Overview
Capella Education Company (Capella or the Company) is an education services company that provides the most direct path between learning and employment through our online postsecondary education offerings and through programs to develop job-ready skills for high-demand markets. As of
December 31, 2017
, our wholly owned subsidiaries included the following:
Post-Secondary Segment
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Capella University (the University) offers a variety of doctoral, master’s and bachelor’s programs, primarily for working adults, in the following markets: public service leadership; nursing and health sciences; psychology; business and technology; counseling and human services; and education. We focus on master's and doctoral degrees, with
71%
of our learners enrolled in a master’s or doctoral degree program. Our academic offerings are built with competency-based curricula and designed to demonstrate competencies through real-world, authentic assessments delivered in an online format that is both convenient and flexible. We design our offerings to help working adult learners develop specific competencies they can employ in their workplace. We actively support and engage with our learners throughout their programs to enhance their prospects for successful program completion. We believe the relevance of our programs, combined with a focus on working adult professionals and offering the most direct path to learners' professional and academic goals, sets Capella University apart in the education space. At
December 31, 2017
, we offered over
2,050
online courses and
54
academic programs with
155
specializations
to nearly
38,000
learners.
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Sophia Learning, LLC (Sophia) is an innovative learning company which leverages technology to support self-paced learning, including courses eligible for transfer into credit at over 2,000 colleges and universities.
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Job-Ready Skills Segment
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Capella Learning Solutions, LLC (CLS) provides online, non-degree training solutions and services to individuals and corporate partners focused on the delivery of job-ready skills in high-demand employment areas, primarily through RightSkill. RightSkill provides job seekers with unique learning experiences that prepare them for in-demand careers while partnering with employers who are looking for verified, job-ready candidates.
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Hackbright Academy, Inc. (Hackbright) is a leading software engineering school for women with a mission to close the gender gap in the high-demand software engineering space. Hackbright’s primary offering is an intensive 12-week accelerated software development program for women, together with placement services and coaching. This program is a live, in-person educational experience held in Hackbright’s San Francisco classroom. Hackbright partners with employers to facilitate alumnae transition from program completion into the workplace.
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DevMountain, LLC (DevMountain) is a leading software development school with a mission to be the most impactful coding school in the country by offering affordable, high-quality, leading-edge software coding education. DevMountain primarily offers Web Development, iOS Development, and UX Design programs in a 12- week immersive experience. Learners engage in DevMountain courses in-person, at DevMountain’s classrooms in Provo and Salt Lake City, Utah, Dallas, Texas, and Phoenix, Arizona. In 2017, DevMountain introduced its first online program in Web Development.
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On February 8, 2016, the Company’s Board of Directors approved a plan to divest our wholly owned subsidiary, Arden University Limited (Arden University). On August 18, 2016, the Company completed the sale of 100% of the share capital of Arden University. Beginning in the first quarter of 2016 and through the date of sale of the business, the assets and liabilities of Arden University were considered to be held for sale, and the Company presented Arden University as discontinued operations within the financial statements and footnotes.
On October 29, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Strayer Education, Inc. (“Strayer”) to combine in an all-stock merger of equals transaction, creating a national leader in education innovation. Strayer will be the remaining corporate entity, to be renamed Strategic Education, Inc. upon the closing of the Merger, which is expected to close in the third quarter of 2018. Strayer University and Capella University will continue to operate as independent and separately accredited institutions.
We believe we have the right operating strategies in place to provide the most direct path between learning and employment for our learners. We focus on innovation to continually differentiate ourselves in our markets and drive growth by supporting learner success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of our learners' professional needs, and establishing new growth platforms. Technology and the talent of our faculty
and employees enable these strategies. We believe these strategies and enablers will allow us to continue to deliver high quality,
affordable education, resulting in continued growth over the long-term. We will continue to invest in these enablers to strengthen the foundation and future of our business.
Our History
We were founded in 1991 as a Minnesota corporation. In 1993, we established our wholly owned Capella University subsidiary, then named The Graduate School of America, to offer doctoral and master’s degrees through distance learning programs in management, education, human services and interdisciplinary studies. In 1995, we launched our online format for delivery of our doctoral and master’s degree programs over the Internet. Through our early entry into online education, we gained extensive experience in the delivery of effective online programs. In 1997, our university subsidiary received accreditation from the North Central Association of Colleges and Schools (later renamed The Higher Learning Commission, or HLC). In 1998, we expanded our original portfolio of academic programs by introducing doctoral and master’s degrees in psychology and a master of business administration degree. In 1999, to expand the reach of our brand in anticipation of moving into the bachelor’s degree market, we changed our name to Capella Education Company and the name of our university to Capella University. In 2000, we introduced our bachelor’s degree completion program in information technology, which provided instruction for the last two years of a four-year bachelor’s degree. In 2004, we expanded our addressable market through the introduction of our four-year bachelor’s degree programs in business and information technology. In November 2006, we completed an initial public offering of our common stock and in May 2007, we completed a follow-on offering of our common stock.
Over the past several years, we introduced numerous new programs and specializations across all of our post-secondary education markets, including the launch of doctoral, master’s and bachelor’s level programs. In 2010, we formed a joint venture with Sophia, an online social teaching and learning platform, in which we were the majority owner. On April 16, 2012, we acquired the remaining interest in Sophia and it became a wholly owned subsidiary. In 2011, we acquired Arden University, an independent provider of distance learning. In 2013, the Company introduced the first set of offerings of CLS, which consisted of online training solutions and services to corporate partners. Also in 2013, the Company began offering its FlexPath direct assessment degree delivery program, which was the first direct assessment program to be approved by the Higher Learning Commission and the Department of Education for Title IV eligibility at the Bachelor's and Master's level in the U.S. In 2014, the Department of Education approved the Company's use of non-term based FlexPath offerings for Title IV eligibility. In January 2015, Capella University launched a new School of Nursing and Health Sciences, further demonstrating the Company's commitment to providing competency-based education in nursing and health care.
In our Job-Ready Skills segment, CLS began to expand its offerings to include non-degree, high-demand, job-ready training solutions and services to individuals and corporate partners in late 2015. In April 2016, the Company acquired Hackbright Academy, Inc., a software engineering school for women headquartered in San Francisco, and in May 2016, the Company acquired DevMountain, LLC, a coding school based in Provo, Utah. In August 2016, the Company completed the divestiture of Arden University. Refer to Footnote 4 -
Discontinued Operations
, and Footnote 15 -
Acquisitions,
for additional information pertaining to the divestiture of Arden University and the acquisitions of Hackbright and DevMountain. In December 2016, we launched a name for our traditional credit hour learning format - GuidedPath. Naming our original online format articulates Capella University’s differentiation, highlights differences between our credit hour and FlexPath offerings, and reduces complexity within prospects’ and learners’ experience, which will help us continue to grow both our GuidedPath and FlexPath programs.
On October 29, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Strayer Education, Inc. (“Strayer”) and Sarg Sub Inc. (“Merger Sub”). Strayer is the holding company of Strayer University, which is an institute of higher learning which offers undergraduate and graduate degree programs in business administration, accounting, information technology, health care and nursing, and public administration. Pursuant to the terms of the Merger Agreement, which has been unanimously approved by the boards of directors of both companies, Merger Sub will merge with and into the Company with the Company surviving as a wholly-owned subsidiary of Strayer (the “Merger”). At the effective time of the Merger, each share of the Company’s stock will be exchanged for 0.875 shares of Strayer common stock. On November 9, 2017, each of the Company and Strayer filed a Pre-Merger Notification and Report Form pursuant to the Hart-Scott-Rodino Act with the Antitrust Division of the Department of Justice and the Federal Trade Commission, and on November 22, 2017, the Federal Trade Commission granted early termination, effective immediately, of the applicable waiting period under the Hart-Scott-Rodino Act. On January 19, 2018, the Merger agreement was approved by the stockholders of the Company and
Strayer. The proposed Merger remains subject to the satisfaction of customary closing conditions, including approvals by State regulators, and relevant accreditation bodies. By letter dated February 26, 2018, the Department of Education issued the results of its preacquisition review of the proposed change in ownership of the Company. That letter confirms that, subject to submission of additional documents following the closing, Capella University will have uninterrupted participation in the Title IV Programs while the Department of Education completes its review of the relevant documentation. The Company continues to expect that the Merger will close in the third quarter of 2018. Following the completion of the Merger, Strategic Education, Inc. will be the corporate entity under which both Capella University and Strayer University will continue to operate as independent and separately accredited institutions. The Merger Agreement provides for certain termination rights for both the Company and Strayer. In the event that the Company terminates the Merger Agreement under certain specified circumstances, the Company would be required to pay Strayer a termination fee in the amount of
$25.0 million
, and in the event that Strayer terminates the Merger Agreement under certain specified circumstances, Strayer would be required to pay the Company a termination fee in the amount of
$25.0 million
.
A detailed description of the Merger and the Merger Agreement can be found in the joint proxy statement/prospectus filed with the SEC by the Company on December 8, 2017.
Segments
The primary driver of our performance today remains Capella University within the Post-Secondary segment. We expanded our Job-Ready Skills offerings in 2016 with the acquisitions of Hackbright and DevMountain and the introduction of our RightSkill partnership with CareerBuilder. The Job-Ready Skills segment is currently a relatively small portion of our overall portfolio. Our goal is to develop a leadership position in equipping the 21
st
century workforce with job-ready skills that employers of today are expecting from their employees.
We are focused on executing our strategy of providing the most direct path between learning and employment across our portfolio. The most direct path means there is no wasted time, effort or money in obtaining a post-secondary degree or job-ready 21
st
century skill that are in high demand by employers. We believe our most direct path innovations will position us to drive growth by expanding our addressable market, creating new sources of revenue, and better positioning us to deliver differentiated value to both consumers and employers.
Refer to Footnote 19 -
Segment Reporting
- within the footnotes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for revenue and operating income (loss) information by reportable segment for each of the years ended
December 31, 2017
,
2016
, and
2015
.
Given the Company’s relatively recent entry into the Job-Ready Skills market, the extended business discussion which follows focuses primarily upon the Post-Secondary education market.
Market
The U.S. market for postsecondary education is large and highly fragmented. According to the National Center for Education Statistics (NCES) Digest of Education Statistics, released in December 2016, the total number of postsecondary learners enrolled as of the fall of 2015 was 20.0 million, reflecting a 5 percent decrease from record enrollment in the fall of 2010. Postsecondary enrollment between 2016 and 2026 is expected to grow by an estimated 12 percent. We believe the forecasted growth in postsecondary enrollment is a result of many factors including the significant and measurable personal income premium that is attributable to postsecondary education, and an increase in demand by employers for professional and highly skilled workers.
According to the U.S. Census Bureau’s 2015 American Community Survey five-year estimates, 62.2% of adults (persons 25 years of age or older) do not possess a postsecondary degree. Of the 20.0 million postsecondary learners enrolled as of the fall of 2015, the NCES estimated that 8.1 million were adults, representing approximately 41% of total enrollment. We expect adults will continue to represent a large segment of the postsecondary education market as they seek additional education to secure better jobs, or to remain competitive or advance in their current or prospective careers.
In 2017, Eduventures, Inc., an education consulting and research firm, published a report projecting moderate growth in online enrollment over the next few years with accelerated growth starting in 2020. Growth is driven by increased adult participation in higher education and the overall economy.
We believe the addressable market for job-ready skills is significant, since millions of people employed in the U.S. will need upskilling at some time in the future to keep up with our 21st-century economy. For example, the U.S. Bureau of Labor Statistics estimates that 1.2 million positions in computing will exist by the year 2022.
Competition
The postsecondary education market is highly competitive, with no private or public institution holding a significant market share. We compete primarily with public and private degree-granting regionally accredited colleges and universities. Our competitors include both traditional and proprietary colleges and universities offering online programs, such as Ashford University, Colorado Technical University, Grand Canyon University, Kaplan University, Liberty University, Southern New Hampshire University, Strayer University, University of Phoenix, Walden University, and Western Governors University. Traditional colleges and universities increasingly offer a variety of distance education alternatives to professional adults. Competition from traditional colleges and universities is expected to increase as they expand their online offerings.
We believe that the competitive factors in the postsecondary education market primarily include the following:
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Relevant, high-quality and accredited program offerings;
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Reputation of the college or university and marketability of the degree;
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Flexible, convenient, and dependable access to programs and courses;
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Qualified and experienced faculty;
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Level of learner support;
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Affordability of the program;
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Availability of Title IV funds;
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Marketing and recruiting effectiveness; and
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The time necessary to earn a degree.
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Our Competitive Strengths
Our commitment to academic quality is a tenet of our culture, and we believe a competitive strength across our portfolio. In addition, we challenge ourselves to innovate and explore opportunities that leverage our brand reputation, educational capabilities, and analytics expertise to increase affordability, speed to competency, flexibility, and alignment with employer needs, leading to stronger demand potential and long-term growth opportunities.
The following discussion of competitive strengths is focused on Capella University since this is the largest portion of our business today. We believe Capella University’s competitive strengths are as follows:
Commitment to Academic Quality and Compliance.
We are committed to providing our learners with a rewarding and challenging academic experience. Our commitment to academic quality is a tenet of our culture, and we believe that quality is an important consideration to learners who choose Capella University. Having originated as an institution exclusively focused on graduate education, we have historically promoted an educational experience based on high academic standards. We have continued to apply this approach as we have expanded both our graduate and undergraduate programs. Today, we believe that our commitment to academic quality is reflected in our curricula and assessment model, faculty, learner support services and academic oversight processes. The impact of this commitment is evidenced by the satisfaction of our learners both during their educational experience and their career success following graduation. Results from national surveys, such as the Priorities Survey for Online Learners, show that Capella University learners have higher levels of overall learner satisfaction relative to learners in online programs at other institutions.
Consistent with our approach to academic quality, Capella University is committed to complying with all applicable local, state and federal requirements. The Company continually monitors Department of Education guidance, invests in regular staff training and, performs periodic reviews of policies and procedures to maintain compliance with federal regulations. In addition, the Company's Risk Advisory and Assurance team performs regular process testing, and a cross-organizational Compliance Committee chaired by our General Counsel promotes an organizational culture committed to integrity, ethical conduct and compliance. Capella’s commitment to regulatory compliance is evident through the results of our internal compliance testing as well as our annual Federal Student Aid compliance audit performed by an independent external auditor.
Deep Competency-Based Education Infrastructure.
Capella University's academic programs have been distinctively designed for online delivery. For more than 10 years, we have integrated and continually invested in a competency-based learning
approach throughout our university. As a result, we are able to map our curriculum to external academic and professional standards for all of our degree programs and more fully support students as they progress through their program. Competency-based learning is comprised of three main elements:
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Professionally-aligned curriculum designed around measurable skills, knowledge, and abilities needed to be successful in a career;
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Faculty scholar-practitioners who are experienced leaders in their field, have a deep understanding of foundational theory, and the ability to transform such theory into practice to meet the needs of the profession; and
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Real-world assessments that authentically measure the learner's proficiency in the demonstration of competencies.
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Every assessment associated with Capella University’s courses is meaningful and purposeful because the assessments focus on competencies aligned to external academic and professional standards. Learning activities are designed to give learners the relevant information and practice they need to develop the capabilities they can use immediately in their career.
Our competency-based curriculum and course design offers flexibility while promoting a high level of interaction with other learners and faculty members. Complementing the curriculum and course design is a comprehensive infrastructure that enables extensive predictive and actionable analytics capabilities. These analytics are leveraged to develop and implement learner success, course, curriculum, and process improvements as well as to develop new learning models. Such improved learning models include our FlexPath option, which offers the potential to significantly reduce the cost of a degree, accelerate the time required for degree completion, and better align learning to the needs of employers and society. Traditional degree programs, such as our GuidedPath programs, are constructed around credit hours that set a specific schedule to complete the coursework. In the FlexPath model, learners’ demonstration of competencies are directly assessed by faculty when the learner submits an assessment. FlexPath learners set their own deadlines, demonstrate competencies via authentic assessment, and move through courses at their own speed, giving them an opportunity to accelerate or slow down to meet their learning needs and schedule demands.
Extensive Learner Support Services.
We are committed to providing high quality, responsive and convenient learner support services. Capella University support services include: academic services, such as advising, writing, tutoring and research support; administrative services, such as online class registration and transcript requests; library services; financial aid counseling; and career counseling. Increasingly, we are leveraging analytics to create processes to proactively reach out to learners and to create personalized experiences. Our effective use of analytics capabilities is reflected in our early cohort persistence improvements and continued high learner satisfaction.
Focus on Innovation.
The education market is undergoing significant changes to address national challenges including the affordability of higher education and meeting the skill requirements of employers. Capella's focus on regulatory compliance, our reputation as a quality institution, extensive information technology infrastructure and analytics capabilities, and a culture of helping our learners to succeed has uniquely positioned Capella for innovation. The introduction of our numerous FlexPath offerings demonstrates our ability and desire to innovate. Our goal is to continue to invest in developing new academic and business models and processes to drive excellence in executing our strategies to drive long-term sustainable growth and meet today’s educational challenges.
Our Operating Strategy
Our operating strategy is based on helping our learners succeed, which we believe will drive our financial results. To that end, we are pursuing the following operating strategies:
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Focusing on learner success, including improving retention rates while maintaining high standards of academic quality and rigor;
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Maintaining and improving upon our ability to offer affordable degrees, where learners receive a high return on their investment;
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Expanding and optimizing our relationship-based marketing efforts and increasingly personalizing the prospective learner experience;
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Further strengthening and expanding our product offering and the alignment of our offering with employer needs; and
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Driving consumer adoption of new growth platforms such as FlexPath, RightSkill and our other Job-Ready Skills program offerings.
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We are focused on the following operational priorities to deliver these strategies:
Competency-Based Curriculum and Authentic Assessment.
Across our portfolio, we continue to refine and implement best practices for teaching and learning models and focus on learner success to improve completion rates and align the curriculum to employers' needs to drive career success. Our goal is to further strengthen our position as a recognized leader in high quality learning.
We are committed to delivering a superior academic, professionally aligned, real-world education to our learners. Capella University’s competency-based curriculum is designed for busy, experienced professionals who want to gain the relevant competencies to help advance their career. We seek to develop a deep understanding of the professions we serve and the competencies required of skilled professionals in these fields. This commitment guides the development of our competency based curricula, the recruitment of our faculty and staff, and the design of our support services. We continue to advance tools that provide learners, faculty, and staff with timely information and actionable interventions to improve learning outcomes. We use the results of internal assessments to develop an understanding of the specific needs and readiness of each individual learner at the start of a program. Through our competency-based curricula and transparent measurement of competency demonstrations through authentic assessment - that is, assessments which are real-world deliverables that blend professional and academic competencies and easily transfer to the workplace, we provide our learners the most direct path to a degree that signifies they have mastered the skills and knowledge needed to be successful in their careers.
Learner Success.
We look for opportunities to improve our learners' educational experience and increase the likelihood of learners successfully completing their programs. Capella University learners tend to be working professionals with an average age of
39
. Additionally, 71% of Capella University learners are pursuing graduate degrees to fulfill a strong desire to be at the forefront of their profession. Our programs surround these learners with a supportive, flexible, and engaging environment to help them achieve academic success. To foster that environment, we maintain a comprehensive focus on improving early cohort persistence, a personalized on-boarding experience for new learners, simplified administrative interactions, and continuous improvements in the quality and frequency of interaction between our learners and our faculty.
