sv1za
As filed with the Securities and Exchange Commission on
April 6, 2007
Registration
No. 333-141503
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
CAPELLA EDUCATION
COMPANY
(Exact name of Registrant as
specified in its charter)
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Minnesota
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8221
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41-1717955
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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225 South 6th Street, 9th Floor
Minneapolis, Minnesota 55402
(888) 227-3552
(Address, including zip code,
and telephone number,
including area code, of
Registrants principal executive offices)
Stephen G. Shank
Chairman and Chief Executive Officer
Capella Education Company
225 South 6th Street, 9th Floor
Minneapolis, Minnesota 55402
(888) 227-3552
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
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David B. Miller, Esq.
Michael K. Coddington, Esq.
Faegre & Benson LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402
Telephone: (612) 766-7000
Facsimile: (612) 766-1600
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Kris F. Heinzelman, Esq.
Damien R. Zoubek, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Telephone: (212) 474-1000
Facsimile: (212) 474-3700
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Approximate date of commencement of proposed sale to
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering: o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Amount to
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Offering Price
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Aggregate
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Amount of
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Securities to be Registered
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be
Registered(1)
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per
Share(2)
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Offering
Price(1)(2)
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Registration
Fee(3)
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Common Stock
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3,565,000
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$32.40
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$115,506,000
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$3,547
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(1)
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Includes 465,000 shares of
Common Stock issuable upon exercise of the underwriters
over-allotment option.
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(2)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(c) of
the Securities Act of 1933, as amended, based on the average of
the high and low trading prices for the common stock as reported
by the Nasdaq Global Market on March 16, 2007.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT
TO COMPLETION, DATED APRIL 6, 2007
3,100,000 Shares
Common Stock
We are selling
301,145 shares of common stock and the selling shareholders
are selling 2,798,855 shares of common stock. We will not
receive any of the proceeds from the shares of common stock sold
by the selling shareholders.
Our common stock is
traded on The Nasdaq Global Market under the symbol
CPLA. On April 5, 2007, the last reported sale
price of our common stock was $34.96 per share.
The underwriters
have an option to purchase a maximum of 45,172 additional shares
from us and 419,828 additional shares from certain of the
selling shareholders to cover over-allotments of shares.
Investing in our
common stock involves risks. See Risk Factors
beginning on page 9.
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Underwriting
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Proceeds to
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Price to
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Discounts and
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Proceeds to
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Selling
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Public
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Commissions
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Capella
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Shareholders
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Per
Share
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$
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$
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$
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$
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Total
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$
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$
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$
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$
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Delivery of the
shares of common stock will be made on or
about ,
2007.
Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Banc
of America Securities LLC
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The date of this
prospectus
is ,
2007.
TABLE OF
CONTENTS
You should rely only on the information contained in this
document or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. This document may only be used where it is legal to
sell these securities. The information in this document may only
be accurate on the date of this document.
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PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary sets forth the material terms of
the offering, but does not contain all of the information that
you should consider before investing in our common stock. You
should read the entire prospectus carefully before making an
investment decision, especially the risks of investing in our
common stock discussed under Risk Factors. Unless
the context otherwise requires, the terms we,
us, our and Capella refer to
Capella Education Company and its wholly owned subsidiary,
Capella University. Unless otherwise indicated, industry data is
derived from publicly available sources. Certain figures in this
prospectus may not total due to rounding adjustments.
Overview
We are an exclusively online post-secondary education services
company. Through our wholly owned subsidiary, Capella
University, we offer a variety of doctoral, masters and
bachelors programs in the following markets: health and
human services, business management and technology, and
education. Our academic offerings combine competency-based
curricula with the convenience and flexibility of an online
learning format. At December 31, 2006, we offered over 760
online courses and 13 academic programs with 75 specializations
to approximately 18,000 learners.
The majority of our learners are working adults seeking a degree
to advance their careers, often with their current employer. The
convenience and flexibility of our online learning environment
allow learners to combine academic studies with their personal
and professional responsibilities. Our courses are focused on
helping working adult learners develop specific competencies
that they can employ in their workplace. Our research shows that
the quality of our academic offerings appeals to adults who
value life-long learning. For this reason, we refer to our
customers as learners, rather than students.
We are committed to providing our learners with a high quality
educational experience. We offer a broad array of curricula that
incorporates competency-based instruction into a format
specifically designed for online learning. Our faculty members
bring significant academic credentials as well as teaching or
practitioner experience in their particular disciplines. We
offer our learners extensive support services, such as academic
advising and career counseling, that are tailored to meet their
specific needs in a flexible manner.
In 2006, our
end-of-year
enrollment and revenues grew by approximately 23% and 21%,
respectively, as compared to 2005. To date, our growth has
resulted from a combination of: increased demand for our
programs; expansion of our program and degree offerings; our
ability to obtain specialized accreditations, professional
licensures and endorsements for certain programs we offer;
establishment of relationships with large corporate employers,
the U.S. Armed Forces and other colleges and universities;
and a growing acceptance of online education. We seek to achieve
growth in a manner that assures continued improvement in
educational quality and learner success, while maintaining
compliance with regulatory standards. Additionally, we seek to
enhance our operational and financial performance by tracking
and analyzing quantifiable metrics that provide insight as to
the effectiveness of our business and educational processes. Our
exclusively online focus facilitates our ability to track a
variety of metrics.
Capella University participates in the federal student financial
aid programs authorized by Title IV of the Higher Education
Act of 1965, as amended, or Title IV, which are
administered by the U.S. Department of Education. To be
certified to participate in Title IV programs, a school
must receive and maintain authorization by the appropriate state
educational agency, be accredited by an accrediting agency
recognized by the Secretary of the Department of Education, and
be certified as an eligible institution by the Department of
Education.
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Industry
The U.S. market for post-secondary education is a large,
growing market. Based on 2005 Integrated Post-Secondary
Education Data System data from the U.S. Department of
Education, National Center for Education Statistics (NCES),
revenue for post-secondary degree-granting educational
institutions exceeded $305 billion in academic year 2004.
According to a 2005 publication by the NCES, the number of
post-secondary students enrolled as of the Fall of 2004 was
17.3 million and is expected to grow to 18.8 million
in 2010. We believe the forecasted growth in post-secondary
enrollment is a result of a number of factors, including the
expected increase in annual high school graduates from
2.9 million in 2002 to 3.3 million in 2010 (based on
estimates published by the NCES in 2005), the significant and
measurable personal income premium that is attributable to
post-secondary education, and an increase in demand by employers
for professional and skilled workers. According to the
U.S. Census Bureaus October 2006 report, 64% of
adults (persons 25 years of age or older) did not possess a
post-secondary degree in 2005. Of the 17.3 million
post-secondary students enrolled as of the Fall of 2004, the
NCES estimated that 6.8 million were adults, representing
39% of total enrollment. We expect that adults will continue to
represent a large, growing segment of the post-secondary
education market as they seek additional education to secure
better jobs, or to remain competitive or advance in their
current careers.
According to Eduventures, LLC, an education consulting and
research firm, the revenue growth rate in fully-online education
exceeded the revenue growth rate in the for-profit segment of
the post-secondary market from 2001 to 2006. We believe that the
higher growth in demand for fully-online education is largely
attributable to the flexibility and convenience of this
instructional format, as well as the growing recognition of its
educational efficacy. Additionally, in 2006, Eduventures
projected that the number of students enrolled in fully-online
programs at
Title IV-eligible,
degree-granting institutions would grow by approximately 24% in
2006 to reach approximately 1.5 million as of
December 31, 2006, and would grow to approximately
2.1 million by December 31, 2008. Eduventures also
projected that annual revenues generated from students enrolled
in fully-online programs at
Title IV-eligible,
degree-granting institutions would increase by more than 30% in
2006 to reach approximately $8.1 billion in that year.
Our
Competitive Strengths
We believe we have the following competitive strengths:
Commitment to Academic Quality. We are
committed to providing our learners with a high quality academic
experience. Our commitment to academic quality is a tenet of our
culture and we believe that our commitment is reflected in our
curricula, faculty, learner support services and academic
oversight process.
Exclusive Focus on Online Education. In
contrast to institutions converting traditional, classroom-based
educational offerings to an online format, our academic programs
have been designed solely for online delivery. Our curriculum
design offers flexibility and promotes a high level of
interaction, our faculty are specifically trained to deliver
online education, and our learner support infrastructure was
developed to track learner progress and performance to meet the
needs of online learners.
Academic Programs and Specializations Designed for Working
Adults. At December 31, 2006, we offered
13 academic programs with 75 specializations specifically
designed to appeal to and meet the educational objectives of
working adults. Our curricula and pedagogy are designed to
enable learners to apply relevant knowledge in their workplace.
Extensive Learner Support Services. We
provide extensive learner support services, both online and
telephonically. Our support services include: academic services,
such as advising, writing and research services; administrative
services, such as online class registration and transcript
requests; library services; and career counseling services.
Experienced Management Team with Significant Business,
Academic and Marketing Expertise. Our
management team possesses extensive experience in business,
academic and marketing management. We
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utilize cross-functional teams to ensure that our business
objectives are met while continuing to deliver academic quality.
Our
Operating Strategy
We intend to pursue the following operating strategies:
Focus on Markets and Learners. Within
our specified markets, we will continue to develop our existing
bachelors, masters and doctoral program offerings
while selectively adding new programs and specializations for
targeted professions within these markets that we believe offer
significant market potential. In particular, we intend to
emphasize growth in targeted professions by offering
specializations in our masters and doctoral programs for
which we believe there is significant demand.
Building Capella Brand
Differentiation. We will continue to focus on
enhancing our brand differentiation as a high quality,
exclusively online university for working adults in targeted
professions within our specified markets through a variety of
integrated online and offline advertising and direct media. We
seek to differentiate our brand from those of other educational
providers by communicating our ability to deliver high quality
educational programs in select specializations within each
learners chosen profession.
Increasing Enrollment Effectiveness. We
have invested substantial resources in performing detailed
market research that enables us to more effectively segment our
target market and identify potential learners best suited for
our educational experience. As a result, we will continue to
target our marketing and recruiting expenditures towards
segments of the market that we believe are more likely to result
in us enrolling learners who will complete their programs, and
we seek to deliver an inspiring educational experience that
motivates our learners throughout the learner lifecycle.
Delivering Both Superior Learning Outcomes and a Superior
Learner Experience. We are committed to
helping our learners reach their educational and professional
goals. This commitment guides the development of our curricula,
the recruitment and training of our faculty and staff, and the
design of our support services. We believe our focus on both
superior learning outcomes and a superior learner experience
complements our brand strategy and will continue to enhance
learner satisfaction, leading to higher levels of engagement,
persistence and referrals.
Drive Successful New Business
Development. We also seek to drive growth
through a multifaceted strategy of enhancing existing program
offerings, through improvements in course design and technology
and obtaining specialized accreditation, additional professional
licensure approvals and select endorsements, developing new
programs and specializations within our three current target
markets, and pursuing new market opportunities that leverage our
existing expertise, brand reputation and educational
capabilities.
Risks
Affecting Us
Our business is subject to numerous risks as discussed more
fully in the section entitled Risk Factors
immediately following this Prospectus Summary. In particular,
our business would be adversely affected if:
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we are unable to comply with the extensive regulatory
requirements to which our business is subject, including
Title IV of the Higher Education Act and the regulations
under that act, from which we derived 71% of our revenues
(calculated on a cash basis) in 2006, state laws and
regulations, and accrediting agency requirements, and our
inability to comply with these regulations could result in our
ceasing operations altogether;
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we experience any learner, regulatory, reputational,
instructional or other events that adversely affect our doctoral
offerings, from which we currently derive a significant portion
of our revenues and, after the full allocation of corporate
overhead expenses, all of our operating income;
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we experience damage to our reputation or other adverse effects
in connection with the compliance audit of Capella University
currently being conducted by the Office of Inspector General of
the U.S. Department of Education;
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we are unable to develop new programs and expand our existing
programs in a timely and cost-effective manner;
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we are unable to attract and retain working adult learners to
our programs in the highly competitive market in which we
operate;
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we are unable to attract and retain key personnel needed to
sustain and grow our business; or
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our reputation is damaged by regulatory actions or negative
publicity affecting us or other companies in the for-profit
higher education sector.
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Our
Executive Offices
Our principal executive offices are located at 225 South
6th Street, 9th Floor, Minneapolis, Minnesota 55402,
and our telephone number is
(888) 227-3552.
Our website is located at www.capellaeducation.com. The
information on, or accessible through, our website does not
constitute part of, and is not incorporated into, this
prospectus.
Accreditation
Capella University is accredited by The Higher Learning
Commission and is a member of the North Central Association of
Colleges and Schools (NCA), 30 N. LaSalle,
Suite 2400, Chicago, Illinois
60602-2504;
telephone
(312) 263-0456;
website www.ncahlc.org. The information on, or accessible
through, the website of The Higher Learning Commission and the
NCA does not constitute part of, and is not incorporated into,
this prospectus.
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The
Offering
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Common stock offered by us |
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301,145 shares (or 346,317 shares, if the underwriters exercise
their over-allotment option in full) |
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Common stock offered by the selling shareholders |
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2,798,855 shares (or 3,218,683 shares, if the underwriters
exercise their over-allotment option in full) |
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Total offering |
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3,100,000 shares |
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Common stock to be outstanding after the offering |
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16,576,724 shares |
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Nasdaq Global Market symbol |
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CPLA |
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Use of proceeds |
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We estimate that the net proceeds to us from this offering will
be approximately $10.1 million, or approximately
$11.6 million if the underwriters exercise their
over-allotment option in full. Each $1.00 increase or decrease
in the assumed public offering price of $34.96 per share
(the last reported sale price of our common stock on
April 5, 2007) would increase or decrease, as applicable,
the net proceeds to us from this offering by approximately
$0.3 million (including if the underwriters exercise their
over-allotment option in full), assuming the number of shares
offered by us as set forth on the cover of this prospectus
remains the same and after deducting estimated underwriting
discounts and commissions payable by us. |
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As described in Use of Proceeds, we intend to use
the net proceeds of this offering for working capital and
general corporate purposes. |
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Risk Factors |
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You should carefully read and consider the information set forth
under the heading titled Risk Factors and all other
information set forth in this prospectus before deciding to
invest in shares of our common stock. |
The number of shares of common stock shown to be outstanding
after the offering is based on the number of shares of common
stock outstanding as of February 28, 2007. This number does
not include:
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3,879,245 shares of common stock reserved for future issuance
under our stock option plans, including 1,929,894 shares of
common stock reserved for future issuance upon the exercise of
stock options outstanding as of February 28, 2007 under our
stock option plans, at a weighted average exercise price of
$17.51 per share (as adjusted to reflect
257,829 shares issuable by us upon the exercise of stock
options by certain selling shareholders in connection with this
offering); and
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450,000 shares of common stock reserved for future issuance
upon the vesting of common stock outstanding under our stock
purchase plan.
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Except as otherwise indicated, all information in this
prospectus assumes:
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no exercise by the underwriters of their option to purchase up
to 45,172 additional shares from us and up to 419,828
shares from certain of the selling shareholders to cover
over-allotments of shares;
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no outstanding options have been exercised since
February 28, 2007; and
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all fractional common share amounts have been rounded to the
nearest whole number.
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5
Summary
Financial and Other Data
The following table sets forth our summary consolidated
financial and operating data as of the dates and for the periods
indicated. The summary consolidated statement of operations data
for each of the years in the three-year period ended
December 31, 2006, and the summary consolidated balance
sheet data as of December 31, 2006 and 2005, have been
derived from our audited consolidated financial statements,
which are included elsewhere in this prospectus. The summary
consolidated balance sheet data as of December 31, 2004,
have been derived from our audited consolidated balance sheet as
of December 31, 2004, which is not included in this
prospectus.
The following table also sets forth summary unaudited
consolidated as adjusted balance sheet data, which give effect
to the transactions described in footnote (e) of the
following table. The unaudited consolidated as adjusted balance
sheet data are presented for informational purposes only and do
not purport to represent what our financial position actually
would have been had the transactions so described occurred on
the dates indicated or to project our financial position as of
any future date.
You should read the following summary financial and other data
in conjunction with Selected Consolidated Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and related notes included
elsewhere in this prospectus.
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Year Ended December 31,
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2006(a)
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2005
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2004
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(In thousands, except per share and enrollment data)
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Statement of Operations
Data:
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Revenues
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$
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179,881
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$
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149,240
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$
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117,689
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Costs and expenses:
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Instructional costs and services
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83,627
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71,243
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58,850
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Selling and promotional
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56,646
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45,623
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35,089
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General and administrative
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21,765
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17,501
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13,885
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Total costs and expenses
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162,038
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134,367
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107,824
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Operating income
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17,843
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14,873
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9,865
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Other income, net
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4,472
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2,306
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724
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Income before income taxes
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22,315
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17,179
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10,589
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Income tax expense (benefit)
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8,904
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6,929
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(8,196
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Net income
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$
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13,411
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$
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10,250
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$
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18,785
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Net income per common share:
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Basic
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$
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1.09
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$
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0.89
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$
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1.68
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Diluted
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$
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1.06
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$
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0.86
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$
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1.62
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Weighted average number of common
shares outstanding:
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Basic
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12,271
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11,476
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11,189
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Diluted
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12,629
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11,975
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11,599
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Other Data:
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Depreciation and
amortization(b)
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$
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8,195
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$
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6,474
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$
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5,454
|
|
Net cash provided by operating
activities
|
|
$
|
28,901
|
|
|
$
|
28,940
|
|
|
$
|
16,049
|
|
Capital expenditures
|
|
$
|
15,354
|
|
|
$
|
9,079
|
|
|
$
|
7,541
|
|
EBITDA(c)
|
|
$
|
26,038
|
|
|
$
|
21,347
|
|
|
$
|
15,319
|
|
Enrollment(d)
|
|
|
17,976
|
|
|
|
14,613
|
|
|
|
12,252
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
2006 As
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
Adjusted(e)
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term marketable securities
|
|
$
|
87,661
|
|
|
$
|
100,591
|
|
|
$
|
72,133
|
|
|
$
|
49,980
|
|
Working
capital(f)
|
|
|
69,147
|
|
|
|
82,077
|
|
|
|
53,718
|
|
|
|
37,935
|
|
Total assets
|
|
|
129,314
|
|
|
|
142,245
|
|
|
|
106,562
|
|
|
|
80,026
|
|
Total redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
57,646
|
|
|
|
57,646
|
|
Shareholders equity (deficit)
|
|
|
93,745
|
|
|
|
106,677
|
|
|
|
14,414
|
|
|
|
(5
|
)
|
|
|
|
(a) |
|
Operating income, income before income taxes and EBITDA for the
year ended December 31, 2006 included $4.2 million of
stock-based compensation expense recognized under
FAS 123(R). Net income and net income per common share for
the year ended December 31, 2006 included $3.1 million
of stock-based compensation expense recognized under
FAS 123(R). In accordance with the modified prospective
transition method provided under FAS 123(R), our
consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
FAS 123(R). |
|
(b) |
|
Depreciation and amortization is calculated using the
straight-line method over the estimated useful lives of the
assets. Amortization includes amounts related to purchased
software, capitalized website development costs and internally
developed software. |
|
(c) |
|
EBITDA consists of net income minus other income, net plus
income tax expense (benefit) and plus depreciation and
amortization. Other income, net consists primarily of interest
income earned on short-term marketable securities, net of any
interest expense for capital leases and notes payable. We use
EBITDA as a measure of operating performance. However, EBITDA is
not a recognized measurement under U.S. generally accepted
accounting principles, or GAAP, and when analyzing our operating
performance, investors should use EBITDA in addition to, and not
as an alternative for, net income as determined in accordance
with GAAP. Because not all companies use identical calculations,
our presentation of EBITDA may not be comparable to similarly
titled measures of other companies. Furthermore, EBITDA is not
intended to be a measure of free cash flow, as it does not
consider certain cash requirements such as tax payments. |
|
|
|
We believe EBITDA is useful to investors in evaluating our
operating performance and liquidity because it is widely used to
measure a companys operating performance without regard to
items such as depreciation and amortization. Depreciation and
amortization can vary depending upon accounting methods and the
book value of assets. We believe EBITDA presents a meaningful
measure of corporate performance exclusive of our capital
structure and the method by which assets were acquired. |
Our management uses EBITDA:
|
|
|
|
|
as a measurement of operating performance, because it assists us
in comparing our performance on a consistent basis, as it
removes depreciation, amortization, interest and taxes; and
|
|
|
|
in presentations to the members of our board of directors to
enable our board to have the same measurement basis of operating
performance as is used by management to compare our current
operating results with corresponding prior periods and with the
results of other companies in our industry.
|
7
The following table provides a reconciliation of net income to
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
13,411
|
|
|
$
|
10,250
|
|
|
$
|
18,785
|
|
Other income, net
|
|
|
(4,472
|
)
|
|
|
(2,306
|
)
|
|
|
(724
|
)
|
Income tax expense (benefit)
|
|
|
8,904
|
|
|
|
6,929
|
|
|
|
(8,196
|
)
|
Depreciation and amortization
|
|
|
8,195
|
|
|
|
6,474
|
|
|
|
5,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
26,038
|
|
|
$
|
21,347
|
|
|
$
|
15,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
Enrollment reflects the total number of learners registered in a
course as of the last day of classes for such periods. |
|
(e) |
|
The consolidated as adjusted balance sheet data as of
December 31, 2006, give effect to: |
|
|
|
|
|
the sale of 301,145 shares of common stock by us in this
offering at a public offering price of $34.96 per share
(the last reported sale price of our common stock on
April 5, 2007);
|
|
|
|
|
|
our receipt of the estimated net proceeds of that sale after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us; and
|
|
|
|
|
|
the exercise of stock options to purchase 257,829 shares of
our common stock to be sold by certain selling shareholders in
this offering.
|
Each $1.00 increase or decrease in the assumed public offering
price of $34.96 per share (the last reported sale price of our
common stock on April 5, 2007) would increase or decrease,
respectively, the amount of cash, cash equivalents and
short-term marketable securities, working capital, total assets
and shareholders equity in each case by approximately
$0.3 million, assuming the number of shares offered by us,
as set forth on the cover of this prospectus, remains the same
and after deducting the estimated underwriting discounts and
commissions payable by us.
|
|
|
(f) |
|
Working capital is calculated by subtracting total current
liabilities from total current assets. |
8
RISK
FACTORS
Investing in our common stock involves risks. Before making
an investment in our common stock, you should carefully consider
the following risks, as well as the other information contained
in this prospectus, including our consolidated financial
statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The risks described below are those which we
believe are the material risks we face. Any of the risk factors
described below could significantly and adversely affect our
business, prospects, financial condition and results of
operations. As a result, the trading price of our common stock
could decline and you may lose all or part of your
investment.
Risks
Related to the Extensive Regulation of Our Business
If we
fail to comply with the extensive regulatory requirements for
our business, we could face significant restrictions on our
operations and monetary penalties, including loss of access to
federal loans and grants for our learners on which we are
substantially dependent.
In 2006, we derived approximately 71% of our revenues
(calculated on a cash basis) from federal student financial aid
programs, referred to in this prospectus as Title IV
programs, administered by the U.S. Department of Education.
A significant percentage of our learners rely on the
availability of Title IV program funds to cover their cost
of attendance at Capella University and related educational
expenses. Title IV programs include educational loans for
our learners from both private lenders and the federal
government at below-market interest rates that are guaranteed by
the federal government in the event of default. Title IV
programs also include several income-based grant programs for
learners with the greatest economic need as determined in
accordance with Department of Education regulations. To
participate in Title IV programs, a school must receive and
maintain authorization by the appropriate state education
agencies, be accredited by an accrediting agency recognized by
the Secretary of the Department of Education and be certified as
an eligible institution by the Department of Education. As a
result, we are subject to extensive regulation by state
education agencies, our accrediting agency and the Department of
Education. These regulatory requirements cover the vast majority
of our operations, including our educational programs,
facilities, instructional and administrative staff,
administrative procedures, marketing, recruiting, financial
operations and financial condition. These regulatory
requirements can also affect our ability to acquire or open
additional schools, to add new or expand existing educational
programs and to change our corporate structure and ownership.
The state education agencies, our accrediting agency and the
Department of Education periodically revise their requirements
and modify their interpretations of existing requirements.
If we fail to comply with any of these regulatory requirements,
our regulatory agencies could impose monetary penalties, place
limitations on our operations, terminate our ability to grant
degrees and certificates, revoke our accreditation
and/or
terminate our eligibility to receive Title IV program
funds, each of which could adversely affect our financial
condition and results of operations. In addition, should we fail
to properly comply with the regulatory requirements set forth in
the following risk factors, and as a result be charged,
sanctioned, subjected to loss of a federal, state or agency
approval or authorization, or otherwise be penalized in some
way, our reputation could be damaged and such damage could have
a negative impact on our stock price. We cannot predict with
certainty how all of these regulatory requirements will be
applied or whether we will be able to comply with all of the
requirements in the future. We have described some of the most
significant regulatory risks that apply to us in the following
paragraphs.
We
must seek recertification to participate in Title IV
programs no less than every six years, and may, in certain
circumstances, be subject to review by the Department of
Education prior to seeking recertification.
An institution that is certified to participate in Title IV
programs must seek recertification from the Department of
Education at least every six years, or when it undergoes a
change of control. The recertification process includes the
electronic submission of a new Application for Approval to
Participate in the Federal Student Financial Aid Programs,
which includes information about the schools
9
administration, ownership, educational programs and compliance
with Department of Education regulations. The application is
accompanied by financial statements and documentation of
continued accreditation and state authorization. Our current
certification expires on December 31, 2008. Our application
for recertification will be due for submission no later than
September 30, 2008. The Department of Education may also
review our continued certification to participate in
Title IV programs in the event we expand our activities in
certain ways, such as opening an additional location or, in
certain cases, if we modify the academic credentials that we
offer. In addition, the Department of Education may withdraw our
certification without advance notice if it determines that we
are not fulfilling material requirements for continued
participation in Title IV programs. If the Department of
Education did not renew or withdrew our certification to
participate in Title IV programs, our learners would no
longer be able to receive Title IV program funds, which
would have a material adverse effect on our enrollments,
revenues and results of operations.
Congress
may change the law or reduce funding for Title IV programs,
which could reduce our learner population, revenues and profit
margin.
Congress reauthorizes the Higher Education Act of 1965, as
amended (the Higher Education Act) and other laws governing
Title IV programs approximately every five to eight years.
The last reauthorization of the Higher Education Act was
completed in 1998, which extended authorization through
September 30, 2004. Because reauthorization had not yet
been completed in a timely manner, Congress extended the current
provisions of the Higher Education Act through June 30,
2007. Additionally, Congress reviews and determines
appropriations for Title IV programs on an annual basis
through the budget and appropriations process. There is no
assurance that reauthorization of the Higher Education Act will
happen, or that Congress will not enact changes that decrease
Title IV program funds available to students, including
students who attend our institution. A failure by Congress to
reauthorize or otherwise extend the provisions of the Higher
Education Act, or any action by Congress that significantly
reduces funding for Title IV programs or the ability of our
school or learners to participate in these programs, would
require us to arrange for non-federal sources of financial aid
and would materially decrease our enrollment. Such a decrease in
enrollment would have a material adverse effect on our revenues
and results of operations. Congressional action may also require
us to modify our practices in ways that could result in
increased administrative costs and decreased profit margin.
The
Office of Inspector General of the U.S. Department of
Education has commenced a compliance audit of Capella University
which is ongoing and which may result in repayment of
Title IV funds, interest, fines, penalties, remedial action
and damage to our reputation in the industry.
The Office of Inspector General (OIG) of the
U.S. Department of Education is responsible for, among
other things, promoting the effectiveness and integrity of the
Department of Educations programs and operations. With
respect to educational institutions that participate in the
Title IV funding programs, the OIG conducts its work
primarily through compliance audits and investigations. An OIG
compliance audit typically focuses upon 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. In our case, the OIG has informed us that they are
conducting a compliance audit (and not an investigation) of
Capella University. The compliance audit commenced on
April 10, 2006 and since then we have been working
with the OIG to facilitate their audit. The period under audit
is the Title IV award years of
2002-2003,
2003-2004
and
2004-2005
(with each award year commencing on July 1st).
We do not yet know the full scope of the OIGs findings;
however, based on the field auditors preliminary audit
exceptions and our verbal communications with the OIG audit
staff, we believe that the audit is primarily focused upon
whether we properly calculated the amount of Title IV funds
required to be returned for learners who withdrew from Capella
University without providing an official notification of
withdrawal and without engaging in any academic activity prior
to such withdrawal. Based on its review to date, the OIG audit
staff has identified several such learners for whom it believes
proper returns of Title IV funds were not made. If it is
determined that we improperly withheld any portion of these
funds, we would
10
be required to return the improperly withheld funds, with
interest (and possibly fines and penalties). As part of our
internal process of continuously evaluating and attempting to
improve our policies and procedures, prior to the initiation of
the OIG audit we had already begun modifying our policies and
procedures for determining whether a learner is engaged in any
academic activity. We developed these policies and procedures
during spring 2006 and fully implemented them for the
2006-2007
financial aid year. For the three-year audit period, and for
that portion of the
2005-2006
award year prior to our change in policies and procedures
described above, we estimate that the total amount of the
Title IV funds not returned for learners who withdrew
without providing official notification was less than
$1.0 million, including interest, but not including any
fines or penalties.
We believe the audit is also focused upon our policies and
procedures for disbursing Title IV funding to learners, and
focused to a lesser extent on our communication to our learners
of our satisfactory academic progress policy, our exit
counseling for federal student loan recipients, and our review
of learners financial aid histories prior to disbursing
Title IV funding. See Regulatory
Environment Regulation of Federal Student Financial
Aid Programs Compliance Reviews for
information about the OIG audit staffs inquiries.
The OIG informed us that it completed its field work in January
2007, and based on our conversations with the OIG, we believe it
will issue a draft audit report for our response and comment
shortly. We expect that the OIG will not issue a final report
until several months thereafter. At this time, we expect that
the OIG will ultimately identify findings of noncompliance in
its final audit report, and that it will likely recommend
remedial actions to the Office of Federal Student Aid, including
that Capella University refund certain federal student aid
funds, modify its Title IV administration procedures and
possibly pay fines or penalties. Because of the ongoing nature
of the OIG audit, we can neither know nor predict with certainty
the ultimate extent of the draft or final audit findings, or the
potential liability or remedial actions that might result. Such
findings and related remedial action may have an adverse impact
on our reputation in the industry, our cash flows and results of
operations and our ability to recruit learners, and may have an
adverse effect on our stock price. The possible effects of a
finding of a regulatory violation (including refunds, fines,
penalties and limitations, conditions, suspension or termination
of our participation in Title IV programs) are described
more fully in Regulatory Environment
Regulation of Federal Student Financial Aid Programs
Potential Effect of Regulatory Violations.
If we
fail to maintain our institutional accreditation, we would lose
our ability to participate in Title IV
programs.
Capella University is accredited by The Higher Learning
Commission of the North Central Association of Colleges and
Schools, one of six regional accrediting agencies recognized by
the Secretary of the Department of Education as a reliable
indicator of educational quality. Accreditation by a recognized
accrediting agency is required for an institution to become and
remain eligible to participate in Title IV programs. In
2007, we will seek to have our accreditation reaffirmed with The
Higher Learning Commission as part of a regularly scheduled
accreditation reaffirmation process. The Higher Learning
Commission may impose restrictions on our accreditation or may
not renew our accreditation. To remain accredited we must
continuously meet certain criteria and standards relating to,
among other things, performance, governance, institutional
integrity, educational quality, faculty, administrative
capability, resources and financial stability. Failure to meet
any of these criteria or standards could result in the loss of
accreditation at the discretion of The Higher Learning
Commission. The Department of Education has recently begun a
rulemaking proceeding to consider changes in its regulations
governing accrediting agencies. Changes in such regulations
could impact our ability to comply with accreditation standards
and could increase our cost of maintaining accreditation. The
loss of accreditation would, among other things, render our
learners and us ineligible to participate in Title IV
programs, reduce the marketability of a Capella degree and have
a material adverse effect on our enrollments, revenues and
results of operations.
11
If
Capella University does not maintain its authorization in
Minnesota, it may not operate or participate in Title IV
programs.
A school that grants degrees, diplomas or certificates must be
authorized by the relevant education agency of the state in
which it is located. Capella University is deemed to be located
in the State of Minnesota and is authorized by the Minnesota
Office of Higher Education. State authorization is also required
for our learners to be eligible to receive funding under
Title IV programs. Such authorization may be lost or
withdrawn if Capella University fails to submit renewal
applications and other required submissions to the state in a
timely manner, or if Capella University fails to comply with
material requirements under Minnesota statutes and rules for
continued authorization. Loss of state authorization by Capella
University from the Minnesota Office of Higher Education would
terminate our ability to provide educational services as well as
our eligibility to participate in Title IV programs.
Our
regulatory environment and our reputation may be negatively
influenced by the actions of other
post-secondary
educational institutions.
We are part of a large and highly regulated post-secondary
education market that includes public and private two-year and
four-year colleges, and other for-profit institutions. In recent
years, regulatory investigations and civil litigation have been
commenced against several companies that own for-profit
educational institutions, as well as against public and private
non-profit institutions. These investigations and lawsuits have
alleged, among other things, deceptive trade practices and
non-compliance with Department of Education regulations or state
consumer protection laws. These allegations have attracted
adverse media coverage and have been the subject of legislative
hearings and regulatory actions at both the federal and state
levels. Although the media, regulatory and legislative focus has
been primarily upon the allegations made against specific
companies and institutions, broader allegations against the
overall post-secondary education sector may negatively impact
public perceptions of other educational institutions, including
Capella University. Adverse media coverage regarding other
companies in the for-profit school sector or public and private
non-profit institutions, or regarding us directly, could damage
our reputation, could result in lower enrollments, revenues and
operating profit, and could have a negative impact on our stock
price. Such allegations could also result in increased scrutiny
and regulation by the Department of Education, Congress,
accrediting bodies, state legislatures or other governmental
authorities on all educational institutions, including us.
We are
subject to sanctions if we fail to correctly calculate and
timely return Title IV program funds for learners who
withdraw before completing their educational
program.
A school participating in Title IV programs must correctly
calculate the amount of unearned Title IV program funds
that have been disbursed to students who withdraw from their
educational programs before completion and must return those
unearned funds in a timely manner, generally within 45 days
(or within 30 days under regulations that were in effect
prior to September 8, 2006) of the date the school
determines that the student has withdrawn. Under Department of
Education regulations, late returns of Title IV program
funds for 5% or more of students sampled on the
institutions annual compliance audit constitutes material
non-compliance. If unearned funds are not properly calculated
and timely returned, we may have to post a letter of credit in
favor of the Department of Education or otherwise be sanctioned
by the Department of Education, which could increase our cost of
regulatory compliance and adversely affect our results of
operations. As described in Regulatory
Environment Regulation of Federal Student Financial
Aid Programs Compliance Reviews, we are
currently subject to an OIG audit which we understand includes a
review of the amount of Title IV program funds that we
returned for learners who withdrew from their educational
programs before completion and without providing official
notification of such withdrawal.
12
A
failure to demonstrate financial responsibility may
result in the loss of eligibility by Capella University to
participate in Title IV programs or require the posting of
a letter of credit in order to maintain eligibility to
participate in Title IV programs.
To participate in Title IV programs, an eligible
institution must satisfy specific measures of financial
responsibility prescribed by the Department of Education, or
post a letter of credit in favor of the Department of Education
and possibly accept other conditions on its participation in
Title IV programs. The Department of Education may also
apply such measures of financial responsibility to the operating
company and ownership entities of an eligible institution and,
if such measures are not satisfied by the operating company or
ownership entities, require the institution to post a letter of
credit in favor of the Department of Education and possibly
accept other conditions on its participation in Title IV
programs. Any obligation to post a letter of credit could
increase our costs of regulatory compliance. If Capella
University is unable to secure a letter of credit, it would lose
its eligibility to participate in Title IV programs. In
addition to the obligation to post a letter of credit, an
institution that is determined by the Department of Education
not to be financially responsible can be transferred from the
advance system of payment of Title IV funds to
cash monitoring status or to the reimbursement
system of payment. Limitations on, or termination of, Capella
Universitys participation in Title IV programs as a
result of its failure to demonstrate financial responsibility
would limit Capella Universitys learners access to
Title IV program funds, which could significantly reduce
our enrollments and revenues and materially and adversely affect
our results of operations.
A
failure to demonstrate administrative capability may
result in the loss of Capella Universitys eligibility to
participate in Title IV programs.
Department of Education regulations specify extensive criteria
an institution must satisfy to establish that it has the
requisite administrative capability to participate
in Title IV programs. These criteria require, among other
things, that the institution:
|
|
|
|
|
comply with all applicable Title IV program regulations;
|
|
|
|
have capable and sufficient personnel to administer the federal
student financial aid programs;
|
|
|
|
have acceptable methods of defining and measuring the
satisfactory academic progress of its students;
|
|
|
|
not have cohort default debt rates above specified levels;
|
|
|
|
have various procedures in place for safeguarding federal funds;
|
|
|
|
not be, and not have any principal or affiliate who is, debarred
or suspended from federal contracting or engaging in activity
that is cause for debarment or suspension;
|
|
|
|
provide financial aid counseling to its students;
|
|
|
|
refer to the Department of Educations Office of Inspector
General any credible information indicating that any applicant,
student, employee or agent of the institution has been engaged
in any fraud or other illegal conduct involving Title IV
programs;
|
|
|
|
submit in a timely manner all reports and financial statements
required by the regulations; and
|
|
|
|
not otherwise appear to lack administrative capability.
|
If an institution fails to satisfy any of these criteria or
comply with any other Department of Education regulations, the
Department of Education may:
|
|
|
|
|
require the repayment of Title IV funds;
|
|
|
|
transfer the institution from the advance system of
payment of Title IV funds to cash monitoring status or to the
reimbursement system of payment;
|
|
|
|
place the institution on provisional certification
status; or
|
13
|
|
|
|
|
commence a proceeding to impose a fine or to limit, suspend or
terminate the participation of the institution in Title IV
programs.
|
If we are found not to have satisfied the Department of
Educations administrative capability
requirements we could be limited in our access to, or lose,
Title IV program funding, which would significantly reduce
our enrollment and revenues and materially and adversely affect
our results of operations.
We are
subject to sanctions if we pay impermissible commissions,
bonuses or other incentive payments to individuals involved in
certain recruiting, admissions or financial aid
activities.
A school participating in Title IV programs may not provide
any commission, bonus or other incentive payment to any person
involved in student recruiting or admission activities or in
making decisions regarding the awarding of Title IV program
funds based on success in enrolling students or securing
financial aid. If we violate this law, we could be fined or
otherwise sanctioned by the Department of Education. Any such
fines or sanctions could harm our reputation, impose significant
costs on us, and have a material adverse effect on our results
of operations.
Our
failure to comply with regulations of various states could
result in actions taken by those states that would have a
material adverse effect on our enrollments, revenues and results
of operations.
Various states impose regulatory requirements on educational
institutions operating within their boundaries. Several states
have sought to assert jurisdiction over online educational
institutions that have no physical location or other presence in
the state but offer educational services to students who reside
in the state, or that advertise to or recruit prospective
students in the state. State regulatory requirements for online
education are inconsistent between states and not well developed
in many jurisdictions. As such, these requirements change
frequently and, in some instances, are not clear or are left to
the discretion of state employees or agents. Our changing
business and the constantly changing regulatory environment
require us to continually evaluate our state regulatory
compliance activities. In the event we are found not to be in
compliance, and a state seeks to restrict one or more of our
business activities within its boundaries, we may not be able to
recruit learners from that state and may have to cease providing
service to learners in that state.
Capella University is subject to extensive regulations by the
states in which it is authorized or licensed. In addition to
Minnesota, Capella University is authorized or licensed in the
following 14 states for all or
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some of its programs because we have determined that our
activities in these states constitute a presence or otherwise
require authorization or licensure by the respective state
educational agencies:
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State
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Capella University Activity Constituting Presence Requiring
Licensure or Authorization
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Alabama
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Agreement with a former provider of
library services to Capella students.
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Arizona
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State agency broadly interprets
presence requiring licensure to include the offering of degree
programs by distance education; Capella also conducts in-state
colloquia.
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Arkansas
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Agreement with Wal-Mart Stores,
Inc. under which Wal-Mart employees located in Arkansas receive
discounted tuition for certain Capella University programs.
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Colorado
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No determination of presence;
authorization granted in order to have marketing and recruiting
agents in the state.
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Florida
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Recruiting activities in the state.
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Georgia
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Direct marketing and recruiting
activities in the state.
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Illinois
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Authorization to conduct in-state
colloquia.
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Kentucky
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Direct marketing and recruiting
activities in the state.
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Nevada
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Direct marketing and recruiting
activities in the state; agreements with community colleges.
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Ohio
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Direct marketing and recruiting
activities in the state for select programs.
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Virginia
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Direct marketing and recruiting
activities in the state; agreements with community colleges.
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Washington
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Direct marketing and recruiting
activities in the state; agreements with community colleges.
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West Virginia
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Direct marketing and recruiting
activities in the state.
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Wisconsin
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State agency broadly interprets
licensure requirements to cover all institutions serving
residents of the state.
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As of the last day of classes for the quarter ended
December 31, 2006, the number of learners living in each of
these states (other than Minnesota, Florida and Georgia) was
less than 5% of our total enrollment. As of the last day of
classes for the quarter ended December 31, 2006,
approximately 5% of our learners lived in Minnesota,
approximately 6% lived in Florida and approximately 8% lived in
Georgia.
In some cases, the licensure or authorization is only for
specific programs. In the majority of these states, Capella
University has determined that separate licensure or
authorization for its certificate programs is not necessary,
although approval of certificate programs is required and has
been obtained from the States of Arizona, Florida and Ohio.
State laws typically establish standards for instruction,
qualifications of faculty, administrative procedures, marketing,
recruiting, financial operations and other operational matters.
State laws and regulations may limit our ability to offer
educational programs and award degrees. Some states may also
prescribe financial regulations that are different from those of
the Department of Education. Capella University is required to
post surety bonds in several states. If we fail to comply with
state licensing or authorization requirements, we may be subject
to the loss of state licensure or authorization. Although we
believe that the only state licensure or authorization that is
necessary for Capella University to participate in Title IV
programs is our authorization from the Minnesota Office of
Higher Education, loss of licensure or authorization in other
states could prohibit us from recruiting or enrolling students
in those states, reduce significantly our enrollments and
revenues and have a material adverse effect on our results of
operations.
The
inability of our graduates to obtain licensure in their chosen
professional fields of study could reduce our enrollments and
revenues, and potentially lead to litigation that could be
costly to us.
Certain of our graduates seek professional licensure in their
chosen fields following graduation. Their success in obtaining
licensure depends on several factors, including the individual
merits of the learner, but also may depend on whether the
institution and the program were approved by the state or by a
professional association, whether the program from which the
learner graduated meets all state requirements and whether the
institution is accredited. Certain states have refused to
license students who graduate from programs that do not meet
specific types of accreditation, residency or other state
requirements. Specifically, certain states have refused to
license learners from particular Capella University programs due
15
to the fact that the program did not meet one or more of the
states specific licensure requirements or were not
approved by the state for purposes of licensure. We have had to
respond to claims brought against us by former learners as a
result of such refusal. Certain states have denied our graduates
professional licensure because the Capella University program
from which they graduated did not have a sufficient number of
residency hours, did not include a state approved clinical
program, did not satisfy state coursework requirements or was
not accredited by a specific third party (such as the American
Psychological Association). In the event that one or more states
refuses to recognize our learners for professional licensure in
the future based on factors relating to our institution or
programs, the potential growth of our programs would be
negatively impacted, which could have a material adverse effect
on our results of operations. In addition, we could be exposed
to litigation that would force us to incur legal and other
expenses that could have a material adverse effect on our
results of operations.
If
regulators do not approve or delay their approval of
transactions involving a change of control of our company, our
ability to participate in Title IV programs may be
impaired.
If we or Capella University experience a change of control under
the standards of applicable state education agencies, The Higher
Learning Commission or the Department of Education, we must seek
the approval of each relevant regulatory agency. Transactions or
events that constitute a change of control include significant
acquisitions or dispositions of an institutions common
stock and significant changes in the composition of an
institutions board of directors. Some of these
transactions or events may be beyond our control. The potential
adverse effects of a change of control with respect to
participation in Title IV programs could influence future
decisions by us and our shareholders regarding the sale,
purchase, transfer, issuance or redemption of our common stock.
In addition, the adverse regulatory effect of a change of
control finding also could discourage bids for your shares of
our common stock and could have an adverse effect on the market
price of your shares.
We do not believe that this offering would constitute a change
of control or otherwise require any filing or approval under the
standards of The Higher Learning Commission, the Department of
Education or the State of Minnesota. We also do not believe that
this offering would constitute a change of control or otherwise
require any filing or approval under the standards of applicable
state education agencies which presently authorize or license
Capella University. However, in many of these states, the
regulatory standards as to the types of transactions that
constitute a change of control or otherwise require filings or
approvals are unclear or there is insufficient regulatory
guidance for us to definitively determine that this offering
would not constitute a change of control or require any such
filing or approval with respect to any particular state.
Further, any particular state may interpret their applicable
standards differently than we do. Accordingly, we cannot assure
that no state will determine that this offering constitutes a
change of control under that states standards or that any
other filings or approvals are necessary in connection with this
offering. In the event any state that presently authorizes or
licenses Capella University concludes that this offering
constitutes a change of control, or that any other actions are
necessary to be taken in connection with this offering, we could
be required to obtain the reaffirmation of our authorization
from the relevant state education agency or otherwise take the
requisite action necessary with respect to this offering. If we
fail to obtain any such required reaffirmation, or otherwise
fail to take the requisite action necessary in the relevant
state, the state could restrict Capella Universitys
ability to engage in activities within that state. In some
cases, a relevant state could potentially prevent Capella
University from offering services to learners in the state or
from having employees in the state. As a result of these
potential restrictions or prohibitions our enrollments and
results of operations could be materially adversely affected.
Government
and regulatory agencies and third parties may conduct compliance
reviews, bring claims or initiate litigation against
us.
Because we operate in a highly regulated industry, we are
subject to compliance reviews and claims of non-compliance and
lawsuits by government agencies, regulatory agencies and third
parties, including claims brought by third parties on behalf of
the federal government. If the results of these reviews or
proceedings are unfavorable to us, or if we are unable to defend
successfully against lawsuits or claims, we may be
16
required to pay money damages or be subject to fines,
limitations, loss of Title IV funding, injunctions or other
penalties. Even if we adequately address issues raised by an
agency review or successfully defend a lawsuit or claim, we may
have to divert significant financial and management resources
from our ongoing business operations to address issues raised by
those reviews or to defend against those lawsuits or claims.
Claims and lawsuits brought against us may damage our
reputation, even if such claims and lawsuits are without merit.
We may
lose eligibility to participate in Title IV programs if our
student loan default rates are too high, which would
significantly reduce our learner population.
An educational institution may lose its eligibility to
participate in some or all Title IV programs if, for three
consecutive federal fiscal years, 25% or more of its students
who were required to begin repaying their student loans in the
relevant fiscal year default on their payment by the end of the
next federal fiscal year. In addition, an institution may lose
its eligibility to participate in some or all Title IV
programs if its default rate exceeds 40% in the most recent
federal fiscal year for which default rates have been calculated
by the Department of Education. Capella Universitys
default rates on the Federal Family Education Loan, or FFEL,
program loans for the 2004, 2003 and 2002 federal fiscal years,
the three most recent years for which information is available,
were 2.2%, 1.8% and 2.8%, respectively. If Capella University
loses its eligibility to participate in Title IV programs
because of high student loan default rates, our learners would
no longer be eligible to receive Title IV program funds
under various government-sponsored financial aid programs, which
would significantly reduce our enrollments and revenues and have
a material adverse effect on our results of operations.
We may
lose eligibility to participate in Title IV programs if the
50% Rules are reinstated temporarily or permanently, which would
significantly reduce our learner population and have an adverse
effect on our revenues and operating profits.
Prior to passage of the Higher Education Reconciliation Act of
2006, which was part of the Deficit Reduction Act of 2006, the
Higher Education Act generally excluded from Title IV
program participation institutions at which (1) more than
50% of the institutions courses were offered via
correspondence, including online courses, or (2) 50% or
more of the institutions students were enrolled in
correspondence courses, including online courses. As an
exclusively online university, the so called 50%
Rules, enacted in 1992, would otherwise have precluded us
from participating in Title IV programs. However, in 1998,
Congress authorized the Department of Education to establish and
administer the Distance Education Demonstration Program, or the
Demonstration Program, to assess the viability of providing
Title IV program funds to institutions that offered online
educational programs. We were accepted as a participant in the
program and, by virtue of our participation in the program, our
learners were able to access Title IV program funds.
The 50% Rules were repealed for telecommunications courses
(including online courses) as part of the Higher Education
Reconciliation Act, and the Demonstration Program was thereafter
terminated. The Department of Education subsequently promulgated
regulations to implement the Higher Education Reconciliation
Acts provisions, including repeal of the 50% Rules. Those
regulations became effective December 1, 2006. As a result,
our learners continue to be able to access Title IV Funds.
At least six lawsuits were filed challenging the
constitutionality of the Deficit Reduction Act in general, on
grounds that discrepancies exist between non-education related
provisions of the legislation passed in the House and Senate. At
least five of these cases have been dismissed at the
U.S. District Court level, although at least two of those
dismissals are currently being appealed. In the event litigation
challenging the Deficit Reduction Act is successful, the 50%
Rules could be reinstated and, barring reinstatement of the
Demonstration Program or additional legislative action, our
learners would not be able to access Title IV program
funds. If our learners were temporarily or permanently unable to
access Title IV funds, many would not be able to continue
their educations at Capella University, which would
significantly reduce our enrollments, revenues and operating
profits.
17
We may
lose eligibility to participate in Title IV programs if the
percentage of our revenue derived from those programs is too
high, which would significantly reduce our learner
population.
A for-profit institution loses its eligibility to participate in
Title IV programs if, on a cash accounting basis, it
derives more than 90% of its revenue from those programs in any
fiscal year. In 2006, under the regulatory formula prescribed by
the Department of Education, we derived approximately 71% of our
revenues (calculated on a cash basis) from Title IV
programs. If we lose our eligibility to participate in
Title IV programs because more than 90% of our revenues are
derived from Title IV program funds in any year, our
learners would no longer be eligible to receive Title IV
program funds under various government-sponsored financial aid
programs, which would significantly reduce our enrollments and
revenues and have a material adverse effect on our results of
operations and financial condition.
Risks
Related to Our Business
Our
success depends in part on our ability to update and expand the
content of existing programs and develop new programs and
specializations on a timely basis and in a cost-effective
manner.
The updates and expansions of our existing programs and the
development of new programs and specializations may not be
accepted by existing or prospective learners or employers. If we
cannot respond to changes in market requirements, our business
may be adversely affected. Even if we are able to develop
acceptable new programs, we may not be able to introduce these
new programs as quickly as learners require or as quickly as our
competitors introduce competing programs. To offer a new
academic program, we may be required to obtain appropriate
federal, state and accrediting agency approvals, which may be
conditioned or delayed in a manner that could significantly
affect our growth plans. In addition, to be eligible for federal
student financial aid programs, a new academic program may need
to be certified by the Department of Education. If we are unable
to respond adequately to changes in market requirements due to
financial constraints or other factors, our ability to attract
and retain learners could be impaired and our financial results
could suffer.
Establishing new academic programs or modifying existing
programs requires us to make investments in management and
capital expenditures, incur marketing expenses and reallocate
other resources. We may have limited experience with the courses
in new areas and may need to modify our systems and strategy or
enter into arrangements with other educational institutions to
provide new programs effectively and profitably. If we are
unable to increase the number of learners, or offer new programs
in a cost-effective manner, or are otherwise unable to manage
effectively the operations of newly established academic
programs, our results of operations and financial condition
could be adversely affected.
Our
financial performance depends on our ability to continue to
develop awareness among, and attract and retain, working adult
learners.
Building awareness of Capella University and the programs we
offer among working adult learners is critical to our ability to
attract prospective learners. It is also critical to our success
that we convert these prospective learners to enrolled learners
in a cost-effective manner and that these enrolled learners
remain active in our programs. Some of the factors that could
prevent us from successfully enrolling and retaining learners in
our programs include:
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the emergence of more successful competitors;
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factors related to our marketing, including the costs of
Internet advertising and broad-based branding campaigns;
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performance problems with our online systems;
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failure to maintain accreditation;
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learner dissatisfaction with our services and programs;
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adverse publicity regarding us, our competitors or online or
for-profit education generally;
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price reductions by competitors that we are unwilling or unable
to match;
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a decline in the acceptance of online education; and
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a decrease in the perceived or actual economic benefits that
learners derive from our programs.
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If we are unable to continue to develop awareness of Capella
University and the programs we offer, and to enroll and retain
learners, our enrollments would suffer and our ability to
increase revenues and maintain profitability would be
significantly impaired.
Strong
competition in the post-secondary education market, especially
in the online education market, could decrease our market share,
increase our cost of acquiring learners and put downward
pressure on our tuition rates.
Post-secondary education is highly competitive. We compete with
traditional public and private two-year and four-year colleges
as well as other for-profit schools. Traditional colleges and
universities may offer programs similar to ours at lower tuition
levels as a result of government subsidies, government and
foundation grants, tax-deductible contributions and other
financial sources not available to for-profit institutions. In
addition, some of our competitors, including both traditional
colleges and universities and other for-profit schools, have
substantially greater name recognition and financial and other
resources than we have, which may enable them to compete more
effectively for potential learners and decrease our market
share. We also expect to face increased competition as a result
of new entrants to the online education market, including
established colleges and universities that had not previously
offered online education programs. Moreover, one or more of our
competitors may obtain specialized accreditations that improve
their competitive positions against us.
We may not be able to compete successfully against current or
future competitors and may face competitive pressures that could
adversely affect our business or results of operations. For
example, as the market continues to mature, certain of our
competitors have begun to reduce tuition rates. We may therefore
be required to reduce our tuition or increase spending in
response to competition in order to retain or attract learners
or pursue new market opportunities. We may also face increased
competition in maintaining and developing new marketing
relationships with corporations, particularly as corporations
become more selective as to which online universities they will
encourage their current employees to attend and from which
online universities they will hire prospective employees. These
competitive factors could cause our enrollments, revenues and
profitability to significantly decrease.
We
operate in a highly competitive market with rapid technological
change, and we may not have the resources needed to compete
successfully.
Online education is a highly competitive market that is
characterized by rapid changes in our learners
technological requirements and expectations and evolving market
standards. Competitors vary in size and organization from
traditional colleges and universities to for-profit schools,
corporate universities and software companies providing online
education and training software. Each of these competitors may
develop platforms or other technologies that are superior to the
platform and technology we use. We may not have the resources
necessary to acquire or compete with technologies being
developed by our competitors, which may render our online
delivery format less competitive or obsolete.
System
disruptions and vulnerability from security risks to our online
computer networks could impact our ability to generate revenue
and damage the reputation of Capella University, limiting our
ability to attract and retain learners. We are currently
migrating to a new enterprise resource planning system, and
unplanned costs and decreases in productivity could adversely
impact our financial results.
The performance and reliability of our technology infrastructure
is critical to our reputation and ability to attract and retain
learners. Any system error or failure, or a sudden and
significant increase in bandwidth usage, could result in the
unavailability of our courseroom platform, damaging our ability
to generate revenue. Our technology infrastructure could be
vulnerable to interruption or malfunction due to events
19
beyond our control, including natural disasters, terrorist
activities and telecommunications failures. In the Fall of 2005,
we completed the transfer of our learners to a new courseroom
platform, Blackboard Learning System, formerly known as WebCT
Vista, and we recently migrated this courseroom platform to a
new server system.
We are currently replacing our individual software applications
with a comprehensive enterprise resource planning system. The
implementation of this enterprise resource planning system is
projected to continue into 2008. The enterprise resource
planning system is a large-scale project to which our employees
and contractors continue to devote substantial time. Our
in-house expertise, including the expertise of our contractors,
related to large-scale enterprise resource planning system
implementations is limited, and an implementation of this scope
by its nature gives rise to risk of system interruption or
failure. In addition, implementation of the enterprise resource
planning system may result in unplanned and unbudgeted costs,
which could have a material adverse effect on our financial
results. Further, during and after implementation, we may
experience decreases in productivity in excess of planned levels
as our employees transition to and begin to use the new system,
and such decreases could have a material adverse effect on our
financial results.
During 2003 and 2004, we experienced intermittent failures of
our courseroom platform that prevented learners from accessing
their courses. We may experience additional interruptions or
failures in our computer systems as a result of our ongoing
implementation of our enterprise resource planning system, or
our recently implemented new courseroom platform and server
system. Any interruption to our technology infrastructure could
have a material adverse effect on our ability to attract and
retain learners and could require us to incur additional
expenses to correct or mitigate the interruption.
Our computer networks may also be vulnerable to unauthorized
access, computer hackers, computer viruses and other security
problems. A user who circumvents security measures could
misappropriate proprietary information or cause interruptions or
malfunctions in operations. As a result, we may be required to
expend significant resources to protect against the threat of
these security breaches or to alleviate problems caused by these
breaches. We engage with multiple security assessment providers
on a periodic basis to review and assess our security. We
utilize this information to audit ourselves to ensure that we
are continually monitoring the security of our technology
infrastructure. However, we cannot assure you that these
security assessments and audits will protect our computer
networks against the threat of security breaches.
At
present we derive a significant portion of our revenues and,
after the full allocation of corporate overhead expenses, all of
our operating income from our doctoral programs.
Our origins are as an online university primarily for doctoral
learners. Despite the expansion of our program offerings to
include both masters and bachelors degrees, our
doctoral learner community remains an integral part of the
success of our business model. At December 31, 2006,
learners seeking doctoral, masters and bachelors
degrees represented approximately 42%, 43% and 15%,
respectively, of our enrollment. Due to the relative size,
maturity and economics of our doctoral programs, for the year
ended December 31, 2006, doctoral learners accounted for
approximately $98.9 million, or 55%, of our revenues, and,
after the full allocation of corporate overhead expenses, all of
our operating income. Prior to the full allocation of corporate
overhead expenses, our doctoral programs accounted for most of
our operating income in these periods. If we were to experience
any learner, regulatory, reputational, instructional or other
event that adversely affected our doctoral offerings, our
results of operations could be significantly and adversely
affected.
