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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 March 31, 2009
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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes |_| 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 |X|
Non-accelerated filer |_| 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 April 30, 2009
was 18,147,896.
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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 14
Item 4. Controls and Procedures 15
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 15
Item 1A. Risk Factors 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 16
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN PUBLIC EDUCATION, INC.
Consolidated Balance Sheets
(In thousands)
As of March 31, As of December 31,
2009 2008
--------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 52,968 $ 47,714
Accounts receivable, net of allowance of
$697 in 2009 and $537 in 2008 8,018 6,188
Prepaid expenses 2,284 2,156
Income tax receivable - 1,306
Deferred income taxes 942 640
--------------- ------------------
Total current assets 64,212 58,004
Property and equipment, net 20,117 19,622
Other assets, net 1,306 1,187
--------------- ------------------
Total assets $ 85,635 $ 78,813
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,935 $ 4,946
Accrued liabilities 4,174 5,250
Accrued bonus 1,074 1,825
Income tax payable 1,617 -
Deferred revenue and student deposits 10,823 9,626
--------------- ------------------
Total current liabilities 21,623 21,647
Deferred income taxes 3,821 3,691
--------------- ------------------
Total liabilities 25,444 25,338
--------------- ------------------
Commitments and contingencies (Note 2)
Stockholders' equity:
Preferred stock, $.01 par value;
Authorized shares - 10,000; no shares
issued or outstanding - -
Common stock, $.01 par value;
Authorized shares - 100,000; 18,103
issued and 18,103 outstanding in 2009;
18,030 issued and 18,023 outstanding in
2008 181 180
Additional paid-in capital 133,260 132,078
Less cost of 6 shares of treasury stock - (295)
Accumulated deficit (73,250) (78,488)
--------------- ------------------
Total stockholders' equity 60,191 53,475
--------------- ------------------
Total liabilities and stockholders' equity $ 85,635 $ 78,813
=============== ==================
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 amounts)
Three Months Ended
-----------------------------
March 31,
-----------------------------
2009 2008
------------- -------------
(Unaudited)
Revenues $ 33,161 $ 23,241
------------- -------------
Costs and expenses:
Instructional costs and services 12,743 9,912
Selling and promotional 4,331 2,177
General and administrative 6,056 4,803
Depreciation and amortization 1,297 898
------------- -------------
Total costs and expenses 24,427 17,790
------------- -------------
Income from operations before
interest income and income taxes 8,734 5,451
Interest income, net 11 242
------------- -------------
Income before income taxes 8,745 5,693
Income tax expense 3,507 2,288
------------- -------------
Net income $ 5,238 $ 3,405
============= =============
Net Income per common share:
Basic $ 0.29 $ 0.19
============= =============
Diluted $ 0.28 $ 0.18
============= =============
Weighted average number of
common shares:
Basic 18,055,009 17,735,908
============= =============
Diluted 18,888,600 18,767,995
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMERICAN PUBLIC EDUCATION, INC.
Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended March 31
---------------------------
2009 2008
--------- ---------
(Unaudited)
Operating activities
Net income $ 5,238 $ 3,405
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for bad debt 160 207
Depreciation and amortization 1,297 898
Stock-based compensation 535 377
Stock issued for director compensation 41 49
Deferred income taxes (172) (143)
Changes in operating assets and liabilities:
Accounts receivable (1,990) 222
Prepaid expenses and other assets (128) (139)
Income tax receivable 1,306 1,089
Accounts payable (1,011) (592)
Accrued liabilities (1,076) 123
Accrued bonus (751) (791)
Income tax payable 1,617 910
Deferred revenue and student deposits 1,197 1,413
--------- ---------
Net cash provided by operating activities 6,263 7,028
--------- ---------
Investing activities
Capital expenditures (1,754) (2,193)
Capitalized program development costs and other
assets (157) (736)
--------- ---------
Net cash used in investing activities (1,911) (2,929)
--------- ---------
Financing activities
Cash paid for repurchase of common stock (1) -
Cash received from issuance of common stock, net of
issuance costs 209 273
Excess tax benefit from stock based compensation 694 429
--------- ---------
Net cash provided by financing activities 902 702
--------- ---------
Net increase in cash and cash equivalents 5,254 4,801
Cash and cash equivalents at beginning of period 47,714 26,951
--------- ---------
Cash and cash equivalents at end of period $ 52,968 $ 31,752
========= =========
Supplemental disclosure of cash flow information
Income taxes paid $ 63 $ 3
========= =========
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 subsidiary (the
"Company") is a provider of exclusively online postsecondary education directed
primarily at the needs of the military and public service communities that
operates in one reportable segment. APEI has one subsidiary, 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.
