111 WEST CONGRESS STREET‚ CHARLES TOWN‚ WEST VIRGINIA 25414 www.americanpubliceducation.com Higher education that makes a difference AMERICAN PUBLIC EDUCATION, INC. 2016 ANNUAL REPORT We have a proud history of serving military and public service professionals, as well as the community at large. Our students come to us primarily as working adults to expand their knowl- edge, to improve their skills, to pursue new opportunities—and to achieve their full potential. As graduates, they’re out there making a difference in the world. This is APEI. We change lives through higher education. 2 SHAREEMA GRANVILLE, M.A. (with honors), Management, APU (2014) AMERICAN PUBLIC EDUCATION, INC. 2016 ANNUAL REPORT 1 Dear Stakeholder DR. WALLACE E. BOSTON, PRESIDENT & CEO American Public Education, Inc. (APEI) serves a unique purpose. Students come to our insti- tutions of higher learning to advance in their careers and pursue new opportunities. Many of them work in service to others in the military, public service and nursing professions, and many are working adults who are supporting their families and communities as they pursue their education. By providing them with a quality, affordable education and by supporting their success, we’re helping them change their own lives and the lives of others. APEI TODAY APEI encompasses the American Public University System (APUS) and Hondros College of Nursing. In 2016, Hondros made great progress in attracting new students while enhancing the quality of its programs and strengthening its overall student population. In fact, new student enrollment for the 2017 winter term increased 22 percent compared to prior year. Today, Hondros serves more than 1,700 students on five Ohio campuses; the college opened its fifth campus in suburban Toledo in January 2017. With a growing reputation and 5,600 alumni, Hondros has partnered with several clinical networks, and built close relationships with more than 30 com- munity healthcare organizations to provide staffing solutions and education benefits to their employees. I am proud of the progress the college made over the past year. However, we still have work to do. For example, Hondros is pursuing initial accreditation by the Accrediting Bureau of Higher Education Schools (ABHES), a national accreditor for allied health schools, a significant step for us. Today, APUS continues to earn recognition for quality and inno- vation. At the start of 2017, APUS was awarded its fifth Effective Practice Award from the Online Learning Consortium, an unprecedented achievement. In addition, in 2017, APUS received the “Best for Vets Colleges” distinction from Military Times for 2 AMERICAN PUBLIC EDUCATION, INC. 2016 ANNUAL REPORT 1 “ I knew when I left the Marine Corps I was going to be a firefighter. My education has opened so many doors for me.” EARL DAY, B.S. (with honors), Fire Science Management, AMU (2012) A Degree of Difference U.S. Marine Corps veteran and AMU alumnus Earl Day has a deeply rooted passion for helping others. He served his country in the military and now he’s serving his community as a firefighter and EMT. “I thought the best way to make myself competitive would be with a degree in fire science management,” he says. “AMU’s classes have given me extensive knowledge beyond what the Fire Academy would have.” APUS ENROLLMENT BY DEGREE LEVEL ■ 59% Bachelor’s ■ 16% Associate’s ■ 16% Master’s ■ 9% Certificate/other APUS ENROLLMENT BY SCHOOL the third consecutive year and U.S. News and World Report ranked APUS bachelor’s programs among the best nationally for the fifth consecutive year in its 2017 ranking of online institutions. Originally founded in 1991 to provide affordable education to a mobile military, APUS today has grown to serve a diverse array of students and offer a full complement of programs including 200 degree and certificate programs. I am pleased to report that APUS conferred degrees upon 11,000 hard-working students in 2016. These graduates joined the ranks of more than 70,000 AMU and APU alumni worldwide. That is the true ■ 26% Security & Global measure of our success. Studies ■ 23% Business ■ 23% Arts & Humanities ■ 15% Science, Technology, Engineering & Math ■ 10% Public Service and Health ■ 3% Education Quality and affordability have always been fundamental hallmarks of an APUS education. We believe the cost of tuition, books and fees at APUS remains significantly below in-state costs at four- year institutions. We keep costs down through our efficient online approach and programs such as our Undergraduate Book Grant, which provides textbooks and course materials at 2 AMERICAN PUBLIC EDUCATION, INC. 2016 ANNUAL REPORT 3 no cost to our undergraduate students. This focus on affordability ANNUAL TUITION & FEES* provides immeasurable benefits to the families and communities we serve. Our unwavering focus on quality has helped advance APUS’ reputation throughout the higher education community. The distinguished faculty of APUS consists of scholar practitioners, leaders in their respective disciplines who bring a real-world experience to the classroom. They reported publishing more than 400 articles, papers or books; earning approximately 50 awards for professional practice, research and community service; and presenting at more than 500 conferences, work- shops and panels in 2016. APUS is a community of teachers and learners committed to excellence. We take great pride in the fact that, in 2016, four APUS students were named finalists in the Presidential Manage- ment Fellows (PMF) program. Overall, since 2012, APUS has had 38 PMF finalists. PMF receives 8,000 applications for its program each year, making it one of the most prestigious and competitive government opportunities in leadership development. A pioneer in online higher education, APUS offers a compelling learning environment—small class sizes, flexibility, an engaging curriculum and a high level of faculty support. The curriculum includes specialized programs such as cybersecurity, emergency & disaster management, and transportation logistics that attract highly motivated students—as well as classes such as Asymmetric Warfare, Space Studies, and Explosive Ordinance Disposal that might be hard to find elsewhere. Consistently high levels of student satisfaction and alumni referrals are a testament to the quality and relevance of our programs and levels of student engagement. COLLEGE READINESS AND PERSISTENCE In recent years, we have increased our emphasis on improving retention and attracting more college-ready students to the university. As part of this effort, APUS implemented changes to the enrollment process and introduced assessments for new applicants. In addition, each year we add new programs and enhancements aimed at attracting students and increasing engagement, including rich media, simulations and other enhancements. $270 PER CREDIT HOUR $8,600 $250 PER CREDIT HOUR $7,500 $350 PER CREDIT HOUR $6,600 $325 PER CREDIT HOUR $5,850 WITH MILITARY GRANT WITHOUT GRANT WITH MILITARY GRANT WITHOUT GRANT UNDERGRADUATE (30 CREDITS ANNUALLY) GRADUATE (18 CREDITS ANNUALLY) * Annual estimates are based on published tuition and technology fees assuming 30 undergraduate or 18 graduate-level semester credit hours. Technology fees are $50 per course and are covered by APUS grants for U.S. active-duty military service members, and for Guard and Reserve personnel when using military tuition assistance. 95% APUS ALUMNI SURVEYED respondents were either completely satisfied or very satisfied with education received.1 91% APUS SENIORS SURVEYED respondents would probably or definitely chose APUS again if they could start over.2 1. APUS, 2016 End of Program Survey 2. National Survey of Student Engagement (NSSE), 2016 Survey 2 AMERICAN PUBLIC EDUCATION, INC. 2016 ANNUAL REPORT 3 TALENT DEVELOPMENT PROFESSIONALS SAY3: 56% Skills of current work- force do not match changes in company strategy, goals, markets or business models. 48% When promoting internal candidates for certain types of jobs, there is a lack of requisite skills. 45% When hiring for certain types of jobs, there are too few qualified candidates. 3. 2015 ATD Skills Gap Survey (p.5) At the same time, we have instituted a number of initiatives and innovations to drive even greater student persistence and success. For example, we introduced a Learning Relationship Management (LRM) system that supports student engagement and mentorship. In addition, we recently added a predictive analytics tool that helps faculty and advisors identify and engage at-risk students so they can provide those students with additional resources and support. In 2016, for the third year in a row, we saw improvement in student persistence. For the three months ended December 31, 2016, the first-course pass and completion rate for APUS under- graduate students using Federal Student Aid increased by 19% compared to the same period last year. We believe this continued improvement in persistence may be an indicator that our efforts to attract and retain students with greater college readiness are having an impact. BUILDING OUR WORKFORCE DEVELOPMENT CAPABILITIES Today, U.S. employers are experiencing a substantial skills gap. They report increased difficulty filling certain types of jobs with qualified candidates, as well as a growing need for skills devel- opment in certain fields. As an example, in a 2015 study by the Association for Talent Development (ATD), 84% of those surveyed across a variety of industries reported a skills gap in their organizations. Given our history of building partnerships with corporations and organizations, we believe APUS is well positioned to bridge the skills gap through workforce development programs that address the specific needs of today’s employers. We’re moving forward with this strategic objective on a number of fronts. We continue to expand our program offerings in areas where demand is growing and where corporations struggle to find talent to fill job openings. In 2016, we launched seven new degree programs in business analytics, technical management and accounting—areas where our corporate partners tell us they can find good people but many of them lack specific skills. We also continue to add new corporate and strategic partners. In 2016, new partnerships included Holland America Group, the U.S. Postal Service and National Public Employees Alliance, the only national affinity group dedicated to the public service sector. In addition, APUS recently launched MomentumTM, an initiative to provide competency-based degree programs that address the 4 AMERICAN PUBLIC EDUCATION, INC. 2016 ANNUAL REPORT 5 skills gap in specific fields. We believe this program is one way to help our partners advance their workforce and to help students advance their careers. Through our Momentum program, participating students who possess work experience in specific fields can potentially test out of certain courses and further benefit from personalized learning content and guidance from faculty mentors. Going forward, we are interested in partnering with, investing in and potentially acquiring businesses that will help us address the growing demand for workforce development. In an environment where more and more traditional universities are getting into the field of online education, we belief this strategy will open up new opportunities. APEI is well positioned to pursue such investments. For the twelve months ending December 31, 2016, cash and cash equivalents increased to $146.4 million despite a decline in total revenues and net income. That represents an increase of $40.7 million over the prior year. Total assets increased to $313.7 million. That cash reserve gives us the financial strength to explore investments “ My bachelor’s degree in nursing from APU will make me more marketable. It is certainly well respected in the community.” SHANNON O’BRIEN, B.S., Nursing, APU (2017) Ready When You Are 4 AMERICAN PUBLIC EDUCATION, INC. 2016 ANNUAL REPORT 5 Shannon O’Brien began her nursing career in the critical care department of a shock trauma center and now works in the radiation oncology division of a large medical center in Maryland. “A lot of bigger hospital organizations prefer that nurses come in with a bachelor’s degree,” she says. “As an oncology nurse, I would like to dedicate my life to helping others—which my degree will allow me to do.” in nursing and healthcare education, as well as other education and training opportunities. 2016 APPOINTMENTS In July, Dr. Karan Powell was named president of APUS. Dr. Powell has more than 30 years of experience in higher education and online learning, including leadership development, organizational transformation within business, government and non-profit sectors. Prior to her appointment, she had served as Provost of APUS since 2011 and has held several other senior academic leadership roles within the university. Dr. Powell is committed to expanding APUS’s reputation as a premier provider of higher education and as a partner in fostering the success of its students. In 2016, we made a number of other key appointments to support our strategic objectives. We named a new Provost, who will focus on learning outcomes assessments, new program and faculty development, as well as curriculum innovation and advancement. Improving retention and developing new programs will be at the forefront of his agenda. Our top priority in 2017 is stabilizing student enrollment at APUS. To help lead the advancement of our enrollment efforts, we recently appointed a new SVP and Chief Operations Officer with a strong background in enrollment management. This new position has responsibility for re-engineering our enrollment management processes to improve conversion rates of incoming Educating Tomorrow’s Leaders DR. KARAN POWELL, PRESIDENT, APUS “ Our vision is to continue to pursue our mission of educating and pre- paring tomorrow’s leaders. That’s our mandate—which is especially important in today’s complex world, with all its challenges. We are creating students as well as the onboarding experience. Within APEI, we a learning environment that engages and supports our students—and helps them succeed. I think that’s our greatest responsibility.“ appointed a new chief innovation officer. She will play a central role in advancing our long-term strategy of investing in health- care education and education companies aimed at bridging the skills gap and serving our nation’s workforce development needs. IN CLOSING APEI has a 25-year history of innovation as a provider of higher education in the digital space. During that period, our world has changed dramatically. Today, technology is how people connect, how they find jobs, how they do their work, how they communi- cate. Based on a 2015 study, fully 87% of college students use a laptop to do school work and 78% of elementary school students regularly use a tablet.4 The current generation of elementary 4. Pearson Student Mobile Device Survey, 2015 6 AMERICAN PUBLIC EDUCATION, INC. 2016 ANNUAL REPORT 7 “ My education at AMU helped me better understand the strategic planning and decision making that goes into leading a business.” AL HOPPER, MBA, American Military University (2015) The Path to Success A veteran of the U.S. Army, Al Hopper leveraged his education to co-found SocialPath Solutions, where he helps clients develop their social media customer service operations. Today, he’s building a business and a reputation. In 2016, he was featured in a Microsoft e-book outlining the top 10 customer service trends for the year and profiled in the San Antonio Business Journal, which dubbed him a social media guru. school students are digital natives. In today’s world, technology Truly yours, has become an indispensable element of education at every level. Over time, this change has drawn more institutions into the field of online higher education. The competition for college-ready students has increased. Nonetheless, APUS has built a reputation based on certain fundamental strengths that set us apart— including highly specialized programs, experience with best practices in online learning, and an understanding of how to engage students and build supportive relationships in an online setting. We believe our affordability and quality is a key differen- tiator, as is our commitment to the nursing, public service and military communities we serve. As we approach our tenth anniversary as a public company on November 17, we have built an excellent platform not only for continued leadership in providing higher education for adult learners, but also for addressing the growing need for health- care education and workforce development. We look forward to an exciting future and to serving our students with distinction. Dr. Wallace E. Boston, President & CEO American Public Education, Inc. 6 AMERICAN PUBLIC EDUCATION, INC. 2016 ANNUAL REPORT 7 Executive Leadership FROM LEFT TO RIGHT Amy Bevilacqua, Amy Panzarella, Richard Sunderland, Jr., CPA, Dr. Wallace Boston, Dr. Karan Powell, Thomas Beckett Dr. Wallace Boston* President and Chief Executive Officer, American Public Education, Inc. Richard Sunderland, Jr., CPA* Executive Vice President and Chief Financial Officer Dr. Karan Powell* President, American Public University System Thomas Beckett* Senior Vice President, General Counsel Amy Bevilacqua Senior Vice President, Chief Innovation Officer Peter Gibbons* Senior Vice President, Special Projects (not pictured) Amy Panzarella, SPHR, SHRM-SCP* Senior Vice President, Human Resources *denotes executive officers for Rule 3b-7 University Leadership FROM LEFT TO RIGHT Dr. Gwendolyn Hall, Richard Sunderland, Jr., CPA, Dr. Karan Powell, Robert Gay, Dr. Vernon Smith Dr. Karan Powell President, American Public University System Richard Sunderland, Jr., CPA Executive Vice President and Chief Financial Officer Robert Gay Senior Vice President and Chief Operations Officer Dr. Gwendolyn Hall Senior Vice President and Chief of Staff Dr. Vernon Smith Senior Vice President and Provost 8 AMERICAN PUBLIC EDUCATION, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K [×] AnnualReportpursuanttoSection13or15(d)oftheSecuritiesExchangeActof1934 ForthefiscalyearendedDecember 31,2016 or [ ] TransitionReportpursuanttoSection13or15(d)oftheSecuritiesExchangeActof1934 Forthetransitionperiodfrom______to______ Commission File Number: 001-33810 American Public Education, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 01-0724376 (I.R.S. Employer Identification No.) 111 West Congress Street Charles Town, West Virginia 25414 (Address, including zip code, of principal executive offices) (304) 724-3700 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $.01 par value Name of each exchange on which registered NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None (Title of class) 2016 Annual Report 9 Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405ofthe SecuritiesAct. Yes [ ] No [×] IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d) oftheAct. Yes [ ] No [×] Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d) oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthatthe registrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast 90 days. Yes [×] No [ ] Indicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporatewebsite, ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T (§232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwas requiredtosubmitandpostsuchfiles). Yes [×] No [ ] IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-K(§229.405ofthis chapter)isnotcontainedherein,andwillnotbecontained,tothebestofregistrant’sknowledge,indefinitive proxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-Koranyamendmentto thisForm10-K. [×] Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceler - atedfiler,orasmallerreportingcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler”and “smallerreportingcompany”inRule12b-2oftheExchangeAct. Largeacceleratedfiler [ ] Acceleratedfiler [×] Non-acceleratedfiler [ ] Smallerreportingcompany [ ] (Donotcheckifasmallerreportingcompany) Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchange Act). Yes [ ] No [×] Theaggregatemarketvalueoftheregistrant’scommonstockheldbynon-affiliatescomputedbyreferenceto thepriceatwhichthecommonequitywaslastsoldasofJune30,2016,thelastbusinessdayoftheregistrant’s mostrecentlycompletedsecondfiscalquarter,wasapproximately$361.7million.Forpurposesofthiscalcu - lation,sharesofcommonstockheldbytheregistrant’schiefexecutiveofficer,theregistrant’schieffinancial officer,andtheregistrant’sdirectorswereexcluded.Exclusionofsuchsharesheldbyanypersonshouldnotbe construedtoindicatethatthepersonpossessesthepower,directorindirect,todirectorcausethedirectionof themanagementorpoliciesoftheregistrant,orthatthepersoniscontrolledbyorundercommoncontrolwith theregistrant. ThetotalnumberofsharesofcommonstockoutstandingasofFebruary 24,2017,was16,205,924. DocumentsIncorporatedbyReference Certainportionsoftheregistrant’sDefinitiveProxyStatementforits2017AnnualMeetingofStockholders (whichisexpectedtobefiledwiththeCommissionwithin120daysaftertheendoftheregistrant’s2016fiscal year)areincorporatedbyreferenceintoPartIIIofthisReport. 10 AmericanPublicEducation,Inc. Index PART I Item1. Business Item1A. RiskFactors Item1B. UnresolvedStaffComments Item2. Properties Item3. LegalProceedings Item4. MineSafetyDisclosures PART II Item5. MarketforRegistrant’sCommonEquity,RelatedStockholderMatters andIssuerPurchasesofEquitySecurities Item6. SelectedFinancialData Item7. Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations Item7A. QuantitativeandQualitativeDisclosuresaboutMarketRisk Item8. FinancialStatementsandSupplementaryData Item9. ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure Item9A. ControlsandProcedures Item9B. OtherInformation PART III Item10. Directors,ExecutiveOfficers,andCorporateGovernance Item11. ExecutiveCompensation PAGE 5 60 103 103 103 103 104 107 109 135 136 169 169 172 173 173 Item12. SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters 173 Item13. CertainRelationshipsandRelatedPartyTransactions,andDirectorIndependence Item14. PrincipalAccountantFeesandServices PART IV Item15. ExhibitsandFinancialStatementSchedules 174 174 174 2016 Annual Report 11 SpecialNoteRegardingForward-LookingStatements ThisAnnualReport,includingthesectionsentitled“RiskFactors,”“Management’sDiscussionandAnalysisof FinancialConditionandResultsofOperations,”and“Business,”containsforward-lookingstatements.Wemay, insomecases,usewordssuchas“project,”“believe,”“anticipate,”“plan,”“expect,”“estimate,”“intend,”“should,” “would,”“could,”“potentially,”“will,”or“may,”orotherwordsthatconveyuncertaintyoffutureeventsorout - comestoidentifytheseforward-lookingstatements.Forward-lookingstatementsinthisAnnualReportinclude statementsabout: • changestothesizeofourstudentenrollment,netcourseregistrations,andthecompositionofourstudent body,includingthepaceofsuchchanges; • ourabilitytomanageandinfluenceourbaddebtexpense; • ourabilitytomaintain,develop,andgrowourtechnologyinfrastructuretosupportourstudentbody; • ourconversionofprospectivestudentstoenrolledstudentsandourretentionofactivestudents; • ourabilitytoupdateandexpandthecontentofexistingprogramsanddevelopnewprogramsinacost-effec - tivemanneroronatimelybasis; • ourplansfor,marketingof,andinitiativesat,NationalEducationSeminars,Inc.,whichwerefertoasHondros CollegeofNursing; • ourabilitytoleverageourinvestmentsinsupportofourinitiatives,students,andinstitutions; • ourmaintenanceandexpansionofourrelationshipsandpartnershipswiththeUnitedStatesArmedForces, corporations,andotherorganizations,andthedevelopmentofnewrelationshipsandpartnerships; • actionsbytheDepartmentofDefenseorbranchesoftheUnitedStatesArmedForces; • federalappropriationsandotherbudgetarymattersthataffecttheabilityofourstudentstofinancetheir educationthroughprogramsadministeredbytheDepartmentofEducation,theDepartmentofDefense,and theDepartmentofVeteransAffairs; • ourabilitytocomplywiththeextensiveregulatoryframeworkapplicabletoourindustry,includingTitleIVof theHigherEducationActof1965,asamended,andtheregulationsthereunder,aswellasstatelawandregula - tionsandaccreditingagencyrequirements; • ourabilitytoundertakeinitiativestoimprovethelearningexperienceandattractstudentswhoarelikelyto persist; • thecompetitiveenvironmentinwhichweoperate; • ourcashneedsandexpectationsregardingcashflowfromoperations; • ourabilitytomanage,grow,anddiversifyourbusinessandexecuteourbusinessinitiativesandstrategy;and • ourfinancialperformancegenerally. Althoughwebelievethattheexpectationsreflectedintheforward-lookingstatementsarereasonable,wecan - notguaranteefutureresults,levelsofactivity,performance,orachievements.Thereareanumberofimportant factorsthatcouldcauseactualresultstodiffermateriallyfromtheresultsanticipatedbytheseforward-looking statements,whichapplyonlyasofthedateofthisAnnualReport.Theseimportantfactorsincludethosethat wediscussinItem1A“RiskFactors,”Item7“Management’sDiscussionandAnalysisofFinancialConditionand ResultsofOperations”andelsewhere.Youshouldreadthesefactorsandtheothercautionarystatementsmade inthisAnnualReportasbeingapplicabletoallrelatedforward-lookingstatementswherevertheyappearinthis AnnualReport.Ifoneormoreofthesefactorsmaterialize,orifanyunderlyingassumptionsproveincorrect, ouractualresults,performance,orachievementsmayvarymateriallyfromanyfutureresults,performance, orachievementsexpressedorimpliedbytheseforward-lookingstatements.Weundertakenoobligationto publiclyupdateanyforward-lookingstatementsafterthedateofthisAnnualReport,whetherasaresultofnew information,futureevents,orotherwise,exceptasrequiredbylaw. 12 AmericanPublicEducation,Inc. PartI Item1. Business AmericanPublicEducation,Inc.,orAPEI,providesonlineandon-campuspostsecondaryeducationtoapprox - imately90,000studentsthroughtwosubsidiaryinstitutions.InthisAnnualReport,“we,”“our,”“us,”“the Company”andsimilartermsrefertoAPEIanditssubsidiaryinstitutionscollectivelyunlessthecontextindicates otherwise. ThisItem1ofourAnnualReportcontainsa“CompanyOverview”sectionthatprovidesinformationaboutour subsidiaryinstitutions,reportingsegments,ourhistory,thepostsecondaryeducationalmarket,competition, competitivestrengths,strategicapproach,executiveofficers,seasonalityandavailableinformation.Item1also containsasectionentitled“OurInstitutions”thatprovidesinstitution-specificinformationregardingeachofour twosubsidiaryinstitutions,anda“RegulatoryEnvironment,”sectionthatprovidesinformationonsomeofthe regulationsthatimpactpostsecondaryeducationalinstitutions. CompanyOverview SUBSIDIARY INSTITUTIONS Ourinstitutionsofferprogramsdesignedtoprepareindividualsforproductivecontributionstotheirprofessions andsociety,andtoofferopportunitiesthatmayadvancestudentsintheircurrentprofessionorhelpthempre - parefortheirnextcareer.Ourwholly-ownedoperatingsubsidiaryinstitutionsinclude: • AmericanPublicUniversitySystem,Inc.,orAPUS,providesonlinepostsecondaryeducationtoapproximately 88,700adultlearnerswithahistoryofservingtheneedsofthemilitaryandpublicsafetycommunities.APUS isanoverarchinguniversitysystem,withtwocomponents:AmericanMilitaryUniversity,orAMU,whichis focusedoneducatingmilitarystudents,andAmericanPublicUniversity,orAPU,whichisfocusedoneducating non-militarystudents. APUSoffers106degreeprogramsand103certificateprogramsindiversefieldsofstudy,includingbusiness administration,healthscience,technology,criminaljustice,educationandliberalarts,aswellasnational security,militarystudies,intelligence,andhomelandsecurity.APUSemploysapproximately390full-timefac - ultymembersand1,650part-timefacultymembersandhasregionalaccreditationfromtheHigherLearning Commission,orHLC. AlthoughAPUS’sfocushasexpanded,APUScontinuestohaveanemphasisonitsrelationshipwiththemilitary community.AsofDecember31,2016,approximately54%ofAPUS’sstudentsself-reportedthattheyservedin themilitaryonactivedutyatthetimeofinitialenrollment. • NationalEducationSeminars,Inc.,whichwerefertoasHondrosCollegeofNursing,orHCON,providesnurs - ingeducationtoapproximately1,300studentsacrossfivecampusesintheStateofOhio,aswellasonline. HCONoffersaDiplomainPracticalNursingandanAssociateDegreeinNursing.Thecampusesarelocatedin thesuburbanareasofCincinnati,Cleveland,Columbus,Daytonand,beginninginJanuary2017,Toledo.HCON alsooffersanonlineRegisteredNursetoBachelorofScienceinNursingcompletionprogram,whichwerefer toastheRN-to-BSNProgram,predominantlytostudentsinOhio. HCONisnationallyaccreditedbytheAccreditingCouncilofIndependentCollegesandSchools,orACICS,and theRN-to-BSNProgramisaccreditedbytheCommissiononCollegiateNursingEducation,orCCNE.HCON’s locationsandprogramsareapprovedbytheOhioStateBoardofCareerCollegesandSchoolsandtheRN-to- BSNProgramisapprovedbytheOhioDepartmentofHigherEducation.Inaddition,theDiplomainPractical 2016 Annual Report 13 NursingandAssociateDegreeinNursingprogramsareapprovedbytheOhioBoardofNursing.TheRN-to- BSNprogramisfullyonline,whiletheDiplomainPracticalNursingandAssociateDegreeinNursingoffer portionsoftheprogramonline.HCONemploysapproximately90full-timefacultymembersand40part-time facultymembers. REPORTING SEGMENTS Ouroperationsareorganizedintotworeportingsegments: • American Public Education Segment, or APEI Segment. Thissegmentreflectstheoperationalactivitiesof APUS,othercorporateactivities,andminorityinvestments. • Hondros College of Nursing Segment, or HCON Segment. Thissegmentreflectstheoperationalactivitiesof HCON. OurconsolidatedrevenuefortheyearendedDecember31,2016,decreasedto$313.1millionfrom$327.9million fortheyearendedDecember31,2015.Netincomewas$24.2millionfortheyearendedDecember31,2016, comparedtonetincomeof$32.4millionfortheyearendedDecember31,2015.Financialinformationregard - ingeachofourreportingsegments,includinginformationregardingsegmentrevenue,netincomeandtotal assetsforeachofthelastthreefiscalyears,canbefoundinourConsolidatedFinancialStatementsfoundin Item8ofPartIIofthisAnnualReport;financialinformationisreportedinthisAnnualReportin“Management’s DiscussionandAnalysisofFinancialConditionandResultsofOperations,”“SelectedFinancialData,”and “FinancialStatementsandSupplementaryData.” OUR HISTORY In1991,retiredMarineCorpsofficerJamesP.EtterfoundedAmericanMilitaryUniversity,orAMU,inVirginia, offeringdistancegraduateeducationtoamobilepopulationofmilitarylearnerswithuniqueneeds.Overtime, undergraduateandgraduateprogramswereaddedtohelppreparestudentsforleadershiprolesbothwithin themilitaryandfortransitiontopost-militarylifeandcareers. In2002,AMUwasreorganizedintoaholdingcompanyandAPEIwasformedandincorporatedinDelawareas theparentofAPUS,whichwasorganizedwithtwocomponents:AMUandAmericanPublicUniversity,orAPU, whichwascreatedtoprovidethesamequality,affordableandflexibleeducationtoabroaderaudienceofadult learners. In2003,APUSmovedtoitscurrenthomeinCharlesTown,WestVirginia. In2006,APUSreceivedregionalaccreditationfromtheHigherLearningCommission,orHLC. In2007,APEIbecameapubliclytradedcompanyonNASDAQ. In2011,HLCreaffirmedaccreditationforAPUSthroughthe2020-2021academicyear. In2013,APEIacquiredHCON,withcampuseslocatedinOhio. Today,APUSisoneofthelargestprovidersofonlinehighereducation,offeringabroadarrayofprogramstostu - dentsenrolledworldwide,includingAssociate,Bachelor’sandMaster’sdegrees,alongwithUndergraduateand Graduatecertificates,dedicatedtopreparingstudentsforexcellenceinservice,leadershipandachievement. POSTSECONDARY EDUCATION MARKET STRUCTURE AND MARKET OPPORTUNITIES ThepostsecondaryeducationsectorintheUnitedStatesislarge,withover4,000institutions,diverseinitsbusi - nessmodelsandfragmentedinthatnooneinstitutionhasasignificantshareofthesector.Mostpostsecondary 14 AmericanPublicEducation,Inc. institutions,includingfor-profitpostsecondaryinstitutions,regardlessofwheretheyarelocated,howtheyare organized,andwhotheyserve,facecertainkeydriversofchange,including: • continuedfocusonthecostofacollegeeducationandtheresultingimpactonaccess; • concernoverthehighlevelofindebtednessthatcollegestudentstakeon; • largenumberofstudentswithsomecollegecredit,butnodegree; • questionsaboutthequalityofacademicprogramsandtheabilitytotranslatethevalueofapostsecondary educationintoeconomicmobility;and • risingnumbersofadultlearnerswithadifferentiatedsetofneedsfromtraditionalagestudents. Webelievethatwithnearly2.1millionactive-dutymilitaryandreservists,themilitarycommunitywillcontinue tobeasignificantmarketforonlineeducation.Becauseofirregularschedules,geographicmobilityandaccess totuitionassistancefunding,webelieveservicememberswillcontinuetoseekrespecteduniversitiesthatpro - videmilitary-focusedsupportservicescoupledwithanonlinecurriculumthatisdesignedtopreparegraduates forbothcareeradvancementandemploymentoutsideofthemilitary.Aspartoftheirlongstandingtradition, militaryleadersoftenencourageservicememberstousetheirearnededucationbenefits,andtoenhancetheir qualificationsforpurposesofthemilitary’scompensation,promotion,assignmentandperformancesystems. Electedandprivate-industryleadersareheavilypromotingnewpoliciesandcampaignstofacilitatethehiring ofveterans,supportingatransitionfrommilitaryservicetotheworkforceandstimulatingdemandforonline education.Asthesepolicieslowerbarrierstonon-militaryjobsandfacilitateveteran-ownedbusinesseswinning federalcontracts,onlineuniversitiesoffervaluableeducationalopportunitiesforconstituentsregardlessof wheretheylive,workorlearn. TheDepartmentofDefense,orDoD,uniformtuitionassistancepolicyoffersservicemembersavarietyof affordableeducationandfinancialaidoptions.Additionally,veterans(andcertainservicemembers)areentitled toeducationalbenefitsfromtheDepartmentofVeteransAffairs,orVA.Formoreinformation,referto“Our Institutions”and“RegulatoryEnvironment—StudentFinancingSourcesandRelatedRegulations/Requirements.” Onanationallevel,theexpandinghealthcaresectorisdrivingdemandfornursingeducation.Accordingtothe U.S.BureauofLaborStatistics’OccupationalOutlookHandbook,2016-17Edition,jobopportunitiesforlicensed practicalnursesandregisterednursesareexpectedtogrowapproximately16%between2014and2024,faster thantheaveragegrowthforalloccupations.ThedemandfornursesinOhioissimilartonationaldemand. AccordingtotheOhioDepartmentofJobandFamilyServices’2022OhioJobOutlookreport,jobopportunities forlicensedpracticalnursesandregisterednursesareexpectedtogrow21.6%and15.4%,respectively.Despite anticipatedgrowthinjobopportunities,a2014reportfromtheAmericanAssociationofCollegesofNursing statedthatover53,000qualifiedapplicationswerenotacceptedbyentry-levelbaccalaureateprogramsatnurs - ingschoolsin2013.Thesestatisticssuggesttheremaybeunmetdemandfromqualifiedstudentsfornursing educationalprograms. COMPETITION APUScompetesprimarilywithnot-for-profitpublicandprivatetwo-yearandfour-yearcolleges,aswellasother for-profitschools,particularlythosethatofferonlinelearningprograms.WebelieveAPUS’sprimarycompeti - torsinclude:AshfordUniversity,CapellaUniversity,GrandCanyonUniversity,LibertyUniversity,SouthernNew HampshireUniversity,StrayerUniversity,UniversityofMarylandUniversityCollege,andflagshipandmid-size stateuniversitiesofferingdegreeprogramsonline. WebelievethatthecompetitivefactorsintheU.S.postsecondaryeducationmarketinclude: 2016 Annual Report 15 • alignmentofacademicprogramstohighgrowthsectorsofthejobmarket; • affordability; • breadthofdegreeofferings; • flexibilityindeliverymodels; • experiencedfacultyengagedinthepracticeoftheirfields; • levelofsupportforstudentsuccess; • effectivenessofmarketingeffortsdirectedatattractingstudents;and • strongcompliancetrackrecord. Ourinstitutionscontinuetofacesignificantcompetitionandotherchallengesthatimpactthecompetitiveenvi - ronment.Thesechallengesincludethoserelatedtofederalpoliciesgoverningfor-profitinstitutionsandfinancial aidthateitherapplyonlytofor-profitinstitutionsandexcludenot-for-profitandpubliceducation,suchasthe 90/10Rule,orthatineffectimposemorerestrictionsonfor-profitinstitutionsthanonnot-for-profitandpublic institutionsbasedonthenatureoftherequirements,suchasgainfulemploymentregulations. Mostpublicinstitutionsareaidedbysubstantialgovernmentsubsidies.Publicandprivatenot-for-profitinstitu - tionsbenefitfromgovernmentandfoundationgrants,inadditiontotax-exemptstatus,tax-deductiblecontri - butionsandotherfinancialresourcesnotwidelyavailabletofor-profitinstitutions.Manypubliccompetitorsalso benefitfromlongstandingnamerecognitionandareabletodirectlyrecruitstudentsinamorecost-effective manner,especiallyintheirlocalmarkets. Wealsoexpectourinstitutionstocontinuetofacegreatercompetitionfromanincreasingnumberofinstitu - tionsshiftingtheirdeliverymodelstoincludeonlineeducationprograms,aswellasfromnon-traditionaloffer - ingsprovidedbybotheducationalinstitutionsandnon-traditionalproviders.Inrecentyears,otherinstitutions, includingcompetinginstitutions,havestartedprovidingnon-traditional,credit-bearingandnon-credit-bearing educationprograms,includingmassivelyopenonlinecourses,orMOOCs,withoutchargeoratlowcosts.We havealsoobservedanincreaseininstitutionsofferingcompetency-basedprograms,whichpermitstudents toprogressinaprogrambydemonstratingthattheyhaveachievedcertainskillsorknowledgeratherthanby earningcredithours.Webelievethatourinstitutionswillcontinuetofacenewcompetitionfromsuchprograms, includingcompetitionfromlowercostalternatives.Additionally,non-traditionalcompetitors,suchasentities offeringcodingbootcampsandmicro-credentials,areofferingnewalternativeeducationalpaths.Whileweare workingtodevelopourownalternativesinsomeoftheseareas,includingwithrespecttocompetency-based educationatAPUS,thereareotherinstitutionswithprogramsthataremorefullydeveloped,andourofferings maynotreceivemarketacceptanceorqualifyforaccesstoTitleIVprograms.Thecompetitionfromanincreased numberofschoolsshiftingtheirdeliverymodelstoincludeonlineeducationprogramsandfromnon-traditional offeringsisaccelerating,includingbecausetheonlineexperimentsthatmanyinstitutionsbeganseveralyears agoarenowbecomingmoremainstreamandbecauseagreaternumberofstudentsandemployersareseeking alternativestoatraditionalformat. Withinthepostsecondaryeducationmarketgenerally,weanticipateincreasedcompetition,includingbecause thetotalpostsecondarystudentpopulationhasbeendeclining.Thecombinationofreducedgrowthordeclines inthepostsecondarystudentpopulation,increasedcapacityinthepostsecondaryeducationmarketand greatercompetitionfromnon-traditionalofferingswillfurtherintensifycompetition,andanyfurtherdecline inthenumberofenrollmentscouldhaveanadverseeffectonourresultsofoperations.Formoreinformation oncompetitionwithinthepostsecondaryeducationmarket,see“RiskFactors—RisksRelatedtoAttractingand RetainingStudents.” 16 AmericanPublicEducation,Inc. COMPETITIVE STRENGTHS Today’sadultlearners,whethermilitaryorcivilian,areoftenworkingwithextendedorirregularworkschedules, havefamilyobligations,travelorrelocatefrequently,andoftenhavelimitedfinancialresources. TheLuminaFoundationpublished“WhoisToday’sStudent,”whichaggregatedkeyfactsdescribingtoday’spost - secondarystudents,wholargely: • Areolderthan25andarejugglingmorethanjusteducation—38%ofcollegestudentstodayareolderthan25, 25%areraisingchildrenwhilepursuingtheireducation; • Aretryingtofitcollegealongsideworkobligations—58%areworkingwhiletheyareenrolled,40%attend schoolpart-time; • Arebalancinglivingexpenseswiththerisingaveragenationalcostofcollege—42%oftoday’scollegestudents arelivingnearorbelowthepovertyline,25%ofrecipientsofaBachelor’sdegreegraduatewithatleast $24,000indebt; • Arestrugglingtograduate—53%ofstudent-parentsleavecollegewithnodegree,11%oflow-income,first-gen- erationcollegestudentshadattainedabachelor’sdegreewithinsixyears. Whilemanyinstitutionsarestrugglingtodeterminehowtomeettheneedsoftoday’sstudents,bothAPUSand HCONhavebeensuccessfullyservingstudentswiththeseprofilessincetheirfounding. Thesourcesofourinstitutions’competitivestrengthsinclude: • Academic Relevance and Excellence. BothAPUSandHCONofferprogramsalignedtoareasofhighgrowth inthejobmarketassupportedbydataprovidedbytheBureauofLaborStatisticsandnon-governmental organizations.Thisisparticularlytrueinthehealthcare,technologyandbusinesssectors,andincybersecu - rity,nursingandhealthinformationmanagementprograms.APUSalsooffersaliberalartscurriculumthat developsthe“softskills”indemandbyemployers.APUSutilizesIndustryAdvisoryCouncils,orIACs,toeval - uateandinformtheoverallandprogram-specificacademiclearningstrategyregardingcareerrelevanceof programsanddegrees.ThisfacilitateseffortstoconnectAPUS’scurriculumtotheindustriesandthestudents itservesandtodeliverahigh-qualityacademicproduct.ThedepthandbreadthofAPUS’sprogramofferings aredesignedtoeffectivelyaddressthediverseneedsofstudentswhoenterintoeducationprogramswith vastlydifferenteducationalandcareerbackgroundsandgoals.Similarly,HCONfocusesoneducationalrele - vanceandexcellencebyhiringexperiencedindustryprofessionalsasfacultywhileenhancingstudentservices toassiststudentswithcourses,labs,andclinicalofferings.HCON’sfacultyincludesindividualswithresearch experienceandspecializednursingcredentials.Further,HCONhasinvestedinaninnovativeconcept-based curriculumandsimulationlabstoenhancethestudentlearningexperienceandimprovestudentsuccess.Our institutionsarecommittedtocontinuallyassessingandenhancingouracademicprogramsandourstudent servicestoofferahigh-qualityeducationandsupportsuccessfuloutcomesforourstudentsandgraduates. • Affordable Tuition. Fromitsfounding,APUSsettuitiontoalignwithtuitionassistanceprogramsavailable tomembersofthemilitaryandtoday,tuitionatAPUSremainsamongthelowestinthesector,therefore notrequiringstudentstotakeonasmuchindebtednessastheymightatanotherinstitution.Thecombined tuitionandfeesatAPUSare,inalmosteverycase,lessexpensiveforundergraduateandgraduatestudents thantheaveragein-statecostatapublicuniversity.This,whencombinedwithAPUS’sundergraduatebook grant,whichisprovidedtoallundergraduatestudents,resultsinsignificantsavingsforstudents.Fornearly15 years,APUSdidnotincreaseundergraduatetuition.FollowingatuitionincreasethatwaseffectiveinJuly2015, undergraduatetuitionatAPUSis$270percredithour,or$810perthree-creditcourse.Afull121-credithour undergraduatedegreemaybeearnedfor$32,670intuitioncostsatcurrenttuitionrates.FollowingtheJuly 2015tuitionincrease,APUS’sgraduatetuitionis$350percredithour,or$1,050perthree-creditcourse,which 2016 Annual Report 17 meansmanyAPUSgraduatedegreesmaybeearnedfor$12,600intuitionatcurrentrates.APUSprovidesa tuitiongranttosupportstudentswhoareU.S.Militaryactive-dutyservicemembers,Guard,Reserve,military spousesanddependents,andveterans.Forsuchindividuals,tuitionissetatpre-July2015rates,withunder - graduatecoursetuitionat$250percredithour,andgraduatecoursetuitionat$325percredithour.APUSesti- matesthatthetuitiongrantappliedtoapproximately75%ofitstotalnetcourseregistrationsin2016.Because ofthetuitiongrant,APUS’sundergraduatetuitionis100%coveredbyDoDtuitionassistanceandapproxi - mately80%ofgraduatetuitioniscovered.TuitionandfeesatHCONarealsodesignedtobeaffordableand competitivewiththoseofsimilarinstitutionsofferingthesamelevelofflexibility,accessibility,andstudent experience. • Flexible Delivery and Frequent Entry Points, Focused on Adult Learners. APUSdesignscoursesandprograms specificallyforonlinedelivery.APUSrecruitsandpreparesitsfacultyexclusivelytodeliveronlineinstruction. Becausestudentsarelocatedworldwide,APUSfocusesonprovidingasynchronous,interactiveeducationto studentsthatfitstheirbusylives.APUSoffersmonthlystarts,givingstudentstheopportunitytobegintheir studiesatatimethatworksforthem.Ouracademicsupportofferings,fromadvisingandmentoringtolibrary servicesandcareerplanning,areindividualizedtostudents’needs,designedtosupportthemateachstep oftheireducationjourneyandinaformatthatworksbestforthem.Theseofferingsrangefromself-service accesstoresourcesandvirtualcareerfaireventstolivevideochatsandpersonalizedcoachingsessionswith expertsintheapplicablediscipline.HCONoffersprogramsthataccommodateworkingadultsbyofferinga fullyonlineRN-to-BSNprogram,blendedonlineandin-personcoursesfortheDiplomainPracticalNursing andAssociateDegreeinNursingprograms,anddaytimeandevening/weekendoptionsforin-personclasses. • History of serving the military community. AlthoughAPUS’sfocushasexpanded,theuniversitysystem continuestohaveastrongemphasisonitsrelationshipwiththemilitarycommunityandisoneofthelead - ingprovidersofpostsecondaryeducationtomembersofthemilitarycommunity.AsofDecember31,2016, approximately54%ofAPUSstudentsself-reportedthattheyservedinthemilitaryonactivedutyatthetime ofinitialenrollment. STRATEGIC APPROACH Inanefforttoreturntorevenuegrowthandimproveourfinancialperformance,weareemployingthefollowing strategies: • Maintain Our Leading Position in the Military Market. APUShasfocusedontheneedsoftheU.S.military communitysincebeingfoundedasAMU.Thecombinationofouronlinemodel,focusedcurriculum,andout - reachtomilitarycommunitieshasenabledAPUStomaintainmarketshareagainstmoreestablishedinsti - tutions,manyofwhicharetraditionalschoolsofferingon-campusinstructionthathaveservedthemilitary marketforlongerperiods.APUSremainsfirmlycommittedtoprovidingexceptionalserviceandsupporttothe militarycommunity. • Increase APUS’s Share of the Civilian Market. APUSdesignsitscurriculumtobebroadlyrelevanttoadult learners,andparticularlyresponsivetothoseinpublicsafety,security,andpublicservicecommunities. Today’sadultlearners,regardlessoftheirspecificcareerrequirements,arelookingforahighly-tailorededu - cationalexperiencethatpreparesthemforsuccess.APUS’sacademicofferingsareattractiveoptionsforall studentslookingforhighquality,affordableandflexibleprograms. • Add New Degree Programs and Offerings at Our Institutions. Ourinstitutionswillcontinueexpandingtheir degreeofferingstomeetemergingstudentneedsandmarketplacedemands,withafocusonnewprograms infieldsexhibitinghigherthanaveragejobgrowth.Ourinstitutionswillalsocontinuetoconsideralternatives andnon-traditionalofferings,includingcompetency-basededucation. 18 AmericanPublicEducation,Inc. • Enhance Student Success. Wearefocusedonincreasingthepercentageofapplicantswhoarepreparedfor therigorsofhighereducationandcapableofsuccessfullycompletingcoursesandgraduatingfromourpro - grams.Wealsoprovideservicesdesignedtoimprovestudentpersistence,increasethelevelofengagement andcollaborationintheclassroom,anddeliverinterventionsdesignedt ohelpstudentssucceed. • Utilize Innovative Education Technology. Weprovideauniqueandadvancedonlinelearningenvironment leveragingexistingandproprietarytechnologies,aswellasemergingtechnologies,inserviceofenhancing studentservices,classroominstruction,learningoutcomesandtheoverallstudentexperience,aswellasto encouragestudentpersistenceandengagement. Tosupportgrowthinourexistingbusinessesaswellaseffectbusinessmodeldiversification,wewillcontinueto assessandpursuestrategicinvestmentsandacquisitions.Examplesofourinvestmentsandacquisitionstodate include: • Hondros College of Nursing. InNovember2013,weacquiredalloftheissuedandoutstandingcapitalstockof NationalEducationSeminars,Inc.,whichwerefertoasHCON,foranapproximateadjustedaggregatepur - chasepriceof$46.8million.AsdescribedmorefullyelsewhereinthisAnnualReport,HCONoffersaDiploma inPracticalNursing,anAssociateDegreeinNursing,andanonlineRN-to-BSNprogram. • RallyPoint. InDecember2015,wemadea$3.5millioninvestmentinpreferredstockofRallyPointNetworks, Inc.,orRallyPoint,anonlinesocialnetworkformembersofthemilitary.Ourinvestmentrepresentedapproxi - mately14%ofitsfullydilutedequityandentitledAPEItotwoboardobserverseats. • New Horizons Worldwide, Inc. InSeptember2012,wemadea$6.8millionequityinvestmentanda$6.0million debtinvestmentinaholdingcompanythatacquiredNewHorizons,aglobalinformationtechnologytraining companyoperatingover300locationsaroundtheworldthroughfranchisearrangementsinapproximately 70countries.Inconnectionwiththeinvestment,weacquiredapproximately20%ofthefullydilutedequityof theNewHorizonsholdingcompanyandareentitledtocertainrights,includingrightstorepresentationonthe BoardofDirectorsoftheholdingcompany.InDecember2014,theNewHorizonsholdingcompanyprepaidthe $6.0milliondebtinvestmentwemadeinconnectionwiththetransaction.In2016,wereceiveda$3.0million dividendfromtheNewHorizonsholdingcompany.WeaccountforourinvestmentintheNewHorizonshold - ingcompanyusingtheequitymethodofaccounting,andthereforerecordedacorrespondingreductioninthe amountofourinvestment. Thestrategyforfutureinvestmentswillbetofocusoninvestinginhealthcareandincompaniesthatbridge educationtoemployment,deliveringonthepromisetoenableeconomicmobilityforadultlearners,inparticu - larthoseinthemilitary,nationalsecurityandpublicservicecommunities,throughacombinationofeducational offeringsandworkforce-relatedsolutions. Foradditionalinformationregardingtheseandourotherinvestmentsandacquisitions,pleaserefertothe “FinancialStatementsandSupplementaryData—NotestoConsolidatedFinancialStatements.” EXECUTIVE OFFICERS SetforthbelowiscertaininformationconcerningourexecutiveofficersservingasofthedateofthisAnnual Report. Name Age Position Dr.WallaceE.Boston RichardW.Sunderland,Jr.,CPA Dr.KaranPowell 62 56 63 President,ChiefExecutiveOfficerandDirectorofAPEI ExecutiveVicePresident,ChiefFinancialOfficer PresidentofAPUS 2016 Annual Report 19 Name ThomasA.Beckett AmyN.Panzarella,SPHR,SHRM-SCP Age Position 49 42 SeniorVicePresident,GeneralCounselandSecretary SeniorVicePresident,HumanResourcesandCommunityAffairs Dr. Wallace E. Boston joinedusinSeptember2002asExecutiveVicePresidentandChiefFinancialOfficerof APUSand,sinceJuly2016,hasservedasPresidentandChiefExecutiveOfficerandamemberoftheBoardof DirectorsofAPEI.FromJune2004toJuly2016,heservedasPresident,ChiefExecutiveOfficerandamember oftheBoardofDirectorsofAPEIaswellasPresidentandChiefExecutiveOfficerofAPUS.FromAugust2001to April2002,Dr.BostonservedasChiefFinancialOfficerofSunHealthcareGroup.FromJuly1998toMay2001, Dr.BostonservedasChiefOperatingOfficerand,later,PresidentofNeighborCare,Inc.FromFebruary1993to May1998,Dr.BostonservedasVicePresidentofFinanceandlater,SeniorVicePresidentofAcquisitionsand DevelopmentofManorHealthcareCorporation,nowManorCare,Inc.FromNovember1985toDecember1992, Dr.BostonservedasChiefFinancialOfficerofMeridianHealthcare. Richard W. Sunderland, Jr., CPA joinedusinFebruary2011asaconsultantandbecameSeniorVicePresident ofFinanceofAPUSinDecember2012.EffectiveJanuary1,2014,Mr.SunderlandwasappointedExecutiveVice PresidentandChiefFinancialOfficerofAPEI.PriortojoiningAPUS,Mr.SunderlandservedastheChiefFinancial OfficerofNovaSom,Inc.from2008to2010.Inaddition,Mr.SunderlandservedasChiefFinancialOfficerof ActiveDay,Inc.between2005and2008,andinvariousroles,includingasController,SeniorVicePresidentand ChiefFinancialOfficer,ofNeighborCare,Inc.from1993to2004. Dr. Karan H. Powell joinedusinApril2004asInterimChancellorafterservingontheBoardofTrusteesofAPUS fortwoyearsand,sinceJuly2016,hasservedasPresidentofAPUS.FromOctober2005toDecember2005,Dr. PowellservedastheDeanoftheSchoolofBusiness,ManagementandGraduatestudies.FromJanuary2006 toJuly2008,Dr.PowellservedasVicePresidentandAcademicDean.InJuly2008,Dr.Powellwaspromotedto SeniorVicePresidentandservedasSeniorVicePresidentandAcademicDeanuntilAugust2011,whenshewas promotedtoExecutiveVicePresidentandProvost.In2010,Dr.PowelljoinedtheboardoftheHigherEducation ResourceServices(HERS)andwaselectedtotheHERSexecutiveboardasSecretaryin2014.Dr.Powellhas servedontheBoardofTrusteesforGarrisonForestSchoolinBaltimore,Marylandsince2012.Between1988 and2007,Dr.PowellservedatGeorgetownUniversityinvariousroles,includingDirectorofProfessional DevelopmentintheSchoolofContinuingEducation,DirectorofOrganizationDevelopmentPrograms,Director ofIRSExecutiveDevelopmentProgramandasanExecutiveInstructorintheSchoolofBusiness. Thomas A. Beckett joinedusinApril2011asDirector,LegalAffairsforAPUS,inJanuary2012becameVice President,LegalAffairsand,sinceJanuary2016,hasservedasSeniorVicePresidentandGeneralCounselfor APEIandAPUS,andSecretaryforAPEIsinceJune2016.PriortojoiningAPUS,Mr.BeckettwastheGeneral CounselandChiefOperatingOfficerofHealthSport,Inc.anditswhollyownedsubsidiary,InnoZen,Inc.(now CUREPharmaceutical)fromDecember2007toSeptember2010.Inaddition,from2004to2010,Mr.Beckettheld variousleadershippositionsatHealthSportandInnoZen.Priortothis,Mr.BeckettwasanassociateatKing& SpaldingLLPfrom1996to1999andatHolland&KnightLLPfrom1995to1996.Mr.Beckettbeganhiscareerin 1989asabankingofficerwithFirstUnionNationalBank. Amy N. Panzarella, SPHR, SHRM-SCP joinedusin2008astheManagerofHumanResourcesofAPUS,andsince July2016,hasservedasSeniorVicePresident,HumanResourcesandCommunityAffairs.PriortojoiningAPUS, Ms.PanzarellawastheDirectorofHumanResourcesatDALB,Inc.fromSeptember2006toFebruary2008; EmployeeRelationsManageratHollywoodCasinoatCharlesTownRacesfromApril2003toSeptember2006; andHumanResourcesGeneralistatWright-PattCreditUnion,Inc.fromDecember1995toJune2002.Ms. PanzarellaearnedherSeniorProfessionalHumanResourceCertification(SPHR)in2009andherSocietyfor HumanResourceManagementSeniorCertifiedProfessionalCertification(SHRM-SCP)in2014. 20 AmericanPublicEducation,Inc. SEASONALITY AND QUARTERLY FLUCTUATIONS Ourquarterlyresultsfluctuateand,therefore,theresultsinanyquartermaynotrepresenttheresultswemay achieveinanysubsequentquarterorfullyear.Ourrevenueandoperatingresultsnormallyfluctuateasaresult ofseasonalorothervariationsinourenrollments.Ourstudentpopulationalsovariesasaresultofnewenroll - ments,graduations,studentattrition,thesuccessofourmarketingprograms,andotherreasonsthatwecannot alwaysanticipate.Weexpectquarterlyfluctuationsinoperatingresultstocontinueasaresultofthesefactors. AVAILABLE INFORMATION ABOUT US APEIwasincorporatedinDelawarein2002,asthesuccessortoaVirginiacorporationincorporatedin1991.Our websiteiswww.americanpubliceducation.com.Theinformationonourwebsiteisnotincorporatedbyreference inthisAnnualReportonForm10-K.Wemakeavailable,freeofchargethroughourwebsite,ourAnnualReports onForm10-K,QuarterlyReportsonForm10-Q,CurrentReportsonForm8-K,andamendmentstothose reportsfiledorfurnishedpursuanttoSection13(a)or15(d)oftheExchangeAct,assoonasreasonablypractica - bleaftertheyareelectronicallyfiledwith,orfurnishedto,theSEC. OurInstitutions Weprovidepostsecondaryeducationthroughtwosubsidiaryinstitutions,APUSandHCON.Ourinstitutionsare licensedorotherwiseauthorizedbystateauthorities,orareintheprocessofobtainingsuchlicensesorauthoriza- tions,toofferpostsecondaryeducationprogramstotheextenttheinstitutionsbelievesuchlicensesorauthoriza- tionsarerequired,andarecertifiedbytheUnitedStatesDepartmentofEducation,orED,toparticipateinstudent financialaidprogramsauthorizedunderTitleIVoftheHigherEducationActof1965,asamended,orTitleIV. AMERICAN PUBLIC UNIVERSITY SYSTEM APUSisbasedinCharlesTown,WestVirginia,andhasregionalaccreditationfromtheHigherLearning Commission,orHLC.APUStracesitsrootstoAMU,whichwasfoundedin1991asadistance-learning,grad - uate-levelinstitutionformilitaryofficersseekinganadvanceddegreeinmilitarystudies.APUShasgradually broadeneditsfocustoincludeothermilitarycommunities,veterans,publicsafety,andcertainothernon-mili - tarycommunitieswithafocusonabroadpurposeof“educatingthosewhoserve.”In2002,APUSwasorganized intoauniversitysystemwithtwocomponents:AmericanMilitaryUniversity,orAMU,andAmericanPublic University,orAPU.AMUisfocusedoneducatingstudentsfromthemilitary,nationalsecurityandpublicsafety communities.APUisfocusedoneducatingcareer-focusedworkingadultswithanemphasisoneducatingpro - fessionalsworkinginpublicservicerelatedcommunities.APUSisanonlineinstitutionofhigherlearning,which webelieveiswell-suitedtoitsstudents,especiallyitsmilitary,publicserviceandworkingadultstudents,who serveinpositionsrequiringextendedandirregularworkschedules,areoncallforrapidresponsemissions,par - ticipateinextendeddeploymentsandexercises,travelorrelocatefrequently,balancefamilyandworkdemands andmaybesingleparentswithlimitedfinancialresources.Manyofourstudentshavesignificantprioreduca - tionandcareerexperiences.APUSisdesignedtoservethosestudentswithtailoredofferingstosupportthemin successfullyreachingtheirindividualgoals. AlthoughAPUS’sfocushasbroadened,itcontinuestohaveanemphasisonitsrelationshipwiththemilitarycommu- nity.AsofDecember31,2016,approximately54%ofAPUS’sstudentsself-reportedthattheyservedinthemilitary onactivedutyatthetimeofinitialenrollment.TheremainderofAPUS’sstudentsaremilitary-affiliatedprofessionals (suchasveterans,reservistsorNationalGuardmembers),publicsafetyprofessionals(suchaslawenforcementper- sonnelorotherfirstresponders)andothercivilians(suchasmilitaryspousesandworkingadultstudents). 2016 Annual Report 21 CURRICULUM AND SCHEDULING APUSoffers209degreeandcertificateprogramsthroughover1,700uniquecoursesthatareprimarilyofferedin eithereight-or16-weekformats.AcademictermsbeginonthefirstMondayofeachmonth.APUS’sprogramsareas Number 37 46 23 106 Number 49 54 103 209 follows: Programs Master’sDegrees Bachelor’sDegrees AssociateDegrees TotalDegreePrograms Certificates Graduate Undergraduate TotalCertificates TOTALPROGRAMSANDCERTIFICATES Atthegraduatelevel,APUSoffersprogramsinthefollowingfieldsofstudy: MasterofArtsin: CriminalJustice MasterofEducationin: EducationalLeadership EmergencyandDisasterManagement Teaching EmergencyandDisasterManagementand Teaching—Non-LicensureConcentration HomelandSecurity Entrepreneurship History HomelandSecurity Humanities IntelligenceStudies InternationalRelationsandConflictResolution LegalStudies Management MilitaryHistory MilitaryStudies NationalSecurityStudies PoliticalScience Psychology ReverseLogisticsManagement SecurityManagement TransportationManagementandLogistics MasterofBusinessAdministration inElementaryEducation Teaching—Non-LicensureConcentration inSocialStudies MasterofPublicAdministration MasterofPublicHealth MasterofPublicPolicy MasterofSciencein: Accounting AppliedBusinessAnalytics CybersecurityStudies EnvironmentalPolicyandManagement HealthInformationManagement InformationTechnology Nursing SpaceStudies SportsandHealthSciences SportsManagement Attheundergraduatelevel,APUSoffersprogramsinthefollowingfieldsofstudy: BachelorofArtsin: CriminalJustice BachelorofSciencein(continued): InformationTechnologyManagement EmergencyandDisasterManagement English LegalStudies Mathematics 22 AmericanPublicEducation,Inc. Entrepreneurship GeneralStudies GovernmentContractingandAcquisition History HomelandSecurity HospitalityManagement HumanDevelopmentandFamilyStudies IntelligenceStudies InternationalRelations Management Marketing MiddleEasternStudies MilitaryHistory Philosophy PoliticalScience Psychology Religion RetailManagement ReverseLogisticsManagement SecurityManagement Sociology TransportationandLogistics NaturalSciences Nursing PublicHealth SpaceStudies SportsandHealthSciences SportsManagement TechnicalManagement AssociateofArtsin: BusinessAdministration Communication Counter-TerrorismStudies CriminalJustice EarlyChildhoodCareandEducation GeneralStudies History Hospitality Management MilitaryHistory RealEstateStudies RetailManagement WeaponsofMassDestructionPreparedness BachelorinBusinessAdministration AssociateinAppliedSciencein: BachelorofSciencein: Accounting BusinessAnalytics CriminalJustice–Forensics Cybersecurity ElectricalEngineering EnvironmentalScience HealthInformationManagement FireScienceManagement InformationSystemSecurity InformationTechnology HealthSciences TechnicalManagement AssociateofSciencein: Accounting ComputerApplications DatabaseApplicationDevelopment ExplosiveOrdinanceDisposal FireScience ParalegalStudies PublicHealth WebPublishing APUSoffers103certificateprograms.APUS’scertificateprogramsgenerallyconsistofaminimumof18credit hoursandfocusonaparticularcomponentofabroaderdegreeprogram.Studentsmayearndiscretecertifi - catesorearncertificatesincombinationwithworktowardadegreeprogram.APUSalsooffersseveralLearning Trackscomprisedofonetwo-week“ClassroomSuccess”orientationcourseaboutonlinelearning,andthree academiccoursesinarelatedareaofinterest.ALearningTrackallowsstudentstopursueacourseofstudy withouthavingtocommittoadegreeorcertificateprogram.Inthefirstquarterof2017,APUSintendstolaunch MomentumTM,itsCompetencyBasedEducationProgram.CompetencyBasedEducation,orCBE,focuseson theachievementofknowledgeandskills,providingamoreflexibledegreepathtonon-traditionalstudentsseek - inganalternativetoprevailingscheduleandtuitionconstraints. 2016 Annual Report 23 STUDENT RECRUITMENT AND MARKETING APUS’srelationship-basedmarketingstrategyfocusesonbuildinglong-term,mutuallybeneficialrelationships withorganizationsandindividualsinthemilitaryandpublicsafetycommunities.Thecoreofthisstrategyis rootedinourmilitaryandpublicsafetyoutreachteams,whichservethesecommunitiesandfosterlong-stand - ingrelationships.WebelieveAPUS’sreputationasatrustededucatoryieldspeer-to-peerreferrals,andpositions APUSasarespectedinstitutionamongcertainfederalandprivatesectoremployers.Theserelationships,aswell asAPUS’sstudentandalumninetworks,alsocreatepersonalreferrals.Webelievethatthisrelationship-based marketingapproachenablesAPUStoachievelowerstudentacquisitioncoststhanotherwisewouldbeachieved ifitfocusedmoreheavilyontraditionalmediaadvertising. APUSsupplementsrelationship-basedmarketingwithmultichannelmarketingcampaignstocreategreater brandawareness,particularlyfortheAPUbrandoutsidethemilitaryandpublicsafetycommunities,andto connectwithandattractacademicallypreparedpotentialstudents.Inthesecampaigns,APUSutilizesdigital marketingchannelssuchasorganicandpaidsearch,APUSownedandexternalcontentmarketingcommunities, traditionalanddigitalTV,radio,printadvertising,andsocialmedia,amongothers.ThisaspectofAPUS’smar - ketingstrategy,alongwithincreasedcompetitionandmoreinvestmentinmarketingthelesswellknownAPU brand,hasresultedinincreasedstudentacquisitioncosts.Tobettermanagecostsandfocusmarketingefforts onprospectivestudentaudiencesmostlikelytomatriculateandsucceed,APUSputinplacetoolstoprovidenew insightsconnectingindividualstudentperformancedatawiththemarketingchannelthatattractedthem.APUS isusingtheseinsightstoimprovefuturedecisionswithrespecttomarketingmixallocation,audiencetargeting, newinitiatives,andmessagingdecisions. APUScontinuestoenhancethestudentlearningexperiencetoattractstudentswhoaremorelikelytopersist andsucceedinitsprograms,andwillcontinuetoworktoidentifyandimplementpotentialchangesandinitia - tivesthatwillmoreeffectivelyattractandenrollmorecollege-readystudents.Suchinitiativesmayincludealter - ingadmissionsstandards,whichmayhaveanadverseeffectonAPUS’senrollmentandourfinancialcondition. ForadditionalinformationontheriskfactorsassociatedwithsuchinitiativesandtheAPUSadmissionsprocess pleasereferto“RiskFactors—RisksRelatedtoOurBusiness.” ENROLLMENTANDSTUDENTBODY TheactivestudentbodyofAPUSconsistsofapproximately88,700students,mostofwhomholdfull-time employment.Activestudentsaredefinedasthosewhohavecompletedacourseinthepast12months,orare currentlyenrolledinorregisteredforanupcomingcourse.APUSdisenrollsstudentswhofailtoregisterforand completeatleastonecourseintheprior12-monthperiod,althoughstudentsmayapplyforreadmissionand activestatus.Studentsonextendedmilitarydeploymentsmayapplyforaprogramhold,whichkeepssuchstu - dentsfrombeingdisenrolledfromtheuniversity. APUSisfocusedonidentifyingpotentialchangesandinitiativesthatwillmoreeffectivelysupportitsstudents andhelpimprovethosestudents’educationaloutcomes,includingthroughfacultyengagementinitiativesand co-curricularinitiativestoincreasethelevelofengagementandcollaborationintheclassroomandstrengthen thebondbetweenAPUSanditsstudents.ImprovedengagementisanimportantelementinAPUS’sgoalof retainingqualifiedstudents. ACCREDITATION APUShasregionalaccreditationfromHLC.HLCaccreditsdegree-grantinginstitutionsina19-stateregion, includingWestVirginia,andisrecognizedbytheDepartmentofEducation,orED.Thestatusandmeaningofthis accreditationisdescribedmorefullybelowin“RegulatoryEnvironment—Accreditation.” 24 AmericanPublicEducation,Inc. InadditiontoregionalaccreditationbyHLC,certainprogramsofferedbyAPUShavereceivedspecializedaccred - itationsorprofessionalrecognition.Forexample,theAccreditationCouncilforBusinessSchoolsandPrograms, orACBSP,accredits19differentacademicprograms,includingthefollowing: • AssociateofScience,BachelorofScienceandMasterofScienceinAccounting; • AssociateofArts,BachelorandMasterofBusinessAdministration; • AssociateofArtsandBachelorofArtsinHospitalityManagement; • AssociateofArts,BachelorofArts,andMasterofArtsinManagement; • AssociateofArtsinRealEstateStudies; • AssociateofArtsandBachelorofArtsinRetailManagement; • BachelorofArtsandMasterofArtsinReverseLogisticsManagement; • BachelorofArtsinMarketing;and • BachelorandMasterofArtsinTransportationandLogisticsManagement. InadditiontothegeneralACBSPaccreditation,theBachelorofScienceandMasterofScienceinAccountinghold specializedAccountingaccreditationfromACBSP. TheCommissiononCollegiateNursingEducation,orCCNE,accreditstheBachelorofScienceinNursingpro - gram.Inaddition,APUShasobtainedprofessionalrecognitionforitsprogramconcentrationsinHuman ResourcesfromtheSocietyforHumanResourceManagement,forcertaincoursesintheSportsandHealth SciencesprogramfromtheAmericanSportEducationProgramforBronzeLevelCertificationandtheNational AcademyofSportsMedicinePerformanceEnhancementSpecialist,fortheInformationSystemsSecurity programfromtheNationalSecurityAgency—InformationAssuranceCoursewareEvaluation,andforcertain coursesintheHumanDevelopmentandFamilyStudiesprogramfromtheNationalCouncilonFamilyRelations fortheCertifiedFamilyLifeEducator.Theseaccreditationsandrecognitionsaredescribedmorefullybelowin “RegulatoryEnvironment—Accreditation.” STUDENT ADMISSIONS APUSwelcomesprospectivestudentstoapplyforadmissionatanytimethroughanonlineapplicationprocess. ThecurrentqualificationsformostundergraduateprogramsareahighschooldiplomaorGeneralEducation Developmentcertificate.Applicantsforgraduateprogramsmustholdabachelor’sdegreefromanaccredited U.S.institutionoranequivalentforeigninstitution.Certainprogramsmayhaveadditionaladmissionsstandards andrestrictions.FollowingadmissionstudentsareissuedastudentIDnumberandpassword,andarepro - videdinformationonhowtofinalizetheiradmissionandapplyforevaluationoftransfercredits.Studentsare alsoprovidedinformationonhowtoregisterforcourses,arrangeforpaymentandnavigatetheonlinestudent environment. InApril2015,APUSimplementedanadmissionsprocessrequiringprospectivestudentstocompleteafree, non-creditadmissionsassessmentiftheyarenot(i)activedutymilitaryorveteranapplicants;(ii)graduatesof certifiedfederal,stateorlocallawenforcementorpublicsafetyacademies;or(iii)studentswithatleastnine hoursoftransfercreditfromanaccreditedinstitutionwithagradeof“C”orbetterforeachcourse.APUShas mademultiplechangestotheassessmentprocesssinceitsoriginalimplementationandmayfurthermodifyitin thefutureinordertobetteridentifycollege-readystudents. 2016 Annual Report 25 COST OF ATTENDANCE AND FINANCIAL AID WebelievethatAPUS’sabilitytoofferaffordableprogramsisoneofitscompetitivestrengths.ManyAPUSstu - dentsalsotransferasignificantnumberofpreviouslyearnedacademiccredithours,whichreducesthecostand timeofearningtheirdegrees. BeginninginJuly2015,APUSincreasedundergraduateandgraduatetuitionbyapproximately8%. UndergraduatetuitionatAPUSisnow$270percredithour,or$810perthree-creditcourse.Ingeneral,abach - elor’sdegreemaybeearnedfor$32,670intuitioncostsatcurrenttuitionrates.APUS’sgraduatetuitionisnow $350percredithour,or$1,050perthree-creditcourse,whichmeansmanyAPUSgraduatedegreesmaybe earnedfor$12,600intuitionatcurrenttuitionrates.Thecombinedtuition,feesandbooksatAPUSaredesigned tobelessexpensiveforundergraduateandgraduatestudentsthantheaveragein-statecostatapublicuni - versity.APUSprovidesatuitiongranttosupportstudentswhoareU.S.Militaryactive-dutyservicemembers, Guard,Reserve,militaryspousesanddependents,andveterans.Forsuchindividuals,tuitionissetatthepre- July2015rates,withundergraduatecoursetuitionat$250percredithour,andgraduatecoursetuitionat$325 percredithour.APUSestimatesthatthemilitarytuitiongrantappliedtoapproximately75%ofits2016totalnet courseregistrations. TheJuly2015tuitionincreasewasAPUS’sfirstundergraduatetuitionincreasesince2000,andthefirstgraduate tuitionincreaseinfouryears.BasedoninformationintheCollegeBoard’sTrendsinCollegePricing2015(under - graduate)andtheNationalCenterforEducationStatistics’DigestofEducationalStatistics,2014(graduate),we estimatethat,afterthetuitionincrease,APUS’scombinedtuition,feesandbooksremainapproximately19% lessforundergraduatestudentsand38%lessforgraduatestudentsthantheaveragepublishedin-stateratesat publicuniversities. Undergraduatestudentsenrolledincoursesforacademiccreditreceivetheirtextbooksandcertaincourse materialsatnoadditionalcosttothemthroughabook-grantprogram.Thisbookgrantrepresentsanapprox - imatesavingsoverthecourseofastudent’sundergraduatedegreeprogramof$5,000ascomparedtopublic four-yearcollegesanduniversitiesaccordingtocomparativeinformationfromTheCollegeBoard’sTrendsin CollegePricing2015report.APUSalsoutilizesopenaccessandonlinelibrarymaterialswhereappropriateand workswithvariouspublisherstoreducethecostoftextbooksandcoursematerialsforbothundergraduatestu - dentsreceivingthebookgrantandforgraduatestudentswhopayfortextbooksandcoursematerials. APUSdoesnotchargeanadmissionfeeorfeesforservicessuchasregistration,coursedropsorsimilarevents thattriggerfeesatmanyotherinstitutions.BecauseAPUSisanexclusivelyonlineinstitution,thereareno requiredresidentfees,suchasforparking,foodservice,studentunion,andrecreation.APUSchargesstudents atechnologyfee,butprovidesagranttocoverthetechnologyfeeforstudentsusingDoDtuitionassistance programs.Whenapplicable,APUSstudentsarechargedcertainadditionalfees,suchasgraduation,lateregistra - tion,transcriptrequest,andcomprehensiveexaminationfees. DoDtuitionassistanceprogramscover$750ofthetuitioncostspercourseor$250percredithourformilitary students,andthesestudentsmayalsobeabletouseVAeducationbenefitsoraidfromED’sTitleIVprograms tocoveranyremainingcost,asdescribedmorefullybelowin“SourcesofStudentFinancing”and“Regulatory Environment—StudentFinancingSourcesandRelatedRegulations/Requirements.”APUShassetitstuitiongrant sothattheDoDtuitionassistanceprogramcoversthefulltuitioncostofundergraduatecoursesformembersof themilitaryuptotheannualmaximumbenefit. 26 AmericanPublicEducation,Inc. SOURCES OF STUDENT FINANCING APUS’sstudentsfinancetheireducationthroughacombinationofindividualresources,DoDtuitionassistance programs,VAeducationbenefits,ED’sTitleIVprograms,privateloans,stateandfederalgrants,andcorpo - ratereimbursementprograms.Moststudentsrelyonsomeformoffinancialaidinadditiontotheirindividual resources.StudentsutilizingED’sTitleIVprogramsaccountedfor29%ofAPUS’snetcourseregistrationsin2016, andwebelievethattheabilityofourstudentstoparticipateintheseprogramsisessentialtoAPUS’ssuccess. ParticipationintheDoDtuitionassistanceprograms,VAeducationbenefitsandED’sTitleIVprogramsadd toAPUS’sregulatoryburden,asdescribedmorefullybelowin“RegulatoryEnvironment—StudentFinancing SourcesandRelatedRegulations/Requirements.”Participationintheseprogramsmeansthatchangesto,or interruptionsin,federalappropriationsfortheseprogramsorotheractionsbythefederalgovernmentwill impactAPUS’soperationsandourfinancialcondition. Asdescribedmorefullybelowin“RegulatoryEnvironment—RecentLegislativeandEDActivity—Federal LegislativeActivity—SequestrationandBudgetaryMatters,”inMarch2013,inresponsetoautomaticacross- the-boardreductionsinfederalspending,alsoknownassequestration,theArmy,AirForce,CoastGuard,and MarineCorpsannouncedthesuspensionoftheirtuitionassistanceprograms.Congresssubsequentlyapproved legislationrequiringDoDtorestoreitstuitionassistanceprograms.InOctober2013,theDoDtuitionassistance programswereagaintemporarilysuspendedasaresultoftheU.S.governmentpartialshutdown.Eachbranch ofthemilitaryrestoreditstuitionassistanceprogramthroughfiscalyear2014.Asaresultofcontinueduncer - taintyabouttheavailabilityoffunding,severalofthemilitarybranchesannouncedchangestotheirtuition assistanceprogramsthattookeffectinfederalfiscalyear2014.Forexample,theAirForceisnolongerautho - rizingtuitionassistanceforassociatedegreesiftheservicememberalreadyhasanassociatedegreefromthe CommunityCollegeoftheAirForce,theArmynowrequiresservicememberstocompleteoneyearofservice aftergraduationfromAdvancedIndividualTraininginordertobeeligiblefortuitionassistanceandhasreduced thetotalbenefitperservicememberperyearfrom$4,500to$4,000,andtheMarineCorpsnowrequires Marinestohave24monthsonactivedutypriortobeingeligibletoapplyfortuitionassistance.InOctober2015, theCoastGuardrestoredtuitionassistancefundingto$250percredithour,anincreasefromthepreviouscap of$187.50percredithour,whichwasimplementedin2014.Additionalchangestothetuitionassistancepro - gramscouldoccur,includingduetoCongressionalactionorDoDpolicyandfundingchanges. OnDecember10,2016,theU.S.Congressenactedacontinuingresolutiontoextendfundingforthefederal government,includingtheDoD,throughApril28,2017;however,iffundingisnotextendedbeyondthatdate agovernmentshutdowncouldoccurresultinginasuspensionofDoDtuitionassistanceprograms.Agovern - mentshutdownorsuspensionofDoDtuitionassistanceprogramscouldhaveamaterialadverseeffectonour operationsandfinancialcondition.Forinstance,onOctober1,2013,priortothegovernmentshutdownand temporarysuspensionofDoDtuitionassistanceprograms,APUS’scourseregistrationsforOctober2013were approximately41,200.However,asofOctober14,2013,approximately13,100registrationshadbeendropped, resultinginanetcourseregistrationreductionofapproximately20%comparedtoOctober2012.Webelievethat manyofthesedroppedregistrationsresultedfromthesuspensionofDoDtuitionassistanceprograms.Afterthe governmentshutdownended,DoDresumeditstuitionassistanceprograms;however,wedonotbelievethat APUS’sregistrationsforsubsequentperiodsreplacedallofthedroppedregistrations. WedonotknowwhatfutureactionmaybetakenwithrespecttoDoDtuitionassistanceprograms,whichcould includeeliminatingthoseprograms,reducingthefundsorbenefits(orboth)availableunderthoseprograms,or enactingnewrestrictionsonparticipationinthoseprograms.Anysuchchanges,oranyotherreductionsinthe fundingforDoDtuitionassistanceprograms,couldhaveamaterialadverseeffectonAPUS’senrollmentsand ourfinancialcondition.Thepotentialrisksassociatedwiththeseandsimilareventsaredescribedmorefully belowin“RiskFactors—RisksRelatedtoOurBusiness.” 