a5552057.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
|
|
|
þ
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT
OF 1934
|
For
the quarterly period ended September 30, 2007
or
|
|
|
o
|
|
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
o
No
þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer o
Accelerated
filer o
Non-accelerated
filer þ
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
The
total number of shares of common stock outstanding as of November 14,
2007, was
17,676,113.
AMERICAN
PUBLIC EDUCATION, INC.
FORM
10-Q
INDEX
AMERICAN
PUBLIC EDUCATION, INC.
Consolidated
Balance Sheets
(In
thousands)
|
As
of September 30,
|
|
As
of December 31,
|
|
|
2007
|
|
2006
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
20,261
|
|
|
$ |
11,678
|
|
Accounts
receivable, net of allowance of $529 at 2007 and $263 at
2006
|
|
|
3,941
|
|
|
|
5,448
|
|
Income
tax receivable
|
|
|
1,012
|
|
|
|
679
|
|
Prepaid
expenses
|
|
|
1,106
|
|
|
|
856
|
|
Deferred
income taxes
|
|
|
406
|
|
|
|
299
|
|
Current
assets of discontinued operations
|
|
|
- |
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
26,726
|
|
|
|
18,993
|
|
Property
and equipment, net
|
|
|
10,845
|
|
|
|
9,363
|
|
Other
assets
|
|
|
1,648
|
|
|
|
386
|
|
Noncurrent
assets of discontinued operations
|
|
|
- |
|
|
|
8
|
|
Total
assets
|
|
$ |
39,219
|
|
|
$ |
28,750
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,965
|
|
|
$ |
1,502
|
|
Accrued
liabilities
|
|
|
4,088
|
|
|
|
3,157
|
|
Deferred
revenue and student deposits
|
|
|
6,838
|
|
|
|
3,852
|
|
Current
portion of long term debt
|
|
|
-
|
|
|
|
29
|
|
Current
liabilites of discontinued operations
|
|
|
- |
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
12,891
|
|
|
|
8,548
|
|
Deferred
income taxes
|
|
|
2,136
|
|
|
|
1,437
|
|
Long
term debt
|
|
|
-
|
|
|
|
1,944
|
|
Total
liabilities
|
|
|
15,027
|
|
|
|
11,929
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Class
A, $.01 par value;
|
|
|
|
|
|
|
|
|
Authorized
shares - 9,412; Issued and outstanding
|
|
|
|
|
|
|
|
|
shares
- 9,256 in 2007 and 2006
|
|
|
93 |
|
|
|
93 |
|
Common
stock, $.01 par value;
|
|
|
|
|
|
|
|
|
Authorized
shares - 50,000; Outstanding shares -
|
|
|
|
|
|
|
|
|
2,873
and 2,542 in 2007 and 2006
|
|
|
29 |
|
|
|
25 |
|
Additional
paid-in capital
|
|
|
27,952
|
|
|
|
26,378
|
|
Accumulated
deficit
|
|
|
(3,882 |
) |
|
|
(9,675 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity:
|
|
|
24,192
|
|
|
|
16,821
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
39,219
|
|
|
$ |
28,750
|
|
See
accompanying notes to consolidated financial
statements.
AMERICAN
PUBLIC EDUCATION, INC.
Consolidated
Statements of Income
(In
thousands, except share and per share data)
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
September
30,
|
|
|
2007
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
17,612
|
|
|
$ |
10,188
|
|
|
|
|
$ |
47,873
|
|
|
|
$ |
27,149
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional
costs and services
|
|
|
7,708
|
|
|
|
4,635
|
|
|
|
|
|
20,697
|
|
|
|
|
12,558
|
|
Selling
and promotional
|
|
|
1,946
|
|
|
|
1,158
|
|
|
|
|
|
4,834
|
|
|
|
|
3,533
|
|
General
and administrative
|
|
|
3,695
|
|
|
|
2,436
|
|
|
|
|
|
10,769
|
|
|
|
|
6,461
|
|
Depreciation
and amortization
|
|
|
685
|
|
|
|
451
|
|
|
|
|
|
2,007
|
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
14,034
|
|
|
|
8,680
|
|
|
|
|
|
38,307
|
|
|
|
|
23,796
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before
|
|
interest
income and income taxes
|
|
|
3,578
|
|
|
|
1,508
|
|
|
|
|
|
9,566
|
|
|
|
|
3,353
|
|
Interest
income, net
|
|
|
257
|
|
|
|
85
|
|
|
|
|
|
595
|
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
before
income taxes
|
|
|
3,835
|
|
|
|
1,593
|
|
|
|
|
|
10,161
|
|
|
|
|
3,564
|
|
Income
tax expense
|
|
|
1,613
|
|
|
|
210
|
|
|
|
|
|
4,368
|
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
2,222
|
|
|
|
1,383
|
|
|
|
|
|
5,793
|
|
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of
|
|
income
tax benefit of $228 and $302 for
|
|
the
three and nine months ended
|
|
|
|
|
September
30, 2006, respectively
|
|
|
-
|
|
|
|
(538 |
) |
|
|
|
|
-
|
|
|
|
|
(633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,222
|
|
|
$ |
845
|
|
|
|
|
$ |
5,793
|
|
|
|
$ |
1,778
|
|
`
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.18
|
|
|
$ |
0.12
|
|
|
|
|
$ |
0.48
|
|
|
|
$ |
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.18
|
|
|
$ |
0.11
|
|
|
|
|
$ |
0.46
|
|
|
|
$ |
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.18
|
|
|
$ |
0.07
|
|
|
|
|
$ |
0.48
|
|
|
|
$ |
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.18
|
|
|
$ |
0.07
|
|
|
|
|
$ |
0.46
|
|
|
|
$ |
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,107,018
|
|
|
|
11,765,600
|
|
|
|
|
|
11,990,375
|
|
|
|
|
11,723,458
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,640,799
|
|
|
|
12,175,384
|
|
|
|
|
|
12,530,269
|
|
|
|
|
12,159,350
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
PUBLIC EDUCATION, INC.
