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| LOPE > SEC Filings for LOPE > Form 10-K/A on 14-Nov-2011 | All Recent SEC Filings |
14-Nov-2011
Annual Report
The following discussion and analysis of our financial condition and results of
operations has been restated to reflect the restatement of the balance sheet and
statements of income, stockholders' equity and cash flows for the year ended
December 31, 2010 and should be read in conjunction with our financial
statements and related notes that appear in Item 8, 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/A, particularly in Item 1A, Risk Factors and Forward-Looking
Statements.
Restatement of Financial Statements
We are filing this Amendment No. 1 as a result of the correction of an error in
the methodology we use to estimate our allowance for doubtful accounts, which
requires us to restate our financial statements for the year ended December 31,
2010 and our unaudited interim financial statements for the quarters ended
June 30, 2010, September 30, 2010, March 31, 2011 and June 30, 2011.
In recent periods, we experienced a significant change in the composition of our
receivable balances since our transition to the borrower-based financial aid
model in the second quarter of 2010 in which the receivables due from former
students had grown as a percentage of the total amount outstanding. However, our
historical process for estimating the allowance for doubtful accounts did not
consider the disaggregation of receivable balances by student based on
enrollment status. As a result, the growth in the inactive student receivables
was not evident when making our allowance estimate in prior periods. As our
collection experience indicates that receivables from former students carry a
higher risk, this disaggregated information should have been considered in
determining the probability of loss within our receivables. If such information
had been evaluated, we would have increased the allowance for doubtful accounts
to reflect the increased risk profile of the receivables in prior periods.
Accordingly, the Audit Committee of the Board of Directors, together with
management and in consultation with Ernst & Young LLP, our independent
registered public accounting firm, determined that, because management should
have taken the additional steps necessary to develop the disaggregated
information for use in the analysis of reserve requirements and resulting
allowance for doubtful accounts, the financial statements identified above
should be restated to correct the allowance for doubtful accounts.
As a result, we have concluded that we understated our bad debt expense, and
overstated our operating income and net income, by approximately $15.2 million,
$15.4 million and $9.2 million, respectfully, for the year ended December 31,
2010. Accordingly, we have restated:
• Our balance sheet as of December 31, 2010 by increasing our allowance for
doubtful accounts by $15.2 million; and
• Our income statement for the year ended December 31, 2010 by decreasing
revenues by $0.2 million, increasing instructional costs and services expense by
$15.2 million and decreasing operating income and net income by $15.4 million
and $9.2 million, respectively.
As a result of this restatement, amounts in our statements of cash flows and
stockholders' equity for the year ended December 31, 2010 have also been
restated. Our total cash flows from operations for the year ended December 31,
2010 remains unchanged. A summary of the effects of this restatement to our
financial statements included within this Amendment to our Annual Report on Form
10-K/A is presented in Note 2 in the accompanying notes to financial statements.
Executive Overview
We are a regionally accredited provider of postsecondary education services
focused on offering graduate and undergraduate degree programs in our core
disciplines of education, business, healthcare, and liberal arts. We offer
programs online as well as ground programs at our approximately 100-acre
traditional campus in Phoenix, Arizona and onsite at the facilities of
employers. At December 31, 2010, we had approximately 41,500 students. At
December 31, 2010, 91.0% of our students were enrolled in our online programs
and, of those students 45.5% were pursuing master's or doctoral degrees.
Key Trends, Developments and Challenges
The following circumstances and trends present opportunities, challenges and
risks.
Evolving Postsecondary Education Market. The U.S. is in the midst of an economic
downturn that has caused an increased number of individuals to consider
advancing their education. Additionally, we 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. Given these trends, we
believe that many individuals will be attracted to our high quality academic
programs at affordable tuition rates. However we believe that competition for
students, especially graduate students, continues to increase.
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 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.