We believe our superior online experience and competency-based curriculum differentiates Capella University and provides the most direct path to goal achievement and professional credibility, enhancing learner satisfaction. We believe this approach will contribute to higher levels of engagement, persistence, brand advocacy and referrals. Additionally, we are building a long-term roadmap to maintain our ability to offer affordable degrees that lead to a compelling return on the learner’s investment and will ensure the Capella University brand remains competitively positioned. The effectiveness of our learner success initiatives is evidenced by the fact that, according to a 2016 Gallup research study, Capella University alumni are more likely to agree or strongly agree that Capella University was the perfect school for people like them at every degree level compared to the national benchmark. Effectiveness of learner success is further evidenced by the fact that Capella University has experienced improvements in early cohort persistence of 21 percent over a period of approximately five years. Early cohort persistence measures the four-quarter weighted moving average new cohort persistence rate calculated from a learner's first quarter through the start of their fourth quarter of enrollment.
Relationship-Based Marketing.
We continue to focus on building our brands and establishing our strong differentiation as a provider of high quality and professionally aligned educational offerings, both as an innovative online university and a leading provider of job-ready skills for the 21
st
century workforce. At Capella University, we continue to expand on this differentiation through a variety of initiatives, including creating brand recognition, optimizing marketing efforts, interacting with prospective learners earlier in the decision process, the use of analytics, and expanding strategic employer relationships. We will continue to leverage our data rich environment and analytical capabilities to drive greater marketing efficiencies, higher quality inquiries and improved conversion rates from prospective new learners. Our marketing strategy is designed to attain greater strategic control over our new enrollment growth and strengthen engagement with prospective as well and current learners and alumni, who can act as advocates for Capella University.
Innovation and Diversification.
We seek to expand the addressable market by investing in innovation, learner success, academic infrastructure, and new business models. Our expansion in the Job-Ready Skills segment with new product offerings through CLS, Hackbright, and DevMountain demonstrate our ability to diversify and adapt to serve the needs of learners and employers in new markets, with new content, and across multiple delivery platforms. Yet our efforts to innovate and diversify are not restricted to the Job-Ready Skills segment. Across both the Post-Secondary and Job-Ready Skills segments, we also seek to drive growth through a multifaceted strategy of enhancing existing program offerings and developing new and innovative programs.
At Capella University, our market and product teams focus on certain vertical markets as we strive to enhance our existing program offerings by continuously improving course design and technology, and obtaining specialized accreditation and
additional state approval of programs leading to professional licensure and select endorsements. Within our current target markets, we seek to expand our program offerings. We challenge ourselves to innovate and explore opportunities that leverage our existing Capella University competency-based infrastructure, analytics, expertise, brand reputation, and educational capabilities to increase affordability, speed to competency, flexibility, and alignment with employer needs, leading to stronger demand potential and long-term growth opportunities. Through our focus on innovation we have developed new technologies, new learning and business models, and are entering new markets, which are essential ingredients for long-term growth.
In 2013, Capella University offered its first courses in its Bachelor of Science and Masters programs under the FlexPath model, a direct assessment degree delivery offering. Under the FlexPath model, degree offerings are constructed around the direct assessment of demonstrated competencies and the application of learning. FlexPath is a self-paced model without pre-set deadlines where learners can move quickly through more familiar areas of study and more slowly through areas they are less familiar with as they grasp new concepts and skills.
FlexPath offerings have continued to grow, and as of
December 31, 2017
, Capella University offered the following FlexPath offerings:
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Bachelor of Science in Business;
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Bachelor of Science in Information Technology;
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Bachelor of Science in Psychology;
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Registered Nurse to Bachelor of Science in Nursing;
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Master of Business Administration;
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Master of Science in Psychology;
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Master of Health Administration; and
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Master of Science in Nursing.
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All of the specializations within these FlexPath offerings have received approval from the Higher Learning Commission. Additionally, all of the specializations within our FlexPath offerings (other than three specializations) have received approval from the Department of Education to be eligible to receive federal financial aid under Title IV.
The FlexPath direct assessment model provides the Company with the opportunity to expand its served market and drive affordability through an opportunity for lower tuition costs, reduced time to completion, and increased flexibility. The Company's goals are to ensure learners have the right experience and that it is understood what learners need to do in order to be successful. As Capella University continues to learn and gain experience, it will refine the academic model and evolve the business model for FlexPath. At
December 31, 2017
, approximately 20 percent of Capella University bachelor's and master's learners were enrolled in FlexPath programs.
Employees
As of
December 31, 2017
, the Company, through its wholly owned subsidiaries, employed
2,954
employees.
Capella University
Capella University is accredited by the Higher Learning Commission. The Higher Learning Commission is one of six regional accrediting agencies recognized by the Secretary of the Department of Education as a reliable indicator of educational quality. Accreditation by a recognized accrediting agency is required for an institution to become and remain eligible to participate in Title IV programs.
Our Approach to Academic Quality
We believe the following critical elements promote a high level of academic quality at Capella University:
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Curricula.
We design the curricula for our programs around professional competencies desired for high performance in each field and at the appropriate degree level. The particular competencies are identified and validated through a variety of external sources and reviews. There are specific expected learning outcomes for each
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program and course-level competencies that align to those outcomes. We assess the learner’s achievement of the expected learning outcomes and course competencies during his or her period of enrollment.
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Faculty.
We select our faculty based on their academic credentials as well as their teaching and practitioner experience. Our faculty members tend to be practitioners as well as scholars, bringing relevant, practical experience from their professional careers into the courseroom. As of
December 31, 2017
, approximately
88%
of our faculty members have a doctoral degree. We invest in the professional development of our faculty members through required training in online teaching techniques as well as events and discussions designed to foster sharing of best practices and a commitment to academic quality. We also communicate clear expectations regarding the quality of faculty and learner interactions, and monitor achievement of those expectations.
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Online course design.
We employ a comprehensive design framework to ensure that our online courses offer consistent learning experiences, high quality interactions, and the tools required for assessing learning outcomes. We regularly assess data related to course outcomes as well as learner assessments to identify opportunities for course enhancements and upgrades.
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Learner support.
We establish teams comprised of both academic and administrative personnel in areas including advising, academic support, financial aid counseling and administration, library and career counseling services to serve as important points of contact to learners throughout the duration of their studies. Most of our support services are accessible online, allowing users to access these services at a time and in a manner that is convenient for them. We believe that a strong and reliable support network is as important to maintaining learner motivation and commitment as the knowledge and engagement of our faculty.
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In addition to these traditional components of academic quality, our teaching approach and the online format of our programs offer several features that enrich the learning experience for our primarily professional adult learners:
Low learner to faculty ratio.
Our GuidedPath credit bearing courses average about
16
learners per course, providing each learner the opportunity to interact directly with our faculty and to receive individualized feedback and attention. As a result of this low ratio, our instructors are better enabled to evaluate each learners' competency demonstration and provide rich feedback for improvement, which strengthens the academic quality of our programs.
Diverse learner population.
Our online format allows us to focus on adult learners as well as to attract a diverse population of learners with a variety of professional backgrounds and life experiences.
Practitioner-oriented course experience.
Our courses are designed to encourage learners to incorporate workplace issues or projects into their studies. This approach provides relevant context to many of the academic theories covered by our curricula, and allows learners to immediately apply value to their current career or profession.
Time efficiency.
While many campus-based learners are required to spend time commuting, parking, or otherwise navigating a large campus, our online learning format enables our learners to focus their time on course assignments and discussions. In addition, we design our programs and courses to achieve the most efficient time to completion. Our FlexPath option further optimizes the potential for efficiency with its self-paced design and elimination of pre-determined learning activities. This allows learners to prepare, submit and complete their assessments when they are ready, rather than on the course’s schedule. The FlexPath approach enables learners to quicken or slow their pace as they see fit.
Residency experience.
Our residency programs, required for doctoral and certain master’s learners pursuing professional licensure, provide the opportunity to engage in face-to-face interaction with other learners and faculty. This interaction creates a rich learning experience with relevant content to help prepare our learners for particular stages of their academic program. In addition, we offer residency to our psychology and counseling learners as a key component of their required learning experience.
Capella University Curricula
Our program offerings cover six markets: public service leadership; nursing and health sciences; psychology; business and technology; counseling and human services; and education. At
December 31, 2017
, Capella University offered
54
academic programs with
155
specializations within these markets:
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Public Service Leadership
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Doctor of Philosophy in Criminal Justice
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Master of Public Administration (MPA)
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Doctor of Philosophy in Emergency Management
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General Public Administration
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Doctor of Emergency Management (DEM)
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Nonprofit Management and Leadership
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Doctor of Public Administration (DPA)
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Public Policy and Governance
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General Public Administration
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Master of Social Work (MSW)
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Doctor of Social Work (DSW)
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Master of Social Work - Advanced Standing
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Master of Science in Criminal Justice
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Bachelor of Science (BS) in Criminal Justice
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Master of Science in Emergency Management
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Nursing and Health Sciences
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Doctor of Health Administration (DHA)
|
|
Master of Science in Nursing (MSN)
|
|
General Health Administration
|
|
|
Care Coordination (FlexPath option available)
|
|
Health Care Leadership
|
|
|
Diabetes Nursing
|
|
Health Care Quality & Analytics
|
|
|
Nursing Education (FlexPath option available)
|
|
Health Policy and Advocacy
|
|
|
Nursing Informatics (FlexPath option available)
|
Doctor of Public Health (DrPH)
|
|
|
Nursing Leadership and Administration (FlexPath option available)
|
Doctor of Nursing Practice (DNP)
|
|
|
RN-to-MSN Care Coordination (FlexPath option available)
|
Master of Health Administration (MHA)
|
|
|
RN-to-MSN Diabetes Nursing
|
|
General Health Administration (FlexPath option available)
|
|
|
RN-to-MSN Nursing Education (FlexPath option available)
|
|
Health Care Informatics
|
|
|
RN-to-MSN Nursing Informatics (FlexPath option available)
|
|
Health Care Leadership
|
|
|
RN-to-MSN Nursing Leadership and Administration (FlexPath option available)
|
|
Health Care Operations
|
|
Bachelor of Science in Health Care Administration
|
Master of Public Health (MPH)
|
|
|
Health Information Management
|
Bachelor of Science (BS) in Public Health
|
|
|
Leadership
|
Bachelor of Science in Nursing (BSN)
(FlexPath option available)
|
|
|
|
|
|
|
|
Psychology
|
|
|
Doctor of Philosophy in Psychology
|
|
Master of Science in Psychology
|
|
Addiction Psychology
|
|
|
Applied Behavior Analysis
|
|
Developmental Psychology
|
|
|
Child and Adolescent Development (FlexPath option available)
|
|
Educational Psychology
|
|
|
Educational Psychology (FlexPath option available)
|
|
General Psychology
|
|
|
Evaluation, Research, and Measurement
|
|
Industrial/Organizational Psychology
|
|
|
General Psychology (FlexPath option available)
|
Doctor of Psychology (PsyD)
|
|
|
Industrial/Organizational Psychology (FlexPath option available)
|
|
Clinical Psychology, Bachelor's Entry
|
|
|
Leadership Coaching Psychology
|
|
Clinical Psychology, Master's Entry
|
|
|
Sport Psychology (FlexPath option available)
|
Doctor of Psychology (PsyD) in School Psychology
|
|
Bachelor of Science in Psychology
|
Master of Science in Clinical Psychology
|
|
|
General Psychology (FlexPath option available)
|
|
Applied Research
|
|
|
|
|
Clinical Counseling
|
|
|
|
|
Forensic
|
|
|
|
|
Sex Therapy
|
|
|
|
|
|
|
|
|
Business and Technology
|
|
|
|
Doctor of Business Administration (DBA)
|
|
Doctor of Philosophy in Information Technology
|
|
Accounting
|
|
|
General Information Technology
|
|
Business Intelligence
|
|
|
Information Assurance and Security
|
|
Global Operations and Supply Chain Management
|
|
|
Information Technology Education
|
|
Human Resource Management
|
|
|
Project Management
|
|
Information Technology Management
|
|
Master of Science in Human Resources Management
|
|
Leadership
|
|
|
General Human Resource Management
|
|
Project Management
|
|
Master of Science in Analytics
|
|
Strategy and Innovation
|
|
Master of Science in Information Assurance and Cybersecurity
|
Doctor of Philosophy in Business Management
|
|
|
Digital Forensics
|
|
Accounting
|
|
|
Health Care Security
|
|
General Business Management
|
|
|
Network Defense
|
|
Human Resource Management
|
|
Master of Science in Information Technology
|
|
Information Technology Management
|
|
|
Analytics
|
|
Leadership
|
|
|
Cybersecurity
|
|
Project Management
|
|
|
Enterprise Networks and Cloud Computing
|
|
Strategy and Innovation
|
|
|
General Information Technology (FlexPath option available)
|
Master of Business Administration (MBA)
|
|
|
Project Management
|
|
Accounting (FlexPath option available)
|
|
Bachelor of Science in Business
|
|
Accounting CPA Pathway
|
|
|
Accounting (FlexPath option available)
|
|
Business Intelligence (FlexPath option available)
|
|
|
Business Administration (FlexPath option available)
|
|
Entrepreneurship (FlexPath option available)
|
|
|
Finance
|
|
Finance
|
|
|
Health Care Management (FlexPath option available)
|
|
General Business Administration (FlexPath option available)
|
|
|
Human Resource Management (FlexPath option available)
|
|
Global Operations and Supply Chain Management (FlexPath option available)
|
|
|
Management and Leadership (FlexPath option available)
|
|
Health Care Management (FlexPath option available)
|
|
|
Marketing
|
|
Human Resource Management (FlexPath option available)
|
|
|
Project Management (FlexPath option available)
|
|
Information Technology Management
|
|
Bachelor of Science (BS) in Information Technology
|
|
Marketing
|
|
|
General Information Technology (FlexPath option available)
|
|
Project Management (FlexPath option available)
|
|
|
Health Information Management
|
Doctor of Information Technology (DIT)
|
|
|
Information Assurance and Cybersecurity (FlexPath option available)
|
|
General Information Technology
|
|
|
Project Management (FlexPath option available)
|
|
Information Assurance and Cybersecurity
|
|
|
Software Development
|
|
Information Technology Education
|
|
|
|
|
Project Management
|
|
|
|
|
|
|
|
|
Counseling and Human Services
|
Doctor of Human Services (DHS)
|
|
Master of Science in Human Services
|
|
Advanced Program Evaluation and Data Analytics
|
|
|
Leadership and Organizational Management
|
|
Leadership and Organizational Management
|
|
|
Program Evaluation and Data Analytics
|
Doctor of Philosophy in Human Services
|
|
|
Social and Community Services
|
|
Multidisciplinary Human Services
|
|
Master of Science in Marriage and Family Counseling
|
|
Nonprofit Management and Leadership
|
|
|
General Marriage and Family Counseling
|
|
Social and Community Services
|
|
Master of Science in Mental Health Counseling
|
Doctor of Philosophy in Advanced Studies in Human Behavior
|
|
|
General Mental Health Counseling
|
|
General Advanced Studies in Human Behavior
|
|
Master of Science in School Counseling
|
Doctor of Philosophy in Counselor Education and Supervision
|
|
|
General School Counseling
|
|
General Counselor Education and Supervision
|
|
Master of Science in Studies in Human Behavior
|
Master of Science in Addiction Studies
|
|
|
General Studies in Human Behavior
|
|
|
|
|
|
|
Education
|
Doctor of Education (EdD)
|
|
Doctor of Philosophy in Education (PhD)
|
|
Adult Education
|
|
|
Curriculum and Instruction
|
|
Curriculum and Instruction
|
|
|
Instructional Design for Online Learning
|
|
Educational Leadership and Management
|
|
|
K-12 Studies in Education
|
|
Performance Improvement Leadership
|
|
|
Leadership in Educational Administration
|
|
Personalized and Competency-Based Instruction
|
|
|
Leadership for Higher Education
|
|
Reading and Literacy
|
|
|
Nursing Education
|
|
Teacher Leader in K-12 Studies
|
|
|
Postsecondary and Adult Education
|
|
Teacher Leader in Digital Transformation
|
|
|
Professional Studies in Education
|
Education Specialist (EdS)
|
|
|
Special Education Leadership
|
|
Curriculum and Instruction
|
|
Master of Science in Education Innovation and Technology
|
|
Leadership in Educational Administration
|
|
|
Competency-Based Instruction
|
|
Personalized and Competency-Based Instruction
|
|
|
General Educational Technology
|
|
Reading and Literacy
|
|
|
Instruction in the 1:1 Environment
|
|
Teacher Leader in Digital Transformation
|
|
|
Personalized Learning
|
|
Teacher Leader in K-12 Studies
|
|
|
Professional Growth and Development
|
Master of Science in Higher Education
|
|
Master of Education (MEd) in Teaching and Learning
(FlexPath option available)
|
|
Adult Education
|
|
|
|
|
Higher Education Leadership and Administration
|
|
|
|
|
Integrative Studies
|
|
|
|
Master of Science in Education
|
|
|
|
|
Curriculum and Instruction
|
|
|
|
|
Early Childhood Education
|
|
|
|
|
English Language Learning and Teaching
|
|
|
|
|
Instructional Design for Online Learning
|
|
|
|
|
K-12 Studies in Education
|
|
|
|
|
Leadership in Educational Administration
|
|
|
|
|
Reading and Literacy
|
|
|
|
|
Special Education Teaching
|
|
|
|
|
Training and Performance Improvement
|
|
|
|
Capella University's GuidedPath credit hour courses are offered on a quarterly academic schedule, which generally coincides with calendar quarters. We offer new learners in most programs the flexibility to begin the first course in their program of study at the beginning of any month. These learners then enroll in subsequent courses on a regular quarterly course schedule. Depending on the program, learners generally enroll in one to two courses per quarter. Each course has a designated start date, and the majority of our courses last for ten weeks.
To meet traditional University best practices, GuidedPath learners typically need to access the online courseroom multiple times each week. However, the courses are developed to be taken asynchronously, so learners can attend each course as it fits their weekly schedule. GuidedPath learners are required to respond to questions posed by the instructor, as well as comments made by other learners. This format provides for an interactive experience in which each learner is both encouraged and required to be actively engaged. Faculty are also required to have substantive engagement in each course each week. Additional learning activities may include reading, simulations, team projects and/or research papers. Our online format provides a digital record of learner interactions for the course instructor to assess learners’ levels of engagement and demonstration of required competencies. The course design also includes assessment of course competencies.
In the FlexPath model, learners’ demonstration of competencies are directly assessed by faculty when the learner submits an assessment. FlexPath learners set their own deadlines, demonstrate competencies via authentic assessment, and move through courses at their own speed, giving them an opportunity to accelerate or slow down to meet their learning needs and schedule demands.
The primary exception to our online format is for doctoral learners and for certain master’s degree candidates pursuing professional licenses. These learners participate in periodic residencies, year-in-residencies, and supervised practica and internships as a complement to their courses. Residencies typically last from
three
to
42
days and are required, on average, once per year for learners in applicable programs. The supervised practica and internships vary in length based on the program in which the learner is enrolled.
