As filed with the Securities and Exchange Commission on October 26, 2007

Registration No. 333-145185

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

Pre-Effective Amendment No. 3

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

 

 

 

 

111 W. Congress Street

Charles Town, WV 25414

(304) 724-3700

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Harry T. Wilkins

Executive Vice President and Chief Financial Officer

American Public Education, Inc.

111 W. Congress Street

Charles Town, WV 25414

(304) 724-3700

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

 

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

Table of Contents

 

 

 

 

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Common stock offered by us		4,687,500 Shares

Common stock outstanding after the offering		17,048,772 Shares

Proposed NASDAQ Global Market symbol		“APEI”
Use of proceeds		We estimate that the net proceeds to us from this offering will be approximately $68.0 million, or approximately $78.4 million if the underwriters exercise their over-allotment option in full, based on the midpoint of the price range set forth on the cover page of this prospectus.
		As described in “Use of Proceeds” and “Special Distribution,” we intend to use the proceeds of this offering to pay a special distribution to stockholders who own shares immediately prior to the closing of this offering, in an amount equal to the gross proceeds from the sale of stock in this offering, before the underwriting discount and before expenses, not including any proceeds received from the underwriters exercise of their over-allotment option. We intend to use the proceeds, if any, we receive from the underwriters exercise of their over-allotment option to pay the amount by which the special distribution exceeds our proceeds prior to that option exercise, the expenses of this offering and for general corporate purposes. We anticipate that the special distribution will exceed our net proceeds from this offering by $7.0 million, and, to the extent that the underwriters do not exercise their over-allotment option, we will pay this excess amount from our cash on hand.

		The payment of the special distribution in an amount equal to the gross proceeds of this offering permits a return of capital to all of our existing stockholders, and does so without significantly decreasing our capital resources or requiring these stockholders to sell their shares. The aggregate amount of the special distribution will be $75.0 million, or approximately $6.10 per share of common stock, of which $62.4 million will be paid in respect of shares of our capital stock as to which our directors and executive officers as a group may be deemed to have beneficial ownership, assuming the sale of shares of common stock in the offering at an initial public offering price of $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. In particular, the special distribution to be paid in respect of shares of capital stock as to which our directors may be deemed to have beneficial ownership includes $2.1 million to be distributed in respect of shares for which Wallace E. Boston, Jr., our chief executive officer, may be deemed to have beneficial ownership, $43.4 million to be distributed in respect of shares held by funds affiliated with ABS Capital Partners, for which Phillip A. Clough and Timothy T. Weglicki may be deemed to have beneficial ownership, $10.7 million to be distributed in respect of shares held by funds affiliated with Camden Partners, for which David L. Warnock may be deemed to have beneficial ownership and

		approximately $20,000 to be distributed in respect of shares held by Jean C. Halle.

		The special distribution to be paid in respect of shares of capital stock as to which our executive officers, other than our chief executive officer who is addressed above, may be deemed to have beneficial ownership will be:

		Amount of
Executive Officer		Special Distribution
Harry T. Wilkins		$	1,218,614
Executive Vice President and Chief Financial Officer
James H. Herhusky		$	3,021,858
Executive Vice President, Institutional Advancement
Dr. Frank B. McCluskey		$	—
Executive Vice President, Provost
Peter W. Gibbons		$	214,888
Senior Vice President, Chief Administrative Officer
Carol S. Gilbert		$	201,457
Senior Vice President, Marketing
Mark L. Leuba		$	107,444
Senior Vice President, Chief Information Officer

		Pursuant to the terms of our equity incentive arrangements, the special distribution will also cause a proportionate adjustment to the stock options held by our optionees, including our executive officers and directors who hold options.

		The following table shows the options held by our directors and executive officers as of September 30, 2007, the aggregate exercise price for all shares subject to an option as of that date, and the total number of shares for which the options will be exercisable as a result of the adjustment in connection with the special distribution, assuming that the offering price is $16.00 per share, which is the mid point of the price range set forth on the cover page of this prospectus:

		Shares Subject to								Shares Subject to
		Options				Aggregate				Options as Adjusted
		Outstanding as of				Exercise				for the Special
Name of Optionee		September 30, 2007				Price				Distribution
Directors
Wallace E. Boston, Jr.(1)			88,000			$	125,920				121,576
Jean C. Halle			24,200			$	166,220				33,433
J. Christopher Everett			27,500			$	265,550				37,993
F. David Fowler			27,500			$	150,000				37,993
Executive Officers
Harry T. Wilkins			165,000			$	900,000				227,955
Peter W. Gibbons			19,800			$	27,588				27,355
Carol S. Gilbert			22,000			$	31,480				30,394
James H. Herhusky			55,000			$	250,000				75,985
Dr. Frank B. McCluskey			110,000			$	376,200				151,970
Mark L. Leuba			26,400			$	92,064				36,473

		(1) Mr. Boston is our chief executive officer and a member of our board of directors.

		See “Certain Relationships and Related Person Transactions — Special Distribution” for additional information regarding the beneficiaries of the special distribution and the effect of the adjustment to our outstanding option awards.

Risk factors		See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding whether to invest in shares of our common stock.

