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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: August 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number : 0-25232
APOLLO GROUP, INC.
(Exact name of registrant as specified in its charter)
ARIZONA 86-0419443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (602) 966-5394
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE NONE
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, NO PAR
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
No shares of the Company's Class B Common Stock, its voting stock, is held by
non-affiliates. The holders of the Company's Class A Common stock are not
entitled to any voting rights. The number of shares outstanding for each of
the registrant's classes of common stock, as of October 10, 1997, is as
follows:
Class A Common Stock, no par 50,688,244 Shares
Class B Common Stock, no par 547,819 Shares
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-K
INDEX
PAGE
PART I ----
Item 1. Business 3
Item 2. Properties 29
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 31
Item 6. Selected Consolidated Financial Data 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 34
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 66
PART III
Item 10. Directors and Executive Officers of the Registrant 67
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial
Owners and Management 79
Item 13. Certain Relationships and Related Transactions 80
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 81
SIGNATURES 85
2
PART I
Item 1 -- Business
OVERVIEW
Apollo Group, Inc. ("Apollo" or the "Company"), through its
subsidiaries, the University of Phoenix, Inc. ("UOP"), the Institute for
Professional Development ("IPD"), the College for Financial Planning,
Inc.("CFPI") and Western International University, Inc. ("WIU"), is a leading
provider of higher education programs for working adults based on the number
of working adults enrolled in its programs. The consolidated enrollment in
the Company's educational programs would make it the largest private
institution of higher education in the United States. The Company currently
offers its programs and services at over 100 campuses and learning centers in
31 states, Puerto Rico and London, England. The Company's enrollment,
excluding CFPI which was acquired in September 1997, has increased to 57,382
at August 31, 1997 from 24,987 at August 31, 1993.
Based on its enrollment of over 42,000 adult students, UOP is currently
one of the largest regionally accredited private universities in the United
States and has one of the nation's largest private business schools. UOP has
been accredited by the Commission on Institutions of Higher Education of the
North Central Association of Colleges and Schools ("NCA") since 1978 and has
successfully replicated its teaching/learning model while maintaining
educational quality at over 57 campuses and learning centers in Arizona,
California, Colorado, Florida, Hawaii, Louisiana, Michigan, Nevada, New
Mexico, Oregon, Utah, Washington and Puerto Rico. UOP has developed
specialized systems for student tracking, marketing, faculty recruitment and
training, financial aid, accounting and academic quality management. These
systems enhance UOP's ability to expand into new markets while still
maintaining academic quality. Currently, approximately 55% of UOP's students
receive some level of tuition reimbursement from their employers, many of
which are Fortune 500 companies.
The Online campus was established by UOP in 1989 to provide group-based,
faculty-led instruction through computer-mediated communications. The Online
campus currently serves approximately 3,300 degree-seeking students. Students
can access their Online classes with a computer and modem from anywhere in
the world, on schedules that meet their individual needs. Online's degree
programs can be accessed though direct-dial, local Internet providers or
CompuServe(R). The Online faculty receive specialized training to enable
them to teach effectively in the electronic learning environment. The same
academic quality management standards applied to campus-based programs,
including the assessment of student learning outcomes, are applied to
programs delivered through Online.
IPD provides program development and management services under long-term
contracts that meet the guidelines of the client institutions' respective
regional accrediting associations. IPD provides these services to 18
regionally accredited private colleges and universities at over 38 campuses
and learning centers in 20 states and shares in the tuition revenues
generated from these programs. IPD is able to assist these colleges and
universities in expanding and diversifying their programs for working adults.
IPD places a priority on institutions that: (1) are interested in developing
or expanding off-campus degree programs for working adults; (2) recognize
that working adults require a different teaching/learning model than the 18
to 24 year old student; (3) desire to increase enrollments with a limited
investment in institutional capital and (4) recognize the unmet
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educational needs of the working adult students in their market.
Approximately 13,900 students are currently enrolled in IPD-assisted
programs.
On September 23, 1997, the Company acquired the assets and related
business operations of the College for Financial Planning and related
divisions that include the Institute for Wealth Management, the Institute for
Retirement Planning, the American Institute for Retirement Planners, Inc. and
the Institute for Tax Studies. The purchase price consisted of $19.1 million
in cash, $15.9 million in stock and the assumption of approximately $17.3
million in liabilities, consisting primarily of deferred tuition revenue.
With current enrollments of over 22,000 students, CFPI is one of the largest
U.S. providers of financial planning education programs, including the
Certified Financial Planner Professional Education Program.
WIU currently offers graduate, undergraduate and certificate degree
programs to approximately 1,300 students and has a total of four campuses and
learning centers in Phoenix, Fort Huachuca and Douglas, Arizona and London,
England.
The Company was incorporated in Arizona in 1981 and maintains its
principal executive offices at 4615 East Elwood Street, Phoenix, Arizona
85040. The Company's telephone number is (602) 966-5394. The Company's
Internet Web Site addresses are as follows:
- Apollo and IPD http://www.apollogrp.edu
- UOP http://www.uophx.edu
- WIU http://www.wintu.edu
- CFPI http://www.cfpi.edu
The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 1997, 1996 and 1995 relate to the
fiscal years ended August 31, 1997, 1996 and 1995, respectively.
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements relating to future plans, expectations, events or
performances involve risks and uncertainties and a number of factors could
affect the validity of such forward-looking statements, including those set
forth in Item 1 of this Form 10-K under the sections "Regulatory
Environment," "Accreditation," "Federal Financial Aid Programs" and "State
Authorizations."
MARKET
The United States education market may be divided into the following
distinct segments: kindergarten through twelfth grade schools ("K-12"),
vocational and technical training schools, workplace and consumer training,
and degree-granting colleges and universities ("higher education"). The
Company primarily operates in the higher education segment and, with the
acquisition of CFPI and the introduction of other non-degree programs, also
operates in the workplace and consumer training segments. The
U.S. Department of Education National Center for Education Statistics
("NCES") estimated that for 1995 (the most recent historical year reported),
adults over 24 years of age comprised approximately 6.2 million, or 43.5%, of
the 14.3 million students enrolled in higher education programs. Currently,
the U.S. Bureau of Census estimates that approximately 75% of students over
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the age of 24 work while attending school. The NCES estimates that by the
year 2002 the number of adult students over the age of 24 will increase to
6.3 million, or 41.5%, of the 15.2 million students projected to be enrolled
in higher education programs.
The Company believes that the unique needs of working adults include the
following:
- Convenient access to a learning environment (including both location
and delivery system)
- Degree programs offered by regionally accredited institutions that
can be completed in a reasonable amount of time
- Programs that provide knowledge and skills with immediate practical
value in the workplace
- Education provided by academically qualified faculty with current
practical experience in fields related to the subjects they instruct
- Administrative services designed to accommodate the full-time
working adult's schedule
- Recognition of adult students as critical consumers of educational
programs and services
- A learning environment characterized by a low student-to-faculty
ratio
- Learning resources available electronically to all students
regardless of geographical location
The Company also believes that the increasing demand from and the unique
requirements of the adult working population represent a significant market
opportunity to regionally accredited higher education institutions that can
offer programs that meet these unique needs.
Most regionally accredited colleges and universities are focused on
serving the 18 to 24 year old student market. This focus has resulted in a
capital-intensive teaching/learning model that may be characterized by: (1) a
high percentage of full-time tenured faculty with doctoral degrees;
(2) fully-configured library facilities and related full-time staff;
(3) dormitories, student unions and other significant plant assets to support
the needs of younger students and (4) an emphasis on research and the related
staff and facilities. In addition, the majority of accredited colleges and
universities continue to provide the bulk of their educational programming
from September to mid-December and from mid-January to May. As a result,
most full-time faculty members only teach during that limited period of time.
While this structure serves the needs of the full-time 18 to 24 year old
student, it limits the educational opportunity for working adults who must
delay their education for up to five months during these spring, summer and
winter breaks. In addition, this structure generally requires working adults
to attend one course three times a week, commute to a central site, take work
time to complete administrative requirements and, in undergraduate programs,
participate passively in an almost exclusively lecture-based learning format
5
primarily focused on a theoretical presentation of the subject matter. For
the majority of working adults, earning an undergraduate degree in this
manner would take seven to ten years. In recent years, many regionally
accredited colleges and universities have began offering more flexible
programs for working adults, although their focus appears to remain on the 18
to 24 year old students.
BUSINESS STRATEGY
The Company's strategic goal is to become the preferred provider of
higher education programs for working adult students and the preferred
provider of workplace training to their employers. The Company is managed as
a for-profit corporation in a higher education industry served principally by
not-for-profit providers. By design, the Company treats both its adult
students and their employers as its primary customers. Key elements of the
Company's business strategy include the following:
Establish New UOP Campuses and Learning Centers -----------------------------
UOP plans to add campuses and learning centers throughout the United
States. New locations are selected based on an analysis of various factors,
including the population of working adults in the area, the number of local
employers and their educational reimbursement policies and the availability
of similar programs offered by other institutions. Campuses consist of
classroom and administrative facilities with full student and administrative
services. Learning centers differ from campuses in that they consist
primarily of classroom facilities with limited on-site administrative staff.
Establish New IPD Relationships ---------------------------------------------
IPD plans to enter into additional long-term contracts with private
colleges and universities in proximity to metropolitan areas throughout the
United States. In general, IPD seeks to establish relationships with
colleges and universities located in states where it is difficult for out-of-
state accredited institutions to obtain state authorizations. In this way,
the Company is able to optimize its campus-based penetration of potential new
markets.
Expand Educational Programs -------------------------------------------------
The Company expects to continue to respond to the changing educational
needs of working adults and their employers through the introduction of new
undergraduate and graduate degree programs and non-degree programs in
business and information technology ("IT"). The Company currently has a
full-time staff of over 50 persons involved in its centralized curriculum
development process.
The Company is also exploring other educational areas, such as K-12 and
adult remedial education, where it can leverage its educational expertise
and/or delivery systems in a cost-effective manner.
Expand Access to Programs ---------------------------------------------------
The Company plans to expand its distance education programs and
services. Enrollments in distance education degree programs, including
Online, have increased to 4,660 in 1997 from 1,114 in 1993. The Company
plans to convert many of its non-degree business and financial programs so
6
that they may be delivered through the Internet. The Company also plans to
enhance its distance education delivery systems as new technologies become
cost-effective.
International Expansion -----------------------------------------------------
The Company is conducting ongoing market research in various foreign
countries. The Company will continue to monitor and assess the feasibility
of expanding its educational programs internationally.
The timing related to the establishment of new locations and the
expansion of programs may vary depending on regulatory requirements and
market conditions.
TEACHING/LEARNING MODEL-DEGREE PROGRAMS
The Company's teaching/learning model used by UOP and IPD client
institutions was designed for working adults. This model is structured to
enable students who are employed full-time to earn their degrees and still
meet their personal and professional responsibilities. Students attend
weekly classes, averaging 15 students in size, and also meet weekly as part
of a three to five person study group. The study group meetings are used for
review, work on assigned group projects and preparation for in-class
presentations. Courses are designed to facilitate the application of
knowledge and skills to the workplace and are taught by faculty members who
possess advanced degrees and have an average of 15 years of professional
experience in business, industry, government and the professions. In this
way, faculty members are able to share their professional knowledge and
skills with the students.
The Company's teaching/learning model has the following major
characteristics:
Curriculum The curriculum provides for the achievement of
specific educational outcomes that are based on the
input from faculty, students and student employers.
The curriculum is designed to integrate academic
theory and professional practice and the application
to the workplace. The standardized curriculum for
each degree program is also designed to provide
students with specified levels of knowledge and
skills regardless of delivery method or location.
Faculty Faculty applicants must possess an earned master's
or doctoral degree, and have a minimum of five years
recent professional experience in a field related to
the subject matter in which they seek to instruct.
To help promote quality delivery of the curriculum,
UOP faculty members are required to: (1) complete an
initial assessment conducted by staff and faculty;
(2) receive training in grading, facilitation of the
teaching/learning model and oversight of study group
activities; (3) serve an internship with an
experienced faculty mentor and (4) receive ongoing
performance evaluations by students, peer faculty
and staff. The results of these evaluations are
used to establish developmental plans to improve
individual faculty performance and to determine
7
continued eligibility of faculty members to provide
instruction.
Interactive Learning Courses are designed to combine individual and group
activity with interaction between and among students
and the instructor. The curriculum requires a high
level of student participation for purposes of
increasing the student's ability to work as part of
a team.
Learning Resources Students and faculty members are provided with
electronic and other learning resources for their
information needs. During 1996 and 1997, the
Company substantially expanded these services
including the addition of research tools available
on the Internet. These extensive electronic
resources minimize the Company's need for
capital-intensive library facilities and holdings.
Sequential Enrollment Students enroll in and complete courses
sequentially, rather than concurrently, thereby
allowing full-time working adults to focus their
attention and resources on one subject at a time,
thus balancing learning with ongoing personal and
professional responsibilities.
Academic Quality The Company has developed and operationalized an
Academic Quality Management System ("AQMS") that is
designed to maintain and improve the quality of
programs and academic and student services
regardless of the delivery method or location.
Included in the AQMS is the Adult Learning Outcomes
Assessment which seeks to measure student growth in
both the cognitive (subject matter) and affective
(educational, personal and professional values)
domains.
STRUCTURAL COMPONENTS OF TEACHING/LEARNING MODEL
Although adults over 24 currently comprise approximately 43.5% of all
higher education enrollments in the United States, the mission of most
accredited colleges and universities is to serve 18 to 24 year old students
and conduct research. UOP and IPD client institutions acknowledge the
differences in educational needs between older and younger students and
provide programs and services that allow working adult students to earn their
degrees while integrating the process with both their personal and
professional lives.
The Company believes that working adults require a different
teaching/learning model than that designed for the 18 to 24 year old student.
The Company has found that working adults seek accessibility, curriculum
consistency, time and cost effectiveness and learning that has an immediate
application to the workplace. The Company's teaching/learning model differs
from the models used by most regionally accredited colleges and universities
because it is designed to enable adults to complete an undergraduate degree
in four years and a graduate degree in two years while working full-time.
8
The structural components of the Company's teaching/learning model
include:
Accessibility Centrally developed standardized curricula that can
be accessed through a variety of delivery methods
(e.g., campus-based or electronically delivered),
that make the educational programs accessible
regardless of where the students work and live.
Instructional Costs While the faculty at most accredited colleges and
universities are employed full-time, UOP's and IPD
client institutions' part-time faculty are
academically qualified, professionally employed and
are contracted for instructional services on a
course-by-course basis. This policy keeps a portion
of the cost of instruction variable.
Facility Costs The Company leases its campus and learning center
facilities and rents additional classroom space on a
short-term basis to accommodate growth in
enrollments, thus keeping a portion of its
instructional costs variable.
Employed Students UOP's students are employed full-time and
approximately 73% have been employed for nine years
or more. This minimizes the need for
capital-intensive facilities and services (e.g.,
dormitories, student unions, food services, personal
and employment counseling, health care, sports and
entertainment).
Employer Support Approximately 55% of UOP's students currently
receive some level of tuition reimbursement from
their employers, many of which are Fortune 500
companies. The Company develops relationships with
key employers for purposes of recruiting students
and responding to specific employer needs. This
allows the Company to remain sensitive to the needs
and perceptions of employers, while helping both to
generate and sustain diverse sources of revenues.
CFPI currently offers text-based self-study programs for students
preparing for the Certified Financial Planner designation and other
financial-related designations. The Company plans to offer these same
programs in a classroom-based format and also through Internet or Online-based
formats as well. Most of CFPI's students are working and over 75% have
four or more years of college education.
WIU's teaching/learning model has similar characteristics to the
teaching/learning model used by UOP and IPD client institutions, including
the use of part-time practitioner faculty, standardized curriculum,
computerized learning resources and leased facilities. However, WIU provides
educational programs in a semester-based format and does not focus
exclusively on working adult students.
9
PROGRAMS AND SERVICES
UOP Programs ----------------------------------------------------------------
UOP currently offers the following degree programs and related areas of
specialization at one or more campuses and learning centers or through its
distance education delivery systems:
DEGREE PROGRAMS
- ---------------
Associate of Arts in General Studies
Bachelor of Arts in Management
Bachelor of Science in Business
Bachelor of Science in Nursing
Master of Arts in Education
Master of Arts in Organizational Management
Master of Business Administration
Master of Counseling
Master of Nursing
Master of Science in Computer Information Systems
AREAS OF SPECIALIZATION AVAILABLE IN CERTAIN DEGREE PROGRAMS
- ------------------------------------------------------------
Undergraduate BUSINESS
Accounting
Administration
Environmental Management
Management
COMPUTER INFORMATION SYSTEMS
Information Systems
Graduate BUSINESS
Administration
Global Management
Organizational Management
COMPUTER INFORMATION SYSTEMS
Technology Management
Information Systems
EDUCATION
Administration and Supervision
Bilingual-Bicultural
Curriculum and Instruction
Diverse Learner
Educational Counseling
Elementary Education
English as a Second Language
Professional Development for Educators
Special Education
NURSING
Women's Health Nurse Practitioner
10
COUNSELING
Community Counseling
Marriage and Family Therapy
Mental Health Counseling
Marriage, Family and Child Counseling
UOP also offers over 50 certificate programs in the areas of business,
technology, nursing, continuing education for teachers, custom training and
the environment.
Graduate level courses are also offered for students' continuing
professional education requirements, including state teacher certification
and state teacher renewal. Undergraduate students may demonstrate and
document college level learning gained from experience through an assessment
by faculty members (according to the guidelines of the Council for Adult and
Experiential Learning ("CAEL")) for the potential award of credit. The
average number of credits awarded to the approximately 3,700 UOP
undergraduate students who utilized the process in 1997 was approximately 12
credits of the 120 required to graduate. CAEL reports that over 1,300
regionally accredited colleges and universities currently provide for the
assessment mechanism of college level learning gained through experience for
the award of credit.
IPD Services ----------------------------------------------------------------
IPD offers services to its client institutions including: (1) assisting
with curriculum development; (2) conducting market research; (3) developing
and executing marketing strategies; (4) training faculty; (5) establishing
administrative infrastructures; (6) developing and implementing financial
accounting and academic quality management systems; (7) assessing the future
needs of adult students and (8) helping develop additional degree programs
suitable for the adult higher education market. In consideration for its
services, IPD receives a contractual share of tuition revenues from students
enrolled in IPD-assisted programs.
IPD also assists its client institutions in identifying and developing
new degree programs and in seeking the required approvals from their
respective regional accrediting associations. In order to facilitate the
sharing of information related to the operations of their respective
programs, the IPD client institutions and UOP formed the Consortium for the
Advancement of Adult Higher Education ("CAAHE"). CAAHE meets semiannually to
address issues such as the recruitment and training of part-time,
professionally employed faculty, employer input in the curriculum development
process, assessment of the learning outcomes of adult students and regulatory
issues affecting the operation of programs for working adult students.
IPD client institutions offer the following programs with IPD
assistance:
No. of IPD
Degree Programs Client Institutions
- -------------------------------------------------- --------------------
Associate of Arts 2
Associate of Science in Business 7
Bachelor of Arts in Business Administration 2
Bachelor of Arts in Management 1
Bachelor of Business Administration 8
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Bachelor of Science in Business Administration 6
Bachelor of Science in Human Resources Management 1
Bachelor of Science in Management 8
Bachelor of Science in Management Information Systems 1
Bachelor of Science in Nursing 1
Master of Business Administration 11
Master of Science in Management 7
Master of Science in Health Services Administration 1
The IPD-assisted programs also include a limited number of general
education courses, certificate programs and areas of specialization.
