets would be subject to New GCU’s performance and its ability to
pay amounts due under the secured note as they come due.
•
•
If the Proposed Transaction is consummated, our revenue and expenses would be materially reduced, while our operating margin
would materially increase and we would recognize significant interest income on the long-term secured note. In addition, the Proposed
Transaction would trigger an obligation to repay all amounts outstanding on our credit facility, which totaled $66.5 million at
December 31, 2017. If, however, we are unable to successfully re-focus our business to providing services to third parties, or if the
contemplated shared services arrangement with New GCU fails to achieve the anticipated levels of performance, then our business,
financial condition and results of operations, as well as our stock price, could be materially and adversely affected.
Evolving Post-secondary Education Market. We believe that there is a large number of traditional-aged students looking for a
residential experience at an affordable, private, Christian university. As a result of state funding challenges, most state universities are
receiving less state subsidies and therefore have been forced to increase tuition, decrease the number of students they can accept
and/or make other changes that impact the student experience. Some private universities also are facing enrollment challenges as a
result of their high tuition costs. We also believe the number of non-traditional students who work, are raising a family, or are doing
both while trying to earn a college degree continues to grow. The continued economic environment in the U.S., however, has caused
an increased number of potential students and/or their parents to consider the cost of education as a primary factor in choosing the
school that they will attend. Given these trends, we believe that many individuals will be attracted to our high quality academic
programs at affordable tuition rates. We also believe that competition for students continues to increase. We compete primarily with
traditional public and four-year degree-granting regionally accredited colleges and universities and other proprietary degree-granting
regionally accredited schools. An increasing number of traditional colleges, universities and community colleges are offering distance
learning and other online education programs, including programs that are geared towards the needs of working adult students. This
trend has been accelerated by private companies that provide and/or manage online learning platforms for traditional colleges and
universities. As the proportion of traditional colleges and universities providing alternative learning modalities increases, we face
increasing competition for students from such institutions, including those with well-established reputations for excellence.
Regulation and Oversight. We are subject to extensive regulation by federal and state governmental agencies and accrediting
bodies. In particular, the Higher Education Act of 1965, as amended (the “Higher Education Act”), and the regulations promulgated
44
thereunder by the Department of Education subject us 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. Recent regulations have imposed new reporting and disclosure requirements that have caused increased administrative
burden and costs and may have a negative effect on our growth and enrollments. In addition, in recent years, there has been increased
focus by Congress on the role that proprietary educational institutions play in higher education and various proposals to modify the
laws to which proprietary educational institutions are subject. We cannot predict what legislation, if any, may result from these
Congressional proposals or what impact any such legislation might have on the proprietary education sector generally or our business
in particular. To the extent that any laws or regulations are adopted, or other administrative actions are taken, that limit our
participation in Title IV programs or the amount of student financial aid for which the students at our institutions are eligible, our
enrollments, revenues and results of operation could be materially and adversely affected.
New Tax Law. On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. For businesses, the Act
reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The rate reduction took effect on January 1, 2018.
The reduced tax rate caused the University’s deferred tax assets and liabilities to be revalued as of December 22, 2017. Deferred
income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the
financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted though income tax
expense. The University’s net deferred tax liability was revalued as of December 22, 2017. The University recorded a $10.7 million
income tax benefit related to the revaluation of its deferred tax assets and liabilities. Excluding this income tax benefit in 2017, our
effective tax rate would have been 32.1%.
Fiscal Year 2017 Highlights
We achieved the following in 2017:
Enrollment, Net Revenue, Operating Income Growth with No Increase in Ground Tuition Rates. We achieved enrollment
growth of 10.2% during the fiscal year ended December 31, 2017, as ground enrollment increased 9.2% and online enrollment
increased 10.5% over the prior year. We attribute the significant growth in our ground enrollment between years to our increasing
brand recognition and the value proposition that our ground traditional campus affords to traditional-aged students and their parents.
After scholarships, our ground traditional students pay tuition, room, board, and fees in an amount that is often half to a third of what
it costs to attend a private, traditional university in another state and an amount comparable to what it costs to attend a public
university. Our online students pay tuition and fees in an amount that is often less than the cost of other high service online programs
such as ours. For example, our largest local competitor’s undergraduate tuition for online programs ranges from $510 to $718 per
credit hour and its graduate tuition for online programs ranges from $512 to $1,312 per credit hour while our online tuition per credit
hour ranges from $355 to $470 for undergraduate programs and $330 to $640 for graduate programs. There are online programs that
are less expensive than ours but those programs generally do not provide the full level of support services that we provide to our
students. Although our online enrollment continues to grow, as the proportion of traditional colleges and universities providing
alternative learning modalities increases, we will face increasing competition for working adult students from such institutions,
including those with well-established reputations for excellence. We did not raise tuition in any of our programs for our 2016-2017
and 2017-2018 academic years. A tuition increase of approximately 1% was implemented for the majority of online programs for our
2015-2016 academic year. We have not raised our tuition for our traditional ground programs in nine years. Net revenues increased
11.5% over the prior year primarily due to the enrollment growth and due to an increase in ancillary revenues resulting from the
increased traditional student enrollment (e.g. housing, food, etc.). Operating income was $282.8 million for the fiscal year ended
December 31, 2017, an increase of 19.2% over the $237.2 million in operating income for 2016.
Capital Expenditures. Our capital expenditures in 2017 of $113.6 million primarily related to the expansion of our over 275
acre physical campus in Phoenix, Arizona and significant investment in technology innovation to support our students and staff. In
order to accommodate the continued growth of the traditional ground population, the University completed the construction of an
additional dormitory, other ground campus building projects and land acquisitions adjacent to our campus, as well as purchases of
computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.
Included in off-site development for 2017 is $10.4 million we spent to finish the building and parking garage in close proximity to our
ground traditional campus. Employees that worked in two leased office buildings in the Phoenix area were relocated to this new
building by the end of 2016.
45
Income Taxes. Our adoption of the new share-based compensation standard in 2017 resulted in a reduction to our provision for
income taxes of $16.5 million for the year ended December 31, 2017, due to the recognition of excess tax benefits from restricted
stock awards that vested or stock options that were exercised in 2017. The inclusion of excess tax benefits and deficiencies as a
component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax
benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the restricted awards vest,
our stock price on the date an option is exercised, and the quantity of options exercised. Our restricted stock vests in March each year
so the favorable benefit is greatest in the first quarter each year.
Revenue and Enrollment
Net revenue consists principally of tuition, room and board charges attributable to students residing on our ground campus,
application and graduation fees, and fees from educational resources such as access to online materials, 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 timing of our ground traditional
campus semesters; (vi) the amount of the scholarships that we offer; and (vii) the number of students housed in, and the rent charged
for, our on-campus student apartments and dormitories.
We define enrollment as individual students who attended a course during the last two months of the calendar quarter. We offer
three 15-week semesters in a calendar year with one start available per semester for our traditional ground students. Online and
professional studies students have more frequent class starts in courses that generally range from five to sixteen weeks through the
calendar year. 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 our brand strength and price point; 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, 2017, 2016, and 2015 by degree type and by
instructional delivery method:
Graduate degree(2)
Undergraduate degree
Total
Online(3)
Ground(4)
Total
2017(1)
December 31,
2016(1)
2015(1)
# of Students % of Total
# of Students % of Total
# of Students
% of Total
37,339
52,958
90,297
41.4%
58.6%
100.0%
33,215
48,693
81,908
40.6%
59.4%
100.0%
29,237
45,269
74,506
39.2%
60.8%
100.0%
2017(1)
December 31,
2016(1)
2015
# of Students % of Total
# of Students % of Total
# of Students
% of Total
71,455
18,842
90,297
79.1%
20.9%
100.0%
64,646
17,262
81,908
78.9%
21.1%
100.0%
59,311
15,195
74,506
79.6%
20.4%
100.0%
(1) Enrollment represents individual students who attended a course during the last two months of the calendar quarter. Included in
enrollment at December 31, 2017, 2016 and 2015 are students pursuing non-degree certificates of 886, 847, and 679,
respectively.
(2)
Includes 7,703, 7,084 and 6,302 students pursuing doctoral degrees at December 31, 2017, 2016 and 2015, respectively.
(3) As of December 31, 2017, 2016 and 2015, 50.5%, 49.5% and 47.8%, respectively, of our working adult students (online and
professional studies students) were pursuing graduate or doctoral degrees.
Includes our traditional on-campus students, as well as our professional studies students.
(4)
46
For the 2017-18 academic year (the academic year begins in May), our prices per credit hour range from $355 to $470 for
undergraduate online and professional studies courses, $330 to $630 for graduate online courses, $640 for doctoral online programs,
and $688 for undergraduate courses for ground students. For our active duty and active reserve online and professional studies
students, our prices per credit hour are $250 for undergraduate, $400 for graduate courses and $608 for doctoral courses. The overall
price of each course varies based upon the number of credit hours per course (with most courses representing four credit hours), the
degree level of the program, and the discipline. In addition, we charge a fixed $8,250 “block tuition” for undergraduate ground
students taking between 12 and 18 credit hours per semester, with an additional $688 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 master’s degree and overall cost for such a degree varies by program, although such programs typically require approximately 36
credit hours. The doctoral program requires approximately 60 credit hours and since program inception on average, doctoral students
who graduated required 5.2 dissertation continuation courses to complete their degree.
Based on current tuition rates, tuition for a full program would generally equate to between $15,450 and $37,000 for an online
master’s program, between $42,600 and $56,400 for a full four-year online bachelor’s program, approximately $66,000 for a full four-
year bachelor’s program taken on our ground campus, and $48,000 for a full doctoral program including five dissertation continuation
courses. Students requiring dissertation continuation courses in excess of five are only charged $500 per course. 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. For example, the average student on our ground traditional campus will pay approximately $8,700 in tuition in the
2017-18 school year after scholarships. Thus, based on the number of transfer credits and the scholarships they receive it is likely that
a student will pay less than $35,000 in tuition for a bachelor’s degree on our ground campus. For the years ended December 31, 2017,
2016 and 2015, our revenue was reduced by approximately $196.3 million, $179.2 million and $163.9 million, respectively, as a result
of scholarships that we offered to our students. The increase in scholarships reflects our increased revenues and our resulting increased
use of scholarships, especially academic scholarships, to attract high performing students to our ground traditional campus.
Revenue per student for the year ended December 31, 2017 increased over 2016 primarily due to the enrollment growth and due
to an increase in ancillary revenues resulting from the increased traditional student enrollment (e.g. housing, food services, etc.). The
increase in revenue per student between years is primarily due to a higher percentage of students residing on campus resulting in
higher room and board related revenue as compared to the prior year. When factoring in room, board, and fees, the revenue per student
is higher for these students than for our working adult students. We did not raise tuition in any of our programs for our 2016-2017 and
2017-2018 academic years and have not raised our tuition for our traditional ground program in nine years. A tuition increase of
approximately 1% was implemented for the majority of online programs in September 2015. This reflects a concerted effort to control
tuition pricing for students so that debt levels assumed by our students are reasonable. 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.
We derive a majority of our net revenues from tuition financed by the Title IV programs. For the years ended December 31,
2017, 2016 and 2015, we derived cash receipts equal to approximately 71.5%, 72.3%, and 74.8%, respectively, of our net revenues
from Title IV programs. Our students also may rely on scholarships, personal savings, private loans, and employer tuition
reimbursements to pay a portion of their tuition and related expenses.
Critical Accounting Policies and Estimates
The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. During the preparation of these
consolidated 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 consolidated financial statements.
We believe that the following critical accounting policies involve our more significant judgments and estimates used in the
preparation of our consolidated financial statements:
Revenue recognition. Net revenues consist primarily of tuition and fees derived from courses taught by us online, at our over
275 acre campus in Phoenix, Arizona, and at facilities we lease or those of employers, as well as from related educational resources
such as access to online materials. Tuition revenue and most fees and related educational resources are recognized pro-rata over the
applicable period of instruction, net of scholarships awarded by us. Generally, we will refund all or a portion of tuition already paid
pursuant to our refund policy, dependent upon length of course and modality and subject to certain state specific refund requirements.
If a student withdraws at a time when only a portion, or none of the tuition is refundable, then in accordance with its revenue
recognition policy, the University continues to recognize the tuition that was not refunded pro-rata over the applicable period of
47
instruction. However, for students that have taken out financial aid to pay their tuition and for which a return to Title IV is required as
a result of his or her withdrawal, the University recognizes revenue after a student withdraws only at the time of cash collection. Sales
tax collected from students is excluded from net revenues. We also charge online students an upfront learning management fee, which
is deferred and recognized over the average expected term of a student. Costs that are direct and incremental to new online students
are also deferred and recognized ratably over the average expected term of a student. 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. Our educational programs have
starting and ending dates that differ from our quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these
programs is not yet earned. Other revenues may be recognized as sales occur or services are performed.
