AMERICAN PUBLIC EDUCATION INC
10-Ks and 10-Qs
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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2009
Commission
File Number: 001-33810
American
Public Education, Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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01-0724376
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(State
or other jurisdiction of
Incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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111 West
Congress Street
Charles
Town, West Virginia 25414
(Address, including
zip code, of principal executive offices)
(304) 724-3700
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $.01 par Value
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The
NASDAQ Stock Market
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Title
of each class
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Name
of each exchange on which registered
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Securities
registered pursuant to section 12(g) of the Act:
None
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
o
No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No
þ
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
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
o
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer
o
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Accelerated
filer
þ
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Non-accelerated
filer
o
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Smaller
reporting company
o
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|||
| (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
o
No
þ
The total
number of shares of common stock outstanding as of February 19, 2010, was
18,302,012.
The
aggregate market value of the registrant’s common stock held by nonaffiliates
computed by reference to the price at which the common equity was last sold as
of June 30, 2009, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $696 million. For
purposes of this calculation, shares of common stock held by stockholders whose
ownership exceeds 10 percent of the common stock outstanding at June 30, 2009,
the Registrant’s chief executive officer, the Registrant’s chief financial
officer and the Registrant’s directors and funds affiliated with them were
excluded. Exclusion of such shares held by any person should not be construed to
indicate that the person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the Registrant, or that the
person is controlled by or under common control with the
Registrant.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
portions of the registrant’s Definitive Proxy Statement for its 2010 Annual
Meeting of Stockholders (which is expected to be filed with the Commission
within 120 days after the end of the registrant’s 2009 fiscal year) are
incorporated by reference into Part III of this Report.
AMERICAN
PUBLIC EDUCATION, INC.
FORM 10-K
INDEX
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Page
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PART
I
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| 2 | ||
| 25 | ||
| 39 | ||
| 39 | ||
| 39 | ||
| 39 | ||
| PART II | ||
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| 39 | ||
| 42 | ||
| 44 | ||
| 52 | ||
| 53 | ||
| 68 | ||
| 68 | ||
| 70 | ||
| PART III | ||
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| 70 | ||
| 70 | ||
| 70 | ||
| 70 | ||
| 70 | ||
| PART IV | ||
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| 71 | ||
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
annual report, including the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and
“Business,” contains forward-looking statements. 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. Forward-looking statements in this annual report
include statements about:
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•
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our
ability to comply with the extensive regulatory framework applicable to
our industry, including Title IV of the Higher Education Act and the
regulations thereunder, state laws and regulatory requirements, and
accrediting agency requirements;
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our
expectations regarding provisional certification;
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the
pace of growth of our enrollment;
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our
conversion of prospective students to enrolled students and our retention
of active students;
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our
ability to update and expand the content of existing programs and the
development of new programs in a cost-effective manner or on a timely
basis;
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our
maintenance and expansion of our relationships with the United States
Armed Forces and various organizations and the development of new
relationships;
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the
competitive environment in which we operate;
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our
cash needs and expectations regarding cash flow from
operations;
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our
ability to manage and grow our business and execution of our business and
growth strategies; and
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our
financial performance generally.
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Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements. There are a number of important factors that could cause actual
results to differ materially from the results anticipated by these
forward-looking statements, which apply only as of the date of this annual
report. These important factors include those that we discuss in Item 1A
“Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” and elsewhere. You should read these factors
and the other cautionary statements made in this annual report as being
applicable to all related forward-looking statements wherever they appear in
this annual 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 after
the date of this annual report, whether as a result of new information, future
events or otherwise, except as required by law.
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BUSINESS
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Company
Overview
American
Public Education, Inc. is a provider of exclusively online postsecondary
education with an emphasis on serving 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. Our universities share a
common faculty and curriculum, which includes 76 degree programs and 51
certificate programs in disciplines related to national security, military
studies, intelligence, homeland security, criminal justice, technology, business
administration, education and liberal arts. We currently serve over 63,700
students living in all 50 states, the District of Columbia, and many
foreign countries. Our university system is regionally and nationally
accredited.
From 2007
to 2009, our total revenue increased from $69.1 million to
$149.0 million, which represents a compound annual growth rate (CAGR) of
47%. Our net course registrations increased 55% and 41% in 2008 and 2009,
respectively, over the prior periods. We believe our growth is attributable to:
(i) high student satisfaction and referral rates; (ii) regional
accreditation in May 2006; (iii) increasing acceptance of distance learning
within our targeted markets; and (iv) achieving certification to
participate in federal student aid programs under Title IV of the Higher
Education Act of 1965 beginning with classes starting in November 2006. As our
revenue base grows, we expect our growth rate percentages to continue to
decline. However, we expect actual dollar revenue growth to increase. Net income
improved to $23.9 million in 2009 from net income of $8.8 million in
2007.
Approximately 75% of our students serve
in the United States military on active duty, in the reserves, or in the
National Guard or are veterans. Many of our other students
have careers in public service, such as federal, national and local law
enforcement personnel or other first responders. Our programs are generally
designed to help these and other students advance in their current professions
or prepare for their next career. Our online method of instruction is
well-suited to our students, many of whom serve in positions requiring extended
and irregular schedules, are on-call for rapid response missions, participate in
extended deployments and exercises, travel or relocate frequently and have
limited financial resources. Our satisfied students have been a significant
source of referrals for us,
which we believe has led to lower marketing
costs among certain of our student populations.
Over 50% of our new students in 2009
who responded to our surveys indicated that they inquired about enrolling in
either AMU or APU as the result of a personal
referral.
As of
December 31, 2009, we had approximately 210 full-time and over 770 adjunct
faculty. Nearly all of our faculty members have advanced degrees and many of
them have leadership experience in their fields. Our adjunct faculty also
includes professors who teach at leading national and state universities. We
believe quality faculty members are attracted to us because of the high
percentage of military and public service professionals in our student body who
can immediately apply lessons learned in our classroom to their daily work. In
addition, our faculty members are attracted to the flexible nature of teaching
online, the numerous support services we provide them, and our per student pay
structure for adjunct faculty. Our faculty is organized into several departments
under the leadership of a Provost who reports to our President and under the
supervision of a nine-member university Board of Trustees.
We have
invested significant amounts of capital and resources in developing proprietary
information systems and processes to support what we refer to as Partnership At
a Distance, or PAD. PAD is our approach to how we interact with our students,
and at its center is the PAD system. The PAD system allows prospective and
current students to interact with us exclusively online, on their schedule. The
PAD system also allows us to manage on an automated and cost-effective basis the
complex administrative tasks resulting from offering monthly starts for over
1,400 classes in over 820 unique courses to our over 63,700 students taught by
over 980 faculty members. Our systems and processes also help us measure and
manage the activities of our faculty, student support personnel, and prospective
and active students, allowing us to continuously improve our academic quality,
student support services and marketing efficiency. We believe these proprietary
systems and processes will support a much larger institution and provide us
important competitive and cost advantages.
History
We were
founded as American Military University in 1991 and began offering courses in
January 1993. Our founder, a retired Marine officer, established American
Military University as a distance learning graduate-level institution,
specializing in a military studies curriculum for military officers seeking an
advanced degree relevant to their profession. While American Military University
began as a paper-based institution that operated by mail, fax, phone and e-mail,
we have always been an institution specializing in distributed, distance
delivery. Following initial national accreditation by the Accrediting Commission
of the Distance Education and Training Council, or DETC, in 1995, in January
1996 American Military University began offering undergraduate programs
primarily directed to members of the armed forces. It gradually broadened its
military studies curriculum over the next three years to include defense
management, civil war studies, intelligence, and unconventional warfare, and
later expanded into military-related disciplines such as criminal justice,
emergency management, national security, and homeland security. Over time,
American Military University 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
extended its outreach to the greater public service community, primarily police,
fire, emergency management personnel and national security professionals. In
2002, we reorganized the operations of American Military University into our
current university system and we began operating through two brands, AMU and
APU. The purpose of the reorganization was in part to establish an institution
brand, APU, that would appeal to non-military markets, including public service
professionals such as teachers.
2
Our
university system achieved regional accreditation in May 2006 with The Higher
Learning Commission of the North Central Association of Colleges and Schools
(Higher Learning Commission). In September 2007, we received approval from The
Higher Learning Commission to offer seven new degree programs in Education and
Information Technology. We recently received approval from The Higher Learning
Commission to offer 19 new Associate degrees, a Bachelor of Arts in General
Studies, and a Master of Arts in Legal Studies.
Since the
founding of American Military University, we have gradually transitioned from a
military focus to a more broad-based focus on the military and public services
communities. Today, the split between students who are eligible for tuition
assistance programs of the Department of Defense, or DoD, and those who are not
is approximately two-thirds to one-third. We expect the percentage of our
students that are not eligible for tuition assistance programs of the DoD to
continue to increase, particularly as a result of our eligibility to participate
in Title IV programs..
Market
Overview
Within
the postsecondary education market, we believe that there is significant
opportunity for growth in online programs. We believe that increasing
requirements for workers to have job mobility, combined with the growing
acceptance of online learning from employers, and the flexibility associated
with online learning should attract more students, both traditional and adult,
to distance learning.
There are
more than 2.1 million active and reserve military professionals in the
United States Armed Forces. Each year, approximately 300,000 new service members
are enlisted or commissioned to replace retiring and separating members. We
believe that the unpredictable and demanding work schedules of military
personnel and their geographic distribution make online learning and
asynchronous teaching particularly attractive to them. Military leaders and
policies promote voluntary education programs as a means for service members to
gain the knowledge and skills that will improve their military performance as
well as prepare them for a career following their military service. Academic
achievement can also result in increased rank and pay for service members. The
United States Armed Forces recognize academic achievement through awarding
promotion points for academic credits, specifying education level eligibility
requirements for assignments, promotions, and service schools, and entering
remarks on performance appraisals.
Active
duty and reserve component military personnel are eligible for tuition
assistance through the Uniform Tuition Assistance Program of the DoD. DoD policy
allows for payment of 100% of a military student’s tuition costs, up to $250 per
semester credit hour and a maximum benefit of $4,500 per fiscal year. Our
undergraduate tuition per course is designed so that the tuition assistance paid
by the service branches
covers the cost of our courses for
service members up to the annual maximum benefit. Military students who are
eligible for the Veterans Administration’s GI Bill Entitlement Program may apply
those funds to pay for tuition costs above the DoD limits through the GI Bill’s
Top-Up feature. Most military veterans are also eligible to use their GI Bill
entitlement in continuing their education after retirement or
separation.
We
believe that national security, homeland security, and public safety
professionals also represent a large and growing market for online education. As
with their military counterparts, these individuals have unique program
requirements as well as unpredictable and demanding work schedules that often
prevent them from attending traditional universities.
Competitive
Strengths
We
believe that we have the following competitive strengths:
Exclusively Online Education
— We have designed our courses and programs specifically for online
delivery, and we recruit and train faculty exclusively for online instruction.
Because our students are located around the globe, we focus our instruction on
asynchronous, interactive instruction that provides students the flexibility to
study and interact during the hours of the day or days of the week that suit
their terms and schedules.
Emphasis on Military and Public
Services Communities
— Since our founding, our culture has
reflected our devotion to our mission of Educating Those Who Serve
tm
. We have designed our academic programs, policies, marketing strategies and
tuition specifically to meet the needs of the military and public service
communities.
Affordable Tuition
—
Our tuition is generally consistent with less expensive in-state tuition at
state universities and is designed so that DoD tuition assistance programs fully
cover the cost of undergraduate courses and over 90% of the cost of graduate
courses. We have not increased our undergraduate tuition of $250 per credit hour
since 2000 and have no current intention to do so.
Commitment to Academic
Excellence
— Our academic programs are overseen by our Board of
Trustees, which counts as members two former college presidents, active
accreditation peer evaluators, a former Commandant of the Marine Corps, and a
former Department of the Army Inspector General. We are committed to
continuously improving our academic programs and services, as evidenced by the
level of attention and resources we apply to instruction and educational
support.
3
Proprietary Information Systems and
Processes
— Through the PAD system, students may access our
services online 24/7, such as admission, orientation, course registrations,
tuition payments, book requests, grades, transcripts and degree progress, and
various other inquiries. We also have created management tools based on the data
from the PAD system that help us to improve continuously our academic quality,
student support services and marketing efficiency. A key benefit to our
proprietary systems and processes is that they allow us to manage the
complexities involved in starting over 1,400 classes in over 820 unique courses
monthly. We believe our proprietary systems and processes will support a much
larger student body and provide us important competitive and cost
advantages.
Highly Scalable and Profitable
Business Model
— We believe our exclusively online education model,
our proprietary management information systems, our relatively low student
acquisition costs, and our variable faculty cost model have enabled us to expand
our operating margins.
Growth
Strategies
We
believe our growth in student enrollment and revenue has consistently been
driven by high student satisfaction and referral rates, and by increasing
acceptance of distance learning within our targeted markets. Between 2007 and
2008, we grew our revenue 55% from $69.1 million to $107.1 million. Our
revenues increased by 39% to $149.0 million for the year ended
December 31, 2009. As our revenue base grows, we
expect
our growth rate percentages to continue to decline. However, we expect actual
dollar revenue growth to increase. We plan to grow our business by employing the
following primary strategies:
Expand in Our Core Military
Market
— We have focused on the needs of the military community
since our founding and this community has been responsible for the vast majority
of our growth to date. The combination of our online model, focused curriculum
and outreach to the military has enabled us to gain share from more established
schools that have served this market for longer periods, many of which are
traditional brick and mortar schools.
Broaden Our Acceptance in the Public
Service and Civilian Markets
— We believe our curriculum is
directly relevant to federal, state and local law enforcement, first responders,
and other public service professionals, but historically this market was limited
to us because, outside the federal government, only a few agencies or
departments have the tuition reimbursement plans critical to fund continuing
adult education. Now that our students can obtain grants or low cost student
loans through Title IV programs, we have been increasing our focus on these
markets. We also believe that the affordability and diversity of our academic
program offerings, including our liberal arts degrees, attracts civilian
students.
Pursue and Expand Strategic
Partnerships
– We intend to pursue articulation agreements and strategic
relationships with institutions of higher learning, corporations, professional
associations, and other organizations as an additional source of enrollment
growth.
Focus on Improving Student
Retention
— As of December 31, 2009, over 80% of the students
who have completed three classes with us remain as active students or have
graduated from our university system. However, because our academics are
rigorous, and because we are an open enrollment university system, accepting
into our undergraduate programs all applicants with a high school diploma or
equivalent, many of our new students have difficulty continuing with our program
and drop after only one or two courses.
Add New Degree Programs
— We plan to continue to expand our degree offerings to meet our students’
needs. For example, we recently received approval from The Higher Learning
Commission and DETC to offer 19 new Associate degrees, a Bachelor of Arts in
General Studies, and a Master of Arts in Legal Studies.
Accreditation
An
institution must be licensed before it is allowed to teach students but
generally cannot be accredited until it has active students and two years of
successful, demonstrated performance. The accrediting body must observe the
institution’s processes, policies and procedures, and assess its financial
viability, among other factors. We maintain institutional accreditation with
accrediting bodies recognized by the U.S. Department of Education. The
Higher Learning Commission, a regional accrediting agency, initially granted us
Candidacy status in February 2004. We received accreditation from The Higher
Learning Commission in May 2006. We submitted a February 2009 Progress
Report on undergraduate program reviews and assessment to The Higher Learning
Commission, notwithstanding that we were not required to do so because of our
participation in The Higher Learning Commission’s Academy for Assessment of
Student Learning. The Higher Learning Commission has scheduled the next
reaccreditation site visit during the 2010-2011 academic year. We received
accreditation by the Accrediting Commission of the Distance Education and
Training Council, a national accrediting agency, in 1995. DETC’s process
provides for a reevaluation and affirmation of our accreditation every five
years. We are slated for a reaccreditation review in late 2011.
4
Curriculum
and Scheduling
We offer
127 degree and certificate programs. These programs include more than 1,400
courses, designated as core, major or elective courses. We offer terms beginning
on the first Monday of each month, with approximately 1,400 classes in over 820
unique courses starting 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.
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Programs
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Number
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Master
of Arts
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15 | |||
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Master
of Business Administration
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1 | |||
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Master
of Education
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3 | |||
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Master
of Public Administration
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1 | |||
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Master
of Public Health
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1 | |||
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Master
of Science
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3 | |||
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Bachelor
of Arts
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22 | |||
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Bachelor
of Business Administration
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1 | |||
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Bachelor
of Science
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10 | |||
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Associate
of Arts
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12 | |||
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Associate
of Science
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7 | |||
| 76 | ||||
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Certificates
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Graduate
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27 | |||
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Undergraduate
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24 | |||
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TOTAL
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127 | |||
At the
graduate level, we offer degree programs in the following
disciplines:
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Master
of Arts in:
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•
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Criminal
Justice
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•
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Emergency
Management and Disaster Management
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•
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History
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•
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Homeland
Security
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•
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Humanities
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•
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Intelligence
Studies
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•
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International
Relations and Conflict Resolution
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•
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Management
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•
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Legal
Studies
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•
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Military
History
|
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•
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Military
Studies
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•
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National
Security Studies
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•
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Political
Science
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•
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Security
Management
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•
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Transportation
Management and Logistics
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•
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Master
of Business Administration
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||||
| • |
Master
of Public Administration
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5
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Master
of Education in:
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•
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Administration
and Supervision
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Guidance
Counseling
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•
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Teaching
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•
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Master
of Public Health
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Master
of Science in:
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•
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Environmental
Policy and Management
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•
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Space
Studies
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•
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Sports
Management
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At the
undergraduate level, we offer degree programs in the following
disciplines:
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Bachelor
of Arts in:
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| • |
Child
and Family Development
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| • |
Criminal
Justice
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| • |
Emergency
and Disaster Management
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| • |
English
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•
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General
Studies
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| • |
History
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| • |
Homeland
Security
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| • |
Hospitality
Management
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| • |
Intelligence
Studies
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| • |
International
Relations
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| • |
Management
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| • |
Marketing
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| • |
Middle
Eastern Studies
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| • |
Military
History
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| • |
Military
Management and Program Acquisition
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| • |
Philosophy
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| • |
Political
Science
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|||
| • |
Psychology
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| • |
Religion
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| • |
Security
Management
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| • |
Sociology
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| • |
Transportation
and Logistics Management
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6
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•
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Bachelor
of Business Administration
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•
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Bachelor
of Science in:
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•
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Criminal
Justice with Concentration in Forensics
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•
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Environmental
Studies
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•
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Fire
Science Management
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•
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Information
Technology
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•
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Information
Technology Management
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•
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Information
System Security
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•
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Legal
Studies
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•
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Public
Health
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•
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Space
Studies
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•
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Sports
and Health Sciences
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•
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Associate
of Arts in:
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•
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Accounting
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•
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Business
Administration
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•
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Communication
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•
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Counter-Terrorism
Studies
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•
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Early
Childhood Care and Education
|
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•
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General
Studies
|
|
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•
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History
|
|
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•
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Hospitality
|
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•
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Military
History
|
|
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•
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Personnel
Administration
|
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•
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Real
Estate Studies
|
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•
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Weapons
of Mass Destruction Preparedness
|
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•
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Associate
of Science in:
|
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•
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Computer
Applications
|
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•
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Database
Application Development
|
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•
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Fire
Science
|
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•
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Explosive
Ordnance Disposal
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•
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Web
Publishing
|
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•
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Paralegal
Studies
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•
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Public
Health
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7
Our
certificate programs generally consist of a minimum of 18 semester hours of
required courses focusing on a particular component of the broader degree
program. Students may earn discrete certificates or in combination with work
toward a degree program.
Lead
Generation and Student Recruitment
We direct
our marketing efforts primarily toward building brand awareness and lead
generation among professionals serving in the military and public service
communities. We mainly focus on a relationship-based strategy by striving to
build long term and sustainable relationships with influential people and
organizations within these groups. We believe that persons working in these
fields tend to be tightly knit, which we believe greatly facilitates personal
testimonials from active and former students to prospective students. We believe
this approach enables us to achieve student acquisition costs that are
substantially less than the industry average. We also utilize internet organic
search techniques and key word purchases for more consumer focused marketing
efforts.
Admissions
Our
universities welcome qualified individuals to apply for admission at any time
through an online application process. We are an open enrollment institution,
and qualifications for our undergraduate program are a high school diploma or
General Education Development certificate. Graduate applicants must hold a
baccalaureate degree from an accredited U.S. institution or an equivalent
foreign institution. In 2008, more than 89,600 prospective students inquired
about admission through our website or by mail, e-mail, or phone and more than
23,300 started at least one course. In 2009, more than 157,800 inquiries were
received and more than 31,500 students started at least one
course.
Prospective
students apply directly online. Upon completing the online application and
orientation, students are issued a student ID number and password and provided
information for submitting the necessary documentation to finalize their
admission and apply for evaluation of credits that they would like to transfer.
Students are also informed how to register for their initial course(s), arrange
for tuition payment and navigate the online student environment. Prospective
students who have questions during the admissions process may obtain assistance
through our online resources and can contact the Admissions Department through
our online resources or by telephone.
Tuition,
Books and Fees
We
believe that our ability to provide affordable programs is one of our
competitive strengths. We have maintained our tuition costs in line with public,
in-state rates and within the DoD tuition ceilings. Undergraduate tuition is
$250 per semester credit hour, or $750 per three-credit course. This is aligned
with the DoD’s maximum tuition assistance levels per course, which enables most
of our military students to take courses with no out-of-pocket costs. Since 2000
we have not raised undergraduate tuition and we anticipate no tuition increase
for undergraduate students for the foreseeable future. If we were to implement a
tuition increase or if the DoD were to lower the amount of tuition assistance
per student, military students eligible for the U.S. Department of Veterans
Affairs’ GI Bill may apply that entitlement to cover the difference through the
Top-Up program. A full 120-semester hour undergraduate degree may be earned for
$30,000. Eligible undergraduate students receive their textbooks through our
book grant program, which represents a potential average student savings over
the course of a degree of approximately $4,500 when compared to four-year
colleges according to The College Board Study, Annual Survey of Colleges report
from 2009. Most students transfer in a significant amount of
prior credit earned, which also reduces the cost and time of earning their
degree.
With
respect to tuition for graduate programs, we had a modest tuition increase in
2007 but otherwise have not altered tuition since 2000. Graduate tuition is
currently $275 per semester hour, or $825 per three-semester credit hour course.
For graduate courses beginning in April 2010, tuition will be increased to $300
per semester hour , or $900 per three-credit hour course. For military students,
the service branch pays $750 of the tuition costs per course, and students have
the option of paying the remainder out of pocket or applying their GI Bill
entitlement to cover the cost above $750. At these tuition rates, including the
planned tuition increase, students may earn a graduate degree for less than
$10,000 in tuition costs.
Consistent
with our approach to affordability, we believe we have limited fees for students
compared to other institutions. We do not charge an admission fee, nor do we
charge fees for services such as registration, technology, course drops, and
similar events that trigger fees at most institutions. In addition, as a total
distance learning institution, there are no resident fees, such as for parking,
food service, student union and recreation. We do
charge fees for credit transfer evaluation, withdrawal, graduation, late
registration, transcript request and comprehensive examination, when applicable.
While we charge a fee for transfer credit evaluation, unlike transfer credit
fees at many institutions, the fee is a one-time fee that does not increase as
more credits are transferred.
In
addition to military and veterans benefits, we offer a variety of federal and
non-federal aid programs to assist students with their education costs. The
federal student aid programs under Title IV constituted 18.7% of our net
registrations in 2009, and we expect that the ability to participate in these
programs is important to our growth. The following aid sources are available
from military, federal, state, agency and local organizations to help students
meet their education goals:
8
Military and Veterans
Student Aid
|
•
|
Training
Funds
|
|
|
•
|
Tuition
Assistance
|
|
|
•
|
Veterans
Administration Benefits (G.I. Bill)
|
|
Other Federal Student Aid,
Including Title IV Programs
|
•
|
Federal
Pell Grant
|
|
|
•
|
Federal
Subsidized Stafford Loan
|
|
|
•
|
Federal
Unsubsidized Stafford Loan
|
|
|
•
|
Federal
PLUS Loan
|
|
|
•
|
Federal
Graduate PLUS Loan
|
|
|
•
|
Academic
Competitiveness Grant
|
|
|
•
|
National
Science, Mathematics and Access to Retain Talent (SMART)
Grant
|
|
|
•
|
Teacher
Education Assistance for College and Higher Education (TEACH)
Grant
|
Non-Federal Student
Aid
|
•
|
Employer
Voucher
|
|
|
•
|
Private
Loans
|
|
|
•
|
Undergraduate
Book Grant
|
|
Enrollment
and Student Body
Our
student body consists of over 63,700 students, and most of them hold full-time
employment. Active students are defined as those who have completed a course in
the past twelve months, are currently enrolled or registered for an
upcoming course or are on Program Hold. We disenroll students who fail to
register for and complete at least one course in a calendar year, although they
may later reapply for admission and active status. Program Hold permits students
on extended military deployments to remain active until they return
and are able to resume their studies.
Faculty
Our
faculty consists of over 980 members with relevant teaching and practitioner
experience. As of December 31, 2009, approximately 210 faculty members are
designated as full-time, and more than 770 members are serving as adjunct
faculty. A significant majority of our graduate faculty hold a doctorate in the
relevant field, while virtually all undergraduate faculty have earned a graduate
degree. Exceptions are granted for a limited number of faculty who may not meet
the degree standards, but evidence significant experience and achievement in the
subject area they teach.
We
establish full-time and adjunct positions based on program and course
enrollment. Many full-time faculty began their career with us as adjunct
members. As enrollment increases, we expect to establish additional full-time
positions, as well as additional adjunct positions.
We
attract faculty through referrals by current faculty members, advertisements in
education and trade association journals, and prospective members discovering us
through our Internet presence. Program Managers and Department Chairs review
applications and conduct interviews. We check references prior to offering
positions to new faculty and, upon selection, we require each new faculty member
to complete an orientation and training program that leads to their
certification and assignment. Many of our faculty members have relevant
experience at leading universities and within military and governmental
institutions. We believe that the composition of our student body and course
curriculum is particularly attractive to potential faculty members because of
the opportunity to teach relevant material to students that are involved on a
daily basis in implementing what is being taught. In turn, we believe that our
well-regarded faculty, including many former and current practitioners in their
fields, attracts new students with interest in these fields.
9
We
believe that the quality of our faculty is critical to our success, particularly
because faculty members have the largest amount of interaction with our
students. We do not provide our faculty with tenure. In addition, we regularly
review the performance of our faculty, including monitoring the amount of online
contact that faculty have with students, reviewing student feedback and
evaluating the learning outcomes achieved by students. If we determine that a
faculty member is not performing at the level that we require, we work with the
faculty member to improve performance, including through assigning the faculty
member a mentor. If the faculty member’s performance does not improve, we will
no longer allow that faculty member to teach.
Partnership
At a Distance
We have
established proprietary information systems and processes to support what we
refer to as Partnership At a Distance, or PAD. PAD is our approach to how we
interact with our students, and at its center is the PAD system. The PAD system
allows prospective and current students to interact with us exclusively online,
on their schedule. Through PAD we try to create learning partnerships with our
students and faculty that remove time and distance barriers. The PAD system
serves as the backbone for all online student interaction, other than the
classroom, which is provided through a separate program that is integrated with
the PAD system. We believe that the PAD system empowers students to control the
path to achieving their educational goals by providing them with 24/7 access to
resources without requiring intervention from staff. The PAD system also serves
as a business workflow process designed to enable faculty and staff to make
decisions for continuous process improvement based primarily on objective
information and feedback from students. Through the PAD system we are also able
to manage on an automated and cost-effective basis the complex administrative
tasks resulting from offering monthly semester starts for over 1,400 classes in
over 820 unique courses to our over 63,700 students taught by over 980 faculty
members.
Other
Technology Systems and Management
We
believe that we have established a functional, secure and reliable technology
system to help us fulfill our mission. We continue to invest in technology
systems and enhancements to support this system and our growth. Our IT
infrastructure consists of two data centers, one at our headquarters in Charles
Town, West Virginia, and one at a co-location facility in Virginia. Our
technology environment is managed internally. Student access is provided through
redundant data carriers in both data centers.
Our
online classroom employs the web-based portal learning management system,
Educator
™
,
from Ucompass.com, Inc., for which we obtained a perpetual license with
long-term support commitments in the first quarter of 2008. The Educator system
is a web-based portal that stores and delivers course content, provides
interactive communication between students and faculty, and supplies online
evaluation tools. We currently rely on Ucompass for ongoing support and
customization and integration of the Educator system with the rest of our
technology infrastructure. We have determined that it is in our long-term best
interest to transition to a new online classroom that allows us to integrate
additional technologies and resources. Our online classroom is central to our
operations, and the process of switching our provider will be complicated and
time consuming. We may underestimate the amount of time and capital that will be
required to complete the transition and our management team could be distracted
from focusing on other aspects of our business. Furthermore, the online
classroom that we select may not be well received by our current or future
students. Any of the foregoing problems could result in an adverse impact on our
operations, damage to our reputation and limits on our ability to attract and
retain students. Once a new platform is selected and implemented, we will
continue to utilize our Educator platform as a storage software system to
maintain the historical record of our student/faculty
interactions.
Competition
There are
more than 4,000 U.S. colleges and universities serving traditional college
age students and adult students. Competition is highly fragmented and varies by
geography, program offerings, delivery method,
ownership,
quality level, and selectivity of admissions. No one institution has a
significant share of the total postsecondary market. Within our primary military
market, there are more than 1,000 institutions that serve military students and
receive tuition assistance funds. Our primary competitors for military students
are other institutions offering online bachelor’s and master’s degrees and
traditional colleges and universities located near military
installations
We
compete with not-for-profit public and private two-year and four-year colleges
as well as other for-profit schools, particularly those that offer online
learning programs. Public and private colleges and universities, as well as
other for-profit schools, offer programs similar to those we offer. Public
institutions receive substantial government subsidies, and public and private
institutions have access to government and foundation grants, tax-deductible
contributions and other financial resources generally not available to
for-profit schools. Accordingly, public and private institutions may have
instructional and support resources that are superior to those in the for-profit
sector. In addition, some of our competitors, including both traditional
colleges and universities and other for-profit schools, have substantially
greater name recognition and financial and other resources than we have, which
may enable them to compete more effectively for potential students. We also
expect to face increased competition as a result of new entrants to the online
education market, including established colleges and universities that had not
previously offered online education programs.
10
The
primary competitive factors for institutions targeting working adult students
include: specific degree program offerings; affordability, including tuition and
fees and rates of increase; convenience and flexibility, including availability
of online courses; reputation and academic quality; and marketing
effectiveness.