	•	1,100,000 shares of our common stock reserved for issuance under our new 2007 Omnibus Incentive Plan, 259,050 of which are the subject of stock option awards to be granted to employees at the time of the pricing of this offering with an exercise price equal to the initial public offering price, which includes 126,390 options to be granted to Mr. Boston, 56,880 options to be granted to Mr. Wilkins, 1,875 options to be granted to Mr. Herhusky, 8,610 options to be granted to Mr. McCluskey, 5,475 options to be granted to Mr. Gibbons, and 5,475 options to be granted to Ms. Gilbert;
	•	917,774 shares of common stock issuable upon the exercise of outstanding stock options issued under prior plans, which number will be increased to 1,267,949 shares (assuming an offering price equal to the midpoint of the price range set forth on the cover page of this prospectus) of common stock as a result of the antidilution adjustment necessitated by the special distribution; and
	•	100,000 shares of common stock reserved for issuance under our new Employee Stock Purchase Plan;

	•	72,093 shares of the common stock reserved under our new 2007 Omnibus Incentive Plan that are to be issued as restricted stock awards to employees and directors at the time of the closing of this offering, which includes 32,265 shares underlying restricted stock awards to be granted to Mr. Boston, 14,520 shares underlying restricted stock awards to be granted to Mr. Wilkins, 480 shares underlying restricted stock awards to be granted to Mr. Herhusky, 2,100 shares underlying restricted stock awards to be granted to Mr. McCluskey, 1,200 shares underlying restricted stock awards to be granted to Mr. Gibbons, 1,200 shares underlying restricted stock awards to be granted to Ms. Gilbert, 1,200 shares underlying restricted stock awards to be granted to Mr. Leuba and 6,888 shares underlying restricted stock awards of 1,148 shares to be granted to each of our non-employee directors;

	•	3,690 shares that are to be issued at the time of the closing of this offering, as a result of the issuance at that time of 10 shares to each of our full-time employees below the level of vice-president, assuming our employee count is the same as it was on September 30, 2007; and

	•	155,815 shares of common stock issued upon the exercise of a warrant outstanding as of September 30, 2007, which warrant was exercised in October 2007.

	•	reflects an 11- for -1 split of our outstanding common stock and Class A common stock that occurred on September 19, 2007;
	•	reflects the conversion of all of the shares of our outstanding Class A common stock into an equal number of shares of common stock immediately before the completion of this offering;
	•	assumes that the initial public offering price of the common stock will be $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus; and
	•	assumes that the underwriters do not exercise their over-allotment option.

		Year Ended December 31,												Six Months Ended June 30,
		2004				2005				2006				2006				2007
														(Unaudited)
		(In thousands)
STATEMENT OF OPERATIONS DATA:
Revenues		$	23,119			$	28,178			$	40,045			$	16,961			$	30,262
Costs and expenses:
Instructional costs and services			10,944				13,247				17,959				7,923				12,990
Selling and promotional			2,206				4,043				4,895				2,374				2,888
General and administrative			5,737				7,364				9,150				4,026				7,074
Write-off of software development project(1)			—				—				3,148				—				—
Depreciation and amortization			674				1,300				1,953				793				1,323
Total costs and expenses			19,561				25,954				37,105				15,116				24,275
Income from continuing operations before interest income and income taxes			3,558				2,224				2,940				1,845				5,987
Interest income, net			56				225				289				126				338
Income from continuing operations before income taxes			3,614				2,449				3,229				1,971				6,325
Income tax expense			1,327				1,061				771				943				2,755
Income from continuing operations			2,287				1,388				2,458				1,028				3,570
Preferred stock accretion			(1,085	)			(681	)			—				—				—
Income from continuing operations attributable to common stockholders			1,202				707				2,458				1,028				3,570
Loss from discontinued operations, net of income tax benefit			—				(303	)			(660	)			(95	)			—
Net income attributable to common stockholders		$	1,202			$	404			$	1,798			$	933			$	3,570

														Six Months Ended
		Year Ended December 31,												June 30,
		2004				2005				2006				2006				2007
														(Unaudited)
STATEMENT OF OPERATIONS DATA:
Income from continuing operations per common share:
Basic		$	0.22			$	0.09			$	0.21			$	0.09			$	0.30
Diluted		$	0.22			$	0.08			$	0.20			$	0.08			$	0.29
Net income attributable to common stockholders per common share:
Basic		$	0.22			$	0.05			$	0.15			$	0.08			$	0.30
Diluted		$	0.22			$	0.05			$	0.15			$	0.08			$	0.29
Weighted average number of shares outstanding:
Basic			5,386,392				8,055,300				11,741,191				11,702,042				11,931,001
Diluted			5,407,050				8,463,653				12,177,693				12,152,008				12,492,155

 

														Six Months Ended
		Year Ended December 31,												June 30,
		2004				2005				2006				2006				2007
		(Dollars in thousands)
OTHER DATA (Unaudited):
Net cash provided by operating activities from continuing operations		$	4,546			$	3,971			$	9,011			$	2,719			$	9,928
Capital expenditures		$	2,613			$	4,613			$	4,475			$	2,582			$	1,770
Stock-based compensation expense(2)			—			$	1,198			$	284			$	192			$	618
EBITDA from continuing operations(3)		$	4,232			$	3,524			$	4,893			$	2,638			$	7,310
Net course registrations(4)			32,558				37,506				54,828				22,962				41,721

 

		As of June 30, 2007
		Actual				As Adjusted(6)
		(In thousands)
CONSOLIDATED BALANCE SHEET DATA (Unaudited):
Cash and cash equivalents		$	18,154			$	11,141
Working capital(5)		$	12,641			$	5,628
Total assets		$	33,993			$	26,980
Stockholders’ equity		$	21,625			$	14,612