20
We
recently transitioned our library services and resources
in-house, and we now have responsibility for providing library
services directly to our learners. We have limited experience
providing such services and any inability to do so effectively
could limit our ability to attract and retain learners, and
adversely affect our enrollments, revenues and operating
profits.
Our library services and resources had previously been provided
by the Sheridan Libraries at The Johns Hopkins University under
an agreement between The Johns Hopkins University and us. We
provided notice of our intent to terminate that agreement in
June 2006, and effective January 31, 2007, we completed the
transition of those services and resources. The library services
that were performed by The Johns Hopkins University are now
performed in-house by our own employees, except interlibrary
loan coordination, which we have outsourced to the University of
Michigan. We have limited experience in providing library
services in-house, and to do so we needed to hire additional
library personnel, including in-house librarians.
It is possible that we may not be able to provide library
services in-house and through the University of Michigan as
successfully or as cost-effectively as we are currently
planning. If we are not able to successfully provide in-house
certain of the library services formerly performed by The Johns
Hopkins University, or if the University of Michigan does not
perform as expected, the quality of our overall program would
suffer, which would in turn decrease our enrollments, revenues
and operating profits. If we are not able to provide such
services as cost-effectively as planned, our operating profits
would be adversely affected.
We may
experience declines in our revenue and enrollment growth rates,
and our growth may place a strain on our
resources.
We have experienced significant growth since we established our
university in 1993. However, while we have continued to achieve
growth in revenues and enrollment
year-over-year,
these growth rates have declined in recent periods and may
continue to decline in the future. Specifically, we expect
additional competitors to enter the online educational market
and increased competition for online education offerings,
including from colleges and universities that provide blended
educational programs involving both classroom and online
components.
The growth that we have experienced in the past, as well as any
future growth that we experience, may place a significant strain
on our resources and increase demands on our management
information and reporting systems and financial management
controls. If we are unable to manage our growth effectively
while maintaining appropriate internal controls, we may
experience operating inefficiencies that could increase our
costs and adversely affect our profitability and results of
operations.
We
rely on exclusive proprietary rights and intellectual property
that may not be adequately protected under current laws, and we
encounter disputes from time to time relating to our use of
intellectual property of third parties.
Our success depends in part on our ability to protect our
proprietary rights. We rely on a combination of copyrights,
trademarks, service marks, trade secrets, domain names and
agreements to protect our proprietary rights. We rely on service
mark and trademark protection in the United States and select
foreign jurisdictions to protect our rights to the marks
CAPELLA, CAPELLA EDUCATION COMPANY, and
CAPELLA UNIVERSITY, as well as distinctive logos and
other marks associated with our services. We rely on agreements
under which we obtain rights to use course content developed by
faculty members and other third-party content experts. We cannot
assure you that these measures will be adequate, that we have
secured, or will be able to secure, appropriate protections for
all of our proprietary rights in the United States or select
foreign jurisdictions, or that third parties will not infringe
upon or violate our proprietary rights. Despite our efforts to
protect these rights, unauthorized third parties may attempt to
duplicate or copy the proprietary aspects of our curricula,
online resource material and other content. Our
managements attention may be diverted by these attempts
and we may need to use funds in litigation to protect our
proprietary rights against any infringement or violation.
21
We may encounter disputes from time to time over rights and
obligations concerning intellectual property, and we may not
prevail in these disputes. In certain instances, we may not have
obtained sufficient rights in the content of a course. Third
parties may raise a claim against us alleging an infringement or
violation of the intellectual property of that third party. Some
third party intellectual property rights may be extremely broad,
and it may not be possible for us to conduct our operations in
such a way as to avoid those intellectual property rights. Any
such intellectual property claim could subject us to costly
litigation and impose a significant strain on our financial
resources and management personnel regardless of whether such
claim has merit. Our general liability and cyber liability
insurance may not cover potential claims of this type adequately
or at all, and we may be required to alter the content of our
classes or pay monetary damages, which may be significant.
We may
incur liability for the unauthorized duplication or distribution
of class materials posted online for class
discussions.
In some instances, our faculty members or our learners may post
various articles or other third-party content on class
discussion boards. We may incur liability for the unauthorized
duplication or distribution of this material posted online for
class discussions. Third parties may raise claims against us for
the unauthorized duplication of this material. Any such claims
could subject us to costly litigation and impose a significant
strain on our financial resources and management personnel
regardless of whether the claims have merit. Our general
liability insurance may not cover potential claims of this type
adequately or at all, and we may be required to alter the
content of our courses or pay monetary damages.
A
reclassification of our adjunct faculty by authorities may have
a material adverse effect on our results of
operations.
Adjunct faculty comprised approximately 86% of our faculty
population at December 31, 2006. We classify our adjunct
faculty as independent contractors, as opposed to employees.
Because we classify our adjunct faculty as independent
contractors, we do not withhold federal or state income or other
employment-related
taxes, make federal or state unemployment tax or Federal
Insurance Contributions Act, or FICA, payments or provide
workers compensation insurance with respect to our adjunct
faculty. The determination of whether adjunct faculty members
are properly classified as independent contractors or as
employees is based upon the facts and circumstances of our
relationship with our adjunct faculty members. Federal or state
authorities may challenge our classification as incorrect and
assert that our adjunct faculty members must be classified as
employees. In the event that we were to reclassify our adjunct
faculty as employees, we would be required to withhold the
appropriate taxes, make unemployment tax and FICA payments and
pay for workers compensation insurance and additional
payroll processing costs. If we had reclassified our adjunct
faculty members as employees for 2006, we estimate our
additional tax, workers compensation insurance and payroll
processing payments would have been approximately
$1.6 million for that year. The amount of additional tax
and insurance payments would increase in the future as the total
amount we pay to adjunct faculty increases. In addition to these
known costs, we could be subject to retroactive taxes and
penalties, which may be significant, by federal and state
authorities, which could adversely affect our financial
condition and results of operations.
We may
not be able to retain our key personnel or hire and retain the
personnel we need to sustain and grow our
business.
Our success to date has depended, and will continue to depend,
largely on the skills, efforts and motivation of our executive
officers, who generally have significant experience with our
company and within the education industry. Our Chairman and
Chief Executive Officer, Stephen Shank, is 63 years old and
has been our Chief Executive Officer since he founded Capella in
1991. Mr. Shank is also the Chancellor of Capella
University. To facilitate an orderly development and transition
of leadership, our board of directors has been engaged in
ongoing succession planning. Mr. Shank has advised the
board that at such point as clear Chief Executive Officer
succession capability has been established, and no earlier than
2008, he would
22
relinquish his duties as Chief Executive Officer. As one means
to facilitate Mr. Shanks eventual transition, the
board established the position of Chief Operating Officer.
Our success also depends in large part upon our ability to
attract and retain highly qualified faculty, school directors,
administrators and corporate management. In March 2007, we began
a national search for a new president of Capella University, a
position currently held by Dr. Michael Offerman who is
transitioning to a new executive position at Capella. Due to the
nature of our business, we face significant competition in
attracting and retaining personnel who possess the skill sets we
seek. In addition, key personnel may leave us and subsequently
compete against us. We do not carry life insurance on our key
personnel for our benefit. The loss of the services of any of
our key personnel, or our failure to attract and retain other
qualified and experienced personnel on acceptable terms, could
impair our ability to successfully sustain and grow our
business, which could in turn materially and adversely affect
our results of operations.
Our
learner population and revenues could decrease if the government
tuition assistance offered to U.S. Armed Forces personnel
is reduced or eliminated, if the tuition discounts which we
offer to U.S. Armed Forces personnel are reduced or
eliminated, or if our informal arrangements with any military
bases deteriorate.
Active duty members of the U.S. Armed Forces are eligible
to receive tuition assistance from the government, which they
may use to pursue post-secondary degrees. We offer tuition
discounts generally ranging from 10% to 15% to all members of
the U.S. Armed Forces and immediate family members of
active duty U.S. Armed Forces personnel. For the year ended
December 31, 2006, approximately 18% of our learners
received a U.S. Armed Forces tuition discount. During 2006,
we provided approximately $3.0 million of such discounts.
We also have non-exclusive agreements with various educational
institutions of the U.S. Armed Forces pursuant to which we
have agreed to accept credits toward a Capella University degree
from certain military educational programs. These agreements
generally may be terminated by either party upon 30 to
45 days notice. Additionally, we have informal
arrangements with several military bases pursuant to which the
bases make information about Capella University available to
interested service members. Each of these informal arrangements
is not binding on either party and either party could end the
arrangement at any time. If our informal arrangement with any
military base deteriorates or ends, our efforts to recruit
learners from that base will be impaired. In the event that
governmental tuition assistance programs to active duty members
of the U.S. Armed Forces are reduced or eliminated, if our
tuition discount program which we offer U.S. Armed Forces
personnel and their immediate family members is reduced or
eliminated, or if our informal arrangements with any military
base deteriorates, this could materially and adversely affect
our revenues and results of operations.
Our
expenses may cause us to incur operating losses if we are
unsuccessful in achieving growth.
Our expenses are based, in significant part, on our estimates of
future revenues and are largely fixed in the short term. As a
result, we may be unable to adjust our spending in a timely
manner if our revenues fall short of our expectations.
Accordingly, any significant shortfall in revenues in relation
to our expectations would have an immediate and material adverse
effect on our profitability. In addition, as our business grows,
we anticipate increasing our operating expenses to expand our
program offerings, marketing initiatives and administrative
organization. Any such expansion could cause material losses to
the extent we do not generate additional revenues sufficient to
cover those expenses.
Seasonal
and other fluctuations in our results of operations could
adversely affect the trading price of our common
stock.
In reviewing our results of operations, you should not focus on
quarter-to-quarter
comparisons. Our results in any quarter may not indicate the
results we may achieve in any subsequent quarter or for the full
year. Our revenues and operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to changes in enrollment. Learner population varies as a result
of new enrollments, graduations and learner attrition. While our
number of enrolled learners has grown in each sequential quarter
over the past three years, the number of enrolled learners has
been proportionally greatest in the
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fourth quarter of each respective year. A significant portion of
our general and administrative expenses do not vary
proportionately with fluctuations in revenues. We expect
quarterly fluctuations in operating results to continue as a
result of seasonal enrollment patterns. Such patterns may
change, however, as a result of new program introductions, the
timing of colloquia and events and increased enrollments of
learners. These fluctuations may result in volatility or have an
adverse effect on the market price of our common stock.
Our
current success and future growth depend on the continued
acceptance of the Internet and the corresponding growth in users
seeking educational services on the Internet.
Our business relies on the Internet for its success. A number of
factors could inhibit the continued acceptance of the Internet
and adversely affect our profitability, including:
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inadequate Internet infrastructure;
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security and privacy concerns; and
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the unavailability of cost-effective Internet service and other
technological factors.
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If Internet use decreases, or if the number of Internet users
seeking educational services on the Internet does not increase,
our business may not grow as planned.
Government
regulations relating to the Internet could increase our cost of
doing business, affect our ability to grow or otherwise have a
material adverse effect on our business.
The increasing popularity and use of the Internet and other
online services has led and may lead to the adoption of new laws
and regulatory practices in the United States or foreign
countries and to new interpretations of existing laws and
regulations. These new laws and interpretations may relate to
issues such as online privacy, copyrights, trademarks and
service marks, sales taxes, fair business practices and the
requirement that online education institutions qualify to do
business as foreign corporations or be licensed in one or more
jurisdictions where they have no physical location or other
presence. New laws, regulations or interpretations related to
doing business over the Internet could increase our costs and
materially and adversely affect our enrollments, revenues and
results of operations.
An
increase in interest rates could adversely affect our ability to
attract and retain learners.
Approximately 71% of our revenues (calculated on a cash basis)
for the year ended December 31, 2006, were derived from
Title IV programs, which involve subsidized student
borrowing. Additionally, many of our learners finance their
education through private, unsubsidized borrowing. Interest
rates have reached relatively low levels in recent years,
creating a favorable borrowing environment for learners.
However, interest rates are currently increasing. Much of the
financing our learners receive is tied to floating interest
rates. In addition, in the event Congress decreases the amount
available for federal student aid, our learners may have to pay
higher, unsubsidized interest rates. Therefore, any future
increase in interest rates will result in a corresponding
increase in educational costs to our existing and prospective
learners, which could result in a significant reduction in our
learner population and revenues. Higher interest rates could
also contribute to higher default rates with respect to our
learners repayment of their education loans. Higher
default rates may in turn adversely impact our eligibility to
participate in some or all Title IV programs, which could
result in a significant reduction in our learner population and
our profitability.
Risks
Related to the Offering
The
price of our common stock may fluctuate significantly, and you
could lose all or part of your investment.
Volatility in the market price of our common stock may prevent
you from being able to sell your shares at or above the price
you paid for your shares. The market price of our common stock
could fluctuate significantly for various reasons, which include:
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our quarterly or annual earnings or those of other companies in
our industry;
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the publics reaction to our press releases, our other
public announcements and our filings with the SEC;
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changes in earnings estimates or recommendations by research
analysts who track our common stock or the stocks of other
companies in our industry;
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changes in our number of enrolled learners;
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new laws or regulations or new interpretations of laws or
regulations applicable to our business;
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seasonal variations in our learner population;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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changes in general conditions in the U.S. and global economies
or financial markets, including those resulting from war,
incidents of terrorism or responses to such events;
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litigation involving our company or investigations or audits by
regulators into the operations of our company or our
competitors; and
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sales of common stock by our directors, executive officers and
significant shareholders.
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In addition, in recent years, the stock market has experienced
extreme price and volume fluctuations. This volatility has had a
significant impact on the market price of securities issued by
many companies, including companies in our industry. The changes
frequently appear to occur without regard to the operating
performance of these companies. The price of our common stock
could fluctuate based upon factors that have little or nothing
to do with our company, and these fluctuations could materially
reduce our stock price.
Future
sales of our common stock in the public market could lower our
stock price.
We may sell additional shares of common stock in subsequent
public offerings. We may also issue additional shares of common
stock to finance future acquisitions. After the completion of
this offering, we will have 16,576,724 outstanding shares
of common stock. This number includes 4,600,000 shares sold
in our initial public offering, which may be resold immediately
in the public market and 3,100,000 shares being sold in
this offering, which may be resold immediately in the public
market.
8,424,718 shares of our common stock, or 50.8% of our total
outstanding shares, are restricted from immediate resale under
the federal securities laws and the terms of various
lock-up
agreements between certain of our shareholders and the
underwriters of our initial public offering or the underwriters
of this offering, but may be sold into the market in the near
future. Under the terms of these
lock-up
agreements:
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240,575 of these shares will become available for sale, subject
to volume limitations and
manner-of-sale
requirements under Rule 144 of the Securities Act of 1933
(the Securities Act), at various times following the May 8,
2007 expiration of the
lock-up
agreements entered into with the underwriters of our initial
public offering (which lock-up period is subject to an extension
of no more than 34 days as a result of an earnings release
by us or the occurrence of material news or a material event
relating to us). These
lock-up
agreements are described in the section entitled
Shares Eligible for Future Sale Lock Up
Agreements;
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5,832,589 of these shares will become available for sale,
subject to volume limitations and
manner-of-sale
requirements under Rule 144 of the Securities Act, at
various times following the expiration of the
60-day
lock-up
period of the
lock-up
agreements which have been entered into by certain of our
shareholders with the underwriters of this offering and are
described in the section entitled Underwriting,
which 60-day lock-up period will commence on the date of this
prospectus and is subject to an extension of no more than
34 days as a result of an earnings release by us or the
occurrence of material news or a material event relating to us;
and
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2,351,554 of these shares will become available for sale,
subject to volume limitations and
manner-of-sale
requirements under Rule 144 of the Securities Act, at
various times following the
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expiration of the
90-day
lock-up
period of the
lock-up
agreements which have been entered into by certain of our
shareholders with the underwriters of this offering and are
described in the section entitled Underwriting,
which 90-day lock-up period will commence on the date of this
prospectus and is subject to an extension of no more than
34 days as a result of an earnings release by us or the
occurrence of material news or a material event relating to us.
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The terms of any
lock-up
agreement may be waived with the prior consent of Credit Suisse
Securities (USA) LLC, and Credit Suisse Securities (USA) LLC may
release all or a portion of the shares subject to any
lock-up
agreement at any time without notice. The periods immediately
following expiration of any of the various
lock-up
agreements may experience relatively higher levels of selling
activity.
In addition, we have an effective
S-8
registration statement under the Securities Act pursuant to
which we have registered 4,192,890 shares of our common
stock issuable under our stock incentive plans. As a result,
shares issued under our stock incentive plans covered by the
S-8
registration statement are eligible for resale in the public
market without restriction, subject to certain Rule 144
limitations applicable to affiliates and, to the extent
applicable, the
lock-up
agreements described above.
After this offering, certain of our existing shareholders are
expected to be parties to a registration rights agreement with
us relating to 2,936,862 shares of our common stock. Under
that agreement, these shareholders will have the right, after
the expiration of any
lock-up
period to which they are subject, to require us to effect the
registration of these shares. In addition, if we propose to
register, or are required to register following the exercise of
a demand registration right as described in the
previous sentence, any of our shares of common stock under the
Securities Act, all the shareholders who are parties to the
registration rights agreement will be entitled to include these
shares of common stock in that registration.
In accordance with the terms of our employee stock purchase
plan, we may offer to our employees shares of our common stock
under our employee stock purchase plan at a per share price
below the then-current market price of our common stock. The
discount would give our employees incentives to purchase shares
of our common stock under the employee stock purchase plan. We
have not yet implemented the employee stock purchase plan, but
should we do so, we would also likely file an
S-8
registration statement to register up to 450,000 shares of
our common stock thereunder. Our employees would then be able to
sell all or some of the shares purchased under the employee
stock purchase plan in the open market.
We cannot predict the size of future issuances of our common
stock or the effect, if any, that future issuances and sales of
shares of our common stock will have on the market price of our
common stock. Sales of substantial amounts of our common stock
(including shares issued in connection with an acquisition and
shares issued under our stock incentive plans and employee stock
purchase plan), or the perception that such sales could occur,
may adversely affect prevailing market prices for our common
stock.
Our
executive officers, directors and principal existing
shareholders will continue to own a large percentage of our
voting stock after this offering, which may allow them to
collectively control substantially all matters requiring
shareholder approval and, in the case of certain of our
principal shareholders, will have other unique rights that may
afford them access to our management.
Our directors, executive officers and principal existing
shareholders will beneficially own approximately
8,604,495 shares, or 50.0%, of our common stock upon the
completion of this offering. Our directors and executive
officers will beneficially own in the aggregate approximately
6,067,063 shares, or 35.2%, of our common stock after the
offering, including approximately 2,307,596 shares, or
13.7%, of our common stock beneficially owned by Stephen Shank,
our Chief Executive Officer and Chairman of our Board of
Directors. Our principal existing shareholders consist of
Forstmann Little & Co. Equity Partnership-VI, L.P.
(Forstmann VI), Forstmann Little & Co. Equity
Partnership-VII, L.P. (Forstmann VII) and Forstmann
Little & Co. Subordinated Debt and Equity Buyout
Partnership-VIII, L.P. (Forstmann VIII), which we refer to as
the Forstmann Little entities in this prospectus,
Cherry Tree Ventures IV, L.P., Cherry Tree Core Growth Fund,
L.L.L.P. and InfoPower L.L.L.P., which we refer to as the
Cherry Tree entities in this prospectus, TCV V,
L.P. and TCV Member Fund L.P., which we refer to as the
entities affiliated with Technology Crossover
Ventures in this prospectus, Maveron Equity Partners 2000,
L.P., Maveron
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Equity Partners 2000-B, L.P. and MEP 2000 Associates LLC, which
we refer to as the Maveron entities in this
prospectus, and Insight-Salmon River LLC, Insight Venture
Partners IV, L.P., Salmon River Capital I LLC, Salmon River CIP
LLC, Salmon River Capital II, L.P., Insight Venture
Partners IV (Fund B), L.P., Insight Venture
Partners IV (Co-Investors), L.P. and Insight Venture
Partners (Cayman) IV, L.P., which we refer to as the
Salmon River and Insight entities in this
prospectus. The Forstmann Little entities are selling all of
their shares in this offering, but our remaining principal
existing shareholders will beneficially own approximately
5,832,589 shares, or 35.2%, of our common stock after this
offering. In addition to their shareholdings, Maveron Equity
Partners 2000, L.P. and TCV V, L.P. will also have the
right to inspect our books and records, to visit and inspect any
of our properties and to discuss our affairs, finances, and
accounts with our officers, lawyers, and accountants after the
offering. See Principal and Selling Shareholders for
a more detailed discussion of the shareholdings of our
directors, executive officers and principal existing
shareholders, and Management Board Observation
Rights; Inspection Rights for a more detailed discussion
of the inspection and consultation rights of certain of our
principal existing shareholders.
Accordingly, if some or all of these shareholders decided to act
in concert, they could control us through their ability to
determine the outcome of the election of our directors, to amend
our articles of incorporation and bylaws and to take other
actions requiring the vote or consent of shareholders, including
mergers, going private transactions and other extraordinary
transactions, and the terms of any of these transactions. The
ownership positions of these shareholders may have the effect of
delaying, deterring or preventing a change in control or a
change in the composition of our board of directors. These
shareholders may also use their contractual rights, including
access to management, and their large ownership position to
address their own interests, which may be different from those
of our other shareholders, including investors in this offering.
Our
articles of incorporation, bylaws, Minnesota law and regulations
of state and federal education agencies may discourage takeovers
and business combinations that our shareholders might consider
in their best interests.
Anti-takeover provisions of our articles of incorporation,
bylaws, Minnesota law and regulations of state and federal
education agencies could diminish the opportunity for
shareholders to participate in acquisition proposals at a price
above the then-current market price of our common stock. For
example, while we have no present plans to issue any preferred
stock, our board of directors, without further shareholder
approval, may issue shares of undesignated preferred stock and
fix the powers, preferences, rights and limitations of such
class or series, which could adversely affect the voting power
of your shares. In addition, our bylaws provide for an advance
notice procedure for nomination of candidates to our board of
directors that could have the effect of delaying, deterring or
preventing a change in control. Further, as a Minnesota
corporation, we are subject to provisions of the Minnesota
Business Corporation Act, or MBCA, regarding business
combinations, which can deter attempted takeovers in
certain situations. The approval requirements of the Department
of Education, our regional accrediting agency and state
education agencies for a change in control transaction could
also delay, deter or prevent a transaction that would result in
a change in control. We may, in the future, consider adopting
additional anti-takeover measures. The authority of our board to
issue undesignated preferred or other capital stock and the
anti-takeover provisions of the MBCA, as well as other current
and any future anti-takeover measures adopted by us, may, in
certain circumstances, delay, deter or prevent takeover attempts
and other changes in control of the company not approved by our
board of directors.
Being
a public company has increased our expenses and administrative
workload.
As a public company with listed equity securities since our
November 2006 initial public offering, we must comply with new
laws, regulations and requirements, certain provisions of the
Sarbanes-Oxley Act of 2002, related SEC regulations and
requirements of The Nasdaq Global Market with which we were not
required to comply as a private company. Complying with these
statutes, regulations and requirements has and will occupy a
significant amount of the time of our board of directors and
management and will
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increase our costs and expenses. We estimate that incremental
annual public company costs will be between $2.5 million
and $3.0 million. We have recently or will need to:
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create or expand the roles and duties of our board of directors,
our board committees and management;
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institute more comprehensive compliance and internal audit
functions;
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evaluate and maintain our system of internal control over
financial reporting, and report on managements assessment
thereof, in compliance with the requirements of Section 404
of the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the SEC and the Public Company Accounting
Oversight Board;
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prepare and distribute periodic public reports in compliance
with our obligations under the federal securities laws;
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implement more comprehensive internal policies, such as those
relating to disclosure controls and procedures and insider
trading;
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involve and retain to a greater degree outside counsel and
accountants in the above activities;
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hire investor relations support personnel; and
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hire additional personnel to perform external reporting and
internal accounting functions.
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If we fail to take some of these actions, in particular with
respect to our internal audit and accounting functions and our
compliance function, our ability to timely and accurately report
our financial results could be impaired.
In addition, we also expect that being a public company subject
to these rules and regulations will make it more expensive for
us to obtain director and officer liability insurance, and we
may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage. These factors
could also make it more difficult for us to attract and retain
qualified members of our board of directors, particularly to
serve on our audit and compensation committees, and qualified
executive officers.
We
will be exposed to risks relating to evaluations of controls
required by Section 404 of the Sarbanes-Oxley Act of
2002.
We are in the process of evaluating our internal controls
systems to allow management to report on, and our independent
auditors to attest to, our internal control over financial
reporting. We are required to comply with Section 404 with
respect to our fiscal year ending December 31, 2007. With
the assistance of outside consultants who specialize in
preparing companies to comply with Section 404 of the
Sarbanes Oxley Act of 2002, we began our process evaluation and
subsequent remediation work in the second half of 2004. In
connection with our evaluation, we have identified a number of
control deficiencies, some of which have been remedied. In 2005
and 2006, we continued our remediation work and expanded our
process evaluation through internal process reviews. However, we
cannot be certain as to the timing of completion of our
evaluation, testing and remediation actions or the impact of the
same on our operations. Furthermore, upon completion of this
process, we may identify control deficiencies of varying degrees
of severity under applicable SEC and Public Company Accounting
Oversight Board rules and regulations that remain unremediated.
As a public company, we are required to report, among other
things, control deficiencies that constitute a material
weakness or changes in internal controls that materially
affect, or are reasonably likely to materially affect, internal
controls over financial reporting. A material
weakness is a significant deficiency, or combination of
significant deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. If we
fail to implement the requirements of Section 404 in a
timely manner, we might be subject to sanctions or investigation
by regulatory authorities such as the SEC or The Nasdaq Global
Market, and if we fail to remedy any material weakness, our
financial statements may be inaccurate, we may face restricted
access to the capital markets, and our stock price may be
adversely affected.
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You
will suffer immediate and substantial dilution.
The public offering price per share in this offering is
substantially higher than the pro forma net tangible book value
per share immediately after this offering. As a result, you will
pay a price per share that substantially exceeds the tangible
book value of our assets after subtracting our liabilities. At
an assumed public offering price of $34.96 per share (the
last reported sale price of our common stock on April 5,
2007), you will incur immediate and substantial dilution in the
amount of $28.52 per share. A $1.00 increase or decrease in
the assumed public offering price of $34.96 per share would
increase or decrease, as applicable, the dilution per share you
experience by $0.98 per share. Upon consummation of this
offering, we expect to have outstanding stock options to
purchase 1,929,894 shares of our common stock at a weighted
average exercise price of $17.51 per share. To the extent
these options are exercised, there will be further dilution.
We
will have broad discretion in applying the net proceeds of this
offering and may not use those proceeds in ways that will
enhance the market value of our common stock.
We have significant flexibility in applying the net proceeds we
will receive in this offering. As part of your investment
decision, you will not be able to assess or direct how we apply
these net proceeds. If we do not apply these funds effectively,
we may lose significant business opportunities. Furthermore, our
stock price could decline if the market does not view our use of
the net proceeds from this offering favorably.
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FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements,
which include information relating to future events, future
financial performance, strategies, expectations, competitive
environment, regulation and availability of resources. These
forward-looking statements include, without limitation,
statements regarding: proposed new programs; expectations that
regulatory developments or other matters will not have a
material adverse effect on our consolidated financial position,
results of operations or liquidity; statements concerning
projections, predictions, expectations, estimates or forecasts
as to our business, financial and operational results and future
economic performance; and statements of managements goals
and objectives and other similar expressions concerning matters
that are not historical facts. Words such as may,
should, could, would,
predicts, potential,
continue, expects,
anticipates, future,
intends, plans, believes,
estimates and similar expressions, as well as
statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by, which such
performance or results will be achieved. Forward-looking
statements are based on information available at the time those
statements are made or managements good faith belief as of
that time with respect to future events, and are subject to
risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in or
suggested by the forward-looking statements. Important factors
that could cause such differences include, but are not limited
to:
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our failure to comply with the extensive regulatory framework
applicable to our industry, including Title IV of the
Higher Education Act and the regulations thereunder, state laws
and regulatory requirements, and accrediting agency requirements;
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issuance of draft and final audit reports of the OIG arising out
of its ongoing compliance audit of Capella University,
unanticipated findings therein, and possible remedial actions
resulting therefrom;
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risks associated with changes in applicable federal and state
laws and regulations and accrediting agency policies;
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the pace of growth of our enrollment;
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our ability to convert prospective learners to enrolled learners
and to retain active learners;
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our success in updating and expanding the content of existing
programs and developing new programs in a cost-effective manner
or on a timely basis;
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industry competition;
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failure on our part to maintain and expand existing commercial
relationships with the U.S. Armed Forces and various
corporations and develop new commercial relationships;
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risks associated with the competitive marketing environment in
which we operate;
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failure on our part to keep up with advances in technology that
could enhance the online experience for our learners;
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our ability to effectively implement our enterprise resource
planning system;
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our ability to manage future growth effectively;
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general and economic conditions; and
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other factors discussed under the headings Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Business and Regulatory Environment.
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Forward-looking statements speak only as of the date the
statements are made. You should not put undue reliance on any
forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting
forward-looking information, except to the extent required by
applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we
will make additional updates with respect to those or other
forward-looking statements.
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USE OF
PROCEEDS
The net proceeds from the sale of 301,145 shares of our
common stock offered by us in this offering will be
approximately $10.1 million (or approximately
$11.6 million if the underwriters exercise their
over-allotment option in full), based on the assumed public
offering price of $34.96 per share, the last reported sale
price of our common stock on April 5, 2007, and after
deducting the underwriting discounts and commissions and
estimated offering expenses payable by us. Each $1.00 increase
or decrease in the assumed public offering price of
$34.96 per share would increase or decrease, as applicable,
the net proceeds to us by approximately $0.3 million
(including if the underwriters exercise their over-allotment
option in full), assuming the number of shares offered by us as
set forth on the cover of this prospectus remains the same and
after deducting estimated underwriting discounts and commissions
payable by us. We will not receive any proceeds from the sale of
the shares to be sold by the selling shareholders.
We intend to use all the net proceeds we receive from this
offering for working capital and general corporate purposes. Our
management will have broad discretion in the application of our
net proceeds from this offering.
31
PRICE
RANGE OF COMMON STOCK
Our common stock has traded on the Nasdaq Global Market under
the symbol CPLA since it began trading on
November 10, 2006. Our initial public offering was priced
at $20.00 per share on November 9, 2006. The following
table sets forth, for the periods indicated, the high and low
sales prices for our common stock as reported on the Nasdaq
Global Market.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
Fourth Quarter (from
November 10, 2006)
|
|
$
|
26.68
|
|
|
$
|
23.29
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter (through
March 30, 2007)
|
|
$
|
35.70
|
|
|
$
|
24.46
|
|
On April 5, 2007, the last reported sale price of our
common stock on the Nasdaq Global Market was $34.96.
On February 28, 2007, we had approximately 137 holders of
record of our common stock.
32
DIVIDEND
POLICY
On November 21, 2006, we paid a special distribution to our
shareholders of record as of October 3, 2006 in the
aggregate amount of $72.6 million, which equaled the gross
proceeds received by us from our initial public offering in
November 2006, excluding the proceeds received by us from the
underwriters exercise of their over-allotment option. We
do not anticipate declaring or paying any additional cash
dividends on our common stock in the foreseeable future. The
payment of any dividends in the future will be at the discretion
of our board of directors and will depend upon our financial
condition, results of operations, earnings, capital
requirements, contractual restrictions, outstanding indebtedness
and other factors deemed relevant by our board. As a result, you
will need to sell your shares of common stock to realize a
return on your investment, and you may not be able to sell your
shares at or above the price you paid for them.
33
CAPITALIZATION
The following table sets forth our cash, cash equivalents and
short-term marketable securities and our capitalization as of
December 31, 2006:
|
|
|
|
|
on an as adjusted basis to reflect the exercise of stock options
to purchase 257,829 shares of our common stock to be sold
by certain selling shareholders in this offering, the closing of
this offering and the receipt of the estimated net proceeds from
our sale of shares of common stock in this offering at the
assumed public offering price of $34.96 per share (the last
reported sale price of our common stock on April 5, 2007),
after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
|
You should read this table together with Use of
Proceeds, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Description of Capital Stock and our consolidated
financial statements and related notes included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Actual
|
|
|
As
Adjusted(a)
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Cash, cash equivalents and
short-term marketable securities
|
|
$
|
87,661
|
|
|
$
|
100,591
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Line of
credit(b)
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Undesignated preferred stock:
10,000,000 shares authorized, none issued and outstanding,
actual and as adjusted
|
|
|
|
|
|
|
|
|
Common stock: $0.01 par
value; 100,000,000 shares authorized,
16,002,371 shares issued and outstanding, actual;
100,000,000 shares authorized, 16,561,345 shares
issued and outstanding, as
adjusted(c)
|
|
|
160
|
|
|
|
166
|
|
Additional paid-in capital
|
|
|
156,513
|
|
|
|
169,439
|
|
Accumulated other comprehensive
loss
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Retained earnings/(Accumulated
deficit)
|
|
|
(62,921
|
)
|
|
|
(62,921
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
93,745
|
|
|
|
106,677
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
93,757
|
|
|
$
|
106,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Each $1.00 increase or decrease in the assumed public offering
price of $34.96 per share (the last reported sale price of our
common stock on April 5, 2007) would increase or decrease,
respectively, the amount of cash, cash equivalents and
short-term marketable securities, additional paid-in capital and
total shareholders equity in each case by approximately
$0.3 million, assuming the number of shares offered by us,
as set forth on the cover of this prospectus, remains the same
and after deducting the estimated underwriting discounts and
commissions payable to us. |
|
|
|
(b) |
|
At December 31, 2006, we had available funds under our
revolving line of credit in the amount of $10.0 million.
There have been no borrowings to date under our revolving line
of credit. |
34
|
|
|
|
|
3,898,625 shares of common stock reserved for future issuance
under our stock option plans, including 1,663,445 shares of
common stock reserved for future issuance upon the exercise of
stock options outstanding as of December 31, 2006 under our
stock option plans, at a weighted average exercise price of
$17.26 per share (as adjusted to reflect the exercise of
stock options to purchase 257,829 shares of our common
stock to be sold by certain selling shareholders in this
offering); and
|
|
|
|
|
|
450,000 shares of common stock reserved for future issuance
upon the vesting of common stock outstanding under our stock
purchase plan.
|
For further information regarding our stock and stock option
plans, see Description of Capital Stock and
Executive Compensation.
35
SELECTED
CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated
financial and operating data as of the dates and for the periods
indicated. You should read this data together with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes, included elsewhere in
this prospectus. The selected consolidated statement of
operations data for each of the years in the three-year period
ended December 31, 2006, and the selected consolidated
balance sheet data as of December 31, 2006 and 2005, have
been derived from our audited consolidated financial statements,
which are included elsewhere in this prospectus. The selected
consolidated statements of operations data for the years ended
December 31, 2003 and 2002, and selected consolidated
balance sheet data as of December 31, 2004, 2003 and 2002,
have been derived from our audited consolidated financial
statements not included in this prospectus. Historical results
are not necessarily indicative of the results of operations to
be expected for future periods.
The following table also sets forth summary unaudited
consolidated as adjusted balance sheet data as of
December 31, 2006, which give effect to the transactions
described in footnote (e) of the following table. The
unaudited consolidated as adjusted balance sheet data are
presented for informational purposes only and do not purport to
represent what our financial position actually would have been
had the transactions so described occurred on the dates
indicated or to project our financial position as of any future
date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006(a)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share and enrollment data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
179,881
|
|
|
$
|
149,240
|
|
|
$
|
117,689
|
|
|
$
|
81,785
|
|
|
$
|
49,556
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
83,627
|
|
|
|
71,243
|
|
|
|
58,850
|
|
|
|
43,759
|
|
|
|
28,074
|
|
Selling and promotional
|
|
|
56,646
|
|
|
|
45,623
|
|
|
|
35,089
|
|
|
|
22,246
|
|
|
|
15,894
|
|
General and administrative
|
|
|
21,765
|
|
|
|
17,501
|
|
|
|
13,885
|
|
|
|
11,710
|
|
|
|
11,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
162,038
|
|
|
|
134,367
|
|
|
|
107,824
|
|
|
|
77,715
|
|
|
|
55,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
17,843
|
|
|
|
14,873
|
|
|
|
9,865
|
|
|
|
4,070
|
|
|
|
(5,994
|
)
|
Other income, net
|
|
|
4,472
|
|
|
|
2,306
|
|
|
|
724
|
|
|
|
427
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
22,315
|
|
|
|
17,179
|
|
|
|
10,589
|
|
|
|
4,497
|
|
|
|
(5,667
|
)
|
Income tax expense (benefit)
|
|
|
8,904
|
|
|
|
6,929
|
|
|
|
(8,196
|
)
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,411
|
|
|
$
|
10,250
|
|
|
$
|
18,785
|
|
|
$
|
4,393
|
|
|
$
|
(5,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.09
|
|
|
$
|
0.89
|
|
|
$
|
1.68
|
|
|
$
|
0.41
|
|
|
$
|
(0.58
|
)
|
Diluted
|
|
$
|
1.06
|
|
|
$
|
0.86
|
|
|
$
|
1.62
|
|
|
$
|
0.39
|
|
|
$
|
(0.58
|
)
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,271
|
|
|
|
11,476
|
|
|
|
11,189
|
|
|
|
10,804
|
|
|
|
9,698
|
|
Diluted
|
|
|
12,629
|
|
|
|
11,975
|
|
|
|
11,599
|
|
|
|
11,154
|
|
|
|
9,698
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization(b)
|
|
$
|
8,195
|
|
|
$
|
6,474
|
|
|
$
|
5,454
|
|
|
$
|
4,177
|
|
|
$
|
3,108
|
|
Net cash provided by operating
activities
|
|
$
|
28,901
|
|
|
$
|
28,940
|
|
|
$
|
16,049
|
|
|
$
|
15,399
|
|
|
$
|
123
|
|
Capital expenditures
|
|
$
|
15,354
|
|
|
$
|
9,079
|
|
|
$
|
7,541
|
|
|
$
|
3,719
|
|
|
$
|
3,805
|
|
EBITDA(c)
|
|
$
|
26,038
|
|
|
$
|
21,347
|
|
|
$
|
15,319
|
|
|
$
|
8,247
|
|
|
$
|
(2,886
|
)
|
Enrollment(d)
|
|
|
17,976
|
|
|
|
14,613
|
|
|
|
12,252
|
|
|
|
9,313
|
|
|
|
6,578
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
2006 As
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
Adjusted(e)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term marketable securities
|
|
$
|
87,661
|
|
|
$
|
100,591
|
|
|
$
|
72,133
|
|
|
$
|
49,980
|
|
|
$
|
41,190
|
|
|
$
|
22,060
|
|
Working
capital(f)
|
|
|
69,147
|
|
|
|
82,077
|
|
|
|
53,718
|
|
|
|
37,935
|
|
|
|
27,516
|
|
|
|
15,340
|
|
Total assets
|
|
|
129,314
|
|
|
|
142,245
|
|
|
|
106,562
|
|
|
|
80,026
|
|
|
|
55,402
|
|
|
|
35,380
|
|
Total redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
57,646
|
|
|
|
57,646
|
|
|
|
57,646
|
|
|
|
50,401
|
|
Shareholders equity (deficit)
|
|
|
93,745
|
|
|
|
106,677
|
|
|
|
14,414
|
|
|
|
(5
|
)
|
|
|
(20,416
|
)
|
|
|
(26,250
|
)
|
|
|
|
(a) |
|
Operating income, income before income taxes and EBITDA for the
year ended December 31, 2006 included $4.2 million of
stock-based compensation expense recognized under
FAS 123(R). Net income and net income per common share for
the year ended December 31, 2006 included $3.1 million
of stock-based compensation expense recognized under
FAS 123(R). In accordance with the modified prospective
transition method provided under FAS 123(R), our
consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
FAS 123(R). |
|
(b) |
|
Depreciation and amortization is calculated using the
straight-line method over the estimated useful lives of the
assets. Amortization includes amounts related to purchased
software, capitalized website development costs and internally
developed software. |
|
(c) |
|
EBITDA consists of net income (loss) minus other income, net
plus income tax expense (benefit) and plus depreciation and
amortization. Other income, net consists primarily of interest
income earned on short-term marketable securities, net of any
interest expense for capital leases and notes payable. We use
EBITDA as a measure of operating performance. However, EBITDA is
not a recognized measurement under U.S. generally accepted
accounting principles, or GAAP, and when analyzing our operating
performance, investors should use EBITDA in addition to, and not
as an alternative for, net income (loss) as determined in
accordance with GAAP. Because not all companies use identical
calculations, our presentation of EBITDA may not be comparable
to similarly titled measures of other companies. Furthermore,
EBITDA is not intended to be a measure of free cash flow, as it
does not consider certain cash requirements such as tax payments. |
We believe EBITDA is useful to investors in evaluating our
operating performance and liquidity because it is widely used to
measure a companys operating performance without regard to
items such as depreciation and amortization. Depreciation and
amortization can vary depending upon accounting methods and the
book value of assets. We believe EBITDA presents a meaningful
measure of corporate performance exclusive of our capital
structure and the method by which assets were acquired.
Our management uses EBITDA:
|
|
|
|
|
as a measurement of operating performance, because it assists us
in comparing our performance on a consistent basis, as it
removes depreciation, amortization, interest and taxes; and
|
|
|
|
in presentations to the members of our board of directors to
enable our board to have the same measurement basis of operating
performance as is used by management to compare our current
operating results with corresponding prior periods and with the
results of other companies in our industry.
|
37
The following table provides a reconciliation of net income
(loss) to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
13,411
|
|
|
$
|
10,250
|
|
|
$
|
18,785
|
|
|
$
|
4,393
|
|
|
$
|
(5,667
|
)
|
Other income, net
|
|
|
(4,472
|
)
|
|
|
(2,306
|
)
|
|
|
(724
|
)
|
|
|
(427
|
)
|
|
|
(327
|
)
|
Income tax expense (benefit)
|
|
|
8,904
|
|
|
|
6,929
|
|
|
|
(8,196
|
)
|
|
|
104
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,195
|
|
|
|
6,474
|
|
|
|
5,454
|
|
|
|
4,177
|
|
|
|
3,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
26,038
|
|
|
$
|
21,347
|
|
|
$
|
15,319
|
|
|
$
|
8,247
|
|
|
$
|
(2,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
Enrollment reflects the total number of learners registered in a
course as of the last day of classes for such periods. |
|
(e) |
|
The consolidated as adjusted balance sheet data as of
December 31, 2006, give effect to: |
|
|
|
|
|
the sale of 301,145 shares of common stock by us in this
offering at a public offering price of $34.96 per share
(the last reported sale price of our common stock on
April 5, 2007);
|
|
|
|
|
|
our receipt of the estimated net proceeds of that sale after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us; and
|
|
|
|
|
|
the exercise of stock options to purchase 257,829 shares of
our common stock to be sold by certain selling shareholders in
this offering.
|
Each $1.00 increase or decrease in the assumed public offering
price of $34.96 per share (the last reported sale price of our
common stock on April 5, 2007) would increase or decrease,
respectively, the amount of cash, cash equivalents and
short-term marketable securities, working capital, total assets
and shareholders equity in each case by approximately
$0.3 million, assuming the number of shares offered by us,
as set forth on the cover of this prospectus, remains the same
and after deducting the estimated underwriting discounts and
commissions payable by us.
|
|
|
(f) |
|
Working capital is calculated by subtracting total current
liabilities from total current assets. |
38
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the
financial statements and the related notes included elsewhere in
the prospectus. This discussion contains forward-looking
statements that are based on managements current
expectations, estimates and projections about our business and
operations. The cautionary statements made in this prospectus
should be read as applying to all related forward-looking
statements wherever they appear in this prospectus. Our actual
results may differ materially from those currently anticipated
and expressed in such forward-looking statements as a result of
a number of factors, including those we discuss under Risk
Factors, Forward-Looking Statements and
elsewhere in this prospectus. You should read Risk
Factors and Forward-Looking Statements.
Overview
Background
We are an exclusively online post-secondary education services
company. Our wholly owned subsidiary, Capella University, is a
regionally accredited university that offers a variety of
undergraduate and graduate degree programs primarily delivered
to working adults. At December 31, 2006, we offered over
760 courses and 13 academic programs with 75 specializations at
the graduate and undergraduate levels to approximately 18,000
learners.
We were founded in 1991, and in 1993 we established our wholly
owned university subsidiary, then named The Graduate School of
America, to offer doctoral and masters 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 masters
degree programs over the Internet. In 1997, our university
subsidiary received accreditation from the North Central
Association of Colleges and Schools (later renamed The Higher
Learning Commission of the North Central Association of Colleges
and Schools). In 1998, we began the expansion of our original
portfolio of academic programs by introducing doctoral and
masters 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 bachelors degree
market, we changed our name to Capella Education Company and the
name of our university to Capella University. In 2000, we
introduced our bachelors degree completion program in
information technology, which provided instruction for the last
two years of a four-year bachelors degree. In 2001, we
introduced our bachelors degree completion program in
business administration. In 2004, we introduced our four-year
bachelors degree programs in business administration and
information technology, as well as three masters level
specializations in education targeted at K-12 teachers. In 2005,
we introduced two masters level specializations in
education targeted to higher education and K-12 teachers as well
as a masters in business administration specialization in
accounting. In 2006, we introduced seven specializations
including healthcare management, accounting and information
assurance and security. Additionally, in November 2006, we
completed an initial public offering of our common stock. We
introduced three new programs and seven new specializations in
the first quarter of 2007.
Our
key financial results metrics
Revenues. Revenues consist principally
of tuition, application and graduation fees, and commissions we
earn from bookstore and publication sales. During each of 2004,
2005 and 2006, tuition represented approximately 98.5% of our
revenues. Factors affecting our revenues include: (i) the
number of enrollments; (ii) the number of courses per
learner; (iii) our degree and program mix; (iv) the
number of programs and specializations we offer; and
(v) annual tuition adjustments.
Enrollments for a particular time period are defined as the
number of learners registered in a course on the last day of
classes within that period. We offer monthly start options for
newly enrolled learners. Learners who start their program in the
second or third month of a quarter transition to a quarterly
schedule
39
beginning in their second quarter. Enrollments are a function of
the number of continuing learners at the beginning of each
period and new enrollments during the period, which are offset
by graduations, withdrawals and inactive learners during the
period. Inactive learners for a particular period include
learners who are not registered in a class and, therefore, are
not generating revenues for that period, but who have not
withdrawn from Capella University. We believe that our
enrollments are influenced by the attractiveness of our program
offerings and learning experience, the effectiveness of our
marketing and recruiting efforts, the quality of our
instructors, the number of programs and specializations we
offer, the availability of federal and other funding, the length
of our educational programs, the seasonality of our enrollments
and general economic conditions.
The following is a summary of our learners as of the last day of
classes for the years ended December 31, 2006, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Doctoral
|
|
|
7,473
|
|
|
|
6,471
|
|
|
|
5,611
|
|
Masters
|
|
|
7,685
|
|
|
|
5,640
|
|
|
|
4,543
|
|
Bachelors
|
|
|
2,729
|
|
|
|
2,380
|
|
|
|
1,859
|
|
Other
|
|
|
89
|
|
|
|
122
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,976
|
|
|
|
14,613
|
|
|
|
12,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition and Fees. Our tuition rates
vary by type and length of program and by degree level, such as
doctoral, masters or bachelors. For all
masters and bachelors programs and for selected
doctoral programs, tuition is determined by the number of
courses taken by each learner. For the
2005-2006
academic year (the academic year that began in July 2005),
prices per course generally ranged from $1,400 to $1,950. The
price of the course will vary based upon the number of credit
hours, the degree level of the program and the discipline. For
the
2005-2006
academic year, the majority of doctoral programs were priced at
a fixed quarterly amount of $3,975 per learner, regardless
of the number of courses in which the learner was registered. In
January 2006, we adjusted our fixed quarterly tuition rate for
doctoral learners in their comprehensive exam or dissertation to
$3,200. In addition, if a learner in a doctoral program with
fixed quarterly tuition had paid for 16 quarters, completed all
coursework except for their comprehensive exam or dissertation
and met all colloquia requirements, the tuition rate was reduced
to $500 per quarter. Based on prices from the
2005-2006
academic year, we estimate that full tuition was in the mid
$50,000 range for a four-year bachelors program, ranged
from approximately $17,000 to $28,000 for a masters
program, and ranged from approximately $31,000 to $62,000 for a
doctoral program. These amounts and ranges assume no reductions
for transfer credits. Many of our learners reduce their total
program costs at Capella University by transferring credits
earned at other institutions. Other in the table
above refers primarily to certificate-seeking learners.
Certificate programs generally consist of four courses, and the
price of a course depends on the number of credit hours, the
degree level of the program and the discipline. For the
2005-2006
academic year, prices per course in certificate programs
generally ranged from $1,400 to $1,925.
Tuition increases generally ranged from 4% to 11% in the
2005-2006
academic year as compared to the prior academic year. Tuition
increases have not historically been, and may not in the future
be, consistent across our programs and specializations due to
market conditions or changes in operating costs that have an
impact on price adjustments of individual programs or
specializations.
We implemented a tuition increase in 10 of our 13 programs
generally ranging from 2% to 6% for the
2006-2007
academic year (the academic year that began in July 2006). The
price increase resulted in prices per course generally ranging
from $1,460 to $1,995 for masters, bachelors and
certificate programs. The majority of doctoral programs were
priced at a fixed quarterly amount of $4,050 per learner,
regardless of the number of courses in which the learner was
registered. The fixed quarterly tuition for doctoral learners in
their comprehensive exam or dissertation increased to $3,240.
The reduced tuition rate for doctoral
40
learners who have paid for 16 quarters, completed all coursework
except for their comprehensive exam or dissertation and met all
colloquia requirements increased from $500 to $810 per
quarter. Based on prices from the
2006-2007
academic year, we estimate that full tuition is in the low
$50,000 range for a four-year bachelors program, from
approximately $18,000 to $29,000 for a masters program,
and from approximately $33,000 to $60,000 for a doctoral
program. The high end of the range for the doctoral program has
decreased slightly from the prior year due to the implementation
of a discount program for learners in the psychology program who
take more than one course per quarter. These amounts and ranges
assume no reductions for transfer credits. Many of our learners
reduce their total program costs at Capella University by
transferring credits earned at other institutions.
A large portion of our learners rely on funds received under
various government-sponsored student financial aid programs,
predominantly Title IV programs, to pay a substantial
portion of their tuition and other education-related expenses.
In the years ended December 31, 2006, 2005 and 2004
approximately 71%, 67% and 64%, respectively, of our revenues
(calculated on a cash basis) were attributable to funds derived
from Title IV programs. In addition to Title IV
funding, our learners receive financial aid from other
governmental sources or finance their education through private
financing institutions or with their own funds.
Costs and expenses. We categorize our
costs and expenses as (i) instructional costs and services
expenses, (ii) selling and promotional expenses and
(iii) general and administrative expenses.
Instructional costs and services expenses are items of expense
directly attributable to the educational services we provide our
learners. This expense category includes salaries and benefits
of full-time faculty, administrators and academic advisors, and
costs associated with adjunct faculty. Instructional pay for
adjunct faculty varies across programs and is primarily
dependent on the number of learners taught. Instructional costs
and services expenses also include costs of educational
supplies, costs associated with academic records and other
university services, and an allocation of facility, admissions
and human resources costs, stock-based compensation expense,
depreciation and amortization and information technology costs
that are attributable to providing educational services to our
learners.
Selling and promotional expenses include salaries and benefits
of personnel engaged in recruitment and promotion, as well as
costs associated with advertising and the production of
marketing materials related to new enrollments and current
learners. Our selling and promotional expenses are generally
affected by the cost of advertising media, the efficiency of our
selling efforts, salaries and benefits for our sales personnel,
and the number of advertising initiatives for new and existing
academic programs. Selling and promotional expenses also include
an allocation of facility, admissions and human resources costs,
stock-based compensation expense, depreciation and amortization
and information technology costs that are attributable to
selling and promotional efforts.
General and administrative expenses include salaries and
benefits of employees engaged in corporate management, finance,
compliance and other corporate functions, together with an
allocation of facility and human resources costs, stock-based
compensation expense, depreciation and amortization and
information technology costs attributable to such functions.
General and administrative expenses also include bad debt
expense and any charges associated with asset impairments.
Other income, net. Other income, net
consists primarily of interest income earned on cash, cash
equivalents and short-term marketable securities, net of any
interest expense for capital leases and notes payable.
41
Factors
affecting comparability
We set forth below selected factors that we believe have had, or
are expected to have, a significant effect on the comparability
of recent or future results of operations:
Introduction of new programs and
specializations. At December 31, 2004,
learners seeking doctoral degrees represented approximately 46%
of our enrollment, while learners seeking masters and
bachelors degrees represented approximately 37% and 15% of
our enrollment, respectively. The higher concentration of
learners in doctoral programs reflects our early emphasis on
these programs. In 2004, we expanded our addressable market
through the introduction of our four-year bachelors degree
programs in business administration and information technology
as well as three masters level specializations in
education targeted at K-12 teachers. In 2005, we introduced two
masters level specializations in education targeted to
higher education and K-12 teachers as well as a masters in
business administration specialization in accounting. In 2006,
we introduced three specializations in masters in business
administration, including healthcare management, two
bachelors level specializations in accounting and
information assurance and security, and two doctoral
specializations in education servicing K-12 teachers. At
December 31, 2006, learners seeking doctoral, masters
and bachelors degrees represented approximately 42%, 43%
and 15%, respectively, of our enrollment.
We expect to introduce additional degree programs and
specializations in the future. We make investments in program
and specialization development, support infrastructure and
marketing and selling when introducing new programs and
specializations, while associated revenues are dependent upon
enrollment, which in many cases is lower during the period of
new program and specialization introduction and development.
Relative to our doctoral programs, our masters and
bachelors programs have lower revenue per learner and
higher selling and promotional, learner recruitment and support
costs. In the year ended December 31, 2006, doctoral
programs accounted for a significant portion of our revenues
and, after the full allocation of corporate overhead expenses,
all of our operating income. Prior to the full allocation of
corporate overhead expenses, doctoral programs accounted for
most, but not all, of our operating income in the year ended
December 31, 2006. During the period of new program and
specialization introduction and development, the rate of growth
of revenues and operating income has been, and may be, adversely
affected in part due to these factors. As our newer programs and
specializations develop, we anticipate increases in enrollment,
more cost-effective delivery of instructional and support
services and more efficient selling and promotional processes.
Stock option expense. On
January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123(R), Share-based Payment
(FAS 123(R)), which requires the measurement and
recognition of compensation expense for stock-based payment
awards made to employees and directors, including employee stock
options. FAS 123(R) eliminates the ability to account for
stock-based compensation transactions using the footnote
disclosure-only provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and instead requires that such transactions
be recognized and reflected in our financial statements using a
fair-value-based method. In March 2005, the Securities and
Exchange Commission issued Staff Accounting
Bulletin No. 107 (SAB 107), relating to
FAS 123(R). We have applied the provisions of SAB 107
in our adoption of FAS 123(R).
We have adopted FAS 123(R) using the modified prospective
method, which requires the application of the accounting
standard as of January 1, 2006. Our financial statements
for the year ended December 31, 2006 reflect the impact of
FAS 123(R). In accordance with the modified prospective
transition method, our consolidated financial statements for the
years ended December 31, 2005 and 2004 have not been
restated to reflect, and do not include, the impact of
FAS 123(R).
Prior to the adoption of FAS 123(R), we accounted for
stock-based awards to employees and directors using the
intrinsic value method in accordance with APB 25 as allowed
under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS 123).
Under the intrinsic value method, no stock-based compensation
expense had been recognized in our consolidated statement of
income because the exercise price of stock options granted to
employees and directors equaled the fair
42
market value of the underlying stock at the date of grant. See
Note 12 to our consolidated financial statements included
elsewhere in this prospectus for pro forma information had
compensation expense been determined based on the fair value of
options at grant dates computed in accordance with FAS 123.
As a result of adopting FAS 123(R) on January 1, 2006,
our income before income taxes and net income for the year ended
December 31, 2006 are $4.2 million and
$3.1 million lower, respectively, than if we had continued
to account for stock-based compensation under APB 25. Basic
and diluted net income per share for the year ended
December 31, 2006 were $0.26 and $0.25 lower, respectively,
than if we had continued to account for stock-based compensation
under APB 25.
The table below reflects our stock-based compensation expense
recognized in the consolidated statements of income for the year
ended December 31, 2006 (in thousands):
|
|
|
|
|
Instructional costs and services
|
|
$
|
748
|
|
Selling and promotional
|
|
|
357
|
|
General and administrative
|
|
|
3,074
|
|
|
|
|
|
|
Stock-based compensation expense
included in operating income
|
|
|
4,179
|
|
Tax benefit
|
|
|
1,075
|
|
|
|
|
|
|
Stock-based compensation expense,
net of tax
|
|
$
|
3,104
|
|
|
|
|
|
|
Prior to the adoption of FAS 123(R), we presented all tax
benefits of deductions resulting from the exercise of stock
options as operating cash flows in our consolidated statement of
cash flows. FAS 123(R) requires the cash flows resulting
from the tax benefits resulting from tax deductions in excess of
the compensation cost recognized for those stock options (excess
tax benefits) to be classified as financing cash flows. The
$0.08 million excess tax benefit classified as a financing
cash inflow for the year ended December 31, 2006 would have
been classified as an operating cash inflow if we had not
adopted FAS 123(R).
Public company expense. We became a
public company and our shares of common stock began trading on
the Nasdaq Global Market with the consummation of our initial
public offering in November 2006. As a result, we now need
to comply with new laws, regulations and requirements that we
did not need to comply with as a private company, including
certain provisions of the Sarbanes-Oxley Act of 2002, related
SEC regulations and the requirements of The Nasdaq Global
Market. Compliance with the requirements of being a public
company required us to increase our general and administrative
expenses in order to pay our employees, legal counsel and
accountants to assist us in, among other things, external
reporting, instituting and monitoring a more comprehensive
compliance and board governance function, establishing and
maintaining internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of
2002 and preparing and distributing periodic public reports in
compliance with our obligations under the federal securities
laws. In addition, being a public company makes it more
expensive for us to obtain director and officer liability
insurance. We estimate that incremental annual public company
costs will be between $2.5 million and $3.0 million.