Consolidated
Statements of Cash Flows
(In
thousands)
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
$ |
5,793
|
|
|
$ |
1,778
|
|
Add:
(loss) from discontinued operations, net
|
|
|
|
|
-
|
|
|
|
(633 |
) |
Income
from continuing operations, net
|
|
|
|
|
5,793
|
|
|
|
2,411
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
Provision
for bad debts/(decrease) in allowance for doubtful
accounts
|
|
|
|
|
266
|
|
|
|
(439 |
) |
Depreciation
and amortization
|
|
|
|
|
2,007
|
|
|
|
1,244
|
|
Stock-based
compensation
|
|
|
|
|
754
|
|
|
|
239
|
|
Excess
tax benefit from stock based compensation
|
|
|
|
|
17
|
|
|
|
-
|
|
Deferred
income taxes
|
|
|
|
|
592
|
|
|
|
(53 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
|
1,241
|
|
|
|
512
|
|
Prepaid
expenses and other assets
|
|
|
|
|
(250 |
) |
|
|
(370 |
) |
Income
tax receivable
|
|
|
|
|
(333 |
) |
|
|
(214 |
) |
Accounts
payable and accrued liabilities
|
|
|
|
|
1,394
|
|
|
|
555
|
|
Income
tax payable
|
|
|
|
|
-
|
|
|
|
1,073
|
|
Deferred
revenue and student deposits
|
|
|
|
|
2,986
|
|
|
|
945
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities from continuing
operations
|
|
|
|
|
14,467
|
|
|
|
5,903
|
|
Net
cash provided by operating activities from discontinued
operations
|
|
|
|
|
33
|
|
|
|
40
|
|
Net
cash provided by operating activities
|
|
|
|
|
14,500
|
|
|
|
5,943
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
|
(3,489 |
) |
|
|
(3,574 |
) |
Capitalized
program development costs and other assets
|
|
|
|
(218 |
) |
|
|
(190 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities from continuing
operations
|
|
|
|
|
(3,707 |
) |
|
|
(3,764 |
) |
Cash
used in investing activities from discontinued
operations
|
|
|
|
|
-
|
|
|
|
(116 |
) |
Net
cash used in investing activities
|
|
|
|
|
(3,707 |
) |
|
|
(3,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
Borrowing
on long term debt
|
|
|
|
|
-
|
|
|
|
1,980
|
|
Payments
on long-term debt
|
|
|
|
|
(1,973 |
) |
|
|
-
|
|
Common
stock issuance costs in anticipation of initial public
offering
|
|
|
(1,044 |
) |
|
|
-
|
|
Cash
paid for repurchase of common stock
|
|
|
|
|
(55 |
) |
|
|
-
|
|
Cash
received from issuance of common stock, net of issuance
costs
|
|
|
-
|
|
|
|
168
|
|
Proceeds
from exercise of stock options
|
|
|
|
|
862
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in)/provided by financing activities
|
|
|
|
|
(2,210 |
) |
|
|
2,148
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
|
|
8,583
|
|
|
|
4,211
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
11,678
|
|
|
|
5,511
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
|
|
$ |
20,261
|
|
|
$ |
9,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
|
$ |
56
|
|
|
$ |
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
|
|
$ |
4,092
|
|
|
$ |
445
|
|
See
accompanying notes to consolidated financial
statements.
AMERICAN
PUBLIC EDUCATION, INC.
Notes
to Consolidated Financial Statements
(In
thousands, except per share and share data)
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 five 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
Company was incorporated in Delaware in May 2002 in anticipation
of the
reorganization of American Military University, Inc., a Commonwealth
of Virginia
corporation that was founded 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 (“DETC”), in 1995,
American Military University, Inc. began offering undergraduate programs
primarily directed to members of the armed forces. Over time, American
Military
University, Inc. diversified its educational offerings into the liberal
arts in
response to demand by military students for post-military career
preparation.
With its expanded program offerings, American Military University,
Inc. extended
its outreach to the greater public service community, primarily police,
fire,
emergency management personnel and national security professionals.
Effective
July 29, 2002, American Military University, Inc. reorganized into a
holding company structure, with all of the shares of capital stock
of American
Military University, Inc. being converted into equivalent shares
of capital
stock of the Company and the operations of American Military University,
Inc.
becoming operations of the University System. Because this transaction
was
consummated among entities under common control, it was recorded
in a manner
similar to that in pooling-of-interest accounting, which is often
referred to as
a reorganization.
The
University System is subject to extensive regulation by (1) state
regulatory bodies, (2) accrediting agencies recognized by the
U.S. Secretary of Education and (3) the federal government through the
U.S. Department of Education and under the Higher Education Act of 1965,
as
amended, or the Higher Education Act. The regulations, standards
and policies of
these agencies cover the vast majority of the Company’s operations, including
educational programs, facilities, instructional and administrative
staff,
administrative procedures, marketing, recruiting, financial operations
and
financial condition.