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, 2009. 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 included in its Annual Report, on Form 10-K,
for the year ended December 31, 2008.
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 February 2009, FASB issued FASB
Staff Position No. (FSP) 157-2 deferring the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years for items within the scope of this FSP. The effective date for the
Company is January 1, 2009. In April 2009, FASB issued FASB Staff Position No.
(FSP) 157-4, Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly. FSP FAS 157-4 reaffirms SFAS 157's objective of fair value
measurement to reflect how much an asset would be sold for in an orderly
transaction. Its effective date is for interim and annual periods ending after
June 15, 2009 but it may be adopted early for the interim and annual periods
ending after March 15, 2009.
In April 2008, FASB issued FASB Staff Position No. (FSP) 142-3,
Determination of the Useful Life of Intangible Assets. This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets. The FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. FSP 142-3 was effective for the
Company on January 1, 2009.
6
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141, (revised 2007), Business Combinations ("SFAS 141R") which was
amended and clarified in April 2009 when FASB issued FASB Staff Position No.
(FSP) 141(R)-1. The Statement establishes revised principles and requirements
for how the Company 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 141R and 160 are effective for the Company on
January 1, 2009.
The adoption of the above standards did not have a material impact on the
financial statements for the three months ended March 31, 2009 and 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 March 31, 2009, management believes there were no material
commitments or contingencies requiring disclosure.
Concentration
Approximately 63% and 66% of the Company's revenues for the three months
ended March 31, 2009 and 2008 were derived from students who received 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.
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 restricted stock. Stock options and restricted
stock are not included in the computation of diluted earnings per share when
their effect is anti-dilutive. There were no anti-dilutive stock options or
restricted stock excluded from the calculation for the three months ended March
31, 2009 and 2008.
4. Income Taxes
The Company is subject to U.S. Federal income taxes as well as income taxes
of multiple state jurisdictions. For Federal and state tax purposes, tax years
2005-2008 remain open to examination. Currently, no examinations are open in any
jurisdiction.
The actual combined effective tax rate for the three months ended March 31,
2009 was 40.1% which is in line with the 40.0% effective combined Federal and
state statutory rate the Company was anticipating.
The Company does not anticipate any significant increases or decreases in
unrecognized tax benefits within the next twelve months.
7
5. Stock Based Compensation
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
authorized the grant of 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 then available for issuance
under the new equity plan. As of March 31, 2009 there were 651,872 shares
available for grant under the 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.
The Company has adopted the provisions of FASB Statement No. 123R -- Share
Based Payment, a revision of FASB Statement No. 123 -- Accounting for Stock
Based Compensation ("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.
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. We
calculate the expected term of stock option awards using the "simplified method"
in accordance with Staff Accounting Bulletins No. 107 and 110 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 expected stock
price 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 three-year constant maturity, quoted on an
investment basis in effect at the time of grant for that business day.