Intellectual
Property
We
exercise rights associated with copyrights, trademarks, service marks, domain
names, agreements and registrations to protect our intellectual property. Course
syllabi are our property, may be used in current and future courses as needed to
facilitate instruction, and may be modified to meet evolving course or
curriculum requirements. Intellectual property of individual faculty members,
such as weekly notes or lectures, remains the property of the faculty member,
and is reserved specifically for use only by the faculty member who owns it,
unless he/she grants permission for use by others.
We have
secured a trademark for the phrase “Educating Those Who Serve,” which is used in
promotional materials and messaging, as well as the brand names American
Military University, American Public University and American Community College,
and we have applied for a trademark for the term Partnership At a Distance. We
also own rights to more than 200 Internet domain names pertaining to APUS, AMU,
APU and other unique descriptors. Our proprietary student information and
service system, the PAD system, is pending patent with the Patent and Trademark
Office.
Employees
In
addition to our faculty of over 980 members, as of December 31, 2009, we
had a professional staff of approximately 500 non-faculty employees
administering our academic, technology, service and business operations. Most of
our non-faculty employees work in either our headquarters in Charles Town, West
Virginia, or in our administrative offices in Manassas,
Virginia.
All
full-time employees participate in an incentive compensation program, which
enables staff and full-time faculty to earn quarterly and annual
bonus.
None of
our employees are parties to any collective bargaining arrangement. We believe
our relationships with our employees are good.
11
EXECUTIVE
OFFICERS OF AMERICAN PUBLIC EDUCATION, INC.
The table
below shows information about our executive officers:
|
Name
|
Age
|
Position
|
||||
|
Wallace
E. Boston, Jr.
|
55
|
President,
Chief Executive Officer and Director
|
||||
|
Harry
T. Wilkins
|
53
|
Executive
Vice President, Chief Financial Officer
|
||||
|
Carol
S. Gilbert
|
51
|
Executive
Vice President, Marketing
|
||||
|
Dr. Frank
B. McCluskey
|
60
|
Executive
Vice President, Provost
|
||||
|
Dr.
Sharon van Wyk
|
50
|
Executive
Vice President, Chief Operations Officer
|
||||
|
Peter
W. Gibbons
|
57
|
Senior
Vice President, Chief Administrative Officer
|
||||
|
W.
Dale Young
|
60
|
Senior
Vice President, Chief Information
Officer
|
||||
Wallace E. Boston, Jr.
joined us in September 2002 as Chief Financial Officer and, since June 2004 has
served as President, Chief Executive Officer and a member of our board of
directors. From August 2001 to April 2002, Mr. Boston served as Chief
Financial Officer of Sun Healthcare Group. From July 1998 to May 2001,
Mr. Boston served as Chief Operating Officer and later, President of
NeighborCare Pharmacies. From February 1993 to May 1998, Mr. Boston served as
VP-Finance and later, SVP of Acquisitions and Development of Manor Healthcare
Corporation, now Manor Care, Inc. From November 1985 to December 1992,
Mr. Boston served as Chief Financial Officer of Meridian
Healthcare.
Harry T. Wilkins
joined us in
February 2007 as Executive Vice President and Chief Financial Officer. From
December 2004 to February 2007, Mr. Wilkins served as a member of our board
of directors and from January 2005 to February 2007 he served on the Board of
Trustees of American Public University System. Since 2002, Mr. Wilkins has
also served as a founding partner of Wilkins, Little & Matthews, LLP, a
Baltimore-based CPA firm specializing in consulting for postsecondary education
clients. From May 1992 to August 2001, Mr. Wilkins served as Chief
Financial Officer of Strayer Education, Inc. From November 1984 to April 1992,
Mr. Wilkins served as Director at Wooden & Benson, an accounting
firm specializing in audits of education companies. From January 1979 to
November 1984, Mr. Wilkins served as a senior consultant with Deloitte,
Haskins and Sells, now Deloitte & Touche.
Carol S. Gilbert
joined us in
May 2004 as Vice President, Programs and Marketing, was promoted to Senior Vice
President, Marketing in January 2005 and was promoted to Executive Vice
President, Marketing in January 2009. From August 1998 to October 2003,
Ms. Gilbert served as Brand Vice President at Marriott International where
she led the strategic planning efforts for the SpringHill Suites’ brand and
directed business and marketing strategies for the Fairfield Inn brand,
including the launch of the Fairfield Inn & Suites brand extension.
From April 1996 to October 1997, Ms. Gilbert served as Vice President and
Director of Choice Hotels International (formerly owned by Manor Care, Inc.).
From February 1991 to April 1996, Ms. Gilbert served as Senior Director,
Marketing Strategy of Manor HealthCare Corporation, now Manor Care,
Inc.
Frank B.
McCluskey, Ph.D.
joined the Company in April 2005 as Executive
Vice President, Provost. From July 2001 to April 2005, Dr. McCluskey served
as Director and Dean of Online Learning at Mercy College in Dobbs Ferry, New
York. From September 2005 to December 2005, Dr. McCluskey served on the
online learning accreditation teams for the State of New York. From May 1998 to
December 2002, Dr. McCluskey served as a corporate trainer and
organizational consultant for the American Management Association. From December
1988 to January 1999, Dr. McCluskey served as an adjunct professor at
Marymount College and Western Connecticut State College. From January 1978 to
April 2005, Dr. McCluskey served as a faculty member in the philosophy
department at Mercy College and also held a post-doctoral fellowship in
philosophy at Yale University.
Sharon van Wyk,
Ph.D.
joined the Company in August 2009 as Executive Vice President,
Chief Operations Officer. From March 2009 to April 2008, Dr. van Wyk served
as Vice President of Process Excellence, Infrastructure & Online Customer
Support at Intuit. From 2001 to 2006, Dr. van Wyk served as Vice President
of Process Excellence and New Market Development for Genworth
Financial. From 1996 to 2001, Dr. van Wyk served as Manager, Global
Risk Management and Six Sigma for GE Capital. From 1988 to 1996, Dr. van Wyk
served as Associate Partner, Change Management for Accenture Consulting. Dr. van
Wyk was an adjunct professor for the Executive MBA program at the University of
Connecticut Business School and possesses several process improvement
certifications including Master Black Belt and Six Sigma
Instructor.
Peter W. Gibbons
joined us in
October 2002 as Vice President, Student Services and in January 2005 became
Senior Vice President, Chief Operating Officer. In May 2007, Mr. Gibbon’s
title was changed to Senior Vice President, Chief Administrative Officer. From
June 2002 to October 2002, Mr. Gibbons served as Vice President, Human
Resources for Sitel Corporation. Previously, from May 1975 to June 2000,
Mr. Gibbons served as a field artillery officer in the United States Army
and during his 25 years of service before retiring,
Mr. Gibbons commanded soldiers in combat, held senior staff positions at
the Department of Army level, and taught at the United States Military Academy
for 3 years.
W. Dale Young
joined us in
September 2009 as interim Chief Information Officer, and in February 2010 became
Senior Vice President, Chief Information Officer. From March 2005
until September 2009 Mr. Young served as President of Decent LLC, a business and
technology consulting company, during which time he provided consulting advice
to us on a number of important information technology and management projects.
From September 2003 to March 2005 Mr. Young served as Executive Vice President
of Systems Alliance, Inc. a Maryland based web-content management software and
consulting company. From January 1978 until his retirement in October 2002, Mr.
Young held several staff and leadership assignments in the US and Korea with
Pricewaterhouse Coopers LLP, PW Consulting and PwC Consulting
Korea.
12
Available
Information
Our
Company’s Internet address is www.americanpubliceducation.com. We make
available, free of charge through our website, our annual reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Exchange Act, soon after they are
electronically filed with the SEC. In addition to visiting our website, you may
read and copy public reports we file with the SEC at the SEC’s Public Reference
Room at 100 F. Street, NE, Washington DC 20549, or at
www.sec.gov
. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.
REGULATION OF
OUR BUSINESS
We are
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 our operations, including our 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,
we are 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, an institution
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.
Our
operations are also subject to regulation due to our participation in federal
student financial aid programs under Title IV of the Higher Education Act,
which we refer to in this annual report as Title IV programs. Title IV
programs, which are administered by the Department of Education, include
educational loans with below-market interest rates that are guaranteed by the
federal government in the event of default. Title IV programs also include
several grant programs for students with the greatest economic need as
determined in accordance with the Higher Education Act and Department of
Education regulations. To participate in Title IV programs, a school must
receive and maintain authorization by the appropriate state education agencies,
be accredited by an accrediting agency recognized by the Secretary of Education,
and be certified as an eligible institution by the Department of
Education.
State
Education Licensure
We are
authorized to offer our programs by the West Virginia Higher Education Policy
Commission, the regulatory agency governing postsecondary education in the State
of West Virginia, where we are headquartered.
We are
also authorized to operate as an out-of-state institution by the State Council
of Higher Education for Virginia. We are authorized in Virginia because we have
administrative offices there, which requires state authorization under Virginia
laws. We have sought and received confirmation that our current operations do
not require licensure or authorization or we have been notified that we are
exempt from licensure or authorization requirements in each of 37 states. We are
currently in the process of working with the New York State Board of Regents to
determine the appropriate level and form of our relationship with that agency in
light of recent revisions to various state statutes and New York State
Department of Education guidelines relating to distance education programs. The
university and its representatives are licensed or authorized to operate or to
conduct activities in the remaining 12 states and the District of Columbia
(Alabama, Arkansas, Florida, Georgia, Idaho, Kansas, Massachusetts, Minnesota,
New Mexico, Pennsylvania, Wisconsin and Wyoming). In some cases, the
licensure or authorization is restricted to specific programs or activities.
Because state education agencies may develop new administrative rules, or may be
subject to new legislative mandates, we routinely review the licensure
requirements of relevant state education agencies and contact relevant state
education agencies to determine whether our activities in their states
constitute a presence or otherwise require licensure or authorization by the
respective state education agencies. Because we enroll students from each of the
50 states, as well as the District of Columbia, and because we may
undertake activities in other states that constitute a presence or otherwise
subject us to the jurisdiction of the respective state education agency, it is
unlikely that from time to time we will need to seek licensure or authorization
in additional states, or modify our approach with respect to the manner by which
we operate in specific states.
13
The
increasing popularity and use of the Internet and other online services for the
delivery of education has led and may lead to the adoption of new laws and
regulatory practices in the United States or foreign countries and to new
interpretations of existing laws and regulations. These new laws, regulations
and interpretations may relate to issues such as the requirement that online
education institutions be licensed in one or more jurisdictions where they have
no physical location or other presence. For instance, in some states we are or
may be required to seek licensure or authorization because our recruiters meet
with prospective students in the state. In other states, the state education
agency requires, or may require, licensure or authorization because, for
example, we enroll students or employ faculty who reside in the state. Some
state education agencies that do not currently require us to be licensed or
authorized may in the future require such licensure or authorization for a
variety of reasons, including as a result of: new laws or regulations; changes
in our business; changes in the nature or amount of our contact or presence with
the applicable state; or changes in the interpretation of existing laws and
regulations. New laws, regulations or interpretations related to doing business
over the Internet could increase our cost of doing business and affect our
ability to recruit students in particular states, which could, in turn,
negatively affect enrollments and revenues and have a material adverse effect on
our business.
We are
subject to extensive regulations by the states in which we are authorized or
licensed to operate. State laws typically establish standards for instruction,
qualifications of faculty, administrative procedures, marketing, recruiting,
financial operations and other operational matters. State laws and regulations
may limit our ability to offer educational programs and to award degrees. Some
states may also prescribe financial regulations that are different from those of
the Department of Education, and may require the posting of surety bonds. If we
fail to comply with state licensing requirements, we may lose our state
licensure or authorizations. Although we believe that the only state
authorization or licensure necessary for us to participate in the tuition
assistance programs of the United States Armed Forces and in Title IV
programs is our authorization from the West Virginia Higher Education Policy
Commission, failure to comply with authorization or licensure requirements in
other states could restrict our ability to recruit or enroll students in those
states. Failure to comply with the requirements of the West Virginia Higher
Education Policy Commission could result in our losing authorization from the
West Virginia Higher Education Policy Commission, eligibility to participate in
Title IV programs, or ability to offer certain programs, any of which may
force us to cease operations.
Accreditation
We
received institutional accreditation in 2006 from The Higher Learning Commission
of the North Central Association of Colleges and Schools, a regional accrediting
agency recognized by the Secretary of Education. Our next comprehensive
evaluation will be in 2010-2011, as part of a regularly scheduled evaluation
process. In November 2008, The Higher Learning Commission conducted a focused
visit for the purpose of considering an expansion of our mission to include
liberal arts bachelors degrees. In December 2008, The Higher Learning Commission
approved expansion of our mission to include liberal arts bachelors degrees. The
Higher Learning Commission conducted a focused evaluation in February 2009 due
to the August 2008 change in ownership under The Higher Learning Commission’s
standards, and the site visitors did not identify concerns related to the August
2008 change and our accreditation status.
Accreditation
is a non-governmental system for recognizing educational institutions and their
programs for student performance, governance, integrity, educational quality,
faculty, physical resources, administrative capability and resources, and
financial stability. In the United States, this recognition comes primarily
through private voluntary associations that accredit institutions or programs of
higher education. To be recognized by the Secretary of Education, accrediting
agencies must adopt specific standards and procedures for their review of
educational institutions or programs. Accrediting agencies establish criteria
for accreditation, conduct peer-review evaluations of institutions and programs,
and publicly designate those institutions that meet their criteria. Accredited
schools are subject to periodic review by accrediting agencies to determine
whether such schools maintain the performance, integrity, and quality required
for accreditation.
The
Higher Learning Commission is the same accrediting agency that accredits such
universities as The University of Chicago, Northwestern University, West
Virginia University, and other degree-granting public and private colleges and
universities in its region (including, Arkansas, Arizona, Colorado, Iowa,
Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, North Dakota,
Nebraska, Ohio, Oklahoma, New Mexico, South Dakota, West Virginia, Wisconsin and
Wyoming).
Accreditation
by The Higher Learning Commission is an important attribute of ours. Colleges
and universities depend, in part, on accreditation in evaluating transfers of
credit and applications to graduate schools. Employers rely on the accredited
status of institutions when evaluating a candidate’s credentials, and students
and corporate and government sponsors under tuition reimbursement programs look
to accreditation for assurance that an institution maintains quality educational
standards. Moreover, institutional accreditation by an accrediting agency
recognized by the Secretary of Education is necessary for eligibility to
participate in tuition assistance programs of the United States Armed Forces and
Title IV programs.
14
In
addition to regional accreditation, we have been accredited by the Accrediting
Commission of the Distance Education and Training Council, or DETC, since 1995.
DETC is a national accrediting agency that is recognized by the Secretary of
Education. The Higher Learning Commission, and not DETC, is our designated
primary accreditor for Title IV program purposes.
In
November and December 2009, the Department of Education’s Office of the
Inspector General (OIG) issued reports criticizing three accrediting agencies,
including The Higher Learning Commission, for failing to define both program
length and credit hours. OIG explained that such failure could result in
inflated credit hours, improper designation of full-time student status, and
over-awarding of Title IV funds. OIG, in an unusual action, recommended that the
Department of Education consider limiting, suspending, or terminating The Higher
Learning Commission’s recognition as an accrediting agency for purposes of
determining institutional eligibility to participate in Title IV programs. The
Department of Education generally is not required to act on OIG recommendations.
As explained elsewhere in this annual report, the Department of Education is
considering regulations to address OIG’s concerns regarding measurement of
credit hours. As stated above, we also are accredited by DETC, which is a
national accrediting agency recognized by the Secretary of Education for
purposes of eligibility to participate in tuition assistance programs of the
United States Armed Forces and Title IV programs.
We
believe many prospective students, employers, state licensing authorities and
higher education organizations may view accreditation by a regional accrediting
agency to be more prestigious than accreditation by a national accrediting
agency, and loss of our regional accreditation would reduce the marketability of
the American Public University System even if we were to maintain our national
accreditation.
We also
believe that military personnel are counseled that regional accreditation is an
important consideration when selecting a postsecondary institution and that
there are further opportunities to leverage regional accreditation to service
members, such as joining degree networks previously closed to us like the
Servicemember Opportunity Colleges Degree Network System, a DoD program that
promotes its member institutions to military professionals.
Nature
of Federal, State and Private Financial Support for Postsecondary
Education
Our
students finance their education through a combination of individual resources,
tuition assistance programs of the United States Armed Forces, private loans,
corporate reimbursement programs, and Title IV programs. Participation in
these programs adds to the regulation of our operations.
Service
members of the United States Armed Forces are eligible to receive tuition
assistance from their branch of service through the Uniform Tuition Assistance
Program of the DoD. Service members may use this tuition assistance to pursue
postsecondary degrees at postsecondary institutions that are accredited by
accrediting agencies that are recognized by the Secretary of Education. For our
undergraduate programs we have established tuition per course that can be 100%
covered by DoD tuition assistance funds, resulting in no out-of-pocket costs to
undergraduate military students to attend our institution. Each branch of the
armed forces has established its own rules for the tuition assistance programs
of DoD. Pursuant to these rules, in order for service members to use their
tuition assistance funds at American Public University System, we need to
maintain our state licensure and either our regional or national accreditation
and the service member must maintain satisfactory academic progress and must
also progress in a timely manner toward completion of their
degree.
To the
extent that tuition assistance programs do not cover the full cost of tuition
for service members, service members may also use their benefits under the
Montgomery GI Bill administered by the U.S. Department of Veterans Affairs,
or VA, through the GI Bill’s Top-Up feature. If we lost our eligibility to
receive tuition assistance from the United States Armed Forces, or if the amount
of tuition assistance per service member is reduced, military service members
would need to seek alternative funds. While they may be able to use their
education benefits under the Montgomery GI Bill in lieu of DoD tuition
assistance funds, we do not know if that option would be as attractive to these
students. As a result, the inability to participate in DoD tuition assistance
programs, and any reduction in the funding for DoD tuition assistance programs,
could have a material adverse effect on our operations.
The
federal government provides a substantial part of its support for postsecondary
education through Title IV programs, in the form of grants and loans to
students who can use those funds at any institution that has been certified by
the Department of Education to participate in Title IV programs. Aid under
Title IV programs is primarily awarded on the basis of financial need,
generally defined as the difference between the cost of attending the
institution and the amount a student can reasonably contribute to that cost. All
recipients of Title IV program funds must maintain satisfactory academic
progress and must also progress in a timely manner toward completion of their
program of study. In addition, each school must ensure that Title IV
program funds are properly accounted for and disbursed in the correct amounts to
eligible students.
We were
first certified to participate in Title IV programs in September 2006. The
Department of Education has approved us to participate in the following
Title IV programs (described below): (1) the Federal Family Education
Loan Program (the “FFEL” program), (2) William D. Ford Federal Direct Loan
Program (the “Direct Loan Program”, (3) the Federal Pell Grant program (the
“Pell” program), (4) campus-based programs, and (5) Teacher Education
Assistance for College and Higher Education (TEACH) Grant
Program.
15
(1)
FFEL Program.
Under the FFEL program, banks and other lending institutions make
loans to students and parents of dependent students. The FFEL program includes
the Federal Stafford Loan Program, the Federal PLUS Program (which beginning on
July 1, 2006 provided for making loans to graduate and professional
students as well as parents of dependent undergraduate students), and the
Federal Consolidation Loan Program. If a student defaults on a loan, payment is
guaranteed by a federally recognized guaranty agency, which is then reimbursed
by the Department of Education. Students who demonstrate financial need may
qualify for a subsidized Stafford loan. With a subsidized Stafford loan, the
federal government will pay the interest on the loan while the student is in
school and during any approved periods of deferment, until the student’s
obligation to repay the loan begins. Unsubsidized Stafford loans are available
to students who do not qualify for a subsidized Stafford loan or, in some cases,
in addition to a subsidized Stafford loan. As of December 31, 2009, we ceased to
participate actively in the FFEL Program.
(2)
Direct Loan Program
. Under the Direct Loan Program, the Department of Education makes
loan directly to students rather than guaranteeing loans made by lending
institutions. As of June 1, 2009, APUS has originated all new loans for students
and their parents through the Direct Loan Program.
(3)
Federal Grant Programs.
Grants under the Federal Pell Grant program are available to
eligible students based on financial need and other factors. Grants under the
Academic Competitiveness Grant Program and National Science and Mathematics
Access to Retain Talent Grant Program are available to students who are eligible
for Pell Grants and meet certain other requirements.
(4)
Campus-Based Programs.
The “campus-based” Title IV programs include the Federal
Supplemental Education Opportunity Grant program, the Federal Work-Study program
and the Federal Perkins Loan program. We do not actively participate in any
campus-based program.
(5)
Teacher Education Assistance for
College and Higher Education (TEACH) Grant Program
. The TEACH
Grant Program provides up to $4,000 a year in grant assistance to undergraduate,
post-baccalaureate, and graduate students who agree to serve for at least four
years as full-time “highly qualified” teachers in high-need fields in public or
not-for-profit private elementary or secondary schools that serve students from
low-income families.
Congress
is considering legislation that among other changes would eliminate the FFEL
Program and require all institutions that participate in the Title IV programs
to participate exclusively in the Direct Loan Program by July 1,
2010.
See Pending
Legislative and Regulatory Changes below for more information.
As of June
1, 2009, we have processed new federal loan applicants exclusively in the Direct
Loan Program.
In
addition to the programs stated above, eligible students may participate in
several other financial aid programs or receive support from other governmental
and private sources. For example, some of our students who are veterans use
their benefits under the GI Bill to cover their tuition. Certain of our students
are also eligible to receive funds from other education assistance programs
administered by the VA. Pursuant to federal law providing benefits for veterans
and reservists, we are approved for education of veterans and members of the
selective reserve and their dependents by the state approving agencies in
Virginia and West Virginia. We offer institutional financial aid to eligible
students. In certain circumstances, our students may access alternative loan
programs. Alternative loans are intended to cover the difference between what
the student receives from all financial aid sources and the full cost of the
student’s education. Students can apply to a number of different lenders for
this funding at current market interest rates. Finally, some of our students
finance their own education or receive full or partial tuition reimbursement
from their employers.
The
Post-9/11 Veterans Educational Assistance Act of 2008, sometimes referred to as
the “New GI Bill”, expands education benefits for veterans who have served on
active duty since September 11, 2001, including reservists and members of
the National Guard. Under the New GI Bill, eligible veterans may receive
benefits for tuition purposes up to the cost of in-state tuition at the most
expensive public institution of higher education in the state where the veteran
is enrolled. In addition, veterans who are not enrolled in wholly distance
education programs may receive monthly housing stipends. Veterans may also
receive up to $1,000 per academic year for books and other education costs. The
provisions regarding benefits for post-9/11 veterans were effective
August 1, 2009. Effective August 1, 2008, the legislation also
increases the amount of education benefits available to eligible veterans under
pre-existing law, namely the Montgomery GI Bill. The legislation also authorizes
expansion of service members’ ability to transfer veterans education benefits to
family members.
16
Regulation
of Title IV Financial Aid Programs
To be
eligible to participate in Title IV programs, an institution must comply
with specific standards and procedures set forth in the Higher Education Act and
the regulations issued thereunder by the Department of Education. An institution
must, among other things, be licensed or authorized to offer its educational
programs by the state within which it is physically located (in our case, West
Virginia) and maintain institutional accreditation by a recognized accrediting
agency. In May 2008, we were fully recertified to participate in Title IV
programs after having completed an initial period of participation during which
we were provisionally certified. In August 2008, we were deemed to have
undergone a change in ownership and control requiring review by the Department
of Education in order to reestablish our eligibility and continue participation
in Title IV programs. In connection with this review, we submitted to the
Department of Education a change in ownership application that included the
submission of required documentation, including a letter from The Higher
Learning Commission indicating that it had approved the change. On
October 2, 2008, we received a letter from the Department of Education
approving the change in ownership and control and granting us provisional
certification until September 30, 2010. See “Eligibility and Certification
Procedure” and “Regulatory Actions and Restrictions on Operations” below for
more information.
The
substantial amount of federal funds disbursed through Title IV programs,
the large number of students and institutions participating in these programs
and allegations of fraud and abuse by certain for-profit institutions have
caused Congress to require the Department of Education to exercise considerable
regulatory oversight over for-profit institutions of higher learning.
Accrediting agencies and state education agencies also have responsibilities for
overseeing compliance of institutions with Title IV program requirements.
As a result, our institution is subject to extensive oversight and review.
Because the Department of Education periodically revises its regulations and
changes its interpretations of existing laws and regulations, and because
Congress recently enacted legislation that imposes new obligations on
institutions, we cannot predict with certainty how the Title IV program
requirements will be applied in all circumstances. See “Pending Legislative and
Regulatory Changes” below for more information.
Significant
factors relating to Title IV programs that could adversely affect us
include the following:
Congressional Action.
Congress reauthorizes the Higher Education Act approximately every
five to six years. On July 31, 2008, Congress completed the reauthorization
process by passing the Higher Education Opportunity Act or HEOA. The bill was
enacted on August 14, 2008. HEOA provisions are effective upon enactment,
unless otherwise specified in the law. Selected HEOA provisions are described in
relevant parts of this annual report. Although Congress took many years to
complete reauthorization, three laws to amend and reauthorize aspects of the
Higher Education Act were enacted in the meantime. In February 2006, the Deficit
Reduction Act of 2005, which includes the Higher Education Reconciliation Act of
2005 or HERA, was enacted. Among other measures, HERA reauthorized the Higher
Education Act with respect to the federal guaranteed student loan programs. In
September 2007, the College Cost Reduction and Access Act (CCRA) was
enacted. Among other measures, the CCRA increased benefits to
students under Title IV programs and reduced payments to and raised costs
for lenders that participate in the federal student loan programs. In May 2008,
the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) was enacted.
ECASLA was designed to facilitate student loan availability and to increase
student access to federal financial aid in light of market conditions. HEOA
includes numerous new and revised requirements for higher education institutions
and thus increases substantially regulatory burdens imposed on such institutions
under the Higher Education Act. We cannot predict with certainty the effect
HEOA’s provisions will have on our business. In addition, we cannot predict with
certainty whether or when Congress might act to amend further the Higher
Education Act. The elimination of certain Title IV programs, material
changes in the requirements for participation in such programs, or the
substitution of materially different programs could increase our costs of
compliance and could reduce the ability of certain students to finance their
education at our institution.
The
Department of Education has stated that affected parties are responsible for
taking steps to comply with HEOA by the effective dates established in HEOA even
in the absence of final effective regulations. During 2009, the Department of
Education developed regulations to implement HEOA changes to Title IV of the
Higher Education Act. The Department of Education published final regulations in
October 2009. Those regulations are effective July 1, 2010. If our efforts to
comply with HEOA’s provisions are inconsistent with how the Department of
Education interprets those provisions, we may be found to be in noncompliance
with such provisions and the Department of Education could impose monetary
penalties, place limitations on our operations, and/or condition or terminate
our eligibility to receive Title IV program funds.
In
addition, Congress reviews and determines appropriations for Title IV
programs on an annual basis through the budget and appropriations process. A
reduction in federal funding levels of such programs could reduce the ability of
certain students to finance their education. These changes, in turn, could lead
to lower enrollments, require us to increase our reliance upon alternative
sources of student financial aid and impact our growth plans. The loss of or a
significant reduction in Title IV program funds available to our students
could reduce our enrollment and revenue and possibly have a material adverse
effect on our business and plans for growth. In addition, the legislation and
implementing regulations applicable to our operations have been subject to
frequent revisions, many of which have increased the level of scrutiny to which
for-profit postsecondary education institutions are subjected and have raised
applicable standards. If we were not to continue to comply with legislation and
implementing regulations applicable to our operations, such noncompliance might
impair our ability to participate in Title IV programs, offer educational
programs or continue to operate. Certain of the statutory and regulatory
requirements applicable to us are described below.
17
Eligibility and Certification
Procedure
s.
Each institution must apply periodically to the Department of
Education for continued certification to participate in Title IV programs.
Such recertification generally is required every six years, but may be required
earlier, including when an institution undergoes a change of control. An
institution may come under the Department of Education’s review when it expands
its activities in certain ways, such as opening an additional location or, in
certain cases, when it modifies academic credentials that it offers. The
Department of Education may place an institution on provisional certification
status if it finds that the institution does not fully satisfy all of the
eligibility and certification standards and in certain other circumstances, such
as when an institution is certified for the first time or undergoes a change in
ownership resulting in a change in control. During the period of provisional
certification, the institution must comply with any additional conditions
included in its program participation agreement. In addition, the Department of
Education may more closely review an institution that is provisionally certified
if it applies for approval to open a new location, add an educational program,
acquire another school or make any other significant change. If the Department
of Education determines that a provisionally certified institution is unable to
meet its responsibilities under its program participation agreement, it may seek
to revoke the institution’s certification to participate in Title IV
programs with fewer due process protections for the institution than if it were
fully certified. Students attending provisionally certified institutions remain
eligible to receive Title IV program funds. We are currently provisionally
certified because we underwent a change in ownership and control in August
2008.
On
October 2, 2008, we received a letter from the Department of Education
approving our August 2008 deemed change in ownership and control and granting us
provisional certification until September 30, 2010. We will
apply for recertification by the deadline for the application, which is June 30,
2010. See “Regulatory Actions and Restrictions on Operations” for more
information.
Distance Learning.
We offer all of our existing degree, diploma and certificate
programs via Internet-based telecommunications from our headquarters in Charles
Town, West Virginia. Under HEOA, an accreditor that evaluates institutions
offering distance education must require such institutions to have processes
through which the institution establishes that a student who registers for a
distance education program is the same student who participates in and receives
credit for the program.
Administrative Capability.
Department of Education regulations specify extensive criteria by
which an institution must establish that it has the requisite “administrative
capability” to participate in Title IV programs. Failure to satisfy any of
the standards may lead the Department of Education to find the institution
ineligible to participate in Title IV programs or to place the institution
on provisional certification as a condition of its participation. To meet the
administrative capability standards, an institution must, among other
things:
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comply
with all applicable Title IV program regulations;
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have
capable and sufficient personnel to administer Title IV programs
;
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have
acceptable methods of defining and measuring the satisfactory academic
progress of its students;
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not
have cohort default rates above specified levels;
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have
various procedures in place for safeguarding federal
funds;
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not
be, and not have any principal or affiliate who is, debarred or suspended
from federal contracting or engaging in activity that is cause for
debarment or suspension;
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provide
financial aid counseling to its students;
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refer
to the Department of Education’s Office of Inspector General any credible
information indicating that any applicant, student, employee or agent of
the institution has been engaged in any fraud or other illegal conduct
involving Title IV programs;
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submit
in a timely manner all reports and financial statements required by the
regulations;
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report
annually to the Secretary of Education on any reasonable reimbursements
paid or provided by a private education lender or group of lenders to any
employee who is employed in the institution’s financial aid office or who
otherwise has responsibilities with respect to education loans;
and
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not
otherwise appear to lack administrative
capability.