Allowance for doubtful accounts. We record an allowance for doubtful accounts for estimated losses resulting from the
inability, failure or refusal of our students to make required payments, which includes the recovery of financial aid funds advanced to
a student for amounts in excess of the student’s cost of tuition and related fees that we may have to return under Title IV after a
student drops. We determine the adequacy of our allowance for doubtful accounts based on an analysis of our historical bad debt
experience, current economic trends, and the aging of the accounts receivable and student status. We apply a reserve to our receivables
based upon an estimate of the risk presented by the age of the receivables and student status. We write off accounts receivable
balances of active students at the earlier of the time the balance is deemed uncollectible, or one year after the revenue is generated. We
reserve for receivables due from inactive students on a more accelerated basis than those due from active students and write off
inactive student accounts at 150 days, as amounts due from inactive students are much more difficult to collect than amounts due from
active students. We monitor our collections and write-off experience to assess whether adjustments to the estimated reserve are
necessary.
Long-Lived Assets (other than goodwill). 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. We recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities
for future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expect to be
realized. Our deferred tax assets 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 in August 2005, we have not recorded any
valuation allowances to date on our deferred income tax assets. We evaluate and account for uncertain tax positions using a two-step
approach. Recognition occurs when we conclude that a tax position based solely on its technical merits, is more-likely-than-not to be
sustained upon examination. Measurement determines the amount of benefit that is greater than 50% likely to be realized upon the
ultimate settlement with a taxing authority that has full knowledge of the facts. Derecognition of a tax position that was previously
recognized occurs when we determine that a tax position no longer meets the more-likely-than-not threshold of being sustained upon
examination. As of December 31, 2017 and 2016, the University has reserved approximately $2,008 and $1,981, respectively, for
uncertain tax positions, including interest and penalties.
48
Results of Operations
The following table sets forth statements of operations data as a percentage of net revenue for each of the periods indicated:
Year Ended December 31,
Net revenue
Costs and expenses
Instructional costs and services
Admissions advisory and related
Advertising
Marketing and promotional
General and administrative
Lease termination costs
Total costs and expenses
Operating income
Interest expense
Interest income and other
Income before income taxes
Income tax expense
Net income
2017
2016
100.0% 100.0% 100.0%
2015
42.2
13.2
10.1
1.0
4.5
0.0
71.0
29.0
(0.2)
0.3
29.1
8.2
20.9
42.7
13.7
10.1
1.0
4.9
0.4
72.8
27.2
(0.2)
0.0
27.0
10.0
17.0
42.4
14.5
9.8
0.9
5.4
0.0
73.0
27.0
(0.2)
0.0
26.9
10.0
16.9
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net revenue. Our net revenue for the year ended December 31, 2017 was $974.1 million, an increase of $100.8 million, or
11.5%, as compared to net revenue of $873.3 million for the year ended December 31, 2016. This increase was primarily due to an
increase in online and ground enrollment and, to a lesser extent, an increase in room and board and other student fees, partially offset
by an increase in institutional scholarships. We have not raised our tuition for our traditional ground programs in nine years and we
have not raised tuition for our working adult students since September 2015. End-of-period enrollment increased 10.2% between
December 31, 2017 and 2016, as ground enrollment increased 9.2% and online enrollment increased 10.5% over the prior year. The
majority of the ground enrollment growth between years is due to an increase in the number of residential students at our ground
traditional campus in Phoenix, Arizona. We attribute the growth in our enrollment between years to our increasing brand recognition
and the value proposition we believe we provide to students and their parents. Although our online enrollment continues to grow, as
the proportion of traditional colleges and universities providing alternative learning modalities increases, we will face increasing
competition for working adult students from such institutions, including those with well-established reputations for excellence. The
increase in revenue per student between years is primarily due to the enrollment growth and due to an increase in ancillary revenues
resulting from the increased traditional student enrollment (e.g. housing, food, etc.). The increase in revenue per student between years
is primarily due to a higher percentage of students residing on campus resulting in higher room and board related revenue as compared
to the prior year. When factoring in room, board and fees, the revenue per student is higher for these students than for our working
adult students.
Instructional costs and services expenses. Our instructional costs and services expenses for the year ended December 31, 2017
were $410.8 million, an increase of $37.7 million, or 10.1%, as compared to instructional costs and services expenses of
$373.1 million for the year ended December 31, 2016. This increase was primarily due to increases in employee compensation and
related expenses including share-based compensation, faculty compensation, depreciation and amortization and occupancy expense
including disposals, dues, fees, subscriptions and instructional supplies, and other instructional costs and services of $11.4 million,
$10.3 million, $9.6 million, $4.6 million and $1.8 million, respectively. The increase in employee compensation and related expenses
and faculty compensation are primarily due to the increase in the number of staff to support the increasing number of students
attending the University, tenure adjustments, and increased benefit costs between years. In addition, we continue to increase our full-
time faculty between years. The increase in depreciation, amortization and occupancy costs including fixed asset disposals is the result
of our placing into service additional buildings to support the growing number of students. In addition, during the third quarter of 2017
we wrote-off the remaining book value of two buildings that will be replaced by a new classroom building that is needed for Fall
2018. The increase in dues, fees, subscriptions and instructional supplies is primarily due to higher food and other expenses as a result
of the increased ancillary revenues and a higher number of residential students, and increased licensing fees related to educational
resources. Our instructional costs and services expenses as a percentage of net revenue decreased by 0.5% to 42.2% for the year ended
December 31, 2017, as compared to 42.7% for the year ended December 31, 2016 due to our ability to leverage our instructional costs
and services expenses across an increasing revenue base, partially offset by depreciation and amortization increasing as a percentage
of net revenues. Bad debt expense decreased by 0.2% to 1.9% for the year ended December 31, 2017, as compared to 2.1% for the
year ended December 31, 2016 due to improved collections.
49
Admissions advisory and related expenses. Our admissions advisory and related expenses for the year ended December 31, 2017
were $128.5 million, an increase of $9.2 million, or 7.8%, as compared to admissions advisory and related expenses of $119.3 million
for the year ended December 31, 2016. This increase was primarily due to increases in employee compensation and related expenses
including share-based compensation of $9.2 million, as a result of tenure adjustments and increased benefit costs between years. Our
admissions advisory and related expenses as a percentage of net revenue decreased by 0.5% to 13.2% for the year ended December 31,
2017, from 13.7% for the year ended December 31, 2016 primarily due to our ability to leverage our admissions advisory personnel
across an increasing revenue base. Although we are hopeful that we will continue to see leverage of our admissions advisory
personnel, we do not anticipate the leverage in future years will be as significant as in 2017.
Advertising expenses. Our advertising expenses for the year ended December 31, 2017 were $98.6 million, an increase of
$10.4 million, or 11.9%, as compared to advertising expenses of $88.2 million for the year ended December 31, 2016. This increase
was primarily due to increased digital media and branding advertising. Our advertising expenses as a percentage of net revenue stayed
flat at 10.1% for both of the years ended December 31, 2017 and 2016 as our advertising spend to increase brand awareness was in
line with our increasing revenue base. We plan to continue to increase our advertising spend on brand awareness in 2018. We plan to
continue to increase our advertising spend on brand awareness in 2018 to counter the increased advertising of our competitors.
Marketing and promotional expenses. Our marketing and promotional expenses for the year ended December 31, 2017 were
$9.6 million, an increase of $0.7 million, or 8.7%, as compared to marketing and promotional expenses of $8.9 million for the year
ended December 31, 2016. Our marketing and promotional expenses as a percentage of net revenue stayed flat at 1.0% for both of the
years ended December 31, 2017 and 2016.
General and administrative expenses. Our general and administrative expenses for the year ended December 31, 2017 were
$43.8 million, an increase of $0.6 million, or 1.2%, as compared to general and administrative expenses of $43.2 million for the year
ended December 31, 2016. This increase was primarily due to increases in employee compensation and related expenses including
share-based compensation, and increased depreciation and occupancy costs of $2.7 million and $0.5 million, respectively. The
increase in employee compensation and related expenses are primarily due to the increase in the number of staff to support the
increasing number of students attending the University, and increased benefit costs between years. These increases were partially
offset by lower contributions to private school tuition organizations in lieu of state income taxes, and lower legal, audit and insurance
costs and other general administrative expenses of $2.0 million and $0.6 million, respectively. During 2017 and 2016 our
contributions to private school tuition organizations in lieu of state income taxes were $2.0 million and $4.0 million, respectively. Our
general and administrative expenses as a percentage of net revenue decreased by 0.4% to 4.5% for the year ended December 31, 2017,
from 4.9% for the year ended December 31, 2016 due to the lower contributions made in lieu of state income taxes and our ability to
leverage our general and administrative expenses across an increasing revenue base.
Lease termination costs. In July 2016, we notified a current landlord of our intent to vacate leased space by the fourth quarter of
2016. As a result, we were required to pay a termination fee to terminate the lease resulting in $3.4 million of expense in the third
quarter of 2016. Additionally in the fourth quarter of 2016, we completed our relocation of our employees to the new buildings and as
a result expensed $0.1 million related to impaired assets from leased space no longer occupied by our employees.
Interest expense. Our interest expense for the year ended December 31, 2017 was $2.2 million, an increase of $0.9 million, as
compared to interest expense of $1.3 million for the year ended December 31, 2016. This increase was primarily due to lower
capitalized interest as compared to the prior year due to a decrease in capital spending in 2017, partially offset by the decrease in the
average balance of our loan facility. Our interest expense stayed flat as a percentage of net revenue at 0.2% for the years ended
December 31, 2017 and 2016.
Interest income and other. Our interest income and other for the year ended December 31, 2017 was $2.9 million, an increase of
$2.7 million, as compared to interest income and other of $0.2 million for the year ended December 31, 2016. Interest income was
higher in 2017 as compared to 2016 primarily due to higher average investment balances between years. In addition, included in
interest income and other in 2017 is our proportional share of equity income of $0.7 million related to our former ownership interest in
LoudCloud, and in 2016 an impairment charge on an investment of $2.5 million.
Income tax expense. Income tax expense for the year ended December 31, 2017 was $80.2 million, a decrease of $7.4 million
from $87.6 million for the year ended December 31, 2016. Our effective tax rate was 28.3% in 2017, a significant decrease from
37.1% in 2016. This decrease was primarily due to the adoption of the share-based compensation standard in the first quarter of 2017,
which resulted in the recognition of excess tax benefits of $16.5 million from share-based compensation awards that vested or settled
in 2017 in the consolidated income statement. The inclusion of excess tax benefits and deficiencies as a component of our income tax
expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from share-
based compensation awards are dependent on our stock price at the date the restricted awards vest, our stock price on the date an
option is exercised, and the quantity of options exercised. In addition, as a result of the Tax Cuts and Jobs Act (the “Act”) which was
signed into law on December 22, 2017, we revalued our deferred tax assets and liabilities due to the reduced corporate federal tax rate.
50
The Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate effective January 1, 2018. The University’s
net deferred tax liability was revalued as of December 22, 2017 and the University recorded a $10.7 million income tax benefit related
to the revaluation of its deferred tax assets and liabilities. These decreases were slightly offset by a decrease in the contributions made
in lieu of state income taxes to school sponsoring organizations. Our contributions decreased from $4.0 million in 2016 to $2.0 million
in 2017. Excluding the revaluation of the deferred tax assets and liabilities recorded in 2017, our effective income tax rate would have
been 32.1%.
Net income. Our net income for the year ended December 31, 2017 was $203.3 million, an increase of $54.8 million, as
compared to $148.5 million for the year ended December 31, 2016, due to the factors discussed above.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net revenue. Our net revenue for the year ended December 31, 2016 was $873.3 million, an increase of $95.1 million, or 12.2%,
as compared to net revenue of $778.2 million for the year ended December 31, 2015. This increase was primarily due to an increase in
ground and online enrollment and, to a lesser extent, an increase in room and board and other student fees, partially offset by an
increase in institutional scholarships. We did not raise tuition in any of our programs for our 2016-17 academic year. A tuition
increase of approximately 1% was implemented for the majority of our online programs in September 2015. We have not raised our
tuition for our traditional ground program in eight years. End-of-period enrollment increased 9.9% between December 31, 2016 and
2015, as ground enrollment increased 13.6% and online enrollment increased 9.0% over the prior year. The majority of the ground
enrollment growth between years was residential students at our ground traditional campus in Phoenix, Arizona. We attribute the
significant growth in our ground enrollment between years to our increasing brand recognition and the value proposition that our
ground traditional campus affords to traditional-aged students and their parents. After scholarships, our ground traditional students pay
for tuition, room, board, and fees, often half to a third of what it costs to attend a private, traditional university in another state and an
amount comparable to what it costs to attend a public university. Although our online enrollment continues to grow, as the proportion
of traditional colleges and universities providing alternative learning modalities increases, we will face increasing competition for
working adult students from such institutions, including those with well-established reputations for excellence. The growth in revenue
per student between years is primarily due to our residential traditional campus enrollment growing at a rate higher than our working
adult enrollment. When factoring in room, board and fees, the revenue per student is higher for these students than for our working
adult students.