March 31, 2009 March 31, 2008
--------------------------------
Expected volatility 27.17%-29.20% 26.23%
Expected dividends 0.00% 0.00%
Expected term, in years 4.0 - 4.5 4.5
Risk-free interest rate 1.0%-1.3% 2.59%
Weighted-average fair value of options
granted during the year $ 9.09 $ 8.26
8
Options granted through March 31, 2009 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-Average Intrinsic
Number Average Contractual Value
of Options Exercise Price Life (Yrs) (In thousands)
------------------------------------------------------------------------------------------
Outstanding, December 31, 2008 1,257,441 $ 7.02
Options granted 87,584 $ 37.19
Awards exercised (78,786) $ 2.83
Awards forfeited (630) $ 20.00
------------------------------------------------------------
Outstanding, March 31, 2009 1,265,609 $ 9.36 $ 6.63 $ 41,388
============================================================
Exercisable, March 31, 2009 572,769 $ 6.08 $ 6.72 $ 20,606
============================================================
The following table summarizes information regarding stock option exercises
(unaudited):
March 31, 2009 March 31, 2008
(In thousands)
--------------------------------
Proceeds from stock options exercised $ 223 $ 106
Intrinsic value of stock options exercised $ 2,950 $ 2,394
Tax benefit from exercises $ 717 $ 432
The table below summarizes the restricted stock activity for the three
months ended March 31, 2009 (unaudited):
Weighted-Average
Number Grant Price
of Shares and Fair Value
----------------------------
Non vested, December 31, 2008 48,988 $ 22.27
Shares granted 18,358 $ 37.12
Vested shares (80) $ 31.00
Shares forfeited (160) $ 20.00
----------------------------
Non vested, March 31, 2009 67,106 $ 26.33
============================
9
Stock based compensation cost charged against income during the three month
period ended March 31, 2009 and March 31, 2008 is as follows:
Three Months Ended
March 31,
------------------
2009 2008
------- -------
(Unaudited)
(In thousands)
Instructional costs and services $ 109 $ 56
Marketing and promotional 37 17
General and administrative 389 304
------- -------
Stock-based compensation expense in operating income 535 377
Tax benefit (189) (128)
------- -------
Stock-based compensation expense, net of tax $ 346 $ 249
======= =======
As of March 31, 2009, there was $3.3 million of total unrecognized
compensation cost, representing $2.0 million of unrecognized compensation cost
associated with share-based compensation arrangements, and $1.3 million of
unrecognized compensation cost associated with non-vested restricted stock. The
total remaining cost is expected to be recognized over a weighted average period
of 2.75 years.
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
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,
2008 (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.
10
Overview
Background
American Public Education, Inc. is a provider of online postsecondary
education directed primarily 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 requirements for participation in Title IV programs and to
assist students who are utilizing Title IV programs in meeting eligibility
requirements.
Summary
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 64% from 2006 to 2008. Over that same
time, total revenue increased at a CAGR of 64%, from $40.0 million in 2006 to
$107.1 million in 2008. 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 55% in 2008 over 2007. Our revenue
increased from $69.1 million to $107.1 million, or by 55%, over the same time
period and operating margins increased to 24% from 21% over the same time
period. Net course registrations increased 41% for the three month period ended
March 31, 2009 over the three month period ended March 31, 2008. Our revenue
increased from $23.2 million to $33.2 million, or by 43%, for the three month
period ended March 31, 2009 over the three month period ended March 31, 2008.
Operating margins increased to 26.3% for the three month period ended March 31,
2009 from 23.5% for the three month period ended March 31, 2008.
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. You should also note that our rates of growth in net course
registrations, revenues and earnings from 2007 to 2008 were all lower than our
rate of growth from 2006 to 2007. We do not expect to return to the levels of
growth that we had from 2006 to 2007, when we had a particularly strong growth
rate, which we think is largely as a result of our receipt of regional
accreditation in late 2006.
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. We first became eligible to use Title IV funds
beginning with classes that started in November 2006. 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, estimating
the costs and expenses associated with administering Title IV programs and
complying with the associated regulations is difficult. For the year ended
December 31, 2008, 14% of our net course registrations were from students using
financial aid under Title IV programs. For the three months ended March 31, 2009
and March 31, 2008, 16% and 12%, or approximately 7,500 and 4,000, of our net
course registrations were from students using financial aid under the Title IV
programs. This represents an increase of 87.5%.