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If an
institution fails to satisfy any of these criteria or any other Department of
Education regulation, the Department of Education may:
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require
the repayment of Title IV funds;
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transfer
the institution from the “advance” system of payment of Title IV
funds to cash monitoring status or to the “reimbursement” system of
payment;
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place
the institution on provisional certification
status; or
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commence
a proceeding to impose a fine or to limit, suspend or terminate the
participation of the institution in Title IV
programs.
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18
If we are
found not to have satisfied the Department of Education’s “administrative
capability” requirements, we could lose, or be limited in our access to,
Title IV program funding.
Third Party Servicers.
Department of Education regulations permit an institution to enter
into a written contract with a third-party servicer for the administration of
any aspect of the institution’s participation in Title IV programs. The
third-party servicer must, among other obligations, comply with Title IV
requirements and be jointly and severally liable with the institution to the
Secretary of Education for any violation by the servicer of any Title IV
provision. An institution must report to the Department of Education new
contracts with or any significant modifications to contracts with third-party
servicers as well as other matters related to third-party servicers. We contract
with the third-party servicer Global Financial Aid Services, Inc., which
performs activities related to our participation in Title IV programs. If
Global Financial Aid Services does not comply with applicable statute and
regulations including the Higher Education Act, we may be liable for their
actions and we could lose our eligibility to participate in Title IV
programs.
Financial Responsibility.
The Higher Education Act and Department of Education regulations
establish extensive standards of financial responsibility that
institutions must satisfy in order to participate in Title IV
programs. These standards generally require that an institution provide the
resources necessary to comply with Title IV program requirements and meet
all of its financial obligations, including required refunds and any repayments
to the Department of Education for liabilities incurred in programs administered
by the Department of Education.
The
Department of Education evaluates institutions on an annual basis for compliance
with specified financial responsibility standards. Generally, the standards
require an institution to receive an unqualified opinion from its accountants on
its audited financial statements, maintain sufficient cash reserves to satisfy
refund requirements, meet all of its financial obligations and remain current on
its debt payments. The financial responsibility standards include a complex
formula that uses line items from the institution’s audited financial
statements. The formula focuses on three financial ratios: (1) equity ratio
(which measures the institution’s capital resources, financial viability and
ability to borrow); (2) primary reserve ratio (which measures the
institution’s viability and liquidity); and (3) net income ratio (which
measures the institution’s profitability or ability to operate within its
means). An institution’s financial ratios must yield a composite score of at
least 1.5 for the institution to be deemed financially responsible without the
need for further federal oversight. The Department of Education may also apply
such measures of financial responsibility to the operating company and ownership
entities of an eligible institution. At the request of the Department of
Education, we supply our consolidated financial statements to the Department of
Education for purposes of calculating the composite score. We have applied the
financial responsibility standards to our consolidated financial statements as
of and for the year ended December 31, 2009, and calculated a composite
score of 3.0 out of a maximum score of 3.0. We therefore believe that we meet
the Department of Education’s composite score standards. If the Department of
Education were to determine that we did not meet the financial responsibility
standards due to a failure to meet the composite score or other factors, we may
be able to establish financial responsibility on an alternative basis by, among
other things:
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posting
a letter of credit in an amount equal to at least 50% of the total
Title IV program funds received by us during our most recently
completed fiscal year;
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posting
a letter of credit in an amount equal to at least 10% of such prior year’s
Title IV program funds received by us, accepting provisional
certification, complying with additional Department of Education
monitoring requirements and agreeing to receive Title IV program
funds under an arrangement other than the Department of Education’s
standard advance payment arrangement such as the “reimbursement” system of
payment or cash monitoring; or
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complying
with additional Department of Education monitoring requirements and
agreeing to receive Title IV program funds under an arrangement other
than the Department of Education’s standard advance payment arrangement
such as the “reimbursement” system of payment or cash
monitoring.
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Failure
to meet the Department of Education’s “financial responsibility” requirements,
because we do not meet the Department of Education’s minimum composite score to
establish financial responsibility or are unable to establish financial
responsibility on an alternative basis or fail to meet other financial
responsibility requirements, would cause us to lose access to Title IV
program funding.
Title IV Return of
Funds.
Under the Department of Education’s return of funds
regulations, when a student withdraws an institution must return unearned funds
to the Department of Education in a timely manner. An institution must first
determine the amount of Title IV program funds that a student “earned.” If
the student withdraws during the first 60% of any period of enrollment or
payment period, the amount of Title IV program funds that the student
earned is equal to a pro rata portion of the funds for which the student would
otherwise be eligible. If the student withdraws after the 60% threshold, then
the student has earned 100% of the Title IV program funds. The institution
must return to the appropriate Title IV programs, in a specified order, the
lesser of (i) the unearned Title IV program funds or (ii) the
institutional charges incurred by the student for the period multiplied by the
percentage of unearned Title IV program funds. An institution must return
the funds no later than 45 days after the date of the institution’s
determination that a student withdrew. If such payments are not timely made, an
institution may be subject to adverse action, including being required to submit
a letter of credit equal to 25% of the refunds the institution should have made
in its most recently completed fiscal year. Under Department of Education
regulations, late returns of Title IV program funds for 5% or more of
students sampled in the institution’s annual compliance audit constitutes
material noncompliance.
19
The “90/10 Rule.”
A requirement of the Higher Education Act, commonly referred to as
the “90/10 Rule,” applies only to “proprietary institutions of higher
education,” which includes us. Under the Higher Education Act, a proprietary
institution is prohibited from deriving from Title IV funds, on a cash
accounting basis (except for certain institutional loans) for any fiscal year,
more than 90% of its revenues (as computed for 90/10 Rule purposes). Prior to
the adoption of HEOA, an institution that violated the rule became ineligible to
participate in Title IV programs as of the first day of the fiscal year
following the fiscal year in which its Title IV revenue exceeded 90% of its
revenues, and it was unable to apply to regain its eligibility until the next
fiscal year.
HEOA
changed the 90/10 Rule from an eligibility requirement to a compliance
obligation that is part of an institution’s program participation agreement with
the Department of Education. Accordingly, HEOA generally lessens the severity of
noncompliance with the 90/10 Rule, although repeated noncompliance will result
in loss of eligibility to participate in Title IV programs. Under the terms
of HEOA, a proprietary institution of higher education that violates the 90/10
Rule for any fiscal year will be placed on provisional status for two fiscal
years. Proprietary institutions of higher education that violate the 90/10 Rule
for two consecutive fiscal years will become ineligible to participate in
Title IV programs for at least two fiscal years and will be required to
demonstrate compliance with Title IV eligibility and certification
requirements for at least two fiscal years prior to resuming Title IV
program participation. HEOA requires the Secretary of Education to disclose on
its website any proprietary institution of higher education that fails to meet
the 90/10 requirement and to report annually to Congress the relevant ratios for
each proprietary institution of higher education. HEOA generally codifies the
formula for 90/10 Rule calculations as set forth in preceding Department of
Education regulations, but also expands on the Department of Education’s formula
in certain respects, including by broadening the categories of funds that may be
counted as non-Title IV revenue for 90/10 Rule purposes. HEOA’s changes to the
90/10 Rule are effective upon enactment, which occurred on August 14,
2008.
The
Department of Education issued final regulations implementing the 90/10 Rule and
certain other HEOA provisions on October 29, 2009. The regulations generally
track the HEOA provisions, but clarify the treatment of certain types of
revenue. The regulations require institutions to report in their annual
financial statement audits not only the percentage of revenues derived from
Title IV funds during the fiscal year, but also the dollar amount of the
numerator and denominator of the 90/10 calculation and specified categories of
revenue. The regulations shorten from 90 to 45 days the time period within which
institutions must notify the Secretary of Education after the end of a fiscal
year in which the institution failed to meet the 90/10 requirement. The
regulations are effective July 1, 2010, but institutions may, at their
discretion, implement the 90/10 regulations on or after November 1,
2009.
Using the
formula in effect prior to enactment of HEOA, we derived approximately 14% of
our cash-basis revenues from eligible programs in 2007 compared to 1% in 2006
and 0% in 2005.
Using the HEOA formula,
we derived approximately 19% of our cash-basis revenues from Title IV program
funds in 2008. Our auditors will compute our 90/10 Rule percentage when they
perform our annual compliance audit.
Student Loan Defaults.
Under the Higher Education Act, an educational institution may lose
its eligibility to participate in some or all of the Title IV programs if
defaults on the repayment of FFEL program or Direct Loan Program loans by its
students exceed certain levels. For each federal fiscal year, a rate of student
defaults (known as a “cohort default rate”) is calculated for each institution
with 30 or more borrowers entering repayment in a given federal fiscal year by
determining the rate at which borrowers who become subject to their repayment
obligation in that federal fiscal year default by the end of the next federal
fiscal year. For such institutions, the Department of Education calculates a
single cohort default rate for each federal fiscal year that includes in the
cohort all current or former student borrowers at the institution who entered
repayment on any FFEL program or Direct Loan Program loan during that
year.
If the
Department of Education notifies an institution that its cohort default rates
for each of the three most recent federal fiscal years are 25% or greater, the
institution’s participation in the FFEL program, Direct Loan Program and Pell
program ends 30 days after the notification, unless the institution appeals
in a timely manner that determination on specified grounds and according to
specified procedures. In addition, an institution’s participation in the FFEL
program and Direct Loan Program ends 30 days after notification that its
most recent cohort default rate is greater than 40%, unless the institution
timely appeals that determination on specified grounds and according to
specified procedures. An institution whose participation ends under these
provisions may not participate in the relevant programs for the remainder of the
fiscal year in which the institution receives the notification, as well as for
the next two fiscal years.
If an
institution’s cohort default rate equals or exceeds 25% in any single year, the
institution may be placed on provisional certification status. Provisional
certification does not limit an institution’s access to Title IV program
funds; however, an institution with provisional status is subject to closer
review by the Department of Education and may be subject to summary adverse
action if it violates Title IV program requirements.
20
The three
most recent federal fiscal years for which FFEL/Direct Loan cohort defaults
rates have been officially calculated are federal fiscal years 2005, 2006, and
2007. Because we began only recently to enroll students who are participating in
the federal student loan programs, we have no historical cohort default rate for
federal fiscal year 2006 or earlier. Our FFEL/Direct Loan cohort default rate
for federal fiscal year 2007 is 0.0%. However, we do not believe that
our low cohort default rate for federal fiscal year 2007 is a meaningful measure
because of the relatively few students in repayment during the applicable
period. Relatively few students are expected to enter the repayment
phase in the near term, which could result in defaults by a few students having
a relatively large impact on our cohort default rate.
HEOA
extends by one year the period for measuring the cohort default rate for FFEL
program and Direct Loan program loans. Beginning with cohort default rate
calculations for federal fiscal year 2009, the cohort default rate will be
calculated by determining the rate at which borrowers who become subject to
their repayment obligation in the relevant federal fiscal year default by the
end of the second following federal fiscal year. The current method of
calculating rates will remain in effect and will be used to determine any
sanctions on institutions because of their cohort default rates until three
consecutive years of official cohort default rates calculated under the new
formula are available – i.e., in 2014.
The HEOA
also increases the cohort default rate ceiling from 25% to 30%. The HEOA
provides for the following sanctions based on cohort default rates calculated
under the new HEOA methodology:
|
·
|
An
institution whose cohort default rate is equal to or greater than 30% for
each of the three most recent federal fiscal years for which data are
available will be ineligible to participate in the FFEL Program, Direct
Loan Program, and Federal Pell Grant
Program.
|
|
·
|
If
an institution’s cohort default rate is 30% or more in a given fiscal
year, the institution will be required to assemble a “default prevention
task force” and submit to the Department of Education a default
improvement plan.
|
|
·
|
An
institution whose cohort default rate exceeds 30% for two consecutive
years will be required to review, revise and resubmit its default
improvement plan, and the Department of Education may direct that such
plan be amended to include actions, with measurable objectives, that it
determines will promote loan
repayment.
|
|
·
|
The
Department of Education may subject an institution to provisional
certification if the institution’s cohort default rate is 30% or more for
any two consecutive federal fiscal years. An institution whose cohort
default rate is 30% or more for any two consecutive federal fiscal years
may file an appeal on specified grounds and according to specified
procedures, and if the Secretary of Education determines that the
institution has demonstrated grounds for relief, the Secretary may not
subject the institution to provisional certification based solely on the
institution’s cohort default
rate.
|
HEOA does not change the current
provision that an institution generally loses eligibility to participate in the
FFEL Program and the Direct Loan Program if its most recent cohort default rate
is greater than 40%.
The Department of Education has
issued final regulations to implement the HEOA provisions on cohort default
rates and other student loan matters. Those regulations are effective July 1,
2010. The final regulations provide that the Department of Education will issue
two cohort default rates -- a rate calculated in accordance with pre-HEOA
methodology (two-year rate) and a rate calculated in accordance with HEOA
methodology (three-year rate) -- for fiscal years 2009 through
2011. The final regulations also indicate that the Department of
Education will rely on the two-year rate and related thresholds to determine
institutional eligibility until 2014, when the Department of Education issues
official three-year rates for the federal fiscal year 2011 cohort.
In December 2009 the Department of
Education sent to institutions unofficial, “trial” cohort default rates showing
institutions’ cohort default rates for federal fiscal years 2005, 2006, and 2007
as they would be calculated under the HEOA methodology. Three-year cohort
default rates were generally expected to be higher than two-year cohort default
rates, because of both the longer repayment history and current economic
conditions. Our “trial” three-year cohort default rates are 0.0%, 0.0%, and 3.3%
for federal fiscal years 2005, 2006, and 2007, respectively. The
Department of Education has not published average “trial” cohort default rates
for proprietary institutions nationally for those federal fiscal
years.
Incentive Payment Rules.
As part of an institution’s program participation agreement with the
Department of Education and in accordance with the Higher Education Act, an
institution may not provide any commission, bonus or other incentive payment to
any person or entity engaged in any student recruitment, admissions or financial
aid awarding activity based directly or indirectly on success in securing
enrollments or financial aid. Certain Department of Education regulations
clarify the incentive payment rule. The regulations set forth 12 “safe harbors,”
which describe payments or arrangements that do not violate the incentive
payment rule. Failure to comply with the incentive payment rule could result in
termination of participation in Title IV programs, limitation on
participation in Title IV programs, or financial penalties. Although there
can be no assurance that the Department of Education would not find deficiencies
in our present or former employee compensation and third-party contractual
arrangements, we believe that our employee compensation and third-party
contractual arrangements comply with the incentive payment provisions of the
Higher Education Act and Department of Education regulations
thereunder.
Code of Conduct Related to Student
Loans.
HEOA adds a new requirement, as part of an
institution’s program participation agreement with the Department of Education,
that institutions that participate in Title IV programs adopt a code of
conduct pertinent to student loans. For financial aid office or other employees
who have responsibility related to education loans, the code must forbid, with
limited exceptions, gifts, consulting arrangements with lenders, and advisory
board compensation other than reasonable expense reimbursement. The code also
must ban revenue-sharing arrangements, “opportunity pools” that lenders offer in
exchange for certain promises and staffing assistance from lenders. The
institution must post the code prominently on its website and ensure that its
officers, employees, and agents who have financial aid responsibilities are
informed annually of the code’s provisions. In addition to the code of conduct
requirements that apply to institutions, HEOA contains provisions that apply to
federal and private lenders, prohibiting such lenders from engaging in certain
activities as they interact with institutions. Failure to comply with the code
of conduct provision could result in termination of our participation in
Title IV programs, limitations on participation in Title IV programs,
or financial penalties.
21
College Affordability and
Transparency Lists.
Under HEOA, beginning July 1, 2011,
the Department of Education will publish on its website lists of the top five
percent of institutions, in each of nine categories, with (1) the highest
tuition and fees for the most recent academic year, (2) the highest “net
price” for the most recent academic year, (3) the largest percentage
increase in tuition and fees for the most recent three academic years, and
(4) the largest percentage increase in net price for the most recent three
academic years. An institution that is placed on a list for high percentage
increases in either tuition and fees or in net price must submit a report to the
Department of Education explaining the increases and the steps that it intends
to take to reduce costs. The Department of Education will report annually to
Congress on these institutions and will publish their reports on its web site.
The Department of Education also will post lists of the top 10% of institutions
in each of the nine categories with lowest tuition and fees or the lowest net
price for the most recent academic year. Under HEOA, net price means average
yearly price actually charged to first-time, full-time undergraduate students
who receive student aid at a higher education institution after such aid is
deducted. We cannot predict with certainty the effect such lists will have on
our operations.
Compliance Reviews.
We are subject to announced and unannounced compliance reviews and
audits by various external agencies, including the Department of Education, its
Office of Inspector General (“OIG”), state licensing agencies, agencies that
guarantee FFEL program loans, the Department of Veterans Affairs and accrediting
agencies. As part of the Department of Education’s ongoing monitoring of
institutions’ administration of Title IV programs, the Higher Education Act
and Department of Education regulations also require institutions to submit
annually a compliance audit conducted by an independent certified public
accountant in accordance with Government Auditing Standards and applicable audit
standards of the Department of Education. In addition, to enable the Secretary
of Education to make a determination of financial responsibility, institutions
must annually submit audited financial statements prepared in accordance with
Department of Education regulations.
Privacy.
The
Family Educational Rights and Privacy Act of 1974, or FERPA, and the Department
of Education’s FERPA regulations require institutions to allow students to
review and request changes to such student’s education records maintained by the
institution, notify students at least annually of this inspection right, and
maintain records in each student’s file listing requests for access to and
disclosures of personally identifiable information and the interest of such
party in the student’s personally identifiable information. FERPA also limits
the disclosure of a student’s personally identifiable information by an
institution without such student’s prior written consent. If an institution
fails to comply with FERPA or the Department of Education’s FERPA regulations,
the Department of Education may require corrective actions by the institution,
withhold further payments under any applicable Title IV program or
terminate an institution’s eligibility to participate in Title IV programs.
In addition, an institution participating in any Title IV program is
obligated to safeguard customer information pursuant to applicable provisions of
the Gramm-Leach-Bliley Act, or GLBA, and Federal Trade Commission, or FTC,
regulations. GLBA and FTC regulations require an institution to develop and
maintain a comprehensive information security program to protect personally
identifiable financial information of students, parents or other individuals
with whom an institution has a customer relationship. If an institution fails to
comply with GLBA or FTC regulations, it may be required to take corrective
actions, be subject to FTC monitoring and oversight, and be subject to fines or
penalties imposed by the FTC.
Potential Effect of Regulatory
Violations.
If we fail to comply with the regulatory
standards governing Title IV programs, the Department of Education could
impose one or more sanctions, including transferring us to the reimbursement or
cash monitoring system of payment, seeking to require repayment of certain
Title IV program funds, requiring us to post a letter of credit in favor of
the Department of Education as a condition for continued Title IV
certification, taking emergency action against us, referring the matter for
criminal prosecution or initiating proceedings to impose a fine or to limit,
condition, suspend or terminate our participation in Title IV programs. In
addition, the agencies that guarantee FFEL program loans for our students could
initiate proceedings to limit, suspend or terminate our eligibility to provide
guaranteed student loans in the event of certain regulatory violations. If such
sanctions or proceedings were imposed against us and resulted in a substantial
curtailment, or termination, of our participation in Title IV programs, our
enrollments, revenues and results of operations would be materially and
adversely affected.
If we
lost our eligibility to participate in Title IV programs, or if Congress
reduced the amount of available federal student financial aid, we would seek to
arrange or provide alternative sources of revenue or financial aid for students.
Although we believe that one or more private organizations would be willing to
provide financial assistance to students attending our universities, there is no
assurance that this would be the case, and the interest rate and other terms of
such financial aid might not be as favorable as those for Title IV program
funds. We may be required to guarantee all or part of such alternative
assistance or might incur other additional costs in connection with securing
alternative sources of financial aid. Accordingly, the loss of our eligibility
to participate in Title IV programs, or a reduction in the amount of
available federal student financial aid, would be expected to have a material
adverse effect on our growth plans and results of operations even if we could
arrange or provide alternative sources of revenue or student financial
aid.
22
In
addition to the actions that may be brought against us as a result of our
participation in Title IV, we also may be subject, from time to time, to
complaints and lawsuits relating to regulatory compliance brought not only by
our regulatory agencies, but also by other government agencies and third
parties, such as present or former students or employees and other members of
the public.
Regulatory
Actions and Restrictions on Operations
Many
actions that we may wish to take in connection with our operations are also
subject to regulation from a variety of agencies.
Restrictions on Adding Educational
Programs.
State requirements and accrediting agency standards
may, in certain instances, limit our ability to establish additional programs.
Many states require approval before institutions can add new programs under
specified conditions. The Higher Learning Commission, DETC, and the West
Virginia Higher Education Policy Commission require institutions to notify them
in advance of implementing new programs, and upon notification may undertake a
review of the institution’s licensure, authorization or
accreditation.
Under the
Higher Education Act and Department of Education regulations, a proprietary
institution of higher education must have been in existence for at least two
years in order to be eligible to participate in Title IV programs. The
Department of Education considers an institution to have been in existence for
two years if it was legally authorized to give (and continuously was giving) the
same postsecondary instruction for at least two consecutive years. Thus, when a
for-profit institution applies to participate in Title IV programs for the
first time, it must show that it is in compliance with the so-called two-year
rule. An institution subject to the two-year rule may not award Title IV
funds to a student in a program that is not included in the institution’s
approval documents. For institutions that are subject to the two-year rule,
during the institution’s initial period of participation in Title IV
programs, the Department of Education will not approve additional programs that
would expand the scope of the institution’s eligibility. The Department of
Education may provide an exception to such limitation if the institution
demonstrates that the program has been legally authorized and continuously
provided for at least two years prior to the date of the request. In addition,
when an institution is certified for the first time, its certification is
provisional until the Department of Education has reviewed a compliance audit
that covers a complete fiscal year of Title IV program participation and
has decided to certify fully the institution. In the first quarter of 2008, we
timely filed a recertification application because our initial period of
certification was scheduled to end on June 30, 2008. As part of that
recertification process, the Department of Education fully certified us and it
no longer considers us to be in our initial period of certification. However, in
August 2008, we were deemed to have undergone a change in ownership and control
requiring review by the Department of Education in order to reestablish our
eligibility and continue participation in Title IV programs. On
October 2, 2008 the Department of Education approved our change in
ownership application and granted us provisional certification for a two-year
period ending September 30, 2010. Our program participation agreement
provides that as a provisionally certified institution, we must apply for and
receive approval by the Secretary of Education for any substantial change. Under
our program participation agreement, substantial changes include but are not
limited to establishment of additional locations, an increase in the level of
academic offering, and addition of any non-degree or short-term training
program. The Department of Education has advised us that an institution that is
provisionally certified based on a change in ownership and control that resulted
from a reduction of ownership interest is able to add new degree programs under
the same conditions that apply to a fully certified
institution.
Generally,
if an institution that is not subject to the two-year rule or is not in its
initial period of certification adds an educational program after it has been
designated as an eligible institution, the institution must apply to the
Department of Education to have the additional program designated as eligible.
However, a fully certified degree-granting institution is not obligated to
obtain the Department of Education’s approval of additional programs that lead
to an associate, bachelor’s, professional or graduate degree at the same degree
level(s) previously approved by the Department of Education. Similarly, a fully
certified institution is not required to obtain advance approval for new
programs that both prepare students for gainful employment in the same or
related recognized occupation as an educational program that has previously been
designated as an eligible program at that institution and meet certain
minimum-length requirements. However, the Department of Education, as a
condition of certification to participate in Title IV programs, can require
prior approval of such programs or otherwise restrict the number of programs an
institution may add. In the event that an institution that is required to obtain
the Department of Education’s express approval for the addition of a new program
fails to do so, and erroneously determines that the new educational program is
eligible for Title IV program funds, the institution may be liable for
repayment of Title IV program funds received by the institution or students
in connection with that program.
Change in Ownership Resulting in a
Change of Control.
Many states and accrediting agencies
require institutions of higher education to report or obtain approval of certain
changes in ownership or other aspects of institutional status, but the types of
and triggers for such reporting or approval vary among states and accrediting
agencies. In addition, our accrediting agencies, The Higher Learning Commission
and the Distance Education and Training Council, require institutions that they
accredit to inform them in advance of any substantive change, including a change
that significantly alters the ownership or control of the institution. Examples
of substantive changes requiring advance notice to The Higher Learning
Commission and to the Distance Education and Training Council include changes in
the legal status, ownership, or form of control of the institution, such as the
sale of a proprietary institution. The Higher Learning Commission must approve a
substantive change in advance in order to include the change in the
institution’s accreditation status. The Higher Learning Commission also requires
an on-site evaluation within six months to confirm the appropriateness of the
approval. The Distance Education and Training Council requires advance
notification and an on-site evaluation within six months for the purpose of
reaffirming the institution’s accreditation.
23
In June
2009, The Higher Learning Commission adopted new policies related to
institutional control, structure and organization. Part of The Higher
Learning Commission’s stated rationale for these changes was to better define
the range of its oversight of transactions related to change of ownership at
institutions. The new policies extend The Higher Learning Commission’s oversight
to transactions that change, or have the potential to change, the control of an
institution or its fundamental structure and organization. Under the new
policies, The Higher Learning Commission also now extends its oversight to
defined changes that occur in a parent or controlling entity, and not
necessarily in the institution itself. Actions by, or relating to, an
accredited institution, including a significant acquisition of another
institution, significant changes in board composition or organizational
documents, and accumulations by one stockholder of greater than 25% of the
capital stock, could open up an accredited institution to additional reviews by
The Higher Learning Commission and possible change from an accredited status to
candidate status, which enhances the risks of these types of
actions. In particular, the change from accredited status to
candidate status could adversely impact an institution’s ability to participate
in Title IV programs. For-profit institutions may also be less
attractive acquisition candidates because of the enhanced scrutiny of change in
control transactions, the explicit ability to move an institution from
accredited status to candidate status, and because The Higher Learning
Commission will now also be looking more closely at entities that own accredited
institutions.
The
Higher Education Act provides that an institution that undergoes a change in
ownership resulting in a change in control loses its eligibility to participate
in Title IV programs and must apply to the Department of Education in order
to reestablish such eligibility. An institution is ineligible to receive
Title IV program funds during the period prior to recertification. The
Higher Education Act provides that the Department of Education may temporarily
provisionally certify an institution seeking approval of a change in ownership
and control based on preliminary review by the Department of Education of a
materially complete application received by the Department of Education within
10 business days after the transaction. The Department of Education may continue
such temporary, provisional certification on a month-to-month basis until it has
rendered a final decision on the institution’s application. If the Department of
Education determines to approve the application after a change in ownership and
control, it issues a provisional certification, which extends for a period
expiring not later than the end of the third complete award year following the
date of provisional certification. Department of Education regulations describe
some transactions that constitute a change of control, including the transfer of
a controlling interest in the voting stock of an institution or the
institution’s parent corporation. Department of Education regulations provide
that a change of control of a publicly traded corporation occurs in one of two
ways: (i) if there is an event that would obligate the corporation to file
a Current Report on Form 8-K with the SEC disclosing a change of control or
(ii) if the corporation has a stockholder that owns at least 25% of the
total outstanding voting stock of the corporation and is the largest stockholder
of the corporation, and that stockholder ceases to own at least 25% of such
stock or ceases to be the largest stockholder. A significant purchase or
disposition of our voting stock could be determined by the Department of
Education to be a change in ownership and control under this
standard.
When a
change of ownership resulting in a change of control occurs, the Department of
Education applies a different set of financial tests to determine the financial
responsibility of the institution in conjunction with its review and approval of
the change of ownership. The institution generally is required to submit a
same-day audited balance sheet reflecting the financial condition of the
institution immediately following the change in ownership. The institution’s
same-day balance sheet must demonstrate an acid test ratio of at least 1:1,
which is calculated by adding cash and cash equivalents to current accounts
receivable and dividing the sum by total current liabilities (and excluding all
unsecured or uncollateralized related party receivables). The same-day balance
sheet must demonstrate positive tangible net worth. When a publicly traded
company undergoes a change in ownership and control due to a reduction in
ownership interest, as occurred when in August 2008 funds affiliated with ABS
Capital Partners distributed approximately 400,000 shares of our stock to
its general and limited partners, the institution may submit its most recent
quarterly financial statement as filed with the SEC, along with copies of all
other SEC filings made after the close of the fiscal year for which a compliance
audit has been submitted to the Department of Education, instead of the “same
day” balance sheet. In addition, when a change in ownership and control occurs
and there is a new owner, the institution must submit to the Department of
Education audited financial statements of the institution’s new owner’s two most
recently completed fiscal years that are prepared and audited in accordance with
Department of Education requirements. The Department may determine whether the
financial statements meet financial responsibility standards with respect to the
composite score formula. If the institution does not satisfy these requirements,
the Department of Education may condition its approval of the change of
ownership on the institution’s agreeing to letters of credit, provisional
certification, and/or additional monitoring requirements, as described in the
above section on Financial Responsibility. If the new owner does not have the
required audited financial statements, the Department of Education may impose
certain restrictions on the institution, including with respect to adding
locations and programs.
In August
2008, funds affiliated with ABS Capital Partners reduced their beneficial
ownership interest from approximately 26% to approximately 24% of our
outstanding common stock by distributing to their limited partners and general
partners 400,000 shares of our stock. As a result of such distribution, we
were deemed to have undergone a change in ownership and control requiring review
by the Department of Education in order to reestablish our eligibility and
continue participation in Title IV programs. As required under Department
of Education regulations, we timely notified the Department of Education of our
change in ownership and control. In connection with the Department of
Education’s review of the change, we submitted to the Department of Education a
change in ownership application that included the submission of required
documentation, including a letter from The Higher Learning Commission indicating
that it had approved the change. On October 2, 2008, we received a letter
from the Department of Education approving the change in ownership and control
and granting us provisional certification until September 30,
2010.
24
Many
states include the sale of a controlling interest of common stock in the
definition of a change of control requiring approval. A change of control under
the definitions of an agency that regulates us might require us to obtain
approval of the change in ownership and control in order to maintain our
regulatory approval. Under certain circumstances, the West Virginia Higher
Education Policy Commission and the State Council of Higher Education for
Virginia might require us to seek approval of changes in ownership and control
in order to maintain our state authorization or licensure. With respect to the
ABS Funds’ August 2008 distribution of 400,000 shares of our stock to their
limited and general partners, the State Council of Higher Education for Virginia
did not consider the distribution to be a change in ownership under its
regulations and the West Virginia Higher Education Policy Commission approved
the change.
