Ahead of the Curve.
Online higher education for a complex world.
2008 Annual Report
3/30/09 8:23:28 AM
Uniquely prepared.
In an increasingly complex world, it is not enough to keep up.
You must go farther, learn more, and think critically. Our students
are ready. Because our academic model, like our mission, is
designed to meet a new generation of challenges.
Our mission: We educate the nation’s military and public service
communities by providing respected, relevant, affordable, and
student-focused online programs that prepare them for service
and leadership in a diverse, global society.
209065_beatley-cover.indd 2
American Public Education, Inc. (NASDAQ: APEI) is a leading
provider of exclusively online post-secondary education
focused primarily on serving the military and public service
communities. American Public University System (APUS),
wholly owned by APEI, comprises two universities—American
Military University (AMU) and American Public University (APU).
Regionally and nationally accredited, APUS services more
than 45,200 students who live and work in all 50 states and in
more than 100 countries. With fields ranging from homeland
security and intelligence studies to business administration
and liberal arts, APUS offers more than 70 degree programs.
1
3/27/09 10:19:59 AM
209065_beatley-narrative.indd 1
Positioned for the future.
Dear Shareholders:
In 2008, APEI had another outstanding year. Our
We offer 74 regionally accredited degree programs,
enrollments—and revenues—have never been higher.
including 11 undergraduate liberal arts degree programs.
At a time when rising tuition costs are putting a college
The North Central Association of the Higher Learning
education out of reach for many students, we continue to
Commission formally approved APUS as a liberal arts
broaden our programs, grow enrollments and maintain
degree-granting institution in December 2008. This status
academic quality, while strengthening our financial position
builds on our existing regional accreditation and will expand
and keeping tuition increases to a minimum. That commit-
student access to liberal arts degree programs.
ment to quality combined with a student-centric focus and
While many institutions continue to raise tuition
a business model that enables affordability puts us—and
several percentage points every year, APUS has not
our graduates—ahead of the curve today and for the future.
increased undergraduate tuition in eight years and
As a nation, we share a responsibility for promoting
currently has no plans to do so. The cost of a bachelor’s
educational attainment. At APEI, our purpose aligns
degree at APU and AMU is comparable to that of a public
with that of Congress and the administration—to make
college; and our master’s degrees cost less than many
higher education more accessible, affordable and
traditional public institutions. If you consider our under-
attainable. By offering high-quality, accredited degree
graduate book grant program and the fact that there are
programs in an online setting—programs that are
no hidden fees associated with our degree programs,
competitive with more traditional public colleges and
we have a strong competitive advantage in college costs.
universities—we are creating opportunities for a growing
The Department of Defense provides tuition assistance
number of students across a wider array of disciplines.
to active duty military professionals that can enable them
Most importantly, our graduates are gaining the skills,
to earn their first undergraduate degree through APUS
knowledge and solid credentials they need to advance
with minimal out-of-pocket expense. For civilian students,
professionally in an intensely competitive, rapidly chang-
the federal student loan program more than covers the
ing environment. That puts them ahead of the curve.
cost of our tuition. The majority of APUS students are
A Compelling Model for Higher Education
able to graduate without the burden of massive student
Today, a large and growing number of people at all
loan debt from their APUS tuition.
stages in their careers are looking for options that offer
quality, affordability and flexibility so they can pursue
American Public Education, Inc.
higher education while they continue to thrive profes-
Net Course Registrations
147,124
sionally. By addressing the challenge of rising tuition costs
with a broad range of high-quality, accessible academic
programs, we are creating a compelling new model that
puts us ahead of the curve.
American Public University System (APUS), wholly
owned by APEI, serves military personnel and civilians
through two brands—American Military University (AMU)
94,846
54,828
32,558
37,506
25,567
and American Public University (APU). We continue to
2003
2004
2005
2006
2007
2008
broaden our curriculum for a wider array of students. In
2009, we added four new master’s degree specializations
in education in addition to the six we launched in 2008.
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 financial penalty.
2
209065_beatley-narrative.indd 2
3/27/09 9:03:52 AM
Wallace E. Boston, Jr., President and Chief Executive Officer, with
American Public University System’s Advanced Technology Platform.
Revenues (in millions)
$107.1
$69.1
$40.0
$28.2
$17.8
$23.1
Income from Continuing Operations
before Interest Income and Income Tax
(in millions)
$25.7
$14.7
$3.6
$2.2
$1.8
$6.1(1)
2003
2004
2005
2006
2007
2008
2003
2004
2005
2006
2007
2008
(1) Excludes a $3.1 million write-off of software development costs.
209065_beatley-narrative.indd 3
3
3/27/09 9:03:57 AM
Our business model enables us to keep tuition rates
degree. More and more students are realizing the value
affordable. PAD, our sophisticated IT system, allows us to
of a degree from APUS. Net course registrations for 2008
perform administrative functions and serve customers
were 147,124, up 55% from the prior year; and total
efficiently and at a low cost, and we pass those savings
student enrollments at year-end were over 45,200, a 50%
on directly to our students in the form of lower tuition.
increase over 2007 levels.
At the same time, our targeted approach to advertising
Military enrollment remains strong, with all service
and high student referral rates keep marketing costs low.
branches performing well in 2008. Our entry into the
Flexibility is central to our business model, and extends
Navy’s Distance Learning Partnership produced faster
beyond having an online presence. For example, we
than expected growth, and we experienced higher than
accept more transfer credits than most other undergradu-
expected enrollments from the U.S. Army. In addition,
ate educational institutions, up to 75% of the degree
Military Advanced Education magazine named AMU one
requirements. We make a special effort to accommodate
of America’s Top 20 Military-Friendly Colleges and
active duty service members with course extensions and
Universities for 2008.
practical leave of absence policies; and our classes start
In 2008, we maintained a strong financial position
monthly, rather than only a few times a year.
with no corporate debt, ample cash and a strong balance
“As a nation, we share a responsibility for
promoting educational attainment. At APEI, our
purpose aligns with that of Congress and the
administration—to make higher education more
accessible, affordable and attainable.”
sheet. Revenues were $107.1 million, an increase of 55%
compared to total revenues of $69.1 million for 2007.
Income from operations before interest income and
income tax increased to $25.7 million, compared to
$14.7 million in the same period of 2007. And net
income for 2008 of $16.2 million or $0.86 per diluted
share, compares to net income of $8.8 million or $0.64
per diluted share for the 2007.
Our ongoing commitment to academic quality is
Going Forward
reflected in student performance. In 2008, our seniors
outperformed the national norms in every category
of the Measurement of Academic Proficiency and
Progress (MAPP) exam, a gauge of academic success
administered by Educational Testing Service. We also
offer smaller class sizes than many of our competitors.
The average student-to-teacher ratio is 14.5 to 1,
enabling our faculty to give each student personal
attention. For many of our programs with a military
and public service focus, the presence of faculty with
real-life expertise is a distinct advantage.
2008 Performance
We see ample opportunity to continue to expand our
leadership in serving military professionals and even
greater opportunities for expansion among civilian
students. By expanding our liberal arts degrees and
offering highly specialized degree programs, we increase
our capacity for growth and gain a competitive advan-
tage in the online space—as well as among traditional
institutions of higher education. Going forward, we are
well positioned to invest in future growth and to capitalize
on our unique model for advanced, online education
that puts our graduates ahead of the curve.
The strength of our academic and business model is
Sincerely,
reflected in our 2008 results. We continue to experience
high levels of customer satisfaction, as demonstrated by
our referral rates. More than 50% of new students are
Wallace E. Boston, Jr.
referred by others and over 25% return for a second
President and Chief Executive Officer
4
209065_beatley-narrative.indd 4
3/27/09 9:03:57 AM
Personal perspectives.
“APUS was the answer for us. The online format, the courses—
everything was a fit for what we needed.”
Jim and Jennifer Deater
Bachelor’s Student, Intelligence Studies
Bachelor’s Student, Public Health
Two new degrees, countless new opportunities.
In 2008, due to the economy, Jennifer Deater lost her job with an insurance company. Her husband, Jim, a sergeant with the
Maryland State Police, was planning to retire in 2011 after 22 years of service. Both believed that a bachelor’s degree was a
necessity to achieve their goals—but, given their work and family commitments, the possibility seemed out of reach. Today,
Jennifer is pursuing her bachelor’s degree in public health at APU, and Jim is pursuing a bachelor’s degree in intelligence studies at
AMU. They are studying online together, and scheduling homework around their busy lives and those of their three children.
209065_beatley-narrative.indd 5
5
3/27/09 9:04:05 AM
An advanced degree, a new direction.
The prospect of getting an advanced degree posed unique challenges for Rebecca Roch, a single mom with three children.
Today she’s pursuing a master’s degree in public administration at AMU, opening the way for new opportunities in the private
and public sectors. Not only did the online format appeal to Roch; but, with nine years of service in the Connecticut Army
National Guard, she liked the fact the faculty includes instructors with military service and government experience. APUS
made the process straightforward: “It was very easy to get information. There was no pushing or pulling to get what you needed.”
“I have been able to give my children more goals to strive for
and more dreams to dream.”
Rebecca Roch
Master’s Student, Public Administration
6
209065_beatley-narrative.indd 6
3/27/09 9:04:11 AM
“AMU was the smartest decision I have made in my life,
next to marrying my wife.”
Terrence Warner
Master’s Degree, Strategic Intelligence
A new career, a bright future.
After 15 years in the U.S. Air Force, Terrence Warner decided to pursue an advanced degree to prepare for a career in the
private sector. AMU was one of the few institutions that offered a degree in his field of interest: strategic intelligence.
“I was able to select from a wide variety of courses to meet my professional requirements,” he says, listing AMU’s other
advantages: “Price, curriculum, course length, accreditation, and courses starting monthly.” Five years later, his AMU
degree has helped him successfully transition to a civilian intelligence career with a leading U.S. defense contractor.
209065_beatley-narrative.indd 7
7
3/27/09 9:04:14 AM
Front Row, left to right: Lyn M. Geer, Wallace E. Boston, Jr., Dr. Frank B. McCluskey, Carol S. Gilbert
Back Row, left to right: Lisa G. Kessler, Mark L. Leuba, Peter W. Gibbons, Harry T. Wilkins, James M. Sweizer
Senior Management
Mr. Wallace E. Boston, Jr.*
President and Chief Executive Officer;
Member, Board of Trustees;
Member, Board of Directors
Mr. Mark L. Leuba*
Senior Vice President,
Chief Information Officer
Dr. Frank B. McCluskey*
Executive Vice President and Provost
Mr. Phillip A. McNair
Vice President, Academic Services
Dr. Karan H. Powell
Senior Vice President and
Academic Dean
Mr. James M. Sweizer
Vice President, Military Programs
Mr. Harry T. Wilkins, CPA*
Executive Vice President
and Chief Financial Officer
Ms. Lyn M. Geer
Vice President, Student Services
and University Registrar
Mr. Peter W. Gibbons*
Senior Vice President,
Chief Administrative Officer
Ms. Carol S. Gilbert*
Executive Vice President,
Programs and Marketing
Ms. Lisa G. Kessler
Senior Vice President, Finance
*Denotes our executive officers
8
Not Pictured: Dr. Karan H. Powell, Philip A. McNair
Board of Directors
Mr. Phillip A. Clough, Chairman
Managing General Partner,
ABS Capital Partners
Mr. Wallace E. Boston, Jr., Director
President and Chief Executive Officer,
American Public Education, Inc.
