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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: - 001-33810
AMERICAN PUBLIC EDUCATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 01-0724376
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting
company. See the definition of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |X| Smaller reporting company |_|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The total number of shares of common stock outstanding as of August 1, 2008
was 17,822,182.
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AMERICAN PUBLIC EDUCATION, INC.
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements 3
---------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
--------------------------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
-----------------------------------------------------------------------
Item 4. Controls and Procedures 16
------------------------------------
PART II - OTHER INFORMATION 17
----------------------------
Item 1. Legal Proceedings 17
------------------------------
Item 1A. Risk Factors 17
-----------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities 17
--------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 17
----------------------------------------------------------------
Item 5. Other Information 17
------------------------------
Item 6. Exhibits 17
---------------------
19
SIGNATURES
-----------
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN PUBLIC EDUCATION, INC.
Consolidated Balance Sheets
(In thousands, except per share data)
As of June As of December
30, 31,
2008 2007
------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 34,884 $ 26,951
Accounts receivable, net of
allowance of $501 in 2008 and
$385 in 2007 4,365 4,896
Income tax receivable 2,437 1,089
Prepaid expenses 1,565 1,596
Deferred income taxes 683 309
------------- --------------
Total current assets 43,934 34,841
Property and equipment, net 16,065 13,364
Other assets 1,248 775
------------- --------------
Total assets $ 61,247 $ 48,980
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,600 $ 2,471
Accrued liabilities 5,733 4,323
Deferred revenue and student
deposits 7,979 6,614
------------- --------------
Total current liabilities 15,312 13,408
Deferred income taxes 3,168 2,065
------------- --------------
Total liabilities 18,480 15,473
------------- --------------
Commitments and contingencies (Note
2)
Stockholders' equity:
Preferred stock, $.01 par value;
Authorized shares - 10,000
Common stock, $.01 par value;
Authorized shares - 100,000; 17,820 issued
and
outstanding in 2008 and 17,688
in 2007 178 177
Additional paid-in capital 129,934 128,005
Accumulated deficit (87,345) (94,675)
------------- --------------
Total stockholders' equity: 42,767 33,507
------------- --------------
Total liabilities and
stockholders' equity $ 61,247 $ 48,980
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMERICAN PUBLIC EDUCATION, INC.
Consolidated Statements of Income
(In thousands, except share and per share data)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30,
------------------------------ ------------------------------
2008 2007 2008 2007
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
Revenues $ 24,999 $ 16,173 $ 48,240 $ 30,262
-------------- -------------- -------------- --------------
Costs and
expenses:
Instructional
costs and
services 10,521 6,886 20,433 12,991
Selling and
promotional 2,613 1,449 4,790 2,888
General and
administrative 5,072 3,837 9,875 7,073
Depreciation
and
amortization 1,031 705 1,929 1,323
-------------- -------------- -------------- --------------
Total costs and
expenses 19,237 12,877 37,027 24,275
-------------- -------------- -------------- --------------
Income from
operations before
interest income
and income taxes 5,762 3,296 11,213 5,987
Interest income,
net 196 194 438 338
-------------- -------------- -------------- --------------
Income before
income taxes 5,958 3,490 11,651 6,325
Income tax
expense 2,033 1,454 4,321 2,755
-------------- -------------- -------------- --------------
Net income $ 3,925 $ 2,036 $ 7,330 $ 3,570
============== ============== ============== ==============
Net Income per
common share:
Basic $ 0.22 $ 0.17 $ 0.41 $ 0.30
============== ============== ============== ==============
Diluted $ 0.21 $ 0.17 $ 0.39 $ 0.30
============== ============== ============== ==============
Weighted average
number of common
shares:
Basic 17,806,884 11,998,159 17,771,396 11,931,086
============== ============== ============== ==============
Diluted 18,791,644 12,052,532 18,779,761 11,982,100
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMERICAN PUBLIC EDUCATION, INC.
Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended June 30,
----------------------------------
2008 2007
--------------- ---------------
(Unaudited)
Operating activities
Net income $ 7,330 $ 3,570
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for bad debt 116 302
Depreciation and amortization 1,929 1,323
Stock-based compensation 846 618
Deferred income taxes 729 101
Changes in operating assets and liabilities:
Accounts receivable 415 1,198
Prepaid expenses 31 (175)
Income tax receivable (1,348) 679
Accounts payable and accrued liabilities 539 148
Income tax payable - 574
Deferred revenue and student deposits 1,365 1,569
--------------- ---------------
Net cash provided by operating activities 11,952 9,907
--------------- ---------------
Investing activities
Capital expenditures (4,630) (1,770)
Capitalized program development costs and other assets (473) (304)
--------------- ---------------
Net cash used in investing activities (5,103) (2,074)
--------------- ---------------
Financing activities
Payments on long-term debt - (1,973)
Cash paid for repurchase of common stock - (55)
Cash received from issuance of common stock, net of
issuance costs 452 660
Excess tax benefit from stock based compensation 632 11
--------------- ---------------
Net cash provided by (used in) financing activities 1,084 (1,357)
--------------- ---------------
Net increase in cash and cash equivalents 7,933 6,476
Cash and cash equivalents at beginning of period 26,951 11,678
--------------- ---------------
Cash and cash equivalents at end of period $ 34,884 $ 18,154
=============== ===============
Supplemental disclosure of cash flow information
Interest paid $ - $ 56
=============== ===============
Income taxes paid $ 4,639 $ 1,389
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
5
AMERICAN PUBLIC EDUCATION, INC.