Pursuant
to federal law providing benefits for veterans and reservists, we are approved
for education of veterans and members of the selective reserve and their
dependents by the state approving agencies in West Virginia and Virginia. In
certain circumstances, state approving agencies may require an institution to
obtain approval for a change in ownership and control.
A change
of control could occur as a result of future transactions in which we are
involved. Some corporate reorganizations and some changes in the board of
directors are examples of such transactions. Moreover, as a publicly traded
company, the potential adverse effects of a change of control could influence
future decisions by us and our stockholders regarding the sale, purchase,
transfer, issuance or redemption of our stock. In addition, the regulatory
burdens and risks associated with a change of control also could discourage bids
for your shares of common stock and could have an adverse effect on the market
price of your shares.
Pending
Legislative and Regulatory Changes
Congress
is considering legislation that would make further changes in the Higher
Education Act and other education-related federal laws, and the U.S. Department
of Education recently conducted a negotiated rulemaking to amend certain
regulations relating to Title IV programs. Some of the proposed changes are
noted below. It is not possible at this time to predict the outcome of these
initiatives or their potential impact on us.
Congress
The U.S.
House of Representatives has passed H.R. 3221, the Student Aid and Fiscal
Responsibility Act of 2009. Among other changes, that bill would eliminate the
FFEL Program, require all institutions participating in Title IV programs to
convert exclusively to the Direct Loan Program by July 1, 2010, and make certain
temporary changes in the 90/10 Rule. A companion bill has not yet been
introduced in the U.S. Senate, but the Senate is expected to pursue such
legislation in the near term. Democratic leaders on the Senate’s education
committee maintain that they are committed to passing student aid reform without
extending the authority of the Secretary of Education to purchase FFEL Program
loans under ECASLA, which expires on July 1, 2010. See – Regulation
-- Financial Aid Regulation. In the meantime, Republican members of
both chambers who are opposed to the elimination of the FFEL Program have
introduced bills to extend the Secretary’s authority to purchase FFEL Program
loans for an additional year.
U.S.
Department of Education
The
Department of Education recently conducted negotiated rulemaking to develop
regulations to address matters related to the integrity of Title IV programs.
Negotiated rulemaking is a process required by the Higher Education Act to allow
affected constituencies to share with the Department of Education their views on
regulatory issues before the Department issues proposed
regulations. Among the topics that were negotiated are institutional
eligibility issues (such as state authorization for postsecondary education
institutions), definitional issues (such as the definition of “gainful
employment in a recognized occupation” and “credit hour” for certain eligibility
and other purposes), student eligibility issues (including the validity of high
school diplomas), and other Title IV provisions (such as incentive payment). The
negotiated rulemaking committee failed to reach consensus on the entire
regulatory package that was the subject of negotiation. Accordingly,
the Department of Education is not required to use any language that was
developed during negotiations, including language on which the negotiators
reached tentative agreement. Rather, if the Department of Education
decides to proceed with regulations, it may use regulatory language developed
during the negotiations as the basis for its proposed regulations or develop new
regulatory language for all or a portion of its proposed regulations. Any
proposed regulations will be published for comment. Any final regulations will
become effective on July 1, 2011 at the earliest.
| Item 1A. | RISK FACTORS |
Investing
in our common stock has a high degree of risk. Before making an investment in
our common stock, you should carefully consider the following risks, as well as
the other information contained in this annual report, including our
consolidated financial statements and related notes and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.” Any of the risk
factors described below could significantly and adversely affect our business,
prospects, financial condition and results of operations. As a result, the
trading price of our common stock could decline and you may lose all or part of
your investment.
25
Risks
Related to Our Business
If
we are unable to continue our recent revenue and earnings growth, our stock
price may decline and we may not have adequate financial resources to execute
our business plan.
Our
revenue increased 55% from $69.1 million in 2007 to $107.1 million in
2008, and it increased 39% from $107.1 million in 2008 to $149.0 million in
2009, primarily due to strong referrals from current students, new student
marketing, and the receipt of regional accreditation in May 2006. The same
factors that led to the growth in revenues also contributed to our net income
improving to $23.9 million in 2009 from $16.2 million in 2008. The rate of
revenue growth from 2008 to 2009 was at a slower pace than the rate of growth
from 2007 to 2008. As our revenue base grows, we expect our growth rate
percentages to continue to decline. You should not rely on the results of any
prior periods as an indication of our future operating performance. If we are
unable to maintain adequate revenue and earnings growth, or if investors react
negatively to the slowing of our growth rates, the value of our stock price may
decline.
Our
growth may place a strain on our resources that could adversely affect our
systems, controls and operating efficiency.
The
growth that we have experienced in the past, as well as any future growth that
we experience, may place a significant strain on our resources and increase
demands on our management information and reporting systems and financial
management controls. We do not have experience scheduling courses and
administering programs for more students than our current enrollment, and if
growth negatively impacts our ability to do so, the learning experience for our
students could be adversely affected, resulting in a higher rate of student
attrition and fewer student referrals. We also have limited experience adding to
our courses, programs and operations through acquisitions. Future growth will
also require continued improvement of our internal controls and systems,
particularly those related to complying with federal regulations under the
Higher Education Act of 1965, or the Higher Education Act, as administered by
the U.S. Department of Education, including as a result of our
participation in federal student financial aid programs under Title IV of
the Higher Education Act, which we refer to in this annual report as
Title IV programs. We have described some of the most significant
regulatory risks that apply to us, including those related to Title IV
programs, under the heading “Risks Related to the Regulation of our Industry”
below. If we are unable to manage our growth or successfully carry out and
integrate acquisitions, we may also experience operating inefficiencies that
could increase our costs and adversely affect our profitability and results of
operations.
Tuition
assistance programs offered to United States Armed Forces personnel constituted
56% of our net course registrations for 2009, and our revenues and number of
students would decrease if we are no longer able to receive funds under these
tuition assistance programs or tuition assistance is reduced or
eliminated.
Service
members of the United States Armed Forces are eligible to receive tuition
assistance from their branch of the armed forces that they may use to pursue
postsecondary degrees. Service members of the United States Armed Forces
can use tuition assistance at postsecondary schools that are accredited by
accrediting agencies recognized by the U.S. Secretary of Education. Our
tuition is currently structured so that tuition assistance payments for service
members fully cover the service member’s per course tuition cost of our
undergraduate courses and cover more than 90% of the per course tuition cost of
our graduate courses. If we are no longer able to receive tuition assistance
payments or the tuition assistance program is reduced or eliminated, our
enrollments and revenues would be significantly reduced resulting in a material
adverse effect on our results of operations and financial
condition.
Strong
competition in the postsecondary education market, especially in the online
education market, could decrease our market share and increase our cost of
acquiring students.
Postsecondary
education is highly fragmented and competitive. We compete with traditional
public and private two-year and four-year colleges as well as other for-profit
schools, particularly those that offer online learning programs. Public and
private colleges and universities, as well as other for-profit schools, offer
programs similar to those we offer. Public institutions receive substantial
government subsidies, and public and private institutions have access to
government and foundation grants, tax-deductible contributions and other
financial resources generally not available to for-profit schools. Accordingly,
public and private institutions may have instructional and support resources
that are superior to those in the for-profit sector. In addition, some of our
competitors, including both traditional colleges and universities and other
for-profit schools, have substantially greater name recognition and financial
and other resources than we have, which may enable them to compete more
effectively for potential students, particularly in the non-military sector of
the market. We also expect to face increased competition as a result of new
entrants to the online education market, including established colleges and
universities that have not previously offered online education
programs.
26
We may
not be able to compete successfully against current or future competitors and
may face competitive pressures that could adversely affect our business or
results of operations. We may also face increased competition if our competitors
pursue relationships with the military and governmental educational programs
with which we already have relationships. These competitive factors could cause
our enrollments, revenues and profitability to decrease
significantly.
If
we are unable to update and expand the content of existing programs and develop
new programs and specializations on a timely basis and in a cost-effective
manner, our future growth may be impaired.
The
updates and expansions of our existing programs and the development of new
programs and specializations may not be accepted by existing or prospective
students or employers. If we cannot respond to changes in market requirements,
our business may be adversely affected. Even if we are able to develop
acceptable new programs, we may not be able to introduce these new programs as
quickly as students require or as quickly as our competitors introduce competing
programs. To offer a new academic program, we may be required to obtain
appropriate federal, state and accrediting agency approvals, which may be
conditioned or delayed in a manner that could significantly affect our growth
plans. Under certain circumstances or because we are currently provisionally
certified by the Department of Education, to be eligible for Title IV
programs, a new academic program may need to be approved by the Department of
Education. If we are unable to respond adequately to changes in market
requirements due to financial constraints, regulatory limitations or other
factors, our ability to attract and retain students could be impaired and our
financial results could suffer.
Establishing
new academic programs or modifying existing programs requires us to make
investments in management, incur marketing expenses and reallocate other
resources. We may have limited experience with the courses in new areas and may
need to modify our systems and strategy or enter into arrangements with other
institutions to provide new programs effectively and profitably. If we are
unable to increase the number of students, or offer new programs in a
cost-effective manner, or are otherwise unable to manage effectively the
operations of newly established academic programs, our results of operations and
financial condition could be adversely affected.
If
we do not have adequate continued personal referrals and marketing and
advertising programs that are effective in developing awareness among,
attracting and retaining new students, our financial performance in the future
would suffer.
Building
awareness of AMU and APU and the programs we offer among potential students is
critical to our ability to attract new students. In order to maintain and
increase our revenues and profits, we must continue to attract new students in a
cost-effective manner and these students must remain active in our programs.
During 2009, we increased the amounts spent on marketing and advertising, and we
anticipate this trend to continue, particularly as a result of our attempts to
attract and retain students from non-military market sectors. We use marketing
tools such as the Internet, exhibits at conferences, and print media advertising
to promote our schools and programs. Additionally, we rely on the general
reputation of AMU and APU and referrals from current students, alumni and
educational service officers in the United States Armed Forces as a source of
new students. Some of the factors that could prevent us from successfully
advertising and marketing our programs and from successfully enrolling and
retaining students in our programs include:
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the
emergence of more successful competitors;
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factors
related to our marketing, including the costs of Internet advertising and
broad-based branding campaigns;
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performance
problems with our online systems;
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failure
to maintain accreditation;
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student
dissatisfaction with our services and programs;
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failure
to develop a message or image that resonates well within non-military
sectors of the market;
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adverse
publicity regarding us, our competitors or online or for-profit education
generally;
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adverse
developments in our relationship with military educational service
officers;
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a
decline in the acceptance of online education; and
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a
decrease in the perceived or actual economic benefits that students derive
from our programs.
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If we are
unable to continue to develop awareness of AMU and APU and the programs we
offer, and to enroll and retain students in both military and non-military
market sectors, our enrollments would suffer and our ability to increase
revenues and maintain profitability would be significantly
impaired.
27
System
disruptions and security breaches to our online computer networks could
negatively impact our ability to generate revenue and damage our reputation,
limiting our ability to attract and retain students.
The
performance and reliability of our technology infrastructure is critical to our
reputation and ability to attract and retain students. Any system error or
failure, or a sudden and significant increase in bandwidth usage, could result
in the unavailability of our online classroom, damaging our ability to generate
revenue. Our technology infrastructure could be vulnerable to interruption or
malfunction due to events beyond our control, including natural disasters,
terrorist activities and telecommunications failures.
Our
systems, particularly those related to our Partnership-At-a-Distance, or PAD,
system, have been predominantly developed in-house, with limited support from
outside vendors. We are continuously working on upgrades to the PAD system, and
our employees continue to devote substantial time to its development. To the
extent that we face problems with the PAD system, we may not have the capacity
to address the problems with our internal capability, and we may not be able to
identify outside contractors with expertise relevant to our custom
system.
Any
failure of our online classroom system could also prevent students from
accessing their courses. Any interruption to our technology infrastructure could
have a material adverse effect on our ability to attract and retain students and
could require us to incur additional expenses to correct or mitigate the
interruption.
Our
computer networks may also be vulnerable to unauthorized access, computer
hackers, computer viruses and other security problems. A user who circumvents
security measures could misappropriate proprietary information, personal
information about our students or cause interruptions or malfunctions in
operations. As a result, we may be required to expend significant resources to
protect against the threat of these security breaches or to alleviate problems
caused by these breaches. We engage multiple security assessment providers on a
periodic basis to review and assess our security. We utilize this information to
audit ourselves to ensure that we are continually monitoring the security of our
technology infrastructure. However, we cannot assure you that these security
assessments and audits will protect our computer networks against the threat of
security breaches.
We
intend to change the third party software provider for our online classroom,
which will be a time-consuming and capital intensive process that may not be
successful and in the interim could lead to our current provider ceasing to
support our current system, any of which could adversely affect our students’
experience and our performance.
Our
online classroom employs the Educator
tm
learning management
system pursuant to a license from Ucompass.com, Inc. The Educator system is a
web-based portal that stores and delivers course content, provides interactive
communication between students and faculty, and supplies online evaluation
tools. We currently rely on Ucompass for ongoing support and customization and
integration of the Educator system with the rest of our technology
infrastructure. We have determined that it is in our long-term best interest to
transition to a new online classroom that allows us to integrate additional
technologies and resources. Our online classroom is central to our
operations, and the process of switching our provider will be complicated and
time consuming. We may underestimate the amount of time and capital
that will be required to complete the transition and our management team could
be distracted from focusing on other aspects of our
business. Furthermore, the online classroom that we select may not be
well received by our current or future students. Any of the foregoing
problems could result in an adverse impact on our operations, damage to our
reputation and limits on our ability to attract and retain students. During the
transition, if Ucompass ceased to operate or was unable or unwilling to continue
to provide us with service, we may have difficulty maintaining the software
required for our online classroom or updating it for future technological
changes, all of which would also have an adverse impact on our operations, cause
damage to our reputation and limit our ability to attract and retain
students.
Future
growth or increased technology demands will require continued investment of
capital, time and resources to develop and update our technology and if we are
unable to increase the capacity of our resources appropriately, our ability to
handle growth, our ability to attract or retain students and our financial
condition and results of operations could be adversely
affected.
We
believe that continued growth will require us to increase the capacity and
capabilities of our technology infrastructure, including our PAD system.
Increasing the capacity and capabilities of our technology infrastructure will
require us to invest capital, time and resources, and there is no assurance that
even with sufficient investment our systems will be scalable to accommodate
future growth. We may also need to invest capital, time and resources to update
our technology in response to competitive pressures in the marketplace. If we
are unable to increase the capacity of our resources or update our resources
appropriately, our ability to handle growth, our ability to attract or retain
students, and our financial condition and results of operations could be
adversely affected.
28
The loss of any key member of our
management team may impair our ability to operate effectively and may harm our
business.
Our
success depends largely upon the continued services of our executive officers
and other key management and technical personnel. The loss of one or more
members of our management team could harm our business. We do not have
employment agreements with all of our other executive officers or key personnel.
We do not maintain key person life insurance policies on any of our
employees.
If
we are unable to attract and retain management, faculty, administrators and
skilled personnel, our business and growth prospects could be severely
harmed.
To
execute our growth strategy, we must attract and retain highly qualified
management, faculty, administrators and skilled personnel. Competition for
hiring these individuals is intense, especially with regard to faculty in
specialized areas. Our growth places constant demands on us to find qualified
individuals across all levels of our institution. Since August 2009 we have
hired a new Chief Operations Officer and Chief Information Officer, reflecting
our continued need to also continue to expand and strengthen our management as
we grow. If we fail to attract new management, faculty,
administrators or skilled personnel or fail to retain and motivate our existing
management, faculty, administrators and skilled personnel, our business and
growth prospects could be severely harmed.
If
we fail to maintain adequate systems and processes to detect and prevent
fraudulent activity in student enrollment and financial aid, we may lose
our ability to participate in Title IV programs or Department of Defense tuition
assistance programs or have our participation in the Title IV programs
conditioned or limited.
As we
continue to grow we may be susceptible to an increased risk of fraudulent
activity by outside parties with respect to student enrollment and student
financial aid programs. The potential for outside parties to perpetrate fraud in
connection with the award and disbursement of Title IV program funds by
APUS, including as a result of identity theft, may be heightened due to our
nature as an online education provider. We must maintain systems and
processes to identify and prevent fraudulent applications for enrollment and
financial aid. We cannot be certain that our systems and processes
will continue to be adequate in the face of increasingly sophisticated fraud
schemes or that we will be able to expand such systems and processes at a pace
consistent with our growth.
The
Department of Education requires institutions that participate in Title IV
programs to refer to the Office of the Inspector General of the Department of
Education any credible information indicating that any applicant, employee,
third-party servicer, or agent of the institution that acts in a capacity that
involves administration of the Title IV programs has been engaged in any fraud
or other illegal conduct involving Title IV programs. If the systems and
processes that we have established to detect and prevent fraud are inadequate,
the Department of Education may find that we do not satisfy its “administrative
capability” requirements. This could result in our being limited in our access
to, or our losing, Title IV program funding, which would limit our
potential for growth outside the military sector and adversely affect our
enrollment, revenues and results of operations. See “Regulation of our Business”
in this annual report for more information on the Department of Education’s
regulations on administrative capability. In addition, our ability to
participate in Title IV programs and the tuition assistance programs of the
United States Armed Forces is conditioned on our maintaining accreditation by an
accrediting agency that is recognized by the Secretary of Education. Any
significant failure to detect adequately fraudulent activity related to student
enrollment and financial aid could cause us to fail to meet our accrediting
agencies’ standards. Furthermore, under HEOA, accrediting agencies that evaluate
institutions that offer distance learning programs, as we do, must require such
institutions to have processes through which the institution establishes that a
student who registers for a distance education program is the same student who
participates in and receives credit for the program. Failure to meet our
accrediting agencies’ standards could result in the loss of accreditation at the
discretion of our accrediting agencies, which could result in a loss of our
eligibility to participate in Title IV programs and the tuition assistance
programs of the United States Armed Forces.
The protection of
our operations through exclusive proprietary rights and intellectual property is
limited, and we encounter disputes from time to time relating to our use of
intellectual property of third parties, any of which could harm our operations
and prospects.
In the
ordinary course of our business, we develop intellectual property of many kinds
that is or will be the subject of copyright, trademark, service mark, patent,
trade secret or other protections. This intellectual property includes but is
not limited to courseware materials and business know-how and internal processes
and procedures developed to respond to the requirements of operating and various
education regulatory agencies. We rely on a combination of copyrights,
trademarks, service marks, trade secrets, domain names, agreements and
registrations to protect our intellectual property. We rely on service mark and
trademark protection in the United States and select foreign jurisdictions to
protect our rights to the marks “AMERICAN MILITARY UNIVERSITY,” “AMERICAN PUBLIC
UNIVERSITY,” “AMERICAN PUBLIC UNIVERSITY SYSTEM” and “EDUCATING THOSE WHO
SERVE,” as well as distinctive logos and other marks associated with our
services. We rely on agreements under which we obtain rights to use course
content developed by faculty members and other third party content experts. We
cannot assure you that the measures that we take will be adequate or that we
have secured, or will be able to secure, appropriate protections for all of our
proprietary rights in the United States or select foreign jurisdictions, or that
third parties will not infringe upon or violate our proprietary rights. Despite
our efforts to protect these rights, unauthorized third parties may attempt to
duplicate or copy the proprietary aspects of our curricula, online resource
material and other content, and offer competing programs to ours.
29
In
particular, third parties may attempt to develop competing programs or duplicate
or copy aspects of our curriculum, online resource material, quality management
and other proprietary content. Any such attempt, if successful, could adversely
affect our business. Protecting these types of intellectual property rights can
be difficult, particularly as it relates to the development by our competitors
of competing courses and programs.
We may
encounter disputes from time to time over rights and obligations concerning
intellectual property, and we may not prevail in these disputes. Third parties
may raise a claim against us alleging an infringement or violation of the
intellectual property of that third party. In July 2006, we settled a dispute
with another institution regarding the use of certain marks that allowed us to
continue to use the marks at issue, but we may not be able to favorably resolve
future disputes. Some third party intellectual property rights may be extremely
broad, and it may not be possible for us to conduct our operations in such a way
as to avoid those intellectual property rights. Any such intellectual property
claim could subject us to costly litigation and impose a significant strain on
our financial resources and management personnel regardless of whether such
claim has merit. Our general liability and cyber liability insurance may not
cover potential claims of this type adequately or at all, and we may be required
to alter the content of our classes or pay monetary damages, which may be
significant.
We
may incur liability for the unauthorized duplication or distribution of class
materials posted online for class discussions.
In some
instances, our faculty members or our students may post various articles or
other third party content on class discussion boards. We may incur liability for
the unauthorized duplication or distribution of this material posted online for
class discussions. Third parties may raise claims against us for the
unauthorized duplication of this material. Any such claims could subject us to
costly litigation and impose a significant strain on our financial resources and
management personnel regardless of whether the claims have merit. Our faculty
members or students could also post classified material on class discussion
boards, which could expose us to civil and criminal liability and harm our
reputation and relationships with members of the military and government. Our
general liability insurance may not cover potential claims of this type
adequately or at all, and we may be required to alter the content of our courses
or pay monetary damages.
Because
we are an exclusively online provider of education, we are entirely dependent on
continued growth and acceptance of exclusively online education and, if the
recognition by students and employers of the value of online education does not
continue to grow, our ability to grow our business could be adversely
impacted.
We
believe that continued growth in online education will be largely dependent on
additional students and employers recognizing the value of degrees from online
institutions. If students and employers are not convinced that online schools
are an acceptable alternative to traditional schools or that an online education
provides value, or if growth in the market penetration of exclusively online
education slows, growth in the industry and our business could be adversely
affected. Because our business model is based on online education, if the
acceptance of online education does not grow, our ability to continue to grow
our business and our financial condition and results of operations could be
materially adversely affected.
If
we do not maintain continued strong relationships with various military bases
and educational service officers, and if we are unable to expand our use of
articulation agreements, our future growth may be impaired.
We have
non-exclusive articulation agreements or memoranda of understanding with various
educational institutions of the United States Armed Forces and other
governmental education programs. Articulation agreements and memoranda of
understanding are agreements pursuant to which we agree to award academic
credits toward our degrees for learning in educational programs offered by
others. Additionally, we rely on relationships with educational service offices
on military bases and base education officers to distribute our information to
interested service members. If our relationships with educational service
offices or base education counselors deteriorate or end, our efforts to recruit
students from that base will be impaired. If our articulation agreements and
memoranda of understanding are eliminated, or if our relationships with
educational service offices or base education counselors deteriorate, this could
materially and adversely affect our revenues and results of
operations.
The
United States Armed Forces has in the past and may in the future approve
programs and initiatives to provide additional educational opportunities to
service members, and these programs and initiatives may not include
participation by us. We cannot predict the impact of these announcements,
programs or initiatives on us, but given our dependence on students from the
armed forces, our net course registrations and results of operations could be
materially adversely affected by such announcements, programs and
initiatives.
Government
regulations relating to the Internet could increase our cost of doing business,
affect our ability to grow or otherwise have a material adverse effect on our
business.
30
The
increasing popularity and use of the Internet and other online services have led
and may lead to the adoption of new laws and regulatory practices in the United
States or foreign countries and to new interpretations of existing laws and
regulations. These new laws and interpretations may relate to issues such as
online privacy, copyrights, trademarks and service marks, sales taxes, fair
business practices and the requirement that online education institutions
qualify to do business as foreign corporations or be licensed in one or more
jurisdictions where they have no physical location or other presence. New laws,
regulations or interpretations related to doing business over the Internet could
increase our costs and materially and adversely affect our enrollments, revenues
and results of operations.
Risks
Related to the Regulation of Our Industry
The
Department of Education has placed us on provisional certification as a result
of our recent change in ownership and control, and the terms of our provisional
certification could limit our potential for growth outside the military sector
and adversely affect our enrollment, revenues and results of
operations.
In August
2008, funds affiliated with ABS Capital Partners reduced their beneficial
ownership interest from approximately 26% to approximately 24% of our
outstanding common stock by distributing to their limited partners and general
partners 400,000 shares of our stock. As a result of this distribution of
shares, we were deemed to have undergone a change in ownership and control
requiring review by the Department of Education in order to reestablish our
eligibility and continue participation in Title IV programs. As required
under Department of Education regulations, we timely notified the Department of
Education of our change in ownership and control. In connection with the
Department of Education’s review of the change, we submitted to the Department
of Education a change in ownership application that included the submission of
required documentation, including a letter from our regional accrediting agency,
The Higher Learning Commission of the North Central Association of Colleges and
Schools, indicating that it had approved the change. On October 2, 2008, we
received a letter from the Department of Education approving the change in
ownership and control and granting us provisional certification until
September 30, 2010.
During a
period of provisional certification, we must comply with any additional
conditions included in our program participation agreement, which include, among
other things, limitations on our operations. Our program participation agreement
provides that as a provisionally certified institution, we must apply for and
receive approval by the Secretary for any substantial change. Under our program
participation agreement, substantial changes include but are not limited to
establishment of additional locations, an increase in the level of academic
offering, and addition of any non-degree or short-term training program. The
Department of Education may also more closely review us while we are
provisionally certified. The conditions to provisional certification or closer
review by the Department of Education could impact, among other things, our
ability to add educational programs, acquire other schools or make other
significant changes. In addition, while we are provisionally certified if the
Department of Education determines that we are unable to meet our
responsibilities, it may seek to revoke our certification to participate in
Title IV programs with fewer due process protections than if we were fully
certified. Limitations on our operations could, and the loss of our
certification to participate in Title IV programs would, adversely affect
our ability to grow our presence outside the military sector in addition to
having adverse effects on our enrollment, revenues and results of
operations.
If
we fail to comply with the extensive regulatory requirements for our business,
we could face penalties and significant restrictions on our operations,
including loss of access to federal tuition assistance programs for members of
the United States Armed Forces and federal loans and grants for our
students.
We are
subject to extensive regulation by (1) the federal government through the
U.S. Department of Education and under the Higher Education Act,
(2) state regulatory bodies and (3) accrediting agencies recognized by
the U.S. Secretary of Education. The regulations, standards and policies of
these agencies cover the vast majority of our operations, including our
educational programs, facilities, instructional and administrative staff,
administrative procedures, marketing, recruiting, financial operations and
financial condition. These regulatory requirements can also affect our ability
to add new or expand existing educational programs and to change our corporate
structure and ownership.
Institutions
of higher education that grant degrees, diplomas or certificates must be
authorized by an appropriate state education agency or agencies. 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 Department
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.
Our
operations are also subject to regulation due to our participation in
Title IV programs. Title IV programs, which are administered by the
Department of Education, include education loans with below-market interest
rates that are guaranteed by the federal government in the event of default or
are funded by the federal government. Title IV programs also include
several grant programs for students with economic need as determined in
accordance with the Higher Education Act and Department of Education
regulations. To participate in Title IV programs, a school must receive and
maintain authorization by the appropriate state education agencies, be
accredited by an accrediting agency recognized by the Secretary of Education and
be certified as an eligible institution by the Department of Education. Our
growth strategy is partly dependent on enrolling more students who are attracted
to us because of our continued participation in these
programs.
31
The
regulations, standards and policies of the Department of Education, state
education agencies and our accrediting agencies change frequently, and changes
in, or new interpretations of, applicable laws, regulations, standards or
policies, or our noncompliance with any applicable laws, regulations, standards
or policies, could have a material adverse effect on our accreditation,
authorization to operate in various states, activities, receipt of funds under
tuition assistance programs of the United States Armed Forces, our ability to
participate in Title IV programs, or costs of doing business. Furthermore,
findings of noncompliance with these laws, regulations, standards and policies
also could result in our being required to pay monetary damages, or being
subjected to fines, penalties, injunctions, limitations on our operations,
termination of our ability to grant degrees, revocation of our accreditation,
restrictions on our access to Title IV program funds or other censure that
could have a material adverse effect on our business.
If
we fail to maintain our institutional accreditation, we would lose our ability
to participate in the tuition assistance programs of the United States Armed
Forces and also to participate in Title IV programs.
American
Public University System is accredited by The Higher Learning Commission of the
North Central Association of Colleges and Schools, one of six regional
accrediting agencies recognized by the Secretary of Education, and by the
Accrediting Commission of the Distance Education and Training Council, or DETC,
which is a national accrediting agency recognized by the Secretary of Education.
Accreditation by an accrediting agency that is recognized by the Secretary of
Education is required for participation in the tuition assistance programs of
the United States Armed Forces. In 2009, we derived approximately 56% of our
revenue from net course registrations from these tuition assistance programs.
Accreditation by an accrediting agency that is recognized by the Secretary of
Education for Title IV purposes is also required for an institution to
become and remain eligible to participate in Title IV programs. American
Public University System achieved regional accreditation from The Higher
Learning Commission in 2006 and has had national accreditation from the Distance
Education and Training Council since 1995. We have identified The Higher
Learning Commission as our primary accreditor for Title IV purposes. Either
The Higher Learning Commission or DETC may impose restrictions on our
accreditation or may terminate our accreditation. To remain accredited American
Public University System must continuously meet certain criteria and standards
relating to, among other things, performance, governance, institutional
integrity, educational quality, faculty, administrative capability, resources
and financial stability. Failure to meet any of these criteria or standards
could result in the loss of accreditation at the discretion of the accrediting
agencies. Furthermore, many prospective students may view accreditation by a
regional accrediting agency to be more prestigious than accreditation by a
national accrediting agency, and we believe that loss of regional accreditation
may reduce the marketability of American Public University System even if
national accreditation were maintained. The complete loss of accreditation
would, among other things, render our students and us ineligible to participate
in the tuition assistance programs of the United States Armed Forces or
Title IV programs and have a material adverse effect on our enrollments,
revenues and results of operations.
Increased
scrutiny of accrediting agencies by the Secretary of Education may result in
increased scrutiny of institutions, particularly proprietary institutions, by
accrediting agencies, and if our institutional accrediting agency loses its
ability to serve as an accrediting agency for Title IV program purposes, we may
lose our ability to participate in Title IV programs.
In
November and December 2009, the Department of Education’s Office of the
Inspector General (“OIG”) issued reports criticizing three regional accreditors
– Middle States Commission on Higher Education, the Southern Association of
Colleges and Schools, and the Higher Learning Commission – for
failing to define both program length and credit hours. OIG, in an unusual
action, recommended that the Department of Education consider limiting,
suspending, or terminating The Higher Learning Commission’s recognition as an
accreditor for purposes of determining institutional eligibility to participate
in Title IV programs. If the Department of Education were to limit, suspend, or
terminate The Higher Learning Commission’s recognition, we could lose our
ability to participate in the Title IV programs, unless and until we were able
to obtain Department of Education approval to rely on DETC accreditation for
purposes of institutional eligibility to participate in the Title IV programs.