Mr. J. Christopher Everett, Director
Independent Consultant
Mr. F. David Fowler, Director
Director, Liquidity Services, Inc.
Ms. Jean C. Halle, Director
President and Chief Executive Officer,
Calvert Education Services
Timothy J. Landon, Director
Chief Executive Officer, Landon Company
Chairman, Blockshopper.com, LLC.
Mr. David L. Warnock, Director
Founding Partner, Camden Partners
Mr. Timothy T. Weglicki, Director
Founding Partner, ABS Capital Partners
209065_beatley-narrative.indd 8
3/27/09 9:04:23 AM
2008 FORM 10-K
Ahead of the Curve.
Online higher education for a complex world.
Financial Highlights
(In thousands except per share data)
Revenues
Income from operations before
interest income and income taxes
Net income
Net income per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital (1)
Total assets
Stockholders’ equity
(1) Working capital is calculated by subtracting total current liabilities from total current assets.
2008
2007
$107,147
$69,095
$25,688
$16,187
$0.91
$0.86
17,840
18,822
$47,714
$36,357
$78,813
$53,475
$14,691
$8,750
$0.69
$0.64
12,759
13,601
$26,951
$21,433
$48,980
$33,507
209065_beatley-financial.indd 1
3/27/09 9:09:52 AM
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, 2008
Commission File Number: 001-33810
American Public Education, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
Incorporation or organization)
01-0724376
(I.R.S. Employer
Identification No.)
111 West Congress Street
Charles Town, West Virginia 25414
(Address, including zip code, of principal executive offices)
(304) 724-3700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par Value
Title of each class
The NASDAQ Global Market
Name of each exchange on which registered
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 n
No ¥
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 n
No ¥
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 ¥
No n
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. n
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):
Large accelerated filer n
Smaller reporting company n
Accelerated filer ¥
Non-accelerated filer n
(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 n
The total number of shares of common stock outstanding as of March 5, 2009, was 18,042,919.
No ¥
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, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter, was approximately $506 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, 2008, 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 2009 Annual Meeting of Stockholders (which is expected
to be filed with the Commission within 120 days after the end of the registrant’s 2008 fiscal year) are incorporated by reference
into Part III of this Report.
AMERICAN PUBLIC EDUCATION, INC.
FORM 10-K
INDEX
PART I
Item 1
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . .
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10 Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . .
Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14
Page
4
31
46
47
47
47
47
49
51
63
64
82
82
84
84
84
84
85
85
Item 15 Exhibits and Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85
PART IV
2
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:
(cid:129) 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;
(cid:129) our expectations regarding provisional certification;
(cid:129) the pace of growth of our enrollment;
(cid:129) our conversion of prospective students to enrolled students and our retention of active students;
(cid:129) 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;
(cid:129) our maintenance and expansion of our relationships with the United States Armed Forces and various
organizations and the development of new relationships;
(cid:129) the competitive environment in which we operate;
(cid:129) our cash needs and expectations regarding cash flow from operations;
(cid:129) our ability to manage and grow our business and execution of our business and growth strategies; and
(cid:129) our financial performance generally.
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.
3
ITEM 1. BUSINESS
Company Overview
American Public Education, Inc. is a provider of exclusively online postsecondary education directed at
the needs of the military and public service communities. We operate through two universities, American
Military University, or AMU, and American Public University, or APU, which together constitute the
American Public University System. Our universities share a common faculty and curriculum, which includes
74 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 45,000 students living in all 50 states and more than 130 foreign countries. Our
university system is regionally and nationally accredited.
From 2006 to 2008, our total revenue increased from $40.0 million to $107.1 million, which represents a
compound annual growth rate (CAGR) of 63.6%. Our net course registrations increased 73% and 55% in 2007
and 2008, 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 decline. However, we expect
actual dollar revenue growth to increase. Net income improved to $16.2 million in 2008 from net income of
$1.8 in 2006.
Over 80% of our students serve in the United States military on active duty, in the reserves, or in the
National Guard or are veterans. Most of our other students are public service professionals including federal,
national and local law enforcement personnel or other first responders. Our programs are designed to help
these working adult students advance in their current professions or prepare for their next career. Our online
method of instruction is well-suited to these 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, reducing our marketing costs per new student. Over 50% of our new students in
2008 who responded to our surveys tell us they inquired about enrolling in either AMU or APU as the result
of a personal referral.
As of December 31, 2008, we had approximately 120 full-time and over 620 adjunct faculty, virtually all
of whom have advanced degrees and many of whom are former or current leading practitioners 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 on 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 1,100 classes in over 700 unique courses to our over 45,000 students taught by over
740 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.
4
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.
Our university system achieved regional accreditation in May 2006 with The Higher Learning Commis-
sion 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.
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 and with our new degree offerings in Education and Information
Technology.
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
5
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 ServeTM. 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, four 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.
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 1,100
classes in over 700 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 increasing acceptance of distance learning within our targeted markets.
Between 2006 and 2007, we grew our revenue 73% from $40.0 million to $69.1 million. Our revenues
increased by 55% to $107.1 million for the year ended December 31, 2008. As our revenue base grows, we
6
expect our growth rate percentages 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.
Capitalize on Title IV Availability to Penetrate the Public Service and Civilian Markets — 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 grants or low cost student loans through Title IV programs,
we have begun to increase our focus on these markets.
Focus on Improving Student Retention — As of December 31, 2008, 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 and a Bachelor of Science in Criminal Justice with
Concentration in Forensics.
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 initially granted us Candidacy status in February 2004. We
received regional 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 national
accreditation with the Accrediting Commission of the Distance Education and Training Council 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 2009.
7
Curriculum and Scheduling
We offer 125 degree and certificate programs. These programs contain more than 1,200 courses, designated
as core, major or elective courses. We offer terms beginning on the first Monday of each month, with
approximately 1,100 classes in over 700 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.
Programs
Number
Master of Arts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Master of Business Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Master of Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Master of Public Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Master of Science . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bachelor of Arts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bachelor of Business Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bachelor of Science . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Associate of Arts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Associate of Science . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates
Graduate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undergraduate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
1
3
1
3
21
1
10
12
7
74
27
24
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125
At the graduate level, we offer degree programs in the following disciplines:
(cid:129) Master of Arts in:
(cid:129) Criminal Justice
(cid:129) Emergency Management and Disaster Management
(cid:129) History
(cid:129) Homeland Security
(cid:129) Humanities
(cid:129) Intelligence Studies
(cid:129) International Relations and Conflict Resolution
(cid:129) Management
(cid:129) Military History
(cid:129) Military Studies
(cid:129) National Security Studies
(cid:129) Political Science
(cid:129) Public Administration
(cid:129) Security Management
(cid:129) Transportation Management and Logistics
(cid:129) Master of Business Administration
8
(cid:129) Master of Education in:
(cid:129) Administration and Supervision
(cid:129) Guidance Counseling
(cid:129) Teaching
(cid:129) Master of Public Health
(cid:129) Master of Science in:
(cid:129) Environmental Policy and Management
(cid:129) Space Studies
(cid:129) Sports Management
At the undergraduate level, we offer degree programs in the following disciplines:
(cid:129) Bachelor of Arts in:
(cid:129) Child and Family Development
(cid:129) Criminal Justice
(cid:129) Emergency and Disaster Management
(cid:129) English
(cid:129) History
(cid:129) Homeland Security
(cid:129) Hospitality Management
(cid:129) Intelligence Studies
(cid:129) International Relations
(cid:129) Management
(cid:129) Marketing
(cid:129) Middle Eastern Studies
(cid:129) Military History
(cid:129) Military Management and Program Acquisition
(cid:129) Philosophy
(cid:129) Political Science
(cid:129) Psychology
(cid:129) Religion
(cid:129) Security Management
(cid:129) Sociology
(cid:129) Transportation and Logistics Management
(cid:129) Bachelor of Business Administration
9
(cid:129) Bachelor of Science in:
(cid:129) Criminal Justice with Concentration in Forensics
(cid:129) Environmental Studies
(cid:129) Fire Science Management
(cid:129) Information Technology
(cid:129) Information Technology Management
(cid:129) Information System Security
(cid:129) Legal Studies
(cid:129) Public Health
(cid:129) Space Studies
(cid:129) Sports and Health Sciences
(cid:129) Associate of Arts in:
(cid:129) Accounting
(cid:129) Business Administration
(cid:129) Communication
(cid:129) Counter-Terrorism Studies
(cid:129) Early Childhood Care and Education
(cid:129) General Studies
(cid:129) History
(cid:129) Hospitality
(cid:129) Military History
(cid:129) Personnel Administration
(cid:129) Real Estate Studies
(cid:129) Weapons of Mass Destruction Preparedness
(cid:129) Associate of Science in:
(cid:129) Computer Applications
(cid:129) Database Application Development
(cid:129) Fire Science
(cid:129) Explosive Ordnance Disposal
(cid:129) Web Publishing
(cid:129) Paralegal Studies
(cid:129) Public Health
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.
10
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 2007, more
than 65,400 prospective students inquired about admission through our website or by mail, e-mail, or phone
and more than 16,100 started at least one course. In 2008, more than 89,600 inquiries were received and more
than 23,300 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. Undergrad-
uate 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. 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 $3,600 when compared to a 2005 estimate by the General Accounting Office of average text
book costs for a first-time, full-time student at four-year public universities for the 2003-2004 academic year.
Most students transfer in significant prior credit earned, which also reduces the cost and time of earning their
degree.
Other than a modest increase in 2007 for graduate tuition, we have not raised tuition since 2000. Graduate
tuition is $275 per semester hour, or $825 per three-semester 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,
students may earn a graduate degree for less than $10,000 in tuition costs. Many students transfer credit from
other institutions or military service schools, reducing their cost and time for earning a degree.