Income tax benefits resulting from reversal of valuation
allowance. In the period from our inception
through 2002, we incurred significant operating losses that
resulted in a net operating loss carryforward for tax purposes
and net deferred tax assets. Until 2004, we provided a 100%
valuation allowance for all net deferred tax assets. Due to
achieving three years of cumulative taxable income in 2004 and
because we expected to be profitable in future years, we
concluded that it was more likely than not that substantially
all of our net deferred tax assets would be realized. As a
result, in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes
(FAS 109), all of the valuation allowance applied to
net deferred tax assets was reversed during the year ended
December 31, 2004. Reversal of the valuation allowance
resulted in a non-recurring non-cash income tax benefit totaling
$12.9 million, which accounted for 68% of our net income of
$18.8 million in the year ended December 31, 2004.
43
Critical
Accounting Policies and Use of Estimates
The discussion of our financial condition and results of
operations is based upon our financial statements, which have
been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. During the preparation of these
financial statements, we are required to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses and related
disclosures. On an ongoing basis, we evaluate our estimates and
assumptions, including those related to revenue recognition,
allowance for doubtful accounts, impairment of long-lived
assets, contingencies, stock-based compensation expense and
income taxes. We base our estimates on historical experience and
on various other assumptions that we believe are reasonable
under the circumstances. The results of our analysis form the
basis for making assumptions about the carrying values of assets
and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions, and the impact of such
differences may be material to our consolidated financial
statements.
We believe that the following critical accounting policies
involve our more significant judgments and estimates used in the
preparation of our consolidated financial statements:
Revenue recognition. Tuition revenue
represented approximately 98.5% of our revenues recognized for
each of the years ended December 31, 2006, 2005 and 2004.
Course tuition revenue is deferred and recognized as revenue
ratably over the period of instruction, which is generally from
one and a half to three months. Colloquia tuition revenue is
recognized over the length of the colloquia, which ranges from
two days to two weeks. Deferred revenue in any period represents
the excess of tuition and fees received as compared to tuition
and fees recognized in revenue on the consolidated statement of
operations and is reflected as a current liability on our
consolidated balance sheet.
Allowance for doubtful accounts. We
maintain an allowance for doubtful accounts for estimated losses
resulting from the inability, failure or refusal of our learners
to make required payments. We determine the allowance for
doubtful accounts amount based on an analysis of the accounts
receivable detail and historical write-off experience.
In establishing our credit practices, we seek to strike an
appropriate balance between prudent learner credit policies and
learner retention. Accordingly, we periodically review and alter
learner credit policies to achieve that objective by restricting
or expanding the availability of credit we extend. Changes to
credit practices may impact enrollments, revenues, accounts
receivables, our allowance for doubtful accounts and bad debt
expense. If changes in credit practices result in higher
receivable balances, if the financial condition of our learners
deteriorates resulting in an impairment of their ability to pay,
or if we underestimate the allowances required, additions to our
allowance for doubtful accounts may be necessary, which will
result in increased general and administrative expenses in the
period such determination is made.
As of December 31, 2006, 2005, and 2004, the allowance for
doubtful accounts was approximately $1.1 million,
$1.3 million and $1.1 million, respectively. During
2006, 2005, and 2004, we recognized bad debt expense of
$2.9 million, $2.3 million and $1.4 million,
respectively.
Impairment of long-lived assets. We
review our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. We measure the recoverability of
an asset by a comparison of the carrying amount of an asset to
undiscounted future net cash flows expected to be generated by
the asset. If the asset is considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the asset exceeds the fair value of the
asset. If we determine that an assets carrying value is
impaired, we will record a write-down of the carrying value of
the identified asset and charge the impairment as an operating
expense in the period in which the determination is made. During
the years ended December 31, 2006, 2005 and 2004, we
recorded impairment charges of $0.06 million,
$0.2 million and $1.0 million, respectively. The
impairment charge recorded in 2004 consisted primarily of the
write-off of previously capitalized software development costs
for software projects that were abandoned due to our decision to
implement an enterprise resource
44
planning system. Capitalized software costs represent our
long-lived assets that are most subject to the risk of
impairment from changes in our business strategy and ongoing
technological developments. As of December 31, 2006, we had
recorded capitalized software costs with a net book value
totaling $17.0 million. Our impairment loss calculation is
subject to uncertainties because management must use judgment to
forecast estimated future cash flows and fair values and to
determine the useful lives of the assets. If actual results are
not consistent with our assumptions and estimates regarding
these factors, we may be exposed to losses that could be
material. Changes in strategy or market conditions, or
significant technological developments, could significantly
impact these judgments and require adjustments to recorded asset
balances.
Contingencies. We accrue for costs
associated with contingencies including, but not limited to,
regulatory compliance and legal matters when such costs are
probable and reasonably estimable. Liabilities established to
provide for contingencies are adjusted as further information
develops, circumstances change, or contingencies are resolved.
We base these accruals on managements estimate of such
costs, which may vary from the ultimate cost and expenses
associated with any such contingency.
Stock-based compensation. On
January 1, 2006, we adopted FAS 123(R), which requires
the measurement and recognition of compensation expense for
stock-based payment awards made to employees and directors,
including employee stock options. FAS 123(R) eliminates the
ability to account for stock-based compensation transactions
using the footnote disclosure-only provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and instead requires that
such transactions be recognized and reflected in our financial
statements using a fair-value-based method. In March 2005, the
Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 (SAB 107), relating to
FAS 123(R). We have applied the provisions of SAB 107
in our adoption of FAS 123(R).
We adopted FAS 123(R) using the modified prospective
method, which requires the application of the accounting
standard as of January 1, 2006. Our financial statements as
of and for the year ended December 31, 2006 reflect the
impact of FAS 123(R). In accordance with the modified
prospective transition method, our consolidated financial
statements for the years ended December 31, 2005 and 2004
have not been restated to reflect, and do not include, the
impact of FAS 123(R).
Prior to the adoption of FAS 123(R), we accounted for
stock-based awards to employees and directors using the
intrinsic value method in accordance with APB 25 as allowed
under FAS 123. Under the intrinsic value method, no
stock-based compensation expense had been recognized in our
consolidated statement of income because the exercise price of
our stock options granted to employees and directors equaled the
fair market value of the underlying stock at the date of grant.
We recognized stock-based compensation of $0.2 million in
2005, related to a modification of the terms of specific stock
options.
Because no market for our common stock existed prior to our
initial public offering, our board of directors determined the
fair value of our common stock based upon several factors,
particularly recent sales of our stock to and by investors and
our annual independent valuation of our common stock prepared
for purposes of valuing our contributions to our Employee Stock
Ownership Plan (ESOP).
More specifically, the practices we used prior to our initial
public offering to value the underlying common stock for
purposes of stock option accounting relied heavily upon
independent third party transactions relating to our preferred
stock (all of which was converted into common stock in
connection with our initial public offering), to the extent such
transactions were significant and occured in the general
timeframe of the stock option issuances. We issued options in
October and December of 2004, December 2005 and through
September 30, 2006 that were priced at $20.00 per
share of common stock. In November 2004, Insight-Salmon River
LLC purchased 1.0 million shares of our Class D
convertible preferred stock at a price of $20.00 per share
and subsequently transferred 0.3 million shares of our
Class D preferred stock to Salmon River Capital I LLC. In
December 2004, the entities affiliated with Technology Crossover
Ventures and the Maveron entities purchased 1.6 million and
0.4 million shares, respectively, of our classes E and
G
45
redeemable convertible preferred stock at a price of $20.83 and
$20.00 per share, respectively, from the Forstmann Little
entities.
We used a combination of other valuation techniques to estimate
the fair value of our common stock to the extent that there were
not significant third party stock transactions that occurred in
the general timeframe of the stock option issuances. These
valuation techniques generally included, as a baseline, the use
of the annual valuation of our common stock that was performed
by an unrelated valuation specialist as of December 31st of
each year for purposes of valuing our ESOP contributions. The
results of this valuation as of December 31, 2005 and 2004
were $20.18 per share and $20.00 per share,
respectively. This annual baseline ESOP valuation was adjusted
for subsequent changes in our interim earnings per share,
changes in growth in our interim earnings per share, and changes
in the market value and operating performance of our peer group
of public post-secondary education companies, among others. Each
of these factors, the most significant of which are the growth
in our earnings and the estimated offering price, has
contributed to the fair value of our stock at the dates of our
stock option issuances over twelve months prior to our initial
public offering. We believe the annual ESOP valuation and the
ability to measure and reasonably value subsequent changes in
value due to growth in our earnings provided a reasonable basis
for valuing our common stock.
Prior to January 1, 2006, had compensation expense been
determined based on the fair value of the options at grant dates
computed in accordance with FAS 123, the pro forma amounts
would be as follows (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
10,250
|
|
|
$
|
18,785
|
|
Stock-based compensation expense
included in net income as reported
|
|
|
202
|
|
|
|
4
|
|
Compensation expense determined
under fair-value-based method, net of tax
|
|
|
(1,966
|
)
|
|
|
(2,154
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
8,486
|
|
|
$
|
16,635
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.89
|
|
|
$
|
1.68
|
|
Basic pro forma
|
|
$
|
0.74
|
|
|
$
|
1.49
|
|
Diluted as reported
|
|
$
|
0.86
|
|
|
$
|
1.62
|
|
Diluted pro forma
|
|
$
|
0.71
|
|
|
$
|
1.45
|
|
The fair value of our service-based stock options was estimated
as of the date of grant using the Black-Scholes option pricing
model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
2006
|
|
|
(Pro Forma)
|
|
|
(Pro Forma)
|
|
|
Expected life (in
years)(1)
|
|
|
4.25-6.25
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected
volatility(2)
|
|
|
45.6
|
%
|
|
|
38.5
|
%
|
|
|
44.1
|
%
|
Risk-free interest
rate(3)
|
|
|
4.4-5.1
|
%
|
|
|
3.9-4.4
|
%
|
|
|
3.9
|
%
|
Dividend
yield(4)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Weighted-average fair value of
options granted
|
|
$
|
9.84
|
|
|
$
|
8.87
|
|
|
$
|
8.54
|
|
|
|
|
(1) |
|
For the year ended December 31, 2006, the expected option
life was determined using the simplified method for estimating
expected option life for service-based stock options. Prior to
the year ended December 31, 2006, the option life was based
on the average expected option life experienced by our peer
group of post-secondary education companies. |
46
|
|
|
(2) |
|
As our stock had not been publicly traded prior to November
2006, the expected volatility assumption for the year ended
December 31, 2006 reflects a detailed evaluation of the
stock price of our peer group of public post-secondary education
companies for a period equal to the expected life of the
options, starting from the date they went public. Prior to the
year ended December 31, 2006 the expected volatility
assumption reflects the public disclosures of our peer group of
post-secondary education companies. |
|
(3) |
|
The risk-free interest rate assumption is based upon the
U.S. Treasury zero coupon yield curve on the grant date for
a maturity similar to the expected life of the options. |
|
(4) |
|
The dividend yield assumption is based on our history and
expectation of regular dividend payments. |
The assumptions discussed above were also used to value the
performance-based stock options granted during the year ended
December 31, 2006 except for the expected life, which was
four years. The expected option life for performance-based stock
options was determined based on the evaluation of certain
qualitative factors including our historical experience and our
competitors historical experience. The weighted-average
fair value of performance-based stock options granted was $8.22.
Under FAS 123(R), the amount of compensation expense will
vary depending on numerous factors, including the number and
vesting period of option grants, the expected life of the
grants, the publicly traded stock price of the security
underlying the options, the volatility of the stock price and
the estimated forfeiture rate. Of the 2.2 million shares
subject to outstanding stock options as of December 31,
2006, 2.0 million related to service-based stock options
which vest ratably over a specific period, usually four years.
Compensation expense relating to these options is recognized
ratably over the vesting period, resulting in the recognition of
$2.6 million of compensation expense in 2006. Approximately
0.2 million of our outstanding stock options as of
December 31, 2006 were performance-based stock options
granted and vested in 2006, which resulted in the recognition of
$1.6 million of compensation expense in 2006. At
December 31, 2006, total compensation expense related to
nonvested service-based stock options not yet recognized was
$6.7 million, which is expected to be recognized over
32 months on a weighted-average basis.
Stock-based compensation expense recognized during the year
ended December 31, 2006 included compensation expense for
stock-based payment awards granted prior to, but not yet vested
as of, December 31, 2005, based on the grant date fair
value estimated in accordance with the pro forma provisions of
FAS 123 and compensation expense for the stock-based
payment awards granted subsequent to December 31, 2005,
based on the grant date fair value estimated in accordance with
the provisions of FAS 123(R). As stock-based compensation
expense is based on awards ultimately expected to vest, it has
been reduced for estimated forfeitures. FAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. In our pro forma information required
under FAS 123 for the periods prior to fiscal 2006, the
calculation of pro forma expense also reflects estimates of
forfeitures which are adjusted in subsequent periods as actual
forfeitures differ from the original estimates.
In determining stock-based compensation expense, FAS 123(R)
will continue to require significant management judgment and
assumptions concerning such factors as term, volatility and
forfeitures. For more information concerning our adoption of
FAS 123(R) and its effects on our results of operations,
see Managements Discussion and Analysis of Financial
Condition and Results of Operations Factors
affecting comparability Stock option expense
and Notes 2 and 12 to our consolidated financial statements
included elsewhere in this prospectus.
Accounting for income taxes. We account
for income taxes utilizing FAS 109, which prescribes the
use of the asset and liability method to compute the differences
between the tax bases of assets and liabilities and the related
financial amounts, using currently enacted tax laws. Valuation
allowances are established, when necessary, to reduce deferred
tax assets to the amount that more likely than not will be
realized. Realization of the deferred tax assets, net of
deferred tax liabilities, is principally dependent upon
achievement of projected future taxable income offset by
deferred tax liabilities. We exercise significant
47
judgment in determining our provisions for income taxes, our
deferred tax assets and liabilities and our future taxable
income for purposes of assessing our ability to utilize any
future tax benefit from our deferred tax assets or other
elements of the tax provision. Although we believe that our tax
estimates are reasonable, the ultimate tax determination
involves significant judgments that could become subject to
examination by tax authorities in the ordinary course of
business. We periodically assess the likelihood of adverse
outcomes resulting from these examinations to determine the
impact on our deferred taxes and income tax liabilities and the
adequacy of our provision for income taxes. Changes in income
tax legislation, statutory income tax rates, or future taxable
income levels, among other things, could materially impact our
valuation of income tax assets and liabilities and could cause
our income tax provision to vary significantly among financial
reporting periods.
Results
of Operations
The following table sets forth statements of operations data as
a percentage of revenues for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
46.5
|
|
|
|
47.7
|
|
|
|
50.0
|
|
Selling and promotional
|
|
|
31.5
|
|
|
|
30.6
|
|
|
|
29.8
|
|
General and administrative
|
|
|
12.1
|
|
|
|
11.7
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
90.1
|
|
|
|
90.0
|
|
|
|
91.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9.9
|
|
|
|
10.0
|
|
|
|
8.4
|
|
Other income, net
|
|
|
2.5
|
|
|
|
1.5
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
12.4
|
|
|
|
11.5
|
|
|
|
9.0
|
|
Income tax expense (benefit)
|
|
|
4.9
|
|
|
|
4.6
|
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7.5
|
%
|
|
|
6.9
|
%
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Revenues. Our revenues for the year
ended December 31, 2006 were $179.9 million,
representing an increase of $30.7 million, or 20.5%, as
compared to revenues of $149.2 million for the year ended
December 31, 2005. Of this increase, 19.0 percentage
points were due to increased enrollments and 4.6 percentage
points were due to tuition increases, which was partially offset
by a 2.3 percentage point decrease due to a larger
proportion of masters learners, who generated less revenue
per learner than our doctoral learners.
End-of-period
enrollment increased 23.0% in 2006 compared to 2005. Tuition
increases in 2005 generally ranged from 4% to 11% and were
implemented during July 2005. Tuition increases in 2006
generally ranged from 2% to 6% and were implemented during July
2006.
Instructional costs and services
expenses. Our instructional costs and
services expenses for the year ended December 31, 2006 were
$83.6 million, representing an increase of
$12.4 million, or 17.4%, as compared to instructional costs
and services expenses of $71.2 million for the year ended
December 31, 2005. This increase was primarily due to
increases in instructional pay related to the increase in
enrollments, an increase in depreciation expense and technology
expense related to providing educational services, an increase
in learner support services and stock-based compensation expense
recorded in 2006 as a result of the adoption of FAS 123(R).
Our instructional costs and services expenses as a percentage of
revenues decreased by 1.2 percentage points to 46.5% for
the year ended December 31, 2006, as compared to 47.7% for
the year ended December 31, 2005. This improvement in 2006
was driven by improvements in our variable cost structure due to
continuously working on process improvements, including more
efficient
48
course scheduling and use of faculty and improved fixed cost
leverage with respect to our university administration expenses
and facilities expenses.
Selling and promotional expenses. Our
selling and promotional expenses for the year ended
December 31, 2006 were $56.6 million, representing an
increase of $11.0 million, or 24.2%, as compared to selling
and promotional expenses of $45.6 million for the year
ended December 31, 2005. This increase was primarily
attributable to an increase in marketing and advertising
expenses, an increase in brand awareness spending, an increase
in online advertising spending and an increase in learner
recruiting personnel. Our selling and promotional expenses as a
percentage of revenues increased by 0.9 percentage points
to 31.5% for the year ended December 31, 2006, from 30.6%
for the year ended December 31, 2005, due to an increase in
marketing and advertising expenses and an increase in brand
differentiation spending.
General and administrative
expenses. Our general and administrative
expenses for the year ended December 31, 2006 were
$21.8 million, representing an increase of
$4.3 million, or 24.4%, as compared to general and
administrative expenses of $17.5 million for the year ended
December 31, 2005. This increase was primarily attributable
to $3.1 million in stock-based compensation expense
recorded in 2006 as a result of the adoption of FAS 123(R),
an increase in spending related to the implementation of our new
enterprise resource planning system, and accruals related to
certain contingencies. Our general and administrative expenses
as a percentage of revenues increased by 0.4 percentage
points to 12.1% for the year ended December 31, 2006, from
11.7% for the year ended December 31, 2005, due to the
factors described above offset by improved fixed cost leverage
with respect to our executive, administrative and
finance-related expenses.
Other income, net. Other income, net
increased by $2.2 million, or 93.9%, to $4.5 million
for the year ended December 31, 2006, from
$2.3 million for the year ended December 31, 2005. The
increase was principally due to higher interest rates and higher
average cash and short-term marketable securities balances
throughout 2006. We anticipate being consistent with or below
2006 other income, net in 2007 due to the use of tax-exempt
investments, which typically earn lower interest rates.
Income tax expense (benefit). We
recognized tax expense for the year ended December 31, 2006
and 2005 of $8.9 million and $6.9 million,
respectively, or at effective tax rates of 39.9% and 40.3%,
respectively. The decrease in our effective tax rate from 2005
to 2006 was primarily due to a one-time tax benefit related to
the dividend portion of the special distribution to our Employee
Stock Ownership Plan (ESOP) from the proceeds of our initial
public offering of common stock, which is deductible for tax
purposes, and tax planning strategies. We anticipate a slight
reduction in our effective tax rate in 2007 due to the use of
tax-exempt investments.
Net income. Net income was
$13.4 million for the year ended December 31, 2006,
compared to net income of $10.3 million for the year ended
December 31, 2005, an increase of $3.2 million,
because of the factors discussed above, including the effects of
$3.1 million from stock-based compensation expense, net of
tax, that was recognized in 2006.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Revenues. Our revenues for the year
ended December 31, 2005 were $149.2 million,
representing an increase of $31.5 million, or 26.8%, as
compared to revenues of $117.7 million for the year ended
December 31, 2004. Of this increase, 17.8 percentage
points were due to increased enrollments and 5.9 percentage
points were due to tuition increases, which was partially offset
by a 0.8 percentage point decrease due to a larger
proportion of bachelors and masters learners, who
generated less revenue per learner than our doctoral learners.
End-of-period
enrollment increased 19.3% in 2005 compared to 2004. Tuition
increases in 2004 generally ranged from 3% to 7% and were
implemented during July 2004. Tuition increases in 2005
generally ranged from 4% to 11% and were implemented during July
2005.
Instructional costs and services
expenses. Our instructional costs and
services expenses for the year ended December 31, 2005 were
$71.2 million, representing an increase of
$12.3 million, or 21.1%, as
49
compared to instructional costs and services expenses of
$58.9 million for the year ended December 31, 2004.
This increase was primarily due to increases in instructional
pay due to the increase in enrollments. Our instructional costs
and services expenses as a percentage of revenues decreased by
2.3 percentage points to 47.7% for the year ended
December 31, 2005, as compared to 50.0% for the year ended
December 31, 2004. This improvement in 2005 was driven by
higher tuition increases than faculty pay rate increases, and
our information technology-related projects that resulted in a
higher mix of costs that were capitalized versus costs that were
expensed due to the nature of the projects.
Selling and promotional expenses. Our
selling and promotional expenses for the year ended
December 31, 2005, were $45.6 million, representing an
increase of $10.5 million, or 30.0%, as compared to selling
and promotional expenses of $35.1 million for the year
ended December 31, 2004. This increase was primarily
attributable to an increase in recruitment personnel, an
increase in marketing and advertising expenses to attract more
learners to our existing programs, and an increase in the cost
of online advertising. Our selling and promotional expenses as a
percentage of revenues increased by 0.8 percentage points
to 30.6% for the year ended December 31, 2005, from 29.8%
for the year ended December 31, 2004, as a result of the
factors described above.
General and administrative
expenses. Our general and administrative
expenses for the year ended December 31, 2005, were
$17.5 million, representing an increase of
$3.6 million, or 26.0%, as compared to general and
administrative expenses of $13.9 million for the year ended
December 31, 2004. This increase was primarily attributable
to an increase in administrative costs resulting from
investments to further develop our corporate infrastructure
through the implementation of an enterprise resource planning
system and an increase in our personnel in preparation of
becoming a public company. General and administrative expenses
as a percentage of revenues remained relatively flat at 11.7%
for the years ended December 31, 2005 and 2004.
Other income, net. Other income, net
increased by $1.6 million, or greater than 100%, to
$2.3 million for the year ended December 31, 2005,
from $0.7 million for the year ended December 31,
2004. The increase was principally due to higher interest rates
and higher average cash and short-term marketable securities
balances throughout 2005.
Income tax expense (benefit). We
recognized tax expense for the year ended December 31, 2005
of $6.9 million, or at an effective tax rate of
approximately 40.3%. We recognized a net tax benefit for the
year ended December 31, 2004, of $8.2 million. The tax
benefit recorded in 2004 included a non-recurring, non-cash tax
benefit for the complete reversal of our valuation allowance on
our net deferred tax assets of $12.9 million, offset by tax
expense of $4.3 million on 2004 pretax earnings and
$0.4 million relating to a change in our estimate of the
income tax rates applied to our net deferred tax assets.
Net income. Net income was
$10.3 million for the year ended December 31, 2005,
compared to net income of $18.8 million for the year ended
December 31, 2004, a decrease of $8.5 million, because
of the factors discussed above.
50
Quarterly
Results and Seasonality
The following tables set forth certain unaudited financial and
operating data in each quarter during the years ended
December 31, 2006 and 2005. The unaudited information
reflects all adjustments, which include only normal and
recurring adjustments, necessary to present fairly the
information shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
(In thousands, except for per share and enrollment data)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
41,858
|
|
|
$
|
43,518
|
|
|
$
|
43,902
|
|
|
$
|
50,603
|
|
Operating income
|
|
|
1,884
|
|
|
|
4,203
|
|
|
|
4,063
|
|
|
|
7,693
|
|
Net income
|
|
|
1,642
|
|
|
|
3,055
|
|
|
|
3,041
|
|
|
|
5,673
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.40
|
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.39
|
|
Enrollment
|
|
|
15,792
|
|
|
|
16,078
|
|
|
|
16,374
|
|
|
|
17,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
34,610
|
|
|
$
|
35,408
|
|
|
$
|
37,303
|
|
|
$
|
41,919
|
|
Operating income
|
|
|
4,145
|
|
|
|
3,523
|
|
|
|
2,925
|
|
|
|
4,280
|
|
Net income
|
|
|
2,705
|
|
|
|
2,356
|
|
|
|
2,204
|
|
|
|
2,985
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
0.21
|
|
|
$
|
0.19
|
|
|
$
|
0.26
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.20
|
|
|
$
|
0.18
|
|
|
$
|
0.25
|
|
Enrollment
|
|
|
12,955
|
|
|
|
13,208
|
|
|
|
13,308
|
|
|
|
14,613
|
|
Our revenues and operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to changes in enrollment. Learner population varies as a result
of new enrollments, graduations and learner attrition. While the
number of enrollments has grown in each sequential quarter over
these periods, the sequential quarterly increase in enrollments
has been the greatest in the fourth quarter of each respective
year, which corresponds with a traditional Fall school start.
The larger relative increases in enrollments in the fourth
quarter have resulted in larger sequential increases in revenue
during the fourth quarter than in other quarters. A significant
portion of our general and administrative expenses does not vary
proportionately with fluctuations in revenues, resulting in
larger relative increases in operating income in the fourth
quarter relative to increases between other quarters. In
addition, we typically implement tuition increases at the
beginning of an academic year, which coincides with the start of
the third quarter of each fiscal year. We expect quarterly
fluctuations in operating results to continue as a result of
these seasonal patterns.
In addition to our recurring seasonal patterns described above,
our quarterly revenue may be impacted by the timing of our
colloquia tuition revenue resulting from week-long gatherings of
our doctoral learners for in-depth,
face-to-face
instruction. We typically have five to eight colloquia per year.
For example, our revenues for the first quarter of 2006 were
slightly lower than our revenues for the fourth quarter of 2005,
partially due to a decrease of approximately $0.7 million
in colloquia tuition revenue. Our quarterly operating results
may fluctuate in the future based on the timing and number of
our colloquia.
On January 1, 2006, we adopted FAS 123(R), which
requires the measurement and recognition of compensation expense
for stock-based payment awards made to employees and directors,
including employee stock options. FAS 123(R)eliminates the
ability to account for stock-based compensation transactions
using the footnote disclosure-only provisions of APB 25,
and instead requires that such transactions be recognized and
reflected in our financial statements using a fair-value method.
As a result of adopting FAS 123(R) on January 1, 2006,
our income before income taxes and net income for the year ended
December 31, 2006 were $4.2 million and
$3.1 million lower, respectively, than if we had continued
51
to account for stock-based compensation under APB 25. Basic
and diluted earnings per share for the year ended
December 31, 2006 are $0.26 and $0.25 lower, respectively,
than if we had continued to account for stock-based compensation
under APB 25.
Under FAS 123(R), the amount of compensation expense will
vary depending on numerous factors, including the number and
vesting period of option grants, the expected life of the
grants, the publicly traded stock price of the security
underlying the options, the volatility of the stock price, and
the estimated forfeiture rate.
Liquidity
and Capital Resources
Liquidity
We financed our operating activities and capital expenditures
during the years ended December 31, 2006, 2005 and 2004
primarily through cash provided by operating activities. Our
cash, cash equivalents and short-term marketable securities were
$87.7 million, $72.1 million and $50.0 million at
December 31, 2006, 2005 and 2004, respectively.
In August 2004, we entered into an unsecured $10.0 million
line of credit with Wells Fargo Bank. The line of credit has an
expiration date of June 30, 2007. There have been no
borrowings to date under this line of credit, therefore
$10.0 million is available. Any borrowings would bear
interest at a rate of either LIBOR plus 2.5% or the
banks prime rate, at our discretion on the borrowing date.
A significant portion of our revenues are derived from
Title IV programs. Federal regulations dictate the timing
of disbursements under Title IV programs. Learners must
apply for new loans and grants each academic year, which starts
July 1. Loan funds are generally provided by lenders in
multiple disbursements for each academic year. The disbursements
are usually received by the start of the second week of the
term. These factors, together with the timing of our learners
beginning their programs, affect our operating cash flow.
Based on our current level of operations and anticipated growth,
we believe that our cash flow from operations and other sources
of liquidity, including cash, cash equivalents and short-term
marketable securities, will provide adequate funds for ongoing
operations and planned capital expenditures for the foreseeable
future.
Operating
Activities
Net cash provided by operating activities for the year ended
December 31, 2006 was $28.9 million, which is
consistent with cash provided by operating activities for the
year ended December 31, 2005. There was a $4.9 million
decrease in 2006 related to various working capital items and
decrease of $3.3 million related to a change in net
deferred tax assets. These factors were offset by an increase of
$3.2 million in net income and $4.2 million of
non-cash stock-based compensation expense as a result of the
adoption of FAS 123(R) for the year ended December 31,
2006 as compared to the year ended December 31, 2005.
Net cash provided by operating activities during the year ended
December 31, 2005 was $28.9 million, an increase of
$12.9 million, or 80.3%, from $16.0 million during the
year ended December 31, 2004. The increase was primarily
due to a $2.2 million increase in non-cash related expenses
for the provision for bad debt, depreciation and amortization
and equity-related expense and a decrease of $14.6 million
in deferred income taxes, offset by a decrease in net income by
$8.5 million primarily related to the result of the
non-cash reversal of the valuation allowance in 2004.
Investing
Activities
Our cash used in investing activities is primarily related to
the purchase of property and equipment and investment in
short-term marketable securities. Net cash used in investing
activities was $22.0 million,
52
$22.6 million and $12.2 million for the years ended
December 31, 2006, 2005 and 2004, respectively. Investment
in short-term marketable securities consists of purchases and
sales of auction rate, asset-backed, U.S. agency and
corporate debt securities, repurchase agreements and money
market funds.
Net purchases of these securities were $6.6 million,
$13.5 million and $4.7 million during the years ended
December 31, 2006, 2005 and 2004, respectively. Capital
expenditures were $15.4 million, $9.1 million and
$7.5 million for the years ended December 31, 2006,
2005 and 2004, respectively. The increase in 2006 was due to the
investments in integrating most of our business systems with an
enterprise resource planning system. The increase in 2005 was
due to the investment in integrating most of our business
systems with an enterprise resource planning system, the
expansion of our existing corporate facilities and classroom
technology and other systems and equipment that support our
program offerings.
We expect to continue to invest in integrating most of our
business systems with an enterprise resource planning system. We
expect that once implemented, this integration of our systems
and processes will improve efficiencies within our instructional
costs and services, selling and promotional and general and
administrative expenses. We expect that our capital expenditures
in 2007 will be approximately $13 million to
$14 million. We expect to be able to fund these capital
expenditures with cash generated from operations.
We lease all of our facilities. We expect to make future
payments on existing leases from cash generated from operations.
Financing
Activities
Net cash provided by financing activities was $1.6 million,
$2.2 million and $0.3 million, for the years ended
December 31, 2006, 2005 and 2004, respectively. Financing
activities during 2006 were primarily related to net cash
proceeds from our initial public offering, after deducting
underwriter commissions and offering expenses, of
$76.5 million and net proceeds of $0.4 million from
stock option exercises. Net proceeds from the initial public
offering were largely offset by the special distribution paid in
November 2006 of $72.6 million and $2.7 million
of payments on two notes payable, which we entered into in 2005
to finance asset purchases related to our enterprise resource
planning system.
The financing activities during 2005 and 2004 were primarily
related to stock option exercises and warrants exercised in
2005. We received proceeds from the exercise of stock options of
$0.3 million and $0.9 million in 2005 and 2004,
respectively. We received proceeds from the exercise of warrants
of $3.0 million in 2005. In 2005, the proceeds from stock
option exercises and warrants were partially offset by the
payments on capital lease obligations and notes payable of
$1.3 million.
Contractual
Obligations
The following table sets forth, as of December 31, 2006,
the aggregate amounts of our significant contractual obligations
and commitments with definitive payment terms due in each of the
periods presented (in thousands):
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Payments Due by Period
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Less Than
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More Than
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Total
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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Capital leases
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$
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12
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$
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5
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$
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7
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$
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$
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Operating
leases(a)
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9,745
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2,773
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6,972
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Total contractual obligations
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$
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9,757
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$
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2,778
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$
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6,979
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$
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$
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Minimum lease commitments for our headquarters and miscellaneous
office equipment. |
53
Regulation
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, however, the Office of
Inspector General (the OIG) of the Department of Education has
informed us that it is conducting a compliance audit of Capella
University. The OIG is responsible for, among other things,
promoting the effectiveness and integrity of the Department of
Educations programs and operations. The audit commenced on
April 10, 2006 and since then we have been periodically
providing the OIG with information, responding to
follow-up
inquiries and facilitating site visits and access to our
records. The OIG informed us that it completed its field work in
January 2007 and we expect to receive a draft report shortly.
Based on the field auditors preliminary audit exceptions,
which is a preliminary list of issues regarding Capella
Universitys compliance with Title IV rules and
requirements, and our verbal communications with the
OIG audit staff, we believe that the most significant
potential financial exposure from the audit pertains to
repayments to the Department of Education that could be required
if the OIG concludes that we did not properly calculate the
amount of Title IV funds required to be returned for
learners who withdrew from Capella University without providing
an official notification of such withdrawal and without engaging
in academic activity prior to such withdrawal. If it is
determined that we improperly withheld any portion of these
funds, we would be required to return the improperly withheld
funds. For the three-year audit period, and for the
2005-2006
Title IV award year, we estimate that the total amount of
Title IV funds not returned for learners who withdrew
without providing official notification was less than
$1.0 million, including interest, but not including fines
and penalties.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors.
Impact of
Inflation
We believe that inflation has not had a material impact on our
results of operations for the years ended December 31,
2006, 2005 or 2004. There can be no assurance that future
inflation will not have an adverse impact on our operating
results and financial condition.
Quantitative
and Qualitative Disclosures About Market Risk
Market
Risk
We have no derivative financial instruments or derivative
commodity instruments. We believe the risk related to marketable
securities is limited due to the adherence to our investment
policy that requires marketable securities to have a minimum
Standard & Poors rating of A minus (or
equivalent). All of our marketable securities as of
December 31, 2006, 2005 and 2004 consisted of cash
equivalents and marketable securities rated A minus or higher.
Interest
Rate Risk
We manage interest rate risk by investing excess funds in cash
equivalents and marketable securities bearing variable interest
rates, which are tied to various market indices. Our future
investment income may fall short of expectations due to changes
in interest rates or we may suffer losses in principal if we are
forced to sell securities that have declined in market value due
to changes in interest rates. At December 31, 2006, a 10%
increase or decrease in interest rates would not have a material
impact on our future earnings, fair values, or cash flows
related to investments in cash equivalents or interest earning
marketable securities.
54
Recent
Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing the recognition threshold a tax position is
required to meet before being recognized in the financial
statements. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We are
currently evaluating the effect that the adoption of FIN 48
will have on our financial condition and results of operations.
55
BUSINESS
Overview
We are an exclusively online post-secondary education services
company. Through our wholly-owned subsidiary, Capella
University, we offer a variety of doctoral, masters and
bachelors programs in the following markets: health and
human services, business management and technology, and
education. Our academic offerings combine competency-based
curricula with the convenience and flexibility of an online
learning format. We design our offerings to help working adult
learners develop specific competencies that they can employ in
their workplace. We actively support and engage with our
learners throughout their programs to enhance their prospects
for successful program completion. We believe that the relevance
and convenience of our programs provide a quality educational
experience for our learners. At December 31, 2006, we
offered over 760 online courses and 13 academic programs with 75
specializations to approximately 18,000 learners.
In 2006, our
end-of-year
enrollment and revenues grew by approximately 23% and 21%,
respectively, as compared to 2005. To date, our growth has
resulted from a combination of: increased demand for our
programs; expansion of our program and degree offerings; our
ability to obtain specialized accreditations, professional
licensures and endorsements for certain programs we offer;
establishment of relationships with large corporate employers,
the U.S. Armed Forces and other colleges and universities;
and a growing acceptance of online education. We seek to achieve
growth in a manner that assures continued improvement in
educational quality and learner success while maintaining
compliance with regulatory standards. Additionally, we seek to
enhance our operational and financial performance by tracking
and analyzing quantifiable metrics that provide insight as to
the effectiveness of our business and educational processes. Our
exclusively online focus facilitates our ability to track a
variety of metrics.
Our
History
We were founded in 1991 as a Minnesota corporation. In 1993, we
established our wholly-owned university subsidiary, then named
The Graduate School of America, to offer doctoral and
masters 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 masters degree programs over the
Internet. Through our early entry into online education, we
believe we have 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 of the North Central Association of Colleges and
Schools). In 1998, we began the expansion of our original
portfolio of academic programs by introducing doctoral and
masters 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 bachelors degree
market, we changed our name to Capella Education Company and the
name of our university to Capella University. In 2000, we
introduced our bachelors degree completion program in
information technology, which provided instruction for the last
two years of a four-year bachelors degree. In 2004, we
expanded our addressable market through the introduction of our
four-year bachelors degree programs in business
administration and information technology as well as the
introduction of three masters level specializations in
education targeted at K-12 teachers. In 2005, we introduced two
masters level specializations in education targeted to
higher education and K-12 teachers as well as a masters in
business administration specialization in accounting. In 2006,
we introduced seven specializations including healthcare
management, accounting and information assurance and security.
Additionally, in November 2006, we completed an initial public
offering of our common stock. We introduced three new programs
and seven new specializations in the first quarter of 2007.
56
Industry
The U.S. market for post-secondary education is a large,
growing market. Based on 2005 Integrated Post-Secondary
Education Data System data from the U.S. Department of
Education, National Center for Education Statistics (NCES),
revenue for post-secondary degree-granting educational
institutions exceeded $305 billion in academic year 2004.
According to a 2005 publication by the NCES, the number of
post-secondary students enrolled as of the Fall of 2004 was
17.3 million and is expected to grow to 18.8 million
in 2010. We believe the forecasted growth in post-secondary
enrollment is a result of a number of factors, including the
expected increase in annual high school graduates from
2.9 million in 2002 to 3.3 million in 2010 (based on
estimates published by the NCES in 2005), the significant and
measurable personal income premium that is attributable to
post-secondary education, and an increase in demand by employers
for professional and skilled workers.
According to the U.S. Census Bureaus October 2006
report, 64% of adults (persons 25 years of age or older)
did not possess a post-secondary degree in 2005. Of the
17.3 million post-secondary students enrolled as of the
Fall of 2004, the NCES estimated that 6.8 million were
adults, representing 39% of total enrollment. We expect that
adults will continue to represent a large, growing segment of
the post-secondary education market as they seek additional
education to secure better jobs, or to remain competitive or
advance in their current careers.
According to Eduventures, an education consulting and research
firm, some traditional, non-profit post-secondary education
providers have had difficulty meeting the increasing demand for
post-secondary education as a result of, among other factors, a
lack of funding and physical constraints on their ability to
admit additional students. Alternatively, many for-profit
institutions have been designed to meet this growing demand and
are becoming an increasingly popular alternative for working
adults. We believe that the focus of for-profit institutions on
education related to specific labor markets and on strong
customer service has made them an increasingly popular
alternative for working adults seeking additional education.
According to Eduventures, the revenue growth rate in
fully-online education exceeded the revenue growth rate in the
for-profit segment of the post-secondary market from 2001 to
2006. We believe that the higher growth in demand for
fully-online education is largely attributable to the
flexibility and convenience of this instructional format, as
well as the growing recognition of its educational efficacy.
Additionally, in 2006, Eduventures projected that the number of
students enrolled in fully-online programs at
Title IV-eligible,
degree-granting institutions would grow by approximately 24% in
2006 to reach approximately 1.5 million as of
December 31, 2006, and would grow to approximately
2.1 million by December 31, 2008. Eduventures also
projected that annual revenues generated from students enrolled
in fully-online programs at
Title IV-eligible,
degree-granting institutions would increase by more than 30% in
2006 to reach approximately $8.1 billion in that year.
Our
Competitive Strengths
We believe we have the following competitive strengths:
Commitment to Academic Quality. 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 those learners who choose
Capella University. Having originated as an institution
exclusively focused on graduate degree education, we have
historically promoted an educational experience based on high
academic standards. We have continued to apply this approach as
we have expanded our graduate and undergraduate programs. Today,
we believe that our commitment to academic quality is reflected
in our curricula, faculty, learner support services and academic
oversight process. The impact of this commitment is evident in
the satisfaction of our learners both during their educational
experience and following graduation.
57
Exclusive Focus on Online Education. In
contrast to institutions converting traditional, classroom-based
educational offerings to an online format, our academic programs
have been designed solely for online delivery. Our curriculum
design offers flexibility while promoting a high level of
interaction with other learners and faculty members. Our faculty
are specifically trained to deliver online education, and our
learner support infrastructure was developed to track learner
progress and performance to meet the needs of online learners.
As a result of our exclusive focus on online education, we
believe we have developed educational programs that meet the
needs of our learners in a convenient and effective manner.
Academic Programs and Specializations Designed for Working
Adults. At December 31, 2006, we offered
13 academic programs with 75 specializations, each designed to
appeal to and meet the educational objectives of working adults.
The diversity of our program portfolio allows us to target
relevant portions of the adult learner population and provide
offerings in several of the highest demand areas of study, such
as business and education. Our specializations are designed to
attract learners by providing depth within a program that is
typically unavailable in an unspecialized program and by
addressing specific competencies that learners can apply in
their current workplace.
Extensive Learner Support Services. We
provide extensive learner support services, both online and
telephonically. Our support services include: academic services,
such as advising, writing and research services; administrative
services, such as online class registration and transcript
requests; library services; financial aid counseling; and career
counseling services. We believe our commitment to providing high
quality, responsive and convenient learner support services
encourages course and degree completion and contributes to our
high learner satisfaction.
Experienced Management Team with Significant Business,
Academic and Marketing Expertise. Our
management team possesses extensive experience in business,
academic and marketing management as well as public company
experience, in many cases with organizations of much larger
scale and operational diversity than our organization. Our
management team is led by Stephen G. Shank, our Chairman and
Chief Executive Officer, who founded our company in 1991, and
who possesses over 12 years of experience serving as the
Chief Executive Officer of a public company. Our President and
Chief Operating Officer, Kenneth J. Sobaski, has over
17 years of public company experience in senior sales,
marketing and general management positions. Lois M. Martin, our
Chief Financial Officer, serves on two public company boards of
directors and has held senior financial management positions in
public companies for over nine years. Dr. Michael J.
Offerman, who has 24 years of academic management
experience, currently serves as President of Capella University
and, upon completion of our search for a new university
president, Dr. Offerman will become the Vice
Chairman External University Initiatives of Capella
Education Company. We integrate our management through
cross-functional teams to ensure that business objectives are
met while continuing to deliver academic quality.
Our
Operating Strategy
We intend to pursue the following operating strategies:
Focus on Markets and Learners. We
believe that significant growth potential exists within each of
the three markets that comprise our existing portfolio of
academic programs and degree offerings. Within our specified
markets, we will continue to develop our existing
bachelors, masters and doctoral program offerings
while selectively adding new programs and specializations for
targeted professions within these markets that we believe offer
significant market potential. In particular, we intend to
emphasize growth in targeted professions by offering
specializations in our masters and doctoral programs for
which we believe there is significant demand. Examples include
our recently launched masters and doctoral specializations
targeting K-12 education, community college and healthcare
management professionals within our education and health and
human services market verticals.
Building Capella Brand
Differentiation. We will continue to focus on
enhancing our brand differentiation as a high quality,
exclusively online university for working adults in targeted
professions within our specified markets through a variety of
integrated online and offline advertising and direct media. We
seek to
58
appeal to prospective learners who aspire to obtain a quality
post-secondary education, but for whom a traditional,
classroom-based educational experience is impractical. We seek
to differentiate our brand from those of other educational
providers by communicating our ability to deliver high quality
educational programs in select specializations within each
learners chosen profession. In order to optimize our
marketing investment, we regularly perform market tests, analyze
the results and refine our marketing approach based on the
findings. We believe increased brand differentiation and
awareness will contribute to continued enrollment growth in our
existing and future program offerings.
Increasing Enrollment Effectiveness. We
believe that it is important to focus on total enrollment
effectiveness across the learner lifecycle, from new enrollment
through graduation. We have invested substantial resources in
performing detailed market research that enables us to more
effectively segment our target market and identify potential
learners best suited for our educational experience. As a
result, we will continue to target our marketing and recruiting
expenditures towards segments of the market that we believe are
more likely to result in us enrolling learners who will complete
their programs, and we intend to increase expenditures targeted
at these segments. Simultaneously, we intend to increase our
enrollment effectiveness through improved enrollment tools and
processes, which we believe will allow us to better manage the
pipeline of potential applicants and help direct the
communication and contact plans with our prospective and current
learners. Finally, in order to further enhance persistence of
our current learners, we seek to deliver an inspiring
educational experience that motivates our learners throughout
the learner lifecycle through regular, proactive communication
and support.
Delivering Both Superior Learning Outcomes and a Superior
Learner Experience. We are committed to
helping our learners reach their educational and professional
goals. This commitment guides the development of our curricula,
the recruitment and training of our faculty and staff, and the
design of our support services. 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 the use of competency-based curricula and
measurement of course and program outcomes, we seek to provide
our learners with tangible outcomes, including a portfolio of
professional competencies and support for career advancement or
change as well as the degree itself. In addition, we look for
opportunities to improve our learners educational
experience and increase the likelihood of learners successfully
completing degree programs. We believe our focus on both
superior learning outcomes and a superior learner experience
complements our brand strategy and will continue to enhance
learner satisfaction, leading to higher levels of engagement,
persistence and referrals.
Drive Successful New Business
Development. We also seek to drive growth
through a multifaceted strategy of enhancing existing program
offerings, developing new programs and specializations within
our three current target markets, and pursuing new market
opportunities. We seek to enhance our existing program offerings
by pursuing improvements in course design and technology and
obtaining specialized accreditation, additional professional
licensure approvals and select endorsements. Within our current
target markets, we seek to expand our program and specialization
offerings, while also targeting additional professions. Finally,
we are beginning to explore new market opportunities in market
segments that leverage our existing expertise, brand reputation
and educational capabilities.
Capella
University
Capella University is a post-secondary educational institution
accredited by The Higher Learning Commission of the North
Central Association of Colleges and Schools, one of six regional
institutional accrediting associations in the United States, and
is authorized to grant degrees by the State of Minnesota.
59
Our
Approach to Academic Quality
Some of the critical elements of our university that we believe
promote a high level of academic quality include:
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Curricula. We design the curricula for our
programs around professional competencies desired for high
performance in each field. The particular competencies are
identified and validated through a variety of external sources
and reviews. There are specific learning outcomes for each
course as well as for the overall program, and we assess the
learners achievement of the expected learning outcomes
during his or her period of enrollment.
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Faculty. We select our faculty based on their
academic credentials and teaching and practitioner experience.
Our faculty members tend to be scholars as well as
practitioners, and they bring relevant, practical experience
from their professional careers into the courses they teach.
Approximately 80% of our faculty members hold a doctoral degree
in their respective fields. We invest in the professional
development of our faculty members through training in online
teaching techniques as well as events and discussions designed
to foster sharing of best practices and a commitment to academic
quality.
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Online Course Design. We employ a
comprehensive design framework to ensure that our online courses
offer a consistent learning experience, high quality
interaction, and the tools required for assessing learning
outcomes. We regularly assess course outcomes data as well as
learner assessments to identify opportunities for course
upgrades.
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Learner Support. We establish teams comprised
of both academic and administrative personnel that are assigned
to serve as the primary support contact point for each of our
learners throughout the duration of their studies. Most of our
support services, including academic, administrative, library
and career counseling services are accessible online, allowing
users to access these services at a time and in a manner that is
convenient to them. We believe that a committed support network
is as important to maintaining learner motivation and commitment
as the knowledge and engagement of our faculty.
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Academic Oversight. Our academic management
organization is structured to provide leadership and continuity
across our academic offerings. In addition to regular reviews by
accrediting bodies, our academic management team oversees
periodic examinations of our curricula by internal and external
reviewers. Internal reviews are performed by our assessment and
institutional research team to assess academic content, delivery
method and learning outcomes for each program. Our internal
academic oversight process is further strengthened by our
ability to track and analyze data and metrics related to learner
performance and satisfaction. External reviews are performed by
individuals with professional certifications in their fields to
provide additional evaluation and verification of program
quality and workplace applicability.
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Accreditation. In addition to being accredited
by The Higher Learning Commission of the North Central
Association of Colleges and Schools, we also pursue specialized
accreditation, where appropriate, such as our accreditation from
the American Counseling Associations Council for the
Accreditation of Counseling and Related Educational Programs
(CACREP) for our mental health counseling and marital, couple,
and family counseling/therapy specializations within our
masters in human services program. Our commitment to
maintaining regional accreditation, and specialized
accreditation where appropriate, reflects our goal to provide
our learners with an academic experience commensurate with that
of traditional post-secondary educational institutions.
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In addition to these traditional components of academic quality,
our approach to teaching and the online format of our programs
offers several features that enrich the learning experience:
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Low student to faculty ratio. Our courses
average between 15 and 20 learners, providing each learner the
opportunity to interact directly with our faculty and to receive
individualized feedback and attention. We believe this adds to
the academic quality of our programs by ensuring that each
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learner is encouraged to participate actively, thus enabling the
instructor to better evaluate the learners understanding
of course material.
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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.
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Practitioner-oriented course experience. Our
courses are designed to encourage our learners to incorporate
workplace issues or projects into their studies, providing
relevant context to many of the academic theories covered by our
curricula.
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Time efficiency. While many campus-based
students 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.
|
|
|
|
Residential colloquia experience. Our
residential colloquia allow doctoral learners to engage in
face-to-face
interaction with other learners and faculty, which provides for
a rich learning experience with relevant content.
|
61
Curricula
Our program offerings cover three markets: health and human
services, business management and technology, and education. At
December 31, 2006, we offered 13 academic programs with 75
specializations within these markets as follows:
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|
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Programs
|
|
Specializations
|
|
Business, Organization and
Management
|
|
|
Doctor of Philosophy in
|
|
General
|
Organization and Management
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|
Human Resource
Management
|
|
|
Information
Technology
Management
|
|
|
Leadership
|
|
|
|
Master of Science
|
|
General
|
in Organization and Management
|
|
Human Resource
Management
|
|
|
Leadership
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|
|
|
Master of Business
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|
General Business
|
Administration
|
|
Accounting
|
|
|
Finance
|
|
|
Health Care Management
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|
|
Information Technology
Management
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|
|
Marketing
|
|
|
Project Management
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|
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|
Bachelor of Science in
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|
Accounting
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Business
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|
Business Administration
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|
|
Finance
|
|
|
Human Resource
Management
|
|
|
Management and
Leadership
|
|
|
Marketing
|
|
Education
|
|
|
Doctor of Philosophy in
Education
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|
Leadership in
Educational
Administration
|
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|
Leadership in Higher
Education
|
|
|
Curriculum and
Instruction
|
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|
Post-Secondary and
Adult Education
|
|
|
Instructional Design
for Online Learning
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|
|
Training and
Performance Improvement
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|
Professional Studies in
Education
|
|
|
K-12 Studies in
Education
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|
|
|
Master of Science in
Education
|
|
Leadership in
Educational
Administration
|
|
|
Leadership in Higher
Education
|
|
|
Curriculum and
Instruction
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|
|
Post-Secondary and
Adult Education
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|
|
Instructional Design
for Online Learning
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|
|
Training and
Performance Improvement
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|
|
Professional Studies in
Education
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|
|
K-12 Studies in
Education
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|
Reading and Literacy
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|
Enrollment Management
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|
|
|
Programs
|
|
Specializations
|
|
Psychology
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|
|
Doctor of Psychology
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|
Clinical Psychology
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|
|
Counseling Psychology
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|
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|
Doctor of Psychology in
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|
General Psychology
|
Philosophy
|
|
Industrial/Organizational
Psychology Educational Psychology
|
|
|
|
Master of Science in
|
|
Clinical Psychology
|
Psychology
|
|
Counseling Psychology
|
|
|
School Psychology
|
|
|
General Psychology
|
|
|
Industrial/Organizational
Psychology
|
|
|
Educational Psychology
|
|
|
Sport Psychology
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|
|
|
|
Human Services
|
|
|
Doctor of Philosophy in
|
|
General Human Services
|
Human Services
|
|
Criminal Justice
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|
|
Counseling Studies
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|
|
Health Care
Administration
|
|
|
Management of
Non-Profit Agencies
|
|
|
Social and Community
Services
|
|
|
|
Master of Science in
|
|
General Human Services
|
Human Services
|
|
Criminal Justice
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|
|
Counseling Studies
|
|
|
Health Care
Administration
|
|
|
Management of
Non-Profit Agencies
|
|
|
Marital, Couple, and
Family Counseling/Therapy
|
|
|
Mental Health Counseling
|
|
|
Social and Community
Services
|
|
Information
Technology
|
|
|
Master of Science in
|
|
General Information
|
Information Technology
|
|
Technology
|
|
|
Information Security
|
|
|
Network Architecture
and Design
|
|
|
Project Management and
Leadership
|
|
|
System Design and
Development
|
|
|
|
Bachelor of Science in
|
|
General Information
|
Information Technology
|
|
Technology
|
|
|
Graphics and Multimedia
|
|
|
Information Assurance
and Security
|
|
|
Network Technology
|
|
|
Project Management
|
|
|
Web Application
Development
|
62
Courses are offered on a quarterly academic schedule, which
generally coincides with calendar quarters. We offer new
learners the flexibility to begin their introductory first
course in their program of study on the first day of classes in
any month. 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 course requirements, learners typically need to access
the online courseroom multiple times each week. However, there
is no set class schedule, so learners can attend each class as
it fits their weekly schedule. Learners are required to respond
to questions posed by the instructor, as well as comments made
by other learners. This provides for an interactive experience
in which each learner is both encouraged and required to be
actively engaged. Additional learning experiences may include
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 learning outcomes.
The only exception to our exclusively online format is for
doctoral learners, and for certain masters degree
candidates pursuing professional licenses. These learners
participate in periodic residential colloquia, supervised
practicum and internships as a complement to their courses. The
colloquia typically last one week and are required, on average,
once per year for learners in applicable programs, while the
supervised practicum 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 as part of a graduate degree program or on
a stand-alone basis. Certificate programs generally consist of
four courses. The duration of our certificate programs ranges
from two quarters to approximately two years.
Faculty
We seek to hire faculty who have teaching or practitioner
experience in their particular discipline and who possess
significant academic credentials. Approximately 80% of our
faculty members have a doctoral degree. We provide significant
training to new faculty members, including a seven-week online
development program focused on effective online teaching methods
and our online platform, prior to offering them 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 periodically
monitor courseroom activity and assess learner performance
against course outcomes.
Our faculty consists of full-time academic administrators,
faculty chairs and core faculty as well as adjunct 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 that we
maintain standards of accreditation. Our full-time faculty
chairs supervise the faculty in their respective
specializations. Our full-time core faculty teach courses in
their assigned specializations and serve as mentors to, and on
dissertation committees for, our doctoral learners. Our adjunct
faculty typically teach one to three courses per quarter in
their specializations. Of our 904 faculty members as of
December 31, 2006, 130 were full-time employees and the
remainder were adjunct faculty. In certain cases, we have
agreements with other post-secondary educational institutions to
provide faculty for certain courses.
Learner
Support Services
The learner support services we provide include:
Academic Services. We provide learners with a
variety of services designed to support their academic studies.
These services include new learner orientation, technical
support, academic advising, research services (particularly for
doctoral degree candidates), writing services and other online
tutoring. We also provide appropriate educational accommodations
to learners with documented disabilities through our disability
support services team.
63
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 transcripts online. We believe this
online accessibility provides the convenience and self-service
capabilities that our learners value. Our financial aid
counselors provide personalized online and telephonic support to
our learners.
Library Services. We provide learners with
online access to the Capella University Library. Our library
provides learners with access to a comprehensive collection of
online journals, eBooks and interlibrary loan services. Our team
of librarians is available via
e-mail and
phone to help with research, teaching and learning. They offer
tutorials, virtual instruction sessions, consultations on
research assignments and online research guides. Librarians also
attend our residential colloquia to teach library instruction
sessions and offer
one-on-one
research appointments. Our interlibrary loan services are
provided through our relationship with the University of
Michigan.
Career Counseling Services. Our staff of
professional career counselors use a variety of tools, including
individualized phone,
e-mail and
face-to-face
communications, online newsletters, online seminars and
conference calls to provide career planning services to learners
and alumni. Our counselors also assist our recruitment staff
with prospective learners selection of the Capella
University program and specialization that best suits their
professional aspirations.
Admissions
Capella Universitys admission process is designed to offer
access to prospective learners who seek the benefits of a
post-secondary education while providing realistic feedback to
prospects regarding their ability to successfully complete their
chosen program. As part of the first course in their program of
study, admitted learners are 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 bachelors 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. 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, a faculty committee.
Marketing
We engage in a range of marketing activities to build the
Capella brand, differentiate us from other educational
providers, raise levels of awareness with prospective learners,
generate inquiries about enrollment, remind and motivate
existing learners to re-register each quarter, and stimulate
referrals from existing learners. These marketing activities
include Internet, print and direct mail advertising campaigns,
participation in seminars and trade shows, and development of
marketing channels through our corporate, healthcare,
U.S. Armed Forces, and educational relationships. Online
advertising (targeted, direct and through aggregators) currently
generates our largest volume of prospective learners.
Our corporate and healthcare, U.S. Armed Forces and
educational relationships and discount programs are developed
and managed by our channel development teams. Our channel
development teams work with representatives in the various
organizations to help them understand the quality, impact and
value that our academic programs can provide, both for the
individuals in their organization and for the organization
itself. For the year ended December 31, 2006, approximately
35% of our learners received a discount in connection with one
of our marketing relationships or programs described below.
64
|
|
|
|
|
Corporate and Healthcare Relationships. We
developed our corporate and healthcare alliance program to offer
education opportunities to employees of large companies.
Pursuant to these arrangements, program participants make
information about Capella University available to their
employees. In return, we provide a tuition discount to
participants employees and their immediate family members.
Our corporate and healthcare alliance program agreements are
non-exclusive written agreements that generally have three year
terms with automatic renewal provisions, but the parties may
generally terminate the agreements at any time on 60 to
90 days prior notice. Through our corporate and healthcare
alliance programs, we presently have learners from approximately
130 corporations and healthcare providers.
|
|
|
|
U.S. Armed Forces Relationships and Discount
Program. We offer a discount on tuition to all
members of the U.S. Armed Forces, including active duty
members, veterans, national guard members, reservists, civilian
employees of the Department of Defense and immediate family
members of active duty personnel. We also have arrangements with
various educational institutions of the U.S. Armed Forces
pursuant to which we have agreed to accept credits from certain
military educational programs earned by learners who meet our
transfer requirements, which they can apply toward a Capella
University degree. As part of these arrangements, several of
these educational institutions make information about Capella
University available to their members. In addition, we have
arrangements with the Army National Guard, the U.S. Coast
Guard Institute and several military bases pursuant to which
these organizations make information about Capella University
available to interested service members. Our arrangements with
the various educational institutions, the Army National Guard
and the U.S. Coast Guard Institute, are non-exclusive
written agreements with varying terms that may generally be
terminated by either party upon 30 to 45 days prior notice.