Final Rules Adopted by the Department of Education. In October 2010, the
Department of Education issued new rules regarding the incentive compensation
rule and certain other "program integrity" issues. These rules, which we
describe below, will largely become effective on July 1, 2011.
Revised incentive compensation rule. As described above in "Item 1 - Business -
Regulation," under current Department of Education regulations, there are 12
"safe harbors" that describe payments and arrangements that do not violate the
incentive compensation rule. In the final rules, the 12 safe harbors under the
incentive compensation rule were eliminated as the Department of Education took
the position that any commission, bonus or other incentive payment based in any
part, directly or indirectly, on securing enrollments or awarding financial aid
is inconsistent with the incentive payment prohibition in the Higher Education
Act. The Department of Education contends that institutions do not need to rely
on safe harbors to protect compensation that complies with the Higher Education
Act, and that institutions can readily determine if a payment or compensation is
permissible under the Higher Education Act by analyzing (1) whether it is a
commission, bonus or other incentive payment, defined as an award of a sum of
money or something of value (other than a fixed salary or wages), paid to or
given to a person or entity for services rendered, and (2) whether the
commission, bonus or other incentive payment is provided to any person based in
any part, directly or indirectly, upon success in securing enrollments or the
award of financial aid, which are defined as activities engaged in for the
purpose of the admission or matriculation of students for any period of time or
the award of financial aid. The Department of Education maintains that an
institution can still make merit-based adjustments to employee compensation,
provided that such adjustments are not based in any part, directly or
indirectly, upon success in securing enrollments or the award of financial aid.
Accordingly, among other things, the Department of Education states that (1) an
institution may maintain a hierarchy of recruitment personnel with different
levels of
responsibility, with salary scales that reflect an added amount of
responsibility, (2) an institution may promote or demote recruitment personnel
based on merit, and (3) an institution may make a compensation decision based on
seniority or length of employment, provided that in each case compensation
decisions are consistent with the Higher Education Act's prohibition on
incentive compensation. The final rules further clarify that this prohibition
may extend to individuals holding a managerial position at any level of the
company, to the extent that a particular individual has responsibility for
recruitment or admission of students, or makes decisions about awarding Title IV
program funds. The Department of Education states that an institution still
would be able to make merit-based adjustments to employee compensation, but
would not be permitted to consider nor base compensation directly or indirectly,
in any part, on factors such as an employee's success in securing student
enrollments, the award of financial aid or institutional goals based on that
success.
While it is anticipated that the Department of Education may issue certain
guidance on incentive compensation issues prior to July 1, 2011, we believe the
changes imposed by the final rules, including the elimination of the safe
harbors, increase the uncertainty about what constitutes incentive compensation
and which employees are covered by the regulation. In light of such uncertainty,
we have changed some of our compensation practices for enrollment counselors and
other employees, as well as the terms of our arrangements with certain third
parties whom we pay for Internet-based services related to lead generation and
marketing and whose activities are also subject to the incentive compensation
rules. The changes in these practices and arrangements could adversely affect
our ability to compensate our enrollment counselors, other employees, and third
parties in a manner that appropriately reflects their relative merit, which in
turn could reduce their effectiveness and make it more difficult to attract and
retain staff with the desired talent and motivation to succeed at Grand Canyon
University. In addition, this lack of certainty could increase the risk of
future federal False Claims Act qui tam lawsuits in which private plaintiffs
assert that our compensation practices violate the incentive compensation rules
and, therefore, that our receipt of Title IV funds constitutes a submission to
the government of a false claim for payment.
Misrepresentation. The final rules include provisions that strengthen the
Department of Education's authority to sanction institutions for
misrepresentations made by employees and certain third parties with which such
institutions maintain service agreements (such as for the provision of
educational programs or marketing, advertising, recruiting or admissions
services). Considering the breadth of this prohibition, it is possible that,
despite our efforts to prevent such misrepresentations, our employees or service
providers may make statements that could be construed as misrepresentations. As
a result, we may face complaints from students, prospective students and
employees over statements made by us and our agents throughout the enrollment,
admissions and financial aid process, as well as throughout attendance at Grand
Canyon University, which would expose us to increased risk of litigation and
enforcement action and applicable sanctions or other penalties up to and
including termination of Title IV eligibility.