11
Our results of operations normally fluctuate as a result of variations in
our business, principally due to changes in enrollment, and we expect that going
forward as our overall growth rate declines we will see a more pronounced
seasonal fluctuation in new enrollments. While our number of enrolled students
has grown in each sequential quarter over the past three years, we believe that
the growth in the number of enrolled students will tend to be slower in the
first half of each year and the growth in the number of enrolled students will
be proportionally greatest in the fourth quarter of each year. Because a
significant portion of our general and administrative expenses do not vary
proportionately with fluctuations in revenues, we expect to see seasonal
fluctuations in our results of operations. Due to our historical growth rates
and our relatively new participation in Title IV programs, these patterns are
hard to predict and may change, including as a result of new program
introductions and increased enrollments of students.
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, 2008 included in our Annual Report on Form 10-K, for the
fiscal year ended December 31, 2008. 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
Ended March 31,
---------------------
2009 2008
------- -------
Revenues 100.0 % 100.0 %
------- -------
Costs and expenses:
Instructional costs and services 38.4 42.6
Selling and promotional 13.1 9.3
General and administrative 18.3 20.7
Depreciation and amortization 3.9 3.9
------- -------
Total costs and expenses 73.7 76.5
------- -------
Income from operations before
interest income and income taxes 26.3 23.5
Interest income, net 0.1 1.0
------- -------
Income from operations
before income taxes 26.4 24.5
Income tax expense 10.6 9.8
------- -------
Net Income 15.8 % 14.7 %
======= =======
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Revenues. Our revenues for the three months ended March 31, 2009 were $33.2
million, an increase of $10.0 million, or 43%, compared to $23.2 million for the
three months ended March 31, 2008. The increase was primarily a result of a 41%
increase in the number of net course registrations.
12
Costs and Expenses. Costs and expenses were $24.4 million for the three
months March 31, 2009, an increase of $6.6 million, or 37%, compared to $17.8
million for the three months ended March 31, 2008. Costs and expenses as a
percentage of revenues decreased to 73.7% for the three months ended March 31,
2009 from 76.5% for the three months ended March 31, 2008. This decrease
resulted from the factors described below.
Instructional costs and services expenses. Our instructional costs and
services expenses for the three months ended March 31, 2009 were $12.7 million,
representing an increase of 28% from $9.9 million for the three months ended
March 31, 2008. 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 38.4%
for the three months ended March 31, 2009, compared to 42.6% for the three
months ended March 31, 2008. This 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 March 31, 2009 were $4.3 million, representing an
increase of 95% from $2.2 million for the three months ended March 31, 2008.
This increase was primarily due to an increase in print, online, and media
advertising expenses. Selling and promotional expenses as a percentage of
revenues increased to 13.1% for the three months ended March 31, 2009 from 9.3%
for the three months ended March 31, 2008. 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 March 31, 2009 were $6.1 million
representing an increase of 27% from $4.8 million for the three months ended
March 31, 2008. 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. General and administrative expenses as a percentage of revenues
decreased to 18.3% for the three months ended March 31, 2009 from 20.7% for the
three months ended March 31, 2008. 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
$1.3 million for the three months ended March 31, 2009, compared with $0.9
million for the three months ended March 31, 2008. This represents an increase
of 44%. The increase resulted from higher depreciation and amortization on a
larger fixed asset base and from the amortization of a software license related
to our learning management system.
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 March 31, 2009
were $535,000 in the aggregate, representing an increase of 42% from $377,000
for the three months ended March 31, 2008. The increase in stock-based
compensation for the three months ended March 31, 2009 is primarily attributable
to stock options granted during the three months ended March 31, 2009.
