Prospectus Summary
This summary highlights information contained or incorporated by reference in this prospectus. Before deciding to invest in shares of our common stock, you should read the entire prospectus carefully, including the documents incorporated by reference in this prospectus, especially the matters discussed under “Risk Factors” beginning on page 8 and the financial statements and related notes included in this prospectus by reference. Unless the context otherwise requires, the terms “we,” “us” and “our” refer to American Public Education, Inc. and its wholly owned subsidiary, American Public University System, Inc.
We are 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 that includes 73 degree programs and 47 certificate programs in disciplines related to national security, military studies, intelligence, homeland security, criminal justice, technology, business administration, liberal arts and education. We currently serve over 41,000 students living in all 50 states and more than 130 foreign countries. Our university system is regionally and nationally accredited.
From 2003 to 2007, our total revenue increased from $17.8 million to $69.1 million, a compound annual growth rate (CAGR) of 40%, while our total revenue increased 58% to $75.6 million for the first nine months of 2008 from $47.9 million for the corresponding period in 2007. We believe the recent acceleration in our growth is attributable to: (i) high student satisfaction and referral rates; (ii) achieving 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, or Title IV programs, beginning with classes starting in November 2006. Net income attributable to common stockholders improved to $11.1 million for the first nine months of 2008 from $5.8 million for the corresponding period in 2007 and improved to $8.8 million in 2007 from a loss of $217,000 in 2003.
Over 80% of our students currently 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 2007 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 September 30, 2008, we had approximately 137 full-time and over 661 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 our adjunct faculty.
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 semester starts for over 1,100 classes in over 700 unique courses to our over 41,000 students taught by over 790 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.
Our university system achieved regional accreditation in May 2006 with The Higher Learning Commission of the North Central Association of Colleges and Schools, or The Higher Learning Commission.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Our university system has been nationally accredited by the Accrediting Commission of the Distance Education and Training Council, or DETC, since 1995. In September 2007, we received approval from The Higher Learning Commission and DETC to offer seven new degree programs in Education and Information Technology. In May 2008, we also became fully certified to participate in Title IV programs after a provisional certification period that had begun in 2006. In August 2008, as a result of a partial distribution of shares by the selling stockholders, we underwent a change in ownership and control under Department of Education regulations. Because of that change in ownership and control, we were required to submit a change in ownership application to the Department of Education. After review of that application, the Department of Education determined that we remain eligible to participate in Title IV programs and provisionally certified us. Provisional certification will allow us to continue to participate in Title IV programs but with certain limitations. We do not believe that these limitations will have an adverse effect on our current operations or growth plans. See “— Recent Developments” below and see “Regulation of Our Business” for additional information regarding our provisional certification.
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 Department of Defense, or DoD. DoD policy allows for payment of 100% of a military student’s tuition costs, up to $250 per semester credit hour and a maximum benefit of $4,500 per fiscal year. Our undergraduate tuition per course is designed so that the tuition assistance paid by the service branches covers the cost of our courses for service members up to the annual maximum benefit. Military students who are eligible for the Department of Veterans Affairs’ 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 Montgomery GI Bill entitlement in continuing their education after retirement or separation.
We believe that national security, homeland security, and public safety professionals also represent a large and growing market for online education. As with their military counterparts, these individuals have unique program requirements as well as unpredictable and demanding work schedules that often prevent them from attending traditional universities.
Competitive Strengths
We believe that we have the following competitive strengths:
Exclusively Online Education — We have designed our courses and programs specifically for online delivery, and we recruit and train faculty exclusively for online instruction. Because our students are located around the globe, we focus our instruction on asynchronous, interactive instruction that provides students the flexibility to study and interact during the hours of the day or days of the week that suit their terms and schedules.
Emphasis on Military and Public Services Communities — Since our founding, our culture has reflected our devotion to our mission of Educating Those Who Serve™ . We have designed our academic programs, policies, marketing strategies and tuition specifically to meet the needs of the military and public service communities. These communities tend to be tightly knit, which greatly facilitates personal testimonials from active to prospective students.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Affordable 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. Our operating margins grew to 23.1% for the first nine months of 2008 from 20.0% for the corresponding period in 2007, on revenue that increased to $75.6 million from $47.9 million over the same period.
Experienced and Accomplished Management Team — Our management team represents a diverse blend of higher education, military, public service and business professionals. Our CEO, Wallace E. Boston, Jr., was previously a senior executive officer of several publicly-traded companies. Our Provost, Dr. Frank B. McCluskey, led successful distance learning programs at Mercy College in New York and has more than 18 years of higher education distance learning experience. Our CFO, Harry T. Wilkins, served previously as the chief financial officer for Strayer Education, Inc. from 1992 until 2001, leading Strayer through its IPO in 1996. Two members of our senior management are retired military officers who served in the U.S. Army for a combined period of over 50 years.