Despite being an open enrollment institution, 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,
11
food service, student union and recreation. 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 13.9%
of our net registrations in 2008, 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 organiza-
tions to help students meet their education goals:
Military and Veterans Student Aid
(cid:129) Training Funds
(cid:129) Tuition Assistance
(cid:129) Veterans Administration Benefits (G.I. Bill)
Other Federal Student Aid, Including Title IV Programs
(cid:129) Federal Pell Grant
(cid:129) Federal Subsidized Stafford Loan
(cid:129) Federal Unsubsidized Stafford Loan
(cid:129) Federal PLUS Loan
(cid:129) Federal Graduate PLUS Loan
(cid:129) Academic Competitiveness Grant
(cid:129) National Science, Mathematics and Access to Retain Talent (SMART) Grant
Non-Federal Student Aid
(cid:129) Employer Voucher
(cid:129) Private Loans
(cid:129) National Sheriff’s Association Scholarship
(cid:129) Undergraduate Book Grant
Enrollment and Student Body
Our student body consists of over 45,000 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, or are currently enrolled
or registered for an upcoming course. 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. Students on
extended military deployments may apply for a Program Hold, which keeps them active until they return and
are able to resume their studies.
Faculty
Our faculty consists of over 740 members with relevant teaching and practitioner experience. As of
December 31, 2008, approximately 120 faculty members are designated as full-time, and more than 620
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.
12
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 Manag-
ers 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.
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 1,100 classes in over
700 unique courses to our over 45,000 students taught by over 740 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 online classroom employs the web-based portal learning management system, EducatorTM, from
Ucompass.com, Inc., for which we obtained a perpetual license with long-term support commitments in the
first quarter of 2008. 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.
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,
13
ownership, quality level, and selectivity of admissions. No one institution has a significant share of the total
postsecondary market.
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.
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.
Within our primary military market, there are more than 1,850 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 installa-
tions. Across all branches of military service, the primary institutions receiving funds, other than us, are the
University of Maryland University College (UMUC), the University of Phoenix, Park University, Touro
International University and varied institutions by branch, such as Central Texas College within the Army and
Embry Riddle Aeronautical University for the Air Force.
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 135 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 740 members, as of December 31, 2008, we had a professional staff of
approximately 400 non-faculty members administering our academic, technology, service and business
operations. Most of our 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 bonuses based on student retention and satisfaction factors, and an annual bonus
based on financial performance.
None of our employees are parties to any collective bargaining arrangement. We believe our relationships
with our employees are good.
14
EXECUTIVE OFFICERS OF AMERICAN PUBLIC EDUCATION, INC.
The table below shows information about our executive officers:
Name
. . . . . . . . . . . . . . . . . . . . .
Wallace E. Boston, Jr.
Harry T. Wilkins . . . . . . . . . . . . . . . . . . . . . . . . .
Carol S. Gilbert . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr. Frank B. McCluskey . . . . . . . . . . . . . . . . . . . .
Peter W. Gibbons . . . . . . . . . . . . . . . . . . . . . . . . .
Age
54
52
50
59
56
Mark L. Leuba . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
Position
President, Chief Executive Officer and Director
Executive Vice President, Chief Financial Officer
Executive Vice President, Marketing
Executive Vice President, Provost
Senior Vice President, Chief Administrative
Officer
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.
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,
15
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.
Mark L. Leuba joined us in January 2005 as Vice President and Chief Information Officer, and in April
2007 was promoted to Senior Vice President, Information Technology. From February 1997 to January 2005,
Mr. Leuba served as Vice President for Corporate Applications and Vice President of Shared Service
Applications at Random House, Inc. From March 1993 to November 1996, Mr. Leuba served as Vice President
of Applications for Prudential Home Mortgage, Inc., where he led the automation of back office processes for
mortgage-backed securities and secondary marketing. From April 1984 to March 1993, Mr. Leuba served as
Senior Director of Application Systems at CSX Technology, a logistics subsidiary of CSX Corporation.
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, a school must be accredited by an accrediting agency
recognized by the Secretary of Education. Accreditation is a non-governmental process through which an
institution submits to qualitative review by an organization of peer institutions, based on the standards of the
accrediting agency and the stated aims and purposes of the institution. The Higher Education Act requires
accrediting agencies recognized by the Secretary of Education to review and monitor many aspects of an
institution’s operations and to take appropriate action when the institution fails to comply with the accrediting
agency’s standards.
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.
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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 regularly review the licensure requirements of other states or contact
applicable regulatory agencies of other states to determine whether our activities in these states constitute a
presence or otherwise require licensure or authorization by the respective state education agencies. We have
sought and received confirmation from a majority of states that our current operations do not require licensure
or authorization. In addition to our authorizations from West Virginia and Virginia, we or our representatives
have also been certified, approved, or otherwise authorized, or we have been notified that we are exempt from
licensure or authorization requirements, in the following states: Alabama, Arkansas, District of Columbia,
Florida, Georgia, Kansas, Massachusetts, Minnesota, New Mexico, Pennsylvania, Wisconsin and Wyoming.
We or our representatives are licensed or authorized to operate or to conduct activities in these states,
excluding states that have notified as that we are exempt from licensure or authorization requirements, because
we have determined, or the applicable regulatory agency has advised us, that our activities, or our
representative’s activities, in each state constitute a presence or involve an activity requiring licensure or
authorization by the relevant state education agency. In some cases, the licensure or authorization is only for
specific programs or specific activities. 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, from time to time we will
need to seek licensure or authorization in additional states.
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 for 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 authoriza-
tion 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.
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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.
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.
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 accredita-
tion 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.
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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 schools 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. Depart-
ment 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) and (4) campus-based
programs.
(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.
(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. To date, we have not
originated any loans under this program, but are taking steps to enable us to do so if we decide to participate
actively in the program.
(3) Federal Pell Grant Program. Grants under the Federal Pell Grant program are available to eligible
students based on financial need and other factors.
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(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.
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, such as members of the National Sheriffs’ Association. 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.
On June 30, 2008, President Bush signed the Post-9/11 Veterans Educational Assistance Act of 2008. The
legislation, 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 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 are effective August 1, 2009. The legislation also increases
the amount of education benefits available to eligible veterans under pre-existing law, namely the Montgomery
GI Bill, effective August 1, 2008. The legislation also authorizes expansion of service members’ ability to
transfer veterans education benefits to family members. We cannot predict with certainty whether and how the
New GI Bill, including the tuition benefit formula and the housing stipend provision’s distance education
exclusion, might affect our operations.
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 “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
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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.
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. President Bush signed the bill into law 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 have been enacted in the meantime. In
February 2006, President Bush signed the Deficit Reduction Act of 2005, which includes the Higher Education
Reconciliation Act of 2005 or HERA. Among other measures, HERA reauthorized the Higher Education Act
with respect to the federal guaranteed student loan programs. In September 2007, President Bush signed the
College Cost Reduction and Access Act, which 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, President Bush signed the Ensuring Continued Access to Student Loans Act of 2008, which was
designed to facilitate student loan availability and to increase student access to federal financial aid in light of
current 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
by the effective dates established in HEOA, even though the Department of Education has yet to issue
regulations to implement HEOA’s provisions. The Department of Education started the negotiated rulemaking
process for certain parts of HEOA by holding a series of public meetings in September and October of 2008.
The Higher Education Act requires negotiated rulemaking for the development of all regulations implementing
statutory changes to Title IV of the Higher Education Act, which contains the federal student financial
assistance programs. The Department of Education recently established five negotiated rulemaking committees
and has published tentative negotiation schedules that began in February 2009. The Department of Education
has explained that where negotiated rulemaking is not required, HEOA’s provisions will be implemented either
through the usual notice and comment processor, where regulations will merely reflect the changes to the
Higher Education Act and not expand upon those changes, as technical changes. We cannot predict how the
Department of Education will interpret HEOA’s provisions through rulemaking or otherwise. If our efforts to
comply with HEOA’s provisions are inconsistent with how the Department of Education interprets those
provisions in final regulations or otherwise, 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 noncom-
pliance 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.
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Eligibility and Certification Procedures. 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 have recently undergone
a change in ownership and control.
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.
See “Regulatory Actions and Restrictions on Operations” for more information.
Distance Learning and Repeal of the “50% Rules”. We offer all of our existing degree, diploma and
certificate programs via Internet-based telecommunications from our headquarters in Charles Town, West
Virginia.
Prior to passage of HERA, as part of the Deficit Reduction Act of 2005, the Higher Education Act
generally excluded from Title IV programs institutions at which (1) more than 50% of the institution’s courses
were offered via correspondence methods, which included online courses under certain circumstances, or
(2) 50% or more of the institution’s students were enrolled in courses delivered via correspondence methods,
which included online courses under certain circumstances (i.e., the “50% Rules”). Because 100% of our
courses are online courses, the 50% Rule regarding online courses previously disqualified us from participation
in Title IV programs.
As part of the 1998 amendments to the Higher Education Act, the Department of Education was
authorized to waive specific statutory and regulatory requirements in order to assess the viability of online
educational offerings. Under the Distance Education Demonstration Program, or Demonstration Program,
institutions were allowed to seek waivers of certain regulatory provisions that inhibited the offering of distance
education programs, including the 50% Rules. Participation in the Demonstration Program included regular
submissions of data to the Department of Education. Only institutions that were accredited by accrediting
agencies recognized by the Secretary of Education for purposes of participation in Title IV programs were
allowed to participate in the Demonstration Program. We were not eligible to participate in the Demonstration
Program, because at the time the Department of Education was accepting applicants we were accredited
exclusively by the Distance Education and Training Council, whose accrediting authority at that time did not
extend to Title IV programs.
Effective July 1, 2006, the 50% Rules were repealed for telecommunications courses (which include
online courses) as part of HERA, but remain in place for traditional correspondence courses. Accordingly,
online institutions such as us, which offer their courses exclusively through telecommunications, are no longer
subject to the 50% Rules. Following passage of HERA, the Department of Education also terminated the
Demonstration Program effective as of June 30, 2006.
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. At this
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time we cannot predict with certainty how our accreditors will interpret this provision for purposes of their
own requirements and whether such interpretation will impact our operations.
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:
(cid:129) comply with all applicable Title IV program regulations;
(cid:129) have capable and sufficient personnel to administer Title IV programs;
(cid:129) have acceptable methods of defining and measuring the satisfactory academic progress of its students;
(cid:129) not have cohort default rates above specified levels;
(cid:129) have various procedures in place for safeguarding federal funds;
(cid:129) 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;
(cid:129) provide financial aid counseling to its students;
(cid:129) 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;
(cid:129) submit in a timely manner all reports and financial statements required by the regulations; and
(cid:129) not otherwise appear to lack administrative capability.
If an institution fails to satisfy any of these criteria or any other Department of Education regulation, the
Department of Education may:
(cid:129) require the repayment of Title IV funds;
(cid:129) transfer the institution from the “advance” system of payment of Title IV funds to cash monitoring
status or to the “reimbursement” system of payment;
(cid:129) place the institution on provisional certification status; or
(cid:129) 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 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 such as us must satisfy in order to participate in
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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, 2008, 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:
(cid:129) 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;
(cid:129) 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 “reimburse-
ment” system of payment or cash monitoring; or
(cid:129) 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.
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
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program funds for 5% or more of students sampled in the institution’s annual compliance audit constitutes
material noncompliance.