As
an
institution of higher education that grants degrees, diplomas and
certificates,
the University System is required to be authorized by appropriate
state
education authorities. In addition, in certain states as a condition
of
continued authorization to grant degrees and in order to participate
in various
federal programs, including tuition assistance programs of the
United States
Armed Forces, a school must be accredited by an accrediting agency
recognized by
the Secretary of Education. Accreditation is a non-governmental
process through
which an institution submits to qualitative review by an organization
of peer
institutions, based on the standards of the accrediting agency
and the stated
aims and purposes of the institution. The Higher Education Act
requires
accrediting agencies recognized by the Secretary of Education to
review and
monitor many aspects of an institution’s operations and to take appropriate
action when the institution fails to comply with the accrediting
agency’s
standards.
The
Company’s operations are also subject to regulation due to the University
System’s participation in federal student financial aid programs under
Title IV of the Higher Education Act. To participate in Title IV
programs, a school must receive and maintain authorization by the
appropriate
state education agencies, be accredited by an accrediting agency
recognized by
the Secretary of Education, and be certified as an eligible institution
by the
Department of Education.
The
Company formed Rockwell Education, Inc. (“Rockwell”) in the Commonwealth of
Virginia for the purpose of acquiring all of the assets of Pinnacle
Software
Solutions, Inc. in February 2005. The acquired assets included
Rockwell University, a school that provided various software and
programming training sessions to students and companies. As of August 31,
2006, the Company discontinued the operations of Rockwell, and the
activities of
Rockwell are included in the accompanying financial statements as
discontinued
operations.
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. They 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, 2007. 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 fiscal year ended December 31,
2006 included in the Prospectus that forms a part of the Company’s
Registration Statement on Form S-1, as amended, which Prospectus was filed
pursuant to Rule 424(b)(4) on November 9, 2007 (Registration No.
333-145185).
Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Contingencies
The
Company accrues for costs associated with contingencies including, but not
limited to, regulatory compliance and legal matters when such costs are probable
and 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.
Concentration
Approximately
66% of the Company’s revenues for the nine months ended September 30, 2007 were
derived from students who receive tuition assistance from tuition assistance
programs sponsored by the United States Department of Defense. A reduction
in
this assistance could have a significant impact on the Company’s operations. In
October of 2006, APUS was approved for participation in Title IV programs,
allowing the Company to participate in federal student aid
programs.
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 and warrants.
The
Company effected an 11-for-1 stock split of its common stock and its Class
A
common stock on September 19, 2007, and increased its authorized
capital. All share and per share amounts related to common stock,
Class A common stock, options and the warrant included in the consolidated
financial statements have been restated to reflect the stock split.
The
following table is a reconciliation of the shares and warrants used to calculate
basic and diluted net income per common share. Stock options and
warrants are not included in the computation of diluted earnings per share
when
their effect is anti-dilutive. Options to purchase 472,989 common shares
were outstanding but not included in the computation of diluted net income
per
common share for the three and nine months ended September 30, 2006 because
they
were anti-dilutive. There were no anti-dilutive stock options
excluded from the calculation for the three and nine months ended September
30, 2007.
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
September
30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,222
|
|
|
$ |
845
|
|
|
$ |
5,793
|
|
|
$ |
1,778
|
|
Add:
(loss) from discontinued operations, net
|
|
|
-
|
|
|
|
(538 |
) |
|
|
-
|
|
|
|
(633 |
) |
Net
income from continuing operations , net
|
|
$ |
2,222
|
|
|
$ |
1,383
|
|
|
$ |
5,793
|
|
|
$ |
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
12,107,018
|
|
|
|
11,765,600
|
|
|
|
11,990,375
|
|
|
|
11,723,458
|
|
Effect
of dilutive stock options and warrants
|
|
|
533,781
|
|
|
|
409,784
|
|
|
|
539,894
|
|
|
|
435,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average shares outstanding
|
|
|
12,640,799
|
|
|
|
12,175,384
|
|
|
|
12,530,269
|
|
|
|
12,159,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$ |
0.18
|
|
|
$ |
0.07
|
|
|
$ |
0.48
|
|
|
$ |
0.15
|
|
Diluted
net income per common share
|
|
$ |
0.18
|
|
|
$ |
0.07
|
|
|
$ |
0.46
|
|
|
$ |
0.15
|
|
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. We
adopted FIN 48 effective January 1, 2007. There were no material
adjustments from the adoption of this standard in the nine months ended
September 30, 2007. The Company is subject to U.S. federal income tax
as well as income tax of multiple state jurisdictions. Currently, no
examinations are open in any jurisdiction.
For
federal purposes, tax years 2004-2006 remain open to examination as a result
of
earlier net operating losses being utilized in recent years. The statue of
limitation remains open on the earlier years for three years subsequent to
the
utilization of net operating losses. For state purposes, the statute of
limitation remains open in a similar manner for states that have generated
net
operating losses.
The
Company does not anticipate any significant increases or decreases in
unrecognized tax benefits within the next twelve months. In September of
2007, the statute of limitations expired on federal issues related to tax
years
2002-2003. There was no material impact on the unrecognized tax benefits
related to the expiration of the statue of limitations for tax years
2002-2003.
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. Under this transition method, stock-based compensation
expense for 2006 included compensation expenses for all stock-based compensation
awards granted prior to, but not yet vested as of December 31, 2005, based
on
the fair value on the grant date estimated in accordance with the original
provisions of SFAS 123. Our determination of the fair value of these
stock option awards was affected by the estimated fair value of our common
stock
on the date of grant, as well as assumptions regarding a number of
highly complex and subjective variables. 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.