(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-Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of FASB Statement No. 123. Stock-based compensation expense for the year ended December 31, 2005 resulted from the repurchase of shares of common stock acquired upon exercise of employee stock options.
(3)		EBITDA from continuing operations consists of income from continuing operations minus interest income, net, plus income tax expense and depreciation and amortization. Interest income, net consists primarily of interest income earned on cash and cash equivalents, net of any interest expense for notes payable. We use EBITDA from continuing operations as a measure of operating performance.
		However, EBITDA from continuing operations is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA from continuing operations in addition to, and not as an alternative for, income from continuing operations as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA from continuing operations may not be comparable to similarly titled measures of other companies and is therefore limited as a comparative measure. Furthermore, as an analytical tool, EBITDA from continuing operations has additional limitations, including that (a) it is not intended to be a measure of free cash flow, as it does not consider certain cash requirements such as tax payments, (b) it does not reflect changes in, or cash requirements for, our working capital needs; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements, or future requirements for capital expenditures or contractual commitments. To compensate for these limitations, we evaluate our profitability by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of cash flows from operations and through the use of other financial measures.
		We believe EBITDA from continuing operations is useful to an investor in evaluating our operating performance and liquidity because it is widely used to measure a company’s operating performance without regard to certain non-cash expenses (such as depreciation and amortization) and expenses that are not reflective of our core operating results over time. We believe EBITDA from continuing operations presents a meaningful measure of corporate performance exclusive of our capital structure, the method by which assets were acquired and non-cash charges, and provides us with additional useful information to measure our performance on a consistent basis, particularly with respect to changes in performance from period to period.
		Our management uses EBITDA from continuing operations:
		• In developing our internal budgets and strategic plan;
		• As a measurement of operating performance, because it assists us in comparing our performance on a consistent basis, as it removes depreciation, amortization, interest and taxes;
		• As a factor in evaluating the performance of our management for purposes of compensation purposes; and
		• In presentations to members of our board of directors to enable our board to have the same measurement basis of operating performance as is used by management to compare our current operating results with corresponding prior periods and with the results of other companies in our industry.

		The following table provides a reconciliation of income from continuing operations to EBITDA from continuing operations:

														Six Months Ended
		Year Ended December 31,												June 30,
		2004				2005				2006				2006				2007
		(In thousands)
Income from continuing operations		$	2,287			$	1,388			$	2,458			$	1,028			$	3,570
Interest income, net			(56	)			(225	)			(289	)			(126	)			(338	)
Income tax expense			1,327				1,061				771				943				2,755
Depreciation and amortization			674				1,300				1,953				793				1,323
EBITDA from continuing operations		$	4,232			$	3,524			$	4,893			$	2,638			$	7,310

		EBITDA from continuing operations for the year ended December 31, 2006 is reduced by a write-off of $3.1 million of capitalized software development costs. EBITDA from continuing operations is also reduced by stock-based compensation expense of $1.2 million, $284,000, $192,000 and $618,000 for the year ended December 31, 2005, the year ended December 31, 2006, the six months ended June 30, 2006 and the six months ended June 30, 2007, respectively.
(4)		Net course registrations represent the total number of course registrations for students that have attended a portion of a course.
(5)		Working capital is calculated by subtracting total current liabilities from total current assets.

(6)		As adjusted to give effect to our sale of common stock in this offering at an assumed offering price of $16.00 per share, which is the midpoint of the range we show on the cover page of this prospectus, and the receipt and application of the net proceeds thereof as described under “Use of Proceeds.”

 

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 prospectus, including our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The risks described below are those that we believe are the material risks we face. 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 growth, our stock price may decline and we may not have adequate financial resources to execute our business plan.

 

Our revenue increased 73% from $23.1 million in 2004 to $40.0 million in 2006, and it increased 78% from $17.0 million in the first six months of 2006 to $30.3 million in the first six months of 2007, primarily due to strong referrals from current students, new student marketing, and the receipt of regional accreditation in May 2006. We may not be able to achieve similar growth rates in future periods. 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 growth, our stock price may decline, and we may not have adequate financial resources to execute our business plan.

 

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. 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 prospectus 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, 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 67% of our revenues for 2006, 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. For 2006 and the six months ended June 30, 2007, tuition assistance payments represented approximately 67% of our revenues. 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 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. In addition, we have been advised by the Department of Education that because we are provisionally certified due to being a new Title IV program participant, we may not add new degree or non-degree programs for Title IV program purposes, except under limited circumstances and only if the Department of Education so approves, until the Department of Education reviews a compliance audit that covers one complete fiscal year of Title IV program participation. Even after our initial certification period ends, 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. Over the last fiscal year, we have 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:

 

 

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 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 Educator^tm learning management system pursuant to a license from Ucompass.com, Inc. The Educator system is a web-based portal that stores and delivers course content, provides interactive communication between students and faculty, and supplies online evaluation tools. We 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 technology infrastructure will require us to invest capital, time and resources, and there is no assurance that even with sufficient investment our systems will be scalable to accommodate future growth. We may also need to invest capital, time and resources to update our technology in response to competitive pressures in the marketplace. If we are unable to increase the capacity of our resources or update our resources appropriately, our ability to handle growth, our ability to attract or retain students, and our financial condition and results of operations could be adversely affected.

 

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, Mr. Wilkins and Mr. Herhusky, 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.