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, on a cash accounting basis, more than
90% of its revenues for any fiscal year from Title IV funds. 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 it exceeded 90%, 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 generally codifies the formula
for 90/10 Rule calculations as set forth in current 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 revenue for 90/10 Rule purposes. HEOA’s changes to the 90/10 Rule are effective
upon enactment, which occurred on August 14, 2008.
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. Because we have begun only recently to enroll students who are participating in the federal
student loan programs, we have no historical cohort default rate. 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 modified the Higher Education Act’s cohort default rate provisions related to FFEL program loans
and Direct Loan Program loans. Beginning with cohort default rate calculations for federal fiscal year 2009,
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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, effective as of federal fiscal year 2012, the cohort default rate threshold of 25% will
be increased to 30%. 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 Title IV
programs. 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 that 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. An
institution whose cohort default rate is 30% or more for any two consecutive federal fiscal years may file an
appeal to demonstrate exceptional mitigating circumstances and, if the Secretary of Education determines that
the institution demonstrated such circumstances, the Secretary may not subject the institution to provisional
certification based solely on the institution’s cohort default rate. At this time, we cannot predict the effect that
this change may have on our ability to meet cohort default rate standards.
Incentive Compensation 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 compensation 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 compensation 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.
Preferred Lender Lists. The Department of Education recently published regulations, effective July 1,
2008, that in part address institutions’ student loan activity. In particular, the Department of Education’s
regulations establish new rules applicable to institutions that make available a list of recommended or
suggested lenders for use by potential borrowers. For example, an institution must include at least three
unaffiliated lenders on a list, must disclose the method and criteria used to select lenders, must provide
comparative information about benefits offered by listed lenders, must include a “prominent statement” that
borrowers may select a lender not on the list, and must update the list and accompanying information at least
annually.
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Under HEOA, institutions that receive any federal funding and enter into preferred lender arrangements
must comply with certain requirements related to development and disclosure of preferred lender list. Such
institutions must submit annual reports to the Department of Education that explain, among other matters, why
the institution has a preferred lender arrangement. Such institution also must publish a code of conduct with
certain specified provisions. If the institution participates in Title IV programs, the institution’s preferred
lender list must satisfy certain requirements, many of which are included in current Department of Education
regulations. In addition, HEOA requires an institution to exercise a duty of care and a duty of loyalty to
compile a preferred lender list without prejudice and for the sole benefit of students at the institution and their
families. The list must cover the institution’s preferred lender arrangements related to federal and private
loans. Institutions with preferred lenders also must make certain disclosures — based on information provided
annually by the lender to the institution — for each type of loan offered under a preferred lender arrangement.
Failure to comply with preferred lender list rules under the Higher Education Act or the Department of
Education’s regulations could result in termination of participation in Title IV programs, limitations on
participation in federal student financial aid programs, or financial penalties.
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’ administra-
tion 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 responsibil-
ity, 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
27
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.
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
28
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 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 appropriate-
ness 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.
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
29
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 funds affiliated
with ABS Capital Partners recently 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 require-
ments. 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.
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
30
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.
ITEM 1A. RISK FACTORS
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 Discus-
sion 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.
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 73% from $40.0 million in 2006 to $69.1 million in 2007, and it increased 55%
from $69.1 million in 2007 to $107.1 million in 2008, 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 $16.2 million in 2008 from $8.8 million
in 2007. The rate of revenue growth from 2007 to 2008 was at a lower pace than the rate of growth from 2006
to 2007. As our revenue base grows, we expect our growth rate percentages 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
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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 65% of our net
course registrations for 2008, 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.
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
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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 2008, 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:
(cid:129) the emergence of more successful competitors;
(cid:129) factors related to our marketing, including the costs of Internet advertising and broad-based branding
campaigns;
(cid:129) performance problems with our online systems;
(cid:129) failure to maintain accreditation;
(cid:129) student dissatisfaction with our services and programs;
(cid:129) failure to develop a message or image that resonates well within non-military sectors of the market;
(cid:129) adverse publicity regarding us, our competitors or online or for-profit education generally;
(cid:129) adverse developments in our relationship with military educational service officers;
(cid:129) a decline in the acceptance of online education; and
(cid:129) a decrease in the perceived or actual economic benefits that students derive from our programs.
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.
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
33
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 use third party software for our online classroom, and if the provider of that software were to cease to
do business or was acquired by a competitor, we may have difficulty maintaining the software required
for our online classroom or updating it for future technological changes, which could adversely affect
our performance.
Our online classroom employs the EducatorTM 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 rely
on Ucompass for ongoing support and customization and integration of the Educator system with the rest of
our technology infrastructure. 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. Any failure to maintain our online classroom would have an adverse
impact on our operations, damage 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 technol-
ogy 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.
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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. Except for the employment agreements we have with Mr. Boston, Dr. McCluskey and
Mr. Wilkins, we do not have employment agreements with any 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 faculty, administrators, management and skilled personnel, our
business and growth prospects could be severely harmed.
To execute our growth strategy, we must attract and retain highly qualified faculty, administrators,
management and skilled personnel. Competition for hiring these individuals is intense, especially with regard
to faculty in specialized areas. If we fail to attract new skilled personnel or faculty or fail to retain and
motivate our existing faculty, administrators, management and skilled personnel, our business and growth
prospects could be severely harmed.
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.
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.
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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 abil-
ity to grow or otherwise have a material adverse effect on our business.
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
36
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 responsibil-
ities, 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 administra-
tive 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
37
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 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 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.
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 2008, we derived approximately 65% of our
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.
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We have only recently begun to participate in Title IV programs, 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 to no 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 bound-
aries. 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 are currently reviewing the licensure requirements of other states to determine whether our activities in
these states constitute a presence or otherwise require licensure or authorization by the respective state
39
education agencies, and we have, and are in the process of seeking, licensure or authorization in additional
states. 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, state laws and regulations 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.
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. 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.
40
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 informed us that it plans to conduct a focused evaluation
in Spring 2009 as its policies require it to do as a result of a change of the type we experienced 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.
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 investiga-
tions 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.
41
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, President Bush signed into law the Higher Education Opportunity Act, or
HEOA, which reauthorizes the Higher Education Act. Additionally, Congress reviews and determines appropri-
ations for Title IV programs on an annual basis through the budget and appropriations process. We cannot
predict with certainty the effect HEOA will have on our business. Further, many of the provisions of HEOA are
effective upon enactment, even though the Department of Education has not yet promulgated regulations related
to such provisions. If our efforts to comply with the provisions of HEOA are inconsistent with how the
Department of Education interprets those provisions in final regulations or otherwise, 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. Further, President Bush
signed three major laws that amend the Higher Education Act. Among other measures, those laws reauthorize
the federal student loan programs, reduce interest rates on certain federal student loans, reduce government
subsidies to lenders that participate in federal student loan programs, and seek to facilitate student loan
availability in light of current market conditions. 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.
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. The
Department of Education recently promulgated regulations, generally effective July 1, 2008, that in part
address institutions’ student loan activity. In particular, the Department of Education’s regulations clarify and
expand rules pertinent to relationships between institutions and lenders and establish new rules applicable to
institutions that make available a list of recommended or suggested lenders for use by 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.
42
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 require-
ments 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.
43
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 recently became eligible to participate in Title IV programs, 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 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, effective as of federal fiscal
year 2012, the cohort default rate threshold of 25% will be increased to 30%. HEOA also requires certain
default prevention action by an institution with a default rate of 30% or more. Because we have begun only
recently to enroll students who are participating in these federal student loan programs, we have no historical
cohort default rates. 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
44
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:
(cid:129) price and volume fluctuations in the overall stock market from time to time;
(cid:129) significant volatility in the market price and trading volume of comparable companies;
(cid:129) 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;
(cid:129) the actual, anticipated or perceived impact of changes in government policies, laws and regulations, or
similar changes made by accrediting bodies;
(cid:129) the depth and liquidity of the market for our common stock;
(cid:129) general economic conditions and trends;
(cid:129) catastrophic events;
(cid:129) sales of large blocks of our stock; or
(cid:129) recruitment or departure of key personnel.
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.
We are incurring significant costs as a result of operating as a public company that we have not previ-
ously incurred, and our management and key employees are, and will continue to be, required to devote
substantial time to compliance initiatives.
We have operated as a public company only since November 8, 2007. As a public company, we incur
significant legal, accounting and other expenses that we did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC and The NASDAQ Stock Market
have imposed various new requirements on public companies, including with respect to public disclosure,
internal control, corporate governance practices and other matters. Our management and other personnel are
devoting substantial amounts of time to these new compliance initiatives. Moreover, these rules and regulations
have significantly increased our legal and financial compliance costs and have made some activities more
time-consuming and costly. In addition, we have and will continue to incur additional costs associated with
our public company reporting requirements. We will incur significant costs to remediate any material
weaknesses we identify through these efforts. These rules and regulations have made it more difficult and
more expensive for us to obtain director and officer liability insurance. We currently are evaluating and
monitoring developments with respect to these rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs. If our profitability is adversely affected because of
these additional costs, it could have a negative effect on the trading price of our common stock.
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
45
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 we fail to maintain proper and effective disclosure controls and procedures and internal controls over
financial reporting, our ability to produce accurate financial statements could be impaired, which could
adversely affect our stock price, our ability to operate our business and investors’ views of us.
Ensuring that we have adequate disclosure controls and procedures, including internal controls over
financial reporting, in place so that we can produce accurate financial statements on a timely basis is a costly
and time-consuming effort that needs to be re-evaluated frequently. We are continuing the process of
documenting, reviewing and, if appropriate, improving our internal controls and procedures following our
becoming a public company and we have just become subject to the requirements of Section 404 of the
Sarbanes-Oxley Act for the first time for the year ended December 31, 2008. Section 404 requires annual
management assessments of the effectiveness of our internal controls over financial reporting and a report by
our independent auditors addressing these assessments. Failure to maintain effective internal controls could
lead to a lack of confidence by investors in our reported results, a decline in our stock price and significant
costs to remediate the situation.
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:
(cid:129) 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;
(cid:129) 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;
(cid:129) a prohibition against stockholder action by means of written consent unless otherwise approved by our
board of directors in advance; and
(cid:129) 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. However, because funds affiliated with ABS Capital
Partners acquired their shares prior to our initial public offering, Section 203 is currently inapplicable
to any business combination or transaction with it or its affiliates.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
46
ITEM 2. PROPERTIES
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 nine downtown facilities totaling approximately 58,000 square feet. The student services and
marketing operations are located in Manassas in facilities totaling approximately 49,000 square feet. All
facilities are leased with the exception of the Academic Center, Corporate/Finance Offices, Technology Center
and a small guest and conference center. Lease terms vary by facility, with termination dates ranging from
2009 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. 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, 2007
Low
High
Fourth Quarter (November 9, 2007 — December 31, 2007) . . . . . . . . . . . . . . . . . $29.23
$46.98
Year Ended December 31, 2008
First Quarter 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27.56
Second Quarter 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29.51
Third Quarter 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34.53
Fourth Quarter 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33.00
$44.94
$41.36
$53.24
$49.96
Holders
As of March 6, 2009, there were approximately 363 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 indebted-
ness and other factors deemed relevant by our board.