CFPI Programs ---------------------------------------------------------------
CFPI currently offers a Masters of Science degree with a concentration
in Financial Planning and the following non-degree programs:
Accredited Asset Management Specialist
Certified Financial Planner
Chartered Mutual Fund Counselor
Foundations in Financial Planning
Chartered Retirement Planning Counselor
Accredited Tax Advisor
Accredited Tax Preparer
WIU Programs ----------------------------------------------------------------
WIU currently offers the following degree and certificate programs:
DEGREE PROGRAMS WITH RELATED MAJORS
- ---------------------------------------------
ASSOCIATE OF ARTS
BACHELOR OF SCIENCE
- - Accounting
- - Aviation Management
- - Business Administration
- - Finance
- - Health Systems Management
- - Information Systems
- - International Business
- - Management
- - Marketing
BACHELOR OF ARTS
- - Administration of Justice
- - Behavioral Science
MASTER OF BUSINESS ADMINISTRATION
- - Finance
- - Health Care Management
- - International Business
- - Management
- - Management Information Services
- - Marketing
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MASTER OF PUBLIC ADMINISTRATION
MASTER OF SCIENCE
- - Accounting
- - Information Systems
- - Information Systems Engineering
WIU also offers a limited number of business-related certificate
programs.
Faculty ---------------------------------------------------------------------
UOP's faculty is comprised of approximately 4,100 working professionals
with earned master's or doctoral degrees and an average of 15 years of
experience in business, industry, government or the professions. To help
promote quality delivery of the curriculum, UOP faculty members are required
to: (1) complete an initial assessment conducted by staff and faculty;
(2) receive training in grading, facilitation of the teaching/learning model
and oversight of study group activities and (3) receive ongoing performance
evaluations by students, peer faculty and staff. The results of these
evaluations are used to establish developmental plans to improve individual
faculty performance and to determine continued eligibility of faculty members
to provide instruction. Most faculty members are recruited as the result of
referrals from faculty, students and corporate contacts. All faculty are
contracted on a course-by-course basis (generally a five to ten week period).
The faculty teaching in IPD-assisted programs are comprised of full-time
faculty from the client institution as well as qualified part-time faculty
who instruct only in these adult programs. The part-time faculty must be
approved by each client institution. IPD makes the AQMS available to its
client institutions to evaluate faculty and academic and administrative
quality. Both UOP and IPD have been successful in recruiting faculty members
who meet these academic and professional requirements.
CFPI's programs are primarily self-study non-degree programs where there
is little or no faculty involvement in the delivery of the programs.
However, CFPI employs approximately 16 faculty who are involved in curriculum
development and the instructional design process.
WIU's faculty consists of approximately 140 working professionals.
WIU's practitioner faculty possess earned master's or doctoral degrees and
participate in a selection and training process that is similar to that at
UOP.
Academic Accountability -----------------------------------------------------
UOP is one of the first regionally accredited universities in the nation
to create and utilize an institution-wide system for the assessment of the
educational outcomes of its students. The information generated is employed
by UOP to improve the quality of the curriculum, instruction and the
Company's teaching/learning model. UOP's undergraduate and graduate students
complete a comprehensive cognitive (core degree subject matter) and affective
(educational, personal and professional values) assessment prior to and upon
the completion of their core degree requirements.
13
Students at UOP and IPD client institutions evaluate both academic and
administrative quality. This evaluation begins with a registration survey
and continues with the evaluation of the curriculum, faculty, delivery
method, instruction and administrative services upon the conclusion of each
course. The evaluation also includes a survey of a random selection of
graduates 2-3 years following their graduation. The results provide an
ongoing basis for improving the teaching/learning model, selection of
educational programs and instructional quality.
Admissions Standards --------------------------------------------------------
To gain admission to the undergraduate programs of UOP, WIU and the IPD
client institutions, students generally must have a high school diploma or
General Equivalency Diploma ("G.E.D.") and satisfy certain minimum grade
point average, employment and age requirements. Additional requirements may
apply to individual programs. Students in undergraduate programs may
petition to be admitted on provisional status if they do not meet certain
admission requirements.
To gain admission to the graduate programs of UOP, WIU, CFPI and the IPD
client institutions, students generally must have an undergraduate degree
from a regionally accredited college or university and satisfy minimum grade
point average, work experience and employment requirements. Additional
requirements may apply to individual programs. Students in graduate programs
may petition to be admitted on provisional status if they do not meet certain
admission requirements.
DISTANCE EDUCATION COMPONENTS
At August 31, 1997, there were approximately 4,700 students utilizing
the Company's distance education delivery systems, approximately 70% of whom
are enrolled in Online. The Company's distance education components consist
primarily of the following:
Online Computer Conferencing ------------------------------------------------
The Online campus was established by UOP in 1989 to provide group-
based, faculty-led instruction through computer-mediated communications.
Students can access their online classes with a computer and modem from
anywhere in the world, on schedules that meet their individual needs. Online
students work together in small groups of 8 to 13, to engage in class
discussion and study group activities that are focused on the same learning
outcomes and objectives required in UOP's classroom degree programs. This
enables the Online students to enjoy the benefits of a study group, where
they can share their regional and cultural differences with each other in the
context of their coursework. Since all communication is asynchronous,
students are not required to participate at the same time. Online's degree
programs can be accessed though direct-dial, the CompuServe(R) network, or
most Internet service providers (CompuServe(R)is a registered trademark of
CompuServe Incorporated, Columbus, Ohio).
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Directed Study --------------------------------------------------------------
Working adult students may also complete individual courses under the
direct weekly instructional supervision of a member of the faculty. These
directed study programs utilize the same courses, faculty and resources
available at UOP campuses. Course assignments are completed in a structured
environment that allows flexibility of schedules. Communication with the
faculty member is by telephone, e-mail, fax or mail.
CPE Internet --------------------------------------------------------------
Business and investment professionals that require continuing
professional education (CPE) as part of their professional certification or
employer requirements may complete individual CPE courses through the
Internet through most online browsers. These programs are short, interactive
courses designed to focus on relevant topics to the students' trade or
profession. The students interact primarily with the Company's web-based
software programs with little or no faculty involvement. The Company plans
to convert much of its non-degree programs in Business, financial planning
and IT to this web-based format so the consumers have more options in
receiving this type of CPE instruction. CFPI also plans to use this same
technology to deliver preparatory work for professional certifications in
addition to its text-based self study delivery methods.
Distance education is currently subject to certain regulatory
constraints. See "Business -- Federal Financial Aid Programs -- Restrictions
on Distance Education Programs" and "Business -- State Authorization."
ACQUISITION STRATEGY
The Company periodically evaluates opportunities to acquire businesses
and facilities. In evaluating such opportunities, management considers,
among other factors, location, demographics, price, the availability of
financing on acceptable terms, competitive factors and the opportunity to
improve operating performance through the implementation of the Company's
operating strategies. The Company has no current commitments with regard to
potential acquisitions.
CUSTOMERS
The Company's customers consist of working adult students, colleges and
universities, governmental agencies and employers. Following is a breakdown
of the Company's students by the level of program they are seeking, at August
31:
15
1997 1996
------ ------
Degree Programs:
Master's 30.2% 30.6%
Bachelor's 60.8% 61.1%
Associate 5.3% 4.2%
------ ------
Total degree programs 96.3% 95.9%
Non-degree Programs:
Certificate, corporate training and
continuing professional education 3.7% 4.1%
------ ------
Total 100.0% 100.0%
====== ======
CFPI, which was acquired on September 23, 1997, has approximately 22,600
students at September 30, 1997, 96% of whom are in non-degree programs.
Based on recent student surveys, the average age of UOP students is in
the mid-thirties, approximately 54% are women and 46% are men, and the
average annual household income is $51,000. Approximately 73% of UOP
students have been employed on a full-time basis for nine years or more. The
Company believes that the demographics of students enrolled in IPD-assisted
programs are similar to those of UOP. The approximate age distribution of
incoming UOP students is as follows:
Age Percentage of Students
------------------------ -----------------------
25 and under 12%
26 to 33 37%
34 to 45 40%
46 and over 11%
-------
100%
=======
Based on recent student surveys, the average age of CFPI students is in
the mid-thirties, approximately 30% are women and 70% are men, most are
employed and over 75% have four or more years of college education.
IPD client institutions have historically consisted of small private
colleges; however, IPD also targets larger institutions of higher education
that are in need of marketing and curriculum consulting. The Company
believes that to develop and manage educational programs for working adult
students effectively, these potential client institutions require both
16
capital and operational expertise. In response to these requirements, IPD
provides the start-up capital, the curriculum development expertise and the
ongoing management in support of the client institutions' provision of
quality programs for working adult students.
The Company also considers the employers of its students as customers.
Many of these employers provide tuition reimbursement programs in order to
educate and provide degree opportunities to their employees. Currently,
approximately 55% of UOP's incoming students receive some level of tuition
reimbursement from their employers, many of which are Fortune 500 companies.
Of these students receiving reimbursement, approximately 83% receive at least
one-half tuition reimbursement and approximately 40% receive full tuition
reimbursement.
CORPORATE PARTNERSHIPS
The Company cooperates and interacts with businesses and governmental
agencies in offering programs designed to meet their specific needs either by
modifying existing programs or, in some cases, by developing customized
programs. These programs are often held at the employers' offices or on-site
at military bases. UOP has also formed educational partnerships with various
companies to provide programs specifically designed for their employees.
MARKETING
To generate interest among potential UOP, WIU and IPD client institution
students, the Company engages in a broad range of activities to inform
potential students about the Company's teaching/learning model and the
programs offered. These activities include print and broadcast advertising,
advertising on services such as CompuServe (R), direct mail and information
meetings at targeted organizations (CompuServe (R) is a registered trademark
of CompuServe Incorporated, Columbus, Ohio). The Company also attempts to
locate its campuses and learning centers near major highways to provide high
visibility and easy access. A substantial portion of new UOP and IPD client
institution students are referred by alumni, employers and currently enrolled
students.
The Company also has Web Sites on the Internet World Wide Web
(http://www.apollogrp.edu, http://www.uophx.edu, http://www.wintu.edu, and
http://www.cfpi.edu) that allow electronic access to Company information,
product information, research, etc. The Company's Web Sites are accessible
from major online networks and Internet service providers.
UOP and WIU advertising is centrally monitored and is directed primarily
at local markets in which a campus or learning center is located. IPD client
institutions approve and monitor all advertising provided by IPD on their
behalf. Direct responses to advertising and direct mail are received,
tracked and forwarded promptly to the appropriate enrollment counselors. In
addition, all responses are analyzed to provide data for future marketing
efforts.
The Company employs over 300 enrollment counselors in its marketing
system who make visits and presentations at various organizations and who
follow up on leads generated from the Company's advertising efforts and
referrals. These individuals also pursue direct responses to interest from
17
potential individual students by arranging for interviews either at a UOP,
WIU or IPD location or at a prospective student's place of employment.
Interviews are designed to establish a prospective student's qualifications,
academic background, course interests and professional goals. Student
recruiting policies and standards and procedures for hiring and training
university representatives are established centrally, but are implemented at
the local level through a director of enrollment or marketing at each
location.
CFPI plans to market its product primarily through print and direct mail
advertising until its programs are available electronically through the
Internet, at which time it will also advertise using various online media.
COMPETITION
The higher education market is highly fragmented and competitive with no
private or public institution enjoying a significant market share. The
Company competes primarily with four-year and two-year degree-granting public
and private regionally accredited colleges and universities. Many of these
colleges and universities enroll working adults in addition to the
traditional 18 to 24 year old students and some have greater financial and
personnel resources than the Company. The Company expects that these
colleges and universities will continue to modify their existing programs to
serve working adults more effectively. In addition, many colleges and
universities have announced various distance-education initiatives.
The Company competes primarily at a local and regional level with other
regionally accredited colleges and universities based on the quality of
academic programs, the accessibility of programs and learning resources
available to working adults, the cost of the program, the quality of
instruction and the time necessary to earn a degree.
In terms of non-degree programs, the Company competes with a variety of
business and IT providers, primarily those in the for-profit training sector.
Many of these competitors have significantly more market share, longer-term
relationships with key vendors and, in some cases, more financial resources
than the Company. There is no assurance that the Company will be able to
gain market share in these more competitive non-degree markets to the same
extent it has done with its degree programs.
IPD faces competition from other entities offering higher education
curriculum development and management services for adult education programs.
The majority of IPD's current competitors provide pre-packaged curricula or
turn-key programs. IPD client institutions, however, face competition from
both private and public institutions offering degree and non-degree programs
to working adults.
18
EMPLOYEES
At September 30, 1997, the Company had the following numbers of
employees:
Full-Time Part-Time Faculty Total
--------- --------- --------- ---------
Apollo 246 8 -- 254
UOP 1,434 93 4,142 5,669
IPD 229 11 -- 240
CFPI 76 9 16 101
WIU 48 24 144 216
------ ------ ------ ------
Total 2,033 145 4,302 6,480
====== ====== ====== ======
______________
Consists primarily of employees in information systems, corporate
accounting, financial aid, human resources and Apollo Press.
Consists primarily of part-time professional faculty contracted on a
course-by-course basis.
Faculty teaching IPD-assisted programs are employed by IPD client
institutions.
Faculty involved primarily in curriculum development and the
instructional design process.
The Company considers its relations with its employees to be good.
REGULATORY ENVIRONMENT
The Higher Education Act of 1965, as amended (the "HEA") and the
regulations promulgated thereunder (the "Regulations") subject all higher
education institutions eligible to participate in Federal Financial Aid
programs under Title IV of the HEA ("Title IV Programs") to increased
regulatory scrutiny. The HEA mandates specific additional regulatory
responsibilities for each of the following components of the higher education
regulatory triad: (1) the accrediting agencies recognized by the United
States Department of Education (the "DOE"); (2) the federal government
through the DOE and (3) state higher education regulatory bodies. All higher
education institutions participating in Title IV Programs must first be
accredited by an association recognized by the DOE. The DOE reviews all such
participating institutions for compliance with all applicable HEA standards
and regulations. Under the HEA, accrediting associations are required to
include the monitoring of certain aspects of Title IV Program compliance as
part of their accreditation evaluations.
New or revised interpretations of regulatory requirements could have a
material adverse effect on the Company. In addition, changes in or new
interpretations of other applicable laws, rules or regulations could have a
material adverse effect on the accreditation, authorization to operate in
19
various states, permissible activities and costs of doing business of UOP,
WIU and one or more of the IPD client institutions. The failure to maintain
or renew any required regulatory approvals, accreditation or state
authorizations by UOP or certain of the IPD client institutions could have a
material adverse effect on the Company.
ACCREDITATION
UOP, WIU, CFPI, and the IPD client institutions are accredited by
regional accrediting associations recognized by the DOE. Accreditation
provides the basis for: (1) the recognition and acceptance by employers,
other higher education institutions and governmental entities of the degrees
and credits earned by students; (2) the qualification to participate in
Title IV Programs and (3) the qualification for authorization in certain
states. CFPI has not participated in Title IV programs as most of its
students are enrolled in non-degree programs.
UOP was granted accreditation by NCA in 1978. UOP's accreditation was
reaffirmed in 1982, 1987, 1992 and 1997. The next focus evaluation visit is
scheduled to begin in 1999, and the next NCA reaffirmation visit is scheduled
to begin in 2002. IPD-assisted programs offered by the IPD client
institutions are evaluated by the client institutions' respective regional
accrediting associations either as part of a reaffirmation or focused
evaluation visits. Current IPD client institutions are accredited by NCA,
Middle States, New England or Southern regional accrediting associations.
CFPI is accredited by NCA and the Accrediting Commission of the Distance
Education and Training Council ("DETC"). NCA and DETC consented to the
change of ownership resulting from the Company's acquisition of the assets
and related operations of the College for Financial Planning and related
divisions in September 1997. Both DETC and NCA plan to schedule focus-visits
for CFPI in 1998. WIU is accredited by NCA and is scheduled to have its next
reaffirmation visit in the Spring of 1998. The withdrawal of accreditation
from UOP or certain IPD client institutions would have a material adverse
effect on the Company.
All accrediting agencies recognized by the DOE are required to include
certain aspects of Title IV Program compliance in their evaluations of
accredited institutions. As a result, all regionally accredited
institutions, including UOP, WIU and IPD client institutions, will be subject
to a Title IV Program compliance review as part of accreditation visits.
Regional accreditation is accepted nationally as the basis for the
recognition of earned credit and degrees for academic purposes, employment,
professional licensure and, in some states, for authorization to operate as a
degree-granting institution. Under the terms of a reciprocity agreement
among the six regional accrediting associations, representatives of each
region in which a regionally accredited institution operates participate in
the evaluations for reaffirmation of accreditation. The achievement of UOP's
and WIU's missions require them to employ academically qualified practitioner
faculty that are able to integrate academic theory with current workplace
practice. Because of UOP's and WIU's choice to utilize all practitioner
faculty, they have not sought business school program accreditation of the
type found at many institutions whose primary missions are to serve the 18 to
24 year old student and to conduct research.
20
UOP's Bachelor of Science in Nursing ("BSN") program received program
accreditation from the National League for Nursing ("NLN") in 1989. The
accreditation was reaffirmed in October 1995 and the next NLN reaffirmation
is scheduled for 2003. The Company believes that the BSN program
accreditation is in good standing.
UOP's Community Counseling program (Master of Counseling degree)
received initial accreditation from the Council for Accreditation of
Counseling and Related Educational Programs in 1995, effective through 2002.
The address and phone number for the accrediting bodies referred to
herein are as follows:
North Central Association of Colleges and Schools
Commission on Institutions of Higher Education
30 North LaSalle Street, Suite 2400
Chicago, Illinois 60602-2504
(312) 263-0456
National League for Nursing
350 Hudson Street
New York, New York 10014
(212) 989-9393
American Counseling Association
Council for Accreditation of Counseling and
Related Educational Programs
5999 Stevenson Avenue
Alexandria, VA 22304
(703) 823-9800
Accrediting Commission of the Distance Education and Training Council
1601 18th Street, NW
Washington, D.C. 20009-2529
(202) 234-5100
FEDERAL FINANCIAL AID PROGRAMS
Most UOP, WIU and IPD client institution students participate in Title
IV Programs. CFPI does not participate in Title IV programs because most of
its students are enrolled in non-degree programs. UOP and WIU derive
approximately 51% and 31% of their net revenues from students who participate
in Title IV Programs, respectively. The IPD percentages are estimated to be
similar to those at UOP. The respective IPD client institutions administer
their own Title IV Programs. The Company's students are eligible to receive
Title IV financial aid because: (i) UOP, WIU and IPD client institutions are
accredited by an accrediting association recognized by the DOE; (ii) the DOE
has certified UOP's, WIU's and IPD client institutions' Title IV Program
eligibility and (iii) UOP, WIU and IPD client institutions have applicable
state authorization to operate and their operating sites have been approved
by the DOE.
The DOE has promulgated Regulations, the most recent of which became
effective on July 1, 1997, that amend certain provisions of the Title IV
Programs and the Regulations promulgated thereunder. Some of the more
important provisions of these Regulations include the following:
21
Limits on Title IV Program Funds --------------------------------------------
The Regulations define the types of educational programs offered by an
institution that qualify for Title IV Program funds. For students enrolled in
qualified programs, the Regulations place limits on the amount of Title IV
Program funds that a student is eligible to receive in any one academic year
(as defined by the DOE).