 

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 counselors to distribute our information to interested service members. If our relationships with educational service offices or base education counselors deteriorate or end, our efforts to recruit students from that base will be impaired. If our articulation agreements and memoranda of understanding are eliminated, or if our relationships with educational service offices or base education counselors deteriorate, this could materially and adversely affect our revenues and results of operations.

 

The United States Armed Forces has in the past and may in the future approve programs and initiatives to provide additional educational opportunities to service members, and these programs and initiatives may not include participation by us. We cannot predict the impact of these announcements, programs or initiatives on us, but given our dependence on students from the armed forces, our net course registrations and results of operations could be materially adversely affected by such announcements, programs and initiatives.

 

Government regulations relating to the Internet could increase our cost of doing business, affect our ability to grow or otherwise have a material adverse effect on our business.

 

The increasing popularity and use of the Internet and other online services have led and may lead to the adoption of new laws and regulatory practices in the United States or foreign countries and to new interpretations of existing laws and regulations. These new laws and interpretations may relate to issues such as online privacy, copyrights, trademarks and service marks, sales taxes, fair business practices and the requirement that online education institutions qualify to do business as foreign corporations or be licensed in one or more jurisdictions where they have no physical location or other presence. New laws, regulations or interpretations related to doing business over the Internet could increase our costs and materially and adversely affect our enrollments, revenues and results of operations.

 

Risks Related to the Regulation of Our Industry

 

If we fail to comply with the extensive regulatory requirements for our business, we could face penalties and significant restrictions on our operations, including loss of access to federal tuition assistance programs for members of the United States Armed Forces and federal loans and grants for our students.

 

We are subject to extensive regulation by (1) the federal government through the U.S. Department of Education and under the Higher Education Act, (2) state regulatory bodies and (3) accrediting agencies recognized by the U.S. Secretary of Education. The regulations, standards and policies of these agencies cover the vast majority of our operations, including our educational programs, facilities, instructional and administrative staff, administrative procedures, marketing, recruiting, financial operations and financial condition. These regulatory requirements can also affect our ability to add new or expand existing educational programs and to change our corporate structure and ownership.

 

Institutions of higher education that grant degrees, diplomas or certificates must be authorized by an appropriate state education agency or agencies. In addition, in certain states as a condition of continued authorization to grant degrees and in order to participate in various federal programs, including tuition assistance programs of the United States Armed Forces, a school must be accredited by an accrediting agency recognized by the Secretary of Education. Accreditation is a non-governmental process through which an institution submits to qualitative review by an organization of peer institutions, based on the standards of the accrediting agency and the stated aims and purposes of the institution. The Higher Education Act requires accrediting agencies recognized by the Department of Education to review and monitor many aspects of an institution’s operations and to take appropriate action when the institution fails to comply with the accrediting agency’s standards.

 

Our operations are also subject to regulation due to our participation in Title IV programs. Title IV programs, which are administered by the Department of Education, include 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. Following our implementation of Title IV programs for classes beginning in November 2006, for the six months ended June 30, 2007, 9% of our net course registrations were from students using financial aid under Title IV programs. 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 or standards, or our noncompliance with any applicable regulations, standards and 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 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 2006, we derived approximately 67% of our revenues 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 recently 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 accreditation or may terminate 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 was 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.

 

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. For the six months ended June 30, 2007, 9% of our total net course registrations were attributable to students utilizing Title IV programs. 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 boundaries. Several states have sought to assert jurisdiction over online educational institutions that have no physical location or other presence in the state but offer educational services to students who reside in the state, or that advertise to or recruit prospective students in the state. State regulatory requirements for online education are inconsistent among states and not well developed in many jurisdictions. As such, these requirements change frequently and, in some instances, are not clear or are left to the discretion of state regulators. Our changing business and the constantly changing regulatory environment require us to evaluate continually our state regulatory compliance activities. In the event we are found not to be in compliance, and a state seeks to restrict one or more of our business activities within its boundaries, we may not be able to recruit students from that state and may have to cease providing service to students in that state.

 

American Public University System has a physical presence in the Commonwealth of Virginia based on administrative offices in that state, and it is authorized by the State Council of Higher Education for Virginia. We 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 educational agencies, and we expect to seek 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 obtain 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 obtain additional licensure or

authorization and 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 that applies to participate in Title IV programs for the first time, if approved, will be certified for no more than one complete award year. In addition, it will be provisionally, not fully, certified. 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. 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. The Department of Education considers us to be in our initial period of certification, which requires us to remain provisionally certified, because we have not yet submitted, and it has not yet reviewed, a compliance audit that covers one complete fiscal year of Title IV program participation. The Department of Education has advised us that we may not add new degree or non-degree programs for Title IV program purposes, except under limited circumstances and only if the Department of Education approves, until the Department of Education reviews a compliance audit that covers one complete fiscal year of Title IV program participation. After an initial certification period, an institution that is certified to participate in Title IV programs 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 for reasons other than initial certification. The Department of Education may also review our continued eligibility and certification to participate in Title IV programs, or scope of eligibility and certification in the event we undergo a change in ownership resulting in a change of control or expand our activities in certain ways, such as the addition of certain types of new programs, or, in certain cases, if we modify the academic credentials that we offer. In addition, 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.