We also offer certificate programs, which consist of a series of courses focused on a particular area of study, for learners who seek to enhance their skills and knowledge. Online certificate courses can be taken to prepare for a graduate degree program or on a stand-alone basis. The duration of our certificate programs ranges from two quarters to approximately two years.
Faculty & Other Employees
Across the organization, we seek to hire faculty who have teaching and/or practitioner experience in their particular discipline and who possess significant and appropriate academic credentials. We also employ non-faculty staff in university services, academic advising and academic support, enrollment services, university administration, financial aid, information technology, human resources, finance and other administrative functions.
As of
December 31, 2017
, approximately
88%
of our Capella University faculty members have a doctoral degree. None of our employees are a party to any collective bargaining or similar agreement with us. We provide significant training to new faculty members, including an online development program focused on the Capella University way of effective online teaching, our educational philosophy, teaching expectations and our online platform, prior to offering a teaching assignment. In addition, we provide professional development and training for all faculty members on an ongoing basis. To evaluate the performance of our faculty members, we regularly monitor courseroom activity and assess both learner satisfaction with the courseroom experience and learner performance against course outcomes.
Our faculty consists of full-time academic administrators, faculty chairs, core faculty and part-time faculty. Our full-time academic administrators’ primary responsibilities are to monitor the quality and relevance of our curricula, to recruit and manage teaching faculty and to ensure we maintain standards of accreditation. Our faculty chairs supervise the faculty in their respective specializations. Our core faculty and part-time faculty teach courses, serve on curriculum or other relevant committees, work on curriculum development in their areas of expertise, and serve as comprehensive exam and dissertation mentors to our doctoral learners.
Learner Support Services
The learner support services we provide to all learners include:
Academic services.
We provide learners with a variety of services designed to support their academic success. These services include new learner orientation, technical support, academic advising, reminders to motivate current learners to re-register each quarter, research services (particularly for doctoral degree candidates), writing services and tutoring. Additionally, interactive, self-paced modules supporting academic and personal success skills are available for learners through our online portal. We also provide appropriate educational accommodations to learners with documented disabilities through our disability support services team. Besides traditional academic advising, our advising model has been transformed to provide additional focus on coaching new learners during the first year of their academic experience. The advising process is supported by the use of tools that are informed by predictive analytics that identify at risk behaviors and the learners’ mastery of competencies. Advisors and faculty collaborate proactively to intervene and help learners stay on track and be successful.
Administrative services.
We provide learners with the ability to access a variety of administrative services both telephonically and via the Internet. For example, learners can register for classes, apply for financial aid, pay their tuition and access their billing statements and transcripts online. In addition, our financial aid counselors provide personalized online and telephonic support to our learners including counseling regarding financing their education. We believe this online accessibility provides the convenience and self-service capabilities that our learners value.
Capella University Library services.
We provide Capella University learners with 24-hour, online access to library databases, instructional guides, Frequently Asked Questions (FAQs) and tutorials. Access to resources is primarily provided through Summon, a web discovery tool that indexes Capella University Library’s database content and Journal and Book Locator, an index of all of the library’s journals and e-books by title. Capella University Librarians offer virtual reference services via email, chat, and phone during certain time periods. Learners have access to a comprehensive collection of scholarly resources and print materials through our InterLibrary Loan (ILL) service. Books, book chapters, articles, and other resources held by universities nationwide can be requested and delivered directly to learners. Articles and book chapters are sent via email at no charge and print books are sent via various delivery services with a return postage mailer. The ILL service is provided through the Library’s partnership with MLibrary at the University of Michigan, InfoNOW at the University of Minnesota, and other direct purchase partners.
The digital collections of the Capella University Library include full text journals, books, dissertations, videos, and company records. The Capella University Library provides links to local academic and public libraries, health libraries, and federal depositories. A few of the services provided by the Capella University Library include online tutorials, webinars, dissertation
consultations, and Library Research Guides. Librarians and reference technicians offer assistance on research assignments, teach effective search strategies to enhance research skills, and provide dissertation literature review consultations. Specific liaison librarians attend PhD and certain professional doctorate residencies, where they are available for one on one consultations and also provide optional drop-in group instruction sessions.
Career center services.
Our staff offers career counseling, job search advising, and career management support to all Capella University learners and alumni. Our Capella University career counselors interact with learners and alumni via email, telephone, and online seminars to assist with career-related activities such as resume development,
curriculum vitae
and cover letter development; interview preparation; effective job search strategies; and career advancement efforts. The Career Center’s online iGuide resources help learners gather occupational information and trends, access job postings, and view sample job search documents. Our counselors also assist with prospective learners’ selection of the Capella University program and specialization that best suits their professional aspirations.
Admissions
Capella University’s admission process is designed to offer access to prospective learners who seek the benefits of a postsecondary education while providing feedback to learners regarding their ability to successfully complete their chosen program. Prior to the first course in their program of study, learners are generally required to complete an orientation to online education and a skills assessment, the results of which enable us to develop an understanding of the specific needs and readiness of each individual learner. Learners must successfully complete the first course in their program of study to continue their education.
Learners enrolling in our bachelor’s programs must have a high school diploma or a GED and demonstrate competence in writing and logical reasoning during the first course of their program of study. Additionally, applicants to our undergraduate programs who do not have transferable credits from an accredited higher education institution are required to pass assessments in writing and reading prior to acceptance into the program. Learners enrolling in our graduate programs must have the requisite academic degree from an accredited institution and a specified minimum grade point average. In addition to our standard admission requirements, we require applicants to some of our programs to provide additional application material and information, and/or interview with, and be approved by faculty.
Marketing
We engage in a range of relationship-based marketing activities to build the Capella brand, differentiate us from other educational providers, increase awareness and consideration with prospective learners, generate inquiries for enrollment, and stimulate referrals from current learners and graduates. These marketing activities may include Internet, television, print, radio, email, social media and direct mail advertising campaigns. Other marketing activities include supportive outreach to current learners, participation in seminars and trade shows, and development of key marketing relationships with corporate, healthcare, armed forces, government, and educational organizations. Online advertising (display, social, mobile, search and through aggregators) currently generates our largest volume of inquiries from prospective learners.
Capella University Enrollment
As of
December 31, 2017
, Capella University enrollment was
37,517
learners. Of the Capella University learners who responded to our demographic survey, approximately
78%
were female and approximately
50%
were people of color. Our learner population is geographically distributed primarily throughout the United States.
The following summarizes Capella University learners as of the last day of the quarter ended
December 31, 2017
:
|
|
|
|
|
|
|
|
Total Enrollment
|
|
Number of Learners
|
|
Percent of Total
|
Doctoral
|
9,096
|
|
|
24.2
|
%
|
Master’s
|
17,437
|
|
|
46.5
|
%
|
Bachelor’s
|
9,856
|
|
|
26.3
|
%
|
Other
|
1,128
|
|
|
3.0
|
%
|
Total
|
37,517
|
|
|
100.0
|
%
|
Capella University Tuition
Capella University's overall tuition rates vary by discipline, length of program, and degree level.
Learners in our GuidedPath credit hour programs are charged tuition on a per course or per term basis. Per course prices vary by discipline, number of credit hours, and degree level. Per course prices for bachelor's level GuidedPath credit hour programs ranged from approximately
$1,000
to
$2,400
for the 2017-2018 academic year (the academic year that began in July 2017) and from
$1,400
to
$1,700
for the 2016-2017 academic year (the academic year that began in July 2016). Per course prices for master's level GuidedPath credit hour programs ranged from approximately
$1,500
to
$2,800
for the 2017-2018 academic year, and from
$1,700
to
$2,700
for the 2016-2017 academic year. Per course prices for doctoral level GuidedPath credit hour programs ranged from approximately
$2,500
to
$4,100
for the 2017-2018 academic year, and from
$2,200
to
$4,400
for the 2016-2017 academic year.
Learners in select doctoral programs are charged tuition at a fixed quarterly amount, regardless of the number of courses for which the learner registers. Quarterly tuition rates ranged from approximately
$4,300
to
$4,800
per quarter for the 2017-2018 academic year and from
$4,300
to
$4,700
per quarter for the 2016-2017 academic year.
Tuition for FlexPath master's and bachelor's programs is priced at a flat, fixed amount for each 12 week subscription period. There is no maximum course load during each subscription period; however, a maximum of two FlexPath courses can be taken at any one time. Tuition for bachelor's level FlexPath programs ranged from
$2,300
to
$2,700
per 12 week subscription period in the 2017-2018 academic year, and from
$2,200
to
$2,500
per 12 week subscription period in the 2016-2017 academic year. Tuition for master's level FlexPath programs ranged from
$2,100
to
$2,500
per 12 week subscription period for the 2017-2018 academic year and was
$2,400
per 12 week subscription period for the 2016-2017 academic year.
“Other” in the preceding enrollment table primarily includes learners enrolled in certificate programs. Learners in credit hour certificate programs are charged tuition on a per course basis, which varies by discipline and the number of credit hours. Per course prices for certificate programs ranged from approximately
$1,000
to
$4,200
for the 2017-2018 academic year and from
$1,200
to
$4,100
for the 2016-2017 academic year. Tuition for FlexPath certificate programs ranged from
$2,100
to
$2,500
per 12 week subscription period for the 2017-2018 academic year and
$2,400
for the 2016-2017 academic year.
Year over year tuition increases are specific to the program or specialization and depend on market conditions, program differentiation or changes in operating costs that have an impact on price adjustments of individual programs or specializations. Capella University implemented a weighted average tuition increase of approximately
1%
for the 2017-2018 academic year. The University’s website, www.capella.edu, provides additional details regarding tuition costs and credits required by individual degree. These program costs will vary by learner based upon the program and specialization selected, the number of courses taken per quarter and the number of transfer credits earned.
We offer scholarships and tuition discounts, under a variety of different programs, to members of the armed forces and in connection with our various corporate, healthcare, federal and educational marketing relationships, for example:
|
|
•
|
U.S. armed forces relationships and discount program
available to all members of the U.S. armed forces, including active duty members, veterans, National Guard members, reservists, civilian employees of the Department of Defense and immediate family members of active duty personnel.
|
|
|
•
|
Corporate, healthcare and federal relationships
with more than 500 large and mid-size organizations.
|
|
|
•
|
Educational relationships
that encourage graduates of nearly 300 community colleges to enroll in our undergraduate programs, and faculty and administrators to enroll in our graduate programs.
|
As of
December 31, 2017
, approximately
25%
of our learners received a discount in connection with these programs.
Throughout the past several years, we expanded and refined our offering of learner success scholarships under a variety of different programs, to promote affordability and encourage learners to remain enrolled. Learners must meet admission requirements, and enroll and apply within certain timeframes to receive the scholarships, which are generally awarded over a period of four to eight consecutive quarters. As of
December 31, 2017
, approximately
18%
of our learners received a Capella University awarded scholarship.
Technology
Capella University provides our learners and faculty members with a secure, online, and mobile-device friendly technology environment through which they can learn about our offerings, access courses and support resources, utilize self-service tools, and engage in a private social network for academic collaboration and professional growth. This environment supports our GuidedPath credit bearing programs as well as our FlexPath direct assessment offerings. The University has access to a
comprehensive data set across the lifecycle of our learners and uses analytics to innovate, support our learners, and create value.
Online courseroom.
The University is a leader in Competency-Based Education (CBE) and provides the instructional content of each course, along with tools to facilitate course discussions, assessments, and grading and submission of assignments through our online courseroom environment. We operate the Blackboard Learn System augmented by proprietary and third party tools such as our online courseroom platform. Through this platform, Capella University supports more than
2,050
online courses each quarter. Underpinning the University’s CBE learning approach is our proprietary Atlas platform used to develop and maintain the curriculum and courses for our academic programs.
Learner portal.
Our University Campus platform acts as a virtual campus to our learners, providing them with a variety of support resources and networking tools to connect with fellow learners and faculty. Learners also use our Campus to access their online courseroom, community discussions, e-books, the library, financial aid, and self-service tools. Our Campus is delivered on the Liferay Portal platform, a Java-based Web portal and content management system platform.
Learner and faculty support.
We utilize Oracle’s PeopleSoft Enterprise Resource Planning (ERP) platform to provide support services to our Capella University learners and faculty, including learner participation monitoring, course registration, transcript requests, and financial aid applications. In addition, we provide our learners and faculty members with online access to library resources, including comprehensive databases of articles, journals, and books across academic disciplines.
Internal administration.
We use Oracle’s PeopleSoft ERP platform as our Capella University Student Information System (SIS) to manage learner academic data and accounts receivable information, and to manage learner applications, academic records, and marketing data. We also employ PeopleSoft’s Customer Relationship Management (CRM) software to organize and process prospective learner information as well as provide a “learner 360 degree” view to faculty and support staff.
Service-oriented architecture.
Data from each of Capella University’s primary technology platforms - the Blackboard Learn System, the Liferay Portal, and Oracle’s PeopleSoft ERP system - is shared through a custom-built service oriented architecture. The Company uses this architecture to build integrated, personalized learning and service applications for learners and faculty, which are then accessed through our Campus and the Blackboard Learn System.
Infrastructure.
Our University servers and storage infrastructure are co-located in a third-party primary hosting facility and at a separate third-party backup data center. We perform redundant backup of software and data. We currently use a combination of Unix and Windows-based software on Cisco, HP, and Oracle/Sun hardware.
Enterprise Data Warehouse (EDW) and analytics.
Capella University's EDW is our comprehensive repository of data throughout the learner lifecycle. We have developed the EDW in a phased approach and continue to expand the EDW to include additional depth of academic data (learning data and engagement data) - including learner and faculty activity in our courseroom, learner demonstration of learning outcomes, accreditation alignments of academic content, and other data. Data from the EDW is made available to stakeholders through a powerful set of reporting and data analytics tools based on Microsoft and SAS software.
Cyber security.
Capella operates a cyber security program that includes dedicated resources, tools, processes, and training. To protect our information assets, Capella’s cyber security practices are designed to reduce cyber security and IT risks, respond to incidents, establish appropriate standards and controls, and establish, implement, monitor and maintain cyber security policies and procedures. These practices include an education and training program on cyber security and privacy matters for employees and external stakeholders. We regularly assess our cyber security risk through continuous vulnerability assessment, external vulnerability and penetration testing and evaluation of data security risk associated with third-parties that may hold or access data on our behalf.
Mobile device accessibility.
Capella University provides a suite of applications to support faculty and learners who use mobile devices to engage with the University. Major mobile platforms that are supported include iPhone, iPad, Android, and mobile-optimized websites. These mobile solutions focus on enabling student productivity and engagement, with features including courseroom interactions, degree planning tools, alerts and notifications, self-service capabilities, e-books, and academic and professional networking.
Visitor Center.
The Visitor Center (
www.capella.edu
) provides an engaging and exploration-friendly experience in which potential Capella University learners can acquaint themselves with our value proposition and key offerings. The site also provides prospective learners with a personalized path to get the right information at the right time in their decision making cycle and enables them to ascertain their readiness to enroll in one of our programs.
Job-Ready Skills
The Job-Ready Skills reportable segment consists of Capella Learning Solutions (CLS), Hackbright, and DevMountain. CLS provides online, non-degree training solutions and services to individuals and corporate partners focused on the delivery of job-ready skills in high-demand employment areas. CLS’ primary offering is RightSkill, in which quality candidates in need of specific job-ready skills undertake self-paced, online learning in one of a variety of disciplines, ranging from restaurant management, to customer service, retail management, technical support, and staff recruiting. Courses are designed to require completion within 7-60 days, depending upon the discipline. While CLS educates and assesses the learners, the partner organization of CLS, CareerBuilder, sources the learners and works to place those who complete the programs with employers.
Hackbright is a San Francisco-based software engineering school for women with a mission to close the gender gap in the high-demand software engineering space. Hackbright’s core offering is an on-site, 12-week immersive software development program known as the Fellowship Program. Learners spend the first half of the program primarily in lecture-based learning combined with labwork, in which learners collaborate in pairs to build their programming knowledge. In the second half of the program, lectures continue, while the labwork gives way to more advanced project-based work, and the program concludes with an intense focus on career planning. Throughout the program, Hackbright supplements the learning experience with field trips to technology companies, exposing learners to various technologies and career possibilities, as well as a series of networking events. Hackbright provides a high level of support and guidance, including assigned mentors who provide the learner with support and technical advice, and an advisor who guides the learner through the program. Hackbright also engages employers through placement agreements, in which Hackbright earns a placement fee in exchange for providing access to and facilitating the transition of alumnae into employment at companies seeking in-demand, qualified female software engineers.
DevMountain is a software development school with locations in Provo and Salt Lake City, Utah; Dallas, Texas; and Phoenix, Arizona. DevMountain’s primary offerings are on-site, 12-week immersive programs in Web Development, iOS Development, and UX Design. The programs include instructor-led sessions, guest lectures, presentations and learning activities in the mornings, followed by afternoon labs and group projects. Throughout the program, and beyond course hours, learners have access to DevMountain’s dedicated student success and employer relations teams as well as instructors and mentors. DevMountain also offers learners housing while they are enrolled in the program, which is included as part of the immersive experience fee. In 2017, DevMountain introduced its first online program in Web Development.
Intellectual Property
Intellectual property is important to our business. We rely on a combination of copyrights, trademarks, service marks, trade secrets, agreements with third parties, patent rights, and confidentiality agreements and practices to protect our proprietary rights. In many instances, our course content is produced for us by faculty and other content experts under work for hire agreements pursuant to which we own the course content in return for a fixed development fee. In certain limited cases, we license course content from third parties on a royalty fee basis.
We own many registered and unregistered trademarks for use in our business. We have trademark or service mark registrations and pending applications in the U.S. and select foreign jurisdictions, including “CAPELLA,” “CAPELLA EDUCATION COMPANY,” “CAPELLA UNIVERSITY,” “CAPELLA LEARNING SOLUTIONS,” “SOPHIA,” “SOPHIA PATHWAYS,” “THE PATH TO YOUR POTENTIAL,” “iGUIDE,” “HACKBRIGHT ACADEMY,” “DEVMOUNTAIN,” a “FLEXPATH” logo, “RIGHTSKILL,” and certain other distinctive logos, along with various other trademarks and service marks related to our offerings. We also own domain name rights to
“www.capellaeducationcompany.com,”
“
www.capellaeducation.com,
” “
www.capella.edu,
” “
www.capellauniversity.edu,
” "
www.capellaresults.com,"
"www.flexpath.com,"
"www.capellalearning.com," "www.capellalearningssolutions.com," "www.hackbrightacademy.com,"
"www.devmountain.com,"
and "
www.sophia.org
," as well as other words and phrases important to our business.
Available Information
Our corporate Internet address is
www.capellaeducation.com
. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) of 15(d) of the Exchange Act, soon after they are electronically filed with the SEC. In addition, our earnings conference calls and presentations to the financial community are web cast live via our website. In addition to visiting our website, you may read and copy public reports we file with the SEC at the SEC’s Public Reference Room at 100 F. Street NE, Washington DC 20549, or at
www.sec.gov
. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information contained on our website is expressly not incorporated by reference into this Form 10-K.