47
Performance Graph
The graph below matches American Public Education, Inc.’s cumulative 14-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 12/31/2008.
COMPARISON OF 14 MONTH CUMULATIVE TOTAL RETURN*
Among American Public Education, Inc., The S&P 500 Index,
The NASDAQ Composite Index And A Peer Group
$160
$140
$120
$100
$80
$60
$40
$20
$0
11/9/07
11/07
12/07
1/08
2/08
3/08
4/08
5/08
6/08
7/08
8/08
9/08
10/08
11/08
12/08
American Public Education, Inc.
S&P 500
NASDAQ Composite
Peer Group
* $100 invested on 11/6/07 in stock & 10/31/07 in index-including reinvestment of dividends.
Fiscal year ending December 31.
Copyright · 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
11/07 11/07 12/07
1/08
2/08 3/08 4/08
5/08
6/08
7/08
8/08
9/08
10/08 11/08 12/08
American Public Education, Inc.
S&P 500 . . . . . . . . . . . . . . . . . . . . . 100.00 95.82 95.15
NASDAQ Composite . . . . . . . . . . . . . 100.00 92.82 92.28
Peer Group . . . . . . . . . . . . . . . . . . . 100.00 95.18 85.08
. . . . . 100.00 117.79 116.31 109.72 92.79 84.55 89.67 103.26 108.69 126.48 124.44 134.41 123.25 110.13 103.54
59.32 59.32
52.19 53.76
91.78 90.95
89.45 86.54 86.17 90.36
82.95 79.32 79.30 84.09
88.95 67.97 55.46 72.66
91.53 83.82 83.11
87.90 80.11 80.07
71.00 68.29 82.23
84.31 76.80 63.90
81.16 71.09 58.29
80.42 75.47 84.66
Recent Sales of Unregistered Securities
None.
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 quarter
ended December 31, 2008, the Company accepted for forfeiture 6,419 shares of restricted stock for satisfaction
of $295,000 in minimum statutory tax withholding.
48
ITEM 6. 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, 2008, and the selected
consolidated balance sheet data as of December 31, 2008 and 2007, 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, 2005 and 2004, and
selected consolidated balance sheet data as of December 31, 2006, 2005 and 2004, 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.
Statement of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and expenses:
Instructional costs and services . . . . . . . . . . . . . . . . . .
Selling and promotional . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . .
Write-off of software development project(1) . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before interest
income and income taxes . . . . . . . . . . . . . . . . . . . . . .
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations. . . . . . . . . . . . . . . . .
Preferred stock charge and accretion . . . . . . . . . . . . . . . .
Income (loss) from continuing operations attributable to
Year Ended December 31,
2004
2006
(In thousands, except per share and net registration data)
2008
2007
2005
$23,119 $ 28,178
$40,045 $69,095
$107,147
10,944
2,206
5,737
—
674
19,561
13,247
4,043
7,364
17,959
4,895
9,150
— 3,148
1,953
37,105
1,300
25,954
29,479
6,765
15,335
—
2,825
54,404
3,558
56
2,224
225
2,940
289
14,691
888
3,614
1,327
2,287
(1,085)
2,449
1,061
1,388
(12,985)
3,229
771
2,458
—
15,579
6,829
8,750
—
43,561
12,361
21,302
—
4,235
81,459
25,688
706
26,394
10,207
16,187
—
common stockholders . . . . . . . . . . . . . . . . . . . . . . . . .
1,202
(11,597)
2,458
8,750
16,187
Loss from discontinued operations, net of income tax
benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to common stockholders . .
Income (loss) from continuing operations per common
share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to common stockholders
per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Data:
Net cash provided by operating activities . . . . . . . . . . . .
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation(2)
. . . . . . . . . . . . . . . . . . . . .
Net course registrations(3). . . . . . . . . . . . . . . . . . . . . . . .
49
—
—
$ 1,202 $(11,900) $ 1,798 $ 8,750 $ 16,187
(303)
(660)
—
$ 0.22 $
$ 0.22 $
(1.44) $ 0.21 $
(1.44) $ 0.20 $
0.69 $
0.64 $
0.91
0.86
$ 0.22 $
$ 0.22 $
(1.48) $ 0.15 $
(1.48) $ 0.15 $
0.69 $
0.64 $
0.91
0.86
5,386
5,407
8,055
8,055
11,741
12,178
12,759
13,601
17,840
18,822
$ 4,546 $ 3,660
$ 2,612 $ 4,613
0 $ 1,198
$
37,506
32,558
$ 8,929 $17,517
$ 29,757
$ 4,475 $ 6,827 $ 10,009
$
1,674
284
147,124
54,828
$ 1,033 $
94,846
2004
2005
As of December 31,
2006
(In thousands)
2007
2008
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
Working capital(4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total redeemable preferred stock . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,250
$ 7,197
$18,223
$11,339
738
$
$11,678
$10,412
$28,750
$47,714
$ 5,511
$36,357
$ 5,741
$22,444
$78,813
$ — $ — $ — $ —
$53,475
$14,539
$26,951
$21,433
$48,980
$33,507
$16,821
As of December 31,
2004
2005
2006
2007
2008
(In thousands)
Income from continuing operations . . . . . . . . . . . . . . . . . $2,287
(56)
Interest (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,327
674
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
EBITDA from continuing operations . . . . . . . . . . . . . . . . $4,232
$1,388
(225)
1,061
1,300
$3,524
$2,458
(289)
771
1,953
$4,893
$ 8,750
(888)
6,829
2,825
$17,516
$16,187
(706)
10,207
4,235
$29,923
(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, 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-Account-
ing 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.
50
ITEM 7. 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 directed at the needs of
the military and public service communities. We operate through two universities, American Military
University, or AMU, and American Public University, or APU, which together constitute the American Public
University System.
Our course enrollments, or net course registrations, representing the aggregate number of classes in which
students remain enrolled after the date by which they may drop the course without financial penalty, increased
at a compound annual growth rate (CAGR) of 64% from 2006 to 2008. Over that same time, total revenue
increased at a CAGR of 64%, from $40.0 million in 2006 to $107.1 million in 2008. We believe achieving
regional accreditation in May 2006 and gaining access to Title IV programs beginning with classes that started
in November 2006 have been additional factors driving growth. 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. Net course
registrations increased by 73% in 2007 over 2006, our revenue increased from $40.0 million to $69.1 million,
or by 73%, over the same time period and operating margins increased to 21.3% from 7.2% over the same
time period. 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 2007 to
2008 were all lower than our rate of growth from 2006 to 2007. We do not expect to return to the levels of
growth that we had from 2006 to 2007, when we had a particularly strong growth rate, which we think is
largely as a result of our receipt of regional accreditation in late 2006.
Our difficulty in forecasting future growth rates and operating margins is in part due to our inability to
fully estimate the actual impact of gaining access to Title IV programs. We first became eligible to use Title IV
funds beginning with classes that started in November 2006. For the year ended December 31, 2008, 13.9% of
our net course registrations were from students using financial aid under Title IV programs. Because of our
limited history with Title IV programs and because we cannot estimate the growth of new students that may
result from our participation in Title IV programs, 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 initial national accreditation by the Accrediting Commission of the Distance
Education and Training Council, or DETC, in 1995, American Military University began offering undergrad-
uate 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
51
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 regional accreditation in May 2006 with The
Higher Learning Commission of the North Central Association of Colleges and Schools and became eligible
for federal student aid programs under Title IV for classes beginning in November 2006. In September 2007,
we received approval from The Higher Learning Commission to offer seven new degree programs in Education
and Information Technology.
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 financial penalty. 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.
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. Other than a
modest increase in 2007 for graduate tuition, we have not raised tuition since 2000. 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), 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.
52
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 $3,600 when compared to a 2005 estimate by the General Accounting Office of average
textbook costs for a first-time, full-time student at four-year public universities for the 2003-2004 academic
year. 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.
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 relating to being a public company with cash provided by operating activities and cash on hand.
A significant portion of the costs and expenses in 2008 related to our preparation for our first year subject to
Section 404 of the Sarbanes-Oxley Act, and we expect those costs to be lower in future years.
53
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, Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor (EITF 02-16), 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.
54
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, 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. 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, 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), 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
55
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 September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defines and establishes a framework for measuring fair value. In
addition, SFAS 157 expands disclosures about fair value measurements. In February 2009, FASB issued FASB
Staff Position No. (FSP),157-2 deferring the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. In
April, 2008, FASB issued FASB Staff Position No. (FSP) 142-3, Determination of the Useful Life of
Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets. The FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. FSP 142-3 and FSP 157-2 are effective
for the Company on January 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141, (revised
2007), Business Combinations (“SFAS 141R”). The Statement establishes revised principles and requirements
for how the company will recognize and measure assets and liabilities acquired in a business combination. The
Statement is effective for business combinations completed on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. In addition, in December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and
reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 requires non-controlling interests or minority interests to be treated as a separate component of
equity and any changes in the parent’s ownership interest (in which control is retained) are to be accounted for
as equity transactions. However, a change in ownership of a consolidated subsidiary that results in
deconsolidation triggers gain or loss recognition, with the establishment of a new fair value basis in any
remaining non-controlling ownership interests. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the non-controlling interests. SFAS 141R and
160 are effective for us on January 1, 2009.
The adoption of the above standards is not expected to have a material impact on our financial
statements.
56
Results of Operations
The following table sets forth statements of operations data as a percentage of revenues for each of the
periods indicated:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and expenses:
2006
2007
2008
100.0% 100.0% 100.0%
Instructional costs and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling and promotional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of software development project . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44.9% 42.6% 40.7%
9.8% 11.5%
12.2%
22.9% 22.2% 19.9%
7.9% —% —%
4.1% 3.9%
4.9%
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
92.8% 78.7% 76.0%
Income from continuing operations before interest income and income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.2% 21.3% 24.0%
1.3% 0.6%
0.7%
Income from continuing operations before income taxes . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.9% 22.6% 24.6%
9.9% 9.5%
1.9%
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of income tax benefit . . . . . . . . . . .
6.0% 12.7% 15.1%
(1.6)% —% —%
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.4% 12.7% 15.1%
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.
Instructional costs and services.
Instructional costs and services expenses for the year ended Decem-
ber 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.
57
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
Selling and promotional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
871
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 223
70
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.