Our arrangements with military bases are established through
informal relationships between us and the respective base. For
the year ended December 31, 2006, approximately 18% of our
learners received a U.S. Armed Forces tuition discount.
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|
|
|
Educational Relationships. We developed our
educational alliance program to allow graduates of community
colleges to matriculate into our programs and to recruit
community college faculty to attend our graduate programs.
Pursuant to the arrangements between us and approximately 230
community colleges, we provide a tuition discount and an
application fee waiver for community college students, alumni,
faculty, administrators and staff in exchange for marketing
opportunities within each community college. Our educational
alliance agreements are non-exclusive written agreements that
generally have a one year term which automatically renews
annually, but generally either party may terminate the agreement
at any time upon 30 to 60 days prior notice.
|
Enrollment
We offer different program start dates to new learners,
occurring approximately once per month. As of the last day of
classes in the quarter ended December 31, 2006, our
enrollment was 17,976 learners. Of the learners that responded
to our demographic survey, as of December 31, 2006,
approximately 66% were female and approximately 39% were people
of color. Our learner population is geographically distributed
throughout the United States.
65
The following is a summary of our learners as of the last day of
classes in the quarter ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Enrollment
|
|
|
|
Number of
|
|
|
% of
|
|
|
|
Learners
|
|
|
Total
|
|
|
Doctoral
|
|
|
7,473
|
|
|
|
41.6
|
%
|
Masters
|
|
|
7,685
|
|
|
|
42.7
|
%
|
Bachelors
|
|
|
2,729
|
|
|
|
15.2
|
%
|
Other
|
|
|
89
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
17,976
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Tuition
and Fees
Our tuition rates vary by type and length of program and by
degree level, such as doctoral, masters or
bachelors. For all masters and bachelors
programs and for selected doctoral programs, tuition is
determined by the number of courses taken by each learner. For
the
2005-2006
academic year (the academic year that began in July 2005),
prices per course generally ranged from $1,400 to $1,950. The
price of the course will vary based upon the number of credit
hours, the degree level of the program and the discipline. For
the
2005-2006
academic year, the majority of doctoral programs were priced at
a fixed quarterly amount of $3,975 per learner, regardless
of the number of courses in which the learner was registered. In
January 2006, we adjusted our fixed quarterly tuition rate for
doctoral learners in their comprehensive exam or dissertation to
$3,200. In addition, if a learner in a doctoral program with
fixed quarterly tuition had paid for 16 quarters, completed all
coursework except for their comprehensive exam or dissertation
and met all colloquia requirements, the tuition rate was reduced
to $500 per quarter. Other in the table above
refers primarily to certificate-seeking learners. Certificate
programs generally consist of four courses, and the price of a
course depends on the number of credit hours, the degree level
of the program and the discipline. For the
2005-2006
academic year, prices per course in certificate programs
generally ranged from $1,400 to $1,925.
Capella University implemented a tuition increase in 10 of our
13 programs generally ranging from 2% to 6% for the
2006-2007
academic year (the academic year that began in July 2006). The
price increase resulted in prices per course generally ranging
from $1,460 to $1,995 for masters, bachelors and
certificate programs. The majority of doctoral programs were
priced at a fixed quarterly amount of $4,050 per learner,
regardless of the number of courses in which the learner was
registered. The fixed quarterly tuition for doctoral learners in
their comprehensive exam or dissertation increased to $3,240.
The reduced tuition rate for doctoral learners who have paid for
16 quarters, completed all coursework except for their
comprehensive exam or dissertation and met all colloquia
requirements increased from $500 to $810 per quarter.
Tuition increases have not historically been, and may not in the
future be, consistent across our programs and specializations
due to market conditions or changes in operating costs that have
an impact on price adjustments of individual programs or
specializations.
A large portion of our learners rely on funds received under
various government-sponsored student financial aid programs,
predominantly Title IV programs, to pay a substantial
portion of their tuition and other education-related expenses.
In the years ended December 31, 2006, 2005, and 2004,
approximately 71%, 67% and 64%, respectively, of our revenues
(calculated on a cash basis) were attributable to funds derived
from Title IV programs. In addition to Title IV
funding, our learners receive financial aid from other
governmental sources or finance their education through private
financing institutions or with their own funds.
Technology
Capella University provides learners and faculty members a
secure web-based portal through which they can access courses
and support services.
66
Online courseroom. Our online courseroom
provides the instructional content of the course, along with
tools to facilitate course discussions, assessments, grading and
submission of assignments. We operate Blackboard Learning
System, formerly known as WebCT Vista, as our courseroom
platform. Blackboard Learning System provides discussion,
testing and grading capabilities for our online courseroom.
Learner and faculty support. We rely on a
combination of packaged and custom software to provide support
services to our learners and faculty, including learner
participation monitoring, course registration, transcript
requests and financial aid applications. In addition, we offer
our learners and faculty members online access to our library
resources.
Internal administration. We use several
commercial software packages to perform internal administrative
and operational functions. Our student information system
manages learner academic data and accounts receivable
information, and our document management system stores and sorts
learner applications, academic records and marketing data. We
also employ customer relationship management software to
organize and process prospective learner information.
Infrastructure. Our servers are located in a
third party hosting facility and at our corporate headquarters.
All of our servers are linked and we have redundant data backup.
We currently use a combination of Microsoft-based software on HP
server equipment and Sun Microsystems servers. We are in the
process of migrating to an Oracle/PeopleSoft enterprise resource
planning system. We anticipate this migration will be completed
in 2008.
Employees
and Adjunct Faculty
As of December 31, 2006, we had a total of 904 faculty
members, consisting of 130 full-time faculty and
774 adjunct faculty. Our adjunct faculty are engaged
through independent contractor agreements.
We engage our adjunct faculty on a
course-by-course
basis. Adjunct faculty are compensated a fixed amount per
learner for a base number of learners and a variable rate per
learner thereafter, which varies depending on discipline. In
addition to teaching assignments, adjunct faculty may be asked
to serve on learner committees, such as comprehensive
examination and dissertation committees, or assist with course
development. We have the right to cancel any teaching assignment
due to low enrollment or to cancel sections to create proper
class sizes. If a teaching assignment is canceled, we do not
compensate the adjunct faculty member for the assignment. Our
independent contractor agreements with adjunct faculty typically
have a one-quarter term, but we are not required to engage them
to teach any certain number of courses and have the right to
terminate their services upon written notice at any time.
As of December 31, 2006, we also employed 883 non-faculty
staff in university services, academic advising and academic
support, enrollment services, university administration,
financial aid, information technology, human resources,
corporate accounting, finance and other administrative
functions. None of our employees is a party to any collective
bargaining or similar agreement with us. We consider our
relationships with our employees to be satisfactory.
Competition
The post-secondary education market is highly fragmented and
competitive, with no private or public institution enjoying a
significant market share. We compete primarily with public and
private degree-granting regionally accredited colleges and
universities. Our competitors include both traditional colleges
and universities, as well as a number of for-profit institutions
offering online programs, such as Walden University and the
University of Phoenix. Many of these colleges and universities
enroll working adults in addition to traditional 18 to
24 year-old students. In addition, many of those colleges
and universities offer a variety of distance education
initiatives.
67
We believe that the competitive factors in the post-secondary
education market include the following:
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|
|
relevant, practical and accredited program offerings;
|
|
|
|
reputation of the college or university and marketability of the
degree;
|
|
|
|
convenient, flexible and dependable access to programs and
classes;
|
|
|
|
regulatory approvals;
|
|
|
|
qualified and experienced faculty;
|
|
|
|
level of learner support;
|
|
|
|
cost of the program;
|
|
|
|
relative marketing and selling effectiveness; and
|
|
|
|
the time necessary to earn a degree.
|
Property
Our corporate headquarters occupies approximately
203,000 square feet in Minneapolis, Minnesota, under a
lease which expires in October 2010. Renewal terms under this
lease allow for us to extend the current lease for up to two
additional five-year terms. We also lease approximately
91,500 square feet in a second facility in Minneapolis that
houses our enrollment services and learner services functions.
That lease expires in February 2009. Renewal terms under this
lease allow for us to extend the current lease for up to two
additional two-year terms. We believe our existing facilities
are adequate for current requirements and that additional space
can be obtained on commercially reasonable terms to meet future
requirements.
Intellectual
Property
Intellectual property is important to our business. We rely on a
combination of copyrights, trademarks, service marks, trade
secrets, domain names and agreements with third parties to
protect our proprietary rights. In many instances, our course
content is produced for us by faculty and other 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 a third party on a
royalty fee basis.
We have trademark or service mark registrations and pending
applications in the U.S. and select foreign jurisdictions for
the words CAPELLA, CAPELLA EDUCATION
COMPANY, and CAPELLA UNIVERSITY and
distinctive logos, along with various other trademarks and
service marks related to our specific offerings. We also own
domain name rights to
www.capellaeducation.com,
www.capella.edu and
www.capellauniversity.edu, as well as other
words and phrases important to our business.
Legal
Proceedings
From time to time, we are a party to various lawsuits, claims
and other legal proceedings that arise in the ordinary course of
our business. We are not at this time a party, as plaintiff or
defendant, to any legal proceedings which, individually or in
the aggregate, would be expected to have a material adverse
effect on our business, financial condition or results of
operation.
68
REGULATORY
ENVIRONMENT
Learners attending Capella University finance their education
through a combination of individual resources, private loans,
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, 2006, approximately 71% of our
revenues (calculated on a cash basis) were derived from
Title IV programs. In connection with a learners
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 of the North Central Association of Colleges and
Schools. 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 in order to participate
in the federal student financial aid programs. To participate in
Title IV programs, a school must be:
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|
|
|
|
authorized to offer its programs of instruction by the
applicable state education agencies in the states in which it is
physically located (in our case, Minnesota);
|
|
|
|
accredited by an accrediting agency recognized by the Secretary
of the Department of Education; and
|
|
|
|
certified as an eligible institution by the Department of
Education.
|
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 of the North Central
Association of Colleges and Schools, a regional accrediting
agency recognized by the Secretary of the Department of
Education. We will seek to have our accreditation reaffirmed in
2007 as part of a regularly scheduled reaffirmation process.
Accreditation is a non-governmental system for recognizing
educational institutions and their programs for student
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 schools are subject to periodic review by accrediting
agencies to determine whether such schools 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 Arkansas, Arizona, Colorado,
Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri,
North Dakota, Nebraska, Ohio, Oklahoma, New Mexico, South
Dakota, Wisconsin, West Virginia and Wyoming).
Accreditation by The Higher Learning Commission is important to
us. Colleges and universities depend, in part, on accreditation
in evaluating transfers of credit and applications to graduate
schools. Employers rely on the accredited status of institutions
when evaluating a candidates credentials, and students and
corporate and government sponsors under tuition reimbursement
programs look to accreditation for assurance that an institution
maintains quality educational standards. Moreover, institutional
69
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
Education Licensure
We are authorized to offer our programs by the Minnesota Office
of Higher Education, the regulatory agency governing the State
of Minnesota, where Capella University is located. We are
required by the Higher Education Act to maintain authorization
from the Minnesota Office of Higher Education in order to
participate in Title IV programs.
The increasing popularity and use of the Internet and other
online services for the delivery of education has led and may
lead to the adoption of new laws and regulatory practices in the
United States or foreign countries and new interpretations of
existing laws and regulations. These new laws, regulations and
interpretations may relate to issues such as the requirement
that online education institutions be licensed in one or more
jurisdictions where they have no physical location or other
presence. For instance, in some states, we are required to seek
licensure or authorization because our recruiters meet with
prospective students in the state. In other cases, the state
educational agency has required licensure or authorization
because we enroll students who reside in the state. New laws,
regulations or interpretations related to doing business over
the Internet could increase our cost of doing business and
affect our ability to recruit students in particular states,
which could, in turn, negatively affect enrollments and revenues
and have a material adverse effect on our business.
In addition to Minnesota, Capella University is licensed or
authorized to operate or to offer degree programs in the
following states: Alabama, Arizona, Arkansas, Colorado, Florida,
Georgia, Illinois, Kentucky, Nevada, Ohio, Virginia, Washington,
West Virginia and Wisconsin. We are licensed or authorized in
these states because we have determined that our activities in
each state constitute a presence requiring licensure or
authorization by the state educational agency. In some cases,
the licensure or authorization is only for specific programs. In
the majority of these states, Capella University has either
determined that separate licensure or authorization for its
certificate programs is not necessary, or has obtained such
licensure or authorization. Capellas certificate programs
must be and have been approved in Arizona, Florida and Ohio.
Because we enroll students from each of the 50 states, as
well as the District of Columbia, and because we may undertake
activities in other states that constitute a presence or
otherwise subject us to the jurisdiction of the respective state
educational agency, we may, from time to time, need to seek
licensure or authorization in additional states.
We are subject to extensive regulations by the states in which
we are authorized or licensed to operate. State laws typically
establish standards for instruction, qualifications of faculty,
administrative procedures, marketing, recruiting, financial
operations and other operational matters. State laws and
regulations may limit our ability to offer educational programs
and to award degrees. Some states may also prescribe financial
regulations that are different from those of the Department of
Education. We are required to post surety bonds in several
states. If we fail to comply with state licensing requirements,
we may lose our state licensure or authorizations. Although we
believe that the only state authorization or licensure necessary
for us to participate in Title IV programs is our
authorization from the Minnesota Office of Higher Education,
loss of authorization or licensure in other states could
restrict our ability to recruit or enroll students in those
states. Failure to comply with the requirements of the Minnesota
Office of Higher Education could result in Capella University
losing its authorization from the Minnesota Office of Higher
Education, its eligibility to participate in Title IV
programs or its ability to offer certain programs, any of which
may force us to cease operations.
State
Professional Licensure
Many states have specific requirements that an individual must
satisfy in order to be licensed as a professional in a specified
field. Students often seek to obtain professional licensure in
their chosen fields
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following graduation. Their success in obtaining licensure
typically depends on several factors, including the individual
merits of the graduate, as well as the following, among other
factors:
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whether the institution and the program were approved by the
state in which the graduate seeks licensure, or by a
professional association;
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whether the program from which the student graduated meets all
state requirements for professional licensure; and
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whether the institution is accredited.
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Due to varying requirements for professional licensure in each
state, Capella Universitys catalog informs learners of the
risks associated with obtaining professional licensure and more
specifically states that (1) Capella University makes no
representation or guarantees that completion of any educational
program ensures that the learner will be able to obtain
individual professional licensure or certification, and
(2) that learners are solely responsible for determining
and complying with state, local, or professional licensure and
certification requirements.
When we learn that a state has refused to grant licensure to one
of our graduates, we take one or more of the following actions.
In certain instances, where we believe the states refusal
to license one of our graduates may be incorrect, we assist
learners by providing clarifying information to the state. In
other cases, such as where a state will not license one of our
learners because a Capella University program is not accredited
by a specific third party, we convey that information to
prospective learners before they enroll in such program. In all
cases, we semi-annually remind our learners that they need to
communicate directly with the state in which they intend to seek
licensure to fully understand the licensing requirements of that
state.
Nature of
Federal, State and Private Financial Support for Post-Secondary
Education
The federal government provides a substantial part of its
support for post-secondary education through Title IV
programs, in the form of grants and loans to students who can
use those funds at any institution that has been certified as
eligible by the Department of Education. Aid under Title IV
programs is primarily awarded on the basis of financial need,
generally defined as the difference between the cost of
attending the institution and the amount a student can
reasonably contribute to that cost. All recipients of
Title IV program funds must maintain satisfactory academic
progress and must also progress in a timely manner toward
completion of their program of study. In addition, each school
must ensure that Title IV program funds are properly
accounted for and disbursed in the correct amounts to eligible
learners.
Capella University learners receive loans and grants to fund
their education under the following Title IV programs:
(1) the Federal Family Education Loan (FFEL) program and
(2) the Federal Pell Grant, or Pell, program. In 2006,
approximately 71% of our revenues (calculated on a cash basis)
were derived from tuition financed under Title IV programs.
1) FFEL. Under the FFEL program, banks
and other lending institutions make loans to learners. If a
learner defaults on a loan, payment is guaranteed by a federally
recognized guaranty agency, which is then reimbursed by the
Department of Education. Students with financial need qualify
for interest subsidies while in school and during grace periods.
In 2006, we derived approximately 70.6% of our revenues
(calculated on a cash basis) from the FFEL program.
2) Pell. Under the Pell program, the
Department of Education makes grants to students who demonstrate
financial need. In 2006, we derived approximately 0.4% of our
revenues (calculated on a cash basis) from the Pell program.
In addition to the programs stated above, eligible learners at
Capella University may participate in several other financial
aid programs or receive support from other governmental and
private sources. Certain learners are eligible to receive funds
from educational assistance programs administered by the
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U.S. Department of Veterans Affairs through the Minnesota
Department of Veterans Affairs. In certain circumstances, we may
assist learners in accessing alternative loan programs available
to Capella Universitys learners. Alternative loans are
intended to cover the difference between what the learner
receives from all financial aid sources and the full cost of the
learners education. Learners can apply to a number of
different lenders for this funding at current market interest
rates. Finally, many Capella University learners finance their
own education or receive full or partial tuition reimbursement
from their employers.
Capella University obtained Department of Education approval in
2006 to be a School as Lender (School Lender). As a School
Lender, Capella University can issue FFEL loans directly to
students in the same manner as banks and other financial
institutions that originate FFEL loans and Capella University is
subject to certain additional regulatory requirements that
pertain solely to School Lenders and FFEL program lenders. As of
February 28, 2007, Capella University had issued two loans
in its capacity as a School Lender. Capella University does not
have any immediate plans to increase the number of loans issued
as a School Lender, but may choose to do so at a later date.
Accordingly, for the foreseeable future, learners who receive
FFEL loans will obtain such loans from FFEL program lenders
other than Capella University.
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 maintain institutional
accreditation by a recognized accrediting agency. Capella
University is currently certified to participate in
Title IV programs through December 31, 2008.
The substantial amount of federal funds disbursed through
Title IV programs, the large number of students and
institutions participating in these programs and allegations of
fraud and abuse by certain for-profit institutions have caused
Congress to require the Department of Education to exercise
considerable regulatory oversight over for-profit 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 with certainty 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 approximately every five
to eight years. Congress most recently reauthorized the Higher
Education Act in 1998. Because reauthorization had not yet been
completed in a timely manner, Congress extended the current
provisions of the Higher Education Act through June 30,
2007. Congress is in the process of reviewing the Higher
Education Act for purposes of reauthorization, but it is not
possible to predict with certainty when the reauthorization
process will be completed. We believe that this reauthorization
will likely result in numerous changes to the Higher Education
Act, although we are not in a position to predict those changes.
The elimination of certain Title IV programs, material
changes in the requirements for participation in such programs,
or the substitution of materially different programs could
reduce the ability of certain learners to finance their
education. If reauthorization is not completed by June 30,
2007, Congress is expected to enact legislation to further
temporarily extend Title IV programs as currently
authorized under the Higher Education Act for a period of
months, not likely to exceed one year.
In addition, Congress reviews and determines appropriations for
Title IV programs on an annual basis through the budget and
appropriations process. A reduction in federal funding levels of
such programs could reduce the ability of certain learners to
finance their education. These changes, in turn, could lead to
lower
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enrollments at Capella University or require Capella University
to increase its reliance upon alternative sources of learner
financial aid. Given the significant percentage of Capella
Universitys revenues that are derived indirectly from
Title IV programs, the loss of or a significant reduction
in Title IV program funds available to Capella
Universitys learners could reduce its enrollment and
revenue and possibly have a material adverse effect on our
business. In addition, the regulations applicable to Capella
University have been subject to frequent revisions, many of
which have increased the level of scrutiny to which for-profit
post-secondary educational institutions are subjected and have
raised applicable standards. If Capella University were not to
continue to comply with such regulations, such non-compliance
might impair its ability to participate in Title IV
programs, offer programs or continue to operate. Certain of the
regulations applicable to Capella University are described below.
Distance Learning and Repeal of the 50% Rules.
Capella University offers all of its
existing degree programs via Internet-based telecommunications
from Capellas headquarters in Minneapolis, Minnesota.
Prior to passage of the Higher Education Reconciliation Act as
part of the Deficit Reduction Act in 2006, the Higher Education
Act generally excluded from Title IV programs institutions
at which (1) more than 50% of the institutions
courses were offered via distance delivery methods, which
includes online courses, or (2) 50% or more of the
institutions students were enrolled in courses delivered
via correspondence methods, including online courses. Because
100% of Capella Universitys courses are online courses and
100% of its learners are enrolled in online courses, the 50%
Rules would have, absent the Distance Education Demonstration
Program described below, precluded Capella University and its
learners from participating in Title IV programs.
As part of the 1998 amendments to the Higher Education Act, the
Department of Education was authorized to waive specific
statutory and regulatory requirements in order to assess the
viability of online educational offerings. Under the Distance
Education Demonstration Program, or Demonstration Program,
institutions were allowed to seek waivers of certain regulatory
provisions that inhibited the offering of distance education
programs, including the 50% Rules. Participation in the
Demonstration Program included regular submissions of data to
the Department of Education. Capella University was selected for
participation in the Demonstration Program in 1999, which
allowed Capella University to participate in the Title IV
programs.
The 50% Rules were repealed for telecommunications courses
(which include online courses) as part of the Higher Education
Reconciliation Act, but remain in place for correspondence
courses. The Department of Education subsequently promulgated
regulations to implement the Higher Education Reconciliation
Acts provisions, including repeal of the 50% Rules. Those
regulations became effective December 1, 2006. Accordingly,
online institutions such as Capella University, which offer
their courses exclusively through telecommunications, are no
longer subject to the 50% Rules. Following passage of the Higher
Education Reconciliation Act, the Department of Education also
terminated the Demonstration Program effective as of
June 30, 2006. Because Capella University is no longer
subject to the 50% Rules, it is likewise no longer dependent on
the Demonstration Program to participate in the Title IV
Programs.
At least six lawsuits were filed challenging the
constitutionality of the Deficit Reduction Act in general, on
grounds that there exist discrepancies between non-education
related provisions of the legislation passed in the House and
Senate. In the event that the Deficit Reduction Act is
invalidated, the 50% Rules could be reinstated, and Capella
University and its learners would not be in a position to
participate in Title IV programs until the 50% Rules were
repealed via alternative legislative action, or until Congress
reinstated the Demonstration Program or otherwise acted to
permit the participation of impacted Title IV participating
institutions.
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
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as a condition of its participation. To meet the administrative
capability standards, an institution must, among other things:
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comply with all applicable Title IV program regulations;
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have capable and sufficient personnel to administer the federal
student financial aid programs;
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have acceptable methods of defining and measuring the
satisfactory academic progress of its students;
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not have cohort default debt rates above specified levels;
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have various procedures in place for safeguarding federal funds;
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not be, and not have any principal or affiliate who is, debarred
or suspended from federal contracting or engaging in activity
that is cause for debarment or suspension;
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provide financial aid counseling to its students;
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refer to the Department of Educations Office of Inspector
General any credible information indicating that any applicant,
student, employee or agent of the institution, has been engaged
in any fraud or other illegal conduct involving Title IV
programs;
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submit in a timely manner all reports and financial statements
required by the regulations; and
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not otherwise appear to lack administrative capability.
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If an institution fails to satisfy any of these criteria or any
other Department of Education regulation, the Department of
Education may:
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require the repayment of Title IV funds;
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transfer the institution from the advance system of
payment of Title IV funds to cash monitoring status or to
the reimbursement system of payment;
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place the institution on provisional certification
status; or
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commence a proceeding to impose a fine or to limit, suspend or
terminate the participation of the institution in Title IV
programs.
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If we are found not to have satisfied the Department of
Educations 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 in order 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 institutions audited financial statements. The
standards focus on three financial ratios: (1) equity ratio
(which measures the institutions capital resources,
financial viability and ability to borrow); (2) primary
reserve ratio (which measures the institutions ability to
support current operations from expendable resources); and
(3) net income ratio (which measures the institutions
ability to operate at a profit or within its means). An
institutions 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
audited financial statements as of and for the years ended
December 31,
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2006 and 2005, 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 Educations
financial responsibility standards. If the Department of
Education were to determine that we did not meet the financial
responsibility standards due to a failure to meet the composite
score or other factors, we could establish financial
responsibility on an alternative basis by, among other things:
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posting a letter of credit in an amount equal to at least 50% of
the total Title IV program funds received by the
institution during the institutions most recently
completed fiscal year;
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posting a letter of credit in an amount equal to at least 10% of
such prior years Title IV program funds received by
us, accepting provisional certification, complying with
additional Department of Education monitoring requirements and
agreeing to receive Title IV program funds under an
arrangement other than the Department of Educations
standard advance funding arrangement; or
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complying with additional Department of Education monitoring
requirements and agreeing to receive Title IV program funds
under an arrangement other than the Department of
Educations standard advance funding arrangement such as
the reimbursement system of payment or cash
monitoring.
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Failure to meet the Department of Educations
financial responsibility requirements, either
because we do not meet the Department of Educations
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.
Title IV Return of Funds. Under
the Department of Educations return of funds regulations,
an institution must first determine the amount of Title IV
program funds that a student earned. If the student
withdraws during the first 60% of any period of enrollment or
payment period, the amount of Title IV program funds that
the student earned is equal to a pro rata portion of the funds
for which the student would otherwise be eligible. If the
student withdraws after the 60% threshold, then the student 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 student 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 institutions determination that a
student withdrew. (Prior to September 8, 2006, an
institution was required to return unearned funds within
30 days of the date the school made the withdrawal
determination.) If such payments are not timely made, 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
students sampled in the institutions annual compliance
audit constitutes material non-compliance.
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 this rule, an institution loses its
eligibility to participate in the Title IV programs, if, on
a cash accounting basis, it derives more than 90% of its
revenues for any fiscal year from Title IV program funds.
Any institution that violates the rule becomes ineligible to
participate in the Title IV programs as of the first day of
the fiscal year following the fiscal year in which it exceeds
90%, and it is unable to apply to regain its eligibility until
the next fiscal year. For the year ended December 31, 2006,
we derived approximately 71% of our 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 students exceed certain levels. For each
federal fiscal 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 fiscal year by determining the rate at which
borrowers who become subject to their repayment obligation in
that federal fiscal year default by the end of the following
federal
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fiscal year. For such institutions, the Department of Education
calculates a single cohort default rate for each federal fiscal
year that includes in the cohort all current or former student
borrowers at the institution who entered repayment on any FFEL
program loan during that year.
If the Department of Education notifies an institution that its
cohort default rates for each of the three most recent federal
fiscal years are 25% or greater, the institutions
participation in the FFEL program and Pell program ends
30 days after the notification, unless the institution
appeals in a timely manner that determination on specified
grounds and according to specified procedures. In addition, an
institutions participation in the FFEL program ends
30 days after notification that its most recent cohort
default rate is greater than 40%, unless the institution timely
appeals that determination on specified grounds and according to
specified procedures. An institution whose participation ends
under these provisions may not participate in the relevant
programs for the remainder of the fiscal year in which the
institution receives the notification, as well as for the next
two fiscal years.
If an institutions cohort default rate equals or exceeds
25% in any single year, the institution may be placed on
provisional certification status. Provisional certification does
not limit an institutions access to Title IV program
funds; however, an institution with provisional status is
subject to closer review by the Department of Education and may
be subject to summary adverse action if it violates
Title IV program requirements. Capella Universitys
cohort default rates on FFEL program loans for the 2004, 2003
and 2002 federal fiscal years, the three most recent years for
which information is available, were 2.2%, 1.8%, and 2.8%
respectively. The average cohort default rates for four-year
proprietary institutions nationally were 7.3%, 6.4%, and 7.3% in
fiscal years 2004, 2003 and 2002, respectively. If our default
rate exceeds 40%, we may lose our eligibility to participate in
some or all Title IV programs.
Incentive Compensation Rules. As a part
of an institutions 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 student recruitment, admissions or financial aid awarding
activity based directly or indirectly on success in securing
enrollments or financial aid. Certain Department of Education
regulations clarify the incentive payment rule. The regulations
set forth 12 safe harbors, which describe payments
or arrangements that do not violate the incentive payment rule.
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. Although there
can be no assurance that the Department of Education would not
find deficiencies in Capella Universitys present or former
employee compensation and third-party contractual arrangements,
we believe that our employee compensation and third-party
contractual arrangements comply with the incentive compensation
provisions of the Higher Education Act and Department of
Education regulations thereunder.
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, agencies that guarantee FFEL loans,
the Department of Veterans Affairs and accrediting agencies. As
part of the Department of Educations 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
Educations 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. The OIG has
informed us that it is conducting a compliance audit of Capella
University. The audit commenced on April 10, 2006 and since
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then we have been periodically providing the OIG with
information, responding to
follow-up
inquires and facilitating site visits and access to our records.
The audit has focused on Capella Universitys
administration of Title IV funding programs for the
Title IV award years of
2002-2003,
2003-2004
and
2004-2005
(with each award year commencing on July 1st). Although the
2005-2006
Title IV award year is not specifically under audit, our
discussions with OIG personnel have also covered activities
during the
2005-2006
award year, and we have included that award year within the
scope of our internal analysis of this matter.
Based on the field auditors preliminary audit exceptions,
which is a preliminary list of issues regarding Capella
Universitys compliance with Title IV rules and
requirements, and our verbal communications with the OIG audit
staff, we believe that the most significant potential financial
exposure from the audit pertains to repayments to the Department
of Education that could be required if the OIG concludes that we
did not properly calculate the amount of Title IV funds
required to be returned for learners who withdrew from Capella
University without providing an official notification of such
withdrawal and without engaging in any academic activity prior
to such withdrawal. Based on its review to date, the OIG audit
staff has identified several such learners for whom it believes
proper returns of Title IV funds were not made. If it is
determined that we improperly withheld any portion of these
funds, we would be required to return the improperly withheld
funds. As part of our internal process of continuously
evaluating and attempting to improve our policies and
procedures, prior to the initiation of the OIG audit we had
already begun modifying our policies and procedures for
determining whether a learner is engaged in any academic
activity. We developed these policies and procedures during
Spring 2006 and fully implemented them for the financial aid
year
2006-2007.
For the three-year audit period, and for the
2005-2006
award year, we estimate that the total amount of Title IV
funds not returned for learners who withdrew without providing
official notification was less than $1.0 million, including
interest, but not including fines and penalties.
The OIG field audit staff is also reviewing certain of our
procedures for determining whether learners are enrolled in an
eligible educational program prior to our disbursing
Title IV funds to these learners. Such enrollment is a
prerequisite to a learners receipt of Title IV
funding. To date, specific inquiries by the OIG audit staff have
focused on our practice of noting learners anticipated
Title IV funding on their accounts prior to final
confirmation of such enrollment, and whether we timely returned
Title IV funds that could not be disbursed within required
time frames to an eligible learner. While Capella University
believes that its practices did not result in a disbursement of
Title IV funds to ineligible learners, and that the
non-disbursed Title IV funds were properly and timely
returned, the OIG is still reviewing the matter.
During the course of the audit process, the OIG field audit
staff have also questioned certain other matters that we
presently believe, based on communications with the OIG audit
staff, to be of lesser significance. Those additional matters
include apparent discrepancies between our policy regarding
satisfactory academic progress as set forth in the Capella
University catalog and as set forth in other communications to
our learners; whether we properly performed and documented
student loan exit counseling for certain learners in the audit
sample; and whether we properly reviewed the financial aid
histories of certain learners in the audit sample.
The OIG informed us that it completed its field work in January
2007, and based on our conversations with the OIG, we believe it
will issue a draft audit report for our response and comment
shortly. We expect that the OIG will not issue a final report
for several months thereafter. Consistent with the OIGs
normal practices, the final audit report will be made public at
the time it is released to both us and to the Department of
Educations Office of Federal Student Aid
(FSA). FSA is responsible for primary oversight of
the Title IV funding programs. At this time, we expect that
the OIG will ultimately identify findings of noncompliance in
its final audit report, and that it will likely recommend
remedial actions to FSA, including that we refund certain
federal student aid funds, modify our Title IV
administration procedures and possibly pay fines or penalties.
The possible effects of a finding of a regulatory violation are
described below in Potential Effect of
Regulatory Violations.
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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. In addition, the
agencies that guarantee FFEL loans for Capella University
learners could initiate proceedings to limit, suspend or
terminate Capella Universitys eligibility to provide
guaranteed student loans in the event of certain regulatory
violations. If such sanctions or proceedings were imposed
against us and resulted in a substantial curtailment, or
termination, of Capella Universitys participation in
Title IV programs, our enrollments, revenues and results of
operations would be materially and adversely affected.
If Capella University lost its eligibility to participate in
Title IV programs, or if the amount of available federal
student financial aid were reduced, we would seek to arrange or
provide alternative sources of revenue or financial aid for
learners. Although we believe that one or more private
organizations would be willing to provide financial assistance
to learners attending Capella University, there is no assurance
that this would be the case, and the interest rate and other
terms of such financial aid might not be as favorable as those
for Title IV program funds. We may be required to guarantee
all or part of such alternative assistance or might incur other
additional costs in connection with securing alternative sources
of financial aid. Accordingly, the loss of eligibility of
Capella University to participate in Title IV programs, or
a reduction in the amount of available federal student financial
aid, would be expected to have a material adverse effect on our
results of operations even if we could arrange or provide
alternative sources of revenue or student financial aid.
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. 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 us and our programs, require
institutions to notify them in advance of implementing new
programs, and upon notification may undertake a review of the
institutions 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
Educations approval of additional programs that lead to an
associate, bachelors, professional or graduate degree at
the same degree level(s) previously approved by the Department
of Education. Similarly, an institution is not required to
obtain advance approval for new programs that both prepare
learners for gainful employment 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.
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
Educations express approval for the addition of a new
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.
78
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 Educations 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. The Department of Education
may place an institution on provisional certification status if
it finds that the institution does not fully satisfy all of the
eligibility and certification standards. The Department of
Education may withdraw an institutions provisional
certification without advance notice if the Department of
Education determines that the institution is not fulfilling all
material requirements. In addition, the Department of Education
may more closely review an institution that is provisionally
certified if it applies for approval to open a new location, add
an educational program, acquire another school or make any other
significant change.
During the period of provisional certification, the institution
must comply with any additional conditions included in its
program participation agreement. If the Department of Education
determines that a provisionally certified institution is unable
to meet its responsibilities under its program participation
agreement, it may seek to revoke the institutions
certification to participate in Title IV programs with
fewer due process protections for the institution than if it
were fully certified. Students attending provisionally certified
institutions remain eligible to receive Title IV program
funds.
School Acquisitions. When a company,
partnership or any other entity or individual acquires a school
that is eligible to participate in Title IV programs, that
school undergoes a change of ownership resulting in a change of
control as defined by the Department of Education. Upon such a
change of control, a schools eligibility to participate in
Title IV programs is generally suspended until it has
applied for recertification by the Department of Education as an
eligible school under its new ownership, which requires that the
school 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 institutions
application. The time required for the Department of Education
to act on such an application may vary substantially. The
Department of Educations recertification of an institution
following a change of control will be on a provisional basis.
Change in Ownership Resulting in a Change of
Control. In addition to school acquisitions,
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 schools, 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 institutions 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 in order 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 for-profit 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
79
immediately following the change in ownership. The
institutions
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 institutions agreeing to letters of
credit, provisional certification,
and/or
additional monitoring requirements, as described in the above
section on 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.
80
MANAGEMENT
Set forth below is certain information concerning our executive
officers and directors:
|
|
|
|
|
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Name
|
|
Age
|
|
Position
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Stephen G. Shank
|
|
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63
|
|
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Chairman and Chief Executive
Officer (Mr. Shank also serves as Chancellor and as a director
of Capella University)
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Kenneth J. Sobaski
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|
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51
|
|
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President and Chief Operating
Officer (Mr. Sobaski also serves as a director of Capella
University)
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Michael J. Offerman
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59
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Senior Vice President (Dr.
Offerman also serves as President of Capella University)
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Lois M. Martin
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44
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Senior Vice President and Chief
Financial Officer
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Paul A. Schroeder
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|
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47
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|
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Senior Vice President, Operations
and Business Transformation
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Reed A. Watson
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|
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48
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Senior Vice President, Marketing
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Scott M. Henkel
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|
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52
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|
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Vice President and Chief
Information Officer
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Gregory W. Thom
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50
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Vice President, General Counsel,
and Secretary
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Elizabeth M. Rausch
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55
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|
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Vice President, Human Resources
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Gordon A. Holmes
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|
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38
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|
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Director
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S. Joshua Lewis
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|
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44
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|
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Director
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Jody G. Miller
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|
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49
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|
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Director
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James A. Mitchell
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|
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65
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|
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Director
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Jon Q. Reynolds, Jr.
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|
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39
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|
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Director
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David W. Smith
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62
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Director
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Jeffrey W. Taylor
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|
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53
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|
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Director
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Sandra E. Taylor
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|
|
56
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|
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Director
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Darrell R. Tukua
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|
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53
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|
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Director
|
Stephen G. Shank founded our company in 1991 and has been
serving as our Chairman and Chief Executive Officer since that
time. Mr. Shank also has been serving as Chancellor of
Capella University since 2001, and as emeritus director of
Capella University from 2003 to 2006. Mr. Shank is
currently a voting director of Capella University.
Mr. Shank served as a member of the board of directors of
Capella University from 1993 through 2003. From 1979 to 1991,
Mr. Shank was Chairman and Chief Executive Officer of Tonka
Corporation, an NYSE-listed manufacturer of toys and games.
Mr. Shank is a member of the board of directors of Tennant
Company, an NYSE-listed manufacturer of cleaning solutions.
Mr. Shank earned a B.A. from the University of Iowa, an
M.A. from the Fletcher School, a joint program of Tufts and
Harvard Universities, and a J.D. from Harvard Law School.
Kenneth J. Sobaski joined our company in February 2006
and has been serving as our President and Chief Operating
Officer since that time. Mr. Sobaski was elected a member
of the Capella University Board of Directors on
February 23, 2007. From April 2002 to April 2005,
Mr. Sobaski served as an officer and Vice President, Sales,
Marketing and Business Development of Polaris Industries Inc., a
publicly held manufacturer of power sports products, and from
September 2001 to April 2002, he served as an officer and Vice
President, Marketing and Business Development of Polaris
Industries. From 1999 to 2001, he served as the President of
ConAgra Grocery Brands of ConAgra Foods, Inc.
Mr. Sobaskis prior experience also includes executive
marketing, general management and sales positions for a number
of consumer product marketing companies, including The Pillsbury
Company, The Drackett Company (a division of Bristol-Myers
Squibb), Kraft Foods, Inc. and General Mills, Inc.
Mr. Sobaski earned his B.A. from St. Olaf College, and an
M.B.A. from Northwestern Universitys Kellogg School of
Management.
81
Dr. Michael J. Offerman joined our company in 2001
and has been serving as our Senior Vice President since that
time. Dr. Offerman also has served as President of Capella
University since 2001. In March 2007, we announced a new
university leadership structure and a national search for a new
university president. Dr. Offerman will continue to serve
as President of Capella University until the national search for
a new university president is successfully completed. At that
time Dr. Offerman will assume the position of Vice
Chairman External University Initiatives of Capella
Education Company. In his new role Dr. Offerman will
continue and expand upon his recent national work with other
institutions on such matters as accountability, learning
outcomes transparency, and potential relationships.
Dr. Offerman was also a director of Capella University from
2001 to 2006. From 1994 to 2001, Dr. Offerman served as
Dean of the Division of Continuing Education at the University
of Wisconsin-Extension, the University of Wisconsins
institution dedicated to the development and delivery of
continuing education and online programs. Dr. Offerman also
has served on a number of national boards, including the
American Council on Education, the University Continuing
Education Association, and the National Technology Advisory
Board. Dr. Offerman earned a B.A. from the University of
Iowa, an M.S. from the University of Wisconsin-Milwaukee and an
Ed.D. from Northern Illinois University.
Lois M. Martin joined our company in 2004 and has been
serving as our Senior Vice President and Chief Financial Officer
since that time. From 2002 to 2004, Ms. Martin served as
Executive Vice President and Chief Financial Officer at World
Data Products, and from 1993 to 2001, Ms. Martin served in
a number of executive positions, including Senior Vice President
and Chief Financial Officer, at Deluxe Corporation.
Ms. Martin is a member of the board of directors of ADC,
Inc., a publicly held global supplier of network infrastructure,
and MTS Systems Corporation, a publicly held, global
manufacturer of mechanical testing solutions. She was also a
member of the board of directors of eFunds Corporation, an
NYSE-listed company offering integrated information, payment and
technology solutions, in 2000. From 1996 to 2001,
Ms. Martin also served as Secretary/Treasurer for the
Deluxe Corporation Foundation and the W.R. Hotchkiss
Foundation, a provider of education and other grant funding to
non-profit organizations. Ms. Martin began her career at
Coopers and Lybrand (now PricewaterhouseCoopers LLP), where she
earned her C.P.A. designation. Ms. Martin earned a B.A.
from Augustana College.
Paul A. Schroeder became our Senior Vice President,
Operations and Business Transformation in March 2007. In his new
role, Mr. Schroeder is responsible for aligning and
integrating the
end-to-end
operations of Capella in order to deliver the superior
experience Capella University wants for its learners.
Mr. Schroeder had been serving as a Senior Vice President
of Capella University from April 2006 to February 2007,
primarily responsible for the
day-to-day
operations of Capella University. In addition, he has been
serving as a Senior Vice President of Capella Education Company
since 2004. Mr. Schroeder also served as director of
Capella University from 2003 to 2006. From 2004 to March 2006,
Mr. Schroeder served as our Senior Vice President, Business
Management, from 2003 to 2004, Mr. Schroeder served as our
Senior Vice President, Business and Technology and from 2001 to
2003, Mr. Schroeder served as our Senior Vice President and
Chief Financial Officer. From 1997 to 2001, Mr. Schroeder
held various executive management positions, including Senior
Vice President, General Manager and Chief Financial Officer,
with Datacard Group, a privately held company providing hardware
and software solutions to the financial card and government ID
markets. From 1984 to 1997, Mr. Schroeder held a variety of
financial management positions at NCR Corporation, an
NYSE-listed technology systems and services company.
Mr. Schroeder earned a B.A. from Haverford College and an
M.B.A. from Northwestern Universitys Kellogg School of
Management. He also completed additional graduate work at the
University of Illinois.
Reed A. Watson joined our company in June 2006 and has
been serving as our Senior Vice President, Marketing since that
time. Prior to joining us, he served as Vice President, Consumer
Strategy & Insights for Select Comfort Corporation, a
Nasdaq-listed mattress and bedding company, from 2005 to 2006,
as President of Watson Management Consulting, a privately held
management consulting firm, from 2002 to 2005 and as Executive
Vice President Chief Marketing Officer of
SimonDelivers.com, a privately held online grocery company, from
1999 to 2001. Mr. Watsons prior experience also
includes serving in various executive positions in marketing and
general management for companies including Recovery Engineering
82
Inc., Pillsbury Company and Kraft Foods, Inc. He earned his B.A.
degree from Northwestern University and his M.B.A. from
Northwestern Universitys Kellogg School of Management.
Scott M. Henkel joined our company in 2004 and has been
serving as our Vice President and Chief Information Officer
since that time. From 1994 to 2003, Mr. Henkel served as
Chief Information Officer and Vice President of Software
Engineering at Datacard Group. Mr. Henkel earned a B.A.
from Metropolitan State University and an M.B.A. in finance from
the College of St. Thomas.
Gregory W. Thom joined our company in 2003 and has been
serving as Vice President, General Counsel, and Secretary since
that time. From 2002 to 2003, Mr. Thom served as Vice
President, Global Sales and Distribution at Datacard Group. From
2000 to 2002, Mr. Thom served as Vice President, Government
Solutions at Datacard Group. From 1994 to 2000, Mr. Thom
served as Vice President, General Counsel and Secretary at
Datacard Group. From 1991 to 1994, Mr. Thom was an attorney
with Dorsey & Whitney LLP, a Minneapolis-based law
firm. Mr. Thom earned a B.A. from Bethel College, an M.B.A.
from the University of Connecticut and a J.D. from William
Mitchell College of Law.
Elizabeth M. Rausch joined our company in 1999 and has
been serving as our Vice President, Human Resources since 2000.
From 1999 to 2000, Ms. Rausch served as our Director, Human
Resources. From 1985 to 1999, Ms. Rausch served as Director
and Manager of Human Resources at Marigold Foods, Inc., a
regional food and dairy processing organization. Ms. Rausch
earned a B.A. from the University of Minnesota and a M.S. degree
from Mankato State University. Ms. Rausch has provided
notice of her intention to leave Capella Education Company on or
about May 31, 2007.
Gordon A. Holmes has served as a director of our company
since 2000. Since 2005, Mr. Holmes has been a Managing
Principal with Quadrangle Group LLC, an investment firm.
Mr. Holmes has been a General Partner of several limited
partnerships affiliated with Forstmann Little & Co., an
investment firm. From 1998 to 2001, Mr. Holmes was an
Associate at Forstmann Little & Co. Mr. Holmes
earned a B.C.L. degree from University College, Dublin and an
M.B.A. from the Stanford University Graduate School of Business.
S. Joshua Lewis has served as a director of our company
since 2000. Since 2001, Mr. Lewis has been Managing Member
and a Principal of Salmon River Capital LLC, a private
equity/venture capital firm he founded. He is also a Special
Partner of Insight Venture Partners, a private equity/venture
capital firm. During 2000, he was a General Partner of Forstmann
Little & Co., an investment firm. From 1997 to 1999,
Mr. Lewis was a Managing Director of Warburg Pincus, a
private equity/venture capital firm with which he was associated
for over a decade. Mr. Lewis serves on several corporate,
non-profit and advisory boards of directors. Mr. Lewis
earned an A.B. from Princeton University and a D.Phil. from
Oxford University.
Jody G. Miller has served as a director of our company
since 2003. Ms. Miller serves as CEO and President of the
Business Talent Group, a company matching independent business
executives with interim and project-based assignments, which she
founded in 2005. Ms. Miller is also a venture partner with
Maveron LLC, a Seattle-based venture capital firm, a position
which she has held since 2000. From 1995 to 1999,
Ms. Miller held various positions at Americast, a digital
video and interactive services partnership, including as Acting
President and Chief Operating Officer, Executive Vice President,
Senior Vice President for Operations and Consultant. From 1993
to 1995, Ms. Miller served in the White House as Special
Assistant to the President with the Clinton Administration.
Ms. Miller is a member of the board of directors of the
National Campaign to Prevent Teenage Pregnancy, a
not-for-profit
program devoted to reducing teen pregnancy, and since May 2005
has been serving as a member of the board of directors of TRW
Automotive Holdings Corp., an NYSE-listed global supplier of
automotive components. From 2000 to 2004, Ms. Miller also
served as member of the board of directors of Exide
Technologies, an NYSE listed battery manufacturing company.
Ms. Miller earned a B.A. from the University of Michigan
and a J.D. from the University of Virginia.
James A. Mitchell has served as a director of our company
since 1999. From 1993 to 1999, when he retired,
Mr. Mitchell served as Executive Vice President of
Marketing and Products of American Express
83
Company, a diversified global financial services company. From
1984 to 1993, he served as Chairman, President and CEO of IDS
Life, a life insurance company and a wholly owned subsidiary of
American Express. From 1982 to 1984, he served as President of
the reinsurance division at CIGNA Corp., an insurance company.
Mr. Mitchell is Executive
Fellow Leadership at the Center for Ethical
Business Cultures, a non-profit organization assisting business
leaders in creating ethical and profitable cultures, and serves
as a member of the board of directors of Great Plains Energy
Incorporated, an NYSE-listed diversified public utility holding
company. He earned a B.A. from Princeton University.
Jon Q. Reynolds, Jr. has served as a director of our
company since 2005. Since 1999, Mr. Reynolds has been a
General Partner at Technology Crossover Ventures, a private
equity and venture capital firm, which he joined in 1997.
Mr. Reynolds earned an A.B. degree from Dartmouth College
and an M.B.A. from Columbia Business School.
David W. Smith has served as a director of our company
since 1998 and is currently our lead director. From 2000 to
2003, when he retired, Mr. Smith was the Chief Executive
Officer of NCS Pearson, Inc. Mr. Smith is a member of the
boards of directors of Plato Learning, Inc. and Scientific
Learning Corporation, both of which are Nasdaq listed companies.
Mr. Smith earned a B.A. and an M.A. from Southern Illinois
University, as well as an M.B.A. from the University of Iowa.
Jeffrey W. Taylor has served as a director of our company
since 2002. Since 2003, Mr. Taylor has been the President
of Pearson, Inc., the U.S. holding company of Pearson plc.
From 2000 to 2003, Mr. Taylor served as Vice President of
Government Relations for Pearson, Inc. From 1994 to 2000, he
served as Vice President and Chief Financial Officer of National
Computer Systems, an education testing and software company.
Mr. Taylor earned a B.S. from Indiana State University.
Sandra E. Taylor has served as a director of our company
since 2006. Ms. Taylor serves as Senior Vice President,
Corporate Social Responsibility of Starbucks Corporation, where
she has been employed since 2003. Prior to joining Starbucks,
Ms. Taylor served as Vice President and Director of Public
Affairs for Eastman Kodak Company from 1996 until 2003. She has
also held senior leadership positions with a number of other
organizations, including ICI Americas Inc. and the European
American Chamber of Commerce in the United States. In addition,
Ms. Taylor sits on the board of several non-profit
organizations, including the Center for International Private
Enterprise, the Seattle Public Library Foundation, the Public
Affairs Council, the National Center for Asia-Pacific Economic
Cooperation, and the Womens Leadership Board of the
Kennedy School of Government at Harvard University.
Ms. Taylor received a B.A. from Colorado Womens
College, and a J.D. from Boston University School of Law.
Darrell R. Tukua has served as a director of our company
since 2004. From 1988 to 2003, when he retired, Mr. Tukua
was a Partner with KPMG LLP, a public accounting firm he joined
in 1976. Mr. Tukua is a member of the audit and budget
committee of The MMIC Group, an insurance company, where he also
served as a board observer from May 2004 to August 2005 and was
elected to serve on the board of directors in August 2005. In
addition, in 2004 Mr. Tukua was elected an advisory board
member of Gate City Bank, a retail and commercial bank, and in
2005 he became a member of the board of directors and audit and
compensation committees of Gate City Bank. Mr. Tukua earned
a B.S. from the University of South Dakota.
Board of
Directors
Our board of directors currently consists of 10 members, with
each director serving a one-year term. At each annual meeting,
our shareholders elect our full board of directors. Directors
may be removed at any time with or without cause by the
affirmative vote of the holders of a majority of the voting
power then entitled to vote.
84
Director
Independence
Our board of directors reviews at least annually the
independence of each director. During these reviews, our board
of directors considers transactions and relationships between
each director (and his or her immediate family and affiliates)
and our company and its management to determine whether any such
transactions or relationships are inconsistent with a
determination that the director was independent. In August 2006,
our board of directors conducted its annual review of director
independence and determined that no transactions or
relationships existed that would disqualify any of the
individuals who then served as a director under the rules of The
Nasdaq Global Market, or require disclosure under Securities and
Exchange Commission rules, with the exception of Mr. Shank,
who is also our Chairman and Chief Executive Officer. Based on
the information provided by the directors and other information
we reviewed, our board of directors concluded that none of our
non-employee directors have or had any relationship with our
company other than as a director or shareholder of our company.
Based upon that finding, our board of directors determined that
Messrs. Holmes, Lewis, Mitchell, Reynolds, Smith, Taylor
and Tukua, and Ms. Miller and Ms. Taylor, are
independent. In addition, our board of directors
determined that Tony J. Christianson, who served as
our director until his resignation following our initial public
offering in November 2006, was independent.
Board
Representation Agreement
We entered into a third amended and restated co-sale and board
representation agreement on January 22, 2003, with certain
of our shareholders, which we refer to as the board
representation agreement in this prospectus. Under the board
representation agreement and giving effect to any rights that
have been transferred under the agreement, Forstmann VI
currently has the right to designate one person for election to
our board. Forstmann VI has designated Mr. Holmes for
election to our board.
We and the shareholder parties have agreed to take all steps
necessary to cause the nomination and election to our board of
each person designated in accordance with the board
representation agreement. The right to designate a director may
be transferred by Forstmann VI to a transferee so long as the
Forstmann VI transfers at least 50% of the capital stock held by
it as of January 22, 2003, to the transferee and the
transferee assumes Forstmann VIs obligations under the
agreement in writing.
After the Offering. The director designation
right of Forstmann VI will terminate upon the completion of this
offering, when the Forstmann Little entities are no longer
shareholders of our company.
Board
Observation Rights; Inspection Rights
Class F Preferred Stock Purchase
Agreement. We entered into a Class F
preferred stock purchase agreement on January 31, 2002, as
amended by an exchange agreement on January 22, 2003. Under
the agreement, Forstmann VII and Forstmann VIII have the right
to consult and advise management on our significant business
issues, including, among other things, managements
proposed annual operating plans. Our management has no
obligation to follow the advice of Forstmann VII and Forstmann
VIII and we will not compensate either Forstmann VII or
Forstmann VIII for their advice under the agreement.
After the Offering. The rights of Forstmann
VII and Forstmann VIII under this agreement will terminate upon
the completion of this offering, when the Forstmann Little
entities are no longer shareholders of our company.
Class E Preferred Stock Purchase
Agreement. We entered into a Class E
preferred stock purchase agreement on April 20, 2000.
Pursuant to the agreement, so long as Forstmann VI holds any
shares of Class E preferred stock, or shares of common
stock acquired upon conversion of the Class E preferred
stock, it will be entitled to designate one representative to
observe our board and board committee meetings and to advise our
management on significant business issues. The observation right
will not apply if Forstmann VI already has a board
representation right pursuant to a separate agreement.
Currently, the
85
board observation right of Forstmann VI does not apply because
it has a board representation right under the board
representation agreement.
After the Offering. The rights of Forstmann VI
under this agreement will terminate upon the completion of this
offering, when the Forstmann Little entities are no longer
shareholders of our company.
Investor Rights Agreement. We entered
into an investor rights agreement on April 20, 2000, as
amended and restated on each of February 21, 2002 and
January 22, 2003, with Forstmann VI, Maveron Equity
Partners 2000, LP, TH Lee, Putnam Investment Trust, TCV V,
L.P. and certain other investor parties. Pursuant to the
agreement, so long as an investor party holds 337,230 or more
shares of Class G preferred stock, or shares of common
stock acquired upon conversion of the Class G preferred
stock (or, in the case of Forstmann VI, so long as it owns 5% or
more of our outstanding capital stock), it will have the right
to visit and inspect any of our properties, to inspect our books
and records and to discuss our affairs, finances, and accounts
with our officers, lawyers, and accountants, except with respect
to trade secrets and similar confidential information, all to
such reasonable extent and at such reasonable times as such
investor may reasonably request. The investor party requesting
such inspection will bear the expenses associated with such
inspection. Each of the investor parties named above currently
has the right to visit and inspect any of our properties.
After the Offering. The investor parties to
the investor rights agreement will retain their inspection
rights after the completion of this offering, except that
Forstmann VI and TH Lee, Putnam Investment Trust will
no longer have such rights as a result of their sales of shares
in this offering.
Committees
of Our Board of Directors
Our board of directors directs the management of our business
and affairs, as provided by Minnesota law, and conducts its
business through meetings of the board of directors and four
standing committees: the audit committee; the compensation
committee; the governance committee; and the executive
committee. In addition, from time to time, special committees
may be established under the direction of the board of directors
when necessary to address specific issues. Our board of
directors has adopted a written charter for each of the audit
committee, the compensation committee, the governance committee
and the executive committee. These charters are available on the
Corporate Governance section of the Investor Relations page of
our website (www.capellaeducation.com).
Audit Committee. Our audit committee consists
of Messrs. Tukua (chair), Holmes, Lewis and Taylor. Our
audit committee is directly responsible for, among other things,
the appointment, compensation, retention and oversight of our
independent registered public accounting firm. The oversight
includes reviewing the plans and results of the audit engagement
with the firm, approving any additional professional services
provided by the firm and reviewing the independence of the firm.
Commencing with our first report on internal controls over
financial reporting, the committee will be responsible for
discussing the effectiveness of the internal controls over
financial reporting with the firm and relevant financial
management. Our board of directors has determined that each
member of our audit committee is independent, as
defined under and required by the rules of The Nasdaq Stock
Market, Inc. and the federal securities laws. The board of
directors has determined that each of Messrs. Tukua and
Taylor qualifies as an audit committee financial
expert, as defined under the rules of the federal
securities laws.
Compensation Committee. Our compensation
committee consists of Messrs. Mitchell (chair), Holmes,
Lewis, Reynolds and Smith. Our compensation committee is
responsible for, among other things, recommending the
compensation level of our Chief Executive Officer to the
executive committee, determining the compensation levels and
compensation types (including base salary, stock options,
perquisites and severance) of the other members of our senior
executive team and administering our stock option plans and
other compensation programs. The compensation committee also
recommends compensation levels for board members and approves
new hire offer packages for our senior executive management.
86
Governance Committee. Our governance committee
consists of Ms. Miller (chair), Messrs. Reynolds,
Smith and Taylor, and Ms. Taylor. Our governance committee
is responsible for, among other things, assisting the board of
directors in selecting new directors and committee members,
evaluating the overall effectiveness of the board of directors,
and reviewing developments in corporate governance compliance.
Executive Committee. Our executive committee
consists of all non-management members of our board of
directors, or all of our directors except Mr. Shank, and is
chaired by Mr. Smith, who is our lead director. Our
executive committee is responsible for, among other things,
evaluating and determining the compensation of our Chief
Executive Officer, setting the agenda for meetings of our board
of directors, establishing procedures for our shareholders to
communicate with our board of directors and reviewing and
approving our management succession plan.
Compensation
Committee Interlocks and Insider Participation
During 2006, Messrs. Holmes, Lewis, Mitchell and Smith
served as the members of our compensation committee. No
executive officer serves, or in the past has served, as a member
of the board of directors or compensation committee of any
entity that has any of its executive officers serving as a
member of our board of directors or compensation committee.
87
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Overview
The compensation committee of the board of directors (the
Committee, for purposes of this Compensation
Discussion and Analysis) has responsibility for establishing and
overseeing our compensation program as it applies to our
executive officers. The Committee is responsible for ensuring
that our compensation program positions us to compete
successfully for skilled executive talent in our dynamic
business environment.