2016 Annual Report 27 FACULTYANDSTAFF APUS’sfacultyconsistsofapproximately2,040fullandpart-timefacultymemberswithrelevantteachingand practitionerexperienceaswellasaprofessionalstaffofapproximately940non-facultyemployeesadminister - ingAPUS’sacademic,technology,serviceandbusinessoperations.MostofAPUS’snon-facultyemployeeswork ateitheritsheadquartersinCharlesTown,WestVirginia,oratitsadministrativeofficesinManassas,Virginia. NoneofAPUS’semployeesarepartiestoanycollectivebargainingarrangement.WebelievethatAPUShasa goodrelationshipwithitsemployees. Approximately390facultymembersaredesignatedasfull-timefacultywiththeremainderdesignatedaspart- time.APUSestablishesfull-timeandpart-timepositionsbasedonprogramandcourseenrollment.Manyof APUS’sfull-timefacultybegantheircareerswithAPUSaspart-timefaculty.WeexpectthatAPUS’sfacultyhead - countandthecompositionoffull-timeandpart-timefacultywillvarywithfluctuationsinenrollment. WebelievethatAPUS’swell-regardedfaculty,whichincludesmanyformerandcurrentpractitionersintheir fields,attractsnewstudentstoAPUS.AsignificantmajorityofAPUS’sgraduatefacultyholdaterminaldegree ordoctorateintherelevantfield,whilevirtuallyallundergraduatefacultyhaveanearned-graduatedegree. ExceptionshavebeengrantedforalimitednumberofAPUS’sfacultymemberswhodonotmeetdegreestan - dardsandwhoprovideevidenceofsignificantexperienceandachievementinthefieldofstudythattheyteach, accordingtoAPUSfacultyqualityguidelines.ManyAPUSfacultymembershaverelevantexperienceatleading universitiesandwithinmilitary,corporateandgovernmentinstitutions. WebelievethatthequalityofAPUS’sfacultyiscriticaltothestudentexperienceandstudentoutcomesandis thereforevitaltoAPUS’ssuccess.APUSregularlyreviewstheperformanceofitsfacultyby,amongotherthings, monitoringtheonlinecontactthatfacultyhaswithstudents,reviewingstudentfeedback,andevaluatingthe learningoutcomesachievedbystudents.IfAPUSdeterminesthatafacultymemberisnotperformingatan acceptablelevel,itworkswiththefacultymembertoimproveperformancebyassigningthefacultymembera mentor,providingadditionaltrainingand/orcoachingthefacultymemberforsuccess.Ifthefacultymember’s performancedoesnotimprove,APUSwillnolongeremploythatfacultymembertoteach.APUSdoesnotoffer itsfacultytenure. WebelievethatthecompositionofAPUS’sstudentbodyandcurriculumareparticularlyattractivetopoten - tialfacultymembersbecauseoftheopportunitytoteachrelevantmaterialtostudentswhocanimplement highereducationlearningattheirworkplaces.APUSrecruitsfacultymembersthroughreferralsbycurrent facultymembers,advertisementsinhighereducationandtradeassociationjournalsanditsInternetpresence. Uponselectionforaposition,APUSrequireseachnewfacultymembertocompleteanorientationandtraining programthatleadstotheircertificationtoteachatAPUSandassignmenttocourses.Allfacultyparticipatein annualfaculty-developmentopportunitiesandrequirements. INFORMATIONTECHNOLOGY APUShasinvestedsignificantcapitalandresourcesintodevelopingproprietaryinformationsystemsandpro - cessestosupportwhatwerefertoasPartnershipAtaDistance™,orPAD.PADisAPUS’splatformforinteracting withitsstudents.PADisaninformationsystemdesignedtoenableAPUStoprovideeachstudentwithindivid - ualizedsupportatappropriatetimesfrompre-enrollmentthroughandbeyondgraduation,includingstudent advising,administrativesupport,andcommunitynetworking. APUSusesSakaiCollaborationandLearningEnvironment,orSakaiCLE,anopen-sourceLearningManagement System,foritsonlineclassroom.Thereareapproximately350educationalinstitutionsaroundtheworld 28 AmericanPublicEducation,Inc. reportedlyusingSakaiCLEtosupportteaching,learning,research,andcollaboration.PADandSakaiCLEare APUS’stwocoreenterprisesystems. APUShasseveralothersystemsthatareusedintheonlinecampus,andtosupportthestudentexperience, financialaidprocessing,financialmanagement,humanresourcesprocesses,marketing,anddecisionsupport. ThebackboneofAPUS’sinformationtechnologyinfrastructureconsistsoftwodatacenters:oneinVirginia,and oneataco-locationfacilityinTexas.APUS’stechnologyenvironmentismanagedinternally.Studentaccessto APUS’ssystemsisprovidedthroughredundantdatacarriersinbothdatacenters. InformationtechnologysystemsareanessentialpartoftheAPUSstudentexperienceandourbusinessopera - tions,andwebelievewewillneedtocontinueto,andpotentiallyincrease,ourinvestmentofcapital,timeand resourcesintechnologyoperationsandenhancementstosupportoursystemsandmissionandevaluatewhen itisappropriatetomakesignificantchanges,modificationsorupgrades.Forexample,webelievewewillneed tocontinuetomakeinvestmentsinresponsetocompetitivepressuresinthemarketplace,includingincreased demandsforinteractivesolutionsandaccessfrommultipleplatforms,toupdateoldersystemsandtoenhance functionality,suchasdifferentialpricing.Forexample,in2010,weselectedSakaiCLEtoreplaceAPUS’sexisting providerasthefoundationalsoftwareforAPUS’sonlineclassroom,andin2015,APUSselectedGlobalFinancial AidServicesforfinancialaidprocessingservices,whichrequiredmeaningfulinformationtechnologychanges. Thesetypesofchangesarenotwithoutrisktoouroperationsandfinancialresults.Wecontinuallyevaluate ourPADsystemforpossiblechangesandupgrades,andsuchchangesandupgradesmayresultinusincurring significantcoststhatcouldaffectourfinancialresultsinthenearterm.Ourinvestmentsininformationtechnol - ogysystemsmayresultinanincreasedlevelofspending,notallofwhichcanbecapitalized,andmaycostmore thanexpectedorfailtobesuccessful.Furthermore,asaresultofunsuccessfuldevelopmentefforts,oraresult ofreplacingoutdatedtechnology,softwareorothertechnologyrelatedassets,wemayhaveassetsthatbecome impaired.Forexample,APUSreporteda$4.0millioncostassociatedwiththeabandonmentofdevelopmentofa newstudentcourseregistrationsystemintheyearendedDecember31,2016. TheperformanceandreliabilityofAPUS’snetworksandtechnologyinfrastructure,includingthoseofthird- partysystemsutilizedbyAPUS,arecriticaltoitsreputationandabilitytoattractandretainstudents.Any systemerrororfailurecouldinterruptAPUS’sabilitytooperateandcouldresultintheunavailabilityofitsonline classrooms,preventingstudentsfromaccessingtheircoursesandadverselyaffectingourresultsofoperations. APUS’stechnologyinfrastructure,andthetechnologyinfrastructureofitsthird-partyvendors,couldbevulner - abletointerruptionormalfunctionduetoeventsbeyondourcontrol,includingnaturaldisasters,cyber-attacks, hackerorterroristactivities,andtelecommunicationsfailures.APUS’scomputernetworks,andthenetworksof itsthird-partyvendors,mayalsobevulnerabletounauthorizedaccess,computerhackers,computerviruses, andothersecurityproblems.APUSusesexternalvendorstoperformitssecurityassessmentsonaperiodic basistoreviewandassessitssecurity.APUSutilizesthisinformationtoaudititselftoensurethatitisadequately monitoringthesecurityofitstechnologyinfrastructure.However,wecannotensurethatthesesecurityassess - mentsandauditswillprotectAPUS’scomputernetworksagainstthethreatofsecuritybreaches.Similarly, althoughAPUSrequiresitsthird-partyvendorstomaintainalevelofsecuritythatisacceptabletousandworks closelywithitsthird-partyvendorstoaddresspotentialandactualsecurityconcernsandattacks,wecannot ensurethatAPUSanditssystemsandproprietaryinformationorpersonalinformationaboutitsstudents oremployeeswillbeprotectedagainstthethreatofsecurityattacksonthird-partyvendorsthataffectAPUS systemsorsuchinformation.SystemdisruptionsandsecuritybreachesofAPUS’sonlinecomputernetworks, technologyinfrastructure,oronlineclassroominfrastructure,orofthenetworks,infrastructuresandsystems ofthirdpartiescouldhaveanadverseeffectonourfinancialcondition. 2016 Annual Report 29 Foradditionalinformationregardingrisksrelatedtoourinformationtechnologypleasereferto“RiskFactors— RisksRelatedtoOurBusiness.” INTELLECTUALPROPERTY APUSexercisesrightsassociatedwithpatents,copyrights,trademarks,servicemarks,domainnames,agree - ments,andregistrationstoprotectitsintellectualproperty.APUS’scoursesyllabiareitsproperty,maybeused incurrentandfuturecoursesasneededtofacilitateinstruction,andmaybemodifiedtomeetevolvingcourse orcurriculumrequirements.IntellectualpropertyofAPUS’sindividualfacultymembersremainsthepropertyof eachsuchfacultymemberandisreservedspecificallyforuseonlybythefacultymemberwhoownsit,unless thefacultymembergrantspermissionforusebyothers.APUSreliesonagreementsunderwhichitobtains rightstousecoursecontentdevelopedbyfacultymembersandotherthird-partycontentproviders. APUShassecuredrightstotrademarksforvariousnamesandtermsusedinitsbusiness,including“American PublicUniversitySystem,”“AmericanMilitaryUniversity,”“AmericanPublicUniversity”andlogosincorporat - ingtheforegoingtermsandacronymsofthoseterms,aswellas“ReadyWhenYouAre,”“EducatingthoseWho Serve,”“RESPECTED.AFFORDABLE.ONLINE.”andtheterm“PartnershipataDistance.”Webelievethesetrade - marksandbrandnamesareimportanttohowprospectivestudentsidentifyAPUSandarecentraltoanumber ofitsmarketingefforts.APUSalsoownsrightstomorethan200internetdomainnamespertainingtoAPEI, APUS,AMU,APUandotheruniquedescriptors.TheU.S.PatentandTrademarkOfficeissuedAPUSapatentfor PADinFebruary2011. COMPETITION Withinthepostsecondaryeducationmarket,APUScompetesprimarilywithnot-for-profitpublicandprivate two-yearandfour-yearcollegesaswellasotherfor-profitschools,particularlythosethatofferonlinelearning programs.APUSalsocompetesinspecifictargetedmarkets,suchasthosediscussedbelow.Foradditionalinfor - mationregardingAPUS’scompetitiveenvironment,pleasereferto“Business—CompanyOverview.” APUShasfocusedonservingthemilitarycommunitysinceitsfoundingasAMU,andthemilitarymarketcontin - uestobetheprimarymarketforAPUS.Withinthemilitarymarket,therearemorethan2,700institutionsthat servemilitarystudentsandreceivefundsthroughtheDoDtuitionassistanceprogram.Theprimarycompetitors formilitarystudentsareotherinstitutionsofferingonlineinstruction,andcollegesanduniversitiesoffering on-campusinstructionlocatednearmilitaryinstallations.Overthelastseveralyears,anumberofAPUS’scom - petitorshaveexpandedtheiroutreachandmarketingeffortsdirectedatactivedutyandreserveservicemem - bers,aswellasveterans. WebelievethatAPUSwillcontinuetoseeincreasedcompetitioninthemilitarycommunityfrombothnot-for- profitandfor-profitschools.Astraditionalnot-for-profitpublicandprivateschoolsadvancetheironlinecapa - bilities,theywillbeabletomoreeasilysupportthemilitarycommunity.Atthesametime,for-profitschoolswill markettostudentseligibleforDoDtuitionassistanceprogramsandVAeducationbenefits,ratherthanED’sTitle IVprograms,inanattempttocomplywithED’sregulatoryrequirementknownasthe90/10Rule.Thisregulatory requirementisdescribedmorefullybelowin“RegulatoryEnvironment—StudentFinancingSourcesandRelated Regulations/Requirements.” Withinthemarketforpublicsafetyprofessionals,suchaslawenforcementpersonnelorotherfirstresponders, andnon-militaryprofessionalsandotherworkingadultswithextendedandirregularworkschedules,APUS facesbroadcompetitionwithnot-for-profitpublicandprivatetwo-yearandfour-yearcollegesaswellasother for-profitschools,particularlythosethatofferonlinelearningprograms. 30 AmericanPublicEducation,Inc. HONDROS COLLEGE OF NURSING HCONisnationallyaccreditedbytheAccreditingCouncilofIndependentCollegesandSchools,orACICS.HCON’s programsaredesignedtoprepareindividualsforproductivecareersinthefieldofnursing.HCON’sstudents principallyreceiveon-campusinstructionatoneofHCON’sOhiocampuses.In2016,HCONhadfouroperating campuseslocatedinthesuburbanareasofCincinnati,Cleveland,Columbus,andDayton.EffectiveJanuary2017, HCONopenedafifthcampusintheToledoarea.Additionally,HCONoffersonlinebothitsRN-to-BSNProgram andsomenursingcourses.Asdiscussedmorefullybelowin“RegulatoryEnvironment—RegulatoryActionsand RestrictionsonOperations,”HCONparticipatesintheDepartmentofEducation’s,orED’s,TitleIVprograms pursuanttoaProvisionalProgramParticipationAgreementthatwasamendedinDecember2016,inresponse toED’sdecisiontowithdrawandterminateED’srecognitionofACICS.HCONhasanin-processapplicationfor accreditationbytheAccreditingBureauofHealthEducationSchools,orABHES,anaccreditorforalliedhealth schoolsthatisrecognizedbyED. CURRICULUM AND SCHEDULING HCONofferson-campusinstructionleadingtoaDiplomainPracticalNursing,orPNProgram,andanAssociate DegreeinNursing,orADNProgram.GraduatesofthePNProgramareeligibletoseeklicensureasaLicensed PracticalNurse,orLPN,afterpassingtheNCLEX-PNexam.GraduatesoftheADNProgramareeligibletoseek licensureasaRegisteredNurse,orRN,afterpassingtheNCLEX-RNexam.ThroughitsRN-to-BSNProgram, HCONalsooffersonlineinstructionleadingtoaBachelorofScienceinNursingtostudentswhoalreadypossess anassociatedegreeinnursing.HCON’sprogramsareofferedinaquarterlyformat.AcademictermsforthePN andtheADNprogramsbeginfourtimeseachyear,withcoursesstartinginJanuary,April,JulyandOctober.Inan efforttobetterservestudentsandincreaseenrollments,HCONhasincreaseditsofferingofeveningandweek - endcourses. ENROLLMENTANDSTUDENTBODY HCON’sstudentenrollment,asofDecember31,2016,wasapproximately1,300students.Thisnumberincludes thoseHCONstudentswhowereenrolledincourseseitheroncampusoronlineasofthatdate. ACCREDITATION HCONisinstitutionallyaccreditedbytheAccreditingCouncilforIndependentCollegesandSchools,orACICS. BydecisiondatedDecember12,2016,theSecretaryofEDwithdrewandterminatedED’srecognitionofACICS. WhentheSecretarywithdrawstherecognitionofanaccreditingagency,apostsecondaryeducationalinsti - tutionmaybeallowedtocontinueitsparticipationintheTitleIVprogramsonaprovisionalbasisforaperiod nottoexceed18monthsfromthedateoftheSecretary’sdecisiontoallowtheinstitutiontoseekaccreditation fromanotherrecognizedaccreditingagency.EDhasindicatedthatduringtheperiodofprovisionalparticipa - tionitwilldeemanACICS-accreditedinstitutiontoholdrecognizedaccreditationandwillrequiretheinstitution tocomplywithcertainconditionsandrestrictions.OnDecember21,2016,HCONandEDexecutedarevised provisionalprogramparticipationagreement,orPPPA,andaddendumtothePPPAinwhichHCONagreedto complywithED’sconditionsandrequirements.HCONhasanin-processapplicationforaccreditationbyABHES. ABHESisanationalaccreditorforalliedhealthschoolsrecognizedbyED.InJune2016,HCONwasnotifiedthat itsDiplomainPracticalNursingandAssociateDegreeinNursingprogramshavebeengrantedpre-accreditation candidacystatusbytheNationalLeagueforNursingCommissionforNursingEducationAccreditationeffective throughJune23,2019.TheRN-to-BSNProgramhasreceivedprogrammaticaccreditationfromtheCommission onCollegiateNursingEducation,orCCNE.Thestatusandmeaningoftheseaccreditationsandrecognitionsis describedmorefullybelowin“RegulatoryEnvironment—Accreditation.” 2016 Annual Report 31 Beginningin2012,ACICSestablishedrequirements,includingminimum“standards”andexpected“bench - marks,”tomeasurestudentretention,graduateplacementandlicensureexampassagerates.Asaresultofthe placementratesreportedforthePNProgramattheClevelandcampus,onFebruary24,2017,ACICSnotified HCONthatunlessitnotifiesACICSthatitisdiscontinuingthePNProgramattheClevelandcampus,thenACICS expectstoissueashow-causeletterrequiringHCONtodemonstratewhyACICSapprovalofthePNProgramat thelocationshouldnotbewithdrawn.AdditionalinformationandadiscussionofapplicableACICSrequirements aredescribedmorefullybelowin“RegulatoryEnvironment—Accreditation.” STUDENT RECRUITMENT AND MARKETING PriortoouracquisitionofHCON,wehadnoexperiencewithattractingnewstudentsto,andretainingstudents in,educationalprogramsofferedprimarilyonphysicalcampuses,andwiththeopeningofHCON’sfifthlocation wewillnowbemarketinginageographicmarketinwhichHCONdidnotpreviouslymarket.HCON’smarketing strategyisfocusedonbuildinglong-termrelationshipswithbusinesses,organizationsandindividualsinthe healthcarecommunity,primarilyinOhio.Webelievethisstrategywillcontinuetogenerateasignificantnumber ofreferrals.Inaddition,HCONutilizestraditionalmediaaswellasinternet-focusedmarketingchannels,includ - ingorganicsearch,localdisplayadvertisingandpay-per-click.However,ifweareunabletoeffectivelymarket HCON’sprograms,wemaynotbeabletosuccessfullyexecuteourlong-termstrategicplantodiversifyourbusi - nessandexpandourprograms,whichwouldnegativelyaffectouroperatingresults. STUDENT ADMISSIONS HCONwelcomesprospectivestudentstoapplyforadmissionatanytimebysubmittinganapplicationalong withanapplicationfee.TobeacceptedintoanyHCONprogram,anapplicantmustbeaU.S.citizenorper - manentresident,beatleast18yearsoldatthetimeofstartingtheprogram,andholdahighschooldiploma orGeneralEducationDevelopmentcertificate.HCON’sprogramsalsohaveprogram-specificadmissions requirements. ApplicantsforboththePNProgramandtheADNProgramarerequiredtocompleteaninterviewwithanadmis - sionsrepresentative,andcompleteandpassacriminalbackgroundcheckandadrugscreening.Applicants forthePNProgramarealsogenerallyrequiredtotakeandpasstheHealthEducationSystemsIncorporated AdmissionAssessment,orHESIExam. ApplicantsfortheADNprogramwhograduatedfromthePNProgrammusthavegraduatedfromthatprogram withintwoquartersoftheirenrollmentintheADNprogram,ormustholdanactive,unencumberedpractical nurselicense.ApplicantsfortheADNprogramwhohavenotgraduatedfromthePNProgrammusthavecom - pletedtheirpracticalnursingtrainingatanapprovedprogram,andmustholdanactive,unencumberedpracti - calnurselicense. ApplicantsfortheRN-to-BSNProgrammustholdanactive,unencumberedregisterednurselicenseinthestate inwhichtheydesiretocompletetheirpracticum.Applicantsmustalsohavegraduatedfromanapprovedreg - isterednursingprogramwithacumulativegradepointaverageofatleast2.0,andmustcompleteaninterview withanadmissionsrepresentative.ApplicantsapplyingtobegintheRN-to-BSNPrograminthequarterimmedi - atelyfollowinggraduationfromtheADNProgrammaybeadmittedwithoutalicense,butarerequiredtoobtain onepriortotheirthirdquarterintheRN-to-BSNProgram. COST OF ATTENDANCE AND FINANCIAL AID HCON’stuitioncostsvaryamongitsthreeprograms.HCON’sPNProgrammaybecompletedforapproximately $18,435intuitionandfees,theADNprogrammaybecompletedforapproximately$26,925intuitionandfees, andtheRN-to-BSNProgrammaybecompletedforapproximately$22,305intuitionandfees.Feesincludethe 32 AmericanPublicEducation,Inc. costofexaminationreviewmaterials,labfees,testreviewfees,andfeesforapplicationswiththeOhioBoardof Nursing,amongothers.SomeofthesecostsarepayabletoHCONandothersarepayabletothirdparties. HCON’sstudentsalsoincurcostsfortextbooks,supplies,uniformsanditstechnologypackage.Thesecostsvary amongHCON’sthreeprogramsandarepaidforbyHCON’sstudentsasthetextbooksorsuppliesareneeded. HCONestimatesthatoverthelifeofitsprogramsastudent’scostsrelatedtotextbooksandsupplieswillbe approximately$2,700forthePNProgram,$4,100fortheADNProgram,and$3,000fortheRN-to-BSNProgram. SOURCES OF STUDENT FINANCING HCON’sstudentsfinancetheireducationthroughacombinationofindividualresources,VAeducationbenefits, ED’sTitleIVprograms,privateloans,stateandfederalgrants,andcorporatereimbursementprograms.Most HCONstudentsrelyonsomeformoffinancialaidinadditiontotheirindividualresources.Thesubstantial majorityofHCON’srevenueisderivedfromstudentsutilizingED’sTitleIVprograms,whichresultsinincreased regulatoryrisks,asdiscussedmorefullybelowin“RegulatoryEnvironment—StudentFinancingSourcesand RelatedRegulations/Requirements—DepartmentofEducation—RegulationofTitleIVFinancialAidPrograms— The‘90/10Rule.’”Asaresult,HCON’smanagementmayfinditnecessarytodecreaseHCON’senrollmentof studentsutilizingtheTitleIVprogramsorpursueotherapproaches,anyofwhichcouldhaveanegativeimpact onitsoperatingresultsandourfinancialcondition. WhileHCONdoesnotcurrentlyparticipateinDoD’stuitionassistanceprograms,itmaydosointhefuture,in whichcaseitwillbesubjecttosuchprogram’srequirementsandrestrictions,whicharemorefullydiscussed inthe“OurInstitutions—AmericanPublicUniversitySystem—SourcesofStudentFinancing,”“Regulatory Environment—StudentFinancingSourcesandRelatedRegulations/Requirements,”“RegulatoryEnvironment— RecentLegislativeandRegulatoryActivity—FederalLegislativeActivity—SequestrationandBudgetaryMatters,” and“RiskFactors”sectionsofthisAnnualReport. FACULTYANDSTAFF HCON’sfacultyconsistsofapproximately130facultymemberswithrelevantteachingandnursingorhealthcare practitionerexperience.HCONalsoemploysapproximately90staffmemberswhoadministerHCON’sacademic, technology,service,andbusinessoperations.HCON’sfacultyandstafflargelyworkatoneofitsfivecampuses. NoneofHCON’semployeesarepartiestoanycollectivebargainingarrangement.WebelievethatHCONhasa goodrelationshipwithitsemployees. Approximately90ofHCON’sfacultymembersaredesignatedasfull-timefacultywiththeremainderdesig - natedaspart-timefaculty.AllfacultywhoseinstructionisfocusedwithinthePNProgrammusthaveearnedthe minimumofabachelor’sdegreeinnursing.AllfacultywhoseinstructionisfocusedwithintheADNProgramand RN-to-BSNProgrammusthaveearnedtheminimumofamaster’sdegree.AllHCONfacultywhoseinstruction isnursingtheory-basedmusthaveanactivelicensetopracticeasaRegisteredNurse.Inadditiontotheformal educationofHCON’sfaculty,manyhavealsoobtainedspecializedcertificationsinthefieldofnursing. Webelievethatselectingwell-educatedandqualifiedfacultymembersisakeycomponenttoHCON’ssuccess. Inadditiontohavingthenecessaryeducationalrequirements,HCONseeksfacultywhohavedemonstrated experienceinthefieldofnursing.AlmostallfacultywhoteachHCON’snursingcourseshavenursingexperience inaclinicalsetting,whichwebelievehelpsteachHCON’sstudentstheskillsneededtobeeffectiveandsafe caregivers. HCONtrainsanddevelopsnewfacultythroughaformal,structuredon-boarding,training,andmentoring program.AllnewHCONfacultymembersreceivea90-dayon-boardingexperience,whichincludesaformal 2016 Annual Report 33 orientationtotheorganization,policiesandprocedures,teachingstrategies,performanceexpectationsandrole responsibilities. INFORMATIONTECHNOLOGY In2015,thehostingandmaintenanceofHCON’sinformationtechnologyinfrastructurewastransitionedfrom athird-partyaffiliatedwithHCON’spreviousownershiptoAPUS,whichprovidesservicesthroughanintercom - panyarrangement.ForinformationregardingthesecurityandreliabilityofAPUSprovidedsystems,pleaserefer to“OurInstitutions—AmericanPublicUniversitySystem—InformationTechnology.” INTELLECTUALPROPERTY InconnectionwithouracquisitionofHCON,wereceivedtherighttothecorporatenameNationalEducation Seminars,Inc.andaroyalty-free,irrevocable,exclusive,transferable,sublicensablelicensetousethenames “HondrosCollege”and“HondrosCollegeofNursing”(or,insteadof“Nursing,”anyotherqualifierdirectlyrelated tonursing,medicineorhealthcareinconnectionwiththebusinessandoperationsofHCON). HCONexercisesrightsassociatedwithcopyrights,trademarks,servicemarks,domainnames,agreements,and registrationstoprotectitsintellectualproperty. COMPETITION HCON’sprogramsarelargelyofferedascampus-basedprogramstoresidentsinthegeographicareaswhereit hascampuses.Intheseregions,HCONcompeteswithotherschoolsofferingnursingprograms,includingfor- profitandnot-for-profitpublicandprivatecolleges.Becauseofthegeographicfocus,HCON’scompetitiveenvi - ronmentisimpactedbyvariousfactorsthatarespecificnotonlytoOhiobutalsototheparticularareasofOhio wherecampusesarelocated,includingintermsofthelocalsupplyof,anddemandfor,bothnursesandnursing schools.AsaresultofHCON’sgeographicfocus,HCON’sresultsarealsomoresusceptibletotheactionsof singlecompetitorsthananinstitutionthatdrawsfromabroadergeographicalarea.Forexample,aparticularly effectiveorineffectivemarketingapproachbyanotherschool,ortheopeningorclosingofanotherschool,could haveunanticipateddetrimentsorbenefitstoHCON’scompetitiveposition.BecauseHCON’sRN-to-BSNProgram isofferedonline,HCONalsocompetesinabroadermarketagainstotheronlinenursingprograms.Foraddi - tionalinformationregardingHCON’scompetitiveenvironment,pleasereferto“Business—CompanyOverview.” RegulatoryEnvironment IntheUnitedStates,postsecondaryeducationinstitutionsareoverseenbyathree-partregulatoryframe - workcomprisedof(i)accreditingagenciesrecognizedbytheU.S.SecretaryofEducation,(ii)stateregulatory bodies,and(iii)thefederalgovernment,throughtheU.S.DepartmentofEducation,orED.BecauseAmerican PublicUniversitySystem,orAPUS,participatesinmilitarytuitionassistanceprogramsadministeredbytheU.S. DepartmentofDefense,orDOD,andAPUSandHCONparticipateinveteranseducationbenefitsprograms administeredbytheU.S.DepartmentofVeteransAffairs,orVA,ourinstitutionsarealsosubjecttooversightby thoseagencies.Theregulations,standards,andpoliciesoftheseorganizationscoverthevastmajorityofour operations,includingoureducationalprograms,facilities,instructionalandadministrativestaff,administrative procedures,marketing,recruiting,financialoperations,andfinancialcondition. Thepostsecondaryeducationregulatoryenvironmentcontinuestobecomemorecomplex.Applicableregu - lations,standards,andpoliciesfrequentlychange,andchangesin,ornewinterpretationsof,existingregula - tions,standards,andpolicies,aswellasapplicablelaws,couldhavematerialconsequencesforourinstitutions’ accreditation,authorizationtooperateinvariousstates,permissibleactivities,receiptoffundsunderfederal studentfinancialaidprograms,andcostsofdoingbusiness.InrecentyearsEDhasbeenactivelyissuingnew 34 AmericanPublicEducation,Inc. rulesthathavehadasubstantialimpactontheproprietarypostsecondaryeducationindustry.Forexample, in2010,EDadoptedrules,whichweregenerallyeffectiveJuly1,2011andwhichwerefertoastheProgram IntegrityRegulations,establishingsignificantnewcompliancerequirementsforinstitutionsofhighereduca - tion.In2014,EDadoptedrules,whichweregenerallyeffectiveJuly1,2015andwhichwerefertoastheFinal GERegulations,definingthecircumstancesunderwhichaneducationprogrampreparesstudentsfor“gain - fulemploymentinarecognizedoccupation,”asisrequiredinorderforstudentsenrolledinsuchprograms toreceivestudentfinancialaidunderTitleIVoftheHigherEducationActof1965,asamended,ortheHEA.In 2016,EDadoptedrules,whichgenerallyareeffectiveJuly1,2017andwhichwerefertoastheBorrowerDefense Regulations,establishinganewfederalstandardandprocessfordeterminingwhetheraborrowerhasadefense torepaymentonaloan,oraDirectLoan,madeundertheWilliamD.FordFederalDirectLoanProgram,orDirect LoanProgram,basedonanactoromissionofaninstitution;prohibitinginstitutionsthatparticipateinthe DirectLoanprogramfromusingcertaincontractualprovisionsregardingdisputeresolution,suchaspre-dis - putearbitrationagreementsorclassactionwaivers,andrequiringcertainnotificationsanddisclosuresregard - ingtheuseofarbitration;andrevisingED’sfinancialresponsibilitystandardsandaddingrelateddisclosure requirements.CertainportionsoftheProgramIntegrityRegulations,theFinalGERegulations,andtheBorrower DefenseRegulationsarediscussedinthisAnnualReport. ThepostsecondaryeducationregulatoryenvironmentmaychangeinthefutureasaresultoftheU.S.federal electioninNovember2016.ThenewPresidentialAdministrationandnewCongressmayacttochangeorelim - inatecurrentlyeffectiveEDregulations,includingtheProgramIntegrityRegulationsandFinalGERegulations, amongothers,andfinalEDregulationsthathavebeenpromulgatedbutarenotyeteffective,suchasthe BorrowerDefenseRegulationsandregulationsrelatedtostateauthorizationofdistanceeducation,among others.Forexample,thenewCongresscouldseektoactundertheCongressionalReviewAct,whichestablishes legislativeproceduresthroughwhichCongressmayadoptajointresolutionofdisapprovaltonullifycertain agencyfinalregulationswithinacertaintimeperiodaftertheregulationsarefinalizedbytheagency.ED,under newleadership,couldalsoinitiatenewrulemakingprocessestoalterexistingregulationsandcouldactto changeexistingEDpoliciesandpracticeswithrespecttomattersrelatedtopostsecondaryeducationinstitu - tions.OnJanuary30,2017,EDannouncedthatitintendstotakeunspecifiedregulatoryactionsregardingcertain regulationsthathavebeenpublishedbuthavenotyettakeneffect,includingtheBorrowerDefenseRegulations andregulationsrelatedtostateauthorizationofdistanceeducation.Wecannotpredicttheextenttowhichthe newPresidentialAdministrationandnewCongresswillacttochangeoreliminateEDregulations,policies,and practices,norcanwepredicttheformthatnewregulations,policies,orpracticesmaytake. ACCREDITATION Accreditationisavoluntary,non-governmentalprocessthroughwhichaninstitutionoraprogramsubmitsto qualitativereviewbyanorganizationofpeerinstitutions,basedonthestandardsoftheaccreditingagencyandthe statedaimsandpurposesoftheinstitutionorprogram.Accreditingagenciesestablishcriteriaforaccreditation, conductpeer-reviewevaluationsofinstitutionsorprograms,andpubliclyrecognizethoseinstitutionsorpro- gramsthatmeetthestatedcriteria.Accreditedschoolsandprogramsaresubjecttoperiodicreviewbyaccrediting agenciestoensurecontinuedhighperformance,institutionalandprogramimprovement,andinstitutionaland programintegrity,andtoconfirmthataccreditationcriteriacontinuetobesatisfied.Aninstitutionorprogramthat isdeterminednottomeetthecriteriamayhaveitsaccreditationlimited,revoked,ornotrenewed. PursuanttoprovisionsoftheHEA,EDreliesonaccreditingagenciestodeterminewhethertheacademicquality ofaninstitution’seducationalprogramsissufficienttoqualifytheinstitutiontoparticipateinstudentfinancial aidprogramsauthorizedunderTitleIVoftheHEA,orTitleIVprograms.Institutionalaccreditationbyanaccred - itingagencyrecognizedbytheSecretaryofEducationisalsonecessarytoparticipateinDoDtuitionassistance programs.ToberecognizedbytheSecretaryofEducation,accreditingagenciesmustadoptspecificstandards 2016 Annual Report 35 andproceduresforthereviewofeducationalinstitutionsorprograms.Thelossofinstitutionalaccreditation wouldresultinthelossofeligibilitytoparticipateinTitleIVprograms,whichwouldhaveamaterialadverse impactonourresultsofoperationsandfinancialcondition.Additionalinformationabouteachofourinstitu - tions’accreditationisprovidedaboveineachreportingsegment’s“OurInstitutions—Accreditation”sectionand asfollows: • APUSisinstitutionallyaccreditedbyTheHigherLearningCommission,orHLC,aregionalinstitutionalaccred - itingagencyrecognizedbytheSecretaryofEducation.InJuly2011,HLCreaffirmedtheaccreditationstatusof APUS.In2015,asrequiredbyHLCinconnectionwiththe2011reaffirmationofaccreditation,APUSsubmitted aninterimprogressreportthatwassubsequentlyacceptedbyHLC.HLCalsofromtimetotimemayschedule sitevisitsforotherreasons,includinganon-sitevisitrelatedtoachangeofcontrol,structureororganization transaction,asubstantivechange,orconformitywithHLC’sCriteriaforAccreditation(relatedtotopicssuchas teachingandlearning,andresources). Inconnectionwithourorganizationalrealignment,HLCrequestedthatAPUSsubmitanapplicationtoenable HLCtodeterminewhetherAPUS’sproposaltoenterintoasharedservicesmodelwithAPEIconstitutesa changeinorganizationorstructurethatrequiresHLCpriorapproval.OnDecember22,2016,APUSsubmit - tedtherequestedchangeofstructureapplication.HLCiscurrentlyreviewingAPUS’sapplicationandaspart ofthatreviewprocessplanstoconductanon-sitevisittoAPUSinearlyMay2017.WeanticipatethattheHLC BoardofTrusteeswillconsiderandactonAPUS’sapplicationduringitsmeetinginJune2017.HLChadplanned tovisitAPUSinFebruary2017aspartofastandardmid-cyclereview.Asaresultofthechange-of-structure applicationprocess,HLCagreedtopostponethatmid-cyclereviewuntilearly2018.Weareunabletopredict whetherHLCwillapproveAPUS’sapplicationandwhetherornotsuchapprovalwillbesubjecttolimitationsor conditions.Further,weareunabletopredictwhatchanges,ifany,HLCmayrequiretoAPUS’sorganizational realignmentandhowsuchchangesmayimpactourbusiness,operations,financialcondition,resultsofoper - ations,andcashflows.Thenextcomprehensiveevaluationforreaffirmationofaccreditationisscheduledfor the2020-2021academicyear. OnAugust31,2016,HLCadoptedpolicychangesthatareintendedtofacilitatequickerHLCresponsesto changingcircumstancesataccreditedinstitutions.ThepolicychangespermitHLCtodesignatepubliclyan institutionas“infinancialdistress”or“undergovernmentalinvestigation”wheresuchsituationshavethe potentialtoimpacttheinstitution’soperationsandHLCbelievesthepublicshouldhaveinformationinmak - ingadecisiontoattendorcontinuetoattendtheinstitution.Anaccreditedinstitutionwithadesignationmay berequiredtosubmitreportsaboutitsfinancialorlegalsituationorundergospecialmonitoring,andmay besubjecttolimitsonsubstantivechanges.Adesignationtypicallywillextendfornotmorethantwoyears andmayberemovedwhenHLCdeterminesthedesignationisnolongerrequiredbecausetheinstitutionhas resolvedtheissuesthatledtothedesignation. • HondrosCollegeofNursing,orHCON,isinstitutionallyaccreditedbytheAccreditingCouncilforIndependent CollegesandSchools,orACICS,anationalaccreditingagency.AftercompletionofouracquisitionofHCON, ACICSactedtoreinstateHCON’saccreditationthroughDecember31,2016,effectivefromthedateofthe acquisition.Duringthefirstquarterof2016,ACICSconductedasitevisitateachofHCON’scampusesas partofACICS’evaluationofHCON’srenewalofaccreditationapplication.In2016,ACICSreaffirmedHCON’s Clevelandcampus’accreditationthroughDecember31,2020,itsCincinnatiandDaytoncampuses’accredita - tionthroughDecember31,2021anditsColumbuscampus’accreditationthroughDecember31,2022.ACICS alsohasgrantedaccreditationtothenewToledocampusthroughDecember31,2017.Formoreinformation, see“RegulatoryEnvironment—RegulatoryActionsandRestrictionsonOperations—ChangeinOwnership ResultinginaChangeofControl”and“RiskFactors—RisksRelatedtotheRegulationofOurIndustry.” 36 AmericanPublicEducation,Inc. ACICSrequiresaccreditedinstitutionstosubmitannuallycertaincampus-levelandprogram-leveldata(e.g., retentionrates,placementrates,andlicensureexampassrates)forpurposesofmonitoringstudentachieve - mentagainstestablishedrequirements,includingminimum“standards”andexpected“benchmarks.”To satisfyACICS’s“standards,”theretentionrate,placementrate,andlicensureexampassrateeachmustexceed 60%.TosatisfyACICS“benchmarks,”eachratemustexceed70%.IfACICSdeterminesthataninstitution’scam - pus-levelorprogram-leveldatadonotsatisfyoneormorestandardsorbenchmarks,ACICSmaytakecertain actions.InJanuary2017,ACICSpublishedanewpolicy,effectiveDecember6,2016,thatdefinesintermsof metricrangeswhenaparticularactionwillbetakenatthecampusandprogramlevels,includingtheissuance ofacompliancewarning,ashow-causedirective,anadverseactionorreportingwithrestrictionsagainsta campusorprogram. ForthereportingyearJuly1,2015throughJune30,2016,severalHCONcampusesandprogramsdidnotsat - isfyACICSstudentachievementmeasures.OnFebruary24,2017,ACICSnotifiedHCONthatunlessitnotifies ACICSthatitisdiscontinuingthePNProgramattheClevelandcampus,thenACICSexpectstoissueashow- causeletterrequiringHCONtodemonstratewhyACICSapprovalofthePNProgramatthelocationshould notbewithdrawn.ACICStooksuchactionunderthenewpolicybecausetheplacementratesreportedforthe PNProgramattheClevelandcampuswerebetween50-59.9%fortwoconsecutiveyears.Aninstitutionthat ACICSdirectstoshowcausemustimmediatelynotifycurrentandprospectivestudentsoftheshow-cause status,includingbypostingaprominentnoticeonitswebsite.WeunderstandthatifthePNProgramatthe Clevelandcampusisputonshowcause,HCONwillberequiredtomakecertainreportstoACICSandwill haveuntilitsnextcampusaccountabilityreport,duebyNovember1,2017,todemonstrateitsplacementrate complieswiththerelevantstudentachievementmeasure.Atthistime,weareunabletopredicttheimpactof thisdevelopmentandthepossibleoutcomesonourenrollmentsandresultsofoperations.Inaddition,based onourunderstandingoftheACICS’snewpolicyrelatedtostudentachievementmeasuresandrelatedactions, weanticipatethatcertainotherHCONcampusesandprogramswillbesubjecttocompliancemonitoringand improvementplanrequirements. BydecisiondatedDecember12,2016,theSecretaryofEDwithdrewandterminatedED’srecognitionofACICS, asdiscussedmorefullybelowinthissection.HCONhasanin-processapplicationforaccreditationbythe AccreditingBureauofHealthEducationSchools,orABHES,anationalaccreditorforalliedhealthschoolsthat isrecognizedbyEDforfederalstudentfinancialaidpurposes.ABHESpoliciesrequirethatinstitutionsandpro- gramsapplyingforABHESaccreditationmustadviseABHESimmediatelyofanyadverseorpotentiallyadverse action,includingashow-causedirective,byanotheraccreditingagency.ABHESalsoreservestherightnotto grantinitialaccreditationifaninstitutionisonprobationoranequivalentstatusimposedbyanotheraccred - itingagency.Atthistime,wecannotpredictwhetherABHESwillrespondtoACICS’sactionswithrespecttothe Clevelandcampus’sPNProgram,includinghowitwillimpactanydecisionwithrespecttoinitialaccreditation ofHCONortheapprovalofthePNProgramaspartofinitialaccreditation. Institutionalaccreditationisanimportantattributeofourinstitutions.Collegesanduniversitiesdepend,inpart, onaccreditationinevaluatingtransfersofcreditandapplicationstograduateschools.Students,corporations, andgovernmentsponsorsundertuitionreimbursementprogramslooktoaccreditationforassurancethatan institutionmaintainsqualityeducationalstandards,andemployersrelyontheaccreditedstatusofinstitutions whenevaluatingacandidate’scredentials. TheNationalAdvisoryCommitteeonInstitutionalQualityandIntegrity,orNACIQI,ischargedwithadvisingthe SecretaryofEducationonwhethertorecognizeaccreditingagenciesforfederalpurposes,includingforpartici - pationinTitleIVprograms.NACIQIiscomposedof18memberswithsix-yearmembershipterms,withmembers appointedequallyandatstaggeredintervalsbytheSecretaryofED,theU.S.HouseofRepresentatives,andthe U.S.Senate. 2016 Annual Report 37 InJune2015,NACIQIvotedtorecommendthatEDrenewHLC’srecognitionasanaccreditingagencythrough December2017.EDsubsequentlyacceptedNACIQI’srecommendationandcontinuedHLC’srecognitionthrough December2017.IfHLCweretoloseitsrecognitionasanaccreditingagency,APUScouldloseitseligibilitytopar - ticipateinTitleIVprogramsandDoDtuitionassistanceprograms. InJune2016,NACIQIrecommendedthatED’sSeniorDepartmentOfficialdenyACICS’spetitionforrenewal ofrecognitionandwithdrawACICS’sstatusasarecognizedaccreditor.OnSeptember22,2016,theEDSenior DepartmentOfficialconcurredwithNACIQI’srecommendationandterminatedED’srecognitionofACICSasa nationallyrecognizedaccreditingagency.ACICSappealedthedecisiontotheSecretaryofED,whobydecision datedDecember12,2016,withdrewandterminatedED’srecognitionofACICS.WhentheSecretarywithdraws therecognitionofanaccreditingagency,apostsecondaryeducationalinstitutionmaybeallowedtocontinue itsparticipationonaprovisionalbasisintheTitleIVprogramsforaperiodnottoexceed18monthsfromthe dateoftheSecretary’sdecisiontoallowtheinstitutiontoseekaccreditationfromanotherrecognizedaccredit - ingagency.InconnectionwithACICS’slossofrecognition,EDhasindicatedthatduringtheperiodofprovisional participationitwilldeemanACICS-accreditedinstitutiontoholdrecognizedaccreditationandwillrequirethe institutiontocomplywithcertainconditions,includingthattheinstitution: • willberestrictedfrommakingmajorchanges,suchasaddinglocations,increasingthelevelofacademic offeringsoraddingnewprograms,withoutEDapproval,andsuchapprovalwillbegrantedonlyinlimited circumstances; • mustsubmitateach-outplantoEDbyJanuary11,2017; • mustmakecertainnotificationsanddisclosuresandwillnotbeeligibletoreceiveTitleIVfundsforanynewly enrolledstudentsifstudentsbecomeineligibletositforanylicensingorcertificationexamasaresultofthe lossofaccreditation; • mustmakecertainnotificationsanddisclosuresandwillnotbeeligibletoreceiveTitleIVfundsiftheinstitu - tionlosesitsauthorizationtooperateandissuepostsecondarycredentials; • mustsubmitreportstoEDregardinglawsuits,arbitrations,andinvestigationsandmustinformstudents aboutwheretofilecomplaintstheymayhavepreviouslysubmittedtotheinstitution’saccreditor;and • mustengageitsthird-partyauditortoevaluatecertaindataandcomplianceindicatorsthatwouldhavebeen monitoredbytheaccreditingagency. EDwillalsoimposecertainadditionalrequirementsonACICS-accreditedinstitutionsthatdonotmeetcertain milestonestowardaccreditationbyanotherrecognizedaccreditingagency.Aninstitutionthatdoesnothave anin-processapplicationwithanotherrecognizedaccreditingagencybyMarch13,2017,mustsubmitaformal teach-outagreementtoEDanddisclosetoitsstudentsthatitdoesnothaveanin-processapplication.Aninsti - tutionthatdoesnothaveanin-processapplicationwithanotherrecognizedaccreditingagencybyJune12,2017, orhasnotcompletedanaccreditingagencysitevisitbyOctober10,2017,willnotbeeligibletoreceiveanyTitle IVfundsforanystudentthatenrollsafterthatdate,mustmakeadditionaldisclosurestostudents,mustsubmit aletterofcredittoEDinanamountdeterminedbyED,andmustsubmitstudentrostersandarecordretention plantoED.OnDecember21,2016,HCONandEDexecutedarevisedprovisionalprogramparticipationagree - ment,orPPPA,andaddendumtothePPPAinwhichHCONagreedtocomplywithED’sconditionsandrequire - ments.HCONhasanin-processapplicationforaccreditationbyABHES,anaccreditorforalliedhealthschools thatisrecognizedbyED. OnDecember15,2016,ACICSfiledamotionforatemporaryrestrainingorderandpreliminaryinjunctionagainst EDintheUnitedStatesDistrictCourtfortheDistrictofColumbia.ACICSaskedthecourttostaytheSecretary’s decisionterminatingACICS’srecognitionstatus,restoreACICS’srecognitionstatus,andenjoinEDfromenforcing 38 AmericanPublicEducation,Inc. therequirementsforACICS-accreditedinstitutions,includingthosesetforthinED’sprovisionalprogrampartic - ipationagreement.OnDecember20,2016,thecourtdeniedACICS’srequestforatemporaryrestrainingorder, andonFebruary21,2017,thecourtdeniedACICS’srequestforapreliminaryinjunction. InadditiontoED,theapprovalstatusandinsomecasesfundingprovidedbyotheragenciescouldbeadversely affectedbyHCON’slossofaccreditationbyarecognizedaccreditingagency,effectiveatthetimetheaccredita - tionislost,evenduringanyperiodthatED’sprovisionalcertificationofHCONcontinues.Foradditionalinforma - tionregardingtherisksassociatedwithlossofaccreditation,pleaserefertothe“RiskFactors—RisksRelatedto theRegulationofOurIndustry”sectionofthisAnnualReport. Inadditiontoinstitutionalaccreditation,ourinstitutionshaveobtainedspecializedaccreditationorprofessional recognitionforseveralspecificprograms,asdescribedmorefullyaboveineachreportingsegment’ssection entitled“OurInstitutions—Accreditation.”Accreditationofaprogrambyaspecializedaccreditingagencyor grantingofprofessionalrecognitionbyaprofessionalorganizationsignifiesthattheprogrammeetsthestan - dardsofthatagencyororganization.Ifoneofourinstitutionsfailstosatisfythestandardsofthesespecialized accreditingagenciesandprofessionalorganizations,theinstitutioncouldlosethespecializedaccreditationor professionalrecognitionfortherelevantprograms,whichcouldresultinmateriallyreducedstudentenroll - mentsinthoseprograms,preventtheinstitutionfromofferingtheprogramsincertainstates,orpreventour studentsfromseekingandobtainingappropriatelicensureintheirdesiredfieldsoremploymentfromparticular employers. STATE LICENSURE/AUTHORIZATION Ourinstitutionsaresubjecttoextensiveregulationsbythestatesinwhichtheyareauthorizedtooperate.The levelofregulatoryoversightvariessubstantiallyfromstatetostate,andstateregulationschangefrequently. Statelawstypicallyestablishstandardsforinstruction,qualificationsoffaculty,administrativeprocedures, marketing,recruiting,financialoperations,andotheroperationalmatters.Somestatesmayalsoprescribe regulationsrelatedtoaninstitution’sfinancialcondition,andsomestatesrequirethepostingofsuretybonds. Statelawsandregulationsmayalsoaffectourinstitutions’abilitytooffereducationalprograms,openlocations, andawarddegrees.Ifoneofourinstitutionsfailstocomplywithastate’sregulatoryrequirements,itmaylose statelicensureorauthorization,whichwouldresultintheinstitution’sinabilitytoenrollstudentsinthatstate, andcouldresultintheinstitution’sinabilitytoreceiveTitleIVprogramfundsandDoDtuitionassistancefunds, atleastforstudentsinthatstate. Somestatesassertauthoritytoregulateaninstitutionifitseducationalprogramsareofferedtoresidentsof thosestates,regardlessofwhethertheinstitutionmaintainsaphysicalpresenceinthestatewherethestudent resides.Theincreasedpopularityofonlineeducationhasled,andmayfurtherlead,totheadoptionofnew lawsandregulatorypracticesandnewinterpretationsofexistinglawsandregulationsinvariousstates.States mayalsorevisetheirregulationsinthisareaasaresultofrecentEDregulations,asdiscussedmorefullybelow in“StateLicensure/AuthorizationRequirements.”Newlaws,regulations,orinterpretationsrelatedtodoing businessovertheinternetcouldincreaseourcostofdoingbusinessandaffectourabilitytorecruitstudentsin particularstates,whichcould,inturn,negativelyaffectenrollmentsandrevenueandhaveamaterialadverse effectonourbusiness.ForadditionalinformationregardingtherisksrelatedtotheregulationoftheInternet, pleasereferto“RiskFactors—RisksRelatedtoOurBusiness.” Changesinourbusinessorchangesinthenatureoramountofourcontactwith,orpresencewithin,aparticular statecouldleadstatesthatdonotcurrentlyrequireourinstitutionstobelicensedorauthorizedtorequiresuch licensureorauthorizationinthefuture.Forexample,programsthatinclude“ontheground”componentsthat maybedescribedasinstructionalactivities,suchasclinicalinternships,maybeviewedbysomestateregulatory 2016 Annual Report 39 agenciesasconstitutingaphysicalpresenceforregulatorypurposes.Asthoseprogramsexpand,itispossible thatourinstitutionswillneedtoseekformalauthorizationtooperateinsomestateswherehistoricallythey havenotbeenrequiredtodoso.Theextentofthisexpansioninregulatoryrequirements,andtheassociated costsandsignificance,arenotknownatthistime.Furthermore,theremaybesomestateswhereittakesasig - nificantamountoftimetomeettheapplicableregulatoryrequirementswithrespecttoanewprograminitiative, orwherewearenotabletodosoatall. TheStateAuthorizationReciprocityAgreement,orSARA,isavoluntaryagreementamongmemberstates, districtsandterritoriesthatestablishescomparablenationalstandardsforinterstateofferingofpostsecond - arydistanceeducationcoursesandprograms.SARAisintendedtomakeiteasierforstudentstotakeonline coursesofferedbypostsecondaryinstitutionsbasedinanotherstate.SARAisoverseenbyaNationalCouncil andadministeredbyfourregionaleducationcompacts,whichacceptapplicationsfromstatesintheirregionsto joinSARA.SARArequiresstatestoapproveinstitutionsintheirstatetoparticipateinSARA,baseduponinsti - tutionalaccreditationandfinancialstability,andtoresolvestudentcomplaints.SARAmembershipisopento degree-grantingpostsecondaryinstitutionsfromallsectors,includingpubliccollegesanduniversitiesaswellas not-for-profitandfor-profitindependentinstitutions.Aninstitutionmustbeaccreditedbyanagencyrecognized bytheU.S.SecretaryofEducation.SARAmemberstatesagreetoimposenoadditional(non-SARA)authorization requirementstoprovidedistanceeducationoninstitutionsfromotherSARAstates.ForSARApurposes,aninsti - tution’s“homestate”isthestatewhereitsmaincampusorcentralunitholdsitsprincipallegaldomicile.SARA shiftsprincipaloversightresponsibilitiesfromthestateinwhichthedistanceeducationisbeingreceivedto the“homestate”oftheinstitutionofferingtheinstruction.SARAdoesnotcover,orlimititscoveragerelatedto, certainactivitiesinwhichaninstitutionmayengageinastate,meaningiftheinstitutionengagesinthatactivity inastate,itmaystillberequiredtoobtainstateauthorizationinthatstateevenifitisaSARAmember,including forexample,authorizationfromagenciesorboardsresponsibleforprofessionalrequirements.Membershipin SARAwasopenedtostatesinJanuary2014.TheStateofWestVirginiajoinedSARAeffectiveDecember1,2014. APUS’sinitialapplicationtobecomeaSARAinstitutionwasapprovedonDecember8,2014,andAPUShasbeen aparticipatingSARAinstitutionsincethattime.TheStateofOhiojoinedSARAeffectiveMarch2,2015.HCON’s applicationtobecomeaSARAinstitutionwasapprovedinApril2016,andHCONhasbeenaparticipatinginstitu - tionsincethattime. Manystatesalsohavespecificrequirementsthatanindividualmustsatisfyinordertobelicensedasapro - fessionalinaspecifiedfield.Studentsoftenseektoobtainprofessionallicensureintheirchosenfieldsafter graduation.Theirsuccessinobtaininglicensuretypicallydependsonseveralfactors,including,forexample:the individualmeritsofthegraduate;whethertheinstitutionandtheprogramwereapprovedbythestateinwhich thegraduateseekslicensure,orbyaprofessionalassociation;whethertheprogrammeetsallstaterequire - mentsforprofessionallicensure;andtheaccreditationoftheinstitutionandthespecificprogram.SARAhasno effectonstateprofessionallicensurerequirements. STATELICENSURE/AUTHORIZATIONREQUIREMENTS “Home” State Authorization ThefinalProgramIntegrityRegulationsadoptedbyEDaddresscertaininstitutionalandprogrameligibility issues,includingstateauthorization.TheProgramIntegrityRegulationsspecifyhowaninstitutionmaydemon - stratethatitisauthorizedtoofferpostsecondaryeducationalprogramsbythestate(s)whereitislocated,which werefertoasits“home”state.IfrequestedbyED,aninstitutionmustbeabletodocumentitshomestate’s approvalinordertoparticipateinTitleIVprograms.Inaddition,thehomestatemusthaveaprocesstoreview andtakeappropriateactiononcomplaintsconcerningpostsecondaryinstitutions.EDhasstatedthatitwillnot publishalistofstatesthatmeet,orfailtomeet,theserequirements.IfEDdeterminesthataninstitutiondoes 40 AmericanPublicEducation,Inc. nothavetherequiredstateapproval,theinstitutionwillbeineligibletoparticipateinTitleIVprograms.After EDstayedimplementationofthehomestateauthorizationrulesfromJuly1,2011toJuly1,2015,theruleswere implementedeffectiveJuly1,2015.WecannotpredicttheextenttowhichEDwilldeterminethattheinstitutional authorizationorcomplaintreviewprocessofanystatesatisfiesED’sregulations.IfAPUSweretoloseitsability toparticipateinTitleIVprogramsbecauseitfailedtoobtainauthorizationbythestateinwhichitislocatedor becauseastate’sinstitutionalauthorizationandcomplaintprocessdidnotsatisfyED’srequirements,itwould alsoloseitsabilitytoparticipateinDoDtuitionassistanceprograms.Thelossofabilityofoneofourinstitu - tionstoparticipateineitherTitleIVprogramsorDoDtuitionassistanceprogramscouldhaveamaterialadverse effectonourbusinessandfinancialcondition. State Authorization of Online Education InNovember2013,EDannounceditsintenttoestablishanegotiatedrulemakingpaneltoconsiderregula - tionsfor,amongotherissues,stateauthorizationofprogramsofferedthroughdistanceeducation.Negotiated rulemakingsessionsoccurredinthewinterandspringof2014,butthenegotiatingcommitteedidnotreachcon - sensus.EDpublishedfinalregulationsonDecember19,2016.Thefinalregulationsrequireaninstitutionoffering distanceeducationprogramstobeauthorizedbyeachstateinwhichtheinstitutionenrollsstudents,ifsuch authorizationisrequiredbythestate,inordertoawardTitleIVaidtosuchstudents.Aninstitutioncouldobtain suchauthorizationdirectlyfromthestateorthroughastateauthorizationreciprocityagreementthatsatisfies ED’sdefinitionofsuchanagreement. Underthefinalrule,forstatesthatdonotparticipateinSARA,ourinstitutionswillberequiredtoobtainany requiredstateauthorizationfromthosestatesinordertoofferdistanceeducationprogramstostudentswho resideinthosestatesandtoawardfederalstudentfinancialaidtothosestudents.Forstatesthatdoparticipate inSARA,ifEDdeemsSARAnottosatisfyED’sdefinitionofastateauthorizationreciprocityagreement,ourinsti - tutionswouldberequiredtoseekanyrequiredauthorizationfromthosestatesaswellinordertoofferdistance educationprogramstostudentswhoresideinthosestatesandtoawardfederalstudentfinancialaidtothose students,whichwouldincreaseourregulatoryburdensandcosts. Thefinalregulationsalsorequireaninstitutiontodocumentthestateprocessforresolvingcomplaintsfrom studentsenrolledinprogramsofferedthroughdistanceeducationforeachstateinwhichsuchstudentsreside. Inaddition,thefinalregulationsrequireaninstitutiontoprovidepublicandindividualizeddisclosuresto enrolledandprospectivestudentsregardingitsprogramsthatareprovidedorcanbecompletedsolelythrough distanceeducationorcorrespondencecourses,excludinginternshipsandpracticums.Thepublicdisclosures wouldincludestateauthorizationfortheprogram,theprocessforsubmittingcomplaintstorelevantstates,any adverseactionsbyastateoraccreditingagencyrelatedtothedistanceeducationprogramwithinthepastfive years,refundpolicies,andapplicablelicensureorcertificationrequirementsforacareerastudentpreparesto enterandtheprogram’ssufficiencytomeetthoserequirements.Aninstitutionwouldberequiredtodisclose directlyandindividuallytoallprospectivestudentswhenadistanceeducationprogramdoesnotmeetthelicen - sureorcertificationrequirementsforthestateinwhichthestudentresides.Aninstitutionwouldberequired todisclosetoeachenrolledandprospectivestudentwhenanadverseactionistakenagainsttheprogramby astateagencyoraccreditingagencyandanydeterminationthataprogramceasestomeetlicensureorcertifi - cationrequirements.ThefinalregulationsareeffectiveJuly1,2018.OnJanuary30,2017,EDannouncedthatit intendstotakeunspecifiedregulatoryactionsregardingthefinalregulations. STATEAUTHORIZATION/LICENSUREOFOURINSTITUTIONS APUSisphysicallyheadquarteredintheStateofWestVirginia,withadministrativeofficesintheCommonwealth ofVirginia.Atpresent,APUSenrollsstudentsfromeachofthe50states,aswellastheDistrictofColumbia. 2016 Annual Report 41 APUSiscurrentlyauthorizedtoofferitsprogramsbytheWestVirginiaHigherEducationPolicyCommission,or WVHEPC,theregulatoryagencygoverningpostsecondaryeducationintheStateofWestVirginia.Webelieve thatundercurrentlawtheonlystateauthorizationorlicensurenecessaryforAPUStoparticipateinDoDtuition assistanceprogramsisitsauthorizationfromWVHEPC.WebelievethesameistrueundercurrentlawforTitleIV programs.Asdescribedaboveunder“StateAuthorizationofOnlineEducation,”EDpublishedfinalrulesregard - ingstateauthorizationofdistanceeducationforTitleIVpurposes,andthoserulesareeffectiveJuly1,2018. FailuretocomplywiththerequirementsofWVHEPCcouldresultinAPUSlosingitsauthorizationfromWVHEPC, itseligibilitytoparticipateinTitleIVprogramsandDoDtuitionassistanceprograms,oritsabilitytooffercertain programs,anyofwhichcouldforceAPUStoceaseoperations. DuetoAPUShavingadministrativeofficeslocatedinVirginia,underVirginialawAPUSisalsorequiredtobe authorizedbytheStateCouncilofHigherEducationforVirginia,orSCHEV.Accordingly,APUShasobtained SCHEV’sauthorizationtooperateasanout-of-stateinstitutioninVirginia. SinceDecember2014,APUShasbeenaparticipatinginstitutioninSARA,whichisdescribedmorefullyabove. APUSislicensedinWestVirginiabyWVHEPCandinVirginiabySCHEVbecauseofitsoperationsinthosestates. Inaddition,APUSisauthorizedthroughreciprocityintheother45SARA-memberstatesandtheDistrictof Columbia.APUShasalsoobtainedlicensureorauthorizationtooperateorconductactivitiesinthethreestates (i.e.,California,Florida,andMassachusetts)thathavenotjoinedSARA. HCONisphysicallyheadquarteredinWesterville,Ohio,andhasfivecampusesinOhio.HCONiscurrently authorizedtoofferitsprogramsbytheOhioStateBoardofCareerCollegesandSchools,theregulatoryagency responsibleforauthorizingfor-profitandnot-for-profitprivatecareerschoolsofferingassociatedegree,certif - icate,anddiplomaprogramsintheStateofOhio.HCON’sPracticalNursingDiplomaandAssociateDegreein NursingprogramsareapprovedbytheOhioBoardofNursing,orOBN.HCON’sonlinecompletionprogramlead - ingtoaBachelorofScienceinNursingisapprovedbytheOhioDepartmentofHigherEducation,theregulatory agencyinOhioresponsibleforauthorizingeducationprogramsatthebachelor’sdegreelevelandabove.Asof April2016,HCONisaparticipatingSARAinstitution. ToapplyforlicensuretopracticenursinginOhio,anapplicantmusthavesuccessfullycompletedanursingedu - cationprogramthatisapprovedbytheOBN.RegulationsoftheOBNrequirethatanursingeducationprogram suchastheHCONPNandADNprogramsmusthaveapassrateontherelevantNCLEXlicensureexamthatisat least95%ofthenationalaverageforfirst-timecandidatesinacalendaryear.Ifaprogramdoesnotattainsuch passrate,theprogrammayfaceconsequences,including,afterfourconsecutiveyearsoffailingtomeetthat standard,placementonprovisionalapprovalstatus.Ifaprogramonprovisionalapprovalcontinuestofailto meettherequirements,theOBNmaywithdrawitsapprovaloftheprogram.HCON’sADNprogram’spassrate ontherelevantNCLEXlicensureexamhasnotmettherequirementsoftheOBNforthepreviousfouryears.Asa result,weexpectthatHCON’sADNprogrammaybeplacedonprovisionalapprovalstatusbytheOBNinMarch 2017.IfaprogramonprovisionalapprovalfailstomeetandmaintaintherequirementsoftheOBNattheendof thetimeperiodestablishedforprovisionalapproval,theOBNmayproposetocontinueprovisionalapprovalfor asettimeperiodormayproposetowithdrawapprovalpursuanttoanadjudicationproceeding.FortheOBNto considerrestoringaprogramtoFullApprovalstatusafteraprogramisplacedonprovisionalstatusduetolow NCLEXscores,theprogrammustattainapassratethatmeetsorexceeds95%ofthenationalaverageforfirst- timecandidatesforatleasttwoconsecutiveyears.HCONhasbeenimplementingchanges,includingthecur - riculumchangesdiscussedinthisAnnualReport,anditsNCLEXpassratesforthePNandADNprogramshave increasedinrecentperiods.Placementonprovisionalstatusmayresultinadditionalregulatoryrequirements, suchasarequirementtodisclosetheprovisionalstatus.Anyconsequencesthatresultfromthissituationmay haveanadverseimpactonourresultsofoperations,cashflows,andfinancialcondition. 42 AmericanPublicEducation,Inc. Failuretocomplywithstateauthorizationorlicensurerequirementscouldrestrictourinstitutions’ability torecruitorenrollstudentsincertainstatesorresultinothersanctionsbeingimposedonourinstitutions, includingfinesandpenalties.Insomecases,stateauthorizationorlicensuremayimposelimitationsoncertain activitiesandmayimposeparticularrequirementswithrespecttocertainprograms.Wereviewthelicensure requirementsofstatestodeterminewhetherourinstitutions’activitiesinthosestatesmayconstituteapres - enceorotherwisemayrequireauthorizationorlicensurebytherespectivestateeducationagencies.Wecannot predicttheextenttowhichstateswillretainmembershipinSARA,themannerinwhichSARA’srulesapplicable tomemberstatesandrulesapplicabletoparticipatinginstitutionsmaybemodified,interpretedandenforced, includinginresponsetoregulationbyED,ourinstitutions’abilitytocomplywithSARA’srequirementsandretain membershipeligibility,ortheimpactthatfailuretomeettheSARArequirementsmayhaveonourbusiness.To date,state-specificlimitationsandrequirementshavenothadamaterialeffectonourinstitutions’operations. However,newlaws,regulations,interpretations,orchangedcircumstancesrelatedtoourinstitutions’educa - tionalprogramscouldincreaseourcostofdoingbusinessandaffectourabilitytorecruitstudentsandoffer programsinparticularstates,whichcould,inturn,adverselyaffectourinstitutions’enrollmentsandrevenue andhaveamaterialeffectonourbusiness. STUDENT FINANCING SOURCES AND RELATED REGULATIONS/REQUIREMENTS OurstudentsfinancetheireducationthroughacombinationofTitleIVprogramsadministeredbyED,theDOD tuitionassistanceprograms,educationbenefitsadministeredbytheVA,privateloans,corporatereimbursement programs,andindividualresources.Participationinfederalstudentaidprograms,includingthoseadministered byDoDandVA,addstotheregulationofouroperations.Inparticular,theHEAandtheregulationsissuedthere - underbyEDsubjectustosignificantregulatoryscrutinyintheformofnumerousstandardswemustsatisfyin ordertoparticipateinandadministerTitleIVprograms. DEPARTMENTOFEDUCATION ThefederalgovernmentprovidesasubstantialpartofitssupportforpostsecondaryeducationthroughTitleIV programs,intheformofgrantsandloanstoeligiblestudentswhocanusethosefundsatanyinstitutionthat hasbeencertifiedbyEDtoparticipateinTitleIVprograms,providedthestudent’sprogramsatisfiesTitleIV programeligibilityrequirements.AninstitutionmayparticipateinTitleIVprogramsonlyifitiscertifiedtodoso anditentersintoawrittenprogramparticipationagreement,orPPA,withtheSecretaryofEducation.ThePPA conditionsinitialandcontinuedparticipationinTitleIVprogramsuponcompliancewithEDregulations,includ - ingregulationsapplicabletoindividualTitleIVprograms,andanyadditionalconditionsspecifiedinthePPA. Types of Title IV Financial Aid Programs TitleIVprogramaidisprimarilyawardedtostudentsonthebasisoffinancialneed,generallydefinedasthedif - ferencebetweenthecostofattendinganinstitutionandtheamountastudentcanreasonablycontributetothat cost.AllrecipientsofTitleIVprogramfundsmustmaintainsatisfactoryacademicprogressandmustprogress inatimelymannertowardcompletionoftheirprogramofstudy.Inaddition,eachschoolmustensurethatTitle IVprogramfundsareproperlyaccountedforanddisbursedinthecorrectamountsandinatimelymannerto eligiblestudents. StudentsatourinstitutionsreceivegrantsandloanstofundtheireducationunderseveralTitleIVprograms,of whichthetwolargestareDirectLoansandPellGrants.Studentsatourinstitutionsareeligibletoparticipatein thefollowingTitleIVprograms: (1) Federal Student and Parent Loans. ED’smostsignificantformofaidincludesloanstostudentsandtheir parentsthroughtheDirectLoanProgram.DirectLoanProgramloansaremadedirectlybythefederal 2016 Annual Report 43 governmenttostudentsortheirparents.TheDirectLoanProgramoffersFederalStaffordLoans,Federal ParentPLUSLoans,FederalGradPLUSLoansandFederalConsolidationLoans. FederalStaffordLoans,orStaffordLoans,mayeitherbesubsidizedorunsubsidized.Astudentwithdemon - stratedfinancialneedmaybeeligibletoreceiveasubsidizedStaffordLoanwhereEDpaystheinterest ontheloanwhilethestudentisenrolledatleasthalf-timeinschoolandduringthefirstsixmonthsafter leavingschool.Astudentwithoutdemonstratedfinancialneedmaybeeligibletoreceiveanunsubsidized StaffordLoanwherethestudentisresponsiblefortheinterestthataccruedwhileinschoolandafterleaving school.StudentswhoareeligibleforasubsidizedStaffordLoanmayalsobeeligibletoreceiveanunsubsi - dizedStaffordLoan.FederalParentPLUSLoans,orParentPLUSLoans,maybeobtainedbytheparentsofa dependentundergraduatestudentinanamountnottoexceedthedifferencebetweenthetotalcostofthat student’seducation(includingallowableexpenses)andotheraidtowhichthatstudentisentitled.Students whoareclassifiedasindependent,anddependentstudentswhoseparentsareunabletoobtainParent PLUSLoans,canreceiveadditionalunsubsidizedStaffordLoans.FederalGradPLUSLoans,orGradPLUS Loans,areavailabletograduateorprofessionalstudentsenrolledatleasthalf-time.Theobligationtobegin repayingfederalloansdoesnotcommenceuntilsixmonthsafterastudentceasesenrollmentasatleasta half-timestudent.FederalConsolidationLoansallowastudentwhohasgraduated,leftschool,ordropped belowhalf-timeenrollmenttocombinemultiplefederaleducationloansintooneloanwithoneinterestrate andonemonthlypayment. (2) Federal Grant Programs. PellGrantsareED’sprimaryprogramforgrantstoundergraduatestudentswho demonstratefinancialneed.ThemaximumamountofavailabilityofaPellGrantis$5,775forthe2015-2016 awardyear,$5,815forthe2016-2017awardyear,and$5,920forthe2017-2018awardyear,andastudent’s lifetimeeligibilitytoreceiveaPellGrantis12semesters(oritsequivalent).Studentsmaynotbeabletouse allofthiseligibilityatAPUSbasedontheirpriorreceiptofPellGrantsfromotherinstitutionspriortoenroll - inginoneofourinstitutions. TheFederalSupplementalEducationOpportunityGrant,orFSEOG,programprovidesgrantawards designedtosupplementPellGrantsfortheneediestundergraduatestudents.TheavailabilityofFSEOG awardsislimitedbytheamountofthosefundsallocatedbyEDtoaninstitutionunderaformulathattakes intoaccountthesizeoftheinstitution,itscosts,andtheincomelevelsofstudents. TheTeacherEducationAssistanceforCollegeandHigherEducationGrant,orTEACHGrant,programpro - videsgrantassistancetoundergraduate,post-baccalaureate,andgraduatestudentswhoagreetoservefor atleastfouryearsasfull-time“highlyqualified”teachersinhigh-needfieldsinpublicornot-for-profitprivate elementaryorsecondaryschoolsthatservestudentsfromlow-incomefamilies.Duetosequestration,the maximumawardforanyTEACHGrantfirstdisbursedonorafterOcto ber1,2016,andbeforeOctober1, 2017,wasreducedto$3,724fromanearliermaximumof$4,000. (3) Federal Work-Study. UndertheFederalWork-Studyprogram,EDpaysashare,generally75%,ofthecostof part-timeemploymentofeligiblestudents,basedontheirfinancialneed,toperformworkfortheinstitu - tionstheyattend,orforoff-campuspublicornot-for-profitorganizations. Regulation of Title IV Financial Aid Programs TobeeligibleandcertifiedtoparticipateinTitleIVprograms,aninstitutionmustbeaccreditedbyanaccrediting bodyrecognizedbytheSecretaryofEducation,mustbeauthorizedtooperatebytheappropriateregulatory authorityineachstatewheretheinstitutionmaintainsaphysicalpresence,andmustcomplywithspecificstan - dardsandproceduressetforthintheHEAandtheregulationsissuedthereunderbyED. 44 AmericanPublicEducation,Inc. EDperiodicallyrevisesitsregulationsandchangesitsinterpretationsofexistinglawsandregulations. Accreditingagenciesandstateeducationagenciesalsohaveresponsibilitiesforoverseeingcomplianceofinsti - tutionswithTitleIVprogramrequirements.Asaresult,ourinstitutionsaresubjecttoextensiveoversightand review.Forallthesereasons,wecannotpredictwithcertaintyhowTitleIVprogramrequirementswillbeapplied inallcircumstances.See“RecentLegislativeandRegulatoryActivity”belowformoreinformation.Keyprovisions relatingtoinstitutionalparticipationinTitleIVandtheprocessingofTitleIVaidthatcouldadverselyaffectus includethefollowing: Eligibility and Certification Procedures. AninstitutionmustapplyperiodicallytoEDforcontinuedcertification toparticipateinTitleIVprograms.Recertificationgenerallyisrequiredeverysixyears,butmayberequiredear - lier,includingwhenaninstitutionundergoesachangeofcontrol.Aninstitutionmaycomeunderreviewwhen itexpandsitsactivitiesincertainways,suchasopeninganadditionallocation,addinganewprogram,or,in certaincases,whenitmodifiesacademiccredentialsthatitoffers. EDmayplaceaninstitutiononprovisionalcertificationstatusifEDfindsthattheinstitutiondoesnotfullysatisfy allTitleIVrequirementsandincertainothercircumstances,suchaswhenaninstitutionisinitiallycertified orundergoesachangeinownershipresultinginachangeincontrol.Duringaperiodofprovisionalcertifica - tion,theinstitutionmustcomplywithanyadditionalconditionsincludedinitsPPPA.Inaddition,EDmaymore closelyreviewaninstitutionthatisprovisionallycertifiedifitappliesforapprovaltoopenanewlocation,add aneducationalprogram,acquireanotherschool,ormakeanyothersignificantchange.IfEDdeterminesthata provisionallycertifiedinstitutionisunabletomeetitsresponsibilitiesunderitsPPPA,itmayseektorevokethe institution’scertificationtoparticipateinTitleIVprogramswithfewerdueprocessprotectionsfortheinstitution thanifitwerefullycertified.StudentsattendingprovisionallycertifiedinstitutionsremaineligibletoreceiveTitle IVprogramfunds. APUSisfullycertifiedtoparticipateinTitleIVprogramsthroughSeptember30,2020.HCONwasdeemedtohave undergoneachangeofownershipandcontrolinNovember2013,requiringreviewbyEDinordertoreestablish eligibilityandcontinueparticipationinTitleIVprograms.Asdescribedmorefullybelowin“RegulatoryActions andRestrictionsonOperations—ChangeinOwnershipResultinginaChangeofControl,”inJanuary2016,we receivedaletterfromEDapprovingthechangeinownershipandcontrolandgrantingHCONprovisionalcerti - ficationtoparticipateintheTitleIVprogramsuntilDecember31,2018.HCONreceivedafullyexecutedprovi - sionalprogramparticipationagreementinFebruary2016.HCONmustcomplywithspecificconditionswhileitis provisionallycertified,asdescribedmorefullyin“RestrictionsonAddingLocationsandEducationalPrograms,” below.Inaddition,asdescribedabovein“Accreditation,”inconnectionwiththeSecretaryofED’sdecisionto withdrawandterminateED’srecognitionofACICS,onDecember21,2016,HCONandEDexecutedarevised PPPAandaddendumtothePPPAinwhichHCONagreedtocomplywithadditionalconditionsandrequirements. UnderthePPPAandaddendum,HCONmaycontinuetoparticipateintheTitleIVprogramsonaprovisional basisuntilJune12,2018,whileHCONseeksaccreditationbyanotherrecognizedaccreditingagency. State Authorization. ToparticipateinTitleIVprograms,aschoolmustreceiveandmaintainauthorizationby theappropriatestateeducationagencies.Asdescribedmorefullyabovein“StateLicensure/Authorization,”ED hasspecifiedthetypesofstateapprovalsthatareacceptabletodemonstratethataninstitutionisauthorizedto offereducationalprogramsbeyondthesecondarylevelbythestatewhereitislocated,andEDrecentlypromul - gatednewrules,effectiveJuly1,2018,thataddressauthorizationbystatesinwhichstudentsenrolledindis - tanceeducationprogramsreside. 2016 Annual Report 45 Administrative Capability. CurrentEDregulationsspecifyextensivecriteriabywhichaninstitutionmustestab - lishthatithastherequisite“administrativecapability”toparticipateinTitleIVprograms.Tomeettheadminis - trativecapabilitystandards,aninstitutionmust,amongotherthings: • complywithallapplicableTitleIVprogramregulations; • havecapableandsufficientpersonneltoadministerTitleIVprograms; • haveacceptablemethodsofdefiningandmeasuringthesatisfactoryacademicprogressofitsstudents; • nothavecohortdefaultratesabovespecifiedlevels; • havevariousproceduresinplaceforsafeguardingfederalfunds; • notbe,andnothaveanyprincipaloraffiliatewhois,debarredorsuspendedfromfederalcontractingor engaginginactivitythatiscausefordebarmentorsuspension; • providefinancialaidcounselingtoitsstudents; • refertoED’sOfficeofInspectorGeneralanycredibleinformationindicatingthatanyapplicant,student, employeeoragentoftheinstitutionhasbeenengagedinanyfraudorotherillegalconductinvolvingTitleIV programs; • submitinatimelymannerallreportsandfinancialstatementsrequiredbytheregulations; • reportannuallytotheSecretaryofEducationonanyreasonablereimbursementspaidorprovidedbyapri - vateeducationlenderorgroupoflenderstoanyemployeewhoisemployedintheinstitution’sfinancialaid office,orwhootherwisehasresponsibilitieswithrespecttoeducationloans; • developandapplyanadequatesystemtoidentifyandresolvediscrepantinformationwithrespecttoastu - dent’sapplicationforTitleIVaid;and • nototherwiseappeartolackadministrativecapability. Ifaninstitutionfailstosatisfyanyofthesecriteria,EDmayrequiretherepaymentoffederalstudentfinancial aidfunds,transfertheinstitutionfromthe“advance”systemofpaymentofTitleIVprogramfundstocashmon - itoringstatusortothe“reimbursement”systemofpayment,placetheinstitutiononprovisionalcertification status,orcommenceaproceedingtoimposeafineortolimit,suspend,orterminatetheparticipationofthe institutioninTitleIVprograms. Financial Responsibility. TheHEAandEDregulationsestablishextensivestandardsoffinancialresponsibility thatinstitutionsmustsatisfyinordertoparticipateinTitleIVprograms.Thesestandardsgenerallyrequirethat aninstitutionprovidetheservicesdescribedinitsofficialpublicationsandstatements,properlyadministerTitle IVprogramsinwhichitparticipates,andmeetallofitsfinancialobligations,includingrequiredrefundsandany repaymentstoEDfordebtsandliabilitiesincurredinprogramsadministeredbyED. EDevaluatesinstitutionsonanannualbasisforcompliancewithspecifiedfinancialresponsibilitystandards.The financialresponsibilitystandardsincludeacomplexformulathatuseslineitemsfromtheinstitution’saudited financialstatements.Theformulafocusesonthreefinancialratios:(1)equityratio(whichmeasurestheinstitu- tion’scapitalresources,financialviability,andabilitytoborrow);(2)primaryreserveratio(whichmeasuresthe institution’sviabilityandliquidity);and(3)netincomeratio(whichmeasurestheinstitution’sprofitabilityorability tooperatewithinitsmeans).Generally,aninstitution’sfinancialratiosmustyieldacompositescoreofatleast1.5 fortheinstitutiontobedeemedfinanciallyresponsiblewithouttheneedforfurtherfederaloversight.Undercer- taincircumstances,aninstitutionmaybeabletoestablishfinancialresponsibilityonanalternativebasis. 46 AmericanPublicEducation,Inc. EDmayalsoapplythefinancialresponsibilitystandardstoaneligibleinstitution’sparentownershipentities.At therequestofED,forpurposesofevaluatingthefinancialresponsibilityofourinstitutions,includingthecom - positescorecalculation,wesupplyconsolidatedfinancialstatementstoED. AspartoftheBorrowerDefenseRegulationspublishedNovember1,2016,andeffectiveJuly1,2017,EDmodified itsfinancialresponsibilitystandardstoprovidethataninstitution(otherthanapublicinstitution)maynotbe abletomeetitsfinancialoradministrativeobligations,andisthereforenotfinanciallyresponsible,ifitissubject tooneormoretriggeringevents,onorafterJuly1,2017.OnJanuary30,2017,EDannouncedthatitintendsto takeunspecifiedregulatoryactionsregardingtheBorrowerDefenseRegulations.Underthefinalregulations,ED determinesautomaticallythataninstitutionisnotfinanciallyresponsibleifitissubjecttooneormorespecified triggeringevents,includingiftheinstitution: • isaproprietaryinstitutionthatfailsinthepreviousfiscalyearthe90/10non-TitleIVrevenuerequirement; • isapubliclytradedinstitutionthatreceivescertainwarningsfromtheSECorfailstotimelyfilerequired reports;or • hasacohortdefaultrateof30%orgreaterforeachofthetwomostrecentofficialcalculations. Underthefinalregulations,EDalsodeterminesthataninstitutionisnotabletomeetitsfinancialoradministra - tiveobligationsif,aftertheendofthefiscalyearforwhichEDhasmostrecentlycalculatedtheinstitution’scom - positescore,theinstitutionissubjecttooneormorespecifiedtriggeringevents,andasaresultoftheactualor potentialdebts,liabilities,orlossesthathavestemmedormaystemfromthoseactionsorevents,theinstitu - tion’srecalculatedcompositescoreislessthan1.0.Suchtriggeringeventsincludecasesinwhichtheinstitution: • isadefendantincertainlawsuitsandotheractionsthathaveresultedinorcouldresultinliabilityormonetary damages; • isrequiredbyitsaccreditingagencytosubmitateach-outplanforcertainreasons; • hasgainfulemploymentprogramsthatcouldbecomeineligibleforTitleIVbasedontheirfinaldebt-to-earn - ingsratesforthenextawardyear;or • isaproprietaryinstitution,hasacompositescoreoflessthan1.5,andhasawithdrawalofowner’sequityby anymeans,includingbydeclaringadividend. Inaddition,underthefinalregulations,EDmaydeterminethatothereventsorconditionsarereasonablylikely tohaveamaterialadverseeffectonthefinancialcondition,business,orresultsofoperationsoftheinstitution andmayatitsdiscretiondeterminethataninstitutionisnotfinanciallyresponsibleonthebasisofsuch“discre - tionarytrigger”events,whichinclude: • significantfluctuationintheamountofTitleIVfundsreceivedbytheinstitution; • citationbyastateagencyorauthorizingagencyforfailingrequirements; • failureofafinancialstresstestdevelopedbyED; • “high”annualdropoutrates,ascalculatedbyED; • actionbyanaccreditingagencytoplacetheinstitutiononprobationorissueashow-causeorderforfailureto meetoneormoreaccreditingstandards; • violationofaprovisioninordefaultonaloanagreement;or • pendingclaimsforborrowerreliefdischargeoranexpectationthatasignificantnumberofborrowerrelief claimswillbefiledrelatedtotheinstitution,asdeterminedbyED. 2016 Annual Report 47 Foreachtriggeringevent,inanattempttodemonstratethattheinstitutionremainsfinanciallyresponsible,the institutionmaysubmitevidencethatthetriggeringeventnolongerexistsorhasbeenresolved,orthattheinsti - tutionhasinsurancethatwillcoverpartorallofthedebtorliabilities. Failureofoneofourinstitutionstomeetthe“financialresponsibility”requirementsbecauseitdoesnotmeet theminimumcompositescoretoestablishfinancialresponsibilityorisunabletoestablishfinancialresponsibil - ityonanalternativebasis,orbecauseitfailstomeetotherfinancialresponsibilityrequirements,couldcause theinstitutiontoloseaccesstoTitleIVprogramfundingorresultinotherpenaltiesorconditionsoncontin - uedparticipation.IfEDdeterminesthatoneofourinstitutionsisnotfinanciallyresponsiblebecauseofoneor moretriggeringevents,theinstitutionwouldberequiredtoprovideanirrevocableletterofcreditequaltoat least10%oftheamountoffederalstudentfinancialaidfundsreceivedbytheinstitutionforthepastyear.An institutionthatisrequiredtoprovidealetterofcreditmayalsoberequiredtodisclosetostudentsinformation abouttheletterofcreditifEDdeterminesthroughconsumertestingthatsuchdisclosuresaremeaningfulto students.BecauseEDmayalsoapplythefinancialresponsibilitystandardstoaneligibleinstitution’sownership entities,ED’sdeterminationthatourConsolidatedFinancialStatementsdonotsatisfythe“financialresponsibil - ity”requirementscouldcausebothAPUSandHCONtoloseaccesstoTitleIVprogramfunding,orresultinother penaltiesorconditionsoncontinuedparticipation. The “90/10 Rule.” ArequirementoftheHEA,commonlyreferredtoasthe“90/10Rule,”appliesonlyto“propri - etaryinstitutionsofhighereducation,”whichincludesfor-profitschoolslikeourinstitutions.Underthisrule,a proprietaryinstitutionisprohibitedfromderivingfromTitleIVprograms,onacashaccountingbasis(exceptfor certaininstitutionalloans)foranyfiscalyear,morethan90%ofitsrevenue(ascomputedfor90/10Rulepur - poses).Ifaninstitutionviolatesthe90/10Ruleforanyfiscalyear,theinstitutionisplacedonprovisionalstatus fortwofiscalyears.Aninstitutionthatviolatestherulefortwoconsecutivefiscalyearsbecomesineligibleto participateinTitleIVprogramsforatleasttwofiscalyearsandisrequiredtodemonstratecompliancewithTitle IVeligibilityandcertificationrequirementsforatleasttwoadditionalfiscalyearspriortoresumingTitleIVpro - gramparticipation.EDdisclosesonitswebsiteanyproprietaryinstitutionofhighereducationthatfailstomeet the90/10requirement,andreportsannuallytoCongresstherelevantratiosforeachproprietaryinstitutionof highereducation. Usingtheapplicable90/10formula,thefollowingtablecontainsthepercentageofcash-basisrevenueearned fromTitleIVprogramfunds. APUS HCON 2014 47% 87% 2015 45% 86% 2016 43% 84% Wecontinuetomonitorcompliancewiththe90/10Rule. The90/10RulehasbeenasubjectofinterestoverthepastseveralCongresses,whichhasresultedinseveral membersofCongressintroducingproposalsandlegislationthatwouldmodifythe90/10Rule.Oneprevious CongressionalproposalwoulddecreasethelimitonTitleIVfundsfrom90%to85%andwouldhavecounted DoDtuitionassistanceandGIBilleducationbenefitstowardthatlimit.Further,thePresident’s2016Budgetpro - posedtheinclusionofDoDtuitionassistanceandGIeducationbenefitsinthe90%portionofthe90/10calcula - tion.AtthistimewecannotpredictwhetherorhowtherecentchangeinAdministrationandCongresswillaffect proposalstomodifythe90/10rule.Suchproposals,orothersimilarlegislation,shouldtheybecomelaw,could haveamaterialadverseimpactontheoperationsofourinstitutions. 