58
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues
Revenues for the year ended December 31, 2007 were $69.1 million, an increase of 73% from
$40.0 million for year ended December 31, 2006. The increase was a result of an increase in the number of
net course registrations, as well as a 10% increase in graduate tuition in 2007 that we announced in the
summer of 2006. Net course registrations increased 73% to 94,846 in 2007 from 54,828 in 2006. 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 $54.4 million for the year ended December 31, 2007, an increase of
$17.3 million, or 47%, compared to $37.1 million for prior year ended December 31, 2006. This increase was
due to the specific factors discussed below. Costs and expenses as a percentage of revenues decreased to
78.7% in 2007 from 92.8% in 2006. Similarly, our income from continuing operations before interest income
and income taxes, or our operating margin, increased to 21.3% from 7.2% 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 Decem-
ber 31, 2007 were $29.5 million, representing an increase of 64% from $18.0 million for the year ended
December 31, 2006. This increase was directly related to an increase in the number of classes offered due to
the increase in net course registrations. Instructional costs and services expense as a percentage of revenues
decreased to 42.6% in 2007 from 44.9% in 2006. This decrease was primarily due to an increase in the
average class size, which provided for a more efficient use of our full-time faculty. Full-time faculty increased
to approximately 99 at December 31, 2007 from 38 at December 31, 2006.
Selling and promotional. Selling and promotional expenses for the year ended December 31, 2007 were
$6.8 million, representing an increase of 38% from $4.9 million for the year ended December 31, 2006. This
increase was primarily due to an increase in the number of personnel in our admissions department required to
support higher student enrollments. Selling and promotional expenses as a percentage of revenues decreased to
9.8% for in 2007 from 12.2% for in 2006. This decrease was primarily due to our ability to realize advertising
efficiencies as a result of strong lead generations from personal referrals.
General and administrative. General and administrative expenses for the year ended December 31, 2007
were $15.3 million, representing an increase of 68% from $9.2 million for the year ended December 21, 2006.
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 and preparations for going public and an increase in stock-based compensation expense.
General and administrative expenses as a percentage of revenues decreased to 22.2% in 2007 from 22.9% in
2006. 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 $2.8 million for the year
ended December 31, 2007, compared with $2.0 million for the year ended December 21, 2006. This represents
an increase of 45%. 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, 2007 was
$1.0 million in the aggregate, representing an increase of 263% from $284,000 the year ended December 21,
2006. The increase in stock-based compensation expense is primarily attributable to an increase in new stock
option grants.
59
The table below reflects our stock-based compensation expense recognized in the consolidated statements
of operations for the year ended December 31, 2006 and 2007 (in thousands):
Year Ended
December 31,
2007
2006
Instructional costs and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77
Selling and promotional. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
191
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 113
49
871
Total stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $191
$1,033
Net Interest Income
Net interest income was $888,000 for the year ended December 31, 2007, representing an increase of
207% from $289,000 for the year ended December 31, 2006. This is attributable to increased cash flow from
operations resulting in investment income on higher cash balances.
Income Tax Expense
We recognized tax expense from continuing operations for the year ended December 31, 2007 and 2006
of $6.8 million and $771,000, respectively, or effective tax rates of 43.8% and 23.9%, respectively. The
increase in income tax expense and the related effective tax rate, was directly attributable to higher pre-tax
profits and the elimination of research and development credits associated with internal software development.
Net Income
Net income was $8.8 million for the year ended December 31, 2007, compared to net income of
$1.8 million for the year ended December 31, 2006, an increase of $7.0 million. This increase was related to
the factors discussed above and a reduction in our loss from discontinued operations of $660,000 and a
$3.1 million write-off of a software development project in 2006.
60
Quarterly Results
The following table presents our unaudited quarterly results of operations for each of our eight last
quarters ended December 31, 2008. 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.
March 31,
2007
June 30,
2007
September 30,
2007
Quarter Ended
March 31,
2008
December 31,
2007
(Dollars in thousands)
(Unaudited)
June 30,
2008
September 30,
2008
December 31,
2008
$17,612
$21,221
$23,241 $24,999
$27,404
$31,503
Statement of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . $14,089 $16,173
Costs and expenses:
Instructional costs and services . . .
Selling and promotional . . . . . . . .
General and administrative . . . . . .
Depreciation and amortization . . .
6,105
1,439
3,236
618
6,886
1,449
3,837
705
7,708
1,946
3,695
685
8,780
1,931
4,567
817
9,912
2,177
4,803
898
10,521
2,613
5,072
1,031
Total costs and expenses . . . . . . .
11,398
12,877
14,034
16,095
17,790
19,237
Income from operations before
taxes . . . . . . . . . . . . . . . . . . .
Interest income, net . . . . . . . . . . .
Income before income taxes . . . . .
Income tax expense . . . . . . . . . . .
2,691
144
2,835
1,301
3,296
194
3,490
1,454
3,578
257
3,835
1,613
5,126
293
5,419
2,461
5,451
242
5,693
2,288
5,762
196
5,958
2,033
10,901
3,600
5,586
1,114
21,201
6,203
181
6,384
2,568
12,227
3,971
5,841
1,192
23,231
8,272
87
8,359
3,318
Net income . . . . . . . . . . . . . . . . . $ 1,534 $ 2,036
$ 2,222
$ 2,958
$ 3,405 $ 3,925
$ 3,816
$ 5,041
Other Data:
Stock-based compensation . . . . . . $
Net cash provided by operating
502 $
116
$
136
$
279
$
377 $
469
$
396
$
432
activities . . . . . . . . . . . . . . . . . $ 4,575 $ 5,386
932
20,923
Capital expenditures . . . . . . . . . . $
Net course registrations . . . . . . . .
20,798
838 $
$ 4,539
$ 1,719
25,291
$ 3,017
$ 3,338
27,834
$ 6,979 $ 4,973
$ 2,193 $ 2,437
33,261
33,091
$ 7,832
$ 1,917
38,926
$ 9,973
$ 3,462
41,846
Liquidity and Capital Resources
We financed our operating activities and capital expenditures during the years ended December 31, 2008
and 2007 primarily through cash provided by operating activities. Cash and cash equivalents were $47.7 million
and $27.0 million at December 31, 2008 and 2007, 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.
We have available to us a line of credit with a maximum borrowing amount of up to $5.0 million. The
line bears interest at LIBOR plus 200 basis points (2.1% at December 31, 2008). The line is secured by
substantially all of our assets. We have never borrowed under this line of credit facility.
In 2006, we borrowed $893,000 and $1.1 million under two mortgage notes. Both notes required interest
at LIBOR plus 225 basis points (7.6% at December 31, 2006), and were secured by real estate in Charles
Town, West Virginia. Payment was due in full on September 1, 2011. These notes were subsequently paid off
in April 2007.
61
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 $29.8 million, $17.5 million and $8.9 million for the years
ended December 31, 2008, 2007 and 2006, respectively.
Investing Activities
Net cash used in investing activities was $10.9 million, $7.2 million and $4.9 million for the years ended
December 31, 2008, 2007, and 2006 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.
Financing Activities
Net cash provided by financing activities was $1.9 million, $4.9 million, and $2.2 million for the years
ended December 31, 2008, 2007 and 2006, respectively. The decline is a result of a reduction in stock issued
for cash. On November 8, 2007, the Company declared a special distribution in the amount of $93.8 million
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.
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 $93.8 million as a special distribution to our shareholders prior to 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, 2008.
Payments Due by Period
Total
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
Operating lease obligations . . . . . . . . . . . . . $5,713
$1,039
Total contractual obligations . . . . . . . . . . . . $5,713
$1,039
$1,893
$1,893
$1,805
$1,805
$976
$976
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, 2006, 2007 or 2008. 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 tuition rates,
however our costs do continually increase with inflation.
62
ITEM 7A. 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, 2008.
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, 2008, 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.
63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
American Public Education, Inc. and Subsidiary
American Public Education, Inc. and Subsidiary:
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006. . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007 and
2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
65
66
67
68
69
70
64
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, 2008 and 2007, and the related consolidated statements of income, stockhold-
ers’ equity, and cash flows for each of the three years in the period ended December 31, 2008. 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, 2008 and 2007,
and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2008, 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, 2008, based on criteria established in Internal Control–Integrated Framework Issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2009
expressed and unqualified opinion on the effectiveness of American Public Education, Inc. and Subsidiary’s
internal control over financial reporting.
Vienna, Virginia
March 10, 2009
/s/ McGladrey & Pullen, LLP
65
AMERICAN PUBLIC EDUCATION, INC.
Consolidated Balance Sheets
As of
December 31,
2007
2008
(In thousands, except per
share amounts)
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,951
4,896
Accounts receivable, net of allowance of $385 in 2007 and $537 in 2008 . . . . . . . .
1,596
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,089
Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
309
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,841
13,364
775
$ 47,714
6,188
2,156
1,306
640
58,004
19,622
1,187
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,980
$ 78,813
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and student deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,471
2,770
1,553
6,614
13,408
2,065
15,473
$
4,946
5,250
1,825
9,626
21,647
3,691
25,338
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; 18,030 issued and
18,023 outstanding in 2008; 17,688 issued and outstanding in 2007 . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cost of 6 shares of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
177
128,005
—
(94,675)
180
132,078
(295)
(78,488)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,507
53,475
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,980
$ 78,813
The accompanying notes are an integral part of these consolidated statements.
66
AMERICAN PUBLIC EDUCATION, INC.
Consolidated Statements of Income
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,045
Year Ended December 31,
2007
2008
2006
(In thousands, except per share
amounts)
$69,095
$107,147
Costs and expenses:
Instructional costs and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling and promotional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of software development project . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,959
4,895
9,150
3,148
1,953
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,105
Income from continuing operations before interest income and income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of income tax benefit of $314 in
2,940
289
3,229
771
2,458
29,479
6,765
15,335
—
2,825
54,404
14,691
888
15,579
6,829
8,750
43,561
12,361
21,302
—
4,235
81,459
25,688
706
26,394
10,207
16,187
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(660)
—
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,798
$ 8,750
$ 16,187
Income from continuing operations per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.21
0.20
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.15
0.15
Weighted average number of shares outstanding:
$
$
$
$
0.69
0.64
0.69
0.64
$
$
$
$
0.91
0.86
0.91
0.86
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,741
12,178
12,759
13,601
17,840
18,822
The accompanying notes are an integral part of these consolidated statements.
67
AMERICAN PUBLIC EDUCATION, INC.
Consolidated Statement of Stockholders’ Equity
Class A
Common Stock
Shares Amount
Common Stock
Shares Amount Shares Amount
Treasury
Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
(In thousands, except shares)
Balance at December 31, 2005. . . 9,256,258
—
Stock issued for cash . . . . . . . . .
$ 93
—
2,420,242
122,100
$ 24
1
— $ — $ 25,895
199
—
—
$(11,473)
—
$ 14,539
200
Stock-based compensation . . . . .
Net income . . . . . . . . . . . . . . .
—
—
Balance at December 31, 2006. . . 9,256,258
—
—
93
—
—
2,542,342
Conversion of classs A shares . . . (9,256,258)
(93)
9,256,258
Stock issued in initial public
offering, net of issuance costs . .