State authorization. States have the authority to assert jurisdiction, to the
extent they so choose, over educational institutions offering online degree
programs in a state but that otherwise have no physical location or other
presence in that state. The final rules include a provision that requires online
providers to meet any such state requirements and, thus, the Department of
Education would seem to have authority, in addition to that of the states, to
enforce applicable state law requirements. It is unclear how this rule will be
enforced and what impact it will have on us. In addition to Arizona, we have
determined that our activities in certain states constitute a presence requiring
licensure or authorization under the requirements of the state education agency
in those states, which we have obtained, while in other states we have
determined that we are exempt under applicable state law from licensure or
authorization requirements due to our regional accreditation or for other
reasons. In still other states, we have obtained approvals to operate as we have
determined necessary in connection with our marketing and recruiting activities.
Although we have a process for evaluating the compliance of our online
educational programs with state requirements regarding distance and
correspondence learning, and have experienced no significant restrictions on our
educational activities to date as a result of such requirements, state
regulatory requirements for online education vary among the states, are not well
developed in many states, are imprecise or unclear in some states and are
subject to change. Moreover, it is also unclear whether and to what extent state
agencies may augment or change their regulations in this area as a result of
these new Department of Education regulations and increased scrutiny. If we fail
to comply with licensing or authorization requirements for a particular state,
or fail to obtain licenses or authorizations when required, we could lose our
licensure or authorization from that state or be subject to other sanctions,
including restrictions on our activities in that state, and fines and penalties,
including Department of Education sanctions. 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.
Approval of new programs. The final rules include provisions regarding the
approval of new programs. Although the final rules relaxed the program approval
standard originally proposed, the rules still impose various new requirements
on, and could adversely affect, our ability to add new academic programs. In
addition, the Department of Education has published no definite standards by
which schools can determine the likelihood that any program will be approved. As
such, we believe this rule adds uncertainty regarding new program approval,
which could adversely affect our ability to respond to emerging employment
trends and add programs that are responsive to those trends, which in turn could
decrease our attractiveness to certain students. In addition, a lack of
certainty could increase the risk of future federal False Claims Act qui tam
lawsuits in which private plaintiffs assert that students improperly received
Title IV aid while attending a program that has not been approved.
Additional final rules. In addition to the program integrity issues specifically
addressed above, the final rules include provisions regarding the definition of
a credit hour; written agreements between institutions, particularly
institutions under common ownership or control; the administration of
ability-to-benefit examinations; requirements regarding an institution's return
of Title IV program funds; and certain other issues pertaining to a student's
eligibility to receive Title IV program funds. We are in the process of
reviewing all of the final rules. We cannot predict how the recently released or
any other resulting regulations will be interpreted, and therefore whether we
will be able to comply with these requirements by the effective date.
Insufficient time, or lack of sufficient guidance, for compliance with the final
rules, could have a material adverse effect on our business. Uncertainty
surrounding the application of the final rules, interpretive regulations, and
guidance from Department of Education may continue for some period of time and
could reduce our enrollment, increase our cost of doing business, and have a
material adverse effect on our business, financial condition, results of
operations and cash flows.
Pending gainful employment rule. 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. The proposed definition of gainful employment in the July 26,
2010 NPRM described above would take into consideration whether former students
are repaying their federal student loans and the relationship between total
student loan debt and average earnings after completing a postsecondary program.
As proposed in the NPRM, individual educational programs would be divided into
three groups based on the proposed metrics:
• Programs with at least 45% of their former students paying down the
principal on their federal loans, or with graduates having a
debt-to-earnings ratio of less than 20% of discretionary income or 8%
of total income, would be deemed fully eligible for Title IV funding.