Notes to Consolidated Financial Statements
1. Nature of the Business
American Public Education, Inc. ("APEI") together with its subsidiaries
(the "Company") is a provider of exclusively online postsecondary education
directed at the needs of the military and public service communities that
operates in one reportable segment. APEI has three subsidiaries, including the
American Public University System, Inc. (the "University System"), a West
Virginia corporation, which operates through two universities, American Military
University and American Public University.
The University System achieved regional accreditation in May 2006 with
the Higher Learning Commission of the North Central Association of Colleges and
Schools and became eligible for federal student aid programs under Title IV for
classes beginning in November 2006.
On August 7, 2007, APEI filed a Registration Statement on Form S-1
(Registration No. 333-145185) for its initial public offering, which was
completed on November 14, 2007.
On January 25, 2008, APEI filed a Registration Statement on Form S-1
(Registration No. 333-148851) for a public offering, which was completed on
February 19, 2008. In the offering 3,744,500 shares were sold, consisting of
25,000 shares sold by the Company and 3,719,500 shares sold by certain
stockholders of the Company. Total net proceeds to the Company were $167,000,
after deducting underwriting discounts and commissions, and offering expenses
2. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of
the Company have been prepared in accordance with accounting principles
generally accepted in the United States ("GAAP"). All intercompany transactions
have been eliminated in consolidation. The financial statements do not include
all of the information and footnotes required by GAAP for complete financial
statement presentations. In the opinion of management, these statements include
all adjustments (consisting of normal recurring adjustments) considered
necessary to present a fair statement of our consolidated results of operations,
financial position and cash flows. Operating results for any interim period are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2008. This Quarterly Report on Form 10-Q should be read in
conjunction with the Company's consolidated financial statements and footnotes
in its audited financial statements for the year ended December 31, 2007
included in its Annual Report, on Form 10-K, for the year ended December 31,
2007.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines and
establishes a framework for measuring fair value. In addition, SFAS 157 expands
disclosures about fair value measurements. In addition, In February 2007, the
FASB issued Statement of Financial Accounting Standards No. 159, Fair Value
Option for Financial Assets and Financial Liabilities -- Including an amendment
of FASB Statement No. 115 ("SFAS 159"). Under SFAS 159, companies have an
opportunity to use fair value measurements in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. For the Company, SFAS 157 and 159 were effective beginning in
fiscal year 2008. SFAS 157 and 159 have not had a material impact on the
company's financial statements.
6
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141, (revised 2007), Business Combinations ("SFAS 141R"). The
Statement establishes revised principles and requirements for how we will
recognize and measure assets and liabilities acquired in a business combination.
The Statement is effective for business combinations completed on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. In addition, in December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Non-controlling Interests in Consolidated
Financial Statements -- An Amendment of ARB No. 51 ("SFAS 160"). SFAS 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
requires non-controlling interests or minority interests to be treated as a
separate component of equity and any changes in the parent's ownership interest
(in which control is retained) are to be accounted for as equity transactions.
However, a change in ownership of a consolidated subsidiary that results in
deconsolidation triggers gain or loss recognition, with the establishment of a
new fair value basis in any remaining non-controlling ownership interests. SFAS
160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the non-controlling
interests. SFAS 141 and 160 are effective for us on January 1, 2009. The
adoption of SFAS 141R and 160 is not expected to have a material impact on the
company's financial statements.
Commitments and Contingencies
The Company accrues for costs associated with contingencies including,
but not limited to, regulatory compliance and legal matters when such costs are
probable and can be reasonably estimated. Liabilities established to provide for
contingencies are adjusted as further information develops, circumstances
change, or contingencies are resolved. The Company bases these accruals on
management's estimate of such costs, which may vary from the ultimate cost and
expenses, associated with any such contingency.
From time to time the Company may be involved in litigation in the
normal course of its business. In the opinion of management, the Company is not
aware of any pending or threatened litigation matters that will have a material
adverse effect on the Company's business, operations, financial condition or
cash flows. As of June 30, 2008, management believes there were no material
commitments or contingencies requiring disclosure.
Concentration
Approximately 65% and 66% of the Company's revenues for the three and
six months ended June 30, 2008 were derived from students who received tuition
assistance from tuition assistance programs sponsored by the United States
Department of Defense compared to approximately 66% and 67% of the Company's
revenues for the three and six months ended June 30, 2007. A reduction in this
assistance could have a significant impact on the Company's operations.
3. Net Income Per Common Share
Basic net income per common share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted net
income per common share also increases the shares used in the per share
calculation by the dilutive effects of options, warrants, and restricted stock.
Stock options, restricted stock, and warrants are not included in the
computation of diluted earnings per share when their effect is anti-dilutive.
Options and warrants to purchase 9,700 common shares were outstanding but not
included in the computation of diluted net income per common share for the six
months ended June 30, 2007. There were no anti-dilutive stock options or
warrants excluded from the calculation for the three months ended June 30, 2007.
There were no warrants outstanding during the three and six months ended June
30, 2008 and there were no anti-dilutive stock options or restricted stock
excluded from the calculation for the three and six months ended June 30, 2008.