In this Compensation Discussion and Analysis, the individuals in
the Summary Compensation Table set forth after this Compensation
Discussion and Analysis are referred to as the named
executive officers. Generally, the types of compensation
and benefits provided to the named executive officers are
similar to those provided to our other executive officers.
Our compensation design is influenced by the incentive
compensation rules promulgated by the U.S. Department of
Education. Under these rules, we may not provide any commission,
bonus or other incentive payment to any person or entity engaged
in any student recruitment, admissions or financial aid awarding
activity, based directly or indirectly on success in securing
enrollments or awarding financial aid.
Our
Philosophy
We have established our executive compensation programs to
attract, motivate and retain top quality executives and managers
who are able to help us achieve superior short- and long-term
performance objectives.
Our compensation philosophy is based on the following principles:
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Compensation programs should be designed to foster an
innovative, high integrity and performance-oriented culture
appropriate for our business strategies, values and competitive
environment.
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Compensation programs should include elements that are directly
tied to creation of long-term shareholder value.
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Executive compensation should reflect a split between base
salary and variable compensation opportunity, which includes
short-term and long-term incentive compensation. The amount of
short-term incentive opportunity, which is based on annual
performance targets, is balanced with a long-term incentive
opportunity. The long-term opportunity is based on the
appreciation potential of our stock option awards. We believe
this balance will support strong short-term financial
performance and increasing shareholder value over the long-term,
measured by appreciation in our stock price.
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General compensation arrangements, including base salary,
short-term and long-term incentive opportunity, and perquisites
and other compensation, should be consistent with relevant
industry norms.
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Compensation
Determination
We benchmark our executive compensation against the for-profit
education sector, along with the services industry, and the
general market for all of industry. We recognize that a blended
approach is necessary due to the fact that it is not possible to
compare all our executive positions to comparables from one
industry segment. For example, our University President position
requires that we employ a highly experienced, highly educated
executive with a strong academic leadership background.
Therefore we are able to benchmark against the for-profit sector
for that position. Other positions do not require the same
industry-specific background, and we are therefore better served
by benchmarking against broader
88
information sources. Our past approach has been to use input
from consulting firms to supplement information obtained and
developed by members of our human resources staff.
For purposes of comparison to companies in the for-profit
education sector in 2006, we reviewed the compensation practices
of Apollo, Blackboard, Career Education Company, Corinthian
Colleges, DeVry, eCollege, Education Management, EVCI, ITT
Educational Services, Laureate, Lincoln Education Services,
Strayer and Universal Technical Institute. The list of
comparable companies in the for-profit education sector may
change over time. For purposes of comparison to companies in the
services industry and general industry, we utilize
well-established executive compensation survey sources that
include a representative sample of organizations with
approximately $300 million in annual revenue.
In 2006, with assistance from the consulting firm Towers Perrin,
the Committee benchmarked our compensation against surveys that
included a specific set of companies in the for-profit education
sector, service companies and companies in general industry. The
Committees benchmarking of executive compensation included
the following elements: base salary; total cash compensation,
which is comprised of base salary and short-term incentive
compensation; and total direct compensation, which is comprised
of total cash compensation plus the value of long-term incentive
compensation. This information was used by the Committee to set
compensation levels for 2007.
In establishing specific executive compensation plans, levels
and amounts, several of our senior executives play a role. Our
Chairman and Chief Executive Officer recommends to the Committee
compensation levels for all other executive officers. The Vice
President of Human Resources, under the direction of the
Committee and the Chairman and Chief Executive Officer, gathers
information and makes recommendations to the Committee on
executive compensation generally, including recommendations as
to specific plans and programs. Our Senior Vice President and
Chief Financial Officer provides information and recommendations
to the Committee on important accounting, tax and financial
matters. In the future, we intend to utilize the services of a
compensation consulting firm as the primary source for gathering
executive compensation information and making recommendations to
the Committee.
Compensation consultants working on our executive compensation
matters are selected and engaged by the Committee, based on
input from senior management. Consultants providing input,
information and recommendations on executive compensation
matters report directly to the Committee.
In 2006, in addition to the engagement mentioned above, Towers
Perrin was retained by the Committee to consult in our hiring of
a President and Chief Operating Officer.
Compensation
Elements
From time to time, we have entered into certain employment
agreements addressing specific compensation arrangements when
hiring senior executives. These are individually developed based
on relevant considerations at the time of hiring. We have
selectively offered signing bonuses
and/or
guaranteed incentive compensation for the first year of
employment. Employment agreement terms have also included
severance and change in control provisions. In those instances
when we entered into employment agreements with senior
executives, the Committees judgment was that such
agreements were appropriate and necessary.
Our current executive compensation mix includes the following
elements: base salary; short-term incentive opportunity,
generally in the form of annual cash bonuses; long-term
incentive opportunity in the form of stock options; and
perquisites and other benefits. In contrasting between the
various compensation elements, the short-term incentive
opportunity is focused on annual results, and the long-term
incentive opportunity is focused on periods beyond one year.
89
Base
Salary
Base salary reflects the experience, knowledge, skills and
performance record the executive brings to the position, and is
influenced by market factors.
The Committee reviews executive salaries annually based on
market survey data. In 2006, the Committee reviewed the salaries
of our four highest paid senior executives and the General
Counsel, and in 2007, the Committee reviewed the salaries of all
of our officers that are subject to Section 16 of the
Securities Act of 1933, except the Principal Accounting Officer.
In some cases, market competitive information may be difficult
to obtain due to unique duties and responsibilities of a
particular position. In those instances, we consider qualitative
criteria, such as education and experience requirements, skills,
complexity and scope/impact of the position compared to other
executive positions internally.
Individual executive base salaries are reviewed annually and may
be adjusted based on individual performance, company performance
and placement relative to market-adjusted ranges. The
performance assessment for each executive includes an evaluation
of performance against objectives established at the beginning
of the year and demonstration of leadership competencies. In
evaluating executive performance for purposes of merit pay
adjustments, the Committee also considers overall company
performance, and the performance of the functional area(s) under
an executives scope of responsibility.
Short-Term
Incentive Opportunity
The short-term incentive opportunity is provided through our
cash-based management incentive plan. This is a group incentive
plan and is based on the companys overall financial
performance. The level of participation for each executive in
the annual incentive plan is based upon the degree to which his
or her position impacts overall financial performance of the
company, and also on market competitive factors. Target award
opportunities are established as a percentage of the
executives base salary, and currently range between 40% to
60% of base salary. The management incentive plan is based on
targets that reward strong company financial performance and
growth, year over year, and is administered to comply with
Department of Education guidelines described above in this
Compensation Discussion and Analysis under
Overview.
At the beginning of each year, the Committee approves a matrix
that reflects payout opportunities based on the companys
achievement of certain financial objectives. Upon completion of
the fiscal year, executives receive bonus payments, if any,
pursuant to the terms of the management incentive plan and the
matrix approved at the beginning of the year.
In 2006, our management incentive plan provided participants an
opportunity to earn between 0 and 200% of targeted incentive
opportunity, depending on the degree to which the company
achieved its annual performance objectives for revenue and
income before income taxes, excluding the impact of stock-based
compensation expense under FAS 123(R). We based 70% of the
target incentive opportunity on achieving the full-year targets
for revenue and income before income taxes, and 30% of the
opportunity on achieving the revenue and income before income
tax targets for the second half of the year. By virtue of this
design, we emphasized a strong finish to the year and momentum
going into 2007. The minimum thresholds for incentive payouts in
2006 were set at 93% and 85% of revenue and income before income
tax objectives, respectively. Participants had the opportunity
to earn a maximum payout of 200% of their targeted incentive
opportunity if the company achieved 103% and 115% or more of its
revenue and income before income tax objectives, respectively.
Performance between the minimum and maximum levels results in
prorated payments to plan participants. Our 2006 targets
reflected target revenue growth over the prior year of
approximately 25% and target income before income tax growth
over the prior year of approximately 56%.
Income before income taxes, excluding the impact of stock-based
compensation expense under FAS 123(R), is a non-GAAP
financial measure. We used this measure in our 2006 management
incentive plan because we believe it was the most useful measure
with which to evaluate performance of our business
90
in 2006. Stock-based compensation expense was excluded to
achieve comparability with prior years, where it had similarly
not been included.
In 2006, we provided to several key executives a special
one-time grant of performance-based stock options in lieu of
cash payouts under the management incentive plan. This design
was adopted by the Committee to more closely align key
management and investor interests at a critical time as we
prepared to become a public company. The decision to provide
this one-time stock option grant also reinforced among those
executives the concept of stock ownership. In 2007, we have
returned to providing an entirely cash-based management
incentive plan for all participants.
Based on our performance against full year 2006 and second half
2006 revenue and income before income tax targets as described
above, participants in the management incentive plan earned
74.5% of the targeted incentive opportunity in 2006.
In 2007, our financial metrics for full-year revenue and
operating income, including the impact of stock-based
compensation expense under FAS 123(R) (as opposed to the
income before income tax metric used in 2006) will comprise
90% of the targeted incentive opportunity, and a learner
satisfaction component will comprise 10% of the targeted
opportunity. The revenue and operating income metrics are
weighted equally in 2007, so each metric comprises a total of
50% of the financial metric component of the targeted
opportunity; however, if performance exceeds target, then
revenue will comprise 75% and operating income will comprise 25%
of the financial metric component. We believe that focusing
operating management on operating income (rather than income
before income taxes) ensures better alignment between company
performance and our objective to create shareholder value by
focusing managements attention on metrics that management
is better able to control. The new learner satisfaction
component is measured using a survey instrument that measures
learner satisfaction over the course of the year against a
pre-established baseline.
For participants to earn a payout under the 2007 plan, the
company must achieve a minimum of 93% of its revenue objective
and a minimum of 95% of its operating income objective. A
maximum payout can be achieved if the company achieves at least
101.4% of its revenue and operating income objectives.
Performance between minimum and maximum levels results in
prorated payments to plan participants. Payouts under the 2007
management incentive plan will range between 0% and 190% of
target incentive. A plan participant achieves a 190% maximum
payout if the company performs at the 200% payout level for both
financial metrics, and the company performs at the 100% payout
level on the learner satisfaction metric (90% * 2 + 10% = 190%).
Shown below is a summary of the 2007 management incentive plan
matrix.
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Payout Level as a Percentage of
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Level of Achievement
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Applicable Metric Target
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Revenue(1)
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93.0%
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45%
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100.0%
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150%
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101.4%
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200%
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Operating Income
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95.0%
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85%
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100.0%
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150%
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101.4%
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200%
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Learner satisfaction measure
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Ranges from 0% to 100%
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Achievement of operating income of at least 95% of the target is
required as a condition to any payout for revenue performance. |
91
The Committee believes this 2007 plan design will result in the
alignment of incentive opportunity with shareholder value
creation. We set our 2007 plan objectives such that they
represent revenue growth of 18% to 22%, and operating income
growth of 25% to 30%, in both cases above industry averages as
projected by for-profit, post-secondary industry research
analysts over the three- to five-year time horizon. The
Committee believes that the revenue and operating income targets
upon which the 2007 plan are built are aggressive but
achievable. Over the last three years ending in 2006, our payout
level has been between 60% and 80% of target.
In making its annual determination of minimum, target and
maximum payout levels under the management incentive plan, the
Committee may consider any specific and unusual circumstances
facing us during the upcoming year. Generally, the Committee
sets the minimum, target and maximum levels within the ranges
described above such that the relative difficulty of achieving
target level performance is consistent from year to year.
In hiring key executives, it has been in the past and may be in
the future necessary to guarantee payout under the management
incentive plan at a specified level in the first year of
employment. This is situational, at the discretion of the
Committee, and is not intended to be ongoing in nature.
Long-Term
Incentive Opportunity
The long-term incentive opportunity for executives is provided
through the use of stock options. Options have historically been
granted with a four-year vesting schedule. We have on occasion
granted options with shorter vesting schedules, including grants
to our Chairman and Chief Executive Officer in 2006 and 2005,
when we used two-year and three-year vesting schedules,
respectively. We used those vesting schedules in order to afford
our Chief Executive Officer additional flexibility, in
recognition of our publicly disclosed succession planning
objectives.
Options are granted to executives at the time of hire, and are
typically granted annually thereafter once the executive has
completed two years of service. The Committee relies on market
survey information to help determine the size of new hire and
annual stock option awards. Additionally, the Committee utilizes
a formula that takes into account base compensation, position
level and the fair market value of the companys common
stock (applying the Black-Scholes model) to determine the size
of the award. The Committee has discretion as to actual award
size based on individual performance factors.
By way of example, if an executives base salary was
$200,000 and target incentive percentage based on her position
level was 60%, her target annual long-term opportunity would be
$120,000. We would then divide $120,000 by the Black-Scholes
value of the stock option based on the fair market value of the
companys stock at the time of grant (using a Black-Scholes
value of $12.00, for purposes of this example), resulting in an
award of 10,000 stock options.
At this time, stock options are the only form of long-term
incentive compensation used by the company. Target awards are
65% for the Chairman and Chief Executive Officer and 60% for the
other named executive officers.
The Committee is considering alternative forms of long-term
incentive compensation, primarily equity-based, for future
long-term incentive awards. Our 2005 Stock Incentive Plan
provides the Committee flexibility in that regard, allowing for
various award types, including restricted stock, stock
appreciation rights and performance shares.
Perquisites
and Other Compensation
Employee benefits offered to key executives are designed to meet
current and future health and security needs for the executives
and their families. Executive benefits are the same as those
offered to all employees, except that medical insurance premiums
are paid in full by the company for the named executive officers
enrolled in our medical benefit plan. The employee benefits
offered to all eligible employees include medical, dental and
life insurance benefits, short-term disability pay, long-term
disability insurance, flexible spending accounts for medical
expense reimbursements, a 401K retirement savings plan that
includes a partial company match, and an Employee Stock
Ownership Plan (ESOP). In addition,
92
named executive officers are eligible to participate in our
Senior Executive Severance Plan, and all executives receive
certain retirement benefits.
The 401K retirement savings plan is a defined contribution plan
under Section 401(a) of the Internal Revenue Code.
Employees may make pre-tax contributions into the plan,
expressed as a percentage of compensation, up to prescribed IRS
annual limits. We provide an employer matching contribution.
Through June 30, 2006, we matched 50% of the first 4% of
employee pay contributed. As of July 1, 2006, we increased
our matching contribution to 100% on the first 2% of employee
pay contributed, and 50% on the next 4% of employee pay
contributed.
Employee compensation for 2006 included company-funded ESOP
contributions of approximately 1% of eligible employee
compensation, which for 2006 was compensation earned during the
period January 1, 2006 through June 30, 2006. Our ESOP
retirement plan is a defined contribution plan, under which we
may make a discretionary contribution of between 0% and 3% of
eligible employee compensation per plan year. To receive a
contribution in a given year, an employee must meet service
requirements as to hours worked and dates of active employment.
In addition, the plan includes a three-year vesting schedule.
The ESOP holds shares of our common stock in an employees
account through a retirement plan trust.
In 2006, following a review of external sources by our human
resources organization, the Committee adopted a Senior Executive
Severance Plan, which applies to our named executive officers
and certain other senior executive officers. The plan provides
severance benefits upon the occurrence of certain triggering
events. The Committee believes that such a plan is necessary to
attract and retain key executives in the companys
competitive employment market. Our Senior Executive Severance
Plan pays additional benefits to most executives covered
thereunder in the event of a change in control followed by an
involuntary termination or termination for good reason. The
Committee chose this double trigger design because
it believed such design to be most consistent with current
industry practice.
Upon retirement, each executive officer is entitled to medical,
dental and life insurance plan continuation for 18 months
under the federal and state COBRA provisions at his or her
election. In addition, the executive is entitled to elect to
receive distributions from our ESOP and the 401K retirement
plans, under the terms of those plans. Under our 1993 and 1999
Stock Option Plans, any vested but unexercised stock options may
be exercised for a period of 60 days and three months,
respectively, after retirement. Under our 2005 Stock Incentive
Plan, vested but unexercised stock options may be exercised for
up to one year after retirement.
Policies
And Practices
Grants of Equity Awards. Prior to our initial
public offering in 2006, we adopted a policy related to all
grants of equity awards to ensure the most appropriate method,
timing and delivery of equity awards. Under this policy, no
grants shall occur on a date when our insider trading window is
closed, which includes the period beginning the first day of the
third month of a quarter, and continuing through the second
trading day after a release of earnings, in addition to other
times throughout the year when we may be aware of material,
non-public information. Grants may be approved by the Committee
during closed window periods; however, the grant date will be
the first trading day after the trading window opens. This
policy helps ensure that option grants are made at a time when
any material information that may affect our stock price has
been provided to the market and, therefore, the exercise price
or value of the award reflects the fair value of our stock based
on all relevant information.
Promotional and other discretionary grants may occur at
regularly scheduled Committee meetings throughout the year. The
full board of directors must approve all equity awards to
non-employee directors. The Committee has delegated authority to
the Chief Executive Officer to award equity grants to employees
who are not executive officers in connection with their
commencement of employment, subject to guidelines established by
the Committee as to position level and award size, and subject
to a quarterly maximum number of shares.
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We set the exercise price of the option award based on the
closing price of our common stock on the date of grant.
Equity Terms and Conditions. In 2006, we
determined that the term of our stock options should not exceed
seven years, which was shorter than the ten-year term used for
prior option grants. This decision was based on a review of
common practices among public companies in our industry. In
2006, we also adopted a practice of issuing only non-qualified
stock options. This decision also considered common practice in
the public company market. Vesting schedules for option awards
are generally four years, at 25% per year. We believe this
schedule reinforces performance over the long term, which will
ultimately be reflected in the stock price.
Stock Ownership Guidelines. During 2006, there
were no stock ownership guidelines applicable to our executive
officers. In February 2007, our board of directors adopted the
following stock ownership guidelines for our officers:
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Officer
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Share Value (Current Market Value)
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Chief Executive Officer
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Four times annual salary
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Chief Operating Officer
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Three times annual salary
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Senior Vice Presidents
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Two times annual salary
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Vice
Presidents(1)
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One times annual salary
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These stock ownership guidelines only apply to Vice Presidents,
except for our Principal Accounting Officer, who have been
identified as officers for purposes of
Section 16 of the Securities Exchange Act of 1934, as
amended. |
The stock ownership guidelines can be met through holding shares
(including ESOP shares),
in-the-money
vested stock options, or a combination of the two. In addition,
the stock ownership guidelines also set guidelines for the
amount of stock that may be sold in any one quarter by any
persons with the title vice president or
higher these guidelines, as a percent of vested
stock holdings are as follows: 15% for the chief executive
officer, chief operating officer and chief financial officer;
20% for senior vice presidents (other than the chief financial
officer); and 50% for vice presidents. Lastly, our insider
trading policy prohibits executives from engaging in margin
loans or otherwise pledging their shares.
Accounting and Tax Impact of Executive Compensation
Programs. We will consider Internal Revenue Code
Section 162(m) as we establish compensation plans in the
future. For 2006, the stock options granted to our named
executive officers in connection with our 2006 management
incentive plan were structured as performance-based
compensation in a manner similar to that which would be
required to satisfy the conditions of Section 162(m).
However, for 2006, we intend to rely on an exemption from
Section 162(m) for plans adopted prior to the time a
company becomes a public company. This transition exemption for
our equity compensation plans will no longer be available to us
after the date of our annual meeting that occurs after the third
calendar year following the year of our initial public offering,
or if we materially modify the plan earlier. We will continue to
consider the implication of the limits on deductibility of
compensation in excess of $1 million as we design our
compensation programs. As previously explained, we modified
other terms of our stock options in 2006 by reducing the term of
awards to seven years and granting non-qualified stock options.
Both of these modifications provided positive tax and accounting
impacts.
Summary
Compensation Table
The following table shows, for our Chief Executive Officer, our
Chief Financial Officer and the three other most highly
compensated executive officers of our company, together referred
to as our named
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executive officers, information concerning compensation earned
for services in all capacities during the fiscal year ended
December 31, 2006.
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All Other
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Salary
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Bonus
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Option Awards
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Compensation
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Total
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Name and Principal Position
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Year
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($)
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($)(1)
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($)(2)
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($)(3)
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($)
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Stephen G. Shank
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2006
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410,385
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|
|
776,848
|
(4)
|
|
|
6,435
|
|
|
|
1,193,668
|
|
Chairman and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth J. Sobaski
|
|
|
2006
|
|
|
|
338,462
|
|
|
|
228,767
|
|
|
|
354,824
|
|
|
|
6,398
|
|
|
|
928,451
|
|
President and Chief Operating
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lois M. Martin
|
|
|
2006
|
|
|
|
277,923
|
|
|
|
|
|
|
|
511,512
|
|
|
|
8,052
|
|
|
|
797,487
|
|
Senior Vice President and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul A. Schroeder
|
|
|
2006
|
|
|
|
272,923
|
|
|
|
|
|
|
|
305,283
|
|
|
|
4,797
|
|
|
|
583,003
|
|
Senior Vice President and
University Senior Vice
President(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Offerman
|
|
|
2006
|
|
|
|
272,923
|
|
|
|
|
|
|
|
304,746
|
|
|
|
5,731
|
|
|
|
583,400
|
|
Senior Vice President and
University
President(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $60,000 signing bonus per the terms of
Mr. Sobaskis offer of employment letter. Also
includes a guaranteed incentive of $168,767. The guaranteed
incentive applies only to his first year of employment. We
guaranteed his incentive award at 100% of his target incentive
opportunity, which was 50% of his base salary. For others, see
table under Grants of Plan Based Awards in 2006
below. |
|
(2) |
|
Valuation of awards based on the compensation cost we recognized
during 2006 for financial statement purposes under
FAS 123(R) for option awards granted in 2006 and prior
years utilizing assumptions discussed in Note 12 to our
financial statements for the fiscal year ended December 31,
2006, but disregarding the estimate of forfeitures related to
service based vesting. This includes a special grant of
performance based options granted in lieu of cash incentive for
2006 for all named executive officers except for
Mr. Sobaski. |
|
(3) |
|
Represents the value of shares of our common stock contributed
to the named executive officers accounts in our Employee
Stock Ownership Plan (ESOP), including the shares connected with
the special distribution paid to the ESOP related to certain
unvested ESOP shares following our initial public offering in
November 2006, our matching contribution to the 401(k) plan
accounts of the named executive officers, and the premiums we
paid for group term life insurance on behalf of the named
executive officers. |
|
|
|
|
|
For Mr. Shank, includes a 2006 contribution into his ESOP
account of approximately 45 shares having a value of
$1,100; 401(k) matching contribution to his account of $4,400;
and life insurance premiums paid on his behalf in the amount of
$935.
|
|
|
|
For Mr. Sobaski, includes a 2006 contribution into his ESOP
account of approximately 45 shares having a value of
$1,100; 401(k) matching contribution to his account of $4,538;
and life insurance premiums paid on his behalf of $760.
|
|
|
|
For Ms. Martin, includes a 2006 contribution into her ESOP
account, related to the unvested portion of her ESOP shares, of
approximately 79 shares having a value of $1,932 in
connection with the special distribution; a 2006 contribution
into her ESOP account of approximately 45 shares having a
value of $1,100; 401(k) matching contribution of $4,460; and
life insurance premiums paid on her behalf of $560.
|
95
|
|
|
|
|
For Mr. Schroeder, includes a 2006 contribution into his
ESOP account of approximately 45 shares having a value of
$1,100; 401(k) matching contribution of $3,075; and life
insurance premiums paid on his behalf of $622.
|
|
|
|
For Dr. Offerman, includes a 2006 contribution into his
ESOP account of approximately 45 shares having a value of
$1,100; 401(k) matching contribution of $4,009; and life
insurance premiums paid on his behalf of $622.
|
|
|
|
(4) |
|
Includes $28,151 incremental fair value related to corrective
actions taken in 2006 with respect to awards of stock options
originally granted on (i) October 24, 2000, for the
purchase of 28,070 shares, and (ii) August 26,
2002 for the purchase of 17,078 shares. See
Explanation of Option Award Corrective Actions
for Mr. Shank below. |
|
(5) |
|
Effective March 1, 2007, Mr. Schroeders title
changed to Senior Vice President of Operations and
Business Transformation. |
|
(6) |
|
On March 1, 2007, we announced that
Dr. Offermans titles will change to Vice
Chairman External University Initiatives and
University President Emeritus. |
Grants of
Plan-Based Awards in 2006
The following table sets forth certain information concerning
plan-based awards granted to the named executive officers during
the fiscal year ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Possible
|
|
|
Possible
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
Payouts Under
|
|
|
Payouts
|
|
|
Awards:
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Non-Equity
|
|
|
Under Equity
|
|
|
Number of
|
|
|
Exercise or
|
|
|
Fair Value of
|
|
|
|
|
|
|
Incentive Plan
|
|
|
Incentive Plan
|
|
|
Securities
|
|
|
Base Price
|
|
|
Stock and
|
|
|
|
|
|
|
Awards
|
|
|
Awards
|
|
|
Underlying
|
|
|
of Option
|
|
|
Option
|
|
|
|
Grant
|
|
|
Target
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
|
|
Options
|
|
|
Awards
|
|
|
Awards
|
|
Name
|
|
Date
|
|
|
($)(1)
|
|
|
($)(2)
|
|
|
(#)(3)
|
|
|
(#)(4)
|
|
|
(#)
|
|
|
($/Sh)
|
|
|
($)
|
|
|
Stephen G. Shank
|
|
|
2/14/2006
|
|
|
|
|
|
|
|
246,231
|
|
|
|
2,257
|
|
|
|
75,235
|
|
|
|
|
|
|
|
20.00
|
|
|
|
460,798
|
|
|
|
|
8/2/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,461
|
(5)
|
|
|
20.00
|
|
|
|
253,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,151
|
(8)
|
Kenneth J. Sobaski
|
|
|
2/27/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,000
|
(6)
|
|
|
20.00
|
|
|
|
1,687,439
|
|
Lois M. Martin
|
|
|
2/14/2006
|
|
|
|
|
|
|
|
111,169
|
|
|
|
1,019
|
|
|
|
33,981
|
|
|
|
|
|
|
|
20.00
|
|
|
|
208,128
|
|
|
|
|
8/2/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,416
|
(7)
|
|
|
20.00
|
|
|
|
167,521
|
|
Paul A. Schroeder
|
|
|
2/14/2006
|
|
|
|
|
|
|
|
109,169
|
|
|
|
1,001
|
|
|
|
33,354
|
|
|
|
|
|
|
|
20.00
|
|
|
|
204,289
|
|
|
|
|
8/2/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,086
|
(7)
|
|
|
20.00
|
|
|
|
164,519
|
|
Michael J. Offerman
|
|
|
2/14/2006
|
|
|
|
|
|
|
|
109,169
|
|
|
|
1,001
|
|
|
|
33,354
|
|
|
|
|
|
|
|
20.00
|
|
|
|
204,289
|
|
|
|
|
8/2/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,086
|
(7)
|
|
|
20.00
|
|
|
|
164,519
|
|
|
|
|
(1) |
|
A special performance-based stock option grant was made to
Mr. Shank, Ms. Martin, Mr. Schroeder, and
Mr. Offerman in lieu of the opportunity to receive a cash
payout under our Management Incentive Plan for 2006. The grant
applied up to 100% of the target payout, based on the
achievement of actual revenue and income before income taxes,
excluding the impact of stock-based compensation expense under
FAS 123(R), compared to our performance targets for revenue
and income before income taxes, excluding the impact of
stock-based compensation expense under FAS 123(R). If we
would have exceeded our 2006 performance targets for revenue and
income before income taxes, excluding the impact of stock-based
compensation expense under FAS 123(R), the excess over 100%
would have been paid in cash. These performance-based stock
options vested on December 31, 2006 at a level of 74.5%,
based on our achievement level compared to performance targets. |
|
(2) |
|
Reflects the maximum cash incentive payout possible under the
Management Incentive Plan for 2006, for achievement in excess of
100% of target and up to the maximum, which was 200% of target
incentive opportunity. Based on actual achievement, a payout
above target did not occur for 2006. |
96
|
|
|
(3) |
|
Reflects the number of shares of common stock underlying options
that would have vested at the threshold payout level. The
threshold amount was determined according to the 2006 Management
Incentive Plan payout scale, which provided that 3% of the
target incentive would be earned if we achieved at least 93% and
85% of our 2006 plan for revenue and income before income taxes,
excluding the impact of stock-based compensation expense under
FAS 123(R), respectively. |
|
(4) |
|
Reflects the number of shares of common stock underlying options
that would have vested at the target level of performance under
the 2006 Management Incentive Plan. This is also the maximum
number of shares of common stock underlying options that could
have vested under the 2006 Management Incentive Plan, because
any incentive paid for achievement in excess of 100% of target
would have been paid in cash. The performance-based stock
options vested at a level of 74.5% of target, which resulted in
the named executive officers vesting in the following number of
options: Mr. Shank 56,050;
Ms. Martin 25,316,
Mr. Schroeder 24,849; and
Dr. Offerman 24,849. The exercise price and
grant date fair value of these awards are reported in the table
above in the row corresponding to the award of the
performance-based options. |
|
(5) |
|
Reflects stock options granted under our annual executive grant
program. These vest and become exercisable in 50% increments on
each annual anniversary of the date of grant. |
|
(6) |
|
Mr. Sobaski received options to purchase
165,000 shares of common stock as a part of his new hire
compensation package. These options vest and become exercisable
in 25% increments on each annual anniversary of the date of
grant. |
|
(7) |
|
Reflects stock options granted under our annual executive grant
program. These vest and become exercisable in 25% increments on
each annual anniversary of the date of grant. |
|
(8) |
|
Reflects the incremental fair value related to corrective
actions taken on March 22, 2006 with respect to awards of
stock options originally granted on (i) October 24,
2000, for the purchase of 28,070 shares, and
(ii) August 26, 2002 for the purchase of
17,078 shares. See Explanation of Option
Award Corrective Actions for Mr. Shank below. |
Determination
of Fair Market Value for Option Awards of Common Stock
In determining the exercise price for stock option grant awards,
under our 2005 Stock Incentive Plan, options must be granted at
an exercise price not less than the fair market value of our
common stock at the close of business on the grant date. Prior
to our initial public offering in November 2006, the valuation
used to determine the fair market value of our common stock at
each grant date was performed internally and contemporaneously
with the issuance of the options. The options expire on the date
determined by the board of directors but may not extend more
than ten years from the grant date for options granted prior to
August 2, 2006. On August 2, 2006, the board of
directors approved a change to our stock option policy to
shorten the contractual term from ten years to seven years for
future grants. The options generally become exercisable over a
four-year period. Canceled options become available for
re-issuance under the 2005 Plan. We have also issued stock
options under two discontinued plans (the 1993 and 1999 Plans).
Stock options issued pursuant to the 1993 and 1999 Plans are
still outstanding, however, unexercised options that are
canceled upon termination of employment are not available for
re-issuance.
Explanation
of Option Award Corrective Actions for Mr. Shank
The Option Awards column in the Summary Compensation Table
includes the incremental fair market value for two corrective
actions approved by our board of directors, related to options
previously issued to Mr. Shank. On two different dates,
October 24, 2000, and August 26, 2002, we issued an
option to purchase 28,070 and 17,078 shares of our common
stock, respectively, to Mr. Shank. The term of the
October 24, 2000 option award, and the vesting schedule of
the August 26, 2002 option award were communicated to
Mr. Shank in two forms which were found to be in conflict.
This had the result of modifying the agreements. As a result,
the board of directors approved an extension on March 22,
2006, to the term of the October 24, 2000 option to ten
years from original grant date, and approved a corrected vesting
schedule for the August 26, 2002 award. We recognized the
incremental compensation expense associated with these
corrections in 2006.
97
Employment
Agreement Provisions
The following provisions for individual employment agreements
are applicable to understanding the tables. On February 27,
2006, we entered into a letter agreement with Kenneth J.
Sobaski, pursuant to which Mr. Sobaski agreed to serve as
President and Chief Operating Officer. Pursuant to the terms of
the letter agreement, Mr. Sobaski received, among other
things, (1) a signing bonus of $60,000, payable in 2006,
(2) an initial annual base salary of $400,000, (3) an
annual incentive compensation award targeted at 50% of his base
salary (which is guaranteed for his first year of employment,
and the amount shown in the bonus column of the Summary
Compensation Table reflects the guaranteed 50% level, as applied
to his actual base salary earnings in 2006), and
(4) options to purchase 165,000 shares of our common
stock at an exercise price of $20.00 per share, 41,250 of
which have vested or will vest on each of February 27,
2007, 2008, 2009 and 2010, subject to acceleration in certain
situations.
On October 25, 2004 we entered into a letter agreement with
Lois M. Martin, pursuant to which Ms. Martin agreed to
serve as our Senior Vice President and Chief Financial Officer.
Pursuant to the terms of the letter agreement, Ms. Martin
received, among other things, (1) an annual incentive
compensation award targeted at 40% of her annual base salary,
and (2) an option to purchase 100,000 shares of our
common stock at an exercise price of $20.00 per share, of which
50,000 have vested and 25,000 of which will vest on each of
November 15, 2007 and 2008, subject to acceleration in
certain situations.
On March 9, 2001, we entered into a letter agreement with
Paul A. Schroeder, pursuant to which Mr. Schroeder agreed
to serve as our Senior Vice President and Chief Financial
Officer. On May 30, 2006, Mr. Schroeders
agreement was amended. Under the terms of the amended agreement,
as further amended in August, 2006, Mr. Schroeder served as
Senior Vice President of both Capella Education Company and
Capella University. Effective March 1, 2007,
Mr. Schroeders title changed to Senior Vice President
of Operations and Business Transformation for Capella Education
Company, and he no longer serves as Senior Vice President for
Capella University. He continues to receive his current base
salary of $274,000, and continues his eligibility in our annual
incentive compensation plan at a target bonus level of 40% of
his annual base salary. In the event that Mr. Schroeder
remains an employee of the company as of June 1, 2007, the
letter agreement terminates.
On April 17, 2001, we entered into a letter agreement with
Michael Offerman, pursuant to which Dr. Offerman agreed to
serve as our Senior Vice President, and President and Chief
Executive Officer of Capella University. The agreement was
amended on November 10, 2003, and again on May 30,
2006. Pursuant to the terms of the amended agreements, as
further amended in August, 2006, Dr. Offerman now serves as
our Senior Vice President and President of Capella University.
On March 1, 2007, we announced that
Dr. Offermans will become the Vice
Chairman External University Initiatives for Capella
Education Company and University President Emeritus for Capella
University. He continues to receive his annual base salary of
$274,000, and continues his eligibility in our annual incentive
compensation plan at a target bonus level of 40% of his annual
base salary. In the event that Dr. Offerman remains an
employee of the company as of June 1, 2007, the letter
agreement terminates.
98
Outstanding
Equity Awards at 2006 Fiscal Year-End
The following table sets forth certain information concerning
equity awards outstanding to the named executive officers at
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Option
|
|
|
|
|
|
|
Unexercised Options
|
|
|
Unexercised Options
|
|
|
Exercise
|
|
|
Option
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Price
|
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
|
|
Stephen G. Shank
|
|
|
56,050
|
|
|
|
|
|
|
|
20.00
|
|
|
|
2/14/2016
|
(1)
|
|
|
|
9,008
|
|
|
|
17,963
|
|
|
|
20.00
|
|
|
|
8/12/2015
|
(2)
|
|
|
|
12,808
|
|
|
|
7,165
|
|
|
|
17.72
|
|
|
|
7/28/2014
|
(3)
|
|
|
|
7,577
|
|
|
|
2,526
|
|
|
|
11.92
|
|
|
|
10/22/2013
|
(4)
|
|
|
|
|
|
|
|
29,461
|
|
|
|
20.00
|
|
|
|
8/1/2013
|
(5)
|
|
|
|
25,592
|
|
|
|
|
|
|
|
11.71
|
|
|
|
8/26/2012
|
(6)
|
|
|
|
17,078
|
|
|
|
|
|
|
|
11.71
|
|
|
|
8/25/2012
|
(7)
|
|
|
|
33,254
|
|
|
|
|
|
|
|
14.25
|
|
|
|
7/25/2011
|
(8)
|
|
|
|
32,816
|
|
|
|
|
|
|
|
14.25
|
|
|
|
10/23/2010
|
(9)
|
|
|
|
|
|
|
|
5,643
|
|
|
|
19.49
|
|
|
|
7/28/2009
|
(10)
|
|
|
|
25,167
|
|
|
|
8,389
|
|
|
|
13.11
|
|
|
|
10/22/2008
|
(11)
|
Kenneth J. Sobaski
|
|
|
|
|
|
|
165,000
|
|
|
|
20.00
|
|
|
|
2/26/2016
|
(12)
|
Lois M. Martin
|
|
|
25,316
|
|
|
|
|
|
|
|
20.00
|
|
|
|
2/14/2016
|
(13)
|
|
|
|
4,123
|
|
|
|
12,371
|
|
|
|
20.00
|
|
|
|
8/11/2015
|
(14)
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
20.00
|
|
|
|
10/26/2014
|
(15)
|
|
|
|
|
|
|
|
18,416
|
|
|
|
20.00
|
|
|
|
8/1/2013
|
(16)
|
Paul A. Schroeder
|
|
|
24,849
|
|
|
|
|
|
|
|
20.00
|
|
|
|
2/14/2016
|
(17)
|
|
|
|
4,139
|
|
|
|
12,417
|
|
|
|
20.00
|
|
|
|
8/11/2015
|
(18)
|
|
|
|
7,606
|
|
|
|
7,605
|
|
|
|
17.72
|
|
|
|
7/28/2014
|
(19)
|
|
|
|
15,487
|
|
|
|
5,164
|
|
|
|
11.92
|
|
|
|
10/22/2013
|
(20)
|
|
|
|
|
|
|
|
18,086
|
|
|
|
20.00
|
|
|
|
8/1/2013
|
(21)
|
|
|
|
100,000
|
|
|
|
|
|
|
|
14.25
|
|
|
|
4/8/2011
|
(22)
|
Michael J. Offerman
|
|
|
24,849
|
|
|
|
|
|
|
|
20.00
|
|
|
|
2/14/2016
|
(23)
|
|
|
|
4,139
|
|
|
|
12,417
|
|
|
|
20.00
|
|
|
|
8/11/2015
|
(24)
|
|
|
|
7,606
|
|
|
|
7,605
|
|
|
|
17.72
|
|
|
|
7/28/2014
|
(25)
|
|
|
|
15,140
|
|
|
|
5,046
|
|
|
|
11.92
|
|
|
|
10/22/2013
|
(26)
|
|
|
|
|
|
|
|
18,086
|
|
|
|
20.00
|
|
|
|
8/1/2013
|
(27)
|
|
|
|
75,000
|
|
|
|
|
|
|
|
14.25
|
|
|
|
7/25/2011
|
(28)
|
|
|
|
(1) |
|
Stock option granted on February 14, 2006 for
56,050 shares vested on December 31, 2006. This
reflects 74.5% vesting level achieved of total target options
under special one-time performance based stock option grant in
2006. |
|
(2) |
|
Stock option granted on August 12, 2005 for
26,971 shares vests and becomes exercisable in
331/3%
increments on each yearly anniversary of the date of grant. |
|
(3) |
|
Stock option granted on July 28, 2004 for
19,973 shares vests and becomes exercisable in 32.1%
increments on the first three yearly anniversaries of the date
of grant, and 3.7% on the fourth anniversary of the date of
grant. |
99
|
|
|
(4) |
|
Stock option granted on October 23, 2003 for
10,103 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(5) |
|
Stock option granted on August 2, 2006 for
29,461 shares vests and becomes exercisable in 50%
increments on each yearly anniversary of the date of grant. |
|
(6) |
|
Stock option granted on August 26, 2002 for
25,592 shares vests and becomes exercisable in 41.7%
increments on the first two yearly anniversaries of the date of
grant, and 8.3% on the third and fourth anniversaries of the
date of grant. |
|
(7) |
|
Stock option granted on August 26, 2002 for
17,078 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(8) |
|
Stock option granted on July 26, 2001 for
33,254 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(9) |
|
Stock options granted on October 24, 2000 for
32,816 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(10) |
|
Stock option granted on July 28, 2004 for 5,643 shares
vests and becomes exercisable in full on July 28, 2008 |
|
(11) |
|
Stock option granted on October 23, 2003 for
33,556 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(12) |
|
Stock option granted on February 27, 2006 for
165,000 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(13) |
|
Stock option granted on February 14, 2006 for
25,316 shares vested on December 31, 2006. This
reflects 74.5% vesting level achieved of total target options
under special one-time performance based stock option grant in
2006. |
|
(14) |
|
Stock option granted on August 12, 2005 for
16,494 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(15) |
|
Stock option granted on October 27, 2004 for
100,000 shares vests and becomes exercisable in 25%
increments on November 15 of each year over a four year period. |
|
(16) |
|
Stock option granted on August 2, 2006 for
18,416 shares vests and becomes exercisable in 25%
increments on each of the yearly anniversary of the date of
grant. |
|
(17) |
|
Stock option granted on February 14, 2006 for
24,849 shares vested on December 31, 2006. This
reflects 74.5% vesting level achieved of total target options
under special one-time performance based stock option grant in
2006. |
|
(18) |
|
Stock option granted on August 12, 2005 for
16,556 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(19) |
|
Stock option granted on July 28, 2004 for
15,211 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(20) |
|
Stock option granted on October 23, 2003 for
20,651 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(21) |
|
Stock option granted on August 2, 2006 for
18,086 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(22) |
|
Stock option granted on April 26, 2001 for
100,000 shares vests and becomes exercisable in 25%
increments on April 8 of each year over a four year period. |
|
(23) |
|
Stock option granted on February 14, 2006 for
24,849 shares vested on December 31, 2006. This
reflects 74.5% vesting level achieved of total target options
under special one-time performance based stock option grant in
2006. |
|
(24) |
|
Stock option granted on August 12, 2005 for
16,556 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(25) |
|
Stock option granted on July 28, 2004 for
15,211 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
100
|
|
|
(26) |
|
Stock option granted on October 23, 2003 for
20,186 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(27) |
|
Stock option granted on August 2, 2006 for
18,086 shares vests and becomes exercisable in 25%
increments on each yearly anniversary of the date of grant. |
|
(28) |
|
Stock option granted on July 26, 2001 for
75,000 shares vests and becomes exercisable in 25%
increments on June 11 of each year over a four year period. |
Potential
Payments Upon Termination or
Change-in-Control
On September 11, 2006, we established the Capella Education
Company Senior Executive Severance Plan, referred to as the
Senior Executive Severance Plan, to provide severance pay and
other benefits to certain eligible employees. To be eligible for
the Senior Executive Severance Plan, the employee must:
(1) be designated as a participant in writing by our Chief
Executive Officer, (2) be in a select group of management
or highly compensated employees within the meaning of the
Employee Retirement Income Security Act of 1974, (3) have
completed 90 days of service with us from the most recent
date of hire, (4) have their employment terminated under
certain circumstances, (5) not be a participant in the
Executive Severance Plan and (6) execute a release. The
release contains non-competition and non-solicitation provisions
that apply for a period of twelve months post-termination of
employment, and confidentiality provisions that apply
indefinitely following termination of employment. Currently, the
participants in the Senior Executive Severance Plan include our
Chief Executive Officer and Chairman of the Board of Directors,
senior vice president level employees and vice president level
employees, including all of the named executive officers in the
Summary Compensation Table.
Under the Senior Executive Severance Plan, a qualifying
severance event occurs if, unrelated to a
change-in-control,
there is an involuntary termination other than for cause. A
qualifying event also occurs in the event there is a
change-in-control,
and there is a voluntary termination of employment for good
reason or an involuntary termination other than for cause,
within 24 months following the
change-in-control.
Participants who experience a qualifying severance event will be
eligible to receive severance benefits, based on their
termination event, including severance pay ranging from twelve
to 24 months, outplacement assistance, and continuation
coverage under certain employee benefit plans for up to
18 months (subject to adjustment, alternative or previous
severance benefits). For employee benefit plan continuation, the
departed employee must pay the employee portion of applicable
premiums during the continuation period, just as
he/she would
have paid during
his/her
employment. Severance payments are made bi-weekly in accordance
with our standard payroll practices. In
change-in-control
situations involving a qualifying termination within twenty-four
months of the
change-in-control
event, a participant (except the Chief Executive Officer) may
also be eligible to receive payment of 200% of any targeted
bonus for the year of termination; the Chief Executive Officer
may be eligible to receive payment of 80% of any targeted bonus
for the year of termination. We have also provided specific
severance benefits to certain of our executives under such
executives employment agreements, which are described
below. The Senior Executive Severance Plan provides that any
employment agreement that specifically provides for the payment
of severance benefits will remain in full force and effect and
that any payments due under the Senior Executive Severance Plan
will be reduced or offset by any similar amounts payable due to
termination under an employment agreement.
Our board of directors, Chief Executive Officer, or any other
individual or committee to whom such authority has been
delegated may amend or terminate the Senior Executive Severance
Plan (the Plan). The Plan cannot be amended to
reduce benefits or alter Plan terms, except as may be required
by law, for a period of 24 months following a
change-in-control,
as defined in the Plan. In addition, the Plan provides that any
amendment to the Plan, or termination of the Plan, adopted
within six months prior to a change in control will become null
and void upon the
change-in-control
event. The Senior Executive Severance Plan will terminate
immediately upon our filing for relief in bankruptcy or on such
date as an order for relief in bankruptcy is entered against us.
101
For purposes of the Senior Executive Severance Plan, certain
terms are defined as follows:
|
|
|
|
|
Cause means (1) employees commission of a
crime or other act that could materially damage our reputation;
(2) employees theft, misappropriation, or
embezzlement of our property; (3) employees
falsification of records maintained by us;
(4) employees failure substantially to comply with
our written policies and procedures as they may be published or
revised from time to; (5) employees misconduct
directed toward learners, employees, or adjunct faculty; or
(6) employees failure substantially to perform the
material duties of employees employment, which failure is
not cured within 30 days after written notice from us
specifying the act of non-performance.
|
|
|
|
Good Reason means (1) the demotion or reduction
of the executives job responsibilities upon a
Change-in-Control;
(2) executives total targeted compensation is
decreased by more than ten percent in a twelve month period; or
(3) a reassignment of executives principal place of
work, without their consent, to a location more than
50 miles from their principal place of work upon a
Change-in-Control.
To be eligible for benefits, the executive must terminate
employment for Good Reason within 24 months after the date
of the qualified
Change-in-Control.
In addition, the executive must have provided written notice to
us of the asserted Good Reason not later than 30 days after
the occurrence of the event on which Good Reason is based and at
least 30 days prior to executives proposed
termination date. We may take action to cure executives
stated Good Reason within this
30-day
period. If we take action, executive will not be eligible for
Plan benefits if the executive voluntarily terminates.
|
|
|
|
A
Change-in-Control
shall be deemed to occur if any of the following occur:
|
|
|
|
|
(1)
|
Any person or entity acquires or becomes a beneficial owner,
directly or indirectly, of securities of Capella representing
35% or more of the combined voting power of our then outstanding
voting securities, subject to certain exceptions;
|
|
|
|
|
(2)
|
A majority of the members of our board of directors shall not be
continuing directors, for which purpose continuing directors are
generally those directors who were members of our board at the
time we adopted the Plan and those directors for whose election
our board of directors solicited proxies or who were elected or
appointed by our board of directors to fill vacancies caused by
death or resignation or to fill newly-created directorships;
|
|
|
(3)
|
Approval by our shareholders of a reorganization, merger or
consolidation or a statutory exchange of our outstanding voting
securities unless, immediately following such reorganization,
merger, consolidation or exchange, all or substantially all of
the persons who were the beneficial owners, respectively, of our
voting securities and shares immediately prior to such
reorganization, merger, consolidation or exchange beneficially
own, directly or indirectly, more than 65% of, respectively, the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors and the
then outstanding shares of common stock, as the case may be, of
the corporation resulting from such reorganization, merger,
consolidation or exchange in substantially the same proportions
as their ownership, immediately prior to such reorganization,
merger, consolidation or exchange, of our voting securities and
shares, as the case may be; or
|
|
|
(4)
|
Approval by the shareholders of (x) a complete liquidation
or dissolution of our company or (y) the sale or other
disposition of all or substantially all of our assets (in one or
a series of transactions), other than to a corporation with
respect to which, immediately following such sale or other
disposition, more than 65% of, respectively, the combined voting
power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of
directors and the then outstanding shares of common stock of
such corporation is then beneficially owned, directly or
indirectly, by all or substantially all of the persons who were
the beneficial owners, respectively, of our voting securities
and shares immediately prior to such sale or other disposition
in substantially the same proportions as their ownership,
immediately prior to such sale or other disposition, of our
voting securities and shares, as the case may be.
|
102
Kenneth J. Sobaski Employment Agreement. Under
our letter agreement with Mr. Sobaski, in the event that
Mr. Sobaskis employment terminates, he is entitled to
receive the greater of the severance benefits provided to him
under our Senior Executive Severance Plan, or the severance
benefits provided for in his letter agreement.
Mr. Sobaskis letter agreement provides that, in the
event that Mr. Sobaskis employment is terminated
without cause (as defined below) or he voluntarily terminates
his employment for good reason (as defined below),
Mr. Sobaski will be entitled to the following severance
benefits: (1) twelve months total compensation (base salary
plus target bonus) and (2) senior executive outplacement
services for twelve months and provision of certain office
support equipment during that period. In the event any such
termination follows a
change-in-control,
Mr. Sobaskis letter agreement entitles him to receive
two times the severance package described above. As defined in
his letter agreement, cause means
(i) commission of a crime or other act that could
materially damage our reputation, (ii) theft,
misappropriation or embezzlement of company property,
(iii) falsification of company records, (iv) failure
to substantially comply with our written policies and
procedures, or (v) misconduct directed toward learners,
employees or adjunct faculty. Good reason as defined
in his letter agreement means (i) a change in his position
to one with a lower pay grade or lesser responsibilities,
(ii) a decrease in fixed compensation by more than 10% in
any 12 month period, (iii) relocation more than
50 miles from his current work location, or
(iv) Mr. Shank is no longer Chief Executive Officer
and Mr. Sobaski has not been assigned to that position. Our
obligation to make the severance payments described above will
terminate if Mr. Sobaski breaches any provision the
non-competition or confidentiality provisions of the release
agreement.
Lois M. Martin Employment Agreement. Under the
terms of our letter agreement with Ms. Martin, in the event
Ms. Martins employment terminates, she is entitled to
receive the greater of the severance benefits provided to her
under our Senior Executive Severance Plan or the severance
benefits provided for in her letter agreement.
Ms. Martins letter agreement provides that, if Ms.
Martin voluntarily terminates her employment for good reason (as
defined below), or if her employment is terminated by Capella
for a reason other than cause or within two years of a
change-in-control,
she will be entitled to receive severance pay in an amount equal
to up to twelve months base salary, outplacement assistance for
up to twelve months, a benefits package at the regular employee
rate, and eighty percent of her targeted bonus amount for the
year of termination (prorated to the date of termination). As
defined in her letter agreement, good reason
includes (i) a change in her position to one with a lower
pay grade or less responsibilities, (ii) a decrease in
fixed compensation by more than 10% in any 12 month period,
(iii) relocation more than 50 miles from her current
work location, or (iv) being temporarily laid off and not
reinstated within 90 days. Finally, Ms. Martins
letter agreement provides that she will be entitled to the
highest level of severance benefits available to any other
employee under the Senior Executive Severance Plan. Our
obligation to make the severance payments described above will
terminate if Ms. Martin breaches any provision the
non-competition or confidentiality provisions of the release
agreement.
Michael J. Offerman, Ed.D. Employment
Agreement. Under the terms of our letter
agreement with Dr. Offerman, Dr. Offerman is also
eligible to participate in our Senior Executive Severance Plan,
subject to the following modifications. If Dr. Offerman
should voluntarily terminate his employment at any time for good
reason, he shall be entitled to receive benefits under our
Senior Executive Severance Plan as if his employment had been
terminated without cause. As defined in his letter agreement,
good reason includes (i) a change in his
position to one with a lower pay grade or lesser
responsibilities, (ii) a decrease in his fixed compensation
or (iii) a material change to his reporting relationship to
the Capella University Board. Dr. Offerman is also subject
to a confidentiality, non-competition and inventions agreement.
In the event that he leaves the company for any reason other
than termination for cause, and is unable to find suitable
employment, as a direct result of the restrictions imposed by
his non-competition agreement, he will be entitled to the
greater of twelve months base salary or his severance
entitlements, if any, pursuant to the Senior Executive Severance
Plan. Our obligation to make the severance payments described
above will terminate if Dr. Offerman breaches any provision
the non-competition or confidentiality provisions of the release
agreement.
For purposes of the following tables, certain terms, such as
cause, good reason, and
change-in-control
are defined in the Senior Executive Severance Plan as described
above, or, if the
103
definition is more favorable to the executive, as such term is
defined in any letter agreement between us and the executive,
which are also described above.
In the event that an involuntary termination of the employment
of a named executive officer other than for cause had occurred
(assuming a
change-in-control
had not occurred) on December 31, 2006, the following
amounts would have been paid to each named executive officer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums for
|
|
|
|
|
|
|
|
|
|
Estimated Value of
|
|
|
Health, Dental and
|
|
|
|
|
|
|
Base Salary Payment
|
|
|
Outplacement
|
|
|
Life Insurance
|
|
|
|
|
|
|
Amount
|
|
|
Assistance
|
|
|
Continuation
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)
|
|
|
Stephen G. Shank
|
|
|
412,000
|
|
|
|
30,000
|
|
|
|
9,933
|
|
|
|
451,933
|
|
Kenneth J. Sobaski
|
|
|
400,000
|
|
|
|
30,000
|
|
|
|
10,880
|
|
|
|
440,880
|
|
Lois M. Martin
|
|
|
279,000
|
|
|
|
30,000
|
|
|
|
9,778
|
|
|
|
318,778
|
|
Paul A. Schroeder
|
|
|
274,000
|
|
|
|
30,000
|
|
|
|
11,787
|
|
|
|
315,787
|
|
Michael J. Offerman
|
|
|
274,000
|
|
|
|
30,000
|
|
|
|
12,642
|
|
|
|
316,642
|
|
|
|
|
(1) |
|
Reflects the employer share of the premiums for our insurance
plans for 12 months. |
|
|
|
|
|
For Mr. Shank, includes medical insurance premiums of
$8,608; dental insurance premiums of $390; and life insurance
premiums of $935.
|
|
|
|
For Mr. Sobaski, includes medical insurance premiums of
$9,629; dental insurance premiums of $491; and life insurance
premiums of $760.
|
|
|
|
For Ms. Martin, includes dental insurance premiums of $197;
life insurance premiums of $560; and expenses related to an
annual medical examination of $9,021.
|
|
|
|
For Mr. Schroeder, includes medical insurance premiums of
$10,585; dental insurance premiums of $580; and life insurance
premiums of $622.
|
|
|
|
For Dr. Offerman, includes medical insurance premiums of
$11,440; dental insurance premiums of $580; and life insurance
premiums of $622.
|
In the event of a
change-in-control,
if within 24 months of the change in control a voluntary
termination of the employment of a named executive officer for
good reason, or an involuntary termination other than for cause,
had occurred on December 31, 2006, the following amounts
would have been paid to each named executive officer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
|
|
|
|
|
|
Premiums for
|
|
|
|
|
|
|
Base
|
|
|
Bonus
|
|
|
|
|
|
Estimated
|
|
|
Health,
|
|
|
|
|
|
|
Salary
|
|
|
Compensation
|
|
|
Value of
|
|
|
Value of
|
|
|
Dental and
|
|
|
|
|
|
|
Payment
|
|
|
Payment
|
|
|
Accelerated
|
|
|
Outplacement
|
|
|
Life Insurance
|
|
|
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Options
|
|
|
Assistance
|
|
|
Continuation
|
|
|
Total
|
|
Name
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)(3)(4)
|
|
|
($)
|
|
|
($)(5)
|
|
|
($)
|
|
|
Stephen G. Shank
|
|
|
412,000
|
|
|
|
197,760
|
|
|
|
399,799
|
|
|
|
30,000
|
|
|
|
14,900
|
|
|
|
1,054,459
|
|
Kenneth J. Sobaski
|
|
|
800,000
|
|
|
|
400,000
|
|
|
|
701,250
|
|
|
|
30,000
|
|
|
|
16,321
|
|
|
|
1,947,571
|
|
Lois M. Martin
|
|
|
558,000
|
|
|
|
223,200
|
|
|
|
343,345
|
|
|
|
30,000
|
|
|
|
19,178
|
|
|
|
1,173,723
|
|
Paul A. Schroeder
|
|
|
548,000
|
|
|
|
219,200
|
|
|
|
242,971
|
|
|
|
30,000
|
|
|
|
17,681
|
|
|
|
1,057,852
|
|
Michael J. Offerman
|
|
|
548,000
|
|
|
|
219,200
|
|
|
|
241,516
|
|
|
|
30,000
|
|
|
|
18,963
|
|
|
|
1,057,679
|
|
|
|
|
(1) |
|
Equal to twenty-four months of base salary in effect on
December 31, 2006 for all named executive officers, other
than Mr. Shank. Mr. Shanks base salary amount is
equal to twelve months of his base salary in effect on
December 31, 2006. Amounts would be paid in bi-weekly
installments over the term of the severance period (calculated
as the number of months during which the participant is entitled
to receive base salary), subject to any six month delay in
payments to comply with Section 409A. |
104
|
|
|
(2) |
|
Equal to two times the targeted bonus amount for fiscal 2006 for
all named executive officers, other than Mr. Shank.