Instructional costs and services expenses. Our instructional costs and services expenses for the year ended December 31, 2016
were $373.1 million, an increase of $43.4 million, or 13.2%, as compared to instructional costs and services expenses of
$329.7 million for the year ended December 31, 2015. This increase was primarily due to increases in instructional compensation and
related expenses including share-based compensation, faculty compensation, occupancy and depreciation and amortization, dues, fees,
subscriptions and other instructional supplies, bad debt expense and other miscellaneous instructional costs and services of
$10.9 million, $8.9 million, $14.2 million, $5.6 million, $2.0 million and $1.8 million, respectively. The increase in employee
compensation and related expenses and faculty compensation are primarily due to the increase in the number of staff to support the
increasing number of students attending the University, tenure adjustments, and increased benefit costs between years. In addition, we
continue to increase our full-time faculty between years. The increase in occupancy, depreciation and amortization is the result of us
placing into service additional buildings to support the growing number of ground traditional students. The increase in dues, fees,
subscriptions and other instructional supplies is primarily due to increased licensing fees related to educational resources and
increased food costs associated with a higher number of residential students. Our instructional costs and services expenses as a
percentage of net revenue increased by 0.3% to 42.7% for the year ended December 31, 2016, as compared to 42.4% for the year
ended December 31, 2015 due to an increase in dues, fees, subscriptions and other instructional supplies as a percentage of revenue
due to the low profit margin derived on food sales, and occupancy, depreciation and amortization increasing as a percentage of
revenue. Bad debt expense stayed flat year over year at 2.1% of net revenue.
Admissions advisory and related expenses. Our admissions advisory and related expenses for the year ended December 31, 2016
were $119.3 million, an increase of $6.7 million, or 6.0%, as compared to admissions advisory and related expenses of $112.6 million
for the year ended December 31, 2015. This increase was primarily due to increases in employee compensation and related expenses,
partially offset by decreases in other admissions advisory expenses of $7.0 million and $0.3 million, respectively. Employee
compensation and related expenses increased as a result of increasing the number of admissions advisors, tenure adjustments, and
increasing benefit costs between years. Our admissions advisory and related expenses as a percentage of net revenue decreased by
0.8% to 13.7% for the year ended December 31, 2016, from 14.5% for the year ended December 31, 2015 primarily due to our ability
to leverage our admissions advisory personnel across an increasing revenue base.
51
Advertising expenses. Our advertising expenses for the year ended December 31, 2016 were $88.2 million, an increase of
$12.0 million, or 15.6%, as compared to advertising expenses of $76.2 million for the year ended December 31, 2015. This increase
was primarily due to increased digital media and branding advertising. Our advertising expenses as a percentage of net revenue
increased by 0.3% to 10.1% for the year ended December 31, 2016, from 9.8% for the year ended December 31, 2015 as we have
increased our advertising spend to increase brand awareness.
Marketing and promotional expenses. Our marketing and promotional expenses for the year ended December 31, 2016 were
$8.9 million, an increase of $1.6 million, or 21.6%, as compared to marketing and promotional expenses of $7.3 million for the year
ended December 31, 2015. Our marketing and promotional expenses as a percentage of net revenue increased slightly by 0.1% to
1.0% for the year ended December 31, 2016, from 0.9% for the year ended December 31, 2015.
General and administrative expenses. Our general and administrative expenses for the year ended December 31, 2016 were
$43.2 million, an increase of $1.1 million, or 2.7%, as compared to general and administrative expenses of $42.1 million for the year
ended December 31, 2015. This increase was primarily due to increases in employee compensation and related expenses including
share-based compensation, and contributions to private school tuition organizations in lieu of state income taxes, partially offset by
lower legal, audit and insurance costs and other general administrative expenses of $1.0 million, $1.2 million and $1.2 million
respectively. During 2016 and 2015 our contributions to private school tuition organizations in lieu of state income taxes were
$4.0 million and $2.8 million, respectively. Our general and administrative expenses as a percentage of net revenue decreased by 0.5%
to 4.9% for the year ended December 31, 2016, from 5.4% for the year ended December 31, 2015 due to decreased legal costs and our
ability to leverage our general and administrative expenses across an increasing revenue base.
Lease termination costs. In July 2016, we notified a current landlord of our intent to vacate leased space by the fourth quarter of
2016. As a result, we were required to pay a termination fee to terminate the lease resulting in $3.4 million of expense in the third
quarter of 2016. Additionally in the fourth quarter of 2016, we completed our relocation of our employees to the new buildings and as
a result expensed $0.1 million related to impaired assets from lease space no longer occupied by our employees.
Interest expense. Our interest expense for the year ended December 31, 2016 was $1.3 million, an increase of $0.1 million, as
compared to interest expense of $1.2 million for the year ended December 31, 2015. Our interest expense stayed flat as a percentage
of net revenue at 0.2% for the years ended December 31, 2016 and 2015.
Interest income and other. Our interest income and other for the year ended December 31, 2016 was a gain of $0.2 million, an
increase of $0.3 million, as compared to interest income and other loss of $0.1 million for the year ended December 31, 2015. The
increase was primarily due to higher investment returns.
Income tax expense. Income tax expense for the year ended December 31, 2016 was $87.6 million, an increase of $10.0 million
from $77.6 million for the year ended December 31, 2015. This increase was primarily attributable to increased income before income
taxes. Our effective tax rate was 37.1% for both of the years ended December 31, 2016 and 2015. The tax rate for both periods is less
than the annual effective tax rates due to the contributions made in lieu of state income taxes in the third quarter of both years.
Net income. Our net income for the year ended December 31, 2016 was $148.5 million, an increase of $17.1 million, as
compared to $131.4 million for the year ended December 31, 2015, 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. The majority of our
traditional ground students do not attend courses during the summer months (May through August), which affects our results for our
second and third fiscal quarters. Since a significant amount of our campus costs are fixed, the lower revenue resulting from the
decreased ground student enrollment has historically contributed to lower operating margins during those periods. We intend to
continue to increase, the relative proportion of our students that are ground traditional students. Thus, we expect this summer effect to
become more pronounced in future years. 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 these fluctuations in net revenue,
resulting in higher operating income in the first and fourth quarters relative to other quarters. We expect quarterly fluctuation in
operating results to continue as a result of these seasonal patterns.
52
Liquidity, Capital Resources, and Financial Position
Liquidity. During 2017, we financed our operating activities and capital expenditures primarily through cash provided by
operating activities. Our unrestricted cash, cash equivalents and investments were $242.7 million at December 31, 2017 and our
restricted cash and cash equivalents were $94.5 million. In December 2012, we entered into a new credit agreement, which increased
our term loan to $100 million with a maturity date of December 2019. Additionally, this facility, as amended in January 2016,
provided a revolving line of credit in the amount of $150 million through December 2017 to be utilized for working capital, capital
expenditures and other general corporate purposes. Indebtedness under the credit facility is secured by our assets and is guaranteed by
certain of our subsidiaries. We did not renew our revolving line of credit at December 31, 2017 as we do not need this additional
liquidity at this time.
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.
Share Repurchase Program
Our Board of Directors has authorized the University to repurchase up to $175.0 million in aggregate of common stock, from
time to time, depending on market conditions and other considerations. The current expiration date on the repurchase authorization by
our Board of Directors is December 31, 2018. Repurchases occur at the University’s discretion.
Under our share purchase authorization, we may purchase shares in the open market or in privately negotiated transactions,
pursuant to the applicable Securities and Exchange Commission Rules. The amount and timing of future share repurchases, if any, will
be made as market and business conditions warrant.
Since the approval of the initial share repurchase plan, the University has purchased 3.5 million shares of common stock at an
aggregate cost of $77.3 million, which includes 17,230 shares of common stock at an aggregate cost of $1.5 million during the year
ended December 31, 2017. At December 31, 2017, there remains $97.7 million available under our current share repurchase
authorization.
Cash Flows
Operating Activities. Net cash provided by operating activities for the years ended December 31, 2017, 2016 and 2015 was
$304.9 million, $237.8 million and $185.1 million, respectively. Cash provided by operations in 2017, 2016 and 2015 resulted from
our increased net income plus non-cash charges for provision for bad debts, depreciation and amortization, timing of income tax and
employee related payments and student deposits and changes in other working capital.
Investing Activities. Net cash used in investing activities was $152.1 million, $216.0 million, and $200.9 million for the years
ended December 31, 2017, 2016, and 2015, respectively. Our cash used in investing activities is primarily related to the purchase of
short-term investments and capital expenditures, partially offset by proceeds from the sale or maturity of short-term investments.
Purchases of short-term investments, net of proceeds of these investments, was $28.8 million for the year ended December 31, 2017.
Proceeds from investment, net of purchases of short-term investments, was $20.8 million and $17.4 million during the years ended
December 31, 2016 and 2015, respectively. Capital expenditures were $113.6 million, $178.3 million and $204.7 million for the years
ended December 31, 2017, 2016, and 2015, respectively. In 2017, capital expenditures primarily consisted of the construction of an
additional dormitory, other ground campus building projects and land acquisitions adjacent to our campus to support our growing
traditional student enrollment, as well as purchases of computer equipment, other internal use software projects and furniture and
equipment to support our increasing employee headcount. Included in off-site development for 2017 is $10.4 million we spent to
finish the off-site student services center and parking garage that is in close proximity to our ground traditional campus. Employees
that worked in two leased office buildings in the Phoenix area were relocated to this new building by the end of 2016. In 2016, capital
expenditures primarily consisted of ground campus building projects that started in late 2015 such as three more apartment style
residence halls, a 170,000 square foot classroom building for our College of Science, Engineering and Technology, a student service
center, and a fourth parking structure, as well as land purchases adjacent to or near our Phoenix campus, and purchases of computer
equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount. Included
in off-site development during 2016 is $60.7 million primarily related to an off-site student services center and parking garage that is
in close proximity to our ground traditional campus. In 2015, in order to accommodate the continued growth of our traditional ground
population, we completed four additional dormitories, a classroom building for our College of Science, Engineering and Technology,
and a third parking structure prior to the 2015/2016 school year and started construction on all the construction projects completed in
2016, as well as land purchases adjacent to or near our Phoenix campus, and purchases of computer equipment, other internal use
software projects and furniture and equipment to support our increasing employee headcount. Included in off-site development during
2015 is $10.0 million we spent to revitalize what was formerly known as the Maryvale Golf Course under a partnership agreement
with the City of Phoenix. The golf course is now known as Grand Canyon University Championship golf course. Also, in late 2015,
we commenced construction on the off-site office building and parking garage that is in close proximity to our ground traditional
campus.
53
Financing Activities. Net cash used in financing activities was $35.7 million for the year ended December 31, 2017. Net cash
provided by financing activities was $10.7 million for the year ended December 31, 2016. Net cash used in financing activities was
$18.9 million for the year ended December 31, 2015. During 2017, $25.0 million was used to repay our revolving line of credit,
$1.5 million was used to purchase treasury stock in accordance with the University’s share repurchase program and $9.8 million was
used to purchase common shares withheld in lieu of income taxes resulting from restricted share awards while principal payments on
notes payable and capital leases totaled $6.8 million, partially offset by proceeds from the exercise of stock options of
$7.4 million. During 2016, net cash provided by financing activities consisted of net proceeds received from the revolving line of
credit of $25.0 million and proceeds from the exercise of stock options of $13.2 million, partially offset by $15.4 million used to
purchase treasury stock in accordance with the University’s share repurchase program and $4.7 million used to purchase common
shares withheld in lieu of income taxes resulting from restricted share awards and principal payments on notes payable, repayments on
our notes payable and capital lease payments totaled $7.2 million. During 2015, $11.3 million was used to purchase treasury stock in
accordance with the University’s share repurchase program and $4.3 million was used to purchase common shares withheld in lieu of
income taxes resulting from restricted share awards while principal payments on notes payable and capital leases totaled $6.8 million,
partially offset by proceeds from the exercise of stock options of $3.5 million.
Contractual Obligations
The following table sets forth, as of December 31, 2017, the aggregate amounts of our significant contractual obligations and
commitments with definitive payment terms due in each of the periods presented (in millions):
Long term notes payable(1)
Capital lease obligations
Purchase obligations(2)
Operating lease obligations(3)
Total contractual obligations
Less than
1 Year
Payments Due by Period
2-3 Years
4-5 Years
More than
5 Years
Total
$ 66.6 $
0.3
83.4
2.4
6.7 $
0.2
76.6
1.1
59.9 $
0.1
5.0
0.8
$ 152.7 $
84.6 $
65.8 $
0.0 $
0.0
1.8
0.5
2.3 $
0.0
0.0
0.0
0.0
0.0
(1) See Note 6, “Notes Payable and Other Noncurrent Liabilities,” to our consolidated financial statements, included in Item 8,
Consolidated Financial Statements and Supplementary Data, for a discussion of our long term notes payable and other
obligations.
(2) Represents unconditional purchase obligations and other obligations. Amount consists primarily of construction agreements for
construction in progress on our ground traditional campus.
(3) See Note 7, “Commitments and Contingencies,” to our consolidated financial statements, included in Item 8, Consolidated
Financial Statements and Supplementary Data, for a discussion of our operating lease obligations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material current or future
effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources.
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. See Item 6, Selected Consolidated Financial
and Other Data, for a discussion of our Adjusted EBITDA computation and reconciliation.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in Item 8, Consolidated Financial Statements and Supplementary Data
54
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Impact of inflation. We believe that inflation has not had a material impact on our results of operations for the years ended
December 31, 2017, 2016, or 2015. There can be no assurance that future inflation will not have an adverse impact on our operating
results and financial condition.