The total number of shares of all classes of stock that the Company has
authority to issue is 110,000,000, of which 100,000,000 of such shares are
common stock having a par value of $.01 per share and 10,000,000 of such shares
are Preferred Stock, having a par value of $.01 per share.
4. Income Taxes
In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48 - Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109 (FIN 48). This interpretation applies
to all tax positions accounted for in accordance with SFAS No. 109 by defining
the criteria that an individual tax position must meet in order for the position
to be recognized within the financial statements and provides guidance on
measurement, de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition of tax positions. This
interpretation is effective for fiscal years beginning after December 15, 2006,
with earlier adoption permitted. The Company adopted FIN 48 effective January 1,
2007. The impact of adopting FIN 48 was not material as of the date of adoption.
Interest and penalties associated with uncertain income tax positions are
classified as income tax expense. The Company has not recorded any material
interest or penalties during any of the years presented.
7
The Company is subject to U.S. Federal income taxes as well as income
taxes of multiple state jurisdictions. For Federal tax purposes, tax years
2003-2007 remain open to examination. For state tax purposes, the statute of
limitations remains open for tax years 2003-2007. Currently, no examinations are
open in any jurisdiction.
The Company anticipates that its effective combined Federal and state
statutory tax rate will be approximately 41%. The actual combined effective tax
rate for the three and six months ended June 30, 2008 was 34.1% and 37.1%,
respectively. The 6.9% and 3.9% difference between the expected tax rate for the
three and six months ended June 30, 2008 and the actual rate was attributable to
the fact that the taxes due on the 2007 federal and state tax returns when filed
were approximately $400,000 less than the 2007 tax liability estimated at
December 31, 2007. This adjustment was booked when the final tax returns were
prepared in the three months ended June 30, 2008 and resulted primarily from the
effects of changes in the state income taxes.
The Company does not anticipate any significant increases or decreases
in unrecognized tax benefits within the next twelve months.
5. Stock Based Compensation
On January 1, 2006, the Company adopted the provisions of FASB
Statement No. 123R - Share Based Payment, a revision of FASB Statement No. 123 -
Accounting for Stock Based Compensation, or SFAS 123R. This standard requires
companies to recognize the expense related to the fair value of their
stock-based compensation awards. The Company elected to use the modified
prospective approach to transition to SFAS 123R, as allowed under the statement;
therefore, the Company has not restated financial results for prior periods. We
calculate the expected term of stock option awards using the "simplified method"
as defined in Staff Accounting Bulletin No. 107 because we lack historical data
and are unable to make reasonable expectations regarding the future. We also
estimate forfeitures of share-based awards at the time of grant and revise such
estimates in subsequent periods if actual forfeitures differ from original
projections. We make assumptions with respect to the expected stock price's
volatility based on the average historical volatility of peers with similar
attributes. In addition, we determine the risk free interest rate by selecting
the U.S. Treasury five-year constant maturity, quoted on an investment basis in
effect at the time of grant for that business day. Estimates of fair value are
subjective and are not intended to predict actual future events, and subsequent
events are not indicative of the reasonableness of the original estimates of
fair value made under SFAS 123R.
In February 2002, the Company adopted the 2002 Stock Incentive Plan
("the 2002 Stock Plan"). The 2002 Stock Plan initially allowed the Company to
grant up to 990,000 shares of stock options and restricted stock at fair value
to employees, officers, directors, and service providers of the Company and its
affiliates, at the discretion of the Board of Directors. Options granted to date
and currently outstanding vest ratably over periods of three to five years and
expire in 10 years from the date of grant. The options are granted to employees
at a purchase price that approximates the fair value of the Company's stock. In
August 2002, the 2002 Stock Plan was amended to increase the shares of common
stock reserved for grant under the plan to 1,815,000. In August 2005, the 2002
Stock Plan was amended to increase the shares of common stock reserved for grant
under the plan to 2,200,000.
On August 3, 2007, the Board of Directors adopted the American Public
Education, Inc. 2007 Omnibus Incentive Plan (the "new equity plan"), and APEI's
stockholders approved the new equity plan on November 6, 2007. The new equity
plan was effective as of August 3, 2007. Upon adoption of the new equity plan,
APEI ceased making awards under the 2002 Stock Plan. The new equity plan allows
APEI to grant up to 1,100,000 shares plus any shares of common stock remaining
available for issuance under the 2002 Stock Plan as of the effective date of the
new equity plan and any shares of APEI common stock that are subject to
outstanding awards under the new equity plan or the 2002 Stock Plan that expire
or are forfeited, canceled or settled for cash without delivery of shares of
APEI common stock after the effective date of the new equity plan. As of
December 31, 2007, there were 3,751 shares available for issuance from the 2002
Stock Plan which were added to the 1,100,000 shares available for issuance under
the 2007 new equity plan. Awards under the new equity plan may be stock options,
which may be either incentive stock options or nonqualified stock options; stock
appreciation rights; restricted stock; restricted stock units; dividend
equivalent rights; performance shares; performance units; cash-based awards;
other stock-based awards, including unrestricted shares; or any combination of
the foregoing.
8
Stock-based compensation expense related to restricted stock grants is
expensed over the vesting period using the straight-line method for Company
employees and the graded-vesting method for members of the Board of Directors
and is measured using APEI's stock price on the date of grant. The fair value of
each option award is estimated at the date of grant using a Black-Scholes
option-pricing model that uses the assumptions noted in the following table.