REGULATORY ENVIRONMENT
The Post-Secondary education market is highly regulated. Learners attending Capella University finance their education through a combination of individual resources, corporate reimbursement programs and federal financial aid programs. Capella University participates in the federal student financial aid programs authorized under Title IV. For the year-ended
December 31, 2017
,
75.53%
of Capella University revenues (calculated on a cash basis) were derived from Title IV programs. In connection with a learner’s receipt of federal financial aid, we are subject to extensive regulation by the Department of Education, state education agencies and our accrediting agency, the Higher Learning Commission. In particular, the Title IV programs, and the regulations issued thereunder by the Department of Education, subject us to significant regulatory scrutiny in the form of numerous standards that we must satisfy to participate in the federal student financial aid programs. To participate in Title IV programs, an institution must be:
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Authorized to offer its programs of instruction by the applicable state education agencies in the states in which it is physically located (in our case, Minnesota), and where its activities require an approval to operate;
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Accredited by an accrediting agency recognized by the Secretary of the Department of Education; and
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Certified as an eligible institution by the Department of Education.
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Our business activities are planned and implemented to achieve compliance with the rules and regulations of the state, regional and federal agencies that regulate our activities. We have established regulatory compliance and management systems and processes under the oversight of our Chief Financial Officer and our General Counsel that are designed to meet the requirements of this regulatory environment.
Accreditation
Capella University has been institutionally accredited since 1997 by the Higher Learning Commission, a regional accrediting agency recognized by the Secretary of the Department of Education. In January 2015, Capella University’s accreditation with the Higher Learning Commission was reaffirmed. The reaffirmation enables Capella University to continue to participate in Title IV programs. The next reaffirmation of accreditation is scheduled to take place in 2022-2023. Accreditation is a non-governmental system for recognizing educational institutions and their programs for learner performance, governance, integrity, educational quality, faculty, physical resources, administrative capability and resources, and financial stability. In the United States, this recognition comes primarily through private voluntary associations that accredit institutions and programs of higher education. To be recognized by the Secretary of the Department of Education, accrediting agencies must adopt specific standards for their review of educational institutions. These associations, or accrediting agencies, establish criteria for accreditation, conduct peer-review evaluations of institutions and professional programs for accreditation and publicly designate those institutions that meet their criteria. Accredited institutions are subject to periodic review by accrediting agencies to determine whether such institutions maintain the performance, integrity and quality required for accreditation.
The Higher Learning Commission is the same accrediting agency that accredits such universities as Northwestern University, the University of Chicago, the University of Minnesota and other degree-granting public and private colleges and universities in its region (namely, the States of Arizona, Arkansas, Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota, West Virginia, Wisconsin, and Wyoming).
Accreditation by the Higher Learning Commission is very important to us as well as our learners. Colleges and universities depend, in part, on accreditation in evaluating transfers of credit and applications to graduate institutions. Employers rely on the accredited status of institutions when evaluating a candidate’s credentials, and corporate and government sponsors under tuition reimbursement programs look to accreditation for assurance that an institution maintains quality educational standards. Moreover, institutional accreditation by an accrediting agency recognized by the Secretary of the Department of Education is necessary for eligibility to participate in Title IV programs.
State Regulatory Accountability
Minnesota Office of Higher Education (MOHE).
Capella University is registered as a private institution with the MOHE pursuant to Minnesota Statute sections 136A.61-131A.71 as required for most post-secondary private institutions that grant degrees at the associate level or above in Minnesota, and as required by the Higher Education Act to participate in Title IV programs.
On October 13, 2016, Capella University received a request for information from MOHE related to its doctoral programs and complaints filed by doctoral students. According to the request, MOHE is completing program reviews of all online doctoral programs for institutions registered in Minnesota in an effort to better understand the context, background, and issues related to
doctoral student complaints. The Company provided data and information in response to MOHE’s request. On July 28, 2017, the Company received correspondence from MOHE confirming the Company's responses fulfilled the original request and asking for certain clarifying and supplemental information. The Company provided clarifying and supplemental information in response.
State Authorization Reciprocity Agreement (SARA).
Capella University is an approved institutional participant in the National Council for State Authorization Reciprocity Agreements (NC-SARA). As an approved SARA participant, Capella University complies with established standards for offering postsecondary distance education courses and programs among SARA member states, districts, and territories. SARA is intended to make it easier for students to take online courses offered by postsecondary institutions based in another state
MOHE is the designated “portal agency” that oversees institutions headquartered in Minnesota that participate in SARA. As the portal agency, MOHE’s responsibilities include coordinating SARA matters for Minnesota and acting as the principal point of contact for resolution of student complaints.
Capella University is authorized to operate in all SARA member states,
and is registered or otherwise not subject to approval in all states not currently participating in SARA.
On December 16, 2016, the Department of Education released final regulations regarding the State Authorization of distance education programs. These rules require institutions offering distance education or correspondence courses to be authorized by each state in which the institution enrolls students, if such authorization is required by the state. The regulation recognizes authorization through participation in a state authorization reciprocity agreement, as long as the agreement does not prevent a state from enforcing its own laws. Also included in the final rules are mandates for a number of general and individualized disclosures by distance education institutions for prospects and learners including how programs are authorized, complaint processes, adverse actions by state and accrediting agencies, refund policies, and prerequisites for licensure or certification for certain programs. The Department of Education has indicated they plan to issue formal guidance clarifying that SARA meets the definition of state authorization reciprocity agreement as included in the final regulation. The new State Authorization regulations become effective July 1, 2018.
Other State Regulatory Authorizations.
Beginning July 1, 2017, California required registration with the Bureau for Private Postsecondary Education (“BPPE”), and Capella has filed its BPPE registration application. Capella University has obtained state-specific regulatory approval to operate in all other states that require such authorization. Hackbright Academy is licensed to operate in the State of California by the Bureau for Private Postsecondary Education (BPPE). DevMountain is registered as a Post-Secondary Proprietary School with the Utah Department of Commerce, Division of Consumer Protection, and received a Certificate of Approval from the Texas Workforce Commission, Career Schools and Colleges, and has received a conditional license by the Arizona State Board for Private Postsecondary Education.
State Professional Licensure
States have specific requirements that an individual must satisfy in order to be licensed as a professional in a specified field. Capella University graduates often seek to obtain professional licensure in their chosen fields following graduation because it will enhance employment opportunities or they are legally required to do so for employment purposes. Their success in obtaining licensure depends on several factors, including each individual’s personal and professional qualifications as well as other factors related to the degree or program completed, such as:
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Whether the institution and the program were approved by the state in which the graduate seeks licensure, or by a professional association;
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Whether the program from which the learner graduated and the curriculum completed meets all state requirements; and
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Whether the institution and/or the specific program is accredited.
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Professional licensure requirements can vary by state and may change over time. Capella University has a team dedicated to professional licensure that works directly with learners. The licensure team develops and maintains extensive resources to inform learners of unique state licensing requirements prior to enrollment and throughout their program. The University’s catalog and websites also describe the requirements for obtaining professional licensure, paired with specific disclaimers that reiterate learner responsibility for licensure outcomes.
Capella’s licensure team works directly with licensing authorities to try to resolve barriers to licensure for its alumni. The team also assists alumni with exploring alternative options to achieve licensure, including completing additional coursework at Capella or at another institution.
Capella University makes no representation, warranty or guarantee that successful completion of the course of study will result in the learner obtaining the necessary licensure or certification. Compliance with state or professional licensure or certification requirements is the learner’s sole responsibility.
Nature of Federal, State and Private Financial Support for Postsecondary Education
The federal government provides a substantial part of its support for postsecondary education through Title IV programs in the form of grants and loans to learners who can use those funds at any institution that has been certified as eligible by the Department of Education. Aid under Title IV is awarded based on the institution’s determined cost of attendance and the student’s expected family contribution, as determined by the Free Application for Federal Student Aid (FAFSA). All recipients of Title IV funds must maintain satisfactory academic progress and must also progress in a timely manner toward completion of their program of study. In addition, we must ensure that Title IV funds are properly accounted for and disbursed in the correct amounts and in a timely manner to eligible learners.
Capella University learners receive loans and grants to fund their education primarily under the Federal Direct Loan Program (FDLP) and the Federal Pell Grant (Pell) Title IV programs. In
2017
,
75.53%
of Capella University revenues (calculated on a cash basis) were derived from tuition financed under Title IV federal financial aid.
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FDLP.
Under the FDLP, the Department of Education, rather than a private lender, makes loans to learners. In
2017
, approximately
73%
of our revenues (calculated on a cash basis) were derived from the FDLP.
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Pell Grants.
Under the Pell program, the Department of Education awards grants to bachelor’s learners who demonstrate financial need. In
2017
, approximately
3%
of our revenues (calculated on a cash basis) were derived from the Pell program.
Certain learners are eligible to receive funds from educational assistance programs administered by the U.S. Department of Veterans Affairs through the Minnesota Department of Veterans Affairs. Some Capella University learners finance all or a portion of their own education or receive full or partial tuition reimbursement from their employers. Finally, eligible learners can also access private loans through a number of different lenders for funding at current market interest rates. For the year-ended
December 31, 2017
, less than
one percent
of our learners utilized private loans, and less than
one percent
of our revenue was derived from private loans.
Regulation of Federal Student Financial Aid Programs
To be eligible to participate in Title IV programs, an institution must comply with specific standards and procedures set forth 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 within which it is physically located (in our case, Minnesota), and where its activities require an approval to operate, and maintain institutional accreditation by a recognized accrediting agency. Capella University is fully certified through June 30, 2020 to participate in the Title IV programs.
The substantial amount of federal funds disbursed through Title IV programs, the large number of learners and institutions participating in these programs and allegations of fraud and abuse by certain proprietary institutions have caused Congress to require the Department of Education to exercise considerable regulatory oversight over proprietary institutions of higher learning. Accrediting agencies and state education agencies also have responsibilities for overseeing compliance of institutions with Title IV program requirements. 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 how the Title IV program requirements will be applied in all circumstances.
Significant factors relating to Title IV programs that could adversely affect us include the following:
Congressional Action.
Congress reauthorizes the Higher Education Act, which governs federal financial assistance for higher education, approximately every five to eight years. Congress most recently reauthorized the Higher Education Act in 2008. It is currently unclear exactly when Congress will reauthorize the Higher Education Act. The most recent reauthorized Higher Education Act continued all of the Title IV programs in which we participate, but made many revisions to the requirements
governing the Title IV programs, including provisions relating to the relationships between institutions and lenders that make student loans, student loan default rates, and the formula for revenue that institutions are permitted to derive from the Title IV programs. In addition, further rulemaking by the Department of Education may impose additional requirements on institutions that participate in Title IV programs. Committee leadership of both the U.S. House of Representatives and Senate began reauthorization hearings in the latter half of 2013, and the House Education and the Workforce Committee released their Higher Education Act bill in December 2017. Existing programs and participation requirements are subject to change in this process. Additionally, funding for the student financial assistance programs may be impacted during appropriations and budget actions.
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 Title IV programs. Failure to satisfy any of the standards may lead the Department of Education to find the institution ineligible to participate in Title IV programs or to place the institution on provisional certification as a condition of its participation. To meet the administrative capability standards, an institution must, among other things:
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Comply with all applicable Title IV program regulations;
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Have capable and sufficient personnel to administer the federal student financial aid programs;
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Have acceptable methods of defining and measuring the satisfactory academic progress of its learners;
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Not have cohort default rates above specified levels;
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Have various procedures in place for safeguarding federal funds;
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Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
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Provide financial aid counseling to its learners;
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Refer to the Department of Education’s Office of Inspector General any credible information indicating that any applicant, learner, employee, or agent of the institution, has been engaged in any fraud or other illegal conduct involving Title IV programs;
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Submit in a timely manner all reports and financial statements required by the regulations; and
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Not otherwise appear to lack administrative capability.
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If an institution fails to satisfy any of these criteria or any other Department of Education regulation, the Department of Education may:
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Require the repayment of Title IV funds;
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Transfer the institution from the U.S. Department of Education’s advance system of receiving Title IV program funds to its reimbursement system, under which an institution must disburse its own funds to learners and document the learners’ eligibility for Title IV program funds before receiving such funds from the U.S. Department of Education;
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Place the institution on provisional certification status; or
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Commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.
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If we are found not to have satisfied the Department of Education’s “administrative capability” requirements, we could lose, or be limited in our access to, Title IV program funding.
Financial Responsibility.
The Higher Education Act and Department of Education regulations establish extensive standards of financial responsibility that institutions such as Capella University must satisfy to participate in Title IV programs. These standards generally require that an institution provide the resources necessary to comply with Title IV program requirements and meet all of its financial obligations, including required refunds and any repayments to the Department of Education for liabilities incurred in programs administered by the Department of Education.
The Department of Education evaluates institutions on an annual basis for compliance with specified financial responsibility standards utilizing a complex formula that uses line items from the institution’s audited financial statements. The standards focus on three financial ratios: (1) equity ratio (which measures the institution’s capital resources, financial viability and ability to borrow); (2) primary reserve ratio (which measures the institution’s ability to support current operations from expendable resources); and (3) net income ratio (which measures the institution’s ability to operate at a profit or within its means). An
institution’s financial ratios must yield a composite score of at least 1.5 for the institution to be deemed financially responsible without the need for further federal oversight. We have applied the financial responsibility standards to our Capella University audited financial statements as of and for the years ended
December 31, 2016
and
2015
, and calculated a composite score of
3.0
for both years, which is the maximum score attainable. We therefore believe that we meet the Department of Education’s financial responsibility standards. We will finalize our composite score as of and for the year-ended
December 31, 2017
in early
2018
, and expect to meet the composite score requirements. 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 could establish financial responsibility on an alternative basis by, among other things:
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Posting a letter of credit in an amount equal to at least 50% of the total Title IV program funds received by the institution during the institution’s most recently completed fiscal year;
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Posting a letter of credit in an amount equal to at least 10% of such prior year’s Title IV program funds received by us, accepting provisional certification, complying with additional Department of Education monitoring requirements and agreeing to receive Title IV program funds under an arrangement other than the Department of Education’s standard advance funding arrangement; or
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Complying with additional Department of Education monitoring requirements and 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 cash monitoring.
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Failure to meet the Department of Education’s “financial responsibility” requirements, either because we do not meet the Department of Education’s minimum composite score to establish financial responsibility or are unable to establish financial responsibility on an alternative basis, would cause us to lose access to Title IV program funding.
Borrower Defense to Repayment.
On November 1, 2016, the Department of Education published revised borrower defense to repayment rules which set forth additional means by which a borrower may assert as a defense to repayment of a Title IV loan, and the consequences of such borrower defenses for borrowers, institutions and the Department of Education. The final regulation sets forth expanded criteria, and substantial discretion for the Department of Education, with respect to borrower rights and relief in defense to repayment of Title IV loans. In particular, for recipients of loans disbursed on or after July 1, 2017, the rule permits student loan debt relief, upon borrower application, where there is:
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State or Federal court or administrative tribunal judgment against a school related to the loan or the educational services for which the loan was made;
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Substantial misrepresentation by the school.
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The regulation grants the Department of Education broad discretion to determine whether a school has committed a breach of contract or substantial misrepresentation, to allow group claims, which may include individuals who have not applied to the Department of Education seeking relief, and to determine when to seek recoupment from the school upon loan discharge. In October 2017, the Department of Education announced its plan to delay implementation of these Borrower Defense to Repayment rules until 2019, pending the outcome of the renegotiations taking place on that topic.
Title IV Return of Funds.
Under the Department of Education’s return of funds regulations, an institution must first determine the amount of Title IV program funds that a learner “earned.” If the learner withdraws during the first 60% of any period of enrollment or payment period, the amount of Title IV program funds that the learner earned is equal to a pro rata portion of the funds for which the learner would otherwise be eligible. If the learner withdraws after the 60% threshold, then the learner has earned 100% of the Title IV program funds. The institution must return to the appropriate Title IV programs, in a specified order, the lesser of (i) the unearned Title IV program funds and (ii) the institutional charges incurred by the learner for the period multiplied by the percentage of unearned Title IV program funds. An institution must return the funds no later than 45 days after the date of the institution’s determination that a learner withdrew. If such payments are not made in a timely fashion, an institution may be subject to adverse action, including being required to submit a letter of credit equal to 25% of the refunds the institution should have made in its most recently completed year. Under Department of Education regulations, late returns of Title IV program funds for 5% or more of learners sampled in the institution’s annual compliance audit constitutes material non-compliance. Regulations require that a company's return of Title IV funds error rate be under 5% for two consecutive annual Federal Student Aid compliance audits.
The “90/10 Rule.”
A requirement of the Higher Education Act commonly referred to as the “90/10 Rule,” applies only to “proprietary institutions of higher education,” which includes Capella University. Under the 2008 reauthorization of the Higher
Education Act, effective upon the date of the law’s enactment, an institution is subject to loss of eligibility to participate in the Title IV programs if, on a cash accounting basis, it derives more than 90% of its fiscal year revenue, for two consecutive fiscal years, from Title IV program funds. An institution whose rate exceeds 90% for any single fiscal year will be placed on provisional certification for at least two fiscal years and may be subject to other conditions specified by the Secretary of Education. For the year-ended
December 31, 2017
, we derived
75.53%
of Capella University revenues (calculated on a cash basis) from Title IV program funds.
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 on the repayment of federally guaranteed student loans by its learners exceed certain levels. For each federal cohort year, a rate of student defaults (known as a “cohort default rate”) is calculated for each institution with 30 or more borrowers entering repayment in a given federal cohort year by determining the rate at which borrowers who become subject to their repayment obligation in that federal cohort year default by the end of the second federal cohort year. For such institutions, the Department of Education calculates a single cohort default rate for each federal cohort year that includes in the cohort all current or former student borrowers at the institution who entered repayment on any Federal Family Education Loan Program (FFELP) Stafford loans or FDLP loans during that year.
To remain eligible to participate in Title IV programs, an educational institution's student loan cohort default rates must remain below certain specified levels. Under current regulations, an educational institution will lose its eligibility to participate in Title IV programs if its three-year measuring period student loan cohort default rate equals or exceeds 30% for three consecutive cohort years, or 40% for any given year. Capella University's three-year cohort default rates for the
2014
,
2013
and
2012
cohorts are
6.9%
,
6.5%
, and
8.9%
respectively. The average cohort default rates for proprietary institutions nationally were
15.5%
,
15.0%
, and
15.8%
in cohort years
2014
,
2013
and
2012
, respectively. The average cohort default rates for all institutions nationally were
11.5%
,
11.3%
, and
11.8%
in cohort years
2014
,
2013
and
2012
, respectively.
Higher Learning Commission
.
The Higher Learning Commission, Capella University’s accrediting body, is continuously developing new standards and approval processes under which it evaluates programs and institutions. Consistent with that approach, the Higher Learning Commission announced policy changes which include giving the Commission more discretion to designate institutions to be in "financial distress” or under "government investigation.” On August 31, 2016, the Commission adopted the policy changes. Receipt of these designations could impact future accreditation status and eligibility for Title IV aid under the Department of Education’s new “financial responsibility” triggers. While the Company believes its strong reputation and compliance record will continue to place it in favorable standing under the new policy, there is sufficient breadth and discretion within the policy such that government investigation, litigation, or financial or other circumstances could result in an impact to our business from the application of the policies. In addition, in November 2017, the Higher Learning Commission announced policy changes to become effective September 1, 2019, mandating certain recruitment, admissions and related institutional practices, as well as guidelines for shared services relationships.