If we were unable to rely on DETC accreditation in such circumstances, among
other things, our students and us would be ineligible to participate in the
Title IV programs, and such consequence would have a material adverse effect on
enrollments, revenues and results of operations. In addition, increased scrutiny
of accrediting agencies by the Secretary of Education in connection with the
Department of Education’s recognition process may result in increased scrutiny
of institutions by accrediting agencies. Furthermore, because the for-profit
education sector is growing at such a rapid pace, it is possible that
accrediting bodies would respond to that growth by adopting additional criteria,
standards and policies that are intended to monitor, regulate or limit the
growth of for-profit institutions like us. For example, in June 2009,
The Higher Learning Commission adopted new policies related to institutional
control, structure and organization. Part of The Higher Learning
Commission’s rationale for these changes was to better define the range of its
oversight of transactions related to change of ownership at institutions. The
new policies extend The Higher Learning Commission’s oversight to transactions
that change, or have the potential to change, the control of an institution or
its fundamental structure and organization. Under the new policies, The Higher
Learning Commission also now extends its oversight to defined changes that occur
in a parent or controlling entity, and not necessarily in the institution
itself. Actions by, or relating to, an accredited institution,
including a significant acquisition of another institution, significant changes
in board composition or organizational documents, and accumulations by one
stockholder of greater than 25% of the capital stock, could open up an
accredited institution to additional reviews by The Higher Learning Commission
and possible change from an accredited status to candidate status, which
enhances the risks of these types of actions. In particular, the
change from accredited status to candidate status could adversely impact an
institution’s ability to participate in Title IV programs. For profit
institutions may also be less attractive acquisition candidates because of the
enhanced scrutiny of change in control transactions, the explicit ability to
move an institution from accredited status to candidate status and The Higher
Learning Commission will now also be looking more closely at entities that own
accredited institutions.
32
Our
experience with the Title IV programs is limited, because we only began to
participate in the programs in 2006, and our failure to comply with the complex
regulations associated with Title IV programs would have a significant
adverse effect on our operations and prospects for growth.
We first
became certified to participate in Title IV programs for classes beginning
in November 2006. We expect a significant portion of our growth in enrollments
and revenues to come from students who are utilizing funds from Title IV
programs. However, compliance with the requirements of the Higher Education Act
and Title IV programs is highly complex and imposes significant additional
regulatory requirements on our operations, which require additional staff,
contractual arrangements, systems and regulatory costs. We have limited
demonstrated history of compliance with these additional regulatory
requirements. If we fail to comply with any of these additional regulatory
requirements, the Department of Education could, among other things, impose
monetary penalties, place limitations on our operations, and/or condition or
terminate our eligibility to receive Title IV program funds, which would
limit our potential for growth outside the military sector and adversely affect
our enrollment, revenues and results of operations.
If
American Public University System does not maintain its authorization in West
Virginia, our operations would be curtailed and we may not grant
degrees.
A school
that grants degrees, diplomas or certificates must be authorized by the relevant
education agency of the state or states in which it is located. State
authorization is also required for an institution to be eligible to participate
in Title IV programs. American Public University System is headquartered in
the State of West Virginia and is authorized by the West Virginia Higher
Education Policy Commission. If we maintain our regional accreditation, we will
likely remain in good standing with the West Virginia Higher Education Policy
Commission. However, the West Virginia Higher Education Policy Commission may
also take disciplinary action or revoke authorization if an institution’s bond
is cancelled, if the institution fails to take corrective action to bring it
into compliance with West Virginia Higher Education Policy Commission policies,
or if the owner is convicted for a felony or crime involving institution
administration of Title IV programs. If we do not maintain regional
accreditation, our state authorization may be continued based on our national
accrediting agency, DETC, if the West Virginia Higher Education Policy
Commission finds that it is an acceptable alternative accrediting agency. If we
lose accreditation from both accrediting agencies, or accreditation by DETC is
not an acceptable alternative accrediting agency in case of loss of Higher
Learning Commission accreditation, the West Virginia Higher Education Policy
Commission may suspend, withdraw, or revoke our authorization. In addition, in
order to maintain our eligibility for accreditation by The Higher Learning
Commission, we must remain headquartered in one of the states in its region,
which includes West Virginia. If we were to lose our authorization from the West
Virginia Higher Education Policy Commission we would be unable to provide
educational services, and we would lose our regional
accreditation.
Our
failure to comply with regulations of various states could have a material
adverse effect on our enrollments, revenues and results of
operations.
Various
states impose regulatory requirements on educational institutions operating
within their boundaries. Several states have sought to assert jurisdiction over
online educational institutions that have no physical location or other presence
in the state but offer educational services to students who reside in the state,
or that advertise to or recruit prospective students in the state. State
regulatory requirements for online education are inconsistent among states and
not well developed in many jurisdictions. As such, these requirements change
frequently and, in some instances, are not clear or are left to the discretion
of state regulators. Our changing business and the constantly changing
regulatory environment require us to evaluate continually our state regulatory
compliance activities. In the event we are found not to be in compliance, and a
state seeks to restrict one or more of our business activities within its
boundaries, we may not be able to recruit students from that state and may have
to cease providing service to students in that state.
American
Public University System has a physical presence in the Commonwealth of Virginia
based on administrative offices in that state, and it is authorized by the State
Council of Higher Education for Virginia. We regularly review the licensure
requirements of all other states to determine the degree to which our activities
in those states rise to the level of requiring licensure or
authorization beyond that already established. APUS has confirmed its
regulatory status in 49 of the 50 states, plus the District of Columbia, and we
are in the process of confirming our status with the last remaining state to
ensure that we are in compliance with its recently revised regulatory
provisions. State laws typically establish standards for instruction,
qualifications of faculty, administrative procedures, marketing, recruiting,
financial operations and other operational matters. To the extent that we have
obtained, or obtain in the future, additional authorizations or licensure,
changes in state laws and regulations and the interpretation of those laws and
regulations by the applicable regulators may limit our ability to offer
educational programs and award degrees. Some states may also prescribe financial
regulations that are different from those of the Department of Education, the
West Virginia Higher Education Policy Commission, The Higher Learning Commission
or DETC. If we fail to comply with state licensing or authorization
requirements, we may be subject to the loss of state licensure or authorization.
If we fail to comply with state requirements to obtain licensure or
authorization, we may be the subject of injunctive actions or penalties.
Although we believe that the only state licensure or authorization that is
necessary for American Public University System to participate in the tuition
assistance programs for the United States Armed Forces and in Title IV
programs is our authorization from the West Virginia Higher Education Policy
Commission, loss of licensure or authorization in other states or the failure to
obtain required licensures or authorizations could prohibit us from recruiting
or enrolling students in those states, reduce significantly our enrollments and
revenues and have a material adverse effect on our results of
operations.
33
We
must periodically seek recertification to participate in Title IV programs,
and may, in certain circumstances, be subject to review by the Department of
Education prior to seeking recertification, and our future success may be
adversely affected if we are unable to successfully maintain certification or
obtain recertification.
An
institution generally must seek recertification from the Department of Education
at least every six years and possibly more frequently depending on various
factors, such as whether it is provisionally certified. The Department of
Education may also review an institution’s continued eligibility and
certification to participate in Title IV programs, or scope of eligibility
and certification, in the event the institution undergoes a change in ownership
resulting in a change of control or expands its activities in certain ways, such
as the addition of certain types of new programs, or, in certain cases, changes
to the academic credentials that it offers. In certain circumstances, the
Department of Education must provisionally certify an institution, such as when
it is an initial participant in Title IV programs or has undergone a change
in ownership and control. In 2006 we applied to participate in Title IV
programs for the first time and were provisionally certified for a period
through June 30, 2007. We timely submitted our application for
recertification, and the Department of Education granted us provisional
certification through June 30, 2008. In May 2008, we were fully recertified
to participate in Title IV programs. In August 2008, we were deemed to have
undergone a change in ownership and control requiring review by the Department
of Education in order to reestablish our eligibility and continue participation
in Title IV programs. As required under Department of Education
regulations, we timely notified the Department of Education of our change in
ownership and control. In connection with the Department of Education’s review
of the change, we submitted to the Department of Education a change in ownership
application that included the submission of required documentation, including a
letter from The Higher Learning Commission indicating that it had approved the
change. On October 2, 2008, we received a letter from the Department of
Education approving the change in ownership and control and granting us
provisional certification until September 30, 2010. A provisionally
certified institution must apply for and receive Department of Education
approval of substantial changes and must comply with any additional conditions
included in its program participation agreement. If the Department of Education
determines that a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it may seek to
revoke the institution’s certification to participate in Title IV programs
with fewer due process protections for the institution than if it were fully
certified. The Department of Education may withdraw our certification if it
determines that we are not fulfilling material requirements for continued
participation in Title IV programs. In 2010 we plan to apply timely for
recertification. If the Department of Education does not renew or
withdraws our certification to participate in Title IV programs, our
students would no longer be able to receive Title IV program funds, which
would have a material adverse effect on our enrollments, revenues and results of
operations. In addition, regulatory restraints related to the addition of new
programs could impair our ability to attract and retain students and could
negatively affect our financial results.
If
regulators do not approve or delay their approval of transactions involving a
change of control of our company, our ability to operate could be
impaired.
If we or
American Public University System experience a change of control under the
standards of applicable state education agencies, the Department of Education,
DETC, The Higher Learning Commission, or other regulators, we must notify or
seek the approval of each relevant regulatory agency. A change of control
occurred in August 2008 and we have completed the required notification and
approval processes. As a result of its review and approval of the change, The
Higher Learning Commission conducted a focused evaluation in February 2009 as
its policies require it to do as a result of a change of the type we experienced
in August 2008. In June 2009 the Higher Learning Commission confirmed approval
of the change of control that occurred in August 2008. Transactions or events
that constitute a change of control include significant acquisitions or
dispositions of an institution’s common stock and significant changes in the
composition of an institution’s board of directors. Some of these transactions
or events may be beyond our control. Our failure to obtain, or a delay in
receiving, approval of any change of control from the West Virginia Higher
Education Policy Commission, the State Council of Higher Education for Virginia,
the Department of Education, DETC or The Higher Learning Commission could have a
material adverse effect on our business and financial condition. Our failure to
obtain, or a delay in receiving, approval of any change of control from other
states in which we are currently licensed or authorized could require us to
suspend our activities in that state or otherwise impair our operations. The
potential adverse effects of a change of control could influence future
decisions by us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our stock. In addition, the regulatory burdens and
risks associated with a change of control also could have an adverse effect on
the market price of your shares.
34
Government
and regulatory agencies and third parties may conduct compliance reviews, bring
claims or initiate litigation against us, any of which could disrupt our
operations and adversely affect our performance.
Because
we operate in a highly regulated industry, we are subject to compliance reviews
and claims of noncompliance and lawsuits by government agencies, regulatory
agencies and third parties, including claims brought by third parties on behalf
of the federal government. For example, the Department of Education regularly
conducts program reviews of educational institutions that are participating in
the Title IV programs and the Office of Inspector General of the Department
of Education regularly conducts audits and investigations of such institutions.
If the results of compliance reviews or other proceedings are unfavorable to us,
or if we are unable to defend successfully against lawsuits or claims, we may be
required to pay monetary damages or be subject to fines, limitations, loss of
Title IV funding, injunctions or other penalties, including the requirement
to make refunds. Even if we adequately address issues raised by an agency review
or successfully defend a lawsuit or claim, we may have to divert significant
financial and management resources from our ongoing business operations to
address issues raised by those reviews or to defend against those lawsuits or
claims. Claims and lawsuits brought against us may damage our reputation, even
if such claims and lawsuits are without merit.
Our
regulatory environment and our reputation may be negatively influenced by the
actions of other for-profit institutions.
We are
one of a number of for-profit institutions serving the postsecondary education
market. In recent years, regulatory investigations and civil litigation have
been commenced against several companies that own for-profit educational
institutions. These investigations and lawsuits have alleged, among other
things, deceptive trade practices and noncompliance with Department of Education
regulations. These allegations have attracted adverse media coverage and have
been the subject of federal and state legislative hearings. Although the media,
regulatory and legislative focus has been primarily on the allegations made
against these specific companies, broader allegations against the overall
for-profit school sector may negatively affect public perceptions of other
for-profit educational institutions, including American Public University
System. In addition, recent reports on student lending practices of various
lending institutions and schools, including for-profit schools, and
investigations by a number of state attorneys general, Congress and governmental
agencies have led to adverse media coverage of postsecondary education. Adverse
media coverage regarding other companies in the for-profit school sector or
regarding us directly could damage our reputation, could result in lower
enrollments, revenues and operating profit, and could have a negative impact on
our stock price. Such allegations could also result in increased scrutiny and
regulation by the Department of Education, Congress, accrediting bodies, state
legislatures or other governmental authorities with respect to all for-profit
institutions, including us.
Congress
may change the law or reduce funding for Title IV programs, which could
reduce our student population, revenues and profit margin.
The
Higher Education Act comes up for reauthorization by Congress approximately
every five to six years. When Congress does not act on complete
reauthorization, there are typically amendments and extensions of authorization.
On August 14, 2008, the Higher Education Opportunity Act, or HEOA, was
enacted. HEOA reauthorizes the Higher Education Act. Additionally, Congress
reviews and determines appropriations for Title IV programs on an annual
basis through the budget and appropriations process. In October 2009 the
Department of Education published final regulations to implement HEOA. Those
regulations generally are effective July 1, 2010, but many of the provisions of
HEOA were effective upon enactment. If our efforts to comply with HEOA’s
provisions are inconsistent with how the Department of Education interprets
those provisions, we may be found to be in noncompliance with such provisions
and the Department of Education could impose monetary penalties, place
limitations on our operations, and/or condition or terminate our eligibility to
receive Title IV program funds. In addition, there is no assurance that
Congress will not in the future enact changes that decrease Title IV
program funds available to students, including students who attend our
institution. Any action by Congress that significantly reduces funding for
Title IV programs or the ability of our school or students to participate
in these programs, would require us to arrange for other sources of financial
aid and would materially decrease our enrollment. Such a decrease in enrollment
would have a material adverse effect on our revenues and results of operations.
Congressional action, including HEOA, may also require us to modify our
practices in ways that could result in increased administrative and regulatory
costs and decreased profit margin. We are not in a position to predict with
certainty whether any legislation will be passed by Congress or signed into law
in the future. The reallocation of funding among Title IV programs,
material changes in the requirements for participation in such programs, or the
substitution of materially different Title IV programs could reduce the
ability of certain students to finance their education at our institution and
adversely affect our revenues and results of operations.
Investigations
by state attorneys general, Congress and governmental agencies regarding
relationships between loan providers and educational institutions and their
financial aid officers may result in increased regulatory burdens and
costs.
35
In recent
years, the student lending practices of postsecondary educational institutions,
financial aid officers and student loan providers have been subjected to several
investigations by state attorneys general, Congress and governmental agencies.
These investigations concern, among other things, possible deceptive practices
in the marketing of private student loans and loans provided by lenders pursuant
to Title IV programs. HEOA contains new requirements pertinent to
relationships between lenders and institutions. In particular, HEOA requires
institutions to have a code of conduct, with certain specified provisions,
pertinent to interactions with lenders of student loans, prohibits certain
activities by lenders and guaranty agencies with respect to institutions, and
establishes substantive and disclosure requirements for lists of recommended or
suggested lenders of federal and private student loans. In addition, HEOA
imposes substantive and disclosure obligations on institutions that make
available a list of recommended lenders for potential borrowers. State
legislators have also passed or may be considering legislation related to
relationships between lenders and institutions. Because of the evolving nature
of these legislative efforts and various inquiries and developments, we can
neither know nor predict with certainty their outcome or effects, or the
potential remedial actions that might result from these or other potential
inquiries. Governmental action may impose increased administrative and
regulatory costs and decreased profit margins.
We
are subject to sanctions that could be material to our results and damage our
reputation if we fail to calculate correctly and return timely Title IV
program funds for students who withdraw before completing their educational
program.
A school
participating in Title IV programs must correctly calculate the amount of
unearned Title IV program funds that have been disbursed to students who
withdraw from their educational programs before completion and must return those
unearned funds in a timely manner, generally within 45 days after the date
the school determines that the student has withdrawn. Because we began to
participate in Title IV programs in 2006, we have limited experience
complying with these provisions. Under Department of Education regulations, late
returns of Title IV program funds for 5% or more of students sampled in
connection with the institution’s annual compliance audit constitutes material
noncompliance. If unearned funds are not properly calculated and timely
returned, we may have to repay Title IV funds, post a letter of credit in
favor of the Department of Education or otherwise be sanctioned by the
Department of Education, which could increase our cost of regulatory compliance
and adversely affect our results of operations.
A
failure to demonstrate “financial responsibility” may result in the loss of
eligibility by American Public University System to participate in Title IV
programs or require the posting of a letter of credit in order to maintain
eligibility to participate in Title IV programs.
To
participate in Title IV programs, an eligible institution must satisfy
specific measures of financial responsibility prescribed by the Department of
Education, or post a letter of credit in favor of the Department of Education
and possibly accept other conditions, such as provisional certification,
additional reporting requirements or regulatory oversight, on its participation
in Title IV programs. The Department of Education may also apply such
measures of financial responsibility to the operating company and ownership
entities of an eligible institution and, if such measures are not satisfied by
the operating company or ownership entities, require the institution to post a
letter of credit in favor of the Department of Education and possibly accept
other conditions on its participation in Title IV programs. Any obligation
to post a letter of credit could increase our costs of regulatory compliance. If
we were unable to secure a letter of credit, we would lose our eligibility to
participate in Title IV programs. In addition to the obligation to post a
letter of credit under certain circumstances, an institution that is determined
by the Department of Education not to be financially responsible may be
transferred from the “advance” system of payment of Title IV funds, which
allows the institution to obtain Title IV program funds from the Department
of Education prior to making disbursements to students, to cash monitoring
status or to the “reimbursement” system of payment, which requires the
institution to make Title IV disbursements to students and seek
reimbursement from the Department of Education. A change in our system of
payment could increase our costs of regulatory compliance. If we fail to
demonstrate financial responsibility and thus lose our eligibility to
participate in Title IV programs, our students would lose access to
Title IV program funds for use in our institution, which would limit our
potential for growth outside the military community and adversely affect our
enrollment, revenues and results of operations.
A
failure to demonstrate “administrative capability” may result in the loss of
American Public University System’s eligibility to participate in Title IV
programs.
Department
of Education regulations specify extensive criteria an institution must satisfy
to establish that it has the requisite “administrative capability” to
participate in Title IV programs. See “Regulation of our Business” in this
annual report for more information on the Department of Education’s regulations
on administrative capability.
If an
institution fails to satisfy any of these criteria or comply with any other
Department of Education regulations, the Department of Education may require the
repayment of Title IV funds, transfer the institution from the “advance”
system of payment of Title IV funds to cash monitoring status or to the
“reimbursement” system of payment, place the institution on provisional
certification status, or commence a proceeding to impose a fine or to limit,
suspend or terminate the participation of the institution in Title IV
programs. If we are found not to have satisfied the Department of Education’s
“administrative capability” requirements we could be limited in our access to,
or lose, Title IV program funding, which would limit our potential for
growth outside the military sector and adversely affect our enrollment, revenues
and results of operations.
36
We
rely on a third party to administer our participation in Title IV programs
and its failure to comply with applicable regulations could cause us to lose our
eligibility to participate in Title IV programs.
We only
began to participate in the Title IV programs in 2006, and we have not developed
the internal capacity to handle without third-party assistance the complex
administration of participation in Title IV programs.
Global Financial Aid
Services, Inc. assists us with administration of our participation in
Title IV programs, and if it does not comply with applicable regulations,
we may be liable for its actions and we could lose our eligibility to
participate in Title IV programs. In addition, if it is no longer able to
provide the services to us, we may not be able to replace it in a timely or
cost-efficient manner, or at all, and we could lose our ability to comply with
the requirements of Title IV programs, which would limit our potential for
growth and adversely affect our enrollment, revenues and results of
operation.
We
are subject to sanctions if we pay impermissible commissions, bonuses or other
incentive payments to individuals involved in recruiting, admissions or
financial aid activities.
A school
participating in Title IV programs may not provide any commission, bonus or
other incentive payment based directly or indirectly on success in enrolling
students or securing financial aid to any person involved in student recruiting
or admission activities or in making decisions regarding the awarding of
Title IV program funds. The law and regulations governing this requirement
do not establish clear criteria for compliance in all circumstances. If we
violate this law, we could be fined or otherwise sanctioned by the Department of
Education, or we could face litigation brought under the whistleblower
provisions of the Federal False Claims Act. Any such fines or sanctions could
harm our reputation, impose significant costs on us, and have a material adverse
effect on our results of operations.
We
may lose eligibility to participate in Title IV programs if our student
loan default rates are too high, and if we lose that eligibility our future
growth could be impaired.
An
educational institution may lose its eligibility to participate in some or all
Title IV programs if, for three consecutive federal fiscal years, 25% or
more of its students who were required to begin repaying their student loans in
the relevant federal fiscal year default on their payment by the end of the next
federal fiscal year. In addition, an institution may lose its eligibility to
participate in some or all Title IV programs if its default rate exceeds
40% in the most recent federal fiscal year for which default rates have been
calculated by the Department of Education. HEOA modifies the Higher Education
Act’s default rate provisions. Beginning with default rate calculations for
federal fiscal year 2009, the cohort default rate will be calculated by
determining the rate at which borrowers who become subject to their repayment
obligation in the relevant federal fiscal year default by the end of the second
following federal fiscal year. The current method of calculating rates will
remain in effect and will be used to determine institutional eligibility until
three consecutive years of cohort default rates calculated under the new formula
are available. In addition, the cohort default rate threshold of 25% will be
increased to 30% for purposes of certain sanctions and requirements related to
cohort default rates. HEOA also requires certain default prevention action by an
institution with a default rate of 30% or more. Because we began only recently
to enroll students who are participating in the federal student loan programs,
we have no historical cohort default rate for federal fiscal year 2006 or
earlier. Our cohort default rate for federal fiscal year 2007 is 0.0%.
Relatively few students are expected to enter the repayment phase in the near
term, which could result in defaults by a few students having a relatively large
impact on our cohort default rate. If American Public University System loses
its eligibility to participate in Title IV programs because of high student
loan default rates, our students would no longer be eligible to use
Title IV program funds in our institution, which would significantly reduce
our enrollments and revenues and have a material adverse effect on our results
of operations.
Risks
Related to Owning our Common Stock
The
price of our common stock may be volatile, and as a result returns on an
investment in our common stock may be volatile.
We
completed our initial public offering in November 2007. For a significant
portion of the time since our initial public offering, we have had relatively
limited public float, and trading in our common stock has also been limited and,
at times, volatile. An active trading market for our common stock may not be
sustained, and the trading price of our common stock may fluctuate
substantially.
The price
of the common stock may fluctuate as a result of:
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price
and volume fluctuations in the overall stock market from time to
time;
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significant
volatility in the market price and trading volume of comparable
companies;
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actual
or anticipated changes in our earnings, enrollments or net course
registrations, or fluctuations in our operating results or in the
expectations of securities analysts;
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the
actual, anticipated or perceived impact of changes in government policies,
laws and regulations, or similar changes made by accrediting
bodies;
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the
depth and liquidity of the market for our common stock;
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general
economic conditions and trends;
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catastrophic
events;
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sales
of large blocks of our stock; or
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recruitment
or departure of key personnel.
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In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been brought against
that company. Because of the potential volatility of our stock price, we may
become the target of securities litigation in the future. Securities litigation
could result in substantial costs and divert management’s attention and
resources from our business.
Seasonal
and other fluctuations in our results of operations could adversely affect the
trading price of our common stock.
Our
results in any quarter may not indicate the results we may achieve in any
subsequent quarter or for the full year. Our revenues and operating results
normally fluctuate as a result of seasonal variations in our business,
principally due to changes in enrollment. Student population varies as a result
of new enrollments, graduations and student attrition. While our number of
enrolled students has grown in each sequential quarter over the past three
years, the number of enrolled students has been proportionally greatest in the
fourth quarter of each respective year. A significant portion of our general and
administrative expenses do not vary proportionately with fluctuations in
revenues. We expect quarterly fluctuations in operating results to continue as a
result of seasonal enrollment patterns. Such patterns may change, however, as a
result of new program introductions and increased enrollments of students. These
fluctuations may result in volatility in our results of operations and/or have
an adverse effect on the market price of our common stock.
If
securities analysts do not publish research or reports about our business or if
they downgrade their evaluations of our stock, the price of our stock could
decline.
The
trading market for our common stock depends in part on the research and reports
that industry or financial analysts publish about us or our business. If one or
more of the analysts covering us downgrade their estimates or evaluations of our
stock, the price of our stock could decline. If one or more of these analysts
cease coverage of our company, we could lose visibility in the market for our
stock, which in turn could cause our stock price to decline.
Provisions
in our organizational documents and in the Delaware General Corporation Law may
prevent takeover attempts that could be beneficial to our
stockholders.
Provisions
in our charter and bylaws and in the Delaware General Corporation Law may make
it difficult and expensive for a third party to pursue a takeover attempt we
oppose even if a change in control of our company would be beneficial to the
interests of our stockholders. These provisions include:
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the
ability of our board of directors to issue up to 10,000,000 shares of
preferred stock in one or more series and to fix the powers, preferences
and rights of each series without stockholder approval, which may
discourage unsolicited acquisition proposals or make it more difficult for
a third party to gain control of our company;
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a
requirement that stockholders provide advance notice of their intention to
nominate a director or to propose any other business at an annual meeting
of stockholders;
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a
prohibition against stockholder action by means of written consent unless
otherwise approved by our board of directors in
advance; and
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the
application of Section 203 of the Delaware General Corporation Law,
which generally prohibits us from engaging in mergers and other business
combinations with stockholders that beneficially own 15% or more of our
voting stock, or with their affiliates, unless our directors or
stockholders approve the business combination in the prescribed
manner.
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UNRESOLVED
STAFF COMMENTS
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None.
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PROPERTIES
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We
operate facilities in Charles Town, West Virginia and in Manassas, Virginia,
which are within a one hour drive of each other and are located within the
Washington, DC metropolitan area. The corporate headquarters, academic,
technology, finance, admissions, and advancement offices are located in Charles
Town, occupying twelve downtown facilities totaling approximately
70,000 square feet. The student services and marketing operations are
located in Manassas in facilities totaling approximately 49,000 square
feet. All facilities in Manassas are leased. In Charles Town, we have a
combination of leased (50%) and owned (50%) properties. Lease terms vary by
facility, with termination dates ranging from 2010 to 2015. Each lease has
extension provisions ranging from 3 to 7 years. We continually evaluate our
space needs and evaluate opportunities for continued physical growth, which
includes considering both additional existing structures and potential new
construction projects. In 2009, we acquired land for $0.8 million in
Charles Town, West Virginia, with the intent of constructing a new 40,000 square
foot facility on the site, to be primarily used for academic offices. The
project should result in an additional expenditure of approximately $8.0 million
to $9.0 million over the next 12 to 18 months.
|
LEGAL
PROCEEDINGS
|
From time
to time, we have been and may be involved in various legal proceedings. We
currently have no material legal proceedings pending.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our
common stock began trading on the NASDAQ Global Market on November 9, 2007
under the symbol “APEI.” Prior to November 9, 2007, there was no public
market for our common stock. The following table sets forth, for the period
indicated, the high and low sales price of the Company’s common stock as
reported on the NASDAQ Global Market.
|
Year Ended December 31,
2008
|
||||||||
|
First
Quarter 2008
|
$
|
27.56
|
$
|
44.94
|
||||
|
Second
Quarter 2008
|
$
|
29.51
|
$
|
41.36
|
||||
|
Third
Quarter 2008
|
$
|
34.53
|
$
|
53.24
|
||||
|
Fourth
Quarter 2008
|
$
|
33.00
|
$
|
49.96
|
||||
|
Year Ended December 31,
2009
|
||||||||
|
First
Quarter 2009
|
$
|
33.69
|
$
|
44.99
|
||||
|
Second
Quarter 2009
|
$
|
31.45
|
$
|
46.53
|
||||
|
Third
Quarter 2009
|
$
|
31.54
|
$
|
39.91
|
||||
|
Fourth
Quarter 2009
|
$
|
30.30
|
$
|
37.21
|
||||
39
Holders
As of
February 19, 2010, there were approximately 361 holders of record of our common
stock.
Dividends
On
November 14, 2007, we paid a special distribution to our shareholders of
record immediately prior to the closing of our initial public offering on
November 14, 2007 in the aggregate amount of $93.8 million, which
equaled the gross proceeds received by us from our initial public offering,
excluding the proceeds received by us from the underwriters’ exercise of their
over-allotment option. We do not anticipate declaring or paying any additional
cash dividends on our common stock in the foreseeable future. The payment of any
dividends in the future will be at the discretion of our board of directors and
will depend upon our financial condition, results of operations, earnings,
capital requirements, contractual restrictions, outstanding indebtedness and
other factors deemed relevant by our board.
Performance
Graph
The graph
below matches American Public Education, Inc.’s cumulative 26-month total
shareholder return on common stock with the cumulative total returns of the
S&P 500 index, the NASDAQ Composite index and a customized peer group of
seven companies that includes: Apollo Group Inc, Capella Education Company,
Career Education Corp., Corinthian Colleges Inc, Devry Inc, ITT Educational
Services Inc and Strayer Education Inc. The graph tracks the performance of a
$100 investment in our common stock, in each index and in the peer group (with
the reinvestment of all dividends) from 11/9/2007 to
12/31/2009.
Recent Sales of Unregistered
Securities
None.
40
Purchases of Equity
Securities by the Issuer and Affiliated Purchasers
Employees
of the Company are provided the opportunity to forfeit shares of restricted
stock equivalent to the minimum statutory tax withholding required to be paid
when their restricted stock vests. During the year ended December 31, 2008
and 2009, the Company accepted for forfeiture 6,419 and 6,431 shares of
restricted stock for satisfaction of $295,000 and $218,000 in minimum statutory
tax withholding respectively.