Market risk. On February 27, 2013 we entered into an interest rate corridor to manage our 30-day LIBOR interest exposure from
variable rate debt, which matures in December 2019. The corridor instrument, which hedges variable interest rate risk starting
March 1, 2013 through December 20, 2019 with a notional amount of $66.7 million as of December 31, 2017, permits us to hedge our
interest rate risk at several thresholds. Under this arrangement, in addition to the credit spread, we will pay variable interest rates based
on the 30-day LIBOR rates monthly until that index reaches 1.5%. If 30-day LIBOR is equal to 1.5% through 3.0%, we will continue
to pay 1.5%. If the 30-day LIBOR exceeds 3.0%, we will pay actual 30-day LIBOR less 1.5%.
Except with respect to the foregoing, we have no derivative financial instruments or derivative commodity instruments. We
invest cash in excess of current operating requirements in short term certificates of deposit and money market instruments, municipal
bond portfolios, or municipal mutual funds at multiple financial institutions.
Interest rate risk. We manage interest rate risk through the instruments noted above and by investing excess funds in cash
equivalents, BBB or higher rated municipal bonds and municipal mutual funds bearing variable interest rates, which are tied to various
market indices or individual bond coupon rates. Our future 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 before their maturity date that have declined in market
value due to changes in interest rates. At December 31, 2017, a 10% increase or decrease in interest rates would not have a material
impact on our future earnings, fair values, or cash flows.
55
Item 8.
Consolidated Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Income Statements for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Page
57
58
59
60
61
62
63
56
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Grand Canyon Education, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Grand Canyon Education, Inc. and subsidiaries (the “Company”)
as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and
cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 21, 2018, expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has elected to change its method of accounting for
restricted cash in 2017, 2016, and 2015 due to the adoption of Accounting Standards Update 2016-18, Restricted Cash. In addition, as
discussed in Note 2 to the consolidated financial statements, the Company has elected to change its method of accounting for the tax
benefits associated with equity compensation in 2017 due to the adoption of Accounting Standards Update 2016-09, Improvements to
Employee Share-Based Payment Accounting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2012.
Phoenix, Arizona
February 21, 2018
57
Grand Canyon Education, Inc.
Consolidated Balance Sheets
ASSETS:
(In thousands, except par value)
Current assets
Cash and cash equivalents
Restricted cash and cash equivalents
Investments
Accounts receivable, net
Income taxes receivable
Other current assets
Total current assets
Property and equipment, net
Prepaid royalties
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities
Accounts payable
Accrued compensation and benefits
Accrued liabilities
Income taxes payable
Student deposits
Deferred revenue
Current portion of notes payable
Total current liabilities
Other noncurrent liabilities
Deferred income taxes, non-current
Notes payable, less current portion
Total liabilities
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding at December 31,
2017 and 2016
Common stock, $0.01 par value, 100,000 shares authorized; 52,277 and 51,509 shares issued and 48,125
and 47,559 shares outstanding at December 31, 2017 and 2016, respectively
Treasury stock, at cost, 4,152 and 3,950 shares of common stock at December 31, 2017 and 2016,
respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
58
As of December 31,
2017
2016
$ 153,474 $ 45,976
84,931
94,534
62,596
89,271
9,538
10,908
4,686
2,086
22,341
24,589
230,068
374,862
855,528
922,284
3,059
2,763
2,941
2,941
897
723
$1,303,573 $1,092,493
$ 29,139 $ 24,824
19,697
23,173
21,283
20,757
2,734
16,182
85,881
95,298
40,739
46,895
31,636
6,691
226,794
238,135
1,689
1,200
23,708
18,362
66,616
59,925
318,807
317,622
—
523
—
515
(724)
(100,694)
232,670
(89,394)
212,559
(910)
854,176
650,916
773,686
985,951
$1,303,573 $1,092,493
Grand Canyon Education, Inc.
Consolidated Income Statements
Year Ended December 31,
2017
2016
$974,134 $873,344 $778,200
2015
410,840 373,101
128,544 119,286
98,608 88,152
9,629 8,860
43,759 43,219
— 3,523
329,651
112,572
76,229
7,287
42,100
—
691,380 636,141
567,839
282,754 237,203
(2,169)
2,943
(1,328)
249
210,361
(1,248)
(106)
283,528 236,124
80,209 87,610
209,007
77,596
$203,319 $148,514 $131,411
$
$
4.31 $
3.22 $
2.86
4.22 $
3.15 $
2.78
47,140 46,083
45,975
48,235 47,121
47,281
(In thousands, except per share amounts)
Net revenue
Costs and expenses:
Instructional costs and services
Admissions advisory and related
Advertising
Marketing and promotional
General and administrative
Lease termination costs
Total costs and expenses
Operating income
Interest expense
Interest income and other
Income before income taxes
Income tax expense
Net income
Earnings per share:
Basic income per share
Diluted income per share
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
The accompanying notes are an integral part of these consolidated financial statements.
59
Grand Canyon Education, Inc.
Consolidated Statements of Comprehensive Income
Year Ended December 31,
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
2017
2016
$ 203,319 $ 148,514 $ 131,411
2015
Unrealized gains (losses) on hedging derivatives, net of taxes of $6, $94, and $230 for the
years ended December 31, 2017, 2016 and 2015, respectively
Unrealized gains (losses) on available for sale securities, net of taxes of $108, $168 and $50
for the years ended December 31, 2017, 2016 and 2015, respectively
Comprehensive income
11
(151)
(372)
175
(270)
(82)
$ 203,505 $ 148,093 $ 130,957
The accompanying notes are an integral part of these consolidated financial statements.
60
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Grand Canyon Education, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
Common Stock
Treasury Stock
Amount
Amount Shares
Shares
49,746 $ 497 3,002 $ (53,770 ) $ 158,549 $
— — — —
— — 288 (11,279 )
(4,283 )
94
27 —
3 — —
— — — —
—
—
11,269
—
3,486
3,863
3
— —
324
218
50,288 503 3,411 (69,332 )
— — — —
— — 416 (15,367 )
(4,695 )
9 —
9 — —
— — — —
— —
3 114
946
275
177,167
—
—
12,273
—
13,198
9,921
Retained
Earnings
Total
(35) $370,991 $476,232
130,957
(454)
(11,279)
—
6,989
—
—
—
3,489
—
3,863
—
131,411
—
—
—
—
—
(489)
(421)
—
—
—
—
—
502,402
148,514
—
—
—
—
—
610,251
148,093
(15,367)
7,581
—
13,207
9,921
51,509 515 3,950 (89,394 )
212,559
(910)
650,916
773,686
— — — —
— — — —
(1,510 )
— —
(9,790 )
34 —
6 — —
17
2 151
— —
576
192
59
—
—
12,686
—
7,366
—
186
—
—
—
—
(59) —
203,505
(1,510)
2,898
—
7,372
203,319
—
—
—
—
Balance at December 31, 2014
Comprehensive income
Common stock purchased for treasury
Share-based compensation
Restricted shares forfeited
Exercise of stock options
Excess tax benefits
Balance at December 31, 2015
Comprehensive income
Common stock purchased for treasury
Share-based compensation
Restricted shares forfeited
Exercise of stock options
Excess tax benefits
Balance at December 31, 2016
Cumulative effect from the adoption of
accounting pronouncements, net of
taxes
Comprehensive income
Common stock purchased for treasury
Share-based compensation
Restricted shares forfeited
Exercise of stock options
Balance at December 31, 2017
52,277 $ 523 4,152 $(100,694) $ 232,670 $
(724) $854,176 $985,951
The accompanying notes are an integral part of these consolidated financial statements.
61
Grand Canyon Education, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows provided by operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation
Provision for bad debts
Depreciation and amortization
Deferred income taxes
Other, including fixed asset impairments
Changes in assets and liabilities:
Accounts receivable
Prepaid expenses and other
Accounts payable
Accrued liabilities
Income taxes receivable/payable
Deferred rent
Deferred revenue
Student deposits
Net cash provided by operating activities
Cash flows used in investing activities:
Capital expenditures
Purchases of land, building and golf course improvements related to off-site development
Proceeds received from note receivable
Return of equity method investment
Purchases of investments
Proceeds from sale or maturity of investments
Net cash used in investing activities
Cash flows (used in) provided by financing activities:
Principal payments on notes payable and capital lease obligations
Debt issuance costs
Net borrowings from revolving line of credit
Repurchase of common shares including shares withheld in lieu of income taxes
Net proceeds from exercise of stock options
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of year
Cash and cash equivalents and restricted cash, end of year
Supplemental disclosure of cash flow information
Cash paid during the year for interest
Cash paid during the year for income taxes
Supplemental disclosure of non-cash investing and financing activities
Purchases of property and equipment included in accounts payable
Purchases of equipment though capital lease obligations
Shortfall tax expense from share-based compensation
Tax benefit of Spirit warrant intangible
The accompanying notes are an integral part of these consolidated financial statements.
62
Year Ended December 31,
2017
2016
2015
$ 203,319 $ 148,514 $ 131,411
12,688 12,276
18,478 18,639
54,228 45,683
(5,160) 8,432
3,883 1,161
11,257
16,620
35,675
4,576
3,713
(2,399)
5,378
3,079 6,743
16,048 11,892
(19,848) (20,598) (17,139)
(2,525)
(1,715)
(4,793) 5,002
(5,500)
(4,965)
(1,211)
1,008
7,158
6,156 2,863
9,417 9,139
(369)
(475)
304,898 237,761
185,080
—
(113,586) (178,292) (204,718)
(10,368) (60,727) (13,583)
—
—
(94,054) (49,157) (48,122)
65,542
65,259 69,925
501
685 1,749
(152,064) (216,001) (200,881)
(7,224)
(6,805)
(6,784)
—
(194) —
—
(25,000) 25,000
(11,300) (20,062) (15,562)
3,489
7,372 13,207
(35,733) 10,727
(18,857)
117,101 32,487
130,907 98,420
(34,658)
133,078
$ 248,008 $ 130,907 $ 98,420
$ 2,252 $ 1,220 $ 1,244
$ 69,606 $ 66,206 $ 75,587
$ 6,682 $ 7,746 $ 13,277
$ — $ — $ 1,156
$ — $
26
253
$ — $
260 $
253 $
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
1. Nature of Business
Grand Canyon Education, Inc. (together with its subsidiaries, the “University”) 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 University converted from a limited liability
company to a corporation and changed its name to Significant Education, Inc. On May 9, 2008, the University changed its name to
Grand Canyon Education, Inc.
The University is a comprehensive regionally accredited university that offers over 225 graduate and undergraduate degree
programs, emphases and certificates across nine colleges both online and on ground at our over 275 acre campus in Phoenix, Arizona,
at leased facilities and at facilities owned by third party employers. Our undergraduate programs are designed to be innovative and to
meet the future needs of employers, while providing students with the needed critical thinking and effective communication skills
developed through a Christian, liberal arts foundation. We offer master’s and doctoral degrees in contemporary fields that are designed
to provide students with the capacity for transformational leadership in their chosen industry, emphasizing the immediate relevance of
theory, application, and evaluation to promote personal and organizational change. The University is accredited by the Higher
Learning Commission. The University’s wholly owned subsidiaries are primarily used to facilitate expansion of the University
campus.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Grand Canyon Education, Inc. and its wholly owned subsidiaries.
Intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The University invests a portion of its cash in excess of current operating requirements in short term certificates of deposit and
money market instruments. The University considers all highly liquid investments with maturities of three months or less at the time
of purchase to be cash equivalents.
Restricted Cash and Cash Equivalents
A significant portion of the University’s revenue is received from students who participate in government financial aid
assistance programs. Restricted cash and cash equivalents primarily represent amounts received from the federal and state
governments under various student aid grant and loan programs, such as Title IV. The University receives these funds subsequent to
the completion of the authorization and disbursement process and holds them for the benefit of the student. The U.S. Department of
Education (“Department of Education”) requires Title IV funds collected in advance of student billings to be restricted until the course
begins. The University records all of these amounts as a current asset in restricted cash and cash equivalents. The majority of these
funds remain as restricted for an average of 60 to 90 days from the date of receipt.
Investments
The University considers its investments in municipal bond, mutual funds, municipal securities and certificates of deposit as
available-for-sale securities. Available-for-sale securities are carried at fair value, determined using Level 1 and Level 2 of the
hierarchy of valuation inputs, with the use of quoted market prices and inputs other than quoted prices that are observable for the
assets, with unrealized gains and losses, net of tax, reported as a separate component of other comprehensive income. Unrealized
losses considered to be other-than-temporary are recognized currently in earnings. Amortization of premiums, accretion of discounts,
interest and dividend income and realized gains and losses are included in interest and other income.