For undergraduate programs, an academic year must consist of at least 30
weeks of instruction or a minimum of 24 credit hours. Because the
Regulations define a week of instruction as the equivalent of 12 hours of
regularly scheduled instruction, examinations or preparation for
examinations, an academic year would require a minimum of 360 hours (30 weeks
times 12 hours per week). Most of the Company's degree programs meet this
360 hour minimum and, therefore, qualify for Title IV Program funds. The
programs that do not qualify for Title IV Program funds consist primarily of
certificate, corporate training and continuing professional education
programs. These programs are paid for directly by the students or their
employers.
Authorizations for New Locations --------------------------------------------
UOP, WIU, and CFPI and IPD client institutions are required to have
authorization to operate as degree-granting institutions in each state where
they physically provide educational programs. Certain states accept
accreditation as evidence of meeting minimum state standards for
authorization. Other states, including California, require separate
evaluations for authorization. Depending on the state, the addition of a
degree program not offered previously or the addition of a new location must
be included in the institution's accreditation and be approved by the
appropriate state authorization agency. UOP, WIU, CFPI, and IPD client
institutions are currently authorized to operate in all states in which they
have physical locations. If UOP is unable to obtain authorization to operate
in certain new states, it may have a material adverse effect on the Company's
ability to expand UOP's business.
In addition, NCA requires UOP and CFPI to obtain NCA's prior approval
before they are permitted to expand into new states. Although NCA recently
approved UOP's expansion into Oregon and Washington, NCA did not adopt its
visitation team's recommendation to eliminate the requirement that UOP obtain
prior approval for all future geographic expansion by UOP. If UOP is unable
to obtain NCA's approval for any future geographic expansion, it may have a
material adverse effect on the Company's ability to expand UOP's business.
Restricted Cash -------------------------------------------------------------
The DOE places certain restrictions on Title IV Program funds collected
for unbilled tuition and funds transferred to the Company through electronic
funds transfer. An institution is required to submit an irrevocable letter
of credit to the DOE in an amount equal to at least 25% of the total dollar
amount of refunds paid by the institution in its most recent fiscal year;
however, the letter of credit requirement is waived if an institution meets
the DOE's standards related to timeliness of refunds, financial
responsibility and other criteria. To date, the Company has not been
required by the DOE to establish any material letter of credit. The DOE will
make an evaluation of the need, if any, for UOP and/or WIU to submit
letter(s) of credit as part of its Title IV program reviews of UOP and WIU.
22
Standards of Financial Responsibility ---------------------------------------
Pursuant to the Regulations, all eligible higher education institutions
must meet several factors of financial responsibility including an acid test
ratio (defined as the ratio of cash, cash equivalents, restricted cash,
current investments and current accounts receivable to total current
liabilities) of at least 1 to 1 at the end of the institution's fiscal year.
At August 31, 1997, UOP's acid test ratio was 1.41 to 1 and WIU's acid test
ratio was 1.81 to 1.
The DOE announced in September 1996 that it intends to issue new
regulations with respect to institutional oversight. The proposed rules have
gone through a series of revisions, the latest of which, if adopted, will be
effective July 1, 1998. The DOE is proposing a new system of evaluating each
institution's audited financial statements for determining financial
stability. Rather than using the current limited ratio analysis, including
the acid test ratio, the DOE is proposing separate measures of financial
responsibility covering items such as liquidity, viability, profitability,
ability to borrow and capital resources. Although it is uncertain whether
the new system will be adopted in its present form, it does not appear at
this time that the Company will be significantly impacted by the proposal.
Branching and Classroom Locations -------------------------------------------
The Regulations contain specific requirements governing the
establishment of new main campuses, branch campuses and classroom locations
at which any student receives more than 50% of his or her instruction. In
addition to classrooms at campuses and learning centers, locations affected
by these requirements include the business facilities of client companies,
military bases and conference facilities used by UOP and WIU. The Company
believes that it has obtained approval for all UOP and WIU locations required
to be approved by the Regulations. The DOE announced in August 1997 its plan
to require institutions to obtain an official approval number for all new
sites prior to certification and its intention to issue these approval
numbers within 35 days of the approval request. Should the DOE significantly
delay approvals of new locations beyond the current or planned approval time
rate, the Company's business strategy may be impacted negatively.
The "85/15 Rule" ------------------------------------------------------------
A requirement of the HEA, commonly referred to as the "85/15 Rule,"
applies only to for-profit institutions of higher education, which includes
UOP and WIU but not IPD client institutions. Under this rule, for-profit
institutions will be ineligible to participate in Title IV Programs if the
amount of Title IV Program funds used by the students or institution to
satisfy tuition, fees and other costs incurred by the students exceed 85% of
the institution's cash-basis revenues from eligible programs. UOP's and
23
WIU's percentage was 56% and 36%, respectively, at August 31, 1997. UOP and
WIU are required to calculate this percentage at the end of each fiscal year.
Student Loan Defaults -------------------------------------------------------
Eligible institutions must maintain a student loan cohort default rate
of less than 35% for each of the federal fiscal years 1991 and 1992, 30% for
fiscal year 1993 and 25% for fiscal year 1994 and all subsequent fiscal
years. In 1994, the most recent DOE cohort default rate reporting period,
the national cohort default rate average for all higher education
institutions was 10.7%. UOP and WIU students' cohort default rates for the
Federal Family Education Loans for fiscal 1994 as reported by the DOE were
5.1% and 7.1%, respectively, and IPD client institution students' cohort
default rates averaged 6.2% over that same period.
Compensation of Representatives ---------------------------------------------
The Regulations prohibit an institution from providing any commission,
bonus, or other incentive payment based directly or indirectly on success in
securing enrollments or financial aid to any person or entity engaged in any
student recruitment, admission or financial aid awarding activity. The
Company believes that its current method of compensating enrollment
counselors complies with the Regulations.
Eligibility and Certification Procedures ------------------------------------
The HEA specifies the manner in which the DOE reviews institutions for
eligibility and certification to participate in Title IV Programs and the
Regulations include detailed new standards. UOP's and WIU's eligibility to
participate in Title IV Programs expires in 1999 and 1998, respectively. If
the DOE does not renew UOP's eligibility, it would have a material adverse
effect on the Company.
Administrative Capability ---------------------------------------------------
The HEA directs the DOE to assess the administrative capability of each
institution to participate in Title IV Programs. The failure of an
institution to satisfy any of the criteria used to assess administrative
capability may allow the DOE to determine that the institution lacks
administrative capability and, therefore, may be subject to additional
scrutiny or denied eligibility for Title IV Programs.
Title IV Program Reviews ----------------------------------------------------
Effective September 1, 1995, the Company, through its newly formed WIU
subsidiary, completed the acquisition of Western International University
("Western"). In connection with the acquisition, the Company assumed the
Title IV liabilities of Western which were subject to change based on the
results of the DOE's audit of Western's Title IV Programs. Although much of
the fieldwork was completed in early 1996, the final audit results and the
amount that the Company is responsible for has not been determined by the DOE
as of the date of this filing. The original acquisition price of $2.1 million
was adjusted to $3.0 million at August 31, 1996 to reflect an increase in the
estimated liability to the DOE related to Western's processing of Title IV
financial aid and other related liabilities. Depending on the interpretation
of the various regulatory requirements, the final audit results and the
Company's liability may differ materially from the estimates currently
recorded. Any difference between the final amount and the estimates
24
currently recorded will be recorded as an increase or decrease, as
applicable, to expense.
UOP's most recent DOE program review began in March 1997 and the
fieldwork has not yet been completed. UOP has not yet received any official
notification as to the results of the ongoing program review, but expects to
receive notification in the Fall or Winter of 1997. Because the DOE may not
approve new locations while a program review is in process, the financial aid
for new students in new campuses and learning centers may be affected until
such time as the program review is completed. The Company believes that such
expected delays will not have a material adverse affect on its results of
operations because of the availability of alternative financing and employer
tuition reimbursement to many of these students. However, should the DOE not
complete its review for an extended period of time, such a delay may have a
material adverse affect on the Company's ability to expand UOP's business.
Restrictions on Distance Education Programs ---------------------------------
The Regulations specify that an institution is not eligible to
participate in Title IV Programs funding if 50% or more of its courses are
correspondence courses, or if 50% or more of its regular students are
enrolled in the institution's correspondence courses. Although UOP, IPD or
WIU do not offer correspondence courses, the Regulations currently consider
most distance education courses to be correspondence courses if the number of
distance education courses exceeds 50% of the sum of courses offered in
campus-based delivery systems and courses offered through distance education.
Neither UOP, IPD or WIU plan to exceed this 50% level and believes that this
restriction will have no significant impact on its business strategy.
Direct Lending Programs -----------------------------------------------------
The DOE instituted a new direct lending program several years ago and
various institutions are participating in the program. The direct lending
program eliminates third-party lending institutions and guarantee agencies
from the loan disbursement process. The goal of the DOE is to streamline the
financial aid lending process through this program, but there is uncertainty
as to when this goal will be fully attained. Recently, certain members of
Congress have proposed to limit the expansion of the direct lending program.
The Company has not yet been required to implement the new direct lending
process and it is uncertain as to what effect this new process, if
implemented, will have on its cash flow.
Change of Ownership or Control ----------------------------------------------
A change of ownership or control of the Company, depending on the type
of change, may have significant regulatory consequences for UOP and WIU.
Such a change of ownership or control could trigger recertification by the
DOE, reauthorization by certain state licensing agencies or the evaluation of
the accreditation by NCA.
For institutions owned by publicly-held corporations, the DOE has
adopted the change of ownership and control standards used by the federal
securities laws. Upon a change of ownership and control sufficient to
require the Company to file a Form 8-K with the Securities and Exchange
Commission, UOP and WIU would cease to be eligible to participate in Title IV
Programs until recertified by the DOE. This recertification would not be
required, however, if the transfer of ownership and control was made upon a
25
person's retirement or death and was made either to a member of the person's
immediate family or to a person with an ownership interest in the Company who
had been involved in its management for at least two years preceding the
transfer.
In addition, certain states where the Company is presently licensed have
requirements governing change of ownership or control. Currently, Arizona
and California would require UOP and WIU, as applicable, to be reauthorized
upon a 20% and 25% change of ownership or control of the Company,
respectively. These states require a new application to be filed for state
licensing if such a change of ownership or control occurs. Moreover, the
Company is required to report any change in stock ownership of UOP, CFPI, WIU
or Apollo. At that time, NCA may seek to evaluate the effect of such a
change of stock ownership on the continuing operations of UOP, CFPI and WIU.
If UOP is not recertified by the DOE, or does not obtain reauthorization
from the necessary state agencies or has its accreditation withdrawn as a
consequence of any change in ownership or control, there would be a material
adverse effect on the Company.
STATE AUTHORIZATION
UOP currently is authorized to operate in 12 states and Puerto Rico.
UOP has held these authorizations for periods ranging from one to nineteen
years. UOP's NCA accreditation is accepted as evidence of compliance with
applicable state regulations in Arizona, Colorado, Louisiana, Michigan, New
Mexico, Nevada and Utah. Hawaii does not have authorization provisions for
regionally accredited degree-granting institutions. California law requires
an on-site visit to all out-of-state accredited institutions of higher
education every five years to determine if the institution is in compliance
with the State of California regulations. All institutions, including UOP,
that operate in California and are accredited by a regional accrediting
association other than the Western Association of Schools and Colleges are
required to be evaluated separately for authorization to operate. UOP was
granted its most recent California authorization in 1997 for a period through
December 31, 1999. All regionally accredited institutions, including UOP,
are required to be evaluated separately for authorization to operate in
Puerto Rico. UOP was granted its most recent authorization in Puerto Rico in
December 1995 for a period of five years. UOP received a regular license to
operate in Florida in April 1997. UOP is authorized to operate in Washington
and Oregon and received approval from NCA in August 1997 to open campuses in
these states. IPD client institutions possess authorization to operate in
all states in which they offer educational programs, which are subject to
renewal. CFPI is currently authorized to operate in Colorado and does not
require authorization for its self-study programs that are offered worldwide.
WIU is currently authorized to operate in Arizona and London, England.
Certain states assert authority to regulate all degree-granting
institutions if their educational programs are available to their residents,
whether or not the institutions maintain a physical presence within those
26
states. If a state were to establish grounds for asserting authority over
telecommunicated learning, UOP may be required to obtain authorization for,
or restrict access to, its programs available through Online in those states.
EMPLOYER TUITION REIMBURSEMENT
Many of the Company's students receive some form of tuition
reimbursement from their employers. In certain situations, as defined by the
Internal Revenue Code (the "Code"), this tuition assistance qualifies as a
deductible business expense when adequately documented by the employer and
employee. The Code also provides a safe-harbor provision for an exclusion
from wages of up to $5,250 of tuition reimbursement per year per student
under the Educational Assistance Program ("EAP") provision. Although the EAP
provision of the Code expired in June 1997, the Tax Reform Act of 1997, which
was signed into law in August 1997, extended the EAP until June 2000. The
EAP provision does not apply to graduate level programs beginning after June
30, 1996. Employers or employees may still continue to deduct such tuition
assistance where it qualifies as a deductible business expense and is
adequately documented. The percentage of incoming students with access to
employer tuition reimbursement declined to 55% in 1997 from 75% in the prior
year due primarily to the delay in extending the EAP provision and the
expiration of the EAP with respect to graduate level programs.
LOCATIONS
UOP currently has campuses and learning centers located throughout 12
states and Puerto Rico. Following is a list of UOP main campuses and
learning centers as of October 10, 1997, with the year the campus was first
opened and enrollments as of August 31, 1997:
Fiscal Enroll-
Year ment at
UOP Main Campuses and Respective Learning Centers Opened 8/31/97
- -----------------------------------------------------------------------------
ARIZONA: Phoenix Campus 1978 5,802
Mesa
Northwest Phoenix
Scottsdale
Southbank*
Tucson Campus 1983 2,212
Fort Huachuca
CALIFORNIA: Orange County (Fountain Valley Campus) 1981 7,204
Diamond Bar
Edwards Air Force Base
Pasadena
Ontario
Gardena
Ventura
La Mirada
Woodland Hills
San Jose Campus 1980 4,317
San Francisco
Pleasanton/San Ramon
Fresno
Walnut Creek
27
Fiscal Enroll-
Year ment at
UOP Main Campuses and Respective Learning Centers Opened 8/31/97
- -----------------------------------------------------------------------------
California (cont'd) San Diego Campus 1989 2,581
Vista
Chula Vista
32nd St. Naval Station*
Rancho Bernardo*
Sacramento Campus 1993 1,619
Fairfield
Stockton*
COLORADO: Denver Campus 1982 3,707
Aurora
Colorado Springs
Northglenn
FLORIDA: Maitland (Orlando Campus) 1996 662
Tampa Campus** 1998 -
HAWAII: Honolulu Campus 1993 849
LOUISIANA: New Orleans 1996 574
MICHIGAN: Detroit 1996 1,662
Livonia*
NEVADA: Las Vegas Campus 1994 1,115
Nellis Air Force Base
Henderson*
Southwest Las Vegas
NEW MEXICO: Albuquerque Campus 1985 2,106
Kirtland Air Force Base
Santa Fe
Santa Teresa/Las Cruces
Las Alamos*
OREGON: Portland Campus** 1998 -
UTAH: Salt Lake City Campus 1984 1,906
Ogden
Provo
Salt Lake City**
WASHINGTON: Seattle Campus** 1998 -
PUERTO RICO: Guaynabo Campus 1980 1,158
Mayaguez*
DISTANCE EDUCATION: Online, San Francisco, CA 1989 3,296
Center for Distance Education, 1989 1,364
Phoenix, AZ
------
TOTAL UOP ENROLLMENT AT AUGUST 31, 1997 42,134
======
______________
Programs are offered throughout the United States and internationally.
Programs are offered in various states throughout the United States.
* Opened in 1997.
** Opened between September 1 and October 10, 1997.
28
IPD had 18 institutional contracts at August 31, 1997 and 1996. IPD-
assisted programs are currently offered at 39 campuses and learning centers
(38 and 34 at August 31, 1997 and 1996, respectively) in Connecticut,
Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri, New York, North Carolina, Ohio, South
Carolina, Tennessee, Texas, Virginia and Wisconsin.
CFPI operations are located in Denver, Colorado.
WIU currently has four campuses and learning centers located in Phoenix,
Fort Huachuca and Douglas, Arizona and London, England.
Item 2 -- Properties
The Company leases all of its administrative and educational facilities.
In some cases, classes are held in the facilities of the students' employers
at no charge to the Company. Leases generally range from five to seven
years; however, the Company attempts to secure longer leases if it is
advantageous to do so. The Company also leases space from time-to-time on a
short-term basis in order to provide specific courses or programs. The table
below sets forth certain information as of August 31, 1997, with respect to
properties leased by the Company in excess of 10,000 square feet:
LOCATION (CITY/STATE) SQUARE FEET
---------------------- -------------
Phoenix, AZ 151,001
Fountain Valley, CA 53,298
Tucson, AZ 49,469
Phoenix, AZ 39,950
Gardena, CA 39,364
Phoenix, AZ 38,086
San Jose, CA 37,876
San Diego, CA 33,097
Englewood, CO 32,000
Marietta, GA 31,274
San Francisco, CA 31,146
Murray, UT 30,000
Sacramento, CA 28,164
Woodland Hills, CA 27,424
Mesa, AZ 23,914
Tempe, AZ 23,486
Albuquerque, NM 23,400
Overland Park, KS 21,210
San Francisco, CA 20,324
Colorado Springs, CO 20,138
Las Vegas, NV 18,849
Pleasanton, CA 18,560
Costa Mesa, CA 18,397
Aurora, CO 16,807
Guaynabo, Puerto Rico 16,000
Scottsdale, AZ 15,457
Walnut Creek, CA 15,445
Diamond Bar, CA 15,280
Ontario, CA 14,899
Englewood, CO 14,383
Pasadena, CA 13,745
29
Southfield, MI 13,467
Lawrenceville, GA 13,320
Northglenn, CO 13,109
Diamond Bar, CA 12,979
Quincy, MA 12,863
Santa Teresa, NM 12,160
Livonia, MI 12,043
Kenner, LA 12,036
Phoenix, AZ 11,745
Charlotte, NC 11,502
Ogden, UT 11,298
Fairfield, CA 10,612
Honolulu, HI 10,411
Crestview Hills, KY 10,303
Provo, UT 10,000
The lease on the Company's corporate headquarters, which includes the
UOP Phoenix Main Campus, expires on August 31, 2003. The Company purchased
approximately 19 acres of land in 1997 and 1996 for the possible relocation
and/or expansion of its corporate headquarters at the expiration of the lease
term.
Item 3 -- Legal Proceedings
The Company is not a party to any legal proceedings, the adverse outcome
of which, in management's opinion, would have a material averse effect on the
Company's operating results.
Item 4 -- Submission of Matters to a Vote of Security Holders
On September 18, 1997 the holders of the Company's Class B Common Stock
unanimously approved certain amendments to the Company's Articles of
Incorporation. The Company has filed as Exhibit 3.1 to this Form 10-K a copy
of its restated and amended Articles of Incorporation reflecting the
amendments approved at this meeting.
30
PART II
Item 5 -- Market for Registrant's Common Equity and Related Stockholder
Matters
There is no established public trading market for the Company's Class B
Common Stock, and all shares of the Company's Class B Common Stock are
beneficially owned by the Company's executive officers. The Company's Class
A Common Stock began trading on the Nasdaq National Market ("Nasdaq") under
the symbol "APOL" during the second quarter of 1995 on December 6, 1994.