Mr. Shanks target bonus amount is 80% of his targeted
bonus amount for fiscal 2006. Amounts would be paid in a lump
sum upon termination, subject to any six month delay in payments
to comply with Section 409A. |
|
(3) |
|
Based on the closing price of our common stock on
December 29, 2006, the last trading day of fiscal 2006, of
$24.25. |
|
(4) |
|
Under the 2005 Stock Incentive Plan, options vest in full if a
termination of employment occurs within 3 years of the
change-in-control. |
|
(5) |
|
Reflects the employer share of the premiums for our insurance
plans for 18 months, as follows: |
|
|
|
|
|
For Mr. Shank, includes medical insurance premiums of
$12,912; dental insurance premiums of $585; and life insurance
premiums of $1,403.
|
|
|
|
For Mr. Sobaski, includes medical insurance premiums of
$14,444; dental insurance premiums of $737; and life insurance
premiums of $1,140.
|
|
|
|
For Ms. Martin, includes $9,021 for a medical examination
each year for two years, totaling $18,042; dental insurance
premiums of $296; and life insurance premiums of $840.
|
|
|
|
For Mr. Schroeder, includes medical insurance premiums of
$15,878; dental insurance premiums of $870; and life insurance
premiums of $933.
|
|
|
|
For Dr. Offerman, includes medical insurance premiums of
$17,160; dental insurance premiums of $870; and life insurance
premiums of $933.
|
Summary
of Other Provisions Termination of
Employment
Disability Termination. Executive
officers whose employment terminates due to disability have the
following provisions specific to the termination event:
|
|
|
|
|
70% of any unused paid time off balance at the time of
termination will be paid out.
|
|
|
|
Under the terms of our stock option plans and stock incentive
plan, all unvested options immediately vest upon termination,
and the employee has up to one year post-termination to exercise
options before expiration. If a termination due to disability
had occurred on December 31, 2006, the value of the
accelerated options for each named executive officer would have
been as follows: Mr. Shank $399,799;
Mr. Sobaski $701,250;
Ms. Martin $343,345;
Mr. Schroeder $242,971; and
Dr. Offerman $241,516.
|
|
|
|
Under the terms of our Employee Stock Ownership Plan, employees
whose disability meets the definition of disability under the
Social Security rules will have any unvested account balance
vest immediately. Two of our named executive officers had
unvested account balances on December 31, 2006 in the
following amounts: Mr. Sobaski $1,100; and
Ms. Martin $10,541.
|
|
|
|
Under the terms of our long term disability insurance plan,
assuming the executive has enrolled, the executive is entitled
to receive 60% of their regular base salary, up to a maximum of
$10,000 a month, for as long as they are classified as disabled
by the insurance company. Such amounts will be paid by the
insurance company under the terms of our insured plan.
|
Retirement. Senior executive officers
(which currently includes all executives at or above the vice
president level, including each of the named executive officers)
whose employment terminates due to retirement have the following
provisions specific to the termination event:
|
|
|
|
|
70% of any unused paid time off balance at the time of
termination will be paid out.
|
|
|
|
Under the terms of our 2005 Stock Incentive Plan, the employee
has up to one year post-termination to exercise any vested
options which were vested as of the termination date. Under the
terms of our 1999 Stock Option Plan, the employee has up to
three months post-termination to exercise any options which were
vested as of the termination date. Under the terms of our 1993
Stock Option
|
105
|
|
|
|
|
Plan, the employee has up to sixty days post-termination to
exercise any options which were vested as of the termination
date.
|
|
|
|
|
|
The executive will be eligible to take a distribution consistent
with reaching normal retirement age, and the provisions
specified in the Employee Stock Ownership Plan and 401(k)
retirement savings plan, from their account balance.
|
Death.
|
|
|
|
|
Upon death, all stock options issued under the 1999 Stock Option
Plan and the 2005 Stock Incentive Plan become immediately
exercisable, and remain exercisable for up to one year following
the event. If a termination due to death had occurred on
December 31, 2006, the value of the accelerated options for
each named executive officer would have been as follows:
Mr. Shank $399,799;
Mr. Sobaski $701,250;
Ms. Martin $343,345;
Mr. Schroeder $242,971; and
Dr. Offerman $241,516.
|
|
|
|
Our ESOP provides that the unvested balance, if any, vests
immediately upon the death of the participant. Two of our named
executive officers had unvested account balances on
December 31, 2006 in the following amounts:
Mr. Sobaski $1,100; and
Ms. Martin $10,541.
|
Director
Compensation
The following table shows, for the fiscal year ended
December 31, 2006, all compensation that our company paid
to our directors. We did not pay any director compensation in
2006 to Messrs. Shank, Holmes, Lewis and Reynolds, each of
whom was either our employee or had represented an entity that
had a financial interest in our company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Option Awards
|
|
|
Total
|
|
Name
|
|
($)(1)
|
|
|
($)(2)(3)(4)
|
|
|
($)
|
|
|
James A. Mitchell
|
|
|
5,000
|
|
|
|
25,769
|
|
|
|
30,769
|
|
David W. Smith
|
|
|
5,000
|
|
|
|
40,994
|
|
|
|
45,994
|
|
Darrell R. Tukua
|
|
|
7,500
|
|
|
|
43,944
|
|
|
|
51,444
|
|
Jeffrey W. Taylor
|
|
|
|
|
|
|
25,769
|
|
|
|
25,769
|
|
Jody G. Miller
|
|
|
|
|
|
|
25,769
|
|
|
|
25,769
|
|
Sandra E. Taylor
|
|
|
|
|
|
|
15,602
|
|
|
|
15,602
|
|
|
|
|
(1) |
|
Fees reflect annual committee chairperson fees which were paid
quarterly. These fees were the only cash compensation paid to
any director in 2006. |
|
(2) |
|
Valuation is based on the stock-based compensation expense we
recognized during 2006 for financial statement purposes under
FAS 123(R) for awards granted in 2006 and prior years
utilizing assumptions discussed in Note 12 to our
consolidated financial statements for the year ended
December 31, 2006, but disregarding the estimate of
forfeitures. |
106
|
|
|
(3) |
|
The following table shows the aggregate number of shares
underlying outstanding stock options held by our directors as of
December 31, 2006. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying
|
|
|
|
|
|
|
|
|
|
Outstanding Stock
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
Name
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
James A. Mitchell
|
|
|
18,500
|
|
|
|
18,500
|
|
|
|
|
|
David W. Smith
|
|
|
15,500
|
|
|
|
13,000
|
|
|
|
2,500
|
|
Darrell R. Tukua
|
|
|
15,000
|
|
|
|
12,500
|
|
|
|
2,500
|
|
Jeffrey W. Taylor
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
Jody G. Miller
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
|
|
Sandra E. Taylor
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
S. Joshua Lewis
|
|
|
12,500
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
(4) |
|
The following table shows the grant date fair value of all stock
option awards made to our directors in fiscal 2006. |
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Value of Option
|
|
|
|
Awards in Fiscal 2006
|
|
Name
|
|
($)
|
|
|
James A. Mitchell
|
|
|
25,769
|
|
David W. Smith
|
|
|
25,769
|
|
Darrell R. Tukua
|
|
|
25,769
|
|
Jeffrey W. Taylor
|
|
|
25,769
|
|
Jody G. Miller
|
|
|
25,769
|
|
Sandra E. Taylor
|
|
|
103,075
|
|
During 2006, the directors who were our employees or who had
represented an entity that had a financial interest in us did
not receive any compensation. The directors who were not our
employees and who did not represent an entity that had a
financial interest in us received an option to purchase
2,500 shares of our common stock under our 2005 Stock
Incentive Plan, with the exception of Sandra Taylor, who joined
the Board in May of 2006. Ms. Taylor received an option to
purchase 10,000 shares of our common stock upon her
election to the board.
We also paid our committee chairpersons an annualized cash
retainer for serving in that role. Mr. Mitchell and
Mr. Smith received $5,000 in 2006, paid quarterly.
Mr. Tukua received $7,500 in 2006, paid quarterly. All
directors were eligible for reimbursement of reasonable expenses
incurred to attend board and committee meetings.
In 2007, we implemented our previously disclosed public company
board compensation package. This includes payment of an annual
cash retainer of $32,500, paid quarterly, to non-employee
directors, for fees associated with board and committee service.
Chairs of the governance and compensation committees, and our
lead director, will receive an additional cash retainer of
$5,000, paid quarterly, and the chair of the audit committee
will receive $7,500, paid quarterly. Each non-employee director
(except Mr. Holmes, who declined) will also receive an
annual stock option grant valued at $32,500 which is vested in
full immediately upon grant. Also, any non-employee director who
wishes to receive stock options in lieu of cash compensation may
elect this form of payment. The number of shares subject to such
stock options is determined by dividing the cash retainer by the
Black-Scholes value based on the closing price of our common
stock on the grant date. These options are also vested in full
immediately upon grant. New non-employee directors who join the
board will receive an option to purchase 10,000 shares of
our common stock, with a four year vesting schedule, granted
upon election. All stock options issued to directors have an
exercise price equal to the closing price of our common stock on
the date of grant, and a term of seven years. We will reimburse
all directors for reasonable expenses incurred to attend our
board and board committee meetings.
107
The Committee believes that a balance of equity and cash
compensation for non-employee directors is the most appropriate
way to compensate them for board service. Providing the
non-employee director the ability to elect equity in lieu of any
or all cash compensation also offers some flexibility to the
individual members. Equity compensation also aligns the board
members interests with the shareholders.
Existing
Stock, Stock Option Plans and Other Incentive Plans
Stock Option Plans. We have adopted
three stock plans: (1) the Capella Education Company 2005
Stock Incentive Plan; (2) the Capella Education Company
1999 Stock Option Plan; and (3) the Learning Ventures
International, Inc. 1993 Stock Option Plan.
Capella Education Company 2005 Stock Incentive
Plan. The Capella Education Company 2005
Stock Incentive Plan, referred to as the 2005 Plan, was
recommended by the compensation committee in May 2005 and
adopted and approved by our board of directors and our
shareholders in May 2005. The 2005 Plan authorizes the granting
of stock-based awards to our officers, directors, employees,
consultants and advisors. We have reserved an aggregate of
3,013,000 shares of common stock for issuance under the
2005 Plan. The compensation committee of our board of directors
administers the 2005 Plan and has the power to determine when
and to whom awards will be granted, determine the amount of each
award and establish the terms and conditions of each award,
including exercise price, vesting schedule and settlement terms.
The types of awards that may be granted under the 2005 Plan
include incentive stock options, non-qualified stock options,
stock appreciation rights, restricted stock, performance units
and other stock-based awards. Our board of directors may
terminate, suspend or modify the 2005 Plan at any time;
provided, however, that certain amendments require approval of
our shareholders. Further, no action may be taken which
adversely affects any rights under outstanding awards without
the holders consent.
As of February 28, 2007, we had granted options to purchase
a total of 1,097,458 shares of our common stock (including
options that have since been cancelled or expired) under the
2005 Plan at exercise prices of $20.00 to $32.71 per share,
of which options to purchase 1,062,314 shares are
outstanding.
Capella Education Company 1999 Stock Option
Plan. The Capella Education Company 1999
Stock Option Plan, referred to as the 1999 Plan, was adopted by
the board of directors in December 1999 and approved by our
shareholders in December 2000. We have reserved an aggregate of
1,650,000 shares of our common stock (subject to
adjustments in the case of a merger, consolidation,
reorganization, recapitalization, stock dividend, or other
change in corporate structure) for issuance under the 1999 Plan
to our employees, officers, directors, advisors, consultants,
and any individual that we desire to induce to become an
employee. The compensation committee of our board of directors
administers the 1999 Plan and has the power to fix any terms and
conditions for the grant or exercise of any award under the 1999
Plan. The types of awards that may be granted under the 1999
Plan include incentive stock options and non-qualified stock
options. Each option will be governed by the terms of the option
agreement and will expire 10 years after the date of the
grant, or an earlier date in the case of a 10% shareholder or a
terminated employee. Our board of directors may amend, suspend,
or discontinue the 1999 Plan at any time; provided, however,
that certain amendments require approval of our shareholders.
Further, no action may be taken which adversely affects any
rights under outstanding awards without the option holders
consent.
As of February 28, 2007, we had granted options to purchase
a total of 1,712,649 shares of our common stock (including
options that have since been cancelled or expired) under the
1999 Plan at exercise prices of $11.12 to $20.00 per share,
of which options to purchase 1,003,851 shares are
outstanding. Our board of directors approved a resolution in May
2005 to cease making additional grants under the 1999 Plan.
Learning Ventures International, Inc. 1993 Stock Option
Plan. The Learning Ventures International,
Inc. 1993 Stock Option Plan, referred to as the 1993 Plan, was
approved by our board of directors in February 1993 and by our
shareholders on February 24, 1993. We have reserved an
aggregate of 1,825,000 shares of common stock (subject to
adjustments in the case of a merger, consolidation,
reorganization, recapitalization, stock dividend, or other
change in corporate structure) for issuance under the 1993 Plan
to any of our employees, officers, directors, consultants, and
independent contractors. The
108
compensation committee of our board of directors administers the
1993 Plan and has the power to determine the terms of each
option grant, including the exercise price, the recipient and
the number of shares subject to each option. The compensation
committee also may amend or modify the terms of an option and
accelerate the time at which an option may be exercised. The
types of awards that may be granted under the 1993 Plan include
incentive stock options and non-qualified stock options. Each
option will be governed by the terms of the option agreement,
but an incentive stock option may not extend more than
10 years from the date of the grant and a non-qualified
stock option may not extend more than 15 years from the
date of the grant. Our board of directors may amend or
discontinue the 1993 Plan at any time; provided, however, that
certain amendments require approval of our shareholders.
Further, no action may be taken which adversely affects any
rights under outstanding awards without the option holders
consent.
As of February 28, 2007, we had granted options to purchase
a total of 2,337,091 shares of our common stock (including
options that have since been cancelled or expired) under the
1993 Plan at exercise prices of $1.00 to $14.25 per share, of
which options to purchase 121,558 shares are outstanding.
The 1993 Plan was terminated on February 23, 2003 and we
cannot grant additional options under the 1993 Plan.
Employee Stock Ownership Plan. In 1999,
we adopted the Capella Education Company Employee Stock
Ownership Plan, as amended, referred to as the ESOP, a qualified
employee stock ownership plan under Section 401(a) of the
Internal Revenue Code. The ESOP provides that we may contribute,
at our discretion, common stock or cash for the benefit of our
eligible employees. To be eligible to share in the ESOP
contribution for a plan year, the employee must satisfy certain
service requirements and be employed by us on December 31
of the plan year. An employee is also eligible to share in the
ESOP contribution for a year in which he or she died, became
disabled or retired, as defined by the ESOP, in that year.
During 2005, we contributed 46,450 shares to the ESOP,
related to 2004 plan compensation. During 2006, we contributed
61,671 shares to the ESOP, related to 2005 plan
compensation. 1,677 shares related to 2006 plan compensation
were contributed in 2007, within the time period required by the
Internal Revenue Code. Participants become vested in their ESOP
contributions after completing three years of service with us,
except in the event of retirement, disability or death, in which
case the participants shares become fully vested and
nonforfeitable. Prior to termination, participants may receive
distributions from the ESOP in accordance with statutory
diversification requirements. Distributions from the ESOP are in
shares of our common stock or, prior to the completion of this
offering, in cash. We recognized $0.2 million,
$1.2 million and $1.1 million of compensation expense
in the years ended December 31, 2006, 2005 and 2004,
respectively, related to the ESOP contributions. The individual
ESOP trustees are also our employees. The trustees hold the ESOP
contributions and make distributions to participants or
beneficiaries. The ESOP trust is invested primarily in shares of
our common stock. In 2006, we amended the ESOP such that for
fiscal year 2006, any company contribution to the ESOP will be
based on eligible employee compensation through June 30,
2006, and will be allocated to eligible employees in active
employment on June 30, 2006 (as well as to any eligible
employee who died, became disabled or retired between
January 1, 2006 and June 30, 2006). The ESOP was also
amended to allow vested participants to elect to have any
dividends paid on the shares of common stock credited to their
ESOP accounts (including a portion of the special distribution
to be paid with the proceeds of this offering) paid to them in
cash, instead of having such amounts deposited into the ESOP
trust and reinvested in common stock.
Employee Stock Purchase Plan. The
Capella Education Company Employee Stock Purchase Plan, referred
to as the ESPP, was recommended by the compensation committee in
May 2005 and adopted and approved by our board of directors and
our shareholders in May 2005. We have reserved an aggregate of
450,000 shares of our common stock for issuance under the
ESPP. The ESPP permits eligible employees to utilize up to 10%
of their compensation to purchase our common stock at a price of
no less than 85% of the fair market value per share of our
common stock at the beginning or the end of the relevant
offering period, whichever is less. The compensation committee
of our board of directors will administer the ESPP. The
compensation committee is presently considering the offering of
stock under the ESPP at a price of 95% of the fair market value
per share of our common stock measured only at the end of the
relevant offering period, in order to avoid adverse accounting
consequences if shares could be purchased at greater discounts
109
to fair market value. The compensation committee is also
considering imposing an annual $15,000 cap on the amount of
funds that eligible employees may utilize to purchase shares
under the ESPP. Our board of directors may amend or terminate
the ESPP. We have not begun utilizing the ESPP, but continue to
consider whether and when to implement the plan.
401(k) Plan. We maintain the Capella
Education Company Retirement Savings Plan, which was originally
adopted in July 1994, and which is referred to as the 401(k)
plan, a cash or deferred arrangement qualified under
Section 401(a) of the Internal Revenue Code. The related
401(k) plan trust is not subject to tax under current tax law.
Under the provisions of the 401(k) plan that were effective
beginning in April 2005, a participant may defer a portion of
his or her pre-tax salary, commissions and bonuses through
payroll deductions, up to the statutorily prescribed annual
limits. If a new employee does not make an election to defer, 4%
of his or her compensation automatically will be deferred unless
the employee elects otherwise. Participants age 50 and
older by the end of the year may make additional
catch-up
contributions to the 401(k) plan, in accordance with statutory
requirements. The percentage elected to be deferred by highly
compensated participants (as defined by statute) may be required
to be lower to satisfy Internal Revenue Code requirements. In
April 2005, we implemented a matching contribution program based
on employee contributions on a per-pay-period basis. The initial
match equaled 50% of the employees contributions on the
first 4% of compensation. Effective in July 2006, we modified
the employer matching contribution to 100% on the first 2% of
employee contributions, and 50% on the next 4% of employee
contributions. In addition, at the discretion of our board of
directors, we may make discretionary profit-sharing
contributions to our 401(k) plan for eligible employees. Any
employer contributions will be subject to a five-year vesting
schedule, except that any participant with three or more years
of service on April 1, 2005, who was fully vested under the
401(k) plans prior vesting schedule will also be fully
vested in future contributions. No employer contributions were
made prior to April 1, 2005. The 401(k) plans trustee
holds and invests the plan contributions at the direction of
each participant. Although we have not expressed any intent to
do so, we do have the right to discontinue, terminate or amend
the 401(k) plan at any time, subject to the provisions of the
Internal Revenue Code and the Employee Retirement Income
Security Act of 1974, as amended.
110
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 2004, we were a party to the transactions
with related persons described below. All such transactions were
entered into prior to the adoption of our related person
transaction approval policy.
Special Distribution. In November 2006,
we paid a special distribution promptly after the completion of
our initial public offering to our shareholders of record as of
October 3, 2006. The aggregate amount of the special
distribution was $72.6 million, or $6.19 per common
share on an as if converted basis. The amount of the special
distribution was equal to the gross proceeds from the sale of
common stock by us in the initial public offering, excluding the
proceeds received by us from the underwriters exercise of
their over-allotment option. A special committee, comprised of
Mr. Taylor, Ms. Taylor and Mr. Tukua, was
appointed by our board of directors for the purpose of
considering whether and on what terms a distribution to our
shareholders should be paid in connection with our initial
public offering. The board declared the special distribution
upon the recommendation of the special committee, and on the
same terms recommended by the special committee.
111
The following table sets forth the amount of cash paid as a
result of the special distribution in respect of shares of our
capital stock as to which each of our more than 5% shareholders,
directors and executive officers was deemed to have sole or
shared voting or investment power as of October 3, 2006.
|
|
|
|
|
|
|
Special Distribution
|
|
|
|
Amount as to Shares
|
|
|
|
Beneficially Owned
|
|
Name of Beneficial Owner
|
|
($)
(a) (b)
|
|
|
Principal
Shareholders
|
|
|
|
|
Forstmann Little entities
|
|
$
|
6,849,539
|
|
Cherry Tree entities
|
|
|
11,018,392
|
|
Entities affiliated with
Technology Crossover Ventures
|
|
|
11,507,077
|
|
Maveron entities
|
|
|
6,495,532
|
|
Salmon River and Insight entities
|
|
|
7,582,268
|
|
Putnam
entities(c)
|
|
|
4,175,570
|
|
|
|
|
|
|
Directors
|
|
|
|
|
Stephen G.
Shank(d)
|
|
$
|
14,187,764
|
|
Tony
Christianson(e)
|
|
|
11,018,392
|
|
Gordon A.
Holmes(f)
|
|
|
|
|
S. Joshua Lewis
|
|
|
7,455,260
|
|
Jody G.
Miller(g)
|
|
|
|
|
James A. Mitchell
|
|
|
255,533
|
|
Jon Q. Reynolds, Jr.
|
|
|
11,507,077
|
|
David W. Smith
|
|
|
55,669
|
|
Jeffrey W. Taylor
|
|
|
|
|
Sandra Taylor
|
|
|
|
|
Darrell R. Tukua
|
|
|
|
|
|
|
|
|
|
Executive
Officers
|
|
|
|
|
Michael J. Offerman
|
|
$
|
37,146
|
|
Lois M. Martin
|
|
|
|
|
Paul A. Schroeder
|
|
|
41,752
|
|
Scott M. Henkel
|
|
|
|
|
Ken J. Sobaski
|
|
|
|
|
Greg W. Thom
|
|
|
|
|
Elizabeth M. Rausch
|
|
|
27,835
|
|
Reed A. Watson
|
|
|
|
|
|
|
|
(a) |
|
For the purpose of calculating shares beneficially owned and
outstanding as of October 3, 2006, the number of shares of
common stock deemed outstanding assumed the conversion of all
outstanding shares of our preferred stock into common stock on
such date, and excluded all shares of common stock subject to
options. Beneficial ownership is determined in accordance with
the rules of the SEC that generally attribute beneficial
ownership of securities to persons that possess sole or shared
voting power
and/or
investment power with respect to those securities. |
|
(b) |
|
Does not include portions of the special distribution paid to
the Employee Stock Ownership Plan (ESOP) with respect to shares
credited to the ESOP accounts of each executive officer as of
October 3, 2006, in approximately the following amounts:
Mr. Shank, $18,747; Dr. Offerman, $12,519;
Ms. Martin, $1,933; Mr. Schroeder, $13,434;
Mr. Henkel; $3,551; Mr. Thom, $5,150; and
Ms. Rausch, $13,683. |
112
|
|
|
(c) |
|
The Putnam entities refers to Putnam OTC &
Emerging Growth Fund (a former shareholder) and TH Lee, Putnam
Investment Trust TH Lee, Putnam Emerging
Opportunities Portfolio (a current shareholder). Immediately
prior to our initial public offering in November 2006, the
Putnam entities beneficially owned 5.7% of our common shares.
Immediately following our initial public offering, in which
Putnam OTC & Emerging Growth Fund participated as a
selling shareholder, the Putnam entities beneficially owned 2.8%
of our common shares. |
|
(d) |
|
Mr. Shank is our Chairman and Chief Executive Officer. |
|
(e) |
|
Mr. Christianson resigned from our board of directors
following our initial public offering in November 2006. As of
October 3, 2006, he was deemed to be a beneficial owner of
shares held by the Cherry Tree Entities. |
|
(f) |
|
Mr. Holmes is a limited partner of each general partner of
the Forstmann Little entities. |
|
(g) |
|
Ms. Miller is a venture partner with Maveron LLC, an
affiliate of the Maveron entities. |
Purchase of Shares in our Initial Public
Offering. The entities affiliated with
Technology Crossover Ventures collectively beneficially own
approximately 12.2% of our common shares, and Jon Q.
Reynolds, Jr., one of our directors, is a General Partner
of Technology Crossover Ventures. The Salmon River and Insight
entities collectively beneficially own approximately 8.5% of our
common shares, and S. Joshua Lewis, one of our directors, is a
principal of Salmon River Capital LLC and a special partner of
Insight Venture Partners. In our November 2006 initial public
offering, the entities affiliated with Technology Crossover
Ventures purchased an aggregate of 100,000 shares of our
common stock from the underwriters, and the Salmon River and
Insight entities purchased an aggregate of 100,000 shares
of our common stock from the underwriters (in each case, at the
initial public offering price of $20.00 per share, less
underwriters discounts).
113
PRINCIPAL
AND SELLING SHAREHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock as of February 28,
2007, and as adjusted to reflect the sale of common stock being
offered in this offering, for:
|
|
|
|
|
each person, or group of affiliated persons, known to us to own
beneficially 5% or more of our outstanding common stock,
|
|
|
|
each of our directors,
|
|
|
|
each of our named executive officers,
|
|
|
|
all of our directors and executive officers as a group, and
|
|
|
|
each selling shareholder.
|
Footnote (a) below provides a brief explanation of what is
meant by the term beneficial ownership. For the
purpose of calculating the percentage of shares beneficially
owned by any shareholder, shares of our common stock subject to
options held by a person that are exercisable within
60 days of February 28, 2007 are deemed to be
beneficially owned by such person, although they are not deemed
outstanding for the purpose of computing the percentage
ownership of any other person.
The number of shares of common stock outstanding after the
offering includes an additional 301,145 shares of
common stock offered by us in the offering, and
257,829 shares underlying stock options to be exercised by
certain selling shareholders in connection with the offering.
The address for each named executive officer is Capella
Education Company, 225 South 6th Street, 9th Floor,
Minneapolis, Minnesota 55402.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
Owned Prior to the
|
|
|
Shares
|
|
|
Owned After
|
|
|
Over-Allotment
|
|
|
Owned After
|
|
|
|
Offering(1)
|
|
|
Being
|
|
|
Offering
|
|
|
Shares Being
|
|
|
Over-Allotment(2)
|
|
Name of Beneficial Owner
|
|
Shares
|
|
|
Percent
|
|
|
Offered
|
|
|
Shares
|
|
|
Percent
|
|
|
Offered(2)
|
|
|
Shares
|
|
|
Percent
|
|
|
Principal
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forstmann Little
entities(3)
|
|
|
1,106,372
|
|
|
|
6.9
|
%
|
|
|
1,106,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cherry Tree Ventures IV,
L.P.(4)
|
|
|
1,779,746
|
|
|
|
11.1
|
%
|
|
|
195,691
|
|
|
|
1,584,055
|
|
|
|
9.6
|
%
|
|
|
164,309
|
|
|
|
1,419,746
|
|
|
|
8.5
|
%
|
Entities affiliated with Technology
Crossover
Ventures(5)
|
|
|
1,958,681
|
|
|
|
12.2
|
%
|
|
|
|
|
|
|
1,958,681
|
|
|
|
11.8
|
%
|
|
|
|
|
|
|
1,958,681
|
|
|
|
11.8
|
%
|
Maveron
entities(6)
|
|
|
1,049,192
|
|
|
|
6.6
|
%
|
|
|
114,065
|
|
|
|
935,127
|
|
|
|
5.6
|
%
|
|
|
95,774
|
|
|
|
839,353
|
|
|
|
5.0
|
%
|
Salmon River and Insight
entities(7)
|
|
|
1,354,726
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
1,354,726
|
|
|
|
8.2
|
%
|
|
|
|
|
|
|
1,354,726
|
|
|
|
8.2
|
%
|
Directors and Named Executive
Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen G.
Shank(8)
|
|
|
2,511,860
|
|
|
|
15.5
|
%
|
|
|
183,826
|
(21)
|
|
|
2,307,596
|
|
|
|
13.7
|
%
|
|
|
142,583
|
(22)
|
|
|
2,147,851
|
|
|
|
12.8
|
%
|
Kenneth J.
Sobaski(9)
|
|
|
41,294
|
|
|
|
*
|
|
|
|
|
|
|
|
41,294
|
|
|
|
*
|
|
|
|
|
|
|
|
41,294
|
|
|
|
*
|
|
Michael J.
Offerman(10)
|
|
|
135,293
|
|
|
|
*
|
|
|
|
50,000
|
(23)
|
|
|
83,789
|
|
|
|
*
|
|
|
|
|
|
|
|
83,789
|
|
|
|
*
|
|
Lois M.
Martin(11)
|
|
|
79,871
|
|
|
|
*
|
|
|
|
|
|
|
|
79,871
|
|
|
|
*
|
|
|
|
|
|
|
|
79,871
|
|
|
|
*
|
|
Paul A.
Schroeder(12)
|
|
|
161,568
|
|
|
|
1.0
|
%
|
|
|
40,000
|
|
|
|
121,568
|
|
|
|
*
|
|
|
|
|
|
|
|
121,568
|
|
|
|
*
|
|
Gordon A. Holmes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S. Joshua
Lewis(13)
|
|
|
1,346,961
|
|
|
|
8.4
|
%
|
|
|
|
|
|
|
1,346,961
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
1,346,961
|
|
|
|
8.1
|
%
|
Jody G.
Miller(14)
|
|
|
2,750
|
|
|
|
*
|
|
|
|
|
|
|
|
2,750
|
|
|
|
*
|
|
|
|
|
|
|
|
2,750
|
|
|
|
*
|
|
James A.
Mitchell(15)
|
|
|
59,775
|
|
|
|
*
|
|
|
|
22,000
|
|
|
|
37,775
|
|
|
|
*
|
|
|
|
|
|
|
|
37,775
|
|
|
|
*
|
|
David W.
Smith(16)
|
|
|
24,492
|
|
|
|
*
|
|
|
|
6,609
|
|
|
|
17,883
|
|
|
|
*
|
|
|
|
|
|
|
|
17,883
|
|
|
|
*
|
|
Jeffrey W.
Taylor(17)
|
|
|
5,000
|
|
|
|
*
|
|
|
|
|
|
|
|
5,000
|
|
|
|
*
|
|
|
|
|
|
|
|
5,000
|
|
|
|
*
|
|
Darrell R.
Tukua(18)
|
|
|
15,250
|
|
|
|
*
|
|
|
|
|
|
|
|
15,250
|
|
|
|
*
|
|
|
|
|
|
|
|
15,250
|
|
|
|
*
|
|
Jon Q.
Reynolds, Jr.(5)
|
|
|
1,958,681
|
|
|
|
12.2
|
%
|
|
|
|
|
|
|
1,958,681
|
|
|
|
11.8
|
%
|
|
|
|
|
|
|
1,958,681
|
|
|
|
11.8
|
%
|
Sandra E.
Taylor(19)
|
|
|
250
|
|
|
|
*
|
|
|
|
|
|
|
|
250
|
|
|
|
*
|
|
|
|
|
|
|
|
250
|
|
|
|
*
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
Owned Prior to the
|
|
|
Shares
|
|
|
Owned After
|
|
|
Over-Allotment
|
|
|
Owned After
|
|
|
|
Offering(1)
|
|
|
Being
|
|
|
Offering
|
|
|
Shares Being
|
|
|
Over-Allotment(2)
|
|
Name of Beneficial Owner
|
|
Shares
|
|
|
Percent
|
|
|
Offered
|
|
|
Shares
|
|
|
Percent
|
|
|
Offered(2)
|
|
|
Shares
|
|
|
Percent
|
|
|
All directors and executive
officers as a group
(18 persons)(20)
|
|
|
6,481,317
|
|
|
|
38.5
|
%
|
|
|
392,312
|
|
|
|
6,067,063
|
|
|
|
35.2
|
%
|
|
|
142,583
|
|
|
|
5,907,318
|
|
|
|
34.2
|
%
|
Other Selling
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gabriel
Abel(24)
|
|
|
14,098
|
|
|
|
*
|
|
|
|
5,998
|
(25)
|
|
|
8,100
|
|
|
|
*
|
|
|
|
|
|
|
|
8,100
|
|
|
|
*
|
|
Lawrence
Abel(26)
|
|
|
63,924
|
|
|
|
*
|
|
|
|
6,198
|
|
|
|
57,726
|
|
|
|
*
|
|
|
|
|
|
|
|
57,726
|
|
|
|
*
|
|
Lorraine
Abel(27)
|
|
|
48,726
|
|
|
|
*
|
|
|
|
3,332
|
(28)
|
|
|
31,896
|
|
|
|
*
|
|
|
|
|
|
|
|
31,896
|
|
|
|
*
|
|
Matthew
Abel(29)
|
|
|
48,726
|
|
|
|
*
|
|
|
|
6,400
|
(30)
|
|
|
31,896
|
|
|
|
*
|
|
|
|
|
|
|
|
31,896
|
|
|
|
*
|
|
Matthew Abel, as custodian for
Julian Abel under the Michigan Uniform Transfers to Minors
Act(31)
|
|
|
48,726
|
|
|
|
*
|
|
|
|
1,100
|
(32)
|
|
|
31,896
|
|
|
|
*
|
|
|
|
|
|
|
|
31,896
|
|
|
|
*
|
|
Brian
Austin(33)
|
|
|
17,725
|
|
|
|
*
|
|
|
|
5,000
|
|
|
|
12,725
|
|
|
|
*
|
|
|
|
|
|
|
|
12,725
|
|
|
|
*
|
|
Citigroup Global Markets
Inc.(34)
|
|
|
266,326
|
|
|
|
1.7
|
%
|
|
|
266,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tom
Clemens(35)
|
|
|
22,620
|
|
|
|
*
|
|
|
|
5,000
|
|
|
|
17,620
|
|
|
|
*
|
|
|
|
|
|
|
|
17,620
|
|
|
|
*
|
|
Amy
Drifka(36)
|
|
|
18,802
|
|
|
|
*
|
|
|
|
5,000
|
|
|
|
13,802
|
|
|
|
*
|
|
|
|
|
|
|
|
13,802
|
|
|
|
*
|
|
DRW Venture Partners
LP(37)
|
|
|
22,481
|
|
|
|
*
|
|
|
|
22,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Bruce
Francis(38)
|
|
|
72,365
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
32,365
|
|
|
|
*
|
|
|
|
|
|
|
|
32,365
|
|
|
|
*
|
|
Joesph Gaylord
IRA(39)
|
|
|
6,905
|
|
|
|
*
|
|
|
|
4,496
|
|
|
|
2,409
|
|
|
|
*
|
|
|
|
|
|
|
|
2,409
|
|
|
|
*
|
|
Scott
Henkel(40)
|
|
|
42,754
|
|
|
|
*
|
|
|
|
20,000
|
|
|
|
22,754
|
|
|
|
*
|
|
|
|
|
|
|
|
22,754
|
|
|
|
*
|
|
Linda
Muehlbauer(41)
|
|
|
26,382
|
|
|
|
*
|
|
|
|
10,041
|
|
|
|
16,341
|
|
|
|
*
|
|
|
|
|
|
|
|
16,341
|
|
|
|
*
|
|
Dana
Offerman(42)
|
|
|
135,293
|
|
|
|
*
|
|
|
|
1,504
|
(43)
|
|
|
83,789
|
|
|
|
*
|
|
|
|
|
|
|
|
83,789
|
|
|
|
*
|
|
Elizabeth
Rausch(44)
|
|
|
55,170
|
|
|
|
*
|
|
|
|
52,377
|
|
|
|
2,793
|
|
|
|
*
|
|
|
|
|
|
|
|
2,793
|
|
|
|
*
|
|
Mark
Rossman(45)
|
|
|
42,660
|
|
|
|
*
|
|
|
|
7,500
|
(46)
|
|
|
27,660
|
|
|
|
*
|
|
|
|
|
|
|
|
27,660
|
|
|
|
*
|
|
Maxine
Rossman(47)
|
|
|
42,660
|
|
|
|
*
|
|
|
|
7,500
|
(48)
|
|
|
27,660
|
|
|
|
*
|
|
|
|
|
|
|
|
27,660
|
|
|
|
*
|
|
Judith F. Shank 2004 Grantor
Retained Annuity
Trust(49)
|
|
|
75,202
|
|
|
|
*
|
|
|
|
10,219
|
|
|
|
64,983
|
|
|
|
*
|
|
|
|
8,581
|
|
|
|
56,402
|
|
|
|
*
|
|
Stephen G. Shank 2004 Grantor
Retained Annuity
Trust(50)
|
|
|
75,202
|
|
|
|
*
|
|
|
|
10,219
|
|
|
|
64,983
|
|
|
|
*
|
|
|
|
8,581
|
|
|
|
56,402
|
|
|
|
*
|
|
Don
Smithmier(51)
|
|
|
74,062
|
|
|
|
*
|
|
|
|
30,000
|
|
|
|
44,062
|
|
|
|
*
|
|
|
|
|
|
|
|
44,062
|
|
|
|
*
|
|
ThinkEquity Investment Partners
LLC(52)
|
|
|
22,481
|
|
|
|
*
|
|
|
|
6,555
|
|
|
|
15,926
|
|
|
|
*
|
|
|
|
|
|
|
|
15,926
|
|
|
|
*
|
|
TH Lee, Putnam Investment
Trust TH Lee, Putnam Emerging Opportunities
Portfolio(53)
|
|
|
449,639
|
|
|
|
2.8
|
%
|
|
|
449,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greg
Thom(54)
|
|
|
40,098
|
|
|
|
*
|
|
|
|
17,500
|
|
|
|
22,598
|
|
|
|
*
|
|
|
|
|
|
|
|
22,598
|
|
|
|
*
|
|
Karen
Viechnicki(55)
|
|
|
43,590
|
|
|
|
*
|
|
|
|
36,907
|
|
|
|
6,683
|
|
|
|
*
|
|
|
|
|
|
|
|
6,683
|
|
|
|
*
|
|
Stephen
Weiss(56)
|
|
|
150,938
|
|
|
|
*
|
|
|
|
49,000
|
|
|
|
101,938
|
|
|
|
*
|
|
|
|
|
|
|
|
101,938
|
|
|
|
*
|
|
|
|
|
(1) |
|
Beneficial ownership is determined in accordance with the rules
of the SEC that generally attribute beneficial ownership of
securities to persons who possess sole or shared voting power
and/or
investment power with respect to those securities and includes
shares of common stock issuable pursuant to the exercise of
stock options that are immediately exercisable or exercisable
within 60 days. Unless otherwise indicated, the persons or
entities identified in this table have sole voting and
investment power with respect to all shares shown as
beneficially owned by them. Percentage ownership calculations
for each beneficial owner prior to the offering, after the
offering, and after over-allotment are based on
16,017,750 shares, 16,576,724 shares and
16,621,896 shares, respectively, of common stock |
115
|
|
|
|
|
outstanding plus any shares of common stock subject to options
held by such beneficial owner that are exercisable within
60 days of February 28, 2007. |
|
|
|
(2) |
|
Amounts presented assume that the over-allotment option is
exercised in full. |
|
|
|
(3) |
|
This information is based on a Schedule 13G filed with the
Securities and Exchange Commission on February 22, 2007 by
Forstmann VI, Forstmann VII, Forstmann VIII, FLC XXXII
Partnership, L.P. (FLC XXXII), FLC XXXIII
Partnership, L.P. (FLC XXXIII), Theodore J.
Forstmann, and Winston W. Hutchins. The address of such persons
is c/o Forstmann Little & Co., 767 Fifth Avenue,
44th Floor, New York, NY 10153. The shares are owned
directly by Forstmann VI (875,336 shares), Forstmann VII
(144,397 shares) and Forstmann VIII (86,639 shares).
Each of Forstmann VI, Forstmann VII and Forstmann VIII disclaims
beneficial ownership of shares owned by the other entities. The
general partner of Forstmann VI and Forstmann VII is FLC XXXII
and the general partner of Forstmann VIII is FLC XXXIII. The
general partners of FLC XXXII and FLC XXXIII are Theodore J.
Forstmann, Winston W. Hutchins, and T. Geoffrey McKay.
Accordingly, each of the individuals named above, other than
Mr. McKay for the reason described below, may be deemed the
beneficial owner of shares owned by Forstmann VI, Forstmann VII
and Forstmann VIII. Mr. McKay does not have any voting or
investment power with respect to, or any economic interest in,
the shares held by Forstmann VI, Forstmann VII or Forstmann VIII
and, accordingly, Mr. McKay is not deemed to be a
beneficial owner of these shares. |
|
|
|
(4) |
|
This information is based on a Schedule 13G filed with the
Securities and Exchange Commission on February 9, 2007 by
Cherry Tree Ventures IV, L.P. (CTV IV), CTV
Partners IV LP (CTV Partners), Cherry Tree Core
Growth Fund, L.L.L.P. (CTCGF), Cherry Tree
Investments, LLC (CTI), Gordon Stofer, and Tony J.
Christianson. The address of such persons is c/o Cherry
Tree Investments, Inc., 301 Carlson Parkway, Suite 103,
Minnetonka, MN 55305. The shares are owned directly by CTV IV
(1,748,000 shares) and CTCGF (31,746). CTV Partners is the
sole general partner of CTV IV, and CTI is the sole general
partner of CTCGF. Messrs. Stofer and Christianson are the
managing partners of CTV Partners and the managing members of
CTI. Accordingly, each of CTV Partners and Messrs. Stofer
and Christianson may be deemed to possess indirect beneficial
ownership of the shares of common stock held by CTV IV, and each
of CTI and Messrs. Stofer and Christianson may be deemed to
possess indirect beneficial ownership of the shares of common
stock held by CTCGF. CTV Partners, CTI and Messrs. Stofer
and Christianson each disclaim indirect beneficial ownership of
the shares of common stock except to the extent of his or its
pecuniary interest in such shares. |
|
|
|
(5) |
|
This information is based on a Schedule 13D filed with the
Securities and Exchange Commission on November 22, 2006 by
TCV V, L.P. (TCV V), TCV Member Fund, L.P.
(Member Fund), Technology Crossover
Management V, L.L.C. (Management V), and the
following individuals: Jon Q. Reynolds, Jr., a
director of Capella, Jay C. Hoag, Richard H. Kimball, John L.
Drew, Henry J. Feinberg and William J.G. Griffith IV
(collectively, the Management V Members). The
address of such persons is 528 Ramona Street, Palo Alto, CA
94301. The shares are owned directly by TCV V
(1,922,294 shares) and Member Fund (36,387). Each of TCV V
and Member Fund has the sole power to dispose or direct the
disposition and voting of its respective shares.
Management V, as a general partner of each of TCV V and
Member Fund, may also be deemed to have the sole power to
dispose or direct the disposition of, and to direct the vote of,
the shares held by each of TCV V and Member Fund. TCM V
disclaims beneficial ownership of such securities except to the
extent of its pecuniary interest therein. Each of the Management
V Members is a Class A member of Management V. Under the
operating agreement of Management V, the Management V
Members have the shared power to dispose or direct the
disposition of, and the shared power to direct the vote of, the
shares held by each of TCV V and Member Fund. Each of the
Management V Members disclaims beneficial ownership of the
securities owned by each of TCV V and Member Fund except to the
extent of their pecuniary interest therein. |
|
|
|
(6) |
|
This information is based on a Schedule 13G filed with the
Securities and Exchange Commission on February 26, 2007 by
Maveron Equity Partners 2000, L.P. (Maveron 2000),
Maveron Equity Partners 2000-B, L.P. (Maveron
2000-B), MEP 2000 Associates LLC (MEP 2000),
Maveron |
116
|
|
|
|
|
General Partner 2000 LLC (Maveron GP), Maveron LLC,
Dan Levitan, Howard Schultz, and Debra Somberg. The address
of such persons is c/o Maveron LLC, 505 Fifth Avenue South,
Suite 600, Seattle, WA 98104. The shares are owned directly
by Maveron 2000 (888,732 shares), Maveron 2000-B
(34,391 shares), and MEP 2000 (126,069 shares).
Maveron GP serves as general partner of Maveron 2000 and Maveron
2000-B, and possess shared power to vote and dispose of shares
directly owned by Maveron 2000 and Maveron 2000-B. Maveron LLC
serves as general partner of MEP 2000, and possesses shared
power to vote and dispose of shares directly owned by MEP 2000.
Dan Levitan, Howard Schultz and Debra Somberg are managing
members of Maveron GP and Maveron LLC. Dan Levitan, Howard
Schultz, Debra Somberg, Maveron GP (with respect to the shares
held directly by Maveron 2000 and Maveron 2000-B) and Maveron
LLC (with respect to the shares held directly by MEP
2000) disclaim beneficial ownership of shares held directly
by Maveron 2000, Maveron 2000-B and MEP 2000, except to the
extent of its pecuniary interest therein. Of the
114,065 shares being sold by the Maveron entities in this
offering, Maveron 2000 is selling 96,620 shares, Maveron
2000-B is
selling 3,739 shares, and MEP 2000 is selling
13,706 shares. |
|
|
|
(7) |
|
This information is based on a Schedule 13G filed with the
Securities and Exchange Commission on February 14, 2007 by
(1) Insight-Salmon River LLC (direct holder of
850,000 shares), Salmon River Capital I LLC (direct holder
of 272,222 shares), Salmon River CIP LLC (direct holder of
146,018 shares), and Salmon River Capital II, L.P.
(direct holder of 55,736 shares) (collectively, the
Salmon River Funds) and (2) Insight Venture
Partners IV, L.P. (direct holder of 24,308 shares), Insight
Venture Partners IV (Fund B), L.P. (direct holder of
194 shares), Insight Venture Partners IV
(Co-Investors), L.P. (direct holder of 2,997 shares), and
Insight Venture Partners (Cayman) IV, L.P. (direct holder of
3,251 shares) (collectively, the Insight
Funds). The address of each of the Salmon River Funds is
680 Fifth Avenue, 8th Floor, New York, NY 10019. The
address of each of the Insight Funds is 527 Madison Avenue,
10th Floor, New York, NY 10022. The managing member of each
of the Salmon River Funds, except Salmon River Capital II,
L.P., is Salmon River Capital LLC. The general partner of Salmon
River Capital II, L.P. is Salmon River Capital GP, LLC. S.
Joshua Lewis, a director of Capella, is the managing member of
Salmon River Capital LLC and the sole member of Salmon River
Capital GP, LLC. Accordingly, Mr. Lewis has voting and
investment powers with respect to the shares beneficially owned
by the Salmon River Funds. Mr. Lewis disclaims beneficial
ownership of such shares except to the extent of his pecuniary
interest therein. The general partner of each of the Insight
Funds is Insight Venture Associates IV, LLC
(Associates), and the managing member of Associates
is Insight Holdings Group, LLC (Holdings).
Accordingly, each of Associates and Holdings may be deemed to be
the beneficial owner of all shares held by the Insight Funds.
The managing member of Insight-Salmon River, LLC is Salmon River
Capital LLC, and the non-managing members of Insight-Salmon
River LLC are the Insight Funds. Salmon River Capital LLC, as
managing member of Insight-Salmon River LLC, generally controls
the voting power over the shares held by Insight-Salmon River
LLC, but the Insight Funds have shared voting power with Salmon
River Capital LLC over the shares with respect to certain
matters. In addition, Salmon River Capital LLC and the Insight
Funds have shared investment power over the shares held by
Insight-Salmon River LLC. Mr. Lewis, Associates and
Holdings have shared voting and investment powers with respect
to the shares beneficially owned by Insight-Salmon River LLC.
All such persons disclaim beneficial ownership of the shares
held by Insight-Salmon River LLC, except to the extent of their
pecuniary interest therein. |
|
|
|
(8) |
|
Consists of (1) 2,013,100 shares held by
Mr. Shank, (2) 125,195 shares held by Judith F.
Shank, Mr. Shanks wife, (3) 75,202 shares
controlled by Mary Shank Retzlaff, Mr. Shanks
daughter, as trustee of the Stephen G. Shank 2004 Grantor
Retained Annuity Trust, (4) 75,202 shares controlled
by Susan Shank, Mr. Shanks daughter, as trustee of
the Judith F. Shank 2004 Grantor Retained Annuity Trust,
(5) 219,350 shares underlying options granted to
Mr. Shank that are exercisable within 60 days, and
(6) 3,811 shares held by the ESOP for
Mr. Shanks account. |
|
|
|
(9) |
|
Consists of (1) 41,250 shares underlying options
granted to Mr. Sobaski that are exercisable within
60 days, and (2) 44 shares held by the ESOP for
Mr. Sobaskis account. |
117
|
|
|
(10) |
|
Consists of (1) 4,496 shares held by
Dr. Offerman, (2) 1,504 shares held by Dana
Offerman, Dr. Offermans wife,
(3) 126,734 shares underlying options granted to
Dr. Offerman that are exercisable within 60 days, and
(4) 2,559 shares held by the ESOP for
Dr. Offermans account. |
|
|
|
(11) |
|
Consists of (1) 79,439 shares underlying options
granted to Ms. Martin that are exercisable within
60 days, and (2) 432 shares held by the ESOP for
Ms. Martins account. |
|
|
|
(12) |
|
Consists of (1) 6,744 shares held by
Mr. Schroeder, (2) 152,081 shares underlying
options granted to Mr. Schroeder that are exercisable
within 60 days, and (3) 2,743 shares held by the
ESOP for Mr. Schroeders account. |
|
|
|
(13) |
|
Consists of (1) 850,000 shares owned by Insight-Salmon
River LLC; (2) 272,222 shares owned by Salmon River
Capital I LLC; (3) 146,018 shares owned by Salmon
River CIP LLC; (4) 55,736 shares owned by Salmon River
Capital II, L.P.; (5) 10,485 shares owned by
Mr. Lewis; and (6) 12,500 shares underlying
options granted to Mr. Lewis that are exercisable within
60 days. The managing member of Insight-Salmon River LLC is
Salmon River Capital LLC, and the non-managing members of
Insight-Salmon River LLC are Insight Venture Partners IV, L.P.,
Insight Venture Partners IV (Fund B), L.P., Insight
Venture Partners IV (Co-Investors), L.P., and Insight
Venture Partners (Cayman) IV, L.P. (collectively, the
Insight Partnerships). Salmon River Capital LLC, as
managing member of Insight-Salmon River LLC, generally controls
the voting power over the shares held by Insight-Salmon River
LLC, but the Insight Partnerships have shared voting power with
Salmon River Capital LLC over such shares with respect to
certain matters. In addition, Salmon River Capital LLC and the
Insight Partnerships have shared investment power over the
shares held by Insight-Salmon River LLC. The managing member of
Salmon River Capital LLC is S. Joshua Lewis. The general partner
of the Insight Partnerships is Insight Venture Associates IV,
LLC. The managing member of Insight Venture Associates IV, LLC
is Insight Holdings Group, LLC. Insight Holdings Group, LLC is
managed by its board of managers. Accordingly, Mr. Lewis,
Insight Venture Associates IV, LLC, and Insight Holdings Group,
LLC have shared voting and investment powers with respect to the
shares beneficially owned by Insight-Salmon River LLC. The
foregoing is not an admission by such persons that such persons
are the beneficial owners of the shares held by Insight-Salmon
River LLC, and each disclaims beneficial ownership of such
shares except to the extent of their pecuniary interest therein.
The managing member of Salmon River Capital I LLC and Salmon
River CIP LLC is Salmon River Capital LLC. The managing member
of Salmon River Capital LLC is Mr. Lewis. Mr. Lewis
has voting and investment powers with respect to the shares
beneficially owned by Salmon River Capital I LLC and Salmon
River CIP LLC. The foregoing is not an admission by
Mr. Lewis that he is the beneficial owner of the shares
held by Salmon River Capital I LLC and Salmon River CIP LLC, and
Mr. Lewis disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein. The
general partner of Salmon River Capital II, L.P. is Salmon
River Capital GP, LLC. The sole member of Salmon River Capital
GP, LLC is Mr. Lewis. Accordingly, Mr. Lewis has
voting and investment powers with respect to the shares
beneficially owned by Salmon River Capital II, L.P. The
foregoing is not an admission by Mr. Lewis that he is the
beneficial owner of the shares held by Salmon River
Capital II, L.P., and Mr. Lewis disclaims beneficial
ownership of such shares except to the extent of his pecuniary
interest therein. |
|
|
|
(14) |
|
Consists of (1) 250 shares held by Ms. Miller,
and (2) 2,500 shares underlying options granted to
Ms. Miller that are exercisable within 60 days. |
|
|
|
(15) |
|
Consists of (1) 41,275 shares controlled by
Mr. Mitchell, as trustee of the James A. Mitchell Trust;
and (2) 18,500 shares underlying options granted to
Mr. Mitchell that are exercisable within 60 days. |
|
|
|
(16) |
|
Consists of (1) 8,992 shares held by Mr. Smith,
and (2) 15,500 shares underlying options granted to
Mr. Smith that are exercisable within 60 days. |
|
|
|
(17) |
|
Consists of 5,000 shares underlying options granted to
Mr. Taylor that are exercisable within 60 days. |
|
|
|
(18) |
|
Consists of (1) 250 shares held by Mr. Tukua, and
(2) 15,000 shares underlying options granted to
Mr. Tukua that are exercisable within 60 days. |
|
|
|
(19) |
|
Consists of 250 shares held by Ms. Taylor. |
118
|
|
|
(20) |
|
Includes (1) 816,821 shares underlying options granted
to our directors and executive officers that are exercisable
within 60 days, and (2) 14,151 shares held by the
ESOP for the accounts of our executive officers. |
|
|
|
(21) |
|
Does not include 20,438 total shares being offered by the
Stephen G. Shank 2004 Grantor Retained Annuity Trust and the
Judith F. Shank 2004 Grantor Retained Annuity Trust. |
|
|
|
(22) |
|
Does not include 17,162 total over-allotment shares being
offered by the Stephen G. Shank 2004 Grantor Retained Annuity
Trust and the Judith F. Shank 2004 Grantor Retained Annuity
Trust. |
|
|
|
(23) |
|
Does not include 1,504 shares being offered by Dana
Offerman, Dr. Offermans wife. |
|
|
|
(24) |
|
Consists of 14,098 shares owned by Gabriel Abel. |
|
|
|
(25) |
|
Does not include 10,832 total shares being offered by Matthew
Abel (Gabriels father), Lorraine Abel (Gabriels
mother) and Matthew Abel as custodian for Julian Abel
(Gabriels brother). |
|
|
|
(26) |
|
Consists of (1) 17,198 shares owned by Lawrence Abel,
(2) 2,200 shares over which Lawrence Abel exercises
voting and investment control as custodian under the
Pennsylvania Uniform Transfers to Minors Act for his two minor
children, (3) 4,432 shares owned by Seyna Abel
(Lawrences wife), (4) 14,098 shares owned by
Jessica Abel (Lawrences daughter),
(5) 12,998 shares owned by Dori Abel (Lawrences
daughter) and (6) 12,998 shares owned by Nora Abel
(Lawrences daughter). |
|
|
|
(27) |
|
Consists of (1) 3,332 shares owned by Lorraine Abel,
(2) 17,198 shares owned by Matthew Abel
(Lorraines husband), (3) 14,098 shares owned by
Julian Abel (Lorraines son) and
(4) 14,098 shares owned by Gabriel Abel
(Lorraines son). |
|
|
|
(28) |
|
Does not include 13,498 total shares being offered by Matthew
Abel (Lorraines husband), Gabriel Abel (Lorraines
son) and Matthew Abel as custodian for Julian Abel
(Lorraines son). |
|
|
|
(29) |
|
Consists of (1) 17,198 shares owned by Matthew Abel,
(2) 3,332 shares owned by Lorraine Abel
(Matthews wife), (3) 14,098 shares owned by
Julian Abel (Matthews son) and (4) 14,098 shares
owned by Gabriel Abel (Matthews son). |
|
|
|
(30) |
|
Does not include 10,430 total shares being offered by Matthew
Abel as custodian for Julian Abel (Matthews son), Lorraine
Abel (Matthews wife) and Gabriel Abel (Matthews son). |
|
|
|
(31) |
|
Consists of (1) 1,100 shares over which Matthew Abel
exercises voting and investment control as custodian for Julian
Abel (Matthews son) under the Michigan Uniform Transfers
to Minors Act, (2) 12,998 additional shares owned by Julian
Abel, (3) 17,198 shares owned by Matthew Abel,
(4) 3,332 shares owned by Lorraine Abel
(Matthews wife), and (5) 14,098 shares owned by
Gabriel Abel (Matthews son). |
|
|
|
(32) |
|
Does not include an aggregate of 15,730 shares being
offered by Matthew Abel on his own behalf, Lorraine Abel
(Matthews wife and Julians mother) and Gabriel Abel
(Matthews son and Julians brother). |
|
|
|
(33) |
|
Consists of (1) 13,125 shares held by Mr. Austin,
(2) 2,800 shares underlying options granted to
Mr. Austin that are exercisable within 60 days and
(3) 1,800 shares held by the ESOP for
Mr. Austins account. Mr. Austin is a member of
the Senior Faculty of Capella University. |
|
|
|
(34) |
|
James Conahan, a Managing Director of Citigroup Global Markets
Inc., exercises voting and investment power over these shares. |
|
|
|
(35) |
|
Consists of (1) 21,031 shares underlying options
exercisable within 60 days granted to Mr. Clemens and
(2) 1,589 shares held by the ESOP for
Mr. Clemens account. Mr. Clemens is our Director
of Events and Outreach Programs. |
|
|
|
(36) |
|
Consists of (1) 250 shares held by Ms. Drifka,
(2) 16,907 shares underlying options granted to
Ms. Drifka that are exercisable within 60 days and
(3) 1,645 shares held by the ESOP for
Ms. Drifkas account. Ms. Drifka is our Vice
President and Corporate Controller. |
|
|
|
(37) |
|
Tony Mayhew, vice president of the general partner of DRW
Venture Partners LP, exercises voting and investment power over
these shares. |
119
|
|
|
(38) |
|
Consists of (1) 67,941 shares held by
Mr. Francis, (2) 1,875 shares underlying options
granted to Mr. Francis that are exercisable within
60 days, and (3) 2,549 shares held by the ESOP
for Mr. Francis account. Mr. Francis is a member
of the Senior Faculty of Capella University. |
|
|
|
(39) |
|
Consists of (1) 4,496 shares held by Mr. Gaylord
in his IRA account and (3) 2,409 shares held by the
ESOP for Mr. Gaylords account. Mr. Gaylord
served as our Vice President, Chief Financial Officer and
Principal Accounting Officer prior to 2006. |
|
|
|
(40) |
|
Consists of (1) 42,025 shares underlying options
granted to Mr. Henkel that are exercisable within
60 days and (3) 729 shares held by the ESOP for
Mr. Henkels account. Mr. Henkel is our Vice
President, Information Technology. |
|
|
|
(41) |
|
Consists of (1) 24,498 shares underlying options
granted to Ms. Muehlbauer that are exercisable within
60 days and (3) 1,884 shares held by the ESOP for
Ms. Muehlbauer s account. Ms. Muehlbauer is our
Vice President, Advising and Learner Experience. |
|
|
|
(42) |
|
Consists of (1) 1,504 shares held by
Ms. Offerman, (2) 4,496 shares held by
Ms. Offermans husband, Dr. Michael Offerman, our
Senior Vice President and the President of Capella University,
(3) 126,734 shares underlying options granted to
Dr. Offerman that are exercisable within 60 days, and
(4) 2,559 shares held by the ESOP for
Dr. Offermans account. |
|
|
|
(43) |
|
Does not include 50,000 shares being offered by
Dr. Michael Offerman, Ms. Offermans husband. |
|
|
|
(44) |
|
Consists of (1) 4,496 shares held by Ms. Rausch,
(2) 47,881 shares underlying options granted to
Ms. Rausch that are exercisable within 60 days and
(3) 2,793 shares held by the ESOP for
Ms. Rauschs account. Ms. Rausch is our Vice
President, Human Resources. |
|
|
|
(45) |
|
Consists of (1) 20,000 shares held by
Mr. Rossman, (2) 20,000 shares held by Maxine
Rossman, Mr. Rossmans wife,
(3) 1,542 shares held by the ESOP for
Mr. Rossmans account, and (4) 1,118 shares
held by the ESOP for Maxine Rossmans account. |
|
|
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(46) |
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Does not include 7,500 shares being offered by Maxine
Rossman, Mr. Rossmans wife. |
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(47) |
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Consists of (1) 20,000 shares held by
Ms. Rossman, (2) 20,000 shares held by Mark
Rossman, Ms. Rossmans husband,
(3) 1,118 shares held by the ESOP for
Ms. Rossmans account, and (4) 1,542 shares
held by the ESOP for Mark Rossmans account. |
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(48) |
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Does not include 7,500 shares being offered by Mark
Rossman, Ms. Rossmans husband. |
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(49) |
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Susan Shank is the daughter of Stephen Shank, our Chairman and
Chief Executive Officer and, as trustee of the trust, exercises
voting and investment power over these shares. |
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(50) |
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Mary Shank Retzlaff is the daughter of Stephen Shank, our
Chairman and Chief Executive Officer and, as trustee of the
trust, exercises voting and investment power over these shares. |
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(51) |
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Consists of (1) 18,000 shares held by
Mr. Smithmier, (2) 53,421 shares underlying
options granted to Mr. Smithmier that are exercisable
within 60 days and (3) 2,641 shares held by the
ESOP for Mr. Smithmiers account. Mr. Smithmier
is our Vice President, Business Management. |
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(52) |
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The investment adviser of TH Lee, Putnam Investment Trust
TH Lee, Putnam Emerging Opportunities Portfolio is TH Lee,
Putnam Capital Management, LLC. TH Lee, Putnam Capital
Management, LLC is indirectly majority owned by Putnam, LLC,
which is an indirectly owned subsidiary of Marsh &
McLennan Companies, Inc., a company traded on the New York Stock
Exchange. Marsh & McLennan Companies, Inc. and Putnam,
LLC disclaim beneficial ownership of all such shares. The
address of TH Lee, Putnam Investment Trust TH Lee, Putnam
Emerging Opportunities Portfolio is One Post Office Square,
Boston, MA 02109. TH Lee, Putnam Investment Trust TH Lee,
Putnam Emerging Opportunities Portfolio is selling shares in
this offering and is an affiliate of Putnam Retail Management
Limited Partnership, a broker-dealer engaged in the distribution
of affiliated mutual funds that is neither participating in this
offering nor affiliated with the underwriting syndicate for this
offering. TH Lee, Putnam Investment Trust TH Lee, Putnam
Emerging Opportunities Portfolio purchased its shares of our
stock in the ordinary course of business, and at the time of its
purchase of such shares, it had no agreements or understandings,
directly or indirectly, with any person to distribute the shares. |
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(53) |
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Michael Moe and Deborah Quazzo, the CEO and President,
respectively, of ThinkEquity Investment Partners LLC, exercise
voting and investment power over these shares. |
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(54) |
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Consists of (1) 39,061 shares underlying options
granted to Mr. Thom that are exercisable within
60 days and (2) 1,037 shares held by the ESOP for
Mr. Thoms account. Mr. Thom is our Vice
President, General Counsel and Secretary. |
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(55) |
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Consists of (1) 2,500 shares held by
Ms. Viechnicki, (2) 39,407 shares underlying
options granted to Ms. Viechnicki that are exercisable
within 60 days and (3) 1,683 shares held by the
ESOP for Ms. Viechnickis account. Ms. Viechnicki
is the Provost of Capella University. |
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(56) |
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Consists of (1) 143,995 shares held by Mr. Weiss,
(2) 4,496 shares held by UBS Financial Services as
custodian of Mr. Weisss IRA account, over which
Mr. Weiss exercises voting and investment power, and
(3) 2,447 shares held by the ESOP for
Ms. Weisss account. |
121
DESCRIPTION
OF CAPITAL STOCK
We are authorized to issue 100,000,000 shares of common
stock, $0.01 par value per share, and
10,000,000 shares of undesignated capital stock. As of
February 28, 2007 no shares of preferred stock are issued
or outstanding. Upon completion of this offering, each
outstanding share of our common stock will be validly issued,
fully paid and non-assessable. As of February 28, 2007,
2,187,723 shares of our common stock are reserved for
issuance upon exercise of outstanding options (including
257,829 shares issuable by us upon the exercise of stock
options by certain selling shareholders in connection with this
offering).