Incentive Compensation Rules.
As a part of an institution’s program participation agreement with the Department of Education and in accordance with the Higher Education Act, the institution may not provide any commission, bonus or other incentive payment to any person or entity engaged in any learner recruitment, admissions or financial aid awarding activity based directly or indirectly on success in securing enrollments or financial aid. Failure to comply with the incentive compensation rules could result in loss of eligibility to participate in federal student financial aid programs or financial penalties.
Gainful Employment (GE).
The Department of Education published a final rule on October 30, 2014 that went into effect on July 1, 2015. The final rule applies to all GE programs, which include non-degree programs at public and private non-profit institutions, and all programs offered by proprietary institutions. The rule establishes a “debt-to-earnings” (DTE) ratio that GE programs must satisfy over the course of annual measurement periods to remain eligible for Title IV federal student aid. A program is determined to “Pass” in a given year if the calculation shows that the graduates who received loans have annual loan payments less than 8% of total earnings OR less than 20% of discretionary earnings. A program is determined to “fail” in a given year if the calculation shows that graduates who received loans have annual loan payments greater than 12% of total earnings AND greater than 30% of discretionary earnings. A program is determined to be in the “zone” in a given year if the program does not “pass,” AND if the calculation shows that graduates who received loans have annual loan payments between 8% and 12% of total earnings OR between 20% and 30% of discretionary earnings. Earnings are calculated by the Department of Education using Social Security Administration data. Earnings information is then aggregated and made available to institutions.
In January 2017, we received final DTE ratios from the Department of Education for the first measurement year. The DTE ratios we received showed that none of our programs were determined to fail. This is significant because the rules state that a program would be ineligible for Title IV funds in the next year if it failed in two out of three consecutive years, whereas for a
program in the zone, a program would be ineligible for Title IV funds in the next year only if it were in the zone (or failed) in each of four consecutive years. The DTE ratio information we received reflected one of our programs (the Master's of Science in Marriage and Family Counseling/Therapy program) was in the zone. Since January 2017, we have not received any additional DTE ratios from the Department of Education for periods subsequent to the first measurement year. We have taken and continue to take steps to avoid or mitigate potential adverse consequences of the DTE ratio rules. Despite our efforts, it remains possible that one or more of our programs could be determined to be in the zone or fail in future calculations.
If a program fails or is in the zone for draft DTE rates during the transition period, the Department of Education will calculate transitional draft DTE rates using the median loan debt of the students who completed the program during the most recently completed award year and the earnings used to calculate the draft DTE rates. The final DTE rate for purposes of any sanctions will be the lower of the draft or transitional DTE rate. The transition period is 5 years for programs with durations of 1 year or less, 6 years for programs between 1 and 2 years in length, and 7 years for programs of more than 2 years. Capella University had no programs for which a transitional rate was utilized as the final DTE rate.
If a GE program could become ineligible in the subsequent award year based on its DTE metrics, the institution is required to inform students and prospective students that the program could lose Title IV eligibility. The warning must state that the program has not passed standards established by the Department of Education, based on amounts students borrow for enrollment in the program and their reported earnings. The warning must also inform students that if the program does not pass the standards in the future, students who are then enrolled may not be able to use federal student grants or loans to pay for the program. The Final Rule also requires institutions to provide certifications regarding a GE program’s satisfaction of programmatic accreditation and state licensure requirements. The final rule expands the currently required disclosures for GE programs, including the requirement that schools provide these disclosures for each GE program through an updated template provided by the Department of Education.
The final rule also requires institutions to provide certifications regarding a GE program’s satisfaction of programmatic accreditation and state licensure requirements as part of the institutional program participation agreements with the Department of Education. We worked with the Department of Education to clarify various issues related to the new certification requirements, and certified our programs as required by the final GE rule and requirements of the Department of Education.
The final rule also includes requirements for the reporting of learner and program data by institutions to the Department of Education and expands the disclosure requirements that have been in effect since July 1, 2011. The rule makes other conforming and technical revisions to the Title IV program participation agreement and related regulations. In 2017, the Department of Education announced its plan to delay the implementation deadline of some aspects of the current Gainful Employment rule, including some disclosure requirements and the appeal deadline for alternate earnings. The Department of Education is currently renegotiating Gainful Employment, with plans to release a new rule in 2018.
The continuing eligibility of our educational programs for Title IV funding could be at risk due to factors beyond our control, such as changes in the actual or deemed income level of our graduates, changes in student borrowing levels, increases in interest rates, changes in the federal poverty income level relevant for calculating discretionary income, and other factors.
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 (OIG), state licensing agencies, the Department of Veterans Affairs and accrediting agencies. As part of the Department of Education’s ongoing monitoring of institutions’ administration of Title IV programs, The Higher Education Act and Department of Education regulations also require institutions to annually submit a compliance audit conducted by an independent certified public accountant in accordance with Government Auditing Standards and applicable audit standards of the Department of Education. In addition, to enable the Secretary of Education to make a determination of financial responsibility, institutions must annually submit audited financial statements prepared in accordance with Department of Education regulations.
The OIG is responsible for, among other things, promoting the effectiveness and integrity of the Department of Education’s programs and operations. With respect to educational institutions that participate in Title IV funding programs, the OIG conducts its work primarily through compliance audits and investigations. An OIG compliance audit typically focuses on whether an institution administers federal funds in accordance with applicable rules and regulations, whereas an investigation typically indicates a concern regarding potential fraud or abuse involving federal funds. We perform periodic reviews of our compliance with the various applicable regulatory requirements. We have not been notified by any of the various regulatory agencies of any significant noncompliance matters that would adversely impact our ability to participate in Title IV programs.
Potential Effect of Regulatory Violations.
If Capella University fails to comply with the regulatory standards governing Title IV programs, the Department of Education could impose one or more sanctions, including transferring Capella University to the reimbursement or cash monitoring system of payment, seeking to require repayment of certain Title IV program funds, requiring Capella University to post a letter of credit in favor of the Department of Education as a condition for continued Title IV certification, taking emergency action against Capella University, referring the matter for criminal prosecution or initiating proceedings to impose a fine or to limit, condition, suspend or terminate the participation of Capella University in Title IV programs.
Capella University also may be subject, from time to time, to complaints and lawsuits relating to regulatory compliance brought not only by our regulatory agencies, but also by other government agencies and third parties, such as present or former learners or employees and other members of the public.
Restrictions on Adding Educational Programs.
State requirements and accrediting agency standards may, in certain instances, limit our ability to establish additional programs, particularly with regard to degree granting programs. Many states require approval before institutions can add new programs under specified conditions. The Higher Learning Commission, the Minnesota Office of Higher Education, and other state educational regulatory agencies that license or authorize Capella University and our degree programs, require institutions to notify them in advance of implementing new programs, and upon notification may undertake a review of the institution’s licensure, authorization or accreditation.
Generally, if an institution eligible to participate in Title IV programs adds an educational program after it has been designated as an eligible institution, the institution must apply to the Department of Education to have the additional program designated as eligible. However, a degree-granting institution is not obligated to obtain the Department of Education’s approval of additional programs that lead to an associate, bachelor’s, professional or graduate degree at the same degree level(s) previously approved by the Department of Education, unless the program is to be offered through direct assessment. Similarly, an institution is not required to obtain advance approval for new programs that both prepare learners for GE in the same or related recognized occupation as an educational program that has previously been designated as an eligible program at that institution and meet certain minimum-length requirements, except in the case of new direct assessment programs. However, the Department of Education, as a condition of certification to participate in Title IV programs, can require prior approval of such programs or otherwise restrict the number of programs an institution may add. In the event that an institution that is required to obtain the Department of Education’s express approval for the addition of a new degree program fails to do so, and erroneously determines that the new educational program is eligible for Title IV program funds, the institution may be liable for repayment of Title IV program funds received by the institution or learners in connection with that program.
Eligibility and Certification Procedures.
Each institution must apply to the Department of Education for continued certification to participate in Title IV programs at least every six years, or when it undergoes a change of control, and an institution may come under the Department of Education’s review when it expands its activities in certain ways, such as opening an additional location or, in certain cases, when it modifies academic credentials that it offers. Capella University is fully certified through June 30, 2020 to participate in the Title IV programs. Our recertification process is described more fully in the section
“Regulatory Environment–Regulation of Federal Student Financial Aid Programs.”
Of the Company's subsidiaries, Capella University is the only one eligible to participate in the Title IV program. For details regarding the planned Strayer Education Inc./Capella Education Company Merger, please see the Change in Ownership Resulting in Change of Control section, below.
Acquisitions of Other Institutions.
When a company, partnership or any other entity or individual acquires an institution that is eligible to participate in Title IV programs, that institution undergoes a change of ownership resulting in a change of control as defined by the Department of Education. Upon such a change of control, an institution's eligibility to participate in Title IV programs is generally suspended until it has applied for recertification by the Department of Education as an eligible institution under its new ownership, which requires that the institution also re-establish its state authorization and accreditation. The Department of Education may temporarily and provisionally certify an institution seeking approval of a change of ownership under certain circumstances while the Department of Education reviews the institution’s application. The time required for the Department of Education to act on such an application may vary substantially. The Department of Education’s recertification of an institution following a change of control will be on a provisional basis. For details regarding the planned Strayer Education Inc./Capella Education Company Merger, please see the Change in Ownership Resulting in Change of Control section below.
Change in Ownership Resulting in a Change of Control.
In addition to acquisitions of other institutions, other types of transactions can also cause a change of control. The Department of Education, most state education agencies and our accrediting agency all have standards pertaining to the change of control of institutions, but these standards are not uniform.
Department of Education regulations describe some transactions that constitute a change of control, including the transfer of a controlling interest in the voting stock of an institution or the institution’s parent corporation. With respect to a publicly traded corporation, Department of Education regulations provide that a change of control occurs in one of two ways: (i) if there is an event that would obligate the corporation to file a Current Report on Form 8-K with the SEC disclosing a change of control or (ii) if the corporation has a shareholder that owns at least 25% of the total outstanding voting stock of the corporation and is the largest shareholder of the corporation, and that shareholder ceases to own at least 25% of such stock or ceases to be the largest shareholder. These standards are subject to interpretation by the Department of Education. A significant purchase or disposition of our voting stock could be determined by the Department of Education to be a change of control under this standard. Many states include the sale of a controlling interest of common stock in the definition of a change of control requiring approval. A change of control under the definition of one of these agencies would require us to seek approval of the change in ownership and control to maintain our accreditation, state authorization or licensure. The requirements to obtain such approval from the states and our accrediting commission vary widely. In some cases, approval of the change of ownership and control cannot be obtained until after the transaction has occurred.
When a change of ownership resulting in a change of control occurs at a proprietary institution, the Department of Education applies a different set of financial tests to determine the financial responsibility of the institution in conjunction with its review and approval of the change of ownership. The institution is required to submit a same-day audited balance sheet reflecting the financial condition of the institution immediately following the change in ownership. The institution’s same-day balance sheet must demonstrate an acid test ratio of at least 1:1, which is calculated by adding cash and cash equivalents to current accounts receivable and dividing the sum by total current liabilities (and excluding all unsecured or uncollateralized related party receivables). In addition, the same-day balance sheet must demonstrate positive tangible net worth. If the institution does not satisfy these requirements, the Department of Education may condition its approval of the change of ownership on the institution’s agreeing to letters of credit, provisional certification, and/or additional monitoring requirements, as described in the above section addressing “
Financial Responsibility.”
A change of control also could occur as a result of future transactions in which Capella Education Company or Capella University is involved. Some corporate reorganizations and some changes in the board of directors are examples of such transactions. Moreover, the potential adverse effects of a change of control could influence future decisions by us and our shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids for shares of our common stock and could have an adverse effect on the market price of our common stock.
On October 29, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Strayer Education, Inc. (“Strayer”) and Sarg Sub Inc. (“Merger Sub”). Consummation of the Merger will constitute a change of control and is subject to receipt of certain regulatory approvals and other conditions specified in the Merger Agreement. In connection with the Merger, Capella University filed an application for pre-acquisition review of change of ownership with the Department of Education on November 28, 2017, and an application for change of control with the Higher Learning Commission on December 1, 2017. On November 22, 2017, the U.S. Federal Trade Commission granted early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In addition, on January 19, 2018, the Company and Strayer announced that shareholders of both companies voted to approve a proposal to effect the merger. The proposed merger remains subject to the satisfaction of customary closing conditions, including approvals by State regulators, and relevant accreditation bodies. By letter dated February 26, 2018, the Department of Education issued the results of its preacquisition review of the proposed change in ownership of the Company. That letter confirms that, subject to submission of additional documents following the closing, Capella University will have uninterrupted participation in the Title IV Programs while the Department of Education completes its review of the relevant documentation. The Company continues to expect that the Merger will close in the third quarter of 2018. Following the completion of the Merger, Strategic Education, Inc. will be the corporate entity under which both Capella University and Strayer University will continue to operate as independent and separately accredited institutions.
Risks Related to the Extensive Regulation of Our Business
If we fail to comply with the extensive regulatory requirements for our business, we could face significant restrictions on our operations and monetary penalties, including loss of access to federal loans and grants for our learners on which we are substantially dependent.
As a provider of higher education, we are subject to extensive U.S. regulation on both the federal and state levels. In particular, the Higher Education Act, as amended and reauthorized from time to time, and related regulations impose significant regulatory scrutiny on Capella University, and all other higher education institutions that participate in the various federal student financial aid programs under Title IV of the Higher Education Act (Title IV programs). The Higher Education Act, as reauthorized, mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the federal government through the U.S. Department of Education; (2) independent accrediting agencies recognized by the Department of Education; and (3) state higher education regulatory bodies.
In
2017
, Capella University derived
75.53%
of its revenues (calculated on a cash basis) from Title IV programs, administered by the U.S. Department of Education. A significant percentage of our learners rely on the availability of Title IV program funds to cover their cost of attendance at Capella University and related educational expenses.
The applicable regulatory requirements cover virtually all phases of our operations, including educational program offerings, facilities, instructional and administrative staff, administrative procedures, marketing and recruiting, financial operations, processing refund payments to the U.S. Department of Education (the Department of Education) for withdrawn learners, commencement of new educational programs, and changes in our corporate structure and ownership.
The regulations, standards and policies of the various regulatory agencies frequently change and are subject to interpretative uncertainty, particularly where they are crafted for traditional schools rather than our on-line academic delivery model. Changes in, or new interpretations of, applicable laws, regulations, or standards could have a material adverse effect on our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs, or costs of doing business. In addition, the development of new avenues of academic and financial resources for learners, such as the University’s implementation of the non-term borrower-based academic year for direct assessment programs, may give rise to unpredictability with regard to application of evolving regulatory standards. We cannot predict how all of the requirements applied by these agencies will be interpreted or whether we will be able to comply with these requirements in the future.
If we are found to be in noncompliance with any applicable regulations, standards or policies, any one of the relevant regulatory agencies may be able to do one or more of the following:
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Impose monetary fines or penalties;
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Limit or terminate our operations or ability to grant degrees and diplomas;
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Restrict or revoke our accreditation, licensure or other approvals to operate;
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Limit, suspend or terminate our eligibility to participate in Title IV programs or state financial aid programs;
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Require repayment of funds received under Title IV programs or state financial aid programs;
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Require us to post a letter of credit with the Department of Education;
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Subject us to heightened cash monitoring by the Department of Education;
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Transfer us from the Department of Education's advanced system of receiving Title IV program funds to its reimbursement system, under which an institution must disburse its own funds to learners and document the learners' eligibility for Title IV program funds before receiving such funds from the Department of Education;
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Subject us to other civil or criminal penalties; and/or
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Subject us to other forms of censure.
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Any of the penalties, injunctions, restrictions or other forms of censure listed above could have a material adverse effect on our business, financial condition, results of operations and cash flows. If we lose our Title IV eligibility, we would experience a dramatic and adverse decline in revenue and we would be unable to continue our business as it currently is conducted.
Rulemaking by the U.S. Department of Education, or future changes to or interpretations of existing regulations, could materially and adversely affect our business.
From time to time, the Department of Education engages in rulemaking which can materially affect our business. Additionally, from time to time the Department of Education issues new guidance on, or interpretations of, existing regulations. The Department of Education has promulgated or engaged in rulemaking on substantive matters in the past two years that impact our business, including the following:
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On October 12, 2016, the Department of Education released final Teacher Preparation regulations to provide transparency around initial teacher preparation programs. This rule requires institutions with initial teacher licensure programs to report outcomes to the state and ties Teacher Education Assistance for College and Higher Education (TEACH) funds to programs shown to be effective via this required reporting. Capella University ended its participation in the TEACH Grant Program effective in October 2016. The published final rules were to be effective July 1, 2017; however, in early 2017, the United States Congress invoked the Congressional Review Act authority to overturn this regulation, which was signed into law by President Trump in March 2017.
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The Department of Education published final rules on November 1, 2016 which set forth expanded criteria, and substantial discretion for the Department of Education, with respect to borrower rights and relief in defense to repayment of Title IV loans. In particular, for recipients of loans disbursed on or after July 1, 2017, the rule permits student loan debt relief, upon borrower application, where there is:
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State or Federal court or administrative tribunal judgment against a school related to the loan or the educational services for which the loan was made;
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Substantial misrepresentation by the school.
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The regulation grants the Department of Education broad discretion to determine whether a school has committed a breach of contract or substantial misrepresentation, to allow group claims, which may include individuals who have not applied to the Department of Education seeking relief, and to determine when to seek recoupment from the school upon loan discharge. In addition, the final rules expand the events triggering a determination that an institution is unable to meet its financial or administrative obligations to include certain automatic triggers, such as failure to satisfy the 90/10 regulation in the most recent fiscal year, a cohort default rate in excess of 30 percent in the two most recent years, and failure to comply with certain SEC requirements, as well as discretionary triggers such as certain federal, and private actions, unspecified dropout rates, unspecified fluctuations in Title IV funding, and actions by the school’s accreditor. In the event of such a triggering event, an institution may become ineligible for Title IV funds or be required to post a letter of credit in the amount of at least 10% of the school’s annual Title IV disbursements for each triggering event, and make disclosure to learners and prospective learners. In addition, the rule increases access to closed school discharges and prohibits the use of pre-dispute arbitration agreements. Finally, the rule makes other conforming and technical changes to repayment plans and loan consolidation.
Although this rule was slated to go into effect July 1, 2017, on June 16, 2017, the Department of Education announced an indefinite postponement of the Borrower Defense to Repayment regulation. On the same day, the Department of Education announced its intent to establish rulemaking committees to develop proposed revisions to the existing gainful employment regulation as well as the Borrower Defense to Repayment regulation. The Department of Education conducted public hearings on Gainful Employment and Borrower Defense to Repayment on July 10 and July 12, 2017, in addition to soliciting written comments on both topics. Capella University submitted comments on July 12, 2017. The Borrower Defense to Repayment negotiated rulemaking committee met in November 2017, as well as in January and February 2018, and wrapped up negotiations without reaching consensus, freeing the Department of Education to draft a rule without including input from the committee. The Gainful Employment negotiated rulemaking committee met in December 2017 and February 2018 and will meet again in March 2018. The Department of Education has indicated it intends to release final rules addressing both Borrower Defense to Repayment and Gainful Employment by November 1, 2018, to go into effect July 1, 2019.