6.
Stock Based Compensation Plan
In
February 2002, the Company’s adopted the 2002 Stock Incentive Plan (the “2002
Stock Plan”). The 2002 Stock Plan had 2.2 million shares of common
stock authorized for issuance as options at fair value to employees, officers,
directors and service providers of APEI and its affiliates, including APUS,
at
the discretion of the Board of Directors.
On
August 3, 2007, APEI’s Board of Directors adopted the American Public Education,
Inc. 2007 Omnibus Incentive Plan (the “new equity plan”), and its stockholders
approved the new equity plan on November 6, 2007. The new equity plan
was effective as of August 3, 2007, however, no grants were made under the
plan
during the period ended September 30, 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 1.1 million
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
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. Awards under the new equity plan may be stock
options, which may be either incentive stock options or non-qualified 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.
Options
granted through September 30, 2007, vest ratably over periods of three to
five
years and expire in 10 years from the date of grant. The
weighted-average fair value of options granted during the nine months ended
September 30, 2007 and 2006 was $3.89 and $2.38, respectively.
Option
activity is summarized as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Plan
Options
|
|
|
Average
|
|
|
|
Available
|
|
Outstanding
|
|
|
Exercise
Price
|
|
Service-based
Stock Options
|
|
for
Grant
|
|
Incentive
|
|
Non-Qualified
|
|
|
per
Share
|
|
Balance,
December 31, 2006
|
|
|
|
|
323,851
|
|
|
|
|
835,274
|
|
|
|
|
104,500
|
|
|
$ |
2.51
|
|
Granted
|
|
|
|
|
(363,000 |
) |
|
|
|
133,804
|
|
|
|
|
229,196
|
|
|
|
6.79
|
|
Exercised
|
|
|
|
|
-
|
|
|
|
|
(277,200 |
) |
|
|
|
(64,900 |
) |
|
|
2.52
|
|
Canceled
|
|
|
|
|
42,900
|
|
|
|
|
(39,600 |
) |
|
|
|
(3,300 |
) |
|
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2007
|
|
|
|
|
3,751
|
|
|
|
|
652,278
|
|
|
|
|
265,496
|
|
|
$ |
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Number
of
|
|
Exercise
|
|
Contractual
|
|
|
Value
|
|
Service-based
Stock Options
|
|
Shares
|
|
Price
|
|
Term
|
|
|
(in
thousands)
|
|
Balance
at September 30, 2007
|
|
|
|
|
917,774
|
|
|
|
$ |
4.25
|
|
|
|
|
8.1
|
|
|
$ |
10,788
|
|
Vested
and expected to vest, September 30, 2007
|
|
|
|
|
917,774
|
|
|
|
$ |
4.25
|
|
|
|
|
8.1
|
|
|
$ |
10,788
|
|
Exercisable,
September 30, 2007
|
|
|
|
|
259,241
|
|
|
|
$ |
4.25
|
|
|
|
|
7.6
|
|
|
$ |
3,049
|
|
The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the company’s estimated fair market
value of its stock on the last day of the period and the exercise price,
multiplied by the number of in-the-money options) that would have been received
by the option holders had all option holders exercised their options on
September 30, 2007. The amount of aggregate intrinsic value will change based
on
the fair market value of the Company’s stock. The aggregate intrinsic
value of options exercised during the three and nine
months ended September 30, 2007 and 2006 was $1,328 and $4,610, and $78 and
$287, respectively. The proceeds from stock option exercises for the
nine months ended September 30, 2007 were $862 and the tax benefits realized
related to the stock option exercises totaled $27.
Stock-based
compensation expense for all stock-based compensation awards granted after
January 1, 2006 was based on the fair value on the grant date, estimated
in
accordance with the provision of SFAS 123R using the Black-Scholes
option-pricing model with the following assumptions:
|
|
Sep-07
|
|
|
Sep-06
|
|
Expected
volatility
|
|
|
27.75 |
% |
|
|
45.50 |
% |
Expected
dividends
|
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected
term, in years
|
|
|
6.5
|
|
|
|
6.5
|
|
Risk-free
interest rate
|
|
|
4.58-4.76 |
% |
|
|
4.61-5.02 |
% |
Compensation
cost charged against income during the three and nine months ended September
30,
2007 and September 30, 2006 for the 2002 Stock Plan is as follows:
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
September
30,
|
|
|
2007
|
|
|
|
2006
|
|
|
2007
|
|
|
|
2006
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Instructional
costs and services
|
|
|
$ |
25
|
|
|
|
$ |
24
|
|
|
$ |
72
|
|
|
|
$ |
53
|
|
Marketing
and promotional
|
|
|
|
6
|
|
|
|
|
3
|
|
|
|
36
|
|
|
|
|
12
|
|
General
and administrative
|
|
|
|
105
|
|
|
|
|
20
|
|
|
|
646
|
|
|
|
|
174
|
|
Stock-based
compensation expense in operating income
|
|
|
136
|
|
|
|
|
47
|
|
|
|
754
|
|
|
|
|
239
|
|
Tax
benefit
|
|
|
|
(23 |
) |
|
|
|
(6 |
) |
|
|
(148 |
) |
|
|
|
(53 |
) |
Stock-based
compensation expense, net of tax
|
|
|
$ |
113
|
|
|
|
$ |
41
|
|
|
$ |
606
|
|
|
|
$ |
186
|
|
As
of
September 30, 2007, total compensation cost related to non-vested service-based
stock options not yet recognized was $1,200, which is expected to be recognized
over the next 48 months on a weighted-average basis.