48 AmericanPublicEducation,Inc. Incentive Payment Rule. Aspartofaninstitution’sTitleIVprogramparticipationagreementwithEDandin accordancewiththeHEA,aninstitutionmaynotprovideanycommission,bonusorotherincentivepaymentto anypersonorentityengagedinanystudentrecruitment,admissions,orfinancialaidawardingactivitybased directlyorindirectlyonsuccessinsecuringenrollmentsorfederalstudentfinancialaid.Failuretocomplywith theincentivepaymentrulecouldresultinterminationofparticipationinTitleIVprograms,limitationonpartici - pationinTitleIVprograms,orfinancialpenalties. OnJune2,2015,EDreleasedamemorandumregardingenforcementoftheprohibitiononthepaymentof incentivecompensationbypostsecondaryinstitutionstoanypersonorentityengagedinanystudentrecruit - ingoradmissionsactivities,orinmakingdecisionsregardingtheawardofstudentfinancialassistancebased directlyorindirectlyuponsuccessinsecuringenrollmentsorfinancialaid.ThememorandumindicatedthatED willreviseitsapproachtomeasuringdamagesfornoncompliancewiththeprohibitionagainstincentivecom - pensation.Inadministrativeenforcementactions,EDwillcalculatetheamountoftheinstitutionalliabilitybased onthecosttoEDoftheTitleIVfundsimproperlyreceivedbytheinstitution,includingthecosttoEDofallofthe TitleIVfundsreceivedbytheinstitutionoveraparticularperiodoftimeifthosefundswereobtainedthrough implementationofapolicyorpracticeinwhichstudentswererecruitedinviolationoftheincentivecompensa - tionprohibition.EDmayalsoimposeafineuponaninstitution,ortakeadministrativeactiontolimit,suspend, revoke,deny,orterminateaninstitution’seligibilitytoparticipateintheTitleIVprograms,iftheinstitution violatestheprohibition.WearecurrentlyunabletopredicttheimpactthatED’srevisedapproachtomeasuring damagesundertheincentivecompensationprohibitionmighthaveonourfinancialconditionifoneofourinsti - tutionsisfoundtobeinviolationoftheprohibition. Webelievethatouremployeecompensationandthird-partycontractualarrangementscomplywiththeincen - tivepaymentrulecurrentlyineffect.However,certainambiguitiesinthefinalrule,ED’saccompanyingstate - mentsintherulerelease,andguidanceissuedbyEDinMarch2011,andJune2015,createuncertaintyasto howtherevisedrulewillbeinterpretedandenforcedbyED.Inlightoftheseuncertainties,orotherwise,wecan makenoassurancesthatEDwouldnotfinddeficienciesinourpast,current,orfutureemployeecompensation plansandrelevantthird-partycontractualarrangements. Inaddition,inrecentyears,otherpostsecondaryeducationalinstitutionshavebeennamedasdefendantsto whistleblowerlawsuits,knownas“quitam”cases,broughtpursuanttotheFederalFalseClaimsAct,allegingthat aninstitution’scompensationpracticesdidnotcomplywiththeincentivecompensationrule.Anysuchlitiga - tioncouldbecostlyandcoulddivertmanagement’stimeandattentionawayfromthebusiness,regardlessof whetheraclaimhasmerit. Gainful Employment. UndertheHEA,asamended,proprietaryschoolsaregenerallyeligibletoparticipatein TitleIVprogramsonlyinrespectofeducationalprogramsthatpreparestudentsfor“gainfulemploymentina recognizedoccupation.”Historically,thisconcepthasnotbeendefinedindetailedregulations.Finalregulations adoptedbyED,whichgenerallybecameeffectiveonJuly1,2011,andwhichwerefertoastheProgramIntegrity Regulations,addresscertaininstitutionalandprogrameligibilityissues,includinggainfulemployment.Under theProgramIntegrityRegulations,allinstitutionsmustuseatemplatedesignedbyEDtodisclosetoprospective students,withrespecttoeachgainfulemploymentprogram,occupationsthattheprogrampreparesstudentsto enter,totalcostoftheprogram,on-timegraduationrate,jobplacementrate,ifapplicable,andthemedianloan debtofprogramcompletersforthemostrecentlycompletedawardyear.TheProgramIntegrityRegulations includedadditionalrulespertinenttogainfulemploymentprograms.Afederalcourtstruckdowntheseaddi - tionalrulesandleftthedisclosurerequirementsinplace. OnOctober31,2014,EDpublishedfinalregulationsrelatedtogainfulemployment,whichwerefertoastheFinal GERegulations.OnJuly1,2015,theFinalGERegulationswentintoeffect,withtheexceptionofnewdisclosure 2016 Annual Report 49 requirements,whichwentintoeffectJanuary1,2017.TheEDtemplatetobeusedinconnectionwiththenew disclosurerequirementswasreleasedJanuary19,2017,andinstitutionsmustprovideupdateddisclosuresno laterthanApril3,2017. TheFinalGERegulationsestablishdebt-relatedmeasuresfordeterminingwhethercertainpostsecondaryedu - cationprogramspreparestudentsforgainfulemploymentinarecognizedoccupation.TheFinalGERegulations setforthtwodebt-to-earningsmeasures:anannualearningsrateandadiscretionaryincomerate,whichwe refertocollectivelyastheD/Erates.Aprogramwillpassthemeasuresiftheprogram’sgraduateshaveannual loanpayments: • lessthanorequalto8%oftheirtotalearnings;or • lessthanorequalto20%oftheirdiscretionaryincome. Aprogramthatdoesnotpasseitherofthedebt-to-earningsmeasures,andthathasanannualearningsrate thatisgreaterthan8%andlessthanorequalto12%oradiscretionaryincomeratethatisgreaterthan20%and lessthanorequalto30%,willbeinawarning“zone.”Aprogramfailsthemeasuresifitsannualearningsrate isgreaterthan12%(orthedenominatoroftheannualearningsrateiszero)anditsdiscretionaryincomerateis greaterthan30%(ortheincomeforthedenominatorofthediscretionaryearningsrateisnegativeorzero). PursuanttotheFinalGERegulations,andsubjecttothepotentialforadjustmentsbasedonatransitionperiod, aprogramwillbecomeineligibleforTitleIVfundingifitfailsbothdebt-to-earningsmeasurestwiceinthree consecutiveyears,oriftheprogramisinthewarning“zone”forfourconsecutiveyears.Aninstitutionwillbe requiredtoprovidewarningstostudents,includingprospectivestudents,whennotifiedbyEDthataprogram couldbecomeineligiblebasedonitsfinaldebt-to-earningsmeasuresforthenextawardyear. AccordingtoED’sfinal2015D/Erates,whichwerereleasedinJanuary2017,noneoftheAPUSgainfulemploy - mentprogramswereidentifiedasfailingorinthewarning“zone.”ED’sD/Eratesincludenocalculationsof regularortransitionalD/Eratesforapproximatelythreequarters(76outof100)ofAPUS’sgainfulemployment programsbecauseofthesizeofthoseprograms.Specifically,underED’sgainfulemploymentrules,EDdoesnot calculateregularD/Eratesforgainfulemploymentprogramswithfewerthan30studentswhoreceivedTitleIV programaidinthecohort,aftermakingcertainadjustments,andEDdoesnotcalculatetransitionalD/Erates forgainfulemploymentprogramswithfewerthan10studentswhoreceivedTitleIVprogramaidinthecohort, aftermakingcertainadjustments.Forpurposesofapplyingthegainfulemploymentaccountabilitymeasures,if againfulemploymentprogram’sD/Eratesarenotcalculatedorissuedforanawardyear,theprogramreceives noresultundertheD/Eratesmeasureforthatawardyearandtheprogram’sstatusundertheD/Eratesmea - sureisunchangedfromthelastyearforwhichD/Erateswerecalculated,providedthatifEDdoesnotcalculate D/Eratesfortheprogramforfourormoreconsecutiveyears,EDwilldisregardtheprogram’sD/Eratesforany awardyearpriortothefour-yearperiodwhendeterminingwhethertheprogramiseligibleforTitleIVfunds. NotwithstandingthelowtuitionrateschargedbyAPUS,weareunabletoreliablyandaccuratelypredicthowthe gainfulemploymentprogramsforwhichEDdidnotcalculate2015D/Eratesmayperformundertheaccountabil - itymeasuresinthefuture,includingbecausecertainunderlyingdatarequiredtocalculatetheD/Eratesarenot availabletous. WithrespecttoHCON,accordingtoED’sfinal2015D/Erates,noneoftheHCONgainfulemploymentprograms wereidentifiedasfailingorinthewarning“zone.”TheDiplomainPracticalNursingandAssociateDegreein NursingprogramseachpasstheD/Eratesmeasure.TheAssociateDegreeinNursingprogrampassedbecause ithadadiscretionaryincomeratelessthanorequalto20%,althoughitsannualearningsratewasnotlessthan orequalto8%.ED’sD/EratesincludenocalculationsofregularortransitionalD/EratesfortheHCONonline RN-to-BSNprogrambecauseofthesizeofthatprogram.Weareunabletoreliablyandaccuratelypredicthow 50 AmericanPublicEducation,Inc. theRN-to-BSNprogrammayperformundertheaccountabilitymeasuresinthefuture,includingbecausecertain underlyingdatarequiredtocalculatetheD/Eratesarenotavailabletous. FortheAPUSandHCONprogramsforwhichwedohaveD/Erates,thereisnoassurancethattheratesinthe futurewillremainthesameandhowourgainfulemploymentprogramswillperformunderED’saccountability measures. Inadditiontothedebt-to-earningsmeasures,theFinalGERegulationsincludenewrequirementsrelatedtogain- fulemploymentprograms.Forexample,theFinalGERegulationsrequireaninstitution’smostseniorexecutive officertocertify,aspartoftheprogramparticipationagreement,thateacheligiblegainfulemploymentprogram offeredbytheinstitutionsatisfiescertainrequirementsrelatedtoinstitutionalandprogrammaticaccreditation andprofessionallicensureorcertificationexamrequirements.Also,theFinalGERegulationsexpanduponthe existinggainfulemploymentprogramdisclosurerequirements.AfailuretocomplywiththeFinalGERegulations couldresultinourinstitutionslosingeligibilitytoparticipateinTitleIVprograms,whichcould,inturn,adversely affectourinstitutions’enrollmentsandrevenueandhaveamaterialeffectonourbusiness. TheBorrowerDefenseRegulations,whichareeffectiveJuly1,2017,andarediscussedinmoredetailbelow, requireaproprietaryinstitutiontoincludealoanrepaymentratewarninginallpromotionalmaterialsforany awardyearinwhichtheinstitution’sloanrepaymentrate,ascalculatedbyED,showsthatthemedianborrower hasnoteitherfullyrepaidormadeloanpaymentssufficienttoreducebyatleastonedollartheoutstanding balanceofeachoftheborrower’sFFELorDirectLoans. Student Loan Defaults. UndertheHEA,aneducationalinstitutionmayloseitseligibilitytoparticipateinsome oralloftheTitleIVprogramsifdefaultsontherepaymentofFFELProgramorDirectLoanProgramloansbyits studentsexceedcertainlevels. PursuanttotheHigherEducationOpportunityActenactedin2008,ortheHEOA,whichamendedtheHEA,an institution’scohortdefaultrate,orthree-yearcohortdefaultrate,iscalculatedasthepercentageofborrowers inthecohortwhodefaultbeforetheendofthesecondfiscalyearfollowingthefiscalyearinwhichtheborrow - ersenteredrepayment.EDcalculatesasinglecohortdefaultrateforeachfederalfiscalyearthatincludesinthe cohortallcurrentorformerstudentborrowersattheinstitutionwhoenteredrepaymentonanyFFELProgram orDirectLoanProgramloanduringthatyear.Beginningwiththethree-yearcohortdefaultrateforthe2011 cohortpublishedbyEDinSeptember2014,three-yearcohortdefaultratesareappliedforpurposesofmeasur - ingcompliancewiththerequirements.Forpreviousyears,theapplicablecohortdefaultrate,ortwo-yearcohort defaultrate,wascalculatedasthepercentageofborrowersinthecohortwhodefaultedbeforetheendofthe firstfiscalyearfollowingthefiscalyearinwhichtheborrowersenteredrepayment.PursuanttoEDrequire - ments,ifthethree-yearcohortdefaultrateforanyyearafter2011exceeds40%,aninstitutionloseseligibilityto participateinTitleIVprograms,andiftheinstitution’sthree-yearcohortdefaultrateexceeds30%forthreecon - secutiveyears,beginningwiththe2009cohort,theinstitutionloseseligibilitytoparticipateinTitleIVprograms. Ifaninstitution’scohortdefaultrateisequaltoorgreaterthan30%inanyyearafter2011,itmustestablisha defaultpreventiontaskforce. InSeptember2016,EDreleasedAPUS’sandHCON’sofficialthree-yearcohortdefaultratesforfederalfiscalyear 2013.ThefinalofficialEDcohortdefaultrateforthefederalfiscalyears2011,2012,and2013,areasfollows: APUS HCON 2014 13.0% 12.1% 2015 23.3% 11.8% 2016 20.1% 11.4% 2016 Annual Report 51 Ifoneorbothofourinstitutionshasadefaultrateinexcessofallowablelevels,itcouldresultinthatinstitution’s orthoseinstitutions’lossofeligibilitytoparticipateinTitleIVprogramsorincurringadditionalcostsrelatedto defaultprevention,whichcouldhaveamaterialadverseeffectonourbusiness. Privacy of Student Records. TheFamilyEducationalRightsandPrivacyActof1974,orFERPA,andED’sregu - lationsimplementingFERPArequireeducationalinstitutionstoprotecttheprivacyofstudents’educational recordsbylimitinganinstitution’sdisclosureofastudent’spersonallyidentifiableinformationwithoutthestu - dent’spriorwrittenconsent.FERPAalsorequiresinstitutionstoallowstudentstoreviewandrequestchanges totheireducationalrecordsmaintainedbytheinstitution,tonotifystudentsatleastannuallyoftheirrights underFERPA,andtomaintainrecordsineachstudent’sfilelistingcertainrequestsforaccessto,anddisclosures of,personallyidentifiableinformationandtheinterestofsuchpartyinthatinformation.Ifaninstitutionfails tocomplywithFERPA,EDmayrequirecorrectiveactionsbytheinstitutionormayterminateaninstitution’s eligibilitytoparticipateinTitleIVprograms.Inaddition,educationalinstitutionsareobligatedtosafeguard studentinformationpursuanttotheGramm-Leach-BlileyAct,orGLBA,afederallawdesignedtoprotectcon - sumers’personalfinancialinformationheldbyfinancialinstitutionsandotherentitiesthatprovidefinancial servicestoconsumers.GLBAandtheapplicableGLBAregulationsrequireaninstitutionto,amongotherthings, developandmaintainacomprehensive,writteninformationsecurityprogramdesignedtoprotectagainstthe unauthorizeddisclosureofpersonallyidentifiablefinancialinformationofstudents,parents,orotherindividu - alswithwhomsuchinstitutionhasacustomerrelationship.Ifaninstitutionfailstocomplywiththeapplicable GLBArequirements,itmayberequiredtotakecorrectiveactions,besubjecttomonitoringandoversightbythe FederalTradeCommission,orFTC,andbesubjecttofinesorpenaltiesimposedbytheFTC.Institutionsarealso subjecttothegeneraldeceptivepracticesjurisdictionoftheFTCwithrespecttotheircollection,useanddisclo - sureofstudentinformation.InstitutionsmustalsocomplywiththeFTCRedFlagsRule,asectionofthefederal FairCreditReportingAct,whichrequirestheestablishmentofguidelinesandpoliciesregardingidentitytheft relatedtostudentcreditaccounts. Accessibility for Students with Disabilities. Section504oftheRehabilitationActof1973,orSection504,prohib - itsdiscriminationagainstapersonwithadisabilitybyanyorganizationthatreceivesfederalfinancialassistance, whichincludesus.In2010,ED’sOfficeforCivilRights,whichenforcesSection504,togetherwiththeDepartment ofJustice,assertedthatrequiringtheuseoftechnologyinaclassroomenvironmentwhensuchtechnologyis inaccessibletoindividualswithdisabilitiesviolatesSection504,unlessthoseindividualsareprovidedaccommo - dationsormodificationsthatpermitthemtoreceivealltheeducationalbenefitsprovidedbythetechnologyin anequallyeffectiveandintegratedmanner.Inrecentyears,ED’sOfficeforCivilRightshastakenenforcement actionagainstseveralinstitutionsofhighereducation,includingprimarilyonlineinstitutions,afterinvestigat - ingtheirwebsitesandonlinelearningmanagementplatformsanddeterminingthattheinstitutionswerenot incompliancewithSection504becausetheonlineresourceswerenotaccessibletopersonswithadisability.If oneofourinstitutionsisfoundtohaveviolatedSection504,itmayberequiredtomodifyexistingcontentand functionalityofitsonlineclassroomorotherusesoftechnology,includingthroughadoptionofspecifictechnical standards.AninstitutionthatdoesnotcomeintocompliancewithSection504couldloseaccesstofederalfund - ing,includingtheabilitytoparticipateintheTitleIVprogramsandDoDtuitionassistanceprograms. College Affordability and Transparency Lists. AsrequiredbytheHEOA,EDpublishesonitswebsitelistsofthe top5%ofinstitutions,ineachofninecategories,with(i)thehighesttuitionandfeesforthemostrecentaca - demicyear,(ii)thehighest“netprice”forthemostrecentacademicyear,(iii)thelargestpercentageincreasein tuitionandfeesforthemostrecentthreeacademicyears,and(iv)thelargestpercentageincreaseinnetprice forthemostrecentthreeacademicyears.Aninstitutionthatisplacedonalistforhighpercentageincreasesin eithertuitionandfeesorinnetpricemustsubmitareporttoEDexplainingtheincreasesandthestepsthatit intendstotaketoreducecosts.EDreportsannuallytoCongressontheseinstitutionsandpublishesitsreports 52 AmericanPublicEducation,Inc. onitswebsite.EDalsopostslistsofthetop10%ofinstitutionsineachoftheninecategorieswithlowesttuition andfeesorthelowestnetpriceforthemostrecentacademicyear.UndertheHEOA,netpricemeansaverage yearlypriceactuallychargedtofirst-time,full-timeundergraduatestudentswhoreceivestudentaidatahigher educationinstitutionaftersuchaidisdeducted.For2014-2015,APUSwaslistedastheinstitutionwiththeninth lowesttuitionandseventeenthlowestnetpriceamongprivatefor-profit,four-yearormoreinstitutions.Wecan - notpredictwithcertaintytheeffectsuchlistswillhaveonouroperations. College Scorecard. PresidentObamadirectedEDtodevelopandpublishanewcollegeratingssystembythe 2015-2016schoolyear.OnDecember19,2014,EDissuedaframeworkforthecollegeratingssystem.OnJune25, 2015,EDstatedthatinlieuofcreatingitspreviouslyannouncedcollegeratingssystem,itwouldinsteadcreate aconsumer-drivenwebsitethatwillallowuserstocomparecollegesbasedonmeasuresthatmaybeofimpor - tancetothem.InSeptember2015,EDpubliclyreleasedits“CollegeScorecard”website.Amongothercharac - teristics,theCollegeScorecardallowsuserstosearchforschoolsbaseduponprogramsoffered,location,size, taxstatus,mission,andreligiousaffiliation.WedonotbelievetheCollegeScorecardisanappropriateindicator ofAPUS’sgraduationratebecausetheCollegeScorecard’sgraduationrateincludesonlytheperformanceof firsttime,full-timeundergraduatestudents,whorepresentlessthanapproximately1%ofallAPUSstudents. Furthermore,substantiallyalloftheotherCollegeScorecardmeasuresarebasedondatacollectedonlyabout studentswhoreceiveTitleIVprogramaid.WhileasignificantportionofAPUSstudentsreceiveTitleIVprogram aid,intotaltheyareaminorityofAPUS’sstudents.WecannotpredicttheextenttowhichtheCollegeScorecard mayimpactourinstitution’senrollments,reputation,oroperatingresults. Third-Party Servicers. EDregulationspermitaninstitutiontoenterintoawrittencontractwithathird-partyser - vicerfortheadministrationofanyaspectoftheinstitution’sparticipationinTitleIVprograms.Thethird-party servicermust,amongotherobligations,complywithTitleIVrequirementsandbejointlyandseverallyliable withtheinstitutiontotheSecretaryofEducationforanyviolationbytheservicerofanyTitleIVprovision.An institutionmustreporttoEDnewcontractswith,oranysignificantmodificationstocontractswith,third-party servicersaswellasothermattersrelatedtothird-partyservicers.Ifanythird-partyservicerengagedbyoneof ourinstitutionsdoesnotcomplywithapplicablestatuteandregulationsincludingtheHEA,ourinstitutionmay beliableforitsactions,andourinstitutioncouldloseitseligibilitytoparticipateinTitleIVprograms. Title IV Return of Funds. UnderED’sreturnoffundsregulations,whenastudentwithdraws,aninstitutionmust returnunearnedfundstoEDinatimelymanner.AninstitutionmustfirstdeterminetheamountofTitleIV programfundsthatastudent“earned”beforewithdrawal.Ifthestudentwithdrawsduringthefirst60%ofany periodofenrollmentorpaymentperiod,theamountofTitleIVprogramfundsthatthestudentearnedisequal toaprorataportionofthefundsforwhichthestudentwouldotherwisebeeligible.Ifthestudentwithdraws afterthe60%threshold,thenthestudenthasearned100%oftheTitleIVprogramfunds.Theinstitutionmust returntotheappropriateTitleIVprograms,inaspecifiedorder,thelesserof(i)theunearnedTitleIVprogram fundsor(ii)theinstitutionalchargesincurredbythestudentfortheperiodmultipliedbythepercentageof unearnedTitleIVprogramfunds.Aninstitutionmustreturnthefundsnolaterthan45daysafterthedateofthe institution’sdeterminationthatastudentwithdrew. Iffundsarenottimelyreturned,aninstitutionmaybesubjecttoadverseaction,includingbeingrequired tosubmitaletterofcreditequalto25%oftherefundstheinstitutionshouldhavemadeinitsmostrecently completedfiscalyear.UnderEDregulations,latereturnsofTitleIVprogramfundsfor5%ormoreofstudents sampledintheinstitution’sannualcomplianceauditconstitutematerialnoncomplianceforwhichaninstitu - tiongenerallymustsubmitanirrevocableletterofcredit.HCON’sTitleIVcomplianceauditfortheyearended December31,2012,identifiedadeficiencyrelatedtotimelyreturnofTitleIVprogramfunds.InaPreliminary AuditDeterminationLetterdatedJuly10,2013,EDrequestedadditionalinformationfromHCONaboutthesitu - ationandrequiredHCONtoconductafilereviewtoidentifythosefilesthatreflectedaninaccuraterefund.Ina 2016 Annual Report 53 FinalAuditDeterminationLetterdatedFebruary28,2014,EDdeterminedthatHCONwasnotrequiredtorepay theliabilitytoEDanddirectedHCONtoadoptprocedurestopreventreoccurrence.HCONwasalsorequiredto postanirrevocableletterofcreditintheamountof$128,290,whichissettoexpireinJuly2017. Misrepresentation. UndertheHEAanditsimplementingregulations,EDmayfine,suspendorterminatethe participationinTitleIVprogramsbyaninstitutionthatengagesinsubstantialmisrepresentationregardingthe natureofitseducationalprogram,itsfinancialcharges,ortheemployabilityofitsgraduates.IntheBorrower DefenseRegulations,effectiveJuly1,2017anddiscussedinmoredetailbelow,EDrevisedthedefinitionof misrepresentationtoincludeomissionsofinformationandstatementswithalikelihoodortendencytomislead underthecircumstances.IntheBorrowerDefenseRegulations,thisdefinitionwasamendedformisrepresen - tationsforwhichEDmayimposeafineorlimit,suspend,orterminateparticipationinTitleIVprogramsand wasadoptedasabasisforallegingborrowerdefenseclaimsforDirectLoansfirstdisbursedafterJuly1,2017. Inthefuture,EDcouldpromulgateregulationsthatexpanditsroleinmonitoringandenforcingprohibitionson misrepresentation.ForinformationregardinganEDfindingofsubstantialmisrepresentationatHCONbased oncircumstancesthatoccurredpriortoouracquisitionofHCON,see“RegulatoryActionsandRestrictionson Operations—ChangeinOwnershipResultinginaChangeofControl.” Credit Hours. TheHEAandcurrentregulationsusetheterm“credithour”todefineaneligibleprogramandan academicyearandtodetermineenrollmentstatusandtheamountofTitleIVprogramfundsaninstitutionmay disburseduringapaymentperiod.TheProgramIntegrityRegulationsdefinethepreviouslyundefinedterm “credithour”intermsofacertainamountoftimeinclassandoutsideclass,oranequivalentamountofwork. TheProgramIntegrityRegulationsalsorequireaccreditingagenciestoreviewthereliabilityandaccuracyof aninstitution’scredithourassignments.Ifanaccreditoridentifiessystematicorsignificantnoncompliancein oneormoreofaninstitution’sprograms,theaccreditormustnotifytheSecretaryofED.IfEDdeterminesthat aninstitutionisoutofcompliancewiththecredithourdefinition,EDcouldrequiretheinstitutiontorepayany incorrectlyawardedamountsofTitleIVprogramfunds.Inaddition,ifEDdeterminesthataninstitutionhas significantlyoverstatedtheamountofcredithoursassignedtoaprogram,itmayfinetheinstitution,orlimit, suspend,orterminateitsparticipationinTitleIVprograms. VAWA and Clery. OnApril1,2014,anegotiatedrulemakingcommittee,convenedbyED,reachedconsensus onproposedregulationstoaddressimplementationofthechangesmadebytheViolenceAgainstWomen ReauthorizationActof2013,orVAWA,tosection485(f)oftheHEA,otherwiseknownastheJeanneClery DisclosureofCampusSecurityPolicyandCampusCrimeStatisticsAct,ortheCleryAct.OnOctober20,2014, EDpromulgatedfinalregulationstoimplementchangesmadebyVAWA,theFinalVAWARegulations.TheClery ActrequiresaninstitutiontoreporttoEDanddiscloseinitsannualsecurityreport,forthethreemostrecent calendaryears,statisticsconcerningthenumberofcertaincrimesthatoccurredonorwithintheinstitution’s so-called“Clerygeography.”UndertheFinalVAWARegulations,aninstitutionmustreportanddisclosestatistics about,forexample,crimesof“datingviolence,”“domesticviolence,”and“stalking,”asnewlydefinedbytheFinal VAWARegulations.Also,undertheFinalVAWARegulations,aninstitution’sannualsecurityreportmustinclude certainstatementsaboutwhataninstitutionwilldotoassistpersonswhoallegethattheyhavebeenavictim ofdatingviolence,domesticviolence,sexualassault,orstalking;inaddition,aninstitutionmustpublishinits annualsecurityreportproceduresforinstitutionaldisciplinaryactioninsuchcases.TheFinalVAWARegulations requireinstitutionstoprovide“primarypreventionprograms”forincomingstudentsandnewemployeesand “ongoingpreventionandawarenesscampaigns”forstudentsandemployees,andtodescribetheseprograms andcampaignsintheirannualsecurityreport.AfailuretocomplywiththeFinalVAWARegulationscouldresult inourinstitutionsbeingfinedorhavingtheireligibilitytoparticipateinTitleIVprogramslimited,suspended,or terminated,whichcould,inturn,adverselyaffectourinstitutions’enrollmentsandrevenueandhaveamaterial effectonourbusiness. 54 AmericanPublicEducation,Inc. Borrower Defenses. UndertheHEA,EDisauthorizedtospecifyinregulationswhichactsoromissionsofan institutionofhighereducationaborrowermayassertasadefensetorepaymentofaDirectLoan.OnNovember 1,2016,EDpublishedfinalregulationsconcerningthesedefensesandothermatters.ED’scurrentregulations permitaborrowertoassertaborrowerdefensetorepaymentofaDirectLoaniftheinstitution’sactsoromis - sionsgiverisetoacauseofactionagainsttheinstitutionunderstatelaw.Thefinalregulationscreateanew federalstandardforborrowerdefensestorepaymentofDirectLoans,newlimitationperiodsforsuchclaims, andnewprocessesforresolutionofsuchclaims.Underthefinalregulations,forloansfirstdisbursedpriorto July1,2017,EDwillconsideraborrowerdefenseclaiminaccordancewiththeexistingprovisions,i.e.,whether theinstitution’sactsoromissionsgiverisetoacauseofactionagainsttheinstitutionunderstatelaw.ForDirect LoansfirstdisbursedonorafterJuly1,2017,aborrowerwillbeabletoassertadefensetorepaymentbasedon oneofthreetypesofclaims: • breachofcontract,iftheinstitutionfailedtoperformitsobligationsunderthetermsofacontractwiththe student; • substantialmisrepresentation,iftheinstitutionoritsagentsmadeasubstantialmisrepresentationonwhich theborrowerreasonablyreliedtotheborrower’sdetrimentwhentheborrowerdecidedtoattendortocon - tinueattendingtheinstitution;or • judgmentagainsttheinstitution,ifagovernmentalagencyortheborrowerasanindividualoramemberof aclassobtainedanon-defaultfavorablejudgmentagainsttheinstitutionbeforeacourtoradministrative agency. Thefinalregulationsamendthedefinitionof“misrepresentation”toincludeomissionsofinformationandto includestatementswithalikelihoodortendencytomisleadunderthecircumstances.Thisdefinitionisadopted forpurposesoftheborrowerdefensesunderthenewregulationandalsoforpurposesofED’ssubstantial misrepresentationregulationsforwhichEDmayimposeafine,orlimit,suspend,orterminateaninstitution’s participationinTitleIVprograms. Underthefinalrules,aborrowerassertingbreachofcontractwillbeabletoassertadefensetorepaymentof amountsowedtothegovernmentatanytimeaftertheinstitution’sbreachandwillbeabletoassertarightto recoveramountsthegovernmentpreviouslycollectedforaperiodnotlaterthansixyearsafterthebreach.A borrowerassertingsubstantialmisrepresentationwillbeabletoassertadefensetorepaymentofamounts owedtothegovernmentatanytimeandwillbeabletoassertarighttoreceiveamountsthegovernmentpre - viouslycollectednotlaterthansixyearsaftertheborrowerdiscovers,orreasonablycouldhavediscovered,the informationconstitutingthesubstantialmisrepresentation.Aborrowerwillbeabletoassertadefensetorepay - mentorrighttoreceivepreviouslycollectedamountsbasedonajudgmentagainsttheinstitutionatanytime. Thefinalregulationssetforthtwoproceduresforborrowerdefenseclaims,oneforindividualborrowersand oneforgroupsofborrowersidentifiedbyED.Forclaimsfiledbyindividualborrowers,attheconclusionofa fact-findingprocess,EDwillissueafinaldecisionastothemeritoftheclaimsandanyreliefgrantedtothe borrower.EDwillbeabletoinitiateaseparateproceedingtocollectfromtheinstitutiontheamountofrelief grantedtotheborrower.ThegroupprocesswillallowEDtoidentifypotentialclaimsagainstaninstitutionon behalfofborrowerswhomayhavefiledindividualclaimsorwhomEDotherwiseidentifiesfromothersources. EDwillcollectfromtheinstitutionanyliabilityassessedagainsttheinstitutionforreliefgrantedtothegroupof borrowers. ForclaimsthatmayformthebasisforaborrowerdefensetorepaymentofaDirectLoan,theregulationsalso prohibitinstitutionsfromrequiringthatstudentsfirstengageintheinstitution’sinternalcomplaintprocess beforecontactingotheragencies,prohibittheuseofpre-disputearbitrationagreementsbytheinstitution,pro - hibittheuseofclassactionlawsuitwaivers,andrequireinstitutionstodisclosetoandnotifyEDofarbitration 2016 Annual Report 55 filingsandawards.Theseprocessesandprohibitionscouldhavetheeffectofincreasingthenumberof,andtime andexpensesnecessarytoresolve,studentclaims,whetherornotthoseclaimshavemerit.Thefinalregulations generallyareeffectiveJuly1,2017,exceptforcertainregulationsrelatedtostudenteligibilityforforbearance andsuspensionofcollectionactivity,whichareeffectiveimmediately,andrelatedtoautomaticclosedschool discharges,whichareeffectiveassoonasoperationallypossible.IfEDdeterminesthatborrowersofDirect LoanswhoattendedourinstitutionshaveadefensetorepaymentoftheirDirectLoans,ourrepaymentliability toEDcouldhaveamaterialadverseeffectonourfinancialcondition,resultsofoperations,andcashflows. WearecontinuingtoevaluatethepotentialeffecttheseregulationswillhaveonAPUSandHCON.However,itis andwillbechallengingtopredictfullythemannerandeffectoffullimplementationofthefinalregulationsfor anumberofreasons.Forexample,theregulationshaveabroadscopeandhaveonlybeenrecentlyadopted. Inaddition,EDhassaiditmayinthefutureissueadditionalguidanceandregulationsoncertainaspectsof thefinalregulations.OnJanuary30,2017,EDannouncedthatitintendstotakeunspecifiedregulatoryactions regardingthefinalregulations. Cash Management Regulations: OnOctober27,2015,EDannouncedthepublicationoffinalregulationsto amendED’scashmanagementregulations,whichwerefertoastheCashManagementRegulations.TheCash ManagementRegulationswereeffectiveJuly1,2016.Amongothertopics,theCashManagementRegulations addressarrangementsbetweenpostsecondaryinstitutionsandfinancialaccountproviderstodisburseTitleIV Programcreditbalancestostudents,includingthroughtheuseofdebitorprepaidcards.TheCashManagement RegulationsrequireinstitutionstoestablishaprocesstofacilitatestudentchoiceinhowstudentsreceiveTitle IVProgramfederalstudentfinancialaidcreditbalances;limitthepersonallyidentifiableinformationabout studentsthatmaybesharedwithfinancialaccountproviders;andrequireinstitutionstoobtainstudentcon - sentbeforeopeninganaccountinthestudent’sname.UndertheCashManagementRegulations,aninstitution thathasenteredintoanarrangementwithafinancialaccountprovidermustmitigatecertainfeesincurred byTitleIVaidrecipients,andcertaintypesoffeesareprohibited.TheCashManagementRegulationsrequire thatcontractsgoverningarrangementswithfinancialaccountprovidersbepubliclydisclosedandevaluatedin lightofthebestfinancialinterestsofstudents.TheCashManagementRegulationsalsomakeotherchangesto requirementsfortheinstitutionaladministrationofTitleIVPrograms,includingbyclarifyinghowpreviously passedcourseworkistreatedforTitleIVeligibilitypurposes,alteringtherequirementsforconvertingclock hourstocredithours,andupdatingotherprovisionsinED’scashmanagementregulations.Forexample,the CashManagementRegulationsestablisharequirementthatinstitutionsparticipatingintheTitleIVPrograms underthereimbursementorheightenedcashmonitoringpaymentmethodsmustpayanycreditbalancedueto astudentbeforeseekingreimbursementorarequestforfunds.TheCashManagementRegulationsalsospecify thecircumstancesunderwhichaninstitutionmayincludethecostofbooksandsuppliesaspartofinstitutional tuitionandfeeschargedtoastudent,suchasiftheinstitutionhasmadearrangementswithpublishersto obtainbooksatbelow-marketratesorifbooksorelectroniccoursematerialsarenotavailableelsewhere.The CashManagementRegulationsalsoexpandthegroupofstudentstowhomaninstitutionmustprovideaway toobtainorpurchase,bytheseventhdayofapaymentperiod,thebooksandsuppliesapplicabletothepay - mentperiod.Previously,aninstitutionwasrequiredtoprovidesuchassistanceonlytostudentswhoreceivePell Grants,butundertheCashManagementRegulations,aninstitutionwillberequiredtoprovidesuchassistance toanystudentwhoiseligibleforTitleIVProgramaid.Ourinstitutionsutilizeathird-partyservicertoprovide servicesrelatedtothedisbursementofTitleIVfinancialaidcreditbalancerefunds. DEPARTMENTOFDEFENSE ServicemembersoftheUnitedStatesArmedForcesareeligibletoreceivetuitionassistancefromtheirbranch ofservicethroughtheUniformTuitionAssistanceProgramoftheDoD,orDoDtuitionassistanceprograms. Servicemembersmayusethistuitionassistancetopursuepostsecondarydegreesatinstitutionsthatare 56 AmericanPublicEducation,Inc. accreditedbyaccreditingagenciesrecognizedbytheSecretaryofEducation.ForstudentsinAPUSundergrad - uateprograms,wehaveestablishedtuitionratespercredithourthatundercurrentDoDpoliciescanbe100% coveredbyDoDtuitionassistancefundsprovidedthatthestudentdoesnotexceedtheannuallimitsperstu - dent.Atthistime,HCONhassubmittedanapplicationtoparticipateinDoDtuitionassistanceprograms.Under aDoDfinalruleeffectiveJanuary7,2013,eachinstitutionparticipatinginDoDtuitionassistanceprogramsis requiredtosignaMemorandumofUnderstanding,orMOU,outliningcertaincommitmentsandagreements betweentheinstitutionandDoDpriortobeingpermittedtoparticipateintheDoDtuitionassistanceprograms. InMay2014,DoDpromulgatednewregulationsandarevisedMOU,the2014MOU.OnJuly7,2014,DoDreleased revisionstothe2014MOU,andAPUSsignedtherevised2014MOUinAugust2014.The2014MOUcontains requirementsandlimitationsthatwerenotcontainedinpreviousMOUstowhichAPUSwasaparty.Pursuant tothe2014MOU,amongotherrequirements,institutionsmust:explaincertainEDandConsumerFinancial ProtectionBureau,orCFPB,toolstoservicemembers,suchasED’s“CollegeNavigator”websiteandtheCFPB’s “PayingforCollege”website;complywithrequirementsrelatedtoreadmissionpoliciesforservicemembers; abidebynewlimitationsontheuseoffundsderivedfromtuitionassistance;provideadditionalacademicand studentsupportservices;discloseinformationabouttransferofcredit;incertaincircumstances,returntuition assistancefundstoDoD(suchaswhenastudentceasestoattendoraninstitutioncancelsacourse);offerto servicemembersloancounselingbeforeprivatestudentloansareofferedorrecommended;andcomplywith ED’sTitleIV“programintegrity”rules,includingrulesrelatedtoincentivepaymentsandmisrepresentation. The2014MOUalsoprovidesthataninstitutionmayonlyparticipateinDoDtuitionassistanceprogramsifit isaccreditedbyanaccreditingagencyrecognizedbyED,approvedforVAfunding,andaparticipantinTitleIV programs.Additionalinformationregardingthepotentialrisksassociatedwiththe2014MOUisprovidedinthe “RiskFactors”sectionofthisAnnualReport. OnMarch14,2013,DoDissuedaninstructionrestrictingtheabilityofservicemembersincertaindutylocations outsidethecontinentalUnitedStates,oroverseaslocations,toreceiveDoDtuitionassistanceforcoursesoffered byinstitutionsofhighereducationthatarenotpartiestocontractswiththeDoDtoprovideDoDvoluntaryedu- cationprogramsatthoselocations.BecausewedonothavecontractswiththeDoDtoprovideinstructionat overseaslocations,servicememberswhobeginapostsecondaryeducationprogramafterarrivalinanapplicable overseasdutylocationmaynotuseDoDtuitionassistanceprogramstopayfortheireducationinourprograms untilaftertheyhavealreadysuccessfullycompletedacoursewithaninstitutionthathasenteredintoacontractto providevoluntaryeducationprogramsatthatoverseaslocation.Servicememberswhowerealreadyenrolledin oneofourprogramsbeforearrivingatanoverseasdutylocationmaycontinuetoreceiveDoDtuitionassistance forthein-progressprogram,buttheywillbeencouragedtoenrollincoursesprovidedbyinstitutionsthathave enteredintocontractswiththeDoDtoprovideprogramsattheapplicableoverseasdutylocation. OnJanuary30,2014,theDoD,VA,ED,andFTC,incollaborationwiththeCFPBandDepartmentofJustice, announcedanewonlinestudentcomplaintsystemforservicemembers,veterans,andtheirfamiliestoreport negativeexperiencesateducationinstitutionsandtrainingprogramsadministeringthePost-9/11GIBill,DoD tuitionassistanceprograms,andothermilitary-relatededucationbenefitprograms.Thecomplaintsystemis designedtohelpthegovernmentidentifyandaddressunfair,deceptive,andmisleadingpractices.Thecom - plaintsystemisbasedonPresidentObama’sApril27,2012ExecutiveOrder13607,EO13607,whichrequires federalagenciestocreateacentralizedcomplaintsystemforstudentsreceivingfederalmilitaryandveterans educationalbenefitstoregistercomplaintsthatcanbetrackedandrespondedtobyrelevantagencies.An institutionhavingrecurringsubstantivecomplaints,ordemonstratinganunwillingnesstoresolvecomplaints, mayfacearangeofpenalties,includingrevocationofitsMOUandremovalfromparticipationintheDoDtuition assistanceprograms. 2016 Annual Report 57 DEPARTMENTOFVETERANSAFFAIRS TheVAadministerseducationbenefitsprovidedbyfederallaw,includingtheMontgomeryGIBill,orGIBill,and thePost-9/11VeteransEducationalAssistanceActof2008,orPost-9/11GIBill.Pursuanttofederallawrelated tothoseprograms,APUSisapprovedtoprovideeducationtoveteransandmembersoftheselectivereserve andtheirdependentsbythestateapprovingagenciesinWestVirginiaandVirginia.ProgramsateachofHCON’s campusesareapprovedforVAbenefitsbythestateapprovingagencyinOhio. ThePost-9/11GIBillexpandededucationbenefitsforveteranswhohaveservedonactivedutysinceSeptember 11,2001,includingreservistsandmembersoftheNationalGuard,aswellasbenefitsavailableundertheGI Bill.ThePost-9/11GIBillexpandedtheabilityofservicememberstotransfertheirbenefitstofamilymem - bers.ThePost-9/11GIBillalsoprovidesveteransupto$1,000peracademicyearforbooks,supplies,equip - ment,andothereducationcosts.ThePost-9/11VeteransEducationalAssistanceImprovementsActof2010,or ImprovementsAct,revisedthecalculationsofbenefitsrelatedtotuitionandfeesunderthePost-9/11GIBill.For aveteranattendinganon-publicU.S.institution,theImprovementsActprovidestuitionandfeesbasedonthe netcosttotheveteran(afteraccountingforstateandfederalstudentfinancialaid,scholarships,institutional aid,feewaivers,andsimilarassistance),upto$21,970.46fortheacademicyearfromAugust1,2016–July31, 2017.Veteranspursuingaprogramofeducationonamorethanhalf-timebasisatanon-campuslocationare eligibleforamonthlyhousingallowanceequaltothebasicallowanceforhousingavailabletoservicemembers whoareatamilitarypaygradeE-5andhavedependents.Veteranspursuingaprogramofeducationsolely throughdistanceeducationonamorethanhalf-timebasisareeligibletoreceive$805.50permonth. TotheextentthatDoDtuitionassistanceprogramsdonotcoverthefullcostoftuitionforservicemembers,eli - gibleservicemembersmayalsousetheirbenefitsundertheGIBillorthePost-9/11GIBillthroughthe“Top-Up” program.The“Top-Up”programallowsU.S.Militaryactive-dutyservicememberstousetheirGIBillorPost-9/11 GIBillbenefitstopaythedifferencebetweenthetotalcostofacollegecourseandtheamountofDoDtuition assistancethatispaidbythemilitaryforthecourse,butislimitedto36monthsofpayments. ADDITIONALSOURCESOFSTUDENTPAYMENTS InadditiontotheTitleIV,DoD,andVAprogramsdescribedabove,eligiblestudentsmayparticipateinseveral otherfinancialaidprogramsorreceivesupportfromothergovernmentalandprivatesources.Someofour studentsfinancetheirowneducationorreceivefullorpartialtuitionreimbursementfromtheiremployers.Our institutionsmayofferinterestfreepaymentplansoflessthan12monthstostudentstoassistthemwiththe financingofeducationalexpenses.Ourinstitutionsenterintoagreementswithvariousemployerswhoprovide employeetuitionreimbursementplans.Throughtheseagreementsourinstitutionsagreetoavarietyofterms, includingtermsrelatedtotheprovisionoftuitiongrantstoeligibleemployees.Incertaincircumstances,our studentsmayaccessalternativeloanprogramsfromprivatelenders.Alternativeloansfromprivatelenders areintendedtocoverthedifferencebetweenwhatthestudentreceivesfromallfinancialaidsourcesandthe student’stotalcostofattendance.Studentscanapplytoanumberofdifferentprivatelendersforthisfunding. Aspartofaninstitution’sTitleIVPPA,theinstitutionmustadoptacodeofconductpertainingtostudentloans, includingalternativeloans. CONSUMER PROTECTION CONSUMERFINANCIALPROTECTIONBUREAU TheCFPBhaspursuedenforcementactionsagainstcertainfor-profitinstitutionsofhighereducationandhas releasedseveralreportsthatdirectlyaddressissuesrelatedtoinstitutionsofhighereducation.InOctober 2016,theCFPBStudentLoanOmbudsmanreleaseditsannualreportanalyzingmorethan5,500complaintsthe 58 AmericanPublicEducation,Inc. CFPBreceivedfromprivatestudentloanborrowersbetweenSeptember1,2015andAugust31,2016,andmore than3,900federalstudentloanfinancingcomplaintstheCFPBreceivedfromfederalstudentloanborrowers betweenMarch1,2016andAugust31,2016.WedonotknowwhatenforcementactionstheCFPBmaypursue, orwhatstepsCongressorfederalagenciesmaytake,inresponsetothesereportsandwhethersuchactions(if any)willhaveanadverseeffectonourbusinessorresultsofoperations. InJuly2013,theCFPBissuedabulletinstatingthatanyentitysubjecttotheCFPB’sjurisdiction,whethera third-partycollectororacreditorcollectingitsowndebts,canbeheldaccountableforanyunfair,deceptive,or abusivepracticesincollectingaconsumer’sdebts.InNovember2013,theCFPBissuedanAdvancedNoticeof ProposedRulemakingannouncingthatitwasconsideringwhetherrulesgoverningthecollectionofdebtsare warrantedundertheFairDebtCollectionPracticesAct,orFDCPA,orotherCFPBauthorities,and,ifso,what typesofruleswouldbeappropriate.Aspartofitsproposedrulemaking,theCFPBsoughtcommentsabout applyingaregulatoryregimesimilartotheFDCPA,whichappliesonlytothird-partydebtcollectors,tofirst-party debtcollectors.ShouldtheCFPBissuerulesregulatingfirst-partydebtcollectors,suchrulesmightapplytoour institutions,whichmayadverselyimpactourcollectionsefforts. InAugust2015,theCFPBissuedacivilinvestigativedemand,orCID,toACICS,theaccreditingagencythataccred- itsHCON.TheCIDrequiredACICStoprovidedocumentsandtestimony,toidentifyallschoolsithasaccredited sinceJanuary1,2010,andtoidentifytheindividualsinvolvedinACICS’sreviewsofcertainschools,notpublicly identified.InSeptember2015,ACICSsubmittedapetitiontotheCFPBtosetasidetheCID,arguingthatACICS isnotundertheCFPB’sjurisdiction.ACICSarguedthatitdoesnotprovideanyfinancialproductorservicenor doesitassistorsupportitsaccreditedinstitutionsinprocuringandmaintainingloansfromED.InOctober2015, theCFPBrejectedACICS’spetitionandfiledapetitiontoenforcetheCIDintheUnitedStatesDistrictCourtfor theDistrictofColumbia.InApril2016,theDistrictCourtdeniedtheCFPB’spetitionanddismissedthecase.The CFPBappealedtheDistrictCourt’sdecisiontotheU.S.CourtofAppealsfortheDistrictofColumbia,whichheld oralargumentonFebruary2,2017.WeareunabletopredicttheimpactthattheCFPBCIDmayhaveonACICSor itspractices. OTHERISSUESRELATEDTOCONSUMERPROTECTIONANDCOMPLAINTS ConcurrentwithreleaseoftheFinalGERegulations,EDannouncedtheformationofaninteragencytaskforceto helpensureoversightoffor-profithighereducationinstitutions.ThetaskforceincludesED,theDepartmentsof JusticeandTreasury,VA,theCFPB,theFTC,andtheSecuritiesandExchangeCommission.Stateattorneysgen - eralalsohavebeeninvitedtoparticipate.Thepurposeofthetaskforceistocoordinatetheagencies’activities andpromoteinformationsharingtoprotectstudentsfromunfair,deceptive,andabusivepoliciesandpractices. EDexplainedthatthetaskforce,whichhaditsfirstofficialmeetinginMay2015,isexpectedtobuildonexisting effortsamongvariousfederalagencies. Manystateshavebecomemoreactiveinregulatingproprietaryeducationfromaconsumerprotectionperspec - tive,specificallyrelatedtoenforcementofconsumerprotectionlawsandimplementationofnewregulations bystateattorneysgeneral.Forexample,agroupofstateattorneysgeneral,ledbytheAttorneyGeneralof Kentucky,areexaminingthefor-profiteducationindustry.TheKentuckyAttorneyGeneral’swebsitereportsthat approximately30stateattorneysgeneralareparticipating.Whilewehaveastrongtrackrecordofregulatory compliance,suchactivities,evenifnotdirectedatoneofourinstitutions,maymakeouroperatingenvironment morechallenging. Ourinstitutionsarerecipientsofcomplaintsfiledwithstateregulatoryauthorities,theBetterBusinessBureau, andpostedinonlineforums.Ourinstitutionsattempttoresolvesuchcomplaintsinacooperativemanner. 2016 Annual Report 59 However,evenifsuchcomplaintsareresolvedorareotherwiseunfounded,theymaystillharmthereputation ofourinstitutions. COMPLIANCE WITH REGULATORY STANDARDS AND THE EFFECT OF REGULATORY VIOLATIONS COMPLIANCEREVIEWS Ourinstitutionsaresubjecttoannouncedandunannouncedcompliancereviewsandauditsbyvariousexter - nalagencies,includingED,itsOfficeofInspectorGeneral,statelicensingagencies,agenciesthatguarantee FFELProgramloans,DoD,VA,andaccreditingagencies.TheHEAandEDregulationsalsorequireinstitutionsto submitannuallyacomplianceauditconductedbyanindependentcertifiedpublicaccountantinaccordancewith GovernmentAuditingStandardsandapplicableEDOfficeofInspectorGeneralauditstandards.Inaddition,to enabletheSecretaryofEducationtomakeadeterminationoffinancialresponsibility,institutionsmustannually submitauditedfinancialstatementspreparedinaccordancewithEDregulations. TheDoDMOUrequiresinstitutionstoparticipateintheDoDThird-PartyAssessmenttoensurethattheinsti - tutionisincompliancewiththeDoDMOUandthatservicemembersareprovidedqualityvoluntaryeducation opportunitiesthatmeettheirneeds.Athird-partyassessmentofAmericanMilitaryUniversitywasconducted inJune2012,witharevisedreportsubmittedinOctober2012.Thereportstatedthat,basedontheassessment team’sfindings,AMUandAPUSwereincompliancewiththeDoDMOUthatAPUSexecuted. InSeptember2016,EDbeganaprogramreviewofAPUS’sadministrationoftheTitleIVprogramsduringthe 2014-2015and2015-2016awardyears.Aspartoftheprogramreview,EDconductedasitevisitfromSeptember 12toSeptember15,2016.Ingeneral,afterEDconductsitssitevisitandreviewsdatasuppliedbytheinstitution, ifEDidentifiesanyinstancesofnoncompliance,EDsendstheinstitutionapreliminaryprogramreviewreport. Theinstitutionhastheopportunitytorespondtothefindingsinthepreliminaryprogramreviewreport.ED thenissuesafinalprogramreviewdeterminationletter,whichidentifiesanyfindings,includinganyliabilities. Theinstitutionmayappealanymonetaryliabilitiesspecifiedinthefinalprogramreviewdeterminationletter.If EDdoesnotidentifyanyinstancesofnoncompliance,itissuesanexpeditedfinalprogramdeterminationletter insteadofapreliminaryprogramreviewreport.APUShasnotreceivedapreliminaryprogramreviewreportor expeditedfinalprogramdeterminationletter,andtheprogramreviewremainsopenandongoing.Atthistime, wecannotpredicttheoutcomeoftheprogramreview,whenitwillbecompleted,orwhetherEDwillplaceany liabilityorotherlimitationsonAPUSasaresultofthereview. POTENTIALEFFECTOFREGULATORYVIOLATIONS IfourinstitutionsfailtocomplywiththeregulatorystandardsgoverningTitleIVprograms,EDcouldimpose oneormoresanctions,includingtransferringourinstitutionstothereimbursementorcashmonitoringsystem ofpayment,seekingtorequirerepaymentofcertainTitleIVprogramfunds,requiringthepostingofaletterof creditinfavorofEDasaconditionforcontinuedTitleIVcertification,takingemergencyactionagainstourinsti - tutions,referringthematterforcriminalprosecution,orinitiatingproceedingstoimposeafineortolimit,con - dition,suspend,orterminateparticipationinTitleIVprograms.Ifsuchsanctionsorproceedingswereimposed againstourinstitutionsandresultedinasubstantialcurtailment,ortermination,ofparticipationinTitleIV programs,ourinstitution’senrollments,revenue,andresultsofoperationswouldbemateriallyandadversely affected.IfAPUS’sapprovaltoparticipateinTitleIVprogramsisterminated,APUSwillalsoloseitsabilityto participateinDoDtuitionassistanceprogramspursuanttotheDoDMOU,whichwouldmateriallyandadversely affectourenrollments,revenue,resultsofoperations,andfinancialcondition. 60 AmericanPublicEducation,Inc. IfoneofourinstitutionsweretoloseitseligibilitytoparticipateinTitleIVprograms,oriftheamountofavail - ableTitleIVprogramfundswerereduced,wecouldseektoarrangeorprovidealternativesourcesofrevenueor financialaidforstudents.Althoughwebelievethatoneormoreprivateorganizationswouldbewillingtopro - videfinancialassistancetostudentsattendingourinstitutions,thereisnoassurancethatthiswouldbethecase, andtheinterestrateandothertermsofsuchfinancialaidmightnotbeasfavorableasthoseforTitleIVprogram funds.Wemayberequiredtoguaranteeallorpartofsuchalternativeassistanceormightincurotheradditional costsinconnectionwithsecuringalternativesourcesoffinancialaid.Accordingly,thelossofoureligibilityto participateinTitleIVprograms,orareductionintheamountofavailablefederalstudentfinancialaid,wouldbe expectedtohaveamaterialadverseeffectonourfinancialconditionandresultsofoperationsevenifwecould arrangeorprovidealternativesourcesofrevenueorstudentfinancialaid. Inadditiontotheactionsthatmaybebroughtagainstusasaresultofourinstitutions’participationinTitleIV programs,wealsomaybesubject,fromtimetotime,tocomplaintsandlawsuitsrelatingtoregulatorycompli - ancebroughtnotonlybyourregulatoryagencies,butalsobyothergovernmentagenciesandthirdparties,such aspresentorformerstudentsoremployeesandothermembersofthepublic. REGULATORY ACTIONS AND RESTRICTIONS ON OPERATIONS Manyactionsthatwemaywishtotakeinconnectionwithouroperationsarealsosubjecttoregulationfrom avarietyofagencies.ED’sregulations,stateregulatoryrequirementsandaccreditingagencystandardsmay, incertaininstances,limitourabilitytoacquireorsellinstitutions,andtoestablishadditionallocationsand programs.Manystatesrequireapprovalbeforeinstitutionscanaddnewprograms,campuses,orteaching locations.HLC,WVHEPC,SCHEV,ACICS,theOhioStateBoardofCareerCollegesandSchools,andtheOhio DepartmentofHigherEducationgenerallyrequireinstitutionstonotifythem,andsometimesrequireinstitu - tionstoobtaintheirapproval,inadvanceofopeninganewlocationorimplementingnewprograms. CHANGEINOWNERSHIPRESULTINGINACHANGEOFCONTROL ED’sregulations,stateregulatoryrequirementsandaccreditationstandardsmaylimitourabilitytoacquire, merge,orsellinstitutions,andmayimposerestrictionsonactivitiesfollowingatransaction.Theserestrictions mayimpedeourabilitytogrowbyacquisition,ortodisposeofassets,whichmayhaveamaterialadverseeffect onourfinancialcondition. Achangeincontrolcouldoccurasaresultoffuturetransactionsinwhichweareinvolved,suchascorporate reorganizationsorchangesintheBoardofDirectors.Moreover,asapubliclytradedcompany,thepotential adverseeffectsofachangeincontrolcouldinfluencefuturedecisionsbyusandourstockholdersregarding thesale,purchase,transfer,issuance,orredemptionofourstock.Inaddition,theregulatoryburdensandrisks associatedwithachangeofcontrolcoulddiscouragebidsforyoursharesofcommonstockandcouldhavean adverseeffectonthemarketpriceofyourshares. U.S. Department of Education TheHEAprovidesthataninstitutionthatundergoesachangeinownershipresultinginachangeincontrol losesitseligibilitytoparticipateinTitleIVprogramsandmustapplytoEDinordertoreestablishsucheligibility. ED’sregulationsprovidethatachangeincontrolofapubliclytradedcompanyoccursinoneoftwoways:(i)if thereisaneventthatwouldobligatethecorporationtofileaCurrentReportonForm8-KwiththeSecurities andExchangeCommissiondisclosingachangeincontrol;or(ii)ifthecorporationhasastockholderthatowns atleast25%ofthetotaloutstandingvotingstockofthecorporationandisthelargeststockholderofthecorpo - ration,andthatstockholderceasestoownatleast25%ofsuchstock,orceasestobethelargeststockholder. Asaresult,asignificantpurchaseordispositionofourvotingstock,includinganacquisitionresultingina 2016 Annual Report 61 stockholderowningatleast25%ofouroutstandingstock,couldbedeterminedbyEDtobeachangeinowner - shipandcontrolpursuanttoED’sregulations. Uponachangeinownershipandcontrol,aninstitutionisineligibletoreceiveTitleIVprogramfundsduringthe periodpriortorecertification.TheHEAprovidesthatEDmaytemporarilyprovisionallycertifyaninstitution seekingapprovalofachangeinownershipandcontrolbasedonpreliminaryreviewofamateriallycomplete applicationreceivedwithin10businessdaysafterthetransaction.EDmaycontinuesuchtemporaryprovisional certificationonamonth-to-monthbasisuntilithasrenderedafinaldecisionontheinstitution’sapplication.If EDdeterminestoapprovetheapplicationafterachangeinownershipandcontrol,itissuesaprovisionalcerti - fication,whichextendsforaperiodexpiringnotlaterthantheendofthethirdcompleteawardyearfollowing thedateofprovisionalcertification.ED’sregulationsdescribesometransactionsthatconstituteachangein ownershipandcontrol,includingthetransferofacontrollinginterestinthevotingstockofaninstitutionorthe institution’sparentcorporation. Whenachangeinownershipandcontroloccurs,EDappliescertainfinancialteststodeterminethefinancial responsibilityoftheinstitutioninconjunctionwithitsreviewandapprovalofthechange.Theinstitutiongener - allyisrequiredtosubmitasame-dayauditedbalancesheetreflectingthefinancialconditionoftheinstitution immediatelyfollowingthechangeinownership.Theinstitution’ssame-daybalancesheetmustdemonstratean acidtestratioofatleast1:1,whichiscalculatedbyaddingcashandcashequivalentstocurrentaccountsreceiv - ableanddividingthesumbytotalcurrentliabilities(andexcludingallunsecuredoruncollateralizedrelated partyreceivables).Thesame-daybalancesheetmustdemonstratepositivetangiblenetworth.Inaddition,when achangeinownershipandcontroloccursandthereisanewowner,theinstitutionmustsubmittoEDaudited financialstatementsoftheinstitution’snewowner’stwomostrecentlycompletedfiscalyearsthatareprepared andauditedinaccordancewithEDrequirements.EDmaydeterminewhetherthefinancialstatementsmeet financialresponsibilitystandardswithrespecttothecompositescoreformula.Iftheinstitutiondoesnotsatisfy theserequirements,EDmayconditionitsapprovalofthechangeofownershipontheinstitution’sagreement tolettersofcredit,provisionalcertification,andadditionalmonitoringrequirements.Thecompositescore formulaandrelatedEDconditionsaredescribedmorefullyabovein“StudentFinancingSourcesandRelated Regulations/Requirements—DepartmentofEducation—RegulationofTitleIVFinancialAidPrograms—Financial Responsibility.”Ifthenewownerdoesnothavetherequiredauditedfinancialstatements,EDmayimposecer - tainrestrictionsontheinstitution,includingwithrespecttoaddinglocationsandprograms. OnNovember1,2013,asaresultofourpurchaseofalloftheoutstandingstockinNationalEducationSeminars, Inc.,HCONwasdeemedtohaveundergoneachangeofownershipandcontrolrequiringreviewbyEDinorder toreestablisheligibilityandcontinueparticipationinTitleIVprograms.AsrequiredunderED’sregulations,we timelysubmittedachangeinownershipapplicationandrequireddocumentation.AspartofED’spost-clos - ingreview,inMayandDecember2014,EDrequestedadditionalinformationrelatedtoaputativeclassaction broughtagainstHCONbytwoformerHCONstudentsthatwassettledinexchangeforademinimissettlement payment,withHCONadmittingtonowrongdoing;weprovidedtherequestedinformationtoEDshortlyafter itwasrequested.OnDecember4,2015,EDsentHCONaletterinformingHCONthatEDhaddeterminedtofine HCON$27,500.ThefinewasbasedonED’sreviewofthesubmittedinformationandafindingthatHCONhad substantiallymisrepresenteditsprogrammaticaccreditationstatusduringatimeperiodpriortoourownership ofHCON.OnDecember18,2015,HCONrespondedtoEDinaletterinwhichitnoteditsdisagreementwithED’s findingsbutinformedEDofitsdecisiontopaythefineinordertopromptlyresolvethematterandtoenableED tofinalizeitsreviewoftheapplicationforachangeinownership.HCONpaidthefineinDecember2015. InJanuary2016,wereceivedaletterfromEDapprovingthechangeinownershipandcontrolofHCONandgrant- ingHCONprovisionalcertificationtoparticipateinTitleIVprogramsuntilDecember31,2018.HCONreceiveda fullyexecutedprovisionalprogramparticipationagreement,orPPPA,inFebruary2016.HCONmustcomplywith 62 AmericanPublicEducation,Inc. specificconditionswhileitisprovisionallycertified,asdescribedmorefullyin“RestrictionsonAddingLocations andEducationalPrograms,”below.Asdescribedin“RegulatoryEnvironment—Accreditation,”inconnectionwith ED’sdecisiontoterminaterecognitionofACICS,onDecember21,2016,HCONandEDexecutedarevisedPPPA andaddendumtothePPPApursuanttowhichHCONagreedtocomplywithcertainconditionsandrequirements whileHCONpursuesaccreditationbyanotheraccreditingagencyrecognizedbyED. State Regulatory Agencies Manystatesrequireinstitutionsofhighereducationtoreportorobtainapprovalofcertainchangesinowner - shiporotheraspectsofinstitutionalstatus,butthetypesofandtriggersforsuchreportingorapprovalvary amongstateregulatoryagencies.Manystatesincludethesaleofacontrollinginterestofcommonstockinthe definitionofachangeincontrolrequiringapproval.Achangeincontrolunderthedefinitionsofastateagency thatregulatesusmayrequireustoobtainapprovalofthechangeinownershipandcontrolinordertomaintain ourstateapproval.Undercertaincircumstances,WVHEPCandtheSCHEVmayrequireustoseekapprovalof changesinownershipandcontrolinordertomaintainAPUS’sstateauthorizationorlicensure. Wewererequiredtoseek,andweobtained,approvalfromtheOhioStateBoardofCareerCollegesandSchools andtheOhioDepartmentofHigherEducationforthechangeinownershipandcontrolofHCON.Inthefuture, ifweattempttoacquireotherinstitutions,thestatesregulatingthetargetinstitutionsmayrequireustoseek approval,whichmayormaynotbegranted. Accreditors Manyaccreditingagenciesrequireinstitutionsofhighereducationtoreportorobtainapprovalforcertain changesinownershiporotheraspectsofinstitutionalstatus,butthetypesofandtriggersforsuchreportingor approvalvary. HLC,theaccreditingagencyforAPUS,requiresHLCaccreditedinstitutionstoinformHLCinadvanceofany substantivechange.ExamplesofsubstantivechangesrequiringadvancenoticetoHLCincludechangesinthe legalstatus,ownership,orformofcontroloftheinstitution,suchasthesaleofafor-profitinstitution.HLCmust approveasubstantivechangeinadvanceinordertoincludethechangeintheinstitution’saccreditationstatus. HLCalsorequiresanon-siteevaluationwithinsixmonthstoconfirmtheappropriatenessoftheapproval. HLCoversightextendstodefinedchangesthatoccurinaninstitution’sparentorcontrollingentity,andnot necessarilyintheinstitutionitself.Actionsby,orrelatingto,anaccreditedinstitution,includingasignificant acquisitionofanotherinstitution,significantchangesinboardcompositionororganizationaldocuments,and accumulationsbyonestockholderofgreaterthan25%ofthecapitalstockcouldtriggeradditionalreviewsofthe institutionandpossiblechangefromaccreditedstatustocandidatestatus,whichenhancestherisksassociated withthesetypesofactions.Inparticular,achangefromaccreditedstatustocandidatestatuscouldadversely impactaninstitution’sabilitytoparticipateinTitleIVprograms,whichinturnwouldimpacttheinstitution’s abilitytoparticipateinDoDtuitionassistanceprograms. ACICS,theaccreditingagencyforHCON,requiresACICS-accreditedinstitutionstoinformACICSinadvanceof anysubstantivechange.ExamplesofsubstantivechangesrequiringadvancenoticetoACICSincludechanges inthelegalstatus,formofcontrol,orownershipoftheinstitution.AninstitutionmustnotifyACICSofachange ofownershipatleast15daysbeforeconsummatingtheproposedchange,andACICSmustacttoreinstatethe institution’saccreditationstatusafterthechangeofownership.ACICSalsorequiresanon-siteevaluationwithin sixmonthstoconfirmtheappropriatenessoftheapproval.HCONtimelynotifiedACICSoftheNovember1, 2013,changeofownership,andonDecember20,2013,ACICSgrantedtoHCONareinstatementofaccreditation throughDecember31,2016,effectivefromthedateofthechange.ACICSconductedon-sitequalityassurance 2016 Annual Report 63 visitsinthesummerof2014,andfoundHCONtobeincompliancewithaccreditationcriteria.Duringthefirst quarterof2016,ACICSconductedasitevisitateachofHCON’scampusesaspartofACICS’evaluationofHCON’s renewalofaccreditationapplication.In2016,ACICSreaffirmedHCON’sClevelandcampusaccreditationthrough December31,2020,itsCincinnatiandDaytoncampuses’accreditationthroughDecember31,2021andits Columbuscampus’accreditationthroughDecember31,2022.See“RegulatoryEnvironment—Accreditation”for adiscussionofthedecisionbyEDtoterminatetherecognitionofACICSasarecognizedaccreditingagency. Shouldweattempttoenterintotransactionswithinstitutionsaccreditedbyotheraccreditors,wewouldbe requiredtofollowtherequirementsofsuchaccreditors.Ourmanagementmaynothaveexperiencewiththe accreditorsofthetargetinstitution,whichwouldincreasetherisksrelatedtosuchatransactionandmanage - mentoftheinstitutionsubsequenttothetransaction. Other Agencies Pursuanttofederallawprovidingbenefitsforveteransandreservists,APUSisapprovedforeducationof veteransandmembersoftheselectivereservesandtheirdependentsbythestateapprovingagenciesinWest VirginiaandVirginia.ProgramsateachofHCON’scampusesareapprovedforVAbenefitsbythestateapprov - ingagencyinOhio.Incertaincircumstances,stateapprovingagenciesmayrequireaninstitutiontoobtain approvalforachangeinownershipandcontrol.ThestateapprovingagencyinOhioapprovedtheNovember1, 2013,changeofownershipofHCON.However,thereisnoguaranteethatrelevantstateapprovingagencieswill approvefuturetransactions. RESTRICTIONSONADDINGLOCATIONSANDEDUCATIONALPROGRAMS EDmay,asaconditionofcertificationtoparticipateinTitleIVprograms,requirepriorapprovalofnewcampus locations,programsorotherwiserestrictthenumberofprogramsaninstitutionmayadd.ED’sregulationsalso requirethatitapproveanychangeinownershipresultinginachangeofcontrol.Asdescribedabovein“Change inOwnershipResultinginaChangeofControl,”HCONwasdeemedtohaveundergoneachangeofownership andcontrolonNovember1,2013,requiringreviewbyEDinordertoreestablisheligibilityandcontinuepartic - ipationinTitleIVprograms.InJanuary2016,wereceivedaletterfromEDapprovingthechangeinownership andcontrolofHCONandgrantingHCONprovisionalcertificationtoparticipateintheTitleIVprogramsuntil December31,2018.HCONreceivedafullyexecutedProvisionalProgramParticipationAgreement,orPPPA,in February2016.Whileprovisionallycertified,HCONoperatesunderthePPPA,whichrequiresHCONtoapplyfor andreceiveapprovalfromtheSecretaryofEducationbeforeinitiatinganysubstantialchanges,suchasestab - lishinganadditionallocationatwhichatleast50%ofaneligibleprogramwillbeofferedandTitleIVprogram fundswillbedisbursed,offeringacademicprogramsathigherthanthebachelor’sdegreelevel,oraddinganew educationprogram.Inaddition,asdescribedabovein“Accreditation,”inconnectionwiththeSecretaryofED’s decisiontowithdrawandterminateED’srecognitionofACICS,onDecember21,2016,HCONandEDexecuted arevisedPPPAandaddendumtothePPPAinwhichHCONagreedtocomplywithadditionalconditionsand requirements,andunderwhichEDhassaidthatitwillapproveadditionoflocationsoreducationalprograms onlyinlimitedcircumstances. TheHEArequiresproprietaryinstitutionsofhighereducationtobeinfulloperationfortwoyearsbeforequal - ifyingtoparticipateinTitleIVprograms.However,theapplicableregulationsinmanycircumstancespermitan institutionthatisalreadyqualifiedtoparticipateinTitleIVprogramstoestablishadditionalcampuslocations thatareexemptfromthetwo-yearrule.Thenewcampuslocationmustsatisfyallotherapplicablerequirements forinstitutionaleligibility,includingapprovaloftheadditionalcampuslocationbytherelevantstateauthorizing agencyandtheinstitution’saccreditingagency.ED’sregulationsalsorequireinstitutionstoreportand,incer - taincases(suchaswhenaninstitutionisprovisionallycertified),toseekapprovalforanewadditionalcampus 64 AmericanPublicEducation,Inc. locationatwhichatleast50%ofaneligibleprogramwillbeofferediftheinstitutionwantstodisburseTitleIV programfundstostudentsenrolledatthatlocation.Institutionsareresponsibleforknowingwhethertheyneed approval,andinstitutionsthataddlocationsanddisburseTitleIVprogramfundswithouthavingobtainedany necessaryapprovalmaybesubjecttoadministrativerepaymentsandothersanctions.UnderthePPPAandthe addendumtothePPPA,HCONmustobtainEDapprovalfortheadditionofanyadditionallocationatwhichat least50%ofaneligibleprogramwillbeofferedandTitleIVprogramfundswillbedisbursed. Afullycertifieddegree-grantinginstitutiongenerallyisnotobligatedtoobtainED’sapprovalofanadditional programleadingtoadegreeatthesamelevelpreviouslyapprovedbyED.Similarly,afullycertifiedinstitution generallyisnotrequiredtoobtainadvanceapprovalforanewprogramthatbothpreparesstudentsforgainful employmentinthesameorrelatedrecognizedoccupationasaneducationalprogramthathaspreviouslybeen designatedasaneligibleprogramatthatinstitutionandmeetscertainminimum-lengthrequirements.However, asaconditionofcertificationtoparticipateinTitleIVprograms,EDcouldrequirepriorapprovalofsuchpro - gramsorotherwiserestrictthenumberofprogramsaninstitutionmayadd.Intheeventthataninstitutionis requiredtoobtainED’sapprovalfortheadditionofanewprogram,failstodoso,anderroneouslydetermines thattheneweducationalprogramiseligibleforTitleIVprogramfunds,theinstitutioncouldbeliableforrepay - mentofTitleIVprogramfundsreceivedbytheinstitutionorstudentsinconnectionwiththatprogram. RECENT LEGISLATIVE AND ED ACTIVITY FEDERALLEGISLATIVEACTIVITY Asaresultofbudgetarypressures,Congresshasenactedseveralpiecesoflegislationthatimpactthefunding ofTitleIVandothertuitionassistanceprograms.Duetothesubstantialamountoffederalfundsdisbursedto schoolsthroughTitleIVprograms,thelargenumberofstudentsandinstitutionsparticipatinginthesepro - grams,andsignificantpoliticalinterestinthecostofeducation,Congresscontinuestoshowinterestinregula - tionandoversightofinstitutionsofhighereducation,especiallythosethatarefor-profit. Sequestration and Budgetary Matters OnAugust2,2011,CongresspassedtheBudgetControlActof2011thatputintoplaceaseriesofautomaticfed - eralbudgetcuts,knownassequestration.Thebudgetcuts,orsequestration,impactcertainfederalstudentaid programseffectiveforfiscalyear2013.WhilethePellGrantprogramwasspecificallyexemptedfromtheeffects ofsequestrationinfiscalyear2013,andtheFiscalYear2016OmnibusAppropriationsBillincreasedthemaxi - mumawardto$5,920inthe2017-2018awardyear,thePellGrantprogramcouldbesubjecttocutsorchanges inthefuture.WhilesequestrationdoesnototherwisechangetheamountortermsorconditionsofDirectLoan Programloans,includingStaffordLoansandPLUSLoans,itraisestheloanfeepaidbyborrowersforDirectLoan ProgramloansdisbursedafterMarch1,2013.CutstoED’sadministrativebudgetcouldleadtodelaysinstudent eligibilitydeterminations,anddelaysinoriginationandprocessingoffederalstudentloans. Aftersequestrationtookeffect,theArmy,AirForce,CoastGuard,andMarineCorpsannouncedthesuspen - sionoftheirtuitionassistanceprograms.CongresssubsequentlyapprovedlegislationrequiringDoDtorestore itstuitionassistanceprograms.InOctober2013,theDoDtuitionassistanceprogramswereagaintemporarily suspendedasaresultoftheU.S.governmentpartialshutdown.Eachbranchofthemilitaryrestoreditstuition assistanceprogramthroughfiscalyear2014.Asaresultofcontinueduncertaintyabouttheavailabilityoffund - ing,severalofthemilitarybranchesannouncedchangestotheirtuitionassistancesprogramsthattookeffect infederalfiscalyear2014.Forexample,theAirForceisnolongerauthorizingtuitionassistanceforassociate degreesiftheservicememberalreadyhasanassociatedegreefromtheCommunityCollegeoftheAirForce,the ArmynowrequiresservicememberstocompleteoneyearofserviceaftergraduationfromAdvancedIndividual Traininginordertobeeligiblefortuitionassistanceandhasreducedthetotalbenefitperservicememberper 2016 Annual Report 65 yearfrom$4,500to$4,000,andtheMarineCorpsnowrequiresMarinestohave24monthsonactivedutyprior tobeingeligibletoapplyforTA.InOctober2015,theCoastGuardrestoredtuitionassistancefundingto$250 percredithour,anincreasefromthepreviouscapof$187.50percredithour,whichwasimplementedin2014. Additionalchangestothetuitionassistanceprogramscouldoccur,includingduetoCongressionalactionorDoD policyandfundingchanges. OnDecember10,2016,theU.S.Congressenactedacontinuingresolutiontoextendfundingforthefederal government,includingtheDoD,throughApril28,2017;however,iffundingisnotextendedbeyondthatdatea governmentshutdowncouldoccurresultinginasuspensionofDoDtuitionassistanceprograms.Agovernment shutdownorsuspensionofDoDtuitionassistanceprogramscouldhaveamaterialadverseeffectonouropera - tionsandfinancialcondition. Higher Education Act TheHEAmustbeperiodicallyreauthorizedbytheU.S.CongressandeachTitleIVprogrammustbefunded throughappropriationsactsonanannualbasis.Themostrecentcomprehensivereauthorizationoccurred in2008,whenCongressreauthorizedmostHEAprogramsthroughthe2014federalfiscalyearbypassing theHEOA.AlthoughthecurrentHEAauthorizationexpiredattheendofthe2014federalfiscalyear,the ConsolidatedAppropriationsAct,2016,extendedfundingforTitleIVprogramsthroughSeptember30,2017. CongresscontinuestodiscussreauthorizationoftheHEA.AmendmentstotheHEAcouldoccurduringreau - thorization,whichcouldrequireustomodifyourbusinesspracticesandincreaseadministrativecosts,thereby negativelyimpactingourresultsofoperations. REGULATORYACTIVITY ED’s Accreditation Initiative OnNovember6,2015,EDannouncedseveralexecutiveactionstoincreasetransparencyandrigorinaccred - itation.EDannouncedthelaunchofanewEDwebsiteonwhichithaspublishedeachaccreditor’scurrent standardsrelatedtostudentoutcomesandstudentandinstitutionalmetrics.EDwillrequireallaccreditorsto forwardtoEDprobationdecisionletters,thepubliclyreleasableportionsofwhichEDwillpublishonitsweb - site.EDalsoannouncedtherequestofareportonstrategiestoimproveinformationcoordinationbetween andamongaccreditorsandED.EDannouncedthatitwillensuredecision-makersintheaccreditorrecognition process,suchasmembersofNACIQI,haveinformationincludingoutcomesdata,stateandfederallitigation reports,andotherinformationaboutinstitutionsaccreditedbyeachaccreditingagency.Acknowledgingthatits authorityrelatedtoaccreditationandstudentoutcomesisrestrictedundertheHEA,EDalsomadeseveralpro - posalsforlegislativechangerelatedtoaccreditation.IncreasedscrutinyofaccreditingagenciesbytheSecretary ofEducationandCongressinconnectionwithED’srecognitionprocessmayresultinincreasedscrutinyofinsti - tutionsbyaccreditingagencies. ED’s Student Aid Enforcement Unit OnFebruary8,2016,EDannouncedthecreationofaStudentAidEnforcementUnit,ortheEnforcementUnit, toenableEDtorespondmorequicklyandefficientlytoallegationsofillegalactionsbyhighereducationinsti - tutions.TheEnforcementUnitconsistsoffourdivisionsincludinganInvestigationsGroup,aBorrowerDefense Group,anAdministrativeActionsandAppealsServiceGroup,andaCleryGroup.TheEnforcementUnitcollab - orateswithpartnerstateandfederalagenciestoenforceviolationsoflaw.TheEnforcementUnitalsoworks withED’sProgramComplianceUnittoreviewevidencethatmayaffectprogramreviews.Thecreationofthe EnforcementUnitwasdesignedtoensurethatEDcansupportmorereviewsofwhatitreferstoas“high-risk 66 AmericanPublicEducation,Inc. institutions,”respondtoconcernsraisedbystates’andotherfederalagencies’investigations,andrespond tocomplaintsandclaimsforloanforgivenessbystudents.TheEnforcementUnitisledbyalawyerwhomost recentlyledtheFTC’sconsumerprotectionunit.EDhasindicatedthattheInvestigationsGroupwillutilizea broadsetofinterventionsandtools,includingsubpoenaauthority,documentdemands,andinterrogatoriesand interviewstoenforceagainstviolationsoffederallaw. Other Federal Rulemakings OnOctober30,2015,EDpublishedfinalrulestoamendtheregulationsgoverningtheDirectLoanProgramto createanewincome-contingentrepaymentplan,theRevisedPayAsYouEarnrepaymentplan,orREPAYE,in accordancewiththePresident’sinitiativetoallowmoreDirectLoanborrowerstocaptheirloanpaymentsat 10%oftheirmonthlyincomes.Inaddition,theregulationsalsoimplementchangestotheFFELProgramand DirectLoanProgramtostreamlineandenhanceexistingprocessesandprovideadditionalsupporttostrug - glingborrowers,including,amongotherthings,establishingnewproceduresforFFELProgramloanholdersto identifyservicememberswhomaybeeligibleforbenefitsundertheServicemembersCivilReliefAct.Thefinal rulesalsoexpandthecircumstancesunderwhichaninstitutioncouldchallengeorappealadraftorfinalcohort defaultratebasedontheinstitution’sparticipationrateindex.ThefinalruleswereeffectiveJuly1,2016. The States Asdiscussedabovein“ConsumerProtection—OtherIssuesRelatedtoConsumerProtectionandComplaints,” manystateshavebecomemoreactiveinregulatingproprietaryeducationfromaconsumerprotectionperspec - tive,specificallyinregardstoenforcementofconsumerprotectionlawsandimplementationofnewregulations bystateattorneysgeneral.Sinceourinstitutionsoperateinmanyjurisdictions,ourinstitutionsmaybesubject toregulationspromulgatedbyavarietyofregulators. 2016 Annual Report 67 ITEM1A.RISKFACTORS Investing in our common stock involves a high degree of risk. Before making an investment in our common stock, you should carefully consider the following risks, as well as the other information contained in this Annual Report, includ- ing our “Financial Statements and Supplementary Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Any of the risk factors described below could significantly and adversely affect our business, financial condition, operating results, cash flows, and prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe are not material may also adversely affect our business, financial condition, operating results, cash flows, and prospects. As a result of the risks and uncertainties described below as well as such additional risks and uncertainties, the trading price of our common stock could decline, and you may lose all or part of your investment. RISKS RELATED TO ATTRACTING AND RETAINING STUDENTS Our success and financial performance depends on the effectiveness of our ability to attract students that persist in our institutions’ programs. Buildingawarenessofourinstitutionsandtheprogramstheyofferamongpotentialstudentsiscriticaltoour institutions’abilitytoattractnewstudents.Inordertomaintainandincreaseourrevenueandprofits,our institutionsmustcontinuetoattractnew,qualifiedstudentsinacost-effectivemanner,andthesestudentsmust remainactiveinourinstitutions’programs.Inaddition,becauseourinstitutionsexperiencedeclinesintheir studentpopulationasaresultofgraduation,transferstootheracademicinstitutions,militarydeploymentsand otherreasons,inordertogrowweneedtofirstattractsufficientstudentstoreplacethosewhohaveleft.Some ofthefactorsthatcouldpreventusfromsuccessfullyadvertisingandmarketingourinstitutions’programsand fromsuccessfullyenrollingandretainingqualifiedstudentsinthoseprogramsinclude: • changesandrevisionstopoliciesoftheDepartmentofDefense,orDoD,andthevariousmilitaryservices; • challengesinmaintainingstrongrelationshipswithmilitaryandmilitary-affiliatedcommunities; • theemergenceofmore,andmoresuccessful,competitors,andalternativeeducationmodels; • factorsrelatedtoourinstitutions’marketing,includingthecostsofInternetadvertisingandmulti-faceted interactivemarketingcampaigns; • challengesindesigningmarketingcampaignsthatsuccessfullyattractcollege-readystudents; • thereducedavailabilityof,orhigherinterestratesandothercostsassociatedwith,TitleIVloanfundsorother sourcesoffinancialaid; • performanceproblemswithourinstitutions’onlinesystems; • ourinstitutions’failuretomaintainaccreditation,stateauthorization,eligibilityforTitleIVprograms,orother approvals; • increasedregulationofonlineeducation,includinginstatesinwhichwedonothaveaphysicalpresence; • regulatoryinvestigationsorlitigationthatmaydamageourreputation; • studentdissatisfactionwithourinstitutions’servicesandprograms; • failuretodevelopanddeliveramessageorimageforAPUSthatresonateswellwithnon-militarystudents; • adversepublicityregardingus,ourinstitutions,ourcompetitors,oronlineorfor-profiteducationgenerally; • adeclineintheacceptanceofonlineeducationgenerally;and • adecreaseintheperceivedoractualeconomicbenefitsthatstudentsderivefromourinstitutions’programs orprogramsprovidedbyfor-profitschoolsgenerally. 