 

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 non-compliance 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 non-compliance with Department of Education regulations. These allegations have attracted adverse media coverage and have been the subject of federal and state legislative hearings. Although the media, regulatory and legislative focus has been primarily on the allegations made against these specific companies, broader allegations against the overall for-profit school sector may negatively affect public perceptions of other for-profit educational institutions, including American Public University System. In addition, recent reports on student lending practices of various lending institutions and schools, including for-profit schools, and investigations by a number of state attorneys general, Congress and governmental agencies have led to adverse media coverage of postsecondary education. Adverse media coverage regarding other companies in the for-profit school sector or regarding us directly could damage our reputation, could result in lower enrollments, revenues and operating profit, and could have a negative impact on our stock price. Such allegations could also result in increased scrutiny and regulation by the Department of Education, Congress, accrediting bodies, state legislatures or other governmental authorities with respect to all for-profit institutions, including us.

 

Congress may change the law or reduce funding for Title IV programs, which could reduce our student population, revenues and profit margin.

 

The Higher Education Act comes up for reauthorization by Congress approximately every five to six years. However, when Congress does not act on complete reauthorization, there are typically amendments and extensions of authorization. The last reauthorization of the Higher Education Act was completed in 1998, and since that time there have been a number of amendments and extensions. Additionally, Congress reviews and determines appropriations for Title IV programs on an annual basis through the budget and appropriations process. There is no assurance that reauthorization of the Higher Education Act will happen, or that Congress will not enact changes that decrease Title IV program funds available to students, including students who attend our institution. A failure by Congress to reauthorize or otherwise extend the provisions of the Higher Education Act, or 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 may also require us to modify our practices in ways that could result in increased administrative and regulatory costs and decreased profit margin. Further, Congress recently passed, and President Bush signed into law, legislation that will reduce interest rates on certain federal student loans and will reduce government subsidies to lenders that participate in federal student loan programs. Congress is currently considering additional legislation that may result in significant changes to Title IV programs, which may include changes to the amount of funding for Title IV programs and the allocation of funding among Title IV programs. We are not in position to predict with certainty whether any legislation will be passed by Congress or signed into law. 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.

 

The student lending practices of postsecondary educational institutions, financial aid officers and student loan providers are currently subject to several investigations being conducted 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. Congress may enact new requirements pertinent to relationships between lenders and institutions. In addition, the Department of Education has proposed regulations that in part would address institutions’ student loan activity. State legislators have also passed or are 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 the potential remedial actions that might result from these or other potential inquiries. Governmental action may impose increased administrative and regulatory costs and decreased profit margins.

 

We are subject to sanctions that could be material to our results and damage our reputation if we fail to calculate correctly and return timely Title IV program funds for students who withdraw before completing their educational program.

 

A school participating in Title IV programs must correctly calculate the amount of unearned Title IV program funds that have been disbursed to students who withdraw from their educational programs before completion and must return those unearned funds in a timely manner, generally within 45 days after the date the school determines that the student has withdrawn. Because we only 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 non-compliance. If unearned funds are not properly calculated and timely returned, we may have to repay Title IV funds, post a letter of credit in favor of the Department of Education or otherwise be sanctioned by the Department of Education, which could increase our cost of regulatory compliance and adversely affect our results of operations.

 

A failure to demonstrate “financial responsibility” may result in the loss of eligibility by American Public University System to participate in Title IV programs or require the posting of a letter of credit in order to maintain eligibility to participate in Title IV programs.

 

To participate in Title IV programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the Department of Education, or post a letter of credit in favor of the Department of Education and possibly accept other conditions, such as provisional certification, additional reporting requirements or regulatory oversight, on its participation in Title IV programs. The Department of Education may also apply such measures of financial responsibility to the operating company and ownership entities of an eligible institution and, if such measures are not satisfied by the operating company or ownership entities, require the institution to post a letter of credit in favor of the Department of Education and possibly accept other conditions on its participation in Title IV programs. Any obligation to post a letter of credit could increase our costs of regulatory compliance. If we were unable to secure a letter of credit, we would lose our eligibility to participate in Title IV programs. In addition to the obligation to post a letter of credit under certain circumstances, an institution that is determined by the Department of Education not to be financially responsible may be transferred from the “advance” system of payment of Title IV funds, which allows the institution to obtain Title IV program funds from the Department of Education prior to making disbursements to students, to cash monitoring status or to the “reimbursement” system of payment, which requires the institution to make Title IV disbursements to students and seek reimbursement from the Department of Education. A change in our system of payment could increase our costs of regulatory compliance. If we fail to demonstrate financial responsibility and thus lose our eligibility to participate in Title IV programs, our students would lose access to Title IV program funds for use in our institution, which would limit our potential for growth outside the military community and adversely affect our enrollment, revenues and results of operations.

 

A failure to demonstrate “administrative capability” may result in the loss of American Public University System’s eligibility to participate in Title IV programs.

 

Department of Education regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV programs. See “Regulation of our Business” in this prospectus 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.

 

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.

 

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. 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. We have sought confirmation from applicable regulators, including state educational agencies that authorize or license American Public University System, the Department of Education, DETC and The Higher Learning Commission, that this offering will not require us to notify them or obtain their approval under their respective standards, and we have received that confirmation from the Department of Education, DETC, the West Virginia Higher Education Policy Commission and the State Council for Higher Education for Virginia. Our failure to obtain, or a delay in receiving, approval of any change of control from the West Virginia Higher Education Policy Commission, 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.