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 2002 and 2005, we grew our revenue at a CAGR of 38% from $10.7 million to $28.2 million. We believe achieving regional accreditation in May 2006 and gaining access to Title IV programs beginning with classes that started in November 2006 have been additional factors driving our recent acceleration in growth. Our revenues increased by 73% to $69.1 million for the year ended December 31, 2007 from $40.0 million for the year ended December 31, 2006. 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 — Through December 31, 2007, over 80% of the students who have completed three classes with us remain as active students or have graduated from our university system.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1However, 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 seven new degree programs in Education and Information Technology, as well as expanded the number of our Associate Degree offerings.
Recent Developments
We gained full acceptance into the Navy College Program Distance Learning Partnership in March 2008. The program allows us to join a select number of schools offering degree programs in support of the Servicemembers Opportunity Colleges Degree Network System for the Marine Corps (SOCMAR), the Coast Guard (SOCCOAST) and the Navy (SOCNAV). Participation in this program offers us greater access to Navy bases and increased visibility on some Navy education websites.
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. In connection with that review, we were required to submit to the Department of Education a change in ownership application. On October 2, 2008 the Department of Education concluded its review of our change in ownership application, determined that we are eligible and may continue to participate in Title IV programs, and provisionally certified us until September 30, 2010. In addition to the review by the Department of Education, we also consulted with state regulators and our accreditors. After its review of the distribution, The Higher Learning Commission informed us that it considered the distribution to be a change in ownership under its policies and it approved the change in ownership. The Higher Learning Commission also informed us that it plans to conduct a focused evaluation in Spring 2009 as its policies require it to do when a change of ownership occurs. See “Regulation of Our Business” for additional information regarding our provisional certification and accreditation.
In the third quarter of 2008, net course registrations from new students were 10,400 and total net course registrations were 38,900, compared to 6,700 net course registrations from new students and 25,300 total net course registrations in the third quarter of 2007. Total revenue for the third quarter of 2008 was $27.4 million, compared to total revenue of $17.6 million in the third quarter of 2007. Our net income for the third quarter of 2008, including stock-based compensation expense, was $3.8 million compared to $2.2 million in the third quarter of 2007. The weighted average number of diluted shares outstanding in the third quarter of 2008 was 18.9 million, resulting in diluted earnings per share of $0.20, compared to $0.18 per diluted share in the third quarter of 2007.
We anticipate that for the year ended December 31, 2008, net course registrations from new students will be approximately 36,300 and total net course registrations will be 145,700 or more. We anticipate that our total revenue for the year ending December 31, 2008 will be between $105.2 million and $106.6 million, and that our net income, including stock-based compensation expense, for the same period will be between $15.2 million and $15.4 million or between $0.81 and $0.82 per diluted share. The weighted average number of diluted shares outstanding is expected to be approximately 18.8 million shares for the year ending December 31, 2008. Our revenue, net income and net course registration anticipated results are based upon our preliminary analysis of estimated and anticipated results and actual results may be significantly different. See “Special Note Regarding Forward-Looking Statements” below for a discussion cautioning against reliance on forward-looking information.
Corporate Information
We were organized as a Virginia corporation in 1991, and we reorganized in Delaware in 2002 into our current holding company structure. As part of our 2002 reorganization, our corporate name was changed from American Military University, Inc. to American Public Education, Inc. We completed our initial public offering in November 2007. Our principal executive offices are located at 111 W. Congress Street, Charles Town, West Virginia 25414, and our main telephone number at that address is (304) 724-3700. The website of the American Public University System is www.apus.edu. Our corporate website address is www.AmericanPublicEducation.com. The contents of these websites are not a part of this prospectus.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1The Offering
The share information above is based on 17,940,439 shares of common stock outstanding as of September 30, 2008 and excludes:
but includes 70,803 shares of restricted stock that are subject to forfeiture as of September 30, 2008.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Summary Consolidated Financial and Operating Data
The following table shows our summary consolidated statements of operations data and other financial and operating data for each of the years ended December 31, 2005, 2006 and 2007 and for the nine months ended September 30, 2007 and 2008 and our summary balance sheet data as of September 30, 2008. The summary consolidated statements of operations data and the other financial data for the years ended December 31, 2005, 2006 and 2007 are derived from our audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States, which are incorporated by reference in this prospectus. The summary statement of operations data for the nine months ended September 30, 2007 and 2008 and the summary consolidated balance sheet data as of September 30, 2008, have been derived from our unaudited financial statements, which are incorporated by reference in this prospectus and include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such data. Our historical results are not necessarily indicative of our results for any future period.
This information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007, and our quarterly Report on Form 10-Q for the quarter ended September 30, 2008, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and related notes appearing in each of those reports.
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