Expected volatilities are based on the best estimate of the historical
volatility of APEI's stock. The Company uses historical data to estimate option
exercise and employee and director terminations within the model, as well as the
expected term of options granted, which represents the period of time that
options granted are expected to be outstanding. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.
Jun-08 Jun-07
---------------- -----------
Expected volatility 26.23% - 28.00% 27.75%
Expected dividends 0.00% 0.00%
Expected term, in years 4.0 - 4.5 6.5
Risk-free interest rate 2.59% - 3.41% 4.58-4.76%
Weighted average fair value of
options granted during the year $ 8.26 $ 3.89
Options granted through June 30, 2008, vest ratably over periods of
three to five years and expire in seven to ten years from the date of grant.
Option activity is summarized as follows (unaudited):
Aggregate
Weighted Weighted- Intrinsic
Average
Number Average Contractual Value
of Exercise Life (Yrs) (In
Options Price thousands)
-------------------------------------------------------------------
Outstanding,
December 31, 2007 1,537,835 $6.13
Options granted 945 $31.00
Awards exercised (98,688) $1.90
Options forfeited (10,993) $4.20
----------------------------------------------
Outstanding, June
30, 2008 1,429,099 $6.45 7.22 $46,571
==============================================
Exercisable, June
30, 2008 573,090 $3.08 7.18 $20,606
==============================================
The following table summarizes information regarding stock option
exercises:
Jun-08 Jun-07
---------- ------------------
(In thousands)
Proceeds from stock options
exercised $ 188 $ 660
Intrinsic value of stock options
exercised $ 3,421 $ 842
Tax benefit from exercises $ 696 $ 18
9
Stock based compensation expense related to restricted stock grants is
expensed over the vesting period using the straight-line method for Company
employees and the graded-vesting method for members of the Board of Directors.
The table below sets for the restricted stock activity for the six months ended
June 30, 2008:
Weighted-
Average
Number Grant
Price
of Shares and Fair
Value
---------- ----------
Non vested, December 31, 2007 72,573 $20.00
Shares granted 5,838 39.01
Vested shares (6,888) 20.00
Shares forfeited (480) 20.00
---------- ----------
Non vested, June 30,
2008 71,043 $21.56
========== ==========
Stock based compensation cost charged against income during the three
and six months ended June 30, 2008 and three and six months ended June 30, 2007
is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
(In thousands) (In thousands)
Instructional costs and services $ 56 $ 44 $ 112 $ 98
Marketing and promotional 18 8 35 (19)
General and administrative 395 64 699 539
------------- ------------- -------------- -------------
Stock-based compensation expense in
operating income 469 116 846 618
Tax benefit (162) 10 (290) (125)
------------- ------------- -------------- -------------
Stock-based compensation expense, net
of tax $ 307 $ 126 $ 556 $ 493
============= ============= ============== =============
As of June 30, 2008, total compensation cost related to non-vested
service-based stock options not yet recognized was $3.2 million, which is
expected to be recognized over the next 45 months on a weighted-average basis.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our historical results of operations and
our liquidity and capital resources should be read in conjunction with the
consolidated financial statements and related notes that appear elsewhere in
this report.
Forward-Looking Statements
Some of the statements contained in this Form 10-Q that are not
historical facts are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"). We intend such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 21E of the Exchange Act. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date this Form 10-Q is filed with the Securities and
Exchange Commission ("SEC"). We may, in some cases, use words such as "project,"
"believe," "anticipate," "plan," "expect," "estimate," "intend," "should,"
"would," "could," "potentially," "will," or "may," or other words that convey
uncertainty of future events or outcomes to identify these forward-looking
statements. The forward-looking statements are based on our beliefs, assumptions
10
and expectations of our future performance, taking into account information
currently available to us. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, not all of which are
known to us or are within our control. If a change occurs, our business,
financial condition and results of operations may vary materially from those
expressed in our forward-looking statements. There are a number of important
factors that could cause actual results to differ materially from the results
anticipated by these forward-looking statements. These important factors include
those that we discuss in this section of our Form 10-Q and in the "Risk Factors"
section of our annual report on Form 10-K for the fiscal year ended December 31,
2007 (the "Annual Report") and our various filings with the Securities and
Exchange Commission. You should read these factors and the other cautionary
statements made in this Form 10-Q in combination with the more detailed
description of our business in our Annual Report as being applicable to all
related forward-looking statements wherever they appear in this quarterly
report. If one or more of these factors materialize, or if any underlying
assumptions prove incorrect, our actual results, performance or achievements may
vary materially from any future results, performance or achievements expressed
or implied by these forward-looking statements. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
Overview
Background
American Public Education, Inc. is a provider of online postsecondary
education directed at the needs of the military and public service communities.
We operate through two universities, American Military University, or AMU, and
American Public University, or APU, which together constitute the American
Public University System.
We were founded as American Military University, Inc. in 1991 and began
offering graduate courses in January 1993. Following initial national
accreditation by the Accrediting Commission of the Distance Education and
Training Council, or DETC, in 1995, American Military University began offering
undergraduate programs primarily directed to members of the armed forces. Over
time, American Military University diversified its educational offerings in
response to demand by military students for post-military career preparation.