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. Because we have just begun to enroll students who are participating in these 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 this Offering

 

We do not know whether a market will develop for our common stock or what the market price of our common stock will be and, as a result, we cannot assure you that an investment in our common stock will be as liquid as alternative investments.

 

Before this offering, there was no public trading market for our common stock. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. The initial public offering price for our common stock will be determined through negotiations with the underwriters and may not bear any relationship to the market price at which the common stock will trade after this offering or to any other established criteria of our value. It is possible that in one or more future periods our operating results may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our common stock may decline.

 

The price of our common stock may be volatile, and as a result returns on an investment in our common stock may be volatile.

 

The trading price of our common stock following this offering may fluctuate substantially. The price of the common stock that will prevail in the market after this offering may be lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. The price of the common stock may fluctuate as a result of:

 

 

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 have never operated as a public company.

 

As a public company, we will 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 requirements on public companies, including public disclosure, internal control, changes in corporate governance practices and other matters. Our management and other personnel will need to devote a substantial amount of time to comply with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

 

Our principal stockholders may be able to exercise significant influence over matters requiring stockholder approval.

 

After completion of this offering, ABS Capital Partners will beneficially own approximately 41.7% of our outstanding common stock, and Camden Partners will beneficially own approximately 10.3%. As a result, ABS Capital Partners and Camden Partners may be able to exercise significant influence over matters requiring stockholder approval, including the election of directors, equity compensation plans and significant corporate transactions. For example, ABS Capital Partners and Camden Partners may vote against a transaction involving an actual or potential change of control of our company or other transaction that you may deem to be in the stockholders’ best interests. In addition, ABS Capital Partners was entitled to designate three of our directors for appointment to our board of directors, two of whom are general partners of ABS Capital Partners, and Camden Partners was entitled to designate one of our directors for appointment to our board of directors, and that director is a general partner of Camden Partners. Following the offering, neither ABS Capital Partners nor Camden Partners will be entitled to designate new directors to our board but their representatives will continue to serve on our board and can exercise substantial influence over us.

 

Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our common stock.

 

Our results in any quarter may not indicate the results we may achieve in any subsequent quarter or for the full year. Our revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in enrollment. Student population varies as a result of new enrollments, graduations and student attrition. While our number of enrolled students has grown in each sequential quarter over the past three years, the number of enrolled students has been proportionally greatest in the fourth quarter of each respective year. A significant portion of our general and administrative expenses do not vary proportionately with fluctuations in revenues. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change, however, as a result of new program introductions and increased enrollments of students. These fluctuations may result in volatility in our results of operations and/or have an adverse effect on the market price of our common stock.

 

If 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 in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures in anticipation of being a public company and eventually being subject to the requirements of Section 404 of the Sarbanes-Oxley Act, which will require annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. We will be required to comply with the internal controls evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act by no later than the end of our 2008 fiscal year.

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 will depend 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.

 

Future sales of our common stock in the public market, or the perception that such sales could occur, could lower our stock price and impair our ability to raise funds in new stock offerings.

 

Future sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock and could make it more difficult for us to raise funds through future public offerings of our equity securities. Beginning approximately 180 days after completion of this offering, approximately 11.7 million shares of our common stock will be eligible for sale in the public market, of which the sale of approximately 10.2 million shares will be subject to volume, manner of sale and other limitations contained in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. In addition, approximately 430,000 shares outstanding as of September 30, 2007 that were acquired on the exercise of stock options and approximately 918,000 shares underlying stock options outstanding as of September 30, 2007, if exercised, will be eligible for resale pursuant to Rule 701 under the Securities Act. In addition, we have granted holders of approximately 9.4 million shares of our outstanding common stock rights to require us, subject to conditions, to register the public sale of their shares under the Securities Act. See “Shares Eligible for Future Sale” elsewhere in this prospectus.

 

We intend to use the proceeds from this offering to pay a special distribution to our existing stockholders. As a result, we do not expect to retain proceeds from this offering and our cash on hand may decrease.

 

We intend to use the proceeds that we receive from the sale of stock in this offering and $7.0 million of our existing cash (based on an assumed offering price equal to the midpoint of the price range set forth on the cover page of this prospectus, and if the underwriters do not exercise their over-allotment option) to pay the special distribution payable to our existing stockholders. As a result of our application of the proceeds of this offering, we do not expect to retain any of the proceeds, and payment of the distribution in an amount greater than the net proceeds to us (if the underwriters do not exercise their over-allotment option), the expenses of the offering and those expenses related to beginning to operate as a public company will cause our cash on hand to decrease.

 

You will experience immediate and substantial dilution in your investment.

 

The offering price of the common stock is substantially higher than the net tangible book value per share of our common stock, which was $1.80 as of June 30, 2007. As a result, you will experience immediate and substantial dilution in net tangible book value when you buy shares of common stock in the offering. This means that you will pay a higher price per share than the amount of our total assets, minus our total liabilities, divided by the number of outstanding shares. Holders of the common stock will experience further dilution if options, warrants or other rights to purchase our common stock that are outstanding or that we may issue in the future are exercised or converted, or if we issue additional shares of our common stock, at prices lower than our net tangible book value at such time.