68 AmericanPublicEducation,Inc. Ifweareunabletocontinuetodevelopawarenessofourinstitutionsandtheprogramsweoffer,andtorecruit andenrollstudentsthatpersistinourprogramsovertime,ourenrollmentswillsufferandtherecouldbea materialadverseeffectonourfinancialconditionandresultsofoperations. Our efforts to market APUS have not always been successful, and if we are unable to develop and optimize marketing and advertising programs that are effective, we will be unable to attract students and stabilize or grow our enrollments. OurmarketingstrategyforAPUStraditionallyfocusedonbuildinglong-term,mutuallybeneficialrelationships withorganizationsandindividualsinthemilitaryandpublicsafetycommunities.However,withlimitationson accesstomilitarystudents,asdiscussedfurtherbelowundertheRiskFactorthatbegins“IfAPUSdoesnothave strongrelationshipswith,andaccessto,variousmilitaryinstallations...”andwithcontinueddiversification outsideofthemilitary,weidentifiedaneedformarketingchannelsthatattractcollege-readystudentswho performwellatAPUSuponenrollment.However,wehaveexperiencedchallengeswithdoingso,andthereisno assurancethatwewillbeabletodoso,onacost-effectivebasis. Furthermore,becauseAPUS’stuitionisgenerallylowerthanthatofmostofitscompetitors,ithasfewerdollars availabletospendonmarketingandadvertisingthantheydo.Asaresult,APUShastriedto,andmayinthe futuretryto,implementnewmarketingtacticsandchannelswithwhichithasnoexperienceandwhichhave noguaranteeofsuccess.Ifweareunabletodevelopandoptimizemarketingandadvertisingprogramsthatare effectiveindevelopingawarenessofourinstitutionsandtheprogramsweoffer,andareunabletoenrolland retainqualifiedstudentsinmilitaryandnon-militarymarkets,ourenrollmentswouldsufferandourabilityto increaserevenueandmaintainprofitabilitywouldbesignificantlyimpaired. We have limited experience with marketing HCON, and if we are unable to effectively market its programs, our operating results would be negatively affected. ThesuccessofHondrosCollegeofNursing,orHCON,depends,inpart,onourabilitytomaintainandincrease studentenrollmentsinHCON’sprograms.PriortoouracquisitionofHCON,wehadnoexperiencewithattract - ingnewstudentsto,andretainingstudentsin,educationalprogramsofferedprimarilyonphysicalcampuses, andwiththeopeningofHCON’sfifthlocationinJanuary2017,wewillnowbemarketinginageographicmarket inwhichHCONdidnotpreviouslymarket.IfweareunabletoeffectivelymarketHCON’sprograms,wemaynot beabletosuccessfullyexecuteourlong-termstrategicplantodiversifyourbusinessandexpandourprograms, whichwouldnegativelyaffectouroperatingresults. If APUS does not have strong relationships with, and access to, various military installations and installation education centers, our ability to maintain enrollments from military students and our future growth may be impaired. AsofDecember31,2016,approximately54%ofAPUS’sstudentsself-reportedthattheyservedinthemilitaryon activedutyatthetimeofinitialenrollment,andasignificantportionofAPUSstudentsrelyonDoDtuitionpro - gramstopayfortheireducation.Wearethereforehighlydependentonourrelationshipwiththemilitaryandits members,andourabilitytoattractandretainmilitaryservicemembersasstudents. APUShistoricallyreliedonitsrelationshipswiththestaffofeducationalcentersonmilitaryinstallationsto distributeinformationaboutAPUStointerestedservicemembers.APUSalsohistoricallyprovidedcounseling servicesdirectlytoexistingstudentsonmilitaryinstallations,whichisbeneficialinsupportingthosestudents andhelpingthemtopersistwiththeireducation.BecauseAPUSreliesonreferralsandpersonalrelationships forrecruiting,impedimentstoaccesscanhaveanadverseeffectonmaintainingandgeneratingregistrations frommilitarystudents. 2016 Annual Report 69 Inrecentyears,DoDhasissuedbriefingsthatspecificallyprohibitauthorizingregularorrecurringofficehours foraneducationalinstitutiontosolelyprovidecounselingandthatprohibitallowingformermilitarymembers toaccessinstallationstorepresentaneducationalinstitutionusingtheirgovernmentIDcardprivileges.This changehasadverselyaffectedoureffortstosupportexistingstudentsandrecruitnewstudents.Ifwearenot abletoimproveouraccesstomilitaryinstallationsandourexistingstudentsonthoseinstallations,orfind alternativemethodstoservethem,ourmilitaryenrollmentscouldcontinuetodecline.Furthermore,the2014 MOU,whichisdiscussedin“RegulatoryEnvironment—DepartmentofDefense,”andtherelatedincreasedfocus byDoDonrelationshipsandoversightofeducationalproviders,oradditionalnewDoDinstructionsorbriefings, couldleadtofurtheradversechangesinthenatureofourrelationshipswithmilitaryinstallationsandtheiredu - cationcentersandouraccesstomilitaryservicemembers. Inadditiontothechallengescausedbylimitsonaccesstomilitaryinstallations,inDecember2015,theU.S. Armyimplementedanewenrollmentmanagementtool,referredtoasVIA,thatmembersoftheArmymust usetoaccessDoDtuitionassistanceprograms.WebelievethatmembersoftheArmycontinuetoexperience variousissueswiththenewenrollmentmanagementtool,includingdifficultyselectingAPUSasaninstitution. WebelievethattheissuesencounteredwiththenewenrollmentmanagementtoolnegativelyimpactedAPUS’s enrollmentsandnetcourseregistrationsduring2016,andmaycontinuetohaveanimpactinto2017. Aninabilitytomaintainstrongrelationshipswithinstallationeducationcentersandwithmilitaryservicemem - berswouldhaveanadverseeffectonAPUS’sabilitytoattractandretainqualifiedstudents,resultinginan adverseeffectonourfinancialcondition. Enrollments and course registrations by active duty service members may be adversely affected by a variety of factors not directly related to education programs, including changes in military activity and budgets. Eventsnotdirectlyrelatedtoeducationprogramsthatcouldoccurinthefuturecouldleadtoareductioninreg - istrationsfromstudentsonactiveduty.Forexample,webelievethatlarge-scalepersonnelreductionsorother significantdrawdownsofU.S.activedutymilitaryforceswouldlikelyhaveanegativeeffectonenrollmentand courseregistrations.Increasedoperationsandoverseasdeploymentsacrossallbranchesofthemilitaryandthe relatedincreaseddemandsonmanyactivedutyservicemembers,combinedwithlimitedInternetaccessassoci - atedwithsomedeployments,couldalsonegativelyimpacttheabilityofcertainactivedutymilitarystudentsto pursuehighereducation. Militarybudgetcutscouldalsonegativelyaffectusbyleadingtoforcereductionsorcutstoservicesandtools thatweorAPUS’sstudentsrelyuponforrecruitment,enrollment,accessandtuitionassistance.Eventempo - rarychangestomilitaryactivityandbudgetsmayadverselyaffectoperations.Forexample,inOctober2013, theUniformTuitionAssistanceProgramoftheDoD,ortheDoDtuitionassistanceprograms,wastemporarily suspendedasaresultoftheU.S.federalgovernmentpartialshutdown,whichwebelievecouldhavecaused asmanyas13,100registrationsatAPUStobedropped.TheU.S.Congresshaspassedlegislationtoextend governmentfundingforDoDthroughApril28,2017;however,iffundingisnotextendedbeyondthatdate,a governmentshutdowncouldoccur,resultinginasuspensionofDoDtuitionassistanceprograms.Anyfuture governmentshutdownorsuspensionofDoDtuitionassistanceprogramscouldhaveamaterialadverseeffect onAPUS’senrollments. Wewillremainsubjecttotheriskofeventsthatoccurwithin,andwithrespectto,themilitary,evenwherethey donotdirectlyrelatetotheuseofDoDtuitionassistanceprograms.Becauseofourdependenceonactiveduty militarystudents,changesthatoccurwithinandwithrespecttothemilitarycouldhaveamaterialadverseeffect onouroperations. 70 AmericanPublicEducation,Inc. DoD tuition assistance programs offered to service members of the U.S. Armed Forces constituted approximately 36% of APUS’s adjusted net course registrations for 2016, and our revenue and number of students would decrease if APUS is no longer able to receive funds under these tuition assistance programs or if tuition assistance is reduced, eliminated, or suspended. ServicemembersoftheU.S.ArmedForcesareeligibletoreceivetuitionassistancefromtheirbranchofservice throughtheDoDtuitionassistanceprograms.ServicemembersmayuseDoDtuitionassistanceprogramsto pursuepostsecondaryeducationatinstitutionsthatareaccreditedbyanaccreditingagencyrecognizedbythe U.S.SecretaryofEducationandthatsatisfyotherrequirements,includingexecutionof,andcompliancewith, aMemorandumofUnderstanding,orMOU,thatspecifiestermsandconditionsofparticipationinDoDtuition assistanceprograms.DoDtuitionassistanceprogramsconstitutedapproximately36%ofAPUS’sadjustednet courseregistrationsfor2016.WhileHCONhassubmittedanapplicationtoparticipateintheDODtuitionassis - tanceprograms,HCONdoesnotcurrentlyparticipateinDoDtuitionassistanceprograms. WedonotknowthescaleornatureoffutureactionsthatmaybetakenwithrespecttoDoDtuitionassistance programs,whichcouldincludeeliminatingthoseprograms,reducingthefundsorbenefitsavailablethereunder, enactingnewrestrictionsonparticipationorimposingothercriteriainadditiontothelevelofreimbursement thatwouldimpactenrollmentsfromservicemembers.OtheradministrativechangestoDoDprogramscould alsohavenegativeeffectsonourenrollments.Forexample,inMarch2013,DoDissuedaninstructionrestrict - ingtheabilityofservicemembersincertainoverseasdutylocationsoutsidethecontinentalUnitedStates,or overseaslocations,toreceiveDoDtuitionassistanceforcoursesofferedbyinstitutionsofhighereducationthat arenotpartiestocontractswithDoDtoprovideDoDvoluntaryeducationprogramsatthoselocations.Because wedonothaveacontractwithDoDtoprovideinstructionatoverseaslocations,servicememberswhobegina postsecondaryeducationprogramafterarrivalatanapplicableoverseasdutylocationmaynotuseDoDtuition assistanceprogramstopayfortheireducationinourprogramsuntilaftertheyhavesuccessfullycompleteda coursewithaninstitutionthathasacontracttoprovidevoluntaryeducationprogramsatthatoverseaslocation. ChangestoDoDtuitionassistanceprogramshavealreadyoccurred,andweexpectchangestotheprograms inthefuture.Forexample,theAirForceisnolongerauthorizingtuitionassistanceforassociatedegreesifthe servicememberalreadyhasanassociatedegreefromtheCommunityCollegeoftheAirForce,theArmynow requiresservicememberstocompleteoneyearofserviceaftergraduationfromAdvancedIndividualTraining inordertobeeligiblefortuitionassistance,theArmyhasreducedthetotalbenefitperservicememberby$500 peryear,andtheMarineCorpsrequires24monthsonactivedutypriortoMarinesbeingeligibletoapplyfor tuitionassistance.InOctober2015,theCoastGuardrestoredtuitionassistancefundingto$250percredithour, anincreaseof$62.50percredithourfromthepreviouscapimplementedin2014.AdditionalchangestoDoD tuitionassistanceprogramscouldoccurduetoCongressionalactionorDoDpolicyandfundingchanges.Ifwe arenolongerabletoreceivefundsfromDoDtuitionassistanceprograms,orifthoseprogramsarereduced, eliminated,ortemporarilysuspended,ourenrollmentsandrevenuecouldbesignificantlyreduced,whichwould resultinamaterialadverseeffectonourresultsofoperationsandfinancialcondition. If our institutions are unable to successfully adjust to future market demands by updating and expanding the content of existing programs and developing new programs, specializations and modes of teaching on a timely basis and in a cost-effective manner, our future growth may be impaired. Webelievethatinordertocontinuetoretainandattractqualifiedstudentsourinstitutionsneedtocontinu - ouslyupdateandexpandthecontentoftheirexistingprogramsanddevelopnewprograms,specializationsand modesofteaching.However,theupdatesandexpansionsofourinstitutions’existingprogramsandthedevel - opmentofnewprogramsandspecializationsmaynotbeacceptedbytheiraccreditors,stateregulators,ED, existingorprospectivestudents,oremployers.Ifwecannotrespondtochangesinmarketrequirements,our 2016 Annual Report 71 businessmaybeadverselyaffected.Evenifourinstitutionsareabletodevelopacceptablenewprograms,they maynotbeabletointroducethesenewprogramsasquicklyasstudentsrequireorasquicklyascompetitors introducecompetingprograms.Toofferanewacademicprogram,ourinstitutionsmayberequiredtoobtain appropriatefederal,state,andaccreditingagencyapprovals,whichmaybeconditionedordelayedinamanner thatcouldsignificantlyaffectourgrowthplans.Ifweareunabletorespondadequatelytochangesinmarket requirementsduetofinancialconstraints,regulatorylimitations,orotherfactors,ourinstitutions’abilityto attractandretainstudentscouldbeimpairedandourfinancialresultscouldsuffer. Establishingnewacademicprograms,specializationsandmodesofteachingormodifyingoreliminatingexisting programsrequiresourinstitutionstomakeinvestmentsinmanagementandcapitalexpenditures,incurmarket - ingexpenses,andreallocateotherresources.Ourinstitutionsmayhavelimitedexperienceprovidingcoursesin newfieldsofstudyornewmodesofteaching(suchascompetency-basededucation,micro-credentialsorother non-degreecredentials)andmayneedtomodifysystemsandstrategyorenterintoarrangementswithother institutionstoprovidenewprogramseffectivelyandprofitably.Ifourinstitutionsareunabletoincreasethe numberofstudentsenrollinginnewacademicprograms,offerprogramsinacost-effectivemanner,orother - wisemanageeffectivelytheoperationsofthoseprograms,ourresultsofoperationsandfinancialcondition couldbeadverselyaffected. Strong competition in the postsecondary education market could continue to decrease our institutions’ market share and increase our cost of acquiring students. Withinthepostsecondaryeducationmarket,ourinstitutionscompeteprimarilywithnot-for-profitpublicand privatetwo-yearandfour-yearcolleges,aswellasotherfor-profitschools,particularlythosethatofferonline learningprograms.Publicinstitutionsreceivesubstantialgovernmentsubsidies,andpublicandprivatenot-for- profitinstitutionshaveaccesstogovernmentandfoundationgrants,tax-deductiblecontributions,andother financialresourcesgenerallynotavailabletofor-profitschools.Theseinstitutionsmayhaveinstructionaland supportresources,orcoursedeliverytools,thataresuperiortothoseofourinstitutionsandotherfor-profit schools.Manyofourcompetitorsalsohavesubstantiallygreaternamerecognitionandfinancialandother resourcesthanwehave,whichmayenablethemtocompetemoreeffectivelyforpotentialstudents,orto provideinstructionalandsupportresourcesthataresuperiortothoseofourinstitutionsandotherfor-profit schools.Withinthepostsecondaryeducationmarketgenerally,weanticipateincreasedcompetition,including becausethetotalpostsecondarystudentpopulationhasbeendeclining.AccordingtotheNationalStudent Clearinghouse,enrollmentinTitleIVpostsecondarydegree-grantinginstitutionsinthefallof2016decreased 1.4%,comparedtothefallof2015,withadecreaseof14.5%takingplaceamongfour-yearfor-profitschools. Longertermprojectionssuggestthatpreviousgrowthinenrollmentinpostsecondarydegree-grantinginstitu - tionsisslowing.AccordingtoaMay2015reportfromED,suchenrollmentwasprojectedtogrow15%overthe 11-yearperiodendinginfallof2023,comparedto24%growthoverthe10-yearperiodthatendedin2012.The combinationofreducedgrowthordeclinesinthepostsecondarystudentpopulationandincreasedcapacityin thepostsecondaryeducationmarketwillfurtherintensifycompetition,andanyfurtherdeclineinthenumberof enrollmentscouldhaveanadverseeffectonourresultsofoperations. We expect to continue to face greater competition from non-traditional offerings, provided by both educational institutions and non-traditional providers. Inrecentyears,competinginstitutionsandothershavestartedprovidingnon-traditional,credit-bearingand non-credit-bearingeducationprograms,includingmassivelyopenonlinecourses,orMOOCs,withoutcharge oratlowcosts.Wehavealsoobservedanincreaseininstitutionsofferingcompetency-basedprograms,which permitstudentstoprogressinaprogrambydemonstratingthattheyhaveachievedcertainskillsorknowledge ratherthanbyearningcredithours.EDhasissuedguidanceaddressingaccesstoTitleIVprogramsforstudents 72 AmericanPublicEducation,Inc. intheseprograms.Webelievethatourinstitutionswillcontinuetofacenewcompetitionfromsuchprograms, includingcompetitionfromlowercostalternatives.Additionally,non-traditionalcompetitors,suchasentities offeringcodingbootcampsandmicro-credentials,areofferingnewalternativeeducationalpaths.Whileweare workingtodevelopourownalternativesinsomeoftheseareas,includingwithrespecttocompetency-based educationatAPUS,thereareotherinstitutionswithprogramsthataremorefullydeveloped,andourofferings maynotreceivemarketacceptanceorqualifyforaccesstoTitleIVprograms.Ourinstitutionsmaynotbeable tocompetesuccessfullyagainstcurrentorfuturecompetitorsandmayfacecompetitivepressuresthatcould adverselyaffecttheirbusinessorresultsofoperations.Thesecompetitivefactorscouldcauseourinstitutions’ enrollments,revenue,andprofitabilitytodecreasesignificantly. Strong competition in the military market could decrease our institutions’ market share and increase our cost of acquiring students. WeanticipatethatAPUSwillcontinuetoseestrongcompetitionwithinthemilitarymarket,whichcontinuesto beaprimarymarketforAPUS.Thereareanumberoffor-profitschoolsandnot-for-profitinstitutionsthatfocus onthemilitarymarketbecauseofthesizeofthemarketandtheavailabilityoffunding,andsomefor-profit schoolsseektoattractstudentseligibleforDoDtuitionassistanceprograms,VAeducationbenefits,orboth, atleastinpartasastrategyofthoseinstitutionstosatisfythe90/10Rule,whichisdescribedin“Regulatory Environment—StudentFinancingSourcesandRelatedRegulations/Requirements—DepartmentofEducation— RegulationofTitleIVFinancialAidPrograms—The‘90/10Rule.’” RISKS RELATED TO THE REGULATION OF OUR INDUSTRY If we or our institutions fail to comply with the extensive regulatory requirements for the operation of postsecondary education institutions, we and our institutions could face penalties and significant restrictions on operations, including loss of access to DoD tuition assistance programs and federal student loans and grants. Weandourinstitutionsaresubjecttoextensiveregulationby(i)accreditingagenciesrecognizedbytheU.S. SecretaryofEducation,(ii)stateregulatorybodies,and(iii)thefederalgovernment,throughED.BecauseAPUS participatesinDoDtuitionassistanceandVAeducationbenefitsprogramsadministeredbyDoDandtheVA, respectively,andHCONparticipatesinVAbenefitprograms,theyarealsosubjecttooversightbythoseagen - cies.Theregulations,standards,andpoliciesoftheseorganizationscoverthevastmajorityofourinstitutions’ operations,includingtheireducationalprograms,facilities,instructionalandadministrativestaff,administrative procedures,marketing,recruiting,financialoperations,andfinancialcondition.Theseregulatoryrequirements canalsoaffecttheabilitytoacquirenewinstitutions,toopennewlocations,toaddneworexpandexisting educationalprograms,tochangeourcorporatestructureorownership,andtomakeothersubstantivechanges. Theserequirementscanalsoincreaseourcostofoperations. Findingsofnoncompliancewiththeselaws,regulations,standards,andpoliciescouldresultinanyoftherel - evantregulatoryagenciestakingactionincluding:imposingmonetaryfines,penalties,orinjunctions;limiting operations,includingrestrictingourinstitutions’abilitytooffernewprogramsofstudyortoopennewlocations, orimposinglimitsonourgrowth;limitingorterminatingourabilitytograntdegrees;restrictingorrevokingour institutions’accreditation,licensure,orotherapprovaltooperate;limiting,suspending,orterminatingourinsti - tutions’eligibilitytoparticipateinTitleIVprograms,DoDtuitionassistanceprograms,orVAbenefitprograms byrequiringustorepayfunds,postaletterofcredit,becomesubjecttopaymentmethodsforTitleIVprograms thatarenottheadvancepaymentsystem;subjectingustocivilorcriminalpenalties;orotheractionsthatcould haveamaterialadverseeffectonourbusiness. 2016 Annual Report 73 Theregulations,standards,andpoliciesofED,stateregulatorybodies,andourinstitutions’accreditingagencies changefrequentlyandaresubjecttointerpretiveambiguities,particularlywheretheyarewrittenforinstitu - tionsthatofferon-campusinstruction,suchasHCON,ratherthanonlineinstitutions,suchasAPUS.Recentand pendingchangesin,ornewinterpretationsof,applicablelaws,regulations,standards,orpolicies,orournon - compliancewithanyapplicablelaws,regulations,standards,orpolicies,couldhaveamaterialadverseeffect onouraccreditation,authorizationtooperateinvariousstates,permissibleactivities,receiptoffundsunder DoDtuitionassistanceprograms,ourabilitytoparticipateinTitleIVprograms,ourabilitytoparticipateinVA educationbenefitprograms,orcostsofdoingbusiness.Wecannotpredictwithcertaintyhowallofthesereg - ulatoryrequirementswillbeappliedorwhetherwewillbeabletocomply,orwillbedeemedbyotherstohave complied,withalloftherequirements.Inthesectionentitled“RegulatoryEnvironment”ofthisAnnualReport andtheseRiskFactors,wehavedescribedsomeofthemoresignificantrisksrelatedtotheabilityofourinstitu - tionstocomplywiththeregulations,standards,andpoliciesofED,stateregulatorybodies,andouraccrediting agencies. Inaddition,insomecircumstancesofnoncomplianceorallegednoncompliance,wemaybesubjectto“quitam” lawsuitsundertheFederalFalseClaimsActorvarious,similar,statefalseclaimstatutes,andvarious“whis - tleblower”statutes. InFederalFalseClaimsActactions,privateplaintiffsseektoenforceremediesundertheFederalFalseClaimsAct onbehalfoftheU.S.governmentand,ifsuccessful,areentitledtorecovertheircostsandtoreceiveaportionof anyamountsrecoveredbytheU.S.governmentinthelawsuit.Asimilarprocessappliestostatefalseclaimstat - utes.Theselawsuitscanbeprosecutedbyaprivateplaintiffinrespectofsomeactiontakenbyus,evenifEDor anotherregulatorybodydoesnotagreewiththeplaintiff’stheoryofliability,orthegovernmentcanintervene andbecomeapartytothelawsuit.Quitamlawsuitshavethepotentialtogenerateverysignificantdamages linkedtoourreceiptofgovernmentfunds,includingTitleIVfundingandDoDtuitionassistancefunds. If our institutions fail to maintain their institutional accreditation, they would lose the ability to participate in DoD tuition assistance programs and Title IV programs. AccreditationbyanaccreditingagencythatisrecognizedbytheSecretaryofEducationisrequiredforpartici - pationinDoDtuitionassistanceprogramsandforaninstitutiontobecomeandremaineligibletoparticipate inTitleIVprograms.APUSparticipatesinDoDtuitionassistanceprogramsandTitleIVprograms,andHCON participatesinTitleIVprograms.Asdescribedmorefullyaboveineachoperatingsegment’ssectionin“Our Institutions—Accreditation”and“RegulatoryEnvironment—Accreditation,”APUSisaccreditedbyHLC,an institutionalaccreditingagencyrecognizedbytheSecretaryofEducation,andHCONisaccreditedbyACICS,an institutionalaccreditingagencythatuntilrecentlywasrecognizedbytheSecretaryofEducation.Bydecision datedDecember12,2016,theSecretaryofEDwithdrewandterminatedED’srecognitionofACICS.Asaresult, underthetermsofitsprovisionalprogramparticipationagreement,orPPPA,HCONmaycontinuetoparticipate intheTitleIVprogramsforupto18monthsfollowingtheSecretary’sdecisiontowithdrawrecognitionofACICS ifHCONcomplieswithcertainconditionsandrequirements,includingthatHCONmustpursueaccreditation byanotheraccreditingagencyrecognizedbyED.HCONhasaninprocessapplicationforaccreditationbythe AccreditingBureauofHealthEducationSchools,orABHES,anationalaccreditorforalliedhealthschoolsthatis recognizedbyED. Ourinstitutions’accreditingagenciesmayimposerestrictionsontheiraccreditationormayterminatetheir accreditation.Toremainaccredited,ourinstitutionsmustcontinuouslymeetcertaincriteriaandstandards relatingto,amongotherthings,performance,governance,institutionalintegrity,educationalquality,faculty, administrativecapability,resources,andfinancialstability.Ourinstitutionsalsomustcomplywithaccrediting agencypoliciesandrequirements,suchastoapplyandwaitforapprovalbeforemakingcertainchanges.For 74 AmericanPublicEducation,Inc. example,inconnectionwithourorganizationalrealignment,HLCrequestedthatAPUSsubmitanapplicationto enableHLCtodeterminewhetherAPUS’sproposaltoenterintoasharedservicesmodelwithAPEIconstitutes achangeinorganizationorstructurethatrequiresHLCpriorapproval.OnDecember22,2016,APUSsubmitted therequestedchangeofstructureapplication.ACICSrequiresaccreditedinstitutionstosubmitannuallycer - taincampus-levelandprogram-leveldataforpurposesofmonitoringstudentachievementagainstestablished requirements,andacampusorprogramwiththreeconsecutiveyearsofbelow-standardratesmaybesubjectto withdrawalofaccreditationormayberequiredtoceaseenrollmentintheprogram.Failuretomeetanyofthese criteriaorstandardsortocomplywiththesepoliciesandrequirementscouldresultinthelossofaccreditation atthediscretionoftheaccreditingagencies.Thecompletelossofaccreditationwould,amongotherthings,ren - derourinstitutionsandtheirstudentsineligibletoparticipateinDoDtuitionassistanceprogramsandTitleIV programs,andhaveamaterialadverseeffectonourenrollments,revenue,andresultsofoperations. Our institutions’ student enrollments could decline if they fail to maintain accreditation. Institutionalaccreditationisanimportantattributeofourinstitutions.Collegesanduniversitiesdepend,in part,onaccreditationinevaluatingtransfersofcreditandapplicationstograduateschools;someinstitutions willaccepttransfercreditonlyfromregionallyaccreditedinstitutions.Students,corporations,andgovernment sponsorsundertuitionreimbursementprogramslooktoaccreditationforassurancethataninstitutionmain - tainsqualityeducationalstandards,andemployersrelyontheaccreditedstatusofinstitutionswhenevaluat - ingacandidate’scredentials.Failuretomaintainourinstitutionalaccreditationwouldhaveamaterialadverse effectonourenrollments,revenue,andresultsofoperations.Inaddition,certainofourindividualprograms areaccreditedbyspecializedaccreditingagencies,orrecognizedbyprofessionalorganizations.Ifwefailto satisfythestandardsofthesespecializedaccreditingagenciesandprofessionalorganizations,wecouldlosethe specializedaccreditationorprofessionalrecognitionfortheaffectedprograms,whichcouldresultinmaterially reducedstudentenrollmentsinthoseprogramsandhaveamaterialadverseeffectonus.Inaddition,incertain cases,professionallicensurewillnotbegrantedifanapplicantforlicensureearnedtherelevanteducational credentialfromaninstitutionoreducationalprogramthatlacksregionalorspecializedaccreditation.Failure toobtainormaintainspecializedaccreditationorprofessionalrecognitionforcertainprogramscouldresultin materiallyreducedstudentenrollmentsinaffectedprogramsandhaveamaterialadverseeffectonus. Increased scrutiny of accrediting agencies by the Secretary of Education and the U.S. Congress may result in increased scrutiny of institutions, particularly for-profit institutions, by accrediting agencies. Further, if the accrediting agency of one of our institutions was to lose its ability to serve as an accrediting agency for Title IV program purposes and the institution was unable to obtain recognition from another recognized accrediting agency, that institution would lose its ability to participate in Title IV programs and DoD tuition assistance programs. IncreasedscrutinyofaccreditingagenciesbytheSecretaryofEducationandCongressinconnectionwithED’s recognitionprocessmayresultinincreasedscrutinyofinstitutionsbyaccreditingagencies.APUSisaccredited byHLC.InJune2015,theNationalAdvisoryCommitteeonInstitutionalQualityandIntegrity,orNACIQI,the panelchargedwithadvisingEDonwhethertorecognizeaccreditingagenciesforTitleIVpurposes,votedto recommendthatEDrenewHLC’srecognitionasanaccreditingagencythroughDecember2017.EDsubsequently acceptedNACIQI’srecommendationandcontinuedHLC’srecognitionthroughDecember2017.Wecannotpre - dictwhetherNACIQIwillrecommendrenewingHLC’srecognitionbeyondDecember2017.IfHLCweretolose itsrecognitionasanaccreditingagencyandAPUSwasunabletoobtainrecognitionfromanotherrecognized accreditingagency,APUSwouldloseitseligibilitytoparticipateinTitleIVprogramsandDoDtuitionassistance programs.TheinabilityofAPUStoparticipateinTitleIVprogramswouldhaveamaterialadverseeffecton enrollments,revenue,andresultsofoperations. 2016 Annual Report 75 HCONisaccreditedbyACICS.InJune2016,NACIQIrecommendedthatED’sSeniorDepartmentOfficial denyACICS’spetitionforrenewalofrecognitionandwithdrawACICS’sstatusasarecognizedaccreditor.On September22,2016,theEDSeniorDepartmentOfficialconcurredwithNACIQI’srecommendationandtermi - natedED’srecognitionofACICSasanationallyrecognizedaccreditingagency.BydecisiondatedDecember12, 2016,theSecretaryofEDwithdrewandterminatedED’srecognitionofACICS.Asdescribedbelow,ACICShas appealedtheSecretary’sdecisionintheU.S.DistrictCourtfortheDistrictofColumbia. WhentheSecretarywithdrawstherecognitionofanaccreditingagency,apostsecondaryeducationalinstitution maybeallowedtocontinueitsparticipationonaprovisionalbasisintheTitleIVprogramsforaperiodnotto exceed18monthsfromthedateoftheSecretary’sdecisiontoallowtheinstitutiontoseekaccreditationfrom anotherrecognizedaccreditingagency.Duringthisperiodofprovisionalparticipation,EDwilldeemanACICS- accreditedinstitutiontoholdrecognizedaccreditation,andEDwillrequiretheinstitutiontocomplywithaddi - tionalconditions.EDwillalsoimposecertainadditionalrequirementsonACICS-accreditedinstitutionsthatdo notmeetcertainmilestonestowardaccreditationbyanotherrecognizedaccreditingagency.OnDecember21, 2016,HCONandEDexecutedarevisedPPPAandaddendumtothePPPAinwhichHCONagreedtocomplywith ED’sconditionsandrequirements.HCONhasanin-processapplicationforaccreditationbyABHES,anaccredit - ingagencythatisrecognizedbyED. OnDecember15,2016,ACICSfiledamotionforatemporaryrestrainingorderandpreliminaryinjunctionagainst EDintheU.S.DistrictCourtfortheDistrictofColumbia.ACICSaskedthecourttostaytheSecretary’sdecision terminatingACICS’srecognitionstatus,restoreACICS’srecognitionstatus,andenjoinEDfromenforcingthe requirementsforACICS-accreditedinstitutions,includingthosesetforthinED’sPPPA.OnDecember20,2016, thecourtdeniedACICS’srequestforatemporaryrestrainingorder,andonFebruary21,2017,thecourtdenied ACICS’srequestforapreliminaryinjunction.IfthecourtdoesnotrestoreACICS’srecognitionstatus,HCON wouldnotbeeligibletoparticipateinTitleIVprogramsbeyondJune12,2018,unlessHCONbecomesaccredited byanotheraccreditingagencyrecognizedbyEDwithinthatperiod.Inaddition,theapprovalstatus,andinsome casesfundingprovidedbyotheragencies,couldbeadverselyaffectedbythelossofaccreditationbyACICS. TheineligibilityofHCONtoparticipateinTitleIVprogramswouldhaveamaterialadverseeffectonHCON’s enrollmentsandonourrevenue,resultsofoperations,andfinancialcondition. National or regional accreditation agencies may prescribe more rigorous accreditation standards for our institutions, which could have a material adverse effect on our student enrollment, revenue and cash flows. Theaccreditationstandardsofthenationalorregionalaccreditationagenciesthataccreditourinstitutionscan anddovary,andtheaccreditationagenciesmayprescribemorerigorousstandardsthanarecurrentlyinplace. Complyingwithmorerigorousaccreditationstandardscouldrequiresignificantchangestothewayweoperate ourbusinessandincreaseouradministrativeandothercosts.Noassurancescanbegiventhatourinstitutions wouldbeabletocomplywithmorerigorousaccreditationstandardsinatimelymanneroratall.Ifoneofour institutionsdoesnotmeetitsaccreditationrequirements,itsaccreditationcouldbelimited,modified,sus - pended,orterminated.Failuretomaintainaccreditationwouldmakesuchinstitutionineligibletoparticipate inDoDtuitionassistanceprogramsandTitleIVprograms,whichcouldhaveamaterialadverseeffectonthe institution’sstudentenrollmentandrevenue. Becauseofrapidgrowthin,andincreasedscrutinyof,thefor-profiteducationsector,accreditingbodiesmay adoptneworrevisedcriteria,standards,andpoliciesthatareintendedtomonitor,regulate,orlimitthegrowth offor-profitinstitutionslikeours.Forexample,onAugust31,2016,HLCadoptedpolicychangesthatare intendedtoallowHLCtorespondquickertodevelopingsituationsataccreditedinstitutions.Thepolicychanges permitHLCtodesignatepubliclyaninstitutionas“infinancialdistress”or“undergovernmentalinvestigation,” 76 AmericanPublicEducation,Inc. wheresuchsituationshavethepotentialtoimpacttheinstitution’soperationsandHLCbelievesthepublic shouldhaveinformationinmakingadecisiontoattendorcontinuetoattendtheinstitution.Anaccreditedinsti - tutionwithadesignationmayberequiredtosubmitreportsaboutitsfinancialorlegalsituationorundergospe - cialmonitoring,andmaybesubjecttolimitsonsubstantivechanges.Adesignationtypicallywillextendfornot morethantwoyearsandmayberemovedwhenHLCdeterminesthedesignationisnolongerrequiredbecause theinstitutionhasresolvedtheissuesthatledtothedesignation.IfAPUSweredeemedbyHLCtobe“infinan - cialdistress”or‘undergovernmentalinvestigation,”APUSwouldbesubjecttoheightenedscrutinyintheformof requirementstosubmitperiodicreports,specialmonitoring,andlimitsonrequestsforsubstantivechange. Beginningin2012,ACICS,HCON’saccreditor,establishedrequirements,includingminimum“standards”and expected“benchmarks,”tomeasurestudentretention,graduateplacementandlicensureexampassagerates. TosatisfyACICS’s“standards,”theretentionrate,placementrate,andlicensureexampassrateeachmust exceed60%.TosatisfyACICS’s“benchmarks,”eachratemustexceed70%.IfACICSdeterminesthataninstitu - tion’scampus-levelorprogram-leveldatadoesnotsatisfyoneormorestandardsorbenchmarks,ACICSmay takecertainactions.InJanuary2017,ACICSpublishedanewpolicy,effectiveDecember6,2016,thatdefines intermsofmetricrangeswhenaparticularactionwillbetaken,atthecampusandprogramlevels,including theissuanceofacompliancewarning,ashow-causedirective,anadverseactionorreportingwithrestrictions againstacampusorprogram.ForthereportingyearfromJuly1,2015throughJune30,2016,severalHCONcam - pusesandprogramsdidnotsatisfyACICSrequirements.OnFebruary24,2017,ACICSnotifiedHCONthatunless itnotifiesACICSthatitisdiscontinuingthePNProgramattheClevelandcampus,thenACICSexpectstoissuea show-causeletterrequiringHCONtodemonstratewhyACICSapprovalofthePNProgramatthelocationshould notbewithdrawn.ACICStooksuchactionunderthenewpolicybecausetheplacementratesreportedforthe PNProgramattheClevelandcampuswerebetween50-59.9%fortwoconsecutiveyears.Aninstitutionthat ACICSdirectstoshowcausemustimmediatelynotifycurrentandprospectivestudentsoftheshow-causesta - tus,includingbypostingaprominentnoticeonitswebsite.WeunderstandthatifthePracticalNursingprogram attheClevelandcampusisputonshowcause,HCONwillberequiredtomakecertainreportstoACICSandwill haveuntilitsnextcampusaccountabilityreport,dueNovember1,2017,todemonstratethatitsplacementrate complieswiththerelevantstudentachievementmeasure.Atthistime,weareunabletopredicttheimpactof thisdevelopmentandthepossibleoutcomesonourenrollmentsandresultsofoperations.IfoneoftheHCON campusesorprogramsfailstosatisfyACICSachievementmeasures,enrollmentinsuchHCONcampusesorpro - gramscoulddecline,whichcouldhaveamaterialadverseimpactonHCON’sstudentenrollment,revenue,and cashflows.Inaddition,HCONisseekingaccreditationfromABHES,andABHESpoliciesrequirethatinstitutions andprogramsapplyingforABHESaccreditationmustadviseABHESimmediatelyofanyadverseorpotentially adverseaction,includingashow-causedirective,byanotheraccreditingagency.ABHESalsoreservestheright nottograntinitialaccreditationifaninstitutionisonprobationoranequivalentstatusimposedbyanother accreditingagency.Atthistime,wecannotpredictABHES’sreaction,ifany,regardingACICS’sactionwithrespect totheClevelandcampus’sPNProgram,includinghowitwillimpactanydecisionwithrespecttoinitialaccredita - tionofHCONortheapprovalofthePNProgramaspartofinitialaccreditation. If our institutions fail to maintain state authorization in the states where they are physically located, the institutions would lose their ability to grant degrees and other credentials in that state and to participate in Title IV programs and DoD tuition assistance programs. Asdiscussedinthe“RegulatoryEnvironment—StateLicensure/Authorization”sectionofthisAnnualReport,to participateinTitleIVprogramsandDoDtuitionassistanceprograms,aninstitutionmustbelegallyauthorized bytherelevanteducationagencyofthestateinwhichitisphysicallylocated.Lossofstateauthorizationbyone ofourinstitutionsinthestateinwhichitisphysicallylocatedwouldcausethatinstitutiontobeineligibletopar - ticipateinTitleIVprogramsandDoDtuitionassistanceprogramsandloseitsabilitytograntcredentials. 2016 Annual Report 77 APUSiscurrentlyauthorizedtoofferitsprogramsbytheWestVirginiaHigherEducationPolicyCommission,or WVHEPC,theregulatoryagencygoverningpostsecondaryeducationintheStateofWestVirginia.Suchauthori - zationmaybelost,limitedorwithdrawnifAPUSfailstocomplywithmaterialrequirementsunderWestVirginia statutesandrulesforcontinuedauthorization.Undercurrentlaw,ifAPUSweretoloseitsregionalaccreditation byHLC,WVHEPCmaysuspend,withdraw,orrevokeAPUS’sauthorization.Inaddition,inordertomaintainits eligibilityforaccreditationbyHLC,APUSmustremainheadquarteredandhaveasubstantialpresenceinoneof thestatesinitsregion,whichincludesWestVirginia.Thus,ifAPUSweretoloseitsauthorizationfromWVHEPC, APUSwouldbeunabletoprovideeducationalservicesinWestVirginia,APUSwouldloseitseligibilityforTitleIV programsandDoDtuitionassistanceprograms,andAPUSwouldloseitsHLCaccreditation. HCONisauthorizedbytheOhioStateBoardofCareerCollegesandSchoolsandtheOhioDepartmentofHigher Education.Suchauthorizationmaybelimited,suspended,orrevokedifHCONfailstosubmitrenewalapplica - tionsorotherrequiredsubmissionstothestateinatimelymanner,orifHCONfailstocomplywithmaterial requirementsunderapplicableOhiostatutesandrulesforcontinuedauthorization.Continuedstateauthoriza - tionisrequiredinordertomaintainACICSaccreditation.IfHCONweretoloseitsauthorizationfromtheOhio StateBoardofCareerCollegesandSchools,HCONwouldbeunabletoprovideeducationalservicesinOhio, HCONwouldloseitseligibilityforTitleIVprograms,andHCONwouldloseitsaccreditation.IfHCONwereto loseitsauthorizationfromtheOhioDepartmentofHigherEducation,HCONwouldbeunabletooffertheonline RegisteredNursetoBachelorofScienceinNursingcompletionprograminOhio.IfHCONweretoloseapproval fromtheOhioBoardofNursingfortheDiplomainPracticalNursingortheAssociateDegreeinNursing,stu - dentsintheprogramlackingapprovalwouldnotbeeligibletoapplyforlicensurebyexaminationtopractice nursinginOhio. EffectiveJuly1,2011,EDregulationsprovidethataninstitutionisconsideredlegallyauthorizedbyastateifthe statehasaprocesstoreviewandappropriatelyactoncomplaintsconcerningtheinstitution,includingenforcing applicablestatelaws,andtheinstitutioncomplieswithanyapplicablestateapprovalorlicensurerequirements consistentwiththenewrules.Ifastateinwhichoneofourinstitutionsislocatedfailstocomplyinthefuture withtheprovisionsofthatregulation,ourinstitutions’abilitytooperateinthatstateandtoparticipateinTitle IVprogramscouldbelimitedorterminated.Foradditionalinformationontheseregulations,pleaserefertothe “RegulatoryEnvironment—ED’sStateLicensure/AuthorizationRegulatoryRequirements”sectionofthisAnnual Report. Our institutions’ failure to comply with the requirements of the State Authorization Reciprocity Agreement or regulations of various states could result in actions that would have a material adverse effect on our enrollments, revenue, and results of operations. Variousstatesimposeregulatoryrequirementsoneducationalinstitutionsoperatingwithintheirboundaries, includingregistrationrequirementsapplicabletoonlineeducationalinstitutionsthathavenophysicallocation orotherpresenceinthestatebutoffereducationalservicestostudentswhoresideinthestateoradvertise toorrecruitprospectivestudentsinthestate.SARAisavoluntaryagreementamongmemberstates,districts andterritoriesthatestablishescomparablenationalstandardsforinterstateofferingofpostsecondarydistance educationcoursesandprograms.SARAisintendedtomakeiteasierforstudentstotakeonlinecoursesoffered bypostsecondaryinstitutionsbasedinanotherstate.OurinstitutionsparticipateinSARA,whichallowsour institutionstoenrollstudentswhoresideinjurisdictionsthataremembersofSARA.AllstatesandtheDistrictof Columbia,withtheexceptionofCalifornia,Massachusetts,andNewYork,aremembersofSARAasofFebruary 2017.ForjurisdictionsthatarenotmembersofSARA,ourinstitutionsmustsatisfytherequirementsofthose individualstateswithregardtoonlineeducation,whichrequirementsmaychangefromtimetotimeand,in someinstances,arenotclearorarelefttothediscretionofstateregulators. 78 AmericanPublicEducation,Inc. FormoreinformationaboutthosejurisdictionsinwhichAPUSandHCONareauthorized,includingwheresuch authorizationisprovidedthroughSARA,see“RegulatoryEnvironment—StateLicensure/Authorization”inthis AnnualReport.ChangesinrequirementstoparticipateinSARAorchangestostatelawsandregulationsandthe interpretationofthoselawsandregulationsbytheapplicableregulatorsmaylimitourabilitytooffereduca - tionalprogramsandawarddegrees.Ifoneofourinstitutionswastofailtocomplywiththerequirementstopar - ticipateinSARAorstatelicensingorauthorizationrequirementstoprovidedistanceeducationinanon-SARA state,theinstitutionmayloseitsabilitytoparticipateinSARAormaybesubjecttothelossofstatelicensureor authorizationtoprovidedistanceeducationinthatnon-SARAstate,respectively.Ifoneofourinstitutionswas tofailtocomplywithstaterequirementstoobtainlicensureorauthorization,itmaybethesubjectofinjunctive actionsorpenalties. Asdescribedinthe“RegulatoryEnvironment—StateLicensure/Authorization”sectionofthisAnnualReport, onDecember19,2016,EDpublishedfinalregulationsaddressing,amongotherissues,stateauthorizationof programsofferedthroughdistanceeducation.Thefinalregulations,whichareeffectiveJuly1,2018,require aninstitutionofferingdistanceeducationprogramstobeauthorizedbyeachstateinwhichtheinstitution enrollsstudents,ifsuchauthorizationisrequiredbythestate,inordertoawardTitleIVaidtosuchstudents.An institutioncouldobtainsuchauthorizationdirectlyfromthestateorthroughastateauthorizationreciprocity agreement.Thefinalregulationsrequireaninstitutiontodocumentthestateprocessforresolvingcomplaints fromstudentsenrolledinprogramsofferedthroughdistanceeducationforeachstateinwhichsuchstudents resideandprovidecertainpublicandindividualizeddisclosurestoenrolledandprospectivestudentsregarding itsprogramsthatareprovidedorcanbecompletedsolelythroughdistanceeducation.OnJanuary30,2017,ED announcedthatitintendstotakeunspecifiedregulatoryactionsregardingcertainregulationsthathavebeen publishedbuthavenotyettakeneffect,includingtheregulationsrelatedtostateauthorizationofdistanceedu - cation.Ifoneofourinstitutionsfailstoobtainormaintainrequiredstateauthorizationtoprovidepostsecond - arydistanceeducationinaspecificstate,theinstitutioncouldloseitsabilitytoawardTitleIVaidtostudentsin thatstateandcouldloseitsabilitytoprovidedistanceeducationinthatstate. The inability of our institutions’ graduates to obtain professional licensure, employment or other outcomes in their chosen fields of study could reduce our enrollments and revenue, and potentially lead to litigation that could be costly to us. Certainofourinstitutions’graduatesseekprofessionallicensure,employmentorotheroutcomesintheircho - senfieldsfollowinggraduation.Theirsuccessinobtainingtheseoutcomesdependsonseveralfactors,including, forexample,theindividualmeritsofthegraduate;whethertheinstitutionandtheprogramwereapprovedby thestateinwhichthegraduateseekslicensure,orbyaprofessionalassociation;whethertheprogramfrom whichthestudentgraduatedmeetsallstaterequirementsforprofessionallicensure;andwhethertheinstitu - tionorprogramhasanyrequiredaccreditation.Certainstateshaverefusedtolicenseorcertifystudentsfrom particularAPUSprogramsongroundsthattheprogramdidnotmeetoneormoreofthestate’sspecificlicen - surerequirementsorwasnotapprovedbythestateforpurposesofprofessionallicensure.Basedonchallenges relatedtosatisfyingvaryingstaterulesregardingeligibilityforteacherlicensureinastate,APUSdeterminednot toenrollnewstudentsinanyofitsinitialteacherlicensureprogramsasofDecember2014. ToapplyforlicensuretopracticenursinginOhio,anapplicantmusthavesuccessfullycompletedanursingedu - cationprogramthatisapprovedbytheOhioBoardofNursing,orOBN.RegulationsoftheOBN,whichapproves theHCONPracticalNurse,orPNprogram,andAssociateDegreeinNursing,orADNprograms,requirethata nursingeducationprogramsuchastheHCONPNandADNprogramsmusthaveapassrateontherelevant NCLEXlicensureexamthatisatleast95%ofthenationalaverageforfirst-timecandidatesinacalendaryear.Ifa programdoesnotattainsuchpassrate,theprogrammayfaceconsequences,including,afterfourconsecutive yearsoffailingtomeetthatstandard,placementonprovisionalapprovalstatus.Ifaprogramonprovisional 2016 Annual Report 79 approvalcontinuestofailtomeet therequirements,theOBNmaywithdrawitsapprovaloftheprogram.HCON’s ADNprogram’spassrateontherelevantNCLEXlicensureexamhasnotmettherequirementsoftheOBNforthe previousfouryears.Asaresult,weexpectthatHCON’sADNprogramwillbeplacedonprovisionalapprovalsta - tusbytheOBNinMarch2017.Ifaprogramonprovisionalapprovalfailstomeetandmaintaintherequirements oftheOBNattheendofthetimeperiodestablishedforprovisionalapproval,theOBNmayproposetocontinue provisionalapprovalforasettimeperiodormayproposetowithdrawapprovalpursuanttoanadjudication proceeding.FortheOBNtoconsiderrestoringaprogramtoFullApprovalstatusafteraprogramisplacedon provisionalstatusduetolowNCLEXscores,theprogrammustattainapassratethatmeetsorexceeds95%of thenationalaverageforfirst-timecandidatesforatleasttwoconsecutiveyears.HCONhasbeenimplementing changes,includingthecurriculumchangesdiscussedinthisAnnualReport,anditsNCLEXpassratesforthePN andADNprogramshaveincreasedinrecentperiods.Placementonprovisionalstatusmayresultinadditional regulatoryrequirements,suchasarequirementtodisclosetheprovisionalstatus.Anyconsequencesthatresult fromthissituationmayhaveanadverseimpactonourresultsofoperations,cashflows,andfinancialcondition. Thestaterequirementsforlicensurearesubjecttochange,asaretheprofessionalcertificationstandards, andwemaynotbecomeawareofchangesthatmayimpactourstudentsincertaininstances.Intheeventthat oneormorestatesrefusetorecognizeourinstitutions’studentsforprofessionallicensurebasedonfactors relatingtoourinstitutionsorprograms,thepotentialgrowthofourinstitutions’programswouldbenegatively impacted,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations andcashflows.Requirementsforemploymentvaryfromemployertoemployerandfromfieldtofield.Tothe extentourgraduatesfailtosatisfyrequirementsforemploymentbyparticularemployersorinaparticularpro - fessionbasedoncharacteristicsofourprograms,thepotentialgrowthofourinstitutions’programswouldbe negativelyimpacted,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsof operationsandcashflows.Inaddition,ifourinstitutions’graduatesfailtoobtainprofessionallicensure,employ - mentorotheroutcomesintheirchosenfieldsofstudy,weandourinstitutionscouldbeexposedtolitigation, includingclass-actionlitigation,thatwouldforceustoincurlegalandotherexpensesthatcouldhaveamaterial adverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows. Our institutions must periodically seek recertification to participate in Title IV programs, and may, in certain circumstances, be subject to review by the Department of Education prior to seeking recertification, and our future success may be adversely affected if our institutions are unable to successfully maintain certification or obtain recertification. AninstitutiongenerallymustseekrecertificationfromEDatleasteverysixyearsandpossiblymorefrequently dependingonvariousfactors,suchaswhetheritisprovisionallycertified.EDmayalsoreviewaninstitution’s continuedeligibilityandcertificationtoparticipateinTitleIVprograms,orscopeofeligibilityandcertification, intheeventtheinstitutionundergoesachangeinownershipresultinginachangeofcontrol,orexpandsits activitiesincertainways,suchastheadditionofcertaintypesofnewprograms,additionofnewlocations,or,in certaincases,changestotheacademiccredentialsthatitoffers.Incertaincircumstances,EDmustprovisionally certifyaninstitution,suchaswhenitisaninitialparticipantinTitleIVprograms,orhasundergoneachangein ownershipandcontrol. AprovisionallycertifiedinstitutionmustapplyforandreceiveEDapprovalofsubstantialchangesandmust complywithanyadditionalconditionsincludedinitsprogramparticipationagreement.IfEDdeterminesthat aprovisionallycertifiedinstitutionisunabletomeetitsresponsibilitiesunderitsprogramparticipationagree - ment,itmayseektorevoketheinstitution’scertificationtoparticipateinTitleIVprogramswithfewerduepro - cessprotectionsfortheinstitutionthanifitwerefullycertified. 80 AmericanPublicEducation,Inc. APUSisfullyrecertifiedtoparticipateinTitleIVprogramsthroughSeptember30,2020.APUSwillberequiredto applytimelyforrecertificationinordertocontinuetoparticipateintheTitleIVprogramsafterSeptember30, 2020. HCONwasdeemedtohaveundergoneachangeofownershipandcontrolinNovember2013,requiringreview byEDinordertoreestablisheligibilityandcontinueparticipationinTitleIVprograms.InJanuary2016,we receivedaletterfromEDapprovingthechangeinownershipandcontrolandgrantingHCONprovisionalcer - tificationtoparticipateinTitleIVprogramsuntilDecember31,2018.HCONreceivedafullyexecutedPPPAin February2016.Whileprovisionallycertified,HCONoperatesunderthePPPA,whichrequiresHCONtoapplyfor andreceiveapprovalfromtheSecretaryofEducationbeforeinitiatinganysubstantialchanges,suchasestab - lishinganadditionallocationatwhichatleast50%ofaneligibleprogramwillbeofferedandTitleIVprogram fundswillbedisbursed,offeringacademicprogramsathigherthanthebachelor’sdegreelevel,oraddinganew educationprogram.Inaddition,asaresultoftheSecretaryofEducation’sdecisiontowithdrawandterminate ED’srecognitionofACICS,onDecember21,2016,HCONandEDexecutedarevisedPPPAandanaddendumto thePPPAinwhichHCONagreedtocomplywithadditionalconditionsandrequirements.Formoreinformation abouttheseconditionsandrequirements,see“RegulatoryEnvironment—RestrictionsonAddingLocationsand EducationalPrograms”inthisAnnualReport.Undertheaddendum,HCONmaycontinuetoparticipateinthe TitleIVprogramsonaprovisionalbasisuntilJune12,2018,whileHCONseeksaccreditationbyanotherrecog - nizedaccreditingagency.DuringthetermofthePPPA,HCON’sparticipationinTitleIVprogramsissubjectto revocationforcause,whichincludesafailuretocomplywithanyprovisionsetforthinthePPPA,aviolationofED regulationsdeemedmaterialbyED,oramaterialmisrepresentationinthematerialsubmittedtoEDaspartof theinstitution’sapplicationforapprovalofthechangeofownershipandcontrol. IfEDweretowithdrawornotrenewourinstitutions’certificationtoparticipateinTitleIVprograms,ourstu - dentswouldnolongerbeabletoreceiveTitleIVprogramfundsorDoDtuitionassistanceprogramfunds,which wouldhaveamaterialadverseeffectonourenrollments,revenue,andresultsofoperations. If our institutions are unable to successfully maintain certification or obtain recertification to participate in Title IV programs, they will not be able to participate in DoD tuition assistance programs. Ifourinstitutionsareunabletosuccessfullymaintaincertificationorobtainrecertificationtoparticipatein ED’sTitleIVprograms,theywillnotbeabletoparticipateinDoDtuitionassistanceprogramsbecausetheDoD MOUrequiresaninstitutiontobecertifiedtoparticipateinTitleIVprogramsinordertoparticipateinDoD tuitionassistanceprograms.LossofparticipationintheDoDtuitionassistanceprogramswouldhaveamaterial adverseeffectonourenrollments,revenue,resultsofoperations,andfinancialcondition. A failure to demonstrate “administrative capability” may result in the loss of eligibility to participate in Title IV programs. ED’sregulationsspecifyextensivecriteriaaninstitutionmustsatisfytoestablishthatithastherequisite“admin - istrativecapability”toparticipateinTitleIVprogramsandthesanctionsEDmayimposeifaninstitutionfails tosatisfyanyofthosecriteria.Tomeettheadministrativecapabilitystandards,aninstitutionmust,among otherthings,complywithallapplicableTitleIVrequirements,includingwithrespecttotheadministrationof TitleIVprogramsandtheprocessingofTitleIVprogramfunds.See“RegulatoryEnvironment—FederalSupport andRegulationofPostsecondaryEducation—RegulationofTitleIVFinancialAidPrograms—Administrative Capability.”Ifaninstitutionfailstosatisfyanyoftheadministrativecapabilityrequirements,EDmayrequirethe repaymentofTitleIVprogramfunds,transfertheinstitutionfromthe“advance”systemofpaymentofTitleIV programfundstoheightenedcashmonitoringstatus,ortothe“reimbursement”methodofpayment,placethe 2016 Annual Report 81 institutiononprovisionalcertificationstatus,orcommenceaproceedingtoimposeafineortolimit,suspend,or terminatetheparticipationoftheinstitutioninTitleIVprograms. IfoneofourinstitutionsisfoundnottohavesatisfiedED’s“administrativecapability”requirements,itcould belimitedinitsaccessto,orlose,TitleIVprogramfunding,whichwouldlimitourpotentialforgrowthand adverselyaffectourenrollment,revenue,andresultsofoperations. A failure to demonstrate “financial responsibility” may result in the loss of eligibility by one of our institutions 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. ToparticipateinTitleIVprograms,aneligibleinstitutionmustsatisfyspecificmeasuresoffinancialresponsi - bilityprescribedbyED,orpostaletterofcreditinfavorofED,andpossiblyacceptotherconditions,suchas provisionalcertification,additionalreportingrequirements,orregulatoryoversightofitsparticipationinTitle IVprograms.EDmayalsoapplysuchmeasuresoffinancialresponsibilitytoaparentcompanyofaneligibleinsti- tutionand,ifsuchmeasuresarenotsatisfiedbytheparentcompany,requiretheinstitutiontopostaletterof creditinfavorofED,andpossiblyacceptotherconditionsonitsparticipationinTitleIVprograms.Forourinsti - tutions,EDappliesitsmeasuresoffinancialresponsibilityattheleveloftheparentcompany,APEI.Anobligation topostaletterofcredit,ortoacceptotherconditions,suchasachangeinoursystemofTitleIVpaymentfrom EDforpurposesofdisbursement,couldincreaseourcostsofregulatorycompliance,oraffectourcashflow. InfinalregulationspublishedNovember1,2016,EDmodifieditsfinancialresponsibilitystandardstoprovide thataninstitution(otherthanapublicinstitution)maynotbeabletomeetitsfinancialoradministrativeobliga - tions,andisthereforenotfinanciallyresponsible,ifitissubjecttooneormoretriggeringeventsthatoccuronor afterJuly1,2017.IfEDdeterminesthataninstitutionisnotfinanciallyresponsiblebecauseofoneormoretrig - geringevents,tocontinueparticipatinginTitleIVprograms,theinstitutionwillberequiredtoprovideanirre - vocableletterofcreditequaltoatleast10%oftheamountoffederalstudentfinancialaidfundsreceivedbythe institutionforthepastyear.Aninstitutionthatisrequiredtoprovidealetterofcreditmayalsoberequiredto disclosetostudentsinformationabouttheletterofcredit.Ifwearesubjecttooneormoretriggeringeventsand asaresultEDdeterminesthatwearenotfinanciallyresponsible,wemayberequiredtopostaletterofcredit oracceptotherlimitationstocontinueparticipatinginTitleIVprograms,whichcouldhaveamaterialadverse effectonourbusiness,financialconditionandresultsofoperations.Formoreinformationabouttheregula - tions,whichareeffectiveJuly1,2017,see“RegulatoryEnvironment—StudentFinancingSourcesandRelated Regulations/Requirements—DepartmentofEducation—RegulationofTitleIVFinancialAidPrograms—Borrower Defenses”ofthisAnnualReport.OnJanuary30,2017,EDannouncedthatitintendstotakeunspecifiedregula - toryactionsregardingcertainregulationsthathavebeenpublishedbuthavenotyettakeneffect,includingthe finalregulationsmodifyingED’sfinancialresponsibilitystandards. IfoneofourinstitutionsisfoundnottohavesatisfiedED’sfinancialresponsibilityrequirements,itcouldbe limitedinitsaccessto,orlose,TitleIVprogramfunds,whichwouldlimitourpotentialforgrowthandadversely affectourenrollment,revenue,andresultsofoperations.Ifwe,astheparentcompanyofaneligibleinstitution, arefoundnottohavesatisfiedED’sfinancialresponsibilitymeasures,allofourinstitutionscouldbelimitedin theiraccessto,orlose,TitleIVprogramfunds,whichwouldlimitourpotentialforgrowthandadverselyaffect ourenrollment,revenue,andresultsofoperations. 82 AmericanPublicEducation,Inc. ED has published final rules setting forth new standards and procedures related to borrower defense-to- repayment claims with respect to Title IV loan obligations and institutional liability for successful claims. While the impact of the final regulations remains unclear, it is possible that the final regulations may create significant liability that could have a material adverse effect on our business. OnNovember1,2016,EDpublishedfinalregulationsconcerningwhichactsoromissionsofaninstitutionof highereducationastudentborrowermayassertasadefensetorepaymentofaloanmadeundertheDirect LoanProgram,oraDirectLoan,andcertainothermatters.Thefinalregulationscreateanewfederalstandard forborrowerdefenses,newlimitationperiodsforborrowerdefenseclaims,andnewprocessesforresolution ofsuchclaims.Underthefinalregulations,EDmayinitiateaseparateproceedingtocollectfromtheinstitution theamountofreliefresultingfromaborrowerdefensebroughtbyanindividualborrower,andaspartofthe group-processhearingEDwillcollectfromtheinstitutionanyliabilityforamountsdischargedorreimbursed toborrowersunderthegroupprocess.Formoreinformationaboutthefinalregulations,see“Regulatory Environment—StudentFinancingSourcesandRelatedRegulations/Requirements—DepartmentofEducation— RegulationofTitleIVFinancialAidPrograms—BorrowerDefenses”ofthisAnnualReport. ThefinalregulationsgenerallyareeffectiveJuly1,2017.Wearecontinuingtoevaluatethepotentialeffectthese regulationswillhaveonHCONandAPUS.However,itisandwillbechallengingtopredictfullythemannerand effectoffullimplementationofthefinalregulations,includingbecauseoftheirbroadscope,becausetheyhave onlybeenrecentlyadopted,andbecauseEDhassaiditmayinthefutureissueadditionalguidanceoncertain aspectsofthefinalregulations.OnJanuary30,2017,EDannouncedthatitintendstotakeunspecifiedregula - toryactionsregardingcertainregulationsthathavebeenpublishedbuthavenotyettakeneffect,includingthe BorrowerDefenseRegulations. IfEDdeterminesthatborrowersofDirectLoanswhoattendedourinstitutionshaveadefensetorepaymentof theirDirectLoans,ourrepaymentliabilitytoEDcouldhaveamaterialadverseeffectonourfinancialcondition, resultsofoperations,andcashflows. Furthermore,thefinalregulationsprohibitinstitutionsfromrequiringthatstudentsfirstengageintheinsti - tution’sinternalcomplaintprocessbeforecontactingotheragencies,prohibittheuseofpre-disputearbitra - tionagreementsbytheinstitution,prohibittheuseofclassactionlawsuitwaivers,andrequireinstitutionsto disclosetoandnotifyEDofarbitrationfilingsandawards,forclaimsthatmayformthebasisforaborrower defensetorepaymentofaDirectLoan.Asaresultoftheseprohibitions,wecouldincurclaimsandexpenses thatwehavenotpreviouslyincurred,andwhichcouldhaveamaterialadverseeffectonourbusiness,financial conditionandresultsofoperations. If one or more of our institutions does not comply with the 90/10 Rule, it or they will lose eligibility to participate in federal student financial aid programs. AprovisionoftheHEArequiresallproprietaryeducationinstitutionstocomplywithwhatiscommonlyreferred toasthe90/10Rule,whichimposessanctionsonparticipatinginstitutionsthatderivemorethan90%oftheir totalrevenueonacashaccountingbasisfromTitleIVprogramsascalculatedunderED’sregulations.For moreinformationincludingthe90/10percentagesforourinstitutions,see“RegulatoryEnvironment—Student FinancingSourcesandRelatedRegulations/Requirements—DepartmentofEducation—RegulationofTitleIV FinancialAidPrograms—The90/10Rule.” The90/10Rulepercentageforourinstitutionscouldincreaseinthefuture,dependingontheimpactoffuture changesinourenrollmentmix,andregulatoryandotherfactorsoutsideourcontrol,including,forAPUS,any reductionintuitionassistanceprovidedbyDoDforservicemembersandeducationbenefitsprovidedbytheVA forveterans,orchangesinthetreatmentofsuchfundingforpurposesofthe90/10Rulecalculation.Currently, 2016 Annual Report 83 DoDtuitionassistanceandVAeducationbenefitsarenottreatedasTitleIVrevenueunderthe90/10Ruleand, therefore,forAPUS,amajorityofsuchfundingisincludedinthe“10%”portionoftherulecalculation.Areduc - tionintheavailabilityofthistypeoffunding,orachange(throughlegislation,regulatoryaction,oranexecutive order)thatrequiresthatthosefundsbetreatedinthesamemannerasTitleIVfundingunderthe90/10Rule, wouldincreaseourinstitutions’90/10Rulepercentage.Forthepastthreeyears,HCONhasderivedmorethan 80%ofitstotalrevenueonacashaccountingbasisfromTitleIVprogramsascalculatedunderED’sregulations. IfHCONisunabletoattractstudentswhodonotdependonTitleIVprogramaid,suchasstudentswhofinance theirowneducationorreceivefullorpartialtuitionreimbursementfromtheiremployers,orthroughVAben - efits,HCONmayviolatethe90/10Rule.Ifanyofourinstitutionsviolatesthe90/10Ruleandloseseligibilityto participateinTitleIVprograms,itsineligibilitytoparticipateinTitleIVprogramswouldhaveamaterialadverse effectonourenrollments,revenue,resultsofoperations,andcashflows. A failure by our institutions to comply with the Department of Education’s incentive payment rule could result in sanctions. Ifoneofourinstitutionspaysabonus,commission,orotherincentivepaymentinviolationofapplicableED rules,thatinstitutioncouldbesubjecttosanctions,whichcouldhaveamaterialadverseeffectonourbusiness. IfEDdeterminesthatoneofourinstitutionsviolatedtheincentivepaymentrule,itmayrequiretheinstitution tomodifyitspaymentarrangementstoED’ssatisfaction.EDmayalsofinetheinstitutionorinitiateactionto limit,suspend,orterminatetheinstitution’sparticipationinTitleIVprograms.EDmayalsoseektorecover TitleIVfundsdisbursedinconnectionwiththeprohibitedincentivepayments.Asdescribedin“Regulatory Environment—StudentFinancingSourcesandRelatedRegulations/Requirements—DepartmentofEducation— RegulationofTitleIVFinancialAidPrograms—IncentivePaymentRule,”changesintheinterpretationofthe regulationmaycreateuncertaintyaboutwhatconstitutesimpermissibleincentivepayments.Uncertaintyasto howtheincentivepaymentrulewillbeinterpretedalsomayinfluenceourapproach,orlimitouralternatives, withrespecttoemploymentpoliciesandpracticesandconsequentlymaynegativelyaffectourabilitytorecruit andretainemployees,and,asaresult,ourbusinesscouldbemateriallyandadverselyaffected. DoD’s2014MOUrequiresthatinstitutionsparticipatingintheDoDtuitionassistanceprogramshavepolicies inplacecompliantwithregulationsissuedbyEDrelatedtorestrictionsonpaymentofincentivecompensa - tion.Underthetermsofthe2014MOU,aninstitutionparticipatingintheDoDtuitionassistanceprograms mustrefrainfromprovidinganycommission,bonus,orotherincentivepaymentbaseddirectlyorindirectlyon securingenrollmentsorfederalfinancialaid,includingDoDtuitionassistanceprogramfunds,toanypersonsor entitiesengagedinstudentrecruiting,admissionactivities,ormakingdecisionsregardingtheawardofstudent financialassistance.In2013,theImprovingTransparencyofEducationOpportunitiesforVeteransActsestab - lishedabanonincentivecompensationbasedonsuccessinsecuringenrollmentsorfinancialaidwithregardto VAbenefits. OnJune2,2015,EDreleasedamemorandumregardingenforcementoftheprohibitiononthepaymentof incentivecompensationbypostsecondaryinstitutionstoanypersonorentityengagedinanystudentrecruit - ingoradmissionsactivitiesorinmakingdecisionsregardingtheawardofstudentfinancialassistancebased directlyorindirectlyuponsuccessinsecuringenrollmentsorfinancialaid.ThememorandumindicatedthatED willreviseitsapproachtomeasuringdamagesfornoncompliancewiththeprohibitionagainstincentivecom - pensation.Inadministrativeenforcementactions,EDwillcalculatetheamountoftheinstitutionalliabilitybased onthecosttoEDoftheTitleIVfundsimproperlyreceivedbytheinstitution,includingthecosttoEDofallofthe TitleIVfundsreceivedbytheinstitutionoveraparticularperiodoftimeifthosefundswereobtainedthrough implementationofapolicyorpracticeinwhichstudentswererecruitedinviolationoftheincentivecompensa - tionprohibition.EDmayalsoimposeafineuponaninstitution,ortakeadministrativeactiontolimit,suspend, revoke,deny,orterminateaninstitution’seligibilitytoparticipateintheTitleIVprograms,iftheinstitution 84 AmericanPublicEducation,Inc. violatestheprohibition.WeareunabletopredicttheimpactthatED’srevisedapproachtomeasuringdamages undertheincentivecompensationprohibitionmighthaveonourfinancialconditionifoneofourinstitutionsis foundtobeinviolationoftheprohibition. Inaddition,thirdpartiesmayfile“quitam”or“whistleblower”suitsonbehalfofthefederalgovernmentalleging violationoftheincentivepaymentprovision.SuchsuitsmaypromptEDinvestigations,andthefederalgovern - mentmaydeterminetointerveneinthelawsuits.Particularlyinlightoftheuncertaintysurroundingthemodi - fiedincentivepaymentruleandED’sJune2015memorandum,theexistenceof,thecostsofrespondingto,and theoutcomeof,quitamorwhistleblowersuitsorEDinvestigationscouldhaveamaterialadverseeffectonour reputationcausingourenrollmentstodecline,couldcauseustoincurcoststhatarematerialtoourbusiness, andcouldimpacttheabilityofourinstitutionstoparticipateinTitleIVprograms,amongotherthings.Asa result,ourbusinesscouldbemateriallyandadverselyaffected. A failure to comply with the Department of Education’s “gainful employment” regulations could result in the loss of eligibility to participate in Title IV programs . UndertheHEA,proprietaryschoolsaregenerallyeligibletoparticipateinTitleIVprogramsonlywithrespectto educationalprogramsthatpreparestudentsfor“gainfulemploymentinarecognizedoccupation.”Historically, thisconcepthasnotbeendefinedindetailedregulations.OnOctober31,2014,EDpublishedregulationsrelated togainfulemployment,whichwerefertoastheFinalGERegulations.OnJuly1,2015,theFinalGERegulations wentintoeffect,withtheexceptionofnewdisclosurerequirements,whichtookeffectJanuary1,2017.TheFinal GERegulationsestablishdebt-relatedmeasuresfordeterminingwhethercertainpostsecondaryeducation programspreparestudentsforgainfulemploymentinarecognizedoccupation.TheFinalGERegulationsset forthtwodebt-to-earningsmeasures:anannualearningsrateandadiscretionaryincomerate.UndertheFinal GERegulations,aprogramwillpassthemeasuresifitsgraduateshaveannualloanpaymentslessthanorequal to8%oftheirtotalearningsorlessthanorequalto20%oftheirdiscretionaryincome.Aprogramthatdoesnot passeitherofthedebt-to-earningsmeasuresandthathasanannualearningsratethatisgreaterthan8%and lessthanorequalto12%,oradiscretionaryincomeratethatisgreaterthan20%andlessthanorequalto30%, wouldbeconsideredtobeinawarning“zone.”Subjecttothepotentialforadjustmentsbasedonatransition period,aprogramwillfailthemeasuresifitsannualearningsrateisgreaterthan12%(orthedenominatorofthe annualearningsrateiszero)anditsdiscretionaryincomerateisgreaterthan30%(orthedenominatorofthe discretionaryearningsrateisnegativeorzero). AprogramwillbecomeineligibleforTitleIVfundingifitfailsbothdebt-to-earningsmeasurestwiceinthree consecutiveyears,oriftheprogramisinthe“zone”forfourconsecutiveyears.Aninstitutionwillberequiredto providewarningstostudents,includingprospectivestudents,whennotifiedbyEDthataprogramcouldbecome ineligiblebasedonitsfinaldebt-to-earningsmeasuresforthenextawardyear. Inadditiontothedebt-to-earningsmeasures,theFinalGERegulationsincludeadditionalrequirementsrelated togainfulemploymentprograms.Forexample,theFinalGERegulationsrequireaninstitution’smostsenior executiveofficertocertify,aspartoftheprogramparticipationagreement,thateachofitseligiblegainful employmentprogramsofferedbytheinstitutionsatisfiescertainrequirementsrelatedtoinstitutionaland programmaticaccreditationandprofessionallicensure,orcertificationexamrequirements.Also,theFinalGE Regulationsexpanduponthegainfulemploymentprogramdisclosurerequirements. TheFinalGERegulationscouldputthecontinuingTitleIVeligibilityofoureducationalprogramsatriskdueto factorsbeyondourcontrol,suchaschangesintheactualordeemedincomelevelofourgraduates,changesin studentborrowinglevels,increasesininterestrates,changesinthefederalpovertyincomelevelrelevantfor calculatingdiscretionaryincome,andotherfactors.Failuretosatisfythegainfulemploymentmeasurescould 2016 Annual Report 85 reducetheabilityofourinstitutionstoofferorcontinuecertaintypesofprogramsforwhichthereismarket demand,whichcouldthereforeimpactourabilitytomaintainorgrowourbusiness.Additionally,theexpanded gainfulemploymentprogramdisclosurerequirementscouldadverselyimpactstudentenrollment,persistence, andretentionifourinstitutions’disclosedprograminformationcomparesunfavorablywithdisclosedinforma - tionofothereducationalinstitutions. Our institutions may lose eligibility to participate in Title IV programs if their student loan default rates are too high, and if our institutions lose that eligibility, our future growth could be impaired. ToremaineligibletoparticipateinTitleIVprograms,aneducationalinstitution’sfederalstudentloancohort defaultratesmustremainbelowcertainspecifiedlevels.Eachcohortisthegroupofstudentswhofirstenter intostudentloanrepaymentduringafederalfiscalyear(endingSeptember30).Ifaninstitution’scohortdefault rateequalsorexceeds30%foranygivenyear,itmustestablishadefaultpreventiontaskforceanddevelopa defaultpreventionplanwithmeasurableobjectivesforimprovingthecohortdefaultrate.Educationalinstitu - tionswillloseeligibilitytoparticipateinTitleIVprogramsiftheircohortdefaultrateexceeds40%foranygiven yearorisequaltoorgreaterthan30%forthreeconsecutiveyears.Formoreinformationincludingthedefault ratesofourinstitutions,see“RegulatoryEnvironment—StudentFinancingSourcesandRelatedRegulations/ Requirements—DepartmentofEducation—RegulationofTitleIVFinancialAidPrograms—StudentLoan Defaults.” Ifoneofourinstitutionsisrequiredtodevelopadefaultpreventionplan,itmayincreaseouradministrative costswhichwouldadverselyimpactourresultsofoperations.Recentlytherehasbeenincreasedattentionby membersofCongressandothersondefaultpreventionactivitiesofproprietaryeducationinstitutions.Ifsuch attentionleadstoCongressionalorregulatoryactionrestrictingthetypesofdefaultpreventionassistancethat educationalinstitutionsarepermittedtoprovide,thedefaultratesofourformerstudentsmaybenegatively impacted.SuchattentioncouldalsoleadtoCongressionalproposalstoincreasethemeasuringperiod,which couldnegativelyimpactourdefaultrates.MembersofCongresshavealsointroducedproposedlegislationthat wouldassessinstitutionsashareofthecostsassociatedwithdefaultofstudentloansbystudentswhowere enrolledintheinstitutions’educationprogramsandwouldtieaninstitution’sobligationtomakesuch“risk-shar - ing”paymentstotheinstitution’seligibilitytoparticipateintheTitleIVprograms.Ifoneofourinstitutionsloses itseligibilitytoparticipateinTitleIVprogramsbecauseofhighstudentloandefaultrates,studentswouldno longerbeeligibletouseTitleIVprogramfundsatthatinstitution,whichwouldsignificantlyreducethatinstitu - tion’senrollmentsandrevenueandhaveamaterialadverseeffectonourresultsofoperations. We rely on third parties to administer our institutions’ participation in Title IV programs and their failure to perform services as agreed or to comply with applicable regulations could cause us to lose our eligibility to participate in Title IV programs. ED’sregulationspermitaninstitutiontoenterintoawrittencontractwithathird-partyservicerfortheadminis - trationofanyaspectoftheinstitution’sparticipationinTitleIVprograms.Thethird-partyservicermust,among otherobligations,complywithTitleIVrequirementsandbejointlyandseverallyliablewiththeinstitutiontothe SecretaryofEducationforanyviolationbytheservicerofanyTitleIVprovision.Ourinstitutionsutilizethird- partyservicersforsomeservices,suchasfinancialaidprocessing,defaultmanagement,andprocessingstudent creditbalancerefunds,andinthefuturemayconsiderusingthird-partyservicersforotherfunctionsthatare currentlymanageddirectlybyourinstitutions.Ifanythird-partyservicerthatwehaveengageddoesnotcom - plywithapplicablestatutesandregulationsincludingtheHEA,ourinstitutionsmaybeliableforitsactions,and ourinstitutionscouldloseeligibilitytoparticipateinTitleIVprograms.Intheeventthatoneofourthird-party servicersfailstoperformtheservicesasagreed,itmayimpactourabilitytooperate,negativelyimpactoureligi - bilitytoparticipateinTitleIVprograms,andotherwisehaveamaterialadverseeffectonourfinancialcondition. 