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On December 16, 2016, the Department of Education published final rules on State Authorization of Postsecondary Distance Education and Foreign Locations. These rules require institutions offering distance education or correspondence courses to be authorized by each state in which the institution enrolls students, if such authorization is required by the state, including via a state reciprocity agreement. In 2015, Capella University became an institutional member of SARA. The Department of Education has indicated they plan to issue formal guidance clarifying that SARA meets the definition of state authorization reciprocity agreement as included in the final regulation. Also included in the final rules are a number of general and individualized disclosures for prospects and learners including how programs are authorized, complaint processes, adverse actions by state and accrediting agencies, refund policies,
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and prerequisites for licensure or certification for certain programs. The new State Authorization regulations become effective July 1, 2018.
These regulations may increase our operating costs and in some cases require us to change the manner in which we operate our business. New or amended regulations, guidance or interpretations in the future could further negatively impact our business.
Application and discharge of learner Title IV debt under the new Borrower Defense to Repayment regulation could result in increased litigation and monetary losses, and could trigger Title IV ineligibility or require us to post letters of credit.
In the event the Borrower Defense to Repayment regulation becomes effective in its current form, borrowers will have access to a new application process designed to lead to discharge of loans for eligible borrowers. In the event the Department of Education were to grant relief from repayment to one or more Capella University learners, the Department of Education may seek recoupment of the losses incurred based on the borrower’s defense, which would result in financial losses for Capella University. The availability of this relatively informal avenue to relief, with substantial Department of Education adjudicatory discretion, may lead to an increase in the volume of learners seeking relief, both through the Department of Education as well as through litigation or other agencies. In addition, under the new financial responsibility rules, repayments to the Department of Education under the borrower defense to repayment regulation could render Capella University unable to meet its financial or administrative obligations for Title IV eligibility or require letters of credit, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Failure to comply with U.S. Department of Education rules regarding incentive compensation could result in monetary penalties and sanctions.
An institution participating in Title IV programs may not pay any commission, bonus or other incentive payments to any person involved in student recruitment or admissions or awarding of Title IV program funds, if such payments are based in any part, directly or indirectly, on success in enrolling students or obtaining student financial aid. Failure to comply could result in monetary penalties and/or sanctions imposed by the Department of Education, which could result in lower enrollments, revenue, and net operating income. The law and regulations governing this requirement do not establish clear criteria for compliance in all circumstances, creating uncertainty about what constitutes incentive compensation and which employees are covered by the regulation, rendering development of effective and compliant performance metrics more difficult to establish.
Failure to comply with new U.S. Department of Education rules regarding Gainful Employment (GE) could result in significant adverse consequences, including ineligibility for our learners to participate in Title IV programs.
Under the Higher Education Act, as reauthorized, proprietary institutions are generally eligible to participate in Title IV programs only for educational programs that lead to “gainful employment in a recognized occupation.”
In connection with this requirement, proprietary postsecondary institutions are required to disclose to prospective students each eligible program’s recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers. These reporting requirements increase our costs of operations and could adversely impact student enrollment, persistence and retention if our reported program information compares unfavorably with other reporting educational institutions.
The final rule went into effect on July 1, 2015. It applies to all GE programs, which include all programs offered by proprietary institutions. Under the rule, the continued eligibility of GE programs to participate in Title IV programs is based on the programs’ performance against the following Debt-to-Earnings (DTE) measures:
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Pass
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Programs whose graduates have annual loan payments less than 8% of total earnings, OR less than 20% of discretionary earnings.
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“Zone”
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Programs that do not pass and whose graduates have annual loan payments between 8% and 12% of total earnings, OR between 20% and 30% of discretionary earnings.
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Fail
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Programs whose graduates have annual loan payments greater than 12% of total earnings AND greater than 30% of discretionary earnings.
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Ineligible:
Programs that fail in 2 out of any 3 consecutive years OR have a combination of zone and failing DTE rates for four consecutive years for which DTE rates are calculated.
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Earnings are calculated by the Department of Education using Social Security Administration (SSA) data. Earnings information is then aggregated and made available to institutions. In January 2017, we received final DTE ratios from the Department of Education for the first measurement year. The DTE ratios we received showed that none of our programs were determined to “Fail.” This is significant because the rules state that a program would be ineligible for Title IV funds in the next year if it Failed in two out of three consecutive years, whereas for a program in the Zone, a program would be ineligible for Title IV funds in the next year only if it were in the Zone (or Failed) in each of four consecutive years. The initial DTE ratio information we received reflected one of our programs (the Master's of Science in Marriage and Family Counseling/Therapy program) was in the Zone. Since January 2017, we have not received any additional DTE ratios from the Department of Education for periods subsequent to the first measurement year. We have taken and continue to take steps to avoid or mitigate potential adverse consequences of the DTE ratio rules. Despite our efforts, it remains possible that one or more of our programs could be determined to be in the “Zone” or “Fail” in future calculations.
If a program fails or is in the zone for draft DTE rates during the transition period, the Department of Education will calculate transitional draft DTE rates using the median loan debt of the students who completed the program during the most recently completed award year and the earnings used to calculate the draft DTE rates. The final DTE rate for purposes of any sanctions will be the lower of the draft or transitional DTE rate. The transition period is five years for programs with durations of one year or less, six years for programs between one and two years in length, and seven years for programs of more than two years.
If a GE program could become ineligible in the subsequent award year based on its DTE metrics, the institution is required to inform students and prospective students that the program could lose Title IV eligibility. The warning must state that the program has not passed standards established by the Department of Education, based on amounts students borrow for enrollment in the program and their reported earnings. The warning must also inform students that if the program does not pass the standards in the future, students who are then enrolled may not be able to use federal student grants or loans to pay for the program.
The final rule also requires institutions to provide certifications regarding a GE program’s satisfaction of programmatic accreditation and state licensure requirements as part of the institutional program participation agreements with the Department of Education. The certification requirements went into effect on December 31, 2015 in connection with the Department of Education's program participation agreement recertification; however, new programs introduced between July 1 and December 31, 2015 were to be certified prior to such program’s introduction to establish eligibility for Title IV federal financial aid. We worked with the Department of Education to clarify various issues related to the new certification requirements, and certified our programs as required by the final GE rule and requirements of the Department of Education.
Under the final GE rule, the continuing eligibility of our educational programs for Title IV program funding is at risk due to factors beyond our control, such as changes in the actual or deemed income level of our graduates, changes in student borrowing levels, increases in interest rates, changes in the federal poverty income level relevant for calculating discretionary income, changes in the percentage of our former students who are current in repayment of their student loans, and other factors.
In addition, if we are required to include a warning notice for any of our programs based on the debt service-to-earnings ratios, enrollment in those programs may decline significantly. The inclusion of a required warning could affect the continuation of the affected programs even if students in the programs are still eligible to participate in Title IV aid programs.
The final rule also includes requirements for the reporting of learner and program data by institutions to the Department of Education. The rule makes other conforming and technical revisions to the Title IV program participation agreement and related regulations. On June 30, 2017, the Department of Education announced that enforcement of certain expanded disclosure and distribution requirements under the current final rule will be postponed until July 1, 2018.
On June 16, 2017, the Department of Education announced its intention to establish a rulemaking committee to examine and revise the Gainful Employment regulation, which it called "overly burdensome and confusing for institutions of higher education." The Department of Education conducted public hearings on Gainful Employment and Borrower Defense to Repayment on July 10 and July 12, 2017, in addition to soliciting written comments on both topics. Capella submitted comments on July 12, 2017. The Gainful Employment negotiated rulemaking committee met in December 2017 and February 2018, and will meet again in March 2018. The Department of Education intends to publish final rules by November 1, 2018, to go into effect July 1, 2019
If Capella University does not maintain its registration in Minnesota, it may not operate or participate in Title IV programs or operate in a number of other states.
An institution that grants degrees, diplomas or certificates must be authorized by the relevant education agency of the state in which it is located. Capella University is deemed to be located in the State of Minnesota and is registered with the Minnesota Office of Higher Education (MOHE). Minnesota registration is also required for our learners to be eligible to receive funding under Title IV programs. Such registration may be lost or withdrawn if Capella University fails to submit renewal applications and other required submissions to the state in a timely manner, or if Capella University fails to comply with material requirements under Minnesota statutes and rules for continued registration. Loss of state registration of Capella University from the Minnesota Office of Higher Education would terminate our ability to provide educational services as well as our eligibility to participate in Title IV programs. Capella University must also remain in good standing with MOHE to obtain and maintain authorization or licensure to operate in states outside of Minnesota. On October 13, 2016, Capella University received a request for information from MOHE related to its doctoral programs and complaints filed by doctoral learners. The Company provided data and information in response to MOHE’s request, along with additional clarifying and supplemental information. According to the original 2016 request, MOHE is completing program reviews of all online doctoral programs for institutions registered in Minnesota in an effort to better understand the context, background, and issues related to doctoral student complaints. Should our registration with MOHE be terminated, our ability to operate in other states would also cease, and it would have a material adverse effect on our business, financial condition, results of operations and cash flows.
In 2017, the Minnesota legislature promulgated revisions to the Act, which clarify MOHE’s authority and processes related to student complaints. Among other revisions, the legislation specifies that if violations of the Act are found, then MOHE may require remedial action by the school or assign a penalty, and that remedial action may include student notifications of violations, adjustments to university policies and procedures and tuition refunds to impacted students. The full impact of the legislation cannot be predicted and will depend upon the manner in which MOHE interprets and applies the process set forth in the statue.
Our failure to comply with state authorization requirements or other regulations of various states could result in actions that would have a material adverse effect on our enrollments, revenues and results of operations.
We must be authorized to operate or otherwise certified to enroll students by the appropriate post-secondary regulatory authority in each state where we conduct activities that require authorization, or be exempt from such regulatory authorization, usually based on recognized accreditation. On January 27, 2015, the State of Minnesota joined the State Authorization Reciprocity Agreement (SARA), and on March 6, 2015, Capella University was approved as an institutional participant in SARA. SARA is a voluntary agreement among member states and U.S. territories that establishes comparable national standards for interstate offering of postsecondary distance-education courses and programs. It is intended to make it easier for students to take online courses offered by postsecondary institutions based in another state. Capella University is authorized to operate in SARA member-states under the terms of the Agreement.
As of July 1, 2017, California requires registration with the Bureau for Private Postsecondary Education (“BPPE”), and Capella has filed its BPPE registration application. Capella University has obtained state-specific regulatory approval to operate in all other states that require such authorization. For example, in some states the higher educational agency may require Capella University to be licensed or authorized because we enroll learners who reside in the state. In other cases, licensure or authorization is required because our recruiters meet with prospective learners in the state. In addition to Minnesota, we are licensed or authorized to operate or certified to offer degree programs in all SARA member-states. Capella University is formally licensed or authorized to operate in these states because we have determined that our activities in each state constitute a presence that requires licensure or authorization by these states' higher educational agencies. In some cases, the licensure or authorization is only for specific programs or specific activities. Because Capella University enrolls learners from each of the 50 states, as well as the District of Columbia, and because we may undertake activities in other states that constitute a presence or otherwise subject us to the jurisdiction of the respective state educational agency, we may need to seek licensure or authorization to operate in additional states. Additionally, state regulations in states in which we are not licensed may limit certain of our activities, such as residencies and internships in programs requiring those experiences. If we lose any of our approvals or experience a delay in obtaining or cannot obtain these approvals or evidence such approvals are not necessary, we may be unable to enroll learners in impacted states, and our business could be materially and adversely impacted.
We are in a period in which many states are reevaluating and revising their authorization regulations, especially as applied to distance education. This increased review and scrutiny has increased uncertainty regarding our regulatory status and ability to offer programs in certain states. If these pressures and uncertainty continue in the future, they could have a material impact on our enrollments, revenue, results of operations and cash flow. If we fail to comply with state licensing or authorization requirements, we may be subject to the loss of state licensure or authorization. Loss of authorization in one or more states could
increase the likelihood of additional scrutiny and potential loss of operating and/or degree granting authority in other states in which we operate, which would further impact our business.
We are subject to extensive regulations by the states in which we are authorized or licensed to operate. State laws typically establish standards for instruction, qualifications of faculty, administrative procedures, marketing, recruiting, financial operations and other operational matters. State laws and regulations may limit our ability to offer educational programs and to award degrees. Some states may also prescribe financial regulations that are different from those of the Department of Education. We are required to post surety bonds in several states. If we fail to comply with state licensing requirements, we may lose our state licensure or authorizations. Failure to comply with the requirements of the Minnesota Office of Higher Education could result in Capella University losing its registration with the Minnesota Office of Higher Education, its eligibility to participate in Title IV programs, or its ability to offer certain programs, any of which would have a material impact on our operations.
Attorneys General in several states have become more active in enforcing consumer protection laws, especially related to recruiting practices and the financing of education at proprietary educational institutions. In addition, several Attorneys General have partnered with the Federal Consumer Financial Protection Bureau and the Federal Trade Commission to review industry practices. Recent litigation initiated by Attorneys General and the Federal Trade Commission against other proprietary educational institutions increases the likelihood of scrutiny of the marketing and advertising practices of educational institutions, and therefore increases risk. If our past or current business practices at Capella University are found to violate applicable consumer protection laws or advertising regulations, we could be subject to monetary fines or penalties and possible limitations on the manner in which we conduct our business, which could materially and adversely affect our business, financial condition, results of operations and cash flows. To the extent that more federal agencies or states commence such investigations or multiple states act in a concerted manner, the cost of responding to these inquiries and investigations could increase significantly and the potential impact on our business would be substantially greater.
The inability of our graduates to obtain licensure or other specialized outcomes in their chosen professional fields of study could reduce our enrollments and revenues, and potentially lead to litigation that could be costly to us.
Certain of our graduates seek professional licensure or other specialized outcomes in their chosen fields following graduation. Their success in obtaining these outcomes depends on several factors, including the individual merits of the learner, but also may depend on whether the institution and the program were approved by the state or by a professional association, whether the program from which the learner graduated meets all state requirements and whether the institution is accredited. Certain states have refused to license or certify learners from particular Capella University programs because the programs did not meet one or more of the state’s specific licensure requirements or were not approved by the state for purposes of professional licensure. In addition, professional associations may refuse to certify specialized outcomes for our learners for similar reasons. We have had to respond to claims brought against us by former learners as a result of such refusals. For instance, certain states have denied our graduates professional licensure because the Capella University program from which they graduated did not have a sufficient number of residency hours, did not include a state-approved clinical program, did not satisfy state coursework requirements, or was not accredited by a specific third party (such as the American Psychological Association). The state requirements for licensure are subject to change, as are the professional certification standards, and we may not immediately become aware of changes that may impact our learners in certain instances. In the event that one or more states refuses to recognize our learners for professional licensure, and/or professional associations refuse to certify specialized outcomes for our learners, based on factors relating to our institution or programs, the potential growth of our programs would be negatively impacted, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, we could be exposed to litigation that would force us to incur legal and other expenses that could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Action by the U.S. Congress to revise the laws governing the federal student financial aid programs or reduce funding for those programs, including changes applicable only to proprietary educational institutions, could reduce our learner population and increase our costs of operation.
The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. The Higher Education Act (HEA) was last reauthorized in 2008 by the Higher Education Opportunity Act. It currently is unclear when the HEA will be reauthorized. Changes to the HEA, 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. We cannot predict what legislation, if any, may emanate from Congressional committee hearings or what impact any such legislation might have on the proprietary education sector and our business in particular.
Any action by Congress that significantly reduces Title IV program funding through across-the-board funding reductions, 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, for instance by reducing our marketing expenses or otherwise modifying our marketing practices, in ways that increase our administrative costs and reduce our enrollment and operating income.
We would lose our eligibility to participate in federal student financial aid programs if the percentage of our revenues derived from those programs is too high, in which event we could not conduct our business in its present form.
A requirement of the Higher Education Act, as reauthorized by the Higher Education Opportunity Act, commonly referred to as the “90/10 Rule”, applies only to proprietary institutions of higher education, which includes Capella University. Under this rule, a proprietary institution will be ineligible to participate in Title IV programs if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue, as defined in the rule, from Title IV programs. An institution that derives more than 90% of its revenue from Title IV programs for any single fiscal year will be automatically placed on provisional certification for two fiscal years and will be subject to possible additional sanctions determined to be appropriate under the circumstances by the U.S. Department of Education in the exercise of its broad discretion. While the Department of Education has broad discretion to impose additional sanctions on such an institution, there is only limited precedent available to predict what those sanctions might be, particularly in the current regulatory environment. The Department of Education could specify any additional conditions as a part of the provisional certification and the institution’s continued participation in Title IV programs. These conditions may include, among other things, restrictions on the total amount of Title IV program funds that may be distributed to learners attending the institution; restrictions on programmatic and geographic expansion; requirements to obtain and post letters of credit; additional reporting requirements to include additional interim financial reporting; or any other conditions imposed by the Department of Education. Should an institution be subject to a provisional certification at the time that its current program participation agreement expired, the effect on recertification of the institution or continued eligibility in Title IV programs pending recertification is uncertain. An institution that derives more than 90% of its revenue from Title IV programs for two consecutive fiscal years will be ineligible to participate in Title IV programs for at least two fiscal years. Capella University is required to calculate this percentage at the end of each fiscal year; as of
December 31, 2017
, our percentage was
75.53%
of Capella University revenues. If an institution is determined to be ineligible to participate in Title IV programs due to the 90/10 Rule, any disbursements of Title IV program funds while ineligible must be repaid to the Department of Education.
The 90/10 Rule percentage for Capella University could increase in the future depending on the degree to which our various initiatives are effective, the impact of future changes in our enrollment mix, and regulatory and other factors outside our control, including any reduction in government tuition assistance for military personnel, including veterans, or changes in the treatment of such funding for purposes of the 90/10 Rule calculation. Currently, tuition assistance for military personnel, including veterans, is not treated as Title IV revenue under the 90/10 Rule and, therefore, based on the prescribed order of application per the regulations, a majority of such funding is included in the “10%” portion of the rule calculation. A reduction in the availability of this type of funding, or a change (through either legislation or executive order) that requires that it be treated in the same manner as Title IV funding under the 90/10 Rule, would increase our 90/10 Rule percentage.
Any necessary further efforts to reduce the 90/10 Rule percentage for Capella University, especially if the percentage exceeds 90% for a fiscal year, may involve taking measures which reduce our revenue, increase our operating expenses, or both, in each case perhaps significantly. If the 90/10 Rule is not changed to provide relief for institutions like Capella University, we may be required to make structural changes to our business in order to remain in compliance. These changes may materially alter the manner in which we conduct our business and materially and adversely impact our business, financial condition, results of operations and cash flows.
An increase in our student loan default rates could result in the loss of eligibility to participate in Title IV programs, which would materially and adversely affect our business.
To remain eligible to participate in Title IV programs, educational institutions must maintain student loan cohort default rates below specified levels. The U.S. Department of Education reviews an educational institution’s cohort default rate annually as a measure of administrative capability. Each cohort is the group of students who first enter into student loan repayment during a federal fiscal year (ending September 30). For each federal fiscal year, the cohort default rate is calculated for each institution with 30 or more borrowers entering repayment in a given federal fiscal year by determining the rate at which borrowers who become subject to their repayment obligation in that federal fiscal year default by the end of the second following federal fiscal year. The cohort default rates are published by the Department of Education approximately 12 months after the end of the measuring period. Thus, in September 2017, the Department of Education published the three-year cohort default rates for the
2014 cohort, which measured the percentage of students who first entered into repayment during the year-ended September 30, 2014 and defaulted prior to September 30, 2016. Capella University's three-year cohort default rates for the
2014
,
2013
and
2012
cohorts are
6.9%
,
6.5%
, and
8.9%
, respectively. If an institution’s three-year cohort default rate exceeds 30% for three consecutive years or 40% for any given year, it will be ineligible to participate in Title IV programs and, as a result, its students would not be eligible for federal student financial aid.
If the Department of Education suspends or terminates our certification, we would lose eligibility to participate in Title IV programs.
Capella University is fully certified through June 30, 2020 to participate in the Title IV programs. The Department of Education may also review our continued certification to participate in Title IV programs in the event we expand our activities in certain ways, such as opening an additional location or, in certain cases, if we modify the academic credentials that we offer. The Department of Education could limit, suspend or terminate our participation in Title IV programs for violations of the Higher Education Act or Title IV regulations. Title IV eligibility is critical to the continued operation of our business. If Capella University becomes ineligible to participate in Title IV federal student financial aid programs, we could not conduct our business as it is currently conducted, and it would have a material adverse effect on our business, financial condition, results of operations and cash flows.
If any regulatory audit, investigation or other proceeding finds us not in compliance with the numerous laws and regulations applicable to the postsecondary education industry, we may not be able to successfully challenge such finding and our business could suffer.
Due to the highly regulated nature of the postsecondary education industry, we are subject to audits, compliance reviews, inquiries, complaints, investigations, claims of non-compliance and lawsuits by federal and state governmental agencies, regulatory agencies, accrediting agencies, present and former students and employees, shareholders and other third parties, any of whom may allege violations of any of the regulatory requirements applicable to us. Such scrutiny may be heightened with regard to certain cutting-edge approach to services related to direct assessment, including our implementation of the borrower-based academic year for certain programs, designed to facilitate the learners’ experience in direct assessment programs. In addition, the creation of interagency task forces, such as that between the Federal Trade Commission, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, and the Departments of Justice, Treasury, and Veteran’s Affairs, dedicated to examining proprietary schools, suggests that scrutiny of the sector continues to grow. If the results of any claims or actions are unfavorable to us, we may be required to pay monetary fines or penalties, be required to repay funds received under Title IV programs or state financial aid programs, have restrictions placed on or terminate our schools’ or programs’ eligibility to participate in Title IV programs or state financial aid programs, have limitations placed on or terminate our schools’ operations or ability to grant degrees and certificates, have our schools’ accreditations restricted or revoked, or be subject to civil or criminal penalties. Any one of these sanctions could materially adversely affect our business, financial condition, results of operations and cash flows and result in the imposition of significant restrictions on us and our ability to operate.
If we fail to maintain our institutional accreditation or if our institutional accrediting body loses recognition by the U.S. Department of Education, we could lose our ability to participate in Title IV programs and lose our authorization to operate in a number of states.
Capella University is accredited by the Higher Learning Commission (HLC). The HLC is one of six regional accrediting agencies recognized by the Secretary of the Department of Education as a reliable indicator of educational quality. Accreditation by a recognized accrediting agency is required for an institution to become and remain eligible to participate in Title IV programs.
In January 2015, Capella University’s accreditation with the HLC was reaffirmed. The reaffirmation enables Capella University to continue to participate in Title IV programs. The next reaffirmation of accreditation will take place in 2022-2023.
To remain accredited, we must continuously meet the HLC’s Criteria for Accreditation and Core Components relating to, among other things, performance, governance, institutional integrity, educational quality, faculty, administrative capability, resources and financial stability. Failure to meet any of these criteria or core components could result in the loss of accreditation at the discretion of the HLC.
On August 31, 2016, the HLC announced policy changes which give the Commission more discretion to designate institutions to be in "financial distress” or under "government investigation.” These policy changes are broad and involve discretion, and receipt of one of these designations could impact future accreditation status, eligibility for Title IV aid by triggering the Department of Education’s financial responsibility triggers, or otherwise negatively impact our business.
In November 2017, the HLC announced policy changes to become effective September 1, 2019, mandating certain recruitment, admissions and related institutional practices. Among other requirements, the policy: mandates that recruitment personnel and vendors be qualified and properly trained, and that prospects be allowed sufficient time to review university policies, financial aid and transfer credit implications, as well as the terms of enrollment agreements, before program enrollment; prohibits certain time-sensitive promotions and restrictions against students’ ability to initiate a lawsuit, state or accreditor complaint, or seek discharge of student loans; places conditions upon universities’ use of automatic re-registration processes; and sets forth criteria for proper publication of job placement, salary and other learner outcomes data. In November 2017, the HLC also introduced guidelines for shared services relationships. These policy changes may create administrative burden or otherwise negatively impact our business. Compliance with these policy changes may increase our operating costs and in some cases require us to change the manner in which we operate our business. Further, new or amended accreditor policies, guidance or interpretations in the future could further negatively impact our business.
If the U.S. Department of Education ceased to recognize the HLC for any reason, Capella University would not be eligible to participate in Title IV programs beginning 18 months after the date such recognition ceased unless the HLC was again recognized or our institution was accredited by another accrediting body recognized by the U.S. Department of Education. The Department of Education’s National Advisory Committee on Institutional Quality & Integrity reviewed the HLC in its June 2015 meeting and recommended renewal of the HLC's recognition for two and one half years.
A failure to demonstrate “financial responsibility” may result in the loss of eligibility by Capella University to participate in Title IV programs or require the posting of a letter of credit to maintain eligibility to participate in Title IV programs.
To participate in Title IV programs, an eligible institution must satisfy specific measures 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 other conditions on its participation in Title IV programs. Any obligation to post a significant letter of credit could increase our costs of regulatory compliance. If Capella University is unable to secure a letter of credit, it would lose its eligibility to participate in Title IV programs. In addition to the obligation to post a letter of credit, an institution that is determined by the Department of Education not to be financially responsible can be transferred from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment. On November 1, 2016 the Department of Education substantially revised the existing financial responsibility requirements to expand their authority to collect Letters of Credit, which would amount to at least 10% of the previous year’s Title IV allotment, in addition to situations which would require recalculation of the composite score more frequently than annually, although the Department of Education subsequently postponed implementation of the revised rule. In particular, certain audits and investigations by state, federal or other oversight entities, court or administrative judgments, the existence of certain lawsuits, the settlement of certain lawsuits, certain actions or probation by accrediting agencies, failure to derive 10 percent of revenues from non-Title IV sources in a given year, a cohort default rate of 30 percent or higher in the two most recent years, failure to comply with SEC regulations, SEC threatened proceedings or suspension, failure to satisfy gainful employment standards, fluctuation in the disbursement of Title IV funds, citation by a state licensing or authorizing agency, failure of a financial stress test, high annual dropout rates, violation of a loan agreement, or repayment of debt forgiven by the Department of Education in a borrower defense claim may render Capella University unable to meet its financial or administrative obligations or require letters of credit, for each triggering event, in an amount of at least 10% of the school’s annual Title IV disbursements, and require that Capella University provide warnings to prospective and current learners that it has been required to provide enhanced financial protection to the Department of Education. Limitations on, or termination of, Capella University’s participation in Title IV programs as a result of its failure to demonstrate financial responsibility would limit Capella University’s learners’ access to Title IV program funds, which could significantly reduce our enrollments and revenues and materially and adversely affect our business, financial condition, results of operations and cash flows.
A failure to demonstrate “administrative capability” may result in the loss of Capella University's eligibility to participate in Title IV programs.
Department of Education regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV programs. If an institution fails to satisfy any of these criteria or comply with any other Department of Education regulations, the Department of Education may:
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Transfer the institution from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment;
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Place the institution on provisional certification status; or
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Commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.
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If we are found not to have satisfied the Department of Education’s “administrative capability” requirements we could be limited in our access to, or lose, Title IV program funding, which would significantly reduce our enrollment and revenues and materially and adversely affect our business, financial condition, results of operations and cash flows.
The interplay of federal and state regulators, other governmental authorities, accreditors, and private litigants could cause one allegation to have a larger impact on our business.
Certain regulations, such as the borrower defense to repayment rules, rely upon external actions of accreditors, government agencies and private litigants as triggers for adverse consequences for Title IV institutions. Similarly, policies of our accreditor, the Higher Learning Commission, allow it to designate institutions in "financial distress” or under "government investigation” at its discretion based on actions of regulators, litigation, other government bodies and other external circumstances. Viewed in combination, the regulations, policies, and authorities governing Capella University are increasingly an interrelated web. The interplay between federal and state governmental authorities, accreditors, and private litigation could result in one allegation, investigation, or action leading to a series of consequences, which cannot be predicted with certainty and which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we fail to comply with state authorization requirements in the operation of our job-ready skill entities, we could lose our ability to conduct business in those states.
State regulation of software coding schools and other non-degree programs continues to evolve. In the event DevMountain, Hackbright or Capella Learning Solutions were to fail to comply with state or local laws and regulations governing their operations, they may face sanctions, penalties, or loss of the ability to operate. Additionally, increasingly strict requirements may impact the time required to obtain approval in a new location and may negatively impact operating margins.
Qui Tam and class action litigation in the sector could materially and adversely affect our business.
In some circumstances of noncompliance or alleged noncompliance with federal or state regulations, we may be subject to lawsuits including
qui tam
lawsuits under the Federal False Claims Act or various, similar, state false claim statutes, and such lawsuits may impact our Title IV eligibility. In
qui tam
actions, private plaintiffs seek to enforce remedies under the Federal False Claims Act on behalf of the federal government and, if successful, are entitled to recover their costs and to receive a portion of any amounts recovered by the federal government in the lawsuit. These lawsuits can be prosecuted by a private plaintiff in respect of some action taken by us, even if the Department of Education does not agree with plaintiff's theory of liability. In addition, more prominent government and class action litigation in the sector, some related to doctoral students, could impact Capella University either by direct government investigation or private litigation against the Company or indirectly by consumer reaction to industry reputation by virtue of pending litigation against other institutions. In the event of such investigation or litigation, we could incur significant legal expenses defending ourselves against any such claims, and an adverse resolution of any future lawsuits could have an effect on our operating results and growth prospects.
Risks Related to Our Business
There can be no assurance that the proposed merger with Strayer will be consummated. The pendency of the merger, or the failure of the merger to be consummated, could have an adverse effect on our stock price, business, financial condition, results of operations or prospects.
On October 29, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Strayer Education, Inc. (“Strayer”) and Sarg Sub Inc. (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company with the Company surviving as a wholly owned subsidiary of Strayer (the “Merger”). On November 22, 2017, the Federal Trade Commission granted early termination, effective immediately, of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. On January 19, 2018, the proposal to adopt the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement were approved by our shareholders. By letter dated February 26, 2018, the Department of Education issued the results of its preacquisition review of the proposed change in ownership of the Company. That letter confirms that, subject to submission of additional documents following the closing, Capella University will have uninterrupted participation in the Title IV Programs while the Department of Education completes its review of the relevant documentation. Consummation of the Merger is also subject to receipt of certain regulatory approvals and other conditions specified in the Merger Agreement. However, regulatory approvals from certain educational agencies will also be required, including approval from the Higher Learning Commission. There can be no assurance that all of the regulatory approvals required to consummate the Merger will be obtained and, if obtained, there can be no assurance (i) as to the timing of any approvals, (ii) the ability to obtain the approvals on satisfactory terms, (iii) that the conditions will not have
an adverse effect on our business, financial conditions, or results of operations or (iv) that the conditions will not result in the abandonment of the Merger. Litigation filed or that may be filed against us or our Board could also prevent or delay the consummation of the Merger. As a result, there can be no assurance that the Merger will be consummated in a timely manner or at all.
Further, the pendency of the Merger could disrupt our businesses, in any of the following ways, among others:
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Our employees may experience uncertainty about their future roles with the combined company, which might adversely affect our ability to retain and hire key managers and other employees;
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The attention of our management may be directed toward the completion of the Merger and transaction-related considerations and may be diverted from our day-to-day business operations; and
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Vendors, suppliers or others may seek to modify or terminate their business relationships with us.
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We may face additional challenges in competing for new business and retaining or renewing business. These disruptions could be exacerbated by a delay in the completion of the Merger or termination of the Merger Agreement. Additionally, if the Merger is not consummated, we will have incurred significant costs and diverted the time and attention of management. A failure to consummate the Merger may also result in negative publicity, litigation against us or our directors and officers, and a negative impression of us in the financial markets. The occurrence of any of these events individually or in combination could have a material adverse effect on our financial condition, results of operations and stock price.
We may be unable to fully realize the expected benefits from the Merger.
We expect to achieve substantial operating and capital synergies and cost savings as a result of the Merger. If we are unable to successfully integrate the businesses, or integrate them in a timely fashion, we may face material adverse effects including, but not limited to (i) diversion of the attention of management and key personnel and potential disruption of our ongoing businesses, (ii) the loss of employees and learners, (iii) declines in our results of operations and financial condition and (iv) a decline in the market price of our common stock.
Even if we successfully integrate the businesses, there can be no assurance that the Merger will result in the realization of the full benefit of the anticipated synergies and cost savings or that these benefits will be realized within the expected time frames.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities and must generally operate our business in the ordinary course consistent with past practice (subject to certain exceptions). These restrictions could prevent us from pursuing attractive business opportunities that arise prior to the completion of the Merger and are generally outside the ordinary course of business, or otherwise have a material adverse effect on our future results of operations or financial condition.
A delay in completing the Merger may reduce or eliminate the expected benefits from the Merger.
The Merger is subject to a number of conditions, some of which are beyond our control, which could prevent, delay or otherwise materially adversely affect its completion. We cannot predict whether and when the conditions will be satisfied. The requirement to obtain certain regulatory approvals could delay the completion of the Merger for a significant period of time or prevent it from occurring. A delay in completing the Merger could cause the combined company to not realize some or all of the synergies and other benefits it expects to achieve if the Merger is successfully completed within its expected time frame. Because the Merger Agreement contains certain restrictions on the conduct of our business, if the Merger is delayed, these restrictions could adversely affect our ability to execute business strategies or pursue attractive business opportunities. In addition, a delay could cause management to focus on completion of the Merger instead of on other opportunities that could be beneficial to the company.
Termination of the Merger Agreement could negatively impact us.
If the Merger Agreement is terminated, our business may be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of our management on the Merger. In addition, if the Merger Agreement is terminated, the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Merger will be completed. If the Merger Agreement is terminated and our Board seeks another merger or business combination, shareholders cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than the consideration offered under the Merger Agreement.
The Merger Agreement provides for certain termination rights for both the Company and Strayer. In the event that the Company terminates the Merger Agreement under certain specified circumstances, the Company would be required to pay Strayer a termination fee in the amount of
$25.0 million
, and in the event that Strayer terminates the Merger Agreement under certain specified circumstances, Strayer would be required to pay the Company a termination fee in the amount of
$25.0 million
. The Company will also be required to pay Strayer the termination fee in the event it signs or consummates a Competing Proposal (as defined in the Merger Agreement) within twelve months following the termination of the Merger Agreement under certain circumstances.
If we are not able to continuously innovate our academic offerings and our business model, including to address increased competition with competency-based learning models, we will not be able to keep pace and effectively compete in the highly competitive proprietary higher education market.
Our success is built in part on our ability to innovate and adapt quickly to changing market dynamics. The pace of innovation in higher education continues to accelerate, especially with the more widespread adoption of competency-based learning models. The number of competency-based learning models, including direct assessment programs approved by the U.S. Department of Education to offer Title IV financial aid, is expected to increase in the upcoming years. As more competitors are approved to participate in such programs, competition in the market will continue to intensify. We need to continue to innovate ahead of market requirements and emerging competitive models, or our offerings may become less successful, which could materially and adversely affect our business, prospects, financial condition, results of operations and cash flows.
Changes we are making to our business to enhance our ability to improve learner success may adversely affect our growth rate, profitability, financial condition, results of operations and cash flows.
In order to improve the learner experience, attract learners who are more likely to persist in our programs, and improve the persistence of new and current learners, we continue to implement a number of important changes and initiatives to transition our business to more effectively support our students and improve their educational outcomes. Certain of these enhancements may adversely impact the number of learners who enroll in our programs. Other initiatives may impact enrollments as we proactively work with learners who are not making sufficient and timely academic progress. In addition, we are investing significant resources in these learner success initiatives, which will have an impact on our business, financial condition, results of operations and cash flows, particularly in the near term.
We may experience reduced revenues and operating margins if the number of our learners enrolled in doctoral programs continues to decrease, or if our learner success initiatives are not successful.
Total doctoral enrollment trends for Capella University continue to be negative. We are proactively seeking to increase doctoral enrollment through enhanced marketing, redesigning certain current programs to enhance affordability and differentiation, and by launching new programs, in particular professional doctorates. These efforts may not yield the intended results, and our revenues and operating margins may be reduced.
We also continue to focus on driving learner success in doctoral programs, particularly in the comprehensive and dissertation portions. These learner success efforts include engaging learners earlier and more often in preparation for the comprehensive and dissertation phase, leveraging analytics to personalize mentor support and effectiveness, more investments in faculty support in their role as mentors, and increasing visibility to milestone completion for learners and faculty. These investments may reduce our operating margins, may include changes that are not well received by faculty or learners, or may not yield the intended learner success improvements. In some instances, our learner success efforts may negatively impact total enrollment if learners who are not making sufficient and timely academic progress withdraw, are administratively withdrawn, or pursue a different degree program.
Our financial performance depends in part on our ability to keep pace with current market needs, build our brand and maintain affordability.
The updates and expansions of our existing programs and the development of new programs and specializations may not be accepted by existing or prospective learners or the employers of our graduates. If we cannot respond to changes in market requirements, our business may be adversely affected. We have shifted to a brand-driven marketing strategy to decrease our reliance on aggregators and improve the quality of the learners enrolling at Capella University. This shift has significantly lowered our inquiry volume, and if we are unable to maintain improvements in our conversion rates and retain enrolled learners, our business, financial condition, results of operations and cash flows would be adversely impacted.
In addition, there is increasing focus and pressure on higher education providers to improve affordability. Affordability includes tuition costs, time to completion, and professional outcomes. If we are unable to keep pace with market and external
expectations regarding affordability, our business, financial condition, results of operations and cash flows could be adversely impacted.
Efforts to diversify our business outside of the traditional areas served by Capella University may adversely impact our financial performance.