These programs would be required to disclose both their repayment rates
and debt-to-earnings ratios unless they pass both of the preceding
tests.
• Programs with less than 35% of their former students paying down the principal on their federal loans, and with graduates having a debt-to-earnings ratio above 30% of discretionary income and 12% of total income, would be deemed ineligible for Title IV funding. Such programs would have lost Title IV eligibility as of July 1, 2012, although institutions would have been required to warn students in the programs about the high debt-to-earnings ratio effective July 1, 2011. In order to mitigate against large and immediate displacements of students as of the July 1, 2012 deadline, the Department of Education further proposed that no more than 5% of a single institution's programs would be declared ineligible as of that date, with the lowest-performing programs immediately losing eligibility and the remaining non-compliant programs losing eligibility one year later.
• Programs that are not fully eligible or ineligible under the above standards would be restricted programs and subject to limits on enrollment growth. Such institutions also would be required to demonstrate employer support for the program and warn consumers and current students of high debt levels.
Due to the unprecedented volume of comments received to the gainful employment
NPRM, on September 24, 2010, the Department of Education announced that it would
delay issuing final rules regarding the gainful employment standard until early
2011 in order to give interested parties more time to clarify their comments and
respond to questions from Department of Education officials.
While there remain many open questions and interpretive issues with respect to
this gainful employment NPRM, including when it will go into effect and
questions as to the availability of, and the ability of education companies to
obtain, the information needed to calculate the applicable metrics, if this
regulation is adopted in a form similar to the Department of Education's
proposal in the NPRM, it could render some of our programs ineligible for Title
IV funding if we do not meet the test to be considered "fully eligible." In
addition, the continuing eligibility of our educational programs for Title IV
funding would be at risk due to factors beyond our control, such as changes in
the income level of persons employed in specific occupations or sectors,
increases in interest rates, changes in student mix to persons requiring higher
amounts of student loans to complete their programs, changes in student loan
delinquency rates and other factors. If a particular program ceased to be
eligible for Title IV funding, in most cases it would not be practical to
continue offering that course under our current business model. Regulations in
the form proposed in the NPRM could result in a significant realignment of the
types of educational programs that are offered by us and by proprietary
institutions in general, in order to comply with the rules or to avoid the
uncertainty associated with compliance over time. Furthermore, we may be
required for certain programs to warn consumers and current students of high
debt levels and provide the most recent debt measures for the program. Such
changes in our business practices could reduce our enrollment, perhaps
materially, which could have a material adverse effect on our business,
prospects, financial condition and results of operations and could adversely
affect our stock price.
Department of Education Program Review. In connection with its administration of
the Title IV federal student financial aid programs, the Department of Education
periodically conducts program reviews at selected schools that receive Title IV
funds. In July 2010, the Department of Education initiated a program review of
Grand Canyon University covering the 2008-2009 and 2009-2010 award years. As
part of this program review, a Department of Education program review team
conducted a site visit on our campus and reviewed, and in some cases requested
further information regarding, our records, practices and policies relating to,
among other things, financial aid, enrollment, enrollment counselor
compensation, program eligibility and other Title IV compliance matters. Upon
the conclusion of the site visit, we were informed by the program review team
that it would (i) conduct further review of our documents and records offsite,
(ii) upon completion of such review, schedule a formal exit interview to be
followed by a preliminary program review report in which any preliminary
findings of non-compliance would be presented, and (iii) conclude the review by
issuance of a final determination letter. The program review team has not yet
scheduled a formal exit interview with us. Accordingly, at this point, the
program review remains open and we intend to continue to cooperate with the
review team until the program review is completed.