41
|
SELECTED
FINANCIAL DATA
|
The
following table sets forth our selected consolidated financial and operating
data as of the dates and for the periods indicated. You should read this data
together with “Item 7 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and related notes, included elsewhere in this annual report on
Form 10-K. The selected consolidated statement of operations data for each
of the years in the three-year period ended December 31, 2009, and the
selected consolidated balance sheet data as of December 31, 2009 and 2008,
have been derived from our audited consolidated financial statements, which are
included elsewhere in this annual report on Form 10-K. The selected
consolidated statements of operations data for the years ended December 31,
2006 and 2005, and selected consolidated balance sheet data as of
December 31, 2007, 2006 and 2005, have been derived from our audited
consolidated financial statements not included in this annual report on
Form 10-K. Historical results are not necessarily indicative of the results
of operations to be expected for future periods.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||
|
(In
thousands, except per share and net registration data)
|
||||||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||
|
Revenues
|
$
|
28,178
|
$
|
40,045
|
$
|
69,095
|
$
|
107,147
|
$
|
148,998
|
||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||
|
Instructional
costs and services
|
13,247
|
17,959
|
29,479
|
43,561
|
58,383
|
|||||||||||||||
|
Selling
and promotional
|
4,043
|
4,895
|
6,765
|
12,361
|
20,479
|
|||||||||||||||
|
General
and administrative
|
7,364
|
9,150
|
15,335
|
21,302
|
25,039
|
|||||||||||||||
|
Write-off
of software development project
(1)
|
—
|
3,148
|
—
|
—
|
—
|
|||||||||||||||
|
Depreciation
and amortization
|
1,300
|
1,953
|
2,825
|
4,235
|
5,231
|
|||||||||||||||
|
Total
costs and expenses
|
25,954
|
37,105
|
54,404
|
81,459
|
109,132
|
|||||||||||||||
|
Income
from continuing operations before interest income and income
taxes
|
2,224
|
2,940
|
14,691
|
25,688
|
39,866
|
|||||||||||||||
|
Interest
income, net
|
225
|
289
|
888
|
706
|
94
|
|||||||||||||||
|
Income
from continuing operations before income taxes
|
2,449
|
3,229
|
15,579
|
26,394
|
39,960
|
|||||||||||||||
|
Income
tax expense
|
1,061
|
771
|
6,829
|
10,207
|
16,017
|
|||||||||||||||
|
Income
from continuing operations
|
1,388
|
2,458
|
8,750
|
16,187
|
23,943
|
|||||||||||||||
|
Preferred
stock charge and accretion
|
(12,985
|
)
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Income
(loss) from continuing operations attributable to common
stockholders
|
(11,597
|
)
|
2,458
|
8,750
|
16,187
|
23,943
|
||||||||||||||
|
Loss
from discontinued operations, net of income tax benefit
|
(303
|
)
|
(660
|
)
|
—
|
—
|
—
|
|||||||||||||
|
Net
income (loss) attributable to common stockholders
|
$
|
(11,900
|
)
|
$
|
1,798
|
$
|
8,750
|
$
|
16,187
|
$
|
23,943
|
|||||||||
|
Income
(loss) from continuing operations per common share:
|
||||||||||||||||||||
|
Basic
|
$
|
(1.44)
|
$
|
0.21
|
$
|
0.69
|
$
|
0.91
|
$
|
1.32
|
||||||||||
|
Diluted
|
$
|
(1.44)
|
$
|
0.20
|
$
|
0.64
|
$
|
0.86
|
$
|
1.27
|
||||||||||
|
Net
income (loss) attributable to common stockholders per common
share:
|
||||||||||||||||||||
|
Basic
|
$
|
(1.48)
|
$
|
0.15
|
$
|
0.69
|
$
|
0.91
|
$
|
1.32
|
||||||||||
|
Diluted
|
$
|
(1.48)
|
$
|
0.15
|
$
|
0.64
|
$
|
0.86
|
$
|
1.27
|
||||||||||
|
Weighted
average number of shares outstanding:
|
||||||||||||||||||||
|
Basic
|
8,055
|
11,741
|
12,759
|
17,840
|
18,167
|
|||||||||||||||
|
Diluted
|
8,055
|
12,178
|
13,601
|
18,822
|
18,906
|
|||||||||||||||
|
Other
Data:
|
||||||||||||||||||||
|
Net
cash provided by operating activities
|
$
|
3,660
|
$
|
8,929
|
$
|
17,517
|
$
|
29,757
|
$
|
36,756
|
||||||||||
|
Capital
expenditures
|
$
|
4,613
|
$
|
4,475
|
$
|
6,827
|
$
|
10,009
|
$
|
10,758
|
||||||||||
|
Stock-based
compensation
(2)
|
$
|
1,198
|
$
|
284
|
$
|
1,033
|
$
|
1,674
|
$
|
2,223
|
||||||||||
|
Net
course registrations
(3)
|
37,506
|
54,828
|
94,846
|
147,124
|
207,799
|
|||||||||||||||
42
|
As
of December 31,
|
||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
5,511
|
$
|
11,678
|
$
|
26,951
|
$
|
47,714
|
$
|
74,866
|
||||||||||
|
Working
capital
(4)
|
$
|
5,741
|
$
|
10,412
|
$
|
21,433
|
$
|
36,357
|
$
|
59,419
|
||||||||||
|
Total
assets
|
$
|
22,444
|
$
|
28,750
|
$
|
48,980
|
$
|
78,813
|
$
|
115,753
|
||||||||||
|
Stockholders’
equity
|
$
|
14,539
|
$
|
16,821
|
$
|
33,507
|
$
|
53,475
|
$
|
82,018
|
||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Income
from continuing operations
|
$
|
1,388
|
$
|
2,458
|
$
|
8,750
|
$
|
16,187
|
$
|
23,943
|
||||||||||
|
Interest
(income), net
|
(225
|
)
|
(289
|
)
|
(888
|
)
|
(706
|
)
|
(94
|
)
|
||||||||||
|
Income
tax expense
|
1,061
|
771
|
6,829
|
10,207
|
16,017
|
|||||||||||||||
|
Depreciation
and amortization
|
1,300
|
1,953
|
2,825
|
4,235
|
5,231
|
|||||||||||||||
|
EBITDA
from continuing operations
|
$
|
3,524
|
$
|
4,893
|
$
|
17,516
|
$
|
29,923
|
$
|
45,097
|
||||||||||
|
(1)
|
During
2006, $3.1 million of capitalized software development costs were
written off when management determined that the asset related to these
costs was impaired because we are no longer pursuing the related
project.
|
|
|
(2)
|
Effective
January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123(R)-Share-Based Payment, or SFAS 123R (FASB ASC
Topic 718) , which requires companies to expense share-based compensation
based on fair value. Prior to January 1, 2006, we accounted for
share-based payment in accordance with Accounting Principles Board Opinion
No. 25-Accounting for Stock Issued to Employees, and provided the
disclosure required in SFAS 123-Accounting for Stock-Based
Compensation, as amended by SFAS No. 148-Accounting for
Stock-Based Compensation-Transition and Disclosure-An Amendment of FASB
Statement No. 123. Stock-based compensation expense for the year
ended December 31, 2005 resulted from the repurchase of shares of
common stock acquired upon exercise of employee stock
options.
|
|
|
(3)
|
Net
course registrations represent the total number of course registrations
for students that have attended a portion of a course.
|
|
|
(4)
|
Working
capital is calculated by subtracting total current liabilities from total
current assets.
|
|
43
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion together with the financial statements and
the related notes included elsewhere in the annual report. This discussion
contains forward-looking statements that are based on management’s current
expectations, estimates and projections about our business and operations, and
involves risks and uncertainties. Our actual results may differ materially from
those currently anticipated and expressed in such forward-looking statements as
a result of a number of factors, including those we discuss under “Risk
Factors,” “Special Note Regarding Forward-Looking Statements” and elsewhere in
this annual report.
Overview
American
Public Education, Inc. is a provider of online postsecondary education with an
emphasis on 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.
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 cost, increased at a compound annual growth rate
(CAGR) of 48% from 2007 to 2009. Over that same time, total revenue increased at
a CAGR of 47%, from $69.1 million in 2007 to $149.0 million in 2009.
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 growth. Net course registrations increased by
55% in 2009 over 2008, our revenue increased from $107.1 million to
$149.0 million, or by 39%, over the same time period and operating margins
increased to 26.8% from 24.0% over the same time period. Net course
registrations increased by 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 24.0% from 21.3% over the same time period.
While we have experienced substantial growth in recent periods, you should not
rely on the results of any prior periods as an indication of our future growth
in net course registrations or revenue as we do not expect that our historical
growth rates are 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 2008 to 2009 have continued to decline
and were all lower than our rate of growth from 2007 to 2008.
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. For the year ended
December 31, 2009, 18.7% 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,
estimating the costs and expenses associated with administering Title IV
programs and complying with the associated regulations is
difficult.
We were
founded as American Military University, Inc. in 1991 and began offering
graduate courses in January 1993. Following accreditation by the Accrediting
Commission of the Distance Education and Training Council, or DETC, a national
accrediting agency, 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 which operates our two universities, AMU and APU. Our
university system achieved accreditation in May 2006 with The Higher Learning
Commission of the North Central Association of Colleges and Schools, a regional
accrediting agency, and became eligible for federal student aid programs under
Title IV for classes beginning in November 2006.
Our
key financial results metrics:
Revenues
In
reviewing our revenues we consider the following components: net course
registrations; tuition we charge; tuition net of scholarships; and other
fees.
Net course registrations.
For financial reporting and analysis purposes, we measure our
student body in terms of aggregate course enrollments, or net course
registrations. Net course registrations represent the aggregate number of
classes in which students remain enrolled after the date by which they may drop
the course without cost. Because we recognize revenues over the length of a
course, net course registrations in a period do not correlate directly with
revenues for that period because revenues recognized from courses are not
necessarily recognized in the period in which the course registrations occur.
For example, revenues in a quarter reflect a portion of the revenue from courses
that began in a prior period and continued into the quarter, all revenue from
courses that began and ended in the quarter, and a portion of the revenue from
courses that began but did not end in the quarter.
44
We
believe our curriculum is directly relevant to federal, state and local law
enforcement and other first responders, but historically this market was limited
to us because, outside the federal government, only a few agencies or
departments have the tuition reimbursement plans critical to fund continuing
adult education. Now that our students can obtain low cost student loans or
grants through Title IV programs, we have begun to increase our focus on
these markets. Title IV programs require participating students to take
more courses per semester than students participating in Department of Defense,
or DoD, tuition assistance programs. As a result, we expect that our increased
focus on markets that utilize Title IV programs may cause the average
number of courses per student to increase.
Tuition.
Providing affordable programs is an important element of our
strategy for growth. Since 2000, we have not raised undergraduate tuition and
have only increased graduate tuition by a modest amount in 2007. We are
scheduled for another modest increase in graduate tuition for courses beginning
in April 2010. We set our tuition costs so that our undergraduate
military students may take courses without incurring out-of-pocket costs because
our tuition is within the DoD tuition ceilings. Using the DoD tuition ceiling as
a benchmark keeps our tuition in line with four-year public university, in-state
rates.
Net tuition.
Tuition revenues vary from period to period based on the aggregate
number of students attending classes and the number of classes they are
attending during the period. Tuition revenue is reduced to reflect amounts
refunded to students who withdraw from a course in the month the withdrawal
occurs. We also provide scholarships to certain students to assist them
financially and to promote their registration. The cost of these scholarships is
netted against tuition revenue in the period incurred for purposes of
establishing net tuition revenue and typically represents less than 1% of
revenues.
Other fees.
Other
fees include charges for transcript credit evaluation, which includes assistance
in securing official transcripts on behalf of the student in addition to
evaluating transcripts for transfer credit. Students also are charged
withdrawal, graduation, late registration, transcript request and comprehensive
examination fees, when applicable. In accordance with Emerging Issues Tasks
Force Issue No. 02-16, Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor(EITF 02-16) )(FASB ASC Topic
605), other fees also includes book purchase commissions we receive for graduate
student book purchases and ancillary supply purchases students make directly
from our preferred book vendor.
Costs
and Expenses
We
categorize our costs and expenses as (i) instructional costs and services,
(ii) selling and promotional, (iii) general and administrative, and
(iv) depreciation and amortization.
Instructional costs and
services.
Instructional costs and services are expenses
directly attributable to the educational services we provide our students. This
expense category includes salaries and benefits for full-time faculty,
administrators and academic advisors, and costs associated with adjunct faculty.
Instructional pay for adjunct faculty is primarily dependent on the number of
students taught. Instructional costs and services expenses also include costs
for educational supplies such as books, costs associated with academic records
and graduation, and other university services such as evaluating
transcripts.
Substantially
all undergraduate students receive their textbooks through our book grant
program. Over the course of a complete bachelor’s degree program, this
represents a potential average student savings of approximately $4,500 when
compared to four-year public colleges according to The College Board Study,
Annual Survey of Colleges report from 2009. In connection with our book grant
program, we have been working to reduce the overall cost of books per course.
Graduate students may order and pay for their books through the contracted
vendor from which we purchase the undergraduate book grant program books or they
can purchase books from a vendor of their choice.
Selling and promotional.
Selling and promotional expenses include salaries and benefits of
personnel engaged in recruitment and promotion, as well as costs associated with
advertising and the production of marketing materials related to new enrollments
and current students. Our selling and promotional expenses are generally
affected by the cost of advertising media, the efficiency of our selling
efforts, salaries and benefits for our selling and admissions personnel, and the
number of advertising initiatives for new and existing academic programs. We
believe that the availability of federal student aid programs to our students
should increase our marketability in non-military markets, but we anticipate
that the more competitive nature of these markets may cause our student
acquisition costs to increase in the future.
General and administrative.
General and administrative expenses include salaries and benefits of
employees engaged in corporate management, finance, information technology,
human resources, facilities, compliance and other corporate functions. In
addition, the cost of renting and maintaining our facilities, technology
expenses and costs for professional services are included in general and
administrative costs. General and administrative expenses also include bad debt
expense.
45
Depreciation and
amortization.
We incur depreciation and amortization expenses
for costs related to the capitalization of property, equipment, software and
program development on a straight-line basis over the estimated useful lives of
the assets.
Interest
Income, Net
Interest
income, net consists primarily of interest income earned on cash and cash
equivalents, net of any interest expense.
Changes
in Connection with Becoming a Public Company
As a
public company, we have begun and will continue to 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 will continue to
range from $1.5 million to $2.0 million per year and anticipate
funding costs related to being a public company with cash provided by operating
activities and cash on hand.
Critical
Accounting Policies and Use of Estimates
The
discussion of our financial condition and results of operations is based upon
our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the U.S., or GAAP. During the preparation of
these financial statements, we are required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, costs and
expenses and related disclosures. On an ongoing basis, we evaluate our estimates
and assumptions, including those related to revenue recognition, accounts
receivable and allowance for doubtful accounts, valuation of long-lived assets,
contingencies, income taxes and stock-based compensation expense. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results of our analysis form
the basis for making assumptions about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions, and the
impact of such differences may be material to our consolidated financial
statements.
A summary
of our critical accounting policies follows:
Revenue recognition.
We record all tuition as deferred revenue when students begin a
class. At the beginning of each class, revenue is recognized on a pro rata basis
over the period of the class, which is either eight or sixteen weeks. This
results in our balance sheet including future revenues that have not yet been
earned as deferred revenue for classes that are in progress. Students who
request to be placed on program hold are required to complete or withdraw from
the courses prior to being placed on hold. Other revenue includes charges for
transcript credit evaluation, which includes assistance in securing official
transcripts on behalf of the student in addition to evaluating transcripts for
transfer credit. Students also are charged withdrawal, graduation, late
registration, transcript request and comprehensive examination fees, when
applicable. In accordance with Emerging Issues Tasks Force Issue No. 02-16
(FASB ASC Topic 605-50), Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor, other fees also includes book
purchase commissions we receive for graduate student book purchases and
ancillary supply purchases students make directly from our preferred book
vendor. Tuition revenues vary from period to period based on the number of net
course registrations. Students may remit tuition payments through the online
registration process at any time or they may elect various payment options,
including payments by sponsors, alternative loans, financial aid, or the DoD
tuition assistance program that remits payments directly to us. These other
payment options can delay the receipt of payment up until the class starts or
longer, resulting in the recording of a receivable from the student and deferred
revenue at the beginning of each session. Tuition revenue for sessions in
progress that has not been yet earned by us, is presented as deferred revenue in
the accompanying balance sheet.
Accounts receivable.
Course registrations are recorded as deferred revenue and accounts
receivable at the time students begin a course. Students may remit tuition
payments through the online registration process at any time or they may elect
various payment options, which can delay the receipt of payment up until the
class starts or longer. These other payment options include payments by
sponsors, alternative loans, financial aid, or a tuition assistance program that
remits payments directly to us. When a student remits payment after a class has
begun, accounts receivable is reduced. If payment is made prior to the start of
class, the payment is recorded as a student deposit and the student is provided
access to the classroom when classes start. If one of the various other payment
options are confirmed as secured, the student is provided access to the
classroom. If no receipt is confirmed or payment option secured, the student
will be dropped from the class. Therefore, billed amounts represent invoices
that have been prepared and sent to students or their sponsor, lender, financial
aid, or tuition assistance program according to the billing terms agreed upon in
advance. The DoD tuition assistance program is billed on a course-by-course
basis when a student starts class, whereas federal financial aid programs are
billed based on the classes included in a student’s semester. Billed accounts
receivable are considered past due if the invoice has been outstanding more than
30 days. The provision for doubtful accounts is based on management’s
evaluation of the status of existing accounts receivable. Recoveries of
receivables previously written off are recorded when received. We do not charge
interest on our past due accounts receivable.
46
Property and
equipment.
Property and equipment are carried at cost less
accumulated depreciation. Assets acquired under capital leases are recorded at
the lesser of the present value of the minimum lease payments or the fair market
value of the leased asset at the inception of the lease. Depreciation and
amortization are calculated on a straight-line basis over the estimated useful
lives of the assets. Our Partnership At a Distance, or PAD, is a customized
student information and services system, that manages admissions, online
orientation, course registrations, tuition payments, grade reporting, progress
toward degrees, and various other functions. Costs associated with the project
have been capitalized in accordance with Statement of Position (SOP) 98-1(FASB
Topic 350), Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use, and classified as property and equipment. These costs are
amortized over the estimated useful life of five years. The Company capitalizes
the costs for program development. Costs are transferred to property and
equipment upon completion of each program and amortized over an estimated life
not to exceed three years.
Valuation of long-lived
assets.
We account for the valuation of long-lived assets
under Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (FASB
ASC Topic 360). SFAS No. 144 requires that long-lived assets and
certain identifiable intangible assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of the long-lived asset is measured by a
comparison of the carrying amount of the asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reportable at the lower of the carrying amount or
fair value, less costs to sell. We account for the valuation of
long-lived assets with intangible lives that are not subject to amortization
under Statement of Financial Accounting Standards (SFAS) No. 142 (FASB ASC
Topic 350), Goodwill and Other Intangible Assets. SFAS No. 142
requires that an intangible asset that is not subject to amortization to be
tested annually for impairment or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The impairment test
shall consist of comparison of the fair value of an intangible asset with its
carrying amount. If the carrying amount of an intangible asset exceeds its fair
value, an impairment loss shall be recognized pursuant to step two of the
two-step process prescribed in SFAS No. 142.
Income
taxes.
Deferred taxes are determined using the liability
method, whereby deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. As those differences
reverse, they will enter into the determination of future taxable income.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Stock-based
compensation.
On January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123(R) (FASB ASC Topic 718), Share-Based
Payment (FAS 123(R)), which requires the measurement and recognition of
compensation expense for stock-based payment awards made to employees and
directors, including employee stock options. FAS 123(R) eliminates the
ability to account for stock-based compensation transactions using the footnote
disclosure-only provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and instead requires that
such transactions be recognized and reflected in our financial statements using
a fair-value-based method. In March 2005, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 107 (SAB 107), relating to
FAS 123(R). We have applied the provisions of SAB 107 in our adoption
of FAS 123(R).
We have
selected the Black-Scholes option pricing model to estimate the fair value of
the stock option awards on the date of grant. 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 by Staff Accounting
Bulleting 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 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 FAS 123(R).
Recent
Accounting Pronouncements
In June
2009, the FASB issued ASC Topic 860, which eliminates the concept of a
qualifying special-purpose entity, creates more stringent conditions for
reporting a transfer of a portion of a financial asset as a sale, clarifies
other sale-accounting criteria, and changes the initial measurement of a
transferor’s interest in transferred financial assets. FASB ASC 860 will be
effective for transfers of financial assets in fiscal years beginning after
November 15, 2009, and in interim periods within those fiscal years with earlier
adoption prohibited. We will adopt FASB ASC 860 on January 1, 2010.
The
adoption of ASC Topic 860 is not expected to have a material impact on our
financial statements.
47
Results
of Operations
The
following table sets forth statements of operations data as a percentage of
revenues for each of the periods indicated:
|
2007
|
2008
|
2009
|
||||||||||
|
Revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||
|
Costs
and expenses:
|
||||||||||||
|
Instructional
costs and services
|
42.6
|
%
|
40.7
|
%
|
39.2
|
%
|
||||||
|
Selling
and promotional
|
9.8
|
%
|
11.5
|
%
|
13.7
|
%
|
||||||
|
General
and administrative
|
22.2
|
%
|
19.9
|
%
|
16.8
|
%
|
||||||
|
Depreciation
and amortization
|
4.1
|
%
|
3.9
|
%
|
3.5
|
%
|
||||||
|
Total
costs and expenses
|
78.7
|
%
|
76.0
|
%
|
73.2
|
%
|
||||||
|
Income
before interest income and income taxes
|
21.3
|
%
|
24.0
|
%
|
26.8
|
%
|
||||||
|
Interest
income, net
|
1.3
|
%
|
0.6
|
%
|
0.1
|
%
|
||||||
|
Income
before income taxes
|
22.6
|
%
|
24.6
|
%
|
26.9
|
%
|
||||||
|
Income
tax expense
|
9.9
|
%
|
9.5
|
%
|
10.7
|
%
|
||||||
|
Net
income
|
12.7
|
%
|
15.1
|
%
|
16.2
|
%
|
||||||
Year
Ended December 31, 2009 Compared to Year Ended December 31,
2008
Revenues
Revenues
for the year ended December 31, 2009 were $149.0 million, an increase
of 39% from $107.1 million for the year ended December 31, 2008. Net
course registrations increased 41% to 207,799 in 2009 from 147,124 in 2008. The
increase in net course registrations was primarily attributable to increased
student referrals, the achievement of regional accreditation in May 2006, our
participation in the Title IV program for classes starting in November
2006, and the increase in civilian students interested in the affordability and
diversity of our academic programs.
Costs
and Expenses
Costs and
expenses were $109.1 million for the year ended December 31, 2009, an
increase of $27.7 million, or 34%, compared to $81.5 million for prior
year ended December 31, 2008. This increase was due to the specific factors
discussed below. Costs and expenses as a percentage of revenues decreased to
73.2% in 2009 from 76.0% in 2008. Similarly, our income before interest income
and income taxes, or our operating margin, increased to 26.8% from 24.0% over
that same period. This decrease in costs and expenses as a percentage of
revenues and increase in operating margins resulted from the factors described
below. Overall, our costs and expenses as a percentage of revenue declined due
to the proportionately higher growth in revenues as compared with the growth in
expenses.
Instructional costs and
services.
Instructional costs and services expenses for the
year ended December 31, 2009 were $58.4 million, representing an
increase of 34% from $43.6 million for the year ended December 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 expense as a percentage of revenues decreased to 39.2% in 2009 from
40.7% in 2008. 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 to approximately 210 at December 31, 2009 from
120 at December 31, 2008.
Selling and promotional.
Selling and promotional expenses for the year ended
December 31, 2009 were $20.5 million, representing an increase of 66%
from $12.4 million for the year ended December 31, 2008. This increase
was primarily due to an increase in internet advertising expense targeting our
APU brand, and the number of personnel in our admissions department required to
support higher student enrollments. Selling and promotional expenses as a
percentage of revenues increased to 13.7% in 2009 from 11.5% for in
2008.
48
General and administrative.
General and administrative expenses for the year ended
December 31, 2009 were $25.0 million, representing an increase of 18%
from $21.3 million for the year ended December 31, 2008. The increase
in expense was a result of the need for additional technology, financial
positions, professional services, management and administrative facilities
required to support a larger student body, participation in federal student aid,
expenses associated with being a public company, and an increase in stock-based
compensation expense. General and administrative expenses as a percentage of
revenues decreased to 16.8% in 2009 from 19.9% in 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
revenue.
Depreciation and
amortization.
Depreciation and amortization expenses were
$5.2 million for the year ended December 31, 2009, compared with
$4.2 million for the year ended December 21, 2008. This represents an
increase of 24%. 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
year ended December 31, 2009 was $2.2 million in the aggregate,
representing an increase of 33% from $1.7 million for the year ended
December 21, 2008. The increase in stock-based compensation expense is
primarily attributable to an increase in new stock option
grants.
The table
below reflects our stock-based compensation expense recognized in the
consolidated statements of operations for the year ended December 31, 2008
and 2009 (in thousands):
|
Year
Ended December 31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Instructional
costs and services
|
$
|
223
|
$
|
469
|
||||
|
Selling
and promotional
|
70
|
147
|
||||||
|
General
and administrative
|
1,381
|
1,607
|
||||||
|
Total
stock-based compensation expense
|
$
|
1,674
|
$
|
2,223
|
||||
Net
Interest Income
Net
interest income was $94,000 for the year ended December 31, 2009,
representing a decrease of $612,000 from $706,000 for the year ended
December 31, 2008. The decrease was attributable to investing cash in lower
yielding investments and a decrease in interest rates for these investments,
offset by an increase in cash flow from operations resulting in higher cash
balances.
Income
Tax Expense
We
recognized tax expense from continuing operations for the year ended
December 31, 2009 and 2008 of $16.0 million and $10.2 million,
respectively, or effective tax rates of 40.1% and 38.7%, respectively. The
increase in the effective tax rate was generally a result of the effects of a
decrease in historical rehabilitation credits associated with real estate
acquired in 2006.
Net
Income
Net
income was $23.9 million for the year ended December 31, 2009,
compared to net income of $16.2 million for the year ended
December 31, 2008, an increase of 48% or $7.8 million. This increase
was related to the factors discussed above.
Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007
Revenues
Revenues
for the year ended December 31, 2008 were $107.1 million, an increase
of 55% from $69.1 million for the year ended December 31, 2007. Net
course registrations increased 55% to 147,124 in 2008 from 94,846 in 2007. The
increase in net course registrations was primarily attributable to increased
student referrals, the achievement of regional accreditation in May 2006, and
our participation in the Title IV program for classes starting in November
2006.
Costs
and Expenses
Costs and
expenses were $81.5 million for the year ended December 31, 2008, an
increase of $27.1 million, or 50%, compared to $54.4 million for prior
year ended December 31, 2007. This increase was due to the specific factors
discussed below. Costs and expenses as a percentage of revenues decreased to
76.0% in 2008 from 78.7% in 2007. Similarly, our income from continuing
operations before interest income and income taxes, or our operating margin,
increased to 24.0% from 21.3% over that same period. This decrease in costs and
expenses as a percentage of revenues and increase in operating margins resulted
from the factors described below. Overall, our costs and expenses as a
percentage of revenue declined due to the proportionately higher growth in
revenues as compared with the growth in expenses.
49
Instructional costs and
services.
Instructional costs and services expenses for the
year ended December 31, 2008 were $43.6 million, representing an
increase of 48% from $29.5 million for the year ended December 31,
2007. This increase was directly related to an increase in the number of classes
offered due to the increase in net course registrations. Instructional costs and
services expense as a percentage of revenues decreased to 40.7% in 2008 from
42.6% in 2007. 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 to approximately 120 at December 31, 2008 from
99 at December 31, 2007.
Selling and promotional.
Selling and promotional expenses for the year ended
December 31, 2008 were $12.4 million, representing an increase of 83%
from $6.8 million for the year ended December 31, 2007. This increase
was primarily due to an increase in advertising expense and the number of
personnel in our admissions department required to support higher student
enrollments. Selling and promotional expenses as a percentage of revenues
increased to 11.5% in 2008 from 9.8% for in 2007.
General and administrative.
General and administrative expenses for the year ended
December 31, 2008 were $21.3 million, representing an increase of 39%
from $15.3 million for the year ended December 31, 2007. The increase
in expense was a result of the need for additional technology, financial
positions, professional services, management and administrative facilities
required to support a larger student body, participation in federal student aid,
expenses associated with being a public company, and an increase in stock-based
compensation expense. General and administrative expenses as a percentage of
revenues decreased to 19.9% in 2008 from 22.2% in 2007. 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
revenue.
Depreciation and
amortization.
Depreciation and amortization expenses were
$4.2 million for the year ended December 31, 2008, compared with
$2.8 million for the year ended December 21, 2007. This represents an
increase of 50%. 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
year ended December 31, 2008 was $1.7 million in the aggregate,
representing an increase of 62% from $1.0 million for the year ended
December 21, 2007. The increase in stock-based compensation expense is
primarily attributable to an increase in new stock option
grants.
The table
below reflects our stock-based compensation expense recognized in the
consolidated statements of operations for the year ended December 31, 2007
and 2008 (in thousands):
|
Year
Ended December 31,
|
||||||||
|
2007
|
2008
|
|||||||
|
Instructional
costs and services
|
$
|
113
|
$
|
223
|
||||
|
Selling
and promotional
|
49
|
70
|
||||||
|
General
and administrative
|
871
|
1,381
|
||||||
|
Total
stock-based compensation expense
|
$
|
1,033
|
$
|
1,674
|
||||
Net Interest
Income
Net
interest income was $706,000 for the year ended December 31, 2008,
representing a decrease of 21% from $888,000 for the year ended
December 31, 2007. The decrease was attributable to investing cash in lower
yielding investments and a decrease in interest rates for these investments,
offset by an increase in cash flow from operations resulting in higher cash
balances.
Income
Tax Expense
We
recognized tax expense from continuing operations for the year ended
December 31, 2008 and 2007 of $10.2 million and $6.8 million,
respectively, or effective tax rates of 38.7% and 43.8%, respectively. The
decrease in the effective tax rate was generally a result of the effects of a
reduction in the aggregate state income tax rate.
Net
Income
Net
income was $16.2 million for the year ended December 31, 2008,
compared to net income of $8.8 million for the year ended December 31,
2007, an increase of $7.4 million. This increase was related to the factors
discussed above.