With its expanded program offerings, American Military University extended its
outreach to the greater public service community, primarily police, fire,
emergency management personnel and national security professionals. In 2002, we
reorganized into a holding company structure, with American Public Education,
Inc. serving as the holding company of American Public University System, Inc.,
which operates our two universities, AMU and APU. Our university system achieved
regional accreditation in May 2006 with the Higher Learning Commission of the
North Central Association of Colleges and Schools and became eligible for
federal student aid programs under Title IV for classes beginning in November
2006. In September 2007, we received approval from the Higher Learning
Commission to offer seven new degree programs in Education and Information
Technology.
The university system offers terms beginning on the first Monday of
each month in either eight- or sixteen-week formats. Semesters and academic
years are established to manage Title IV students and assist them in meeting
eligibility requirements.
On November 14, 2007, the company successfully completed its initial
public offering. As a public company, we will incur significant additional costs
and expenses such as increased legal and audit fees, professional fees,
directors' and officers' insurance costs and expenses related to compliance with
Sarbanes-Oxley Act regulations and other annual costs of doing business as a
public company including hiring additional personnel and expanding our
administrative functions. We expect these additional expenses to range from $1.5
million to $2.0 million per year and anticipate funding costs relating to being
a public company with cash provided by operating activities and cash on hand.
On January 25, 2008 we filed a Registration Statement on Form S-1
(Registration No. 333-148851) for a public offering, which was completed on
February 19, 2008. In the public offering, 3,744,500 shares were sold,
consisting of 25,000 shares sold by the Company and 3,719,500 shares sold by
certain stockholders of the Company, at a price to the public of $35.50 per
share, before underwriting discounts and commissions. Total net proceeds to the
Company were $167,000 after deducting underwriting discounts and commissions,
and offering expenses. The Company did not receive any of the proceeds from the
sale of common stock sold by the selling stockholders. Certain selling
stockholders granted the underwriters a 30-day option to purchase up to an
additional 500,175 shares at the public offering price to cover over-allotments.
On February 27, 2008, the underwriters of the Company's public offering
exercised their over-allotment option in full. The closing of the exercise of
the over-allotment option occurred on March 3, 2008. The Company did not receive
any of the proceeds from the sale of common stock held by the selling
stockholders in the over-allotment option exercise.
11
Summary
In recent years, we have experienced substantial growth. Our course
enrollments, or net course registrations, representing the aggregate number of
classes in which students remain enrolled after the date by which they may drop
the course without financial penalty, increased at a compound annual growth rate
(CAGR) of 39% from 2003 to 2007. Over that same time, total revenue increased at
a CAGR of 40%, from $17.8 million in 2003 to $69.1 million in 2007. We believe
achieving regional accreditation in May 2006 and gaining access to Title IV
programs beginning with classes that started in November 2006 have been
additional factors driving our recent acceleration in growth. Net course
registrations increased 73% in 2007 over 2006. Our revenue increased from $40.0
million to $69.1 million, or by 73%, over the same time period and operating
margins increased to 21.3% from 7.2% over the same time period. Net course
registrations increased 59% for the three and six-month period ended June 30,
2008 over the three and six-month period ended June 30, 2007. Our revenue
increased from $16.2 million to $25 million, or by 55% , and $30.3 million to
$48.2 million, or by 59% for the three and six-month period ended June 30, 2008
over the three and six-month period ended June 30, 2007. Operating margins
increased to 23.0% from 20.4% and 23.2% from 19.8% over the same time period.
While we have experienced substantial growth in recent periods, you
should not rely on the results of any prior periods as an indication of our
future growth in net course registrations or revenue as our historical growth
rates may not be sustainable. Similarly, you should not rely on the improvement
in our operating margins in any prior periods as an indication of our future
operating margins. Our difficulty in forecasting future growth rates and
operating margins is in part due to our inability to fully estimate the actual
impact of gaining access to Title IV programs. Following our implementation of
Title IV for the year ended December 31, 2007, 10.6% of our net course
registrations were from students using financial aid under Title IV programs.
For the three and six months ended June 30, 2008, 12.6% and 12.3%, or
approximately 4,175 and 8,175, of our net course registrations were from
students using financial aid under the Title IV programs compared to 10.6% and
9.0%, or approximately 2,225 and 3,725 for the three and six months ended June
30, 2007. This represents an increase of 88% and 119.0%, respectively. Because
of our limited history with Title IV programs and because we cannot estimate the
growth of new students that may result from our participation in Title IV
programs, we cannot estimate the costs and expenses associated with
administering Title IV programs and complying with the associated regulations.
During the second quarter of 2008, we received full certification from
the Department of Education to participate in Title IV programs based on our
annual recertification. We had been provisionally certified because we were in
our initial period of certification. The Department of Education had advised us
that as a provisionally certified institution that was in its initial period of
certification, we could not add new degree or non-degree programs for Title IV
program purposes, except under limited circumstances and only if the Department
of Education approved such programs. As a fully certified institution that is no
longer in its initial period of certification, we are no longer subject to such
restrictions on new programs. Like all fully certified institutions, under
certain circumstances we must obtain Department of Education approval to add
certain new programs.