63
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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. Internally developed software
represents qualifying salary and consulting costs for time spent on developing internal use software and is included in construction in
progress until its completion. The University capitalizes interest using its interest rates on the specific borrowings used to finance the
improvements, which approximated 2.8% in 2017, 2.2% in 2016, and 1.9% in 2015. Interest cost capitalized and incurred in the years
ended December 31, 2017, 2016, and 2015 are as follows:
Interest incurred
Interest capitalized
Interest expense
Year Ended December 31,
2015
2017
2016
$ 2,656 $ 2,538 $ 1,962
714
487 1,210
$ 2,169 $ 1,328 $ 1,248
Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures,
computer equipment, and vehicles generally have estimated useful lives of ten, four, and five years, respectively. Leasehold
improvements are depreciated over the shorter of their lease term or their useful life. Land improvements and buildings are
depreciated over lives ranging from 10 to 40 years.
Leases
The University enters into various lease agreements in conducting its business. At the inception of each lease, the University
evaluates the lease agreement to determine whether the lease is an operating or capital lease. In addition, many of the lease agreements
contain renewal options and tenant improvement allowances. When such items are included in a lease agreement, the University
records a deferred liability on the balance sheet and records the rent expense evenly over the term of the lease. Leasehold
improvements are included as investing activities and are included as additions to property, plant and equipment. For leases with
renewal options, the University records rent expense and amortizes the leasehold improvement on a straight-line basis over the initial
non-cancelable lease term unless it intends to exercise the renewal option. Once it extends the renewal option, the University
amortizes any tenant improvement allowances over the extended lease period as well as the leasehold improvement asset (unless the
extended lease term is longer than the economic life of the asset). The University expenses any additional payments under its
operating leases for taxes, insurance or other operating expenses as incurred.
Other Assets
The University developed our online delivery platform with an affiliated entity and put this platform into full production in
2011. The University has prepaid perpetual license fees and source code rights for the software developed, and has prepaid
maintenance and service fees. Included in current other assets is the amount that will be amortized in the next twelve month cycle for
maintenance and service fees and included in property and equipment is the amount that will be amortized over fifteen years for the
perpetual licenses.
Long-Lived Assets
The University evaluates the recoverability of its long-lived assets for impairment, other than goodwill, 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.
Prepaid Royalties
In connection with the February 2004 acquisition of the assets of Grand Canyon University from a non-profit foundation, the
University entered into a royalty fee arrangement with the former owner in which the University agreed to pay a stated percentage of
cash revenue generated by its online programs. The University settled all future royalty obligations with the former owner in April
2008 when it finalized an agreement to pay $22,500 to the former owner. Of this payment $5,920 was considered as settlement of the
future royalty payment obligation and is included in the accompanying balance sheet as a component of “Prepaid Royalty” and is
being amortized over a period of 20 years.
64
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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 impairment. The Financial Accounting
Standards Board (“FASB”) has issued guidance that permits an entity to first assess qualitative factors to determine whether it is
necessary to perform the two-step quantitative goodwill impairment test. The University performed its annual goodwill impairment
test, by performing a qualitative assessment. Following this assessment, the University determined that it is more likely than not that
its fair value exceeds its carrying amount.
Share-Based Compensation
The University measures and recognizes compensation expense for share-based payment awards made to employees and
directors. The fair value of the University’s restricted stock awards is based on the market price of its common stock on the date of
grant. Stock-based compensation expense related to restricted stock grants is expensed over the vesting period using the straight-line
method for University employees and the University’s board of directors. Starting January 1, 2017 with the adoption of the share-
based compensation accounting standard, the University made an accounting policy election to account for forfeitures as they occur,
prior to 2017 these forfeitures were estimated and reported net of the expense. See Note 2, Accounting Pronouncements Adopted in
2017.
Derivatives and Hedging
Derivative financial instruments are recorded on the balance sheet as assets or liabilities and re-measured at fair value at each
reporting date. For derivatives designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as
a component of other comprehensive income and reclassified into earnings in the same period or period during which the hedged
transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components
excluded from the assessment of effectiveness are recognized in current earnings.
Derivative financial instruments enable the University to manage its exposure to interest rate risk. The University does not
engage in any derivative instrument trading activity. Credit risk associated with the University’s derivatives is limited to the risk that a
derivative counterparty will not perform in accordance with the terms of the contract. Exposure to counterparty credit risk is
considered low because these agreements have been entered into with institutions with Aa or higher credit ratings, and they are
expected to perform fully under the terms of the agreements.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, note receivable, accounts payable, accrued compensation
and benefits and accrued liabilities approximate their fair value based on the liquidity or the short-term maturities of these instruments.
The carrying value of notes payable approximate fair value based on its variable rate index. The carrying value of notes payable
approximate fair value based upon market interest rates available to the University for debt of similar risk and maturities. Derivative
financial instruments are carried at fair value, determined using Level 2 of the hierarchy of valuation inputs as defined in the FASB
Accounting Standards Codification (“Codification”), with the use of inputs other than quoted prices that are observable for the asset or
liability. See Note 8, Derivative Instruments.
The fair value of investments, primarily municipal securities, were determined using Level 2 of the hierarchy of valuation
inputs, with the use of inputs other than quoted prices that are observable for the assets. The unit of account used for valuation is the
individual underlying security. The municipal securities are comprised of city and county bonds related to schools, water and sewer,
utilities, transportation, healthcare and housing.
Income Taxes
The University accounts for income taxes payable or refundable for the current year and deferred tax assets and liabilities for
future tax consequences of events that have been recognized in the University’s consolidated financial statements or tax returns.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are
expected to be realized.
65
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
The University applies a more-likely-than-not threshold for financial statement recognition and measurement of an uncertain tax
position taken or expected to be taken in a tax return. The University recognizes interest and penalties related to uncertain tax
positions in income tax expense. As of December 31, 2017 and 2016, the University has reserved approximately $2,008 and $1,981,
respectively, for uncertain tax positions, including interest and penalties, which is classified within accrued liabilities on the
accompanying consolidated balance sheet.
The University 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.
Commitments and Contingencies
The University accrues for a contingent obligation when it is probable that a liability has been incurred and the amount is
reasonably estimable. When the University becomes aware of a claim or potential claim, the likelihood of any loss exposure is
assessed. If it is probable that a loss will result and the amount of the loss is estimable, the University records a liability for the
estimated loss. If the loss is not probable or the amount of the potential loss is not estimable, the University will disclose the claim if
the likelihood of a potential loss is reasonably possible and the amount of the potential loss could be material. Estimates that are
particularly sensitive to future changes include tax, legal, and other regulatory matters, which are subject to change as events evolve,
and as additional information becomes available during the administrative and litigation process. The University expenses legal fees as
incurred.
Revenue Recognition
Net revenues consist primarily of tuition and fees derived from courses taught by the University online, at its over 275 acre
campus in Phoenix, Arizona, and at facilities it leases or those of employers, as well as from related educational resources that the
University provides to its students, such as access to online materials. Tuition revenue and most fees from related educational
resources are recognized pro-rata over the applicable period of instruction, net of scholarships provided by the University. For the
years ended December 31, 2017, 2016 and 2015, the University’s revenue was reduced by approximately $196,334, $179,230 and
$163,893, respectively, as a result of scholarships that the University offered to students. The University maintains an institutional
tuition refund policy, which provides for all or a portion of tuition to be refunded if a student withdraws during stated refund periods.
Certain states in which students reside impose separate, mandatory refund policies, which override the University’s policy to the
extent in conflict. If a student withdraws at a time when only a portion, or none of the tuition is refundable, then in accordance with its
revenue recognition policy, the University continues to recognize the tuition that was not refunded pro-rata over the applicable period
of instruction. However, for students that have taken out financial aid to pay their tuition and for which a return to Title IV is required
as a result of his or her withdrawal, the University recognizes revenue after a student withdraws only at the time of cash collection.
Sales tax collected from students is excluded from net revenues. Collected but unremitted sales tax is included as an accrued liability
in our consolidated balance sheet. The University also charges online students an upfront learning management fee, which is deferred
and recognized over the average expected term of a student. Costs that are direct and incremental to new online students are also
deferred and recognized ratably over the average expected term of a student. 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
consolidated income statement and are reflected as current liabilities in the accompanying consolidated balance sheets. The
University’s 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. Other revenues may be recognized as sales occur or services
are performed.
Allowance for Doubtful Accounts
The University records an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of
its students to make required payments, which includes the recovery of financial aid funds advanced to a student for amounts in excess
of the student’s cost of tuition and related fees. The University determines the adequacy of its allowance for doubtful accounts based
on an analysis of its historical bad debt experience, current economic trends, and the aging of the accounts receivable and student
status. The University applies reserves to its receivables based upon an estimate of the risk presented by the age of the receivables and
student status. The University writes off accounts receivable balances of active students at the earlier of the time the balances were
deemed uncollectible, or one year after the revenue is generated. The University accelerates the write off of inactive student accounts
such that the accounts are written off by day 150. The University reflects accounts receivable with an offsetting allowance as long as
management believes there is a reasonable possibility of collection. Bad debt expense is recorded as an instructional costs and services
expense in the consolidated income statement.
66
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Instructional Costs and Services
Instructional costs and services consist primarily of costs related to the administration and delivery of the University’s
educational programs. This expense category includes salaries, benefits and share-based compensation for full-time and adjunct
faculty and administrative personnel, information technology costs, bad debt expense, 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 University’s Phoenix, Arizona campus.
Admissions Advisory and Related
Admissions advisory and related expenses include salaries and benefits for admissions advisory personnel, and revenue share
expense as well as an allocation of depreciation, amortization, rent and occupancy costs attributable to the admissions advisory
personnel.
Advertising
Advertising expenses include brand advertising, marketing leads and other branding activities. Advertising costs are expensed as
incurred.
Marketing and Promotional
Marketing and promotional expenses include salaries, benefits and share-based compensation for marketing personnel, and other
promotional expenses. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to
marketing and promotional activities. Marketing and promotional costs are expensed as incurred.
General and Administrative
General and administrative expenses include salaries, and benefits and share-based compensation of employees engaged in
corporate management, finance, human resources, compliance, and other corporate functions. General and administrative expenses
also include an allocation of depreciation, amortization, rent, and occupancy costs attributable to the departments providing general
and administrative functions.
Lease termination costs
In July 2016, the University notified a current landlord of its intent to vacate leased space by the end of the fourth quarter of
2016. As part of that notification, the University was required to pay a termination fee to its landlord of $3,363 which was recorded as
an expense in the third quarter of 2016. As of December 31, 2016, the University had vacated the space, and expensed an additional
$160 in the fourth quarter of 2016 related to the remaining amounts due under the lease net of remaining deferred rent.
Insurance/Self-Insurance
The University 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 University’s loss
exposure related to self-insurance is limited by stop loss coverage on a per occurrence and aggregate basis. The University regularly
analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to self-funded insurance
programs. While the University believes reserves are adequate, significant judgment is involved in assessing these reserves such as
assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the frequency and
severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments
are included in expense once a probable amount is known.
Concentration of Credit Risk
The University believes the credit risk related to cash equivalents and investments is limited due to its adherence to an
investment policy that required investments to have a minimum BBB rating, depending on the type of security, by one major rating
agency at the time of purchase. All of the University’s cash equivalents and investments as of December 31, 2017 and 2016 consist of
67
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
investments rated BBB or higher by at least one rating agency. Additionally, the University utilizes more than one financial institution
to conduct initial and ongoing credit analysis on its investment portfolio to monitor and lower the potential impact of market risk
associated with its cash equivalents and investment portfolio.
A majority of the University’s 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 University’s 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
University.
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.
Segment Information
The University 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 University’s Chief Executive Officer
manages the University’s operations as a whole and no expense or operating income information is generated or evaluated on any
component level.
Accounting Pronouncements Adopted in 2017
In March 2016, the FASB issued “Compensation – Stock Compensation: Improvement to Employee Share-Based Payment
Accounting,” to simplify certain aspects of the accounting for share-based payment transactions to employees. The new standard
requires excess tax benefits and tax deficiencies to be recorded in the consolidated statements of income as a component of the
provision for income taxes when stock awards vest or options are exercised. In addition, it eliminates the requirement to reclassify
cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows.
The standard also provides an accounting policy election to account for forfeitures as they occur, allows us to withhold more of an
employee’s vesting shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments
made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on our consolidated
cash flows statement.
The University adopted the new guidance in the first quarter of 2017 which required us to reflect any adjustments as of
January 1, 2017. Upon adoption, excess tax benefits or deficiencies from share-based awards or options are now reflected in the
consolidated statement of income as a component of the provision for income taxes, whereas previously they were recognized in
equity. The University elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The net cumulative
effect of this change increased additional paid-in capital and decreased retained earnings as of January 1, 2017 by $59, net of tax. The
University did not have any previously unrecognized excess tax effects that had not been recorded as a reduction to tax liability.
The University adopted the provisions of the standard impacting the cash flow presentation retrospectively, and accordingly, to
conform to the current period presentation, we reclassified $9,928 and $3,636 of excess tax benefits which had been included as a
financing activity to an operating activity for the years ended December 31, 2016 and 2015, respectively, in our consolidated
statement of cash flows. The presentation requirement for cash flows related to employee taxes paid for withheld shares had no impact
on our consolidated statement of cash flows since such cash flows have historically been presented as a financing activity.