Prior to that time, the Company's Class A Common Stock was not listed or
traded on any organized market system. The holders of the Company's Class A
Common Stock are not entitled to any voting rights. The table below sets
forth the high and low bid prices, adjusted for stock splits effected in the
form of stock dividends, for the Company's Class A Common Stock as reported
by Nasdaq.
High Low
------ ------
Fiscal 1996
---------------------
First quarter $13.67 $ 8.89
Second quarter 19.67 13.33
Third quarter 32.33 16.92
Fourth quarter 33.38 23.13
Fiscal 1997
---------------------
First quarter $32.50 $22.25
Second quarter 38.25 25.00
Third quarter 36.75 23.00
Fourth quarter 41.00 32.00
These over-the-counter market quotations may reflect inter-dealer prices
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
At September 30, 1997, there were approximately 150 and 6 holders of
record of shares of Class A and Class B Common Stock, respectively. The
Company estimates that, when you include shareholders whose shares are held
in nominee accounts by brokers, there were approximately 9,000 total holders
of its Class A Common Stock.
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends in the near future. It is the current
policy of the Company's Board of Directors to retain earnings to finance the
operations and expansion of the Company's business. Holders of Class A
Common Stock and Class B Common Stock are entitled to equal per share cash
dividends to the extent declared by the Board.
31
Item 6 -- Selected Consolidated Financial Data
The following selected financial and operating data is qualified by
reference to and should be read in conjunction with the financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Items 7 and 8 of this Form
10-K. The Consolidated Statement of Operations for each of the three years
in the period ended August 31, 1997 and the Consolidated Balance Sheet as of
August 31, 1997 and 1996, and the independent accountants' report thereon are
included in Item 8 of this Form 10-K.
Year Ended August 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Income Statement Data:
Revenues:
Tuition and other, net $279,195 $211,247 $161,013 $124,440 $ 97,461
Interest income 4,341 3,028 2,416 280 84
-------- -------- -------- -------- --------
Total net revenues 283,536 214,275 163,429 124,720 97,545
-------- -------- -------- -------- --------
Costs and expenses:
Instruction costs and services 167,720 130,039 102,122 81,313 65,319
Selling and promotional 35,187 27,896 21,016 17,918 15,812
General and administrative 25,648 21,343 18,462 17,194 14,402
-------- -------- -------- -------- --------
Total costs and expenses 228,555 179,278 141,600 116,425 95,533
-------- -------- -------- -------- --------
Income before income taxes 54,981 34,997 21,829 8,295 2,012
Less provision for income taxes 21,602 13,605 9,229 3,383 869
-------- -------- -------- -------- --------
Net income $ 33,379 $ 21,392 $ 12,600 $ 4,912 $ 1,143
======== ======== ======== ======== ========
Net income per share $ .64 $ .42 $ .27 $ .14 $ .03
Weighted average shares outstanding 51,819 51,194 46,090 34,383 34,056
_______________
In March 1992, the Company discontinued the operations of Apollo
Education Corporation ("AEC"), its technical training school
subsidiary, which was phased out over the period from March 1992 until
October 1992. All assets related to this subsidiary were disposed of
by August 1993. Pretax losses related to the operations of the
technical training schools were $265,000 in 1993.
32
August 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance Sheet Data:
Cash, cash equivalents and
restricted cash $ 78,855 $ 63,267 $ 62,601 $ 12,816 $ 4,839
Short-term investments 27,182 13,273
Long-term investments 14,747
-------- -------- -------- -------- --------
Total cash and investments $120,784 $ 76,540 $ 62,601 $ 12,816 $ 4,839
======== ======== ======== ======== ========
Total assets $194,910 $137,850 $102,132 $ 43,638 $ 28,909
======== ======== ======== ======== ========
Current liabilities $ 67,394 $ 54,804 $ 45,065 $ 34,890 $ 27,086
Long-term liabilities 3,199 2,432 1,715 1,347 1,203
Shareholders' equity 124,317 80,614 55,352 7,401 620
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $194,910 $137,850 $102,132 $ 43,638 $ 28,909
======== ======== ======== ======== ========
Operating Statistics:
Enrollments at end of period 57,382 46,935 36,848 30,236 24,987
Number of locations at end
of period 96 85 68 60 51
_______________
Enrollments are defined as full-time equivalent students in attendance
in a program at the end of a period. Average enrollments represent the
average of the ending enrollments for each month in the period.
Average enrollments were 52,434, 42,377, 34,021, 27,469 and 23,663 for
the years ended 1997, 1996, 1995, 1994 and 1993, respectively.
Includes UOP and WIU campuses and learning centers and IPD contract
sites. At October 10, 1997, there were 102 campuses and learning
centers, including CFPI's facility in Denver, Colorado.
The Company did not pay any cash dividends on its Common Stock during
any of the periods set forth in the table above.
33
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
relating to future plans, expectations, events or performances that involve
risks and uncertainties. The Company's actual results of operations could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including those set forth under "Risk
Factors" in the Company's Prospectus dated September 23, 1997. The following
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included in this Annual Report on Form 10-K.
BACKGROUND AND OVERVIEW
The Company's revenues, net of student discounts, have increased to
$283.5 million in 1997 from $97.5 million in 1993. Average annual student
enrollments have increased to 52,434 students in 1997 from 23,663 in 1993.
Net income has increased to $33.4 million in 1997 from $1.1 million in 1993.
At August 31, 1997, 57,382 students were enrolled in UOP, WIU and
IPD-assisted programs at IPD client institutions.
From September 1992 through August 1997, UOP opened 42 campuses and
learning centers and IPD established operations at 23 campuses and learning
centers with its client institutions. Historically, start-up costs for new
UOP campuses in new markets have averaged $200,000 to $400,000 per site over
a 15-18 month period, at which time the enrollments at these new campuses
averaged 200 to 300 students. Due to increased demand in Florida, Michigan
and Louisiana, the Company has stepped-up its marketing effort in these new
markets. As a result, the start-up costs for these three campuses averaged
approximately $1.1 million. Start-up costs for campuses in new markets are
expected to range from $1.0 million to $1.5 million depending on the
individual market's demand. Costs for establishing a learning center in an
existing market are expected to average $100,000. Start-up costs for IPD
contract sites have averaged from $400,000 to $500,000 per site over a 18-24
month period, and consist primarily of administrative salaries, marketing and
advertising. Start-up costs are expensed as incurred.
Approximately 91% of the Company's net revenues in 1997 consist of
tuition revenues from UOP and WIU students and IPD's contractual share of
tuition revenues from students enrolled in IPD-assisted programs at IPD
client institutions. UOP tuition revenues currently represent approximately
87% of consolidated tuition revenues. The Company's net revenues also
include sales of textbooks, computers and other education-related products,
application fees, other student fees, interest and other income. The
Company's net revenues vary from period to period based on several factors
that include: (1) the aggregate number of students attending classes; (2) the
number of classes held during the period and (3) the weighted average tuition
price per credit hour (weighted by program and location). IPD's contracts
with its respective client institutions generally have terms of five to ten
years with provisions for renewal.
34
Instruction costs and services at UOP and WIU consist primarily of costs
related to the delivery and administration of the Company's educational
programs that include faculty compensation, administrative salaries for
departments that provide service directly to the students, the costs of
educational materials sold, facility leases and other occupancy costs,
amortization of educational program production costs, bad debt expense and
depreciation and amortization of property and equipment. UOP and WIU faculty
members are contracted with and paid for one course offering at a time. All
classroom facilities are leased or, in some cases, are provided by the
students' employers at no charge to the Company. Instruction costs and
services at IPD consist primarily of program administration, student services
and classroom lease expense. Most of the other instruction costs for
IPD-assisted programs, including faculty, financial aid processing and other
administrative salaries, are the responsibility of the IPD client
institutions.
Selling and promotional costs consist primarily of advertising,
marketing salaries and other costs related to the selling and promotional
functions. These costs are expensed as incurred. General and administrative
costs consist primarily of administrative salaries, occupancy costs,
depreciation and amortization and other related costs for departments such as
executive management, information systems, corporate accounting, human
resources and other departments that do not provide direct services to the
Company's students. To the extent possible, the Company centralizes these
services to avoid duplication of effort.
In September 1997, the Company acquired the assets and related business
operations of the College for Financial Planning and related divisions that
include the Institute for Wealth Management, the Institute for Retirement
Planning, the American Institute for Retirement Planners, Inc. and the
Institute for Tax Studies. The purchase price consisted of $19.1 million in
cash, $15.9 million in stock and the assumption of approximately $17.3
million in liabilities, consisting primarily of deferred tuition revenue. The
excess of cost over the value of tangible assets of $45.9 million will be
amortized over 35 years.
The Company currently utilizes proprietary Oracle-based software for its
student records processing and a vendor-supplied human resource system.
Because of the Company's planned growth and the age of the current software,
these systems may no longer meet the Company's needs in the near future
without substantial modification. In September 1997, the Company signed an
agreement with PeopleSoft, Inc. to customize and install its human resource
and student records software systems throughout the Company. The Company is
currently negotiating with various software consulting firms to assist in the
customization and implementation of the software. The Company anticipates a
two to three year minimum process for design, modification and implementation
of the new systems.
In September 1995, the Company, through WIU, acquired certain assets of
Western International University ("Western"), a private non-profit
educational institution. The original acquisition price of $2.1 million,
including $237,000 paid in cash at or prior to closing, was adjusted to $3.0
million due to an increase in the estimated liability to the DOE related to
Western's processing of Title IV financial aid and other liabilities assumed
in the acquisition whose values were subject to adjustment subsequent to the
date of acquisition. The excess of cost over the value of tangible assets
acquired of $2.6 million is being amortized over 15 years.
35
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data of the
Company expressed as a percentage of net revenues for the periods indicated:
Year Ended August 31,
---------------------------
1997 1996 1995
------- ------- -------
Revenues:
Tuition and other, net 98.5% 98.6% 98.5%
Interest income 1.5 1.4 1.5
------- ------- -------
Total net revenues 100.0 100.0 100.0
------- ------- -------
Costs and expenses:
Instruction costs and services 59.1 60.7 62.5
Selling and promotional 12.4 13.0 12.9
General and administrative 9.1 10.0 11.3
------- ------- -------
Total costs and expenses 80.6 83.7 86.7
------- ------- -------
Income before income taxes 19.4 16.3 13.3
Less provision for income taxes 7.6 6.3 5.6
------- ------- -------
Net income 11.8% 10.0% 7.7%
======= ======= =======
Year Ended August 31, 1997 Compared with the Year Ended August 31, 1996 -----
Net revenues increased by 32.3% to $283.5 million in 1997 from $214.3
million in 1996 due primarily to a 23.7% increase in average student
enrollments and tuition price increases averaging four to six percent,
depending on the geographic area and program. Most of the Company's
campuses, which include their respective learning centers, had increases in
net revenues and average student enrollments from 1996 to 1997. Average
student enrollments increased to 52,434 in 1997 from 42,377 in 1996.
Interest income increased to $4.3 million in 1997 from $3.0 million in 1996
due to the increase in cash and investments during the same period.
Instruction costs and services increased by 29.0% to $167.7 million in
1997 from $130.0 million in 1996 due primarily to the direct costs necessary
to support the increase in average student enrollments, consisting primarily
of faculty compensation, classroom lease expenses and related staff salaries
at each respective location. These costs as a percentage of net revenues
decreased to 59.1% in 1997 from 60.7% in 1996 due to greater net revenues
being spread over the fixed costs related to centralized student services.
As the Company expands into new markets, it may not be able to leverage its
instruction costs and services to the same extent.
Selling and promotional expenses increased by 26.1% to $35.2 million in
1997 from $27.9 million in 1996 due primarily to increased marketing and
advertising at the Company's campuses and learning centers, including $1.8
million related to locations opened in new markets during the past two years.
These expenses as a percentage of net revenues decreased to 12.4% in 1997
36
from 13.0% in 1996 due to the Company's ability to increase enrollments and
open new learning centers in existing markets with a proportionally lower
increase in selling and promotional expenses. As the Company expands into
new markets, it may not be able to leverage its selling and promotional
expenses to the same extent.
General and administrative expenses increased by 20.2% to $25.6 million
in 1997 from $21.3 million in 1996 due primarily to costs required to support
the increased number of UOP and IPD campuses and learning centers and
increases in general and administrative salaries. General and administrative
expenses as a percentage of net revenues decreased to 9.1% in 1997 from 10.0%
in 1996 due primarily to higher net revenues being spread over the fixed
costs related to various centralized functions such as information services,
corporate accounting and human resources. The Company may not be able to
leverage its costs to the same extent as it faces increased costs related to
the acqusition of CFPI and the development and implementation of new
information systems.
Costs related to the start-up of new UOP and IPD campuses and learning
centers are expensed as incurred and totaled approximately $3.6 million in
1997 and 1996. Interest expense, which is allocated among all categories of
costs and expenses, was $167,000 and $77,000 in 1997 and 1996, respectively.
The Company's effective tax rate increased to 39.3% in 1997 from 38.9%
in 1996 due primarily to the relative impact of expenses that are
nondeductible for tax purposes.
Net income increased to $33.4 million in 1997 from $21.4 million in 1996
due primarily to increased enrollments, increased tuition rates and improved
utilization of general and administrative costs and fixed instruction costs
and services.
Year Ended August 31, 1996 Compared with the Year Ended August 31, 1995 -----
Net revenues increased by 31.1% to $214.3 million in 1996 from $163.4
million in 1995 due primarily to a 24.6% increase in average student
enrollments from 1995 to 1996 and tuition price increases averaging four to
six percent, depending on the geographic area and program. All UOP campuses,
which include their respective learning centers, and most of the IPD contract
sites had increases in net revenues and average student enrollments from 1995
to 1996. Average student enrollments increased to 42,377 in 1996 from 34,021
in 1995. Interest income increased to $3.0 million in 1996 from $2.4 million
in 1995.
Instruction costs and services increased by 27.3% to $130.0 million in
1996 from $102.1 million in 1995 due primarily to the direct costs necessary
to support the increase in average student enrollments. These costs as a
percentage of net revenues decreased to 60.7% in 1996 from 62.5% in 1995 due
to greater net revenues being spread over the fixed costs related to
centralized student services.
Selling and promotional expenses increased by 32.7% to $27.9 million in
1996 from $21.0 million in 1995 due primarily to increased marketing and
advertising at UOP and IPD campuses and learning centers, including $2.2
million related to locations opened in new markets during the past two years.
These expenses as a percentage of net revenues remained relatively the same
at 13.0% in 1996 and 12.9% in 1995.
37
General and administrative expenses increased by 15.6% to $21.3 million
in 1996 from $18.5 million in 1995 due primarily to costs required to support
the increased number of UOP and IPD campuses and learning centers and
increases in general and administrative salaries. General and administrative
expenses as a percentage of net revenues decreased to 10.0% in 1996 from
11.3% in 1995 due primarily to higher net revenues being spread over the
fixed costs related to various centralized functions such as information
services, corporate accounting and human resources.
Costs related to the start-up of new UOP and IPD campuses and learning
centers are expensed as incurred and totaled approximately $3.6 million and
$1.1 million in 1996 and 1995, respectively. Interest expense, which is
allocated among all categories of costs and expenses, was $77,000 and $96,000
in 1996 and 1995, respectively.
The Company's effective tax rate decreased to 38.9% in 1996 from 42.3%
in 1995 due primarily to an increase in tax-exempt interest income.
Net income increased to $21.4 million in 1996 from $12.6 million in 1995
due to increased enrollments, increased tuition rates, improved utilization
of general and administrative costs and fixed instruction costs and services.
38
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth selected unaudited quarterly financial
information for each of the Company's last eight quarters. The Company
believes that this information includes all normal recurring adjustments
necessary for a fair presentation of such quarterly information when read in
conjunction with the consolidated financial statements included in Item 8 of
this Form 10-K. The operating results for any quarter are not necessarily
indicative of the results for any future period.
Quarter Ended
-------------------------------------------------------------------------------
FY 1997 FY 1996
------------------------------------- ------------------------------------
Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 29, Nov. 30,
1997 1997 1997 1996 1996 1996 1996 1995
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands, except per share amounts)
Revenues:
Tuition and other, net $75,773 $76,633 $60,696 $66,093 $58,406 $58,237 $45,621 $48,982
Interest income 1,286 1,209 956 890 793 754 737 745
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues 77,059 77,842 61,652 66,983 59,199 58,991 46,358 49,727
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Instruction costs and services 46,451 43,572 38,089 39,608 36,808 33,978 29,294 29,959
Selling and promotional 9,724 8,492 8,492 8,479 7,497 7,431 6,640 6,328
General and administrative 5,792 6,522 6,586 6,748 5,402 4,641 5,705 5,595
------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses 61,967 58,586 53,167 54,835 49,707 46,050 41,639 41,882
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 15,092 19,256 8,485 12,148 9,492 12,941 4,719 7,845
Provision for income taxes 5,648 7,702 3,393 4,859 3,275 5,241 1,833 3,256
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 9,444 $11,554 $ 5,092 $ 7,289 $ 6,217 $ 7,700 $ 2,886 $ 4,589
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $ .18 $ .22 $ .10 $ .14 $ .12 $ .15 $ .06 $ .09
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding 52,035 51,827 51,806 51,607 51,614 51,457 51,071 50,633
======= ======= ======= ======= ======= ======= ======= =======
As a percentage of net revenues:
Revenues:
Tuition, and other, net 98.3% 98.4% 98.4% 98.7% 98.7% 98.7% 98.4% 98.5%
Interest income 1.7 1.6 1.6 1.3 1.3 1.3 1.6 1.5
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Instruction costs and services 60.3 56.0 61.8 59.1 62.2 57.6 63.2 60.2
Selling and promotional 12.6 10.9 13.7 12.7 12.7 12.6 14.3 12.7
General and administrative 7.5 8.4 10.7 10.1 9.1 7.9 12.3 11.3
------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses 80.4 75.3 86.2 81.9 84.0 78.1 89.8 84.2
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 19.6 24.7 13.8 18.1 16.0 21.9 10.2 15.8
Provision for income taxes 7.3 9.9 5.5 7.2 5.5 8.9 4.0 6.5
------- ------- ------- ------- ------- ------- ------- -------
Net income 12.3% 14.8% 8.3% 10.9% 10.5% 13.0% 6.2% 9.3%
======= ======= ======= ======= ======= ======= ======= =======
SEASONALITY IN RESULTS OF OPERATIONS
The Company experiences seasonality in its results of operations
primarily as a result of changes in the level of student enrollments. While
the Company enrolls students throughout the year, second quarter (December to
February) average enrollments and related revenues generally are lower than
39
other quarters due to the holiday breaks in December and January. Second
quarter costs and expenses historically increase as a percentage of net
revenues as a result of certain fixed costs not significantly affected by the
seasonal second quarter declines in net revenues.
The Company experiences a seasonal increase in new enrollments in
August of each year when most other colleges and universities begin their
Fall semesters. As a result, instruction costs and services and selling and
promotional expenses historically increase as a percentage of net revenues in
the fourth quarter due to increased costs in preparation for the August peak
enrollments. These increased costs result in accounts payable levels being
higher in August than in any other month during the year.
The Company anticipates that these seasonal trends in the second and
fourth quarters will continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $76.4 million of working capital at August 31, 1997 as
compared to $54.3 million at August 31, 1996. The increase in working
capital is due primarily to $41.5 million in cash generated from operations
during the year, offset in part by capital expenditures during the year. The
Company used $19.1 million of cash in September 1997 for its acquisition of
the assets and related business operations of the College for Financial
Planning.