7.
Subsequent Events
Purchased
Building. On August 13, 2007, the Company entered into an
agreement to purchase office space for $1,215. The Company used cash
to purchase the property and closed the transaction in October
2007.
Warrant
Exercise. In October 2007, the holder of a warrant to
purchase 155,815 shares of Class A common stock at an exercise price
of $4.62 per share exercised the warrant in full.
Initial
Public Offering. APEI closed its initial public offering on
November 14, 2007. In the initial public offering, APEI sold
5,390,625 shares of its common stock at a price to the public of $20.00
per
share, before underwriting discounts and commissions. The sale of the
shares included the exercise in full of the underwriters’ option to purchase up
to an additional 703,125 shares at the initial public offering price
to cover
over-allotments. Net proceeds to APEI were approximately $100,266,
after
deducting underwriting discounts and commissions and before offering
expenses.
In connection with the closing of the initial public offering, all
of APEI’s
Class A Common Stock was converted into shares of common stock.
Special
Distribution. On November 8,
2007, APEI declared a special distribution in the amount of $93,750
or $7.63 per
share, payable upon the completion of the initial public offering to
stockholders of record immediately prior to the completion of the
offering. APEI used proceeds from the initial public offering to pay
the special distribution.
New
Equity Plan Grants. In connection with the
initial public offering, on November 8, 2007, the Company granted options
to purchase 259,050 shares of common stock to employees with an exercise
price
equal to the initial public offering price of $20.00 per share. The
options will vest ratably over a period of three years and the options
will
expire seven years from the date of grant. In connection with the
closing of the public offering, on November 14, 2007, the Company granted
72,093 shares of restricted stock to employees and directors. The
restricted stock granted to employees will vest ratably over a period
of three
years, and the restricted stock granted to directors will vest in full
in
connection with the Company’s 2008 annual meeting of stockholders or one year
from the date of grant, whichever is earlier. Upon the closing of the
initial public offering, the Company issued 10
shares
to
each full time employee below the level of vice president, for an aggregate
of
3,820 shares of common stock.
Outstanding
Shares. The outstanding shares at September 30, 2007 do not
include the shares of stock issued upon the warrant exercise described above,
the shares issued in the initial public offering, the 72,093 shares of
restricted stock issued pursuant to the new equity plan in connection with
the
closing of the initial public offering; and the 3,820 shares of common stock
that were issued at the time of or after the closing of the
offering.
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 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 the Prospectus that forms a part of our
Registration Statement on Form S-1, as amended, which Prospectus was filed
pursuant to Rule 424(b)(4) on November 9, 2007 (Registration No.
333-145185). 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 the Prospectus 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 the parent company of American Public University
System. American Public University System is a provider of
exclusively online postsecondary education directed at the needs of the military
and public service communities, and operates through American Military
University, or AMU, and American Public University, or APU. Our
universities share a common faculty and curriculum that includes 57 degree
programs and 49 certificate programs in disciplines related to national
security, military studies, intelligence, homeland security, criminal justice,
technology, business administration and liberal arts. We currently
serve approximately 27,000 part-time adult students living in all 50 states
and
more than 130 foreign countries. Our university system is regionally
and nationally accredited.
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
August 2007 we filed a Registration Statement on Form S-1 (Registration No.
333-145185) for our initial public offering, which we completed on
November 14, 2007. In the initial public offering, we sold
5,390,625 shares of our common stock at a price to the public of $20.00 per
share, before underwriting discounts and commissions.
The
sale
of the shares included the exercise in full of the underwriters’ option to
purchase up to an additional 703,125 shares at the initial public offering
price
to cover over-allotments. Net proceeds to us were approximately
$100.3 million, after deducting underwriting discounts and
commissions and before offering expenses. In connection with the
closing of the initial public offering, all of our Class A Common Stock was
converted into shares of common stock.
As
a public company, we expect that 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.
The
Company formed Rockwell Education,
Inc. (“Rockwell”) in the Commonwealth of Virginia for the purpose of acquiring
all of the assets of Pinnacle Software Solutions, Inc. in February 2005.
The
acquired assets included Rockwell University, a school that provided
various software and programming training sessions to students and companies.
As
of August 31, 2006, the Company discontinued the operations of Rockwell,
and the activities of Rockwell are included in the accompanying financial
statements as discontinued operations.
Summary
In
recent years, we have experienced substantial growth. In the first nine months
of 2007, revenues increased 76.3% over the same period in 2006 resulting
from a
77.5% increase in net course registrations over the same period and a 10%
increase in graduate student tuition in 2007 that we announced in the summer
of
2006. Net income for the first nine months of 2007 was $5.8 million,
an increase of 225.8% over the same period in 2006. Diluted earnings
per share were $0.46 for the first nine months of 2007 compared to $0.15
for the
same period in 2006. 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. 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 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 programs for classes beginning in November 2006, for the nine months
ended September 30, 2007, 9.9% of our net course registrations were from
students using financial aid under Title IV programs. 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.
Our
results in 2006 also reflect the inclusion of our discontinued operations
related to Rockwell Education, Inc. (“Rockwell”). We formed Rockwell
for the purpose of acquiring all of the assets of Pinnacle Software Solutions,
Inc. in February 2005. The acquired assets included Rockwell University, a
school that provided various software and programming training sessions to
students and companies. As of August 31, 2006, we discontinued the
operations of Rockwell, and the activities of Rockwell are included in our
financial statements as discontinued operations.