Notwithstanding that the Department of Education has fully certified us
through March 31, 2012, in certain circumstances, including a change in
ownership resulting in a change of control, the Department of Education may
determine to provisionally certify us. During a period of provisional
certification, an institution must comply with any additional conditions
included in its program participation agreement. In addition, the Department of
Education may more closely review an institution that is provisionally certified
if it applies for approval to add an educational program, acquires another
school or makes any other significant change. If the Department of Education
determines that a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it may seek to
revoke the institution's certification to participate in Title IV programs with
fewer due process protections for the institution than if it were fully
certified. Students attending provisionally certified institutions remain
eligible to receive Title IV program funds. The Department of Education may
place an institution on provisional certification status if it finds that the
institution does not fully satisfy all of the eligibility and certification
standards and in certain other circumstances, such as when an institution
undergoes a change in ownership resulting in a change in control. Department of
Education regulations provide that a change of control of a publicly traded
corporation includes a situation where a stockholder that owns at least 25% of
the total outstanding voting stock of the corporation and is the largest
stockholder of the corporation ceases to own at least 25% of such stock or
ceases to be the largest stockholder. As of the date of this quarterly report,
ABS Capital Partners beneficially owns approximately 26% of our outstanding
common stock. We expect that a change of control will occur in the near future
as a result of either future transactions in which we are involved or as a
result of actions by ABS Capital Partners.
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The foregoing discussion of certification for participation under Title IV
programs is only a brief summary. Additional information on certification by the
Department of Education and the impact of provisional certification is contained
in Item 1 of our Annual Report on Form 10-K under the heading Regulation of our
Business.
Critical Accounting Policies
Critical accounting policies are disclosed in our consolidated
financial statements and footnotes in the audited financial statements for the
fiscal year ended December 31, 2007 included in our Annual Report on Form 10-K,
for the fiscal year ended December 31, 2007. There have been no significant
changes in our critical accounting policies from those disclosed in the Form
10-K.
Results of Operations
The following table sets forth statements of operations data as a
percentage of revenues for each of the periods indicated:
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ -----------
Revenues 100.0% 100.0% 100.0% 100.0%
------------ ------------ ------------ -----------
Costs and expenses:
Instructional costs and
services 42.1 42.6 42.4 42.9
Selling and promotional 10.5 9.0 9.9 9.5
General and administrative 20.3 23.7 20.5 23.4
Depreciation and
amortization 4.1 4.3 4.0 4.4
------------ ------------ ------------ -----------
Total costs and expenses 77.0 79.6 76.8 80.2
------------ ------------ ------------ -----------
Income from operations before
interest income and income
taxes 23.0 20.4 23.2 19.8
Interest income, net 0.8 1.2 1.0 1.1
------------ -------- ------------ -------
Income from operations
before income taxes 23.8 21.6 24.2 20.9
Income tax expense 8.1 9.0 9.0 9.1
------------ ------------ ------------ -----------
Net Income 15.7% 12.6% 15.2% 11.8%
============ ============ ============ ===========
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Revenues. Our revenues for the three months ended June 30, 2008 were $25.0
million, an increase of $8.8 million, or 55%, compared to $16.2 million for the
three months ended June 30, 2007. The increase was primarily a result of an
increase in the number of net course registrations.
Costs and Expenses. Costs and expenses were $19.2 million for the three
months ended June 30, 2008; an increase of $6.3 million, or 49%, compared to
$12.9 million for the three months ended June 30, 2007. Costs and expenses as a
percentage of revenues decreased to 77% for the three months ended June 30, 2008
from 79.6% for the three months ended June 30, 2007. This decrease resulted from
the factors described below.
Instructional costs and services expenses. Our instructional costs and
services expenses for the three months ended June 30, 2008 were $10.5 million,
representing an increase of 53% from $6.9 million for the three months ended
June 30, 2007. This increase was directly related to an increase in the number
of classes offered due to the increase in net course registrations.
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Instructional costs and services expenses as a percentage of revenues were 42.1%
for the three months ended June 30, 2008, compared to 42.6% for the three months
ended June 30, 2007. The slight decrease was primarily due to efficiencies
realized through a higher volume of students and the number of staff and
expenses increasing at a slower rate than enrollment.
Selling and promotional expenses. Our selling and promotional expenses for
the three months ended June 30, 2008 were $2.6 million, representing an increase
of 80% from $1.4 million for the three months ended June 30, 2007. This increase
was primarily due to an increase in print and online advertising expenses.
Selling and promotional expenses as a percentage of revenues increased to 10.5%
for the three months ended June 30, 2008 from 9.0% for the three months ended
June 30, 2007. This increase reflects additional marketing to expand awareness
of the APU brand to the civilian market, including several advertising
initiatives to promote our new Masters of Education degrees.
General and administrative expenses. Our general and administrative
expenses for the three months ended June 30, 2008 were $5.1 million representing
an increase of 32% from $3.8 million for the three months ended June 30, 2007.
The increase in expense was a result of an increase in expenditures for
stock-based compensation, recruiting, professional services, management and the
administrative facilities required to support a larger student body, as well as
increased expenses associated with being a public company. General and
administrative expenses as a percentage of revenues decreased to 20.3% for the
three months ended June 30, 2008 from 23.7% for the three months ended June 30,
2007. The decrease was primarily due to efficiencies realized through a higher
volume of students and the number of staff and related expenses increasing at a
slower rate than enrollment.
Depreciation and amortization. Depreciation and amortization expenses were
$1.0 million for the three months ended June 30, 2008, compared with $0.7
million for the three months ended June 30, 2007. This represents an increase of
46%. This increase resulted from greater capital expenditures and higher
depreciation and amortization on a larger fixed asset base.