At August 31, 1997, the Company had no outstanding borrowings on its
$4.0 million unsecured line of credit, which bears interest at prime. In
October 1997, the Company received a commitment from its lender to increase
its line of credit to $10.0 million. The line of credit is renewable
annually and any amounts borrowed under the line are payable upon its
termination in January 1999.
Net cash received from operating activities increased to $41.5 million
in 1997 from $25.8 million in 1996 due primarily to the $12.0 million
increase in net income from 1996 to 1997. Capital expenditures, including
additions to educational program production costs, increased to $15.8 million
in 1997 from $14.7 million in 1996 primarily due to an increase in the number
of locations and to additional educational program development.
Total purchases of property, equipment and land for the year ended
August 31, 1998 are expected to range from $24.0 to $27.0 million. The
increase from 1997 is due to: (1) hardware and software related to the
Company's planned conversion to new student records and human resource
systems (see Background and Overview); (2) a greater number of planned new
campuses and learning center compared to 1997; (3) improvements to the
Company's computer facilities and telecommunications equipment at the
corporate level and (4) increases in normal recurring capital expenditures
due to the overall increase in student and employee levels resulting from the
growth in the business and the acquisition of CFPI. Additions to educational
program production costs are not expected to exceed $2.5 million for the year
ended August 31, 1998. Start-up costs are expected to range from $6.0 to
$9.0 million in 1998, as compared to $3.6 million in 1997, due to recent and
planned expansion into new geographic markets.
40
The lease on the Company's corporate headquarters, which includes the
UOP Phoenix Main Campus, was renewed in December 1995 for a five year term.
During 1996, the Company acquired land for a purchase price of $2.9 million
which it may use in the future for the possible relocation of its corporate
headquarters. Such a facility is estimated to cost between $20 to $25
million. The Company currently has approximately $2.0 million in commitments
for capital expenditures in 1998. The Company currently leases all of its
educational and administrative facilities.
The Company's net receivables at August 31 as a percent of net revenues
decreased to 11.3% in 1997 from 12.1% in 1996 due primarily to improvements
made in the financial aid process that resulted in a reduction in the backlog
of students awaiting financial aid loans. Bad debt expense as a percent of
net revenues was less than 1% in 1997 and 1996.
The DOE requires that Title IV Program funds collected by an institution
for unbilled tuition be kept in a separate cash or cash equivalent account
until the students are billed for the portion of their program related to
these Title IV Program funds. In addition, all funds transferred to the
Company through electronic funds transfer programs are held in a separate
cash account until certain conditions are satisfied. As of August 31, 1997,
the Company had approximately $19.9 million in these separate accounts, which
are reflected as restricted cash, to comply with these requirements. These
funds generally remain in these separate accounts for an average of 60-75
days from the date of collection. These restrictions on cash have not
affected the Company's ability to fund daily operations.
The Regulations require all higher education institutions to meet an
acid test ratio (defined as the ratio of cash, cash equivalents, restricted
cash, current investments and current accounts receivable to total current
liabilities) of at least 1 to 1, which is calculated at the end of the
institution's fiscal year. If an institution, including UOP or WIU, fails to
meet the acid test ratio, it may be deemed not financially responsible by the
DOE, which could result in a loss of its eligibility to participate in Title
IV Programs. UOP's acid test ratio was 1.41 to 1 at August 31, 1997 and 1.19
to 1 at August 31, 1996. WIU's acid test ratio was 1.81 to 1 at August 31,
1997 and 1.50 to 1 on September 1, 1996. These requirements apply to the
separate financial statements of UOP, WIU and each of the respective IPD
client institutions, but not to the Company's consolidated financial
statements.
During 1997, the Company began offering an alternative student loan
program on a test basis at two of its campuses. The program, offered by a
commercial lender, allows students to finance their tuition and related
educational costs at a rate of prime plus 1.5%, until the proceeds, if any,
from employer reimbursement or financial aid programs are available. Loans
for students that don't meet certain credit requirements are guaranteed by
the Company, subject to certain limitations. At August 31, 1997, the Company
has guaranteed approximately $756,000 in available credit, $88,000 of which
was borrowed by the students at that date. To date, there have been no
material defaults by students guaranteed by the Company, although the program
has not been in place for a sufficient period of time to assess the overall
collection rate. If the program experiences a favorable collection rate, the
Company will consider expanding the program to its other locations.
41
TAX REFORM ACT OF 1997
In August 1997, Congress passed the Tax Reform Act of 1997 that added
several new tax credits and incentives for students and extended benefits
associated with the educational assistance program. The Hope Scholarship
Credit provides up to $1,500 tax credit per year per eligible student for
tuition expenses in the first two years of postsecondary education in a
degree or certificate program. The Lifetime Learning Credit provides up to
$1,000 tax credit per year per taxpayer return for tuition expenses for all
postsecondary education, including graduate studies. Both of these credits
are phased out for taxpayers with income between $40,000 and $50,000 ($80,000
and $100,000 for joint returns) and are subject to other restrictions and
limitations. The Act also provides for the deduction of interest on
education loans and limited educational IRA's for children under the age of
18. These new provisions do not take affect until 1998 and it is unclear at
this time the effect that these additional tax benefits will have on future
enrollments.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its
software systems and applications to ensure the Company is year 2000
compliant. The financial impact to the Company to ensure year 2000
compliance has not been and is not anticipated to be material to its
financial position or result of operations.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
42
Item 8 -- Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . .44
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . .45
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . .46
Consolidated Statement of Changes in Shareholders' Equity. . . . . . . . . . .47
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . .48
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .49
43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Apollo Group, Inc.:
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of changes in shareholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Apollo Group, Inc. and its subsidiaries at August 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended August 31, 1997, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of Apollo Group, Inc.'s management; our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
October 13, 1997
44
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(In thousands, except per share amounts)
Year Ended August 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Revenues:
Tuition and other, net $279,195 $211,247 $161,013
Interest income 4,341 3,028 2,416
-------- -------- --------
Total net revenues 283,536 214,275 163,429
-------- -------- --------
Costs and expenses:
Instruction costs and services 167,720 130,039 102,122
Selling and promotional 35,187 27,896 21,016
General and administrative 25,648 21,343 18,462
-------- -------- --------
Total costs and expenses 228,555 179,278 141,600
-------- -------- --------
Income before income taxes 54,981 34,997 21,829
Less provision for income taxes 21,602 13,605 9,229
-------- -------- --------
Net income $ 33,379 $ 21,392 $ 12,600
======== ======== ========
Net income per share $ .64 $ .42 $ .27
======== ======== ========
Weighted average shares outstanding 51,819 51,194 46,090
The accompanying notes are an integral part of these consolidated financial
statements.
45
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(Dollars in thousands)
August 31,
-----------------------
1997 1996
-------- --------
Assets:
Current assets-
Cash and cash equivalents $ 58,928 $ 51,982
Restricted cash 19,927 11,285
Investments 27,182 13,273
Receivables, net 32,040 25,985
Inventory 2,220 3,112
Deferred tax assets, net 2,873 2,972
Prepaids and other current assets 633 532
-------- --------
Total current assets 143,803 109,141
Property and equipment, net 25,251 18,925
Investments 14,747
Educational program production costs, net 1,836 1,446
Non-operating property 5,611 4,321
Cost in excess of fair value of assets purchased 2,283 2,459
Deposits and other assets 1,379 1,558
-------- --------
Total assets $194,910 $137,850
======== ========
Liabilities and Shareholders' Equity:
Current liabilities-
Current portion of long-term liabilities $ 295 $ 140
Accounts payable 7,714 7,742
Other accrued liabilities 11,449 10,925
Income taxes payable 253 261
Student deposits and deferred revenue 47,683 35,736
-------- --------
Total current liabilities 67,394 54,804
-------- --------
Long-term liabilities, less current portion 2,494 1,773
-------- --------
Deferred tax liabilities, net 705 659
-------- --------
Commitments and contingencies -- --
-------- --------
Shareholders' equity-
Preferred stock, no par value, 1,000,000 shares authorized,
none issued -- --
Class A nonvoting common stock, no par value, 400,000,000 and
65,000,000 shares authorized at August 31, 1997 and 1996,
respectively; 50,227,000 and 49,476,000 issued and outstanding
at August 31, 1997 and 1996, respectively 66 65
Class B voting common stock, no par value, 3,000,000
shares authorized; 548,000 and 576,000 issued and outstanding at
August 31, 1997 and 1996, respectively 1 1
Additional paid-in capital 51,521 41,201
Retained earnings 72,729 39,347
-------- --------
Total shareholders' equity 124,317 80,614
-------- --------
Total liabilities and shareholders' equity $194,910 $137,850
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
46
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(In thousands)
Common Stock
-------------------------------------
Class A Class B
Nonvoting Voting
----------------- ------------------ Additional Total
Stated Stated Paid-In Retained Shareholders'
Shares Value Shares Value Capital Earnings Equity
------- -------- -------- -------- ---------- --------- -------------
Balance at August 31, 1994 6,909 $9 576 $1 $ 1,982 $ 5,409 $ 7,401
Stock issued in public offering 3,516 4 34,854 34,858
Stock issued under stock
purchase plan 29 388 388
Stock issued under stock
option plans 12 97 97
Stock canceled under stock
option plans (3) (22 (54) (76)
4-for-3 stock split, April 95 3,673 5 (5)
Tax benefit related to
exercise of options 84 84
Net income 12,600 12,600
------- -------- -------- -------- ---------- --------- ------------
Balance at August 31, 1995 14,136 18 576 1 37,378 17,955 55,352
Stock issued under stock
purchase plan 84 912 912
Stock issued under stock
option plans 315 373 373
3-for-2 stock split, Sep 95 7,356 10 (10)
3-for-2 stock split, Feb 96 11,034 15 (15)
3-for-2 stock split, May 96 16,551 22 (22)
Tax benefits related to
disqualifying dispositions
and exercise of options 2,585 2,585
Net income 21,392 21,392
------- -------- -------- -------- ---------- --------- ------------
Balance at August 31, 1996 49,476 65 576 1 41,201 39,347 80,614
Stock issued under stock
purchase plan 80 1,834 1,834
Stock issued under stock
option plans 643 1 978 979
Exchange Class A shares for
Class B shares 28 (28)
Tax benefits related to
disqualifying dispositions
and exercise of options 7,508 7,508
Foreign currency
translation gain 3 3
Net income 33,379 33,379
-------- -------- -------- -------- ---------- --------- ------------
Balance at August 31, 1997 50,227 $66 548 $1 $51,521 $72,729 $124,317
======== ======== ======== ======== ========== ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
47
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands)
Year Ended August 31,
------------------------------
1997 1996 1995
-------- -------- --------
Net cash received from (used for)
operating activities:
Cash received from customers $272,542 $206,268 $159,349
Cash paid to employees and suppliers (213,604) (169,072) (129,442)
Interest received 4,036 2,934 2,207
Interest paid (12) (77) (96)
Net income taxes paid (21,445) (14,230) (9,692)
-------- -------- --------
Net cash received from operating activities 41,517 25,823 22,326
-------- -------- --------
Net cash received from (used for)
investing activities:
Purchase of investments (52,134) (18,636)
Proceeds from sale of investments 22,983 5,363
Purchase of property and equipment (12,826) (10,350) (9,944)
Purchase of non-operating property (1,290) (3,207)
Additions to educational program
production costs (1,664) (1,096) (1,548)
Cash paid at acquisition of Western,
net of cash acquired (585)
Proceeds from sale of assets 90 75
-------- -------- --------
Net cash used for investing activities (44,841) (28,436) (11,492)
-------- -------- --------
Net cash received from (used for)
financing activities:
Tax benefits related to disqualifying
dispositions and exercise of options 7,508 2,585 84
Issuance of stock 2,812 1,284 35,321
Principal payments on long-term debt (50) (181)
Retirement of stock (54)
-------- -------- --------
Net cash received from financing activities 10,270 3,869 35,170
-------- -------- --------
Net increase in cash and cash equivalents 6,946 1,256 46,004
Cash and cash equivalents, beginning
of period 51,982 50,726 4,722
-------- -------- --------
Cash and cash equivalents, end of period $ 58,928 $ 51,982 $ 50,726
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
48
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Apollo Group, Inc. ("Apollo" or the "Company"), through its wholly-owned
subsidiaries The University of Phoenix, Inc. ("UOP"), the Institute for
Professional Development ("IPD"), the College for Financial Planning, Inc.
("CFPI") and Western International University, Inc. ("WIU"), is a leading
provider of higher education programs for working adults.
UOP is a regionally accredited, private institution of higher education
offering bachelor's and master's degree programs in business, management,
computer information systems, education and health care. UOP currently has
58 campuses and learning centers located in Arizona, California, Colorado,
Florida, Hawaii, Louisiana, Michigan, Nevada, New Mexico, Oregon, Utah,
Washington and Puerto Rico. UOP also offers its educational programs
worldwide through Online, its computerized educational delivery system. UOP
is accredited by the Commission on Institutions of Higher Education of the
North Central Association of Colleges and Schools ("NCA").
IPD provides program development and management services under long-term
contracts to 18 regionally accredited private colleges and universities. IPD
currently operates at 39 campuses and learning centers in 20 states.
CFPI, located in Denver, Colorado, was acquired in September 1997 and
provides financial planning education programs as well as a graduate degree
program in financial planning. See Note 15.
WIU currently offers undergraduate and graduate degree programs at four
campuses and learning centers in Phoenix, Fort Huachuca and Douglas, Arizona
and London, England. WIU was acquired on September 1, 1995. See Note 7.
The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 1997, 1996 and 1995 relate to the
fiscal years ended August 31, 1997, 1996 and 1995, respectively.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -------------------------------------------------
The consolidated financial statements include the accounts of Apollo and
its subsidiaries. All significant intercompany transactions and balances
have been eliminated.
Use of Estimates ------------------------------------------------------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
49
New Accounting Pronouncements -----------------------------------------------
During February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards 128, "Earnings per Share" ("SFAS
128"), which requires the disclosure of both basic earnings per share and
diluted earnings per share. The Company will be required to adopt SFAS 128
beginning in the interim period ending February 28, 1998, and believes it
will not have a material impact on previously reported earnings per share.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" ("SFAS 130"), which will be effective beginning in the Company's
fiscal year ending August 31, 1999. Under SFAS 130, companies are required
to report comprehensive income as a measure of overall performance.
Comprehensive income includes all changes in equity during a reporting
period, except those resulting from investments by owners and distributions
to owners. The Company will be required to report net income and foreign
currency translation adjustments as components of comprehensive income.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS 131"), which will be
effective for the Company beginning in the fiscal year ending August 31,
1999. SFAS 131 redefines how operating segments are determined and requires
expanded quantitative and qualitative disclosures relating to an entity's
operating segments. The Company has not yet completed its analysis of how it
will comply with this pronouncement.
Cash and Cash Equivalents ---------------------------------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
carrying value of cash, cash equivalents and restricted cash approximates
fair value due to the short-term maturities of these instruments.
Restricted Cash -------------------------------------------------------------
The U.S. Department of Education (the "DOE") requires that Title IV
Program funds collected for unbilled tuition be kept in a separate cash or
cash equivalent account until the students are billed for that portion of
their program. In addition, all Title IV Program funds transferred to the
Company through electronic funds transfer are subject to certain holding
period restrictions. These funds generally remain in these separate accounts
for an average of 60-75 days from date of collection. Restricted cash is
excluded from cash received from operating activities in the Consolidated
Statement of Cash Flows until the cash is transferred from these restricted
accounts to the Company's operating accounts. The Company's restricted cash
is invested primarily in municipal and U.S. Treasury backed securities with
maturities of ninety days or less.
50
Investments -----------------------------------------------------------------
Investments consist of the following, in thousands:
August 31, 1997 August 31, 1996
----------------------- -----------------------
Estimated Amortized Estimated Amortized
Type Market Value Cost Market Value Cost
- ---------- ------- -------- ------- -------
Classified as current:
Municipal bonds $25,938 $25,932 $10,241 $10,240
Auction market preferred stock 750 750
U.S. agency obligations 500 500 3,033 3,033
------- ------- ------- -------
Total current 27,188 27,182 13,274 13,273
------- ------- ------- -------
Classified as noncurrent:
Municipal bonds due between one
and two years 14,267 14,247
Limited partnership fund 500 500
------- ------- ------- -------
Total noncurrent 14,767 14,747 -- --
------- ------- ------- -------
Total investments $41,955 $41,929 $13,274 $13,273
======= ======= ======= =======
Gross unrealized gains at August 31 totaled $26,000 and $1,000 in 1997
and 1996, respectively. Investments are stated at amortized cost which
approximates fair market value. It is the Company's intention to hold these
investments until maturity.
In June 1997, the Company entered into an agreement to become a limited
partner in a venture capital limited partnership fund that invests in
emerging education and media companies. The Company's total commitment for
this fund is $2.5 million (approximately 5% of the total fund), $500,000 of
which was paid in July 1997. The remaining $2.0 million is due in full upon
15 days written notice by the General Partner. This investment is accounted
for under the cost method of accounting.
Revenues, Receivables and Related Liabilities -------------------------------
The Company's educational programs range in length from one-day seminars
to degree programs lasting up to four years. Long-term programs are billed
in blocks of time ranging in length from five weeks to three months.
Seminars, other shorter term programs and many of CFPI's non-degree programs
are usually billed in one installment. Billings occur when the student first
attends a session resulting in the recording of a receivable and a deferred
tuition revenue liability for the amount billed. The deferred tuition
revenue liability is recognized into income pro rata over the period of
instruction. If a student withdraws from a course or program, the unearned
portion of the program that the student has paid for is refunded, generally
on a pro rata basis. Because most of the Company's educational programs are
billed in short blocks of time ranging from five to six weeks, most of the
deferred tuition revenue liability at the end of each period will
51
be recognized into income within five to six weeks following the end of that
period.
Student deposits consist of payments made in advance of billings. As
the student is billed, the student deposit is applied against the resulting
student receivable.
The Company does not record the unbilled portion of educational programs
for existing students because the students are not usually financially
obligated for the unbilled portion. A majority of these students do,
however, remain in their programs until completion.
Receivables consist of the following, in thousands:
August 31,
--------------------
1997 1996
------- -------
Trade receivables $35,524 $28,925
Interest receivable 606 302
Income tax refunds receivable 431 452
------- -------
36,561 29,679
Less allowance for doubtful accounts (4,521) (3,694)
------- -------
Total receivables, net $32,040 $25,985
======= =======
Bad debt expense was $2.5 million, $1.7 million and $1.8 million for
1997, 1996 and 1995, respectively.
Student deposits and deferred revenue consist of the following, in
thousands:
August 31,
--------------------
1997 1996
------- -------
Student deposits $29,086 $21,437
Deferred tuition revenue 17,709 13,443
Other deferred revenue 888 856
------- -------
Total student deposits and deferred revenue $47,683 $35,736
======= =======
The carrying value of the student deposit liabilities approximates fair
value due to the short-term nature of these instruments.
Inventory -------------------------------------------------------------------
Inventory consists primarily of curriculum materials. Inventories are
stated at the lower of cost, determined using the FIFO (first-in, first-out)
method, or market.
52
Property and Equipment ------------------------------------------------------
Property and equipment is recorded at cost less accumulated
depreciation. The Company capitalizes the cost of software used for internal
operations once technological feasibility of the software has been
demonstrated. Such costs consist primarily of custom-developed and packaged
software and the direct labor costs of internally developed software.