Critical
Accounting Policies
Critical
accounting policies are disclosed in our 2006 audited financial statements,
which are included in the Prospectus that forms a part of our Registration
Statement on Form S-1, as amended, which Prospectus was filed pursuant to
Rule
424(b)(4) on November 9, 2007 (Registration No.
333-145185). There have been no significant changes in our critical
accounting policies from those disclosed in the Prospectus.
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
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional
costs and services
|
|
|
43.8
|
|
|
|
45.5
|
|
|
43.2
|
|
|
|
46.3
|
|
Selling
and promotional
|
|
|
11.0
|
|
|
|
11.4
|
|
|
10.1
|
|
|
|
13.0
|
|
General
and administrative
|
|
|
21.0
|
|
|
|
23.9
|
|
|
22.5
|
|
|
|
23.8
|
|
Depreciation
and amortization
|
|
|
3.9 |
|
|
|
4.4 |
|
|
4.2 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
79.7
|
|
|
|
85.2
|
|
|
80.0
|
|
|
|
87.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
interest
income and income taxes
|
20.3
|
|
|
|
14.8
|
|
|
20.0
|
|
|
|
12.3
|
|
Interest
income, net
|
|
|
1.5
|
|
|
|
0.8
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
21.8
|
|
|
|
15.6
|
|
|
21.2
|
|
|
|
13.1
|
|
Income
tax expense
|
|
|
9.2
|
|
|
|
2.1
|
|
|
9.1
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
12.6
|
|
|
|
13.5
|
|
|
12.1
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
tax benefit of $228 and $302 for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
three and nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006, respectively
|
-
|
|
|
|
(5.3
|
) |
|
-
|
|
|
|
(2.3
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
12.6
|
%
|
|
8.2
|
%
|
12.1
|
%
|
|
6.6
|
%
|
Three
Months Ended September 30, 2007 Compared to Three Months Ended
September 30, 2006
Revenues.
Our revenues for the three months ended September 30, 2007 were $17.6 million,
an increase of $7.4 million, or 72.9%, compared to $10.2 million for the
three
months ended September 30, 2006. The increase was a result of an increase
in the
number of net course registrations, which were primarily attributable to
increased student referrals, the receipt of regional accreditation in May,
2006,
and our participation in the Title IV program starting in October 2006, as
well
as a 10% increase in graduate tuition in 2007.
Costs
and Expenses. Costs and expenses were $14.0 million for
the three months ended September 30, 2007; an increase of $5.3 million, or
61.7%, compared to $8.7 million for the three months ended September 30,
2006. Costs and expenses as a percentage of revenues decreased
slightly to 79.7% for the three months ended September 30, 2007 from 85.2%
for
the three months ended September 30, 2006. This decrease
resulted from the factors described below.
Instructional
costs and services expenses. Our instructional costs and services
expenses for the three months ended September 30, 2007 were $7.7 million,
representing an increase from $4.6 million for the three months ended September
30, 2006. 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 43.8% for the three months ended September 30,
2007,
compared to 45.5% for the three months ended September 30,
2006. This decrease was primarily due to an increase in the
average class size, which provided for a more efficient use of our full-time
faculty. Full-time faculty increased from approximately 37
at September 30, 2006 to 98 at September 30, 2007.
Selling
and promotional expenses. Our selling
and promotional expenses for the three months ended September 30, 2007 were
$1.9
million, representing an increase 68.0% from $1.2 million for the three months
ended September 30, 2006. This increase was primarily due to an
increase in the number of personnel in our marketing
department
required
to support higher student enrollments. Selling and promotional
expenses as a percentage of revenues decreased to 11.0% for the three months
ended September 30, 2007 from 11.4% for the three months ended September
30,
2006. This decrease was primarily due to our ability to realize
advertising efficiencies as a result of strong lead generations from personal
referrals.
General
and administrative expenses. Our general and administrative
expenses for the three months ended September 30, 2007 were $3.7 million
representing an increase of 51.7% from $2.4 million for the three months
ended
September 30, 2006. The increase in expense was a result of the need
for additional technology, financial positions, recruiting, professional
services, management and administrative facilities required to support a
larger
student body, participation in federal student aid, preparations for going
public, and an increase in stock based compensation expense. General and
administrative expenses as a percentage of revenues decreased to 21.0% for
the
three months ended September 30, 2007 from 23.9% for the three months ended
September 30, 2006. The 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.
Depreciation
and amortization. Depreciation and
amortization expenses were $0.7 million for the three months ending September
30, 2007, compared with $0.5 million for the three months ended September
30,
2006. This represents an increase of 51.9%. This increase
resulted from greater capital expenditures and higher depreciation and
amortization on a larger fixed asset base.
Stock-based
compensation. Stock-based compensation included in instructional
costs and services, selling and promotional, and general and administrative
expense for the three months ended September 30, 2007 was $136,000 in the
aggregate, representing an increase of 189.4% from $47,000 for the three
months
ended September 30, 2006. The increase in stock-based compensation is
primarily attributable to an increase in new stock option grants at a higher
value.
Interest
income, net. Our interest income, net increased by $172,000 for
the three months ended September 30, 2007 to $257,000, representing an increase
of 202.4%. This is attributable to increased cash flow due to
revenues and collections and a result of investment yields on the higher
cash
balance.