Adoption of the provision of the new standard related to income taxes was adopted prospectively and resulted in a reduction to
our provision for income taxes of $16,511 for the year ended December 31, 2017, due to the recognition of excess tax benefits from
restricted stock awards that vested or stock options that were exercised in 2017. Our restricted stock awards vest in March each year
so the excess tax benefits and deficiencies is greatest in the first quarter each year. The inclusion of excess tax benefits and
deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of
excess tax benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the restricted
awards vest, our stock price on the date an option is exercised, and the quantity of options exercised.
68
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
In August 2016, the FASB issued a new standard that clarifies how certain cash receipts and cash payments are presented and
classified in the consolidated statement of cash flows. The University elected to early adopt this guidance in the first quarter of 2017
on a retrospective basis. There was no reclassification impact of the adoption on our consolidated statement of cash flows for the years
ended December 31, 2017, 2016 and 2015, as our historical statements have been presented in accordance with this new guidance.
In November 2016, the FASB issued a new standard that requires restricted cash and cash equivalents to be included with the
amount of cash and cash equivalents that are reconciled on the consolidated statement of cash flows. The University elected to early
adopt this guidance in the first quarter of 2017 on a retrospective basis, and accordingly, to conform to the current period presentation,
we reclassified our restricted cash and cash equivalents to be included in the total of cash and cash equivalents presented at the bottom
of our consolidated statement of cash flows for both the beginning and ending periods for our years ended December 31, 2017, 2016
and 2015. As a result, the amount of the change in our net cash provided by operating activities no longer includes the impact of the
change in restricted cash and cash equivalents for either period.
The following table summarizes the effects related to the adoption of both accounting standards (share-based compensation and
restricted cash and cash equivalents) for the years ended December 31, 2016 and 2015:
Consolidated Statement of Cash Flows Data:
December 31, 2016
December 31, 2015
Net cash provided by operating activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of period
Cash and cash equivalents and restricted cash, end of period
Recent Accounting Pronouncements
As
adjusted
As
reported
As
As
reported
adjusted
$218,286 $237,761 $ 173,900 $185,080
$ 20,655 $ 10,727 $ (15,221) $ (18,857)
$ 22,940 $ 32,487 $ (42,202) $ (34,658)
$ 23,036 $ 98,420 $ 65,238 $133,078
$ 45,976 $130,907 $ 23,036 $ 98,420
In May 2014, the FASB issued “Revenue from Contracts with Customers, as amended.” The standard is a comprehensive new revenue
recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an
amount that reflects the consideration expected to be received in exchange for those goods or services. The accounting guidance also
requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgements and changes in judgements and assets recognized from costs incurred to obtain or fulfill a
contract. In July 2015, the FASB approved a one-year delay in the effective date. The University will adopt this new standard
January 1, 2018 using the modified retrospective method and providing certain additional disclosures as defined within the standard.
The University has elected to apply this guidance retrospectively to all contracts at the date of initial application. Management has
undertaken a review of contracts and revenue streams for all of our net revenues. The majority of our revenues are related to tuition,
net of scholarships, due from our students. Tuition revenues, net of scholarships, are currently recognized pro-rata over the applicable
period of instruction which the University believes is consistent with the revenue recognition method required by the new standard.
The University will provide expanded disclosures pertaining to revenue recognition in our annual and quarterly filings beginning in
the period of adoption. The University will clarify further its receivables, contract assets and contract liabilities reported in its
consolidated balance sheets. The University will elect the short-term contract exemption with respect to disclosures associated with its
performance obligations as all performance obligations as of the end of any reporting period have original terms of less than a year.
Thus, we anticipate the adoption of this standard will not have a material impact on our consolidated financial statements, cash flows
or results of operations.
In January 2016, the FASB issued “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities.” The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial
instruments. Most prominent among the amendments is the requirement for changes in the fair value of equity investments, with
certain exceptions, to be recognized through net income rather than other comprehensive income (“OCI”). This standard is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted.
Accordingly, the standard is effective for us on January 1, 2018. We are currently evaluating the impact that the standard will have on
our consolidated financial statements.
69
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
In February 2016, the FASB issued “Leases.” The standard establishes a right-of-use (“ROU”) model that requires a lessee to
recognize a ROU asset and a lease liability on the balance sheet for all leases with lease terms longer than 12 months. Leases will be
classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This
standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is
permitted. Accordingly, the standard is effective for us on January 1, 2019 using a modified retrospective transition approach. A
modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the
beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The
University has begun evaluating the impact that the future adoption of this standard will have on our consolidated financial statements
and we believe the adoption will slightly increase our assets and liabilities, and will expand our financial statement disclosures.
In June 2016, the FASB issued “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial
Instruments”. The new guidance revises the accounting requirements related to the measurement of credit losses on financial
instruments and the timing of when such losses are recorded. The standard is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years and interim periods within those years,
beginning after December 15, 2018. Accordingly, the standard is effective for us on January 1, 2020 using a modified retrospective
approach, and we are currently evaluating the impact that the standard will have on our consolidated financial statements.
The University has determined that no other recent accounting pronouncements apply to its operations or could otherwise have a
material impact on its consolidated financial statements.
3. Investments
The following is a summary of investments as of December 31, 2017 and 2016. The University considers all investments as
available for sale.
Municipal securities
Certificates of Deposit
Total investments
Municipal securities
As of December 31, 2017
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
$ 84,768 $ — $
$ 4,915 $ — $
(409 ) $ 84,359
(3 ) $ 4,912
$ 89,683 $ — $
(412 ) $ 89,271
As of December 31, 2016
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
$ 62,769 $
12 $
(185) $ 62,596
The cash flows of municipal securities are backed by the issuing municipality’s credit worthiness. All municipal securities and
certificates of deposit are due in one year or less as of December 31, 2017. For the years ended December 31, 2017 and 2016, the net
unrealized losses on available-for-sale securities were $255 and $430, net of taxes, respectively.
4. Valuation and Qualifying Accounts
Allowance for doubtful accounts receivable:
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
(1) Deductions represent accounts written off, net of recoveries.
70
Balance at
Beginning of
Year
Charged to
Expense
Deductions
(1)
Balance at
End of
Year
$
$
$
5,918
5,137
6,472
18,478
18,639
16,620
(18,489) $ 5,907
(17,858) $ 5,918
(17,955) $ 5,137
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
5. Property and Equipment
Property and equipment consist of the following:
As of December 31,
2017
2016
Land
Land improvements
Buildings
Building and leasehold improvements
Equipment under capital leases
Computer equipment
Furniture, fixtures and equipment
Internally developed software
Other
Construction in progress
5,937
25,630
$ 160,126 $ 127,769
23,158
595,384 559,791
117,460 105,168
5,943
116,477 108,551
59,300
30,407
1,176
19,112
63,470
36,173
1,176
32,390
Less accumulated depreciation and amortization
Property and equipment, net
1,154,223 1,040,375
(184,847)
(231,939)
$ 922,284 $ 855,528
Depreciation and amortization expense associated with property and equipment, including assets under capital lease, totaled
$53,607, $44,829, and $34,821 for the years ended December 31, 2017, 2016, and 2015, respectively.
6. Notes Payable and Other Noncurrent Liabilities
In 2012, we entered into a new credit agreement, which increased our term loan to $100,000 with a maturity date of December
2019. Additionally, this facility, as amended in January 2016, provided a revolving line of credit in the amount of $150,000 through
December 2017 to be utilized for working capital, capital expenditures, share repurchases and other general corporate purposes. The
amendment to this facility increased the revolving line of credit from $50,000 to $150,000. Indebtedness under the credit facility is
secured by our assets and is guaranteed by certain of our subsidiaries. The Agreement contains standard covenants that, among other
things, restrict the University’s ability to incur additional debt or make certain investments, require the University to maintain
compliance with certain applicable regulatory standards, and require the University to achieve certain financial ratios and maintain
certain financial condition. As of December 31, 2017, the University is in compliance with its debt covenants. No amounts were
drawn on the revolver as of December 31, 2017 and it expired.
Notes Payable
Note payable, monthly payment of $556; interest at 30 day LIBOR plus 1.75%
(3.11% at December 31, 2017) through December 31, 2019
Revolving line of credit; interest at 30 day LIBOR plus 1.75% (2.3% at
December 31, 2016)
Annuities; quarterly payments of $34; extending through 2019; interest at 10%
Less: Current portion
As of December 31,
2017
2016
$ 66,477 $73,001
—
139
25,000
251
66,616
6,691
98,252
31,636
$ 59,925 $66,616
71
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Payments due under the notes payable obligations are as follows as of December 31, 2017:
2018
2019
$ 6,691
59,925
$ 66,616
Long-term deferred rent included in other noncurrent liabilities as of December 31, 2017 and 2016 was $460 and $729,
respectively.
7. Commitments and Contingencies
Leases
The University leases certain land, buildings and equipment under non-cancelable operating leases expiring at various dates
through 2022. Future minimum lease payments under operating leases due each year are as follows at December 31, 2017:
2018
2019
2020
2021
2022
Thereafter
Total minimum payments
$ 1,072
422
412
425
35
—
$ 2,366
Total rent expense and related taxes and operating expenses under operating leases for the years ended December 31, 2017,
2016 and 2015 was $1,545, $6,694, and $7,759, respectively.
Legal Matters
From time to time, the University is 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 University 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
University records a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the
University 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 University’s ultimate legal and financial responsibility, if
any, cannot be estimated with certainty and, in most cases, any potential losses related to those matters are not considered probable.
Upon resolution of any pending legal matters, the University 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
University’s financial condition, results of operations or cash flows.
Tax Reserves, Non-Income Tax Related
From time to time the University has exposure to various non-income tax related matters that arise in the ordinary course of
business. At both December 31, 2017 and 2016, the University has no reserve for tax matters where its ultimate exposure is considered
probable and the potential loss can be reasonably estimated.
8. Derivative Instruments
On February 27, 2013, the University entered into an interest rate corridor to manage its 30 Day LIBOR interest exposure
related to its variable rate debt. This instrument did not contain financing elements. The contractual terms of the University’s
derivative instrument have not been structured such that net payments made by one party in the earlier periods are to be subsequently
returned by the counterparty in later periods of the derivative’s term. The University’s derivative instrument has not been amended or
modified since inception. The fair value of the interest rate corridor instrument as of December 31, 2017 and 2016 was $509 and $490,
72
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
respectively, which is included in other assets. The fair value of the derivative instrument was determined using a hypothetical
derivative transaction and Level 2 of the hierarchy of valuation inputs. This derivative instrument was originally designated as a cash
flow hedge of variable rate debt obligations. The adjustments of $17, $245, and $602 for the years ended December 31, 2017, 2016
and 2015, respectively, for the effective portion of the gain/loss on the derivative is included as a component of other comprehensive
income, net of taxes.
The interest rate corridor instrument reduces variable interest rate risk starting March 1, 2013 through December 20, 2019 with a
notional amount of $66,667 as of December 31, 2017. The corridor instrument’s terms permit the University to hedge its interest rate
risk at several thresholds; the University pays variable interest monthly based on the 30-day LIBOR rates until that index reaches
1.5%. If 30-day LIBOR is equal to 1.5% through 3.0%, the University pays 1.5%. If 30-day LIBOR exceeds 3.0%, the University pays
actual 30-day LIBOR less 1.5%. Therefore, the University has hedged its exposure to future variable rate cash flows through
December 20, 2019.
As of December 31, 2017 no derivative ineffectiveness was identified. Any ineffectiveness in the University’s derivative
instrument designated as a hedge would be reported in interest expense in the income statement. At December 31, 2017, the
University does not expect to reclassify any gains or losses on derivative instruments from accumulated other comprehensive income
(loss) into earnings during the next 12 months.
9. Earnings Per Share
Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per common share reflects the assumed conversion of
all potentially dilutive securities, consisting of stock options and restricted stock awards, for which the estimated fair value exceeds
the exercise price, less shares which could have been purchased with the related proceeds, unless anti-dilutive. For employee equity
awards, repurchased shares are also included for any unearned compensation adjusted for tax. The table below reflects the calculation
of the weighted average number of common shares outstanding, on an as if converted basis, used in computing basic and diluted
earnings per common share.
Denominator:
Basic weighted average shares outstanding
Effect of dilutive stock options and restricted stock
Diluted weighted average shares outstanding
Year Ended December 31,
2017
2016
2015
47,140 46,083 45,975
1,095 1,038 1,306
48,235 47,121 47,281
Diluted weighted average shares outstanding excludes the incremental effect of unvested restricted stock and shares that would
be issued upon the assumed exercise of stock options in accordance with the treasury stock method. For each of the years ended
December 31, 2017, 2016 and 2015, approximately 2, 344 and 385, respectively, of the University’s stock options and restricted stock
awards outstanding were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
These options and restricted stock awards could be dilutive in the future.
10. Equity Transactions
Preferred Stock
As of December 31, 2017 and 2016, the University had 10,000 shares of authorized but unissued and undesignated preferred
stock. The University’s charter provides that the board of directors has authority to issue preferred stock, with voting powers,
designations, preferences, and special rights, qualifications, limitation, or restrictions as permitted by law as determined by the board
of directors, without stockholder approval. 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.