—
— 5,390,625
—
—
25
93
54
—
—
—
—
—
509,727
5
(11,000) —
—
—
—
—
—
—
— 17,687,952
177
—
—
—
—
—
—
—
—
—
—
284
—
—
1,798
26,378
(9,675)
—
98,195
—
—
284
1,798
16,821
—
98,249
1,682
(55)
1,033
772
—
(93,750)
—
(93,750)
1,687
—
—
—
8,750
(55)
1,033
772
8,750
— $128,005
(94,675)
33,507
—
—
—
—
—
—
—
—
—
—
—
—
—
—
40,000
296,919
4,872
3
—
—
—
—
—
—
—
—
— (6,419)
(295)
—
—
—
—
—
—
—
—
—
220
547
196
—
1,674
1,436
—
—
—
—
—
—
—
16,187
220
550
196
(295)
1,674
1,436
16,187
—
—
—
—
—
Special distribution to
stockholders from initial public
offering proceeds . . . . . . . . . .
Stock issued for cash . . . . . . . . .
Stock repurchased from
shareholder . . . . . . . . . . . . . .
Stock-based compensation . . . . .
Excess tax benefit from stock
based compensation . . . . . . . .
Net income . . . . . . . . . . . . . . .
Balance at December 31, 2007. . .
Stock issued in public offerings,
net of issuance costs . . . . . . . .
Stock issued for cash . . . . . . . . .
Stock issued for director
compensation . . . . . . . . . . . .
Restricted stock repurchased from
stockholders . . . . . . . . . . . . .
Stock-based compensation . . . . .
Excess tax benefit from stock
based compensation . . . . . . . .
Net income . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2008. . .
— $ — 18,029,743
$180
(6,419) $(295)
$132,078
$(78,488)
$ 53,475
The accompanying notes are an integral part of these consolidated statements.
68
AMERICAN PUBLIC EDUCATION, INC.
Consolidated Statements of Cash Flows
Year Ended December 31,
2006
2008
2007
(In thousands)
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,798 $ 8,750 $ 16,187
Add: (Loss) from discontinued operations, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
16,187
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities
(660)
2,458
—
8,750
Provision for bad debts/(decrease) in allowance for doubtful accounts . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on write-off of software project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock issued for director compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
(307)
1,953
3,148
284
—
(599)
121
2,825
—
1,033
—
618
152
4,235
—
1,674
196
1,295
(989)
(324)
589
390
814
525
1,069
9,011
(82)
8,929
(1,443)
(560)
(217)
2,474
2,479
273
3,012
29,757
—
29,757
430
(739)
(410)
969
561
596
2,763
17,517
—
17,517
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and student deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities from continuing operations . . . . . . . . . .
Net cash used in operating activities from discontinued operations . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized program development costs and other assets. . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities
—
Borrowing on long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(295)
Cash paid for repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
770
Cash received from issuance of common stock, net of issuance costs . . . . . . . . . .
—
Cash distributed to shareholders from public offering proceeds . . . . . . . . . . . . . . .
1,436
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . .
1,911
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,763
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .
26,951
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,678 $ 26,951 $ 47,714
—
(1,973)
(55)
99,936
— (93,750)
772
—
4,930
2,172
15,273
6,167
11,678
5,511
(10,009)
(896)
(10,905)
1,980
(7)
—
199
(4,475)
(459)
(4,934)
(6,827)
(347)
(7,174)
Supplemental disclosures of cash flow information
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
52 $
56 $
—
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
384 $ 5,849 $ 8,023
The accompanying notes are an integral part of these consolidated statements.
69
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. 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 Commis-
sion 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 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.
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, 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
70
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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, 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.
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), 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, 2007 and 2008 consisted of the following:
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,842
2,772
Student deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,435
4,191
Total deferred revenue and student deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,614
$9,626
71
As of
December 31,
2007
2008
(In thousands)
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company provides scholarships to certain students to assist them financially and promote their
registration. Scholarship assistance of $397,000, $605,000, and $725,000 was provided for the years ended
December 31, 2006, 2007 and 2008, 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, 2006, 2007 and 2008 of $1,816,000, $2,913,000 and $6,405,000, 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, 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.
The following amounts of stock-based compensation have been included in the operating expense line-
items indicated:
Instructional costs and services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling and promotional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
Year Ended December 31,
2007
2008
(In thousands)
$ 113
49
871
$ 223
70
1,381
$ 77
16
191
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . .
$284
$1,033
$1,674
Income per common share. Basic 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, 2006, 2007 and 2008, respectively.
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 credit risk on cash and cash equivalents.
Estimates. The preparation of financial statements requires management to make estimates and assump-
tions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
72
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines and establishes a
framework for measuring fair value. In addition, SFAS 157 expands disclosures about fair value measurements.
In February 2009, FASB issued FASB Staff Position No. (FSP),157-2 deferring the effective date of SFAS 157
to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items
within the scope of this FSP. In April 2008, FASB issued FASB Staff Position No. (FSP) 142-3, Determination
of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets. The FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FSP 142-3 and
FSP 157-2 are effective for the Company on January 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141, (revised
2007), Business Combinations (“SFAS 141R”). The Statement establishes revised principles and requirements
for how the company will recognize and measure assets and liabilities acquired in a business combination. The
Statement is effective for business combinations completed on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. In addition, in December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and
reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 requires non-controlling interests or minority interests to be treated as a separate component of
equity and any changes in the parent’s ownership interest (in which control is retained) are to be accounted for
as equity transactions. However, a change in ownership of a consolidated subsidiary that results in
deconsolidation triggers gain or loss recognition, with the establishment of a new fair value basis in any
remaining non-controlling ownership interests. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the non-controlling interests. SFAS 141R and
160 are effective for the company on January 1, 2009.
The adoption of the above standards is not expected to have a material impact on the Company’s financial
statements.
73
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. Property and Equipment
Property and equipment at December 31, 2007 and 2008 consisted of the following:
Useful
Life
2007
2008
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and building improvements . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Program development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
27.5 - 39 years
life of lease
5 years
3 years
7 years
5 years
5 years
3 years
$
(In thousands)
217
3,986
550
647
3,913
930
—
9,181
486
367
6,080
1,574
976
5,413
2,218
23
12,690
969
Accumulated depreciation and amortization . . . . . . . . . . . . .
19,910
6,546
30,310
10,688
$13,364
$19,622
During the years ended December 31, 2006, 2007 and 2008, the Company recorded $1,953,000,
$2,825,000 and $4,235,000, respectively, in depreciation and amortization expense.
Note 3. Line of Credit
The Company has available a line of credit with a maximum borrowing amount of up to $5,000,000. The
line bears interest at LIBOR plus 200 basis points (2.1% at December 31, 2008 and 6.8% at December 31,
2007). The line is secured by substantially all of the assets of the University System. There were no amounts
outstanding as of December 31, 2007 and 2008, respectively.
Note 4. Operating Leases
The Company leases office space in Virginia and West Virginia under operating leases that expire
between August 2009 and March 2015. Rent expense related to these operating leases amounted to $683,000,
$791,000 and $1,248,000 for the years ended December 31, 2006, 2007 and 2008, respectively. The minimum
rental commitment under the operating leases is due as follows:
Years Ending December 31,
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$1,039
995
898
905
900
976
$5,713
74
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 5.
Income Taxes
The components of the income tax expense (benefit) for the years ended December 31, 2006, 2007 and
2008 were as follows:
Current income tax expense:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 938
117
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,899
1,312
$ 7,158
1,754
2006
2007
(In thousands)
2008
Deferred tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The tax effects of principal temporary differences are as follows:
1,055
6,211
8,912
(585)
(13)
(598)
492
126
618
1,090
205
1,295
$ 457
$6,829
$10,207
2007
2008
(In thousands)
Deferred tax assets:
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Stock option compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued vacation and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
535
247
154
145
34
$
644
509
213
198
69
1,115
1,633
Deferred tax liabilities:
Income tax deductible capitalized software development costs . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,599)
(272)
(4,335)
(349)
(2,871)
(4,684)
$(1,756)
$(3,051)
The deferred tax amounts above have been classified on the accompanying balance sheets as of
December 31, 2007 and 2008, as follows:
2007
2008
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(In thousands)
309
$
640
Non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,065)
$(3,691)
75
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
2006
Amount
%
2007
Amount
%
(In thousands)
2008
Amount
%
Tax expense at statutory rate . . . . . . . . . .
State taxes, net . . . . . . . . . . . . . . . . . . . .
Permanent differences . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 751
112
20
(426)
34.00
5.05
0.09
(19.26)
$5,453
934
184
258
35.00
6.00
1.18
1.65
$ 9,238
1,273
138
(442)
35.00
4.82
0.53
(1.67)
$ 457
19.88
$6,829
43.83
$10,207
38.68
Permanent differences in the table above are mainly attributable to nondeductible stock-based compensa-
tion 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). 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.
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 2005-2008 remain open to examination. Currently, no examina-
tions are open 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 $400,000, $623,000, and $843,000 for the years
ended December 31, 2006, 2007 and 2008, 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
76
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2008 were as follows:
Purchase Date
September 30, 2008 . . . . . . . . . . . . . . . . . .
December 31, 2008 . . . . . . . . . . . . . . . . . . .
Shares
1,656
2,418
Total/Weighted Average. . . . . . . . . . . . . . . .
4,074
Common Stock
Fair Value
Purchase Price
Compensation
Expense
$48.28
$37.19
$41.70
$41.03
$31.61
$35.44
$12,006
$13,492
$25,498
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.
On August 3, 2007, the Board of Directors adopted the American Public Education, Inc. 2007 Omnibus
Incentive Plan (the “new equity plan”), and its stockholders approved the new equity plan on November 6,
2007. The new equity plan was effective as of August 3, 2007. 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,
77
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
On January 1, 2006, the Company adopted the provisions of FASB Statement No. 123R — Share Based
Payment, a revision of FASB Statement No. 123 — Accounting for Stock Based Compensation (“SFAS 123R”).
This standard requires companies to recognize the expense related to the fair value of their stock-based
compensation awards. The Company elected to use the modified prospective approach to transition to
SFAS 123R, as allowed under the statement; therefore, the Company has not restated financial results for prior
periods.
For the years ended December 31, 2006, 2007 and 2008, the Company recognized $284,000, $1,033,000
and $1,674,000 in stock-based compensation expense as required under SFAS 123R and a total income tax
benefit of $57,000, $198,000 and $575,000, 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 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
78
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
2006
2007
2008
Expected volatility . . . . . . . . . . . . . . . . . . . . .
Expected dividends . . . . . . . . . . . . . . . . . . . . .
Expected term, in years . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . 4.61%-5.01%
Weighted-average fair value of options granted
during the year . . . . . . . . . . . . . . . . . . . . . .
45.60%
0.00%
6.5
$2.38
23.97% - 27.75% 26.23-28.00%
0.00%
4.5 - 6.5
3.46%-4.76%
0.00%
4.0 - 4.5
2.59-3.41%
$2.92
$8.26
A summary of the status of the Company’s Stock Incentive Plan as of December 31, 2008 and the
changes during the periods then ended is as follows:
Number
of Options
Weighted
Average Exercise
Price
Weighted
Average
Contracual
Life (years)
Aggregate
Intrinsic
Value
(In thousands)
Outstanding, December 31, 2007 . . . . . . . 1,537,835
945
(268,456)
(12,883)
Options granted . . . . . . . . . . . . . . . . . .
Awards exercised . . . . . . . . . . . . . . . .
Awards forfeited . . . . . . . . . . . . . . . . .
Outstanding, December 31, 2008 . . . . . . . 1,257,441
Exercisable, December 31, 2008 . . . . . . .
512,950
$ 6.13
$31.00
$ 2.05
$ 6.52
$ 7.02
$ 6.42
6.80
6.73
$37,942
$15,783
The following table summarizes information regarding stock option exercises:
2006
Proceeds from stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
$199
2007
(In thousands)
$ 891
2008
$ 550
Intrinsic value of stock options exercised . . . . . . . . . . . . . . . . . . . . . . . .
$356
$2,614
$9,978
Tax benefit from exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
68
$1,654
As of December 31, 2008 there was $2,417,000 of total unrecognized compensation cost, representing
$1,512,000 of unrecognized compensation cost associated with share-based compensation arrangements, and
$904,000 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 1.80 and 1.83 years, respectively.
79
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock
The table below sets forth the restricted stock activity for the year ended December 31, 2008:
Non vested, December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Shares
72,573
5,838
(28,463)
(960)
Non vested, December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,988
Weighted
Average Grant
Price and Fair Value
$20.00
39.01
20.00
20.00
$22.27
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, 2008. The Company recognized an income tax benefit of
$282,000, from vested shares for the year ended December 31, 2008.
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, the Company accepted for forfeiture 6,419 shares for $295,000 under this arrangement.
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.
80
AMERICAN PUBLIC EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. In the
opinion of management, the Company is not aware of any pending or threatened litigation matters that will
have a material adverse effect on the Company’s business, operations, financial condition or cash flows.
Note 10. Concentration
Approximately 67%, 66% and 65% of the Company’s 2006, 2007 and 2008 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.
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”), 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.
81
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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, 2008.
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:
(cid:129) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(cid:129) 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
(cid:129) 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, 2008. 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, 2008, our internal control over
financial reporting is effective based on those criteria.
Our independent auditors, McGladrey & Pullen, LLP, have issued an audit report on our internal control
over financial reporting. This report appears below.
82
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
American Public Education, Inc.
We have audited American Public Education, Inc. and Subsidiary’s internal control over financial reporting as
of December 31, 2008, 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 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, 2008, 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, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2008, and our report dated March 10,
2009 expressed an unqualified opinion.
Vienna, VA
March 10, 2009
/s/ McGladrey & Pullen, LLP
83
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 2008 that have materially affected or are reasonably likely to materially affect the Company’s
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. 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, 2008 with respect to our 2009 Annual Meeting of
Stockholders.
ITEM 11. 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, 2008 with respect
to our 2009 Annual Meeting of Stockholders.
ITEM 12. 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, 2008 with respect to our 2009 Annual Meeting of Stockholders.
84
ITEM 13. 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,
2008 with respect to our 2009 Annual Meeting of Stockholders.
ITEM 14. 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, 2008 with respect to our 2009 Annual Meeting of Stockholders.
PART IV
ITEM 15. 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.
85
AMERICAN PUBLIC EDUCATION, INC.
Schedule II
Valuation and Qualifying Accounts
Year ended December 31, 2008:
Allowance for receivables . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2007:
Balance at
Beginning of
Period
Additions/
(Reductions) Write-Offs
Balance at
End of Period
$385
$454
$(302)
$537
Allowance for receivables . . . . . . . . . . . . . . . . . . . . . .
$263
$606
$(484)
$385
Year ended December 31, 2006:
Allowance for receivables . . . . . . . . . . . . . . . . . . . . . .
$570
$392
$(699)
$263
86
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 March
, 2009.
SIGNATURES
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.
Wallace E. Boston, Jr.
/s/ Harry T. Wilkins
Harry T. Wilkins
/s/ Phillip A. Clough
Phillip A. Clough
J. Christopher Everett
/s/
J. Christopher Everett
/s/ F. David Fowler
F. David Fowler
Jean C. Halle
/s/
Jean C. Halle
/s/ Timothy J. Landon
Timothy J. Landon
/s/ David L. Warnock
David L. Warnock
/s/ Timothy W. Weglicki
Timothy W. Weglicki
March 10, 2009
March 10, 2009
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
March 10, 2009
Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
March 10, 2009
March 10, 2009
March 10, 2009
March 10, 2009
March 10, 2009
March 10, 2009
87
Exhibit No.
INDEX TO EXHIBITS
Exhibit Description
3.1
3.2
4.1
10.1+
10.1A+
10.1B+
10.2+
10.2A+
10.2B+
10.2C+
10.3
10.4+
10.4A+
10.5+
10.5A+
10.6+
10.6A+
10.7+
10.8+
10.9+
21.1
23.1
31.1
31.2
32.1
32.2
Fifth Amended Restated Certificate of Incorporation of the Company(1)
Second Amended and Restated Bylaws of the Company(1)
Form of certificate representing the Common Stock, $0.01 par value per share, of the Company
American Public Education, Inc. 2002 Stock Incentive Plan
Form of Stock Option Agreement for grants pursuant to the American Public Education, Inc. 2002
Stock Incentive Plan
Form of Non-Qualified Stock Option Agreement for grants pursuant to the American Public Education,
Inc. 2002 Stock Incentive Plan
American Public Education, Inc. 2007 Omnibus Incentive Plan
Form of Non-Qualified Stock Option Agreement for grants pursuant to the American Public Education,
Inc. 2007 Omnibus Incentive Plan
Form of Restricted Stock Agreement for grants pursuant to the American Public Education, Inc. 2007
Omnibus Incentive Plan
Form of Restricted Stock Agreement for grants to Directors pursuant to the American Public
Education, Inc. 2007 Omnibus Incentive Plan
Form of Indemnification Agreement
Amended and Restated Employment Agreement between the Company and Wallace E. Boston, Jr.
dated October 10, 2007
Amendment dated December 31, 2008, to the Amended and Restated Employment Agreement
between the Company and Wallace E. Boston, Jr. dated October 10, 2007 (filed herewith)
Amended and Restated Employment Agreement between the Company and Harry T. Wilkins dated
October 10, 2007
Amendment dated December 31, 2008, to the Amended and Restated Employment Agreement
between the Company and Harry T. Wilkins dated October 10, 2007 (filed herewith)
Employment Agreement between the Company and Frank B. McCluskey dated April 10, 2005
Amendment dated December 31, 2008, to the Employment Agreement between the Company and
Frank B. McCluskey dated April 10, 2005 (filed herewith)
Employment Agreement between the Company and James H. Herhusky dated October 31, 2003
Annual Incentive Plan
American Public Education, Inc. Employee Stock Purchase Plan
List of Subsidiaries (filed herewith)
Consent of McGladrey & Pullen, LLP (filed herewith)
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)
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)
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)
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)
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.
Entity
American Public University System, Inc.
Subsidiaries
Exhibit 21.1
State of Organization
West Virginia
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement on Form S-8 (No. 333-147274) of American Public Education, Inc. of
our reports dated March 10, 2009, relating to our audits of the consolidated financial statements, and the financial statement schedule and
internal control over financial reporting, which appear in this Annual Report on Form 10-K of American Public Education, Inc. for the year
ended December 31, 2008.
Exhibit 23.1
/s/ McGladrey & Pullen, LLP
Vienna, Virginia
March 10, 2009
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Wallace E. Boston, certify that:
1.
2.
3.
I have reviewed this annual report on Form 10-K of American Public Education, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 10, 2009
By: /s/ Wallace E. Boston
Name: Wallace E. Boston
Title: President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Harry T. Wilkins, certify that:
1.
2.
3.
I have reviewed this annual report on Form 10-K of American Public Education, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 10, 2009
By: /s/ Harry T. Wilkins
Name: Harry T. Wilkins
Title: Executive Vice President and Chief Financial Officer
EXHIBIT 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
The undersigned, the Chief Executive Officer of American Public Education, Inc. (“the Company”), hereby certifies that, to his knowledge,
on the date hereof:
a)
The annual report on Form 10-K of the Company for the period ended December 31, 2008 filed on the date hereof with the Securities
and Exchange Commission (“the Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
b)
Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 10, 2009
By: /s/ Wallace E. Boston
Name: Wallace E. Boston
Title: President and Chief Executive Officer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting
the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to
American Public Education, Inc. and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff
upon request.
EXHIBIT 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
The undersigned, the Chief Financial Officer of American Public Education, Inc. (“the Company”), hereby certifies that, to his knowledge,
on the date hereof:
a)
The annual report on Form 10-K of the Company for the period ended December 31, 2008 filed on the date hereof with the Securities
and Exchange Commission (“the Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
b)
Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 10, 2009
By: /s/ Harry T. Wilkins
Name: Harry T. Wilkins
Title: Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting
the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to
American Public Education, Inc. and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff
upon request.
Corporate Information
Corporate and Administrative Offices
American Public Education, Inc.
111 West Congress Street
Charles Town, WV 25414
Phone: (304) 724-3700
Fax: (877) 468-6268
Administrative and Marketing Offices
American Public University System, Inc.
10110 Battleview Parkway, Suite 114
Manassas, VA 20109
Phone: (703) 330-5398
Fax: (877) 468-6268
Stock Exchange Listing
Accountants
McGladrey & Pullen, L.L.P.
8000 Towers Crescent Drive, Suite 500
Vienna, VA 22182
Phone: (703) 336-6400
Transfer Agent
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
Attn: Shareholder Services
Toll Free: (800) 937-5449
Legal
Hogan & Hartson L.L.P.
Listed on The NASDAQ Global Select Market under
Michael J. Silver
the symbol “APEI”.
111 South Calvert Street, Suite 1600
Annual Shareholder Meeting
Baltimore, MD 21202
Phone: (410) 659-2700
The Annual Meeting of American Public
Corporate Website: http://www.hhlaw.com
Education shareholders will be held at the
Westfields Marriott Washington Dulles,
14750 Conference Center Drive, Chantilly, VA 20151
Online Information
Investor Information
at 8 a.m. (ET) on May 15, 2009.
www.AmericanPublicEducation.com
Investor Relations
Chris Symanoskie
Director of Investor Relations
American Public Education, Inc.
111 W. Congress Street
Charles Town, WV 25414
Phone: (703) 334-3880
E-mail: csymanoskie@apus.edu
American Public University System
www.apus.edu
American Military University
www.amu.apus.edu
American Public University
www.apu.apus.edu
3/27/09 10:17:15 AM
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