The following description of the material provisions of our
capital stock and our amended and restated articles of
incorporation, amended and restated bylaws and other agreements
with and among our shareholders is only a summary, does not
purport to be complete and is qualified by applicable law and
the full provisions of our amended and restated articles of
incorporation, amended and restated bylaws and other agreements.
You should refer to our amended and restated articles of
incorporation, amended and restated bylaws and related
agreements as in effect upon the closing of this offering, which
are included as exhibits to the registration statement of which
this prospectus is a part.
Common
Stock
As of February 28, 2007, there were 16,017,750 shares
of common stock outstanding, held of record by approximately 137
persons.
Voting Rights. Holders of common stock
are entitled to one vote per share on any matter to be voted
upon by shareholders. All shares of common stock rank equally as
to voting and all other matters. The shares of common stock have
no preemptive or conversion rights, no redemption or sinking
fund provisions, are not liable for further call or assessment
and are not entitled to cumulative voting rights.
Dividend Rights. Subject to the prior
rights of holders of preferred stock, for as long as such stock
is outstanding, the holders of common stock are entitled to
receive ratably any dividends when and as declared from time to
time by the board of directors out of funds legally available
for dividends. Other than the special distribution to be paid to
existing shareholders upon consummation of this offering (as
described elsewhere in this prospectus), we do not anticipate
paying cash dividends on the common stock in the foreseeable
future.
Liquidation Rights. Upon a liquidation
or dissolution of our company, whether voluntary or involuntary,
creditors and holders of our preferred stock with preferential
liquidation rights will be paid before any distribution to
holders of our common stock. After such distribution, holders of
common stock are entitled to receive a pro rata distribution per
share of any excess amount.
Undesignated
Capital Stock
Under our amended and restated articles of incorporation, the
board of directors has authority to issue the undesignated stock
without shareholder approval. The board of directors may also
determine or alter for each class of stock the voting powers,
designations, preferences, and special rights, qualifications,
limitations or restrictions as permitted by law. The board of
directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the
voting power or other rights of the holders of the common stock.
Issuing preferred stock provides flexibility in connection with
possible acquisitions and other corporate purposes, but could
also, among other things, have the effect of delaying, deferring
or preventing a change in control of our company and may
adversely affect the market price of our common stock and the
voting and other rights of the holders of common stock.
Registration
and Other Rights
As of February 28, 2007, the holders of
4,918,388 shares of common stock were entitled to certain
rights with respect to the registration of these shares under
the Securities Act of 1933.
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We entered into a second amended and restated investor rights
agreement with certain holders of our Class E preferred
stock and Class G preferred stock on January 22, 2003.
Pursuant to the second amended and restated investor rights
agreement, certain holders of our Class E preferred stock
and Class G preferred stock and any holder or holders of
shares of our common stock equal to at least 10% of the shares
of Class E preferred stock originally issued have the
right, at any time six months after the completion of our
initial public offering, to demand that we file a registration
statement covering the offer and sale of the registrable shares
so long as the registrable shares have an aggregate offering
price of at least $1,000,000. We are obligated to effect up to
two such registrations for certain shareholders. If we are
eligible to file a registration on
Form S-3,
certain shareholders may request such registration, so long as
the aggregate offering price of the shares will be at least
$1,000,000. We are not obligated to register the eligible shares
on
Form S-3
on more than three occasions. In addition, certain shareholders
have piggyback rights, which may require us to include their
shares in our registration statement. The holders rights
to request inclusion of shares in a registration statement are
subject to the right of the underwriters of the offering to
reduce the number of shares included if, in the good faith
judgment of the underwriters, inclusion of the shares would
jeopardize the success of the offering. The registrable shares
covered under the investor rights agreement will cease to be
registrable under the agreement (a) when such registrable
shares are sold pursuant a registration statement,
Section 4(1) of the Securities Act or Rule 144 under
the Securities Act, (b) at such time as such registrable
shares are eligible for sale under Rule 144(k) of the
Securities Act or (c) when such registrable shares are sold
and/or
transferred not in accordance with the transfer provisions of
the agreement. Of the total 4,652,062 registrable shares covered
under the agreement as of February 28, 2007, 523,116
registrable shares are currently held by non-affiliates of the
company and 4,128,946 shares are currently held by persons
who may be deemed to be our affiliates. We have agreed to pay
all expenses of the registration, excluding fees and expenses of
holders counsel and any underwriting or selling
commissions.
Provisions
of Minnesota Law and Our Articles and Bylaws with Anti-Takeover
Implications
In connection with this offering, we intend to amend and restate
our articles of incorporation. Certain provisions of Minnesota
law, our amended and restated articles of incorporation and our
amended and restated bylaws may be deemed to have an
anti-takeover effect or may delay, deter or prevent a tender
offer or takeover attempt that a shareholder might consider in
the shareholders best interests, including those attempts
that might result in a premium being paid over the market price
for the shares held by a shareholder.
Minnesota
Law
Control Share Acquisitions. We have opted not
to be governed by the provisions of Section 302A.671 of the
Minnesota Statutes. Section 302A.671 applies, with certain
exceptions, to any acquisition of a corporations voting
stock from a person other than the corporation, and other than
in connection with certain mergers and exchanges to which the
corporation is a party, that results in the acquiring person
owning 20% or more of the corporations voting stock then
outstanding. Similar triggering events occur at the one-third
and majority ownership levels. Section 302A.671 requires
approval of the granting of voting rights for the shares
received pursuant to any such acquisitions by a majority vote of
a corporations shareholders, excluding interested shares.
In general, shares acquired without this approval are denied
voting rights and can be called for redemption at their then
fair market value by the corporation within 30 days after
the acquiring person has failed to deliver a timely information
statement to the corporation or the date the shareholders voted
not to grant voting rights to the acquiring persons shares.
Business Combinations. We are subject to the
provisions of Section 302A.673 of the Minnesota Statutes.
Section 302A.673 generally prohibits any business
combination by a corporation, or any of its subsidiaries, with
an interested shareholder, which means any shareholder that
purchases 10% or more of the corporations voting shares
within four years following the date the person became an
interested shareholder, unless the business combination is
approved by a committee composed solely of one or more
123
disinterested members of the corporations board of
directors before the date the person became an interested
shareholder.
Takeover Offer. We are subject to the
provisions of Section 302A.675 of the Minnesota Statutes.
Section 302A.675 generally prohibits an offeror from
acquiring shares of a publicly held Minnesota corporation within
two years following the offerors last purchase of the
corporations shares pursuant to a takeover offer with
respect to that class of shares, unless the corporations
shareholders are able to sell their shares to the offeror upon
substantially equivalent terms as those provided in the earlier
takeover offer. This statute will not apply if the acquisition
of shares is approved by a committee composed solely of one or
more disinterested members of our board of directors before the
purchase of any shares by the offeror pursuant to a takeover
offer.
Power to Acquire Shares. We are subject to the
provisions of Section 302A.553, subdivision 3, of the
Minnesota Statutes. Section 302A.553, subdivision 3,
prohibits a corporation from purchasing any voting shares owned
for less than two years from a holder of more than 5% of its
outstanding voting stock for more than the market value of the
shares. Exceptions to this provision are provided if the share
purchase is approved by a majority of the corporations
shareholders or if the corporation makes a repurchase offer of
equal or greater value to all shareholders.
Articles
of Incorporation and Bylaws
Our amended and restated articles of incorporation provide that
the holders of our capital stock do not have cumulative voting
rights or preemptive rights. Our amended and restated articles
of incorporation also provide that the board of directors has
the power to issue any or all of the shares of undesignated
capital stock, including the authority to establish one or more
series and to fix the powers, preferences, rights and
limitations of such class or series, without seeking shareholder
approval. The board of directors may authorize the issuance of
preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders
of the common stock. Issuing preferred stock provides
flexibility in connection with possible acquisitions and other
corporate purposes, but could also, among other things, have the
effect of delaying, deferring or preventing a change in control
of our company and may adversely affect the market price of our
common stock and the voting and other rights of the holders of
common stock.
Our amended and restated bylaws provide that:
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any vacancy on the board of directors, however occurring,
including a vacancy resulting from an enlargement of the board,
may only be filled by vote of a majority of the directors then
in office;
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any action required or permitted to be taken by the shareholders
at a regular meeting or special meeting of shareholders may only
be taken if it is properly brought before such meeting;
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special meetings of the shareholders may only be called by our
chief executive officer, chief financial officer, our board of
directors, any two or more members of our board of directors or
holders of at least 10% of the voting power of all shares then
entitled to vote; provided that any special meeting called by
one or more shareholders to take action concerning a proposed
business combination may be called only by holders of at least
25% of the voting power of all shares then entitled to vote; and
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in order for any matter to be considered properly brought before
a meeting, a shareholder must comply with requirements to
provide advance notice to us.
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The limitation on the filling of vacancies on the board of
directors could make it difficult for a third party to acquire,
or discourage a third party from seeking to acquire, control of
us. The provisions relating to shareholder meetings could delay
until the next shareholders meeting shareholder actions
that are favored by the holders of a significant amount of
shares of our outstanding voting stock.
124
Limitations
of Director Liability
Our amended and restated articles of incorporation will limit
personal liability for breach of the fiduciary duty of our
directors to the fullest extent provided by Minnesota law. Such
provisions eliminate the personal liability of directors for
damages occasioned by breach of fiduciary duty, except for
liability based on the directors duty of loyalty to us or
our shareholders, liability for acts or omissions not made in
good faith, liability for acts or omissions involving
intentional misconduct or knowing violation of law, liability
based on payments of improper dividends, liability based on a
transaction from which the director derives an improper personal
benefit, liability based on violation of state securities laws,
and liability for acts occurring prior to the date such
provision was added. Any amendment to or repeal of such
provisions will not adversely affect any right or protection of
a director for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
Indemnification
of Directors, Officers and Employees
Our amended and restated bylaws provide that we will, under
certain circumstances and subject to certain limitations,
indemnify any of our directors, officers or employees made or
threatened to be made a party to a proceeding by reason of that
directors, officers or employees former or
present official capacity with us against judgments, penalties,
fines, settlements and reasonable expenses. Any such director,
officer or employee is also entitled, subject to certain
limitations, to payment or reimbursement of reasonable expenses
in advance of the final disposition of the proceeding.
The
Nasdaq Global Market
Our common stock trades on The Nasdaq Global Market under the
symbol CPLA.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is Wells
Fargo Bank, National Association.
125
SHARES ELIGIBLE
FOR FUTURE SALE
We can make no predictions as to the effect, if any, that sales
of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless,
sales of significant amounts of our common stock in the public
market, or the perception that those sales may occur, could
adversely affect prevailing market prices and impair our future
ability to raise capital through the sale of our equity at a
time and price we deem appropriate.
Upon the completion of this offering, based upon the number of
shares of our common stock outstanding as of February 28,
2007, we will have 16,576,724 shares (or in the event the
underwriters over-allotment option is exercised,
16,621,896 shares) of our common stock outstanding. Of these
shares, 4,600,000 shares of our common stock sold in our
November 2006 initial public offering and 3,100,000 shares
of our common stock sold in this offering will be freely
tradable without restriction under the Securities Act, except
for any shares of our common stock purchased by our
affiliates, as that term is defined in Rule 144
under the Securities Act of 1933, which would be subject to the
limitations and restrictions described below. In addition, our
Employee Stock Ownership Plan may under certain circumstances
distribute to participants a portion of the shares that it holds
(298,271 shares as of February 28, 2007). Depending
upon the circumstances of any such distribution, the shares
could be eligible for immediate resale. An additional
54,704 shares of our common stock may be sold at any time
in the public market without restriction.
The remaining 8,822,020 shares of our common stock
outstanding upon completion of this offering are deemed
restricted shares, as that term is defined under
Rule 144 of the Securities Act.
Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration
under Rule 144, 144(k) or 701 under the Securities Act,
which rules are described below.
The restricted shares and the shares held by our affiliates will
be available for sale in the public market as follows:
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397,302 shares will be eligible for sale at various times after
the date of this prospectus pursuant to Rules 144, 144(k)
and 701;
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5,832,589 shares subject to
lock-up
agreements in connection with this offering will be eligible for
sale at various times beginning 60 days (subject to an
extension of no more than 34 days as a result of an
earnings release by us or the occurrence of material news or a
material event relating to us) after the date of this prospectus
pursuant to Rules 144, 144(k) and 701;
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2,351,554 shares subject to
lock-up
agreements in connection with this offering will be eligible for
sale at various times beginning 90 days (subject to an
extension of no more than 34 days as a result of an
earnings release by us or the occurrence of material news or a
material event relating to us) after the date of this prospectus
pursuant to Rules 144, 144(k) and 701; and
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240,575 shares subject to the
lock-up
agreements in connection with our initial public offering will
be eligible for sale at various times beginning on May 8,
2007 (subject to an extension of no more than 34 days as a
result of an earnings release by us or the occurrence of
material news or a material event relating to us) pursuant to
Rules 144, 144(k) and 701.
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Rule 144
In general, under Rule 144 as currently in effect, a
person, or persons whose shares must be aggregated, who has
beneficially owned restricted shares of our common stock for at
least one year is entitled to sell within any three-month period
a number of shares that does not exceed the greater of the
following:
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one percent of the number of shares of common stock then
outstanding, which will equal approximately 165,767 shares
immediately after this offering, or
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the average weekly trading volume of our common stock on The
Nasdaq Global Market during the four calendar weeks preceding
the date of filing of a notice on Form 144 with respect to
the sale.
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Sales under Rule 144 are also generally subject to certain
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person, or persons whose shares must
be aggregated, who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale
and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell the shares
under Rule 144(k) without complying with the manner of
sale, public information, volume limitations or notice or public
information requirements of Rule 144. Therefore, unless
otherwise restricted, the shares eligible for sale under
Rule 144(k) may be sold immediately upon the completion of
this offering.
Rule 701
Certain of our current and former directors, employees and
consultants who acquired their shares in connection with awards
pursuant to our 1993, 1999 and 2005 stock incentive plans, each
of which is a written compensatory plan, are entitled to rely on
the resale provisions of Rule 701 under the Securities Act
of 1933. Under Rule 701, these shareholders, whether or not
they are our affiliates, are permitted to sell the shares
subject to Rule 701 without having to comply with the
Rule 144 holding period restrictions, in each case
commencing 90 days after the date of this prospectus. In
addition, non-affiliates may sell their
Rule 701 shares without complying with the volume,
notice or public information requirements of Rule 144
described above.
Registration
on
Form S-8
We filed registration statements on
Form S-8
under the Securities Act of 1933 to register shares of common
stock issuable under our 1993, 1999 and 2005 stock incentive
plans. As a result, shares issued pursuant to our 1993, 1999 and
2005 stock incentive plans, including upon the exercise of stock
options, are eligible for resale in the public market without
restriction, subject to Rule 144 limitations applicable to
affiliates described above and the
lock-up
agreements described below. In addition, in the event that we
decide to implement our Employee Stock Purchase Plan, referred
to as the ESPP, we intend to file a registration statement on
Form S-8
under the Securities Act of 1933 to register shares of common
stock issuable under the ESPP. Shares issued under the ESPP
would then be eligible for resale in the public market without
restriction, subject to Rule 144 limitations applicable to
affiliates described above and the
lock-up
agreements described below.
As of February 28, 2007:
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121,558 shares of common stock were reserved pursuant to
our 1993 Plan for future issuance in connection with the
exercise of outstanding options previously awarded under this
plan, and options with respect to 121,558 shares had vested;
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1,003,851 shares of common stock were reserved pursuant to
our 1999 Plan for future issuance in connection with the
exercise of outstanding options previously awarded under this
plan, and options with respect to 807,145 shares had vested;
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1,062,314 shares of common stock were reserved pursuant to
our 2005 Plan for future issuance in connection with the
exercise of outstanding options previously awarded under this
plan, and options with respect to 331,260 shares had
vested; and
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450,000 shares of common stock were reserved pursuant to
our ESPP for future employee purchases under this plan.
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127
Lock-Up
Agreements
For a description of the
lock-up
agreements with the underwriters entered into in connection with
this offering that restrict sales of shares by us, our directors
and executive officers and certain of our other employees and
shareholders, see the information under the heading
Underwriting. In addition, we, our directors and
executive officers and certain of our other employees and
shareholders entered into
lock-up
agreements in connection with our initial public offering. The
terms of those
lock-up
agreements are the same as the
lock-up
agreements entered into in connection with this offering and
described under the heading Underwriting, except
that the terms of the initial public offering
lock-up
agreements expire on May 8, 2007 (subject to an extension
of no more than 34 days as a result of an earnings release
by us or the occurrence of material news or a material event
relating to us).
Registration
Rights
For a description of registration rights with respect to our
common stock, see the information under the heading titled
Description of Capital Stock Registration and
Other Rights.
128
U.S. FEDERAL
TAX CONSEQUENCES
TO
NON-U.S. HOLDERS
OF COMMON STOCK
The following is a general discussion of the material
U.S. federal income and estate tax consequences to
non-U.S. Holders
with respect to the acquisition, ownership and disposition of
our common stock. In general, a
Non-U.S. Holder
is any holder of our common stock other than the following:
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a citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United
States or meets the substantial presence test under
section 7701(b)(3) of the Internal Revenue Code;
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a corporation (or an entity treated as a corporation) created or
organized in the United States or under the laws of the United
States, any state thereof, or the District of Columbia;
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an estate, the income of which is subject to U.S. federal
income tax regardless of its source; or
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a trust, if a U.S. court can exercise primary supervision
over the administration of the trust and one or more
U.S. persons can control all substantial decisions of the
trust, or certain other trusts that have a valid election to be
treated as a U.S. person in effect.
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This discussion is based on current provisions of the Internal
Revenue Code, Treasury Regulations promulgated under the
Internal Revenue Code, judicial opinions, published positions of
the Internal Revenue Service, and all other applicable
authorities, all of which are subject to change, possibly with
retroactive effect. This discussion does not address all aspects
of U.S. federal income and estate taxation or any aspects
of state, local, or
non-U.S. taxation,
nor does it consider any specific facts or circumstances that
may apply to particular
Non-U.S. Holders
that may be subject to special treatment under the
U.S. federal income tax laws, such as insurance companies,
tax-exempt organizations, financial institutions, brokers,
dealers in securities, and U.S. expatriates. If a
partnership is a beneficial owner of our common stock, the
treatment of a partner in the partnership will generally depend
upon the status of the partner and the activities of the
partnership. This discussion assumes that the
Non-U.S. Holder
will hold our common stock as a capital asset, generally
property held for investment.
Prospective investors are urged to consult their tax advisors
regarding the U.S. federal, state, local, and
non-U.S. income
and other tax considerations of acquiring, holding and disposing
of shares of common stock.
Dividends
In general, dividends paid to a
Non-U.S. Holder
will be subject to U.S. withholding tax at a rate equal to
30% of the gross amount of the dividend, or a lower rate
prescribed by an applicable income tax treaty, unless the
dividends are effectively connected with a trade or business
carried on by the
Non-U.S. Holder
within the United States. Under applicable Treasury Regulations,
a
Non-U.S. Holder
will be required to satisfy certain certification requirements,
generally on IRS
Form W-8BEN,
directly or through an intermediary, in order to claim a reduced
rate of withholding under an applicable income tax treaty. If
tax is withheld in an amount in excess of the amount applicable
under an income tax treaty, a refund of the excess amount may
generally be obtained by filing an appropriate claim for refund
with the IRS.
Dividends that are effectively connected with such a
U.S. trade or business generally will not be subject to
U.S. withholding tax if the
Non-U.S. Holder
files the required forms, including IRS
Form W-8ECI,
or any successor form, with the payor of the dividend, but
instead generally will be subject to U.S. federal income
tax on a net income basis in the same manner as if the
Non-U.S. Holder
were a resident of the United States. A corporate
Non-U.S. Holder
that receives effectively connected dividends may be subject to
an additional branch profits tax at a rate of 30%, or a lower
rate prescribed by an applicable income tax treaty with respect
to effectively connected dividends (subject to adjustment).
129
Gain on
Sale or Other Disposition of Common Stock
In general, a
Non-U.S. Holder
will not be subject to U.S. federal income tax on any gain
realized upon the sale or other taxable disposition of the
Non-U.S. Holders
shares of common stock unless:
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the gain is effectively connected with a trade or business
carried on by the
Non-U.S. Holder
within the United States, in which case the branch profits tax
discussed above may also apply if the
Non-U.S. Holder
is a corporation; and
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the
Non-U.S. Holder
is an individual who holds shares of common stock as capital
assets and is present in the United States for 183 days or
more in the taxable year of disposition and various other
conditions are met.
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Information
Reporting and Backup Withholding
Generally, we must report annually to the IRS the amount of
dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the
recipient. These information reporting requirements apply even
if withholding was not required because the dividends were
effectively connected dividends or withholding was reduced by an
applicable income tax treaty. Under tax treaties or other
agreements, the IRS may make its reports available to tax
authorities in the recipients country of residence.
Payments made to a
Non-U.S. Holder
that is not an exempt recipient generally will be subject to
backup withholding, currently at a rate of 28%, unless a
Non-U.S. Holder
certifies as to its foreign status, which certification may be
made on IRS
Form W-8BEN.
Proceeds from the disposition of common stock by a
Non-U.S. Holder
effected by or through a United States office of a broker will
be subject to information reporting and backup withholding,
currently at a rate of 28% of the gross proceeds, unless the
Non-U.S. Holder
certifies to the payor under penalties of perjury as to, among
other things, its address and status as a
Non-U.S. Holder
or otherwise establishes an exemption. Generally, United States
information reporting and backup withholding will not apply to a
payment of disposition proceeds if the transaction is effected
outside the United States by or through a
non-U.S. office
of a broker. However, if the broker is, for U.S. federal
income tax purposes, a U.S. person, a controlled foreign
corporation, a foreign person who derives 50% or more of its
gross income for specified periods from the conduct of a
U.S. trade or business, specified U.S. branches of
foreign banks or insurance companies or a foreign partnership
with various connections to the United States, information
reporting but not backup withholding will apply unless:
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the broker has documentary evidence in its files that the holder
is a
Non-U.S. Holder
and other conditions are met; or
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the holder otherwise establishes an exemption.
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Backup withholding is not an additional tax. Rather, the amount
of tax withheld is applied to the U.S. federal income tax
liability of persons subject to backup withholding. If backup
withholding results in an overpayment of U.S. federal
income taxes, a refund may be obtained, provided the required
documents are filed with the IRS.
Estate
Tax
Our common stock owned or treated as owned by an individual who
is not a citizen or resident of the United States (as
specifically defined for U.S. federal estate tax purposes)
at the time of death will be includible in the individuals
gross estate for U.S. federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
130
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement
dated ,
2007, we have agreed to sell to the underwriters named below,
for whom Credit Suisse Securities (USA) LLC is acting as the
representative, the following respective numbers of shares of
common stock:
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Number of
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Underwriter
|
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Shares
|
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Credit Suisse Securities (USA) LLC
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Banc of America Securities LLC
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Piper Jaffray & Co
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Robert W. Baird & Co.
Incorporated
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Stifel, Nicolaus &
Company, Incorporated
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Signal Hill Capital Group LLC
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Barrington Research Associates,
Inc.
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Total
|
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3,100,000
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The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of common stock in the
offering if any are purchased, other than those shares covered
by the over-allotment option described below. The underwriting
agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
We and certain of the selling shareholders have granted to the
underwriters a
30-day
option to purchase on a pro rata basis up to 45,172 additional
shares from us and 419,828 additional outstanding shares from
such selling shareholders at the public offering price less the
underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock to
the public at the price on the cover page of this prospectus and
to selling group members at that price less a selling concession
of $ per share. After the
offering, the representative may change the public offering
price and concession.
The following table summarizes the compensation and estimated
expenses we and the selling shareholders will pay:
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Per Share
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Total
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Without
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With
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Without
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With
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Over-allotment
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Over-allotment
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Over-allotment
|
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Over-allotment
|
|
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Underwriting Discounts and
Commissions paid by us
|
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$
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|
|
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$
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|
$
|
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$
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Expenses payable by us
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$
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$
|
|
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$
|
|
|
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$
|
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|
Underwriting Discounts and
Commissions paid by selling shareholders
|
|
$
|
|
|
|
$
|
|
|
|
$
|
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|
$
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We have agreed that we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file
with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 relating to, any
shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock,
or publicly disclose the intention to make any offer, sale,
pledge, disposition or filing, without the prior written consent
of Credit Suisse Securities (USA) LLC, for a period of
90 days after the date of this prospectus. However, in the
event that either (1) during the last 17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC waives
such extension in writing.
131
In connection with this offering, certain of our executive
officers, directors and principal shareholders, as well as the
selling shareholders, have entered into
lock-up
agreements pursuant to which they have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, shares of our common stock or securities
convertible into or exchangeable or exercisable for shares of
our common stock, enter into a transaction that would have the
same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any of
these transactions is to be settled by delivery of our common
stock or other securities, in cash or otherwise, or publicly
disclose the intention to make any offer, sale, pledge or
disposition, or to enter into any transaction, swap, hedge or
other arrangement, without, in each case, the prior written
consent of Credit Suisse Securities (USA) LLC, as described
below:
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our directors and executive officers and certain of the selling
shareholders (other than the selling shareholders identified
below) have entered into
lock-up
agreements for a period of 90 days after the date of this
prospectus, although Ms. Elizabeth Rausch, our Vice
President, Human Resources, did not enter into a
lock-up
agreement as she has provided notice of her intention to leave
our company on or about May 31, 2007 and Stephen Weiss also
did not enter into a lock-up agreement;
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the Salmon River and Insight entities and the entities
affiliated with Technology Crossover Ventures have entered into
lock-up
agreements for a period of 60 days after the date of this
prospectus; Mr. Lewis, one of our directors, is an
affiliate of the Salmon River and Insight entities and
Mr. Reynolds, one of our directors, is an affiliate of the
entities affiliated with Technology Crossover Ventures; and
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the Maveron entities, the Cherry Tree entities, the Forstmann
Little entities, TH Lee, Putnam Investment Trust and
Citigroup Global Markets Inc., as selling shareholders in this
offering, have each entered into a
lock-up
agreement for a period of 60 days after the date of this
prospectus with respect to that portion (if any) of the shares
they currently hold which are not sold in this offering.
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In the event that either (1) during the last 17 days
of the
lock-up
period in any of the agreements described above, we release
earnings results or material news or a material event relating
to us occurs or (2) prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC waives
such extension in writing. However, the
lock-up
period will not be extended at any time at which our common
stock are actively traded securities, as defined in
Regulation M under the Securities and Exchange Act of 1934
and research reports under Rule 139 of the Securities Act
may otherwise be issued with respect to the company.
We and the selling shareholders have agreed to indemnify the
underwriters against liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to
make in that respect.
Certain of the underwriters and their respective affiliates have
from time to time performed, and may in the future perform,
various financial advisory, commercial banking and investment
banking services for us and our affiliates in the ordinary
course of business, for which they received, or will receive,
customary fees and expenses. Specifically, certain of the
underwriters for this offering acted as underwriters for our
initial public offering in November 2006.
In connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions, passive market making, and penalty bids
in accordance with Regulation M under the Securities
Exchange Act of 1934.
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
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Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position
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132
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may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any covered short position by
either exercising their over-allotment option
and/or
purchasing shares in the open market.
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Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over- allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering.
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In passive market making, market makers in the common stock who
are underwriters or prospective underwriters may, subject to
limitations, make bids for or purchases of our common stock
until the time, if any, at which a stabilizing bid is made.
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Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the Nasdaq Global Market or otherwise and, if
commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses electronically. The
representative may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make Internet distributions on the same basis as other
allocations.
133
NOTICE TO
CANADIAN RESIDENTS
Resale
Restrictions
The distribution of the common stock in Canada is being made
only on a private placement basis exempt from the requirement
that we and the selling shareholders prepare and file a
prospectus with the securities regulatory authorities in each
province where trades of common stock are made. Any resale of
the common stock in Canada must be made under applicable
securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the common stock.
Representations
of Purchasers
By purchasing common stock in Canada and accepting a purchase
confirmation, a purchaser is representing to us, the selling
shareholders and the dealer from whom the purchase confirmation
is received that:
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the purchaser is entitled under applicable provincial securities
laws to purchase the common stock without the benefit of a
prospectus qualified under those securities laws,
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where required by law, that the purchaser is purchasing as
principal and not as agent,
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the purchaser has reviewed the text above under Resale
Restrictions and
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the purchaser acknowledges and consents to the provision of
specified information concerning its purchase of the common
stock to the regulatory authority that by law is entitled to
collect the information.
|
Further details concerning the legal authority for this
information is available on request.
Rights of
Action Ontario Purchasers Only
Under Ontario securities legislation, certain purchasers who
purchase a security offered by this prospectus during the period
of distribution will have a statutory right of action for
damages, or while still the owner of the common stock, for
rescission against us and the selling shareholders in the event
that this prospectus contains a misrepresentation without regard
to whether the purchaser relied on the misrepresentation. The
right of action for damages is exercisable not later than the
earlier of 180 days from the date the purchaser first had
knowledge of the facts giving rise to the cause of action and
three years from the date on which payment is made for the
common stock. The right of action for rescission is exercisable
not later than 180 days from the date on which payment is
made for the common stock. If a purchaser elects to exercise the
right of action for rescission, the purchaser will have no right
of action for damages against us or the selling shareholders. In
no case will the amount recoverable in any action exceed the
price at which the common stock was offered to the purchaser and
if the purchaser is shown to have purchased the securities with
knowledge of the misrepresentation, we and the selling
shareholders will have no liability. In the case of an action
for damages, we and the selling shareholders will not be liable
for all or any portion of the damages that are proven to not
represent the depreciation in value of the common stock as a
result of the misrepresentation relied upon. These rights are in
addition to, and without derogation from, any other rights or
remedies available at law to an Ontario purchaser. The foregoing
is a summary of the rights available to an Ontario purchaser.
Ontario purchasers should refer to the complete text of the
relevant statutory provisions.
Enforcement
of Legal Rights
All of our directors and officers as well as the experts named
herein and the selling shareholders may be located outside of
Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon us or
those persons. All or a substantial portion of our assets and
the
134
assets of those persons may be located outside of Canada and, as
a result, it may not be possible to satisfy a judgment against
us or those persons in Canada or to enforce a judgment obtained
in Canadian courts against us or those persons outside of Canada.
Taxation
and Eligibility for Investment
Canadian purchasers of common stock should consult their own
legal and tax advisors with respect to the tax consequences of
an investment in the common stock in their particular
circumstances and about the eligibility of the common stock for
investment by the purchaser under relevant Canadian legislation.
135
LEGAL
MATTERS
The validity of the shares of common stock offered by this
prospectus and other legal matters will be passed upon for us by
Faegre & Benson LLP, Minneapolis, Minnesota. The
underwriters have been represented by Cravath, Swaine &
Moore LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Capella
Education Company at December 31, 2006 and 2005, and for
each of the three years in the period ended December 31,
2006, appearing in this prospectus and registration statement
have been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance
upon such reports given on the authority of such firm as experts
in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange
Act of 1934 and file annual, quarterly and current reports,
proxy statements and other information with the Securities and
Exchange Commission. We have also filed with the Securities and
Exchange Commission a registration statement on
Form S-1,
which includes amendments and exhibits, under the Securities Act
and the rules and regulations under the Securities Act of 1933
for the registration of common stock being offered by this
prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all the information
that is in the registration statement and its exhibits and
schedules. Certain portions of the registration statement have
been omitted as allowed by the rules and regulations of the
Securities and Exchange Commission. Statements in this
prospectus which summarize documents are not necessarily
complete, and in each case you should refer to the copy of the
document filed as an exhibit to the registration statement.
You may read and copy the registration statement, including
exhibits and schedules filed with it, and reports or other
information we may file with the Securities and Exchange
Commission at the public reference facilities of the Securities
and Exchange Commission at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
rooms. In addition, the registration statement and other public
filings can be obtained from the Securities and Exchange
Commissions Internet site at http://www.sec.gov.
136
Report of
Independent Registered Public Accounting Firm
The Board of
Directors and Shareholders
Capella Education Company
We have audited the accompanying consolidated balance sheets of
Capella Education Company (the Company) as of December 31,
2006 and 2005, and the related consolidated statements of
income, shareholders equity (deficit), and cash flows for
each of the three years in the period ended December 31,
2006. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances but not for
the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Capella Education Company at
December 31, 2006 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 2 Summary of Significant
Accounting Policies, to the Consolidated Financial Statements,
effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, using the modified prospective
method.
Minneapolis, Minnesota
February 13, 2007
F-2
Capella
Education Company
Consolidated
Balance Sheets
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As of December 31,
|
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|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except par value)
|
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ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,491
|
|
|
$
|
13,972
|
|
Short-term marketable securities
|
|
|
65,170
|
|
|
|
58,161
|
|
Accounts receivable, net of
allowance of $1,119 in 2006 and $1,299 in 2005
|
|
|
7,401
|
|
|
|
7,720
|
|
Prepaid expenses and other current
assets
|
|
|
3,703
|
|
|
|
4,758
|
|
Deferred income taxes
|
|
|
1,800
|
|
|
|
1,243
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
100,565
|
|
|
|
85,854
|
|
Property and equipment, net
|
|
|
28,749
|
|
|
|
19,559
|
|
Deferred income taxes
|
|
|
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
129,314
|
|
|
$
|
106,562
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE
PREFERRED STOCK AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,113
|
|
|
$
|
4,222
|
|
Accrued liabilities
|
|
|
18,598
|
|
|
|
17,223
|
|
Income taxes payable
|
|
|
214
|
|
|
|
|
|
Deferred revenue
|
|
|
7,488
|
|
|
|
8,044
|
|
Notes payable and current portion
of capital lease obligations
|
|
|
5
|
|
|
|
2,647
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,418
|
|
|
|
32,136
|
|
Deferred rent
|
|
|
1,813
|
|
|
|
2,366
|
|
Capital lease obligations
|
|
|
7
|
|
|
|
|
|
Deferred income taxes
|
|
|
2,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
35,569
|
|
|
|
34,502
|
|
Redeemable preferred stock:
|
|
|
|
|
|
|
|
|
Class E Redeemable Convertible
Preferred Stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 2,596
|
|
|
|
|
|
|
|
|
Issued and outstanding
shares 0 in 2006 and 2,596 in 2005
|
|
|
|
|
|
|
34,985
|
|
Class G Redeemable Convertible
Preferred Stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 2,185
|
|
|
|
|
|
|
|
|
Issued and outstanding
shares 0 in 2006 and 2,185 in 2005
|
|
|
|
|
|
|
22,661
|
|
|
|
|
|
|
|
|
|
|
Total redeemable preferred stock
|
|
|
|
|
|
|
57,646
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Class A Convertible Preferred
Stock, $1.00 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 3,000
|
|
|
|
|
|
|
|
|
Issued and outstanding
shares 0 in 2006 and 2,810 in 2005
|
|
|
|
|
|
|
2,810
|
|
Class B Convertible Preferred
Stock, $2.50 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 1,180
|
|
|
|
|
|
|
|
|
Issued and outstanding
shares 0 in 2006 and 460 in 2005
|
|
|
|
|
|
|
1,150
|
|
Class D Convertible Preferred
Stock, $4.50 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 1,022
|
|
|
|
|
|
|
|
|
Issued and outstanding
shares 0 in 2006 and 1,022 in 2005
|
|
|
|
|
|
|
4,600
|
|
Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares
100,000
|
|
|
|
|
|
|
|
|
Issued and outstanding
shares 16,002 in 2006 and 2,431 in 2005
|
|
|
160
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
156,513
|
|
|
|
9,527
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(7
|
)
|
|
|
(8
|
)
|
Retained earnings (accumulated
deficit)
|
|
|
(62,921
|
)
|
|
|
(3,689
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
93,745
|
|
|
|
14,414
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable
preferred stock and shareholders equity
|
|
$
|
129,314
|
|
|
$
|
106,562
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Capella
Education Company
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
179,881
|
|
|
$
|
149,240
|
|
|
$
|
117,689
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
83,627
|
|
|
|
71,243
|
|
|
|
58,850
|
|
Selling and promotional
|
|
|
56,646
|
|
|
|
45,623
|
|
|
|
35,089
|
|
General and administrative
|
|
|
21,765
|
|
|
|
17,501
|
|
|
|
13,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
162,038
|
|
|
|
134,367
|
|
|
|
107,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,843
|
|
|
|
14,873
|
|
|
|
9,865
|
|
Other income, net
|
|
|
4,472
|
|
|
|
2,306
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
22,315
|
|
|
|
17,179
|
|
|
|
10,589
|
|
Income tax expense (benefit)
|
|
|
8,904
|
|
|
|
6,929
|
|
|
|
(8,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,411
|
|
|
$
|
10,250
|
|
|
$
|
18,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.09
|
|
|
$
|
0.89
|
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.06
|
|
|
$
|
0.86
|
|
|
$
|
1.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,271
|
|
|
|
11,476
|
|
|
|
11,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,629
|
|
|
|
11,975
|
|
|
|
11,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Capella
Education Company
Consolidated
Statement of Shareholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Earnings/
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit)
|
|
|
Total
|
|
|
Income
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2003
|
|
|
2,810
|
|
|
$
|
2,810
|
|
|
|
460
|
|
|
$
|
1,150
|
|
|
|
1,022
|
|
|
$
|
4,600
|
|
|
|
1,826
|
|
|
$
|
18
|
|
|
$
|
3,734
|
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
$
|
(32,724
|
)
|
|
$
|
(20,416
|
)
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
2
|
|
|
|
856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
858
|
|
|
|
|
|
Income tax benefits associated with
stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
Issuance of common stock to the
Employee Stock Ownership Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Employee Stock Ownership Plan
distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,785
|
|
|
|
18,785
|
|
|
$
|
18,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
2,810
|
|
|
|
2,810
|
|
|
|
460
|
|
|
|
1,150
|
|
|
|
1,022
|
|
|
|
4,600
|
|
|
|
2,074
|
|
|
|
20
|
|
|
|
5,354
|
|
|
|
|
|
|
|
|
|
|
|
(13,939
|
)
|
|
|
(5
|
)
|
|
$
|
18,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
1
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
Exercise of stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271
|
|
|
|
3
|
|
|
|
3,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,039
|
|
|
|
|
|
Issuance of common stock to the
Employee Stock Ownership Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
928
|
|
|
|
|
|
Employee Stock Ownership Plan
distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(280
|
)
|
|
|
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
50
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
Cancellation of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(50
|
)
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
Income tax benefits associated with
stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,250
|
|
|
|
10,250
|
|
|
$
|
10,250
|
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
2,810
|
|
|
|
2,810
|
|
|
|
460
|
|
|
|
1,150
|
|
|
|
1,022
|
|
|
|
4,600
|
|
|
|
2,431
|
|
|
|
24
|
|
|
|
9,527
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(3,689
|
)
|
|
|
14,414
|
|
|
$
|
10,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
|
|
1
|
|
|
|
797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
798
|
|
|
|
|
|
Repurchase of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(412
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,179
|
|
|
|
|
|
Income tax benefits associated with
stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166
|
|
|
|
|
|
Employee Stock Ownership Plan
contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
1
|
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,241
|
|
|
|
|
|
Employee Stock Ownership Plan
distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
Issuance of common stock, net of
underwriters commissions and offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,232
|
|
|
|
42
|
|
|
|
74,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,950
|
|
|
|
|
|
Conversion of convertible preferred
stock
|
|
|
(2,810
|
)
|
|
|
(2,810
|
)
|
|
|
(460
|
)
|
|
|
(1,150
|
)
|
|
|
(1,022
|
)
|
|
|
(4,600
|
)
|
|
|
4,292
|
|
|
|
43
|
|
|
|
8,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of redeemable
convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,886
|
|
|
|
49
|
|
|
|
57,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,646
|
|
|
|
|
|
Payment of special distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72,643
|
)
|
|
|
(72,643
|
)
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,411
|
|
|
|
13,411
|
|
|
$
|
13,411
|
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
16,002
|
|
|
$
|
160
|
|
|
$
|
156,513
|
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
(62,921
|
)
|
|
$
|
93,745
|
|
|
$
|
13,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
Capella
Education Company
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,411
|
|
|
$
|
10,250
|
|
|
$
|
18,785
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for bad debts
|
|
|
2,855
|
|
|
|
2,263
|
|
|
|
1,376
|
|
Depreciation and amortization
|
|
|
8,195
|
|
|
|
6,474
|
|
|
|
5,454
|
|
Amortization of investment
discount/premium
|
|
|
(366
|
)
|
|
|
(158
|
)
|
|
|
|
|
Gain on disposal of assets
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
Asset impairment
|
|
|
63
|
|
|
|
156
|
|
|
|
1,020
|
|
Stock-based compensation
|
|
|
4,179
|
|
|
|
|
|
|
|
|
|
Noncash equity-related expense
|
|
|
169
|
|
|
|
1,381
|
|
|
|
1,135
|
|
Excess tax benefits from
stock-based compensation
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
2,926
|
|
|
|
6,203
|
|
|
|
(8,445
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,536
|
)
|
|
|
(4,106
|
)
|
|
|
(4,278
|
)
|
Prepaid expenses and other assets
|
|
|
(627
|
)
|
|
|
(409
|
)
|
|
|
(1,905
|
)
|
Accounts payable and accrued
liabilities
|
|
|
1,274
|
|
|
|
3,329
|
|
|
|
268
|
|
Income taxes payable
|
|
|
546
|
|
|
|
(292
|
)
|
|
|
140
|
|
Deferred rent
|
|
|
(553
|
)
|
|
|
2,366
|
|
|
|
|
|
Deferred revenue
|
|
|
(556
|
)
|
|
|
1,518
|
|
|
|
2,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
28,901
|
|
|
|
28,940
|
|
|
|
16,049
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(15,354
|
)
|
|
|
(9,079
|
)
|
|
|
(7,541
|
)
|
Purchases of marketable securities
|
|
|
(181,980
|
)
|
|
|
(59,879
|
)
|
|
|
(39,700
|
)
|
Sales of marketable securities
|
|
|
175,340
|
|
|
|
46,360
|
|
|
|
35,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(21,994
|
)
|
|
|
(22,598
|
)
|
|
|
(12,191
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of capital lease
obligations and notes payable
|
|
|
(2,666
|
)
|
|
|
(1,278
|
)
|
|
|
(629
|
)
|
Change in restricted cash
|
|
|
|
|
|
|
391
|
|
|
|
80
|
|
Excess tax benefits from
stock-based compensation
|
|
|
79
|
|
|
|
|
|
|
|
|
|
Net proceeds from exercise and
repurchase of stock options
|
|
|
386
|
|
|
|
278
|
|
|
|
858
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
3,039
|
|
|
|
|
|
Employee Stock Ownership Plan
distributions
|
|
|
(6
|
)
|
|
|
(280
|
)
|
|
|
(27
|
)
|
Net proceeds from issuance of
common stock
|
|
|
76,462
|
|
|
|
|
|
|
|
|
|
Payment of special distribution
|
|
|
(72,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
1,612
|
|
|
|
2,150
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
8,519
|
|
|
|
8,492
|
|
|
|
4,140
|
|
Cash and cash equivalents at
beginning of year
|
|
|
13,972
|
|
|
|
5,480
|
|
|
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
22,491
|
|
|
$
|
13,972
|
|
|
$
|
5,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
24
|
|
|
$
|
23
|
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
5,433
|
|
|
$
|
1,080
|
|
|
$
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment and increase
in prepaid asset through proceeds from issuance of notes payable
|
|
$
|
|
|
|
$
|
3,595
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment included in
accounts payable and accrued liabilities
|
|
$
|
2,078
|
|
|
$
|
2,477
|
|
|
$
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment through
capital lease obligations
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to the
Employee Stock Ownership Plan
|
|
$
|
1,241
|
|
|
$
|
928
|
|
|
$
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred
initial public offering costs from prepaid expenses to equity
|
|
$
|
1,512
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
Capella
Education Company
Notes to
Consolidated Financial Statements
(In
thousands, except per share data)
Capella Education Company (the Company) was incorporated on
December 27, 1991. Through its wholly-owned subsidiary,
Capella University (the University), the Company manages its
business on the basis of one reportable segment. The University
is an online post-secondary education services company that
offers a variety of bachelors, masters and doctoral
degree programs primarily delivered to working adults. Capella
University is accredited by The Higher Learning Commission of
the North Central Association of Colleges and Schools.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Consolidation
The consolidated financial statements include the accounts of
the Company and the University, after elimination of all
intercompany accounts and transactions.
Revenue
Recognition
The Companys revenues consist of tuition, application and
graduation fees and commissions we earn from bookstore and
publication sales. Tuition revenue is deferred and recognized as
revenue ratably over the period of instruction. Colloquia
tuition revenue is recognized over the length of the colloquia,
which ranges from two days to two weeks. Application fee revenue
is deferred and recognized ratably over the average expected
term of a learner at the University. Learners are billed a
graduation fee upon applying for graduation for services
provided in connection with evaluating compliance with
graduation requirements. Graduation fee revenue is deferred and
recognized ratably over the expected application assessment
period for learners not expected to attend commencement
ceremonies or over the period prior to the next commencement
ceremony to account for learners who attend the ceremony.
Deferred revenue represents the excess of tuition and fee
payments received as compared to tuition and fees earned and is
reflected as a current liability in the accompanying
consolidated financial statements. The Company also receives
commissions from a third-party bookstore based on sales of
textbooks and related school materials to the Companys
learners. Commission revenue is recognized as it is earned in
conjunction with sales of textbooks and related materials to the
Companys learners.
Cash
and Cash Equivalents
The Company considers all highly liquid marketable securities
with maturities of three months or less at the time of purchase
to be cash equivalents. Cash equivalents are carried at market
value.
Marketable
Securities
The Company accounts for marketable securities in accordance
with the provisions of the Financial Accounting Standards
Boards (FASB) Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and
Equity Securities (FAS 115). FAS 115 addresses the
accounting and reporting for marketable fixed maturity and
equity securities. Management determines the appropriate
classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. All
of the Companys marketable securities are classified as
available-for-sale
as of December 31, 2006 and 2005.
Available-for-sale
marketable securities are carried at fair value as determined by
quoted market prices, with unrealized gains and losses, net of
tax, reported as a separate component of shareholders
equity. Unrealized losses considered to be
other-than-temporary
are recognized currently in earnings. The cost of securities
sold is based on the specific identification method.
Amortization of premiums, accretion of discounts, interest and
dividend income and realized gains and losses are included in
investment
F-7
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
income. Included in marketable securities are certain auction
rate and corporate debt securities that contain interest rate
reset dates at regular intervals, allowing for the Company to
liquidate the marketable securities within three months
throughout the term of the contract. The Company classifies all
marketable securities as current assets in accordance with
Accounting Research Bulletin (ARB) No. 43, Restatement
and Revision of Accounting Research Bulletins, because the
assets are available to fund current operations.
Allowance
for Doubtful Accounts
The Company records an allowance for doubtful accounts for
estimated losses resulting from the inability, failure or
refusal of its learners to make required payments. The Company
determines its allowance for doubtful accounts amount based on
an analysis of the accounts receivable detail and historical
write-off experience. Bad debt expense is recorded as a general
and administrative expense in the consolidated statement of
income. The Company generally writes off accounts receivable
balances deemed uncollectible prior to sending the accounts to
collection agencies.
Concentration
of Credit Risk
Financial instruments, which potentially subject the Company to
credit risk, consist primarily of marketable securities and
accounts receivable.
Management believes that the credit risk related to marketable
securities is limited due to the adherence to an investment
policy that requires marketable securities to have a minimum
Standard & Poors rating of A minus (or
equivalent). All of the Companys marketable securities as
of December 31, 2006 and 2005 consist of cash equivalents
and investments rated A minus or higher, further limiting the
Companys credit risk related to marketable securities.
Management believes that the credit risk related to accounts
receivable is limited due to the large number and diversity of
learners that principally comprise the Companys customer
base. The Companys credit risk with respect to these
accounts receivable is mitigated through the participation of a
majority of the learners in federally funded financial aid
programs.
Approximately 71%, 67% and 64% of the Companys revenues
(calculated on a cash basis) were collected from funds
distributed under Title IV Programs of the Higher Education
Act (Title IV Programs) for the years ended
December 31, 2006, 2005 and 2004, respectively. The
financial aid and assistance programs are subject to political
and budgetary considerations. There is no assurance that such
funding will be maintained at current levels.
Extensive and complex regulations govern the financial
assistance programs in which the Companys learners
participate. The Companys administration of these programs
is periodically reviewed by various regulatory agencies. Any
regulatory violation could be the basis for the initiation of
potential adverse actions, including a suspension, limitation,
or termination proceeding, which could have a material adverse
effect on the Company.
If the University were to lose its eligibility to participate in
federal student financial aid programs, the learners at the
University would lose access to funds derived from those
programs and would have to seek alternative sources of funds to
pay their tuition and fees. See Note 15 for further
information on the regulatory environment in which the Company
operates.
Property
and Equipment
Property and equipment are stated at cost. Computer software is
included in property and equipment and consists of purchased
software, capitalized Web site development costs and internally
developed
F-8
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
software. Capitalized Web site development costs consist mainly
of salaries and outside development fees directly related to Web
sites and various databases. Web site content development is
expensed as incurred. Internally developed software represents
qualifying salary and consulting costs for time spent on
developing internal use software in accordance with Statement of
Position
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Depreciation is provided using
the straight-line method over the estimated useful lives of the
assets, as follows:
|
|
|
|
|
Computer equipment
|
|
|
2-3 years
|
|
Furniture and office equipment
|
|
|
5-7 years
|
|
Computer software
|
|
|
3-7 years
|
|
Leasehold improvements and assets recorded under capital leases
are amortized over the related lease term or estimated useful
life, whichever is shorter.
Income
Taxes
The Company accounts for income taxes as prescribed by Statement
of Financial Accounting Standards No. 109, Accounting
for Income Taxes (FAS 109). FAS 109 prescribes the
use of the asset and liability method to compute the differences
between the tax bases of assets and liabilities and the related
financial amounts using currently enacted tax laws. Valuation
allowances are established, when necessary, to reduce deferred
tax assets to the amount that more likely than not will be
realized.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Contingencies
The Company accrues for costs associated with contingencies
including, but not limited to, regulatory compliance and legal
matters when such costs are probable and reasonably estimable.
Liabilities established to provide for contingencies are
adjusted as further information develops, circumstances change,
or contingencies are resolved. The Company bases these accruals
on managements estimate of such costs, which may vary from
the ultimate cost and expenses associated with any such
contingency.
Impairment
of Long-Lived Assets
The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted
future net cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. The
Company recorded impairment charges of $63, $156 and $1,020
during 2006, 2005 and 2004, respectively.
The impairment charges primarily consist of the write-off of
previously capitalized internal software development costs for
software projects that were abandoned. These charges are
recorded in general and administrative expenses in the
consolidated statements of income.
F-9
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
Advertising
The Company expenses advertising costs as incurred. Advertising
costs for 2006, 2005 and 2004 were $30,307, $22,859 and $17,825,
respectively.
Net
Income Per Common Share
Basic net income per common share is based on the weighted
average number of shares of common stock outstanding during the
period and, since our preferred stock participated in receipt of
dividends equally to common stockholders, also reflects the
dilutive effects of the outstanding shares of our preferred
stock. Diluted net income per common share increases the shares
used in the per share calculation by the dilutive effects of
options and warrants.
The table below is a reconciliation of the numerator and
denominator in the basic and diluted net income per common share
calculation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,411
|
|
|
$
|
10,250
|
|
|
$
|
18,785
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income
per common share weighted average shares outstanding
|
|
|
12,271
|
|
|
|
11,476
|
|
|
|
11,189
|
|
Effect of dilutive stock options
and warrants
|
|
|
358
|
|
|
|
499
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income
per common share
|
|
|
12,629
|
|
|
|
11,975
|
|
|
|
11,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
1.09
|
|
|
$
|
0.89
|
|
|
$
|
1.68
|
|
Diluted net income per common share
|
|
$
|
1.06
|
|
|
$
|
0.86
|
|
|
$
|
1.62
|
|
Options to purchase 728, 0 and 206 common shares, respectively,
were outstanding but not included in the computation of diluted
net income per common share in 2006, 2005 and 2004,
respectively, because their effect would be antidilutive. The
incremental shares included for the effect of dilutive stock
options do not include assumed tax benefits related to
non-qualified stock options until the fourth quarter of 2004,
which is the first period the Company had not fully reserved for
its net deferred tax assets with a valuation allowance.
Deferred
Initial Public Offering Costs
The Company had deferred approximately $1,512 of costs that were
directly attributable to its initial public offering of common
stock as of December 31, 2005. Such costs were deferred as
of December 31, 2005 since the registration process was
expected to be completed in 2006. The deferred offering costs
were included in prepaid expenses and other current assets in
the consolidated balance sheet in 2005. Upon completion of the
initial public offering in 2006, all deferred initial public
offering costs were included in additional paid-in capital as a
reduction to the initial public offering proceeds.
Comprehensive
Income
Comprehensive income includes net income and all changes in the
Companys equity during a period from non-owner sources
which consists exclusively of unrealized gains and losses on
available-for-sale
marketable securities.
F-10
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
Stock-Based
Compensation
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123(R), Share-based
Payment (FAS 123(R)), which requires the measurement
and recognition of compensation expense for stock-based payment
awards made to employees and directors, including employee stock
options. FAS 123(R) eliminates the ability to account for
stock-based compensation transactions using the footnote
disclosure-only provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and instead requires that such transactions
be recognized and reflected in the Companys consolidated
financial statements using a fair-value-based method. In March
2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 (SAB 107), relating
to FAS 123(R). The Company has applied the provisions of
SAB 107 in its adoption of FAS 123(R).
The Company adopted FAS 123(R) using the modified
prospective method, which requires the application of the
accounting standard as of January 1, 2006. The consolidated
financial statements as of and for the year ended
December 31, 2006 reflect the impact of FAS 123(R). In
accordance with the modified prospective transition method, the
Companys consolidated financial statements for the years
ended December 31, 2005 and 2004 have not been restated to
reflect, and do not include, the impact of FAS 123(R).