Depreciation is provided on all buildings, furniture, equipment and related
software using the straight-line method over the estimated useful lives of
the related assets which range from three to seven years, except software
which is depreciated over three to five years and buildings which are
depreciated over 30 years. Leasehold improvements and capital lease assets
are amortized using the straight-line method over the shorter of the lease
term or the estimated useful lives of the related assets. Depreciation and
amortization expense was $6.4 million, $4.5 million and $2.8 million for
1997, 1996 and 1995, respectively. Maintenance and repairs are expensed as
incurred.
Educational Program Production Costs ----------------------------------------
Direct costs incurred in the original production of, and improvements
to, educational courses are capitalized, then amortized as expense using the
150% declining balance method over a three year period beginning in the month
the courses are placed in service. Courses are generally placed in service
within 6 to 13 months after the program production commences. These direct
costs primarily include contract-based curriculum development and salaries
and wages for staff directly engaged in the development process. Any
unamortized cost is charged to expense whenever a course or program is
discontinued. From 1995 through 1997, approximately 7% of these courses were
discontinued within three years of being placed in service. Indirect costs
related to the curriculum development process, such as space rent and
supplies, are expensed as incurred. Amortization expense was $1.2 million in
1997 and $1.4 million per year in 1996 and 1995.
Deferred Rental Payments and Deposits ---------------------------------------
The Company records rent expense using the straight-line method over the
term of the lease agreement. Accordingly, deferred rental payment
liabilities are provided for lease agreements that specify scheduled rent
increases over the lease term. Rental deposits are provided for lease
agreements that specify payments in advance or scheduled rent decreases over
the lease term.
Cost in Excess of Fair Value of Assets Purchased ----------------------------
The Company amortizes costs in excess of fair value of assets purchased
on a straight line method over the estimated useful life. At August 31,
1997, the Company's cost in excess of fair value of assets purchased relates
solely to the acquisition of certain assets of Western International
University, which is being amortized over a 15-year period. Total
amortization in 1997 and 1996 was $176,000 and $107,000, respectively. The
excess of fair value of assets related to the CFPI acquisition will be
amortized over a 35-year period. Recoverability is reviewed to determine if
there have been any events or changes in circumstances that indicate that the
carrying value may exceed fair value.
53
Selling and Promotional Costs -----------------------------------------------
The Company expenses selling and promotional costs as incurred. Selling
and promotional costs include marketing salaries, direct-response and other
advertising, promotional materials and related marketing costs.
Direct-response advertising is not presently capitalized because all the
criteria of Statement of Position 93-7, "Reporting on Advertising Costs,"
were not satisfied.
Start-up Costs --------------------------------------------------------------
Costs related to the start-up of new campuses and learning centers are
expensed as incurred and totaled $3.6 million in 1997 and 1996 and $1.1
million in 1995.
Non-Operating Income and Expense --------------------------------------------
Interest income totaled $4.3 million, $3.0 million and $2.4 million for
1997, 1996 and 1995, respectively. Interest expense is expensed as incurred
and totaled $167,000, $77,000 and $96,000 in 1997, 1996 and 1995,
respectively.
Income Taxes ----------------------------------------------------------------
Deferred income taxes have been provided for all significant temporary
differences. These temporary differences arise principally from compensation
not yet deductible for tax purposes, limitations on bad debt deductions for
tax purposes and the use of accelerated depreciation methods.
When options granted under the Company's stock option plans are
exercised, the Company receives a tax deduction related to the difference
between the market value of its Class A Common Stock at the date of exercise
and the sum of the exercise price and any compensation expense previously
recognized for financial reporting purposes. The Company receives a similar
tax benefit for disqualifying dispositions of stock acquired by employees
under the 1994 Employee Stock Purchase Plan. The tax benefits resulting from
these tax deductions, totaling $7.5 million in 1997, $2.6 million in 1996 and
$84,000 in 1995, are reflected as a decrease in the Company's income tax
liabilities and an increase in additional paid-in capital.
Stock Splits and Common Stock -----------------------------------------------
In September 1994, the Company's Class A and Class B Common Stock
underwent a 1.118 to 1 stock split. From March 1995 to May 1996, the
Company's Board of Directors authorized four separate stock splits effected
in the form of stock dividends as follows:
54
For Shareholders
Date Authorized Type of Record on Date Distributed
- ----------------- ------- ----------------- ------------------
March 24, 1995 4-for-3 April 7, 1995 April 29, 1995
August 25, 1995 3-for-2 September 8, 1995 September 22, 1995
February 2, 1996 3-for-2 February 16, 1996 February 29, 1996
May 8, 1996 3-for-2 May 21, 1996 May 31, 1996
All Common Stock amounts, Common Stock prices and earnings per share
figures for periods prior to the stock splits, which were effected in the
form of stock dividends, have been restated to reflect the effect of all
previous stock splits except for the number of shares outstanding and the
related impact on the stated value of Class A Common Stock and additional
paid-in capital on the Consolidated Balance Sheet and the Consolidated
Statement of Changes in Shareholders' Equity.
On January 24, 1996, the Company completed a secondary public offering
of 9,281,000 shares of Class A Common Stock, sold by certain management
shareholders of the Company. On January 26, 1996, the underwriters exercised
their option to purchase an additional 1,393,000 shares from the selling
shareholders. The sale made pursuant to the underwriters' over-allotment
option was completed on January 30, 1996. The Company did not receive any of
the proceeds of the offering.
On October 15, 1996, the Company's shareholders approved an amendment to
the Company's articles of incorporation increasing the number of authorized
shares of Class A Common Stock from 65.0 million to 400.0 million. This
amendment did not effect the number of shares then outstanding.
On September 23, 1997, the Company issued 445,000 shares of Class A
common stock in connection with the acquisition of the assets and related
operations of the College for Financial Planning (See Note 15).
Earnings Per Share ----------------------------------------------------------
Net income per share is computed using the weighted average number of
Class A and Class B common and common equivalent shares outstanding during
the period after giving retroactive effect to the stock splits effected in
the form of stock dividends described above. The amount of any tax benefit
to be credited to capital related to the exercise of options and
disqualifying dispositions under the Company's Employee Stock Purchase Plan
is included when applying the treasury stock method to stock options in the
computation of earnings per share. The exercise of outstanding stock options
would not result in a material dilution of earnings per share.
Reclassifications -----------------------------------------------------------
Certain amounts reported for the year ended August 31, 1996 and 1995
have been reclassified to conform to the 1997 presentation, having no effect
on net income.
NOTE 3. FINANCIAL AID PROGRAMS
Approximately 40%-50% of the Company's net revenues was received from
55
students who participated in government sponsored financial aid programs
under Title IV of the Higher Education Act of 1965, as amended. These
financial aid programs consist generally of: (1) guaranteed student loans
that are issued directly to the students and are non-recourse to the Company
and (2) direct grants to students. Annually, the DOE publishes the default
rates of students participating in the Federal Family Education Loan ("FFEL")
programs.
The latest student default rates as reported by the DOE for these FFEL
student loans are as follows:
For Loans Entering
Repayment During the
DOE Fiscal Year Ended
September 30,
--------------------------
1994 1993 1992
------ ------ ------
Students attending:
UOP campuses 5.1% 5.0% 5.0%
IPD client institutions 6.2% 5.9% 5.1%
Western campuses 7.1% 4.2% 4.7%
National average 10.7% 11.6% 15.0%
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following, in thousands:
August 31,
--------------------
1997 1996
------- -------
Furniture and equipment $32,779 $24,041
Software 4,081 3,467
Leasehold improvements 3,766 1,042
Land and buildings 350 350
------- -------
40,976 28,900
Less accumulated depreciation (15,725) (9,975)
------- -------
Property and equipment, net $25,251 $18,925
======= =======
56
NOTE 5. EDUCATIONAL PROGRAM PRODUCTION COSTS
Educational program production costs consist of the following, in
thousands:
August 31,
--------------------
1997 1996
------- --------
Educational program production costs $ 9,358 $ 8,012
Less accumulated amortization (7,522) (6,566)
------- --------
Educational program production costs, net $ 1,836 $ 1,446
======= ========
The net effect on pre-tax income of the capitalization and amortization
of educational program production costs amounted to an increase of $390,000
in 1997, a decrease of $516,000 in 1996 and an increase of $49,000 in 1995.
NOTE 6. NON-OPERATING PROPERTY
Non-operating property consists of approximately 19 acres of land
purchased in 1997 and 1996 for the possible relocation and/or expansion of
the Company's corporate headquarters and 105 acres of undeveloped land
located in Santa Cruz County, California, a substantial portion of which was
acquired from a related party in 1991. As a result of poor market conditions
in Northern California, the Company recorded a $196,000 writedown related to
the Santa Cruz land in 1996 ($117,000 after related tax benefit) and a
$104,000 writedown in 1995 ($60,000 after related tax benefit). These write-
downs were based on independent appraisals dated June 1996 and May 1995,
respectively. The most recent appraisal, dated June 1997, reflected a value
consistent with the prior year.
NOTE 7. COSTS IN EXCESS OF FAIR VALUE OF ASSETS PURCHASED
Effective September 1, 1995, the Company completed the acquisition of
certain assets of Western International University ("Western"). Western was
a private non-profit educational institution incorporated in 1978 that was
accredited by NCA. The Company formed a new wholly-owned subsidiary called
Western International University, Inc. ("WIU") as the holding company for the
net assets acquired from Western. WIU acquired accounts receivable, notes
receivable, furniture, fixtures, equipment, certain contracts and student
agreements, copyrights, trademarks, securities, cash, goodwill and certain
other assets of Western. The original acquisition price of $2.1 million,
including $237,000 paid in cash at or prior to closing, was adjusted to $3.0
million due to an increase in the estimated liability to the DOE related to
Western's processing of Title IV financial aid and other related liabilities.
As previously disclosed, the Company assumed the Title IV liabilities of
Western and those liabilities were subject to change based on the results of
the U.S. Department of Education (the "DOE") audit of Western's Title IV
programs. Although much of the fieldwork was completed in early 1996, the
final audit results and amount that the Company is responsible for have not
been determined by the DOE at the current time.
57
Depending on the interpretation of the various regulatory requirements, the
final audit results and the Company's liability may differ materially from
the estimates recorded at August 31, 1997. Any difference between the final
amount and the estimates currently recorded will be recorded as an increase
or decrease, respectively, to expense.
The acquisition was accounted for under the purchase method and,
accordingly, the results of operations related to this new subsidiary have
been included with those of the Company for periods subsequent to the date of
acquisition. Results of operations for Western prior to the acquisition were
not material in relation to the Company's operation as a whole.
NOTE 8. SHORT-TERM BORROWINGS
At August 31, 1997, the Company had no amounts borrowed against its $4.0
million unsecured line of credit. The line of credit bears interest at prime
(8.5% at August 31, 1997). The line of credit is renewable annually and any
amounts borrowed under the line are payable upon its termination. The
Company's line of credit agreement prohibits the Company from paying cash
dividends or making other cash distributions without the lender's consent.
NOTE 9. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following, in thousands:
August 31,
--------------------
1997 1996
------- -------
Salaries and wages $ 5,786 $ 4,713
Employee benefits and payroll withholdings 1,790 2,201
Other accruals 3,873 4,011
------- -------
Total other accrued liabilities $11,449 $10,925
======= =======
NOTE 10. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company provides various health, welfare and disability benefits to
its full-time salaried employees which are funded primarily by Company
contributions. The Company does not provide post-employment or post-retirement
health care and life insurance benefits to its employees.
401(k)Plan ------------------------------------------------------------------
The Company sponsors a 401(k) plan which is available to all employees
who have completed one year and at least 1,000 hours of continuous service.
The Company matches 100% of the contributions from the first $10,000 of a
participant's annual pre-tax earnings. Contributions from the participant's
earnings in excess of $10,000 are matched by the Company at 18.5%.
Participant contributions are subject to certain restrictions as set forth in
the Internal Revenue Code. The Company's matching contributions totaled $1.3
million, $1.1 million and $848,000 for 1997, 1996 and 1995, respectively.
58
Stock Based Compensation Plans ----------------------------------------------
The Company has three stock-based compensation plans that were adopted
in 1994: the Apollo Group, Inc. Director Stock Plan ("Director Stock Plan"),
the Apollo Group, Inc. Long-Term Incentive Plan ("LTIP"), and the Apollo
Group, Inc. 1994 Employee Stock Purchase Plan ("Purchase Plan"). The
Director Stock Plan currently provides for an annual grant of options to the
Company's non-employee directors of the Company's Class A Common Stock on
September 1 of each year. Under the LTIP, the Company may grant options,
incentive stock options, stock appreciation rights and other stock-based
awards to certain officers or key employees of the Company.
Many of the options granted under the LTIP vest 25% per year starting at
the end of the year 2002. The vesting may be accelerated for individual
employees if the stock price reaches defined goals for at least three trading
days and if certain profit goals, defined for groups of individuals, are also
achieved. The Purchase Plan allows employees of the company to purchase
shares of the Company's Class A Common Stock at quarterly intervals through
periodic payroll deductions. The purchase price per share, in general, is
85% of the lower of: 1) the fair market value (as defined in the Purchase
Plan) on the enrollment date into the respective quarterly offering period,
or 2) the fair market value on the purchase date.
The Company applies Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its stock-based compensation, and has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation cost has been
recognized for these plans. Had compensation cost for the plans been
determined based on the fair value at the grant date consistent with SFAS
123, the Company's net income, income per share and weighted average shares
outstanding would have been as follows, in thousands except per share
amounts:
Year Ended August 31
--------------------
1997 1996
--------- ---------
Net income - as reported $33,379 $21,392
Net income - pro forma $31,551 $19,935
Income per share - as reported $ .64 $ .42
Income per share - pro forma $ .61 $ .39
Weighted average shares outstanding - as reported 51,819 51,194
Weighted average shares outstanding - pro forma 51,837 51,113
The effects of applying SFAS 123 in the above pro forma disclosure are
not necessarily indicative of future amounts. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes method with
the following weighted-average assumptions for grants in 1997 and 1996,
respectively: (1) dividend yield of 0.00% in both years; (2) expected
volatility of 37.0% and 37.1%; (3) risk-free interest rates of 6.0% and 5.7%
and (4) expected lives of 6.9 and 8.3 years. The average fair values of
options granted during 1997 and 1996 were $12.66 and $5.96, respectively.
59
A summary of the activity related to the stock options granted under the
Director Stock Plan and the LTIP is as follows, in thousands except per share
amounts:
Weighted
Average
Exercise Price
Shares per Share
------ --------------
Outstanding at August 31, 1994 830 $ 0.416
Granted 904 2.445
Exercised (40) 2.445
Canceled (9) 2.445
------
Outstanding at August 31, 1995 1,685 1.446
Granted 2,120 11.253
Exercised (315) 1.189
Canceled (48) 11.300
------
Outstanding at August 31, 1996 3,442 7.370
Granted 209 26.004
Exercised (643) 1.521
Canceled (176) 13.746
------
Outstanding at August 31, 1997 2,832 9.680
======
Exercisable at August 31, 1997 1,248
======
Available for issuance at August 31, 1997 1,570
======
The following table summarizes information about the Company's stock
options at August 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -------------------------
Weighted Avg. Weighted Avg.
Number Contractual Exercise Number Exercise
Range of Outstanding Years Price Exercisable Price
Exercise Prices (in thousands) Remaining per share (in thousands) per share
- ------------------- ------------ ----------- --------- ----------- ------------
$ 0.416 to $ 2.445 728 7.02 $ 1.490 728 $ 1.490
$ 8.963 to $11.298 1,926 8.06 $11.257 471 $11.131
$ 25.500 to $26.125 178 8.20 $26.078 49 $25.953
--------- -----------
$ 0.416 to 26.125 2,832 7.80 $ 9.680 1,248 $ 6.092
========= ===========
60
NOTE 11. LONG-TERM LIABILITIES
Long-term liabilities consist of the following, in thousands:
August 31,
-------------------
1997 1996
------- ------
Deferred compensation and note agreements
discounted at 7.5% to 12% $1,554 $1,515
Deferred rental payments 1,235 398
------- ------
Total long-term liabilities 2,789 1,913
Less current portion (295) (140)
------- ------
Total long-term liabilities, net $2,494 $1,773
======= ======
The aggregate maturities of all long-term liabilities for each of the
five fiscal years subsequent to August 31, 1997 are: 1998--$295,000; 1999--
$333,000; 2000--$318,000; 2001--$271,000; 2002--$272,000.
The undiscounted deferred compensation liability was $1.6 million and
$1.7 million at August 31, 1997 and 1996, respectively. The undiscounted
note payable related to the WIU acquisition was $650,000 and $700,000 at
August 31, 1997 and 1996, respectively. The discount rates for these
agreements were determined at the date of each respective agreement based on
the estimated long-term rate of return on high-quality fixed income
investments with cash flows similar to the respective agreements.
61
NOTE 12. LEASES
The Company is obligated under facility and equipment leases that are
classified as operating leases. Following is a schedule of future minimum
lease commitments as of August 31, 1997, in thousands:
Operating Leases
---------------------------
Equipment
Buildings & Other
--------- ---------
1998 $ 19,573 $ 589
1999 19,574 357
2000 18,227 108
2001 15,433 6
2002 13,205
Thereafter 19,635
--------- ---------
$105,647 $1,060
========= =========
Facility and equipment rent expense totaled $23.4 million, $19.9 million
and $16.5 million for 1997, 1996 and 1995, respectively.
NOTE 13. INCOME TAXES
Pre-tax earnings and the related components of the income tax provision
are as follows, in thousands:
Year Ended August 31,
---------------------------
1997 1996 1995
------- ------- -------
Pre-tax earnings(loss):
United States $55,001 $34,322 $21,401
Puerto Rico 337 675 428
United Kingdom (357)
------- ------- -------
Total pre-tax earnings $54,981 $34,997 $21,829
======= ======= =======
Income tax provision (benefit):
Current -- state and other $ 3,870 $ 2,841 $2,550
Current -- federal 17,877 11,239 7,103
Deferred (145) (475) (424)
------- ------- -------
Total provision for income taxes $21,602 $13,605 $9,229
======= ======= =======
62
The income tax provision differs from the tax that would result from
application of the statutory federal corporate tax rate. The reasons for the
differences are as follows, in thousands:
Year Ended August 31,
---------------------------
1997 1996 1995
------- ------- -------
Income tax provision at expected rate
of 35% $19,243 $12,249 $7,640
State taxes, net of federal benefit 2,516 1,777 1,518
Non-taxable interest income (897) (534) (193)
Other, net 740 113 264
------- ------- -------
Total provision for income taxes $21,602 $13,605 $9,229
======= ======= =======
Deferred tax assets and liabilities consist of the following, in
thousands:
August 31,
-------------------
1997 1996
------ ------
Gross deferred tax assets:
Difference in bad debt deductions for
financial reporting purposes $1,842 $1,438
Compensation not yet deductible for tax purposes 781 1,376
Loss reserves not deductible for tax purposes 653 591
Difference in lease expense deductions 361 319
Other 84 85
------ ------
Total gross deferred tax assets 3,721 3,809
------ ------
Gross deferred tax liabilities:
Depreciation and amortization of property
and equipment 1,354 1,062
Deduction of educational program production
costs for tax purposes 195 391
State taxes 4 43
------ ------
Total gross deferred tax liabilities 1,553 1,496
------ ------
Net deferred tax assets $2,168 $2,313
====== ======
63
The net tax assets are reflected in the accompanying balance sheet as
follows, in thousands:
August 31
------------------
1997 1996
------- ------
Current deferred tax assets, net $2,873 $2,972
Noncurrent deferred tax liabilities, net (705) (659)
------ ------
Net deferred tax assets $2,168 $2,313
====== ======
In light of the Company's history of profitable operations, management
has concluded that it is more likely than not that the Company will
ultimately realize the full benefit of its deferred tax assets related to
future deductible items. Accordingly, the Company believes that a valuation
allowance is not required for deferred tax assets in excess of deferred tax
liabilities.