 

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:

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including the sections entitled “Prospectus Summary,” “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 prospectus include statements about:

 

 

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 prospectus. These important factors include those that we discuss in this prospectus under the caption “Risk Factors” and elsewhere. You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

USE OF PROCEEDS

 

We estimate that we will receive $68.0 million in net proceeds from our sale of the 4,687,500 shares of common stock sold by us in the offering (or approximately $78.4 million if the underwriters exercise their over-allotment option in full). Our estimated net proceeds from the offering represent the amount we expect to receive after the underwriting discount and our payment of the other expenses of the offering payable by us. For purposes of estimating our net proceeds, we have assumed that the initial public offering price of the common stock will be $16.00, which is the midpoint of the price range set forth on the cover page of this prospectus. We intend to use all of the proceeds we receive from this offering to pay the special distribution discussed below. We intend to use the proceeds, if any, we receive from the underwriters exercise of their over-allotment option to pay the amount of the distribution in excess of the proceeds and any fees and expenses of this offering instead of using our cash on hand, and for general corporate purposes. We anticipate that the special distribution will exceed our net proceeds from this offering by $7.0 million, and, to the extent that the underwriters do not exercise their over-allotment option, we will pay this excess amount from our cash on hand.

 

We will declare a special distribution that will be payable promptly after the completion of this offering to our stockholders of record immediately prior to the completion of this offering. The aggregate amount of the special distribution will be equal to the gross proceeds from the sale of stock in this offering before the underwriting discount and before expenses, excluding any proceeds received by us in the event the underwriters exercise their over-allotment option. Based on the initial public offering price of $16.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, the amount of the special distribution will be $75.0 million, or approximately $6.10 per common share on an as if converted basis. A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease the amount of the special distribution by approximately $4.7 million. If the underwriters do not exercise their over-allotment option and we are required to pay a portion of the special distribution with cash on hand, a $1.00 increase in the assumed initial public offering price per share would cause our cash on hand to decrease by $328,125 and a $1.00 decrease in the assumed initial public offering price per share would result in our using $328,125 less of our cash on hand. The payment of the special distribution with the estimated proceeds of this offering to us permits a return of capital to all of our existing stockholders, and does so without significantly decreasing our capital resources or requiring these stockholders to sell their shares.

 

SPECIAL DISTRIBUTION

 

We will declare a special distribution that will be payable promptly after the completion of this offering to our stockholders of record immediately prior to the completion of this offering. The payment of the special distribution in an amount equal to the gross proceeds from the sale of stock in this offering before the underwriting discount and before expenses, permits a return of capital to all of our existing stockholders, and does so without significantly decreasing our capital resources or requiring these stockholders to sell their shares. Each of our stockholders will be entitled to receive their pro-rata share of the special distribution based on their holdings of our capital stock on an “as if converted to common stock” basis as of the record date. Based on the assumed offering price of $16.00 per share, which is the midpoint of the range we show on the cover page of this prospectus, the amount of the special distribution will be $75.0 million, or approximately $6.10 per common share on an as if converted basis.

 

Approximately $62.4 million of the special distribution will be paid in respect of shares of our capital stock as to which our directors and executive officers as a group may be deemed to exercise sole or shared voting or investment power. In particular, the special distribution to be paid in respect of shares of capital stock as to which our directors may be deemed to have beneficial ownership, other than our chief executive officer, who is in the table below with our executives officers, includes:

 

be distributed in respect of shares held by funds affiliated with ABS Capital Partners that were acquired on August 2, 2005 for an original investment of $8.0 million;

 

 

 

The following table shows the special distribution to be paid in respect of outstanding shares of capital stock as to which our executive officers may be deemed to have beneficial ownership, as well as the date those shares were acquired and the original purchase price for the acquisition of the shares:

 

 

 

 

 

 

Pursuant to the terms of our equity incentive arrangements, the special distribution will also cause a proportionate adjustment to the stock options held by our optionees, including our executive officers and directors who hold stock options. This adjustment will cause the total number of shares subject to options held by our optionees to increase while the aggregate exercise price will remain the same. Effectively, as a result of the special distribution, our optionees will be entitled to receive more shares for the same aggregate exercise price for each option held. The following table shows the options held by our directors and executive officers as of September 30, 2007, the aggregate exercise price for all shares subject to an option as of that date, and the total number of shares for which the options will be exercisable as a result of the adjustment in connection with the special distribution, assuming that the offering price is $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus:

 

 

See “Certain Relationships and Related Person Transactions — Special Distribution” for additional information regarding the beneficiaries of the special distribution.

 

 

CAPITALIZATION

 

The following table shows our capitalization as of June 30, 2007:

 

 

 

You should read this table together with the sections of this prospectus entitled “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our financial statements and related notes and the other financial information appearing elsewhere in this prospectus.

 

 

A $1.00 increase or decrease in the assumed initial public offering price per share would decrease or increase cash and cash equivalents by $328,125, would increase or decrease additional paid-in capital by $328,125 and would decrease or increase total stockholders’ equity and total capitalization by $328,125, after deducting the underwriting discount, the payment of a special distribution to our existing stockholders in the amount of the aggregate proceeds from the sale of common stock by us in this offering (not including any proceeds received by us from the underwriters’ exercise of their over-allotment option) and the estimated offering expenses payable by us.

 

The outstanding share information as of June 30, 2007 shown in the table above excludes 1,013,474 shares of common stock issuable upon the exercise of stock options and 155,815 shares of Class A common stock issuable upon the exercise of a warrant outstanding as of June 30, 2007, which was subsequently exercised in October 2007. The number also excludes 1,100,000 shares of our common stock reserved for issuance under our new 2007 Omnibus Incentive Plan and 100,000 shares of our common stock reserved for issuance under our new Employee Stock Purchase Plan.