While we have not yet received notification of the timing of our exit interview
or the Department of Education's preliminary program review report or final
determination letter, as a result of concerns first raised by a member of the
program review team at the conclusion of the site visit and subsequently stated
in an affidavit by such member filed in connection with the August 13, 2010
hearing in our qui tam case, we became aware that the program review team had
two preliminary findings of concern. The first issue is whether a compensation
policy in use during part of the period under review improperly rewarded some
enrollment counselors based on success in enrolling students in violation of
applicable law. As we have previously disclosed in the context of our
now-settled qui tam action, while we believe that our compensation policies and
practices are not based on success in enrolling students in violation of
applicable law, the Department of Education's regulations and interpretations of
the incentive compensation law do not establish clear criteria for compliance in
all circumstances and some of our practices in prior years were not within the
scope of any specific "safe harbor" provided in the compensation regulations.
The second issue is whether, during the award years under review, certain
programs offered within our College of Liberal Arts provided students with
training to prepare them for gainful employment in a recognized occupation. This
"gainful employment" standard has been a requirement for Title IV eligibility
for programs offered at proprietary institutions of higher education such as
Grand Canyon University although pursuant to legislation passed in 2008 and
effective as of July 1, 2010, this requirement no longer applies to designated
liberal arts programs offered by us and certain other institutions that have
held accreditation by a regional accrediting agency since a date on or before
October 1, 2007 (we have held a regional accreditation since 1968). Subsequent
to the filing of the affidavit by the program review team member expressing this
preliminary finding, the program review team submitted a written request to us
in which the program review team stated the view that, prior to July 1, 2010,
traditional liberal arts programs were not considered as being eligible under
Title IV but then requested additional information from us that would help the
Department of Education determine whether the programs offered within our
College of Liberal Arts were eligible under Title IV because they did provide
training to prepare students for gainful employment in a recognized occupation.
While we were not informed as to which specific programs offered within our
College of Liberal Arts the program review team believes may be ineligible, in
August 2010 we provided the Department of Education with the requested
information which we believe demonstrates that the programs offered within our
College of Liberal Arts met this requirement. We have received no further
communications from the Department of Education regarding the program review.
Our policies and procedures are planned and implemented to comply with the
applicable standards and regulations under Title IV. If and to the extent the
Department of Education's final determination letter identifies any compliance
issues, we are committed to resolving such issues and ensuring that Grand Canyon
University operates in compliance with all Department of Education requirements.
Program reviews may remain unresolved for months or years with little or no
communication from the Department of Education, and may involve multiple
exchanges of information following the site visit. We cannot presently predict
whether or if further information requests will be made, when the exit interview
will take place, when the preliminary program review report or final
determination letter will be issued, or when the program review will be closed.
If the Department of Education were to make significant findings of
non-compliance in the final program review determination letter, including any
finding related to the two issues discussed above, then, after exhausting any
administrative appeals available to us, we could be required to pay a fine,
return Title IV monies previously received, or be subjected to other
administrative sanctions, any of which outcomes could damage our reputation in
the industry and have a material adverse effect on our business, results of
operations, cash flows and financial position.
Congressional Hearings. During 2010 and since, there has been increased focus by
Congress on the role that for-profit educational institutions play in higher
education. Each of the Congressional education committees held one or more
hearings examining various aspects of the proprietary education industry,
including the manner in which accrediting agencies review higher education
institutions' policies on credit hours and program length, student recruitment
practices, and the debt levels incurred by, and drop-out rates of, students
attending for-profit colleges. In addition, at the request of the Chairmen of
each of these committees, the Government Accountability Office ("GAO") conducted
reviews and prepared reports with recommendations regarding various aspects of
the proprietary sector, including recruitment practices, educational quality,
student outcomes, the sufficiency of integrity safeguards against waste, fraud
and abuse in federal student aid programs and the degree to which proprietary
institutions' revenue is composed of Title IV and other federal funding sources.
Finally, in August 2010, the Health, Education, Labor and Pensions ("HELP")
Committee of the U.S. Senate sent requests to approximately 30 for-profit
. . .
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