64
NOTE 14. CASH RECEIVED FROM OPERATING ACTIVITIES
Following is a reconciliation of net income to net cash received from
operating activities, as shown on the consolidated statement of cash flows,
in thousands:
August 31,
---------------------------
1997 1996 1995
------- ------- -------
Net income $33,379 $21,392 $12,600
Net loss on disposal of assets 37 402 602
Write-down of non-operating assets 196 104
Depreciation and amortization of:
Discount and premium on fixed maturities 495
Property and equipment 6,373 4,545 2,751
Educational program production costs 1,247 1,441 1,375
Cost in excess of fair value of
assets purchased 176 107
Writeoff of unamortized cost of
discontinued educational courses 27 172 124
Bad debt expense 2,523 1,704 1,849
Deferred taxes, net 145 (475) (211)
Foreign currency translation gain (3)
Change in assets and liabilities:
Decrease (increase) in restricted cash (8,642) 590 (3,781)
Increase in receivables, net of write-offs (8,578) (11,621) (3,496)
Decrease (increase) in other current assets 791 (413) 312
Decrease (increase) in other assets 179 (133) (113)
Increase (decrease) in deferred liabilities 933 91 (30)
Increase in accounts payable and accrued
liabilities 496 1,206 4,058
Increase in student deposits and deferred
revenue 11,947 6,454 6,396
Increase (decrease) in income taxes payable (8) 165 (214)
------- ------- -------
Net cash received from operating
activities $41,517 $25,823 $22,326
======= ======= =======
65
Supplemental Schedule of Noncash Investing and Financing Activities --
The Company purchased certain assets of Western for a total purchase
price of $3.0 million. In conjunction with the acquisition, liabilities were
assumed as follows, in thousands:
1996
------
Fair value of assets acquired $3,028
Less cash paid to Western ($237,000) and on behalf of
Western ($393,000) for the assets acquired (630)
------
Net liabilities assumed $2,398
======
NOTE 15. SUBSEQUENT EVENTS (UNAUDITED)
In September 1997, the Company acquired the assets and related business
operations of the College for Financial Planning and related divisions that
include the Institute for Wealth Management, the Institute for Retirement
Planning, the American Institute for Retirement Planners, Inc. and the
Institute for Tax Studies. The purchase price consisted of $19.1 million in
cash, $15.9 million in stock and the assumption of approximately $17.3
million in liabilities, consisting primarily of deferred tuition revenue. The
excess of cost over the value of tangible assets of $45.9 million will be
amortized over 35 years.
The acquired business had approximately $15 and $17 million of revenue
in 1997 and 1996, respectively. Pro forma results of the Company, assuming
the acquisition had been made at the beginning of each period presented,
would not be materially different from the results reported.
Item 9 -- Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
66
PART III
Item 10 -- Directors and Executive Officers of the Registrant
The Company's directors serve one year terms and are elected each year
by the holders of the Company's Class B Common Stock. The following sets
forth information as of August 31, 1997 concerning the Company's directors
and executive officers:
Name Age Position
- ---------------------------------- --- ---------------------------
John G. Sperling, Ph.D. 76 Chairman of the Board and President
William H. Gibbs 47 Senior Vice President and Director
Jerry F. Noble 55 Senior Vice President and Director
Peter V. Sperling 37 Vice President of Administration,
Secretary, Treasurer and Director
Todd S. Nelson 38 Vice President
J. Jorge Klor de Alva, J.D., Ph.D. 49 Vice President of Business Development
and Director
James W. Hoggatt 40 Vice President of Finance and Chief
Financial Officer
Thomas C. Weir 63 Director
Dino J. DeConcini 63 Director
Hedy F. Govenar 52 Director
John R. Norton III 68 Director
JOHN G. SPERLING, Ph.D., is the founder, President and Chairman of the
Board of Directors of the Company. Prior to his involvement with the
Company, from 1961 to 1973, Dr. Sperling was a professor of Humanities at San
Jose State University where he was the Director of the Right to Read Project
and the Director of the NSF Cooperative College-School Science Program in
Economics. At various times from 1955 to 1961, Dr. Sperling was a member of
the faculty at the University of Maryland, Ohio State University and Northern
Illinois University. Dr. Sperling received his Ph.D. from Cambridge
University, an M.A. from the University of California at Berkeley and a B.A.
from Reed College. Dr. Sperling is the father of Peter V. Sperling.
WILLIAM H. GIBBS has been with the Company since 1980. Mr. Gibbs has
been the President of UOP and a Senior Vice President of the Company since
1987. From 1985 to 1987, Mr. Gibbs was the President of Apollo Education
Corporation ("AEC"). From 1980 to 1985, Mr. Gibbs held various positions
with the Company, including Chief Financial Officer and faculty member. From
1975 to 1984, Mr. Gibbs was with the accounting firm of Price Waterhouse and,
from 1982 to 1984, served as a management advisory manager. Mr. Gibbs
currently serves as the Chairman of the Arizona State Board of Private
Post-Secondary Education. Mr. Gibbs received his M.B.A. from the University
of Illinois and his B.A. from Arizona State University. Mr. Gibbs is a
Certified Public Accountant in the State of Arizona.
JERRY F. NOBLE has been with the Company since 1981. Mr. Noble has been
a Senior Vice President of the Company since 1987 and the President of IPD
since 1984. From 1981 to 1987, Mr. Noble also was the controller of the
67
Company. From 1977 to 1981, Mr. Noble was the corporate accounting manager
for Southwest Forest Industries, a forest products company. Mr. Noble
received his M.B.A. from UOP and his B.A. from the University of Montana.
PETER V. SPERLING has been with the Company since 1983. Mr. Sperling
has been the Vice President of Administration since 1992 and the Secretary
and Treasurer of the Company since 1988. From 1987 to 1992, Mr. Sperling was
the Director of Operations at AEC. From 1983 to 1987, Mr. Sperling was
Director of Management Information Services of the Company. Mr. Sperling
received his M.B.A from UOP and his B.A. from the University of California at
Santa Barbara. Mr. Sperling is the son of John G. Sperling.
TODD S. NELSON has been with the Company since 1987. Mr. Nelson has
been a Vice President of the Company since 1994 and the Executive Vice
President of UOP since 1989. From 1987 to 1989, Mr. Nelson was the Director
of UOP's Utah campus. From 1985 to 1987, Mr. Nelson was the General Manager
at Amembal and Isom, a management training company. From 1984 to 1985,
Mr. Nelson was a General Manager for Vickers & Company, a diversified holding
company. From 1983 to 1984, Mr. Nelson was a Marketing Director at Summa
Corporation, a recreational properties company. Mr. Nelson received an
M.B.A. from the University of Nevada at Las Vegas and a B.S. from Brigham
Young University. Mr. Nelson was a member of the faculty at University of
Nevada at Las Vegas from 1983 to 1984.
J. JORGE KLOR DE ALVA, J.D., Ph.D., has been a Vice President of Business
Development of the Company since July 1996 and has been a director of the
Company since 1991. Dr. Klor de Alva was a Professor at the University of
California at Berkeley from July 1994 until July 1996. From 1989 to 1994,
Dr. Klor de Alva was a Professor at Princeton University. From 1984 to 1989,
Dr. Klor de Alva was the Director of the Institute for Mesoamerican Studies
from 1982 to 1989 and was an Associate Professor at the State University of
New York at Albany. From 1971 to 1982, Dr. Klor de Alva served at various
times as associate professor, assistant professor or lecturer at San Jose
State University and the University of California at Santa Cruz. Dr. Klor de
Alva received a B.A. and J.D. from the University of California at Berkeley
and a Ph.D. from the University of California at Santa Cruz.
JAMES W. HOGGATT has been with the Company since 1986. Mr. Hoggatt has
been the Vice President of Finance and Chief Financial Officer of the Company
since 1990. From 1987 to 1990, Mr. Hoggatt was the Vice President-Controller
of the Company. From 1986 to 1987, Mr. Hoggatt was the Director of Financial
Reporting of the Company. From 1979 to 1986, Mr. Hoggatt was with the
accounting firm of Price Waterhouse and, from 1984 to 1986, served as an
audit manager. Mr. Hoggatt received a B.S. from Abilene Christian
University. Mr. Hoggatt is a Certified Public Accountant in the State of
Arizona.
THOMAS C. WEIR has been a director of the Company since 1983 and is a
member of the Audit and Compensation Committees of the Board of Directors of
the Company. During 1994, Mr. Weir became the President of Dependable
Nurses, Inc., a provider of temporary nursing services, W.D. Enterprises,
Inc., a financial services company and Dependable Personnel, Inc., a provider
of temporary clerical personnel. In addition, Mr. Weir has been an
68
independent financial consultant since 1990. From 1989 to 1990, Mr. Weir was
President of Tucson Electric Power Company. From 1979 to 1987, Mr. Weir was
Chairman and Chief Executive Officer of Home Federal Savings & Loan
Association, Tucson, Arizona.
DINO J. DECONCINI has been a director of the Company since 1981 and is
currently a member of the Audit and Compensation Committees of the Board of
Directors of the Company. Mr. DeConcini is currently Executive Director,
Savings Bonds Marketing Office, U.S. Department of the Treasury. From 1979
to 1995, Mr. DeConcini was a shareholder in DeConcini, McDonald, Brammer,
Yetwin and Lacy, P.C., Attorneys at Law. From 1993 to 1995, Mr. DeConcini
was a Vice President and Senior Associate of Project International
Associates, Inc., an international business consulting firm. From 1991 to
1993 and 1980 to 1990, Mr. DeConcini was a Vice President and partner of Paul
R. Gibson & Associates, an international business consulting firm.
HEDY F. GOVENAR has been a director of the Company since March of 1997.
Ms. Govenar is founder and President of Governmental Advocates, Inc., a
lobbying and political consulting firm in Sacramento, California. An active
lobbyist with the firm since 1979, she represents a variety of corporation
and trade association clients. Ms. Govenar has been a State Assembly
appointee to the California Film Commission since 1992. Ms. Govenar received
an M.A. from California State University, and a B.A. from UCLA.
JOHN R. NORTON III has been a director of the Company since March of
1997. Mr. Norton founded his own company in 1955 engaged in diversified
agriculture including crop production and cattle feeding. He served as the
Deputy Secretary of the United States Department of Agriculture in 1985 and
1986. He attended Stanford University and the University of Arizona where he
received a B.S. in Agriculture in 1950.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than 10% of a registered class of the Company's equity securities, to
file with the Securities and Exchange Commission ("SEC") initial reports of
ownership and reports of changes in ownership. Officers, directors and
greater than 10% shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file. Based solely upon
a review of the copies of such forms furnished to the Company, or written
representations that no Forms 5 were required, the Company believes that
during the fiscal year ended August 31, 1997, its officers and directors
complied with all Section 16(a) filing requirements with the following
exception: John D. Murphy filed late Form 4's for October 1996, November
1996, December 1996, January 1997 and April 1997, relating to transactions
involving the selling of 15,000, 185,000, 100,000 and 100,000 shares,
respectively of Class A Common Stock on various dates. In addition, Mr.
Murphy's May 1997 Form 4 was filed late relating to the transfer of 27,950
shares of Class B Common Stock to Class A Common Stock. John D. Murphy
resigned from his position as Senior Vice President and Director in February
1997 and terminated as an employee of the Company on August 31, 1997.
69
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two principal committees: (1) an Audit
Committee comprised of Thomas C. Weir (Chairperson), Dino J. DeConcini and
John R. Norton III and (2) a Compensation Committee comprised of Thomas
C. Weir (Chairperson) and John R. Norton III.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the year ended August 31, 1997, the Board of Directors of the
Company met or acted by written consent on nine occasions. Each of the
Company's current directors attended 100% of the meetings of the Board of
Directors and of meetings held by committees of the Board on which such
director served, except for Messrs. Peter Sperling and DeConcini who attended
50% or more.
Compensation Committee ------------------------------------------------------
The Compensation Committee of the Board of Directors, which met or acted
by written consent twice during 1997, reviews all aspects of compensation of
executive officers of the Company and determines or makes recommendations on
such matters to the full Board of Directors. The report of the Compensation
Committee for 1997 is set forth in Item 11.
Audit Committee -------------------------------------------------------------
The Audit Committee, which met or acted by written consent twice in
1997, represents the Board of Directors in evaluating the quality of the
Company's financial reporting process and internal financial controls through
consultations with the independent auditors, internal management and the
Board of Directors.
Other Committees ------------------------------------------------------------
The Company does not maintain a standing nominating committee or other
committee performing similar functions.
70
Item 11 -- Executive Compensation
DIRECTOR COMPENSATION
Fees ------------------------------------------------------------------------
Non-employee directors of the Company received in 1997 a $15,000 annual
retainer, $1,250 for each board meeting attended and $625 for each committee
meeting attended. Mr. DeConcini has elected not to receive any director
compensation because of his position with the U.S. Department of the
Treasury. In addition, non-employee directors are reimbursed for
out-of-pocket expenses. Ms. Govenar was retained by the Company as a
consultant and received a consulting fee of $60,000 during 1997.
Apollo Group, Inc. Director Stock Plan --------------------------------------
In August 1994, the Board of Directors of the Company adopted the Apollo
Group, Inc. Director Stock Plan (the "Director Plan") to attract and retain
independent directors for the Company. The Director Plan is administered by
a committee appointed by the Board. The aggregate number of shares of
Class A Common Stock subject to the Director Plan may not exceed 450,000,
subject to adjustment. Options granted under the Director Plan are fully
vested six months and one day after the date of grant and are exercisable in
full thereafter until the date that is ten years after the date of grant.
The exercise price per share under the Director Plan is equal to the fair
market value of such shares upon the date of grant. In addition, on September
1 of each year, non-employee Directors receive an annual grant of options to
purchase 13,500 shares, adjusted by stock splits, of the Company's Class A
Common Stock. Mr. DeConcini has elected not to receive this annual grant
because of his position with the U.S. Department of the Treasury.
EXECUTIVE COMPENSATION
The following table discloses the annual and long-term compensation
earned for services rendered in all capacities by the Company's Chairman of
the Board and President and the Company's four other most highly compensated
executive officers for 1997, 1996, and 1995:
71
-- SUMMARY COMPENSATION TABLE --
Long-Term
Annual Compensation
Compensation Awards
--------------------------------- ---------------------
Other Restrict- Securities All Other
Annual ed Stock Underlying LTIP Compen-
Name and Principal Salary Bonus Compensation Awards Options Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------------ ------- --------- -------- ------------ --------- ---------- -------- -----------
John G. Sperling
Chairman of the Board
and President 1997 $387,500 $290,625 $62,463 $ -- -- $ -- $ --
1996 310,000 232,500 -- -- 137,250 -- --
1995 310,000 186,000 -- -- 112,500 -- --
William H. Gibbs
Senior Vice President
and President of UOP 1997 225,000 168,750 -- -- -- -- 2,409
1996 180,000 135,000 -- -- 137,250 -- 2,409
1995 180,000 108,000 -- -- 67,500 -- 2,361
Jerry F. Noble
Senior Vice President
and President of IPD 1997 225,000 84,375 -- -- -- -- 2,980
1996 180,000 135,000 -- -- 137,250 -- 2,980
1995 180,000 108,000 -- -- 67,500 -- 2,932
Peter V. Sperling
Vice President Adminis-
tration, Secretary and
Treasurer 1997 200,000 150,000 36,688 -- -- -- 46,707
1996 170,000 127,000 -- -- 137,250 -- 52,046
1995 170,000 102,000 -- -- 45,000 -- 45,982
Todd S. Nelson
Vice President
and Executive VP of UOP 1997 175,000 131,250 -- -- -- -- --
1996 140,000 105,000 -- -- 137,250 -- --
1995 140,000 42,000 -- -- 45,000 -- --
_______________
Messrs. Gibbs, Noble, and Nelson also received certain perquisites,
the value of which did not exceed the lesser of $50,000 for each
person or 10% of their cash compensation. Messrs. John Sperling and
Peter Sperling received perquisites primarily in the form of Company
provided cars, available for business and personal use, and tax
consulting services.
Amounts shown consist of: (1) contributions made by the Company to the
Company's Savings and Investment Plan (as described herein) paid in
fiscal years 1997, 1996 and 1995, respectively as follows: $2,409,
$2,409 and $2,361 on behalf of Mr. Gibbs; and $2,980, $2,980 and $2,932
on behalf of Messrs. Noble and Peter Sperling; and (2) premiums
of $43,727 paid in 1997, $49,066 paid in 1996 and $43,050 paid in 1995
attributable to collateral split dollar life insurance premiums for Mr.
Peter Sperling, $10.0 million face value, the beneficiaries of which
are designated by Mr. Peter Sperling. Under this policy, the Company
is entitled to receive, upon the occurrence of certain events, any
premiums the Company paid for the policy. Mr. Peter Sperling is
entitled to the excess of the cash value over the amount of the
premiums paid by the Company.
72
The following table discloses options granted by the Company to the
Chairman of the Board and President and the four other most highly
compensated executive officers of the Company for 1997:
-- OPTION GRANTS IN THE LAST FISCAL YEAR --
Option Grants in Fiscal Year 1997 Potential Realizable
---------------------------------------------------- Value at Assumed
% of Total Annual Rates of
Number of Options/SARs Stock Price
Securities Granted to Exercise Appreciation for
Underlying Employees or Base Option Term
Options/SARs in Fiscal Price Expiration ----------------------
Name Granted Year ($/Share) Date 5% 10%
- ------------------ ---------- ----------- --------- --------- -------- ----------
John G. Sperling -- -- $ -- -- $ -- $ --
William H. Gibbs -- -- -- -- -- --
Jerry F. Noble -- -- -- -- -- --
Peter V. Sperling -- -- -- -- -- --
Todd S. Nelson -- -- -- -- -- --
_______________
The following table discloses the number of shares received from the
exercise of Company options, the value received therefrom and the number and
value of in-the-money and out-of-the-money options held by the Company's
Chairman of the Board and President and the four other most highly
compensated officers of the Company for 1997:
-- AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 --
AND OPTION VALUES AT AUGUST 31, 1997
Value of Unexercised
Shares Number of Unexercised Money Options at Fiscal
Acquired Value Options at Fiscal Year-End Year-End
on Exercise Realized --------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- --------- ----------- ------------- ----------- -------------
John G. Sperling -- $ -- 307,805 102,937 $10,255,231 $2,510,603
William H. Gibbs 163,089 4,763,838 34,313 102,937 836,884 2,510,603
Jerry F. Noble 50,000 1,829,225 162,495 102,937 5,221,162 2,510,603
Peter V. Sperling -- -- 200,057 102,937 6,591,701 2,510,603
Todd S. Nelson 65,744 1,811,620 34,313 102,937 836,884 2,510,603
73
Employment and Deferred Compensation Agreements ----------------------------
In December 1993, the Company entered into an employment agreement (the
"Employment Agreement") and deferred compensation agreement (the "Deferred
Compensation Agreement") with Dr. John G. Sperling, the Chairman of the Board
and President of the Company. The term of the Employment Agreement is for a
four-year term, and expires in December 31, 1997. Thereafter, it is
automatically renewable for additional one-year periods. Under the terms of
the employment agreement, Dr. Sperling received an annual salary, beginning
September 1, 1994, of $310,000. This salary is subject to annual review by
the Compensation Committee. Effective for 1997 and 1998, Dr. Sperling's
salary was increased to $387,500. The Company may terminate the Employment
Agreement only for cause and Dr. Sperling may terminate the Employment
Agreement at any time upon 30 days written notice.