50
Quarterly
Results
The
following table presents our unaudited quarterly results of operations for each
of our eight last quarters ended December 31, 2009. You should read the
following table in conjunction with the consolidated financial statements and
related notes contained elsewhere in this annual report. We have prepared the
unaudited information on the same basis as our audited consolidated financial
statements. Results of operations for any quarter are not necessarily indicative
of results for any future quarters or for a full year.
|
Quarter
Ended
|
||||||||||||||||||||||||||||||||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
|||||||||||||||||||||||||
|
2008
|
2008
|
2008
|
2008
|
2009
|
2009
|
2009
|
2009
|
|||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||||||||||||||
|
Statement of Operations
Data:
|
||||||||||||||||||||||||||||||||
|
Revenues
|
$
|
23,241
|
$
|
24,999
|
$
|
27,404
|
$
|
31,503
|
$
|
33,161
|
$
|
35,713
|
$
|
36,471
|
$
|
43,653
|
||||||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||||||||||
|
Instructional
costs and services
|
9,912
|
10,521
|
10,901
|
12,227
|
12,743
|
14,373
|
14,745
|
16,522
|
||||||||||||||||||||||||
|
Selling
and promotional
|
2,177
|
2,613
|
3,600
|
3,971
|
4,331
|
5,156
|
5,598
|
5,394
|
||||||||||||||||||||||||
|
General
and administrative
|
4,803
|
5,072
|
5,586
|
5,841
|
6,056
|
6,042
|
6,465
|
6,476
|
||||||||||||||||||||||||
|
Depreciation
and amortization
|
898
|
1,031
|
1,114
|
1,192
|
1,297
|
1,360
|
1,277
|
1,297
|
||||||||||||||||||||||||
|
Total
costs and expenses
|
17,790
|
19,237
|
21,201
|
23,231
|
24,427
|
26,931
|
28,085
|
29,689
|
||||||||||||||||||||||||
|
Income
before taxes
|
5,451
|
5,762
|
6,203
|
8,272
|
8,734
|
8,782
|
8,386
|
13,964
|
||||||||||||||||||||||||
|
Interest
income, net
|
242
|
196
|
181
|
87
|
11
|
29
|
30
|
24
|
||||||||||||||||||||||||
|
Income
before income taxes
|
5,693
|
5,958
|
6,384
|
8,359
|
8,745
|
8,811
|
8,416
|
13,988
|
||||||||||||||||||||||||
|
Income
tax expense (benefit)
|
2,288
|
2,033
|
2,568
|
3,318
|
3,507
|
3,497
|
3,404
|
5,609
|
||||||||||||||||||||||||
|
Net
income
|
$
|
3,405
|
$
|
3,925
|
$
|
3,816
|
$
|
5,041
|
$
|
5,238
|
$
|
5,314
|
$
|
5,012
|
$
|
8,379
|
||||||||||||||||
|
Other
Data:
|
||||||||||||||||||||||||||||||||
|
Stock-based
compensation
|
$
|
377
|
$
|
469
|
$
|
396
|
$
|
432
|
$
|
535
|
$
|
552
|
$
|
562
|
$
|
574
|
||||||||||||||||
|
Net
cash provided by operating
activities |
$
|
6,979
|
$
|
4,973
|
$
|
7,832
|
$
|
9,973
|
$
|
6,263
|
$
|
6,383
|
$
|
10,189
|
$
|
13,921
|
||||||||||||||||
|
Capital
expenditures
|
$
|
2,193
|
$
|
2,437
|
$
|
1,917
|
$
|
3,462
|
$
|
1,754
|
$
|
2,640
|
$
|
3,364
|
$
|
3,000
|
||||||||||||||||
|
Net
course registrations
|
33,091
|
33,261
|
38,926
|
41,846
|
46,650
|
47,853
|
55,268
|
58,028
|
||||||||||||||||||||||||
Liquidity
and Capital Resources
We
financed our operating activities and capital expenditures during the years
ended December 31, 2009 and 2008 primarily through cash provided by
operating activities. Cash and cash equivalents were $74.9 million and
$47.7 million at December 31, 2009 and 2008,
respectively.
We derive
a significant portion of our revenues from tuition assistance programs of the
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 have increased since we became a
public company, and we expect to fund these expenses through cash from
operations.
Based on
our current level of operations and anticipated growth, we believe that our cash
flow from operations and other sources of liquidity, including cash and cash
equivalents, will provide adequate funds for ongoing operations and planned
capital expenditures for the foreseeable future.
Operating
Activities
Net cash
provided by operating activities was $36.8 million, $29.8 million and
$17.5 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Investing
Activities
Net cash
used in investing activities was $11.8 million, $10.9 million and
$7.2 million for the years ended December 31, 2009, 2008, and 2007
respectively. Cash used in investing activities is primarily for capital
expenditures, the majority of which have been related to software development
and IT infrastructure costs and buildings to support expansion. 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. In particular, in 2009 we acquired land for $0.8
million in Charles Town, West Virginia, with the intent of constructing a new
40,000 square foot facility on the site, to be primarily used for academic
offices. The project should result in an additional expenditure of approximately
$8 million to $9 million over the next 12 to 18 months.
51
Financing
Activities
Net cash
provided by financing activities was $2.2 million, $1.9 million, and
$4.9 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
On
November 14, 2007, we completed our initial public offering of
5,390,625 shares at a price of $20 per share. After the underwriters’
discount, we received net proceeds of $100.3 million. Following the
completion of the offering, we paid a special distribution in the amount of
$93.8 million or $7.63 per share of common stock and Class A common stock , to
our stockholders of record immediately prior to the completion of the
offering. After the special distribution, the remaining $6.5 million was
used to pay expenses remaining related to the offering and the residual proceeds
were retained for general corporate purposes.
Contractual
Commitments
We have
various contractual obligations consisting of operating leases. The following
table sets forth our future contractual obligations as of December 31,
2009.
|
Payments
Due by Period
|
||||||||||||||||||||
|
Less
than
|
More
than
|
|||||||||||||||||||
|
Total
|
1
Year
|
1-3
Years
|
3-5
Years
|
5
Years
|
||||||||||||||||
|
Operating
lease obligations
|
4,700 | 1,021 | 1,803 | 1,693 | 183 | |||||||||||||||
|
Total
contractual obligations
|
$ | 4,700 | $ | 1,021 | $ | 1,803 | $ | 1,693 | $ | 183 | ||||||||||
Off-Balance
Sheet Arrangements
We do not
have off-balance sheet financing arrangements, including any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose
entities.
Impact
of Inflation
We
believe that inflation has not had a material impact on our results of
operations for the years ended December 31, 2007, 2008 or 2009. There can
be no assurance that future inflation will not have an adverse impact on our
operating results and financial condition. We do not generally increase our
undergraduate tuition rates, however our costs do continually increase with
inflation.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
We are
subject to the impact of interest rate changes and may be subject to changes in
the market values of future investments. We invest our excess cash in bank
overnight deposits. We have no material derivative financial instruments or
derivative commodity instruments as of December 31, 2009
Market
Risk
We have
no material derivative financial instruments or derivative commodity
instruments. We maintain our cash and cash equivalents in bank deposit accounts,
which at times may exceed Federally insured limits. We have not experienced any
losses in such accounts. We believe we are not exposed to any significant credit
risk on cash and cash equivalents.
Interest
Rate 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 December 31, 2009, a 10%
increase or decrease in interest rates would not have a material impact on our
future earnings, fair values, or cash flows related to investments in cash
equivalents.
52
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
American
Public Education, Inc. and Subsidiary
|
Page
|
|
|
American
Public Education, Inc. and Subsidiary:
|
|
| 54 | |
| 55 | |
| 56 | |
| 57 | |
| 58 | |
| 59 |
53
Report
of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders
American
Public Education, Inc.
We have
audited the accompanying consolidated balance sheets of American Public
Education, Inc. and Subsidiary as of December 31, 2009 and 2008, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2009. Our
audits also included the financial statement schedule of American Public
Education, Inc. and Subsidiary listed in Item 15(a). These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of American Public Education,
Inc. and Subsidiary as of December 31, 2009 and 2008, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), American Public Education, Inc. and
Subsidiary’s internal control over financial reporting as of December 31,
2009, based on criteria established in
Internal Control–Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated February 22, 2010 expressed and
unqualified opinion on the effectiveness of American Public Education, Inc. and
Subsidiary’s internal control over financial reporting.
/s/ McGladrey &
Pullen, LLP
Vienna,
Virginia
February 22,
2010
54
AMERICAN
PUBLIC EDUCATION, INC.
| As of | |||||||
| December 31, | |||||||
|
2008
|
2009
|
||||||
|
(In thousands, except per share
amounts)
|
|||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
47,714
|
$
|
74,866
|
|||
|
Accounts
receivable, net of allowance of $537 in 2008 and $896 in
2009
|
6,188
|
8,664
|
|||||
|
Prepaid
expenses
|
2,156
|
2,990
|
|||||
|
Income
tax receivable
|
1,306
|
863
|
|||||
|
Deferred
income taxes
|
640
|
999
|
|||||
|
Total
current assets
|
58,004
|
88,382
|
|||||
|
Property
and equipment, net
|
19,622
|
25,294
|
|||||
|
Other
assets
|
1,187
|
2,077
|
|||||
|
Total
assets
|
$
|
78,813
|
$
|
115,753
|
|||
|
Liabilities and Stockholders’
Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
4,946
|
$
|
6,756
|
|||
|
Accrued
liabilities
|
5,250
|
4,917
|
|||||
|
Accrued
bonus
|
1,825
|
3,086
|
|||||
|
Deferred
revenue and student deposits
|
9,626
|
14,204
|
|||||
|
Total
current liabilities
|
21,647
|
28,963
|
|||||
|
Deferred
income taxes
|
3,691
|
4,772
|
|||||
|
Total
liabilities
|
25,338
|
33,735
|
|||||
|
Commitments
and contingencies (Note 4 and 9)
|
|||||||
|
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; 18,276 issued and outstanding in 2009; 18,030 issued and
18,024 outstanding in 2008
|
180
|
183
|
|||||
|
Additional
paid-in capital
|
132,078
|
136,380
|
|||||
|
Less
cost of 6 shares of repurchased stock in 2008
|
(
295
|
)
|
—
|
||||
|
Accumulated
deficit
|
(
78,488
|
)
|
(
54,545
|
)
|
|||
|
Total
stockholders’ equity
|
53,475
|
82,018
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
78,813
|
$
|
115,753
|
|||
The
accompanying notes are an integral part of these consolidated
statements.
55
AMERICAN
PUBLIC EDUCATION, INC.
|
Year
Ended
|
||||||||||||
|
December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
(In thousands, except per share
amounts)
|
||||||||||||
|
Revenues
|
$
|
69,095
|
$
|
107,147
|
$
|
148,998
|
||||||
|
Costs
and expenses:
|
||||||||||||
|
Instructional
costs and services
|
29,479
|
43,561
|
58,383
|
|||||||||
|
Selling
and promotional
|
6,765
|
12,361
|
20,479
|
|||||||||
|
General
and administrative
|
15,335
|
21,302
|
25,039
|
|||||||||
|
Depreciation
and amortization
|
2,825
|
4,235
|
5,231
|
|||||||||
|
Total
costs and expenses
|
54,404
|
81,459
|
109,132
|
|||||||||
|
Income
before interest income and income taxes
|
14,691
|
25,688
|
39,866
|
|||||||||
|
Interest
income, net
|
888
|
706
|
94
|
|||||||||
|
Income
before income taxes
|
15,579
|
26,394
|
39,960
|
|||||||||
|
Income
tax expense
|
6,829
|
10,207
|
16,017
|
|||||||||
|
Net
income
|
$
|
8,750
|
$
|
16,187
|
$
|
23,943
|
||||||
|
Net
income attributable to common stockholders per common
share:
|
||||||||||||
|
Basic
|
$
|
0.69
|
$
|
0.91
|
$
|
1.32
|
||||||
|
Diluted
|
$
|
0.64
|
$
|
0.86
|
$
|
1.27
|
||||||
|
Weighted
average number of shares outstanding:
|
||||||||||||
|
Basic
|
12,759
|
17,840
|
18,167
|
|||||||||
|
Diluted
|
13,601
|
18,822
|
18,906
|
|||||||||
The
accompanying notes are an integral part of these consolidated
statements.
|
(In thousands, except
shares)
|
||||||||||||||||||||||||||||||||||||
|
Class A
|
Additional
|
Total
|
||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Common
Stock
|
Repurchased
Stock
|
Paid-In
|
Accumulated
|
Stockholders’
|
|||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
9,256,258
|
$
|
93
|
2,542,342
|
$
|
25
|
—
|
$
|
—
|
$
|
26,378
|
$
|
(
9,675
|
)
|
$
|
16,821
|
||||||||||||||||||||
|
Conversion
of class A shares
|
(
9,256,258
|
)
|
(
93
|
)
|
9,256,258
|
93
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||||
|
Stock
issued in initial public offering,
net of issuance costs |
—
|
—
|
5,390,625
|
54
|
—
|
—
|
98,195
|
—
|
98,249
|
|||||||||||||||||||||||||||
|
Special
distribution to stockholders from
initial public offering proceeds |
(
93,750
|
)
|
(
93,750
|
)
|
||||||||||||||||||||||||||||||||
|
Stock
issued for cash
|
—
|
—
|
509,727
|
5
|
—
|
—
|
1,682
|
—
|
1,687
|
|||||||||||||||||||||||||||
|
Stock
repurchased from shareholder
|
—
|
—
|
(
11,000
|
)
|
—
|
—
|
—
|
(
55
|
)
|
—
|
(
55
|
)
|
||||||||||||||||||||||||
|
Stock-based
compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
1,033
|
—
|
1,033
|
|||||||||||||||||||||||||||
|
Excess
tax benefit from stock based compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
772
|
—
|
772
|
|||||||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
8,750
|
8,750
|
|||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
—
|
—
|
17,687,952
|
177
|
—
|
—
|
128,005
|
(
94,675
|
)
|
33,507
|
||||||||||||||||||||||||||
|
Stock
issued in public offerings, net of issuance costs
|
40,000
|
—
|
—
|
—
|
220
|
220
|
||||||||||||||||||||||||||||||
|
Stock
issued for cash
|
—
|
—
|
296,919
|
3
|
—
|
—
|
547
|
—
|
550
|
|||||||||||||||||||||||||||
|
Stock
issued for director compensation
|
—
|
—
|
4,872
|
—
|
—
|
—
|
196
|
—
|
196
|
|||||||||||||||||||||||||||
|
Restricted
stock repurchased from stockholders
|
—
|
—
|
(
6,419
|
)
|
(
295
|
)
|
—
|
—
|
(
295
|
)
|
||||||||||||||||||||||||||
|
Stock-based
compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
1,674
|
—
|
1,674
|
|||||||||||||||||||||||||||
|
Excess
tax benefit from stock based compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
1,436
|
—
|
1,436
|
|||||||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
16,187
|
16,187
|
|||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
—
|
—
|
18,029,743
|
180
|
(
6,419
|
)
|
(
295
|
)
|
132,078
|
(
78,488
|
)
|
53,475
|
||||||||||||||||||||||||
|
Stock
issued for cash
|
—
|
—
|
254,041
|
3
|
—
|
—
|
637
|
—
|
640
|
|||||||||||||||||||||||||||
|
Stock
issued for director compensation
|
—
|
—
|
4,721
|
1
|
—
|
—
|
185
|
—
|
186
|
|||||||||||||||||||||||||||
|
Repurchased
and retired shares of restricted
stock from stockholders |
(
12,850
|
)
|
(
1
|
)
|
6,419
|
295
|
(
514
|
)
|
—
|
(
220
|
)
|
|||||||||||||||||||||||||
|
Stock-based
compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
2,223
|
—
|
2,223
|
|||||||||||||||||||||||||||
|
Excess
tax benefit from stock based compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
1,771
|
—
|
1,771
|
|||||||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
23,943
|
23,943
|
|||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
—
|
$
|
—
|
18,275,655
|
$
|
183
|
—
|
$
|
—
|
$
|
136,380
|
$
|
(
54,545
|
)
|
$
|
82,018
|
||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated
statements.
57
AMERICAN
PUBLIC EDUCATION, INC.
|
Year
Ended
December 31,
|
|||||||||||
|
2007
|
2008
|
2009
|
|||||||||
|
(In
thousands)
|
|||||||||||
|
Operating
activities
|
|||||||||||
|
Net
income
|
$
|
8,750
|
$
|
16,187
|
$
|
23,943
|
|||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|||||||||||
|
Provision
for bad debts
|
121
|
152
|
359
|
||||||||
|
Depreciation
and amortization
|
2,825
|
4,235
|
5,231
|
||||||||
|
Stock-based
compensation
|
1,033
|
1,674
|
2,223
|
||||||||
|
Loss
on disposal
|
—
|
—
|
5
|
||||||||
|
Stock
issued for director compensation
|
—
|
196
|
186
|
||||||||
|
Deferred
income taxes
|
618
|
1,295
|
722
|
||||||||
|
Changes
in operating assets and liabilities:
|
|||||||||||
|
Accounts
receivable
|
430
|
(
1,443
|
)
|
(
2,835
|
)
|
||||||
|
Prepaid
expenses and other assets
|
(
739
|
)
|
(
560
|
)
|
(
837
|
)
|
|||||
|
Income
tax receivable
|
(
410
|
)
|
(
217
|
)
|
443
|
||||||
|
Accounts
payable
|
969
|
2,474
|
1,810
|
||||||||
|
Accrued
liabilities
|
561
|
2,479
|
(
333
|
)
|
|||||||
|
Accrued
bonus
|
596
|
273
|
1,261
|
||||||||
|
Deferred
revenue and student deposits
|
2,763
|
3,012
|
4,578
|
||||||||
|
Net
cash provided by operating activities
|
17,517
|
29,757
|
36,756
|
||||||||
|
Investing
activities
|
|||||||||||
|
Capital
expenditures
|
(
6,827
|
)
|
(
10,009
|
)
|
(
10,758
|
)
|
|||||
|
Capitalized
program development costs and other assets
|
(
347
|
)
|
(
896
|
)
|
(
1,037
|
)
|
|||||
|
Net
cash used in investing activities
|
(
7,174
|
)
|
(
10,905
|
)
|
(
11,795
|
)
|
|||||
|
Financing
activities
|
|||||||||||
|
Payments
on long-term debt
|
(
1,973
|
)
|
—
|
—
|
|||||||
|
Cash
paid for repurchase of common/restricted stock
|
(
55
|
)
|
(
295
|
)
|
(
220
|
)
|
|||||
|
Cash
received from issuance of common stock , net of issuance
costs
|
99,936
|
770
|
640
|
||||||||
|
Cash
distributed to shareholders from public offering proceeds
|
(
93,750
|
)
|
—
|
—
|
|||||||
|
Excess
tax benefit from stock based compensation
|
772
|
1,436
|
1,771
|
||||||||
|
Net
cash provided by financing activities
|
4,930
|
1,911
|
2,191
|
||||||||
|
Net
increase in cash and cash equivalents
|
15,273
|
20,763
|
27,152
|
||||||||
|
Cash
and cash equivalents at beginning of period
|
11,678
|
26,951
|
47,714
|
||||||||
|
Cash
and cash equivalents at end of period
|
$
|
26,951
|
$
|
47,714
|
$
|
74,866
|
|||||
|
Supplemental disclosures of
cash flow information
|
|||||||||||
|
Interest
paid
|
$
|
56
|
$
|
—
|
$
|
—
|
|||||
|
Income
taxes paid
|
$
|
5,849
|
$
|
8,023
|
$
|
12,932
|
|||||
The
accompanying notes are an integral part of these consolidated
statements.
58
|
Nature
of Business and Significant Accounting
Policies
|
Nature of business.
American Public Education, Inc. (“APEI”) together with its
subsidiary (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 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.
A summary
of the Company’s significant accounting policies follows:
Basis of accounting.
The accompanying financial statements are presented in accordance
with the accrual basis of accounting, whereby revenue is recognized when earned
and expenses are recognized when incurred.
Principles of consolidation.
The accompanying consolidated financial statements include accounts
of APEI and its wholly-owned subsidiary. All material inter-company transactions
and balances have been eliminated in consolidation.
Cash and cash equivalents.
The Company considers all highly liquid investments with original
maturities of ninety days or less when purchased to be cash
equivalents.
Accounts receivable.
Course registrations are recorded as deferred revenue and accounts
receivable at the time students begin a class. Students may remit tuition
payments through the online registration process at anytime or they may elect
various payment options, which can delay the receipt of payment up until the
class starts or longer. These other payment options include payments by
sponsors, alternative loans, financial aid, or a tuition assistance program that
remits payments directly to the Company. When a student remits payment after a
class has begun, accounts receivable is reduced. If payment is made prior to the
start of class, the payment is recorded as a student deposit, and the student is
provided access to the classroom when classes start. If one of the various other
payment options are confirmed as secured, the student is provided access to the
classroom. If no receipt is confirmed or payment option secured, the student
will be dropped from the class. Therefore, billed amounts represent invoices
that have been prepared and sent to students or their sponsor, lender, financial
aid, or tuition assistance program according to the billing terms agreed upon in
advance. The Department of Defense (“DoD”) tuition assistance program is billed
by branch of service on a course-by-course basis when a student starts class,
whereas federal financial aid programs are billed based on the classes included
in a student’s semester. Billed accounts receivable are considered past due if
the invoice has been outstanding more than 30 days. The allowance for
doubtful accounts is based on management’s evaluation of the status of existing
accounts receivable. Recoveries of receivables previously written off are
recorded when received. We do not charge interest on our past due accounts
receivable.
Property and equipment.
Property and equipment is carried at cost less accumulated
depreciation. Assets acquired under capital leases are recorded at the lesser of
the present value of the minimum lease payments or the fair market value of the
leased asset at the inception of the lease. Depreciation and amortization are
calculated on a straight-line basis over the estimated useful lives of the
assets. Partnership At a Distance, or PAD, system is a customized student
information and services system that manages admissions, online orientation,
course registrations, tuition payments, grade reporting, progress toward
degrees, and various other functions. Costs associated with the project have
been capitalized in accordance with Statement of Position (SOP) 98-1 (FASB ASC
Topic 350), Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use, and classified as property and equipment. These costs are
amortized over the estimated useful life of five years. The Company capitalizes
the costs for program development. Costs are transferred to property and
equipment upon completion of each program and amortized over an estimated life
not to exceed three years.
Valuation of long-lived
assets.
The Company accounts for the valuation of long-lived
assets under Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets
. SFAS No. 144 (FASB ASC Topic 350)
requires that long-lived assets and certain identifiable intangible assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
the long-lived asset is measured by a comparison of the carrying amount of the
asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the estimated fair value of the assets. Assets to be disposed of are
reportable at the lower of the carrying amount or fair value, less costs to
sell. The Company accounts for the valuation of long-lived assets
that are not subject to amortization under Statement of Financial Accounting
Standards (SFAS) No. 142 (FASB ASC Topic 350),
Goodwill and Other Intangible
Assets
. SFAS No. 142 requires that an intangible asset that is
not subject to amortization to be tested annually for impairment or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The impairment test shall consist of comparison of the fair value
of an intangible asset with its carrying amount. If the carrying amount of an
intangible asset exceeds its fair value, an impairment loss shall be recognized
pursuant to step two of the two-step process prescribed in SFAS
No. 142.
59
Revenue recognition.
The Company records all tuition as deferred revenue when students
begin a class. At the beginning of each class, revenue is recognized on a pro
rata basis over the period of the class, which is either eight or sixteen weeks.
This results in the Company’s balance sheet including future revenues that have
not yet been earned as deferred revenue for classes that are in progress.
Students who request to be placed on program hold are required to complete or
withdraw from the courses prior to being placed on hold. Other revenue includes
charges for transcript credit evaluation, which includes assistance in securing
official transcripts on behalf of the student in addition to evaluating
transcripts for transfer credit. Students also are charged withdrawal,
graduation, late registration, transcript request and comprehensive examination
fees, when applicable. In accordance with Emerging Issues Tasks Force Issue
No. 02-16, Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor EITF 02-16 (FASB ASC Topic 605-50),
other fees also includes book purchase commissions we receive for graduate
student book purchases and ancillary supply purchases students make directly
from our preferred book vendor Tuition revenues vary from period to period based
on the number of net course registrations. Students may remit tuition payments
through the online registration process at any time or they may elect various
payment options, including payments by sponsors, alternative loans, financial
aid, or the DoD tuition assistance program that remits payments directly to the
Company. These other payment options can delay the receipt of payment up until
the class starts or longer, resulting in the recording of a receivable from the
student and deferred revenue at the beginning of each session. Tuition revenue
for sessions in progress that has not been yet earned by the Company, is
presented as deferred revenue in the accompanying balance
sheet.
Deferred
revenue and student deposits at December 31, 2008 and 2009 consisted of the
following:
|
As
of
|
||||||||
|
December 31,
|
||||||||
|
2008
|
2009
|
|||||||
|
(In
thousands)
|
||||||||
|
Deferred
revenue
|
$
|
5,435
|
$
|
8,848
|
||||
|
Student
deposits
|
4,191
|
5,356
|
||||||
|
Total
deferred revenue and student deposits
|
$
|
9,626
|
$
|
14,204
|
||||
The
Company provides scholarships to certain students to assist them financially and
promote their registration. Scholarship assistance of $605,000, $725,000 and
$851,000 was provided for the years ended December 31, 2007, 2008 and 2009,
respectively, and are included as a reduction to tuition revenue in the
accompanying statements of income.
Advertising costs.
Advertising costs are expensed as incurred. Advertising expenses for
the years ended December 31, 2007, 2008 and 2009 of $2,913,000, $6,405,000
and $12,105,000 respectively, and are included in selling and promotion costs in
the accompanying statements of income.
Income taxes.
Deferred taxes are determined using the liability method, whereby,
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. As those differences reverse, they will
enter into the determination of future taxable income. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Stock-based
compensation.
Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based
Payment
, or SFAS 123R (FASB ASC Topic 718), which requires
companies to expense share-based compensation based on fair value. Prior to
January 1, 2006, the Company accounted for share-based payment in
accordance with Accounting Principles Board Opinion No. 25,
Accounting
for Stock Issued to Employees
, and provided the disclosure required in
SFAS 123,
Accounting
for Stock-Based Compensation
, as amended by
SFAS No
. 148,
Accounting for Stock-Based
Compensation-Transition and Disclosure-An Amendment of FASB Statement
No. 123 (
FASB ASC Topic 718).
The
following amounts of stock-based compensation have been included in the
operating expense line-items indicated:
60
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Instructional
costs and services
|
$ | 113 | $ | 223 | $ | 469 | ||||||
|
Selling
and promotional
|
49 | 70 | 147 | |||||||||
|
General
and administrative
|
871 | 1,381 | 1,607 | |||||||||
|
Total
stock-based compensation expense
|
$ | 1,033 | $ | 1,674 | $ | 2,223 | ||||||
Basic net income per common
share.
Basic net income per common share is based on the
weighted average number of shares of common stock outstanding during the period.
Diluted net income per common share also increases the shares used in the per
share calculation by the dilutive effects of options, warrants, and restricted
stock.
There
were no outstanding options to purchase common shares that were not included in
the computation of diluted net income per common share for the years ended
December 31, 2007 and 2008, respectively and there were 83,884
anti-dilutive stock options excluded from the calculation for the year ended
December 31, 2009.
Fair value of financial
instruments.
The methods and significant assumptions used to
estimate the fair values of financial instruments are as follows: the carrying
amounts including cash and cash equivalents, tuition receivable, accounts
payable, and accrued liabilities approximate fair value because of the short
maturity of these instruments.
Financial risk.
The Company maintains its cash and cash equivalents in bank deposit
accounts, which at times may exceed Federally insured limits. The Company has
not experienced any losses in such accounts. The Company believes it is not
exposed to any significant risk on cash and cash
equivalents.
Estimates.
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at
the date
of the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Recent accounting
pronouncements.
In June
2009, the FASB issued ASC Topic 860, which eliminates the concept of a
qualifying special-purpose entity, creates more stringent conditions for
reporting a transfer of a portion of a financial asset as a sale, clarifies
other sale-accounting criteria, and changes the initial measurement of a
transferor’s interest in transferred financial assets. FASB ASC Topic 860 will
be effective for transfers of financial assets in fiscal years beginning after
November 15, 2009, and in interim periods within those fiscal years with earlier
adoption prohibited. We will adopt FASB ASC 860 on January 1,
2010.
The
adoption of ASC 860 is not expected to have a material impact on the Company’s
financial statements.
|
Note 2.
|
Property
and Equipment
|
Property
and equipment at December 31, 2008 and 2009 consisted of the
following:
|
Useful
|
|||||||||
|
Life
|
2008
|
2009
|
|||||||
|
(in
thousands)
|
|||||||||
|
Land
|
—
|
$
|
367
|
$
|
1,881
|
||||
|
Building
and building improvements
|
27.5 -
39 years
|
6,080
|
8,814
|
||||||
|
Leasehold
improvements
|
up
to 7 years
|
1,574
|
1,574
|
||||||
|
Office
equipment
|
5 years
|
976
|
1,239
|
||||||
|
Computer
equipment
|
3
years
|
5,413
|
5,946
|
||||||
|
Furniture
and fixtures
|
7 years
|
2,218
|
2,256
|
||||||
|
Vehicles
|
5
years
|
23
|
47
|
||||||
|
Software
development
|
5 years
|
12,690
|
17,143
|
||||||
|
Program
development
|
3 years
|
969
|
969
|
||||||
|
30,310
|
39,869
|
||||||||
|
Accumulated
depreciation and amortization
|
10,688
|
14,575
|
|||||||
|
$
|
19,622
|
$
|
25,294
|
||||||
61
During
the years ended December 31, 2007, 2008 and 2009, the Company recorded
$2,825,000, $4,235,000 and $5,081,000, respectively, in depreciation expense. In
addition, the Company recorded $150,000 in amortization expense in 2009 related
to other assets.
|
Note 3.
|
Line
of Credit
|
The
Company had available a line of credit with a maximum borrowing of up to
$5,000,000 with interest at LIBOR plus 200 basis points (2.1% at December 31,
2008 ). The line was secured by substantially all of the assets of the
University system. There were no amounts outstanding at December 31, 2008. The
line of credit was not renewed in 2009.
|
Note 4.
|
Operating
Leases
|
The
Company leases office space in Virginia and West Virginia under operating leases
that expire between July 2010 and March 2015. Rent expense related to these
operating leases amounted to $791,000, $1,248,000 and $1,502,000 for the years
ended December 31, 2007, 2008 and 2009, respectively. The minimum rental
commitment under the operating leases is due as follows:
|
Years Ending December
31,
|
||||
|
(in
thousands)
|
||||
|
2010
|
$ | 1,021 | ||
|
2011
|
898 | |||
|
2012
|
905 | |||
|
2013
|
927 | |||
|
2014
|
766 | |||
|
Thereafter
|
183 | |||
| $ | 4,700 | |||
|
Note 5.
|
Income
Taxes
|
The
components of the income tax expense for the years ended December 31, 2007,
2008 and 2009 were as follows:
|
2007
|
2008
|
2009
|
|||||||
|
(in
thousands)
|
|||||||||
|
Current
income tax expense:
|
|||||||||
|
Federal
|
$
|
4,899
|
$
|
7,158
|
$
|
12,564
|
|||
|
State
|
1,312
|
1,754
|
2,731
|
||||||
|
6,211
|
8,912
|
15,295
|
|||||||
|
Deferred
tax expense:
|
|||||||||
|
Federal
|
492
|
1,090
|
594
|
||||||
|
State
|
126
|
205
|
128
|
||||||
|
618
|
1,295
|
722
|
|||||||
|
$
|
6,829
|
$
|
10,207
|
$
|
16,017
|
||||
The tax
effects of principal temporary differences are as follows:
62
|
2008
|
2009
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Property
and equipment
|
$ | 644 | $ | 1,632 | ||||
|
Stock
option compensation expense
|
509 | 843 | ||||||
|
Allowance
for doubtful accounts
|
213 | 355 | ||||||
|
Accrued
vacation and severance
|
198 | 238 | ||||||
|
Other
|
69 | 131 | ||||||
| 1,633 | 3,199 | |||||||
|
Deferred
tax liabilities:
|
||||||||
|
Income
tax deductible capitalized software development costs
|
( 4,335 | ) | ( 6,096 | ) | ||||
|
Prepaid
expenses
|
( 349 | ) | ( 569 | ) | ||||
|
Other
|
— | ( 307 | ) | |||||
| ( 4,684 | ) | ( 6,972 | ) | |||||
| $ | ( 3,051 | ) | $ | ( 3,773 | ) | |||
The
deferred tax amounts above have been classified on the accompanying balance
sheets as of December 31, 2008 and 2009, as follows:
|
2008
|
2009 | |||||||
|
(in
thousands)
|
||||||||
|
Current
assets
|
$ | 640 | $ | 999 | ||||
|
Non-current
liabilities
|
$ | ( 3,691 | ) | $ | ( 4,772 | ) | ||
Income
tax expense differs from the amount of tax determined by applying the United
States Federal income tax rates to pretax income and loss due to permanent tax
differences, research and development tax credits related to capitalized
software development costs, and the use of historical tax credits, as
follows:
|
2007
|
2008
|
2009
|
||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Tax
expense at statutory rate
|
$
|
5,453
|
35.00
|
$
|
9,238
|
35.00
|
$
|
13,986
|
35.00
|
|||||||||||||||
|
State taxes
,
net
|
934
|
6.00
|
1,273
|
4.82
|
1,859
|
4.65
|
||||||||||||||||||
|
Permanent
differences
|
184
|
1.18
|
138
|
0.53
|
159
|
0.39
|
||||||||||||||||||
|
Other
|
258
|
1.65
|
(
442
|
)
|
(
1.67
|
)
|
13
|
0.04
|
||||||||||||||||
|
$
|
6,829
|
43.83
|
$
|
10,207
|
38.68
|
$
|
16,017
|
40.08
|
||||||||||||||||
Permanent
differences in the table above are mainly attributable to nondeductible
stock-based compensation on incentive stock options.