86 AmericanPublicEducation,Inc. Further,intheeventthatourinstitutionstransitiontoorfromathird-partyservicerforanyofitsservices,there wouldbecostsandrisksrelatedtothetransition,whichcouldhaveamaterialadverseeffectonourfinancial condition. Our institutions will be subject to sanctions that could be material to our results and damage our reputation if the Department of Education determines that our institutions failed to correctly calculate and timely return Title IV program funds for students who withdraw before completing their educational program. AninstitutionparticipatinginTitleIVprogramsmustcorrectlycalculatetheamountofunearnedTitleIVpro - gramfundsthathavebeendisbursedtostudentswhowithdrawfromtheireducationalprogramsbeforecom - pletion,andmustreturnthoseunearnedfundstotheTitleIVprogramsinatimelymanner,generallywithin45 daysafterthedatetheschooldeterminesthatthestudenthaswithdrawn.UnderEDregulations,latereturns ofTitleIVprogramfundsfor5%ormoreofstudentssampledinconnectionwiththeinstitution’sannualcom - plianceauditconstitutematerialnoncomplianceforwhichaninstitutiongenerallymustsubmitanirrevocable letterofcredit. HCON’sTitleIVcomplianceauditfortheyearendedDecember31,2012,identifiedadeficiencyrelatedtotimely returnofTitleIVprogramfunds.InaPreliminaryAuditDeterminationLetterdatedJuly10,2013,EDrequested additionalinformationfromHCONaboutthesituationandrequiredHCONtoconductafilereviewtoidentify thosefilesthatreflectedaninaccuraterefund.InaFinalAuditDeterminationLetterdatedFebruary28,2014,ED determinedthatHCONwasnotrequiredtorepaytheliabilitytoEDanddirectedHCONtoadoptproceduresto preventreoccurrence.HCONalsowasrequiredtopostanirrevocableletterofcreditintheamountof$128,290, whichissettoexpireinJuly2017. Our institutions’ failure to comply with ED’s substantial misrepresentation rules could result in material sanctions. EDmaytakeactionagainstaninstitutionintheeventofsubstantialmisrepresentationbytheinstitutioncon - cerningthenatureofitseducationalprograms,itsfinancialcharges,ortheemployabilityofitsgraduates.The ProgramIntegrityRegulationsexpandedthedefinitionof“substantialmisrepresentation”tocoveradditional representativesoftheinstitutionandadditionalsubstantiveareas,expandedthepartiestowhomasubstan - tialmisrepresentationcannotbemade,andincreasedactionsEDmaytakeifitdeterminesthataninstitution hasengagedinsubstantialmisrepresentation.Aninstitutionengagesinsubstantialmisrepresentationwhen theinstitutionitself,oneofitsrepresentatives,oranorganizationorpersonwithwhichtheinstitutionhasan agreementtoprovideeducationalprograms,marketing,advertising,oradmissionsservices,makesasubstan - tialmisrepresentationdirectlyorindirectlytoastudent,prospectivestudentoranymemberofthepublic,orto anaccreditingagency,astateagency,ortotheSecretaryofEducation. IfEDdeterminesthataninstitutionhasengagedinsubstantialmisrepresentation,EDmay(i)iftheinstitution isprovisionallycertified,revokeaninstitution’sprogramparticipationagreementorimposelimitationsonits participationinTitleIVprograms,(ii)denyparticipationapplicationsmadeonbehalfoftheinstitution,or(iii) initiateaproceedingagainsttheinstitutiontofinetheinstitutionortolimit,suspendorterminatetheinstitu - tion’sparticipationinTitleIVprograms.Weexpectthattherecouldbeanindustry-wideincreaseinadministra - tiveactionsandlitigationclaimingsubstantialmisrepresentationbecausesuchclaimscouldformthebasisof aborrowerdefenseclaimundertheBorrowerDefenseregulationseffectiveJuly1,2017.Ifsuchadministrative actionsorlitigationwerebroughtagainstourinstitutions,wecouldincurlegalcostsrelatedtotheirinvesti - gationanddefense,whichcouldmateriallyandadverselyimpactourfinancialcondition.InDecember2015, EDsentHCONaletterinformingHCONthatEDhaddeterminedtofineHCON$27,500basedonED’sfinding 2016 Annual Report 87 thatHCONhadsubstantiallymisrepresenteditsprogrammaticaccreditationstatusduringatimeperiodprior toourownershipofHCON.HCONpaidthefineinDecember2015.Formoreinformation,seethe“Regulatory Environment—RegulatoryActionsandRestrictionsonOperations—ChangeinOwnershipResultinginaChange ofControl—U.S.DepartmentofEducation”sectionofthisAnnualReport. Failure to comply with ED’s credit hour requirements could result in sanctions. IntheProgramIntegrityRegulations,EDdefined“credithour”forTitleIVpurposesasaninstitutionallyestab - lishedequivalencythatreasonablyapproximatescertainspecifiedtimeinclassandoutsideclass,oranequiva - lentamountofworkforotheracademicactivities.TheProgramIntegrityRegulationsalsorequireinstitutional accreditorstoreviewthereliabilityandaccuracyofaninstitution’scredithourassignments.Anaccreditor musttakeappropriateactionstoaddressaninstitution’scredithourdeficienciesandtonotifyEDifitfinds systemicnoncomplianceorsignificantnoncomplianceinoneormoreprograms.EDhasindicatedthatifitfinds aninstitutiontobeoutofcompliancewiththecredithourdefinitionforTitleIVpurposes,itmayrequirethe institutiontorepaytheamountofTitleIVawardedundertheincorrectassignmentofcredithoursand,ifitfinds significantoverstatementofcredithours,itmayfinetheinstitutionorlimit,suspend,orterminateitsparticipa - tioninTitleIVprograms.Anysuchactioncouldmateriallyandadverselyaffectthebusinessofourinstitutions. Formoreinformation,seethe“RegulatoryEnvironment—StudentFinancingSourcesandRelatedRegulations/ Requirements—DepartmentofEducation—RegulationofTitleIVFinancialAidPrograms—CreditHours”section ofthisAnnualReport. Failure to comply with the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act, as implemented by ED, could result in sanctions. Ourinstitutionsmustcomplywithcertaincampussafetyandsecurityreportingrequirementsaswellasother requirementsintheJeanneCleryDisclosureofCampusSecurityPolicyandCampusCrimeStatisticsAct,or CleryAct,includingchangesmadetotheCleryActbytheViolenceAgainstWomenReauthorizationActof2013, orVAWA.TheCleryActrequiresaninstitutiontoreporttoEDanddiscloseinitsannualsecurityreport,forthe threemostrecentcalendaryears,statisticsconcerningthenumberofcertaincrimesthatoccurredwithinthe institution’sso-called“Clerygeography.”APUShistoricallyhasnothadtocomplywiththeCleryActbecauseitis awhollyonlineinstitution,butAPUSrecentlydeterminedthatitisnolongersubjecttothatexclusionandissued itsfirstannualsecurityreportin2016.NewregulationsimplementingstatutorychangesmadetotheCleryAct byVAWAwereeffectiveJuly1,2015.Thenewregulationsrequire,amongotherthings,thatinstitutionsmaintain statisticsaboutthenumberofincidentsofdatingviolence,domesticviolence,sexualassault,andstalkingthat meetthedefinitionsofthosetermsassetforthinthefinalrule;provideincomingstudentsandnewemploy - eeswith,anddescribeintheirannualsecurityreports,primarypreventionandawarenessprograms;provide studentsandemployeeswith,anddescribeintheirannualsecurityreports,ongoingpreventionandawareness campaigns;andprovideintheirannualsecurityreportsadescriptionofeachtypeofdisciplinaryproceeding usedbytheinstitution,whichmustbeprompt,fair,andimpartial.Ourinstitutions’failuretocomplywiththe CleryActrequirementsorregulationspromulgatedbyEDcouldresultinactionbyEDtofineourinstitutionsor tolimitorsuspendourinstitutions’participationinTitleIVprograms. Enforcement of laws related to the accessibility of technology continues to evolve, which could result in increased information technology development costs and compliance risks. APUS’seducationalprogramsandtheHCONRN-to-BSNprogramaremadeavailabletostudentsthrough personalcomputersandothertechnologicaldevices.Foreachoftheseprograms,thecurriculummakesuse ofacombinationofgraphics,pictures,videos,animations,soundsandinteractivecontent.Federalagen - cies,includingEDandtheDepartmentofJustice,haveconsideredorareconsideringhowelectronicand 88 AmericanPublicEducation,Inc. informationtechnologyshouldbemadeaccessibletopersonswithdisabilities.Forexample,Section504of theRehabilitationActof1973,orSection504,prohibitsdiscriminationagainstapersonwithadisabilitybyany organizationthatreceivesfederalfinancialassistance.In2010,ED’sOfficeforCivilRights,whichenforcesSection 504,togetherwiththeDepartmentofJusticeassertedthatrequiringtheuseoftechnologyinaclassroomenvi - ronmentwhensuchtechnologyisinaccessibletoindividualswithdisabilitiesviolatesSection504,unlessthose individualsareprovidedaccommodationsormodificationsthatpermitthemtoreceivealltheeducationalbene - fitsprovidedbythetechnologyinanequallyeffectiveandintegratedmanner.Ifoneofourinstitutionsisfound tohaveviolatedSection504,itmayberequiredtomodifyexistingcontentandfunctionalityofitsonlineclass - roomorotherusesoftechnology,includingthroughadoptionofspecifictechnicalstandards.Asaresultofsuch enforcementaction,orasaresultofnewlawsandregulationsthatrequiregreateraccessibility,ourinstitutions mayhavetomodifytheironlineclassroomsandotherusesoftechnologytosatisfyapplicablerequirements, whichcouldrequiresubstantialfinancialinvestment.Aswithallnondiscriminationlawsthatapplytorecipients offederalfinancialassistance,aninstitutionmayloseaccesstofederalfinancialassistanceifitdoesnotcomply withSection504requirements.Inaddition,privatepartiesmayfileorthreatentofilelawsuitsallegingfailureto complywithlawsthatprohibitdiscriminationonthebasisofdisability,anddefendingagainstsuchactionsmay requireourinstitutionstoincurcoststomodifytheironlineclassroomsandotherusesoftechnologyandcosts oflitigation. Government and regulatory agencies and third parties may conduct compliance reviews, bring claims, or initiate enforcement actions or litigation against us, any of which could disrupt our institutions’ operations and adversely affect their performance. Becauseourinstitutionsoperateinahighlyregulatedindustry,wearesubjecttoaudits,compliancereviews, inquiries,complaints,investigations,claimsofnoncompliance,enforcementproceedings,andlawsuitsbygov - ernmentagencies,regulatoryagencies,students,employees,andthirdparties,includingclaimsbroughtbythird partiesonbehalfofthefederalgovernment.Forexample,EDregularlyconductsprogramreviewsofeduca - tionalinstitutionsthatareparticipatinginTitleIVprogramsandtheEDOIGregularlyconductsauditsandinves - tigationsofsuchinstitutions.InFebruary2016,EDcreatedaStudentAidEnforcementUnit,ortheEnforcement Unit,toenableEDtorespondmorequicklyandefficientlytoallegationsofillegalactionsbyhighereducation institutions.TheEnforcementUnitcollaborateswithstateandfederalagenciestoenforceviolationsoflawand workswithED’sProgramComplianceUnittoreviewevidencethatmayaffectprogramreviews.TheFederal TradeCommissionhasinvestigated,andinsomecasesbroughtlawsuitsagainst,proprietaryinstitutionsalleging thattheinstitutionsengagedindeceptivetradepractices.TheConsumerFinancialProtectionBureauhassued proprietaryinstitutionsforengaginginallegedlyillegalpredatorylendingpractices.Iftheresultsofcompliance reviewsorotherproceedingsareunfavorabletous,orifweareunabletodefendsuccessfullyagainstlawsuits orclaims,ourinstitutionsmayberequiredtopaymonetarydamagesorbesubjecttofines,limitations,lossof TitleIVfunding,injunctions,orotherpenalties,includingtherequirementtomakerefunds.Evenifourinstitu - tionsadequatelyaddressissuesraisedbyanagencyrevieworsuccessfullydefendalawsuitorclaim,wemay havetodivertsignificantfinancialandmanagementresourcesfromourongoingbusinessoperationstoaddress issuesraisedbythosereviewsortodefendagainstthoselawsuitsorclaims.Claimsandlawsuitsbroughtagainst usoroneofourinstitutionsmayresultinreputationaldamage,evenifsuchclaimsandlawsuitsarewithout merit.Anyoneofthesesanctionscouldmateriallyadverselyaffectourbusiness,financialcondition,results ofoperationsandcashflowsandresultintheimpositionofsignificantrestrictionsonusandourinstitutions, whichmaymateriallyadverselyaffectourabilitytooperate. 2016 Annual Report 89 ED is currently conducting a program review of APUS’s administration of the Title IV programs, and we cannot predict the outcome of the review. InSeptember2016,EDbeganaprogramreviewofAPUS’sadministrationoftheTitleIVprogramsduringthe 2014-2015and2015-2016awardyears.Aspartoftheprogramreview,EDconductedasitevisitfromSeptember 12toSeptember14,2016.Theprogramreviewremainsopenandongoing.Atthistime,wecannotpredictthe outcomeoftheprogramreview,whenitwillbecompleted,orwhetheritwillimposeanyliabilityorotherlimita - tionsonAPUSasaresultofthereview. Investigations by state attorneys general, Congress, and governmental agencies may result in increased regulatory burdens and costs. We,andotherproprietarypostsecondaryeducationproviders,havebeensubjecttoincreasedregulatoryscru - tinyandlitigationinrecentyears.Stateattorneysgeneralhaveincreasinglyfocusedonallegationsofimproper recruiting,compensation,anddeceptivemarketingpractices,amongotherissues.Anumberofstateattorneys generalhavelaunchedinvestigationsintoproprietarypostsecondaryeducationinstitutions.InJuly2011,the AttorneyGeneralofKentuckyannouncedanationalbipartisaneffort,whichnowincludesapproximately30 states,toexaminepotentialabusesbyproprietaryeducationalinstitutions.Whiletheinitialgoalofthejoint investigationissharinginformationamongtheattorneysgeneralaboutpotentialviolationsofconsumerprotec - tionlaws,theattorneygeneralofKentuckyindicatedthattheattorneysgeneralmayultimatelyattempttocom - pelproprietaryinstitutionslocatedintheirrespectivejurisdictionstorevisetheirrecruitingpractices.InJanuary 2014,manyofthepubliclytradedfor-profitpostsecondaryinstitutions,notincludingus,receiveddemandsfor informationfromanetworkof12stateattorneysgeneralrelatingto,amongothermatters,therecruitmentof students,admissionsstandards,graduateplacementstatistics,graduatecertificationandlicensingresults,and studentlendingactivities.InJune2014,theMassachusettsattorneygeneralreleasedseveralconsumerprotec - tionregulations,which,amongotherthings,requirecertaindisclosuresthatapplytofor-profitandoccupational schoolsoperatinginthestate.Actionsbystateattorneysgeneralandothergovernmentalagencies,whetheror notinvolvingusorourinstitutions,coulddamageourreputationandthereputationofourinstitutionsandlimit theabilitytorecruitandenrollstudents,whichcouldreducestudentdemandforourinstitutions’programsand adverselyimpactourrevenueandcashflowfromoperations. Inrecentyears,thestudentlendingpracticesofpostsecondaryeducationalinstitutions,financialaidofficers, andstudentloanprovidershavebeensubjectedtoseveralinvestigationsbystateattorneysgeneral,Congress, andgovernmentalagencies.Theseinvestigationsconcern,amongotherthings,possibledeceptivepracticesin themarketingofprivatestudentloansandloansprovidedbylenderspursuanttoTitleIVprograms.TheHigher EducationOpportunityAct,orHEOA,containsrequirementspertinenttorelationshipsbetweenlendersand institutions.TheHEOAalsoimposessubstantiverequirementsanddisclosureobligationsoninstitutionsthat makeavailablealistofrecommendedlendersforpotentialborrowers.Newproceduresintroducedandrecom - mendationsmadebytheConsumerFinancialProtectionBureaualsocreateuncertaintyaboutwhetherCongress willimposenewburdensonprivatestudentlenders.Statelegislatorshavealsopassed,ormaybeconsidering, legislationrelatedtorelationshipsbetweenlendersandinstitutions.Further,in2014,severalfederalagencies implementedanonlinestudentcomplaintsystemforservicemembers,veterans,andtheirfamiliestoreport negativeexperiencesateducationalinstitutionsandtrainingprogramsadministeringthePost-9/11GIBill,DoD tuitionassistanceprograms,andothermilitary-relatededucationbenefitprograms.Wecanneitherknownor predictwithcertaintytheeffectsofsuchdevelopments.Governmentalactionmayimposeincreasedadminis - trativeandregulatorycostsandadverselyaffectourfinancialcondition. 90 AmericanPublicEducation,Inc. If we undergo a change in ownership and control, the Department of Education will place our institutions on provisional certification, and the terms of that provisional certification could limit our institutions’ potential for growth and adversely affect our institutions’ enrollment, our revenue, and results of operations. ED’sregulationsprovidethatachangeofcontrolofapubliclytradedcorporationoccursif:(i)thereisanevent thatwouldobligatethecorporationtofileaCurrentReportonForm8-KwiththeSECdisclosingachangeofcon - trol;or(ii)thecorporationhasastockholderthatownsatleast25%ofthetotaloutstandingvotingstockofthe corporationandisthelargeststockholderofthecorporation,andthatstockholderceasestoownatleast25%of suchstockorceasestobethelargeststockholder.Asignificantpurchaseordispositionofourvotingstockcould bedeterminedbyEDtobeachangeinownershipandcontrolunderthisstandard.UndertheHEA,aninstitution whoseparentundergoesachangeinownershipresultinginachangeofcontrollosesitseligibilitytoparticipate inTitleIVprogramsandmustapplytoEDinordertoreestablishsucheligibility. FuturetransactionscouldconstituteachangeinownershiporcontrolunderED’sregulationsandcouldcause EDtoplaceourinstitutionsonprovisionalcertificationasrequiredbytheHEA.Theconditionsofprovisional certificationorcloserreviewbyEDcouldimpact,amongotherthings,ourinstitutions’abilitytoaddeducational programs,oradditionallocations,ourabilitytoacquireotherinstitutions,orourabilitytomakeothersignificant changes.Inaddition,ifEDweretodeterminethatourinstitutionswereunabletomeettheirresponsibilities whiletheywereprovisionallycertified,EDcouldseektorevokeourinstitutions’certificationtoparticipatein TitleIVprogramswithfewerdueprocessprotectionsthaniftheywerefullycertified.Limitationsonourinsti - tutions’operationscould,andthelossofourinstitutions’certificationtoparticipateinTitleIVprogramswould, adverselyaffectourinstitutions’abilitytogrowinadditiontohavingadverseeffectsontheirenrollment,and ourrevenueandresultsofoperations. If regulators do not approve or delay their approval of transactions involving a change of control of our Company or of institutions that we own or acquire, our, and our institutions’, ability to operate could be impaired. Ifweoroneofourinstitutionsexperienceachangeofownershiporcontrolunderthestandardsofapplica - blestateregulatorybodies,accreditingagencies,ED,orotherregulators,weortheinstitutiongovernedby suchagenciesmustnotifyorseektheapprovalofeachrelevantregulatoryagency.Transactionsoreventsthat constituteachangeofcontrolincludesignificantacquisitionsordispositionsofaninstitution’scommonstock, significantchangesinthecompositionofaninstitution’sBoardofDirectors,internalrestructurings,acquisitions ofinstitutionsfromotherowners,orcertainothertransactions.Someofthesetransactionsoreventsmaybe beyondourcontrol.Our,orourinstitutions’,failuretoobtain,oradelayinreceiving,approvalofanychangeof controlfromtherelevantregulatoryagenciesfollowingatransactioninvolvingachangeofownershiporcon - trolcouldresultinasuspensionofoperatingauthority,lossofaccreditation,orsuspensionorlossofabilityto participateinTitleIVprograms,whichcouldhaveamaterialadverseeffectonourinstitutionsandourfinancial condition.Ourfailuretoobtain,oradelayinreceiving,approvalofanychangeofcontrolfromotherstatesin whichwearecurrentlylicensedorauthorizedcouldrequireourinstitutionstosuspendactivitiesinthatstateor otherwiseimpairourinstitutions’operations.Thepotentialadverseeffectsofachangeofcontrolcouldinflu - ence,amongotherthings,futuredecisionsbyusandourstockholdersregardingthesale,purchase,transfer, issuance,orredemptionofourstock.Inaddition,theregulatoryburdensandrisksassociatedwithachangeof controlalsocouldhaveanadverseeffectonthemarketpriceofourcommonstock. 2016 Annual Report 91 Certain contingents of the U.S. Congress have been examining the proprietary postsecondary education sector, which could result in legislation, heightened oversight, or additional Department of Education rulemaking that may limit or condition Title IV program participation of proprietary schools in a manner that may materially and adversely affect our business. Inrecentyears,certaincontingentsoftheU.S.Congresshaveincreasedtheirfocusonproprietaryeducational institutions.Thisincreasedfocushasresultedintheintroductionofvariouspiecesoflegislation,theholding ofseveralhearingsbyvariousCongressionalcommittees,andCongressionalinvestigationsandinquiries.We havepreviouslyincurredsignificantlegalandothercoststorespondtoCongressionalinquiries,andcouldincur significantlegalandothercoststorespondtoanyfutureinquiries.Wecannotpredicttheextenttowhich,or whether,thesehearingsandinvestigationswillresultinlegislation,furtherrulemakingaffectingourparticipa - tioninTitleIVprograms,orlitigationallegingstatutoryviolations,regulatoryinfractionsorcommonlawcauses ofaction.Theadoptionofanylaworregulationthatreducesfundingforfederalstudentfinancialaidprograms ortheabilityofourinstitutionsorstudentstoparticipateintheseprogramscouldhaveamaterialadverse effectonourstudentpopulationandrevenue.Legislativeactionalsomayincreaseouradministrativecostsand requireourinstitutionstomodifytheirpracticesinordertocomplywithapplicablerequirements.Additionally, membersofCongresshavealsofromtimetotimeencouragedEDtoadoptadditionalregulationsforparticipa - tioninTitleIVprogramsthatcouldincreaseourcostofoperationsorexposeustoadditionalrisks. Congressional examination of DoD oversight of tuition assistance used for distance education and proprietary institutions could result in legislative or regulatory changes that may materially and adversely affect our business. The90/10RulehasbeenasubjectofinterestoverthepastseveralCongresses,whichhasresultedinseveral membersofCongressintroducingproposalsandlegislationthatwouldmodifythe90/10Rule.Onepastpro - posalwoulddecreasethelimitfrom90%to85%andwouldcountDoDtuitionassistanceandVAeducation benefitstowardthatlimit.Suchaproposalorothersimilarlegislation,shoulditbecomelaw,couldhaveamate - rialadverseimpactontheoperationsofAPUSandHCON.Wecannotpredicttheextenttowhich,orwhether, Congressionalhearingswillresultinlegislationorfurtherrulemakingaffectingourinstitutions’abilitytopar - ticipateinDoDtuitionassistanceprogramsorTitleIVprograms.MembersofCongresshavestated,bothin committeehearingsandintheHELPCommitteereport,thatCongressshouldrevisethe90/10RuletocountDoD tuitionassistanceandVAveteranseducationalbenefitstowardthe90%limit.Wecannotpredictthelikelihood thatCongresswillamendthe90/10RuletocountDoDtuitionassistanceandVAeducationbenefitstowardthe 90%limitortolowertheratioto85/15,norcanwepredictthelikelihoodthatCongressorthePresidentwilltake someotheractiontolimittheuseofDoDtuitionassistanceandVAeducationbenefitsatfor-profitinstitutions. Totheextentthatanylawsorregulationsareadoptedthatlimitorconditiontheparticipationofproprietary schoolsordistanceeducationprogramsinDoDtuitionassistanceprogramsorinTitleIVprograms,orthatlimit orconditiontheamountofDoDtuitionassistanceforwhichfor-profitschoolsordistanceeducationprograms areeligibletoreceive,ourfinancialconditioncouldbemateriallyandadverselyaffected. Congress has in the past changed, and may in the future change, eligibility standards and funding levels for federal student financial aid programs, DoD tuition assistance, and other programs. Other governmental or regulatory bodies may also change similar laws or regulations relating to such programs, which could adversely affect our student population, revenue and financial condition. PoliticalandbudgetaryconcernscansignificantlyaffectTitleIVprograms,militarytuitionassistanceprograms, andotherlawsandregulationsgoverningfederalandstateaidprograms. 92 AmericanPublicEducation,Inc. TitleIVprogramsaremadeavailablepursuanttotheprovisionsoftheHEA,andtheHEAcomesupforreau - thorizationbyCongressapproximatelyeveryfivetosixyears.AuthorizationofappropriationsformostHEA programsiscurrentlyprovidedthroughSeptember30,2017,bytheConsolidatedAppropriationsAct,2016. Inthepast,Congresshaspassedshort-termnonsubstantiveextensionsoftheHEApendingcomprehensive reauthorizationlegislation.Further,whenCongressdoesnotactoncomprehensivereauthorizationthrougha singlepieceoflegislation,itmayactthroughmultiplepiecesoflegislation.Congresscompletedthemostrecent reauthorizationthroughmultiplepiecesoflegislationandmayreauthorizetheHEAinapiecemealmannerinthe future.Additionally,CongressdeterminesthefundinglevelforeachTitleIVprogramonanannualbasis.Future Congressionalaction,includinginreauthorizationsorappropriationsacts,mayresultinnumerouslegislative changes,includingthosethatcouldadverselyaffecttheabilityofourinstitutionstoparticipateinTitleIVpro - grams,DoDtuitionassistanceprograms,andtheavailabilityofsuchfundingsourcesforourstudents.Members ofCongressfrequentlyproposelegislationtoalteroramendthetermsunderwhichourinstitutionsparticipate inthefederalstudentfinancialaidprograms.AnyactionbyCongressthatsignificantlyreducesfundingfor TitleIVprogramsortheabilityofourinstitutionsorstudentstoparticipateintheseprogramscouldmaterially harmourinstitutions’business.Areductioningovernmentfundinglevelscouldleadtolowerenrollmentsat ourinstitutionsandrequireourinstitutionstoarrangeforalternativesourcesoffinancialaidfortheirstudents. Lowerstudentenrollmentsatourinstitutionsortheirinabilitytoarrangealternativesourcesoffundingcould adverselyaffectourfinancialcondition.Congressionalactionmayalsorequireourinstitutionstomodifytheir practicesinwaysthatcouldresultinincreasedadministrativeandregulatoryexpenses. WearenotinapositiontopredictwhetheranylegislationwillbepassedbyCongressorsignedintolawinthe future.ThereallocationoffundingamongTitleIVprograms,materialchangesintherequirementsforpartici - pationinsuchprograms,orthesubstitutionofmateriallydifferentTitleIVprogramscouldreducetheabilityof certainstudentstofinancetheireducationatourinstitutionsandadverselyaffectourrevenueandresultsof operations. Our institutions’ failure to comply with ED’s cash management regulations may result in the loss of eligibility to participate in Title IV programs. OnOctober30,2015,EDpublishedfinalregulationstoamendED’scashmanagementregulations,whichwe refertoastheCashManagementRegulations.TheCashManagementRegulationswentintoeffectonJuly1, 2016.Amongothertopics,theCashManagementRegulationsaddressarrangementsbetweenpostsecondary institutionsandfinancialaccountproviderstodisburseTitleIVprogramcreditbalancestostudents,including throughtheuseofdebitorprepaidcards.TheCashManagementRegulationsrequireinstitutionstoestablisha processtofacilitatestudentchoiceinhowstudentsreceiveTitleIVprogramfederalstudentfinancialaidcredit balances;limitthepersonallyidentifiableinformationaboutstudentsthatmaybesharedwithfinancialaccount providers;andrequireinstitutionstoobtainstudentconsentbeforeopeninganaccountinthestudent’sname. UndertheCashManagementRegulations,aninstitutionthathasenteredintoanarrangementwithafinancial accountprovidermustmitigatecertainfeesincurredbyTitleIVaidrecipients,andcertaintypesoffeesare prohibited.TheCashManagementRegulationsrequirethatcontractsgoverningarrangementswithfinancial accountprovidersbepubliclydisclosedandevaluatedinlightofthebestfinancialinterestsofstudents.The CashManagementRegulationsalsomakeotherchangestorequirementsfortheinstitutionaladministration ofTitleIVprograms,includingbyclarifyinghowpreviouslypassedcourseworkistreatedforTitleIVeligibility purposes,alteringtherequirementsforconvertingclockhourstocredithours,andupdatingotherprovisions inED’scashmanagementregulations.Forexample,theCashManagementRegulationsestablisharequirement thatinstitutionsparticipatingintheTitleIVprogramsunderthereimbursementorheightenedcashmonitoring paymentmethodsmustpayanycreditbalanceduetoastudentbeforeseekingreimbursementorarequestfor funds,respectively.TheCashManagementRegulationsspecifythecircumstancesunderwhichaninstitution 2016 Annual Report 93 mayincludethecostofbooksandsuppliesaspartofinstitutionaltuitionandfeeschargedtoastudent,such asiftheinstitutionhasmadearrangementswithpublisherstoobtainbooksatbelow-marketratesorifbooks orelectroniccoursematerialsarenotavailableelsewhere.TheCashManagementRegulationsalsoexpandthe groupofstudentstowhomaninstitutionmustprovideawaytoobtainorpurchase,bytheseventhdayofapay - mentperiod,thebooksandsuppliesapplicabletothepaymentperiod.Previously,aninstitutionwasrequiredto providesuchassistanceonlytostudentswhoreceivePellGrants,butundertheCashManagementRegulations, aninstitutionwillberequiredtoprovidesuchassistancetoanystudentwhoiseligibleforTitleIVprogramaid. Ourinstitutionsutilizeathird-partyservicertoprovideservicesrelatedtothedisbursementofTitleIVfinancial aidcreditbalancerefunds.IfanyofourinstitutionsviolatestheCashManagementRegulations,EDmayfindthat theinstitutionlackstheadministrativecapability,fiscalresponsibility,orsystemofinternalcontrolsrequiredto participateintheTitleIVprograms.IfoneofourinstitutionsisfoundnottohavesatisfiedED’srequirements,it couldbelimitedinitsaccessto,orlose,TitleIVprogramfunding,whichwouldlimitourpotentialforgrowthand adverselyaffectourenrollment,revenue,andresultsofoperations. Recent and future regulatory developments may adversely impact our institutions’ enrollment, financial condition, results of operations, expenses, and cash flows. EDhasinthepastpublished,andinthefuturemaypublish,additionalrulesthataffectourinstitutions.For example,onOctober30,2015,EDpublishedfinalregulationsthatintroducedanewincome-contingentrepay - mentplan,calledtheRevisedPayAsYouEarnrepaymentplan,orREPAYEplan,whichbecameavailablein December2015,toallDirectLoanstudentborrowersregardlessofwhentheborrowertookouttheloans.Under theREPAYEplan,DirectLoanborrowersmaycaptheirloanpaymentsat10%oftheirmonthlyincomes.The regulationsalsoexpandthecircumstancesunderwhichaninstitutioncouldchallengeorappealadraftorfinal cohortdefaultrate,beginninginFebruary2017. Inadditiontopublishingrules,EDhasinthepastandmayinthefuturetakeotheractionsthataffectourinstitu - tions.Forexample,inSeptember2015,EDpubliclyreleaseditsCollegeScorecardwebsite.Amongothercharac - teristics,theCollegeScorecardallowsuserstosearchforschoolsbaseduponprogramsoffered,location,size, taxstatus,mission,andreligiousaffiliation.WedonotbelievetheCollegeScorecardisanappropriateindicator ofAPUS’sgraduationratebecausetheCollegeScorecard’sgraduationrateonlyincludestheperformanceof firsttime,full-timeundergraduatestudentswhorepresentlessthanapproximately1%ofallAPUSstudents. Furthermore,substantiallyalloftheotherCollegeScorecardmeasuresarebasedonstudentswhoarerecipi - entsofTitleIVprogramfunds;suchstudentsrepresentaminorityofAPUS’sstudents.Wecannotpredictthe extenttowhichtheCollegeScorecardhasimpactedormayimpactourinstitution’senrollments,reputation, oroperatingresults,includingifstudentsexcludeourinstitutionsfromconsiderationbecauseoftheCollege Scorecard’spresentationofourgraduationrate,thefocusontaxstatusandourstatusasafor-profitbusiness, orbecauseofotherfactors. Wecannotpredictthenatureofanyfuturerulemakings,actionsorinterpretationsthatmaybeimplemented oradoptedbyED.However,theseandfutureregulatorydevelopmentsmayadverselyimpactourinstitutions’ enrollments,financialcondition,resultsofoperations,expenses,andcashflows. Our regulatory environment and our reputation may be negatively influenced by the actions of other for- profit institutions. Ourinstitutionsaretwoofamuchlargernumberoffor-profitinstitutionsservingthepostsecondaryeducation market.Inrecentyears,regulatoryinvestigationsandcivillitigationhavebeencommencedagainstseveralfor- profiteducationalinstitutions.Theseinvestigationsandlawsuitshavealleged,amongotherthings,deceptive tradepracticesandnoncompliancewithEDregulations.Theseallegationshaveattractedadversemediaand 94 AmericanPublicEducation,Inc. socialmediacoverage,havebeenthesubjectoffederalandstatelegislativehearings,andhaveinsomecases resultedinlegislationorrulemaking.Insomecases,institutionshaveceasedoperations,includingwhileunder multiplegovernmentinvestigations.Broaderallegationsagainsttheoverallfor-profitschoolsectorhavenega - tivelyaffectedpublicperceptionsoffor-profiteducationalinstitutions,includingourinstitutions,andthistrend couldcontinueorbroaden.Inaddition,inrecentyears,reportsonstudentlendingpracticesofvariouslending institutionsandschools,includingfor-profitschools,andinvestigationsbyanumberofstateattorneysgeneral, Congressandgovernmentalagencieshaveledtoadversemediaandsocialmediacoverageofpostsecondary education.Adversemediaorsocialmediacoverageregardingothersinourindustry,orregardingusorour institutionsdirectly,coulddamageourreputation,couldresultinlowerenrollmentsatourinstitutions,lower revenueandincreasedexpenses,andcouldhaveanegativeimpactonourstockprice.Suchallegationscould alsoresultinincreasedscrutinyandregulationbyED,Congress,accreditingbodies,statelegislatures,state attorneysgeneral,orothergovernmentalauthoritieswithrespecttoallfor-profitinstitutions,includingusand ourinstitutions.Inaddition,forthesereasons,orothers,not-for-profitorpubliceducationalinstitutionsmay takeactionstodifferentiatethemselvesfromthefor-profiteducationalinstitutions,includingbychoosingnot toenterintocollaborationswithfor-profitinstitutions,includingus,orbyexcludingfor-profitinstitutionsfrom membershipinindustrygroups. RISKS RELATED TO OUR BUSINESS DoD’s revised MOU includes terms and conditions that impose extensive regulatory requirements on APUS with respect to participation in DoD tuition assistance programs. UnderaDoDfinalrule,eachinstitutionparticipatinginDoDtuitionassistanceprogramsisrequiredtosign anMOUoutliningcertaincommitmentsandagreementsbetweentheinstitutionandDoDpriortoaccepting fundsfromDoDtuitionassistanceprograms.In2014,DoDpromulgatednewregulationsandinstitutionswere requiredtosignanewMOU,whichwerefertoasthe2014MOU,inordertocontinuetoparticipateinDoD tuitionassistanceprograms.The2014MOUaddedrequirements,manyofwhicharefocusedonthemannerin whichinstitutionsinteractwithservicemembers.Formoreinformationabouttherequirementsimposedby the2014MOU,see“RegulatoryEnvironment—DepartmentofDefense”inthisAnnualReport.Wecannotpredict preciselyhowDoDwillinterpretandenforcetheserequirementsorwhattypeofimmediatesanctions,ifany, willbeimplementedbeforeaninstitutionlosestheabilitytoparticipateinDoDtuitionassistanceprogramsfor failuretocomplywiththe2014MOU.WebelievethatDoDmayalsoimposesanctionsotherthandenyingan institutiontheabilitytoparticipateinthetuitionassistanceprograms,includingsuspendinganinstitutionfrom enrollingnewstudentsintuitionassistanceprograms,limitingaccesstomilitaryinstallations,subjectinginsti - tutionstoheightenedcomplianceoversight,orotherwiselimitinganinstitution’sabilitytoparticipateintuition assistanceprogramsorrestrictingenrollmentofstudents.WeanticipatethatDoDwillbeannouncingadditional changestotheMOUinthenearfuture,butwecannotpredicttheextentornatureofsuchchanges.Ifwefail tocomplywiththerequirementsofthe2014MOUoranysuccessorMOU,wewillnotbeabletoparticipatein DoDtuitionassistanceprograms,whichcouldhaveasignificantadverseeffectonourresultsofoperationsand financialcondition. Our business could be harmed if our institutions experience a disruption in their ability to process Title IV financial aid. Wecollectedasubstantialportionofourfiscalyear2016consolidatedrevenuefromreceiptofTitleIVfinancial aidprogramfunds.AnyprocessingdisruptionsbyED,byourinstitutions,orbythird-partyserviceproviders mayimpacttheabilityofourinstitutions’studentstoobtainTitleIVfinancialaidonatimelybasis.Ifourinsti - tutionsexperienceadisruptionintheirabilitytoprocessTitleIVfinancialaid,eitherbecauseofadministrative challengesontheirpartorthepartoftheirvendors,ortheinabilityofEDtoprocessTitleIVfundsonatimely 2016 Annual Report 95 basis,itcouldhaveamaterialadverseeffectonourinstitutions’businessandonourfinancialcondition,results ofoperationsandcashflows. Changes our institutions may make to their operations to enhance their ability to identify and enroll students who are likely to succeed and to improve the student experience may adversely affect our institutions’ enrollment, growth rate, profitability, financial condition, results of operations, and cash flows. Inordertoincreaseourinstitutions’focusonimprovingthelearningexperienceandattractingstudentswhoare likelytopersistinourinstitutions’programs,wehavebeenworkingtoidentifypotentialchangesandinitiatives thatwillmoreeffectivelyattractandenrollcollege-readystudents,supportthosestudentsandhelpimprove thosestudent’seducationaloutcomes,includingthroughfacultyengagementinitiativesandco-curricularinitia - tivestoincreasethelevelofengagementandcollaborationintheclassroomandstrengthenthebondbetween APUSanditsstudents.Wehavebeguntoimplementsomeofthesechanges.Forexample,inApril2015,APUS implementedanadmissionsprocessrequiringprospectivestudentstocompleteafree,non-creditadmissions assessmentiftheyarenot(i)activedutymilitaryorveteranapplicants;(ii)graduatesofcertifiedfederal,stateor locallawenforcementorpublicsafetyacademies;or(iii)studentswithatleastninehoursoftransfercreditfrom anaccreditedinstitutionwithagradeof“C”orbetterforeachcourse.APUShasmademultiplechangestothe assessmentprocesssinceitsoriginalimplementationandmayfurthermodifyitinthefutureinordertoidentify college-readystudents.Additionalinitiativesmayincludethefollowing: • furtherchangingadmissionsstandardsandrequirements; • alteringtheadmissionsprocessandprocedures; • implementingmorestringentsatisfactoryacademicprogressstandards; • changingtuitioncostsandpaymentoptions; • experimentingwithcompetency-basedlearningandotheralternativedeliverymethods;and • alteringourinstitutions’marketingprogramstotargettheappropriateprospectivestudents. Theseinitiativesmayadverselyimpactourinstitutions’business,financialcondition,resultsofoperationsand cashflows,particularlyinthenearterm,eveniftheyaresuccessfulinachievingthedesiredresultofidentifying andenrollingstudentswhoarelikelytosucceedandimprovingthestudentexperience.Duetothemanyfactors thatcanimpactenrollments,wemaynotappropriatelyidentifythecauseofanyadverseimpacts,andtherefore maynotbeabletoappropriatelymodifyourinitiatives.Theseinitiativesrequiresignificanttime,energy,and resources,andinvolvemanysignificantinterrelatedandsimultaneouschangesinourprocessesandprograms. Wemaynotsucceedinachievingourobjectivesduetoorganizational,operational,regulatory,orothercon - straints.Ifoureffortsarenotsuccessful,wemayexperiencereducedenrollment,increasedexpense,orother impactsonourbusinessthatmateriallyandadverselyimpactouroperatingresultsandfinancialcondition. We have announced an organizational realignment, and challenges encountered due to the realignment may cause strategic or operational challenges and adversely impact us. OnJuly1,2016,Dr.KaranH.Powell,thethen-currentprovostofAPUS,assumedthePresidencyofAPUSin anticipationofanorganizationalrealignment.Dr.WallaceE.Boston,whohadbeenservingasthePresidentof APUSandtheCEOofAPEI,remainedinhispositionasCEOofAPEI,providingstrategicandleadershipsupport toAPUS,HCON,andotherAPEIventures.During2016,weinvestedcapitalandhumanresourcesinthetransi - tionandplannedrealignment,aswellasinchangestooursystems,modificationofinternalcontrolprocedures andtrainingofemployees,amongotherthings.HLC,astheinstitutionalaccreditorforAPUS,requestedthat APUSsubmitanapplicationtoenableHLCtodeterminewhetherAPUS’sproposaltoenterintoasharedser - vicesmodelwithAPEIconstitutesachangeinorganizationorstructurethatrequiresHLC’spriorapproval.On 96 AmericanPublicEducation,Inc. December22,2016,APUSsubmittedtherequestedchangeofstructureapplication.TheHLCstaffiscurrently reviewingAPUS’sapplicationand,aspartofthatreviewprocess,hasscheduledasitevisitinthesecondquar - terof2017.WebelievethattheearliestthattheHLCBoardofTrusteeswouldmakeadeterminationonthe realignmentisJune2017.IfHLCdoesnotapprovetherealignment,imposeslimitationsorconditionsonthe realignment,takeslongerthanexpectedtotakeactionwithrespecttotherealignment(includingtodetermine nofurtheractionisneeded),orotherwisesanctionsAPUS,wecouldincurincreasedcosts,failtorealizethe efficienciesthatweexpectandincuradditionalstrategicoroperationalchallenges.Furthermore,aswithany leadershiporoperationalchange,theimplementationoftheplannedrealignmentcouldalsoleadtostrategic andoperationalchallenges,inefficienciesorincreasedcosts,anyofwhichcouldadverselyaffectourbusiness, financialcondition,resultsofoperationsandcashflows. As part of our business strategy, we have entered into, and may enter into or seek to enter into, business combinations and acquisitions that may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention. Wemayseektoenterintobusinesscombinationsoracquisitionsinthefuture.Acquisitionsaretypicallyaccom - paniedbyanumberofrisks,including: • difficultiesconsolidatingoperationsandintegratinginformationtechnologyandothersystems,aswellasthe inabilitytomaintainuniformstandards,controls,policiesandprocedures; • distractionofmanagement’sattentionfromnormalbusinessoperationsduringtheacquisitionandintegra - tionprocesses; • inabilitytoobtain,ordelayinobtaining,approvaloftheacquisitionfromthenecessaryregulatoryagencies,or theimpositionofoperatingrestrictionsoraletterofcreditrequirementonusorontheacquiredinstitution; • challengesrelatingtoconformingnon-compliantfinancialreportingprocedurestothoserequiredofasubsidi - aryofaU.S.reportingcompany,includingproceduresrequiredbytheSarbanes-OxleyAct; • expensesassociatedwiththeintegrationefforts;and • unidentifiedissuesnotdiscoveredintheduediligenceprocess,includinglegalcontingencies. Anyinabilitytointegratecompletedacquisitionsinanefficientandtimelymannercouldhaveanadverseimpact onourresultsofoperations.Further,manyacquisitionsresultintheacquirerrecordinggoodwill.Ifanyacqui - sitionsforwhichwerecordgoodwillarenotsuccessfulorexperiencechallenges,thatgoodwillmaybecome impairedandhaveanadverseimpactonourfinancialcondition.Forexample,werecordedapretax,non-cash chargeof$4.7millionforthefiscalyearendedDecember31,2016,toreducethecarryingvalueofourgoodwill asaresultofadeterminationthatthefairvalueofHCONwaslessthanitscarryingvalue. Ouracquisitionofaneducationalinstitutionwouldalsolikelybeconsideredachangeinownershipandcontrol oftheacquiredinstitutionunderapplicableregulatorystandards,asintheHCONacquisition.Forsuchanacqui - sition,wemayneedapprovalfromED,applicablestateagenciesandaccreditingagencies,andpossiblyother regulatorybodies,anumberofwhichcanonlyberequestedaftercompletionoftheacquisition.Ourinability toobtainsuchapprovalswithrespecttoacompletedacquisitioncouldhaveamaterialadverseeffectonour business,financialcondition,resultsofoperationsandcashflows.Ifwearenotsuccessfulincompletingacqui - sitions,wemayincursubstantialexpensesanddevotesignificantmanagementtimeandresourceswithouta productiveresult.Inaddition,futureacquisitionscouldresultindilutiveissuancesofsecuritiesorcouldrequire useofsubstantialportionsofouravailablecash,asintheHCONacquisition,orissuancesofdebt,whichcould adverselyaffectourfinancialcondition. 2016 Annual Report 97 We have limited experience in making investments in other entities, and any such investments may not result in strategic benefits for our business or could expose us to other risks. Toassistusinachievingelementsofourbusinessstrategyortofurtherdevelopourbusinesscapabilities,from timetotimewewillconsiderandmaypursuestrategicinvestmentsandacquisitions.Thesetransactionscould include,amongotherthings,investmentsin,partnershipsorjointventureswith,ortheacquisitionof,other schools,serviceprovidersoreducationtechnologyrelatedcompanies,amongothertypesofentities.Investing inanotherentityrequiresexpertiseinevaluatinganotherentity’sbusinessandidentifyingstrategicbenefits ofapotentialinvestmentinsuchentity,amongotherexpertise.Thesetypesofinvestmentsinvolvesignificant challengesandrisks,includingthattheinvestmentdoesnotadvanceourbusinessstrategy,thatwedonotreal - izeasatisfactoryreturnonourinvestment,thatweacquireunknownliabilities,orthatmanagement’sattention isdivertedfromourcorebusiness.Theseeventscouldharmouroperatingresultsorfinancialcondition.Any investmentsinotherentitiesmayalsosubjectustotheoperatingandfinancialrisksofsuchentities,andwerely ontheinternalcontrolsandfinancialreportingcontrolsofsuchentities. Since2012,wehavemademinorityinvestmentsinentitiesinwhichwedonothavesolecontrol,whichpresent risksinadditiontothosethatapplytootherinvestmentsoracquisitions.Theseinvestmentsincludeourinvest - mentinaholdingcompanythatacquiredandnowoperatesNewHorizonsWorldwide,Inc.,orNewHorizons, ourinvestmentinpreferredstockofFidelisEducation,Inc.,orFidelisEducation,ourinvestmentinpreferred stockofSecondAvenueSoftware,Inc.,orSecondAvenue,andourinvestmentinpreferredstockofRallyPoint, anonlinesocialnetworkformembersofthemilitary.AlthoughwehavetherighttorepresentationontheBoard ofDirectorsoftheholdingcompanyofNewHorizons,theBoardofDirectorsofFidelisEducation,andtheBoard ofDirectorsofSecondAvenue,andhaveobserverrightsfortheBoardofDirectorsofRallyPoint,wedonothave theabilitytocontrolthepolicies,managementoraffairsoftheseentities,andgenerallywewouldnothavethat abilityinanyminorityinvestmentinanentity.Theinterestsofpersonswhocontroltheentitiesinwhichwehave investedandmayinvestmaydifferfromourinterests,andtheymaycausesuchentitiestotakeactionsthat arenotinourbestinterest,andwemaybecomeinvolvedindisputeswithsuchpersons.Ourinabilitytocontrol entitiesinwhichwemakeminorityinvestmentscouldnegativelyaffectourabilitytorealizethestrategicbene - fitsofthoseinvestments. Wehavemadetheseminorityinvestmentstorealizestrategicbenefitsforourbusiness,ratherthantogenerate incomeorcapitalgainsfromtheseinvestments,andweanticipatethatwewouldmakefutureminorityinvest - mentsforsimilarpurposes.Wecannotensurethatwewillrealizeanystrategicbenefitsfromtheseinvestments inthenear-termoratall.Totheextentthatthestrategicbenefitsofanyinvestmentarenottimelyrealized,or theinvestmentotherwiseunderperforms,wemaywishtodisposeoftheinvestment.Becauseourinterestsin entitiesinwhichwehavemademinorityinvestments,suchasNewHorizons,FidelisEducation,SecondAvenue, andRallyPointarehighlyilliquidandnottradedinanypublicmarket,wemaynotbeabletotimelydisposeof theseinterests,ormayhavetosellatlessthanourcarryingvalue.Further,shouldthevalueoftheseinvest - mentsbecomeimpaired,wemayberequiredtoreducethecarryingvalueoftheseinvestments.Ourinability todisposeofourinterestinsuchanentity,orareductioninthecarryingvalueofsuchanentityonourbooks, wouldnegativelyaffectouroperatingresults. Efforts to diversify our business outside of the traditional areas served by our institutions may provide strategic and operational challenges that we are not prepared or able to address. Asweseekopportunitiestoexpandourbusinessandservemarketsbeyondthosetraditionallyservedbyour institutions,wemayencounterstrategicandoperationalchallengesdifferentfromthosewithinourexisting institutions.Forexample,oursystemsandinfrastructuremaynotbeabletorespondquicklyenoughtosupport newbusinessopportunities,orwemaynototherwisebeabletoaddressthestrategicoroperationaldifferences 98 AmericanPublicEducation,Inc. ofthesenewopportunities.Ifweareunabletosuccessfullycapitalizeonnewopportunities,thevalueofour commonstockmaydeclineovertime,includingbecauseofthechallengesofgrowingourcorebusinessunder ourcurrentmodel. To address competitive pressures in the market, replace older systems or provide enhanced functionality, we will need to continue to invest, and may need to increase our level of investment in, our institutions’ technology, which may place a strain on resources that could adversely affect our systems, controls, and operating efficiency, and those of our institutions. Webelievewewillneedtoinvestcapital,time,andresourcestoupdateourinstitutions’technologyinresponse tocompetitivepressuresinthemarketplace,includingincreaseddemandsforinteractivesolutionsandaccess frommultipleplatforms,toupdateoldersystemsandtoenhancefunctionality,suchasdifferentialpricing. Wewouldlikelyhavetomakesimilarinvestmentstointegratethetechnologysystemsofanybusinesswemay acquireinthefuture.Oureffortstodosomaynotbesuccessful,maycostmorethanexpected,mayincrease ourlevelofspending,ormayotherwiseadverselyaffectourfinancialcondition.Asaresultofunsuccessful developmentefforts,orasaresultofreplacingoutdatedtechnology,softwareorothertechnologyrelated assets,wemayhaveassetsthatbecomeimpaired.Forexample,werecordedapretax,non-cashchargeof$4.0 millionforthefiscalyearendedDecember31,2016,towriteoffcertainstudentcourseregistrationsoftware development. Ifweareunabletoincreasethecapacityofourinstitutions’resourcesorupdatetheirresourcesappropriately, theirabilitytohandlefuturegrowth,toattractorretainstudents,andourfinancialconditionandresultsof operationscouldbeadverselyaffected.Similarly,evenifweareabletoincreasethecapacityofourinstitutions’ resourcesandupdatetheirresourcesappropriately,ourfinancialconditionandresultsofoperationscouldbe adverselyaffectedbyanincreasedlevelofspending. We have continued to experience increases in our institutions’ administrative expenses. AfterAPUSbeganparticipatinginTitleIVprograms,asignificantportionofitsgrowthwasattributabletostudents usingfundsfromthoseprograms.Asaresult,APUSexperiencedachangeinthecompositionofitsstudentbody, whichhasresulted,andwillcontinuetoresult,inaneedtoprovideagreaterlevelofservicestoitsstudents.The HCONacquisitionhasfurtherchangedthecompositionofourstudentbody,increasingthenumberofstudents usingTitleIVprogramfunds,aswellasaddingstudentswhoattendcoursesatphysicalcampuses.Thesechanges, aswellastoeffortstostrengthenourleadership,controlandgovernancestructures,haveledtoincreasedcostsin avarietyofareas,includingwithrespecttoincreasedgeneralandadministrativeexpenses. WhilebaddebtforeachoftheyearsendedDecember31,2016and2015decreasedfromthelevelofbaddebt foreachoftheimmediatelyprioryears,overthepreviousseveralyearsweexperiencedincreasesinourbad debtexpense,particularlyatAPUS.Webelieveourpreviousincreasesinbaddebtexpensewereprimarilydriven byanincreaseinthenumberofstudentsusingTitleIVprogramfundsatAPUS,operationalpolicies,processing challenges,andcollectionsmanagement.InSeptember2015,APUSchangedthemethodbywhichitdisburses TitleIVprogramfundsfromasingledisbursementmethodtoamultipledisbursementmethodforfirst-time APUSundergraduatestudents.Whilethischangemayhavehad,andmaycontinuetohave,anadverseimpact onenrollment,APUSmadethischangeinordertopotentiallylowerbaddebtexpenseandtoreducetheattrac - tivenessofourprogramstostudentswhoareseekingtotakeimproperadvantageoftheTitleIVprograms. WhileourbaddebtexpensedeclinedatAPUSduring2015and2016,wehavenoassurancethatthechangesthat weremadecausedthereductionorthatwewillbeabletofurtherreducebaddebt.Ifweareunabletomake appropriateimprovements,orifourimprovementsarenotaseffectiveasanticipated,ourbaddebtexpense 2016 Annual Report 99 couldagainincrease,whichcouldhaveamaterialadverseeffectonourfinancialcondition,cashflowsand resultsofoperations. We rely on third-party vendors whose service may be of lower quality than ours, whose responsiveness may be less timely than ours, and whose compliance practices may increase our operational and compliance risk. Werelyonthird-partyvendorstoprovidecertainservicestoourinstitutionsandtheirstudentsprimarily relatedtoinformationtechnologyservicesandfinancialaidprocessing.Whilewemonitorandassesstheservice ofthesevendors,itispossiblethatthequalityoftheirserviceandthetimelinessoftheirresponsesmaybeless thantheserviceandresponsivenessthatweorourinstitutionswouldprovide.Thesethird-partyvendorsmay lackadequatebusinesscontinuityplanning.Usingthird-partyvendorsincreasescomplianceriskthattheven - dorsmaynotadequatelyprotectpersonalinformationregardingourinstitutions’studentsandtheirfamilies,or thattheymaynotcomplywithapplicablefederalorstateregulationsapplicabletoourinstitutions’businesses. Further,transitioningfromexistingvendorsorfromin-houseprocessestonewprovidersinvolvesinherent risks,includingtheriskofsignificantdisruptionsofintegralprocesses.Intheeventthird-partyvendorsfailto provideservices,lackadequatecontinuityplanning,orfailtoprovidenecessaryimplementationortransition services,ourfinancialconditionandresultsofoperationscouldbeadverselyaffected. Implementing systems to comply with regulatory requirements applicable to the administration of Title IV programs is difficult and complex, and challenges in doing so could result in adverse regulatory actions and reputational problems and negatively affect our operating results. Inthebeginningofthethirdquarterof2013,APUStransitionedfromusingtheservicesofathird-partyservicer toassistwiththeadministrationandmanagementofAPUS’sparticipationinTitleIVprogramstoutilizingan internalsolutionthatrelied,inpart,onsoftwareandservicesprovidedbyathird-partyvendor.Weexperienced unexpecteddelaysinfinancialaidprocessingasaresultofvarioussoftwareandprogrammingerrorsandlim - itations,resultinginEDrejectingcertainstudentrecords,aninabilitytodisburseTitleIVprogramfundstosome studentsandotherrelatedissues,includingdelaysinprocessingaid,errors,aninabilitytoautomatecertain functionsandhigherlevelsofmanualworkthanhadbeenanticipated.Thechallengeswiththeprocessingof TitleIVprogramfinancialaidledto,orcouldleadto,furtherreputationalproblems,adverseeffectsonouroper - atingresults,reducedcourseenrollments,increasedcosts,andregulatoryproblems.In2015,APUStransitioned itsfinancialaidprocessingtoathird-partyservicer,GlobalFinancialAidServices.Wehavedescribedadditional risksrelatedtothissituation,TitleIVcompliance,andtheuseofthird-partyservicersintheseRisksFactors. Thoserisksandtheissuesexplainedinthisriskfactormayhaveamaterialadverseeffectonouroperationsand financialcondition. If our institutions fail to maintain adequate systems and processes to detect and prevent fraudulent activity in student enrollment and financial aid, our institutions may lose the ability to participate in Title IV programs or Department of Defense tuition assistance programs, or have participation in these programs conditioned or limited. Institutionsofferingonlineeducation,includingAPUS,haveexperiencedfraudulentactivityrelatedtoTitleIV programfunds.GrantsandloanstostudentsunderTitleIVprogramsareprimarilyawardedonthebasisof financialneed,generallydefinedasthedifferencebetweenthecostofattendinganinstitutionandtheamount astudentcanbeexpectedtocontributetothatcost.Inordertoaccountforlivingexpensesandothercoststhat ourstudentsmayreasonablyincurinthecontextofpursuingadegreeorcertificate,thecostofattendingeach ofourinstitutions,inmostcases,isanamountthatexceedsthecostofitstuition.Whilesomestudentselect toreceivegrantsandloansthatcoveronlythecostoftuitionandfees,otherselecttoreceiveamountsupto 100 AmericanPublicEducation,Inc. thefullcostofattendance.WhenoneofourinstitutionsreceivesTitleIVprogramfundsonastudent’sbehalf, itcreditsthosefundstothestudent’saccount.Ifastudenthaselectedtoreceivefundsinexcessofthecostof tuitionandfees,acreditbalanceisgenerated,andtheinstitutionmustpaythatcreditbalancetothestudent unlessthestudenthasauthorizedtheinstitutiontoholdthecreditbalanceortakeotherpermissibleactionwith respecttothecreditbalance.TheavailabilityofTitleIVprogramfunds,includinganycreditbalancepayment,is animportantpartofenablingsomestudentstopursueadegreeorcertificate.However,someindividualsseek totakeadvantageofTitleIVprogramsbyenrollingforthepurposeofobtainingfundstheymayreceivedirectly throughacreditbalancepayment. Ourinstitutions,inparticularAPUS,havebeenthetargetoffraudulentactivityrelatedtoTitleIVprogramfunds, aswellasotherfraudulentactivities.Webelievetheriskofoutsidepartiesattemptingtoperpetratefraudin connectionwiththeawardanddisbursementofTitleIVprogramfundsatAPUS,includingasaresultofidentity theft,isheightenedduetoitsbeinganexclusivelyonlineeducationprovideranditsrelativelylowtuition.Our institutionsmustmaintainsystemsandprocessestoidentifyandpreventfraudulentapplicationsforenrollment andfinancialaid.Wecannotbecertainthatourinstitutions’systemsandprocesseswillcontinuetobeadequate inthefaceofincreasinglysophisticatedfraudschemes,orthatwewillbeabletoexpandsuchsystemsandpro - cessesatapaceconsistentwiththechangingnatureofthesefraudschemes. EDrequiresinstitutionsthatparticipateinTitleIVprogramstorefertotheEDOfficeoftheInspectorGeneral, orOIG,credibleinformationaboutfraudorotherillegalconductinvolvingTitleIVprograms,andinthepastour institutionshavereferredtotheOIGinformationwithrespecttopotentialfraudbyapplicantsandstudents.If thesystemsandprocessesthatourinstitutionshaveestablishedtodetectandpreventfraudareinadequate,ED mayfindthatourinstitutionsdonotsatisfyED’s“administrativecapability”requirements.Ifourinstitutionsfail tosatisfytheadministrativecapabilityrequirements,EDmayrequiretherepaymentofTitleIVprogramfunds, transferourinstitutionsfromthe“advance”systemofpaymentofTitleIVprogramfundstoheightenedcash monitoringstatus,ortothe“reimbursement”systemofpayment,placeourinstitutionsonprovisionalcertifica - tionstatus,orcommenceaproceedingtoimposeafineortolimit,suspend,orterminateourinstitutions’par - ticipationinTitleIVprograms,whichwouldlimitourinstitutions’potentialforgrowthandadverselyaffectour institutions’enrollment,revenue,andresultsofoperations.Inaddition,ourinstitutions’abilitytoparticipatein TitleIVprogramsandDoDtuitionassistanceprogramsisconditionedonmaintainingaccreditationbyanaccred - itingagencythatisrecognizedbytheSecretaryofEducation.Thesignificanceofaccreditationisdescribedmore fullyabovein“RegulatoryEnvironment—Accreditation.”Anysignificantfailuretoadequatelydetectfraudulent activityrelatedtostudentenrollmentandfinancialaidcouldcauseourinstitutionstofailtomeettheiraccred - itors’standards.Furthermore,undertheHEOA,accreditingagenciesthatevaluateinstitutionsofferingonline programs,likeAPUS’sprogramsandHCON’sonlineRegisteredNursetoBachelorofScienceinNursingcomple - tionprogram,mustrequiresuchinstitutionstohaveprocessesthroughwhichtheinstitutionestablishesthat astudentwhoregistersforsuchaprogramisthesamestudentwhoparticipatesinandreceivescreditforthe program.Failuretomeettherequirementsofourinstitutions’accreditingagenciescouldresultinthelossof accreditationofoneormoreofourinstitutions,whichcouldresultintheirlossofeligibilitytoparticipateinTitle IVprograms,DoDtuitionassistanceprograms,orboth. We may have unanticipated tax liabilities that could adversely impact our results of operations and financial condition. WeandourinstitutionsaresubjecttomultipletypesoftaxesintheUnitedStates,andmaybesubjecttotaxa - tioninthefutureinvariousforeignjurisdictions.Thedeterminationofourprovisionforincometaxesandother taxaccrualsinvolvesvariousjudgments,andthereforetheultimatetaxdeterminationissubjecttouncertainty. Inaddition,changesintaxlaws,regulations,orrules,orapplicationofstatesalestaxes,mayadverselyaffect ourfuturereportedfinancialresults,mayimpactthewayinwhichweconductourbusiness,ormayincrease 2016 Annual Report 101 theriskofauditbytheInternalRevenueServiceorothertaxauthorities.Althoughwebelieveourtaxaccru - alsarereasonable,thefinaldeterminationoftaxreturnsunderrevieworreturnsthatmaybereviewedinthe futureandanyrelatedlitigationcouldresultintaxliabilitiesthatmateriallydifferfromourhistoricalincometax provisionsandaccruals.Inaddition,anincreasingnumberofstatesareadoptingnewlaws,orchangingtheir interpretationofexistinglaws,regardingtheapportionmentfactorsusedforstatecorporateincometaxpur - posesinamannerthatcouldresultinalargerproportionofourincomebeingtaxedbythestatesinwhichwe arerequiredtofilestatetaxreturns.Theselegislativeandadministrativechangescouldhaveamaterialadverse effectonourbusinessandfinancialcondition. We rely on dividends, distributions and other payments, advances and transfers of funds from our operating subsidiaries to meet our obligations and to fund acquisitions and certain investments. Werelyondividends,distributionsandotherpayments,advancesandtransfersoffundsfromouroperating subsidiariestomeetourobligationsandtofundacquisitionsandcertaininvestments.Weconductallofour operationsthroughoursubsidiaries,andasofDecember31,2016,hadnosignificantassetsotherthancash,the capitalstockofourrespectivesubsidiaries,andassetsrelatedtoseveralinvestments.Asaresult,werelyondiv - idendsandotherpaymentsordistributionsfromouroperatingsubsidiariestomeetourobligationsandtofund acquisitionsandinvestments.Theabilityofouroperatingsubsidiariestopaydividendsortomakedistributions orotherpaymentstousdependsontheirrespectiveoperatingresultsandmayberestrictedby,amongother things,thelawsoftheirrespectivejurisdictionsoforganization,regulatoryandaccreditationrequirements, agreementsenteredintobythoseoperatingsubsidiaries,andthecovenantsofanyfutureobligationsthatweor oursubsidiariesmayincur. Having students physically present on HCON’s campuses may result in threats to student safety and other issues. Wemanageandmonitoron-the-groundoperationsatfivephysicalcampuseswhereHCONstudentsattend coursesandparticipateineducationalactivities.Thepresenceofstudentsonphysicalcampusesrequiresus toconsiderandrespondtoissuesrelatedtostudentsafety,security,andviolence.Failuretoprevent,orade - quatelyrespondto,threatstostudentandemployeesafetyorotherproblemscouldharmourreputation,caus - ingenrollmentandrevenuetodecline,orcouldresultincostlyandresource-intensivelitigation. Natural disasters or other extraordinary events may cause us to close one or more of HCON’s campuses or may cause HCON’s enrollment and revenue to decline. HCONmayexperiencebusinessinterruptionsresultingfromnaturaldisasters,inclementweather,transit disruptionsorothereventsinoneormoreofthecitiesinOhioinwhichitoperates.Theseeventscouldcause HCONtocloseoneormorecampusestemporarilyorpermanently.Forexample,aregionalornationaloutbreak ofinfluenzaorotherillnesseasilyspreadbyhumancontactcouldcauseustocloseoneormoreofHCON’s campusesforanextendedperiodoftime.Thesetypesofeventscouldaffectstudentrecruitingopportunitiesin thoselocations,causingenrollmentandrevenuetodecline. The loss of any key member of our management team may impair our ability to operate effectively and may harm our business. Oursuccessdependslargelyuponthecontinuedservicesofourexecutiveofficersandotherkeymanagement andtechnicalpersonnel.Thelossofoneormoreofourkeypersonnelcouldharmourbusiness.Whilewehave employmentagreementswithourChiefExecutiveOfficer,ourChiefFinancialOfficerandthePresidentofAPUS, wedonothaveemploymentagreementswithotherexecutivesorpersonnel,andtheemploymentagreements thatwedohavedonotpreventourexecutivesfromvoluntarilyceasingtoworkforus. 102 AmericanPublicEducation,Inc. If we are unable to attract and retain management, faculty, administrators, and skilled personnel, our business and growth prospects could be severely harmed, and changes in management could cause disruption and uncertainty. Wemustattractandretainhighlyqualifiedmanagement,faculty,administrators,andskilledpersonneltoour institutions.Competitionforhiringtheseindividualsisintense,especiallywithregardtofacultyinspecialized areas,andexecutiveswithrelevantindustryexpertise.Wehavehadanumberofotherexecutiveofficersretire orotherwisedepartourCompanyoverthelastseveralyears,andwealsocontinuetoundergoanorganizational realignment.Forinstance,APUSconductedasearchforanewAPUSpresidentinconnectionwithananticipated organizationalrealignment,andonewashiredonJuly1,2016.Inthefourthquarterof2016,wealsohiredanew provostandanewexecutiveresponsibleforenrollmentmanagementatAPUS.Evenwiththesehires,wemay needtocontinuetostrengthenourmanagementteamtosupporttheoperationsofourinstitutions.Ifwefailto attractnewmanagement,faculty,administrators,orskilledpersonnelorfailtoretainandmotivateourexisting management,faculty,administrators,andskilledpersonnel,ourinstitutionsandourabilitytoserveourstu - dentsandexpandourprogramscouldbeseverelyharmed,andchangesinmanagementcoulddisruptourbusi - nessandcauseuncertainty.ED’sincentivepaymentrulemayalsoaffectthemannerinwhichweattract,retain, andmotivatenewandexistingemployees,asdescribedmorefullybelowin“RisksRelatedtotheRegulationof OurIndustry.” Our limited ability to obtain exclusive proprietary rights and protect our intellectual property, as well as disputes we may encounter from time to time with third parties regarding our use of their intellectual property, could harm our operations and prospects. Intheordinarycourseofbusiness,ourinstitutionsdevelopintellectualpropertyofmanykindsthatisorwill bethesubjectofpatents,copyrights,trademarks,servicemarks,domainnames,agreements,andotherregis - trations.Ourinstitutionsrelyonagreementsunderwhichweobtainrightstousecoursecontentdevelopedby facultymembersandotherthird-partycontentexperts. Wecannotensurethatanymeasuresweandourinstitutionstaketoprotectourintellectualpropertyorobtain rightstotheintellectualpropertyofotherswillbeadequate,orthatwehavesecured,orwillbeabletosecure, appropriateprotectionsforallofourinstitutions’proprietaryrightsintheUnitedStatesorforeignjurisdic - tions,orthatthirdpartieswillnotinfringeuponorviolatetheproprietaryrightsofourinstitutions.Despiteour effortstoprotecttheserights,thirdpartiesmayattempttodevelopcompetingprogramsorcopyaspectsofour institutions’curriculum,onlineresourcematerial,qualitymanagement,andotherproprietarycontent.Anysuch attempt,ifsuccessful,couldadverselyaffectourinstitutions’business.Protectingthesetypesofintellectual propertyrightscanbedifficult,particularlyasitrelatestothedevelopmentbyourinstitutions’competitorsof competingcoursesandprograms. Ourinstitutionsmayencounterdisputesfromtimetotimeoverrightsandobligationsconcerningintellectual property,andmaynotprevailinthesedisputes.Thirdpartiesmayraiseaclaimagainstourinstitutionsalleging aninfringementorviolationoftheirintellectualproperty.Somethird-partyintellectualpropertyrightsmaybe extremelybroad,anditmaynotbepossibleforourinstitutionstoconductoperationsinsuchawayastoavoid disputesregardingthoseintellectualpropertyrights.Anysuchdisputecouldsubjectourinstitutionstocostly litigationandimposeasignificantstrainonourfinancialresourcesandmanagementpersonnelregardlessof whetherthatdisputehasmerit.Ourinsurancemaynotcoverpotentialclaimsofthistypeadequatelyoratall, andourinstitutionsmayberequiredtoalterthecontentoftheircoursesorpaymonetarydamages,whichmay besignificant. 2016 Annual Report 103 We may incur liability for the unauthorized duplication or distribution of course materials posted online for course discussions. Insomeinstances,ourinstitutions’facultymembersorstudentsmaypostvariousarticlesorotherthird-party contentonlineincoursediscussionboardsorinothervenues.Thelawsgoverningthefairuseofthesethird- partymaterialsareimpreciseandadjudicatedonacase-by-casebasis,whichmakesitchallengingtoadoptand implementappropriatelybalancedinstitutionalpoliciesgoverningthesepractices.Weandourinstitutionsmay incurliabilityfortheunauthorizedduplicationordistributionofthismaterialpostedonline.Thirdpartiesmay raiseclaimsagainstusandourinstitutionsfortheunauthorizedduplicationofthismaterial.Anysuchclaims couldsubjectusandourinstitutionstocostlylitigationandimposeasignificantstrainonfinancialresourcesand managementpersonnelregardlessofwhethertheclaimshavemerit.Ourinstitutions’facultymembersorstu - dentscouldalsopostclassifiedmaterialoncoursediscussionboards,whichcouldexposeustocivilandcriminal liabilityandharmourinstitutions’reputationsandrelationshipswithmembersofthemilitaryandgovernment. Ourinsurancemaynotcoverpotentialclaimsofthistypeadequatelyoratall,andwemayberequiredtopay monetarydamagesandourinstitutionsmayberequiredtoalterthecontentoftheircourses. Legal proceedings, particularly class action lawsuits, may require human and financial resources, distract our management and negatively affect our reputation and operating results. Fromtimetotime,weandourinstitutionshavebeenandmaybeinvolvedinvariouslegalproceedings.Inrecent years,wehaveobservedanincreaseinlitigationbroughtagainstfor-profitschools,includingclassactions broughtbystudentsandprospectivestudentsbasedonallegedmisrepresentationsaboutaschool’spro - grams,andanincreasein“quitam”lawsuits,whicharedescribedaboveundertheheading“RisksRelatedtothe RegulationofOurIndustry.”Forexample,inNovember2013,aputativeclassactionwasbroughtagainstHCON relatingtoatimeperiodpriortoourownership.Thelawsuitassertedclaimsforfraudandfraudulentinduce - ment,negligentmisrepresentation,breachofimplied-in-factcontract,promissoryestoppel,unjustenrichment, andviolationoftheOhioConsumerSalesPracticesAct.WhileHCONadmittedtonowrongdoingintheeventual settlementagreementandthecasewasdismissedwithprejudiceafterthepaymentofademinimissettlement, onDecember4,2015,EDsentHCONaletterinformingHCONthatEDhaddeterminedtofineHCON$27,500 basedonED’sfindingthatHCONhadsubstantiallymisrepresenteditsprogrammaticaccreditationstatusduring atimeperiodpriortoourownershipofHCON.HCONinformedEDinaletterthatitdisagreedwithED’sfind - ingsbutwouldpaythefineinordertoresolvepromptlythematterandtoenableEDtofinalizeitsreviewof theapplicationforachangeinownership.Inthefuture,notallclaimsmaybeaseasilyresolved.Aspartofthe DefensetoRepaymentregulationsthatgointoeffectJuly1,2017,EDrecentlyadoptedregulationsthatpro - hibitinstitutionsfromrequiringthatstudentsfirstengageinaninstitution’sinternalcomplaintprocessbefore contactingotheragencies,prohibittheuseofpre-disputearbitrationagreementsbyaninstitution,prohibitthe useofclassactionlawsuitwaivers,andrequireinstitutionstodisclosetoandnotifyEDofarbitrationfilingsand awardsforclaimsthatmayformthebasisforaborrowerdefensetorepaymentofaDirectLoan.Asaresultof thesechanges,wewouldnolongerbepermittedtoincludetheclassactionwaiversandmandatoryarbitration provisionscontainedinAPUSandHCON’senrollmentagreements.Thesechangesalsocouldhavetheeffectof increasingthenumberoffrivolouslawsuitsbroughtagainstusandourinstitutions,couldexposeusandour institutionstolitigationthatcouldbelessefficientthanresolvingdisputesthrougharbitrationandcouldforce ustoincurlegalandotherexpenses.Thesignificanthumanandfinancialresourcesrequiredtoinvestigateand respondtoclaimsbroughtinanyfuturelitigationmaydistractmanagement’sattentionfromoperatingour businessorleadtolargerpaymentsorliabilities,includingadverseregulatoryaction,and,asaresult,negatively affectouroperatingresults. 104 AmericanPublicEducation,Inc. We may need additional capital in the future, but there is no assurance that funds will be available on acceptable terms. Wemayneedadditionalcapitalinthefutureforvariousreasons,includingtofinancebusinessacquisitionsand investmentsintechnologyortoachievegrowthorfundotherbusinessinitiatives,butthereisnoassurance thatcapitalwillbeavailableinsufficientamountsorontermsacceptabletousandmaybedilutivetoexisting stockholders.Additionally,anysecuritiesissuedtoraisecapitalmayhaverights,preferencesorprivilegessenior tothoseofexistingstockholders.Ifadequatecapitalisnotavailableorisnotavailableonacceptableterms, ourandourinstitutions’abilitytoexpand,developorenhanceservicesorproducts,orrespondtocompetitive pressures,willbelimited. Ouraccesstocapitalmarketsandsourcingforadditionalfundingtoexpandoroperateourbusinessissubject tomarketconditions.Creditconcernsregardingtheproprietarypostsecondaryeducationindustryasawhole alsomayimpedeouraccesstocapitalmarkets.Ifweareunabletoobtainneededcapitalontermsacceptableto us,wemayhavetolimitstrategicinitiativesortakeotheractionsthatmateriallyadverselyaffectourbusiness, financialcondition,resultsofoperationsandcashflows. Economic and market conditions, including changes in interest rates, could affect our enrollments, placement and persistence rates and cohort default rates in the United States or abroad. Ourbusinesshasbeen,andmayinthefuturebe,adverselyaffectedbyageneraleconomicslowdownorreces - sionintheUnitedStatesorabroad.OurinstitutionsderiveasignificantportionoftheirrevenuefromTitleIV programs,whichincludestudentloanswithinterestratessubsidizedbythefederalgovernment.Additionally, somestudentsfinancetheireducationthroughprivateloansthatarenotgovernmentsubsidized.Historically lowinterestrateshavecreatedafavorableborrowingenvironmentforstudents.However,ifinterestrates increaseorCongressdecreasestheamountoffundingavailableforTitleIVprograms,ourstudentsmayhave topayhigherinterestratesontheirTitleIVprogramloansandprivateloans.Anyfutureincreaseinapplicable interestratescouldresultinacorrespondingincreaseineducationalcoststoourexistingandprospectivestu - dents,whichcouldresultinareductioninourenrollment.Higherinterestratescouldalsocontributetohigher defaultrateswithrespecttoourstudents’repaymentoftheireducationloans.Higherdefaultratesmayinturn adverselyimpactoureligibilitytoparticipateinsomeTitleIVprograms,whichcouldadverselyimpactouropera - tionsandfinancialcondition. Intherecentpast,theUnitedStatesandotherindustrializedcountrieshaveexperiencedreducedeconomic activity,substantialuncertaintyabouttheirfinancialservicesmarketsand,insomecases,economicrecession. Theseadverseeconomicdevelopmentsmayresultinareductioninthenumberofjobsavailabletoourgrad - uatesandlowersalariesbeingofferedinconnectionwithavailableemployment,which,inturn,mayresultin declinesinourplacementandpersistencerates.Inaddition,theseeventscouldadverselyaffecttheabilityor willingnessofourformerstudentstorepaystudentloans,whichcouldincreaseourinstitutions’studentloan cohortdefaultratesandrequireincreasedtime,attention,andresourcestomanagethesedefaults.Ourinstitu - tions’studentsareabletoborrowTitleIVloansinexcessoftheirtuitionandfees.Theexcessisreceivedbysuch studentsasacreditbalancerefund.However,ifastudentwithdraws,ourinstitutionsmustreturnanyunearned TitleIVfunds,whichmayincludeaportionofthecreditbalancerefund,andmustseektocollectfromthestu - dentanyresultingamountsowedtotheinstitution.Aprotractedeconomicslowdowncouldnegativelyimpact suchstudents’abilitytosatisfydebtstotheinstitution,includingdebtsthatresultfromreturnsofunearned TitleIVamounts.Asaresult,theamountofTitleIVfundswewouldhavetoreturnwithoutrepaymentfromour institutions’studentscouldincrease,andourfinancialresultscouldsuffer. 2016 Annual Report 105 If we are unable to successfully pursue HCON’s program initiatives and expansions, including opening new HCON campuses and increasing online education, our future growth may be impaired. ThesuccessofHCONwilldependonourabilitytomaintainandincreasestudentenrollmentsinHCON’spro - gramsandgrowHCON’son-campusandonlineprogramofferings.Aspartofourstrategy,weintendtoopen newcampusesforHCON,suchasthenewcampusinsuburbanToledo,Ohio,thatbeganoperationsinearly 2017.Suchactionsrequireustoobtainappropriatefederal,stateandaccreditingagencyapprovals.Inaddi - tion,addingnewlocationsmayrequiresignificantfinancialinvestments,humanresourcecapabilities,andnew clinicalplacementrelationships.Ifweareunableto,orsufferanydelayinourabilityto,obtainappropriate approvals,attractadditionalstudentstonewcampuslocations,offerprogramsatnewcampusesinacost-ef - fectivemanner,identifyappropriateclinicalplacements,orotherwisemanageeffectivelytheoperationsof newlyestablishedcampuses,ourresultsofoperationsandfinancialconditioncouldbeadverselyaffected.At thistime,becauseHCONiscertifiedtoparticipateintheTitleIVprogramsonaprovisionalbasisbasedonthe changeinownershipandcontrolofHCONthatresultedfromouracquisitionofit,HCONmustapplytoEDand waitforapprovalbeforeitcanawardanddisburseTitleIVprogramfundstostudentsenrolledatnewHCON locationsatwhichHCONoffers50%ormoreofaneligibleprogram,orbeforeitcanawardTitleIVprogram fundstostudentsenrolledinnewdegreeorcertificateprograms.Similarly,basedonED’sdecisiontowithdraw andterminaterecognitionoftheAccreditingCouncilforIndependentCollegesandSchools,orACICS,HCONis alsosubjecttocertainconditionsandrestrictions.Formoreinformationabouttheconditionsandrestrictions imposedbyED,see“RegulatoryEnvironment—Accreditation”inthisAnnualReport.IfHCONfailstocomplywith theconditionsandrestrictionsimposedbyED,orifHCONfailstoobtainaccreditationfromanotherrecognized accreditingagencybyJune12,2018,18monthsafterthedateoftheSecretary’sdecisiontowithdrawrecognition fromACICS,HCONwilllosetheabilitytoparticipateintheTitleIVprograms. OutsideOhio,otherstates’regulatorybodieshaveregulationsthatapplytoHCONprograms.Forexample,a numberofstatesmayrequirethatweobtainadditionalauthorizationsforHCONstudentsenrolledintheonline RegisteredNursetoBachelorofScienceinNursingcompletionprogramtoparticipateinpracticumcoursesin thosestates,evenwhereHCONhasnootherphysicalpresenceinthestateorwhereHCONisauthorizedfor suchplacementsundertheStateAuthorizationReciprocityAgreement,orSARA.Thesetypesofprovisionsmay makeitmoredifficulttoofferonlineeducationprogramsinthosestates.Theinabilitytoexpandefficientlyor successfullyexistingprograms,pursuenewprograminitiativesandaddnewcampuseswouldharmourability togrowthebusinessandcouldhaveanadverseimpactonourfinancialcondition. System disruptions and security breaches to our online computer networks, technology infrastructure, or online classroom infrastructure, or to the networks, infrastructure and systems of third parties, could negatively impact our ability to generate revenue and could damage our reputation, limiting our ability to attract and retain students. Theperformanceandreliabilityofour,andourinstitutions’,networksandtechnologyinfrastructure,including thoseofthird-partysystemsweuse,iscriticaltoourinstitutions’reputationandabilitytoattractandretainstu - dents.Anysystemerrororfailure,orasuddenandsignificantincreaseinbandwidthusage,couldinterruptour, orourinstitutions’,abilitytooperateandcouldresultintheunavailabilityofourinstitutions’onlineclassrooms (whichisparticularlyrelevanttoAPUS),preventingstudentsfromaccessingtheircoursesandadverselyaffect - ingourresultsofoperations. OursystemsatAPUS,particularlythoseproprietaryinformationsystemsandprocessesthatwerefertoas PartnershipataDistance,orPAD,havebeenpredominantlydevelopedin-house,withlimitedsupportfrom outsidevendors.Totheextentthatwehaveutilizedthird-partyvendorstoprovidecertainsoftwareproducts foroursystems,wehavegenerallyneededtointegratethoseproductsinto,andensurethattheyfunctionwith, 106 AmericanPublicEducation,Inc. PAD.WecontinuouslyworkonupgradestoPAD,andouremployeesdevotesubstantialtimetoitsdevelopment andtothesuccessfulintegrationofthird-partyproductsintoPAD.Totheextentthatwefacesystemdisruptions ormalfunctionswithPAD,wemaynothavethecapacitytoaddresssuchdisruptionsormalfunctionswithour internalresources,andwemaynotbeabletoidentifyoutsidecontractorswithexpertiserelevanttoourcustom system. Ourinstitutions’technologyinfrastructure,andthetechnologyinfrastructureofourthird-partyvendors,could bevulnerabletointerruptionormalfunctionduetoeventsbeyondourcontrol,includingnaturaldisasters, cyber-attacks,terroristactivities,andtelecommunicationsfailures.Ourcomputernetworks,andthenetworks ofourthird-partyvendors,mayalsobevulnerabletounauthorizedaccess,computerhackers,ransom-ware, computerviruses,andothersecurityproblems.Auserwhocircumventssecuritymeasurescouldmisappro - priateproprietaryinformationorpersonalinformationaboutourstudentsoremployees,orcouldcause interruptionsormalfunctionsinoperations.Ifweorthirdpartieswithaccesstooursystems,ortoourpropri - etaryinformationorpersonalinformationaboutourstudentsoremployees,experiencesecuritybreachesin thefuture,wemayberequiredtoexpendsignificantresourcestoprotectagainstthethreatofthesesecurity breachesortoalleviateproblemscausedbysuchbreaches,whichcouldincludelitigationbroughtbyaffected individualsorotherparties,theimpositionsofpenalties,disruptiontoouroperations,anddamagetoour reputation. APUSusesexternalvendorstoperformsecurityassessmentsonaperiodicbasistoreviewandassessits security.Weutilizethisinformationtoauditourselvestoensurethatweareadequatelymonitoringthesecu - rityofourtechnologyinfrastructure.However,wecannotensurethatthesesecurityassessmentsandaudits willprotectourcomputernetworksagainstthethreatofsecuritybreaches.Similarly,althoughwerequireour third-partyvendorstomaintainalevelofsecuritythatisacceptabletousandworkcloselywithourthird-party vendorstoaddresspotentialandactualsecurityconcernsandattacks,wecannotensurethatweandoursys - temsandproprietaryinformationorpersonalinformationaboutourstudentsoremployeeswillbeprotected againstthethreatofsecurityattacksonourthird-partyvendorsthataffectoursystemsorsuchinformation. Systemdisruptionsandsecuritybreachestoouronlinecomputernetworks,technologyinfrastructure,oronline classroominfrastructure,ortothenetworks,infrastructuresandsystemsofthirdpartiescouldhaveanadverse effectonourfinancialcondition. The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation and operations. Possessionanduseofpersonalinformationinourinstitutions’operationssubjectsustorisksandcoststhat couldharmourbusiness.Ourinstitutionsor,insomecases,certainthird-partyvendorshiredbyourinstitu - tions,collect,use,andretainlargeamountsofpersonalinformationregardingourstudentsandtheirfamilies, includingsocialsecuritynumbers,taxreturninformation,personalandfamilyfinancialdata,andfinancial accountinformation.Ourinstitutionsalsocollectandmaintainpersonalinformationofemployeesinthe ordinarycourseofourbusiness.Someofthispersonalinformationisheldandmanagedbycertainthird-party vendors,includingourthird-partyservicersandinformationtechnologyvendors.Althoughourinstitutions usesecurityandbusinesscontrolstolimitaccessanduseofpersonalinformation,athirdpartymaybeableto circumventthosesecurityandbusinesscontrols,whichcouldresultinabreachofstudentoremployeepri - vacy.Inaddition,errorsinthestorage,useortransmissionofpersonalinformationcouldresultinabreachof studentoremployeeprivacy.Possessionanduseofpersonalinformationinourinstitutions’operationsalso subjectsustolegislativeandregulatoryburdensthatcouldrestricttheuseofpersonalinformationandrequire notificationofdatabreaches.Wecannotguaranteethatabreach,lossortheftofpersonalinformationwillnot occur.Aviolationofanylawsorregulationsrelatingtothecollectionoruseofpersonalinformationcouldresult intheimpositionoffinesorlawsuitsagainstusorourinstitutions.Asaresult,wemayberequiredtoexpend 2016 Annual Report 107 significantresourcestoprotectagainstthethreatofthesesecuritybreachesortoalleviateproblemscaused bysuchbreaches.Abreach,theft,orlossofpersonalinformationregardingourinstitutions’studentsandtheir familiesorourinstitutions’employeesthatisheldbyourinstitutionsorthird-partyvendorscouldhaveamate - rialadverseeffectonourinstitutions’reputationsandresultsofoperationsandresultinlegalactionsbyregu - lators,stateattorneysgeneral,andprivatelitigants,anyofwhichactionscoulddivertmanagement’sattention andhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows. Wefaceanever-increasingnumberofthreatstoourcomputersystems,includingunauthorizedactivityand access,maliciouspenetration,systemviruses,ransomwareandothermaliciouscodeandorganizedcyber-at - tacks,whichcouldbreachoursecurityanddisruptoursystems.Theserisksincreasewhenwemakechangesto ourinformationtechnologysystemsorimplementnewones.Oursizemakesusaprominenttargetforhacking andothercyber-attackswithintheeducationindustry.Fromtimetotimeweexperiencesecurityeventsand incidents,andthesereflectanincreasinglevelofmalicioussophistication,organization,andinnovation.We havedevotedandwillcontinuetodevotesignificantresourcestothesecurityofourcomputersystems,but theymaystillbevulnerabletothesethreats.Auserwhocircumventssecuritymeasurescouldmisappropriate proprietaryinformationorcauseinterruptionsormalfunctionsinoperations,perhapsoveranextendedperiod oftimepriortodetection.Asaresult,wemayberequiredtoexpendsignificantadditionalresourcestoprotect againstthethreatof,oralleviateproblemscausedby,thesesystemdisruptionsandsecuritybreaches.Anyof theseeventscouldhaveamaterialadverseeffectonourbusinessandfinancialcondition.Althoughwemaintain insuranceinrespectofthesetypesofevents,thereisnoassurancethatavailableinsuranceproceedswouldbe adequatetocompensateusfordamagessustainedduetotheseevents. Failure to comply with privacy laws or regulations could have an adverse effect on our business. Variousfederal,stateandinternationallawsandregulationsgovernthecollection,use,retention,sharingand securityofconsumerdata.Thisareaofthelawisevolving,andinterpretationsofapplicablelawsandregula - tionsdiffer.Legislativeactivityintheprivacyareamayresultinnewlawsthatarerelevanttousandtheoper - ationsofourinstitutions,forexample,restrictinguseofconsumerdataformarketingoradvertising,andmay leadtoincreasesinthecostofcompliance.Claimsoffailuretocomplywithourinstitutions’privacypoliciesor applicablelawsorregulationscouldformthebasisofgovernmentalorprivate-partyactionsagainstus.Such claimsandactionsmaycausedamagetoourinstitutions’reputationandcouldhaveanadverseeffectonour financialcondition. Any significant interruption in the operation of data centers hosting our institutions’ technology infrastructure could cause a loss of data and disrupt the ability to manage our institutions’ technology infrastructure. Anysignificantinterruptionintheoperationofourinstitutions’datacentersorserverroomscouldcausealoss ofdataanddisrupttheabilitytomanagenetworkhardwareandsoftwareandtechnologicalinfrastructure. Evenwithredundancy,asignificantinterruptionintheoperationofthesefacilitiesorthelossofinstitutional andoperationaldataduetoanaturaldisaster,fire,powerinterruption,actofterrorismorotherunanticipated catastrophiceventmaynotbepreventable.Anysignificantinterruptionintheoperationofthesefacilities, includinganinterruptioncausedbythefailuretosuccessfullyexpandorupgradesystemsormanagetransitions andimplementations,couldreducetheabilitytomanagenetworkandtechnologicalinfrastructure,whichcould adverselyaffectourinstitutions’operationsandreputations.Additionally,ourinstitutionsdonotnecessarily controltheoperationofthefacilitieshostingourtechnologyinfrastructureandmayberequiredtorelyonother partiestoprovidephysicalsecurity,facilitiesmanagementandcommunicationsinfrastructureservices.Ifany third-partyvendorsencounterfinancialdifficultysuchasbankruptcyorothereventsbeyondourcontrolthat causesthemtofailtoadequatelysecureandmaintaintheirfacilitiesorprovidenecessarydatacommunications 108 AmericanPublicEducation,Inc. capacity,ourinstitutions’studentsmayexperienceinterruptionsinserviceorthelossortheftofimportant data,whichcouldadverselyaffectourfinancialcondition. Government regulations relating to the Internet could increase our cost of doing business and affect our ability to grow. Governmentregulationsrelatingtotheinternetcouldincreaseourcostofdoingbusinessandaffectourability togrow.TheincreasingrelianceonanduseoftheInternetandotheronlineserviceshasledandmaycontinue toleadtotheadoptionofnewlawsandregulatorypracticesintheUnitedStatesorforeigncountriesandto newinterpretationsofexistinglawsandregulations.Thesenewlawsandinterpretationsmayrelatetoissues suchasonlineprivacy,internetneutrality,copyrights,trademarksandservicemarks,salestaxes,fairbusiness practices,andtherequirementthatonlineeducationinstitutionsqualifytodobusinessasforeigncorporations orbelicensedinoneormorejurisdictionswheretheyhavenophysicallocation.Newlaws,regulationsorinter - pretationsrelatedtodoingbusinessovertheInternetcouldincreaseourcostsofcomplianceordoingbusiness andmateriallyaffectourinstitutions’abilitytoofferonlinecourses,whichwouldhaveamaterialeffectonour businessandfinancialcondition. RISKS RELATED TO OWNING OUR COMMON STOCK The price of our common stock may be volatile, and as a result, returns on an investment in our common stock may be volatile. Sinceourinitialpublicoffering,wehavehadrelativelylimitedpublicfloat,andtradinginourcommonstockhas alsobeenlimitedand,attimes,volatile.Anactivetradingmarketforourcommonstockmaynotbesustained, andthetradingpriceofourcommonstockmayfluctuatesubstantially. Thepriceofourcommonstockmayfluctuateasaresultofsomeorallofthefollowing: • priceandvolumefluctuationsintheoverallstockmarketfromtimetotime; • significantvolatilityinthemarketpriceandtradingvolumeofcomparablecompanies; • actualoranticipatedchangesinourearnings,ourinstitutions’enrollmentsornetcourseregistrations,orfluc - tuationsinouroperatingresultsorintheexpectationsofsecuritiesanalysts; • theactual,anticipatedorperceivedimpactofchangesinthepoliticalenvironment,governmentpolicies,laws andregulations,orsimilarchangesmadebyaccreditingbodies; • thedepthandliquidityofthemarketforourcommonstock; • generaleconomicconditionsandtrends; • catastrophicevents; • salesoflargeblocksofourstock; • recruitmentordepartureofkeypersonnel;or • actionsofothersinourindustry. Inthepast,followingperiodsofvolatilityinthemarketpriceofacompany’ssecurities,securitiesclassaction litigationhasoftenbeenbroughtagainstthatcompany.Becauseofthepotentialvolatilityofourstockprice,we maybecomethetargetofsecuritieslitigationinthefuture.Securitieslitigationcouldresultinsubstantialcosts andmonetarydamagesandcoulddivertmanagement’sattentionandresourcesfromourbusiness. 2016 Annual Report 109 Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our common stock. Ourquarterlyresultsfluctuateand,therefore,theresultsinanyquartermaynotrepresenttheresultswemay achieveinanysubsequentquarterorfullyear.Ourrevenueandoperatingresultsnormallyfluctuateasaresult ofseasonalorothervariationsinourinstitutions’enrollmentsandassociatedexpenses.Studentpopulationat ourinstitutionsvariesasaresultofnewenrollments,graduations,studentattrition,thesuccessofourmarket - ingprograms,andotherreasonsthatwecannotalwaysanticipate.Weexpectquarterlyfluctuationsinoperating resultstocontinueasaresultofseasonalenrollmentpatternsatourinstitutionsandrelatedfluctuationsin expenses.Thesefluctuationsmayresultinvolatilityinourresultsofoperations,haveanadverseeffectonthe marketpriceofourcommonstock,orboth. Provisions in our organizational documents and in the Delaware General Corporation Law may prevent takeover attempts that could be beneficial to our stockholders. ProvisionsinourcharterandbylawsandintheDelawareGeneralCorporationLawmaymakeitdifficultand expensiveforathirdpartytopursueatakeoverattemptweopposeevenifachangeofcontrolofourCompany wouldbebeneficialtotheinterestsofourstockholders.Theseprovisionsinclude: • theabilityofourBoardofDirectorstoissueupto10,000,000sharesofpreferredstockinoneormoreseries andtofixthepowers,preferences,andrightsofeachserieswithoutstockholderapproval,whichmaydiscour - ageunsolicitedacquisitionproposalsormakeitmoredifficultforathirdpartytogaincontrolofourCompany; • arequirementthatstockholdersprovideadvancenoticeoftheirintentiontonominateadirectorortopro - poseanyotherbusinessatanannualmeetingofstockholders; • aprohibitionagainststockholderactionbymeansofwrittenconsentunlessotherwiseapprovedbyourBoard ofDirectorsinadvance;and • Section203oftheDelawareGeneralCorporationLaw,whichgenerallyprohibitsusfromengaginginmergers andotherbusinesscombinationswithstockholdersthatbeneficiallyown15%ormoreofourvotingstock,or withtheiraffiliates,unlessourdirectorsorstockholdersapprovethebusinesscombinationintheprescribed manner. 110 AmericanPublicEducation,Inc. Item1B.UnresolvedStaffComments None. Item2.Properties AmericanPublicEducation,Inc.,orAPEI,andAmericanPublicUniversitySystem,Inc.,orAPUS,togetheroperate administrativefacilitiesinCharlesTown,WestVirginia,Manassas,Virginia,andColumbia,Maryland,whichare withinanapproximateone-hourdriveofoneanotherandarelocatedwithintheWashington,DC,metropolitan area.ThecorporateheadquartersandadministrativeofficesarelocatedinCharlesTownandconsistof12owned facilitiestotalingapproximately254,000squarefeet.AlsoinCharlesTown,APUSownstwoandahalfacresofland earmarkedforfuturedevelopmentanda12,000squarefootbuildingthatisunoccupiedandforsaleasofthedate ofthisAnnualReport.APUS’sstudentservices,graduation,andmarketingoperationsarelocatedin25,000square feetofleasedspaceinManassasunderaleasethatexpiresin2018.APEIleasesanadministrativeofficeofapproxi- mately2,000squarefeetinColumbia,Maryland,underaleasethatexpiresin2018. HondrosCollegeofNursing,orHCON,operatesfiveOhiocampusesinthesuburbanareasofCincinnati(West Chester),Cleveland(Independence),Columbus(Westerville),Dayton(Fairborn)andToledo(Maumee).These campusesincludeatotalofeightleasedfacilitieswithapproximately109,000squarefeetcombined.Thefacili - tiesareprimarilyusedforinstructionalactivities.ThemaincampusinWestervillealsohousesHCON’scorporate officesandadditionaladministrativeservices.Leasetermsandextensionoptionsvarybyfacility,withexpiration datesrangingfrom2022to2029. TheCompanybelievesitsexistingfacilitiesareingoodoperatingconditionandareadequateandsuitablefor theconductofitsbusiness. Item3.LegalProceedings Fromtimetotime,wehavebeenandmaybeinvolvedinvariouslegalproceedings.Wecurrentlyhavenomate - riallegalproceedingspending. Item4.MineSafetyDisclosures Notapplicable. 2016 Annual Report 111 PARTII Item5. MarketforRegistrant’sCommonEquity,Related StockholderMattersandIssuerPurchasesofEquity Securities MARKET INFORMATION OurcommonstocktradesontheNASDAQGlobalSelectMarketunderthesymbol“APEI.”Thefollowingtable setsforth,fortheperiodsindicated,thehighandlowsalespriceofourcommonstockasreportedonthe NASDAQGlobalSelectMarket. Year Ended December 31, 2015 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Year Ended December 31, 2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter HOLDERS Low $29.13 $21.30 $19.22 $18.56 Low $13.80 $19.25 $18.53 $14.75 High $37.08 $32.56 $27.26 $25.17 High $22.50 $28.64 $30.79 $27.20 AsofFebruary24,2017,therewereapproximately531holdersofrecordofourcommonstock. DIVIDENDS Wehavenothistoricallypaiddividendsonourcommonstockanddonotanticipatedeclaringorpayinganycash dividendsonourcommonstockintheforeseeablefuture.Thepaymentofanydividendsinthefuturewillbe atthediscretionofourBoardofDirectorsandwilldependuponourfinancialcondition,resultsofoperations, earnings,capitalrequirements,contractualrestrictions,outstandingindebtedness,andotherfactorsdeemed relevantbyourBoard. PERFORMANCE GRAPH Thegraphbelowcomparesthefive-yearcumulativetotalreturnofholdersofourcommonstockwiththe cumulativetotalreturnsoftheS&P500index,theNASDAQCompositeindexandacustomizedpeergroupof sevencompaniesthatincludes:BridgepointEducation,Inc.;CapellaEducationCompany;CareerEducation Corporation;DeVryEducationGroupInc.;GrandCanyonEducation,Inc.;NationalAmericanUniversityHoldings, Inc.;andStrayerEducation,Inc.WehaveremovedApolloEducationGroup,Inc.andITTEducationalServices,Inc. fromthecustomizedpeergroup.Apollowasremovedbecauseitacceptedapurchaseofferfromaprivateequity firm.ITTwasremovedbecauseithasceasedsubstantiallyalloperationsinconnectionwithitsbankruptcy proceedings.Thegraphassumesthatthevalueoftheinvestmentinourcommonstock,ineachindex,andinthe 112 AmericanPublicEducation,Inc. peergroup(includingreinvestmentofdividends)was$100onDecember31,2011,andtracksthevalueofthose investments,respectively,throughDecember31,2016. Theinformationcontainedintheperformancegraphshallnotbedeemed“solicitingmaterial”ortobe“filed” withtheSecuritiesandExchangeCommission,norshallsuchinformationbedeemedincorporatedbyreference intoanypriororfuturefilingundertheSecuritiesActortheExchangeAct,excepttotheextentthatwespecifi - callyincorporateitbyreferenceintosuchfiling. COMPARISONOF5-YEARCUMULATIVETOTALRETURN* AmongAmericanPublicEducation,Inc.,theS&P500Index,theNASDAQCompositeIndex,andaPeerGroup. $250 $200 $150 $100 $50 0 12/11 12/12 12/13 12/14 12/15 12/16 AmericanPublicEducation,Inc. S&P500 NASDAQComposite PeerGroup *$100investedon12/31/11instockorindex,includingreinvestmentofdividends. FiscalyearendingDecember31. Copyright©2017Standard&Poor’s,adivisionofS&PGlobal.Allrightsreserved. December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016 APEI S&P500 NASDAQComposite PeerGroup 100.00 100.00 100.00 100.00 83.46 116.00 116.41 67.11 100.44 153.58 165.47 103.87 85.19 174.60 188.69 123.92 43.00 177.01 200.32 83.42 56.72 198.18 216.54 123.55 Thestockpriceperformanceincludedinthegraphandtableaboveisnotnecessarilyindicativeoffuturestockprice performance. RECENT SALES OF UNREGISTERED SECURITIES None. 2016 Annual Report 113 USE OF PROCEEDS FROM REGISTERED SECURITIES Notapplicable. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS OnMay14,2012,ourBoardofDirectorsauthorizedaprogramtorepurchaseupto$20millionofsharesofour commonstock.OneachofMarch14,2013,June13,2014,andJune12,2015,ourBoardofDirectorsincreased theauthorizationbyanadditional$15millionofshares,foracumulativeincreaseof$45millionofshares,and atotalcumulativeauthorizationof$65millionofshares.Subjecttomarketconditions,applicablelegalrequire - ments,andotherfactors,therepurchasesmaybemadefromtimetotimeintheopenmarketorinprivately negotiatedtransactions.Theauthorizationdoesnotobligateustoacquireanyshares,andpurchasesmaybe commencedorsuspendedatanytimebasedonmarketconditionsandotherfactorsaswedeemappropriate. DuringtheyearendedDecember31,2016,noshareswereacquiredunderourrepurchaseprograms.In2015,we repurchased1,322,846sharesunderourrepurchaseprogramsforanaggregateamountof$33.5million.Asof December31,2016,$148,008ofsharesremainedauthorizedforrepurchase. Thefollowingtablepresentsinformationonoursharerepurchaseprograms.Foradditionalinformation regardingoursharerepurchasespleasereferto“FinancialStatementsandSupplementaryData—Notesto ConsolidatedFinancialStatements—Note11.Stockholders’Equity—Repurchase.” Period October 1,2015–October 31,2015 November 1,2015– November 30,2015 December1,2015– December 31,2015 Total Total Number of Shares Purchased Average Price Paid per Share — — — — $ — $ — $ — $ — Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(2)(3) — — — — 336,434 $ 148,008 336,434 148,008 336,434 336,434 148,008 $ 148,008 (1) OnDecember9,2011,ourBoardofDirectorsapprovedastockrepurchaseprogramforourcommonstock,underwhich wemayannuallypurchaseuptothecumulativenumberofsharesissuedordeemedissuedinthatyearunderourequity incentiveandstockpurchaseplans.Repurchasesmaybemadefromtimetotimeintheopenmarketatprevailingmarket pricesorinprivatelynegotiatedtransactionsbasedonbusinessandmarketconditions.Thestockrepurchaseprogrammay besuspendedordiscontinuedatanytime,andisfundedusingouravailablecash. (2) OnMay14,2012,ourBoardofDirectorsauthorizedaprogramtorepurchaseupto$20millionofsharesofourcommon stock.OneachofMarch14,2013,June13,2014,andJune12,2015,ourBoardofDirectorsincreasedtheauthorizationbyan additional$15millionofshares,foracumulativeincreaseof$45millionofsharesandatotalcumulativeauthorizationof $65millionofshares.Subjecttomarketconditions,applicablelegalrequirements,andotherfactors,therepurchasesmay bemadefromtimetotimeintheopenmarketorinprivatelynegotiatedtransactions.Theauthorizationdoesnotobligateus toacquireanyshares,andpurchasesmaybecommencedorsuspendedatanytimebasedonmarketconditionsandother factorsaswedeemappropriate. (3) Duringtheyear-endedDecember31,2016,theCompanywasdeemedtohaverepurchased49,512sharesofcommonstock forfeitedbyemployeestosatisfyminimumtax-withholdingrequirementsinconnectionwiththevestingofrestrictedstock grants.TheserepurchaseswerenotpartofthestockrepurchaseprogramsauthorizedbyourBoardofDirectors. 114 AmericanPublicEducation,Inc. Item6.SelectedFinancialData Thefollowingtablesetsforthourselectedconsolidatedfinancialandoperatingdataasofthedatesandforthe periodsindicated.Youshouldreadthisdatatogetherwith“Item7—Management’sDiscussionandAnalysisof FinancialConditionandResultsofOperations”andourConsolidatedFinancialStatementsandrelatednotes, includedelsewhereinthisAnnualReport.Theselectedconsolidatedstatementofoperationsdataforeachof theyearsinthethree-yearperiodendedDecember31,2016,andtheselectedConsolidatedBalanceSheetdata asofDecember31,2015and2016,havebeenderivedfromourauditedConsolidatedFinancialStatements, whichareincludedelsewhereinthisAnnualReport.Theselectedconsolidatedstatementsofoperationsdata fortheyearsendedDecember31,2012and2013,andselectedConsolidatedBalanceSheetdataasofDecember 31,2012,2013,and2014,havebeenderivedfromourauditedConsolidatedFinancialStatementsnotincluded inthisAnnualReport.WeacquiredHondrosCollegeofNursing,orHCON,onNovember1,2013,andthere - foretheconsolidatedresultsforperiodspriortoNovember1,2013,donotincludeanyresultsfromHCON. Historicalresultsarenotnecessarilyindicativeoftheresultsofoperationsthatshouldbeexpectedinfuture periods.Certainprioryearamountshavebeenreclassifiedforcomparativepurposestoconformwiththe2016 presentation. (In thousands, except per share and net registration data) 2012 2013 2014 2015 2016 Year Ended December 31, Statement of Operations Data: Revenue Costsandexpenses: $313,516 $329,479 $350,020 $327,910 $313,139 Instructionalcostsandservices 110,192 112,784 123,765 118,848 117,013 Sellingandpromotional Generalandadministrative Lossondisposalsoflong-livedassets Lossonassetsheldforsale Impairmentofgoodwill 59,761 63,615 65,687 70,063 — — — — — — 69,229 74,958 115 — — 62,397 73,047 817 — — Depreciationandamortization 11,146 13,508 16,121 20,520 59,095 68,666 5,147 823 4,735 19,384 Totalcostsandexpenses 244,714 262,042 284,188 275,629 274,863 Incomefromcontinuingoperationsbefore interestincomeandincometaxes 68,802 67,437 65,832 52,281 38,276 Interestincome,net 135 309 361 115 116 Incomefromcontinuingoperations beforeincometaxes Incometaxexpense Investmentincome/(loss) 68,937 26,528 (86) 67,746 25,645 66,193 25,150 52,396 20,072 38,392 14,940 (67) (166) 90 703 Netincomeattributabletocommonstockholders $ 42,323 $42,034 $ 40,877 $ 32,414 $ 24,155 Netincomeattributabletocommon stockholderspercommonshare: Basic Diluted Weightedaveragenumberof sharesoutstanding: Basic Diluted $ 2.38 $ 2.35 $ 2.38 $ 2.35 $ 2.36 $ 1.94 $ 1.50 $ 2.33 $ 1.93 $ 1.49 17,772 18,041 17,656 17,921 17,357 17,543 16,676 16,798 16,068 16,214 2016 Annual Report 115 (In thousands, except per share and net registration data) 2012 2013 2014 2015 2016 Year Ended December 31, Other Data: Netcashprovidedbyoperatingactivities $ 52,838 $ 59,414 $ 61,030 $ 57,211 $ 56,014 Capitalexpenditures Stock-basedcompensation APUSnetcourseregistrations(1) $ 35,014 $ 20,649 $ 24,596 $ 26,002 $ 13,826 $ 3,818 $ 4,024 $ 5,369 $ 5,912 $ 5,211 402,200 409,700 403,900 375,100 345,400 (In thousands) 2012 2013 2014 2015 2016 As of December 31, ConsolidatedBalanceSheetData: Cashandcashequivalents Workingcapital(2) Totalassets Stockholders’equity $114,901 $ 86,004 $237,603 $171,153 $ 94,820 $ 62,327 $271,655 $207,069 $115,634 $ 87,968 $297,904 $234,218 $105,734 $ 80,312 $299,427 $237,153 $146,351 $121,544 $320,712 $264,670 (In thousands) 2012 2013 2014 2015 2016 Year Ended December 31, Netincomeattributableto commonstockholders Interest(income),net Incometaxexpense Equityinvestment(income)/loss Depreciationandamortization EBITDAfromcontinuingoperations $79,948 $42,323 $42,034 $40,877 $32,414 $24,155 (135) 26,528 86 11,146 (309) 25,645 67 13,508 $80,945 (361) 25,150 166 16,121 $81,953 (115) 20,072 (90) 20,520 $72,801 (116) 14,940 (703) 19,384 $57,660 (1) APUSnetcourseregistrationsrepresenttheaggregatenumberofcoursesforwhichstudentsremainenrolledafterthedate bywhichtheymaydropacoursewithoutfinancialpenalty. (2) Workingcapitaliscalculatedbysubtractingtotalcurrentliabilitiesfromtotalcurrentassets. 116 AmericanPublicEducation,Inc. Item7.Management’sDiscussionandAnalysisofFinancial ConditionandResultsofOperations You should read the following discussion together with the consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that are based on management’s current expectations, estimates, and projections about our business and operations, and involves risks and uncertainties. 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,” “Special Note Regarding Forward-Looking Statements,” and elsewhere in this Annual Report. Overview AmericanPublicEducation,Inc.,orAPEI,whichtogetherwithitssubsidiariesisreferredtoasthe“Company,”is aproviderofonlineandon-campuspostsecondaryeducationtoapproximately90,000studentsthroughtwo subsidiaryinstitutions.Weprovideonlinepostsecondaryeducationprimarilydirectedattheneedsofthemili - taryandpublicsafetycommunitiesthroughAmericanPublicUniversitySystem,orAPUS,aregionallyaccredited onlineuniversitythatincludesAmericanMilitaryUniversity,orAMU,andAmericanPublicUniversity,orAPU. Weprovideon-campusnursingeducationtostudentsinOhiothroughNationalEducationSeminars,Inc.,which werefertoasHondrosCollegeofNursing,orHCON.HCONoperatesfivecampusesintheStateofOhio,aswell asanonlineRN-to-BSNProgram,toservetheneedsofthenursingandhealthcarecommunities.Additional informationregardingoursubsidiaryinstitutionsandtheirregulationisincludedinthe“Business—Company Overview”and“Business—RegulatoryEnvironment”sectionsofthisAnnualReport. Ourrevenueislargelydrivenbythenumberofstudentsenrolledatourinstitutionsandthenumberofcourses thattheytake.OurconsolidatedrevenuefortheyearendedDecember31,2016,decreasedto$313.1million from$327.9millionfortheyearendedDecember31,2015.Ourconsolidatedrevenuedecreasedto$327.9 millionfortheyearendedDecember31,2015,from$350.0millionfortheyearendedDecember31,2014.The revenuedecreasesthatoccurredin2016and2015werecausedbydecreasesinnetcourseregistrationsatAPUS anddecreasesinenrollmentatHCON. Ouroperationsareorganizedintotworeportablesegments: • American Public Education Segment, or APEI Segment. Thissegmentreflectstheoperationalactivitiesof APUS,othercorporateactivities,andminorityinvestments. • Hondros College of Nursing Segment, or HCON Segment. Thissegmentreflectstheoperationalactivitiesof HCON. FinancialinformationregardingeachofourreportablesegmentsisreportedinthisAnnualReportinthesec - tions“FinancialStatementsandSupplementaryData,”“Management’sDiscussionandAnalysisofFinancial ConditionandResultsofOperations—OperatingResultsbyReportableSegmentYearEndedDecember31,2016 ComparedtoYearEndedDecember31,2015,”and“Management’sDiscussionandAnalysisofFinancialCondition andResultsofOperations—YearEndedDecember31,2015ComparedtoYearEndedDecember31,2014.” Acquisition of HCON. WeacquiredHCONonNovember1,2013,andwecontinuetoexecuteinitiativesfocused ongrowingHCONandimprovingitsefficiency.Theseinitiativesmayresultinincreasedoperatingexpensesand capitalinvestments,whichmaynotresultinhigherrevenueornetincome.WereceivedED’sapprovalofour HCONchange-in-ownershipapplicationonJanuary19,2016,andHCONsubsequentlyenteredintoaProvisional ProgramParticipationAgreement,orPPPA,whichrequiresHCONtocomplywithspecificconditionswhileprovi - sionallycertified.Inaddition,asaresultoftheSecretaryofEducation’sdecisiontowithdrawandterminateED’s 2016 Annual Report 117 recognitionofACICS,onDecember21,2016,HCONandEDexecutedarevisedPPPAandanaddendumtothe PPPAinwhichHCONagreedtocomplywithadditionalconditionsandrequirements.Priortoouracquisitionof HCON,wehadnoexperiencewithattractingandretainingstudentsineducationalprogramsofferedprimarily onphysicalcampuses.WiththeopeningofHCON’sfifthlocationinJanuary2017,wearenowmarketinginanew geographicmarket.FurtherinformationregardingtheHCONandthepotentialrisksassociatedwithitarefur - theraddressedinthe“Business—RegulatoryEnvironment”and“RiskFactors—RisksRelatedtotheRegulationof OurIndustry”sectionsofthisAnnualReport. Changing Student Body. AlthoughAPUS’sfocushasbroadened,itcontinuestohavearelationshipwithmilitary andmilitaryaffiliatedcommunities.AsofDecember31,2016,approximately54%ofAPUS’sstudentsself-re - portedthattheyservedinthemilitaryonactivedutyatthetimeofinitialenrollment,andasaresultAPUSis particularlyreliantontheDepartmentofDefense,orDoD’s,tuitionassistanceprogramsandDoD’sbudget. Since2006,whenAPUSbeganparticipatinginED’sTitleIVfinancialaidprograms,orTitleIVprograms,asignif - icantportionofAPUS’sgrowthhasbeenattributabletostudentsusingfundsfromthoseprogramsand,asa result,APUSexperiencedachangeinthecompositionofitsstudentbody,whichhasresulted,andmaycontinue toresult,inaneedtoprovideabroaderarrayofservicestoitsstudents.TheHCONacquisitionfurtherchanged thecompositionofourstudentbody,addingstudentswhoattendclassesatphysicalcampuses,aswellasaddi - tionalstudentsusingTitleIVprogramfunds.Activedutymilitarystudentsgenerallytakefewercoursesperyear onaveragethannon-militarystudents. ThechangeinthecompositionofAPUS’sstudentbodyhasalsomadeitmoredifficultforustomakelong-range studentenrollmentforecasts.Forexample,wehavenoticedadecreaseinthepredictabilityoftherateatwhich ourinstitutionsconvertprospectivestudentsintoenrolledstudents,whichweattribute,inpart,toincreased competition,changesinourmarketingapproach,ouradmissionsassessmentprocessatAPUS,andthe2015 tuitionincreaseatAPUS,amongotherfactors.Webelievethatinordertocontinuetoretainandattractqualified studentsourinstitutionsneedtocontinuouslyupdateandexpandthecontentoftheirexistingprogramsand developnewprograms,whichmayrequireobtainingappropriatefederal,state,andaccreditingapprovals,incur - ringmarketingexpenses,makinginvestmentsinmanagementandcapitalexpenditures,andreallocatingother resources.Ifweareunabletomanagechangesinthecompositionofourinstitutions’studentbodies,attract andretainqualifiedstudentsandcontrolthegrowthofrelatedexpenditures,wemayexperienceoperating inefficienciesthatcouldincreaseourcostsandadverselyaffectourresultsofoperationsandfinancialcondition. Formoreinformationabouttherisksrelatedtothesechallenges,pleasesee“RiskFactors—RisksRelatedto AttractingandRetainingStudents.” Increased Costs and Expenses; Our Initiatives. Ourcostsandexpenseshaveincreasedovertimedueinpartto increasedgeneralandadministrativeexpensesrelatedtotheadditionofHCON’sphysicalcampuses,achanging studentbody,anincreaseinexpendituresforfinancialaidprocessing,andexpendituresfortechnologyrequired tosupportstudentsatAPUS.Further,althoughbaddebtexpenseasapercentageofrevenuedecreasedduring theyearsendedDecember31,2015andDecember31,2016,ithastrendedupwardovertimeandcouldincrease infutureperiods. Ourrevenuemaycontinuetodeclineandourcostsandexpensesmayincreaseasourinstitutionsadjustto changesintheirstudentcomposition,undertakeinitiativestoimprovethelearningexperience,andattract studentswhoaremorelikelytopersistintheirprograms.Additionalinitiativesthatmayincreasecostsand expensesoradverselyaffectourrevenuesmayincludethefollowing: • furtherchangestoadmissionsstandardsandrequirements; • alteringtheadmissionsprocessandprocedures; • implementingmorestringentsatisfactoryacademicprogressstandards; 118 AmericanPublicEducation,Inc. • changingtuitioncostsandpaymentoptions; • potentialimplementationofdifferentialprogrampricing; • changingfunddisbursementmethods; • implementingcompetency-basedlearningandotheralternativedeliverymethods;and • alteringourinstitutions’marketingprogramstotargettheappropriateprospectivestudents. InformationtechnologysystemsareanessentialpartoftheAPUSstudentexperienceandourbusinessoper - ations.Wewillneedtoinvestcapital,timeandresourcestoupdateourinstitutions’technologyinresponseto competitivepressuresinthemarketplace,includingincreaseddemandsforinteractivesolutionsandaccess frommultipleplatforms,toupdateoldersystemsandtoenhancefunctionality.Oureffortstodosomaynotbe successful,maycostmorethanexpected,mayincreaseourlevelofspending,ormayotherwiseadverselyaffect ourfinancialcondition.Asaresultofunsuccessfuldevelopmentefforts,orasaresultofreplacingoutdated technology,softwareorothertechnologyrelatedassets,wemayhavesomeassetsthatbecomeimpaired.In thissituation,therelatedassetabandonmentscouldadverselyimpactourresultsofoperation,cashflows,and financialcondition. Thesetypesofchangesarenotwithoutrisktoouroperationsandfinancialresults.Wecontinuallyevaluate ourPADsystemforpossiblechangesandupgrades,andsuchchangesandupgradesmayresultinusincur - ringsignificantcoststhatcouldaffectourfinancialresultsinthenearterm.Theseinvestmentsmayresultin anincreasedlevelofspending,notallofwhichcanbecapitalized.Forexample,fortheyearendedDecember 31,2016,APUSdisposedofapproximately$5.1millioninlong-livedassets,primarilyconsistingofalossthat resultedfromtheabandoneddevelopmentofanewstudentcourseregistrationsystembecauseitwasnolon - gerprobablethatdevelopmentwouldbecompletedandthesoftwareplacedinservice. Organizational Realignment. OnJuly1,2016,aspreviouslyannounced,Dr.KaranH.Powellassumedthe PresidencyofAPUSinconnectionwithourorganizationalrealignment.Dr.WallaceE.Bostonisfocusedonhis positionasPresidentandCEOofAPEI,providingstrategicleadershipsupporttoAPUS,HCON,andotherAPEI ventures.HLC,astheinstitutionalaccreditorofAPUS,requestedthatAPUSsubmitanapplicationtoenableHLC todeterminewhetherAPUS’sproposaltoenterintoasharedservicesmodelwithAPEIconstitutesachange inorganizationorstructurethatrequiresHLCpriorapproval.OnDecember22,2016,APUSsubmittedthe requestedchangeofstructureapplication.HLCiscurrentlyreviewingAPUS’sapplicationandaspartofthe reviewprocessplanstoconductanon-sitevisittoAPUSinearlyMay2017.WeanticipatethattheHLCBoardof TrusteeswillconsiderandactonAPUS’sapplicationduringitsmeetinginJune2017.Thisorganizationalrealign - ment,andthepossibilitythatHLCmaynotapprovetherealignment,maycausestrategicoroperationalchal - lengesforus,theimpactofwhichcouldadverselyaffectourbusiness,resultsofoperations,cashflows,and financialcondition. Admissions Process. InApril2015,APUSimplementedanadmissionsprocessrequiringprospectivestudentsto completeafree,noncreditadmissionsassessmentiftheyarenot(i)activedutymilitaryorveteranapplicants; (ii)graduatesofcertifiedfederal,state,orlocallawenforcementorpublicsafetyacademies;or(iii)studentswith atleastninehoursoftransfercreditfromanaccreditedinstitutionwithagradeof“C”orbetterforeachcourse. APUShasmademultiplechangestotheassessmentprocesssinceitsoriginalimplementationandmayfurther modifyitinthefutureinordertobetteridentifycollege-readystudents.Eveniftheseinitiativesaresuccessful inachievingthedesiredresultofidentifyingandenrollingstudentsthatarelikelytosucceedandimproving studentexperience,duetomanyfactorsthatimpactenrollments,wemaynotbeabletoappropriatelyiden - tifythecauseofanyadverseimpacts,andthereforemaynotbeabletoappropriatelymodifyourinitiatives. 2016 Annual Report 119 Theseinitiativesrequiresignificanttime,energyandresources,andifoureffortsarenotsuccessful,theymay adverselyimpactourresultsofoperations,cashflows,andfinancialcondition. Tuition and Fees. InApril2015,APUSstoppedprovidinga$50percoursetechnologyfeegranttostudentswho wereidentifiedasveteransduringtheirapplicationprocess.APUScontinuestoprovideagranttocoverthetech - nologyfeeforstudentsusingDoDtuitionassistanceprograms.InJuly2015,thefollowingtuitionincreasesfor APUSundergraduateandgraduatecourseregistrationswentintoeffect: • Thetuitionforundergraduatelevelcoursesincreasedby$20percredithourto$270percredithour. • Thetuitionforgraduatelevelcoursesincreasedby$25percredithourto$350percredithour. TosupportAPUS’sactivedutymilitaryandcertainmilitaryaffiliatedstudents,APUScurrentlyprovidesatuition grantthatkeepsthecostoftuitionforthesestudentsatitspreviouslevel.Asaresult,undergraduatecourse tuitioncontinuestobe$250percredithour,andgraduatecoursetuitionwillcontinuetobe$325percredithour forU.S.Militaryactive-dutyservicemembers,Guard,Reserve,militaryspousesanddependents,andveterans. APUSestimatesthatthetuitiongrantappliedtoapproximately75%ofitstotalnetcourseregistrationsin2016. TheJuly2015tuitionincreasewasAPUS’sfirstundergraduatetuitionincreasesince2000,andthefirstgraduate tuitionincreaseinfouryears.BasedoninformationintheCollegeBoard’sTrendsinCollegePricing2015(under - graduate)andtheNationalCenterforEducationStatisticsDigestofEducationalStatistics2014(graduate),we estimatethat,afterthetuitionincrease,APUS’scombinedtuition,fees,andbooksremainapproximately19% lessforundergraduatestudentsand38%lessforgraduatestudentsthantheaveragepublishedin-stateratesat publicuniversities. InMarch2016,APUSeliminateditstransfercreditevaluationfee.FortheyearendedDecember31,2015,APUS recordedapproximately$0.4millioninrevenuerelatedtothetransfercreditevaluationfee. APUScontinuestoevaluatethepossibilityofrepositioningselectdegreeprogramsbyimplementingdifferenti - atedpricingofitsprograms,primarilytobetteralignthetuitionofcertainprogramswithmarketdemand.We cannotpredictwhetherandwhenwewouldimplementthischangeorhowtheimplementationoftuitionpricing byprogramwouldimpactournetcourseregistrations,resultsofoperations,andfinancialcondition. Financial Aid Processing Transition. In2015,APUStransitioneditsfinancialaidprocessingtoathird-party servicer,GlobalFinancialAidServices.ThereweresignificantcostsrelatedtotheimplementationofGlobal FinancialAidServices’financialaidprocessingservicesandtheremaybesignificantcostsandrisksgoingfor - ward.FormoreinformationregardingtherisksassociatedwithAPUS’sfinancialaidprocessingsystems,please seethefollowingitemsinthe“RiskFactors”sectionofthisAnnualReport:“Implementingsystemstocomply,” “TitleIVcompliance,”and“Theuseofthird-partyservices”. Bad Debt Expense. OvertimewehaveexperiencedincreasesinourAPEISegment’sbaddebtexpense;however, thistrendhasstabilizedandbaddebtexpenseasapercentageofrevenuehasdecreasedfortheyearsended December31,2015andDecember31,2016,whencomparedtotheprioryears.Wehaveobservedthatsome studentsenrollorattempttoenrollatAPUSsolelytoobtainfundsfromTitleIVprograms,andsomestudents whomightnototherwisepursueadegreeorcertificateareattractedtoenrollinAPUS’sprogramsbecauseof theavailabilityofsuchfunds.Webelievethesestudentsmaybemorelikelythanotherstudentstoceasepursu - ingadegreeorcertificateduetoseveralfactors,suchasbecomingemployed,ornothavingthelevelofcom - mitmentnecessarytosuccessfullycompletetherequiredcoursework.Asdescribedmorefullyabovein“Risk Factors—RisksRelatedtoOurBusiness,”wehavealsobeenthetargetoffraudulentactivitiesbyoutsideparties withrespecttostudentenrollmentandTitleIVprograms,andwemaybesusceptibletoanincreasedriskof suchactivities.Webelievethefactorsdiscussedinthisparagraphweretheprimarydriversoftheincreasedbad debtexpenseinprioryears.Wearenotabletoestimatethenumberofstudentswhofallintotheseenrollment 120 AmericanPublicEducation,Inc. categories,andourabilitytoestimatetheimpactonourenrollmentsovertimeislimited,asisourabilitytoesti - mateanyadditionalimpactthatthiscouldhaveonourexposuretobaddebtorthenumberofourstudentswho defaultontheirTitleIVprogramloans.WebelievethatourinitiativesdiscussedinthisAnnualReport,including bothouradmissionsprocessandthechangeinthedisbursementmethodofTitleIVaidfromasingledisburse - mentmethodtoamultipledisbursementmethodforfirst-timeundergraduatestudentsatAPUS,havecontrib - utedtothestabilizationofourAPEISegment’sbaddebtexpense. Impact of Government Budgetary Pressures. OnAugust2,2011,CongresspassedtheBudgetControlActof 2011whichputintoplaceaseriesofautomaticfederalbudgetcuts,knownassequestration.Thebudgetcuts, orsequestration,impactedcertainfederalstudentaidprogramseffectivebeginningfiscalyear2013.Whilethe PellGrantprogramwasspecificallyexemptedfromtheeffectsofsequestrationinfiscalyear2013,andtheFiscal Year2016OmnibusAppropriationsBillincreasedthemaximumawardto$5,920inthe2017-2018awardyear,the PellGrantprogramcouldbesubjecttocutsorchangesinthefuture.Whilesequestrationdoesnototherwise changetheamountortermsorconditionsofDirectLoanProgramloans,includingStaffordLoansandPLUS Loans,itdidraisetheloanfeepaidbyborrowersforDirectLoanProgramloansdisbursedafterMarch1,2013. CutstoED’sadministrativebudgetcouldleadtodelaysinstudenteligibilitydeterminations,anddelaysinorigi - nationandprocessingoffederalstudentloans. Aftersequestrationtookeffect,theArmy,AirForce,CoastGuard,andMarineCorpsannouncedthesuspension oftheirtuitionassistanceprograms.CongresssubsequentlyapprovedlegislationrequiringtheDoDtorestore itstuitionassistanceprograms.InOctober2013,theDoDtuitionassistanceprogramswereagaintemporarily suspendedasaresultoftheU.S.governmentpartialshutdown.Eachbranchofthemilitaryrestoreditstuition assistanceprogram.However,asaresultofcontinueduncertaintyabouttheavailabilityoffunding,severalof themilitarybranchesannouncedchangestotheirtuitionassistanceprogramsthattookeffectinfederalfiscal year2014.Forexample,theAirForceisnolongerauthorizingtuitionassistanceforassociatedegreesifthe servicememberalreadyhasanassociatedegreefromtheCommunityCollegeoftheAirForce,theArmynow requiresservicememberstocompleteoneyearofserviceaftergraduationfromAdvancedIndividualTrainingin ordertobeeligiblefortuitionassistanceandhasreducedthetotalbenefitperservicememberby$500peryear, andtheMarineCorpsnowrequiresMarinestohave24monthsonactivedutypriortobeingeligibletoapplyfor tuitionassistance.InOctober2015,theCoastGuardrestoredtuitionassistancefundingto$250percredithour, anincreaseof$62.50percredithourfromthepreviouscapimplementedin2014.AdditionalchangestotheDoD tuitionassistanceprogramscouldoccurduetoCongressionalactionorDoDpolicyandfundingchanges. OnDecember10,2016,theU.S.Congressenactedacontinuingresolutiontoextendfundingforthefederal government,includingtheDoD,throughApril28,2017;however,iffundingisnotextendedbeyondthatdatea governmentshutdowncouldoccurresultinginasuspensionofDoDtuitionassistanceprograms.Agovernment shutdownorsuspensionofDoDtuitionassistanceprogramscouldhaveamaterialadverseeffectonAPUS’s operationsandfinancialcondition. U.S. Army Troop Reductions. InJune2015,theU.S.Armyreportedthat,bySeptember30,2017,itplanstoreduce itstroopcountby40,000anditscivilianemployeecountby17,000.Wecannotpredictthetimingorfullextentof reductionsinthesizeoftheU.S.Military,butanysuchreductionsmayhaveanadverseimpactonAPUS’senroll - ments,ourresultsofoperations,cashflows,andfinancialcondition. DoD MOU. UnderaDoDfinalrule,eachinstitutionparticipatinginDoDtuitionassistanceprogramsisrequired tosignaMemorandumofUnderstanding,orMOU,outliningcertaincommitmentsandagreementsbetween theinstitutionandDoDpriortoacceptingfundsfromDoDtuitionassistanceprograms.In2014,DoDpromul - gatednewregulationsandinstitutionswererequiredtosignanewMOU,whichwerefertoasthe2014MOU,in ordertocontinuetoparticipateinDoDtuitionassistanceprograms.The2014MOUaddedrequirements,many 2016 Annual Report 121 ofwhicharefocusedonthemannerinwhichinstitutionsinteractwithservicemembers.Formoreinformation abouttherequirementsimposedbythe2014MOU,see“RegulatoryEnvironment—DepartmentofDefense”and “RiskFactors—RisksRelatedtoOurBusiness”inthisAnnualReport. Army Enrollment Management Tool. Inadditiontothechallengescausedbylimitsonaccesstomilitaryinstal - lations,inDecember2015,theU.S.Armyimplementedanewenrollmentmanagementtool,referredtoasVIA, thatmembersoftheArmymustusetoaccessDoDtuitionassistanceprograms.Webelievethatmembersof theArmycontinuetoexperiencevariousissueswiththenewenrollmentmanagementtool,includingdifficulty selectingAPUSasaninstitution.Webelievethattheissuesencounteredwiththenewenrollmentmanagement toolnegativelyimpactedAPUS’senrollmentsandnetcourseregistrationsduring2016,andmaycontinuetohave animpactin2017.Formoreinformationaboutthenewenrollmentmanagementtool,see“RiskFactors—IfAPUS doesnothavestrongrelationshipswith...”inthisAnnualReport. Regulated Industry. Ourinstitutionsoperateinahighlyregulatedindustry.Formoreinformationontheregula - tionstowhichourinstitutionsaresubject,pleaserefertothe“Business—CompanyOverview”and“Business— RegulatoryEnvironment”sectionofthisAnnualReport.Suchregulationsmayimpactourfinancialresultsina waythatwecannotpredict,andmayhaveanadverseimpactonourfinancialcondition. OUR KEY FINANCIAL RESULTS METRICS REVENUE Whenreviewingourrevenue,weevaluatethefollowingcomponents:netcourseregistrationsandenrollment, tuitionrate,nettuitionandotherfees. Net course registrations and enrollment. Forfinancialreportingandanalysispurposes,APUSmeasuresitsstu - dentpopulationintermsofaggregatecourseenrollments,ornetcourseregistrations.Courseenrollments,or netcourseregistrations,whichincludeone-creditlabcoursescombinedwiththeirrelatedthree-creditcourses, representtheaggregatenumberofcoursesinwhichstudentsremainenrolledafterthedatebywhichtheymay dropthecoursewithoutfinancialpenalty.HCONmeasuresitsstudentpopulationintermsofstudentenroll - ments.Studentenrollmentrepresentsthenumberofstudentsenrolledinoneormorecoursesafterthedateby whichtheymaydropthecoursewithoutfinancialpenalty. Becausewerecognizerevenueoverthelengthofacourse,netcourseregistrationsandstudentenrollmentsin afinancialreportingperioddonotcorrelatedirectlywithrevenueforthatperiodbecauserevenuerecognized fromcoursesisnotnecessarilyrecognizedinthefinancialreportingperiodinwhichthecourseregistrationsor enrollmentsoccur.Forexample,revenueinaquarterreflectsaportionoftherevenuefromcoursesthatbegan inapriorquarterandcontinuedintothequarter,allrevenuefromcoursesthatbeganandendedinthequarter, andaportionoftherevenuefromcoursesthatbeganbutdidnotendinthequarter. TheaveragenumberofcoursespersemesteratAPUSvariesbypayortype.Forexample,ED’sTitleIVprograms requireparticipatingstudentstotakemorecoursespersemesterthanstudentsparticipatinginDoDtuition assistanceprograms.Asaresult,shouldthenumberofAPUS’sstudentswhoutilizeED’sTitleIVprograms decrease(orthenumberofstudentsusingDoDtuitionassistanceprogramsincrease),weanticipatethatitmay causetheaveragenumberofcoursesperstudentpersemestertodecrease. Youshouldnotrelyontheresultsofanypriorperiodsasanindicationoffuturenetcourseregistrationsat APUS,studentenrollmentsatHCON,orconsolidatedrevenue.Thecompositionofourstudents,changingmar - ketdemandsandcompetition,makeforecastingverydifficult,andweareunabletodetermineifwewillreturn 122 AmericanPublicEducation,Inc. togrowthorwhatlevelofgrowthwewillachieve,ifany.Similarly,youshouldnotrelyonouroperatingmargins inanypriorperiodsasanindicationofourfutureoperatingmargins. Tuition rate. Providingaffordableprogramsisanimportantelementofourstrategyforgrowth.Assuch,we estimatethatAPUS’stuitionislowerthantheaveragein-stateratesatpublicuniversities.TheJuly2015tuition increasewasAPUS’sfirstundergraduatetuitionincreasesince2000,andthefirstgraduatetuitionincreasein fouryears.HCON’stuitionandfeesarealsodesignedtobeaffordableandcompetitivewhencomparedtothe costsofothernursingprograms. Net tuition. Tuitionrevenuevariesfromperiodtoperiodbasedontheaggregatenumberofstudentsattending coursesandthenumberofcoursestheyareattendingduringtheperiod,themixofprogramsthatstudentsare attendingduringtheperiod,aswellasthenumberofstudentsstartingcourseseachmonthduringtheperiod andthetimingofthestartofacourseeachmonthorterm.Tuitionrevenueisadjustedtoreflectamountsfor studentswhowithdrawfromacourseinthemonthortermthewithdrawaloccurs.Wealsoprovidescholar - shipstocertainstudentstoassistthemfinanciallywiththeireducationalgoals.Thecostofthesescholarships isreportedasareductionoftuitionrevenueintheperiodincurredforpurposesofestablishingnettuition revenue. Other fees. Inadditiontotuition,APUSchargesapercoursetechnologyfee.APUSmayalterthisfeeinthe future.APUSstudentsarealsochargedcertainadditionalfees,suchasgraduation,lateregistration,transcript request,andcomprehensiveexaminationfees,whenapplicable.APUSprovidesagranttocoverthetechnol - ogyfeeforcertainstudents,includingstudentsusingDoDtuitionassistanceprograms.Fortheyearended December31,2016,technologyfeerevenuenetoftechnologyfeegrantswasapproximately$8.0million,or2.6% ofrevenue.InMarch2016,APUSeliminatedthetransfercreditevaluationfeechargedtostudentslookingto transfercreditsfromotherinstitutions.Additionally,APUSreceivespurchasecommissionsforgraduatestudent bookpurchasesandancillarysupplypurchasesthatstudentsmakedirectlyfromourpreferredbookvendor. HCONstudentsarechargedfeesforvariousitemssuchasapplication,testing,booksandsupplies,lab,technol - ogyandgraduation. COSTSANDEXPENSES Wecategorizeourcostsandexpensesinthefollowingcategories:instructionalcostsandservices,sellingand promotional,generalandadministrative,lossondisposaloflong-livedassets,lossonassetsheldforsale, impairmentofgoodwill,anddepreciationandamortization. Instructional costs and services. Instructionalcostsandservicesaredirectlyattributabletotheeducational servicesourinstitutionsprovidetotheirstudents.Instructionalcostsandservicesinclude:salariesandben - efitsforfull-timefaculty,administrators,andacademicadvisors,andcostsassociatedwithpart-timefaculty. Instructionalcostsandservicesalsoincludecostsassociatedwithacademicrecordsandgraduation,aswellas otherservicesprovidedbyourinstitutions,suchasevaluatingtranscripts. AtAPUS,instructionalcostsandservicesincludesexpensesrelatedtocoursematerials,learningresources, thelibrary,theundergraduatebookgrantprogramandinstructionalpayforpart-timefacultythatisprimarily dependentonthenumberofstudentstaught.AtHCON,instructionalcostsandservicesalsoincludesoperating expensesdirectlyassociatedwithHCON’scampusoperations,includingrent. Selling and promotional. Sellingandpromotionalincludes:salariesandbenefitsofpersonnelengagedin studentenrollment,advertisingcosts,andmarketingmaterialproductioncosts.Oursellingandpromotional expensesaregenerallyaffectedbythecostofadvertisingmedia,theefficiencyofoursellingefforts,salaries andbenefitsforoursellingandadmissionspersonnel,andthelevelofexpendituresforadvertisinginitiatives 2016 Annual Report 123 fornewandexistingacademicprograms.WebelievetheavailabilityofTitleIVprogramfundstostudentshas increasedourmarketabilityinnon-militarymarkets,butthenatureofthesemarkets,includingtheimpactof competition,andtherisingcostofInternetsearchandotheradvertisingmediahascausedourstudentacquisi - tioncoststoincrease.Thistrendmaycontinueandourstudentacquisitioncostsmayincrease. General and administrative. Generalandadministrativeincludes:salariesandbenefitsofemployeesengaged incorporatemanagement,finance,financialaidprocessing,informationtechnology,humanresources,facilities, complianceandothercorporatefunctions,thecostofrentingandmaintainingAPUS’sadministrativefacilities, technologyexpenses,andcostsforprofessionalservices.Generalandadministrativealsoincludesbaddebt expense. Loss on disposal of long-lived assets. Lossondisposaloflong-livedassetsisthedifferencebetweenthelong- livedasset’sresidualvalueanditsbookvalueatthetimeoftheasset’sdispositionorabandonment. Loss on assets held for sale. Lossonassetsheldforsaleisthedifferencebetweentheasset’sestimatedfair valuelessestimatedcoststosellandtheasset’sbookvalueatthetimetheassetisnolongerusedforopera - tionsandclassifiedasheldforsaleinaccordancewiththeheld-for-salecriteria. Impairment of goodwill. Impairmentofgoodwillrecognizesthedifferencebetweenthecarryingvalueofgood - willandtheimpliedfairvalueofgoodwillbaseduponahypotheticalsaleatfairvalue. Depreciation and amortization. Weincurdepreciationandamortizationexpensesforcostsrelatedtothe capitalizationofproperty,equipment,software,andprogramdevelopmentonastraight-linebasisoverthe estimatedusefullivesoftheassets.Inaddition,weincuramortizationexpensefortheamortizationofidentified intangibleassetswithadefiniteliferesultingfromouracquisitionofHCON. INTEREST INCOME, NET Interestincome,netconsistsprimarilyofinterestincomeearnedonnotesreceivableandoncashandcash equivalents,netofanyinterestexpense. EQUITYINVESTMENTINCOMEANDLOSS Equityinvestmentincomeandlossconsistsprimarilyofourproportionalshareofafter-taxearningsorlosses attributabletoourinvestmentsincertaincompanies.Weusetheequitymethodofaccountingforaninvest - mentinacompanyinwhichourownershipis20%orgreaterbutlessthanorequalto50%,orwhenwehavethe abilitytoexercisesignificantinfluenceoveroperatingandfinancialpoliciesoftheinvestment.Werefertothese companiesasinvestees. Undertheequitymethod,ourinvestmentsinandamountsduetoandfromaninvesteeareincludedinthe ConsolidatedBalanceSheets.Ourshareoftheinvestee’searningsorlossesisincludedintheConsolidated StatementsofIncomeasequityinvestmentincome(loss).Dividends,cashdistributions,loans,orothercash receivedfromtheinvesteeaswellasadditionalcashinvestments,loanrepaymentsorothercashpaidtothe investeeareincludedintheConsolidatedStatementsofCashFlows.Additionally,whencircumstanceswarrant, thecarryingvalueofinvestmentsaccountedforusingtheequitymethodofaccountingareadjusteddownward toreflectanyother-than-temporarydeclinesinvalue. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES ThediscussionofourfinancialconditionandresultsofoperationsisbaseduponourConsolidatedFinancial Statements,whichhavebeenpreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnited States,orGAAP.Duringthepreparationofthesefinancialstatements,wearerequiredtomakeestimatesand 124 AmericanPublicEducation,Inc. assumptionsthataffectthereportedamountsofassets,liabilities,revenue,costsandexpenses,andrelated disclosures.Onanongoingbasis,weevaluateourestimatesandassumptions,includingthoserelatedtorevenue recognition,accountsreceivableandallowancefordoubtfulaccounts,valuationoflong-livedassets,contingencies, incometaxes,andstock-basedcompensationexpense.Webaseourestimatesonhistoricalexperienceandonvar- iousotherassumptionsthatwebelievearereasonableunderthecircumstances.Theresultsofouranalysisform thebasisformakingassumptionsaboutthecarryingvaluesofassetsandliabilitiesthatarenotreadilyapparent fromothersources.Actualresultsmaydifferfromtheseestimatesunderdifferentassumptionsorconditions,and theimpactofsuchdifferencesmaybematerialtoourConsolidatedFinancialStatements. Asummaryofourcriticalaccountingpoliciesfollows: Revenue recognition. Werecordalltuitionasdeferredrevenuewhenastudentbeginsanonlinecourse,inthe caseofAPUS,orstartsaterm,inthecaseofHCON.Atthebeginningofeachcourseorterm,revenueisrecog - nizedonaproratabasisovertheperiodofthecourseorterm,whichis,forAPUS,eitheraneight-or16-week periodand,forHCON,aquarterlyterm.ThisresultsindeferredrevenueonourConsolidatedBalanceSheets thatincludesfuturerevenuethathasnotyetbeenearnedforcoursesandtermsthatareinprogress.Thereve - nuerecognitionpoliciesofeachofourreportablesegmentsarediscussedbelow. AMERICAN PUBLIC UNIVERSITY SYSTEM APUS’stuitionrevenuevariesfromperiodtoperiodbasedonthenumberofnetcourseregistrations.Students mayremittuitionpaymentsthroughtheonlineregistrationprocessatanytimeortheymayelectvariouspay - mentoptions,includingpaymentsbysponsors,alternativeloans,financialaid,ortheDoDtuitionassistancepro- gramwhichremitspaymentsdirectlytoAPUS.Theseotherpaymentoptionscandelaythereceiptofpayment upuntilthecoursestartsorlonger,resultingintherecordingofanaccountreceivableatthebeginningofeach session.TuitionrevenueforsessionsinprogressthathasnotbeenearnedbyAPUSispresentedasdeferred revenueintheaccompanyingConsolidatedBalanceSheets. APUSrefunds100%oftuitionforcoursesthataredroppedbeforetheconclusionofthefirstsevendaysofacourse. APUSdoesnotrecognizerevenuefordroppedcourses.Afteracoursebegins,APUSusesthefollowingrefundpolicy: 8-Week Course—Tuition Refund Schedule Withdrawal Date BeforeorduringWeek1 DuringWeek2 DuringWeeks3and4 DuringWeeks5through8 16-Week Course—Tuition Refund Schedule Withdrawal Date BeforeorDuringWeek1 DuringWeek2 DuringWeeks3and4 DuringWeeks5through8 DuringWeeks9through16 Studentsaffiliatedwithcertainorganizationsmayhaveanalternaterefundpolicy. Tuition Refund Percentage 100% 75% 50% NoRefund Tuition Refund Percentage 100% 100% 75% 50% NoRefund 2016 Annual Report 125 APUSrecognizesrevenueonaproratabasisovertheperiodofitscoursesasAPUScompletesthetasksentitling ittothebenefitsrepresentedbysuchrevenue.Ifastudentwithdrawsduringtheacademicterm,APUScalcu - latestheportionoftuitionthatisnon-refundablebasedonthetuitionrefundpolicyandrecognizesitasreve - nueintheperiodthewithdrawaloccurs.Forthosestudentswhohaveanoutstandingreceivablebalanceatthe dateofwithdrawal,APUSassessescollectabilityandrecognizesasrevenuethoseamountswherecollectability isreasonablyassuredbasedonAPUS’shistorywithsimilarstudentaccounts.Thispolicywasimplementedon January1,2015.Previously,APUSrecognizedrevenueforallstudentwithdrawalsandestablishedanallowance forthosereceivablesconsidereduncollectible.Wedonotbelievethatthischangeinpolicyhashadamaterial effectonitsresultsofoperationsorfinancialcondition. Otherrevenueincludesatechnologyfeechargedpercourseandatransfercreditevaluationfee.APUSprovides agranttocoverthetechnologyfeeforstudentsusingDoDtuitionassistanceprograms.PriortoApril2015,APUS providedagranttocoverthetechnologyfeeforstudentsusingeducationbenefitprogramsadministeredbythe U.S.DepartmentofVeteransAffairs,orVA.AfterApril1,2015,thetechnologyfeegrantwasnolongerprovided tostudentsusingVAeducationbenefits.APUSeliminatedthetransfercreditevaluationfeeinMarch2016.The transfercreditevaluationfeewasforsecuringofficialtranscriptsonbehalfofthestudentandevaluatingthe transcriptsfortransfercredit. Studentsalsoarechargedgraduation,lateregistration,transcriptrequestandcomprehensiveexamination fees,whenapplicable.InaccordancewithASC605-50,Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,otherfeesalsoincludebookpurchasecommissionsAPUSreceivesfor graduatestudentbookpurchasesandancillarysupplypurchasesstudentsmakedirectlyfromAPUS’spreferred bookvendor. HONDROS COLLEGE OF NURSING HCON’stuitionrevenuevariesfromperiodtoperiodbasedonthenumberofstudentsenrolledandthepro - gramstheyareenrolledin.Studentsmayremittuitionpaymentsatanytime,ortheymayelectvariouspay - mentoptionsthatcandelayreceiptofpaymentupuntilthetermstartsorlonger.Theseotherpaymentoptions includepaymentsbysponsors,financialaid,alternativeloans,orpaymentplanoptions.Ifoneofthevarious otherpaymentoptionsareconfirmedassecured,thestudentisallowedtostarttheterm.Allfinancialaidis awardedpriortothestartofthetermandrequestsforauthorizationofdisbursementbegininthefirstweek oftheterm.TuitionrevenuefortheterminprogressthathasnotyetbeenearnedbyHCONispresentedas deferredrevenueintheaccompanyingConsolidatedBalanceSheets. HCON’srefundpolicycomplieswiththerulesoftheOhioStateBoardofCareerCollegesandSchoolsandis applicabletoeachterm.Foracoursewithanon-campusorotherin-personcomponent,thedateofwithdrawal isdeterminedbyastudent’slastattendeddayofclinicaloffering,laboratorysession,orlecture.Foranonline course,thedateofwithdrawalisdeterminedbyastudent’slastsubmittedassignmentinthecourse.HCONuses thefollowingrefundpolicy: Withdrawal Date Beforefirstfullcalendarweekofthequarter Duringfirstfullcalendarweekofthequarter Duringsecondfullcalendarweekofthequarter Duringthirdfullcalendarweekofthequarter Duringfourthfullweekofthequarter Tuition Refund Percentage 100% 75% 50% 25% NoRefund Studentsaffiliatedwithcertainorganizationsmayhaveanalternaterefundpolicy. 126 AmericanPublicEducation,Inc. HCONrecognizesrevenueonaproratabasisovertheacademicterm.Ifastudentwithdrawalsduringtheterm, HCONcalculatestheportionoftuitionthatisnon-refundablebasedonthetuitionrefundpolicyandrecognizes itasrevenueintheperiodthewithdrawaloccurs. Otherrevenueincludesapplicationfeesandfeesfortesting,booksandsupplies,lab,technology,andgraduation. Accounts receivable. Coursetuitionisrecordedasaccountsreceivableanddeferredrevenueatthetimestu - dentsbeginacourseorterm.Studentsmayremittuitionpaymentsatanytimeortheymayelectvariousother paymentoptionswithpaymenttermsextendingbeyondthestartofthecourseorterm.Theseotherpay - mentoptionsincludepaymentsbysponsors,financialaid,alternativeloans,oratuitionassistanceprogram thatremitspaymentsdirectlytothesubsidiary.Whenastudentremitspaymentafteracourseortermhas begun,accountsreceivableisreduced.Ifpaymentismadepriortothestartofacourseorterm,thepaymentis recordedasastudentdeposit,andthestudentisprovidedaccesstotheonlineclassroomwhencoursesstart,in thecaseofAPUS,orallowedtostarttheterm,inthecaseofHCON.Ifoneofthevariousotherpaymentoptions areconfirmedassecured,thestudentisprovidedaccesstotheonlineclassroomorallowedtostarttheterm. Generally,ifnoreceiptisconfirmedorpaymentoptionsecured,thestudentwillbedroppedfromtheonline courseornotallowedtostarttheterm.Therefore,billedamountsrepresentchargesthathavebeenprepared andsenttostudentsortheapplicablethird-partypayoraccordingtothetermsagreeduponinadvance. DoDtuitionassistanceprogramsarebilledbybranchofserviceonacourse-by-coursebasiswhenastudent startsacourse,whereasTitleIVprogramsarebilledbasedonthecoursesincludedinastudent’ssemester. Billedaccountsreceivableareconsideredpastdueiftheinvoicehasbeenoutstandingformorethan30days. Theallowancefordoubtfulaccountsisbasedonmanagement’sevaluationofthestatusofexistingaccounts receivable.Amongotherfactors,managementconsiderstheageofthereceivable,theanticipatedsourceof paymentandthehistoricalallowanceconsiderations.Considerationisalsogiventoanyspecificknownriskareas amongtheexistingaccountsreceivablebalances.Recoveriesofreceivablespreviouslywrittenoffarerecorded whenreceived.Wedonotchargeinterestonpastdueaccountsreceivable. Property and equipment. Allpropertyandequipmentarecarriedatcostlessaccumulateddepreciationand amortization,excepttheacquiredassetsofHCON,whichwererecordedatfairvalueattheacquisitiondate. Depreciationandamortizationarecalculatedonastraight-linebasisovertheestimatedusefullivesofthe assets.Fortaxpurposes,differentmethodsareused.Maintenanceandrepairsareexpensedasincurred,while othercostsarecapitalizediftheyextendtheusefullifeoftheasset. OurPartnershipAtaDistanceTM,orPADsystem,isacustomizedstudentinformationandservicessystemused byAPUStomanageadmissions,onlineorientation,courseregistrations,tuitionpayments,gradereporting, progresstowarddegrees,andvariousotherfunctions.Costsassociatedwiththesystemhavebeencapital - izedinaccordancewithFASBASCSubtopic350-40,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,andclassifiedaspropertyandequipment.Thesecostsareamortizedovertheesti - matedusefullifeoffiveyears.Wealsocapitalizecertaincostsforacademicprogramdevelopment.Thesecosts aretransferredtopropertyandequipmentuponcompletionofeachprogramandamortizedoveranestimated lifenottoexceedthreeyears. Investments. Weaccountforourinvestmentsinlessthanmajorityownedcompaniesundereithertheequity orcostmethod.Weapplytheequitymethodtoinvestmentswhenwehavetheabilitytoexercisesignificant influence,butdonotcontroltheoperatingandfinancialpoliciesofthecompany.Investmentsaccounted forundertheequitymethodareinitiallyrecordedatcost.Ourpro-ratashareoftheoperatingresultsofthe investeeisreportedintheConsolidatedStatementsofIncomeas“Equityinvestmentincome/(loss).”We evaluatetherecoverabilityofequitymethodinvestmentsonanannualbasisorsoonerifthereareindicators 2016 Annual Report 127 ofimpairment.Managementmustexercisesignificantjudgmentinevaluatingthepotentialimpairmentofits equityinvestments.Weapplythecostmethodtoinvestmentswhenwedonothavetheabilitytoexercisesig - nificantinfluenceovertheoperatingandfinancialpoliciesoftheinvestment.Underthecostmethod,werecord theinvestmentatcostandrecognizeasincomeanydividendsreceivedfromtheinvestment.Weevaluatethe costmethodinvestmentsforimpairmentonanannualbasisorsoonerifthereareindicatorsofimpairment. Ourinvestmentsarepresentedonaone-linebasisas“Investments”intheaccompanyingConsolidatedBalance Sheets.AdditionalinformationregardingourinvestmentsislocatedinNote6.Investments,initsConsolidated FinancialStatements. Notes receivable. Weevaluatenotesreceivablebyanalyzingtheborrower’screditworthiness,cashflowsand financialstatus,andtheconditionandestimatedvalueofthecollateral.Weconsideranotetobeimpaired when,baseduponcurrentinformationandevents,webelieveitisprobablethatwewillbeunabletocollectall amountsdueaccordingtothetermsofthenote.Notesreceivableareincludedin“Otherassets”intheaccompa - nyingConsolidatedBalanceSheets. Income taxes. Deferredtaxesaredeterminedusingtheliabilitymethod,wherebydeferredtaxassetsarerec - ognizedfordeductibletemporarydifferencesanddeferredtaxliabilitiesarerecognizedfortaxabletemporary differences.Temporarydifferencesarethedifferencesbetweenthereportedamountsofassetsandliabilities andtheirtaxbasis.Asthesedifferencesreverse,theywillenterintothedeterminationoffuturetaxableincome. Deferredtaxassetsarereducedbyavaluationallowancewhen,intheopinionofmanagement,itismorelikely thannotthatsomeportionorallofthedeferredtaxassetswillnotberealized.Deferredtaxassetsandliabili - tiesareadjustedfortheeffectsofchangesintaxlawsandratesonthedateofenactmentofsuchchanges. TherewerenomaterialuncertaintaxpositionsasofDecember31,2014,2015or2016.Interestandpenal - tiesassociatedwithuncertainincometaxpositionswouldbeclassifiedasincometaxexpense.Wehavenot recordedanymaterialinterestorpenaltiesduringanyoftheyearspresented. Stock-based compensation. Weaccountforstock-basedcompensationinaccordancewithASC718,Stock Compensation,whichrequirescompaniestoexpenseshare-basedcompensationbasedonfairvalue.Stock-based paymentsmayinclude:incentivestockoptionsornon-qualifiedstockoptions,stockappreciationrights,restricted stock,restrictedstockunits,dividendequivalentrights,performanceshares,performanceunits,cash-basedawards, otherstock-basedawards,includingunrestrictedshares,oranycombinationoftheforegoing.Atthepresenttime, thecompanyutilizesrestrictedstockgrantsandhasnotissuedanystockoptionssince2011. Stock-basedcompensationexpenserelatedtorestrictedstockgrantsisrecognizedoverthevestingperiod usingthestraight-linemethodforouremployeesandthegraded-vestingmethodformembersoftheBoardof Directors,andismeasuredusingourstockpriceonthedateofthegrant.Thefairvalueofeachoptionaward isestimatedatthedateofgrantusingaBlack-Scholesoption-pricingmodelthatusescertainassumptions, whichhavebeennotedin“Note11.Stockholders’Equity,NotestotheConsolidatedFinancialStatements”in thisAnnualReport.Wemakeassumptionswithrespecttoexpectedstockpricevolatilitybasedontheaverage historicalvolatilityofthestockpricesofpeerswithsimilarattributes.Inaddition,wedeterminetheriskfree interestratebyselectingtheU.S.Treasuryfive-yearconstantmaturity,quotedonaninvestmentbasisineffect atthetimeofgrantforthatbusinessday.Weestimateforfeituresofstock-basedawardsatthetimeofgrantand revisesuchestimatesinsubsequentperiodsifactualforfeituresdifferfromtheoriginalestimates.Estimates offairvaluearesubjectiveandarenotintendedtopredictactualfutureevents,andsubsequenteventsarenot indicativeofthereasonablenessoftheoriginalestimatesoffairvaluemadeunderFASBASCTopic718. Goodwill and indefinite-lived intangible assets. Goodwillrepresentstheexcessofthepurchasepriceofan acquiredbusinessovertheamountassignedtotheassetsacquiredandliabilitiesassumed.Goodwillisnot 128 AmericanPublicEducation,Inc. amortized.InaccordancewithASC350,IntangiblesGoodwillandOther,weassessgoodwillforimpairment annuallyonoraroundtheanniversarydate,ormorefrequentlyifeventsandcircumstancesindicatethatgood - willmightbeimpaired.InconnectionwithourNovember1,2013acquisitionofHCON,werecorded$38.6million ofgoodwill,representingtheexcessofthepurchasepriceovertheamountassignedtothenewassetsacquired andthefairvalueassignedtoidentifiedintangibleassets.Wealsorecorded$3.7millionofindefinite-livedtangi - bleassetsaspartoftheHCONacquisition. Goodwillimpairmenttestingconsistsofanoptionalqualitativeassessmentaswellasatwo-stepquantitative test.Steponeinvolvescomparingthefairvalueofthereportingentitytoitscarryingvalue.Ifthecarryingvalue ofthereportingentityisgreaterthanzeroanditsfairvalueisgreaterthanitscarryingamount,thereisno impairment.Ifthecarryingvalueisgreaterthanthefairvaluethensteptwomustbecompletedtomeasurethe amountofimpairment,ifany.Steptwoinvolvescalculatingtheimpliedfairvalueofgoodwillbydeductingthe fairvalueofalltangibleandintangibleassets,excludinggoodwill,ofthereportingunitfromthefairvalueofthe reportingunitasdeterminedinstepone.Theimpliedfairvalueofgoodwilldeterminedinthisstepiscompared tothecarryingvalueofgoodwill.Iftheimpliedfairvalueofgoodwillislessthanthecarryingvalueofgoodwill, animpairmentlossisrecognizedequaltothedifference. Inconnectionwiththepreparationofthethirdquarterfinancialstatements,theCompanycompletedaquali - tativeassessmenttodetermineifaninterimgoodwillimpairmenttestwasnecessary.Duetorelevantcircum - stancesthatincluded,butwerenotlimitedto:(1)HCON’sunderperformanceagainstinternaltargets;(2)the challenginghighereducationcompetitiveandregulatoryenvironment,particularlyforproprietaryinstitutions; (3)overallfinancialperformance;and(4)theuncertainstatusofACICS,theCompanyconcludeditwasmore likelythannotthefairvalueofHCONwaslessthanitscarryingamount;therefore,theCompanyproceededwith steponeofthegoodwillimpairmenttest.SteponeofthegoodwillimpairmenttestidentifiedthatHCON’sfair valuewaslessthanthecarryingvalue.Accordingly,steptwotestingwascompletedinordertodeterminethe amountoftheimpairment.Insteptwo,thefairvalueofallassetsandliabilitieswasestimatedforthepurpose ofderivinganestimateoftheimpliedfairvalueofgoodwill.Theimpliedfairvalueofgoodwillwasthencom - paredtotherecordedgoodwilltodeterminetheamountofimpairment.Steptwotestingindicatedthatthefair valueofgoodwillwas$33.9millionor$4.7millionlessthanitscarryingvalue.Asaresult,theCompanyrecorded a$4.7millionimpairmentchargetoreducethecarryingvalueofitsgoodwill. TheCompanyutilizedanindependentvaluationfirmtodeterminethefairvalueofHCON.Theindependent valuationfirmweightedtheresultsoffourdifferentvaluationmethods:(1)discountedcashflow;(2)guideline companymethod;(3)guidelinetransactionmethod—comparabletransactions;and(4)guidelinetransaction method—privateequitytransactions.Undertheincomeapproach,fairvaluewasdeterminedbasedonesti - mateddiscountedfuturecashflowsofHCON.Thecashflowswerediscountedbyanestimatedriskweighted-av - eragecostofcapital,whichwasintendedtoreflecttheoveralllevelofinherentriskofHCON.Underthemarket approach,valuationmultiplesfromothertransactionsinthehighereducationmarketwereusedtodetermine thevalueofHCON.ValuesderivedunderthefourvaluationmethodswerethenweightedtoestimateHCON’s enterprisevalue. Inaccordancewithcompanypolicy,steponeimpairmenttestingwascompletedasofOctober31,2016.That testingindicatedthatfairvalueexceededcarryingvaluebyapproximately$1.1million.Determiningthefair valueofHCONisjudgmentalinnatureandrequirestheuseofsignificantestimatesandassumptions,including revenuegrowthrates,operatingmargins,discountratesandfuturemarketconditions,amongothers.Giventhe currentcompetitiveandregulatoryenvironment,andtheuncertaintiesregardingtherelatedimpactonHCON’s business,therecanbenoassurancethattheestimatesandassumptionsmadeforpurposesoftheCompany’s goodwillimpairmenttestingwillprovetobeaccuratepredictionsofthefuture.IftheCompany’sassumptions arenotachieved,theCompanymayrecordadditionalgoodwillimpairmentchargesinfutureperiods.Itisnot 2016 Annual Report 129 possibleatthistimetodetermineifanysuchfutureimpairmentchargewouldresultor,ifitdoes,whethersuch chargewouldbematerial. Indefinite-livedintangibleassetsaretestedatleastannuallyforimpairmentbycomparingthefairvalueofthe assettothecarryingvalue.APEIutilizestheservicesofathird-partyvaluationfirmtoestimatefairvalue.In completingtheiranalysis,thevaluationfirmcompletesadiscountedcashflowanalysis.Thediscountedcash flowanalysisincludessignificantmanagementassumptionssuchasrevenuegrowthrates,operatingmargins andfutureeconomicandmarketconditions.Additionally,thevaluationfirm’sanalysisincludessignificant assumptionswithrespecttodiscountratesandassumedroyaltyrates.Ifthefairvalueislessthanthecarrying value,theassetisreducedtofairvalue.Theannualtestingconcludedthattheindefinite-livedassetswerenot impaired. Foradditionaldetailsregardinggoodwillandindefinite-livedintangibleassets,refertoNote7.Goodwilland IntangibleAssets,intheseConsolidatedFinancialStatements. Valuation of long-lived assets. Weaccountforthevaluationoflong-livedassetsunderASC360,Accounting for the Impairment or Disposal of Long-Lived Assets.ASC360requiresthatlong-livedassetsandcertainidentifiable intangibleassetsbereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthe carryingamountofanassetmaynotberecoverable.Recoverabilityofthelong-livedassetismeasuredbya comparisonofthecarryingamountoftheassettofutureundiscountednetcashflowsexpectedtobegenerated bytheasset.Ifsuchassetsareconsideredtobeimpaired,theimpairmenttoberecognizedismeasuredbythe amountbywhichthecarryingamountoftheassetsexceedstheestimatedfairvalueoftheassets.Assetstobe disposedofarereportableatthelowerofthecarryingamountorfairvalue,lesscoststosell. RECENT ACCOUNTING PRONOUNCEMENTS WeconsidertheapplicabilityandimpactofallAccountingStandardsUpdates,orASUs.SeeNote2toour ConsolidatedFinancialStatementsforinformationrelatingtoourdiscussionoftheeffectsofrecentaccounting pronouncements.InadditiontotheASUsthatarediscussedinourConsolidatedFinancialStatements,wehave summarizedadditionalASUsbelow,includingthoseforwhichweareuncertainofthepotentialimpact. InMay2014,theFinancialAccountingStandardsBoard,orFASB,issuedASUNo.2014-09,Revenuefrom ContractswithCustomers(Topic606).Thestandardisacomprehensivemodeltouseinaccountingforrevenue arisingfromcontractswithcustomersandsupersedestherevenuerecognitionrequirementsintheAccounting StandardsCodification,orASC,605,RevenueRecognition,aswellasothervarioussectionsoftheASC.Thecore principleofASU2014-09istorecognizerevenuewhenpromisedgoodsorservicesaretransferredtocustomers inanamountthatreflectstheconsiderationtowhichanentityexpectstobeentitledforthosegoodsorser - vices.Theauthoritativeguidanceprovidesafive-stepanalysisoftransactionstodeterminewhenandhowrev - enueisrecognized.Morejudgmentandestimatesmayberequiredwithintherevenuerecognitionprocessthan arerequiredunderexistingU.S.GAAP.Thestandardalsoincludesacohesivesetofdisclosurerequirements includingcomprehensiveinformationaboutthenature,amount,timinganduncertaintyofrevenueandcash flowsarisingfromcontractswithcustomers.ASU2014-09wasinitiallyintendedtobeeffectiveforfiscalyears, andtheinterimperiodswithinthesefiscalyears,beginningonorafterDecember15,2016.InAugust2015,the FASBissuedASU2015-14,RevenuefromContractswithCustomers(Topic606):DeferraloftheEffectiveDate. ThisstandarddefersforoneyeartheeffectivedateofASU2014-09.Thedeferralwillresultinthisstandard beingeffectiveforfiscalyears,andinterimperiodswithinthosefiscalyears,beginningafterDecember15,2017. EarlierapplicationispermittedonlyasofannualreportingperiodsbeginningafterDecember15,2016,including interimreportingperiodswithinthatreportingperiod.Entitiesmustuseeitherafullretrospectiveapproachfor allperiodspresentedintheperiodofadoptionoramodifiedretrospectiveapproach. 130 AmericanPublicEducation,Inc. InadditiontoASU2015-14,therehavebeenthreenewASUsissuedamendingcertainaspectsofASU2014-09. • ASUNo.2016-08,Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),issuedinMarch 2016,clarifiescertainaspectsoftheprincipalversusagentguidance. • ASUNo.2016-10,Identifying Performance Obligations and Licensing,issuedinApril2016,clarifiesguidance relatedtoidentifyingperformanceobligationsandlicensingimplementation. • ASUNo.2016-12,Revenue from Contracts with Customers—Narrow Scope Improvements and Practical Expedients, issuedinMay2016,providesamendmentsandpracticalexpedientsintheareasofassessingcollectability, presentationofsalestaxesreceivedfromcustomers,noncashconsideration,contractmodificationandclarifi - cationofusingthefullretrospectiveapproachtoadoptASU2014-09. ASU2014-09requiresidentifyingperformanceobligationsbytheCompanyandtheCustomer.Asaresult,the revenuerecognitionperiodmaybeextendedincertainlimitedinstancesforAPUStuitionandtechnologyfee revenue.APUSgraduationfeerevenue,includedintheCompany’sotherrevenue,iscurrentlyrecognizedatthe timetheapplicationforgraduationissubmittedbythestudent.Thenewstandardmayextendtherevenuerec - ognitionperiodforthisrevenuestream.TheCompanyiscurrentlyevaluatingtheimpactofthenewstandardon otherAPUSandHCONrevenuestreams. TheCompanyiscurrentlyevaluatingwhichtransitionapproachtouseandadditionalimpactsthenewrevenue recognitionstandardandsubsequentupdateswillhaveonitsConsolidatedFinancialStatements. InJanuary2016,theFASBissuedASUNo.2016-01,Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.Thestandardaddressescertainaspectsofrecogni - tion,measurement,presentation,anddisclosureoffinancialinstruments.Thesechangeswillrequireanentity tomeasure,atfairvalue,investmentsinequitysecuritiesandotherownershipinterestsinanentityandto recognizethechangesinfairvaluewithinnetincome.ASU2016-01iseffectiveforfiscalyears,andinterimperi - odswithinthoseyears,beginningafterDecember15,2017,andearlyadoptionisnotpermitted.TheCompany iscurrentlyassessingtheimpactoftheadoptionofthisstandardanddoesnotcurrentlyanticipateitwillhavea materialimpactonitsConsolidatedFinancialStatements. InFebruary2016,theFASBissuedASUNo.2016-02, Leases (Topic 842) .Thisstandardrequiresentitiesthatlease assetstorecognizeonthebalancesheettheassetsandliabilitiesfortherightsandobligationscreatedbythose leasesinadditiontodisclosingcertainkeyinformationaboutleasingarrangements.Entitiesmayelectnotto recognizeleaseassetsandliabilitiesformostleaseswithtermsof12monthsorless.Expensesrelatedtofinance leaseswillbethesumofinterestontheleaseobligationandamortizationoftheright-of-useassetandexpenses relatedtooperatingleaseswillgenerallyberecognizedonastraight-linebasis.Intransition,lesseesandlessors arerequiredtorecognizeandmeasureleasesatthebeginningoftheearliestperiodpresentedusingamodified retrospectiveapproach.Thisstandardiseffectiveforfiscalyears,andtheinterimperiodswithinthosefiscal years,beginningafterDecember15,2018.Earlyadoptionispermitted.TheCompanydoesnotplantoearly adoptandiscurrentlyevaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancialStatements. InMarch2016,theFASBissuedASUNo.2016-09,Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,changinghowentitiesaccountforcertainaspectsofshare-based paymentstoemployees.Thenewguidancerequiresexcesstaxbenefitsandtaxdeficienciestoberecognizedas incometaxexpenseorbenefitintheincomestatement,andcouldintroducevolatilitytotheCompany’sprovi - sionforincometaxes.Excesstaxbenefitsmustbepresentedasanoperatingactivityonthestatementofcash flowsratherthanafinancingactivity.ASU2016-09requirescompaniestomakeanaccountingpolicyelectionat thetimeofadoptiontoeitherestimatethenumberofawardsthatareexpectedtovest(consistentwithexisting U.S.GAAP)oraccountforforfeitureswhentheyoccur.Theforfeitureelectionprovisionmustbeappliedusinga 2016 Annual Report 131 retrospectivetransitionapproach,withacumulative-effectadjustmentrecordedtoretainedearningsasofthe beginningoftheperiodofadoption.ThenewguidanceiseffectiveforfiscalyearsbeginningafterDecember15, 2016,includinginterimperiodswithinthosefiscalyears.TheCompanyelectedtheforfeitureoptiontocontinue toestimatethenumberofawardsthatareexpectedtovest.TheCompanyestimatestheadoptionof2016-09 mayincreaseitsreportedincometaxexpensebetween$400,000and$700,000inthefirstquarterof2017,and between$600,000and$900,000inthefirstquarterof2018,duetoexpiringstockoptionswithanoptionprice greaterthanthecurrentstockprice.Otherincreasesinincometaxexpensemayoccurthroughouttheyearfor thevestingofrestrictedstock,determinedbythestockpriceattheendofeachreportingperiod. InJune2016,theFASBissuedASUNo.2016-13,Financial Instruments—Credit Losses, which is included in ASC Topic 326, Measurement of Credit Losses on Financial Instruments.Thenewguidancerevisestheaccountingrequire - mentsrelatedtothemeasurementofcreditlossesandwillrequireentitiestomeasureallexpectedcreditlosses forfinancialassetsbasedonhistoricalexperience,currentconditionsandreasonableandsupportableforecasts aboutcollectability.Assetsmustbepresentedinthefinancialstatementsatthenetamountexpectedtobe collected.TheguidancewillbeeffectiveforthefiscalyearsbeginningafterDecember15,2019,includinginterim periodswithinthosefiscalyears.EarlyadoptionispermittedwithfiscalyearsbeginningafterDecember15, 2018.TheCompanyisevaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancialStatements. InAugust2016,theFASBissuedASUNo.2016-15,Classification of Certain Cash Receipts and Cash Payments, which isincludedinFASBASCTopic230,StatementofCashFlows.Thenewguidanceclarifieshowcompaniespresent andclassifycertaincashreceiptsandcashpaymentsinthestatementofcashflows,includingcontingentcon - siderationpaymentsmadeafterabusinesscombinationanddistributionsreceivedfromequitymethodinvest - ees.TheguidanceiseffectiveforfiscalyearsbeginningafterDecember15,2017,includinginterimperiodswithin thosefiscalyears,withearlyadoptionpermitted.TheCompanydoesnotplantoearlyadoptandiscurrently evaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancialStatements. InOctober2016,theFASBissuedASUNo.2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,requiringentitiestorecognizetheincometaxconsequencesofanintra-entitytransferofan assetotherthaninventorywhenthetransferoccurs.Thenewguidanceiseffectiveforfiscalyearsbeginning afterDecember15,2017,includinginterimperiodswithinthosefiscalyears.Earlyadoptionispermittedifinthe firstinterimperiodanentityissuesinterimfinancialstatements.ASU2016-16mustbeappliedonamodifiedret - rospectivebasisthroughacumulative-effectadjustmentdirectlytoretainedearningsasofthebeginningofthe periodofadoption.TheCompanyiscurrentlyevaluatingtheimpactthisstandardwillhaveonitsConsolidated FinancialStatements. InJanuary2017,theFASBissuedASUNo.2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business,providingaframeworkforentitiestousewhendeterminingwhetherasetofassetsandactivities constitutesabusiness.TheguidanceiseffectiveforfiscalyearsbeginningafterDecember15,2017,including interimperiodswithinthosefiscalyears,andshouldbeappliedprospectively.Earlyadoptionispermitted.The CompanyiscurrentlyevaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancialStatements. InJanuary2017,theFASBissuedASUNo.2017-04,Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,whicheliminatessteptwofromthegoodwillimpairmenttest.Instead,ifthecarryingamount ofareportingunitexceedsitsfairvalue,animpairmentlossshouldberecognizedinanamountequaltothe excess,butlimitedtothetotalamountofgoodwillallocatedtothereportingunit.Theguidancemustbeapplied onaprospectivebasisanddisclosureofthenatureofandreasonforthechangeinaccountingprincipleisrequired upontransition.ASU2017-04iseffectiveforfiscalyearsbeginningafterDecember15,2019.Earlyadoptionis permittedforinterimorannualgoodwillimpairmenttestsperformedontestingdatesafterJanuary1,2017.The CompanyiscurrentlyevaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancialStatements. 132 AmericanPublicEducation,Inc. RESULTS OF OPERATIONS Thefollowingtablesetsforthstatementsofoperationsdataasapercentageofrevenueforeachoftheyearsended: Revenue Costsandexpenses: Instructionalcostsandservices Sellingandpromotional Generalandadministrative Lossondisposalsoflong-livedassets Lossonassetsheldforsale Impairmentofgoodwill Depreciationandamortization Totalcostsandexpenses Incomefromoperationsbeforeinterestincomeandincometaxes Interestincome,net Incomefromoperationsbeforeincometaxes Incometaxexpense Equityinvestmentloss/(gain),netoftaxes Netincome 2014 100.0% 2015 100.0% 2016 100.0% 35.4% 19.8% 21.3% —% —% —% 4.6% 81.1% 18.9% 0.1% 19.0% 7.2% 0.1% 11.9% 36.2% 19.0% 22.3% 0.2% —% —% 6.3% 84.0% 16.0% —% 16.0% 6.1% —% 9.9% 37.4% 18.9% 21.9% 1.6% 0.3% 1.5% 6.2% 87.8% 12.2% 0.1% 12.3% 4.8% 0.2% 7.7% 2016 Annual Report 133 YEAR ENDED DECEMBER 31, 2016 COMPARED TO YEAR ENDED DECEMBER 31, 2015 REVENUE OurconsolidatedrevenuefortheyearendedDecember31,2016was$313.1million,adecreaseof$14.8million or4.5%,comparedto$327.9millionfortheyearendedDecember31,2015. ThedecreaseinrevenuewasaresultofadecreaseinnetcourseregistrationsatAPUSandadecreaseinenroll - mentsatHCON.APUSnetcourseregistrations,whichincludeone-creditlabcoursescombinedwiththeir relatedthree-creditcourse,decreasedtoapproximately345,000intheyearendedDecember31,2016from approximately375,000intheyearendedDecember31,2015,adecreaseofapproximately8.0%.Webelievethat thedecreaseinAPUS’snetcourseregistrationsfortheyearendedDecember31,2016isattributable,inpart, toincreasedcompetition,changesinourmarketingapproach,ouradmissionsassessment,andourJuly2015 tuitionincrease,amongotherfactors.WebelievethatHCON’sstudentenrollmentdecreaseisattributable,in part,toHCON’sJanuary2016implementationofcurriculumchangesthatcausedrecruitingchallenges,whichwe believeresultedincertainstudentschoosingnottopursuetheirstudiesatHCON. COSTSANDEXPENSES Costsandexpenseswere$274.8millionfortheyearendedDecember31,2016,adecreaseof$0.8million,or 0.3%,comparedto$275.6millionfortheyearendedDecember31,2015.Thisdecreasewasprimarilytheresult ofdecreasedcostsandexpensesfor:generalandadministrative,salesandpromotional,instructionalcostsand services,anddepreciationandamortization;offsetbyincreasedcostsandexpensesfor:impairmentofgood - will,lossondisposalsoflong-livedassets,andlossonassetsheldforsale. Costsandexpensesasapercentageofrevenueincreasedto87.8%intheyearendedDecember31,2016,from 84.0%intheyearendedDecember31,2015.Similarly,ourincomebeforeinterestincomeandincometaxes, orouroperatingmargin,decreasedto12.2%from16.0%overthatsameperiod.Ourcostsandexpensesasa percentageofrevenueincreaseddueto:increasedinstructionalcostsandservicesexpensesasapercentof revenue,thelossesattributabletotheimpairmentofgoodwillinourHCONsegment,thelossesonthedisposal oflong-livedassetsandlossesonassetsheldforsaleinourAPEIsegment. Instructional costs and services. InstructionalcostsandservicesexpensesfortheyearendedDecember31, 2016,were$117.0million,adecreaseofapproximately$1.8million,or1.5%,comparedto$118.8millionforthe yearendedDecember31,2015.Instructionalcostsandservicesexpensesasapercentageofrevenuewere 37.4%fortheyearendedDecember31,2016,comparedto36.2%fortheyearendedDecember31,2015.The decreaseininstructionalcostsandservicesexpensesisprimarilytheresultofdecreasedcompensationand bookcostsduetolowernetcourseregistrationsatAPUS,partiallyoffsetbyhigherprofessionalfees,andhigher instructionalcostsandservicesexpensesatHCON.Ourinstructionalcostsandservicesexpensesasapercent - ageofrevenueincreasedprimarilyduetoourrevenuedecreasingatarategreaterthanthedecreaseincosts andexpenses. Selling and promotional. SellingandpromotionalexpensesfortheyearendedDecember31,2016,were$59.1 million,adecreaseof$3.3million,or5.3%,comparedto$62.4millionfortheyearendedDecember31,2015. Thisdecreasewasprimarilyduetodecreasedadvertisingandpromotionalexpenses.Sellingandpromotional expensesasapercentageofrevenuewere18.9%fortheyearendedDecember31,2016,comparedto19.0%for theyearendedDecember31,2015.Sellingandpromotionalexpensesasapercentageofrevenuedecreased yearoveryearduetosellingandpromotionalexpensesdecreasingatarategreaterthanthedecreasein revenue. 134 AmericanPublicEducation,Inc. General and administrative. GeneralandadministrativeexpensesfortheyearendedDecember31,2016,were $68.7million,adecreaseof$4.3million,or5.9%comparedto$73.0millionfortheyearendedDecember31, 2015.Thedecreaseingeneralandadministrativeexpensesisduetolowerbaddebtexpense,partiallyoffset byincreasesinprofessionalfees.Generalandadministrativeexpensesasapercentageofrevenuewere21.9% fortheyearendedDecember31,2016comparedto22.3%fortheyearendedDecember31,2015.Ourgeneral andadministrativeexpensesasapercentageofrevenuedecreasedprimarilyduetogeneralandadministrative expensesdecreasingatarategreaterthanthedecreaseinrevenue. Baddebtexpensedecreasedto$6.7million,orapproximately2.1%ofrevenue,intheyearendedDecember31, 2016,from$12.7million,orapproximately3.9%ofrevenue,intheyearendedDecember31,2015.Webelieve thattheinitiativesofourAPEISegmentdiscussedinthisAnnualReport,includingtheadmissionsprocessat APUSandthechangetoamultipledisbursementmethodforfirsttimeAPUSstudents,weretheprimarycon - tributorstothedecreaseinourbaddebtexpenseasanamountandasapercentageofrevenue.Forfurther informationregardingtheinitiativesdiscussedintheprevioussentence,pleasereferto“Overview-BadDebt Expense”above. Loss on disposal of long-lived assets. Thelossondisposaloflong-livedassetswas$5.1millionintheyearended December31,2016,comparedto$0.8millionintheyearendedDecember31,2015.Theincreaseisprimarilydue tothelossthatresultedfromtheabandoneddevelopmentofanewstudentcourseregistrationsysteminour APEIsegment. Loss on assets held for sale. Thelossondisposalofassetsheldforsaleresultedfromthesaleofrealproperty nolongerinuse,andafairmarketvalueadjustmentofasecondpropertyheldforsale,inourAPEIsegmentin theyearendedDecember31,2016.TherewasnolossonassetsheldforsaleintheyearendedDecember31, 2015. Impairment of goodwill. The$4.7millionimpairmentofgoodwillduringtheyearendedDecember31,2016, resultedfromthereductionofthecarryingvalueofgoodwillinourHCONsegmentfromitscarryingvaluetoits impliedfairvalue.The$4.7milliongoodwillimpairmentchargeeliminatedthedifferencebetweentheimplied fairvalueofgoodwillandthebookvalueofgoodwillasofAugust31,2016.Assuch,futurechanges,including minorchanges,inrevenue,operatingincome,valuationmultiples,discountratesandotherinputstothevalua - tionprocessmayresultinfutureimpairmentchargesandthosechargesmaybematerial.Foradditionalinfor - mationregardingtheimpairmentofgoodwill,pleaserefertothediscussionaboveand“Note7.Goodwilland IntangibleAssets,NotestotheConsolidatedFinancialStatements”inthisAnnualReport.Therewasnogoodwill impairmentchargeduringtheyearendedDecember31,2015. Depreciation and amortization. Depreciationandamortizationexpenseswere$19.4millionfortheyearended December31,2016,comparedto$20.5millionfortheyearendedDecember31,2015,adecreaseof$1.1million or5.4%.Whencomparedtotheprioryear,thedecreaseindepreciationandamortizationwasduetolowercapi - talexpendituresandlowertotalinvestmentinpropertyandequipmentnetofdepreciation. Stock-based compensation. Stock-basedcompensationexpensesincludedininstructionalcostsandservices, sellingandpromotional,andgeneralandadministrativeexpensesfortheyearendedDecember31,2016,were $5.2millionintheaggregate,representingadecreaseof$0.7million,or11.9%,comparedto$5.9millionforthe yearendedDecember31,2015.Thisdecreaseresultedprimarilyduetoafewernumberofemployeesbeing eligibleforstock-basedcompensation. 2016 Annual Report 135 Thetablebelowreflectsourstock-basedcompensationexpenserecognizedintheConsolidatedStatementsof IncomefortheyearsendedDecember31,2015and2016(inthousands): Instructionalcostsandservices Sellingandpromotional Generalandadministrative Totalstock-basedcompensationexpense INCOMETAXEXPENSE Year Ended December 31, 2015 $1,598 684 3,630 $5,912 2016 $1,497 672 3,042 $5,211 WerecognizedtaxexpensefromcontinuingoperationsfortheyearsendedDecember31,2015and2016of $20.1millionand$14.9million,respectively,oraneffectivetaxrateof38.2%inbothperiods. EQUITYINVESTMENTINCOME/(LOSS) Equityinvestmentincomewas$0.7millionfortheyearendedDecember31,2016,comparedto$0.1million fortheyearendedDecember31,2015,anincreaseof$0.6million.Theincreasewasrelatedtoourpro-rata shareofearningsfromNWHWHoldings,Inc.’sfavorableadjustmentofitsdeferredtaxvaluationallowance.For furtherinformationregardingNWHWHoldings,Inc.andourotherequityinvestments,pleasereferto“Note6. Investments,NotestoConsolidatedFinancialStatements”inthisAnnualReport. NET INCOME Netincomewas$24.2millionfortheyearendedDecember31,2016,comparedtonetincomeof$32.4million fortheyearendedDecember31,2015,adecreaseof$8.2million,or25.3%.Thisdecreasewasrelatedtothe factorsdiscussedabove. OPERATING RESULTS BY REPORTABLE SEGMENT—YEAR ENDED DECEMBER 31, 2016 COMPARED TO YEAR ENDED DECEMBER 31, 2015 Thetablebelowdetailsouroperatingresultsbyreportablesegmentfortheperiodsindicated(inthousands): Year Ended December 31, 2015 2016 $ Change % Change Revenue AmericanPublicEducationSegment HondrosCollegeofNursingSegment $297,439 30,471 $283,941 $ (13,498) 29,198 (1,273) Total Revenue $327,910 $313,139 $(14,771) Income (loss) from continuing operations before interest income and income taxes AmericanPublicEducationSegment $ 48,967 $ 41,916 $ (7,051) HondrosCollegeofNursingSegment 3,314 (3,640) (6,954) (4.5)% (4.2)% (4.5)% (14.4)% (209.8)% Total income from continuing operations before interest income and income taxes $ 52,281 $ 38,276 $(14,005) (26.8)% 136 AmericanPublicEducation,Inc. APEISEGMENT FortheyearendedDecember31,2016,ourAPEISegmentearnedapproximately$283.9millioninrevenue,a $13.5million,or4.5%,decreaseascomparedtotheyearendedDecember31,2015,whichisprimarilyattrib - utabletolowernetcourseregistrationspartiallyoffsetbytheJuly2015tuitionincrease.Incomefromcontinu - ingoperationsbeforeinterestincomeandincometaxeswasapproximately$41.9millionfortheyearended December31,2016,adecreaseof$7.1million,or14.4%,comparedtotheyearendedDecember31,2015asa resultofthedecreaseinrevenueresultingfromlowernetcourseregistrationspartiallyoffsetbyadecreasein costsandexpenses.ForinformationregardingtheAPEISegment’snetcourseregistrationspleasereferto“Year EndedDecember31,2016ComparedtoYearEndedDecember31,2015-Revenue”above. HCON SEGMENT FortheyearendedDecember31,2016,theHCONSegmentearnedapproximately$29.2millioninrevenue,a $1.3million,or4.2%decreasedascomparedtotheyearendedDecember31,2015,whichisprimarilyattribut - abletodecreaseenrollments.Lossfromcontinuingoperationsbeforeinterestincomeandincometaxeswas approximately$3.6millionfortheyearendedDecember31,2016,a209.8%decrease,comparedtothe$3.3mil - lionincomefromcontinuingoperationsbeforeinterestincomeandincometaxesfortheyearendedDecember 31,2015.The$3.6millionlossfromcontinuingoperationsbeforeinterestincomeandincometaxesfortheyear endedDecember31,2016,wasprimarilyduetothe$4.7millionimpairmentofgoodwill,revenuedecreasingat arategreaterthanexpensesandtoalesserdegree,costsincurredrelatedtothestart-upoftheToledocampus inJanuary2017.WebelieveourHCONSegment’srevenuewasnegativelyimpactedin2016bytheJanuary2016 implementationofcurriculumchangesthatcausedrecruitingchallenges,whichwebelieveresultedincertain studentschoosingnottopursuetheirstudiesatHCON. ForthereportingyearJuly1,2015throughJune30,2016,severalHCONcampusesandprogramsdidnotsatisfy ACICSstudentachievementmeasures.OnFebruary24,2017,ACICSnotifiedHCONthatunlessitnotifiesACICS thatitisdiscontinuingthePNProgramattheClevelandcampus,thenACICSexpectstoissueashow-causeletter requiringHCONtodemonstratewhyACICSapprovalofthePNProgramatthelocationshouldnotbewithdrawn. ACICStooksuchactionunderthenewpolicybecausetheplacementratesreportedforthePNProgramatthe Clevelandcampuswerebetween50-59.9%fortwoconsecutiveyears.AninstitutionthatACICSdirectstoshow causemustimmediatelynotifycurrentandprospectivestudentsoftheshow-causestatus,includingbypost - ingaprominentnoticeonitswebsite.WeunderstandthatifthePNProgramattheClevelandcampusisputon showcause,HCONwillberequiredtomakecertainreportstoACICSandwillhaveuntilitsnextcampusaccount - abilityreport,duebyNovember1,2017,todemonstratethatitsplacementratecomplieswiththerelevant studentachievementmeasure.Atthistime,weareunabletopredicttheimpactofthisdevelopmentandthe possibleoutcomesonourenrollmentsandresultsofoperations. 2016 Annual Report 137 YEAR ENDED DECEMBER 31, 2015 COMPARED TO YEAR ENDED DECEMBER 31, 2014 REVENUE OurconsolidatedrevenuefortheyearendedDecember31,2015,was$327.9million,adecreaseof$22.1million, or6.3%,comparedto$350.0millionfortheyearendedDecember31,2014. ThedecreaseinrevenuewasaresultofadecreaseinnetcourseregistrationsinourAPEISegment.APEI Segmentnetcourseregistrations,whichincludeone-creditlabcoursescombinedwiththeirrelatedthree- creditcourse,decreasedtoapproximately375,000intheyearendedDecember31,2015,fromapproximately 404,000intheyearendedDecember31,2014,adecreaseofapproximately7.9%.Webelievethatthedecrease intheAPEISegment’snetcourseregistrationsfortheyearendedDecember31,2015,isattributable,inpart,to increasedcompetition,changesinourmarketingapproach,ouradmissionsassessmentatAPUS,andourtuition increaseatAPUS,amongotherfactorsasdiscussedinthisAnnualReport. COSTSANDEXPENSES Costsandexpenseswere$275.6millionfortheyearendedDecember31,2015,adecreaseof$8.6million,or 3.0%,comparedto$284.2millionfortheyearendedDecember31,2014.Thisdecreasewasprimarilytheresult ofdecreasedsalesandpromotionalandinstructionalcostsandservicesexpenses,partiallyoffsetbyincreased depreciationandamortizationexpenses. Costsandexpensesasapercentageofrevenueincreasedto84.0%intheyearendedDecember31,2015,from 81.1%intheyearendedDecember31,2014.Similarly,ourincomebeforeinterestincomeandincometaxes, orouroperatingmargin,decreasedto16.0%from18.9%overthatsameperiod.Ourcostsandexpensesasa percentageofrevenueincreasedprimarilyduetoourrevenuedecreasingatarategreaterthanthedecreasein costsandexpenses. IntheyearendedDecember31,2015,ourAPEISegmentincurredincreasedcostsof$1.4millionduetothe accelerateddepreciationofinformationtechnologyassetsthatwasincludedindepreciationandamortization expense,and$0.8millionrelatedtoimpairmentsincludedinlossesondisposalsoflong-livedassets.Wealso incurredincreasedcostsintheamountof$1.6millionduetochargestakenasaresultofworkforcerealign - ments.AdditionalchargessuchasthosetakenduringtheyearendedDecember31,2015,maybeincurredinthe futureasaresultofassetimpairmentsordisposals,theaccelerationofdepreciation,workforcerealignments, reductionsinstaff,andotherinitiatives. Instructional costs and services. InstructionalcostsandservicesexpensesfortheyearendedDecember31, 2015,were$118.8million,adecreaseofapproximately$5.0million,or4.0%,comparedto$123.8millionfor theyearendedDecember31,2014.Instructionalcostsandservicesexpensesasapercentageofrevenuewere 36.2%fortheyearendedDecember31,2015,comparedto35.4%fortheyearendedDecember31,2014.The decreaseininstructionalcostsandservicesexpenseswasprimarilytheresultofdecreasedcompensationand coursematerialcostsinourAPEISegmentastheresultoflowernetcourseregistrations,anddecreasedcurric - ulumexpensesinourHCONSegment.Ourinstructionalcostsandservicesexpensesasapercentageofrevenue increasedprimarilyduetoourrevenuedecreasingatarategreaterthanthedecreaseincostsandexpenses. Selling and promotional. SellingandpromotionalexpensesfortheyearendedDecember31,2015,were$62.4 million,adecreaseof$6.8million,or9.8%,comparedto$69.2millionfortheyearendedDecember31,2014. ThisdecreasewasduetodecreasedadvertisingexpensesinourAPEISegment,partiallyoffsetbyincreasedsell - ingandpromotionalexpensesinourHCONSegment.Sellingandpromotionalexpensesasapercentageofreve - nuewere19.0%fortheyearendedDecember31,2015,and19.8%fortheyearendedDecember31,2014.Selling 138 AmericanPublicEducation,Inc. andpromotionalexpensesasapercentageofrevenuedecreasedyearoveryearduetosellingandpromotional expensesdecreasingatarategreaterthanrevenue. General and administrative. GeneralandadministrativeexpensesfortheyearendedDecember31,2015,were $73.0million,adecreaseof$2.0million,or2.7%,comparedto$75.0millionfortheyearendedDecember31,2014. Thedecreaseingeneralandadministrativeexpenseswasprimarilyaresultofdecreasesinbaddebtexpense,par- tiallyoffsetbyincreasesinexpensesrelatedtoTitleIVprocessinginourAPEISegment.Generalandadministrative expensesasapercentageofrevenuewere22.3%fortheyearendedDecember31,2015,and21.3%fortheyear endedDecember31,2014.Ourgeneralandadministrativeexpensesasapercentageofrevenueincreasedprimar- ilyduetoourrevenuedecreasingatarategreaterthanthedecreaseinsuchcostsandexpenses. Baddebtexpensedecreasedto$12.7million,orapproximately3.9%ofrevenue,intheyearendedDecember31, 2015,from$19.2million,orapproximately5.5%ofrevenue,intheyearendedDecember31,2014.Webelievethatthe initiativesofourAPEISegmentdiscussedinthe2015AnnualReport,includingtheadmissionsprocessatAPUS,were theprimarycontributorstothedecreaseinourbaddebtexpenseasanamountandasapercentageofrevenue. Loss on disposal of long-lived assets. Thelossondisposaloflong-livedassetsfortheyearendedDecember31, 2015,was$0.8million,anincreaseof$0.7million,comparedto$0.1millionfortheyearendedDecember31,2014. Depreciation and amortization. Depreciationandamortizationexpenseswere$20.5millionfortheyearended December31,2015,comparedto$16.1millionfortheyearendedDecember31,2014,oranincreaseof27.3%. TheincreaseresultedfromhigherdepreciationandamortizationinourAPEISegmentasaresultofalargerfixed assetbaseandacceleratedamortizationoncertainintangibleassets. Stock-based compensation. Stock-basedcompensationexpensesincludedininstructionalcostsandservices, sellingandpromotional,andgeneralandadministrativeexpensesfortheyearendedDecember31,2015,were $5.9millionintheaggregate,representinganincreaseof$0.5million,or10.1%,comparedto$5.4millionfor theyearendedDecember31,2014.Thisincreaseresultedprimarilyfromagreaternumberofemployeesbeing eligibleforstock-basedcompensation. Thetablebelowreflectsourstock-basedcompensationexpenserecognizedintheConsolidatedStatementsof IncomefortheyearsendedDecember31,2014and2015(inthousands): Instructionalcostsandservices Sellingandpromotional Generalandadministrative Totalstock-basedcompensationexpense INCOMETAXEXPENSE Year Ended December 31, 2014 $1,274 568 3,527 $5,369 2015 $1,598 684 3,630 $5,912 WerecognizedtaxexpensefromcontinuingoperationsfortheyearsendedDecember31,2014and2015of $20.1millionand$25.1million,respectively,oreffectivetaxratesof38.2%and38.1%,respectively. NET INCOME Netincomewas$32.4millionfortheyearendedDecember31,2015,comparedtonetincomeof$40.9million fortheyearendedDecember31,2014,adecreaseof$8.5million,or20.8%.Thisdecreasewasrelatedtothe factorsdiscussedabove. 2016 Annual Report 139 OPERATING RESULTS BY REPORTABLE SEGMENT—YEAR ENDED DECEMBER 31, 2015 COMPARED TO YEAR ENDED DECEMBER 31, 2014 Thetablebelowdetailsouroperatingresultsbyreportablesegmentfortheperiodsindicated(inthousands): Year Ended December 31, 2014 2015 $ Change % Change Revenue AmericanPublicEducationSegment HondrosCollegeofNursingSegment $319,879 30,141 $297,439 30,471 $(22,440) 330 Total Revenue $350,020 $327,910 $(22,110) Income (loss) from continuing operations before interest income and income taxes AmericanPublicEducationSegment $ 62,499 $ 48,967 $(13,532) HondrosCollegeofNursingSegment 3,333 3,314 (19) (7.0)% 1.1% (6.3)% (21.7)% (0.6)% Total income from continuing operations before interest income and income taxes $ 65,832 $ 52,281 $(13,551) (20.6)% APEISEGMENT FortheyearendedDecember31,2015,ourAPEISegmentearnedapproximately$297.4millioninrevenue,a $22.4million,or7.0%,decreaseascomparedtotheyearendedDecember31,2014,whichisprimarilyattribut - abletolowernetcourseregistrations.Incomefromcontinuingoperationsbeforeinterestincomeandincome taxeswasapproximately$49.0millionfortheyearendedDecember31,2015,adecreaseof$13.5million,or 21.7%,comparedtotheyearendedDecember31,2014,asaresultofthedecreaseinnetcourseregistrations partiallyoffsetbyadecreaseinexpenses.ForinformationregardingtheAPEISegment’snetcourseregistra - tions,pleasereferto“YearEndedDecember31,2015ComparedtoYearEndedDecember31,2014-Revenue” above. HCON SEGMENT FortheyearendedDecember31,2015,theHCONSegmentearnedapproximately$30.5millioninrevenue,a $0.3million,or1.1%,increaseascomparedtotheyearendedDecember31,2014,whichisprimarilyattributable toincreasedtuitionrates.Incomefromcontinuingoperationsbeforeinterestincomeandincometaxeswas approximately$3.3millionfortheyearendedDecember31,2015,a0.6%decrease,comparedtotheyearended December31,2014,asaresultofexpensesincreasingatarategreaterthanrevenue.WebelieveourHCON Segment’srevenuewasnegativelyimpactedin2015duetodecreasedenrollmentinHCON’sADNprogramasa resultofstrengthenedcompletionrequirementsinthePracticalNursingprogram,whichistheprimarysource ofADNstudents,andtheadditionofnightandweekendcourses,whichhasresultedinstudentstakingfewer totalcourseseachacademictermassomestudentsthatwouldotherwisehavestudiedonafull-timebasisare nowpursuingcoursesonapart-timebasis.InJanuary2016,HCONimplementedcurriculumchangesthatcaused recruitingchallenges,whichwebelieveresultedincertainstudentschoosingnottopursuetheirstudiesat HCON;weareunabletopredictwhetherthistrendmaycontinue. QUARTERLY RESULTS Thefollowingtablepresentsourunauditedquarterlyresultsofoperationsforthelasteightquarters,and shouldbereviewedinconjunctionwiththeConsolidatedFinancialStatementsandrelatednotescontained elsewhereinthisAnnualReport.Wehavepreparedtheunauditedinformationonthesamebasisasouraudited 140 AmericanPublicEducation,Inc. ConsolidatedFinancialStatements.Resultsofoperationsforanyquarterarenotnecessarilyindicativeofresults foranyfuturequartersorforafullyear(inthousands). (Unaudited) Statement of Operations Data: Revenue Costsandexpenses: March 31, 2015 June 30, 2015 Sept. 30, 2015 Dec. 31, 2015 March 31, 2016 June 30, 2016 Sept. 30, 2016 Dec. 31, 2016 Quarter Ended $85,444 $80,263 $76,291 $85,912 $83,966 $76,745 $73,803 $78,625 Instructionalcostsandservices 30,260 Sellingandpromotional Generalandadministrative 17,019 19,104 29,696 16,152 18,125 29,167 14,062 17,616 29,725 15,164 18,202 29,708 16,469 16,669 28,903 14,984 16,909 28,357 13,139 17,125 30,045 14,503 17,963 Lossondisposalsof long-livedassets Lossonassetsheldforsale Impairmentofgoodwill 1 — — 16 — — 43 — — 757 — — 261 — — 464 — — Depreciationandamortization 4,589 4,698 4,891 6,342 4,889 4,825 4,323 822 4,735 4,910 99 1 — 4,760 Totalcostsandexpenses 70,973 68,687 65,779 70,190 67,996 66,085 73,411 67,371 Incomefromcontinuing operationsbeforeinterest incomeandincometaxes 14,471 11,576 10,512 15,722 15,970 10,660 Interestincome,net 10 31 37 37 37 37 392 37 11,254 5 Incomefromcontinuing operationsbefore incometaxes Incometaxexpense Investmentincome (loss),netoftaxes Netincome Other Data: 14,481 11,607 10,549 15,759 16,007 10,697 5,650 4,548 3,796 6,078 6,267 4,172 429 85 11,259 4,416 $ (38) $ 14 $ 4 $ 110 $ 600 $ 71 $ (18) $ 50 $ 8,793 $ 7,073 $ 6,757 $ 9,791 $10,340 $ 6,596 $ 326 $ 6,893 Stock-basedcompensation $ 1,394 $ 1,348 $ 1,341 $ 1,829 $ 1,502 $ 1,179 $ 1,291 $ 1,239 Netcashprovidedby operatingactivities $ 7,146 $15,585 $20,077 $14,403 $20,052 $ 8,735 $13,901 $13,326 Capitalexpenditures $ 5,288 $ 7,475 $ 6,801 $ 6,438 $ 3,139 $ 3,765 $ 3,610 $ 3,312 APUSnetcourseregistrations 99,600 89,000 94,200 92,300 95,800 82,000 84,600 83,000 LIQUIDITY AND CAPITAL RESOURCES WefinancedouroperatingactivitiesandcapitalexpendituresduringtheyearsendedDecember31,2016and December31,2015,primarilythroughcashprovidedbyoperatingactivities.Cashandcashequivalentswere $146.4millionand$105.7millionatDecember31,2016andDecember31,2015,respectively,representingan increaseof$40.6million,or38.4%,duringtheyearendedDecember31,2016.Theincreaseincashandcash equivalentsduringtheyearendedDecember31,2016,wasduetocashprovidedbyoperatingactivitiesexceed - ingcashusedininvestingandfinancingactivities.Cashandcashequivalentswere$115.6millionatDecember 31,2014.Cashandcashequivalentsthereforeincreased$10.9million,or11.5%,duringtheyearended December31,2015,whichwasduetocashprovidedbyoperatingactivitiesexceedingcashusedininvestingand financingactivities. 2016 Annual Report 141 IntheyearendedDecember31,2016,weusedcashforaninvestmentinthepreferredstockofFidelisEducation, Inc.,whileintheyearendedDecember31,2015,weusedcashtorepurchaseourcommonstockandforour minorityinvestmentinRallyPoint,anonlinesocialnetworkformembersofthemilitary. WederiveasignificantportionofourrevenuefromourparticipationinED’sTitleIVprograms,forwhichdis - bursementsaregovernedbyfederalregulations.WehavetypicallyreceiveddisbursementsunderED’sTitleIV programswithin30daysofthestartoftheapplicablecourse.AnothersignificantsourceofrevenueforourAPEI SegmentisrevenuederivedfromDoDtuitionassistanceprograms.Generally,thesefundsarereceivedwithin 60daysofthestartofthecoursestowhichtheyrelate.Thesefactors,togetherwiththenumberofcourses startingeachmonth,affectouroperatingcashflow. Ourcostsandexpensesasapercentageofrevenuehaveincreasedduetorevenuedecreasingatarategreater thantherateofdecreaseincostsandexpensesforinstructionalcostsandservices,sellingandpromotional, generalandadministrative,anddepreciationandamortization,andfortheyearendedDecember31,2016, theimpairmentofgoodwill,thelossondisposalsoflong-livedassets,andthelossonassetsheldforsale.We expecttocontinuetofundcostsandexpensesthroughcashgeneratedfromoperations.Basedonourcurrent levelofoperations,webelievethatourcashflowfromoperationsandothersourcesofliquidity,includingcash andcashequivalents,willprovideadequatefundsforongoingoperationsandplannedcapitalexpendituresfor theforeseeablefuture.Wemayneedadditionalcapital,however,inconnectionwithanychangeinourcurrent levelofoperations,includingwerewetopursuesignificantbusinessacquisitionsorinvestmentopportunities,or determinetomakeothersignificantinvestmentsinourbusiness. OPERATINGACTIVITIES Netcashprovidedbyoperatingactivitieswas$61.0million,$57.2million,and$56.0millionfortheyearsended December31,2014,2015and2016,respectively.FortheyearendedDecember31,2016,cashflowfromopera - tionsdecreasedby$1.2millionwhencomparedtotheprioryear.Thisdecreaseisprimarilyduetothedecrease innetincomepartiallyoffsetbynon-cashcharges,andchangesinworkingcapitalduetothetimingofreceipts anddisbursements. INVESTINGACTIVITIES Netcashusedininvestingactivitieswas$21.3million,$31.3millionand$13.5million,fortheyearsended December31,2014,2015and2016,respectively.Thedifferencesincashusedininvestingactivitiesareprimarily relatedtodifferingamountsoffundsbeingusedeachyeartofundcapitalexpendituresandinvestments. FortheyearendedDecember31,2016,cashusedininvestingactivitiesforcapitalexpenditureswasprimar - ilyforthefollowingwithinourAPEISegment:computerhardwareandsoftware,andsoftwaredevelopment, includingsoftwaredevelopmentrelatedtoPAD.Inaddition,duringtheyearendedDecember31,2016,ourAPEI Segmentmadea$1.0millionequityinvestmentinFidelisEducationandreceiveda$3.0milliondividendfrom NWHWHoldingsInc. DuringtheyearendedDecember31,2015,ourAPEISegmentmadea$3.5millionequityinvestmentin RallyPoint,anonlinesocialnetworkformembersofthemilitary.DuringtheyearendedDecember31,2014,our APEISegmentmadea$1.5millionequityinvestmentinSecondAvenueSoftware,andreceivedprepaymentofa $6.0millionloanwehadinconnectionwithourinvestmentinNewHorizons. Weexpectthatwewillcontinuetomakeexpenditurestoinvestinstrategicopportunitiesandtoenhanceour businesscapabilities.Wewillcontinuetoexploreopportunitiestoinvestintheeducationindustry,whichcould includepurchasingorinvestinginothereducation-relatedcompaniesorcompaniesdevelopingnewtechnolo - gies.Wemayneedadditionalcapitalinconnectionwithanychangeinourcurrentlevelofoperations,including 142 AmericanPublicEducation,Inc. ifweweretopursuesignificantbusinessacquisitionsorinvestmentopportunities,ordeterminetomakeother significantinvestmentsinourbusiness. FINANCINGACTIVITIES Netcashusedinfinancingactivitieswas$1.8millionfortheyearendedDecember31,2016,comparedto$35.8 millionand$18.9millionfortheyearsendedDecember31,2015,and2014,respectively.Thedecreaseincash usedinfinancingactivitiesfortheyearendedDecember31,2016,comparedtotheyearendedDecember31, 2015,wasprimarilyduetolesscashbeingexpendedfortherepurchaseofourcommonstock.Theincreasein cashusedinfinancingactivitiesfortheyearendedDecember31,2015,comparedtotheyearendedDecember 31,2014,wasprimarilyduetomorecashbeingexpendedfortherepurchaseofourcommonstock. CONTRACTUALANDCAPITALCOMMITMENTS Wehavevariouscontractualobligationsconsistingofoperatingleasesandpurchaseobligations.Purchase obligationsincludeagreementswithconsultants,contractswiththird-partyserviceproviders,andotherfuture contractsoragreements.ThefollowingtablesetsforthourfuturecontractualobligationsasofDecember31, 2016(inthousands): Operatingleaseobligations Purchaseobligations Totalcontractualobligations Payments Due by Period Total $15,217 3,526 $18,743 Less than 1 Year $2,207 2,983 $5,190 1–3 Years $ 3,652 517 $4,169 3–5 Years $3,598 26 $3,624 More than 5 Years $5,760 — $5,760 OFF-BALANCESHEETARRANGEMENTS Wedonothaveoff-balancesheetfinancingarrangements,includinganyrelationshipswithunconsolidatedenti - tiesorfinancialpartnerships,suchasentitiesoftenreferredtoasstructuredfinanceorspecialpurposeentities. IMPACTOFINFLATION Wedonotbelievethatinflationhadamaterialimpactonourresultsofoperationsfortheyearsended December31,2014,2015,or2016.Therecanbenoassurancethatfutureinflationwillnothaveanadverse impactonouroperatingresultsandfinancialcondition. Item7A.QuantitativeandQualitativeDisclosuresaboutMarketRisk Wearesubjecttotheimpactofinterestratechangesandmaybesubjecttochangesinthemarketvaluesof futureinvestments.Weinvestourexcesscashinbankovernightdeposits.Wehavenomaterialderivativefinan - cialinstrumentsorderivativecommodityinstrumentsasofDecember31,2016. MARKET RISK Wemaintainourcashandcashequivalentsinbankdepositaccounts,whichmayexceedfederallyinsuredlimits. Wehavehistoricallynotexperiencedanylossesinsuchaccounts.Webelievewearenotexposedtoanysignif - icantcreditriskoncashandcashequivalents.Duetotheshort-termdurationofourinvestmentportfolioand thelowriskprofileofourinvestments,animmediate100basispointchangeininterestrateswouldnothavea materialeffectonthefairmarketvalueofourportfolio. 2016 Annual Report 143 INTEREST RATE RISK Wearesubjecttoriskfromadversechangesininterestrates,primarilyrelatingtoourinvestingofexcessfunds incashequivalentsbearingvariableinterestrates,whicharetiedtovariousmarketindices.Ourfutureinvest - mentincomewillvaryduetochangesininterestrates.AtDecember31,2016,a10%increaseordecreasein interestrateswouldnothaveamaterialimpactonourfutureearnings,fairvalues,orcashflowsrelatedto investmentsincashequivalents. Item8.FinancialStatementsandSupplementaryData INDEX TO CONSOLIDATED FINANCIAL STATEMENTS American Public Education, Inc. and Subsidiaries ReportofIndependentRegisteredPublicAccountingFirm ConsolidatedBalanceSheetsasofDecember31,2015and2016 ConsolidatedStatementsofIncomefortheyearsendedDecember31,2014,2015and2016 ConsolidatedStatementsofStockholders’Equityfortheyears endedDecember31,2014,2015and2016 ConsolidatedStatementsofCashFlowsfortheyearsendedDecember2014,2015and2016 NotestoConsolidatedFinancialStatements Page 137 138 139 140 142 143 144 AmericanPublicEducation,Inc. ReportofIndependentRegisteredPublicAccountingFirm TOTHEBOARDOFDIRECTORSANDSTOCKHOLDERS AMERICANPUBLICEDUCATION,INC. WehaveauditedtheaccompanyingconsolidatedbalancesheetsofAmericanPublicEducation,Inc.and SubsidiariesasofDecember31,2015and2016,andtherelatedconsolidatedstatementsofincome,stockholders’ equity,andcashflowsforeachofthethreeyearsintheperiodendedDecember31,2016.Ourauditsalsoincluded thefinancialstatementscheduleofAmericanPublicEducation,Inc.andSubsidiarieslistedinItem15(a).These financialstatementsandfinancialstatementschedulearetheresponsibilityoftheCompany’smanagement.Our responsibilityistoexpressanopiniononthesefinancialstatementsandschedulebasedonouraudits. WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard (UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceabout whetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis, evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingthe accountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinan- cialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion. Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects, thefinancialpositionofAmericanPublicEducation,Inc.andSubsidiariesasofDecember31,2015and2016,and theresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31, 2016,inconformitywithU.S.generallyacceptedaccountingprinciples.Also,inouropinion,therelatedfinan - cialstatementschedule,whenconsideredinrelationtothebasicconsolidatedfinancialstatementstakenasa whole,presentsfairlyinallmaterialrespectstheinformationsetforththerein. Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard (UnitedStates),AmericanPublicEducation,Inc.andSubsidiaries’internalcontroloverfinancialreportingas ofDecember31,2016,basedoncriteriaestablishedinInternalControl-IntegratedFrameworkissuedbythe CommitteeofSponsoringOrganizationsoftheTreadwayCommissionin2013,andourreportdatedMarch1, 2017expressedanunqualifiedopinionontheeffectivenessofAmericanPublicEducation,Inc.andSubsidiaries’ internalcontroloverfinancialreporting. /s/RSMUSLLP Richmond,Virginia March1,2017 2016 Annual Report 145 ConsolidatedBalanceSheets (In thousands, except per share amounts) Assets Currentassets: Cashandcashequivalents(Note2) Accountsreceivable,netofallowanceof$13,012 in2015and$8,077in2016. Prepaidexpenses Deferredincometaxes Totalcurrentassets Propertyandequipment,net Assetsheldforsale Investments Goodwill Otherassets,net Totalassets Liabilities and Stockholders’ Equity Currentliabilities: Accountspayable Accruedliabilities Deferredrevenue Incometaxpayable Totalcurrentliabilities Deferredincometaxes Totalliabilities Commitmentsandcontingencies(Notes8and12) Stockholders’equity: PreferredStock,$.01parvalue;authorizedshares— 10,000;nosharesissuedoroutstanding CommonStock,$.01parvalue;authorizedshares— 100,000;15,989issuedandoutstandingin2015; 16,109issuedandoutstandingin2016 Additionalpaid-incapital Retainedearnings Totalstockholders’equity As of December 31, 2015 2016 $105,734 $146,351 7,917 6,277 6,714 126,642 109,281 — 15,915 38,634 8,955 6,949 5,327 5,092 163,719 97,687 2,100 14,611 33,899 8,696 $299,427 $320,712 6,264 14,126 25,258 682 46,330 15,944 62,274 6,853 14,124 20,639 559 42,175 13,867 56,042 — — 160 173,700 63,293 237,153 161 177,061 87,448 264,670 Totalliabilitiesandstockholders’equity $299,427 $320,712 Theaccompanyingnotesareanintegralpartoftheseconsolidatedstatements. 146 AmericanPublicEducation,Inc. ConsolidatedStatementsofIncome (In thousands, except per share amounts) Revenue Costsandexpenses: Instructionalcostsandservices Sellingandpromotional Generalandadministrative Lossondisposalsoflong-livedassets Lossonassetsheldforsale Impairmentofgoodwill Depreciationandamortization Totalcostsandexpenses Incomefromcontinuingoperationsbefore interestincomeandincometaxes Interestincome,net Incomefromcontinuingoperations beforeincometaxes Incometaxexpense Equityinvestmentincome(loss) Netincome Netincomepercommonshare: Basic Diluted Weightedaveragenumberofsharesoutstanding: Basic Diluted Year Ended December 31, 2014 $350,020 2015 $327,910 2016 $313,139 123,765 69,229 74,958 115 — — 16,121 284,188 65,832 361 66,193 25,150 (166) 118,848 62,397 73,047 817 — — 20,520 275,629 52,281 115 52,396 20,072 90 117,013 59,095 68,666 5,147 823 4,735 19,384 274,863 38,276 116 38,392 14,940 703 $ 40,877 $ 32,414 $ 24,155 $ 2.36 $ 2.33 17,357 17,543 $ 1.94 $ 1.93 16,676 16,798 $ 1.50 $ 1.49 16,068 16,214 Theaccompanyingnotesareanintegralpartoftheseconsolidatedstatements. 2016 Annual Report 147 Preferred Stock Shares Amount Common Stock Repurchased Stock Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings Stockholders’ Total Equity — — — — — — — — — — — — — — — — — — — — — — — — — $— 17,577,625 $176 $ — $164,913 $ 41,980 $207,069 — — — — — — — — — — — — — — — — — — — — — — — (530,962) (18,470) 530,962 18,470 (18,465) 17,151,868 172 169,654 64,392 234,218 40,877 40,877 (1,322,846) (33,526) (1,322,952) (13) 1,322,846 33,526 (33,513) — — — — — — — — — — — — — — — — — — — 536 90 (1,242) 5,107 — 250 — 54 66 (1,784) 6,229 (519) — — 118 47 (848) 5,164 (1,120) — — — — — — — — — — — — — — — — — — 24,155 (19,712) 5,107 537 90 — 250 55 66 (35,310) 6,229 — (519) 119 47 (848) 5,164 — (1,120) 24,155 32,414 32,414 173,700 63,293 237,153 133,643 2,535 (30,973) (530,962) 213,921 2,248 (56,272) — — — — — — 15,988,813 167,270 2,322 (49,512) — — — — 1 — — — (5) — — 1 — — — — — 160 1 — — — — — — — — — — — — — — — — — — — — — — — — — — $— 16,108,893 $161 — $ — $177,061 87,448 $264,670 ConsolidatedStatementsofStockholders’Equity (In thousands, except shares) BalanceasofDecember 31,2013 Stockissuedforcash Stockissuedfordirectorcompensation Repurchasedsharesofcommonandrestrictedstockfromstockholders Stock-basedcompensation Repurchasedandretiredsharesofcommonstock Excesstaxbenefitfromstockbasedcompensation Netincome BalanceasofDecember 31,2014 Stockissuedforcash Stockissuedfordirectorcompensation Repurchasedsharesofcommonandrestrictedstockfromstockholders Stock-basedcompensation Repurchasedandretiredsharesofcommonstock Excesstaxbenefitfromstockbasedcompensation Netincome BalanceasofDecember 31,2015 Stockissuedforcash Stockissuedfordirectorcompensation Repurchasedsharesofcommonandrestrictedstockfromstockholders Stock-basedcompensation Repurchasedandretiredsharesofcommonstock Excesstaxexpensefromstockbasedcompensation Netincome BalanceasofDecember 31,2016 Theaccompanyingnotesareanintegralpartoftheseconsolidatedstatements. 148 AmericanPublicEducation,Inc. ConsolidatedStatementsofStockholders’Equity Preferred Stock Shares Amount Common Stock Repurchased Stock Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings Total Stockholders’ Equity Repurchasedsharesofcommonandrestrictedstockfromstockholders (In thousands, except shares) BalanceasofDecember 31,2013 Stockissuedforcash Stockissuedfordirectorcompensation Stock-basedcompensation Repurchasedandretiredsharesofcommonstock Excesstaxbenefitfromstockbasedcompensation Netincome BalanceasofDecember 31,2014 Stockissuedforcash Stockissuedfordirectorcompensation Stock-basedcompensation Repurchasedandretiredsharesofcommonstock Excesstaxbenefitfromstockbasedcompensation Netincome BalanceasofDecember 31,2015 Stockissuedforcash Stockissuedfordirectorcompensation Stock-basedcompensation Repurchasedandretiredsharesofcommonstock Excesstaxexpensefromstockbasedcompensation Netincome Repurchasedsharesofcommonandrestrictedstockfromstockholders Repurchasedsharesofcommonandrestrictedstockfromstockholders — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — $— 17,577,625 $176 133,643 2,535 (30,973) — (530,962) — — 1 — — — (5) — — 17,151,868 172 213,921 2,248 (56,272) — (1,322,952) — — 15,988,813 167,270 2,322 (49,512) — — — — 1 — — — (13) — — 160 1 — — — — — — $ — $164,913 $ 41,980 $207,069 — — — (530,962) — 530,962 — — — — — — — (18,470) — 18,470 — — — — — (1,322,846) — 1,322,846 (33,526) — 33,526 — — — — — — — — — — — — — — — — — — — — 536 90 (1,242) 5,107 — 250 — — — — — (18,465) — 40,877 537 90 (19,712) 5,107 — 250 40,877 169,654 64,392 234,218 54 66 (1,784) 6,229 — (519) — — — — — (33,513) — 32,414 55 66 (35,310) 6,229 — (519) 32,414 173,700 63,293 237,153 118 47 (848) 5,164 — (1,120) — — — — — — — 24,155 119 47 (848) 5,164 — (1,120) 24,155 BalanceasofDecember 31,2016 $— 16,108,893 $161 — $ — $177,061 87,448 $264,670 Theaccompanyingnotesareanintegralpartoftheseconsolidatedstatements. 2016 Annual Report 149 Year Ended December 31, 2014 2015 2016 $40,877 $32,414 $24,155 ConsolidatedStatementsofCashFlows (In thousands) Operating activities Netincome Adjustmentstoreconcilenetincometonet cashprovidedbyoperatingactivities Depreciationandamortization Stock-basedcompensation Investmentloss/(income) Deferredincometaxes Lossondisposaloflong-livedassets Lossonassetsheldforsale Impairmentofgoodwill Other Changesinoperatingassetsandliabilities: Accountsreceivable,netofallowanceforbaddebt Prepaidexpensesandotherassets Incometaxreceivable Accountspayable Accruedliabilities Incometaxpayable Deferredrevenueandstudentdeposits Netcashprovidedbyoperatingactivities Investing activities Capitalexpenditures Proceedsfromsaleofrealproperty Equityinvestment Dividendreceivedfromequityinvestment Notereceivable Capitalizedprogramdevelopmentcostsandotherassets Netcashusedininvestingactivities Financing activities 16,121 5,369 166 2,494 115 — — 90 3,390 (512) 1,186 (534) (6,708) — (1,024) 61,030 (24,596) — (1,620) 6,000 (1,075) (21,291) Cashpaidforrepurchaseofcommon/restrictedstock (19,711) Cashreceivedfromissuanceofcommonstock Excesstaxbenefit/(expense)from stock-basedcompensation Netcashusedinfinancingactivities Netincrease(decrease)incashandcashequivalents Cashandcashequivalentsatbeginningofperiod Cashandcashequivalentsatendofperiod Supplemental disclosures of cash flow information 536 250 (18,925) 20,814 94,820 $115,634 20,520 5,912 (90) (160) 817 — — 66 (1,787) 64 2,029 (4,765) 56 682 1,453 57,211 (26,002) — (3,871) (199) (1,265) (31,337) (35,310) 55 (519) (35,774) (9,900) 19,384 5,211 (703) (455) 5,147 823 4,735 329 968 997 — 589 (424) (123) (4,619) 56,014 (13,826) 844 (950) 2,957 — (2,573) (13,548) (847) 118 (1,120) (1,849) 40,617 115,634 $105,734 105,734 $146,351 Incometaxespaid $21,631 $18,037 $16,637 Theaccompanyingnotesareanintegralpartoftheseconsolidatedstatements. 150 AmericanPublicEducation,Inc. NotestoConsolidatedFinancialStatements NOTE 1. NATURE OF BUSINESS AmericanPublicEducation,Inc.,orAPEI,whichtogetherwithitssubsidiariesisreferredtoasthe“Company,”is aproviderofonlineandcampus-basedpostsecondaryeducationtoapproximately90,000studentsthroughthe operationsoftwosubsidiaryinstitutions: • AmericanPublicUniversitySystem,Inc.,orAPUS,providesonlinepostsecondaryeducationdirectedprimarily attheneedsofthemilitaryandpublicsafetycommunitiesthroughAmericanMilitaryUniversity,orAMU,and AmericanPublicUniversity,orAPU.APUSisregionallyaccreditedbytheHigherLearningCommission. • NationalEducationSeminars,Inc.,whichisreferredtointhesefinancialstatementsasHondrosCollegeof Nursing,orHCON,providesnursingeducationtostudentsatfivecampusesintheStateofOhioaswellas onlinetoservetheneedsofthenursingandhealthcarecommunities.HCONisnationallyaccreditedbythe AccreditingCouncilofIndependentCollegesandSchools,orACICS,andtheRN-to-BSNProgramisaccred - itedbytheCommissiononCollegiateNursingEducation.InJune2016,HCONwasnotifiedthatitsDiplomain PracticalNursingandAssociateDegreeinNursingprogramshavebeengrantedpre-accreditationcandidacy statusbytheNationalLeagueforNursingCommissionforNursingEducationAccreditationeffectivethrough June23,2019. TheCompany’sinstitutionsarelicensedorotherwiseauthorized,orareintheprocessofobtainingsuchlicenses orauthorizations,toofferpostsecondaryeducationprogramsbystateauthoritiestotheextenttheinstitu - tionsbelievesuchlicensesorauthorizationsarerequired,andarecertifiedbytheUnitedStatesDepartment ofEducation,orED,toparticipateinstudentfinancialaidprogramsauthorizedunderTitleIVoftheHigher EducationActof1965,asamended,orTitleIVprograms. Ouroperationsareorganizedintotworeportablesegments: • American Public Education Segment, or APEI Segment. Thissegmentreflectstheoperationalactivitiesat APUS,othercorporateactivities,andminorityinvestments. • Hondros College of Nursing Segment, or HCON Segment. Thissegmentreflectstheoperationalactivitiesof HCON. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AsummaryoftheCompany’ssignificantaccountingpoliciesfollows: Basis of accounting. Theaccompanyingfinancialstatementshavebeenpreparedinaccordancewithaccounting principlesgenerallyacceptedintheUnitedSates,orGAAP.Certainprioryearamountshavebeenreclassifiedfor comparativepurposestoconformwiththe2016presentation. Principles of consolidation. TheaccompanyingconsolidatedfinancialstatementsincludeaccountsofAPEIand itswholly-ownedsubsidiaries.Allmaterialintercompanytransactionsandbalanceshavebeeneliminatedin consolidation. Use of estimates. InpreparingfinancialstatementsinconformitywithGAAP,theCompanyisrequiredtomake estimatesandassumptionsthataffectthereportedamountsofassetsandliabilities,thedisclosureofcontin - gentassetsandliabilitiesatthedateofthefinancialstatements,andthereportedamountsofrevenueand expensesduringthereportingperiod.Weevaluatetheseestimatesandjudgmentsonanongoingbasisand 2016 Annual Report 151 baseourestimatesonexperience,currentandexpectedfutureconditionsandvariousotherassumptionsthat webelievearereasonableunderthecircumstances.Actualresultscoulddifferfromthoseestimates. Cash and cash equivalents. TheCompanyconsidersallshort-termhighlyliquidinvestmentswithoriginalmatur - itiesof90daysorlesswhenpurchasedtobecashequivalents. Restricted cash. Cashandcashequivalentsincludesfundsheldforstudentsforunbillededucationalservices thatwerereceivedfromTitleIVprograms.AsatrusteeoftheseTitleIVprogramfunds,theCompanyisrequired tomaintainandrestrictthesefundspursuanttothetermsoftheprogramparticipationagreementwiththeU.S. DepartmentofEducation.RestrictedcashontheCompany’sConsolidatedBalanceSheetsasofDecember31, 2015and2016was$3.3millionand$1.6million,respectively.Changesinrestrictedcashthatrepresentfunds heldforstudentsasdescribedaboveareincludedincashflowsfromoperatingactivitiesontheConsolidated StatementsofCashFlowsbecausetheserestrictedfundsareacoreactivityofoperations. Accounts receivable. Coursetuitionisrecordedasaccountsreceivableanddeferredrevenueatthetimestu - dentsbeginacourseorterm.Studentsmayremittuitionpaymentsatanytimeortheymayelectvariousother paymentoptionswithpaymenttermsextendingbeyondthestartofthecourseorterm.Theseotherpay - mentoptionsincludepaymentsbysponsors,financialaid,alternativeloans,oratuitionassistanceprogram thatremitspaymentsdirectlytothesubsidiary.Whenastudentremitspaymentafteracourseortermhas begun,accountsreceivableisreduced.Ifpaymentismadepriortothestartofacourseorterm,thepaymentis recordedasastudentdeposit,andthestudentisprovidedaccesstotheonlineclassroomwhencoursesstart,in thecaseofAPUS,orallowedtostarttheterm,inthecaseofHCON.Ifoneofthevariousotherpaymentoptions areconfirmedassecured,thestudentisprovidedaccesstotheonlineclassroomorallowedtostarttheterm. Generally,ifnoreceiptisconfirmedorpaymentoptionsecured,thestudentwillbedroppedfromtheonline courseornotallowedtostarttheterm.Therefore,billedamountsrepresentchargesthathavebeenprepared andsenttostudentsortheapplicablethird-partypayoraccordingtothetermsagreeduponinadvance. DepartmentofDefense,orDoD,tuitionassistanceprogramsarebilledbybranchofserviceonacourse-by- coursebasiswhenastudentstartsacourse,whereasTitleIVprogramsarebilledbasedonthecoursesincluded inastudent’ssemester.Billedaccountsreceivableareconsideredpastdueiftheinvoicehasbeenoutstanding formorethan30days. Theallowancefordoubtfulaccountsisbasedonmanagement’sevaluationofthestatusofexistingaccounts receivable.Amongotherfactors,managementconsiderstheageofthereceivable,theanticipatedsourceofpay - mentandtheCompany’shistoricalallowanceconsiderations.Considerationisalsogiventoanyspecificknown riskareasamongtheexistingaccountsreceivablebalances.Recoveriesofreceivablespreviouslywrittenoffare recordedwhenreceived.TheCompanydoesnotchargeinterestonitspastdueaccountsreceivable. Property and equipment. Allpropertyandequipmentarecarriedatcostlessaccumulateddepreciationand amortization,excepttheacquiredassetsofHCON,whichwererecordedatfairvalueattheacquisitiondate. Depreciationandamortizationarecalculatedonastraight-linebasisovertheestimatedusefullivesofthe assets.Fortaxpurposes,differentmethodsareused.Maintenanceandrepairsareexpensedasincurred,while othercostsarecapitalizediftheyextendtheusefullifeoftheasset. TheCompany’sPartnershipAtaDistanceTMsystem,orPAD,isacustomizedstudentinformationandservices systemusedbyAPUStomanageadmissions,onlineorientation,courseregistrations,tuitionpayments,grade reporting,progresstowarddegrees,andvariousotherfunctions.Costsassociatedwiththissystemhave beencapitalizedinaccordancewithAccountingStandardsCodification,orASC,subtopic350-40,(ASC350-40) Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,andclassifiedasproperty andequipment.Thesecostsareamortizedovertheestimatedusefullifeoffiveyears.TheCompanyalso 152 AmericanPublicEducation,Inc. capitalizescertaincostsforacademicprogramdevelopment.Thesecostsaretransferredtopropertyandequip - mentuponcompletionofeachprogramandamortizedoveranestimatedlifenottoexceedthreeyears. Investments. TheCompanyaccountsforitsinvestmentsinlessthanmajorityownedcompaniesundereither theequityorcostmethod.TheCompanyappliestheequitymethodtoinvestmentswhenithastheability toexercisesignificantinfluence,butdoesnotcontroltheoperatingandfinancialpoliciesofthecompany. Investmentsaccountedforundertheequitymethodareinitiallyrecordedatcost.Thepro-ratashareofthe operatingresultsoftheinvesteeisreportedintheConsolidatedStatementsofIncomeas“Equityinvestment income/(loss).”TherecoverabilityoftheCompany’sequitymethodinvestmentsisevaluatedonanannual basisorsoonerifthereareindicatorsofimpairment.TheCompanyappliesthecostmethodtoinvestments whenitdoesnothavetheabilitytoexercisesignificantinfluenceovertheoperatingandfinancialpoliciesofthe investment.Underthecostmethod,theinvestmentisrecordedatcostandanydividendsreceivedfromthe investmentarerecognizedasincome.Thecostmethodinvestmentsareevaluatedforimpairmentonanannual basisorsoonerifthereareindicatorsofimpairment.TheCompany’sinvestmentsarepresentedonaone-line basisas“Investments”intheaccompanyingConsolidatedBalanceSheets.Additionalinformationregardingthe Company’sinvestmentsislocatedinNote6.Investments,intheseConsolidatedFinancialStatements. Notes receivable. TheCompanyevaluatesnotesreceivablebyanalyzingtheborrower’screditworthiness,cash flowsandfinancialstatus,andtheconditionandestimatedvalueofthecollateral.TheCompanyconsidersa notetobeimpairedwhen,baseduponcurrentinformationandevents,managementbelievesitisprobablethat theCompanywillbeunabletocollectallamountsdueaccordingtothetermsofthenote.Notesreceivableare includedin“Otherassets”intheaccompanyingConsolidatedBalanceSheets. Goodwill and indefinite-lived intangible assets. Goodwillrepresentstheexcessofthepurchasepriceofan acquiredbusinessovertheamountassignedtotheassetsacquiredandliabilitiesassumed.Goodwillisnot amortized,butisevaluatedforimpairmentannuallyormorefrequentlyifindicatorsofimpairmentexist.The Company’smeasurementofgoodwillimpairmentinvolvesacomparisonoftheestimatedfairvalueofthe reportingunittoitscarryingvalue. Iftheestimatedfairvalueofthereportingunitislessthanthecarrying value, anestimateofthecurrentfairvaluesofallassetsandliabilitiesismadetodeterminetheamountofimplied goodwilland,consequently,theamountofanygoodwillimpairment.Fairvalueisderivedusingacombinationof valuationapproaches.ThemarketapproachutilizesmarketbasedrevenueandEBITDAmultiplestoestimatefair value.Theincomeapproachutilizesadiscountedcashflowmodeltoestimatefairvalue. Indefinite-livedintangibleassetsareassessedatleastannuallyforimpairment,ormorefrequentlyifevents occurorcircumstanceschangebetweenannualteststhatwouldmorelikelythannotreducethefairvalueofthe respectivereportingunitbelowitscarryingamount. UnderAccountingStandardsUpdateNo.2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment,theCompanyispermitted,butnotrequired,tofirstassessqualitativefactorstodeterminewhether itisnecessarytoperformaquantitativegoodwillimpairmenttest.TheCompany’sannualimpairmenttestingis performedonoraroundeachanniversarydateoftheHCONacquisition.Foradditionaldetailsregardinggood - willandindefinite-livedintangibleassetsrefertoNote7.GoodwillandIntangibleAssets,intheseConsolidated FinancialStatements. Valuation of long-lived assets. TheCompanyaccountsforthevaluationoflong-livedassetsunderASC360, Accounting for the Impairment or Disposal of Long-Lived Assets.ASC360requiresthatlong-livedassetsandcertain identifiableintangibleassetsbereviewedforimpairmentwhenevereventsorchangesincircumstancesindicate thatthecarryingamountofanassetmaynotberecoverable.Recoverabilityofthelong-livedassetismeasured byacomparisonofthecarryingamountoftheassettofutureundiscountednetcashflowsexpectedtobe 2016 Annual Report 153 generatedbytheasset.Ifsuchassetsareconsideredtobeimpaired,theimpairmenttoberecognizedismea - suredbytheamountbywhichthecarryingamountoftheassetsexceedstheestimatedfairvalueoftheassets. Assetstobedisposedofarereportableatthelowerofthecarryingamountorfairvalue,lesscoststosell. Revenue recognition. TheCompanyrecordsalltuitionasdeferredrevenuewhenastudentbeginsanonline course,inthecaseofAPUS,orstartsaterm,inthecaseofHCON.Atthebeginningofeachcourseorterm, revenueisrecognizedonaproratabasisovertheperiodofthecourseorterm,whichis,forAPUS,eitheran eight-or16-weekperiodand,forHCON,aquarterlyterm.ThisresultsindeferredrevenueontheCompany’s ConsolidatedBalanceSheetsthatincludesfuturerevenuethathasnotyetbeenearnedforcoursesandterms thatareinprogress.TherevenuerecognitionpoliciesofeachoftheCompany’sreportablesegmentsaredis - cussedbelow. AMERICANPUBLICUNIVERSITYSYSTEM APUS’stuitionrevenuevariesfromperiodtoperiodbasedonthenumberofnetcourseregistrations.Students mayremittuitionpaymentsthroughtheonlineregistrationprocessatanytimeortheymayelectvariouspay - mentoptions,includingpaymentsbysponsors,alternativeloans,financialaid,ortheDoDtuitionassistance programthatremitspaymentsdirectlytoAPUS.Theseotherpaymentoptionscandelaythereceiptofpayment upuntilthecoursestartsorlonger,resultingintherecordingofanaccountreceivableatthebeginningofeach session.TuitionrevenueforsessionsinprogressthathasnotbeenearnedbyAPUSispresentedasdeferred revenueintheaccompanyingConsolidatedBalanceSheets. APUSrefunds100%oftuitionforcoursesthataredroppedbeforetheconclusionofthefirstsevendaysofa course.TheCompanydoesnotrecognizerevenuefordroppedcourses.Afteracoursebegins,APUSusesthe followingrefundpolicy: 8-Week Course—Tuition Refund Schedule Withdrawal Date BeforeorDuringWeek1 DuringWeek2 DuringWeeks3and4 DuringWeeks5through8 16-Week Course—Tuition Refund Schedule Withdrawal Date BeforeorDuringWeek1 DuringWeek2 DuringWeeks3and4 DuringWeeks5through8 DuringWeeks9through16 Tuition Refund Percentage 100% 75% 50% NoRefund Tuition Refund Percentage 100% 100% 75% 50% NoRefund Studentsaffiliatedwithcertainorganizationsmayhaveanalternaterefundpolicy. APUSrecognizesrevenueonaproratabasisovertheperiodofitscoursesasAPUScompletesthetasksentitling ittothebenefitsrepresentedbysuchrevenue.Ifastudentwithdrawsduringtheacademicterm,APUScalcu - latestheportionoftuitionthatisnon-refundablebasedonthetuitionrefundpolicyandrecognizesitasreve - nueintheperiodthewithdrawaloccurs.Forthosestudentswhohaveanoutstandingreceivablebalanceatthe 154 AmericanPublicEducation,Inc. dateofwithdrawal,APUSassessescollectabilityandrecognizesasrevenuethoseamountswherecollectability isreasonablyassuredbasedonAPUS’shistorywithsimilarstudentaccounts.Thispolicywasimplementedon January1,2015.Previously,APUSrecognizedrevenueforallstudentwithdrawalsandestablishedanallowance forthosereceivablesconsidereduncollectible.TheCompanydoesnotbelievethatthischangeinpolicyhashad amaterialeffectonitsresultsofoperationsorfinancialcondition. Otherrevenueincludeschargesforatechnologyfeepercourse.APUSprovidesagranttocoverthetechnology feeforstudentsusingDoDtuitionassistanceprograms.PriortoApril2015,APUSprovidedagranttocoverthe technologyfeeforstudentsusingeducationbenefitprogramsadministeredbytheU.S.DepartmentofVeterans Affairs,orVA.AfterApril1,2015,thetechnologyfeegrantwasnolongerappliedtostudentsusingVAeducation benefits.APUSchargedatransfercreditevaluationfeeandeliminatedthefeeinMarch2016.Thetransfercredit evaluationfeewasforsecuringofficialtranscriptsonbehalfofthestudentandevaluatingthetranscriptsfor transfercredit. Studentsalsoarechargedgraduation,lateregistration,transcriptrequestandcomprehensiveexamination fees,whenapplicable.InaccordancewithASC605-50,Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,otherfeesalsoincludebookpurchasecommissionsAPUSreceivesforgrad - uatestudentbookpurchasesandancillarysupplypurchasesstudentsmakedirectlyfromAPUS’spreferredbook vendor. HONDROS COLLEGE OF NURSING HCON’stuitionrevenuevariesfromperiodtoperiodbasedonthenumberofstudentsenrolledandthepro - gramstheyareenrolledin.Studentsmayremittuitionpaymentsatanytime,ortheymayelectvariouspay - mentoptionsthatcandelayreceiptofpaymentupuntilthetermstartsorlonger.Theseotherpaymentoptions includepaymentsbysponsors,financialaid,alternativeloans,orpaymentplanoptions.Ifoneofthevarious otherpaymentoptionsareconfirmedassecured,thestudentisallowedtostarttheterm.Allfinancialaidis awardedpriortothestartofthetermandrequestsforauthorizationofdisbursementbegininthefirstweek oftheterm.TuitionrevenuefortheterminprogressthathasnotyetbeenearnedbyHCONispresentedas deferredrevenueintheaccompanyingConsolidatedBalanceSheets. HCON’srefundpolicycomplieswiththerulesoftheOhioStateBoardofCareerCollegesandSchoolsandis applicabletoeachterm.Foracoursewithanon-campusorotherin-personcomponent,thedateofwithdrawal isdeterminedbyastudent’slastattendeddayofclinicaloffering,laboratorysession,orlecture.Foranonline course,thedateofwithdrawalisdeterminedbyastudent’slastsubmittedassignmentinthecourse.HCONuses thefollowingrefundpolicy: Withdrawal Date Beforefirstfullcalendarweekofthequarter Duringfirstfullcalendarweekofthequarter Duringsecondfullcalendarweekofthequarter Duringthirdfullcalendarweekofthequarter Duringfourthfullweekofthequarter Studentsaffiliatedwithcertainorganizationsmayhaveanalternaterefundpolicy. Tuition Refund Percentage 100% 75% 50% 25% NoRefund 2016 Annual Report 155 HCONrecognizesrevenueonaproratabasisovertheacademicterm.Ifastudentwithdrawsduringtheterm, HCONcalculatestheportionoftuitionthatisnon-refundablebasedonthetuitionrefundpolicyandrecognizes itasrevenueintheperiodthewithdrawaloccurs. Otherrevenueincludesapplicationfeesaswellasfeesfortesting,booksandsupplies,lab,technologyand graduation. Deferred revenue and student deposits. DeferredrevenueandstudentdepositsatDecember31,2015and 2016,was$29,727,000and$20,639,000,respectively. TheCompanyprovidesscholarshipstocertainstudents,includingemployeesandeligibledependents,to assistthemfinanciallyandpromotetheirregistration.Scholarshipassistanceof$2,589,000,$7,583,000and $18,021,000wasprovidedfortheyearsendedDecember31,2014,2015and2016,respectively,andisincluded asareductiontorevenueintheaccompanyingConsolidatedStatementsofIncome. Advertising costs. AdvertisingcostsareexpensedasincurredduringtheyearpursuanttoASC720-35. AdvertisingexpensesfortheyearsendedDecember31,2014,2015and2016,were$50,950,000,$42,226,000 and$39,450,000respectively,andareincludedinsellingandpromotionalcostsintheaccompanying ConsolidatedStatementsofIncome. Income taxes. Deferredtaxesaredeterminedusingtheliabilitymethod,wherebydeferredtaxassetsarerecog - nizedfordeductibletemporarydifferencesanddeferredtaxliabilitiesarerecognizedfortaxabletemporarydif - ferences.Temporarydifferencesarethedifferencesbetweenthereportedamountsofassetsandliabilitiesand theirtaxbases.Asthesedifferencesreverse,theywillenterintothedeterminationoffuturetaxableincome. Deferredtaxassetsarereducedbyavaluationallowancewhen,intheopinionofmanagement,itismorelikely thannotthatsomeportionorallofthedeferredtaxassetswillnotberealized.Deferredtaxassetsandliabili - tiesareadjustedfortheeffectsofchangesintaxlawsandratesonthedateofenactmentofsuchchanges. TherewerenomaterialuncertaintaxpositionsasofDecember31,2014,2015or2016.Interestandpenalties associatedwithuncertainincometaxpositionswouldbeclassifiedasincometaxexpense.TheCompanyhasnot recordedanymaterialinterestorpenaltiesduringanyoftheyearspresented. Stock-based compensation. TheCompanyaccountsforstock-basedpaymentsinaccordancewithASC718, Stock Compensation,whichrequirescompaniestoexpenseshare-basedcompensationbasedonfairvalue. Stock-basedpaymentsmayinclude:incentivestockoptionsornon-qualifiedstockoptions,stockappreciation rights,restrictedstock,restrictedstockunits,dividendequivalentrights,performanceshares,performance units,cash-basedawards,otherstock-basedawards,includingunrestrictedshares,oranycombinationofthe foregoing. Income per common share. Basicnetincomepercommonshareisbasedontheweightedaveragenumberof sharesofcommonstockoutstandingduringtheperiod.Dilutednetincomepercommonshareincreasesthe sharesusedinthepersharecalculationbythedilutiveeffectsofoptions,warrants,andrestrictedstock. Fair value of financial instruments. Thecarryingamountsofcashandcashequivalents,tuitionreceivable, accountspayable,andaccruedliabilitiesapproximatefairvaluebecauseoftheshortmaturityofthese instruments. Concentration of credit risk. TheCompanymaintainsitscashandcashequivalentsinbankdepositaccounts withvariousfinancialinstitutions.CashandcashequivalentbalancesmayexceedtheFDICinsurancelimit.The Companyhashistoricallynotexperiencedanylossesinsuchaccounts. 156 AmericanPublicEducation,Inc. Accounting Pronouncements. WeconsidertheapplicabilityandimpactofallAccountingStandardsUpdates,or ASUs.ASUsissuedbutnotlistedbelowwereassessedanddeterminedtobeeithernotapplicableorexpectedto haveminimalimpactonourconsolidatedfinancialpositionand/orresultsofoperations. InMay2014,theFinancialAccountingStandardsBoard,orFASB,issuedASUNo.2014-09,Revenue from Contracts with Customers (Topic 606).Thestandardisacomprehensivemodeltouseinaccountingforrevenuearising fromcontractswithcustomersandsupersedestherevenuerecognitionrequirementsinASC605,R evenue Recognition,aswellasothervarioussectionsoftheASC.ThecoreprincipleofASU2014-09istorecognizereve - nuewhenpromisedgoodsorservicesaretransferredtocustomersinanamountthatreflectstheconsideration towhichanentityexpectstobeentitledforthosegoodsorservices.Theauthoritativeguidanceprovidesafive- stepanalysisoftransactionstodeterminewhenandhowrevenueisrecognized.Morejudgmentandestimates mayberequiredwithintherevenuerecognitionprocessthanarerequiredunderexistingU.S.GAAP.Thestan - dardalsoincludesacohesivesetofdisclosurerequirementsincludingcomprehensiveinformationaboutthe nature,amount,timinganduncertaintyofrevenueandcashflowsarisingfromcontractswithcustomers.ASU 2014-09wasinitiallyintendedtobeeffectiveforfiscalyears,andtheinterimperiodswithinthesefiscalyears, beginningonorafterDecember15,2016.InAugust2015,theFASBissuedASU2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.Thisstandarddefersforoneyeartheeffectivedateof ASU2014-09.Thedeferralwillresultinthisstandardbeingeffectiveforfiscalyears,andinterimperiodswithin thosefiscalyears,beginningafterDecember15,2017.Earlierapplicationispermittedonlyasofannualreport - ingperiodsbeginningafterDecember15,2016,includinginterimreportingperiodswithinthatreportingperiod. Entitiesmustuseeitherafullretrospectiveapproachforallperiodspresentedintheperiodofadoptionora modifiedretrospectiveapproach. InadditiontoASU2015-14,therehavebeenthreenewASUsissuedamendingcertainaspectsofASU2014-09. • ASUNo.2016-08,Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),issuedinMarch 2016,clarifiedcertainaspectsoftheprincipalversusagentguidance. • ASUNo.2016-10,Identifying Performance Obligations and Licensing,issuedinApril2016,clarifiesguidance relatedtoidentifyingperformanceobligationsandlicensingimplementation. • ASUNo.2016-12,Revenue from Contracts with Customers—Narrow Scope Improvements and Practical Expedients, issuedinMay2016,providesamendmentsandpracticalexpedientsintheareasofassessingcollectability, presentationofsalestaxesreceivedfromcustomers,noncashconsideration,contractmodificationandclarifi - cationofusingthefullretrospectiveapproachtoadoptASU2014-09. ASU2014-09requiresidentifyingperformanceobligationsbytheCompanyandtheCustomer.Asaresult,the revenuerecognitionperiodmaybeextendedincertainlimitedinstancesforAPUStuitionandtechnologyfee revenue.APUSgraduationfeerevenue,includedintheCompany’sotherrevenue,iscurrentlyrecognizedatthe timetheapplicationforgraduationissubmittedbythestudent.Thenewstandardmayextendtherevenuerec - ognitionperiodforthisrevenuestream.TheCompanyiscurrentlyevaluatingtheimpactofthenewstandardon otherAPUSandHCONrevenuestreams. TheCompanyisevaluatingwhichtransitionapproachtouseandadditionalimpactsthatthenewrevenuerecog - nitionstandardandsubsequentupdateswillhaveonitsConsolidatedFinancialStatements. InAugust2014,theFASBissuedASUNo.2014-15,Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.Thestandardrequiresmanagementtoevaluate,ateachinterimandannualreportingperiod, whetherthereareconditionsoreventsthatraisesubstantialdoubtabouttheentity’sabilitytocontinueasa goingconcernwithinoneyearafterthedatethefinancialstatementsareissued,andproviderelateddisclo - sures.ASU2014-15iseffectiveforannualperiodsendingafterDecember15,2016,andforannualandinterim 2016 Annual Report 157 periodsthereafter,andearlyadoptionispermitted.TheCompany’sadoptionofthisstandarddidnothavea materialimpactonitsConsolidatedFinancialStatements. InApril2015,theFASBissuedASUNo.2015-05,Intangibles-Goodwill and Other-Internal-Use Software, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (Subtopic 350-40).Thestandardrequirescustomersto determinewhetheracloudcomputingarrangementcontainsasoftwarelicense.Ifthearrangementcontainsa softwarelicense,customersmustaccountforfeesrelatedtothesoftwarelicenseelementinamannerconsis - tentwithhowtheacquisitionofothersoftwarelicensesisaccountedforunderASC350-40;ifthearrangement doesnotcontainasoftwarelicense,customersmustaccountforthearrangementasaservicecontract.ASU 2015-05waseffectivefortheCompanyforthefiscalyearendingDecember31,2016.Theprospectiveadoption ofthisstandarddidnothaveamaterialimpactontheCompany’sConsolidatedFinancialStatements. InSeptember2015,theFASBissuedASUNo.2015-16,Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.Thenewguidanceeliminatestherequirementthatanacquirerinabusiness combinationaccountformeasurement-periodadjustmentsretrospectivelyandinsteadallowsrecognitionof measurement-periodadjustmentsduringtheperiodinwhichtheamountoftheadjustmentisdetermined.This standardwaseffectiveforfiscalyearsbeginningafterDecember15,2015,andinterimperiodswithinthosefiscal years.TheadoptionofthisstandarddidnothaveamaterialimpactontheCompany’sConsolidatedFinancial Statements. InNovember2015,theFASBissuedASUNo.2015-17,Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.Thestandardrequiresthatdeferredtaxassetsanddeferredtaxliabilitiesbeclassifiedas non-currentonthebalancesheetratherthanbeingseparatedintocurrentandnon-current.Thisstandard iseffectiveforfiscalyears,andinterimperiodswithinthoseyears,beginningafterDecember15,2016.Early adoptionispermittedandthestandardmaybeappliedeitherretrospectivelyoronaprospectivebasis.The Companydoesnotplantoearlyadopt,willapplytheguidanceprospectively,andcurrentlyanticipatesthatthe implementationofthisstandardwillnothaveamaterialimpactonitsConsolidatedFinancialStatements. InJanuary2016,theFASBissuedASUNo.2016-01,Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.Thestandardaddressescertainaspectsofrecogni - tion,measurement,presentation,anddisclosureoffinancialinstruments.Thesechangeswillrequireanentity tomeasure,atfairvalue,investmentsinequitysecuritiesandotherownershipinterestsinanentityandto recognizethechangesinfairvaluewithinnetincome.ASU2016-01iseffectiveforfiscalyears,andinterimperi - odswithinthoseyears,beginningafterDecember15,2017,andearlyadoptionisnotpermitted.TheCompany iscurrentlyassessingtheimpactoftheadoptionofthisstandardanddoesnotcurrentlyanticipateitwillhavea materialimpactonitsConsolidatedFinancialStatements. InFebruary2016,theFASBissuedASUNo.2016-02,Leases (Topic 842) .Thisstandardrequiresentitiesthatlease assetstorecognizeonthebalancesheettheassetsandliabilitiesfortherightsandobligationscreatedbythose leasesinadditiontodisclosingcertainkeyinformationaboutleasingarrangements.Entitiesmayelectnotto recognizeleaseassetsandliabilitiesformostleaseswithtermsof12monthsorless.Expensesrelatedtofinance leaseswillbethesumofinterestontheleaseobligationandamortizationoftheright-ofuseassetandexpenses relatedtooperatingleaseswillgenerallyberecognizedonastraight-linebasis.Intransition,lesseesandlessors arerequiredtorecognizeandmeasureleasesatthebeginningoftheearliestperiodpresentedusingamodified retrospectiveapproach.Thisstandardiseffectiveforfiscalyears,andtheinterimperiodswithinthosefiscal years,beginningafterDecember15,2018.Earlyadoptionispermitted.TheCompanydoesnotplantoearly adoptandiscurrentlyevaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancialStatements. 