Treasury Stock
The Board of Directors has authorized the University to repurchase up to $175,000 in aggregate of common stock, from time to
time, depending on market conditions and other considerations. The expiration date on the repurchase authorization has been extended
to December 31, 2018. Repurchases occur at the University’s discretion. Repurchases may be made in the open market or in privately
73
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules. The amount and timing of future share
repurchases, if any, will be made as market and business conditions warrant. Since its approval of the share repurchase plan, the
University has purchased 3,509 shares of common stock at an aggregate cost of $77,292, which are recorded at cost in the
accompanying December 31, 2017 consolidated balance sheet and statement of stockholders’ equity. During the year ended
December 31, 2017 the University repurchased 17 shares of common stock at an aggregate costs of $1,510. At December 31, 2017,
there remained $97,708 available under its current share repurchase authorization. Shares repurchase in lieu of taxes are not included
in the repurchase plan totals as they were approved in conjunction with the restricted share awards.
11. Income Taxes
The University 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. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more-
likely-than-not that the University will realize the benefits of these deductible differences. The University has no valuation allowance
at December 31, 2017 and 2016.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. For businesses, the Act reduces the
corporate federal tax rate from a maximum of 35% to a flat 21% rate. The rate reduction took effect on January 1, 2018. The
University has concluded that the Act will cause the University’s deferred tax assets and liabilities to be revalued. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted though income tax expense. The University’s net deferred tax liability was revalued as of December 22, 2017. The University
recorded a $10.7 million income tax benefit related to the revaluation of its net deferred tax liabilities. Excluding this income tax
benefit in 2017, our effective tax rate would have been 32.1%. Due to the enactment date and complexities of the new tax law, the
regulations may have not been fully interpreted by the federal and state taxing authorities, thus there may be additional impacts to the
tax provision that may not have been included herein.
The components of income tax expense (benefit) are as follows:
Current:
Federal
State
Deferred:
Federal
State
Year Ended December 31,
2017
2016
2015
$ 76,966 $ 64,006 $ 63,481
8,589 4,831 5,222
85,555 68,837 68,703
(6,189) 7,961 4,473
557
843
891
Tax expense recorded as an increase of paid-in capital
(5,346) 8,852 5,030
— 9,921 3,863
$ 80,209 $ 87,610 $ 77,596
74
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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,
Statutory U.S. federal income tax rate
State income taxes, net of federal tax benefit
State tax credits, net of federal effect
Excess tax benefits
Deferred tax revaluation (Federal Rate change)
Nondeductible expenses
Other
Effective income tax rate
2017
2015
2016
35.0% 35.0% 35.0%
3.3
(1.2)
0.0
0.0
0.1
(0.1)
3.2
(0.7)
(5.8)
(3.7)
0.0
0.3
3.2
(1.5)
0.0
0.0
0.2
0.2
28.3% 37.1% 37.1%
Significant components of the University’s deferred income tax assets and liabilities, included in Deferred income taxes, non-
current on the consolidated balance sheets are as follows:
Deferred tax assets:
Allowance for doubtful accounts
Share-based compensation
Deferred tuition revenue
Deferred scholarship
Deferred rent
Intangibles
State taxes
Other
Deferred tax assets
Deferred tax liability:
Property and equipment
Other
Deferred tax liability
Net deferred tax liability
As of December 31,
2017
2016
$ 1,685 $ 2,362
7,681
4,201
1,539
1,294
1,198
618
122
54
1,048
590
1,228
985
2,731
1,422
10,849
17,909
(28,028) (40,358)
(1,259)
(1,183)
(29,211) (41,617)
$ (18,362) $ (23,708)
The net deferred tax liability on the accompanying consolidated balance sheet is comprised of the following:
Deferred income taxes, current
Deferred income taxes, non-current
Net deferred tax liability
As of December 31,
2017
2016
$ 5,214 $ 7,814
(31,522)
(23,576 )
$(18,362) $ (23,708)
The University recognizes the impact of a tax position in its financial statements if that position is more-likely-than-not to be
sustained on audit, based on the technical merits of the position. The University discloses all unrecognized tax benefits, which
includes the reserves recorded for uncertain tax positions on filed tax returns and the unrecognized portion of affirmative claims. The
University recognizes interest and penalties related to uncertain tax positions in income tax expense. Unrecognized tax benefits as of
December 31, 2017 and 2016 were not significant.
75
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
The University is subject to taxation in the United States, in states with an income tax and in several local jurisdictions. The
University is currently under audit by various state taxing authorities. The University does not anticipate any material adjustments as a
result of these audits. As of December 31, 2017, the earliest tax year still subject to examination for federal and state purposes is 2014
and 2013, respectively.
12. Regulatory
The University is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In
particular, the Higher Education Act of 1965, as amended (the “Higher Education Act”), and the regulations promulgated thereunder
by the Department of Education, subject the University 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 Education’s
extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance to the Department of
Education on an ongoing basis. The University’s accreditation has been reaffirmed by the Higher Learning Commission (“HLC”) after
a comprehensive review of the institution’s academic offerings, governance and administration, mission, finances and resources
during 2016. The accreditation was reaffirmed by the HLC’s Institutional Actions council at its meeting on February 28, 2017 with no
requirements for any monitoring or interim reports. The comprehensive review occurs every 10 years, along with a mid-term report in
year four. As of December 31, 2017, management believes the University is in compliance with the applicable regulations in all
material respects. The University has a program participation agreement with full certification from the Department of Education,
which gives the University the ability to participate in the Title IV programs through December 31, 2020.
Because the University 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 University, or that such claims, if made, will not have a material
adverse effect on the University’s business, results of operations or financial condition, management believes the University is in
compliance with applicable regulations in all material respects.
90/10 Disclosure
The University derives a substantial portion of its revenues from student financial aid received by its students under the Title IV
programs administered by the Department of Education pursuant to the Higher Education Act. To continue to participate in the student
financial aid programs the University must comply with the regulations promulgated under the Higher Education Act. The regulations
restrict the proportion of cash receipts for tuition and fees from eligible programs to not more than 90 percent from Title IV programs
(the “90/10 revenue test”). If an institution fails to satisfy the test for one year, its participation status becomes provisional for two
consecutive fiscal years. If the test is not satisfied for two consecutive years, eligibility to participate in Title IV programs is lost for at
least two fiscal years. Using the Department of Education’s cash-basis, regulatory formula under the 90/10 Rule as currently in effect,
for its 2017, 2016, and 2015 fiscal years, the University derived 71.5%, 72.3%, and 74.8%, respectively, for its 90/10 revenue from
Title IV program funds.
13. Share-Based Compensation Plans
Incentive Plans
Prior to June 2017, the University made grants of restricted stock and stock options under its 2008 Equity Incentive Plan (the
“2008 Plan”). In January 2017, the Board of Directors of the University approved, and at the University’s 2017 annual meeting of
stockholders held on June 14, 2017, the University’s stockholders adopted a 2017 Equity Incentive Plan (the “2017 Plan”) under
which a maximum of 3 million shares may be granted. All future grants of equity incentives will be made from the 2017 Plan.
76
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Restricted Stock
During fiscal year 2017, 2016, and 2015, the University granted 188, 264, and 315 shares of common stock under the 2008 Plan,
respectively, with a service vesting condition to certain of its executives, officers, faculty and employees. The restricted shares have
voting rights and vest evenly at 20% over each of the next five years. Upon vesting, shares will be held in lieu of taxes equivalent to
the statutory tax withholding required to be paid when the restricted stock vests. During the years ended December 31, 2017, 2016 and
2015, the University withheld 151, 114, and 94 shares of common stock in lieu of taxes at a cost of $9,790, $4,695, and $4,283, on the
restricted stock vesting dates, respectively. In June 2017, following the annual stockholders meeting, the University granted 4 shares
of common stock under the 2017 Plan to the non-employee members of the University’s board of directors. In 2016 and 2015, the
University granted 11 and 9 shares of common stock under the 2008 Plan, respectively, to certain of the non-employee members of the
University’s board of directors. The restricted shares granted to these directors have voting rights and vest on the earlier of (a) the one
year anniversary of the date of grant or (b) immediately prior to the following year’s annual stockholders’ meeting.
A summary of the activity related to restricted stock granted under the University’s Incentive Plan is as follows:
Outstanding as of December 31, 2014
Granted
Vested
Forfeited, canceled or expired
Outstanding as of December 31, 2015
Granted
Vested
Forfeited, canceled or expired
Outstanding as of December 31, 2016
Granted
Vested
Forfeited, canceled or expired
Outstanding as of December 31, 2017
Weighted
Average
Grant Date
Fair Value
per Share
28.75
45.66
27.18
30.27
Total
Shares
1,033 $
324 $
(274) $
(27) $
1,056 $
34.30
275 $
(329) $
(9) $
44.46
30.56
37.94
993 $
38.32
192 $
(375) $
(34) $
70.44
32.46
44.51
776 $
49.16
As of December 31, 2017, there was approximately $27,221 of total unrecognized share-based compensation cost related to
unvested restricted stock awards. These costs are expected to be recognized over a weighted average period of 2.0 years.
77
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Stock Options
No options were granted in 2017, 2016 and 2015. Prior to 2012, the University granted time vested options to purchase shares of
common stock with an exercise price equal to the fair market value on the date of grant to employees. These time vested options vest
ratably over a period of five years and expire ten years from the date of grant. A summary of the activity related to stock options
granted under the University’s Incentive Plan is as follows:
Summary of Stock Options Outstanding
Outstanding as of December 31, 2014
Granted
Exercised
Forfeited, canceled or expired
Outstanding as of December 31, 2015
Granted
Exercised
Forfeited, canceled or expired
Outstanding as of December 31, 2016
Granted
Exercised
Forfeited, canceled or expired
Outstanding as of December 31, 2017
Exercisable as of December 31, 2017
Weighted
Average
Exercise
Price
per
Share
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value ($)(1)
Total
Shares
2,452 $ 14.83
— $ —
(218) $ 15.97
(14) $ 16.08
2,220 $ 14.71
— $ —
(946) $ 13.97
(2) $ 19.23
1,272 $ 15.26
— $ —
(576) $ 12.79
(2) $ 16.35
694 $ 17.31
694 $ 17.31
2.71 $ 50,114
2.71 $ 50,114
(1) Aggregate intrinsic value represents the value of the University’s closing stock price on December 29, 2017 ($89.53) in excess
of the exercise price multiplied by the number of options outstanding or exercisable.
Share-based Compensation
Share-based Compensation Expense Assumptions – Restricted Stock Awards
The University measures and recognizes compensation expense for share-based payment awards made to employees and
directors. The fair value of the University’s restricted stock awards is based on the market price of its common stock on the date of
grant. Stock-based compensation expense related to restricted stock grants is expensed over the vesting period using the straight-line
method for University employees and the University’s board of directors. Starting January 1, 2017 with the adoption of the share-
based compensation accounting standard, the University made an accounting policy election to account for forfeitures as they occur,
prior to 2017 these forfeitures were estimated and reported net of the expense. The restricted shares have voting rights.
78
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
The table below outlines share-based compensation expense for the fiscal years ended December 31, 2017, 2016 and 2015
related to restricted stock and stock options granted:
Instructional costs and services
Admissions advisory and related
Marketing and promotional
General and administrative
2017
2015
2016
$ 7,874 $ 7,398 $ 6,779
192
130
4,447 4,521 4,156
198
169
232
125
Share-based compensation expense included in operating expenses
Tax effect of share-based compensation
Share-based compensation expense, net of tax
12,688 12,276 11,257
(5,075) (4,910) (4,503)
$ 7,613 $ 7,366 $ 6,754
401(k) Plan
The University has established 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 University to make discretionary matching contributions. The
University plans to make a matching contribution to the Plan of approximately $2,837 for the year ended December 31, 2017. The
University made discretionary matching contributions to the Plan of $1,920 and $1,769 for the years ended December 31, 2016 and
2015, respectively.
14. Related Party Transactions
Related party transactions include transactions between the University and certain of its 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, 2017, 2016, and 2015, related party transactions consisted of
the following:
Affiliates
GCU Community Fund (“GCUCF”) — GCUCF was formed in 2014 to provide seed funding for entrepreneurial ventures
initiated by the University’s students. The University’s President, CEO and Chairman serves as the president of GCUCF. The
University is not the primary beneficiary of GCUCF, and accordingly, the University does not consolidate GCUCF’s statement of
activities with its financial results. The University contributed $500 for the year ended December 31, 2015.
79
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
15. Quarterly Results of Operations (Unaudited)
The following table summarizes the unaudited quarterly results of operations for 2017 and 2016 and should be read in
conjunction with other information included in the accompanying consolidated financial statements.
2017
Net revenue
Costs and expenses:
Instructional costs and services
Admissions advisory and related
Advertising
Marketing and promotional
General and administrative
Total costs and expenses
Operating income
Interest expense
Interest income and other
Income before income taxes
Income tax expense
Net income
Earnings per share:
Basic income per share(1)
Diluted income per share(1)
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
First Quarter Second Quarter Third Quarter
$ 248,206 $
218,301 $
236,209 $
Fourth Quarter
271,418
102,574
31,972
24,631
2,460
9,941
171,578
76,628
(580)
2
76,050
20,138
55,912 $
1.20 $
1.16 $
46,748
48,070
$
$
$
95,030
31,085
24,776
2,264
10,058
163,213
55,088
(495)
739
55,332
15,485
39,847 $
0.85 $
0.83 $
47,151
48,192
104,303
31,426
25,523
2,350
12,915
176,517
59,692
(567)
1,445
60,570
21,266
39,304 $
0.83 $
0.81 $
47,316
48,292
108,933
34,061
23,678
2,555
10,845
180,072
91,346
(527)
757
91,576
23,320
68,256
1.44
1.41
47,342
48,382
(1) The sum of quarterly income per share may not equal annual income per share due to rounding.