Income
tax expense. We recognized income tax expense for the three months
ended September 30, 2007 and 2006 of $1.6 million and $0.2 million,
respectively, or effective tax rates of 42.0% and 13.2%,
respectively. The increase in income tax expense was directly
attributable to higher pre-tax profits and a reduction in the historic tax
credit we were eligible for in 2006.
Net
income. Our net income was $2.2 million for the three months
ended September 30, 2007, compared to net income of $0.8 million for the
three
months ended September 30, 2006, an increase of $1.4 million. This
increase was related to the factors discussed above and a reduction in our
loss
from discontinued operations. Income from continuing operations was
$2.2 million for the three months ended September 30, 2007, compared to income
from continuing operations of $1.4 million for the three months ended September
30, 2006. We incurred a net loss of $538,000 for the three months
ended September 30, 2006 related to our discontinued Rockwell operations
compared to $0 for the three months ended September 30, 2007.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
Revenues.
Our revenues for the nine months ended September 30, 2007 were $47.9 million,
an
increase of $20.8 million, or 76.3%, compared to $27.1 million for the nine
months ended September 30, 2006. The increase was a result of an
increase in the number of net course registrations, which were primarily
attributable to increased student referrals, the receipt of regional
accreditation in May 2006, and our participation in the Title IV program
starting in October 2006, as well as a 10% increase in graduate tuition in
2007.
Costs and Expenses. Costs and expenses were
$38.3 million for the nine months ended September 30, 2007; an increase of
$14.5
million, or 61.0% compared to $23.8 million for the nine months ended September
30, 2006. Costs and expenses as a percentage of revenues decreased
slightly to 80.0% for the nine months ended September 30, 2007 from 87.7%
for
the nine months ended September 30, 2006. This decrease
resulted from the factors described below.
Instructional
costs and services expenses. Our instructional costs and services
expenses for the nine months ended September 30, 2007 were $20.7 million,
representing an increase of 64.8% from $12.6 million for the nine months
ended
September 30, 2006. 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 expense as a
percentage of revenues decreased to 43.2% for the nine months ended September
30, 2007 from 46.3% for the nine months ended September 30,
2006. This decrease was primarily due to an increase in the average
class size, which provided for a more efficient use of our full-time
faculty. Full-time faculty increased from approximately 37 at
September 30, 2006 to 98 at September 30, 2007.
Selling
and promotional expenses. Our selling
and promotional expenses for the nine months ended September 30, 2007 were
$4.8
million, representing an increase of 36.8% from $3.5 million for the nine
months
ended September 30, 2006. This increase was primarily due to an
increase in the number of personnel in our admissions department required
to
support higher student enrollments. Selling and promotional expenses
as a percentage of revenues decreased to 10.1% for the nine months ended
September 30, 2007 from 13.0% for the nine months ended September 30,
2006. This decrease was primarily due to our ability to realize
advertising efficiencies as a result of strong lead generations from personal
referrals.
General and administrative expenses. Our general and
administrative expenses for the nine months ended September 30, 2007 were
$10.8
million, representing an increase of 66.7% from $6.5 million for the nine
months
ended September 30, 2006. The increase in expense was a result of the
need for additional technology, financial positions, recruiting, professional
services, management and administrative facilities required to support a
larger
student body, participation in federal student aid, preparations for going
public, and an increase in stock based compensation expense. General
and administrative expenses as a percentage of revenues decreased to 22.5%
for
the nine months ended September 30, 2007, from 23.8% for the nine months
ended
September 30, 2006. The 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.
Depreciation
and amortization. Depreciation and
amortization expenses were $2.0 million for the nine months ended September
30,
2007, compared with $1.2 million for the nine months ended September 30,
2006. This represents an increase of 61.3%. This increase
resulted from greater capital expenditures and higher depreciation and
amortization on a larger fixed asset base.
Stock-based
compensation. Stock-based compensation included in instructional
costs and services, selling and promotional, and general and administrative
expense for the nine months ended September 30, 2007 was $754,000 in the
aggregate, representing an increase of 215.5% from $239,000 for the nine
months
ended September 30, 2006. The increase in stock-based compensation is
primarily attributable to an increase in new stock option grants at a higher
value.
Interest
income, net. Our interest income, net increased by $384,000 for
the nine months ended September 30, 2007 to $595,000, representing an increase
of 182.0%. This is attributable to increased cash flow from
operations resulting in investment income on higher cash balances.
Income
tax expense. We recognized income tax expense from continuing
operations for the nine months ended September 30, 2007 and 2006 of
$4.4 million and $1.2 million, respectively, or effective tax rates of
43.0% and 32.4%, respectively. The increase in income tax expense was
directly attributable to higher pre-tax profits and a reduction in the historic
tax credit we were eligible for in 2006.
Net
income. Our net income was $5.8 million for the nine months
ended September 30, 2007, compared to net income of $1.8 million for the
nine
months ended September 30, 2006, an increase of $4.0 million. This
increase was related to the factors discussed above and a reduction in our
loss
from discontinued operations. Income from continuing operations was
$5.8 million for the nine months ended September 30, 2007, compared to income
from continuing operations of $2.4 million for the nine months ended September
30, 2006. We incurred a net loss of $633,000 for the nine months
ended September 30, 2006 related to our discontinued Rockwell operations
compared to $0 for the nine months ended September 30, 2007.