 

DILUTION

 

Purchasers of the common stock in the offering will suffer an immediate and substantial dilution in net tangible book value per share. Dilution is the amount by which the initial public offering price paid by purchasers of shares of our common stock exceeds the net tangible book value per share of our common stock after the offering. Net tangible book value represents the amount of our total tangible assets reduced by our total liabilities. Tangible assets equal our total assets less goodwill and intangible assets. Net tangible book value per share represents our net tangible book value divided by the number of shares of common stock outstanding. As of June 30, 2007, our net tangible book value was $21.6 million and our net tangible book value per share was $1.80.

 

After giving effect to the sale of 4,687,500 shares of common stock in the offering at an initial public offering price of $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and the payment of the estimated amount of the special distribution to our existing stockholders, our adjusted net tangible book value as of June 30, 2007 would have been $14.6 million, or $0.87 per share. This represents an immediate decrease in net tangible book value of $0.93 per share to existing stockholders and an immediate dilution of $15.13 per share to new investors purchasing shares in the offering. The following table illustrates this per share dilution:

 

 

Our adjusted net tangible book value after the offering, and the dilution to new investors in the offering, will change from the amounts shown above if the underwriters’ over-allotment option is exercised.

 

A $1.00 increase or decrease in the assumed initial public offering price per share would decrease or increase our adjusted net tangible book value per share after the offering by approximately $0.02, and increase or decrease dilution per share to new investors by approximately $1.02, after deducting the underwriting discount and estimated offering expenses payable by us.

 

The following table illustrates, on the as adjusted basis described above as of June 30, 2007, the total number of shares held, total consideration paid and average price per share paid by existing stockholders and by new investors for the shares of common stock, assuming the sale of shares of common stock in the offering at an initial public offering price of $16.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus:

 

 

 

The data in the tables above assume that outstanding options to purchase common stock are not exercised and do not give effect to the issuance of 155,815 shares of Class A common stock upon the exercise of a warrant in October 2007, the issuance of options to purchase 259,050 shares of common stock at the time of the pricing of this offering and the issuance of 72,093 shares of restricted common stock at the time of the closing of this offering. As of June 30, 2007, options to purchase 1,013,474 shares of common stock at a weighted average exercise price of $4.04 per share and a warrant to purchase 155,815 shares of Class A common stock at an exercise price of $4.62 per share were outstanding, which warrant was exercised in October 2007. If all those options had been exercised and assuming the exercise of the warrant, the exercise of the options to purchase 259,050 shares that are to be issued at the time of the pricing of this offering and the issuance of 72,093 shares of restricted common stock to be issued at the time of the closing of this offering, the dilution to new investors purchasing shares in the offering as of June 30, 2007 would have decreased by $0.48 per share to $14.65 per share. To the extent that any options or warrants are granted in the future and are exercised, new investors will experience further dilution.

 

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following table shows our consolidated statements of operations, balance sheet and other financial and operating data as of the dates and for each of the periods indicated. The selected consolidated statements of operations and the other financial data for the years ended December 31, 2004, 2005 and 2006 and the selected balance sheet data as of December 31, 2005 and 2006 are derived from our audited consolidated financial statements prepared in accordance with GAAP, which appear elsewhere in this prospectus. The selected consolidated statements of operations and the other financial data for the years ended December 31, 2002 and 2003 and the selected consolidated balance sheet data as of December 31, 2002, 2003 and 2004 are derived from our audited consolidated financial statements prepared in accordance with GAAP, which are not included in this prospectus. Our historical results are not necessarily indicative of our results for any future period.

 

The selected consolidated statement of operations data for the six months ended June 30, 2006 and 2007 and the selected consolidated balance sheet data as of June 30, 2007 have been derived from our unaudited consolidated financial statements which are included elsewhere in this prospectus. In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements, except we adopted FAS 123(R) as of January 1, 2006, and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of our financial position and operating results for the unaudited periods. The selected consolidated financial and operating data as of and for the six months ended June 30, 2007 are not necessarily indicative of the results that may be obtained for a full year.

You should read this data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes appearing elsewhere in this prospectus.

 

 

 

 

 

 

 

 

However, EBITDA from continuing operations is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA from continuing operations in addition to, and not as an alternative for, income from continuing operations as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA from continuing operations may not be comparable to similarly titled measures of other companies and is therefore limited as a comparative measure. Furthermore, as an analytical tool EBITDA from continuing operations has additional limitations, including that (a) it is not intended to be a measure of free cash flow, as it does not consider certain cash requirements such as tax payments, (b) it does not reflect changes in, or cash requirements for, our working capital needs; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements, or future requirements for capital expenditures or contractual commitments. To compensate for these limitations, we evaluate our profitability by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of cash flows from operations and through the use of other financial measures.

 

We believe EBITDA from continuing operations is useful to an investor in evaluating our operating performance and liquidity because it is widely used to measure a company’s operating performance without regard to certain non-cash expenses (such as depreciation and amortization) and expenses that are not reflective of our core operating results over time. We believe EBITDA from continuing operations presents a meaningful measure of corporate performance exclusive of our capital structure, the method by which assets were acquired and non-cash charges, and provides us with additional useful information to measure our performance on a consistent basis, particularly with respect to changes in performance from period to period.

 

Our management uses EBITDA from continuing operations:

 

 

The following table provides a reconciliation of income (loss) from continuing operations to EBITDA from continuing operations: