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:

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:

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:

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.

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:

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.

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.

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'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 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:

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:

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.

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.

• 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.

• 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:

If an institution fails to satisfy any of these criteria or any other Department of Education regulation, the Department of Education may:

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:

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:

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.