Interest income, net. Our interest income, net decreased by $231,000 for
the three months ended March 31, 2009 to $11,000 from $242,000 for the three
months ended March 31, 2008, representing a decrease of 95%. This decrease is
attributable to increased cash on hand which was offset by lower investment
returns due to a decline in interest rates and adoption of a more conservative
investment strategy.
Income tax expense. We recognized income tax expense for the three months
ended March 31, 2009 and 2008 of $3.5 million and $2.3 million, respectively, or
effective tax rates of 40.1% and 40.2%, respectively.
Net income. Our net income was $5.2 million for the three months ended
March 31, 2009, compared to net income of $3.4 million for the three months
ended March 31, 2008, an increase of $1.8 million, or 53%. This increase was
related to the factors discussed above.
Liquidity and Capital Resources
Liquidity
The Company financed operating activities and capital expenditures during
the three months ended March 31, 2009 and 2008 primarily through cash provided
by operating income and proceeds received from the exercise of stock options.
Cash and cash equivalents were $53.0 million and $31.8 million at March 31, 2009
and March 31, 2008, respectively, representing an increase of $21.2 million, or
67%.
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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.
These factors, together with the number of classes starting each month,
affect our operational cash flow. As a result, our costs and expenses have
increased with the increase in student enrollment, and we expect to fund these
expenses through cash generated 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.
We continually to evaluate our space needs and evaluate opportunities for
continued physical growth, which includes considering both additional existing
structures and potential new construction projects. In particular, we are
currently considering new construction projects that could result in
approximately $10 million of new real estate expenditures for the 18 to 24 month
period from the date of filing of this quarterly report. We expect that
additional real estate expenditures, if any, would be funded from our cash on
hand.
Operating Activities
Net cash provided by operating activities was $6.3 million and $7.0 million
for the three months ended March 31, 2009 and 2008, respectively. Cash provided
by operating activities decreased slightly due to timing of receipts and billing
for various branches of the military in March.
Investing Activities
Net cash used in investing activities was $1.9 million and $2.9 million for
the three months ended March 31, 2009 and 2008, respectively. The $1.0 million
decrease related to expenditures in 2008 not incurred in 2009 such as
improvements on property leased and acquired in 2007 and 2008, increased
software development and IT infrastructure costs and purchase of a perpetual
software license. Capital expenditures could be significantly higher in the
future as a result of the acquisition of existing structures or potential new
construction projects that arise as a result of our ongoing evaluation of our
space needs and opportunities for physical growth.
Financing Activities
Net cash provided by financing activities for the three months ended March
31, 2009 was $0.9 million from cash received from the issuance of common stock
and the excess tax benefit from stock based compensation. Net cash used by
financing activities for the three months ended March 31, 2008 was $0.7 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.
On March 27, 2009 the Board of Directors adopted resolutions to retire all
shares of the Company's Treasury Stock. The Company retired shares that had been
surrendered to the Company for the payment of withholding taxes arising from the
vesting of restricted stock issued under the Company's equity plan, including
6,419 shares that had been surrendered in 2008 and 32 shares that had been
surrendered during the three months ended March 31, 2009.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to risk from adverse changes in interest rates, primarily
relating to our investing of excess funds in cash equivalents bearing variable
interest rates, which are tied to various market indices. Our future investment
income will vary due to changes in interest rates. At March 31, 2009, 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. We
have no derivative financial instruments or derivative commodity instruments as
of March 31, 2009.
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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
March 31, 2009 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 March
31, 2009.
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.
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
Form 10-K for the year ended December 31, 2008, and all of the other information
set forth in this Form 10-Q and our Form 10-K before deciding to invest in our
common stock.
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
None.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit Description
-------------------
Exhibit No.
-----------
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.
16
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, Jr. May 7, 2009
--------------------------
Wallace E. Boston, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Harry T. Wilkins May 7, 2009
---------------------
Harry T. Wilkins
Executive Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
17