Liquidity
and Capital Resources
Liquidity
The
company financed operating activities and capital expenditures during the
nine
months ended September 30, 2007 and 2006 primarily through cash provided
by
operating activities and proceeds received from the exercise of stock
options. Cash and cash equivalents were $20.3 million and
$11.7 million at September 30, 2007 and December 31, 2006,
respectively.
We derive a significant portion of our revenues from tuition assistance
programs from the Department of Defense (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. However, we have typically received disbursements under
this program within 30 days of the start of the applicable class.
These
factors, together with the number of classes starting each month, affect
our
operational cash flow. Our costs and expenses will increase 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. After the completion of our initial public offering, and on
a regular basis, we intend to review the terms of our credit
facilities.
In
2006, we borrowed $893,000 and $1.1 million under two mortgage
notes. Both notes accrued interest at LIBOR plus 22 basis points
(7.6% at December 31, 2006), and were secured by real estate in Charles Town,
West Virginia. Payment was due in full on September 1,
2011. These notes were subsequently paid off in April
2007.
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.
On
November 14, 2007, the company closed its initial public offering of 5,390,625
shares at a price of $20 per share. After the underwriters’ discount,
the company received net proceeds of $100.3 million. Following the
closing, the company paid $93.8 million as a special distribution to
shareholders prior to the offering. After the special distribution,
the remaining $6.5 million will be used to pay any expenses remaining related
to
the offering and the residual proceeds will be retained.
Operating
Activities
Net
cash provided by operating activities was $14.5 million and $5.9 million
for the nine months ended September 30, 2007 and 2006,
respectively. As revenue and profits have grown, cash has
increased. Cash and cash equivalents were $20.3 million and $11.7
million at September 30, 2007 and December 31, 2006, respectively.
Investing Activities
Net
cash used in investing activities was $3.7 million and $3.9 million for the
nine
months ended September 30, 2007 and 2006, respectively. The $0.2
million increase is primarily due to capital expenditures, the majority of
which were related to software development and IT infrastructure
costs.
Financing Activities
Net
cash used in financing activities for the nine months ended September 30,
2007 was primarily a result of the repayment of two mortgage notes that
were obtained in 2006.
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 September 30,
2007.
Future
investment income may fall short of expectations due to changes in interest
rates. At September 30, 2007, 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.
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 September 30,
2007
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 September 30,
2007.
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 Securities Exchange Act of 1934, as amended, 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.
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.
We
currently have no material legal proceedings pending.
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
Prospectus that forms a part of our Registration Statement on
Form S-1, as amended, which Prospectus was filed
pursuant to Rule 424(b)(4) on November 9, 2007
(Registration
No. 333-145185).
Recent
Sales of Unregistered Securities
In
the three months ended September 30, 2007, options under our 2002 Stock
Incentive Plan were exercised to purchase 95,700 shares of our common stock
for
aggregate consideration of $202,476. The issuances of the securities
described in this paragraph were deemed to be exempt from registration
under the Securities Act of 1933 in reliance upon Section 4(2) under the
Securities Act of 1933 in that such issuances did not involve a public
offering
or under Rule 701 promulgated under the Securities Act of 1933, in that
they were offered and sold pursuant to a written compensatory plan relating
to
compensation, as provided by Rule 701.
Use
of Proceeds
On
November 8, 2007, our Registration Statement on Form S-1 (333-145185)
covering our initial public offering was declared effective by the SEC,
and the
offering commenced that day. We sold 5,390,625 shares of common stock,
including 703,125 shares to cover an over-allotment option granted to the
underwriters. William Blair 7 Company, L.L.C acted as sole book-running
manager
and Piper Jaffray & Co. acted as co-lead manager. The offering
closed on November 14, 2007. T he shares were sold
at a
price to the public of $20.00 per share. Costs incurred in connection with
the issuance and distribution of the securities registered were as
follows:
·
|
Underwriting
discounts and commissions —
$7,546,875
|
·
|
Estimate
of other expenses — $1,762,422
|
·
|
Estimate
of total expenses — $9,309,297
|
The
net offering proceeds to us after deducting the estimated total expenses
described above total approximately $98,503,203.
We
have used $93,750,006 of the net proceeds to pay a special distribution to
our stockholders of record who owned shares immediately before the closing
of
our initial public offering, which included payments to our directors,
executive
officers, and persons who own 10% or more of our common stock on a pro
rata
basis in accordance with their ownership of our stock. We intend to
use the estimated remaining $4,753,197 of the net proceeds from the offering
for
working capital and other general corporate purposes.
Purchases
of Equity
Securities by the Issuer and Affiliated Purchasers
None.
None.
By
written consent dated September 19, 2007, holders of a majority of our
capital stock entitled to vote at each meeting of our stockholders, and
holders
of a majority of our issued and outstanding shares of Class A Common Stock,
voting together as a single voting class, (i) approved an amendment to our
Amended and Restated Certificate
of
Incorporation (the “Charter”) to effect an 11-for-1 stock split of our common
stock and our Class A Common Stock, and (ii) increasing our authorized
capital. Each of the foregoing items was approved by holders of
9,256,258 shares of our Class A Common Stock then outstanding and
2,873,442 shares of our common stock then outstanding. There were no votes
cast against or withheld and no abstentions with respect to the foregoing
items.
None.
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.
|
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__________
|
|
November
20, 2007
|
|
|
|
|
|
Wallace
E. Boston
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
__________/s/
Harry T. Wilkins__________
|
|
November
20, 2007
|
|
|
|
|
|
Harry
T. Wilkins
|
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
|
(Principal
Financial and Principal Accounting Officer)
|
|
|
19