Stock-based compensation expenses. Stock-based compensation expenses
included in instructional costs and services, selling and promotional, and
general and administrative expense for the three months ended June 30, 2008 were
$469,000 in the aggregate, representing an increase of 304% from $116,000 for
the three months ended June 30, 2007. The increase in stock-based compensation
for the three months ended June 30, 2008 is primarily attributable to expense
for options granted subsequent to June 30, 2007.
Interest income, net. Our interest income, net increased by $2,000 for the
three months ended June 30, 2008 to $196,000 from $194,000 for the three months
ended June 30, 2007, representing an increase of 1%. This increase is
attributable to increased cash on hand which was offset by lower investment
returns due to a decline in interest rates.
Income tax expense. We recognized income tax expense for the three months
ended June 30, 2008 and 2007 of $2.0 million and $1.5 million, respectively, or
effective tax rates of 34.1% and 41.7%, respectively. The decrease was
attributable to the fact that the tax due on the 2007 federal and state tax
returns when filed was approximately $400,000 less than the 2007 tax liability
estimated at December 31, 2007. This adjustment was booked when the tax returns
were finalized in the three months ended June 30, 2008 and resulted primarily
from the effects of changes in the state income taxes.
Net income. Our net income was $3.9 million for the three months ended June
30, 2008, compared to net income of $2.0 million for the three months ended June
30, 2007, an increase of $1.9 million, or 93%. This increase was related to the
factors discussed above.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Revenues. Our revenues for the six months ended June 30, 2008 were $48.2
million, an increase of $17.9 million, or 59.4%, compared to $30.3 million for
the six months ended June 30, 2007. The increase was primarily a result of an
increase in the number of net course registrations.
Costs and Expenses. Costs and expenses were $37.0 million for the six
months ended June 30, 2008; an increase of $12.7 million, or 53%, compared to
$24.3 million for the six months ended June 30, 2007. Costs and expenses as a
percentage of revenues decreased to 76.8% for the six months ended June 30, 2008
from 80.2% for the six months ended June 30, 2007. This decrease resulted from
the factors described below.
Instructional costs and services expenses. Our instructional costs and
services expenses for the six months ended June 30, 2008 were $20.4 million,
representing an increase of 57% from $13.0 million for the six months ended June
30, 2007. This increase was directly related to an increase in the number of
classes offered due to the increase in net course registrations. Instructional
costs and services expenses as a percentage of revenues were 42.4% for the six
months ended June 30, 2008, compared to 42.9% for the six months ended June 30,
2007. The slight decrease was primarily due to efficiencies realized through a
higher volume of students and the number of staff and expenses increasing at a
slower rate than revenue.
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Selling and promotional expenses. Our selling and promotional expenses for
the six months ended June 30, 2008 were $4.8 million, representing an increase
of 66% from $2.9 million for the six months ended June 30, 2007. This increase
was primarily due to an increase in online advertising expenses. Selling and
promotional expenses as a percentage of revenues increased to 9.9% for the six
months ended June 30, 2008 from 9.5% for the six months ended June 30, 2007.
This increase reflects additional marketing to expand awareness of the APU brand
to the civilian market, including several advertising initiatives to promote our
new M.Ed. degrees.
General and administrative expenses. Our general and administrative
expenses for the six months ended June 30, 2008 were $9.9 million representing
an increase of 40% from $7.1 million for the six months ended June 30, 2007. The
increase in expense was a result of additional technology, and financial staff
positions, and an increase in expenditures for stock-based compensation,
recruiting, professional services, management and the administrative facilities
required to support a larger student body as well as increased expenses
associated with being a public company. General and administrative expenses as a
percentage of revenues decreased to 20.5% for the six months ended June 30, 2008
from 23.4% for the six months ended June 30, 2007. The decrease was primarily
due to efficiencies realized through a higher volume of students and the number
of staff and related expenses increasing at a slower rate than revenue.
Depreciation and amortization. Depreciation and amortization expenses were
$1.9 million for the six months ended June 30, 2008, compared with $1.3 million
for the six months ended June 30, 2007. This represents an increase of 46%. This
increase resulted from greater capital expenditures and higher depreciation and
amortization on a larger fixed asset base.
Stock-based compensation expenses. Stock-based compensation expenses
included in instructional costs and services, selling and promotional, and
general and administrative expense for the six months ended June 30, 2008 was
$0.8 million in the aggregate, representing an increase of 37% from $0.6 million
for the six months ended June 30, 2007. The increase in stock-based compensation
for the six months ended June 30, 2008 is primarily attributable to expense for
options granted subsequent to June 30, 2007.
Interest income, net. Our interest income, net increased by $100,000 for
the six months ended June 30, 2008 to $438,000 from $338,000 for the six months
ended June 30, 2007, representing an increase of 30%. This increase is
attributable to increased cash on hand which was offset by lower investment
returns due to a decline in interest rates.
Income tax expense. We recognized income tax expense for the six months
ended June 30, 2008 and 2007 of $4.3 million and $2.8 million, respectively, or
effective tax rates of 37.1% and 43.6%, respectively. The decrease was
attributable to the fact that the tax due on the 2007 federal and state tax
returns when filed was approximately $400,000 less than the 2007 tax liability
estimated at December 31, 2007. This adjustment was booked when the tax returns
were finalized in the three months ended June 30, 2008 and resulted primarily
from the effects of changes in the state income taxes.