The Deferred Compensation Agreement provides that upon his termination
of employment with the Company and until his death, Dr. Sperling shall
receive monthly payments equal to one-twelfth of his highest annual base
salary paid by the Company during any one of the three calendar years
preceding the calendar year in which Dr. Sperling's employment is terminated.
In addition, upon Dr. Sperling's death, his designated beneficiary shall be
paid an amount equal to three times his highest annual base salary in 36
equal monthly installments with the first such installment due on the first
day of the month following the month of Dr. Sperling's death.
The Company does not have employment agreements with any of its other
executive officers.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's Compensation Committee (the "Committee") is composed
entirely of independent outside members of the Company's Board of Directors.
The Committee reviews and approves each of the elements of the executive
compensation program of the Company and periodically assesses the
effectiveness and competitiveness of the program in total. In addition, the
Committee administers the key provisions of the executive compensation
program and reviews with the Board of Directors in detail all aspects of
compensation for the Company's executives. During 1997, Dino DeConcini
resigned from the Compensation Committee and was replaced by John Norton III.
The Committee has furnished the following report on executive compensation:
Overview and Philosophy -----------------------------------------------------
The Company's compensation program for executive officers is primarily
comprised of base salary, annual bonus and long-term incentives in the form
of stock option grants. Executives also participate in various other benefit
plans, including medical and retirement plans, generally available to all
employees of the Company.
The Company's philosophy is to pay base salaries to executives that
enable the Company to attract, motivate and retain highly qualified
executives. The annual bonus program is designed to reward for performance
based on financial results. Stock option grants are intended to result in no
reward if the stock price does not appreciate, but may provide substantial
rewards to executives as shareholders benefit from stock price appreciation.
74
Base Salary -----------------------------------------------------------------
Each of the Company's executives receives a base salary, which when
aggregated with their maximum bonus amount, is intended to be competitive
with similarly situated executives in comparable industries. The base
salaries in 1996 were effective for the period from September 1994 and
through August 1996. In setting the base salaries, the Committee reviewed
and considered compensation information provided by an independent
compensation consulting firm. The Company targets base pay at the level
required to attract and retain highly qualified executives. In determining
salaries, the Committee also takes into account individual experience and
performance and specific needs particular to the Company.
The Committee increased the base salary of each of the Company's
executive officers by approximately 25%. This increase was effective
beginning September 1996. The Committee determined that such an increase was
appropriate in light of the fact that there had been no increase in the base
salaries since 1994.
Annual Bonus Program --------------------------------------------------------
In addition to a base salary, in fiscal year 1995 executives were
eligible to receive a bonus of up to sixty percent (60%) of their respective
base salaries, and in fiscal years 1996 and 1997 are eligible to receive a
bonus of up to seventy-five percent (75%) of their respective base salaries.
All annual bonuses are tied to the Company's financial performance.
At the beginning of each fiscal year, the Committee establishes an
after-tax net income goal for the Company and operating profit goals for the
Company's subsidiaries. The annual bonuses are calculated differently for
(i) executives who also serve as executive officers of either The University
of Phoenix, Inc. ("UOP") or the Institute for Professional Development
("IPD") (collectively, the "Division Executives") and (ii) executives who do
not serve as executive officers of either UOP or IPD (collectively, the
"Company Executives").
The annual bonuses for Division Executives are tied to both the after-
tax net income goal for the Company and the operating profit goal for either
UOP or IPD, as applicable. If the applicable operating profit goal is
achieved, the Division Executives earn fifty percent (50%) of their
respective annual bonuses. The remaining fifty percent (50%) is earned only
if the after-tax net income goal for the Company is achieved or exceeded. If
the after-tax net income goal for the Company is achieved, the Division
Executives are entitled to an additional twenty-five percent (25%) of their
respective annual bonuses. The remaining twenty-five percent (25%) of the
annual bonuses can be earned by the Division Executives only if the after-tax
net income goal for the Company is exceeded. In particular, the Division
Executives are entitled to receive an additional one-and-one-quarter percent
(1.25%) for each $100,000 by which the after-tax net income goal is exceeded.
The annual bonuses for the Company Executives are tied solely to the
after-tax net income goal for the Company. If the after-tax net income goal
for the Company is achieved, the Company Executives earn fifty percent (50%)
of their respective annual bonuses. If the after-tax net income goal is
exceeded, the Company Executives earn a larger percentage of their annual
bonus depending on the amount by which the after-tax net income goal is
exceeded. The remaining fifty percent (50%) of the annual bonuses can be
earned by the Company Executives only if the after-tax net income goal for
75
the Company is exceeded. In particular, the Company Executives are entitled
to receive an additional two-and-one-half percent (2.5%) for each $100,000 by
which the after-tax net income goal is exceeded.
Options ---------------------------------------------------------------------
The Company believes that it is important for executives to have an
equity stake in the Company and, toward this end, makes option grants to key
executives from time to time. In making option awards, the Committee reviews
the Company's financial performance during the past fiscal year, the awards
granted to other executives within the Company and the individual officer's
specific role at the Company.
In September 1995, the Committee approved a substantial number of stock
option grants to the executive officers as part of the Company's 1995
Performance Incentive Grants. These options were granted at fair market
value, begin to vest seven years after the grant date and expire 10 years
after the grant date. The vesting of the options can be accelerated if
certain profit and stock price goals are achieved. The 1995 Performance
Incentive Grants are intended to be one-time grants under the Company's Long-
Term Incentive Plan. Except for promotions or new hires, the Committee does
not currently anticipate granting any additional stock options to the
Company's executive officers until 1998.
Other Benefits --------------------------------------------------------------
Executive officers are eligible to participate in benefit programs
designed for all full-time employees of the Company and also received certain
perquisites primarily including Company cars and Company paid tax consulting.
These programs include medical, disability and life insurance and a qualified
retirement program allowed under Section 401(k) of the Internal Revenue Code,
as amended (the "Code").
Chief Executive Officer Compensation ----------------------------------------
Dr. John G. Sperling is the founder, President and Chairman of the Board
of Directors of the Company. In December 1993, the Company entered into an
employment agreement (the "Employment Agreement") and deferred compensation
agreement (the "Deferred Compensation Agreement") with Dr. Sperling. The
Employment Agreement terminates on December 31, 1997, but is automatically
renewable for additional one-year terms. The Deferred Compensation Agreement
provides that upon Dr. Sperling's termination of employment with the Company
and until his death, Dr. Sperling shall receive monthly payments equal to
1/12 of his highest annual base salary paid by the Company during any one of
the three calendar years preceding the calendar year in which Dr. Sperling's
employment is terminated. In addition, upon Dr. Sperling's death, his
designated beneficiary shall be paid an amount equal to three times his
highest annual base salary in 36 equal monthly installments with the first
installment due on the first day of the month following the month of Dr.
Sperling's death.
During fiscal year 1997, Dr. Sperling received an annual base salary of
$387,500. In addition, because the after-tax net income goal for the Company
was exceeded, Dr. Sperling was paid a bonus of $290,625 for 1997. Dr.
Sperling also was granted options in September 1995 to purchase a total of
137,250 shares of Class A Common Stock in connection with the 1995
76
Performance Incentive Grants. All options were granted at fair market value
and expire ten years after the grant date. These options have an exercise
price of $11.30 per share with various vesting periods.
Under Dr. Sperling's leadership, the Company's net revenues increased
32.3%, to $283.5 million in 1997 from $214.3 million in 1996. In addition,
earnings per share increased to $.64 in 1997 from $.42 in 1996. Shareholder
value also has increased over this same period. For example, the closing
price at August 31, 1996 was $25.50 per share whereas the closing price for
the Company's Class A Common Stock on August 28, 1997, as reported on the
Nasdaq National Market, was $35.6875 per share.
All share numbers and prices contained in this report have been adjusted
for the stock splits effected in the form of stock dividends that were
approved by the Company's Board of Directors.
-- COMPENSATION COMMITTEE --
Thomas C. Weir
John R. Norton III
Dino J. DeConcini
77
STOCK PERFORMANCE GRAPH
The line graph below compares the cumulative total shareholder return on
the Company's Class A Common Stock with the cumulative total return for the
Standard & Poor's 400 Index and an index of Company-selected peer group
companies for the period from December 6, 1994 (the effective date of the
Company's initial public offering) through August 31, 1997. The graph
assumes that the value of the investment in the Company's Class A Common
Stock and each index was $100 at December 6, 1994, and that all dividends
paid by those companies included in the indexes were reinvested.
Dec. 6 Aug. 31 Aug. 31 Aug. 31
1994 1995 1996 1997
-------- -------- -------- ---------
Apollo Group, Inc.
Class A Common Stock $100.00 $336.80 $966.30 $1,352.40
S&P 400 100.00 123.40 143.23 193.40
Education Peer Group 100.00 135.30 211.70 238.90
The education peer group is composed of the publicly-traded common stock
of 14 education-related companies that include Berlitz International, Inc.
(BTZ), California Culinary Academy, Inc. (COOK), Information Technology, Inc.
(XCEL - formerly called Canterbury Corporate Services Inc.), Children's
Discovery Centers of America, Inc. (CDCR), DeVry Inc. (DV), Education
Alternatives, Inc. (EAIN), ITC Learning Corporation (ITCC - formerly
Industrial Training Corp.), ITT Educational Services, Inc.(ESI), Nobel
Education Dynamics, Inc. (NEDI), Sylvan Learning Systems, Inc. (SLVN), TRO
Learning, Inc. (TUTR), Wave Technologies International, Inc. (WAVT) and
Whitman Education Group,Inc. (WIX - formerly called Whitman Medical Corp.)
Three of the companies included in prior year's education peer group are not
included above as their stock was not publicly-traded at August 31, 1997.
78
Item 12 -- Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of September 30,
97. Except as otherwise indicated, to the knowledge of the Company, all
persons listed below have sole voting and investment power with respect to
their shares, except to the extent that authority is shared by spouses under
applicable law or as otherwise noted below.
Class A Class B
Shares Shares
of Common of Common
Name and Address of Beneficial Owner Stock % Owned Stock % Owned
- --------------------------------------- ---------------- --------- ----------- ----------
John G. Sperling 10,275,986 20.3% 243,081 44.4%
Peter V. Sperling 10,701,907 21.2 232,068 42.4
William H. Gibbs 545,337 1.1 27,950 5.1
Jerry F. Noble 649,110 1.3 27,950 5.1
Todd S. Nelson 107,191 .2 8,385 1.5
J. Jorge Klor de Alva 32,250 .1 -- --
Thomas C. Weir 55,000 .1 -- --
Dino J. DeConcini 24,075 -- -- --
Total for All Directors and Executive
Officers as a Group (11 persons) 21,426,271 41.9 547,819 100.0
_______________
The address of each of the listed shareholders, unless noted
otherwise, is in care of Apollo Group, Inc., 4615 East Elwood Street,
Phoenix, Arizona 85040.
Includes 1,223,360 shares held by the John Sperling 1994 Irrevocable
Trust dated April 27, 1994 for which Messrs. John and Peter Sperling
are the co-trustees.
Includes 307,805 shares that Dr. John Sperling has the right to
acquire within 60 days of the date of the table set forth above.
Includes 200,057 shares that Mr. Peter Sperling has the right to
acquire within 60 days of the date of the table set forth above.
Includes 34,313 shares that Mr. Gibbs has the right to acquire within
60 days of the date of the table set forth above.
Includes 162,495 shares that Mr. Noble has the right to acquire within
60 days of the date of the table set forth above.
Includes 34,313 shares that Mr. Nelson has the right to acquire
within 60 days of the date of the table set forth above.
Represents 32,250 shares that Dr. Klor de Alva has the right to
acquire within 60 days of the date of the table set forth above.
Includes 50,000 shares that Mr. Weir has the right to acquire within
60 days of the date of the table set forth above.
Includes 23,625 shares that Mr. DeConcini has the right to acquire
within 60 days of the date of the table set forth above.
79
Includes 879,171 shares that all Directors and Executive Officers as
a group have the right to acquire within 60 days of the date of the
table set forth.
Includes 243,080 shares held by the John G. Sperling Revocable Trust
dated January 31, 1995.
Includes 232,067 shares held by the Peter V. Sperling Revocable Trust
dated January 31, 1995.
Includes 27,949 shares held by the William H. Gibbs Revocable Trust
dated March 8, 1995.
Includes 1,000,000 shares held by The Sperling Foundation.
Item 13 -- Certain Relationships and Related Transactions
The Company believes that all transactions it has entered into with
affiliates were at arm's length and on terms as favorable as could have been
obtained from unaffiliated parties.
80
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Sequentially
Numbered
Page or Method
of Filing
----------------
A. Financial Statements
(1) Report of Price Waterhouse LLP Page 44
(2) Consolidated Financial Statements
(a) Statement of Operations for the Years
Ended August 31, 1997, 1996 and 1995 Page 45
(b) Balance Sheet as of August 31, 1997
and 1996 Page 46
(c) Statement of Changes in Shareholders'
Equity for the Years Ended August 31,
1997, 1996 and 1995 Page 47
(d) Statement of Cash Flows for the Years
Ended August 31, 1997, 1996 and 1995 Page 48
(e) Notes to Consolidated Financial Statements Page 49
B. Financial Statement Schedule:
None.
C. Exhibits
Sequentially
Numbered
Exhibit Page or Method
Number Description of Exhibit of Filing
------- --------------------------------------- ----------------
2.1 Asset Purchase Agreement by and among Incorporated by
National Endowment for Financial Educa- reference to
tion, (R) College for Financial Planning, Exhibit 10.1 of
Inc., as assignee of Apollo Online, Inc., the Company's
as Buyer, and Apollo Group, Inc. dated Registration
August 21, 1997 Statement No.
333-35465 on
Form S-3 filed
September 11,
1997
81
Sequentially
Numbered
Exhibit Page or Method
Number Description of Exhibit of Filing
------- --------------------------------------- ----------------
2.2 Assignment and Amendment of Asset Purch- Incorporated by
ase Agreement by and among National reference to
Endowment for Financial Education, Inc., the Exhibit 10.2 of
the College for Financial Planning, Inc., the Company's
Apollo Online, Inc., and Apollo Group, Inc., Registration
dated September 23, 1997 Statement on
Form S-3 filed
September 11,
1997
3.1 Restated and Amended Articles of Filed Herewith
Incorporation of the Registrant
(As Amended Through September 18, 1997)
3.2 Amended Bylaws of the Registrant Incorporated by
(As Amended Through June 1996) reference to
Exhibit 3.2 of
the August 31,
1996 Form 10-K
4 Restated and Amended Articles of Filed Herewith
Incorporation of the Registrant
filed as Exhibit 3.1
10.1a Business Loan Agreement between Incorporated by
Apollo Group, Inc. and First reference to
Interstate Bank Exhibit 10.1 of
the August 31,
1996 Form 10-K.
10.1b Commitment Letter between Filed Herewith
Apollo Group, Inc. and Wells Fargo
Bank, National Association
10.2 Apollo Group, Inc. Director Stock Incorporated by
Plan reference to
Exhibit 10.2 of
the August 31,
1995 Form 10-K
10.3 Apollo Group, Inc. Long-Term Incorporated by
Incentive Plan reference to
Exhibit 10.3 of
Form S-1 No.
33-83804
10.4 Apollo Group, Inc. Savings and Incorporated by
Investment Plan reference to
Exhibit 10.4 of
the August 31,
1996 Form 10-K.
82
Sequentially
Numbered
Exhibit Page or Method
Number Description of Exhibit of Filing
------- --------------------------------------- ----------------
10.5 Apollo Group, Inc. 1994 Employee Incorporated by
Stock Purchase Plan (As Amended reference to
Through August 1996) Exhibit 10.4 of
the August 31,
1996 Form 10-K.
10.6 Employment Agreement between Apollo Incorporated by
Group, Inc. and John G. Sperling reference to
Exhibit 10.6 of
Form S-1 No.
33-83804
10.7 Deferred Compensation Agreement between Incorporated by
John G. Sperling and Apollo Group, Inc. reference to
Exhibit 10.7 of
Form S-1 No.
33-83804
10.8 Deferred Compensation Agreement between Incorporated by
Apollo Group, Inc. and Carole A. reference to
Crawford Exhibit 10.8 of
Form S-1 No.
33-83804
10.9 Lease Agreement between Apollo Group, Incorporated by
Inc. and Kaiser Center Partners reference to
Exhibit 10.9 of
Form S-1 No.
33-83804
10.10 Shareholder Agreement Dated September Incorporated by
7, 1994. reference to
Exhibit 10.10 of
Form S-1 No.
33-83804
10.11 Agreement of Purchase and Sale of Incorporated by
Assets of Western International reference to the
University Dated June 30, 1995 August 31, 1995
(without schedules and exhibits) Form 10-K.
10.12 Purchase and Sale Agreement Dated Incorporated by
October 10, 1995 reference to
Exhibit 10.12 of
the August 31,
1996 Form 10-K.
21 List of Subsidiaries Incorporated by
reference to
Exhibit 21 of
Form S-1 No.
33-83804
83
23.1 Consent of Price Waterhouse LLP Filed Herewith
24 Power of Attorney See Signature
Page
27 Financial Data Schedule Filed Herewith
99.1 Form of Agreement of Institute for Incorporated by
Professional Development reference to
Exhibit 99.1 of
Form S-1 No.
33-83804
D. Reports on Form 8-K
During the last quarter of the 1997 fiscal year, the Company filed no
reports on Form 8-K. On September 23, 1997 the Company filed a current
report on Form 8-K related to the acquisition of certain assets and
operations of the College for Financial Planning.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Phoenix, State of Arizona, on October 24, 1997.
APOLLO GROUP, INC.
An Arizona Corporation
By: /s/ John G. Sperling
--------------------------------
John G. Sperling
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John G. Sperling and James W. Hoggatt, and
each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Form
10-K Annual Report, and to file the same, with all exhibits thereto, and
other documents in connection therewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person hereby ratifying
and confirming all that said attorneys-in-fact and agents, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date
- -----------------------------------------------------------------------------
/s/ John G. Sperling Chairman of the Board October 24, 1997
- ------------------------- of Directors and President
John G. Sperling (Principal Executive Officer)
/s/ William H. Gibbs Senior Vice President and October 24, 1997
- ------------------------- Director
William H. Gibbs
/s/ Jerry F. Noble Senior Vice President and October 24, 1997
- ------------------------- Director
Jerry F. Noble
85
Signature Title Date
- -----------------------------------------------------------------------------
/s/ Peter V. Sperling Vice President of October 24, 1997
- ------------------------- Administration, Secretary,
Peter V. Sperling Treasurer and Director
/s/ J. Jorge Klor de Alva Vice President of Business October 24, 1997
- -------------------------- Development and Director
J. Jorge Klor de Alva
/s/ Todd S. Nelson Vice President and October 24, 1997
- ------------------------- Executive VP of UOP
Todd S. Nelson
/s/ James W. Hoggatt Vice President of Finance October 24, 1997
- ------------------------- and Chief Financial Officer
James W. Hoggatt (Principal Financial and
Accounting Officer)
/s/ Dino J. DeConcini Director October 24, 1997
- -------------------------
Dino J. DeConcini
/s/ Thomas C. Weir Director October 24, 1997
- -------------------------
Thomas C. Weir
/s/ John R. Norton III Director October 24, 1997
- -------------------------
John R. Norton III
/s/ Hedy Govenar Director October 24, 1997
- -------------------------
Hedy Govenar
86