Prior to the adoption of FAS 123(R), the Company accounted
for stock-based awards to employees and directors using the
intrinsic value method in accordance with APB 25 as allowed
under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS 123).
Under the intrinsic value method, no stock-based compensation
expense had been recognized in the Companys consolidated
statements of income because the exercise price of stock options
granted to employees and directors equaled the fair market value
of the underlying stock at the date of grant. The Company
recognized stock-based compensation of $202 in 2005, related to
a modification of the terms of specific stock options. See
Note 12 for pro forma information had compensation expense
been determined based on the fair value of options at grant
dates computed in accordance with FAS 123.
As a result of adopting FAS 123(R) on January 1, 2006,
the Companys income before income taxes and net income for
the year ended December 31, 2006 are $4,179 and $3,104
lower, respectively, than if the Company had continued to
account for stock-based compensation under APB 25. Basic
and diluted earnings per share for the year ended
December 31, 2006 are $0.26 and $0.25 lower, respectively,
than if the Company had continued to account for stock-based
compensation under APB 25.
Prior to the adoption of FAS 123(R), the Company presented
all tax benefits of deductions resulting from the exercise of
stock options as operating cash flows in the consolidated
statements of cash flows. FAS 123(R) requires the cash
flows resulting from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for
those options (excess tax benefits) to be classified as
financing cash flows. The $79 excess tax benefit classified as a
financing cash inflow for the year ended December 31, 2006
would have been classified as an operating cash inflow if the
company had not adopted FAS 123(R).
New
Accounting Standards
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing the recognition threshold a tax position is
required to meet before being recognized in the financial
statements. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company
is currently evaluating the effect that the adoption of
FIN 48 will have on its financial condition and results of
operations.
F-11
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
The following is a summary of
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
Auction rate
|
|
$
|
35,100
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35,100
|
|
Corporate debt
|
|
|
29,282
|
|
|
|
6
|
|
|
|
(16
|
)
|
|
|
29,272
|
|
U.S. Agency
|
|
|
799
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,181
|
|
|
$
|
6
|
|
|
$
|
(17
|
)
|
|
$
|
65,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
Auction rate
|
|
$
|
44,775
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44,775
|
|
Corporate debt
|
|
|
8,550
|
|
|
|
2
|
|
|
|
(8
|
)
|
|
|
8,544
|
|
U.S. Agency
|
|
|
4,851
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
4,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,176
|
|
|
$
|
2
|
|
|
$
|
(17
|
)
|
|
$
|
58,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized gains and losses on the Companys
investments in U.S. agency and corporate debt were caused
by interest rate changes. The cash flows of the agency
instruments are guaranteed by an agency of the
U.S. government while corporate securities are backed by
the issuing companys credit worthiness. It is expected
that the securities would not be settled at a price less than
the amortized cost of the Companys marketable securities
and, therefore, the Company does not consider those investments
to be
other-than-temporarily
impaired as of December 31, 2006.
The remaining contractual maturities of the Companys
marketable securities are shown below:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Due in one year or less
|
|
$
|
13,575
|
|
|
$
|
11,382
|
|
Due in one to five years
|
|
|
8,426
|
|
|
|
2,004
|
|
Due after ten years
|
|
|
43,169
|
|
|
|
44,775
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,170
|
|
|
$
|
58,161
|
|
|
|
|
|
|
|
|
|
|
Included in marketable securities are certain auction rate and
corporate debt securities that contain interest rate reset dates
at regular intervals, allowing for the Company to liquidate the
marketable securities within three months throughout the term of
the contract. The Company classifies all marketable securities
as current assets in accordance with Accounting Research
Bulletin (ARB) No. 43, Restatement and Revision of
Accounting Research Bulletins, because the assets are
available to fund current operations.
Gross realized gains and losses resulting from the sale of
available-for-sale
securities were $6 and $5, respectively, in 2006. Gross realized
gains and losses resulting from the sale of
available-for-sale
securities were zero in 2005 and 2004.
F-12
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
|
|
4.
|
Property
and Equipment
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Computer software
|
|
$
|
30,871
|
|
|
$
|
18,469
|
|
Computer equipment
|
|
|
12,531
|
|
|
|
10,235
|
|
Furniture and office equipment
|
|
|
8,059
|
|
|
|
6,612
|
|
Leasehold improvements
|
|
|
1,975
|
|
|
|
1,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,436
|
|
|
|
36,634
|
|
Less accumulated depreciation and
amortization
|
|
|
(24,687
|
)
|
|
|
(17,075
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
28,749
|
|
|
$
|
19,559
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Accrued instructional fees
|
|
$
|
4,470
|
|
|
$
|
3,189
|
|
Accrued compensation and benefits
|
|
|
3,618
|
|
|
|
4,510
|
|
Accrued vacation
|
|
|
1,047
|
|
|
|
1,386
|
|
Customer deposits
|
|
|
1,218
|
|
|
|
1,010
|
|
Other
|
|
|
8,245
|
|
|
|
7,128
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,598
|
|
|
$
|
17,223
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Financing
Arrangements
|
The Company entered into an unsecured $10,000 line of credit in
August 2004 with Wells Fargo Bank. The line of credit has an
expiration date of June 30, 2007. Any borrowings under the
line of credit would bear interest at a rate of either LIBOR
plus 2.5% or the Banks prime rate, at the Companys
discretion on the borrowing date. There have been no borrowings
to date under the line of credit.
The Company entered into agreements in 2005 to borrow $3,595 to
finance asset purchases related to its enterprise resource
planning system. The notes were repaid in full in 2006.
|
|
7.
|
Operating
and Capital Lease Obligations
|
The Company leases its office facilities and certain office
equipment under various noncancelable lease arrangements, which
have been accounted for as operating or capital leases, as
appropriate.
F-13
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
Future minimum lease commitments under the leases as of
December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
2007
|
|
$
|
5
|
|
|
$
|
2,773
|
|
2008
|
|
|
5
|
|
|
|
2,803
|
|
2009
|
|
|
2
|
|
|
|
2,305
|
|
2010
|
|
|
|
|
|
|
1,864
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
12
|
|
|
$
|
9,745
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
|
|
|
|
|
|
Present value of net minimum
payments
|
|
|
12
|
|
|
|
|
|
Less current portion
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease
obligations
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under capital leases with a cost of $16 and $92 and
accumulated depreciation of $4 and $85 at December 31, 2006
and 2005, respectively, are included in computer equipment,
furniture and office equipment, and computer software (see
Note 4). Amortization of the related lease assets is
included with depreciation expense.
The Company recognizes rent expense on a straight-line basis
over the term of the lease, although the lease may include
escalation clauses that provide for lower rent payments at the
start of the lease term and higher lease payments at the end of
the lease term. Cash or lease incentives received from lessors
are recognized on a straight-line basis as a reduction to rent
from the date the Company takes possession of the property
through the end of the lease term. The Company records the
unamortized portion of the incentive as a part of deferred rent,
in accrued liabilities or long-term liabilities, as appropriate.
Total rent expense and related taxes and operating expenses
under operating leases for the years ended December 2006, 2005
and 2004 were $5,369, $5,036, and $2,940, respectively.
In the ordinary conduct of business, the Company is subject to
various lawsuits and claims covering a wide range of matters,
including, but not limited to, claims involving learners or
graduates and routine employment matters. The Company does not
believe that the outcome of any pending claims will have a
material adverse impact on its consolidated financial position
or results of operations.
On November 10, 2006, the Company sold 3,632 shares of
common stock and the selling shareholders sold 368 shares
of common stock in an initial public offering for $63,790 in net
cash proceeds, after deducting underwriting commission and
offering expenses of $8,853. On November 13, 2006, the
underwriters exercised their over-allotment option in full to
purchase 600 shares of common stock for $11,160 in net cash
proceeds, after deducting underwriter commission of $840. Upon
completion of the initial public offering, the Company paid a
special distribution in the amount of $72,643, which is equal to
the total gross proceeds from the sale of common stock by the
Company in the offering, not including the proceeds received by
the Company from the underwriters exercise of their
over-allotment option. The special distribution was paid on an
as if converted basis to the common, preferred, and redeemable
preferred shareholders of record as of October 3, 2006.
F-14
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
Each class of the Companys preferred and redeemable
preferred stock was converted to common stock upon the
consummation of the initial public offering.
The Company amended its articles of incorporation, effective
upon the completion of the initial public offering, to change
the par value of its common stock from $0.10 per share to
$0.01 per share. The consolidated financial statements have
been retroactively adjusted for the change in par value.
As of December 31, 2005, including the redeemable preferred
stock in Note 11, the Company was authorized to issue
13,000 shares of preferred stock, of which
3,017 shares were available for issuance.
The Class A, Class B and Class D preferred stock
had certain voting and registration rights and had preference
over common stock upon liquidation. The Class B and
Class D shares ranked equal to each other and to the
Class E and Class G shares, and all ranked senior to
the Class A shares with respect to liquidation preference.
The holders of convertible preferred stock were entitled to
receive dividends in an amount determined by the Board of
Directors, if declared by the Board of Directors. However, in no
event would any dividend have been paid on any common shares
unless equal or greater dividends were paid on the convertible
preferred shares on an as if converted basis.
The convertible preferred stock was convertible at any time into
shares of common stock at the option of the shareholder. The
conversion price was subject to adjustments related to any stock
splits, dividends, sales of common stock, or merger of the
Company. The convertible preferred stock was converted into
common stock upon the closing of the initial public offering in
November 2006.
|
|
11.
|
Redeemable
Preferred Stock
|
The Class E and Class G redeemable convertible
preferred stock had certain voting and registration rights and
had preference over common stock upon liquidation. The
Class E and Class G shares ranked equal to each other
and to the Class B and Class D shares, and all ranked
senior to the Class A shares with respect to liquidation
preference.
The holders of redeemable convertible preferred stock were
entitled to receive dividends in an amount determined by the
Board of Directors, if declared by the Board of Directors.
However, in no event would any dividend have been paid on any
common shares unless equal or greater dividends were paid on the
redeemable convertible preferred shares on an as if converted
basis.
The redeemable convertible preferred stock was convertible at
any time into shares of common stock at the option of the
shareholder. The conversion price was subject to adjustments
related to any stock splits, dividends, sales of common stock,
or merger of the Company. The redeemable convertible preferred
stock was converted into common stock upon the closing of the
initial public offering in November 2006.
|
|
12.
|
Stock-Based
Compensation
|
The Company has three stock-based compensation plans, which are
described below. The compensation cost that has been charged
against income during the year ended December 31, 2006 for
those plans was $2,614 for service-based stock options and
$1,565 for performance-based stock options. The total income tax
benefit recognized in the statement of income for stock-based
compensation arrangements during the year ended
December 31, 2006 was $492 for service-based stock options
and $583 for performance-based stock options.
F-15
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
Stock-based
compensation plans
During 2005, the Company implemented a stock option plan that
includes both incentive stock options and non-qualified stock
options to be granted to employees, directors, officers, and
others (the 2005 Plan). On May 25, 2006 the Board of
Directors approved a change to the Companys stock option
policy in which the Company will only issue non-qualified stock
options for future grants. At December 31, 2006, the
maximum number of shares of common stock reserved under the 2005
Plan is 3,013 shares. The Board of Directors establishes
the terms and conditions of all stock option grants, subject to
the 2005 Plan and applicable provisions of the Internal Revenue
Code (the Code). Under the 2005 Plan, options must be granted at
an exercise price not less than the fair market value of the
Companys common stock on the grant date. Prior to the
initial public offering in November 2006, the valuation used to
determine the fair market value of the Companys common
stock at each grant date was performed internally and
contemporaneously with the issuance of the options. The options
expire on the date determined by the Board of Directors but may
not extend more than ten years from the grant date for options
granted prior to August 2, 2006. On August 2, 2006 the
Board of Directors approved a change to the Companys stock
option policy to shorten the contractual term from ten years to
seven years for future grants. The options generally become
exercisable over a four-year period. Canceled options become
available for reissuance under the 2005 Plan.
The Company has also issued stock options under two discontinued
plans (the 1993 and 1999 Plans). Stock options issued pursuant
to the 1993 and 1999 Plans are still outstanding; however,
unexercised options that are canceled upon termination of
employment are not available for reissuance.
During the year ended December 31, 2006, the Company
granted performance-based stock options to purchase
255 shares of common stock in lieu of a portion of the cash
bonus under the Companys 2006 Annual Incentive Plan for
Management Employees. On December 31, 2006, 74.5% of these
stock options ultimately vested based on meeting certain
performance thresholds related to planned revenue and operating
income. The remaining 25.5% of these performance-based stock
options were canceled.
Stock-based compensation expense recognized in the
Companys consolidated statements of income during the year
ended December 31, 2006 included compensation expense for
stock-based payment awards granted prior to, but not yet vested
as of December 31, 2005, based on the grant date fair value
estimated in accordance with the pro forma provisions of
FAS 123 and compensation expense for the stock-based
payment awards granted subsequent to December 31, 2005,
based on the grant date fair value estimated in accordance with
the provisions of FAS 123(R). As stock-based compensation
expense recognized in the consolidated statements of income is
based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. FAS 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those
estimates. In the Companys pro forma information required
under FAS 123 for the periods prior to fiscal 2006, the
calculation of pro forma expense also reflects estimates of
forfeitures which are adjusted in subsequent periods as actual
forfeitures differ from the original estimates.
The Companys determination of fair value of stock-based
payment awards on the date of grant using an option-pricing
model is affected by the Companys stock price as well as
assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to the
Companys expected stock price volatility over the term of
the awards and actual and projected employee stock option
exercise behaviors.
F-16
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
Option activity is summarized as follows, in thousands except
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Plan Options
|
|
|
Average
|
|
|
|
Available
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
Service-based Stock Options
|
|
for Grant
|
|
|
Incentive
|
|
|
Non-Qualified
|
|
|
per Share
|
|
|
Balance, December 31, 2005
|
|
|
1,318
|
|
|
|
1,120
|
|
|
|
594
|
|
|
$
|
14.67
|
|
Granted
|
|
|
(573
|
)
|
|
|
107
|
|
|
|
466
|
|
|
|
20.00
|
|
Exercised
|
|
|
|
|
|
|
(119
|
)
|
|
|
(3
|
)
|
|
|
10.25
|
|
Canceled
|
|
|
23
|
|
|
|
(130
|
)
|
|
|
(47
|
)
|
|
|
14.56
|
|
Shares reserved for issuance
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2006(a)
|
|
|
2,168
|
|
|
|
978
|
|
|
|
1,010
|
|
|
|
16.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The total available for grant, including the 190 outstanding
performance-based stock options, was 1,978. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Service-based Stock Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Balance at December 31, 2006
|
|
|
1,988
|
|
|
$
|
16.46
|
|
|
|
6.8
|
|
|
$
|
15,500
|
|
Vested and expected to vest,
December 31, 2006
|
|
|
1,908
|
|
|
$
|
16.32
|
|
|
|
6.7
|
|
|
$
|
15,125
|
|
Exercisable, December 31, 2006
|
|
|
1,033
|
|
|
$
|
13.94
|
|
|
|
5.6
|
|
|
$
|
10,652
|
|
The aggregate intrinsic value in the table above represents the
total pre-tax intrinsic value (the difference between the
Companys closing stock price on the last day of the year
and the exercise price, multiplied by the number of
in-the-money
options) that would have been received by the option holders had
all option holders exercised their options on December 31,
2006. The amount of aggregate intrinsic value will change based
on the fair market value of the Companys stock.
During the year ended December 31, 2006, the Company
granted performance-based stock options to purchase
255 shares of common stock at a weighted-average exercise
price per share of $20.00 and with a weighted-average remaining
contractual life of 9.1 years. The aggregate intrinsic
value of these options was $809 at December 31, 2006. At
December 31, 2006, 74.5% of these performance-based stock
options vested and were exercisable based on meeting certain
performance thresholds related to planned revenue and income
before income taxes. The remaining 25.5% of these
performance-based stock options were canceled.
The following table summarizes information regarding all stock
option exercises for the year ended December 31, 2006 (in
thousands):
|
|
|
|
|
Proceeds from stock options
exercised
|
|
$
|
798
|
|
Tax benefits related to stock
options exercised
|
|
|
166
|
|
Intrinsic value of stock options
exercised
|
|
|
1,357
|
|
Intrinsic value of stock options exercised is estimated by
taking the difference between the Companys closing stock
price on the date of exercise and the exercise price, multiplied
by the number of options exercised for each option holder and
then aggregated.
F-17
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
The table below reflects our stock-based compensation expense
recognized in the consolidated statements of income for the year
ended December 31, 2006 (in thousands):
|
|
|
|
|
Instructional costs and services
|
|
$
|
748
|
|
Selling and promotional
|
|
|
357
|
|
General and administrative
|
|
|
3,074
|
|
|
|
|
|
|
Stock-based compensation expense
included in operating income
|
|
|
4,179
|
|
Tax benefit
|
|
|
1,075
|
|
|
|
|
|
|
Stock-based compensation expense,
net of tax
|
|
$
|
3,104
|
|
|
|
|
|
|
As of December 31, 2006, total compensation cost related to
nonvested service-based stock options not yet recognized was
$6,710, which is expected to be recognized over the next
32 months on a weighted-average basis.
Prior to January 1, 2006, had compensation expense been
determined based on the fair value of the options at grant dates
computed in accordance with FAS 123, the pro forma amounts
would be as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
10,250
|
|
|
$
|
18,785
|
|
Stock-based compensation expense
included in net income as reported
|
|
|
202
|
|
|
|
4
|
|
Compensation expense determined
under fair- value-based method, net of tax
|
|
|
(1,966
|
)
|
|
|
(2,154
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
8,486
|
|
|
$
|
16,635
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.89
|
|
|
$
|
1.68
|
|
Basic pro forma
|
|
$
|
0.74
|
|
|
$
|
1.49
|
|
Diluted as reported
|
|
$
|
0.86
|
|
|
$
|
1.62
|
|
Diluted pro forma
|
|
$
|
0.71
|
|
|
$
|
1.45
|
|
The fair value of our service-based stock options was estimated
as of the date of grant using the
Black-Scholes
option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
2006
|
|
|
(Pro Forma)
|
|
|
(Pro Forma)
|
|
|
Expected life (in
years)(1)
|
|
|
4.25-6.25
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected
volatility(2)
|
|
|
45.6
|
%
|
|
|
38.5
|
%
|
|
|
44.1
|
%
|
Risk-free interest
rate(3)
|
|
|
4.4-5.1
|
%
|
|
|
3.9-4.4
|
%
|
|
|
3.9
|
%
|
Dividend
yield(4)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Weighted-average fair value of
options granted
|
|
$
|
9.84
|
|
|
$
|
8.87
|
|
|
$
|
8.54
|
|
|
|
|
(1) |
|
For the year ended December 31, 2006, the expected option
life was determined using the simplified method for estimating
expected option life for service-based stock options. Prior to
the year ended December 31, 2006, the expected option life
was based on the average expected option life experienced by our
peer group of post-secondary education companies. |
F-18
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
|
|
|
(2) |
|
As the Companys stock had not been publicly traded prior
to November 2006, the expected volatility assumption for the
year ended December 31, 2006 reflects a detailed evaluation
of the stock price of its peer group of public post-secondary
education companies for a period equal to the expected life of
the options, starting from the date they went public. Prior to
the year ended December 31, 2006 the expected volatility
assumption reflects the public disclosures of the Companys
peer group of post-secondary education companies. |
|
(3) |
|
The risk-free interest rate assumption is based upon the
U.S. Treasury zero coupon yield curve on the grant date for
a maturity similar to the expected life of the options. |
|
(4) |
|
The dividend yield assumption is based on the Companys
history and expectation of regular dividend payments. |
The assumptions discussed above were also used to value the
performance-based stock options granted during the year ended
December 31, 2006 except for the expected life, which was
four years. The expected option life for performance-based stock
options was determined based on the evaluation of certain
qualitative factors including the Companys historical
experience and the Companys competitors historical
experience. The weighted-average fair value of performance-based
stock options granted was $8.22.
In June 1998, the Company issued warrants to purchase
5 shares of common stock at $4.50 per share to an
officer of the Company for personally guaranteeing a note. These
warrants were exercised during 2005. The estimated fair value
assigned to these warrants was deemed to be immaterial.
In addition, in 1998, the Company issued warrants to purchase 10
and 131 shares of common stock at $4.50 and $5.40 per
share, respectively, in connection with the issuance of the
Class D Convertible Preferred Stock. During 2005, 131
warrants were exercised and the remaining 10 warrants expired.
In May 2000, the Company issued warrants to purchase
135 shares of common stock at $17.10 per share in
connection with the issuance of the Class E Redeemable
Convertible Preferred Stock. These warrants were exercised
during 2005.
The Company has deferred tax assets and liabilities that reflect
the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Deferred tax assets are subject to periodic recoverability
assessments. Realization of the deferred tax assets, net of
deferred tax liabilities is principally dependent upon
achievement of projected future taxable income. Given the
uncertainty of future taxable income, the Company had provided a
valuation allowance for all net deferred tax assets for all
periods prior to 2004. Because the Company achieved three years
of cumulative taxable income in 2004 and expected profitability
in future years, the Company concluded in 2004 that it is more
likely than not that all of its net deferred tax assets will be
realized. As a result, in accordance with FAS 109, the
valuation allowance applied to such net deferred tax assets of
$12,863 at December 31, 2003, was reversed during the year
ended December 31, 2004.
At December 31, 2006, the Company had a net operating loss
carryforward of approximately $4,379 for state income tax
purposes that is available to offset future taxable income. The
net operating loss carryforwards expire at various dates through
2022. The Companys current federal tax provisions in 2005
and 2004 represent recognition of alternative minimum tax due
for the respective periods.
F-19
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
The components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,670
|
|
|
$
|
345
|
|
|
$
|
187
|
|
State
|
|
|
312
|
|
|
|
381
|
|
|
|
62
|
|
Deferred
|
|
|
2,922
|
|
|
|
6,203
|
|
|
|
(8,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,904
|
|
|
$
|
6,929
|
|
|
$
|
(8,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax computed at the
U.S. statutory rate to the effective income tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes
|
|
|
2.6
|
|
|
|
2.6
|
|
|
|
3.5
|
|
FAS 123R expense related to
incentive stock options
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.3
|
|
|
|
2.7
|
|
|
|
2.0
|
|
Change in rate applied to deferred
tax assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
3.6
|
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(121.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.9
|
%
|
|
|
40.3
|
%
|
|
|
(77.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Companys deferred income tax
assets and liabilities as of December 31, 2006 and 2005,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
179
|
|
|
$
|
1,878
|
|
Accounts receivable
|
|
|
419
|
|
|
|
489
|
|
Alternative minimum tax credit
|
|
|
87
|
|
|
|
646
|
|
Goodwill
|
|
|
75
|
|
|
|
89
|
|
Accrued liabilities
|
|
|
2,179
|
|
|
|
1,810
|
|
Nonqualified stock options
|
|
|
1,075
|
|
|
|
|
|
Other
|
|
|
3
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,017
|
|
|
|
4,917
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(4,548
|
)
|
|
|
(2,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,548
|
)
|
|
|
(2,525
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(531
|
)
|
|
$
|
2,392
|
|
|
|
|
|
|
|
|
|
|
The Company adjusted the federal and state income tax rates used
to record its net deferred tax assets in 2004 based upon an
updated evaluation of the income tax benefits that will likely
exist when the net deferred tax assets are realized on future
tax returns. During 2006 and 2005, the Company also recorded
F-20
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
tax benefits of approximately $166 and $10 directly to
additional paid-in capital related to the exercise of
non-qualified stock options and disqualifying dispositions of
incentive stock options.
The University is subject to extensive regulation by federal and
state governmental agencies and accrediting bodies. In
particular, the Higher Education Act (HEA) and the regulations
promulgated thereunder by the U.S. Department of Education
(DOE) subject the University to significant regulatory scrutiny
on the basis of numerous standards that schools must satisfy to
participate in the various types of federal learner financial
assistance under Title IV Programs.
To participate in the Title IV Programs, an institution
must be authorized to offer its programs of instruction by the
relevant agencies of the state in which it is located,
accredited by an accrediting agency recognized by the DOE and
certified as eligible by the DOE. The DOE will certify an
institution to participate in the Title IV Programs only
after the institution has demonstrated compliance with the HEA
and the DOEs extensive academic, administrative, and
financial regulations regarding institutional eligibility. An
institution must also demonstrate its compliance with these
requirements to the DOE on an ongoing basis.
The Company performs periodic reviews of its compliance with the
various applicable regulatory requirements. The Company has not
been notified by any of the various regulatory agencies of any
significant noncompliance matters that would adversely impact
its ability to participate in Title IV programs, however,
the Office of Inspector General (the OIG) of the Department of
Education has informed the Company that it is conducting a
compliance audit of the University. The OIG is responsible for,
among other things, promoting the effectiveness and integrity of
the Department of Educations programs and operations. The
audit commenced on April 10, 2006 and since then the
Company has been periodically providing the OIG with
information, responding to follow up inquiries and facilitating
site visits and access to the Companys records. The OIG
completed its field work in January 2007 and the Company expects
to receive a draft report sometime in 2007. Based on the field
auditors preliminary audit exceptions, which is a
preliminary list of issues regarding Capella Universitys
compliance with Title IV rules and requirements, and our
verbal communications with the OIG audit staff, the Company
believes that the most significant potential financial exposure
from the audit pertains to repayments to the Department of
Education that could be required if the OIG concludes that the
Company did not properly calculate the amount of Title IV
funds required to be returned for learners that withdrew from
Capella University without providing an official notification of
such withdrawal and without engaging in academic activity prior
to such withdrawal. If it is determined that we improperly
withheld any portion of these funds, we would be required to
return the improperly withheld funds. For the three year audit
period, and for the
2005-2006
aid year, we estimate that the total amount of Title IV
funds not returned for learners who withdrew without providing
official notification was less than $1.0 million, including
interest, but not including fines and penalties.
Political and budgetary concerns significantly affect the
Title IV Programs. Congress reauthorizes the HEA and other
laws governing Title IV Programs approximately every five
to eight years. The last reauthorization of the HEA was
completed in 1998. Although the process for reauthorization of
the HEA is underway, there is no assurance on when or if it will
be completed. Because reauthorization has not yet been completed
in a timely manner, Congress has extended the current provisions
of the HEA through June 30, 2007. Additionally, Congress
reviews and determines appropriations for Title IV programs
on an annual basis through the budget and appropriations
processes. As of December 31, 2006, programs in which the
Companys learners participate are operative and
sufficiently funded.
F-21
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
As an exclusively online university, the 50% Rule,
enacted in 1992, would preclude the Companys learners from
participating in Title IV programs. However, the 50% Rule
was repealed (effective July 1, 2006) as part of the
Higher Education Reconciliation Act, which was part of the
Deficit Reduction Act signed into law by President Bush on
February 8, 2006. The Deficit Reduction Act is currently
being challenged in court by private plaintiffs alleging that
the act is invalid due to discrepancies between non-education
related provisions of the House and Senate bills. Although the
legal challenges do not relate to the 50% Rule, an invalidation
of the Deficit Reduction Act could reinstate the provisions of
the 50% Rule. Therefore, should the plaintiffs prevail in the
pending litigation, the Company may need to find alternative
ways of either qualifying for Title IV or providing
alternative student financing vehicles.
|
|
16.
|
Other
Employee Benefit Plans
|
The Company sponsors an employee retirement savings plan, which
qualifies under Section 401(k) of the Internal Revenue Code
(the Code). The plan provides eligible employees with an
opportunity to make tax-deferred contributions into a long-term
investment and savings program. All employees over the age of 18
are eligible to participate in the plan. The plan allows
eligible employees to contribute up to 100% of their annual
compensation. Contributions are subject to certain limitations.
The plan allows the Company to consider making a discretionary
contribution; however, there is no requirement that it do so.
Effective July 1, 2006, the Company elected to match 100%
on the first 2%, and 50% on the next 4%, of the employee
contributions. No employer contributions were made for the year
ended December 31, 2004. Effective April 1, 2005, the
Company elected to match 50% on the first 4% of the employee
contributions. Employer contributions and related expense were
$1,467 and $689 for the years ended December 31, 2006 and
2005, respectively.
In 1999, the Company adopted a qualified ESOP in which the
Company may contribute to its employees, at its discretion,
common stock of the Company. Historically, the Company has
chosen to contribute 3% of employee compensation on an annual
basis. During the year ended December 31, 2006, the Company
elected to contribute common stock with a value equal to 1% of
employee compensation for the six months ended June 30,
2006. Shares related to 2006 compensation expense will be
contributed in 2007. During 2006, the Company contributed
62 shares to the plan related to 2005 compensation expense.
During 2005, the Company contributed 46 shares to the plan
related to 2004 compensation expense. During 2004, the Company
contributed 47 shares to the plan related to 2003
compensation expense. Contributions vest over three years,
except in the event of retirement, disability, or death, in
which case the participants shares become fully vested and
nonforfeitable. Prior to the initial public offering in November
2006, the Company had an obligation to repurchase, at fair
market value determined by annual independent valuation, the
allocated shares in the above events, as the shares were not
readily tradable on an established securities market. The
Company recognized $169, $1,209 and $1,131 of compensation
expense in 2006, 2005 and 2004, respectively, related to the
ESOP contributions.
Upon completion of the Companys initial public offering in
November 2006, the Company paid a special distribution in the
amount of $72,643 to its shareholders, including the
Companys ESOP. The ESOP purchased shares of the
Companys common stock with the portion of the special
distribution allocated to nonvested participants in the ESOP.
Vested participants in the ESOP were given the right to elect to
receive a cash payment of a portion of the special distribution
allocated to their ESOP account. The ESOP purchased shares of
the Companys common stock in the open market with the
remaining amounts it received from the special distribution. The
total number of shares purchased by the ESOP with proceeds from
the special distribution was 48 shares.
In May 2005, the Company adopted the Capella Education Company
Employee Stock Purchase Plan, referred to as the ESPP. The
Company has reserved an aggregate of 450 shares of its
common stock for
F-22
Capella
Education Company
Notes to
Consolidated Financial Statements Continued
(In
thousands, except per share data)
issuance under the ESPP. The ESPP permits eligible employees to
utilize up to 10% of their compensation to purchase the
Companys common stock at price of no less than 85% of the
fair market value per share of the Companys common stock
at the beginning or the end of the relevant offering period,
whichever is less. The compensation committee of the Board of
Directors will administer the ESPP. The Company had not
implemented this plan as of December 31, 2006.
|
|
17.
|
Quarterly
Financial Summary (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
41,858
|
|
|
$
|
43,518
|
|
|
$
|
43,902
|
|
|
$
|
50,603
|
|
|
$
|
179,881
|
|
Operating income
|
|
|
1,884
|
|
|
|
4,203
|
|
|
|
4,063
|
|
|
|
7,693
|
|
|
|
17,843
|
|
Net income
|
|
|
1,642
|
|
|
|
3,055
|
|
|
|
3,041
|
|
|
|
5,673
|
|
|
|
13,411
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.40
|
|
|
$
|
1.09
|
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.39
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
34,610
|
|
|
$
|
35,408
|
|
|
$
|
37,303
|
|
|
$
|
41,919
|
|
|
$
|
149,240
|
|
Operating income
|
|
|
4,145
|
|
|
|
3,523
|
|
|
|
2,925
|
|
|
|
4,280
|
|
|
|
14,873
|
|
Net income
|
|
|
2,705
|
|
|
|
2,356
|
|
|
|
2,204
|
|
|
|
2,985
|
|
|
|
10,250
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
0.21
|
|
|
$
|
0.19
|
|
|
$
|
0.26
|
|
|
$
|
0.89
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.20
|
|
|
$
|
0.18
|
|
|
$
|
0.25
|
|
|
$
|
0.86
|
|
F-23
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following are the estimated expenses to be incurred in
connection with the issuance and distribution of the securities
registered under this Registration Statement, other than
underwriting discounts and commissions. All amounts shown are
estimates except the Securities and Exchange Commission
registration fee and the National Association of Securities
Dealers, Inc. filing fee. The following expenses will be borne
solely by the Registrant.
|
|
|
|
|
SEC registration fee
|
|
$
|
3,547
|
|
NASD filing fee
|
|
|
12,051
|
|
Legal fees and expenses
|
|
|
150,000
|
|
Accounting fees and expenses
|
|
|
150,000
|
|
Printing expenses
|
|
|
125,000
|
|
Transfer agent fees and expenses
|
|
|
24,000
|
|
Miscellaneous expenses
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
464,598
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 302A.521, subd. 2, of the Minnesota Statutes
requires that we indemnify a person made or threatened to be
made a party to a proceeding by reason of the former or present
official capacity of the person with respect to the company,
against judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with
respect to an employee benefit plan, settlements, and reasonable
expenses, including attorneys fees and disbursements,
incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person
(i) has not been indemnified by another organization or
employee benefit plan for the same judgments, penalties or
fines, (ii) acted in good faith, (iii) received no
improper personal benefit, and statutory procedure has been
followed in the case of any conflict of interest by a director,
(iv) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful, and
(v) in the case of acts or omissions occurring in the
persons performance in the official capacity of director
or, for a person not a director, in the official capacity of
officer, board committee member or employee, reasonably believed
that the conduct was in the best interests of the company, or,
in the case of performance by a director, officer or employee of
the company involving service as a director, officer, partner,
trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not
opposed to the best interests of the company. In addition,
Section 302A.521, subd. 3, requires payment by us,
upon written request, of reasonable expenses in advance of final
disposition of the proceeding in certain instances. A decision
as to required indemnification is made by a disinterested
majority of our board of directors present at a meeting at which
a disinterested quorum is present, or by a designated committee
of the board, by special legal counsel, by the shareholders, or
by a court.
Our bylaws provide that we shall indemnify each of our directors
and officers, for such expenses and liabilities, in such manner,
under such circumstances, and to such extent, as required or
permitted by the Minnesota Statutes, as detailed above. We also
maintain a director and officer liability insurance policy.
In addition, the investor rights agreement that we entered into
with certain of our preferred shareholders, and the warrants
that we issued to Legg Mason Wood Walker, Incorporated, obligate
us to indemnify such shareholders requesting or joining in a
registration (and, in some instances, indemnify each underwriter
of the securities so registered, as well as the officers,
directors and partners of such shareholders) against any and all
loss, damage, liability, cost and expense, including claims
arising out of or based on any untrue statement, or alleged
untrue statement, of any material fact contained in any
registration
II-1
statement, prospectus or other related document or any omission,
or alleged omission, to state any material fact required to be
stated or necessary to make the statements not misleading.
The Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification by the
underwriters of us and our officers and directors for certain
liabilities arising under the Securities Act of 1933, or
otherwise.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
Stock
Option Grants and Option Exercises
From January 1, 2004 through November 15, 2006 (the
effective date of our Registration Statement on
Form S-8)
we granted options to purchase 1,483,960 shares of our
common stock to officers, directors and employees under our 1999
and 2005 stock incentive plans at exercise prices ranging from
$15.13 to $20.00 per share. During the same period, we issued
and sold 351,824 shares of our common stock pursuant to
option exercises at prices ranging from $2.50 to $14.25 per
share. These sales were made in reliance on Section 4(2) of
the Securities Act of 1933 and Rule 506 and Rule 701
promulgated under the Securities Act of 1933.
Shares Issued
Upon the Exercise of Warrants
On March 9, 2005, we sold and issued 4,500 shares of
our common stock to Stephen Shank pursuant to the exercise of a
warrant by Mr. Shank at an exercise price of $4.50 per
share. The sale was made in reliance on Section 4(2) of the
Securities Act of 1933 and Rule 506 promulgated under the
Securities Act of 1933.
On May 9, 2005, we sold and issued 135,088 shares of
our common stock to Legg Mason Wood Walker, Incorporated
pursuant to the exercise of a warrant by Legg Mason Wood Walker,
Incorporated at an exercise price of $17.10 per share. The
sale was made in reliance on Section 4(2) of the Securities
Act of 1933 and Rule 506 promulgated under the Securities
Act of 1933.
On June 14, 2005, we sold and issued 131,238 shares of
our common stock to Legg Mason Wood Walker, Incorporated
pursuant to the exercise of a warrant by Legg Mason Wood Walker,
Incorporated at an exercise price of $5.40 per share. The
sale was made in reliance on Section 4(2) of the Securities
Act of 1933 and Rule 506 promulgated under the Securities
Act of 1933.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement.
|
|
3
|
.1**
|
|
Amended and Restated Articles of
Incorporation.
|
|
3
|
.2*
|
|
Amended and Restated By-Laws.
|
|
4
|
.1*
|
|
Specimen of common stock
certificate.
|
|
4
|
.2*
|
|
Third Amended and Restated Co-Sale
and Board Representation Agreement, dated as of January 22,
2003, by and among the Registrant and the shareholders named
therein.
|
|
4
|
.3*
|
|
Second Amended and Restated
Investor Rights Agreement, dated as of January 22, 2003, by
and among the Registrant and the shareholders named therein.
|
|
4
|
.4*
|
|
Warrant, dated as of June 16,
1998, issued by the Registrant to Legg Mason Wood Walker,
Incorporated.
|
|
4
|
.5*
|
|
Amendment No. 1 to Warrant,
dated as of April 20, 2000, by and between the Registrant
and Legg Mason Wood Walker, Incorporated.
|
II-2
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.6*
|
|
Amendment No. 2 to Warrant,
dated as of February 21, 2002, by and between the
Registrant and Legg Mason Wood Walker, Incorporated.
|
|
4
|
.7*
|
|
Amendment No. 3 to Warrant,
dated as of January 22, 2003, by and between the Registrant
and Legg Mason Wood Walker, Incorporated.
|
|
4
|
.8*
|
|
Warrant, dated as of May 11,
2000, issued by the Registrant to Legg Mason Wood Walker,
Incorporated.
|
|
4
|
.9*
|
|
Amendment No. 1 to Warrant,
dated as of February 21, 2002, by and between the
Registrant and Legg Mason Wood Walker, Incorporated.
|
|
4
|
.10*
|
|
Amendment No. 2 to Warrant,
dated as of January 22, 2003, by and between the Registrant
and Legg Mason Wood Walker, Incorporated.
|
|
4
|
.11*
|
|
Exchange Agreement, dated as of
January 22, 2003, by and among the Registrant and the
shareholders named therein.
|
|
4
|
.12*
|
|
Class F Convertible Preferred
Stock Purchase Agreement, dated as of January 31, 2002, by
and among the Registrant and the shareholders named therein.
|
|
4
|
.13*
|
|
Class E Convertible Preferred
Stock Purchase Agreement, dated as of April 20, 2000, by
and among the Registrant and the shareholders named therein.
|
|
5
|
.1
|
|
Opinion of Faegre &
Benson LLP.
|
|
10
|
.1*#
|
|
Capella Education Company 2005
Stock Incentive Plan.
|
|
10
|
.2*#
|
|
Forms of Option Agreements for the
Capella Education Company 2005 Stock Incentive Plan.
|
|
10
|
.3*#
|
|
Capella Education Company 1999
Stock Option Plan, as amended.
|
|
10
|
.4*#
|
|
Form of Non-Statutory Stock Option
Agreement (Director) for the Capella Education Company 1999
Stock Option Plan.
|
|
10
|
.5*#
|
|
Form of Non-Statutory Stock Option
Agreement (Employee) for the Capella Education Company 1999
Stock Option Plan.
|
|
10
|
.6*#
|
|
Form of Incentive Stock Option
Agreement for the Capella Education Company 1999 Stock Option
Plan.
|
|
10
|
.7*#
|
|
Learning Ventures International,
Inc. 1993 Stock Option Plan, as amended.
|
|
10
|
.8*#
|
|
Form of Option Agreement for the
Learning Ventures International, Inc. 1993 Stock Option Plan.
|
|
10
|
.9*#
|
|
Capella Education Company Employee
Stock Ownership Plan and the First Amendment thereto.
|
|
10
|
.10*#
|
|
Capella Education Company
Retirement Plan with Adoption Agreement and EGTRRA Amendment.
|
|
10
|
.11*#
|
|
Capella Education Company
Executive Severance Plan.
|
|
10
|
.12*#
|
|
Capella Education Company Employee
Stock Purchase Plan.
|
|
10
|
.13*#
|
|
Confidentiality, Non-Competition
and Inventions Agreement, dated as of April 16, 2001, by
and between the Registrant and Michael J. Offerman.
|
|
10
|
.14*#
|
|
Confidentiality, Non-Competition
and Inventions Agreement, dated as of May 9, 2001, by and
between the Registrant and Paul A. Schroeder.
|
|
10
|
.15*#
|
|
Form of Confidentiality,
Non-Competition and Inventions Agreement (executed by Scott M.
Henkel).
|
|
10
|
.16*#
|
|
Offer Letter, dated as of
March 9, 2001, by and between the Registrant and Paul A.
Schroeder.
|
|
10
|
.17*#
|
|
Offer Letter, dated as of
November 10, 2003, by and between the Registrant and
Michael J. Offerman.
|
|
10
|
.18*#
|
|
Offer Letter, dated as of
December 22, 2003, by and between the Registrant and Scott
M. Henkel.
|
II-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.19*#
|
|
Form of Nondisclosure Agreement
(executed by Scott M. Henkel, Paul A. Schroeder, Stephen G.
Shank, Michael J. Offerman and Lois M. Martin).
|
|
10
|
.20*
|
|
Office Lease, dated as of
February 23, 2004, by and between the Registrant and 601
Second Avenue Limited Partnership.
|
|
10
|
.21*
|
|
Short Term Office Space Lease,
dated as of February 23, 2004, by and between the
Registrant and 601 Second Avenue Limited Partnership.
|
|
10
|
.22*
|
|
Memorandum of Lease, dated as of
March 10, 2004, by and between the Registrant and 601
Second Avenue Limited Partnership.
|
|
10
|
.23*
|
|
Office Lease, dated as of
June 28, 2000, as amended, by and between the Registrant
and 222 South Ninth Street Limited Partnership and ND
Properties, Inc. as successor in interest to 222 South Ninth
Street Limited Partnership.
|
|
10
|
.24*#
|
|
Capella Education Company Annual
Incentive Plan for Management Employees 2006.
|
|
10
|
.25*#
|
|
Form of Performance Vesting Option
Agreement (Annual Incentive Plan for Management
Employees 2006) for the Capella Education
Company 2005 Stock Incentive Plan.
|
|
10
|
.26*#
|
|
Offer Letter, dated
October 20, 2004, by and between the Registrant and Lois M.
Martin.
|
|
10
|
.27*#
|
|
Offer Letter, dated
February 21, 2006, by and between the Registrant and
Kenneth J. Sobaski.
|
|
10
|
.28*#
|
|
Confidentiality, Non-Competition
and Inventions Agreement dated as of February 27, 2006, by
and between the Registrant and Kenneth J. Sobaski.
|
|
10
|
.29*#
|
|
Offer Letter, dated June 6,
2006, by and between the Registrant and Reed Watson.
|
|
10
|
.30*#
|
|
Confidentiality, Non-Competition
and Inventions Agreement dated as of June 20, 2006, by and
between the Registrant and Reed Watson.
|
|
10
|
.31*#
|
|
Employment Agreement dated
May 30, 2006 between Capella Education Company and Michael
J. Offerman.
|
|
10
|
.32*#
|
|
Amendment to Confidentiality,
Non-Competition and Inventions Agreement, dated June 16,
2005, by and between the Registrant and Michael J. Offerman.
|
|
10
|
.33*#
|
|
Employment Agreement dated
May 30, 2006 between Capella Education Company and Paul A.
Schroeder.
|
|
10
|
.34*
|
|
First Amendment to Lease, dated as
of May 16, 2006, by and between the Registrant and 601
Second Avenue Limited Partnership.
|
|
10
|
.35*
|
|
Letter Agreement, dated
July 5, 2006, between the Registrant and ASB Minneapolis
225 Holdings, LLC.
|
|
10
|
.36*
|
|
Amendment No. 3 to Lease
Agreement, dated as of June 16, 2005, by and between the
Registrant and ND Properties, Inc. and ND Properties of
Delaware, Inc.
|
|
10
|
.37*#
|
|
Amendments to Capella Education
Company Retirement Plan dated as of April 20, 2006 and
June 1, 2006
|
|
10
|
.38*#
|
|
Amendment 1 to Employment
Agreement dated August 25, 2006 between Paul A. Schroeder
and Capella Education Company.
|
|
10
|
.39*#
|
|
Amendment 1 to Employment
Agreement dated August 25, 2006 between Michael J. Offerman
and Capella Education Company.
|
|
10
|
.40*#
|
|
Amendment No. 1 to Capella
Education Company 2005 Stock Incentive Plan.
|
|
10
|
.41*#
|
|
Capella Education Company Senior
Executive Severance Plan.
|
|
10
|
.42*#
|
|
Second Amendment to the Capella
Education Company Employee Stock Ownership Plan.
|
|
10
|
.43***#
|
|
Annual Incentive Plan
Management Employees 2007.
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
II-4
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
23
|
.1
|
|
Consent of Ernst & Young
LLP.
|
|
23
|
.2
|
|
Consent of Faegre &
Benson LLP (included in Exhibit 5.1 to this Registration
Statement).
|
|
24
|
|
|
Powers of Attorney.
|
|
|
|
|
|
To be filed by Amendment. |
Previously filed.
|
|
|
* |
|
Incorporated by reference to Capella Education Companys
Registration Statement on
Form S-1
(File
No. 333-124119). |
|
|
|
** |
|
Incorporated by reference to Capella Education Companys
Current Report on
Form 8-K
filed on November 11, 2006. |
|
|
|
*** |
|
Incorporated by reference to Capella Education Companys
Current Report on
Form 8-K
filed on February 15, 2007. |
|
|
|
# |
|
Management contract or compensatory plan or arrangement. |
(b) Financial Statement Schedule
Report of Independent Registered Public Accounting Firm on
Schedule
Schedule II Valuation and Qualifying Accounts.
Other
schedules are omitted because they are not required.
II-5
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Capella Education Company
We have audited the consolidated financial statements of Capella
Education Company as of December 31, 2006 and 2005, and for
each of the three years in the period ended December 31,
2006, and have issued our report thereon dated February 13,
2007. Our audits also included the financial statement schedule
listed in Item 16(b) of this Registration Statement. This
schedule is the responsibility of the Companys management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Minneapolis, Minnesota
February 13, 2007
II-6
CAPELLA
EDUCATION COMPANY
Schedule II
Valuation and Qualifying Accounts
Fiscal
Years 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Charged to
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Deductions
|
|
|
Balance
|
|
|
|
(In thousands)
|
|
|
Allowance accounts for the
years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,299
|
|
|
$
|
2,855
|
|
|
$
|
(3,035
|
)(a)
|
|
$
|
1,119
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
1,065
|
|
|
|
2,263
|
|
|
|
(2,029
|
)(a)
|
|
|
1,299
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
713
|
|
|
|
1,376
|
|
|
|
(1,024
|
)(a)
|
|
|
1,065
|
|
Deferred tax asset valuation
allowance
|
|
|
12,863
|
|
|
|
|
|
|
|
(12,863
|
)(b)
|
|
|
|
|
|
|
|
(a) |
|
Write-off of accounts receivables. |
|
(b) |
|
Reversal of deferred tax valuation allowance as a result of
achieving three years of cumulative taxable income in 2004 along
with expectations of future profitability. |
II-7
(a) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers, and controlling persons of the Registrant pursuant to
the provisions described in Item 14
Indemnification of Directors and Officers above, or
otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on
the
6th
day of April, 2007.
Capella Education Company
Stephen G. Shank
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities indicated on April 6, 2007.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Stephen
G. Shank
Stephen
G. Shank
|
|
Chairman and Chief Executive
Officer (Principal Executive Officer)
|
|
|
|
/s/ Lois
M. Martin
Lois
M. Martin*
|
|
Senior Vice President and Chief
Financial Officer (Principal Financial Officer)
|
|
|
|
/s/ Amy
L. Drifka
Amy
L. Drifka*
|
|
Vice President and Corporate
Controller (Principal Accounting Officer)
|
|
|
|
/s/ S.
Joshua
Lewis
S.
Joshua Lewis*
|
|
Director
|
|
|
|
/s/ James
A. Mitchell
James
A. Mitchell*
|
|
Director
|
|
|
|
/s/ David
W. Smith
David
W. Smith*
|
|
Director
|
|
|
|
/s/ Gordon
A. Holmes
Gordon
A. Holmes*
|
|
Director
|
|
|
|
/s/ Jody
G. Miller
Jody
G. Miller*
|
|
Director
|
|
|
|
/s/ Jeffrey
W. Taylor
Jeffrey
W. Taylor*
|
|
Director
|
|
|
|
/s/ Darrell
R. Tukua
Darrell
R. Tukua*
|
|
Director
|
II-9
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Jon
Q. Reynolds,
Jr.
Jon
Q. Reynolds, Jr.*
|
|
Director
|
|
|
|
/s/ Sandra
E. Taylor
Sandra
E. Taylor*
|
|
Director
|
|
|
|
* |
|
Stephen G. Shank, by signing his name hereto, does hereby sign
this document on behalf of each of the above-named officers
and/or
directors of the Registrant pursuant to powers of attorney duly
executed by such persons. |
Stephen G. Shank
Attorney-in-Fact
II-10
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement.
|
|
3
|
.1**
|
|
Amended and Restated Articles of
Incorporation.
|
|
3
|
.2*
|
|
Amended and Restated By-Laws.
|
|
4
|
.1*
|
|
Specimen of common stock
certificate.
|
|
4
|
.2*
|
|
Third Amended and Restated Co-Sale
and Board Representation Agreement, dated as of January 22,
2003, by and among the Registrant and the shareholders named
therein.
|
|
4
|
.3*
|
|
Second Amended and Restated
Investor Rights Agreement, dated as of January 22, 2003, by
and among the Registrant and the shareholders named therein.
|
|
4
|
.4*
|
|
Warrant, dated as of June 16,
1998, issued by the Registrant to Legg Mason Wood Walker,
Incorporated.
|
|
4
|
.5*
|
|
Amendment No. 1 to Warrant,
dated as of April 20, 2000, by and between the Registrant
and Legg Mason Wood Walker, Incorporated.
|
|
4
|
.6*
|
|
Amendment No. 2 to Warrant,
dated as of February 21, 2002, by and between the
Registrant and Legg Mason Wood Walker, Incorporated.
|
|
4
|
.7*
|
|
Amendment No. 3 to Warrant,
dated as of January 22, 2003, by and between the Registrant
and Legg Mason Wood Walker, Incorporated.
|
|
4
|
.8*
|
|
Warrant, dated as of May 11,
2000, issued by the Registrant to Legg Mason Wood Walker,
Incorporated.
|
|
4
|
.9*
|
|
Amendment No. 1 to Warrant,
dated as of February 21, 2002, by and between the
Registrant and Legg Mason Wood Walker, Incorporated.
|
|
4
|
.10*
|
|
Amendment No. 2 to Warrant,
dated as of January 22, 2003, by and between the Registrant
and Legg Mason Wood Walker, Incorporated.
|
|
4
|
.11*
|
|
Exchange Agreement, dated as of
January 22, 2003, by and among the Registrant and the
shareholders named therein.
|
|
4
|
.12*
|
|
Class F Convertible Preferred
Stock Purchase Agreement, dated as of January 31, 2002, by
and among the Registrant and the shareholders named therein.
|
|
4
|
.13*
|
|
Class E Convertible Preferred
Stock Purchase Agreement, dated as of April 20, 2000, by
and among the Registrant and the shareholders named therein.
|
|
5
|
.1
|
|
Opinion of Faegre &
Benson LLP.
|
|
10
|
.1*#
|
|
Capella Education Company 2005
Stock Incentive Plan.
|
|
10
|
.2*#
|
|
Forms of Option Agreements for the
Capella Education Company 2005 Stock Incentive Plan.
|
|
10
|
.3*#
|
|
Capella Education Company 1999
Stock Option Plan, as amended.
|
|
10
|
.4*#
|
|
Form of Non-Statutory Stock Option
Agreement (Director) for the Capella Education Company 1999
Stock Option Plan.
|
|
10
|
.5*#
|
|
Form of Non-Statutory Stock Option
Agreement (Employee) for the Capella Education Company 1999
Stock Option Plan.
|
|
10
|
.6*#
|
|
Form of Incentive Stock Option
Agreement for the Capella Education Company 1999 Stock Option
Plan.
|
|
10
|
.7*#
|
|
Learning Ventures International,
Inc. 1993 Stock Option Plan, as amended.
|
|
10
|
.8*#
|
|
Form of Option Agreement for the
Learning Ventures International, Inc. 1993 Stock Option Plan.
|
|
10
|
.9*#
|
|
Capella Education Company Employee
Stock Ownership Plan and the First Amendment thereto.
|
|
10
|
.10*#
|
|
Capella Education Company
Retirement Plan with Adoption Agreement and EGTRRA Amendment.
|
|
10
|
.11*#
|
|
Capella Education Company
Executive Severance Plan.
|
|
10
|
.12*#
|
|
Capella Education Company Employee
Stock Purchase Plan.
|
|
10
|
.13*#
|
|
Confidentiality, Non-Competition
and Inventions Agreement, dated as of April 16, 2001, by
and between the Registrant and Michael J. Offerman.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.14*#
|
|
Confidentiality, Non-Competition
and Inventions Agreement, dated as of May 9, 2001, by and
between the Registrant and Paul A. Schroeder.
|
|
10
|
.15*#
|
|
Form of Confidentiality,
Non-Competition and Inventions Agreement (executed by Scott M.
Henkel).
|
|
10
|
.16*#
|
|
Offer Letter, dated as of
March 9, 2001, by and between the Registrant and Paul A.
Schroeder.
|
|
10
|
.17*#
|
|
Offer Letter, dated as of
November 10, 2003, by and between the Registrant and
Michael J. Offerman.
|
|
10
|
.18*#
|
|
Offer Letter, dated as of
December 22, 2003, by and between the Registrant and Scott
M. Henkel.
|
|
10
|
.19*#
|
|
Form of Nondisclosure Agreement
(executed by Scott M. Henkel, Paul A. Schroeder, Stephen G.
Shank, Michael J. Offerman and Lois M. Martin).
|
|
10
|
.20*
|
|
Office Lease, dated as of
February 23, 2004, by and between the Registrant and 601
Second Avenue Limited Partnership.
|
|
10
|
.21*
|
|
Short Term Office Space Lease,
dated as of February 23, 2004, by and between the
Registrant and 601 Second Avenue Limited Partnership.
|
|
10
|
.22*
|
|
Memorandum of Lease, dated as of
March 10, 2004, by and between the Registrant and 601
Second Avenue Limited Partnership.
|
|
10
|
.23*
|
|
Office Lease, dated as of
June 28, 2000, as amended, by and between the Registrant
and 222 South Ninth Street Limited Partnership and ND
Properties, Inc. as successor in interest to 222 South Ninth
Street Limited Partnership.
|
|
10
|
.24*#
|
|
Capella Education Company Annual
Incentive Plan for Management Employees 2006.
|
|
10
|
.25*#
|
|
Form of Performance Vesting Option
Agreement (Annual Incentive Plan for Management
Employees 2006) for the Capella Education
Company 2005 Stock Incentive Plan.
|
|
10
|
.26*#
|
|
Offer Letter, dated
October 20, 2004, by and between the Registrant and Lois M.
Martin.
|
|
10
|
.27*#
|
|
Offer Letter, dated
February 21, 2006, by and between the Registrant and
Kenneth J. Sobaski.
|
|
10
|
.28*#
|
|
Confidentiality, Non-Competition
and Inventions Agreement dated as of February 27, 2006, by
and between the Registrant and Kenneth J. Sobaski.
|
|
10
|
.29*#
|
|
Offer Letter, dated June 6,
2006, by and between the Registrant and Reed Watson.
|
|
10
|
.30*#
|
|
Confidentiality, Non-Competition
and Inventions Agreement dated as of June 20, 2006, by and
between the Registrant and Reed Watson.
|
|
10
|
.31*#
|
|
Employment Agreement dated
May 30, 2006 between Capella Education Company and Michael
J. Offerman.
|
|
10
|
.32*#
|
|
Amendment to Confidentiality,
Non-Competition and Inventions Agreement, dated June 16,
2005, by and between the Registrant and Michael J. Offerman.
|
|
10
|
.33*#
|
|
Employment Agreement dated
May 30, 2006 between Capella Education Company and Paul A.
Schroeder.
|
|
10
|
.34*
|
|
First Amendment to Lease, dated as
of May 16, 2006, by and between the Registrant and 601
Second Avenue Limited Partnership.
|
|
10
|
.35*
|
|
Letter Agreement, dated
July 5, 2006, between the Registrant and ASB Minneapolis
225 Holdings, LLC.
|
|
10
|
.36*
|
|
Amendment No. 3 to Lease
Agreement, dated as of June 16, 2005, by and between the
Registrant and ND Properties, Inc. and ND Properties of
Delaware, Inc.
|
|
10
|
.37*#
|
|
Amendments to Capella Education
Company Retirement Plan dated as of April 20, 2006 and
June 1, 2006.
|
|
10
|
.38*#
|
|
Amendment 1 to Employment
Agreement dated August 25, 2006 between Paul A. Schroeder
and Capella Education Company.
|
|
10
|
.39*#
|
|
Amendment 1 to Employment
Agreement dated August 25, 2006 between Michael J. Offerman
and Capella Education Company.
|
|
10
|
.40*#
|
|
Amendment No. 1 to Capella
Education Company 2005 Stock Incentive Plan.
|
|
10
|
.41*#
|
|
Capella Education Company Senior
Executive Severance Plan.
|
|
10
|
.42*#
|
|
Second Amendment to the Capella
Education Company Employee Stock Ownership Plan.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.43***#
|
|
Annual Incentive Plan
Management Employees 2007.
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Ernst & Young
LLP.
|
|
23
|
.2
|
|
Consent of Faegre &
Benson LLP (included in Exhibit 5.1 to this Registration
Statement).
|
|
24
|
|
|
Powers of Attorney.
|
|
|
|
|
|
To be filed by Amendment. |
|
|
|
* |
|
Incorporated by reference to Capella Education Companys
Registration Statement on
Form S-1
(File
No. 333-124119). |
|
|
|
** |
|
Incorporated by reference to Capella Education Companys
Current Report on
Form 8-K
filed on November 11, 2006. |
|
|
|
*** |
|
Incorporated by reference to Capella Education Companys
Current Report on
Form 8-K
filed on February 15, 2007. |
|
|
|
# |
|
Management contract or compensatory plan or arrangement. |