2016
Net revenue
Costs and expenses:
Instructional costs and services
Admissions advisory and related
Advertising
Marketing and promotional
General and administrative
Lease termination costs
Total costs and expenses
Operating income
Interest expense
Interest income and other
Income before income taxes
Income tax expense
Net income
Earnings per share:
Basic income per share(1)
Diluted income per share(1)
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
First Quarter Second Quarter Third Quarter
$ 226,958 $
191,279 $
210,444 $
Fourth Quarter
244,663
94,654
29,544
21,107
2,242
10,720
—
158,267
68,691
(329)
2,048
70,410
26,745
43,665 $
0.96 $
0.93 $
45,622
46,860
$
$
$
84,599
28,866
22,149
2,108
8,809
—
146,531
44,748
(158)
293
44,883
17,257
27,626 $
0.60 $
0.59 $
46,004
46,990
91,748
28,814
23,896
2,127
13,430
3,363
163,378
47,066
(344)
(2,291)
44,431
15,187
29,244 $
0.63 $
0.62 $
46,231
47,175
102,100
32,062
21,000
2,383
10,260
160
167,965
76,698
(497)
199
76,400
28,421
47,979
1.03
1.01
46,470
47,452
(1) The sum of quarterly income per share may not equal annual income per share due to rounding.
80
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be
disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the specified time periods
and accumulated and communicated to our management, including our Chief Executive Officer (“Principal Executive Officer”) and
Chief Financial Officer (“Principal Financial Officer”), as appropriate, to allow timely decisions regarding required disclosure. We
have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. Our Disclosure
Committee meets on a quarterly basis and more often if necessary.
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal
Financial Officer, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act), as of the end of the period covered by
this annual report. Based on that evaluation, our management, including the Principal Executive Officer and Principal Financial
Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2017.
Attached as exhibits to this Annual Report on Form 10-K are certifications of our Chief Executive Officer and Chief Financial
Officer, which are required in accordance with Rule 13a-14 of the Exchange Act. This Disclosure Controls and Procedures section
includes information concerning management’s evaluation of disclosure controls and procedures referred to in those certifications and,
as such, should be read in conjunction with the certifications of our Chief Executive Officer and Chief Financial Officer.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles (“GAAP”).
Our internal control over financial reporting includes those policies and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial
statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitation, our internal control systems and procedures may not prevent or detect misstatements. An
internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation
of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in condition, or that
the degree of compliance with the policies and procedures may deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31,
2017, utilizing the criteria described in the “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The objective of this assessment was to determine whether our internal control over
financial reporting was effective as of December 31, 2017. Based on its assessment, management believes that, as of December 31,
2017, the Company’s internal control over financial reporting is effective.
The effectiveness of our internal control over financial reporting as of and for the year ended December 31, 2017 has been
audited by KPMG LLP, an independent registered public accounting firm, as stated in their audit report which is included herein.
81
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Grand Canyon Education, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Grand Canyon Education, Inc. and subsidiaries (the “Company”) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements
of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2017, and the related notes (collectively, the “consolidated financial statements”), and our report dated February 21,
2018, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Phoenix, Arizona
February 21, 2018
82
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2017 that
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
We have a policy governing transactions in our securities by directors, officers, employees and others which permits these
individuals to enter into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
We anticipate that, as permitted by Rule 10b5-1 and our policy governing transactions in our securities, some or all of our
directors, officers and employees may establish or terminate trading plans in the future. We intend to disclose the names of executive
officers and directors who establish or terminate a trading plan in compliance with Rule 10b5-1 and the requirements of our policy
governing transactions in our securities in our future quarterly and annual reports on Form 10-Q and 10-K filed with the Securities and
Exchange Commission. We undertake no obligation, however, to update or review the information provided herein, including for
revision or termination of an established trading plan, other than in such quarterly and annual reports.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Information relating to our Board of Directors, Executive Officers, and Corporate Governance required by this item appears in
the sections entitled “Corporate Governance and Board Matters” and “Proposal No. 1: Election of Directors” in our 2018 proxy
statement, to be filed within 120 days of our fiscal year end (December 31, 2017) and such information is incorporated herein by
reference.
Our employees must act ethically at all times and in accordance with the policies in our Code of Business Conduct and Ethics.
We require full compliance with this policy from all designated employees including our Chief Executive Officer, Chief Financial
Officer, and Chief Accounting Officer. We publish the policy, and any amendments or waivers to the policy, in the Corporate
Governance section of our website located at www.gcu.edu/ Investor Relations/Corporate Governance.
The charters of our Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee are
also available in the Corporate Governance section of our website located at www.gcu.edu/Investor Relations/Corporate Governance.
Item 11.
Executive Compensation
Information relating to this item appears in the section entitled “Executive Compensation” in our 2018 proxy statement, to be
filed within 120 days of our fiscal year end (December 31, 2017) and such information is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to this item appears in the sections entitled “Executive Compensation” and “Beneficial Ownership of
Common Stock” in our 2018 proxy statement, to be filed within 120 days of our fiscal year end (December 31, 2017) and such
information is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Information relating to this item appears in the sections entitled “Corporate Governance and Board Matters — Director
Independence” and “Certain Relationships and Related Party Transactions” in our 2018 proxy statement, to be filed within 120 days of
our fiscal year end (December 31, 2017) and such information is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services
Information relating to this item appears in the section entitled “Ratification of Independent Registered Public Accounting Firm
— Fees” in our 2018 our proxy statement, to be filed within 120 days of our fiscal year end (December 31, 2017) and such
information is incorporated herein by reference.
83
Item 15.
Exhibits and Consolidated Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1.
Consolidated Financial Statements filed as part of this report
PART IV
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Income Statements for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
2.
Consolidated Financial Statement Schedules:
Page
57
58
59
60
61
62
63
Schedules are omitted because they are not required, or because the information required is included in the Consolidated
Financial Statements and Notes thereto.
84
3.
Exhibits
Number
Description
Method of Filing
3.1
Amended and Restated Certificate of Incorporation
3.2
Third Amended and Restated Bylaws
4.1
Specimen of Stock Certificate
10.1
2008 Equity Incentive Plan, as amended†
10.2
2017 Equity Incentive Plan, as amended†
Incorporated by reference to Exhibit 3.1 to Amendment
No. 6 to the University’s Registration Statement on Form
S-1 filed with the SEC on November 12, 2008.
Incorporated by reference to Exhibit 3.1 to the University’s
Current Report on Form 8-K filed with the SEC on
October 29, 2014.
Incorporated by reference to Exhibit 4.1 to Amendment
No. 2 to the University’s Registration Statement on
Form S-1 filed with the SEC on September 29, 2008.
Incorporated by reference to Exhibit 10.1 to the
University’s Quarterly Report on Form 10-Q filed with the
SEC on November 14, 2011.
Incorporated by reference to Exhibit 10.1 to the
University’s Current Report on Form 8-K filed with the
SEC on June 14, 2017.
10.3
10.4
10.5
10.6
10.7
10.8
Form of Restricted Stock Agreement under the 2017 Equity
Incentive Plan, as amended†
Filed herewith.
Amended Executive Employment Agreement, dated
February 9, 2016, by and between Grand Canyon
Education, Inc. and Brian E. Mueller†
Incorporated by reference to Exhibit 10.4.1 to the
University Annual Report on Form 10-K filed with the
SEC on February 17, 2016.
Amended Executive Employment Agreement, dated
February 9, 2016, by and between Grand Canyon
Education, Inc. and W. Stan Meyer†
Incorporated by reference to Exhibit 10.5.1 to the
University Annual Report on Form 10-K filed with the
SEC on February 17, 2016.
Amended Executive Employment Agreement, dated
February 9, 2016, by and between Grand Canyon
Education, Inc. and Daniel E. Bachus†
Incorporated by reference to Exhibit 10.6.1 to the
University Annual Report on Form 10-K filed with the
SEC on February 17, 2016.
Amended Executive Employment Agreement, dated
February 9, 2016, by and between Grand Canyon
Education, Inc. and Joseph N. Mildenhall†
Incorporated by reference to Exhibit 10.7.1 to the
University Annual Report on Form 10-K filed with the
SEC on February 17, 2016.
Amended Executive Employment Agreement, dated
February 9, 2016, by and between Grand Canyon
Education, Inc. and Brian M. Roberts†
Incorporated by reference to Exhibit 10.8.1 to the
University Annual Report on Form 10-K filed with the
SEC on February 17, 2016.
10.9
Form of Director and Officer Indemnity Agreement
Incorporated by reference to Exhibit 10.21 to Amendment
No. 2 to the University’s Registration Statement on Form
S-1 filed with the SEC on September 29, 2008.
85
Number
10.10
10.11
21.0
23.1
24.1
31.1
31.2
32.1
32.2
Description
Method of Filing
Credit Agreement, dated December 21, 2012, by and
among Grand Canyon Education, Inc., Bank of America,
N.A., and the other parties named therein.
Incorporated by reference to Exhibit 10.10 to the
University’s Annual Report on Form 10-K filed with the
SEC on February 19, 2013.
Amendment No. 1 to Credit Agreement, dated
January 15, 2016, by and among Grand Canyon
Education, Inc., Bank of America, N.A., and the other
parties named therein.
Incorporated by reference to Exhibit 10.10.1 to the
University Annual Report on Form 10-K filed with the
SEC on February 17, 2016.
Subsidiaries of Grand Canyon Education, Inc.
Filed herewith.
Consent of KPMG LLP, Independent Registered Public
Accounting Firm
Filed herewith.
Power of Attorney
Filed herewith (on signature page)
Certification of Principal Executive Officer Pursuant to
Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to
Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith.
Filed herewith.
Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002††
Filed herewith.
Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002††
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
Filed herewith.
Filed herewith.
Filed herewith.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Filed herewith.
101.DEF
XBRL Taxonomy Extension Definition Linkbase
Filed herewith.
101.LAB
XBRL Taxonomy Extension Label Linkbase
Filed herewith.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Filed herewith.
†
Indicates a management contract or any compensatory plan, contract or arrangement.
†† This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed
for purposes of Section 18 of the Exchange Act, and is not to be incorporated by reference into any filings of the University,
whether made before or after the date hereof, regardless of any general incorporation language in such filing.
86
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
GRAND CANYON EDUCATION, INC.
By: /s/ Brian E. Mueller
Name: Brian E. Mueller
Title: President and Chief Executive Officer
Dated: February 21, 2018
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brian E.
Mueller, Daniel E. Bachus, and Brian M. Roberts, and each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Brian E. Mueller
Brian E. Mueller
/s/ Daniel E. Bachus
Daniel E. Bachus
/s/ Sara R. Dial
Sara R. Dial
/s/ David J. Johnson
David J. Johnson
/s/ Jack A. Henry
Jack A. Henry
/s/ Kevin F. Warren
Kevin F. Warren
Title
Date
President, Chief Executive Officer and Chairman
(Principal Executive Officer)
February 21, 2018
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Director
Director
Director
Director
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
87
G R A N D C A N Y O N E D U C A T I O N
C O R P O R A T E I N F O R M A T I O N
TRANSFER AGENT
Computershare Investor Services
P.O. Box 505000
Louisville, KY 40233-5000
ACCOUNTANTS
KPMG LLP
PRIMARY IR CONTACT
Dan Bachus
Chief Financial Officer
Grand Canyon Education
3300 W. Camelback Road
Phoenix, AZ 85017
Phone: 602-639-7500
Web site: gcu.edu
COMMON STOCK
The Company’s common stock
trades on the Nasdaq Global Market
under the symbol LOPE.
ANNUAL MEETING OF STOCKHOLDERS
The Company’s annual meeting of stockholders will
be held at 9 a.m., Arizona time, on Wednesday, June 13, 2018
at the Grand Canyon University Antelope Reception Center in Phoenix.
BOARD OF DIRECTORS
Brian Mueller
Chairman and
Chief Executive Officer
Kevin F. Warren
Director
Sara R. Dial
Director
David J. Johnson
Director
Jack A. Henry
Director
MANAGEMENT
Brian Mueller
Chief Executive Officer,
Chairman and President
Dr. W. Stan Meyer
Chief Operating Officer
Joe Mildenhall
Chief Information Officer
Dan Bachus
Chief Financial Officer
Brian Roberts
General Counsel
G
R
A
N
D
C
A
N
Y
O
N
E
D
U
C
A
T
I
O
N
|
2
0
1
7
A
N
N
U
A
L
R
E
P
O
R
T
3300 W. Camelback Road | Phoenix, AZ 85017 | 800-800-9776 | gcu.edu
[THIS PAGE INTENTIONALLY LEFT BLANK]