As we expand CLS offerings and seek additional opportunities to grow our business and serve markets beyond those traditionally served by Capella University, including job-ready skills training, employer-based solutions, and non-degree programs, we will encounter strategic and operational challenges different than those within our core business. As we expand our business lines, some of our expanded offerings may present us with business, strategic and operational challenges with which we have limited experience. We may partner with others to identify candidates for these programs, place candidates with employers, provide content, and share revenue, refunds, information and intellectual property related to such programs. As such, the success of these programs may be dependent on the performance of third party partners over which we have limited control, and may result in greater refunds and fewer learner candidates and placements with employers than anticipated. If we offer refunds to learners that are not successfully employed within a certain period of time following completion of these programs, our revenue from these programs will also be more dependent on the quality of our learners in these programs and employment conditions than our traditional programs. Additionally, investing in diversification and innovation may require significant resources and negatively impact our operating income and cash flows. If we are unable to successfully capitalize on these opportunities, our business, financial condition, results of operations and cash flows would be adversely impacted.
We may pursue additional acquisition opportunities, which we may not do successfully and which may subject us to considerable business and financial risks.
We may continue to pursue additional acquisition opportunities. While we evaluate potential acquisitions on an ongoing basis, we may not be successful in assessing the value, strengths and weaknesses of acquisition opportunities or completing acquisitions on acceptable terms. For example, to the extent that our analysis and market studies performed by third parties are not accurate indicators of market, business and education trends, we may not appropriately evaluate or realize the future market growth or business opportunities in targeted programs, professions, geographic areas and business lines that we expect from an acquisition. Furthermore, we may not be successful in identifying acquisition opportunities, and suitable acquisition opportunities may not be made available or known to us. In addition, we may compete for certain acquisition targets with companies that have greater financial resources than we do. We may finance future acquisitions through cash provided by operating activities, borrowings under our bank credit facility, to the extent allowed by the terms of the credit facility, and/or other debt or equity financing. All of these financing mechanisms could reduce our cash available for other purposes.
We may incur significant expenses while pursuing acquisitions, which could negatively impact our financial condition and results of operations. Acquisitions that we complete may expose us to particular business and financial risks that include, but are not limited to:
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Diverting management’s time, attention and resources from managing our business;
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Incurring additional indebtedness and assuming liabilities;
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Incurring significant additional capital expenditures and operating expenses to improve, coordinate or integrate managerial, operational, financial and administrative systems;
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Experiencing an adverse impact on our earnings from non-recurring acquisition-related charges or the write-off or amortization of acquired goodwill and other intangible assets;
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Failing to integrate the operations and personnel of the acquired businesses;
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Failing to implement or maintain our centralized accounting, learner support, and information systems effectively and efficiently because of additional demands from expanded business;
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Facing additional rules and regulations in new geographies and for new programs and endangering our compliance with applicable rules and regulations as the size and complexity of our business increases;
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Facing operational difficulties in new markets or with new program or service offerings; and
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Failing to retain key personnel and customers of the acquired businesses.
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We may not be able to successfully manage acquired businesses or increase our cash flow from these operations. If we are unable to successfully implement our acquisition strategy or address the risks associated with acquisitions, or if we encounter unforeseen expenses, difficulties, complications or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, our growth and ability to compete may be impacted, we may fail to achieve
acquisition synergies and we may be required to focus resources on integration of operations rather than other profitable areas. In addition, the increased costs associated with our acquisitions and capital expenditures aimed at organic growth may not be offset by corresponding increases in our revenues, which would decrease our operating margins.
If the overall trend in the operating performance of the Hackbright and DevMountain Coding Schools continues and operating improvements are not realized, some or all of the remaining goodwill and intangible assets associated with the Coding Schools reporting unit could become impaired in the future, resulting in the recognition of additional impairment charges.
Throughout 2017, Hackbright and DevMountain continued to develop their offerings. In May 2017, DevMountain received approval to begin operating in Phoenix, and in the fourth quarter 2017, DevMountain introduced their first online program offering. Since the dates of acquisition, we have made investments in both businesses to position them for scalable growth and will continue to make additional investments for the foreseeable future. Although both acquisitions have had a positive impact on our revenue growth, Hackbright and DevMountain have not achieved the degree of revenue growth initially anticipated or met operating performance expectations, and these trends are expected to continue. As a result, during the year ended
December 31, 2017
, we recorded goodwill and intangible asset charges of
$15.0 million
based on the results of the goodwill and intangible assets impairment analysis. Refer to Footnote 8 -
Goodwill and Intangible Assets
- within the Footnotes to the Consolidated Financial Statements for additional information related to the goodwill and intangible asset impairment charges recorded during the year-ended December 31, 2017. If the overall trend in revenue growth and operating performance of the coding schools continues and operating improvements as discussed above are not realized, some or all of the remaining goodwill and intangible assets associated with the Coding Schools reporting unit could become impaired in the future, resulting in the recognition of additional impairment charges.
We face intense and increasing competition in the post-secondary education market, especially in the online education market, which could decrease our market share, increase our cost of attracting learners and put downward pressure on our tuition rates.
Post-secondary education, especially in the online market, is a highly competitive industry. We compete with traditional public and private two-year and four-year colleges and other proprietary institutions, as well as corporate universities and software companies providing online education and training software. In addition, we face competition from various emerging nontraditional, credit-bearing and noncredit-bearing education programs. Each of these competitors may offer programs similar to ours at lower tuition levels as a result of government subsidies, government and foundation grants, tax-deductible contributions and other financial sources not available to all institutions. An increasing number of traditional colleges and community colleges are offering distance learning and other online education programs, including programs that are geared towards the needs of working adult learners. This trend has been accelerated by private companies that provide and/or manage online learning platforms for traditional colleges and community colleges. As the proportion of traditional colleges providing alternative learning modalities increases, we will face increasing competition for students from traditional colleges, including colleges with well-established reputations. As the online and distance learning segment of the postsecondary education market matures, we believe that the intensity of the competition we face will continue to be intense.
This intense competition could make it more challenging for us to enroll students who are likely to succeed in our educational programs, which could adversely affect our enrollment levels and put downward pressure on our tuition rates, either of which could materially and adversely affect our business, financial condition, results of operations and cash flows.
The external demands for increased affordability will continue to impact our business. For example, as the market continues to mature, certain of our competitors have begun to reduce tuition rates or offer significant discounts in the form of grants or scholarships. Capella University, like other universities particularly in the proprietary sector, has increased our use of grants and scholarships to improve learner persistence and as incentive to increase demand. Continuation of this trend will further decrease the amount of tuition we receive from learners unless we can increase persistence and/or increase our spending to pursue new market opportunities. In addition, certain of our competitors have increased their focus on markets and learners that we have historically served, and these actions could increase costs and decrease our enrollments and revenue. As Capella University seeks to strengthen its employer alignment, we face increased competition in maintaining and developing new marketing relationships with corporations and other employers, particularly as employers become more selective as to which online universities they will encourage their current employees to attend and from which online universities they will hire prospective employees. These competitive factors could adversely affect our enrollments, revenue, business, financial condition, results of operations and cash flows.
If we fail to maintain adequate systems and processes to detect and prevent fraudulent activity in learner enrollment and financial aid, our business could be adversely impacted.
As we continue to grow, we are susceptible to continued risk of fraudulent activity by outside parties with respect to learner enrollment and student financial aid programs. While we believe past incidents of fraudulent activity have been relatively isolated, we cannot be certain that our systems and processes will always be adequate in the face of increasingly sophisticated and ever-changing fraud schemes. The potential for outside parties to perpetrate fraud in connection with the award and disbursement of Title IV program funds, including as a result of identity theft, may be heightened due to our nature as an online education provider. We must maintain systems and processes to identify and prevent fraudulent applications for enrollment and financial aid. Efforts we take to identify and prevent fraudulent applications may also impose additional processes on potential legitimate learners, which could adversely affect our enrollments, revenue, business, financial condition, results of operations and cash flows.
The Department of Education requires institutions that participate in Title IV programs to refer to the Office of the Inspector General of the Department of Education any credible information indicating that any applicant, employee, third-party servicer, or agent of the institution that acts in a capacity that involves administration of the Title IV programs has been engaged in any fraud or other illegal conduct involving Title IV programs. If the systems and processes that we have established to detect and prevent fraud are inadequate, the Department of Education may find that we do not satisfy its “administrative capability” requirements. This could limit our access to, or cause us to lose, Title IV program funding, which would adversely affect our enrollment, revenues, results of operations and cash flows. In addition, our ability to participate in Title IV programs is conditioned on our maintaining accreditation by an accrediting agency that is recognized by the Secretary of Education. Any significant failure to adequately detect fraudulent activity related to learner enrollment and financial aid could cause us to fail to meet our accrediting agencies’ standards. Furthermore, under the Higher Education Act, accrediting agencies that evaluate institutions that offer distance learning programs, as we do, must require such institutions to have processes through which the institution establishes that a learner who registers for a distance education program is the same learner who participates in and receives credit for the program. Failure to meet our accrediting agencies’ standards could result in the loss of accreditation at the discretion of our accrediting agencies, which could result in a loss of our eligibility to participate in Title IV programs and would adversely affect our business, financial condition, results of operations and cash flows.
We rely on third party vendors, and the outsourcing increases our operational and compliance risk.
We rely on third party vendors to provide services to us and our learners. While we monitor and assess the service of these vendors, it is possible their service and response levels may be less than ours, and that they may not have adequate business continuity planning. Some of our vendors are uniquely positioned to provide novel services not offered by others in the industry, such as vendors providing services related to implementation of the borrower-based academic year for direct
assessment programs, increasing our dependency related to complex operational functions. In addition, using third party vendors increases compliance risk, if they do not adequately protect learners’ sensitive data or personally identifiable information, or if they do not comply with applicable federal or state regulations applicable to our business. In the event of any of those or related actions or omissions by third party vendors, our business, financial condition, results of operations and cash flows could be adversely impacted.
System disruptions and vulnerability from security risks to our online infrastructure or the infrastructure of key third-party providers could impact our business and financial performance and damage the reputation of the Company, limiting our ability to attract and retain learners.
The performance and reliability of our technology infrastructure is critical to our reputation and ability to attract and retain learners. Any system error or failure, or a sudden and significant increase in bandwidth usage, could result in the unavailability of our courseroom platform, damaging our business and financial performance and the reputation of the Company. Our technology infrastructure could be vulnerable to interruption or malfunction due to events beyond our control, including natural disasters, terrorist activities, telecommunications failures and/or the unavailability or disruption of third-party providers used as a part of our technology platform. Our core computer network infrastructure is concentrated in a single geographic area. If we experience a catastrophic failure or unavailability for any reason of both our principal data center and backup data center, we may need to replicate the function of these data centers elsewhere, which may require expensive and time-consuming equipping and restoring activities. The disruption from such an event could significantly impact our operations and have a material adverse effect on our reputation, business, financial condition, results of operations and cash flows.
We may experience interruptions or failures in our computer systems as a result of ongoing maintenance of and enhancements to our enterprise resource planning system, course room platform, and/or supporting infrastructure. Any interruption to our technology infrastructure could have a material adverse effect on our ability to attract and retain learners and could require us to incur additional expenses to correct or mitigate the interruption.
Our technology infrastructure may also be vulnerable to cyber attacks such as unauthorized access, computer hackers, computer viruses, malware and other security problems and system disruptions. We engage with multiple cyber security
assessment providers on a periodic basis to review, assess and remediate our cyber security program. We utilize this information to audit ourselves to ensure that we are continually monitoring the security of our technology infrastructure and have a rehearsed response to cyber security incidents, but we are still vulnerable to threats. Circumvention of cyber security measures could lead to misappropriation of personally identifiable or proprietary information or cause interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat of these security breaches, respond to loss or exposure of data or to alleviate problems caused by these breaches, which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flows.
The personal information that we collect may be vulnerable to breach, theft or loss that 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 use and retain large amounts of personal information regarding our learners 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. Some of this personal information is held and managed by certain of our vendors. Although we use security and business controls to limit access and use of personal information, circumvention of these controls could occur, and could result in a breach of learner or employee privacy. In addition, errors in the storage, use or transmission of personal information could result in a breach of learner or employee privacy.
Possession and use of personal information in our operations also subjects us to legislative and regulatory burdens that could require notification of data breaches and restrict our use of personal information. We cannot guarantee that a breach, loss or theft of personal information will not occur. A breach, theft, or loss of personal information regarding our learners and their families or our employees that is held by us or our vendors could have a material adverse effect on our reputation and results of operations and result in liability under state and federal privacy statutes and legal actions by state attorneys, general and private litigants, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We rely on exclusive proprietary rights and intellectual property that may not be adequately protected under current laws, and we encounter disputes from time to time relating to our use of intellectual property of third parties.
Our success depends in part on our ability to protect our proprietary rights. We rely on a combination of copyrights, trademarks, service marks, trade secrets, confidentiality agreements and practices, and other agreements to protect our proprietary rights. We rely on service mark and trademark protection in the United States and select foreign jurisdictions to protect our rights to the marks “CAPELLA,” “CAPELLA EDUCATION COMPANY,” and “CAPELLA 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. We cannot guarantee that these measures will be adequate, 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. Despite our efforts to protect these rights, unauthorized third parties may attempt to duplicate or copy the proprietary aspects of our curricula, online resource material and other content. Our management's attention may be diverted by these attempts and we may need to use funds in litigation to protect our proprietary rights against any infringement or violation, which could have a material adverse effect on our business, financial condition, results of operation and cash flows.
We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in these disputes. Third parties have in the past and may again in the future raise claims 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. Our general liability and cyber 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 classes or pay monetary damages or license fees to third parties, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our learner population and revenues could decrease if the government tuition assistance offered to U.S. Armed Forces personnel is reduced or eliminated, if the tuition discounts which we offer to U.S. Armed Forces personnel are reduced or eliminated, or if our informal arrangements with any military bases deteriorate.
Active duty members of the U.S. Armed Forces are eligible to receive tuition assistance from the government, which they may use to pursue postsecondary degrees. Our ability to accept such tuition assistance depends, in part, upon our continued compliance with federal regulations and any applicable memoranda of understanding with the Department of Defense and
related agencies. We offer tuition discounts generally ranging from 10% to 15% to all members of the U.S. Armed Forces and spouses of active duty U.S. Armed Forces personnel as well as recipients of the Veterans Affairs (VA) Dependents Education Assistance program (Chapter 35). As of
December 31, 2017
, learners receiving a military discount comprised approximately 9% of Capella University total enrollment. We also have non-exclusive agreements with various educational institutions of the U.S. Armed Forces pursuant to which we have agreed to accept credits toward a Capella University degree from certain military educational programs.
These agreements generally may be terminated by either party upon 30 to 45 days notice. Additionally, we have informal arrangements with several military bases pursuant to which the bases make information about Capella University available to interested service members. Each of these informal arrangements is not binding on either party and either party could end the arrangement at any time. If our informal arrangement with any military base deteriorates or ends, our efforts to recruit learners from that base will be impaired. In the event that governmental tuition assistance programs to active duty members of the U.S. Armed Forces are reduced or eliminated, if our tuition discount program which we offer U.S. Armed Forces personnel and their immediate family members is reduced or eliminated, or if our informal arrangements with any military base deteriorates, this could materially and adversely affect our revenues, results of operations and cash flows.
If we fail to offer products aligned with employer expectations or do not maintain existing, and develop additional, relationships with employers, our future growth may be impaired.
Our success depends in part on our ability to offer products aligned with learners’ professional goals and employer expectations. If our products are not aligned with these external needs, then our offerings will be less successful and this would materially and adversely affect our business, prospects, financial condition, results of operations and cash flows.
In addition, we currently have relationships with large 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 learners for particular programs and also serve to increase our reputation among high-profile employers. If we are unable to develop new relationships, or if our existing relationships deteriorate or end, our efforts to seek these sources of potential working adult learners will be impaired, and this could materially and adversely affect our business, prospects, financial condition, results of operations and cash flows.
Certain of our programs have specialized accreditations and/or state approvals; our business may be adversely impacted if we are unable to obtain such accreditations or approvals in the future, or if such accreditations or approvals impose requirements that impact other aspects of our business.
Certain of our programs, especially at the master's and doctoral level, have specialized accreditations or program approvals which are desirable to our learners and may be important to learners obtaining licensure or certification in their chosen field of study. In addition, certain of our education-related programs are approved by the Minnesota Board of Teaching or other state higher educational oversight authorities. If we are unable to obtain or renew such accreditations or approvals in the future, our programs will be less attractive to prospective learners and our current learners in such programs will be negatively impacted. In addition, these specialized accrediting bodies or state agencies may impose requirements which adversely impact our business, such as limiting or closing enrollments to certain programs, imposing specific faculty to learner ratios or dictating the way in which we name and market related programs. These situations could adversely affect our business, financial condition, results of operations and cash flows.
Our financial performance depends on our ability to continue to develop awareness among, and attract and retain, high quality learners.
Building awareness of Capella University and the programs we offer among working adult professionals, our primary target market, is critical to our ability to attract prospective learners. If we are unable to successfully market and advertise our educational programs, Capella University's ability to attract and enroll prospective learners in such programs could be adversely affected, and consequently, our ability to increase revenue or maintain profitability could be impaired. It is also critical to our success that we convert these prospective learners to enrolled learners in a cost-effective manner and that these enrolled learners remain active in our programs. Some of the factors that could prevent us from successfully enrolling and retaining learners in our programs include:
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The emergence of more successful competitors;
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Factors related to our marketing, including the costs of Internet advertising and broad-based branding campaigns;
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Performance problems with our online systems;
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Failure to maintain accreditation;
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Learner dissatisfaction with our services, programs and outcomes, including with our customer service and responsiveness;
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Adverse publicity regarding us, our competitors, or online or proprietary education in general;
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Price reductions by competitors that we are unwilling or unable to match;
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Increased regulation of online education, including in states in which we do not have a physical presence;
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A decrease in the perceived or actual economic benefits that learners derive from our programs;
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Litigation or regulatory investigations that may damage our reputation;
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Difficulties in executing on our strategy as a preferred provider to employers for the vertical markets we serve; and
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Challenges building and leveraging our presence in social media and mobile-device services.
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If we are unable to continue to develop awareness of Capella University and the programs we offer, and to enroll and retain learners, our enrollments would suffer and our ability to increase revenues and maintain profitability would be significantly impaired.
We may experience lower revenues per learner, reduced margins and higher default rates if our degree mix changes unfavorably.
The ratio of learners in our bachelor’s, master’s and doctoral programs shifts over time due to program offerings, competition in the market, learner demand, employment rates, economic conditions and other factors. For example, our bachelor’s programs have historically generated lower retention rates, higher default rates, and higher bad debt expense compared to our graduate level programs. Also, master's and bachelor's programs have historically generated lower revenues per learner compared to our doctoral programs. As the mix of our learners continues to be subject to variability in the future, we may experience these and other effects, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our credit agreement limits our ability to take various actions.
In certain circumstances, our credit agreement limits our ability to take various actions, including paying dividends, repurchasing shares, offering loans to learners, and acquiring and disposing of assets or businesses. Accordingly, we may be restricted from taking actions that management believes would be desirable and in the best interests of us and our shareholders. Our credit agreement also requires us to satisfy specified financial and non-financial covenants, including covenants relating to regulatory compliance. A breach of any covenants contained in our credit agreement would result in an event of default under the agreement and allow the lenders to pursue various remedies, including accelerating the repayment of any indebtedness outstanding under the agreement, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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Item 1B.
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Unresolved Staff Comments
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None.