158 AmericanPublicEducation,Inc. InMarch2016,theFASBissuedASUNo.2016-09,Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,changinghowentitiesaccountforcertainaspectsofshare-based paymentstoemployees.Thenewguidancerequiresexcesstaxbenefitsandtaxdeficienciestoberecognizedas incometaxexpenseorbenefitintheincomestatement,andcouldintroducevolatilitytotheCompany’sprovi - sionforincometaxes.Excesstaxbenefitsmustbepresentedasanoperatingactivityonthestatementofcash flowsratherthanafinancingactivity.ASU2016-09requirescompaniestomakeanaccountingpolicyelectionat thetimeofadoptiontoeitherestimatethenumberofawardsthatareexpectedtovest(consistentwithexisting U.S.GAAP)oraccountforforfeitureswhentheyoccur.Theforfeitureelectionprovisionmustbeappliedusinga retrospectivetransitionapproach,withacumulative-effectadjustmentrecordedtoretainedearningsasofthe beginningoftheperiodofadoption.ThenewguidanceiseffectiveforfiscalyearsbeginningafterDecember15, 2016,includinginterimperiodswithinthosefiscalyears.TheCompanyhaselectedtheforfeitureoptiontocon - tinuetoestimatethenumberofawardsthatareexpectedtovest.TheCompanyestimatestheadoptionof2016- 09mayincreaseitsreportedincometaxexpensebetween$400,000and$700,000inthefirstquarterof2017, andbetween$600,000and$900,000inthefirstquarterof2018,duetoexpiringstockoptionswithanoption pricegreaterthanthecurrentstockprice.Otherincreasesinincometaxexpensemayoccurthroughouttheyear forthevestingofrestrictedstock,determinedbythestockpriceattheendofeachreportingperiod. InJune2016,theFASBissuedASUNo.2016-13,Financial Instruments—Credit Losses, which is included in ASC Topic 326, Measurement of Credit Losses on Financial Instruments.Thenewguidancerevisestheaccountingrequire - mentsrelatedtothemeasurementofcreditlossesandwillrequireentitiestomeasureallexpectedcreditlosses forfinancialassetsbasedonhistoricalexperience,currentconditionsandreasonableandsupportableforecasts aboutcollectability.Assetsmustbepresentedinthefinancialstatementsatthenetamountexpectedtobe collected.TheguidancewillbeeffectiveforthefiscalyearsbeginningafterDecember15,2019,includinginterim periodswithinthosefiscalyears.EarlyadoptionispermittedwithfiscalyearsbeginningafterDecember15, 2018.TheCompanyisevaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancialStatements. InAugust2016,theFASBissuedASUNo.2016-15,Classification of Certain Cash Receipts and Cash Payments, which is included in FASB Accounting Standards Codification (ASC) Topic 230,Statement of Cash Flows.Thenewguidance clarifieshowcompaniespresentandclassifycertaincashreceiptsandcashpaymentsinthestatementof cashflows,includingcontingentconsiderationpaymentsmadeafterabusinesscombinationanddistributions receivedfromequitymethodinvestees.TheguidanceiseffectiveforfiscalyearsbeginningafterDecember15, 2017,includinginterimperiodswithinthosefiscalyears,withearlyadoptionpermitted.TheCompanydoesnot plantoearlyadoptandiscurrentlyevaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancial Statements. InOctober2016,theFASBissuedASUNo.2016-16,Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, requiringentitiestorecognizetheincometaxconsequencesofanintra-entitytransferofan assetotherthaninventorywhenthetransferoccurs.Thenewguidanceiseffectiveforfiscalyearsbeginning afterDecember15,2017,includinginterimperiodswithinthosefiscalyears.Earlyadoptionispermittedifinthe firstinterimperiodanentityissuesinterimfinancialstatements.ASU2016-16mustbeappliedonamodifiedret - rospectivebasisthroughacumulative-effectadjustmentdirectlytoretainedearningsasofthebeginningofthe periodofadoption.TheCompanyiscurrentlyevaluatingtheimpactthisstandardwillhaveonitsConsolidated FinancialStatements. InNovember2016,theFASBissuedASUNo.2016-18,Restricted Cash,whichisincludedinFASBAccounting StandardsCodification(ASC)Topic230,Statement of Cash Flows. Thenewguidancerequiresthatamountsgen - erallydescribedasrestrictedcashandrestrictedcashequivalentsbeincludedwithcashandcashequivalents whenreconcilingthebeginning-of-periodandend-of-periodtotalamountsshownonthestatementofcash flows.TheguidanceiseffectiveforfiscalyearsbeginningafterDecember15,2017,includinginterimperiods 2016 Annual Report 159 withinthosefiscalyears,withearlyadoptionpermitted.TheCompanydoesnotcurrentlyanticipatethenew guidancewillhaveamaterialimpactonitsConsolidatedFinancialStatements. InJanuary2017,theFASBissuedASUNo.2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business,providingaframeworkforentitiestousewhendeterminingwhetherasetofassetsandactivities constitutesabusiness.TheguidanceiseffectiveforfiscalyearsbeginningafterDecember15,2017,including interimperiodswithinthosefiscalyears,andshouldbeappliedprospectively.Earlyadoptionispermitted.The CompanyiscurrentlyevaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancialStatements. InJanuary2017,theFASBissuedASUNo.2017-04,Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,whicheliminatessteptwofromthegoodwillimpairmenttest.Instead,ifthecarryingamount ofareportingunitexceedsitsfairvalue,animpairmentlossshouldberecognizedinanamountequaltothe excess,butlimitedtothetotalamountofgoodwillallocatedtothereportingunit.Theguidancemustbeappliedon aprospectivebasisanddisclosureofthenatureof,andreasonfor,thechangeinaccountingprincipleisrequired upontransition.ASU2017-04iseffectiveforfiscalyearsbeginningafterDecember15,2019.Earlyadoptionis permittedforinterimorannualgoodwillimpairmenttestsperformedontestingdatesafterJanuary1,2017.The CompanyiscurrentlyevaluatingtheimpactthisstandardwillhaveonitsConsolidatedFinancialStatements. NOTE 3. ACQUISITION ACCOUNTING OnNovember1,2013,theCompanyacquiredalloftheoutstandingcommonstockofHCON,foraninitial adjustedaggregatepurchasepriceofapproximately$46.3million.TheHCONacquisitionwasaccountedfor underFASBASCTopic805,Business Combinations, whichrequirestheacquisitionmethodtobeusedforallbusi - nesscombinations.UnderFASBASCTopic805,theassetsandliabilitiesofanacquiredcompanyarereportedat businessfairvaluealongwiththefairvalueofunrecordedintangibleassetsatthedateofacquisition.Goodwill representstheexcessofthepurchasepriceofanacquiredbusinessovertheamountassignedtotheassets acquiredandliabilitiesassumedandthefairvalueassignedtoidentifiableintangibleassets.Theinitialpurchase priceallocationresultedin$38.1millionofgoodwill,whichisdeductiblefortaxpurposes.Intangibleassetsare amortizedovertheirestimatedusefullivesunlesstheyaredeemedtohaveanindefinitelife.Identifiedintangi - bleassetswithanindefinitelifearetradename,accreditation,licensingandTitleIV,andaffiliateagreementsas theybenefittheCompanyindefinitely.BecauseHCONiswhollyownedbytheCompanyasaresultoftheacquisi - tion,managementhasdeterminedthatpush-downaccountingisappropriate. Aspartofthetransaction,theCompanyandthesellingstockholdersofHCONagreedtoanelectionunder Section338(h)(10)oftheInternalRevenueCodeof1986,asamended,asitrelatestotheacquisitionofHCONby theCompany.ASection338(h)(10)electionisanelectionmadejointlybybuyer(s)andseller(s)totreatastock acquisitionasanassetacquisitionforU.S.federalincometaxpurposes.Theacquisitionresultedinaprelimi - naryestimateoffairvalueofitsliabilitytothesellingstockholdersrelatedtotheSection338(h)(10)electionin theamountof$150,000,whichwasincludedintheinitialgoodwillallocation.PriortoDecember31,2014,the CompanyreviseditsestimateofthefairvalueofitsliabilitytoHCON’ssellingstockholdersrelatedtotheSection 338(h)(10)electiontoapproximately$636,000.Asaresult,thetotaladjustedaggregatepurchasepriceandthe amountofgoodwillwererevisedto$46.8millionand$38.6million,respectively. Thefairvalueofidentifiedintangibleassetsacquiredwasdeterminedusingoneofthefollowingthreevaluation methodologies: • Costapproach; • Incomeapproach;or • Marketapproach. 160 AmericanPublicEducation,Inc. (in thousands) Fair value consideration transferred: Cash FairValueofIRC338(h)(10)election Total fair value consideration transferred Recognized amounts of identifiable tangible assets acquired and liabilities assumed: Assetsacquired Liabilitiesassumed Assets acquired in excess of liabilities assumed Recognized identified intangible assets: Studentcontractsandrelationships Tradename Curricula Accreditation,licensingandTitle IV Affiliateagreements Non-competeagreements Total recognized identified intangible assets Goodwill Useful Life 6years Indefinite 3years Indefinite Indefinite 5years NOTE 4. PROPERTY AND EQUIPMENT PropertyandequipmentatDecember31,2015and2016consistedofthefollowing: (in thousands) Land Buildingandbuildingimprovements Leaseholdimprovements Officeequipment Computerequipment Furnitureandfixtures OtherCapitalizableAssets Softwaredevelopment Programdevelopment Accumulateddepreciationandamortization Useful Life — 27.5–39years upto15years 5years 3years 7years 5years 5years 3years 2015 $ 9,501 58,429 1,002 2,322 25,179 8,124 1,829 74,737 4,920 186,043 76,762 $109,281 $46,128 636 $46,764 $ 4,834 4,786 $ 48 $ 3,870 1,998 405 1,686 37 86 $ 8,082 $38,634 2016 $ 9,394 54,541 1,208 2,219 22,492 8,036 128 79,452 6,966 184,436 86,749 $ 97,687 Assetsheldforsaleof$2.1millionareexcludedfromthe$97.7millioninpropertyandequipmentintheabove table.Foradditionalinformationsee“Note5.AssetsHeldforSale”intheseConsolidatedFinancialStatements. FortheyearendedDecember31,2016,theCompany’sAPEISegmentdisposed$5.0millioninlong-livedassets, primarilyconsistingofalossthatresultedfromtheabandoneddevelopmentofanewstudentcourseregistra - tionsystem.Itwasnolongerprobablethatdevelopmentwouldbecompletedandthesoftwareplacedinservice 2016 Annual Report 161 duetoprogrammingdifficultiesthatcouldnotberesolvedinatimelybasisandwithoutadditionalcost.The originalcarryingvalueofthesoftwareandincurredcostwas$4.0million.Thelossesonlong-livedassetsare includedaslossondisposalsoflong-livedassetsintheseConsolidatedFinancialStatements. DuringtheyearsendedDecember31,2014,2015and2016,theCompanyrecordeddepreciationexpense of$14,980,000,$19,626,000and$18,674,000,respectively.Inaddition,theCompanyrecordedamortization expenserelatedtootherassetsof$1,141,000,$894,000,and$710,000duringtheyearsendedDecember31, 2014,2015and2016,respectively. NOTE 5: ASSETS HELD FOR SALE AssetsheldforsalerepresentexcessrealpropertylocatedinCharlesTown,WestVirginia,forourAPEISegment, whichisnolongerinuseduetotherelocationofemployeestoanewfacility.Long-livedassetsareclassifiedas heldforsalewhentheassetsareexpectedtobesoldwithinthenext12monthsandmeettheotherrelevant held-for-salecriteria.Assuch,thepropertyisrecordedatthelowerofthecarryingvalueorfairvalue,lesscost tosell,untilsuchtimeastheassetissold.Thefairvalueoftheassetof$2.1million,asdeterminedbyaninde - pendentappraisal,waslessthanthecarryingvalue,andthereforetheCompanyrecognizedalossof$0.5million fortheyearendedDecember31,2016. Inaddition,fortheyearendedDecember31,2016,theCompany’sAPEIsegmentsoldcertainexcessrealprop - ertylocatedinCharlesTown,WestVirginia,withacarryingvalueof$1.1millionforanetsalespriceof$0.8 million.Thispropertywasnolongerinuseduetotherelocationofemployeestoanotherfacility.Inconnection withthissale,theCompanyrecordedalossonsaleof$0.3million. Inconnectionwiththeitemsnotedabove,theCompany’sAPEIsegmenthadalossonassetsheldforsaleof$0.8 millionincludedinlossonassetsheldforsaleintheseConsolidatedFinancialStatements. NOTE 6: INVESTMENTS OnSeptember30,2012,theCompanymadea$6.8millioninvestmentinpreferredstockofNWHWHoldings, Inc.,orNWHWHoldings,aholdingcompanythatoperatesaninformationtechnologytrainingcompany,New HorizonsWorldwide, Inc.,orNewHorizons,representingapproximately20%ofthefullydilutedequityofNWHWHoldings.Duringthe yearendedDecember31,2016,theCompanyreceivedadividendof$3.0millionfromNWHWHoldings.Incon - nectionwiththeinvestment,theCompanyisentitledtocertainrights,includingtherighttorepresentationon theBoardofDirectorsofNWHWHoldings.TheCompanyaccountsforitsinvestmentinNewHorizonsunderthe equitymethodofaccounting.Therefore,theCompanyrecordedtheinvestmentatcostandrecognizesitsshare ofearningsorlossesintheinvesteeintheperiodsforwhichtheyarereportedwithacorrespondingadjustment inthecarryingamountoftheinvestment. OnFebruary20,2013,theCompanymadea$4.0millioninvestmentinpreferredstockofFidelisEducation, Inc.,orFidelisEducation,representingapproximately22%ofitsfullydilutedequity.OnFebruary1,2016,the Companymadeanadditional$950,000investmentinpreferredstock.AsofDecember31,2016,theCompany ownedapproximately23%ofitsfullydilutedequity.FidelisEducationoffersalearningrelationshipmanagement platformthathasthegoalofimprovingeducationadvisingandcareermentoringservicesofferedtostudents astheypursuecollegedegrees.Inconnectionwiththeinvestment,theCompanyisentitledtocertainrights, includingtherighttorepresentationontheBoardofDirectorsofFidelisEducation.TheCompanyaccountsfor itsinvestmentinFidelisEducationundertheequitymethodofaccounting.Therefore,theCompanyrecorded theinvestmentatcostandrecognizesitsshareofearningsorlossesintheinvesteeintheperiodsforwhichthey arereportedwithacorrespondingadjustmentinthecarryingamountoftheinvestment. 162 AmericanPublicEducation,Inc. OnApril2,2014,theCompanymadea$1.5millioninvestmentinpreferredstockofSecondAvenueSoftware, Inc.,orSecondAvenueSoftware,representingapproximately26%ofitsfullydilutedequity.SecondAvenue Softwareisagame-basededucationsoftwarecompanythatdevelopssoftwareonaproprietaryand“work-for- hire”basis.Inconnectionwiththeinvestment,theCompanyisentitledtocertainrights,includingtherightto representationontheBoardofDirectorsofSecondAvenueSoftware.TheCompanyaccountsforitsinvestment inSecondAvenueSoftwareundertheequitymethodofaccounting.Therefore,theCompanyrecordedthe investmentatcostandrecognizesitsshareofearningsorlossesintheinvesteeintheperiodsforwhichtheyare reportedwithacorrespondingadjustmentinthecarryingamountoftheinvestment. OnDecember21,2015,theCompanymadea$3.5millioninvestmentinpreferredstockofRallyPoint,anonline socialnetworkformembersofthemilitary,representingapproximately14%ofitsfullydilutedequity.The CompanyaccountsforitsinvestmentinRallyPointusingthecostmethodofaccounting. TheCompanyevaluateditscostmethodinvestmentsforimpairmentasofDecember31,2016,andestimated thatthefairvalueofitscostmethodinvestmentswasatleastequaltoitscarryingvalueasofthatdate.The aggregatecarryingamountoftheCompany’scostmethodinvestmentspresentedonitsConsolidatedBalance SheetasofDecember31,2015,andDecember31,2016,is$4.1million.Unlessindicatorsofimpairmentexist,the fairvalueoftheCompany’scostmethodinvestmentsisnotestimatedinanyperiodwhereitisnotpracticableto estimatethefairvalueofsuchinvestments. NOTE 7. GOODWILL AND INTANGIBLE ASSETS InconnectionwithitsNovember1,2013,acquisitionofHCON,theCompanyappliedASC805,Business Combinations,usingtheacquisitionmethodofaccounting.TheCompanyrecorded$38.6millionofgoodwill, representingtheexcessofthepurchasepriceovertheamountassignedtothenetassetsacquiredandthefair valueassignedtoidentifiedintangibleassets,andrecorded$8.1millionofidentifiedintangibleassets. InaccordancewithASC350,Intangibles-GoodwillandOther,theCompanyassessesgoodwillforimpairmenton oraroundeachanniversarydateoftheacquisition,andmorefrequentlyifeventsandcircumstancesindicate thatgoodwillmightbeimpaired.Goodwillimpairmenttestingconsistsofanoptionalqualitativeassessmentas wellasatwo-stepquantitativetest.Steponeinvolvescomparingthefairvalueofthereportingunittoitscarry - ingvalue.Ifthecarryingvalueofthereportingunitisgreaterthanzeroanditsfairvalueisgreaterthanitscarry - ingamount,thereisnoimpairment.Ifthecarryingvalueisgreaterthanthefairvalue,thesecondstepmustbe completedtomeasuretheamountofimpairment,ifany.Steptwoinvolvescalculatingtheimpliedfairvalueof goodwillbydeductingthefairvalueofalltangibleandintangibleassets,excludinggoodwill,ofthereportingunit fromthefairvalueofthereportingunitasdeterminedinstepone.Theimpliedfairvalueofgoodwilldetermined inthisstepiscomparedtothecarryingvalueofgoodwill.Iftheimpliedfairvalueofgoodwillislessthanthe carryingvalueofgoodwill,animpairmentlossisrecognizedequaltothedifference. Inadditiontogoodwill,HCONrecordedatotalof$8.1millionofidentifiableintangibleassetsattheacquisi - tiondate.HCONrecordedidentifiedintangibleassetswithanindefiniteusefullifeintheaggregateamountof $3.7million,whichincludestradenames,accreditation,licensingandTitleIV,andaffiliateagreements.HCON 2016 Annual Report 163 recorded$4.4millionofidentifiedintangibleassetswithadefiniteusefullife.Attheacquisitiondate,theuseful lifeassignedtoeachtypeofintangibleassetwithadefiniteusefullifewasasfollows: (in thousands) Studentcontractsandrelationships Curricula Non-competeagreements Thefutureamortizationofintangibleassetsisasfollows(inthousands): 2017 2018 2019 2020andbeyond Total Useful Life 6years 3years 5years $598 563 322 — $1,483 InAugust2016,theCompanycompletedaqualitativeassessmenttodetermineifaninterimgoodwillimpair - menttestwasnecessary.Duetorelevantcircumstancesthatincluded:(1)HCON’sunderperformanceagainst internaltargets;(2)thechallenginghighereducationcompetitiveandregulatoryenvironment,particularlyfor proprietaryinstitutions;(3)overallfinancialperformance;and(4)theuncertainstatusofACICS,theCompany concludeditwasmorelikelythannotthefairvalueofHCONwaslessthanitscarryingamount;therefore,the CompanyproceededwithsteponeofthegoodwillimpairmenttestasofAugust31,2016.Steponeofthegood - willimpairmenttestidentifiedthatHCON’sfairvaluewaslessthanthecarryingvalue.Accordingly,steptwotest - ingwascompletedinordertodeterminetheamountoftheimpairment.Insteptwo,thefairvalueofallassets andliabilitieswasestimatedforthepurposeofderivinganestimateoftheimpliedfairvalueofgoodwill.The impliedfairvalueofgoodwillwasthencomparedtotherecordedgoodwilltodeterminetheamountofimpair - ment.Steptwotestingindicatedthatthefairvalueofgoodwillwas$33.9millionor$4.7millionlessthanits carryingvalue.Therewasnoimpairmentoftheintangibleassets.Asaresult,theCompanyrecordedapretax, non-cashchargeof$4.7milliontoreducethecarryingvalueofitsgoodwill. TheCompanyutilizedanindependentvaluationfirmtodeterminethefairvalueofHCON.Theindependent valuationfirmweightedtheresultsoffourdifferentvaluationmethods:(1)discountedcashflow;(2)guideline companymethod;(3)guidelinetransactionmethod-comparabletransactions;and(4)guidelinetransaction method-privateequitytransactions.Undertheincomeapproach,fairvaluewasdeterminedbasedonesti - mateddiscountedfuturecashflowsofHCON.Thecashflowswerediscountedbyanestimatedriskweighted-av - eragecostofcapital,whichwasintendedtoreflecttheoveralllevelofinherentriskofHCON.Underthemarket approach,pricingtermsfromothertransactionsinthehighereducationmarketwereusedtodeterminethe valueofHCON.ValuesderivedunderthefourvaluationmethodswerethenweightedtoestimateHCON’senter - prisevalue. ThegoodwillimpairmentchargerecordedinthequarterendedSeptember30,2016,eliminatedthedifference betweenthefairvalueofgoodwillandthebookvalueofgoodwill.Assuch,futurechanges,includingminor changes,inrevenue,operatingincome,valuationmultiples,discountratesandotherinputstothevaluation processmayresultinfutureimpairmentchargesandthosechargesmaybematerial. AsofOctober31,2016,theCompanycompletedsteponeofthegoodwillimpairmenttestaspartofitsannual assessment.SteponeofthegoodwillimpairmenttestconcludedthatHCON’sfairvaluewasmorethanthecar - ryingvalue;consequently,therewasnoimpairment.Themethodandestimatesusedinthesteponetestwere consistentwiththoseusedintheAugust31,2016,impairmenttesting. 164 AmericanPublicEducation,Inc. ChangesinthecarryingamountofgoodwillbyreportablesegmentduringfiscalyearendingDecember31,2015 andDecember31,2016areasfollows(inthousands): Goodwill as of December 31, 2014 Impairment Goodwill as of December 31, 2015 Impairment Goodwill as of December 31, 2016 APEI Segment HCON Segment Total Goodwill — — — — — $38,634 — $38,634 (4,735) 33,899 $38,634 — 38,634 (4,735) 33,899 Thefollowingtablepresentsthecomponentsofthenetcarryingamountofgoodwillbyreportablesegmentas ofDecember31,2015(inthousands): Gross carrying amount of Goodwill as of December 31, 2014 Accumulatedimpairment Net Carrying amount of Goodwill as of December 31, 2015 APEI Segment HCON Segment Total Goodwill — — — $38,634 — $38,634 — $38,634 $38,634 Thefollowingtablepresentsthecomponentsofthenetcarryingamountofgoodwillbyreportablesegmentas ofDecember31,2016(inthousands): Gross carrying amount of Goodwill as of December 31, 2015 Accumulatedimpairment Net Carrying amount of Goodwill as of December 31, 2016 APEI Segment HCON Segment Total Goodwill — — — $38,634 (4,735) $38,634 (4,735) $33,899 $33,899 Otherintangibleassets,includedinOtherAssetsontheConsolidatedBalanceSheetsintheseConsolidated FinancialStatements,consistofthefollowingasofDecember31,2016(inthousands): Finite-lived intangible assets Curricula Non-competeagreements Studentcontractsandrelationships Total finite-lived intangible assets Indefinite-lived intangible assets Tradename Accreditation,licensingandTitleIV Affiliationagreements Total indefinite-lived intangible assets Total intangible assets 2016 Gross Carrying Amount Accumulated Amortization Net Carrying Amount $ 405 86 3,870 4,361 1,998 1,686 37 3,721 $8,082 $ 405 54 2,419 2,878 $ — — — — $2,878 $ — 32 1,451 1,483 $1,998 1,686 37 3,721 $5,204 2016 Annual Report 165 Identifiedintangibleassetsareamortizedinamannerthatreflectstheestimatedeconomicbenefitoftheintan - gibleassets.CurriculaandNon-competeagreementsareamortizedonastraight-linebasis.Studentcontracts andrelationshipsareamortizedusinganacceleratedmethod. DeterminingthefairvalueofHCONrequiresjudgmentandtheuseofsignificantestimatesandassumptions, includingrevenuegrowthrates,EBITDAmargins,discountratesandfuturemarketconditions,amongothers. Giventhecurrentcompetitiveandregulatoryenvironment,andtheuncertaintiesregardingtherelatedimpact onHCON’sbusiness,therecanbenoassurancethattheestimatesandassumptionsmadeforpurposesofthe Company’sinterimandannualgoodwillimpairmenttestswillprovetobeaccuratepredictionsofthefuture.If theCompany’sassumptionsarenotachieved,theCompanymayrecordadditionalgoodwillimpairmentcharges infutureperiods.Itisnotpossibleatthistimetodetermineifanysuchfutureimpairmentchargewouldresult orwhethersuchchargewouldbematerial. NOTE 8. OPERATING LEASES TheAPEISegmentleasesofficespaceinMarylandandVirginiaunderoperatingleasesthatexpirethrough September2018.HCONoperatesfivecampusesinOhio,locatedinthesuburbanareasofCincinnati,Cleveland, Columbus,DaytonandToledounderoperatingleasesthatexpirethroughJune2029.Rentexpenserelatedto theAPEISegment’soperatingleaseswas$1,666,000,$1,094,000and$584,000fortheyearsendedDecember 31,2014,2015and2016,respectively.RentexpenserelatedtotheHCONSegment’soperatingleaseswas $2,212,000,$2,347,000,and$2,528,000fortheyearsendedDecember31,2014,2015and2016,respectively. Theminimumrentalcommitmentsdueundertheoperatingleasesareasfollows(inthousands): Years Ending December 31, 2017 2018 2019 2020 2021andbeyond Totalminimumrentalcommitment NOTE 9. INCOME TAXES Combined $ 2,207 1,891 1,761 1,803 7,555 $15,217 ThecomponentsofincometaxexpensefortheyearsendedDecember31,2014,2015and2016wereasfollows (inthousands): Currentincometaxexpense: Federal State Deferredtaxexpense: Federal State 2014 2015 2016 $19,404 3,252 22,656 2,623 (129) 2,494 $17,910 2,322 20,232 (241) 81 (160) $13,518 1,877 15,395 (424) (31) (455) IncomeTaxExpense $25,150 $20,072 $14,940 166 AmericanPublicEducation,Inc. Thetaxeffectsofprincipaltemporarydifferencesareasfollows(inthousands): Deferredtaxassets: Stockoptioncompensationexpense Allowancefordoubtfulaccounts Accruedvacationandseverance Restrictedstock Investment Deferredtaxliabilities: Incometaxdeductiblecapitalizedsoftwaredevelopmentcosts Propertyandequipment Prepaidexpenses 2015 2016 $ 1,336 $ 1,057 4,988 576 1,830 19 8,749 (11,275) (4,688) (2,016) (17,979) 3,079 798 1,874 168 6,976 (11,827) (2,208) (1,716) (15,751) Deferredtaxliabilities,net $ (9,230) $ (8,775) IncometaxexpensediffersfromtheamountoftaxdeterminedbyapplyingtheUnitedStatesfederalincometax ratestopretaxincomeandlossduetopermanenttaxdifferences,andtheapplicationofstateapportionment laws,asfollows(inthousands): Taxexpenseatstatutoryrate Statetaxes,net Permanentdifferences Other 2014 2015 2016 Amount $23,110 1,985 228 (173) $25,150 % Amount % Amount % 35.00% $18,370 35.00% $13,683 35.00% 3.01% 0.35% (0.27)% 38.09% 1,590 278 (166) $20,072 3.03% 0.53% (0.32)% 38.24% 1,278 221 (242) $14,940 3.27% 0.56% (0.62)% 38.21% Permanentdifferencesinthetableabovearemainlyattributabletominorityinvestmentearningsand/orlosses, nondeductiblemealsandentertainmentexpenses,andnon-deductibleemployercontributionstotheAmerican PublicEducation,Inc.EmployeeStockPurchasePlan,orESPP. TheCompanyissubjecttoU.S.federalincometaxesaswellasincometaxofmultiplestatejurisdictions.ForU.S. federalandstatetaxpurposes,taxyears2013-2016remainopentoexamination. NOTE 10. OTHER EMPLOYEE BENEFITS TheCompanyhasestablishedataxdeferred401(k)retirementplanthatprovidesretirementbenefitstoallofits eligibleemployees.Participantsmayelecttocontributeupto60%oftheirgrossannualearningsnottoexceed ERISAandIRSlimits.TheplanprovidesforCompanydiscretionaryprofitsharingcontributionsatmatchingper - centages.Employeesimmediatelyvest100%inallsalaryreductioncontributionsandemployercontributions. InJune2015,theCompany’s401(k)retirementplanwasamendedsothateffectiveAugust31,2015,the Company’s401(k)retirementplannolongerallowsparticipantstoinvestfuturecontributionsintheCompany’s commonstock.TheCompany’s401(k)retirementplancompletelyremovedtheCompany’scommonstockasan 2016 Annual Report 167 investmentelectiononJune30,2016.AnyoftheCompany’scommonstockheldby401(k)retirementplanpartic - ipantsasofJune30,2016,wassoldandautomaticallyre-allocatedtoanage-appropriatemutualfund. TheCompanymadediscretionarycontributionstotheplanof$3,270,000,$3,309,000and$3,284,000forthe yearsendedDecember31,2014,2015and2016,respectively. InNovember2007,theCompanyadoptedtheAmericanPublicEducation,Inc.EmployeeStockPurchasePlan, ortheESPP,whichwasimplementedeffectiveJuly1,2008,withquarterlyenrollmentperiods.Eligiblepartici - pantsmayonlyentertheplanandestablishtheirwithholdingsatthestartofanenrollmentperiod.Participating employeesmaywithdrawfromtheplanandendpayrolldeductionsanytimeuptofivedaysbeforetheshare purchasedateandfundswillbereturnedtothem.UndertheESPP,participatingemployeesmaypurchase sharesoftheCompany’scommonstock,subjecttocertainlimitations,at85%ofitsfairmarketvalueonthelast dayofthequarterlyperiod.Thetotalvalueofcontributionsperparticipantmaynotexceed$21,000annuallyor thevalueofthecommonstockpurchasedperparticipantcannotexceed$25,000.Therewereinitially100,000 sharesofcommonstockavailableforpurchasebyparticipatingemployeesundertheESPP.OnJune13,2014, theCompany’sstockholdersapprovedanamendmenttotheESPPtoincreasethenumberofsharesofthe Company’scommonstockavailableforissuanceundertheplanby100,000shares,extendthetermoftheESPP toMarch7,2024,andmakeotheradministrativechanges.Sharespurchasedintheopenmarketforissuanceto employeespursuanttotheplanfortheyearsendedDecember31,2014,2015and2016,wereasfollows: Purchase Date March31,2014 June30,2014 September30,2014 December31,2014 Total/WeightedAverage March31,2015 June30,2015 September30,2015 December31,2015 Total/WeightedAverage March31,2016 June30,2016 September30,2016 December31,2016 Total/WeightedAverage Shares 4,961 5,180 5,246 3,931 19,318 4,322 5,443 4,939 6,822 21,526 4,617 3,617 4,991 3,717 16,942 Common Stock Fair Value Purchase Price Compensation Expense $35.08 $34.38 $26.99 $36.87 $33.06 $29.98 $25.72 $23.45 $18.61 $23.80 $20.63 $28.10 $19.81 $24.80 $22.90 $29.82 $29.22 $22.94 $31.34 $28.10 $25.49 $21.86 $19.93 $15.82 $20.23 $17.54 $23.89 $16.84 $21.08 $19.46 $26,095 $26,729 $21,246 $21,738 $95,808 $19,406 $21,010 $17,385 $19,033 $76,834 $14,267 $15,228 $14,823 $13,827 $58,145 NOTE 11. STOCKHOLDERS’ EQUITY STOCKINCENTIVEPLANS OnMarch15,2011,theCompany’sBoardofDirectorsadoptedtheAmericanPublicEducation,Inc.2011 OmnibusIncentivePlan,orthe2011IncentivePlan,andtheCompany’sstockholdersapprovedthe2011 IncentivePlanonMay6,2011,atwhichtimethe2011IncentivePlanbecameeffective.Uponeffectivenessof the2011IncentivePlan,theCompanyceasedmakingawardsundertheAmericanPublicEducation,Inc.2007 OmnibusIncentivePlan,orthe2007IncentivePlan.The2011IncentivePlanallowstheCompanytograntup 168 AmericanPublicEducation,Inc. to2,000,000sharesplusanysharesofcommonstockthataresubjecttooutstandingawardsunderthe2007 IncentivePlanortheAmericanPublicEducation,Inc.2002StockPlan,orthe2002StockPlan,thatterminatedueto expiration,forfeiture,cancellationorotherwisewithouttheissuanceofsuchshares.Priorto2012,theCompany usedamixofstockoptionsandrestrictedstock,butsince2011,theCompanyhasnotissuedanystockoptions. RESTRICTEDSTOCKANDRESTRICTEDSTOCKUNITAWARDS Stock-basedcompensationexpenserelatedtorestrictedstockandrestrictedstockunitgrantsisexpensedover thevestingperiodusingthestraight-linemethodforCompanyemployeesandthegraded-vestingmethodfor membersoftheBoardofDirectors,andismeasuredusingAPEI’sstockpriceonthedateofgrant.TheCompany alsoestimatesforfeituresofshare-basedawardsatthetimeofgrantandrevisessuchestimatesinsubsequent periodsifactualforfeituresdifferfromoriginalestimates. ThetablebelowsetsforththerestrictedstockandrestrictedstockunitactivityfortheyearendedDecember31,2014: Nonvested,December31,2013 Sharesgranted Vestedshares Sharesforfeited Nonvested,December31,2014 Number of Options 190,761 272,550 (87,445) (15,097) 360,769 Weighted Average Grant Price and Fair Value $38.61 36.73 38.69 41.64 $37.03 ThetablebelowsetsforththerestrictedstockandrestrictedstockunitactivityfortheyearendedDecember31,2015: Nonvested,December31,2014 Sharesgranted Vestedshares Sharesforfeited Nonvested,December31,2015 Number of Options 360,769 127,469 (164,144) (30,675) 293,419 Weighted Average Grant Price and Fair Value $37.03 35.15 37.85 36.76 $35.86 ThetablebelowsetsforththerestrictedstockandrestrictedstockunitactivityfortheyearendedDecember31,2016: Nonvested,December31,2015 Sharesgranted Vestedshares Sharesforfeited Nonvested,December31,2016 Number of Options 293,419 336,434 (152,714) (39,168) 437,971 Weighted Average Grant Price and Fair Value $35.86 16.34 35.83 25.46 $21.54 2016 Annual Report 169 Therewerenosharesofrestrictedstockorrestrictedstockunitsexcludedinthecomputationofdilutednet incomepercommonsharefortheyearendedDecember31,2016.TheCompanyrecognizedincometaxbenefits of$2,022,000,$2,467,000,and$2,064,000fromvestedrestrictedstockandrestrictedstockunitsfortheyears endedDecember31,2014,2015and2016,respectively. AtDecember31,2016,totalunrecognizedcompensationexpenseintheamountof$5.1millionrelatestonon-vested restrictedstockandrestrictedstockunitswhichwillberecognizedoveraweightedaverageperiodof1.6years. Asaresultofterminationofemployment,theCompanyacceptedthefollowingcommonsharesforforfeiture: 15,097sharesfor$628,639in2014,22,066sharesfor$815,886in2015,and31,370sharesfor$611,335in2016. OPTIONAWARDS ThefairvalueofeachoptionawardisestimatedatthedateofgrantusingaBlack-Scholesoption-pricingmodel. Priorto2012,theCompanycalculatedtheexpectedtermofstockoptionawardsusingthe“simplifiedmethod” inaccordancewithSecurities and Exchange Commission Staff Accounting Bulletins No. 107 and 110becausethe Companylackedhistoricaldataandwasunabletomakereasonableassumptionsregardingthefuture.The Companymakesassumptionswithrespecttoexpectedstockpricevolatilitybasedontheaveragehistoricalvol - atilityofpeerswithsimilarattributes.Inaddition,theCompanydeterminestheriskfreeinterestratebyselect - ingtheU.S.Treasuryfive-yearconstantmaturity,quotedonaninvestmentbasisineffectatthetimeofgrantfor thatbusinessday.Estimatesoffairvaluearesubjectiveandarenotintendedtopredictactualfutureevents,and subsequenteventsarenotnecessarilyindicativeofthereasonablenessoftheoriginalestimatesoffairvalue madeunderFASBASCTopic718.Optionspreviouslygrantedvestratablyoverperiodsofthreetofiveyearsand expireinsevento10yearsfromthedateofgrant. AsummaryofthestatusoftheCompany’sStockIncentivePlansasofDecember31,2014,andthechanges duringtheperiodsthenendedisasfollows: Outstanding,December 31,2013 Optionsgranted Awardsexercised Optionsforfeited Outstanding,December 31,2014 Exercisable,December 31,2014 Number of Options 501,202 — (46,198) (20,603) 434,401 434,401 Weighted Average Exercise Price Weighted Average Contractual Life (years) Aggregate Intrinsic Value (in thousands) $28.82 $ — $13.66 $37.04 $30.04 $30.04 2.14 2.14 $3,080 $3,080 170 AmericanPublicEducation,Inc. AsummaryofthestatusoftheCompany’sStockIncentivePlansasofDecember31,2015,andthechanges duringtheperiodsthenendedisasfollows: Outstanding,December 31,2014 Optionsgranted Awardsexercised Optionsforfeited Outstanding,December 31,2015 Exercisable,December 31,2015 Number of Options 434,401 — (55,382) (49,147) 329,872 329,872 Weighted Average Exercise Price Weighted Average Contractual Life (years) Aggregate Intrinsic Value (in thousands) $30.04 $ — $ 3.29 $35.97 $33.65 $33.65 1.30 1.30 $359 $359 AsummaryofthestatusoftheCompany’sStockIncentivePlansasofDecember31,2016,andthechanges duringtheperiodsthenendedisasfollows: Outstanding,December 31,2015 Optionsgranted Awardsexercised Optionsforfeited Outstanding,December 31,2016 Exercisable,December 31,2016 Number of Options 329,872 — (16,878) (53,025) 259,969 259,969 Weighted Average Exercise Price Weighted Average Contractual Life (years) Aggregate Intrinsic Value (in thousands) $33.65 $ — $ 7.00 $37.09 $34.68 $34.68 0.53 0.53 $246 $246 Thefollowingtablesummarizesinformationregardingstockoptionexercises: Proceedsfromstockoptionsexercised Intrinsicvalueofstockoptionsexercised Taxbenefitfromexercises Year Ended December 31, 2014 $ 631 $1,033 $ 193 2015 $ 182 $1,057 $ 54 2016 $118 $290 $ 94 Therewere365,832,317,961and247,993anti-dilutivestockoptionsexcludedfromthecalculationofdilutednet incomepercommonsharefortheyearsendedDecember31,2014,2015and2016,respectively. STOCK-BASEDCOMPENSATIONEXPENSE AsofDecember31,2016,therewere437,971sharessubjecttooutstandingawardsunderthe2011Incentive Plan,and259,969sharessubjecttooutstandingawardsunderthe2007IncentivePlanandthe2002StockPlan. 2016 Annual Report 171 FortheyearsendedDecember31,2014,2015and2016,theCompanyrecognized$5,369,000,$5,912,000and $5,211,000instock-basedcompensationexpense,andrecognizedatotalincometaxbenefitof$2,022,000, $2,467,000and$2,064,000,respectively. Instructionalcostsandservices Sellingandpromotional Generalandadministrative Totalstock-basedcompensationexpense REPURCHASE Year Ended December 31, 2014 $1,274 568 3,527 $5,369 2015 $1,598 684 3,630 $5,912 2016 $1,497 672 3,042 $5,211 DuringtheyearendedDecember31,2014,theCompanyrepurchasedsharesoftheCompany’scommonstock, parvalue$0.01pershare.ThechartbelowprovidesdetailastotheCompany’srepurchasesduringtheperiod. Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs January1,2014 January20,2014 January1,2014–January30,2014 February 1,2014–February 28,2014 March 1,2014–March 31,2014 April 1,2014–April 30,2014 May 1,2014–May 31,2014 June 1,2014–June 30,2014 June 13,2014 July 1,2014–September 31,2014 October 1,2014–October 31,2014 — — — — 40,000 185,000 139,568 51,760 — — — $ — $ — $ — $ — $35.26 $34.60 $35.11 $34.95 $ — $ — $ — — — — — 40,000 185,000 139,568 51,760 — — — Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(2)(3) — $ 9,417,721 147,284 147,284 147,284 107,284 14,784 — — — — 9,417,721 9,417,721 9,417,721 9,417,721 6,217,221 1,836,055 27,043 15,027,043 15,027,043 114,634 15,027,043 November 1,2014– November 30,2014 December1,2014– December 31,2014 Total 30,000 $35.48 30,000 84,634 15,027,043 84,634 530,962 $34.09 $34.78 84,634 530,962 — — 15,027,043 $15,027,043 172 AmericanPublicEducation,Inc. DuringtheyearendedDecember31,2015,theCompanyrepurchasedsharesoftheCompany’scommonstock, parvalue$0.01pershare.ThechartbelowprovidesdetailastotheCompany’srepurchasesduringtheperiod. Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs January1,2015 January1,2015–January31,2015 February 1,2015–February 28,2015 March 1,2015–March 31,2015 April 1,2015–April 30,2015 May 1,2015–May 31,2015 June 1,2015–June 30,2015 June 30,2015 July 1,2015–July 31,2015 August 1,2015–August 31,2015 September 1,2015– September 30,2015 October 1,2015–October 31,2015 November 1,2015– November 30,2015 December1,2015– December 31,2015 Total — — — 100,000 203,820 200,000 160,000 — — — 129,849 211,040 $ — $ — $ — $31.69 $30.84 $25.59 $24.93 $ — $ — $ — $23.15 $23.19 — — — 100,000 203,820 200,000 160,000 — — — 129,849 211,040 199,391 $22.11 199,391 118,746 1,322,846 $22.39 $25.34 118,746 1,322,846 Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(2)(3) — $15,027,043 116,910 116,910 66,910 — — — — — — — — — — — 15,027,043 15,027,043 13,442,543 9,220,841 4,102,131 114,029 15,114,029 15,114,029 15,114,029 12,107,835 7,214,395 2,806,575 148,008 $ 148,008 2016 Annual Report 173 DuringtheyearendedDecember31,2016,theCompanydidnotrepurchasesharesoftheCompany’scommon stock,parvalue$0.01pershare.Thechartbelowprovidesdetailastothemaximumnumberofsharesthatmay yetbepurchasedundertheexistingplans. Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs January1,2016 January1,2016–January31,2016 February1,2016–February29,2016 March1,2016–March31,2016 April1,2016–April30,2016 May1,2016–May31,2016 June1,2016–June30,2016 July1,2016–July31,2016 August1,2016–August31,2016 September1,2016– September30,2016 October1,2016–October31,2016 November1,2016– November30,2016 December1,2016– December31,2016 Total — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(2)(3) — $148,008 315,231 315,231 315,231 316,935 316,935 330,816 336,125 336,125 336,125 336,434 148,008 148,008 148,008 148,008 148,008 148,008 148,008 148,008 148,008 148,008 336,434 148,008 336,434 336,434 148,008 $148,008 1. OnDecember9,2011,theCompany’sBoardofDirectorsapprovedastockrepurchaseprogramforourcommonstock,under whichtheCompanymayannuallypurchaseuptothecumulativenumberofsharesissuedordeemedissuedinthatyear undertheCompany’sequityincentiveandstockpurchaseplans.Repurchasesmaybemadefromtimetotimeintheopen marketatprevailingmarketpricesorinprivatelynegotiatedtransactionsbasedonbusinessandmarketconditions.The stockrepurchaseprogrammaybesuspendedordiscontinuedatanytime,andisfundedusingtheCompany’savailablecash. 2. OnMay14,2012,theCompany’sBoardofDirectorsauthorizedaprogramtorepurchaseupto$20millionofsharesofthe Company’scommonstock.OneachofMarch14,2013,June13,2014,andJune12,2015theCompany’sBoardofDirectors increasedtheauthorizationbyanadditional$15millionofshares,foracumulativeincreaseof$45millionofsharesanda totalauthorizationof$65millionofshares.Subjecttomarketconditions,applicablelegalrequirementsandotherfactors, therepurchasesmaybemadefromtimetotimeintheopenmarketorprivatelynegotiatedtransactions.Theauthorization doesnotobligatetheCompanytoacquireanyshares,andpurchasesmaybecommencedorsuspendedatanytimebased onmarketconditionsandotherfactorsastheCompanydeemsappropriate. 3. TheCompanywasdeemedtohaverepurchased56,272and49,512sharesofcommonstockforfeitedbyemployeestosat- isfyminimumtax-withholdingrequirementsinconnectionwiththevestingofrestrictedstockgrantsduringthe12months endedDecember31,2015and2016,respectively.Duringthe12monthsendedDecember31,2014,theCompanywas deemedtohaverepurchased30,973sharesofcommonstockforfeitedbyemployeestosatisfyminimumtax-withholding requirementsinconnectionwiththevestingofrestrictedstockgrantsandtocovertheexerciseandminimumtax-withhold- ingrequirementsofexpiringstockoptions.Theserepurchaseswerenotpartofthestockrepurchaseprogramauthorizedby theCompany’sBoardofDirectors. 174 AmericanPublicEducation,Inc. DuringtheyearsendedDecember31,2014and2015,theCompanyrepurchasedandretired530,962,and 1,322,846,sharesofcommonstock,respectively.Nosharesofcommonstockwererepurchasedandretiredin 2016. NOTE 12. CONTINGENCIES FromtimetotimetheCompanymaybeinvolvedinlitigationinthenormalcourseofitsbusiness.TheCompany isnotcurrentlysubjecttoanypendingmateriallegalproceedings. NOTE 13. CONCENTRATION APUSstudentsutilizevariouspaymentsourcesandprogramstofinancetuition.Theseprogramsincludefunds fromDoDtuitionassistanceprograms,VAeducationbenefitprograms,andfederalstudentaidfromTitleIV programs,aswellascashandothersources.Reductionsin,orchangesto,DoDtuitionassistance,VAeducation benefits,TitleIVprogramsandotherpaymentsourcescouldhaveasignificantimpactontheCompany’soper - ations.AsofDecember31,2016,approximately54%ofAPUSstudentsself-reportedthattheyservedinthemil - itaryonactivedutyatthetimeofinitialenrollment.Activedutymilitarystudentsgenerallytakefewercourses peryearonaveragethannon-militarystudents. AsummaryofAPEISegmentrevenuederivedfromstudentsbyprimaryfundingsourcefortheyearsended December31,2014,2015and2016,isasfollows: Title IVprograms DoDtuitionassistanceprograms VAeducationbenefits Cashandothersources 2014 36% 35% 18% 11% Year Ended December 31, 2015 32% 35% 21% 12% 2016 29% 36% 22% 13% AsofDecember31,2016,approximately84%oftheHCONSegment’srevenuewasderivedfromstudentswho receivedfederalstudentaidandapproximately2.5%oftheHCONSegment’srevenuewasderivedfromstu - dentswhoreceivedveteran’seducationbenefits. AreductioninorchangetoanyoftheseprogramscouldhaveasignificantimpactontheCompany’soperations andfinancialcondition. NOTE 14. SEGMENT INFORMATION TheCompanyhastwooperatingsegmentsthataremanagedinthefollowingreportablesegments: • •AmericanPublicEducationSegment,orAPEISegment,and • •HondrosCollegeofNursingSegment,orHCONSegment. InaccordancewithFASBASCTopic280,SegmentReporting,thechiefoperatingdecision-makerhasbeenidenti - fiedastheChiefExecutiveOfficer.TheChiefExecutiveOfficerreviewsoperatingresultstomakedecisionsabout allocatingresourcesandassessingperformanceforAPEIandHCON. 2016 Annual Report 175 Asummaryoffinancialinformationbyreportablesegmentisasfollows(inthousands): Revenue AmericanPublicEducationSegment HondrosCollegeofNursingSegment Total Revenue Depreciation and Amortization AmericanPublicEducationSegment HondrosCollegeofNursingSegment Total Depreciation and Amortization Income from continuing operations before interest income and income taxes AmericanPublicEducationSegment HondrosCollegeofNursingSegment Total income from continuing operations Year Ended December 31, 2014 2015 2016 $319,879 30,141 $350,020 $ 14,859 1,262 $ 16,121 $297,439 30,471 $327,910 $ 19,337 1,183 $ 20,520 $283,941 29,198 $313,139 $ 18,029 1,355 $ 19,384 $ 62,499 3,333 $ 48,967 3,314 $ 41,916 (3,640) before interest income and income taxes $ 65,832 $ 52,281 $ 38,276 Interest Income, Net AmericanPublicEducationSegment $ 361 $ 115 $ 116 HondrosCollegeofNursingSegment 0 0 — Total Interest Income, Net Income Tax Expense AmericanPublicEducationSegment HondrosCollegeofNursingSegment Total Income Tax Expense Capital Expenditures AmericanPublicEducationSegment HondrosCollegeofNursingSegment Total Capital Expenditures $ 361 $ 115 $ 116 $ 23,861 1,289 $ 25,150 $ 24,273 323 $ 24,596 $ 18,788 1,284 $ 20,072 $ 24,541 1,461 $ 26,002 $ 16,322 (1,382) $ 14,940 $ 12,912 914 $ 13,826 AsummaryoftheCompany’sconsolidatedassetsbyreportablesegmentisasfollows(inthousands): Assets AmericanPublicEducationSegment HondrosCollegeofNursingSegment Total Assets NOTE 15. SUBSEQUENT EVENTS As of December 31, 2015 2016 $245,649 53,778 $299,427 $ 271,436 49,276 $320,712 OnFebruary24,2017,ACICSnotifiedHCONofitsintentiontoissueashow-causedirectiveonHCON’sPractical NursingprogramattheCleveland,Ohio,campusbecausetheplacementratesforthePracticalNursingprogram atthislocationwerebetween50-59.9%fortwoconsecutiveyears.Atthistime,theCompanyisunabletopredict theimpactofthisdevelopmentandpossibleoutcomesonitsenrollmentsandresultsofoperations. 176 AmericanPublicEducation,Inc. NOTE 16. QUARTERLY FINANCIAL SUMMARY (UNAUDITED) Thefollowingunauditedconsolidatedinterimfinancialinformationpresentedshouldbereadinconjunction withotherinformationincludedintheCompany’sconsolidatedfinancialstatements.Intheopinionofmanage - ment,thefollowingunauditedconsolidatedfinancialinformationreflectsalladjustmentsnecessaryforthefair presentationoftheresultsofinterimperiods.Historicalresultsarenotnecessarilyindicativeoftheresultsof operationstobeexpectedforfutureperiods.Thefollowingtablessetforthselectedunauditedquarterlyfinan - cialinformationforeachoftheCompany’slasteightquarters: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (in thousands, except per share data) Revenue Incomefromcontinuingoperations Netincome Netincomepercommonshare: Basic Diluted Revenue Incomebeforeincometaxes Netincome Netincomepercommonshare: Basic Diluted $83,966 16,007 10,340 $ 0.64 $ 0.64 $85,444 14,481 8,793 $ 0.51 $ 0.51 $76,745 10,697 6,596 $ 0.41 $ 0.41 $80,263 11,607 7,073 $ 0.42 $ 0.42 2016 2015 $73,803 429 326 $ 0.02 $ 0.02 $76,291 10,549 6,757 $ 0.41 $$ 0.41 $78,625 11,259 6,893 $ 0.43 $ 0.42 $85,912 15,759 9,791 $ 0.61 $ 0.60 Item9. ChangesinandDisagreementswithAccountantson AccountingandFinancialDisclosure None. Item9A. ControlsandProcedures EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Wehavecarriedoutanevaluation,underthesupervisionandwiththeparticipationofourmanagement, includingourprincipalexecutiveofficerandprincipalfinancialofficer,oftheeffectivenessofourdisclosure controlsandprocedures(asdefinedinRules13a-15(e)and15d-15(e)undertheSecuritiesExchangeActof1934, asamended,ortheSecuritiesExchangeAct),asofDecember31,2016.Baseduponthatevaluation,ourprincipal executiveofficerandprincipalfinancialofficerconcludedthat,asoftheendofthatperiod,ourdisclosurecon - trolsandprocedureswereeffective. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. Therewasnochangeinourinternalcontroloverfinancialreportingidentifiedinconnectionwiththeevalua - tionrequiredbyRules13a-15(d)and15d-15(d)oftheExchangeActthatoccurredduringthefourthquarterof 2016,thathasmateriallyaffectedorisreasonablylikelytomateriallyaffectourinternalcontroloverfinancial reporting. 2016 Annual Report 177 Management’sAnnualReportonInternalControloverFinancial Reporting Ourmanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancial reportingfortheCompany.InternalcontroloverfinancialreportingisdefinedinRule13a-15(f)or15d-15(f) promulgatedundertheSecuritiesExchangeActof1934,asamended,asaprocessdesignedby,orunderthe supervisionof,theCompany’sPrincipalExecutiveandPrincipalFinancialOfficersandeffectedbytheCompany’s BoardofDirectors,managementandotherpersonnel,toprovidereasonableassuranceregardingthereliability offinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgen - erallyacceptedaccountingprinciplesandincludesthosepoliciesandproceduresthat: • pertaintothemaintenanceofrecordsthatinreasonabledetailaccuratelyandfairlyreflectthetransactions anddispositionsoftheassetsoftheCompany; • providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancial statementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpenditures ofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthe Company;and • providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,useor dispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements. Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstate - ments.Projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmay becomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesor proceduresmaydeteriorate. UnderthesupervisionandwiththeparticipationofourPrincipalExecutiveOfficerandPrincipalFinancialOfficer, ourmanagementassessedtheeffectivenessofourinternalcontroloverfinancialreportingasofDecember31, 2016.Inmakingthisassessment,ourmanagementusedthecriteriaestablishedinInternalControl-Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissionin2013. Basedonitsassessment,managementconcludedthat,asofDecember31,2016,ourinternalcontroloverfinan - cialreportingiseffectivebasedonthosecriteria.Managementreviewedtheresultsofitsassessmentwiththe AuditCommitteeofourBoardofDirectors. Ourindependentauditors,RSMUSLLP,whoauditedandreportedontheConsolidatedFinancialStatementsof theCompanyincludedinthisAnnualReport,havealsoauditedtheeffectivenessoftheCompany’sinternalcon - troloverfinancialreportingasofDecember31,2016,asstatedinitsreportthatappearsbelow. 178 AmericanPublicEducation,Inc. ReportofIndependentRegisteredPublicAccountingFirm TOTHEBOARDOFDIRECTORSANDSTOCKHOLDERS AMERICANPUBLICEDUCATION,INC. WehaveauditedAmericanPublicEducation,Inc.andSubsidiaries’internalcontroloverfinancialreportingasof December31,2016,basedoncriteriaestablishedinInternalControl-IntegratedFrameworkissuedbytheCommittee ofSponsoringOrganizationsoftheTreadwayCommissionin2013.AmericanPublicEducation,Inc.andSubsidiaries’ managementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessment oftheeffectivenessofinternalcontroloverfinancialreportingincludedintheaccompanyingManagement’sAnnual ReportonInternalControloverFinancialReporting.Ourresponsibilityistoexpressanopiniononthecompany’s internalcontroloverfinancialreportingbasedonouraudit. WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(United States).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhether effectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtain- inganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists, andtestingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk.Our auditalsoincludedperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelieve thatourauditprovidesareasonablebasisforouropinion. Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregard- ingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccor- dancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludes thosepoliciesandproceduresthat(a)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyand fairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(b)providereasonableassurancethat transactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerally acceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccor- dancewithauthorizationsofmanagementanddirectorsofthecompany;and(c)providereasonableassurance regardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthat couldhaveamaterialeffectonthefinancialstatements. Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements. Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecome inadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmay deteriorate. Inouropinion,AmericanPublicEducation,Inc.andSubsidiariesmaintained,inallmaterialrespects,effectiveinternal controloverfinancialreportingasofDecember31,2016,basedoncriteriaestablishedinInternalControl-Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissionin2013. Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(United States),theconsolidatedbalancesheetsofAmericanPublicEducation,Inc.anditsSubsidiariesasofDecember31, 2015and2016,andtherelatedconsolidatedstatementsofincome,stockholders’equity,andcashflowsforeachof thethreeyearsintheperiodendedDecember31,2016,andourreportdatedMarch1,2017expressedanunquali- fiedopinion. /s/RSMUSLLP Richmond,VA March1,2017 2016 Annual Report 179 Item9B. OtherInformation None. 180 AmericanPublicEducation,Inc. PARTIII Item10. Directors,ExecutiveOfficers,andCorporateGovernance EXECUTIVE OFFICERS PursuanttoGeneralInstructionG(3)ofForm10-K,informationregardingourexecutiveofficersissetforthin Item1ofPartIofthisAnnualReportunderthecaption“ExecutiveOfficersoftheRegistrant.” CODE OF ETHICS Aspartofoursystemofcorporategovernance,ourBoardofDirectorshasadoptedaCodeofBusinessConduct andEthicsthatisapplicabletoallofouremployees,officersanddirectorsandalsocontainsprovisionsonly applicabletoourprincipalexecutiveofficerandseniorfinancialofficers.OurCodeofBusinessConductand EthicsisavailableontheGovernancepageofourwebsiteathttp://www.americanpubliceducation.com.We intendtosatisfyanydisclosurerequirementunderItem5.05ofForm8-Kregardinganamendmentto,orwaiver from,aprovisionoftheCodeofBusinessConductandEthicsthatappliestoourprincipalexecutiveofficeror seniorfinancialofficers,bypostingsuchinformationonourwebsiteattheaddressabove.Theinformationon ourwebsiteisexpresslynotincorporatedbyreferenceinthisAnnualReportonForm10-K. ADDITIONAL INFORMATION Theadditionalinformationregardingdirectors,executiveofficers,andcorporategovernancerequiredby thisItemisherebyincorporatedbyreferencefromtheinformationcontainedunderthecaptions“Corporate GovernanceStandardsandDirectorIndependence,”“BoardCommitteesandTheirFunctions,”“Director NominationsandCommunicationwithDirectors,”“ProposalNo.1-ElectionofDirectors”and“Section16(a) BeneficialOwnershipReportingCompliance”intheCompany’sProxyStatement,whichwillbefiledwiththeSEC nolaterthan120daysfollowingDecember31,2016,withrespecttoour2017AnnualMeetingofStockholders. Item11. ExecutiveCompensation TheinformationrequiredbythisItemisherebyincorporatedbyreferencefromtheinformationcontained underthecaptions“DirectorCompensation,”“ExecutiveCompensation,”“CompensationCommitteeReport”and “CompensationCommitteeInterlocksandInsiderParticipation”intheCompany’sProxyStatement,whichwill befiledwiththeSecuritiesandExchangeCommissionnolaterthan120daysfollowingDecember31,2016,with respecttoour2017AnnualMeetingofStockholders. Item12. SecurityOwnershipofCertainBeneficialOwnersand ManagementandRelatedStockholderMatters TheinformationrequiredbythisItemisherebyincorporatedbyreferencefromtheinformationcontained underthecaptions“BeneficialOwnershipofCommonStock”and“EquityCompensationPlanInformation”inthe Company’sProxyStatement,whichwillbefiledwiththeSecuritiesandExchangeCommissionnolaterthan120 daysfollowingDecember31,2016,withrespecttoour2017AnnualMeetingofStockholders. 2016 Annual Report 181 Item13. CertainRelationshipsandRelatedPartyTransactions, andDirectorIndependence TheinformationrequiredbythisItemisherebyincorporatedbyreferencefromtheinformationcontained underthecaptions“CertainRelationshipsandRelatedPersonsTransactions”and“BoardIndependenceand LeadershipStructure”intheCompany’sProxyStatement,whichwillbefiledwiththeSecuritiesandExchange Commissionnolaterthan120daysfollowingDecember31,2016,withrespecttoour2017AnnualMeetingof Stockholders. Item14.PrincipalAccountantFeesandServices TheinformationrequiredbythisItemisherebyincorporatedbyreferencefromtheinformationcontained underthecaptions“PrincipalAccountantFeesandServices”and“AuditCommittee’sPre-ApprovalPoliciesand Procedures”intheCompany’sProxyStatement,whichwillbefiledwiththeSecuritiesandExchangeCommission nolaterthan120daysfollowingDecember31,2016withrespecttoour2017AnnualMeetingofStockholders. PARTIV Item15. ExhibitsandFinancialStatementSchedules (a) ListofdocumentsfiledaspartofthisAnnualReport: (1) TherequiredfinancialstatementsareincludedinItem8ofPartIIofthisAnnualReport. (2) TherequiredfinancialstatementschedulesareincludedinItem8ofPartIIofthisAnnualReport. (3) AcompletelistingofexhibitsisincludedintheIndextoExhibits. (b) AcompletelistingofexhibitsisincludedintheIndextoExhibits. (c) ScheduleII:ValuationandQualifyingAccounts. Otherschedulesareomittedbecausetheyarenotrequired. 182 AmericanPublicEducation,Inc. American Pubic Education Inc. Schedule II Valuation and Qualifying Accounts (in thousands) Year ended December 31, 2016: AmericanPublicEducationSegment HondrosCollegeofNursingSegment Allowanceforreceivables Year ended December 31, 2015: AmericanPublicEducationSegment HondrosCollegeofNursingSegment Allowanceforreceivables Year ended December 31, 2014: AmericanPublicEducationSegment HondrosCollegeofNursingSegment Allowanceforreceivables Balance at Beginning of Period Additions/ (Reductions) Write-Offs Balance at End of Period $10,286 2,726 $13,012 $ 8,461 2,238 10,699 $11,452 1,723 $13,175 $ 4,861 1,898 $ 6,759 $(10,435) (1,259) $(11,694) $11,203 $ (9,378) 1,511 12,714 $17,480 1,344 $18,824 (1,023) (10,401) $ (20,471) (829) $(21,300) $ 4,712 3,365 $ 8,077 $10,286 2,726 13,012 $ 8,461 2,238 $10,699 2016 Annual Report 183 Signatures PursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthas dulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized. Dated:March1,2017 American Public Education, Inc. By: /s/Dr.WallaceE.Boston Name: Dr.WallaceE.Boston Title: PresidentandChiefExecutiveOfficer PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisReporthasbeensignedbelowbythe followingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedateindicated. Name Date Title /s/Dr.WallaceE.Boston March1,2017 Dr.WallaceE.Boston President,ChiefExecutiveOfficerandDirector (PrincipalExecutiveOfficer) /s/RichardW.Sunderland,Jr. March1,2017 RichardW.Sunderland,Jr. ExecutiveVicePresidentandChiefFinancial Officer (PrincipalFinancialOfficerand PrincipalAccountingOfficer) /s/BarbaraG.Fast BarbaraG.Fast /s/EricC.Andersen EricC.Andersen /s/JeanC.Halle JeanC.Halle /s/BarbaraKurshan BarbaraKurshan /s/TimothyJ.Landon TimothyJ.Landon /s/WestleyMoore WestleyMoore March1,2017 ChairpersonoftheBoardofDirectors March1,2017 Director March1,2017 Director March1,2017 Director March1,2017 Director March1,2017 Director /s/WilliamG.Robinson,Jr. March1,2017 Director WilliamG.Robinson,Jr. 184 AmericanPublicEducation,Inc. INDEXTOEXHIBITS Exhibit No. Exhibit Description 3.1 3.2 4.1 10.1+ 10.2+ 10.3+ 10.4+ 10.5+ 10.6+ 10.7+ 10.8+ 10.9+ FifthAmendedandRestatedCertificateofIncorporationoftheCompany(1) FourthAmendedandRestatedBylawsoftheCompany(10) FormofcertificaterepresentingtheCommonStock,$0.01parvaluepershare,oftheCompany(2) AmericanPublicEducation,Inc.2002StockIncentivePlan,asamended(2) AmericanPublicEducation,Inc.2007OmnibusIncentivePlan(2) FormofIndemnificationAgreementwithdirectorsandexecutiveofficers(2) AmendedandRestatedEmploymentAgreementdatedMay31,2016,byandbetweenAmerican PublicUniversitySystem,Inc.,AmericanPublicEducation,Inc.andWallaceE.Boston,Jr.(3) AmendedandRestatedEmploymentAgreementdatedApril28,2014,byandamongAmerican PublicUniversitySystem,Inc.,AmericanPublicEducation,Inc.andHarryT.Wilkins(3) LetterAgreementdatedNovember6,2015,byandbetween AmericanPublicEducation,Inc.andHarryT.Wilkins(4) EmploymentAgreementdatedAugust1,2014byandamongAmericanPublic UniversitySystem,Inc.,AmericanPublicEducation,Inc.andCarolGilbert(5) LetterAgreementdatedDecember15,2016byandamong AmericanPublicEducation,Inc.andCarolGilbert(10) AmendedandRestatedExecutiveEmploymentAgreementdatedMay31,2016,byandamong AmericanPublicUniversitySystem,Inc.,AmericanPublicEducation,Inc.andKaranPowell(5) 10.10+ EmploymentAgreementdatedAugust1,2014,byandamongAmericanPublicUniversity System,Inc.,AmericanPublicEducation,Inc.andRichardW.Sunderland,Jr.(5) 10.11+ AmericanPublicEducation,Inc.EmployeeStockPurchasePlan(2) 10.12+ AmendmenttotheAmericanPublicEducation,Inc.EmployeeStockPurchasePlan(6) 10.13+ AmericanPublicEducation,Inc.2011OmnibusIncentivePlan(7) 10.14+ APUSNon-QualifiedPlan(8) 10.15 21.1 23.1 31.1 31.2 32.1 32.2 StockPurchaseAgreement,datedAugust28,2013,byandamong,theCompanyNationalEducation Seminars,Inc.,theSellingStockholders,theFoundersandtheStockholderRepresentative(9) ListofSubsidiaries(filedherewith) ConsentofRSMUSLLP(filedherewith) CertificationofChiefExecutiveofficerpursuanttoRule13a-14(a)undertheSecuritiesExchangeAct of1934asadoptedpursuanttoSection302oftheSarbanes-OxleyActof2002(filedherewith) CertificationofChiefFinancialOfficerpursuanttoRule13a-14(a)undertheSecuritiesExchangeAct of1934asadoptedpursuanttoSection302oftheSarbanes-OxleyActof2002(filedherewith) CertificationofChiefExecutiveOfficerpursuantto18U.S.C.Section1350asadopted pursuanttoSection906oftheSarbanes-OxleyActof2002(filedherewith) CertificationofChiefFinancialOfficerpursuantto18U.S.C.Section1350asadopted pursuanttoSection906oftheSarbanes-OxleyActof2002(filedherewith) 2016 Annual Report 185 Exhibit No. Exhibit Description EX-101.INS XBRLInstanceDocument EX-101.SCH XBRLTaxonomyExtensionSchemaDocument EX-101.CAL XBRLTaxonomyExtensionCalculationLinkbaseDocument EX-101.DEF XBRLTaxonomyExtensionDefinitionLinkbaseDocument EX-101.LAB XBRLTaxonomyExtensionLabelLinkbaseDocument EX-101.PRE XBRLTaxonomyExtensionPresentationLinkbaseDocument + Managementcontractorcompensatoryplanorarrangement. (1) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sCurrentReportonForm8-K(FileNo.001-33810),filedwiththe CommissiononNovember14,2007. (2) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sRegistrationStatementonFormS-1(FileNo.333-145185). (3) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sCurrentReportonForm8-K(FileNo.001-33810),filedwiththe CommissiononMay2,2014. (4) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sCurrentReportonForm8-K(FileNo.001-33810),filedwiththe CommissiononNovember6,2015. (5) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sQuarterlyReportonForm10-QforthequarterlyperiodendedJune 30,2014(FileNo.001-33810),filedwiththeCommissiononAugust5,2014. (6) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sCurrentReportonForm8-K(FileNo.001-33810),filedwiththe CommissiononJune17,2014. (7) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sCurrentReportonForm8-K(FileNo.001-33810),filedwiththe CommissiononMay10,2011. (8) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sAnnualReportonForm10-KfortheyearendedDecember31,2013 (FileNo.001-33810),filedwiththeCommissiononFebruary27,2014. (9) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sQuarterlyReportonForm10-Qforthequarterlyperiodended September30,2013(FileNo.001-33810),filedwiththeCommissiononNovember5,2013. (10) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sCurrentReportonForm8-K(FileNo.001-33810),filedwiththe CommissiononDecember15,2016. (11) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sCurrentReportonForm8-K(FileNo.001-33810),filedwiththe CommissiononJune1,2016. (12) IncorporatedbyreferencetoexhibitfiledwithRegistrant’sQuarterlyReportonForm10-QforthequarterlyperiodendedJune 30,2016(FileNo.001-33810),filedwiththeCommissiononAugust9,2016. 186 AmericanPublicEducation,Inc. Exhibit21.1 LISTOFSUBSIDIARIES Entity AmericanPublicUniversitySystem,Inc. NationalEducationSeminars,Inc. State of Organization WestVirginia Ohio 2016 Annual Report 187 Exhibit23.1 CONSENTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM WeconsenttotheincorporationbyreferenceinRegistrationStatements(333-197086,333-174105,333-151789, and333-150454)onFormS-8ofAmericanPublicEducation,Inc.ofourreportsdatedMarch1,2017,relatingto ourauditsoftheconsolidatedfinancialstatementsandthefinancialstatementscheduleandinternalcontrol overfinancialreporting,whichappearinthisAnnualReportonForm10-KofAmericanPublicEducation,Inc.and SubsidiariesfortheyearendedDecember31,2016. /s/RSMUSLLP Richmond,VA March1,2017 188 AmericanPublicEducation,Inc. Exhibit31.1 CERTIFICATIONOFCHIEFEXECUTIVEOFFICERPURSUANTTORULE13A-14(A)/15D-14(A) I,WallaceE.Boston,certifythat: 1. IhavereviewedthisannualreportonForm10-KofAmericanPublicEducation,Inc.; 2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromitto stateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuch statementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport; 3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport, fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsofthereg - istrantasof,andfor,theperiodspresentedinthisreport; 4. Theregistrant’sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosure controlsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontrolover financialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave: (a) Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobe designedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitscon- solidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhich thisreportisbeingprepared; (b) Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreport- ingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliabilityoffinan- cialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerally acceptedaccountingprinciples; (c) Evaluatedtheeffectivenessoftheregistrant’sdisclosurecontrolsandproceduresandpresentedinthis reportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendofthe periodcoveredbythisreportbasedonsuchevaluation;and (d) Disclosedinthisreportanychangeintheregistrant’sinternalcontroloverfinancialreportingthatoccurred duringtheregistrant’smostrecentfiscalquarter(theregistrant’sfourthfiscalquarterinthecaseofanannual report)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant’sinternalcontrolover financialreporting;and 5. Theregistrant’sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinter - nalcontroloverfinancialreporting,totheregistrant’sauditorsandtheauditcommitteeoftheregistrant’s boardofdirectors(orpersonsperformingtheequivalentfunctions): (a) Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinan- cialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant’sabilitytorecord,process,summarize andreportfinancialinformation;and (b) Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantrole intheregistrant’sinternalcontroloverfinancialreporting. Date:March1,2017 By: /s/Dr.WallaceE.Boston Name: Dr.WallaceE.Boston Title: PresidentandChiefExecutiveOfficer 2016 Annual Report 189 Exhibit31.2 CERTIFICATIONOFCHIEFFINANCIALOFFICERPURSUANTTORULE13A-14(A)/15D-14(A) I,RichardW.Sunderland,Jr.,certifythat: 1. IhavereviewedthisannualreportonForm10-KofAmericanPublicEducation,Inc.; 2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromitto stateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuch statementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport; 3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport, fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsofthereg - istrantasof,andfor,theperiodspresentedinthisreport; 4. Theregistrant’sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosure controlsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontrolover financialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave: (a) Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedures tobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includ - ingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringthe periodinwhichthisreportisbeingprepared; (b) Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancial reportingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliability offinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewith generallyacceptedaccountingprinciples; (c) Evaluatedtheeffectivenessoftheregistrant’sdisclosurecontrolsandproceduresandpresentedinthis reportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendof theperiodcoveredbythisreportbasedonsuchevaluation;and (d) Disclosedinthisreportanychangeintheregistrant’sinternalcontroloverfinancialreportingthat occurredduringtheregistrant’smostrecentfiscalquarter(theregistrant’sfourthfiscalquarterinthecase ofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant’s internalcontroloverfinancialreporting;and 5. Theregistrant’sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinter - nalcontroloverfinancialreporting,totheregistrant’sauditorsandtheauditcommitteeoftheregistrant’s boardofdirectors(orpersonsperformingtheequivalentfunctions): (a) Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontrolover financialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant’sabilitytorecord,process, summarizeandreportfinancialinformation;and (b) Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignifi - cantroleintheregistrant’sinternalcontroloverfinancialreporting. Date:March1,2017 By: /s/RichardW.Sunderland,Jr. Name: RichardW.Sunderland,Jr Title: ExecutiveVicePresidentandChiefFinancialOfficer 190 AmericanPublicEducation,Inc. Exhibit32.1 CERTIFICATIONOFCHIEFEXECUTIVEOFFICERPURSUANTTO18U.S.C.SECTION1350,AS ADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002 Theundersigned,theChiefExecutiveOfficerofAmericanPublicEducation,Inc.(“theCompany”),herebycertifies that,tohisknowledge,onthedatehereof: (a) TheannualreportonForm10-KoftheCompanyfortheperiodendedDecember31,2016filedonthedatehereof withtheSecuritiesandExchangeCommission(“theReport”)fullycomplieswiththerequirementsofSection 13(a)or15(d)oftheSecuritiesExchangeActof1934;and (b) InformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionand resultsofoperationsoftheCompany. Date:March1,2017 By: /s/Dr.WallaceE.Boston Name: Dr.WallaceE.Boston Title: PresidentandChiefExecutiveOfficer AsignedoriginalofthiswrittenstatementrequiredbySection906,orotherdocumentauthenticating,acknowl - edging,orotherwiseadoptingthesignaturethatappearsintypedformwithintheelectronicversionofthis writtenstatementrequiredbySection906,hasbeenprovidedtoAmericanPublicEducation,Inc.andwillbe retainedbytheCompanyandfurnishedtotheSecuritiesandExchangeCommissionoritsstaffuponrequest. 2016 Annual Report 191 Exhibit32.2 CERTIFICATIONOFCHIEFFINANCIALOFFICERPURSUANTTO18U.S.C.SECTION1350,AS ADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002 Theundersigned,theChiefFinancialOfficerofAmericanPublicEducation,Inc.(“theCompany”),herebycertifies that,tohisknowledge,onthedatehereof: (a) TheannualreportonForm10-KoftheCompanyfortheperiodendedDecember31,2016filedonthedate hereofwiththeSecuritiesandExchangeCommission(“theReport”)fullycomplieswiththerequirementsof Section13(a)or15(d)oftheSecuritiesExchangeActof1934;and (b) InformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionand resultsofoperationsoftheCompany. Date:March1,2017 By: /s/RichardW.Sunderland,Jr. Name: RichardW.Sunderland,Jr Title: ExecutiveVicePresidentandChiefFinancialOfficer AsignedoriginalofthiswrittenstatementrequiredbySection906,orotherdocumentauthenticating,acknowl - edging,orotherwiseadoptingthesignaturethatappearsintypedformwithintheelectronicversionofthis writtenstatementrequiredbySection906,hasbeenprovidedtoAmericanPublicEducation,Inc.andwillbe retainedbytheCompanyandfurnishedtotheSecuritiesandExchangeCommissionoritsstaffuponrequest. 192 AmericanPublicEducation,Inc. Thispageintentionallyleftblank. 2016 Annual Report 193 AmericanPublicEducation,Inc. EXECUTIVE LEADERSHIP Dr. Wallace Boston* President and Chief Executive Officer, American Public Education, Inc. AMERICAN PUBLIC UNIVERSITY SYSTEM Michael Harbert Vice President, Alumni Relations Dr. Grady Batchelor Dean, Faculty and Student Success Dr. Jennifer Helm Vice President, Accreditation Richard Sunderland, Jr., CPA* Executive Vice President and Chief Financial Officer Daniel Benjamin Dean, School of Science, Technology, Engineering and Math Daniel Lochner Vice President, Business Planning and Project Management Dr. Karan Powell* President, American Public University System Dr. Patricia Campbell Dean, Graduate Studies, Research and Innovation Dr. Brian Freeland Dean, School of Health Sciences Dr. Grace Glass Dean, School of Arts & Humanities Jeffrey McCafferty Vice President, Strategic Planning Caroline Simpson Vice President, Student Services Karen Vendouern-Srba Vice President, Academic and Instructional Technology Dr. Conrad Lotze Dean, School of Education Resources and School of Education Keith Wellings Vice President, Financial Aid and Compliance Dr. Chad Patrizi Dean, School of Business Dr. Chris Reynolds Dean Academic Outreach and Program Development Dr. Mark Riccardi Dean, School of Security and Global Studies Michelle Newman University Registrar Richard Locher Executive Director, Center for Applied Learning John Aldrich Vice President, Military, Veterans, and Community College Outreach Wendy Anson Vice President, Faculty Human Resources and Administration Dr. David Becher Vice President, Institutional Research Elizabeth LaGuardia Cooper Vice President, Marketing Terry Grant Vice President, Enrollment Management and Student Support FINANCE, INFORMATION TECHNOLOGY AND HUMAN RESOURCES Melissa Frey, CPA Senior Vice President and Controller Tracy Woods Senior Vice President and Chief Information Officer Jessica Jackson Vice President, Human Resources Chris Symanoskie, IRC Vice President, Investor Relations Amy Weber, CPA Vice President, Internal Audit Michael White, CPA Vice President, Budgeting, Tax and Facilities Management HONDROS COLLEGE OF NURSING Tony Mediate Chief Operating Officer & CEO Dr. Jeremy Hoshor-Johnson Chief Administrative Officer and Provost Thomas Beckett* Senior Vice President, General Counsel Amy Bevilacqua Senior Vice President, Chief Innovation Officer Peter Gibbons* Senior Vice President, Special Projects Amy Panzarella, SPHR, SHRM-SCP* Senior Vice President, Human Resources *denotes executive officers for Rule 3b-7 UNIVERSITY LEADERSHIP Dr. Karan Powell President, American Public University System Richard Sunderland, Jr., CPA Executive Vice President and Chief Financial Officer Robert Gay Senior Vice President and Chief Operations Officer Dr. Gwendolyn Hall Senior Vice President and Chief of Staff Dr. Vernon Smith Senior Vice President and Provost 194 AmericanPublicEducation,Inc. Corporate Information APUS Board of Trustees APEI Board of Directors Corporate and Administrative Offices American Public Education, Inc. 111 West Congress Street Charles Town, WV 25414 Phone: (304) 724-3700 Toll Free: (877) 468-6268 Stock Exchange Listing The NASDAQ Global Select Market under the symbol “APEI”. Annual Shareholder Meeting The Annual Meeting of American Public Education shareholders will be held at the Gaylord National Resort & Conference Center, 201 Waterfront Street, National Harbor, Maryland 20745 on May 12, 2017 at 7:30 a.m. Eastern time. Investor Relations Chris Symanoskie, IRC Vice President, Investor Relations American Public Education, Inc. 111 West Congress Street Charles Town, WV 25414 Phone: (703) 334-3880 csymanoskie@apus.edu Accountants RSM US LLP 919 East Main Street, Suite 1800 Richmond, VA, 23219 Phone: (703) 336-6400 Transfer Agent American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 Attn: Shareholder Services Toll Free: (800) 937-5449 Legal Hogan Lovells US LLP William Intner Harbor East 100 International Drive, Suite 2000 Baltimore, MD 21202 Phone: (410) 659-2700 www.hoganlovells.com Online Information Investor Relations www.AmericanPublicEducation.com www.APEI.com Dr. Wallace Boston, Member President and Chief Executive Officer, American Public Education, Inc. Eric C. “Ric” Andersen, Director Partner, Peak Equity Frank Ball, Member Emeritus Independent Consultant Faculty Member, Georgetown University Lieutenant General (USMC Retired) Thomas Conant, Member Former Deputy Commander, United States Pacific Command Dr. Wallace Boston, Director President and Chief Executive Officer, American Public Education, Inc. Major General (Retired) Barbara Fast, Chairperson President and CEO, BGF Enterprises LLC Jean Halle, Director Independent Consultant General (Retired) Alfred Gray, Chairman Emeritus and Member Chairman, Board of Regents, Potomac Institute for Policy Studies Chancellor, Marine Military Academy 29th Commandant of the Marine Corps Dr. Barbara Kurshan, Director Executive Director and Senior Fellow, Academic Innovation, University of Pennsylvania Graduate School of Education Timothy Landon, Director Chief Executive Officer, Aggrego LLC Wes Moore, Director Author, Chairman of Omari Productions William Robinson, Jr., Director Executive Vice President and Chief Human Resources Officer, Sabre Dr. Lucie Lapovsky, Member Principal, Lapovsky Consulting Former President, Mercy College Dr. Katy Marre, Member Professor Emerita Assoc. Vice President, Graduate Studies & Research (Ret.), University of Dayton Major General (Retired) Robert Nabors, Member Executive Advisor, Booz Allen Hamilton Dr. J. D. Polk, Member Senior Medical Officer, National Aeronautics and Space Administration (NASA) Lieutenant General (Retired) Richard Trefry, Member Senior Fellow, Institute of Land Warfare Former Program Manager, The Army Force Management School Dr. Katherine Zatz, Chair Vice President, Allpar LLC Senior Consultant, Tookpack.com Member, Registry of College Presidents 111 WEST CONGRESS STREET‚ CHARLES TOWN‚ WEST VIRGINIA 25414 www.americanpubliceducation.com VISIT OUR SOCIAL COMMUNITIES FOR APUS, AMU & APU www.apus.edu/communities VISIT OUR SOCIAL COMMUNITIES FOR HONDROS COLLEGE OF NURSING facebook.com/HondrosCollegeNursingPrograms twitter.com/HondrosNursing