Net income. Our net income was $7.3 million for the six months ended June
30, 2008, compared to net income of $3.6 million for the six months ended June
30, 2007, an increase of $3.7 million, or 105%. This increase was related to the
factors discussed above.
Liquidity and Capital Resources
Liquidity
The Company financed operating activities and capital expenditures
during the six months ended June 30, 2008 and 2007 primarily through cash
provided by operating activities and proceeds received from the exercise of
stock options. The net offering proceeds, after offering expenses, from the
public offering that closed on February 19, 2008 were approximately $167,000,
which we used for working capital and other general corporate purposes. Cash and
cash equivalents were $34.9 million and $27.0 million at June 30, 2008 and
December 31, 2007, respectively.
We derive a significant portion of our revenues from tuition assistance
programs from the Department of Defense, or DoD. Generally, these funds are
received within 60 days of the start of the classes to which they relate. A
growing source of revenue is derived from our participation in Title IV
programs, for which disbursements are governed by federal regulations. We have
typically received disbursements under Title IV programs within 30 days of the
start of the applicable class.
15
These factors, together with the number of classes starting each month,
affect our operational cash flow. Our costs and expenses have increased now that
we are a public company, and we expect to fund these expenses through cash from
operations.
We have available to us a line of credit with a maximum borrowing
amount of up to $5.0 million. The line bears interest at LIBOR plus 200 basis
points. The line is secured by substantially all of our assets. We have never
borrowed under this line of credit facility. The terms of our credit facilities
are reviewed on a regular basis.
Based on our current level of operations and anticipated growth, we
believe that our cash flow from operations and other sources of liquidity,
including cash and cash equivalents, will provide adequate funds for ongoing
operations and planned capital expenditures for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $11.0 million and $9.9
million for the six months ended June 30, 2008 and 2007, respectively. As
revenue and profits have grown, cash has increased. Cash and cash equivalents
were $34.9 million and $27.0 million at June 30, 2008 and December 31, 2007,
respectively.
Investing Activities
Net cash used in investing activities was $4.2 million and $2.1
million for the six months ended June 30, 2008 and 2007, respectively. The $2.1
million increase related to improvements on property leased and acquired in
2007, increased software development and IT infrastructure costs and a perpetual
software license.
Financing Activities
Net cash provided by financing activities for the six months ended June
30, 2008 was $1.1 million from cash received from the issuance of common stock
including the net proceeds to us from the public offering, and the excess tax
benefit from stock based compensation. Net cash used by financing activities for
the six months ended June 30, 2007 was $1.4 million which was primarily a result
of the repayment of two mortgages notes that were obtained in 2006.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to the impact of interest rate changes and may be
subject to changes in the market values of future investments. We invest excess
cash in bank overnight deposits. We have no derivative financial instruments or
derivative commodity instruments as of June 30, 2008.
Future investment income may fall short of expectations due to changes
in interest rates. At June 30, 2008, a 10% increase or decrease in interest
rates would not have a material impact on our future earnings or cash flows
related to investments in cash equivalents.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of our disclosure controls and procedures as of June
30, 2008 as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon the
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of June
30, 2008.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in reports we file or submit under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting
identified in connection with the evaluation required by Rule 13a-15(f) and
15d-15(f) of the Exchange Act that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We currently have no material legal proceedings pending.
Item 1A. Risk Factors
An investment in our stock involves a high degree of risk. You should
carefully consider the risks set forth in the Risk Factors section of our Annual
Report on Form10-K for the fiscal year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
APEI's Annual Meeting of Stockholders was held on May 16, 2008.
Following are descriptions of the matters voted on and the results of such
voting:
Proposal 1: Election of Directors:
The following members were elected to APEI's Board of Directors to hold
office until the next annual meeting of stockholders and until his or her
successor is elected and qualified or until his or her earlier death,
resignation or removal:
Votes Withheld
Votes For
========================== =============================
Wallace E. Boston, Jr. 15,438,068 86.5% 114,440 0.6%
Phillip A. Clough 15,158,573 85.0% 393,935 2.2%
J. Christopher Everett 15,514,633 87.0% 37,875 0.2%
F. David Fowler 15,494,209 86.9% 58,299 0.3%
Jean C. Halle 15,513,662 87.0% 38,846 0.2%
David L. Warnock 13,181,120 73.9% 2,471,388 13.9%
Timothy T. Weglicki 15,197,898 85.2% 354,610 2.0%
Proposal 2: Ratification of the appointment of McGladrey & Pullen, LLP as the
Company's independent registered public accounting firm for the
fiscal year ending December 31, 2008 :
The proposal was approved by the following vote:
Votes For Votes Against Abstentions [Broker Non-Votes]
-------------------------------------------------------------------------------------------
15,548,351 87.2% 3,200 0.0% 956 0.0% 0 0.0%
-------------------------------------------------------------------------------------------
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit No. Exhibit Description
----------- -------------------
31.01 Certification of Chief Executive officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN PUBLIC EDUCATION, INC.
__________/s/ Wallace E. Boston__________ August 12, 2008
---------------------
Wallace E. Boston
President and Chief Executive Officer
(Principal Executive Officer)
__________/s/ Harry T. Wilkins__________ August 12, 2008
---------------------
Harry T. Wilkins
Executive Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
19