Other is
primarily historic rehabilitation credits associated with real estate acquired
in 2006, adjustments for estimates made in a prior period, and research and
development tax credits related to capitalized software development
costs.
In June
2006, the FASB issued Interpretation No. 48 — Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement
No. 109 (FIN 48) (FASB ASC Topic 740). 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 was effective for fiscal years beginning after December 15,
2006, with earlier adoption permitted. The Company adopted FIN 48 effective
January 1, 2007. The impact of adopting FIN 48 was not material as of
the date of adoption or in subsequent periods. Interest and penalties associated
with uncertain income tax positions are classified as income tax expense. The
Company has not recorded any material interest or penalties during any of the
years presented.
63
The
Company is subject to U.S. federal income taxes as well as income tax of
multiple state jurisdictions. For federal and state tax purposes, tax years
2006-2009 remain open to examination. Currently, no examinations are in process
in any jurisdiction.
|
Note 6.
|
Other
Employee Benefits
|
The
Company has established a tax deferred 401(k) retirement plan that provides
retirement benefits to all of its eligible employees. The participants may elect
to contribute up to 60% of their gross annual earnings not to exceed ERISA and
IRS limits. The plan provides for Company discretionary profit sharing
contributions at matching percentages. Employees immediately vest 100% in all
salary reduction contributions and employer contributions. On June 20,
2008, the Company filed a Form S-8 to register 100,000 shares of
common stock that may be purchased in the open market and subsequently issued
pursuant to the retirement plan. The Company made discretionary contributions to
the plan of $623,000, $843,000 and $1,134,000 for the years ended
December 31, 2007, 2008 and 2009, respectively.
In
November 2007, the Company adopted the American Public Education, Inc. Employee
Stock Purchase Plan (“ESPP”). The ESPP was implemented effective July 1,
2008, with quarterly enrollment periods. Participants may only enter the plan
and establish their withholdings at the start of an enrollment period. They may
withdraw from the plan and end payroll deductions any time up to five days
before the purchase date and funds will be returned to them. Under the ESPP,
eligible employees may purchase shares of the Company’s common stock, subject to
certain limitations, at 85% of its fair market value on the last day of the
quarterly period. The total value of contributions per participant may not
exceed approximately $21,000 annually (or the value of the common stock cannot
exceed $25,000). The aggregate number of shares of common stock that may be made
available for purchase by participating employees under the ESPP is
100,000 shares. Shares purchased in the open market for employees for the
year ended December 31, 2009 were as follows:
|
Purchase
Date
|
Shares
|
Common
Stock
Fair Value |
Purchase
Price
|
Compensation
Expense |
||||||||||||
|
March
31, 2009
|
2,955 | $ | 42.06 | $ | 35.75 | $ | 18,646 | |||||||||
|
June
30, 2009
|
2,997 | $ | 39.55 | $ | 33.61 | $ | 17,802 | |||||||||
|
September
30, 2009
|
4,168 | $ | 34.73 | $ | 29.52 | $ | 21,715 | |||||||||
|
December
31, 2009
|
3,962 | $ | 34.36 | $ | 29.20 | $ | 20,444 | |||||||||
|
Total/Weighted
Average
|
14,082 | $ | 37.19 | $ | 31.61 | $ | 78,607 | |||||||||
|
Note 7.
|
Stockholders’
Equity
|
Common
Stock
In
connection with the Company’s initial public offering described in Note 8,
the Company effected an 11-for-1 stock split of its common stock and its
Class A common stock on September 19, 2007, the Company increased its
authorized capital and each share of Class A common stock was converted
into a share of common stock. 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 total
number of shares of all classes of stock that the Company has the authority to
issue is 110,000,000, of which 100,000,000 of such shares are common stock
having a par value of $.01 per share and 10,000,000 of such shares are Preferred
Stock, having a par value of $.01 per share.
On
November 8, 2007, the Company declared a special distribution in the amount
of $93,750,000 or $7.63 per share of common stock and Class A common stock,
payable upon the completion of the initial public offering to stockholders of
record immediately prior to the completion of the offering. The Company used
proceeds from the initial public offering to pay the special distribution.
Shares of common stock issuable upon the exercise of outstanding stock options
issued under prior plans were increased by 350,160 shares as a result of an
equitable antidilution adjustment triggered by the special
distribution.
Stock
Incentive Plans
In
February 2002, the Company adopted the 2002 Stock Incentive Plan (the “2002
Stock Plan”). The 2002 Stock Plan initially allowed the Company to grant up to
990,000 shares of stock options and restricted stock at fair value to
employees, officers, directors, and service providers of the Company and its
affiliates, at the discretion of the Board of Directors. Options granted to date
and currently outstanding vest ratably over periods of three to five years and
expire in 10 years from the date of grant. The options were granted to
employees at a purchase price that approximates the fair value of the Company’s
stock. In August 2002, the 2002 Stock Plan was amended to increase the shares of
common stock reserved for grant under the plan to 1,815,000. In August 2005, the
2002 Stock Plan was amended to increase the shares of common stock reserved for
grant under the plan to 2,200,000.
64
On
August 3, 2007, the Board of Directors adopted the American Public
Education, Inc. 2007 Omnibus Incentive Plan (the “new equity plan”), and the
Company’s stockholders approved the new equity plan on November 6, 2007.
The new equity plan was effective as of August 3, 2007. Upon adoption of
the new equity plan, APEI ceased making awards under the 2002 Stock Plan. The
new equity plan allows APEI to grant up to 1,100,000 shares plus any shares
of common stock remaining available for issuance under the 2002 Stock Plan as of
the effective date of the new equity plan and any shares of APEI common stock
that are subject to outstanding awards under the 2002 Stock Plan that expire or
are forfeited, canceled or settled for cash without delivery of shares of APEI
common stock after the effective date of the new equity plan. As of
December 31,
2007,
there were 3,751 shares available for issuance from the 2002 Stock Plan
which were added to the 1,100,000 shares available for issuance under the
2007 new equity plan. Awards under the new equity plan may be stock options,
which may be either incentive stock options or nonqualified stock options; stock
appreciation rights; restricted stock; restricted stock units; dividend
equivalent rights; performance shares; performance units; cash-based awards;
other stock-based awards, including unrestricted shares; or any combination of
the foregoing.
In
connection with the initial public offering, on November 8, 2007, the
Company granted options to purchase 259,050 shares of common stock 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 issued
72,573 shares of restricted stock to employees and directors at the initial
public offering price of $20.00 per share. The restricted stock issued to
employees will vest ratably over a period of three years, and the restricted
stock granted to directors vested in full in connection with the Company’s 2008
annual meeting of stockholders. 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 3,800 shares of common
stock.
For the
years ended December 31, 2007, 2008 and 2009, the Company recognized
$1,033,000, $1,674,000 and $2,223,000 in stock-based compensation expense as
required under SFAS 123R (FASB ASC Topic 718) and a total income tax
benefit of $198,000, $575,000 and $767,000, respectively.
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 and 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 FAS 123(R).
The
following table sets forth the assumptions used in calculating the fair value at
the date of grant of each option award granted:
|
2007
|
2008
|
2009
|
||||
|
Expected
volatility
|
23.97%
- 27.75%
|
26.23%
|
27.17-28.93%
|
|||
|
Expected
dividends
|
0.00%
|
0.00%
|
0.00%
|
|||
|
Expected
term, in years
|
4.5
- 6.5
|
4.5
|
4.5
|
|||
|
Risk-free
interest rate
|
3.46%-4.76%
|
2.59%
|
1.00
to 2.53%
|
|||
|
Weighted-average
fair value of options granted during the year
|
$2.92
|
$8.26
|
$9.23
|
65
A summary of the status of
the Company’s Stock Incentive Plan as of December 31, 2009 and the changes
during the periods then ended is as follows:
|
Weighted
|
|||||||||||||||
|
Weighted
|
Average
|
Aggregate
|
|||||||||||||
|
Number
|
Average
Exercise
|
Contracual
|
Intrinsic
|
||||||||||||
|
of
Options
|
Price
|
Life
(years)
|
Value
|
||||||||||||
|
|
(in
thousands)
|
||||||||||||||
|
Outstanding,
December 31, 2008
|
1,257,441
|
$
|
7.02
|
||||||||||||
|
Options
granted
|
101,362
|
$
|
36.95
|
||||||||||||
|
Awards
exercised
|
(
226,779
|
)
|
$
|
2.88
|
|||||||||||
|
Options
forfeited
|
(
6,220
|
)
|
$
|
30.23
|
|||||||||||
|
|
|||||||||||||||
|
Outstanding,
December 31, 2009
|
1,125,804
|
$
|
10.42
|
5.96
|
$
|
27,208
|
|||||||||
|
Exercisable,
December 31, 2009
|
681,565
|
$
|
7.86
|
5.92
|
$
|
18,064
|
|||||||||
The
following table summarizes information regarding stock option
exercises:
|
2007
|
2008
|
2009
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Proceeds
from stock options exercised
|
$
|
891
|
$
|
550
|
$
|
654
|
||||||
|
Intrinsic
value of stock options exercised
|
$
|
2,614
|
|
|
$
|
9,978
|
|
|
$
|
7,892
|
||
|
Tax
benefit from exercises
|
$
|
68
|
$
|
1,654
|
|
|
$
|
2,342
|
||||
As of
December 31, 2009 there was $2,311,000 of total unrecognized compensation
cost, representing $1,276,000 of unrecognized compensation cost associated with
share-based compensation arrangements, and $1,035,000 of unrecognized
compensation cost associated with non-vested restricted stock. That total
remaining cost is expected to be recognized over a weighted average period of
.77 and .78 years, respectively.
There
were no outstanding options to purchase common shares that were not included in
the computation of diluted net income per common share for the years ended
December 31, 2007 and, 2008, respectively and there were 83,884 anti-dilutive
stock options excluded from the calculation for the year ended December 31,
2009.
Restricted
Stock
The table
below sets forth the restricted stock activity for the year ended
December 31, 2009:
|
Weighted
|
|||||||
|
|
Average
Grant
|
||||||
|
Number
of Shares
|
Price
and
Fair Value |
||||||
|
Non
vested, December 31, 2008
|
48,988
|
$
|
22.27
|
||||
|
Shares
granted
|
30,177
|
36.88
|
|||||
|
Vested
shares
|
(
27,294
|
)
|
24.18
|
||||
|
Shares
forfeited
|
(
2,532
|
)
|
32.69
|
||||
|
Non
vested, December 31, 2009
|
49,339
|
$
|
29.61
|
||||
There
were no shares of restricted stock not included in the computation of diluted
net income per common share for the year ended December 31, 2009. The
Company recognized an income tax benefit of $398,000 from vested shares for the
year ended December 31, 2009.
Employees
are provided the option to forfeit to the Company shares equivalent to the
minimum statutory tax withholding required to be paid when the restricted stock
vests. During the year ended December 31, 2008 and 2009, the Company
accepted for forfeiture 6,419 shares for $295,000 and 6,431 shares for
$218,000, respectively, under this arrangement.
66
|
Note 8.
|
Warrant
and Public Offerings
|
Warrant
In
connection with an August 2002 equity offering, the Company issued a warrant
(the “Warrant”) to a third party placement agent for its service in arranging
and negotiating the offering. In August 2005, in connection with a subsequent
financing the Company entered into an agreement to exchange the Warrant into a
warrant to purchase 155,815 shares of Class A common stock. The
warrant was exercised in October 2007 at $4.62 per share. Upon exercise, the
excess tax benefit was $718,000 and the intrinsic value was
$1,772,000.
Initial
Public Offering
On
August 7, 2007, the Company filed a Registration Statement on Form S-1
(Registration No. 333-145185) for its initial public offering, which was
completed on November 14, 2007.
In the
initial public offering, the Company sold 5,390,625 shares of 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 the
Company 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 the Class A common stock was
converted into shares of common stock on a 1 for 1 basis. The total number of
shares of all classes of stock that the Company has the authority to issue is
110,000,000, of which 100,000,000 of such shares are common stock having a par
value of $.01 per share and 10,000,000 of such shares are Preferred Stock,
having a par value of $.01 per share.
On
November 8, 2007, the Company declared a special distribution in the amount
of $93,750,000 or $7.63 per share of common stock and Class A common stock,
payable upon the completion of the initial public offering to stockholders of
record immediately prior to the completion of the offering. The Company used
proceeds from the initial public offering to pay the special distribution.
Shares of common stock issuable upon the exercise of outstanding stock options
issued under prior plans were increased by 350,160 shares as a result of an
equitable antidilution adjustment triggered by the special
distribution.
Public
Offerings
On
January 25, 2008, APEI filed a Registration Statement on Form S-1
(Registration No. 333-148851) for a public offering, which was completed on
February 19, 2008. In the offering 3,744,500 shares were sold,
consisting of 25,000 shares sold by the Company and 3,719,500 shares
sold by certain stockholders of the Company. Total net proceeds to the Company
were $167,000, after deducting underwriting discounts and commissions, and
offering expenses. The Company did not receive any of the proceeds from the sale
of common stock sold by the selling stockholders. Certain selling stockholders
granted the underwriters a 30-day option to purchase up to an additional
500,175 shares at the public offering price to cover over-allotments. On
February 27, 2008, the underwriters of the Company’s public offering
exercised their over-allotment option in full. The closing of the exercise of
the over-allotment option occurred on March 3, 2008. The Company did not
receive any of the proceeds from the sale of common stock held by the selling
stockholders in the over-allotment option exercise.
On
November 12, 2008, APEI filed a Registration Statement that was
subsequently amended on Form S-3 (Registration No. 333-155300) for a
public offering, which was completed on December 12, 2008. In the offering
4,227,952 shares were sold consisting of 15,000 shares sold by the
Company and 3,791,657 shares sold by certain stockholders of the Company.
Total net proceeds to the Company were $52,280, after deducting underwriting
discounts and commissions, and offering expenses. The Company did not receive
any of the proceeds from the sale of common stock sold by the selling
stockholders. Certain selling stockholders granted the underwriters a 30-day
option to purchase up to an additional 421,295 shares at the public
offering price to cover over-allotments. On December 9, 2008, the
underwriters of the Company’s public offering exercised their over-allotment
option in full. The closing of the exercise of the over-allotment option
occurred on December 9, 2008. The Company did not receive any of the
proceeds from the sale of common stock held by the selling stockholders in the
over-allotment option exercise.
|
Note 9.
|
Contingencies
|
From time
to time the Company may be involved in litigation in the normal course of its
business. The Company is not aware of any pending or threatened litigation
matters that, in the opinion of management, will have a material adverse effect
on the Company’s business, operations, financial condition or cash
flows.
|
Note 10.
|
Concentration
|
Approximately
61%, 61% and 56% of the Company’s 2007, 2008 and 2009 revenues, respectively,
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. Approximately, 11%, 14% and 19% of the Company’s 2007, 2008 and
2009 revenues respectively, were derived from students who received federal
student aid.
67
|
Note 11.
|
Segment
Information
|
The
Company is organized and operates as one operating segment. In accordance with
FASB Statement No. 131, “Disclosures About Segments of an Enterprise and
Related Information” (“SFAS No. 131”) (FASB ASC Topic 280), the chief
operating decision-maker has been identified as the Chief Executive Officer. The
Chief Executive Officer reviews operating results to make decisions about
allocating resources and assessing performance for the entire company. Because
the Company operates in one segment and provides one group of similar services,
all financial segment and product line information required by
SFAS No. 131 can be found in the consolidated financial
statements.
|
Note 12.
|
Subsequent
Events
|
We
have reviewed our business activities through February 22, 2010, and we have no
subsequent events to report.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
We have
carried out an evaluation, under the supervision and the participation of our
management, including our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended, or the Securities Exchange
Act), as of December 31, 2009. Based upon that evaluation, our principal
executive officer and principal financial officer concluded that, as of the end
of that period, our disclosure controls and procedures are effective in
providing reasonable assurance that (a) the information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Security and Exchange Commission’s rules and forms, and
(b) such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company. Internal control over
financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the company’s principal executive and principal financial
officers and effected by the company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
•
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
|
|
•
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
|
|
|
•
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2009. In making this
assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control — Integrated Framework.
Based on
our assessment, management concluded that, as of December 31, 2009, our
internal control over financial reporting is effective based on those
criteria.
Our
independent registered public accounting firm, McGladrey & Pullen, LLP,
has issued an audit report on our internal control over financial reporting.
This report appears below.
68
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
American
Public Education, Inc.
We have
audited American Public Education, Inc. and Subsidiary’s internal control over
financial reporting as of December 31, 2009, based on criteria established
in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring Organizations
of the Treadway Commission. American Public Education, Inc. and Subsidiary’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying
Management’s Annual Report on
Internal Control over Financial Reporting
. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that
(a)
pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company;
(b)
provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and
(c)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, American Public Education, Inc. and Subsidiary maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of American
Public Education, Inc. and Subsidiary as of December 31, 2009 and 2008, and
the related consolidated statements of income, shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2009,
and our report dated February 22, 2010 expressed an unqualified
opinion.
| /s/ McGladrey & Pullen, LLP |
Vienna,
Virginia
February
22
,
2010
69
Changes
in internal control over financial reporting.
There
were no changes in the Company’s internal controls over financial reporting
during the fourth quarter of 2009 that have materially affected or are
reasonably likely to materially affect the Company’s internal control over
financial reporting.
|
OTHER
INFORMATION
|
None.
|
DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
|
Executive
Officers
Pursuant
to General Instruction G(3) of Form 10-K, information regarding our
executive officers is set forth in Part I of this annual report under the
caption Item 1. “Executive Officers of American Public Education,
Inc.”
Code
of Ethics
As part
of our system of corporate governance, our board of directors has adopted a Code
of Business Conduct and Ethics that is applicable to all of our employees, and
also contains provisions only applicable to our Chief Executive Officer and
senior financial officers. Our Code of Business Conduct and Ethics is available
on the Corporate Governance page of our web site at
http://www.americanpubliceducation.com. We intend to satisfy any disclosure
requirement under Item 5.05 of Form 8-K regarding an amendment to, or
waiver from, a provision of the Code of Business Conduct and Ethics that applies
to our chief executive officer or senior financial officers, by posting such
information on our web site at the address above.
Additional
Information
The
additional information regarding directors, executive officers and corporate
governance required by this Item is hereby incorporated by reference from the
information contained under the captions “Corporate Governance Standards and
Director Independence,” “Board Committees and Their Functions,” “Director
Nominations and Communication with Directors,” “Proposal No. 1 —
Election of Directors” and “Section 16(a) Beneficial Ownership Reporting
and Compliance” in the Company’s Proxy Statement, which will be filed with the
SEC no later than 120 days following December 31, 2009 with respect to
our 2010 Annual Meeting of Stockholders.
|
EXECUTIVE
COMPENSATION
|
The
information required by this Item is hereby incorporated by reference from the
information contained under the captions “Director Compensation” and “Executive
Compensation” in the Company’s Proxy Statement, which will be filed with the SEC
no later than 120 days following December 31, 2009 with respect to our
2010 Annual Meeting of Stockholders.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information required by this Item is hereby incorporated by reference from the
information contained under the captions “Beneficial Ownership of Common Stock”
and “Equity Compensation Plan Information” in the Company’s Proxy Statement,
which will be filed with the SEC no later than 120 days following
December 31, 2009 with respect to our 2010 Annual Meeting of
Stockholders.
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this Item is hereby incorporated by reference from the
information contained under the captions “Certain Relationships and Related
Persons Transactions” and “Board Independence” in the Company’s Proxy Statement,
which will be filed with the SEC no later than 120 days following
December 31, 2009 with respect to our 2010 Annual Meeting of
Stockholders.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The
information required by this Item is hereby incorporated by reference from the
information contained under the captions “Principal Accountant Fees and
Services” and “Audit Committee’s Pre-Approval Policies and Procedures” in the
Company’s Proxy Statement, which will be filed with the SEC no later than
120 days following December 31, 2009 with respect to our 2010 Annual
Meeting of Stockholders.
70
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULE
|
(a) (1) The
information required by this item is included in Item 8 of Part II of
this annual report on Form 10-K.
(2) The
information required by this item is included in Item 8 of Part II of
this annual report on Form 10-K.
(3) Exhibits:
See Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits
are filed or incorporated by reference as part of this annual report on
Form 10-K.
(b) Exhibits:
See Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits
are filed or incorporated by reference as part of this annual report on
Form 10-K.
(c) Schedule II:
Valuation and Qualifying Accounts.
Other
schedules are omitted because they are not required.
71
AMERICAN
PUBLIC EDUCATION, INC.
Schedule II
Valuation
and Qualifying Accounts
|
Balance
at
beginning of period |
Additions/
(reductions)
|
Write-offs
|
Balance
at
end of period
|
|||||||||||
|
Year
ended December 31, 2009:
|
||||||||||||||
|
Allowance
for receivables
|
$
|
537
|
$
|
781
|
$
|
(
422
|
)
|
$
|
896
|
|||||
|
Year
ended December 31, 2008:
|
||||||||||||||
|
Allowance
for receivables
|
$
|
385
|
$
|
454
|
$
|
(
302
|
)
|
$
|
537
|
|||||
|
|
|
|||||||||||||
|
Year
ended December 31, 2007:
|
|
|||||||||||||
|
Allowance
for receivables
|
$
|
263
|
$
|
606
|
$
|
(
484
|
)
|
$
|
385
|
|||||
72
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,, in the city of Charles Town,
State of West Virginia, on February 19, 2010.
|
American Public Education,
Inc.
|
|||
|
|
By:
|
/s/ Wallace
E. Boston, Jr.
|
|
| Name: Wallace E. Boston, Jr. | |||
| Title: President and Chief Executive Officer | |||
Pursuant
to the requirement of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
|
Name
|
Date
|
Title
|
||
|
/s/ Wallace
E. Boston, Jr.
|
February
19, 2010
|
President,
Chief Executive Officer and Director
|
||
|
Wallace
E. Boston, Jr.
|
(Principal
Executive Officer)
|
|||
|
/s/ Harry
T. Wilkins
|
February
19, 2010
|
Executive
Vice President and
|
||
|
Harry
T. Wilkins
|
Chief
Financial Officer
(Principal
Financial Officer and
Principal
Accounting Officer)
|
|||
|
/s/ Phillip
A. Clough
|
February
19, 2010
|
Chairman
of the Board of Directors
|
||
|
Phillip
A. Clough
|
||||
|
/s/ J.
Christopher Everett
|
February
19, 2010
|
Vice
Chairman of the Board of Directors
|
||
|
J.
Christopher Everett
|
||||
|
/s/ F.
David Fowler
|
February
19, 2010
|
Director
|
||
|
F.
David Fowler
|
||||
|
/s/ Jean
C. Halle
|
February
19, 2010
|
Director
|
||
|
Jean
C. Halle
|
||||
|
/s/ Timothy
J. Landon
|
February
19, 2010
|
Director
|
||
|
Timothy
J. Landon
|
||||
|
/s/ Barbara
G. Fast
|
February
19, 2010
|
Director
|
||
|
Barbara
G. Fast
|
||||
|
/s/ Timothy
W. Weglicki
|
February
19, 2010
|
Director
|
||
|
Timothy
W. Weglicki
|
73
INDEX
TO EXHIBITS
|
Exhibit
No.
|
Exhibit
Description
|
|||
|
3
|
.1
|
Fifth
Amended Restated Certificate of Incorporation of the
Company(1)
|
||
|
3
|
.2
|
Second
Amended and Restated Bylaws of the Company(1)
|
||
|
4
|
.1
|
Form
of certificate representing the Common Stock, $0.01 par value per
share, of the Company
|
||
|
10
|
.1+
|
American
Public Education, Inc. 2002 Stock Incentive Plan
|
||
|
10
|
.1A+
|
Form
of Stock Option Agreement for grants pursuant to the American Public
Education, Inc. 2002 Stock Incentive Plan
|
||
|
10
|
.1B+
|
Form
of Non-Qualified Stock Option Agreement for grants pursuant to the
American Public Education, Inc. 2002 Stock Incentive
Plan
|
||
|
10
|
.2+
|
American
Public Education, Inc. 2007 Omnibus Incentive Plan
|
||
|
10
|
.2A+
|
Form
of Non-Qualified Stock Option Agreement for grants pursuant to the
American Public Education, Inc. 2007 Omnibus Incentive
Plan
|
||
|
10
|
.2B+
|
Form
of Restricted Stock Agreement for grants pursuant to the American Public
Education, Inc. 2007 Omnibus Incentive Plan
|
||
|
10
|
.2C+
|
Form
of Restricted Stock Agreement for grants to Directors pursuant to the
American Public Education, Inc. 2007 Omnibus Incentive
Plan
|
||
|
10
|
.3
|
Form
of Indemnification Agreement
|
||
|
10
|
.4+
|
Amended
and Restated Employment Agreement between the Company and Wallace E.
Boston, Jr. dated October 10, 2007
|
||
|
10
|
.4A+
|
Amendment
dated December 31, 2008, to the Amended and Restated Employment
Agreement between the Company and Wallace E. Boston, Jr. dated
October 10, 2007 (2)
|
||
|
10
|
.5+
|
Amended
and Restated Employment Agreement between the Company and Harry T. Wilkins
dated October 10, 2007
|
||
|
10
|
.5A+
|
Amendment
dated December 31, 2008, to the Amended and Restated Employment
Agreement between the Company and Harry T. Wilkins dated October 10,
2007 (2)
|
||
|
10
|
.6+
|
Employment
Agreement between the Company and Frank B. McCluskey dated April 10,
2005
|
||
|
10
|
.6A+
|
Amendment
dated December 31, 2008, to the Employment Agreement between the
Company and Frank B. McCluskey dated April 10, 2005
(2)
|
||
|
10
|
.7+
|
Employment
Agreement between the Company and James H. Herhusky dated October 31,
2003
|
||
|
10
|
.8+
|
Employment
Agreement between the Company and Sharon van Wyk, dated August 24,
2009(3)
|
||
|
10
|
.9+
|
Separation
Agreement and General Release between American Public University System
and Mark Leuba, dated November 3, 2009 (4)
|
||
|
10
|
.10+
|
Consulting
Agreement between the Company and Mark Leuba, dated November 2, 2009
(4)
|
||
|
10
|
.11+
|
Annual
Incentive Plan
|
||
|
10
|
.12+
|
American
Public Education, Inc. Employee Stock Purchase Plan
|
||
|
21
|
.1
|
List
of Subsidiaries (filed herewith)
|
||
|
23
|
.1
|
Consent
of McGladrey & Pullen, LLP (filed herewith)
|
||
|
31
|
.1
|
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 (filed herewith)
|
||
|
31
|
.2
|
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 (filed herewith)
|
||
|
32
|
.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
|
||
|
32
|
.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
|
||
|
EX
|
-101
|
.INS
|
XBRL
Instance Document
|
|
|
EX
|
-101
|
.SCH
|
XBRL
Taxonomy Extension Schema Document
|
|
|
EX
|
-101
|
.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
EX
|
-101
|
.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
EX
|
-101
|
.LAB
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
EX
|
-101
|
.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase
Document
|
|
Unless
otherwise noted, all exhibits are incorporated by reference to the Registrant’s
Form S-1 Registration Statement (No. 333-145185), as
amended.
|
+
|
Management
contract or compensatory plan or arrangement.
|
|
|
(1)
|
Incorporated
by reference to exhibit filed with Registrant’s Current Report on
Form 8-K (File No. 01-33810), filed with the Commission on
November 14, 2007.
|
|
|
(2)
|
Incorporated
by reference to exhibit filed with Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2008 (File
No. 01-33810), filed with the Commission on March 10,
2009.
|
|
|
(3)
|
Incorporated
by reference to exhibit filed with Registrant’s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2009
(File No. 01-33810), filed with the Commission on November 5,
2009.
|
|
|
(4)
|
Incorporated
by reference to exhibit filed with Registrant’s Current Report on
Form 8-K (File No. 01-33810), filed with the Commission on
December 28, 2009.
|
|
74
TABLE OF CONTENTS
Item 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1. Nature Of Business and Significant Accounting PoliciesNote 2. Property and EquipmentNote 3. Line Of CreditNote 4. Operating LeasesNote 5. Income TaxesNote 6. Other Employee BenefitsNote 7. Stockholders EquityNote 8. Warrant and Public OfferingsNote 9. ContingenciesNote 10. ConcentrationNote 11. Segment InformationNote 12. Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers, and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Party Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedule