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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, 1998
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. Aggregate market value of Class A Common Stock
held by non-affiliates as of October 23, 1998, was approximately $1.6 billion.
The number of shares outstanding for each of the registrant's classes of common
stock, as of October 23, 1998, is as follows:
Class A Common Stock, no par 76,906,411 Shares
Class B Common Stock, no par 511,484 Shares
DOCUMENTS INCORPORATED BY REFERENCE
NONE
1
APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-K
INDEX
PAGE
PART I ----
Item 1. Business 3
Item 2. Properties 30
Item 3. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 31
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 32
Item 6. Selected Consolidated Financial Data 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 35
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 45
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 68
PART III
Item 10. Directors and Executive Officers of the Registrant 69
Item 11. Executive Compensation 73
Item 12. Security Ownership of Certain Beneficial
Owners and Management 80
Item 13. Certain Relationships and Related Transactions 81
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 82
SIGNATURES 86
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
Institutes Corporation (the "College"), 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 117 campuses and
learning centers in 34 states, Puerto Rico and London, England. The Company's
degree enrollment has increased to approximately 71,400 at August 31, 1998
from approximately 30,200 at August 31, 1994.
Based on its degree enrollment of over 53,200 adult students, of which
6,500 were distance education 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 70 campuses and learning centers in Arizona, California, Colorado,
Florida, Hawaii, Louisiana, Michigan, Nevada, New Mexico, Oklahoma, Oregon,
Utah, Washington and Puerto Rico. UOP has developed specialized systems for
student tracking, marketing, faculty recruitment and training and academic
quality management. These systems enhance UOP's ability to expand into new
markets while still maintaining academic quality. Currently, approximately
56% of UOP's students receive some level of tuition reimbursement from their
employers, many of which are Fortune 500 companies.
The Apollo Learning Group ("ALG") was established in 1997 to focus on
education opportunities in information technology ("IT") for enhancing the
skills of IT professionals. ALG curriculum includes courses for the
administration of computer networks, internetworking and customized technical
training. ALG's services currently support eight UOP locations offering
Authorized Academic Training Programs to deliver Microsoft Official
Curriculum. These campuses offer lab-based computer courses to prepare
students for Microsoft Certified Systems Engineer exams.
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 20
regionally accredited private colleges and universities at 43 campuses and
learning centers in 22 states and shares in the tuition revenues generated
from these programs. In addition, IPD has contracted to develop online
degree programs for the United States Marine Corp. 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 educational needs of the working adult students in
their market. Approximately 16,000 degree-seeking students are currently
enrolled in IPD-assisted programs.
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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 adjusted purchase price consisted of
$19.4 million in cash, $15.9 million in stock and the assumption of
approximately $11.4 million in liabilities. With current enrollments of
approximately 750 degree and 23,000 nondegree students, the College 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 and undergraduate degree programs to
approximately 1,300 students and has a total of three campuses and learning
centers in Phoenix and Fort Huachuca, 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 http://www.apollogrp.edu
- UOP http://www.uophx.edu
- IPD http://www.ipd.org
- WIU http://www.wintu.edu
- the College http://www.fp.edu
- ALG http://www.mcse.com
The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 1998, 1997 and 1996 relate to the
fiscal years ended August 31, 1998, 1997 and 1996, 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 the College 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 1996 (the most recent historical year reported),
adults over 24 years of age comprised approximately 6.2 million, or 40.9%, of
the 15.2 million students enrolled in higher education programs. Currently,
the U.S. Bureau of Census estimates that approximately 75% of students over
the age of 24 work while attending school. The NCES estimates that by the
4
year 2003, the number of adult students over the age of 24 will remain
approximately the same at 6.1 million, or 40.2%, of the 15.1 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
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
5
accredited colleges and universities have begun 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, Canada and other foreign markets. 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.
The timing related to the establishment of new locations and the
expansion of programs may vary depending on regulatory requirements and
market conditions.
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. UOP received approval in 1998 from the
NCA to offer a Doctor of Management degree. This educational program will be
the first doctoral degree offered by the Company. The Company currently has
a full-time staff of over 55 persons involved in its centralized curriculum
development process.
The Company is also exploring other educational areas, such as the K-12
market, adult remedial education and international opportunities, where it
can leverage its educational expertise and/or delivery systems in a cost-
effective manner.
6
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 approximately 7,200 in 1998 from approximately
1,600 in 1994. The Company has started the process of converting many of its
non-degree business and financial programs so that they can be delivered
through the Internet. The Company also plans to enhance its distance
education delivery systems as new technologies become cost-effective, such as
interactive distance education technology.
International Expansion -----------------------------------------------------
The Company is conducting ongoing market research in various foreign
countries. The Company has been approved by NCA to begin operations in
Canada. The first Canadian campus will be in Vancouver, British Columbia,
with classes expected to commence during the second quarter of 1999. The
Company is considering international expansion into various European and
Latin American markets using the University of Phoenix education model. The
Company will continue to monitor and assess the feasibility of expanding its
educational programs to other international markets.
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 from a regionally accredited
institution 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
7
initial assessment conducted by staff and faculty;
(2) complete a series of certification workshops
related to grading, facilitation of the
teaching/learning model, oversight of
study group activities, adult learning theory, and
use of the Internet; (3) participate in ongoing
development activities 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
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. Over the past three years, 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 years old comprise approximately 40.9% 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
8
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 is 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.
The structural components of the Company's teaching/learning model
include:
Accessibility The Company offers standardized curriculum 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, most of the UOP
and IPD client institutions' faculty are part-time.
All faculty are academically qualified, are
professionally employed and are contracted for
instructional services on a course-by-course basis.
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 the facility portion of
its instructional costs variable.
Employed Students Substantially all of UOP's students are employed
full-time and approximately 72% 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 56% of UOP's students currently
receive some level of tuition reimbursement from
their employers, many of which are Fortune 500
companies; approximately 46% receive at least half
of their tuition and some 23% receive full tuition
reimbursement. 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.
9
The College 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. Most of the College's students are employed 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.
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
Bachelor of Science in Human Services
Master of Arts in Education
Master of Arts in Organizational Management
Master of Business Administration
Master of Counseling
Master of Science in Nursing
Master of Science in Computer Information Systems
AREAS OF SPECIALIZATION AVAILABLE IN CERTAIN DEGREE PROGRAMS
- ------------------------------------------------------------
Undergraduate BUSINESS
Accounting
Administration
Management
Marketing
Project Management
COMPUTER INFORMATION SYSTEMS
Information Systems
Graduate BUSINESS
Administration
Global Management
Organizational Management
COMPUTER INFORMATION SYSTEMS
Technology Management
Information Systems
10
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
Health Care
Women's Health Nurse Practitioner
Family Nurse Practitioner
COUNSELING
Community Counseling
Marriage and Family Therapy
Mental Health Counseling
Marriage, Family and Child Counseling
UOP received approval in 1998 from the NCA to offer a Doctor of
Management degree. This will be UOP's first doctoral program offering. The
program is expected to begin enrolling students by the third quarter of 1999.
UOP also offers over 100 professional education programs, including
continuing education for teachers, custom training, environmental training
and many programs leading to certification in the areas of business,
technology and nursing.
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 4,000 UOP undergraduate students who
utilized the process in 1998 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) conducting
market research; (2) assisting with curriculum development; (3) developing
and executing marketing strategies; (4) marketing and recruiting of students;
(5) establishing operational and administrative infrastructures; (6) training
of faculty; (7) developing and implementing financial accounting and academic
quality management systems; (8) assessing the future needs of adult students;
(9) assisting in developing additional degree programs suitable for the adult
higher education market and (10) assisting in seeking approval from the
respective regional accrediting association for new programs. In
consideration for its services, IPD receives a contractual share of tuition
revenues from students enrolled in IPD-assisted programs.
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
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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 1
Associate of Science in Business 8
Bachelor of Arts in Business Administration 2
Bachelor of Arts in Management 1
Bachelor of Business Administration 9
Bachelor of Science in Business Administration 5
Bachelor of Science in Management 11
Bachelor of Science in Management Information Systems 1
Bachelor of Science in Nursing 1
Master of Business Administration 11
Master of Science in Management 6
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.
The College Programs --------------------------------------------------------
The College currently offers a Master of Science degree with a
concentration in Financial Planning and the following non-degree programs:
Accredited Asset Management Specialist
Certified Financial Planner Professional Education Program
Chartered Financial Analyst Study/Review Program
Chartered Mutual Fund Counselor
Foundations in Financial Planning
Chartered Retirement Plans Specialist
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
- - Business Administration
- - Finance
- - Health Systems Management
- - Information Systems
- - International Business
- - Management
- - Marketing
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BACHELOR OF ARTS
- - Administration of Justice
- - Behavioral Science
MASTER OF BUSINESS ADMINISTRATION
- - Finance
- - Health Care Management
- - International Business
- - Management
- - Management Information Services
- - Marketing
MASTER OF PUBLIC ADMINISTRATION
MASTER OF SCIENCE
- - Accounting
- - Information Systems
- - Information Systems Engineering
WIU also offers a limited number of business-related certificate
programs.
Distance Education Components -----------------------------------------------
At August 31, 1998, there were approximately 7,200 degree seeking
students utilizing the Company's distance education delivery systems,
approximately 61% 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. Students are not required to participate at the
same time since the communication method is not asynchronous in nature.
Online's degree programs can be accessed though direct-dial or Internet
service providers. 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.
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 the student flexibility with their schedule.
Communication with the faculty member is by telephone, e-mail, fax or mail.
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CPE Internet
Business and investment professionals that require continuing
professional education (CPE) as part of their professional certification or
for employment requirements may complete individual CPE courses through the
Internet utilizing most Internet 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 many of its non-degree programs in business, financial
planning and IT to this web-based format in order to provide consumers with
an additional delivery option to receive this type of CPE instruction. The
College also plans to use this same technology to deliver preparatory work
for professional certifications in addition to its text-based self study
delivery methods.
New Distance Education Markets
In August 1998, the Company together with Hughes Network Systems and
Hermes Onetouch L.L.C. ("Hermes") formed a new corporation to acquire One
Touch Systems. The merged expertise of these entities is expected to
contribute to the sales, distribution and service of an integrated and
interactive distance learning solution for reaching corporate training and
education markets via satellite. One Touch Systems has their equipment
currently installed at many Fortune 500 companies. The Company plans to
provide training and educational content to enhance and expand the current
products offered by One Touch Systems.
Distance education is currently subject to certain regulatory
constraints. See "Business -- Federal Financial Aid Programs -- Restrictions
on Distance Education Programs" and "Business -- State Authorization."
FACULTY ---------------------------------------------------------------------
UOP's faculty is comprised of approximately 100 full-time faculty and
5,100 part-time faculty. Substantially all faculty are 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) complete a series of certification workshops related to grading,
facilitation of the teaching/learning model, oversight of study group
activities, adult learning theory and use of the Internet; (3) participate in
ongoing development activities 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 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 part-time
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
14
client institutions to evaluate faculty and academic and administrative
quality. The Company believes that both UOP and IPD will continue to be
successful in recruiting qualified faculty members.
The College's programs are primarily self-study, non-degree programs
where there is little or no faculty involvement in the delivery of the
programs. However, the College employs approximately 15 full-time faculty
who are involved in curriculum development and the instructional design
process.
WIU's faculty consists of approximately 10 full-time faculty and 170
part-time faculty. WIU's practitioner faculty are working professionals and
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, the 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.
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, the College 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.
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
15
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 percentage
breakdown of the Company's students by the level of program they are seeking,
at August 31:
1998 1997
------ ------
Degree Programs:
Master's 30.5% 31.8%
Bachelor's 68.7% 68.1%
Associate .8% .1%
------ ------
Total degree programs 100.0% 100.0%
====== ======
Based on recent student surveys, the average age of UOP students is in
the mid-thirties, approximately 55% are women and 45% are men, and the
average annual household income is $56,000. Approximately 72% 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 percentage
distribution of incoming UOP students is as follows:
Age Percentage of Students
------------------------ -----------------------
25 and under 13%
26 to 33 36%
34 to 45 40%
46 and over 11%
-------
100%
=======
Based on recent student surveys, the average age of students at the
College is in the mid-thirties, approximately 32% are women and 68% 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. IPD understands
16
that to develop and manage educational programs for working adult students
effectively, these potential client institutions require both 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. All of the Apollo Companies
consider 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.
CORPORATE PARTNERSHIPS
The Company works closely with businesses and governmental agencies 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 corporations 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 Internet service providers, direct mail and informational
meetings at targeted organizations. 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.ipd.org,
http://www.wintu.edu, http://www.fp.edu and http://www.mcse.com) that allow
electronic access to Company information, product information, research, etc.
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 College markets its programs and products primarily through
advertising, direct mail, informational meetings, trade shows, and corporate
sales efforts with financial service firms. Marketing activity is primarily
directed at professionals within the financial services industry. Enrollment
advisors are utilized in a comparable fashion to UOP enrollment staff. All
marketing activity is tracked to measure effectiveness and to provide
information for future activity.
17
The Company employs over 450 enrollment counselors who make visits and
presentations at various organizations and who follow up on leads generated
from referrals from customers and advertising efforts. These individuals
also pursue direct responses to interest from 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.
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.
For its degree programs, 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 offered by UOP, IPD and WIU, 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. There is no assurance that UOP, IPD and WIU 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.
The College currently holds a dominant position in the Certified
Financial Planning ("CFP") education field. Recently, however, competition
is increasing slightly due to a higher number of schools registering CFP
curriculum with the Certified Financial Planner Board of Standards, Inc. The
College offers all of its programs using the flexibility of its distance
education format while the majority of the other competing education programs
target local markets using classroom based teaching formats.
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 curriculum 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, 1998, the Company had the following numbers of
employees:
Full-Time Part-Time Faculty Total
--------- --------- --------- ---------
Apollo 299 9 -- 308
UOP 1,976 98 5,159 7,233
IPD 251 10 -- 261
The College 83 4 15 102
WIU 52 11 179 242
------ ------ ------ ------
Total 2,661 132 5,353 8,146
====== ====== ====== ======
______________
Consists primarily of employees in executive administration,
information systems, corporate accounting, financial aid, and human
resources.
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.
Consists primarily of faculty involved 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
19
interpretations of other applicable laws, rules or regulations could have a
material adverse effect on the accreditation, authorization to operate in
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, the College, 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.
UOP was granted accreditation by NCA in 1978. UOP's accreditation was
reaffirmed in 1982, 1987, 1992 and 1997. The next focused 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.
The College's graduate degree program 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. NCA began a
scheduled focus-visit for the College in September 1998 which should be
completed by the end of the first quarter of 1999. DETC plans to schedule a
focus-visit for the College in 2000. WIU was accredited by NCA prior to the
acquisition by the Company and the accreditation was reaffirmed in 1998.
WIU's next NCA reaffirmation visit is scheduled to begin in 2005. 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 practitioner faculty,
20
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.
UOP's Bachelor of Science in Nursing ("BSN") program received program
accreditation from the National League for Nursing Accrediting Commission
("NLNAC") in 1989. The accreditation was reaffirmed in October 1995. The
next NLNAC reaffirmation of the BSN program is scheduled for 2003. The
Company believes that the BSN program accreditation is in good standing. The
Master of Science in Nursing ("MSN") program earned NLNAC accreditation in
1996. The next NLNAC reaffirmation of the MSN program is scheduled for 2000.
UOP's Community Counseling program (Master of Counseling in Community
Counseling degree) received initial accreditation for its Phoenix and Tucson
campuses from the Council for Accreditation of Counseling and Related
Educational Programs in 1995 and the next reaffirmation visit is scheduled
for 2002.
UOP received approval from the NCA to offer its first doctoral level
program in 1998. The first students will be enrolled in the Doctor of
Management degree beginning in 1999. The Doctor of Management degree will be
offered via distance learning technology with annual two-week residencies in
Phoenix throughout their program. The program will be limited to two groups
of 30 new students each per year.
The address and phone number for the accrediting bodies referred to
herein are as follows:
North Central Association of Colleges and Schools (NCA)
Commission on Institutions of Higher Education
30 North LaSalle Street, Suite 2400
Chicago, Illinois 60602-2504
(312) 263-0456
National League for Nursing Accrediting Commission (NLNAC)
61 Broadway, 33rd Floor
New York, New York 10006
(800) 669-9656
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
Students at UOP, WIU and IPD client institutions may participate in
Title IV Programs. The College does not participate in Title IV Programs
because most of its students are enrolled in non-degree programs. UOP and
WIU derive approximately 50% and 26% of their net revenues from students who
21
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.
The DOE has promulgated Regulations, the most recent of which became
effective on July 1, 1998, that amend certain provisions of the Title IV
Programs and the Regulations promulgated thereunder. Some of the more
important provisions of the Regulations include the following:
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, the College 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, the College, 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 the College to obtain NCA's prior
approval before they are permitted to expand into new states or foreign
countries. NCA recently approved UOP's expansion into Oklahoma and British
Columbia. 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.
22
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. Under certain circumstances, 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. The Company has established letters of credit
of $1.6 million for UOP and $44,000 for WIU.
Standards of Financial Responsibility ---------------------------------------
Pursuant to the Regulations, which were revised effective July 1, 1998,
all eligible higher education institutions must satisfy the minimum standard
established for three tests which assess the financial condition of the
institution at the end of the institution's fiscal year. The three tests
are: primary reserve ratio (adjusted equity to total expenses), equity ratio
(modified equity to modified assets), and net income ratio (income before
taxes to total revenues). The tests provide a combined score which must then
satisfy a composite score standard. If the institution achieves a composite
score of at least 1.5, it is considered financially responsible. A composite
score from 1.0 to 1.4 is considered financially responsible, subject to
additional monitoring, and the institution may continue to participate as a
financially responsible institution for up to three years. An institution
that does not achieve a satisfactory composite score will fall under
alternative standards. At August 31, 1998, UOP's composite score was 3.0 and
WIU's composite score was 2.8.
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 DOE has in
the past stated that it requires an official approval for each location prior
to offering Title IV program funds. Currently UOP has several sites awaiting
confirmation of DOE approval.
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 exceeds 85% of
the institution's cash-basis revenues from eligible programs. UOP's and
WIU's percentages were 58% and 27%, respectively, at August 31, 1998. 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 30% for fiscal year 1993 and 25% for fiscal year 1994 and all
23
subsequent fiscal years. In 1996, the most recent DOE cohort default rate
reporting period, the national cohort default rate average for all higher
education institutions was 9.6%. UOP and WIU students' cohort default rates
for the Federal Family Education Loans for fiscal 1996 as reported by the DOE
were 5.8% and 9.1%, respectively, and IPD client institution students' cohort
default rates averaged 6.1% 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. UOP's and
WIU's eligibility to participate in Title IV Programs expires in September
1999 and December 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 ----------------------------------------------------
UOP's most recent Department of Education program review began in March
1997, and an initial program review report has been received. This report
contained six findings in the areas of satisfactory academic progress,
refunds and general program administration. UOP is currently in the process
of responding to these findings regarding compliance with requirements of the
Title IV Programs. UOP's response to these issues is due in January 1999,
and UOP will have its response prepared prior to the deadline. Subsequently,
the Department will issue a final program review determination. It is
uncertain when the final determination will be issued and what the results of
the findings will be.
Additionally, in January 1998 the Department of Education Office of the
Inspector General ("OIG") began performing a routine audit of UOP. The
auditors reviewed UOP's cash management policies. Although no draft report
has been received from the OIG, the audit team indicated at the exit
interview that it had no findings regarding cash management policies. The
team did present questions regarding UOP's interpretation of the "12-hour
rule", UOP's distance education programs and institutional refund
obligations. As of this date, UOP has supplied the OIG with the information
they have requested and is awaiting an initial draft report. Although the
Company believes that the program review and OIG audit will be resolved
without any material effect, as with any program review or audit, no
assurance can be given as to the final outcome since the matters are not yet
resolved.
24
As previously disclosed, the Company assumed the Title IV liabilities of
Western International University ("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 at the current time. 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
currently recorded will be recorded as an increase or decrease, as
applicable, to expense.
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 and
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.
UOP, IPD and WIU do not plan to exceed this 50% level and believe that this
restriction will have no significant impact on their respective business
strategies.
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. 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
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.
25
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. Washington has a
similar reauthorization requirement triggered by a change of ownership, but
provides that a temporary certificate of authorization may be issued pending
the reauthorization process.
Moreover, the Company is required to report any change in stock
ownership of UOP, the College, WIU or Apollo to NCA. At that time, NCA may
seek to evaluate the effect of such a change of stock ownership on the
continuing operations of UOP, the College 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 14 states, Puerto Rico and
British Columbia. UOP has held these authorizations for periods ranging from
less than one year to twenty years. UOP's NCA accreditation is accepted as
evidence of compliance with applicable state regulations in Arizona,
Colorado, Louisiana, Michigan, New Mexico, Nevada, Oklahoma, 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 license to operate in Florida in April 1997. In August
1997, UOP received NCA approval to operate in Washington and Oregon and
subsequently, has opened campuses in these states. The NCA approved UOP's
expansion into British Columbia and Oklahoma in June 1998, and UOP is
currently establishing campuses in these locations. UOP is registered with
British Columbia's Private Post-Secondary Education Commission and will
pursue accreditation through the province of British Columbia after the
required one year period of operation. Maryland has also approved UOP's
request to establish a new campus, and UOP is currently seeking expansion
approval into Maryland from NCA.
26
IPD client institutions possess authorization to operate in all states
in which they offer educational programs, which are subject to renewal. The
College 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
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.
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 modified adjusted gross 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 from gross income on education loans and limited
educational IRA's for children under the age of 18. These deductions are
also subject to adjusted gross income limitations and other restrictions.
These new provisions became effective for the 1998 calendar year, and it is
unclear at this time the effect that these additional tax benefits will have
on future enrollments.
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 was 56% in 1998.
27
LOCATIONS
UOP currently has campuses and learning centers located throughout 13
states and Puerto Rico. Following is a list of UOP main campuses and
learning centers as of September 30, 1998, with the year the campus was first
opened and degree enrollments as of August 31, 1998:
Fiscal Enroll-
Year ment at
UOP Main Campuses and Respective Learning Centers Opened 8/31/98
- -----------------------------------------------------------------------------
ARIZONA Phoenix Campus 1978 6,096
Mesa
Northwest Phoenix
Scottsdale
Southbank
Tempe*
Tucson Campus 1983 2,641
Fort Huachuca
CALIFORNIA Orange County (Fountain Valley Campus) 1981 8,298
Diamond Bar
Edwards Air Force Base
Pasadena
Ontario
Gardena
Oxnard*
La Mirada
Woodland Hills
San Jose Campus 1980 5,140
San Francisco
Pleasanton/San Ramon
Fresno
Walnut Creek
Bakersfield*
Novato*
San Diego Campus 1989 3,047
Vista
Chula Vista
32nd St. Naval Station
Rancho Bernardo
Sacramento Campus 1993 2,400
Fairfield
Stockton
Beale Air Force Base*
Roseville*
COLORADO Denver Campus 1982 4,016
Aurora
Colorado Springs
Northglenn
FLORIDA Maitland (Orlando Campus) 1996 1,220
Orlando*
Tampa Campus* 1998 463
Jacksonville Campus* 1998 301
HAWAII Honolulu Campus 1993 965
Mililani*
LOUISIANA New Orleans Campus 1996 1,040
28
Fiscal Enroll-
Year ment at
UOP Main Campuses and Respective Learning Centers Opened 8/31/98
- -----------------------------------------------------------------------------
MICHIGAN Detroit Campus 1996 2,308
Livonia
NEVADA Las Vegas Campus 1994 1,597
Nellis Air Force Base
Henderson
Southwest Las Vegas
Reno*
NEW MEXICO Albuquerque Campus 1985 2,662
Kirtland Air Force Base
Santa Fe
Santa Teresa/Las Cruces
Las Alamos
Carlsbad**
OKLAHOMA Oklahoma City Campus** 1999 -
OREGON Portland Campus* 1998 577
Hillsboro**
UTAH Salt Lake City Campus 1984 1,936
Ogden
Provo
Salt Lake City*
WASHINGTON Seattle Campus* 1998 647
PUERTO RICO Guaynabo Campus 1980 1,383
Mayaguez
DISTANCE EDUCATION Online, San Francisco, CA 1989 4,456
Center for Distance Education, 1989 2,056
Phoenix, AZ
------
TOTAL UOP ENROLLMENT AT AUGUST 31, 1998 53,249
======
Programs are offered throughout the United States and internationally.
Programs are offered in various states throughout the United States.
* Opened in 1998.
** Opened between September 1 and September 30, 1998.
IPD has 21 institutional contracts at August 31, 1998. IPD-assisted
programs are currently offered at 43 campuses and learning centers in
Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New
York, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia and
Wisconsin.
The College operations are located in Denver, Colorado.
WIU currently has three campuses and learning centers located in Phoenix
and Fort Huachuca, Arizona and London, England.
29
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, 1998, with respect to
properties leased by the Company in excess of 15,000 square feet:
LOCATION (CITY/STATE) SQUARE FEET
---------------------- -------------
Phoenix, AZ 151,391
Fountain Valley, CA 67,062
Tucson, AZ 49,469
Denver, CO 47,395
Tempe, AZ 41,664
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 30,889
Murray, UT 30,000
Sacramento, CA 28,164
Woodland Hills, CA 27,424
Southfield, MI 25,558
Mesa, AZ 23,914
Tempe, AZ 23,486
Albuquerque, NM 23,400
Ontario, CA 22,250
Honolulu, HI 21,279
Overland Park, KS 21,210
San Francisco, CA 20,324
Colorado Springs, CO 20,138
Jacksonville, FL 20,000
Tampa, FL 19,835
Englewood, CO 19,491
Westminster, CO 19,049
Orlando, FL 18,944
Las Vegas, NV 18,849
Provo, UT 18,585
Pleasanton, CA 18,560
Bellevue, WA 16,814
Aurora, CO 16,807
Roseville, CA 16,763
Guaynabo, Puerto Rico 16,000
Scottsdale, AZ 15,457
Walnut Creek, CA 15,445
Diamond Bar, CA 15,280
Quincy, MA 15,000
30
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 involved in any legal proceedings which it believes
would have a material effect on the Company's financial position or operating
results.
Item 4 -- Submission of Matters to a Vote of Security Holders
None
31
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 trades on the Nasdaq National Market ("Nasdaq") under the
symbol "APOL". 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 a 3-for-2 stock split effected in the form of a
stock dividend in April 1998, for the Company's Class A Common Stock as
reported by Nasdaq.
High Low
------ ------
Fiscal 1997
---------------------
First quarter $21.67 $14.83
Second quarter 25.50 16.67
Third quarter 24.50 15.33
Fourth quarter 27.33 21.33
Fiscal 1998
---------------------
First quarter $32.58 $22.42
Second quarter 32.75 25.92
Third quarter 35.92 28.04
Fourth quarter 43.25 29.25
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, 1998, there were approximately 185 and 4 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 12,500 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.
32
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, 1998 and the Consolidated Balance Sheet as of
August 31, 1998 and 1997, and the report of independent accountants thereon
are included in Item 8 of this Form 10-K. Diluted net income per share and
diluted weighted average shares outstanding have been retroactively restated
for stock splits.
Year Ended August 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Income Statement Data:
Revenues:
Tuition and other, net $384,877 $279,195 $211,247 $161,013 $124,440
Interest income 6,205 4,341 3,028 2,416 280
-------- -------- -------- -------- --------
Total net revenues 391,082 283,536 214,275 163,429 124,720
-------- -------- -------- -------- --------
Costs and expenses:
Instruction costs and services 232,592 167,720 130,039 102,122 81,313
Selling and promotional 49,035 35,187 27,896 21,016 17,918
General and administrative 33,183 25,648 21,343 18,462 17,194
-------- -------- -------- -------- --------
Total costs and expenses 314,810 228,555 179,278 141,600 116,425
-------- -------- -------- -------- --------
Income before income taxes 76,272 54,981 34,997 21,829 8,295
Provision for income taxes 29,975 21,602 13,605 9,229 3,383
-------- -------- -------- -------- --------
Net income $ 46,297 $ 33,379 $ 21,392 $ 12,600 $ 4,912
======== ======== ======== ======== ========
Diluted net income per share $ .59 $ .43 $ .28 $ .18 $ .10
Diluted weighted average shares
outstanding 79,086 77,726 76,763 68,872 50,524
_______________
33
August 31,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance Sheet Data:
Cash, cash equivalents and
restricted cash $ 75,039 $ 78,855 $ 63,267 $ 62,601 $ 12,816
Marketable securities 45,467 41,429 13,273
-------- -------- -------- -------- --------
Total cash and marketable securities $120,506 $120,284 $ 76,540 $ 62,601 $ 12,816
======== ======== ======== ======== ========
Total assets $305,160 $194,910 $137,850 $102,132 $ 43,638
======== ======== ======== ======== ========
Current liabilities $ 95,574 $ 67,394 $ 54,804 $ 45,065 $ 34,890
Long-term liabilities 9,778 3,199 2,432 1,715 1,347
Shareholders' equity 199,808 124,317 80,614 55,352 7,401
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $305,160 $194,910 $137,850 $102,132 $ 43,638
======== ======== ======== ======== ========
Operating Statistics:
Degree Enrollments at end of period 71,400 56,200 46,900 36,800 30,200
Number of locations at end
of period 114 96 85 68 60
_______________
Enrollments are defined as students in attendance in a degree program
at the end of a period. Average degree enrollments represent the
average of the ending degree enrollments for each month in the period.
Average degree enrollments were 64,100, 50,500, 41,500, 34,000, and
27,500 for the years ended 1998, 1997, 1996, 1995, and 1994,
respectively.
Includes UOP and WIU campuses and learning centers, IPD client
institutions and the College. At September 30, 1998,
there were 117 campuses and learning centers.
The Company did not pay any cash dividends on its Common Stock during
any of the periods set forth in the table above.
34
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. 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
$391.1 million in 1998 from $124.7 million in 1994. Average annual degree
seeking student enrollments have increased to 64,100 students in 1998 from
approximately 27,500 in 1994. Net income has increased to $46.3 million in
1998 from $4.9 million in 1994. At August 31, 1998, 71,400 degree seeking
students were enrolled in UOP, WIU, the College and IPD-assisted programs at
IPD client institutions.
From September 1994 through August 1998, UOP opened 40 campuses and
learning centers and IPD established operations at 17 campuses and learning
centers with its client institutions. Start-up costs for UOP campuses in new
markets average $700,000 to $900,000 per site. These start-up costs are
incurred over an 18 to 21 month period, at which time the enrollments at
these new campuses average 200 to 300 students. Costs for establishing a
learning center in a market currently served by UOP are expected to average
$150,000. Start-up costs for IPD contract sites average from $400,000 to
$500,000 per site over an 18 to 21 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 1998 consist of
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). UOP tuition revenues currently
represent approximately 87% of consolidated tuition revenues. IPD tuition
revenues consist of the contractual share of tuition revenues from students
enrolled in IPD assisted programs at IPD client institutions. IPD's
contracts with its respective client institutions generally have terms of
five to ten years with provisions for renewal.
Instruction costs and services at UOP, WIU and the College 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, 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
35
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 adjusted purchase price consisted of $19.4
million in cash, $15.9 million in stock and the assumption of approximately
$11.4 million in liabilities. The excess of cost over the fair value of
assets purchased of $40.0 million is being amortized over 35 years.
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,
---------------------------
1998 1997 1996
------- ------- -------
Revenues:
Tuition and other, net 98.4% 98.5% 98.6%
Interest income 1.6 1.5 1.4
------- ------- -------
Total net revenues 100.0 100.0 100.0
------- ------- -------
Costs and expenses:
Instruction costs and services 59.5 59.1 60.7
Selling and promotional 12.5 12.4 13.0
General and administrative 8.5 9.1 10.0
------- ------- -------
Total costs and expenses 80.5 80.6 83.7
------- ------- -------
Income before income taxes 19.5 19.4 16.3
Less provision for income taxes 7.7 7.6 6.3
------- ------- -------
Net income 11.8% 11.8% 10.0%
======= ======= =======
36
Year Ended August 31, 1998 Compared with the Year Ended August 31, 1997 -----
Net revenues increased by 37.9% to $391.1 million in 1998 from $283.5
million in 1997 due primarily to a 26.9% increase in average degree student
enrollments, tuition price increases averaging four to five percent
(depending on the geographic area and program), a higher concentration of
enrollments at locations that charge a higher rate per credit hour and net
revenues from the College. Most of the Company's campuses, which include
their respective learning centers, had increases in net revenues and average
degree student enrollments from 1997 to 1998.
Tuition and other net revenues for the year ended August 31, 1998 and
1997 consists primarily of $334.2 million and $244.7 million, respectively,
of net tuition revenues from students enrolled in degree programs and $23.1
million and $13.2 million, respectively, of net tuition revenues from
students enrolled in non-degree programs. Average degree student enrollments
increased to 64,100 in 1998 from approximately 50,500 in 1997.
Interest income increased to $6.2 million in 1998 from $4.3 million in
1997 due to the increase in cash and investments during the year.
Instruction costs and services increased by 38.7% to $232.6 million in
1998 from $167.7 million in 1997 due primarily to the direct costs necessary
to support the increase in average degree student enrollments, consisting
primarily of faculty compensation, classroom lease expenses and related staff
salaries at each respective location and added expenses related to the
College. These costs as a percentage of net revenues increased to 59.5% in
1998 from 59.1% in 1997 due primarily to the increase in the number of new
locations.
Selling and promotional expenses increased by 39.4% to $49.0 million in
1998 from $35.2 million in 1997 due primarily to an increase in the number of
marketing and enrollment staff, additional advertising and marketing related
to newly opened campuses and learning centers, and expenses related to the
College. These expenses as a percentage of net revenues increased to 12.5%
in 1998 from 12.4% in 1997 due to an increase in the number of campuses
opened in new markets in the last two years and an increase in the number of
marketing and enrollment staff, partially offset by the 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 29.4% to $33.2 million
in 1998 from $25.6 million in 1997 due primarily to costs required to support
the increased number of campuses and learning centers, costs associated with
the implementation of new information systems and overall increases in
general and administrative salaries. General and administrative expenses as
a percentage of net revenues decreased to 8.5% in 1998 from 9.1% in 1997 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
development and implementation of new information systems and expansion into
additional markets.
37
Costs related to the start-up of new campuses and learning centers are
expensed as incurred and totaled approximately $7.2 million and $3.6 million
in 1998 and 1997, respectively. These start-up costs are primarily included
in instruction costs and services and selling and promotional expenses.
Interest expense, which is allocated among all categories of costs and
expenses, was $119,000 and $167,000 in 1998 and 1997, respectively.
The Company's effective tax rate was 39.3% in both 1998 and 1997.
Net income increased to $46.3 million in 1998 from $33.4 million in 1997
due primarily to increased enrollments, increased tuition rates and improved
utilization of general and administrative costs.
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 21.7% increase in average degree 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
degree student enrollments increased to approximately 50,500 in 1997 from
41,500 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 year.
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 degree student enrollments. 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.
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. These expenses
as a percentage of net revenues decreased to 12.4% in 1997 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.
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.
Costs related to the start-up of new campuses and learning centers
totaled approximately $3.6 million in 1997 and 1996.
38
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.
39
QUARTERLY RESULTS OF OPERATIONS
The following table sets 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. Certain expenses in the first two quarters of 1998 were
reclassified between the General and Administrative and the Instructional
Costs and Services categories from the amounts originally reported. The
operating results for any quarter are not necessarily indicative of the
results for any future period. Diluted net income per share and diluted
weighted average shares outstanding have been retroactively restated for
stock splits.
Quarter Ended
-------------------------------------------------------------------------------
FY 1998 FY 1997
------------------------------------- ------------------------------------
Aug. 31, May 31, Feb. 28, Nov 30, Aug. 31, May 31, Feb. 28, Nov. 30,
1998 1998 1998 1997 1997 1997 1997 1996
------- ------- ------- ------- ------- ------- ------- -------
(In thousands, except per share amounts)
Revenues:
Tuition and other, net $106,723 $105,201 $85,078 $87,875 $75,773 $76,633 $60,696 $66,093
Interest income 1,912 1,582 1,386 1,325 1,286 1,209 956 890
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues 108,635 106,783 86,464 89,200 77,059 77,842 61,652 66,983
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Instruction costs and services 64,096 61,093 54,780 52,623 46,451 43,572 38,089 39,608
Selling and promotional 16,195 11,504 10,770 10,566 9,724 8,492 8,492 8,479
General and administrative 8,142 8,479 8,116 8,446 5,792 6,522 6,586 6,748
------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses 88,433 81,076 73,666 71,635 61,967 58,586 53,167 54,835
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 20,202 25,707 12,798 17,565 15,092 19,256 8,485 12,148
Provision for income taxes 7,766 10,185 5,068 6,956 5,648 7,702 3,393 4,859
------- ------- ------- ------- ------- ------- ------- -------
Net income $12,436 $15,522 $ 7,730 $10,609 $ 9,444 $11,554 $ 5,092 $ 7,289
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income per share $ .16 $ .20 $ .10 $ .13 $ .12 $ .15 $ .07 $ .09
======= ======= ======= ======= ======= ======= ======= =======
Diluted weighted average shares
outstanding 79,372 79,250 79,035 78,689 78,050 77,733 77,707 77,414
======= ======= ======= ======= ======= ======= ======= =======
As a percentage of net revenues:
Revenues:
Tuition and other, net 98.2% 98.5% 98.4% 98.5% 98.3% 98.4% 98.4% 98.7%
Interest income 1.8 1.5 1.6 1.5 1.7 1.6 1.6 1.3
------- ------- ------- ------- ------- ------- ------- -------
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 59.0 57.2 63.3 59.0 60.3 56.0 61.8 59.1
Selling and promotional 14.9 10.8 12.5 11.9 12.6 10.9 13.7 12.7
General and administrative 7.5 7.9 9.4 9.4 7.5 8.4 10.7 10.1
------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses 81.4 75.9 85.2 80.3 80.4 75.3 86.2 81.9
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 18.6 24.1 14.8 19.7 19.6 24.7 13.8 18.1
Provision for income taxes 7.2 9.6 5.9 7.8 7.3 9.9 5.5 7.2
------- ------- ------- ------- ------- ------- ------- -------
Net income 11.4% 14.5% 8.9% 11.9% 12.3% 14.8% 8.3% 10.9%
======= ======= ======= ======= ======= ======= ======= =======
40
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
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
Net cash provided by operating activities increased to $49.7 million in
1998 from $41.5 million in 1997. This increase resulted primarily from
increased net income, increased non-cash charges for depreciation,
amortization and bad debt expense, and increases in accounts payable and
accrued expenses as a result of the general growth in operations offset by an
increase in accounts receivable. The increase in accounts receivable was
primarily attributable to the general growth in operations as well as the
implementation in the fourth quarter of new financial aid processing
software. Although the Company believes that the new software will
ultimately result in processing efficiencies and faster collections, delays
in processing were experienced during the transition and training period.
The Company expects its accounts receivable balance to return to more
normalized levels by mid-1999. Bad debt expense as a percent of net revenues
was less than 2% in 1998 and 1997.
Capital expenditures increased to $30.9 million in 1998 from $12.7
million in 1997 primarily due to the implementation of a new financial aid
software package, the installation of computer labs related to the expansion
of Information Technology programs, an increase in leasehold improvements at
new locations and to support an increase in the number of overall locations.
Total purchases of property and equipment for the year ended August 31, 1999
are expected to range from $26.0 to $28.0 million. These expenditures will
primarily be related to new campuses and learning centers, the continued
expansion of computer labs designed to support the Information Technology
programs, hardware and software related to the Company's planned conversion
to a new human resource system and increases in normal recurring capital
expenditures due to the overall increase in student and employee levels
resulting from the growth in the business. During 1998, the Company used
$19.4 million of cash for its acquisition of the assets and related business
operations of the College for Financial Planning and $10.8 million for its
investment in a joint venture.
41
Start-up costs are expected to range from $8.0 to $10.0 million in 1999,
as compared to $7.2 million in 1998, due to recent and planned expansion into
new geographic markets.
In November 1997, the Company increased its line of credit from $4.0 to
$10.0 million. At August 31, 1998, the Company had no outstanding borrowings
on the line of credit, which bears interest at prime. At August 31, 1998,
availability under the line of credit was reduced by outstanding letters of
credit of $1.6 million. The line of credit is renewable annually and any
amounts borrowed under the line are payable upon its termination in February
2000.
The Company currently leases all of its educational and administrative
facilities. 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. The Company is currently considering various options for
expansion of its corporate headquarters and Phoenix Main Campus.
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 are held in a separate cash account
until certain conditions are satisfied. As of August 31, 1998, the Company
had approximately $22.7 million in these separate accounts, which are
reflected in the Consolidated Balance Sheet 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 Title IV Regulations, as revised effective July 1, 1998, require all
higher education institutions to meet a minimum composite score to be deemed
financially responsible by the DOE. If the minimum composite score of 1.0 is
not met, an institution would fall under alternative standards and may lose
its eligibility to participate in Title IV Programs. As of August 31, 1998,
UOP's composite score was 3.0 and WIU's composite score was 2.8. These
requirements apply separately to UOP and WIU and to each of the respective
IPD client institutions, but not to the Company on a consolidated basis.
UOP's most recent Department of Education program review began in March
1997, and an initial program review report has been received. This report
contained six findings in the areas of satisfactory academic progress,
refunds and general program administration. UOP is currently in the process
of responding to these findings regarding compliance with requirements of the
Title IV Programs. UOP's response to these issues is due in January 1999,
and UOP will have its response prepared prior to the deadline. Subsequently,
the Department will issue a final program review determination. It is
uncertain when the final determination will be issued and what the results of
the findings will be.
Additionally, in January 1998 the Department of Education Office of the
Inspector General ("OIG") began performing a routine audit of UOP. The
auditors reviewed UOP's cash management policies. Although no draft report
has been received from the OIG, the audit team indicated at the exit
interview that it had no findings regarding cash management policies. The
team did present questions regarding UOP's interpretation of the "12-hour
rule", UOP's distance education programs and institutional refund
42
obligations. As of this date, UOP has supplied the OIG with the information
they have requested and is awaiting an initial draft report. Although the
Company believes that the program review and OIG audit will be resolved
without any material effect, as with any program review or audit, no
assurance can be given as to the final outcome since the matters are not yet
resolved.
As previously disclosed, the Company assumed the Title IV liabilities of
Western International University ("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 at the current time. 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
currently recorded will be recorded as an increase or decrease, as
applicable, to expense.
As previously disclosed, the Company began offering an alternative
student loan program on a test basis at several of its campuses in March
1997. In May 1998, this pilot program was discontinued. The loans currently
outstanding will continue to be serviced by the commercial lender that
offered the program under the original terms and conditions. Loans for
students that did not meet certain credit requirements were guaranteed by the
Company, subject to certain limitations. At August 31, 1998, the Company had
guaranteed approximately $2.5 million of outstanding loan balances under this
program. To date, there have been no material defaults by students whose
loans are guaranteed by the Company.
On September 25, 1998, the Company's Board of Directors authorized a
program allocating up to $40 million in Company funds to repurchase shares of
its Class A Common Stock. As of October 16, 1998, the Company had
repurchased approximately 295,000 shares at a total cost of approximately
$7.0 million.
YEAR 2000 COMPLIANCE
The Year 2000 computer issue refers to a condition in computer software
where a two digit field rather than a four digit field is used to distinguish
a calendar year. Unless corrected, some computer programs, hardware ("IT")
and non-information technology systems ("non-IT") could be unable to process
information containing dates subsequent to December 31, 1999. As a result,
such programs and systems could experience miscalculations, malfunctions or
disruptions.
The Company is currently in the assessment phase of evaluating its core
business information systems for Year 2000 readiness and is extending that
review to include a wide variety of other IT and non-IT systems. As a result
of hardware and software upgrades and computer system purchases over the past
few years, many of the Company's computer systems should not have a Year 2000
problem or have been warranted to be Year 2000 compliant by third-party
vendors. The Company is continuing the process of updating much of its
existing software for Year 2000 compliance by acquiring new and upgraded
third party software packages to replace existing software and modifying
existing internally developed software. In no case is a system being
replaced solely because of Year 2000 issues, although in some cases, the
timing of system replacements is being accelerated. Sufficient testing of
the Company's IT systems has not been completed to fully validate readiness.
43
Additional testing is planned during 1999 to reasonably ensure Year 2000
compliance. Additionally, while the Company may have incurred an opportunity
cost for addressing the Year 2000 issue, it does not believe that any
specific IT projects have been deferred as a result of its Year 2000 efforts.
The Company's non-IT compliance is focused primarily in the area of
facilities leased by the Company. The Company is working with its lessors to
ensure compliance on these non-IT systems.
The Company has begun to assess the readiness of its significant
suppliers, business partners, banking agencies and governmental agencies to
determine the extent to which the Company may be vulnerable in the event that
those parties fail to properly remediate their own Year 2000 issues. The
Company's operations and liquidity largely depend upon the student funding
provided by Title IV Programs for its students. Processing of applications
for this funding is handled by the U.S. Department of Education's computers
systems. The U.S. Department of Education has stated that its systems will
be Year 2000 compliant in early calendar year 1999 and that various schools
will be able to run tests of the remediated systems during the first half of
calendar year 1999; however, the Company is unable to independently assess
the U.S. Department of Education's progress to date and no test dates have
been announced yet. Similarly, UOP, IPD, WIU, the College and IPD client
institutions are licensed by one or more agencies in the states in which they
are based and are accredited by accrediting bodies that are recognized by the
U.S. Department of Education. Any prolonged interruption would have a
material adverse impact upon the education industry and, accordingly, upon
the Company's business, results of operations, liquidity and financial
condition. The Company is in the process of developing an appropriate
contingency plan in the event that a significant exposure is identified
relative to the dependencies on third-party systems.
The Company believes that the most reasonably likely worst-case scenario
for the Year 2000 issue would be that the Company or the third parties with
whom it has relationships would cease or not successfully complete their Year
2000 remediation efforts. If this were to occur, the Company would encounter
disruptions to its business that could have a material adverse effect on its
results of operations. The Company could be materially impacted by
widespread economic or financial market disruption or by year 2000 computer
system failures at the U.S. Department of Education. The Company has not at
this time established a formal Year 2000 contingency plan but will consider
and, if necessary, address doing so as part of its Year 2000 activities.
Although the Company is unable at this time to assess the possible
impact on its results of operations, liquidity or financial condition of any
Year 2000 related disruptions to its business caused by the malfunctioning of
any IT or non-IT systems and products that it uses or that third parties with
which it has material relationships use, management does not believe at the
current time that the cost of remediating the Company's internal Year 2000
problems will have a material adverse impact upon its business, results of
operations, liquidity or financial condition.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
44
Item 7a -- Quantitative and Qualitative Disclosures about Market Risk
The Company's portfolio of marketable securities includes numerous
issuers, varying types of securities and maturities. The Company intends to
hold these securities to maturity. The fair value of the Company's portfolio
of marketable securities would not be significantly impacted by either a 100
basis point increase or decrease in interest rates due primarily to the
short-term nature of the portfolio. The Company does not hold or issue
derivative financial instruments.
45
Item 8 -- Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . 47
Consolidated Statement of Operations. . . . . . . . . . . . . . . . . . . 48
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . 49
Consolidated Statement of Changes in Shareholders' Equity. . . . . . . . . 50
Consolidated Statement of Cash Flows. . . . . . . . . . . . . . . . . . . 51
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . 52
46
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,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended August 31, 1998, 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.
PricewaterhouseCoopers LLP
Phoenix, Arizona
October 19, 1998
47
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(In thousands, except per share amounts)
Year Ended August 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Revenues:
Tuition and other, net $384,877 $279,195 $211,247
Interest income 6,205 4,341 3,028
-------- -------- --------
Total net revenues 391,082 283,536 214,275
-------- -------- --------
Costs and expenses:
Instruction costs and services 232,592 167,720 130,039
Selling and promotional 49,035 35,187 27,896
General and administrative 33,183 25,648 21,343
-------- -------- --------
Total costs and expenses 314,810 228,555 179,278
-------- -------- --------
Income before income taxes 76,272 54,981 34,997
Provision for income taxes 29,975 21,602 13,605
-------- -------- --------
Net income $ 46,297 $ 33,379 $ 21,392
======== ======== ========
Basic net income per share $ .60 $ .44 $ .29
======== ======== ========
Diluted net income per share $ .59 $ .43 $ .28
======== ======== ========
Basic weighted average shares outstanding 77,245 75,625 74,721
Diluted weighted average shares outstanding 79,086 77,726 76,763
The accompanying notes are an integral part of these consolidated financial
statements.
48
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(Dollars in thousands)
August 31,
-----------------------
1998 1997
-------- --------
Assets:
Current assets-
Cash and cash equivalents $ 52,326 $ 58,928
Restricted cash 22,713 19,927
Marketable securities 27,538 27,182
Receivables, net 61,282 32,040
Deferred tax assets, net 6,203 2,873
Other current assets 3,945 2,853
-------- --------
Total current assets 174,007 143,803
Property and equipment, net 46,618 25,251
Marketable securities 17,929 14,247
Investment in joint venture 10,807
Cost in excess of fair value of assets purchased, net 41,398 2,283
Other assets 14,401 9,326
-------- --------
Total assets $305,160 $194,910
======== ========
Liabilities and Shareholders' Equity:
Current liabilities-
Current portion of long-term liabilities $ 333 $ 295
Accounts payable 9,684 7,714
Accrued liabilities 21,311 11,449
Income taxes payable 1,007 253
Student deposits and current portion of deferred revenue 63,239 47,683
-------- --------
Total current liabilities 95,574 67,394
-------- --------
Deferred tuition revenue, less current portion 4,592 --
-------- --------
Long-term liabilities, less current portion 3,750 2,494
-------- --------
Deferred tax liabilities, net 1,436 705
-------- --------
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
shares authorized; 77,112,000 and 75,614,000 issued and
outstanding at August 31, 1998 and 1997, respectively 101 66
Class B voting common stock, no par value, 3,000,000
shares authorized; 512,000 and 548,000 issued and outstanding at
August 31, 1998 and 1997, respectively 1 1
Additional paid-in capital 80,677 51,521
Retained earnings 119,029 72,729
-------- --------
Total shareholders' equity 199,808 124,317
-------- --------
Total liabilities and shareholders' equity $305,160 $194,910
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
49
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, 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 of stock options
exercised 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 of stock options
exercised 7,508 7,508
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
Stock issued for College
acquisition 445 15,944 15,944
Stock issued under stock
purchase plan 75 2,457 2,457
Stock issued under stock
option plans 475 1 3,542 3,543
Exchange Class A shares for
Class B shares 36 (36) --
Tax benefits of stock options
exercised 7,249 7,249
3-for-2 stock split, April 98 25,854 34 (34) --
Fractional shares paid out (2) (2)
Currency translation gain 3 3
Net income 46,297 46,297
-------- -------- -------- -------- ---------- --------- ------------
Balance at August 31, 1998 77,112 $ 101 512 $ 1 $ 80,677 $ 119,029 $ 199,808
======== ======== ======== ======== ========== ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
50
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands)
Year Ended August 31,
------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income $ 46,297 $ 33,379 $ 21,392
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,786 8,291 6,093
Provision for uncollectible accounts 5,479 2,523 1,704
Deferred income taxes (2,599) 145 (475)
Decrease (increase) in assets:
Restricted cash (2,786) (8,642) 590
Receivables, net (29,733) (8,578) (11,621)
Other assets (2,491) 970 (350)
Increase in liabilities:
Accounts payable and accrued liabilities 9,542 488 1,371
Student deposits and deferred revenue 12,955 11,947 6,454
Other liabilities 192 927 91
-------- -------- --------
Net cash provided by operating activities 49,642 41,450 25,249
-------- -------- --------
Cash flows from investing activities:
Purchase of marketable securities (43,277) (51,634) (18,636)
Maturities of marketable securities 38,556 22,983 5,363
Purchase of other assets (3,685) (3,427) (4,131)
Investment in joint venture (10,807)
Net additions to property and equipment (30,855) (12,699) (9,873)
Cash paid for acquisitions, net of cash
acquired (19,378) (585)
-------- -------- --------
Net cash used for investing activities (69,446) (44,777) (27,862)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 6,000 2,812 1,284
Tax benefits of stock options exercised 7,249 7,508 2,585
Payments on long-term debt (50) (50)
-------- -------- --------
Net cash provided by financing activities 13,199 10,270 3,869
-------- -------- --------
Effect of currency translation 3 3 --
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (6,602) 6,946 1,256
Cash and cash equivalents at beginning
of year 58,928 51,982 50,726
-------- -------- --------
Cash and cash equivalents at end of year $ 52,326 $ 58,928 $ 51,982
======== ======== ========
Supplemental disclosure of cash flow
information
Cash paid during the year for:
Income taxes $ 24,235 $ 13,953 $ 11,675
Interest $ 9 $ 11 $ 2
The accompanying notes are an integral part of these consolidated financial
statements.
51
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
Institutes Corporation (the "College") 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
70 campuses and learning centers located in Arizona, California, Colorado,
Florida, Hawaii, Louisiana, Michigan, Nevada, New Mexico, Oklahoma, 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 20 regionally accredited private colleges and universities. IPD
currently operates at 43 campuses and learning centers in 22 states. IPD has
contracted to develop online degree programs for the United States Marine
Corps.
The College, located in Denver, Colorado, was acquired in September 1997
and provides financial planning education programs as well as a regionally
accredited graduate degree program in financial planning.
WIU, which is accredited by NCA, currently offers undergraduate and
graduate degree programs at three campuses and learning centers in Phoenix
and Fort Huachuca, Arizona and London, England.
The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 1998, 1997 and 1996 relate to the
fiscal years ended August 31, 1998, 1997 and 1996, 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.
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.
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
52
their program. In addition, all Title IV Program funds received by 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 receipt. Restricted cash is
excluded from cash and cash equivalents 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 U.S. Agency-backed securities and auction market preferred stock
with maturities of ninety days or less.
Investments -----------------------------------------------------------------
Investments in marketable securities such as municipal bonds, auction
market preferred stock and U.S. agency obligations are stated at amortized
cost, which approximates fair value. It is the Company's intention to hold
its marketable securities until maturity. Investments in joint ventures and
other long-term investments are carried at cost.
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 are amortized using the
straight-line method over the shorter of the lease term or the estimated
useful lives of the related assets. Maintenance and repairs are expensed as
incurred.
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 degree programs are
billed in blocks of time ranging in length from five weeks to three months.
Seminars, other shorter term programs and many of the College'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 deferred tuition revenue for the amount billed. The deferred tuition
revenue 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 in accordance with the
Company's refund policy.
Because most of the Company's educational programs at UOP, IPD and WIU
are billed in short blocks of time ranging from five to six weeks, most
deferred tuition revenue at the end of each period will be recognized into
income within five to six weeks following the end of that period. Many of
the College's non-degree programs are billed in one installment and will be
recognized into income over 8 to 36 months. Any deferred tuition revenue
that will not be recognized into income within 12 months is classified as
long-term deferred tuition revenue.
53
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.
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,
1998, the Company's cost in excess of fair value of assets purchased related
primarily to the acquisition of certain assets of the College for Financial
Planning and Western International University ("Western"), which are being
amortized over 35 years and 15 years, respectively.
Statement of Financial Accounting Standards 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may not
be recoverable. The carrying value of cost in excess of fair value of assets
purchased is assessed for any permanent impairment by evaluating the
operating performance and future undiscounted cash flows of the underlying
businesses. Adjustments are made if the sum of the expected future net cash
flows is less than book value. As of August 31, 1998, there have been no
impairment adjustments recognized.
Fair value of financial instruments -----------------------------------------
The carrying amount reported in the Consolidated Balance Sheet for cash
and cash equivalents, restricted cash, marketable securities, accounts
receivable, accounts payable, accrued liabilities, and student deposits and
deferred revenue approximate fair value because of the short-term nature of
these financial instruments.
Earnings per share ----------------------------------------------------------
Basic net income per share is computed using the weighted average number
of Class A and Class B Common shares outstanding during the period. Diluted
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. Both basic and diluted weighted average shares have been
retroactively restated for stock splits effected in the form of stock
dividends. 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.
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 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.
54
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. Advertising
expenses, including promotional materials, were $30.0 million in 1998, $21.8
million in 1997 and $16.3 million in 1996.
Start-up costs --------------------------------------------------------------
Costs related to the start-up of new campuses and learning centers are
expensed as incurred and were $7.2 million in 1998 and $3.6 million in 1997
and 1996.
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,
long-term deferred tuition revenue recognized upon receipt of payment for tax
purposes and the use of accelerated depreciation methods for tax purposes.
Stock-based compensation ----------------------------------------------------
The Company has elected to continue to account for its stock-based
awards in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and has provided the pro forma
disclosures as required by Statement of Financial Accounting Standards 123,
"Accounting for Stock Based Compensation" ("SFAS 123"), for the years ended
August 31, 1998, 1997 and 1996.
New accounting pronouncements -----------------------------------------------
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" ("SFAS 130"), which will be effective in the Company's 1999 fiscal
year. 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 in the Company's 1999 fiscal year. SFAS 131 redefines how
operating segments are determined and requires expanded quantitative and
qualitative disclosures relating to an entity's operating segments. The
Company does not anticipate that the adoption of SFAS 131 will have a
significant impact on its disclosures.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 will
be effective for the Company's 2000 fiscal year. The Company does not expect
that the adoption of SOP 98-1 will have a material impact on its financial
statements.
55
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.
Consolidated statement of cash flow -----------------------------------------
Supplemental schedule of non-cash investing activities:
In September 1997, the Company purchased certain assets of the College
for Financial Planning. Non-cash consideration paid included the issuance of
$15.9 million of common stock. As a result of the acquisition, the Company
recorded additional assets of $46.7 million and liabilities of $11.4 million.
In September 1995, the Company purchased certain assets of Western. As
a result of the acquisition, the Company recorded additional assets of $2.0
million and liabilities of $2.4 million.
Reclassifications -----------------------------------------------------------
Certain amounts reported for the years ended August 31, 1997 and 1996
have been reclassified to conform to the 1998 presentation, having no effect
on net income.
NOTE 3. ACQUISITIONS
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 adjusted purchase price consisted of $19.4
million in cash, $15.9 million in stock and the assumption of approximately
$11.4 million in liabilities. The excess of cost over the value of tangible
assets of $40.0 million is being amortized over 35 years.
In September 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. The adjusted purchase price consisted of
$630,000 in cash and the assumption of approximately $2.4 million in
liabilities. The excess of cost over the value of tangible assets of $2.6
million is being amortized over 15 years.
The acquisitions were both accounted for under the purchase method and,
accordingly, the results of operations related to these new subsidiaries have
been included with those of the Company for periods subsequent to the date of
the respective acquisitions. Results of operations for Western and for the
College for Financial Planning prior to the acquisition were not material in
relation to the Company's operations as a whole.
56
NOTE 4. BALANCE SHEET COMPONENTS
Marketable securities consist of the following, in thousands:
August 31, 1998 August 31, 1997
------------------------ -----------------------
Estimated Amortized Estimated Amortized
Type Market Value Cost Market Value Cost
- ---------- ------------ -------- ------------ -------
Classified as current:
Municipal bonds $26,969 $26,898 $25,938 $25,932
Auction market preferred stock 750 750
U.S. agency obligations 640 640 500 500
------- ------- ------- -------
Total current marketable securities 27,609 27,538 27,188 27,182
------- ------- ------- -------
Classified as noncurrent:
Municipal bonds due in 1-2 years 17,975 17,929 14,267 14,247
------- ------- ------- -------
Total marketable securities $45,584 $45,467 $41,455 $41,429
======= ======= ======= =======
Receivables consist of the following, in thousands:
August 31,
--------------------
1998 1997
------- -------
Trade receivables $67,160 $35,524
Interest receivable 671 606
Income tax refunds receivable 79 431
------- -------
67,910 36,561
Less allowance for doubtful accounts (6,628) (4,521)
------- -------
Total receivables, net $61,282 $32,040
======= =======
Bad debt expense was $5.5 million, $2.5 million and $1.7 million for
1998, 1997 and 1996, respectively.
57
Property and equipment consist of the following, in thousands:
August 31,
--------------------
1998 1997
------- -------
Furniture and equipment $52,698 $32,779
Software 11,061 4,081
Leasehold improvements 7,432 3,766
Land and buildings 350 350
------- -------
71,541 40,976
Less accumulated depreciation (24,923) (15,725)
------- -------
Property and equipment, net $46,618 $25,251
======= =======
Depreciation and amortization expense was $9.9 million, $6.4 million and
$4.5 million for 1998, 1997 and 1996, respectively.
Cost in excess of fair value of assets purchased consist of the
following, in thousands:
August 31,
--------------------
1998 1997
------- -------
Cost in excess of fair value of assets purchased $42,831 $ 2,565
Less accumulated amortization (1,433) (282)
------- -------
Total $41,398 $ 2,283
======= =======
Total amortization expense was $1.2 million and $176,000 in 1998 and
1997, respectively.
58
Accrued liabilities consist of the following, in thousands:
August 31,
--------------------
1998 1997
------- -------
Salaries, wages and benefits $ 9,816 $ 7,576
Other accrued liabilities 11,495 3,873
------- -------
Total accrued liabilities $21,311 $11,449
======= =======
Student deposits and current portion of deferred revenue consist of the
following, in thousands:
August 31,
--------------------
1998 1997
------- -------
Student deposits $35,794 $29,086
Current portion of deferred tuition revenue 26,067 17,709
Other deferred revenue 1,378 888
------- -------
Total student deposits and current portion of
deferred revenue $63,239 $47,683
======= =======
NOTE 5. INVESTMENT IN JOINT VENTURE
In August 1998, the Company together with Hughes Network Systems and
Hermes Onetouch L.L.C. ("Hermes") formed a new corporation to acquire One
Touch Systems, a leading provider of interactive distance learning solutions.
The Company contributed $10.8 million and provided a $1.2 million letter of
credit, in exchange for a 19% interest in the newly formed corporation. This
investment is accounted for under the cost method of accounting. Hermes is
wholly-owned by the Company's Chairman and a Senior Vice President.
NOTE 6. SHORT-TERM BORROWINGS
In November 1997, the Company increased its line of credit from $4.0 to
$10.0 million. At August 31, 1998, the Company had no outstanding borrowings
on the line of credit, which bears interest at prime or, at the Company's
option, LIBOR plus 1.25%. At August 31, 1998, availability under the line of
credit was reduced by outstanding letters of credit of $1.6 million. Any
amounts borrowed under the line are payable upon its termination in February
2000. The Company's line of credit agreement prohibits the Company from
paying cash dividends or making other cash distributions without the lender's
consent.
59
NOTE 7. LONG-TERM LIABILITIES
Long-term liabilities consist of the following, in thousands:
August 31,
-------------------
1998 1997
------- ------
Deferred compensation and note agreements
discounted at 7.5% to 12% $1,495 $1,554
Deferred rent 1,436 1,235
Other long-term liabilities 1,152
------- ------
Total long-term liabilities 4,083 2,789
Less current portion (333) (295)
------- ------
Total long-term liabilities, net $3,750 $2,494
======= ======
The aggregate maturities of all long-term liabilities for each of the
five fiscal years subsequent to August 31, 1998 are: 1999--$333,000; 2000--
$318,000; 2001--$273,000; 2002--$349,000; 2003--$332,000.
The undiscounted deferred compensation liability was $1.6 million at
August 31, 1998 and 1997. The undiscounted note payable related to the WIU
acquisition was $600,000 and $650,000 at August 31, 1998 and 1997,
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.
60
NOTE 8. INCOME TAXES
Income before income taxes and the related components of the income tax
provision are as follows, in thousands:
Year Ended August 31,
---------------------------
1998 1997 1996
------- ------- -------
Income (loss) before income taxes:
United States $75,912 $55,001 $34,322
Puerto Rico 544 337 675
United Kingdom (184) (357)
------- ------- -------
Total income before taxes $76,272 $54,981 $34,997
======= ======= =======
Income tax provision (benefit):
Current:
Federal $26,546 $17,877 $11,239
State and other 6,028 3,870 2,841
------- ------- -------
Total current 32,574 21,747 14,080
------- ------- -------
Deferred:
Federal (2,004) (123) (365)
State and other (595) (22) (110)
------- ------- -------
Total deferred (2,599) (145) (475)
------- ------- -------
Total provision for income taxes $29,975 $21,602 $13,605
======= ======= =======
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,
---------------------------
1998 1997 1996
------- ------- -------
Income tax provision at expected rate
of 35% $26,695 $19,243 $12,249
State taxes, net of federal benefit 3,918 2,516 1,777
Non-taxable interest income (1,112) (897) (534)
Other, net 474 740 113
------- ------- -------
Total provision for income taxes $29,975 $21,602 $13,605
======= ======= =======
61
Deferred tax assets and liabilities consist of the following, in
thousands:
August 31,
-------------------
1998 1997
------ ------
Gross deferred tax assets:
Allowance for doubtful accounts $2,869 $1,842
Deferred tuition revenue 2,264
Other 2,096 1,879
------ ------
Total gross deferred tax assets 7,229 3,721
------ ------
Gross deferred tax liabilities:
Depreciation and amortization of property
and equipment 1,542 1,354
Other 920 199
------ ------
Total gross deferred tax liabilities 2,462 1,553
------ ------
Net deferred tax assets $4,767 $2,168
====== ======
Net deferred tax assets are reflected in the accompanying balance sheet
as follows, in thousands:
August 31,
------------------
1998 1997
------- ------
Current deferred tax assets, net $ 6,203 $2,873
Noncurrent deferred tax liabilities, net (1,436) (705)
------- ------
Net deferred tax assets $ 4,767 $2,168
======= ======
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 its net deferred tax assets.
62
NOTE 9. COMMON STOCK
From August 1995 to April 1998, the Company's Board of Directors
authorized four separate stock splits effected in the form of stock dividends
as follows:
For Shareholders
Date Authorized Type of Record on Date Distributed
- ----------------- ------- ----------------- ------------------
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
April 9, 1998 3-for-2 April 13, 1998 April 27, 1998
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 September 25, 1998, the Company's Board of Directors authorized a
program allocating up to $40 million in Company funds to repurchase shares of
its Class A Common Stock. As of October 16, 1998, the Company had
repurchased approximately 295,000 shares at a total cost of approximately
$7.0 million.
NOTE 10. EARNINGS PER SHARE
In February 1998, the Company adopted Statement of Financial Accounting
Standards 128, "Earnings Per Share". As a result, earnings per share
calculations for all prior periods have been restated.
A reconciliation of the basic and diluted per share computations for
1998, 1997 and 1996 are as follows:
For the Year Ended August 31,
(In thousands, except per share amounts)
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Avg. Per Share Avg. Per Share Avg. Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- ---------- -------- -------- ----------
Basic net income
per share $46,297 77,245 $ .60 $33,379 75,625 $ .44 $21,392 74,721 $ .29
===== ===== =====
Effect of dilutive
securities:
Stock options 1,841 2,101 2,042
------- ------ ------- ------ ------- ------
Diluted net income
per share $46,297 79,086 $ .59 $33,379 77,726 $ .43 $21,392 76,763 $ .28
======= ====== ===== ======= ====== ===== ======= ====== =====
63
NOTE 11. 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 $1.8
million, $1.3 million and $1.1 million for 1998, 1997 and 1996, respectively.
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 to the
Company's non-employee directors of options to purchase shares 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 SFAS 123. Accordingly, no compensation cost has been recognized for these
plans. Had compensation cost for the plans been determined based on the fair
64
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
-------------------------------
1998 1997 1996
--------- --------- ---------
Net income - as reported $46,297 $33,379 $21,392
Net income - pro forma $43,986 $31,551 $19,935
Diluted income per share - as reported $ .59 $ .43 $ .28
Diluted income per share - pro forma $ .55 $ .40 $ .26
Diluted weighted average shares
outstanding - as reported 79,086 77,726 76,763
Diluted weighted average shares
outstanding - pro forma 79,889 78,365 77,056
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 1998, 1997, and
1996, respectively: (1) dividend yield of 0.00% in all years; (2) expected
volatility of 40.0%, 37.0%, and 37.1%; (3) risk-free interest rates of 5.9%,
6.0%, and 5.7% and (4) expected lives of 5.4, 6.9, and 8.3 years.
65
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, 1995 2,529 $0.964
Granted 3,178 7.502
Exercised (473) 0.793
Canceled (72) 7.531
------
Outstanding at August 31, 1996 5,162 4.913
Granted 314 17.336
Exercised (965) 1.014
Canceled (264) 9.158
------
Outstanding at August 31, 1997 4,247 6.453
Granted 355 25.986
Exercised (694) 5.100
Canceled (42) 13.650
------
Outstanding at August 31, 1998 3,866 8.413
======
Exercisable at August 31, 1998 2,022
======
Available for issuance at August 31, 1998 2,042
======
The following table summarizes information about the Company's stock
options at August 31, 1998:
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
- ------------------- ------------ ----------- --------- ----------- ------------
$ 0.277 to $ 1.630 795 5.99 $ 0.911 795 $ 0.911
$ 5.975 to $ 7.532 2,481 7.06 $ 7.500 982 $ 7.452
$17.000 to $17.417 250 7.20 $17.383 123 $17.348
$23.792 to $28.833 340 9.07 $25.999 122 $25.044
--------- -----------
$ 0.277 to $28.833 3,866 7.02 $ 8.413 2,022 $ 6.547
========= ===========
66
NOTE 12. COMMITMENTS AND CONTINGENCIES
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, 1998, in thousands:
Operating Leases
---------------------------
Equipment
Facilities & Other
---------- ---------
1999 $ 29,104 $ 687
2000 29,213 412
2001 26,751 121
2002 27,704
2003 22,585
Thereafter 29,638
---------- ---------
$164,995 $1,220
========== =========
Facility and equipment rent expense totaled $32.1 million, $23.4 million
and $19.9 million for 1998, 1997 and 1996, respectively.
UOP's most recent Department of Education program review began in March
1997, and an initial program review report has been received. This report
contained six findings in the areas of satisfactory academic progress,
refunds and general program administration. UOP is currently in the process
of responding to these findings regarding compliance with requirements of the
Title IV Programs. UOP's response to these issues is due in January 1999,
and UOP will have its response prepared prior to the deadline. Subsequently,
the Department will issue a final program review determination. It is
uncertain when the final determination will be issued and what the results of
the findings will be.
Additionally, in January 1998 the Department of Education Office of the
Inspector General ("OIG") began performing a routine audit of UOP. The
auditors reviewed UOP's cash management policies. Although no draft report
has been received from the OIG, the audit team indicated at the exit
interview that it had no findings regarding cash management policies. The
team did present questions regarding UOP's interpretation of the "12-hour
rule", UOP's distance education programs and institutional refund
obligations. As of this date, UOP has supplied the OIG with the information
they have requested and is awaiting an initial draft report. Although the
Company believes that the program review and OIG audit will be resolved
without any material effect, as with any program review or audit, no
assurance can be given as to the final outcome since the matters are not yet
resolved.
As previously disclosed, the Company assumed the Title IV liabilities of
Western International University ("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 at the current time. Depending on the interpretation
67
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
currently recorded will be recorded as an increase or decrease, as
applicable, to expense.
The Company is involved in various legal proceedings occurring in the
normal course of business. The Company believes that the disposition of
these cases will not have a material adverse impact on the financial position
or results of operations of the Company.
Item 9 -- Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
68
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 October 31, 1998 concerning the Company's directors
and executive officers:
Name Age Position
- ---------------------------------- --- ---------------------------
John G. Sperling, Ph.D. 77 Chairman of the Board and Chief Executive
Officer
Todd S. Nelson 39 President and Director
J. Jorge Klor de Alva, J.D., Ph.D. 50 Senior Vice President and Director
Jerry F. Noble 56 Senior Vice President and Director
Peter V. Sperling 39 Senior Vice President, Secretary,
Treasurer and Director
William H. Gibbs 48 Senior Vice President and Director
Kenda B. Gonzales 41 Chief Financial Officer
Junette C. West 34 Vice President - Controller and Chief
Accounting Officer
Thomas C. Weir 64 Director
Dino J. DeConcini 64 Director
Hedy F. Govenar 53 Director
John R. Norton III 69 Director
JOHN G. SPERLING, Ph.D., is the founder, Chief Executive Officer and
Chairman of the Board of Directors of the Company. Dr. Sperling was also
President of the Company from its inception until February 1998. 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.
TODD S. NELSON has been with the Company since 1987. Mr. Nelson has
been the President of the Company since February 1998. Mr. Nelson was the
Vice President of the Company from 1994 to February 1998 and the Executive
Vice President of UOP from 1989 to February 1998. 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.
69
J. JORGE KLOR DE ALVA, J.D., Ph.D., has been President of UOP and a
Senior Vice President of the Company since February 1998 and has been a
director of the Company since 1991. Dr. Klor de Alva was a Vice President of
Business Development of the Company from 1996 to 1998. 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.
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
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 a Senior Vice President since June 1998. Mr. Sperling was the Vice
President of Administration from 1992 to June 1998 and has been 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.
WILLIAM H. GIBBS has been with the Company since 1980. Mr. Gibbs has
been a Senior Vice President of the Company since 1987 and was the President
of UOP from 1987 to February 1998. 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.
KENDA B. GONZALES has been with the Company since October 1998. Ms.
Gonzales is the Chief Financial Officer of the Company. Prior to joining
Apollo, Ms. Gonzales was the Senior Executive Vice President and Chief
Financial Officer of UDC Homes, Inc. from 1996. From 1985 to 1996, Ms.
Gonzales was the Senior Vice President and Chief Financial Officer of
Continental Homes Holding Corp. Ms. Gonzales began her career as a Certified
Public Accountant with Peat, Marwick, Mitchell and Company and is a graduate
of the University of Oklahoma with a Bachelor of Accountancy.
JUNETTE C. WEST has been with the Company since 1986. Ms. West has been
the Vice President-Controller since 1994 and the Chief Accounting Officer
since February 1998. Ms. West has held various accounting and finance
positions at the Company from 1986 to 1994. Ms. West received a B.S. in
Accounting from Grand Canyon University in Phoenix, Arizona in 1985. Ms. West
is a Certified Public Accountant in the State of Arizona.
70
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 1996, Mr. Weir became the President of
Dependable Nurses of Phoenix, Inc., a provider of temporary nursing services.
In addition, Mr. Weir has been an 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 Committee 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 corporate 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 and is currently a member of the Audit and Compensation Committees of
the Board of Directors of the Company. 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. Mr. Norton is also on the Board of
Directors of Arizona Public Service Company, AZTAR Corporation, Terra
Industries, Inc., Pinnacle West Capital Corporation and Suncor Development
Company. 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, 1998, its officers and directors
complied with all Section 16(a) filing requirements with the following
exception: Jerry F. Noble filed a late Form 4 for June 1998, related to
transactions involving the selling of 30,000 shares of Class A Common Stock
on June 30, 1998.
71
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, 1998, 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 Mr. Jerry Noble who attended over 85%.
Compensation Committee ------------------------------------------------------
The Compensation Committee of the Board of Directors, which met or acted
by written consent three times during 1998, 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 1998 is set forth in Item 11.
Audit Committee -------------------------------------------------------------
The Audit Committee, which met or acted by written consent on five
occasions in 1998, represents the Board of Directors in evaluating the
quality of the Company's financial reporting process and internal financial
controls through consultations with the Company's independent accountants,
internal management and the Board of Directors.
Other Committees ------------------------------------------------------------
The Company does not maintain a standing nominating committee or other
committee performing similar functions.
72
Item 11 -- Executive Compensation
DIRECTOR COMPENSATION
Fees ------------------------------------------------------------------------
In 1998, non-employee directors of the Company received 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 $62,000 and $60,000 in 1998 and
1997, respectively.
Apollo Group, Inc. Director Stock Plan --------------------------------------
In August 1994, the Board of Directors of the Company adopted the Apollo
Group, Inc. Director Stock Plan (the "Director Plan") to attract and retain
independent directors for the Company. The aggregate number of shares of
Class A Common Stock subject to the Director Plan may not exceed 675,000,
subject to adjustment. Options granted under the Director Plan are fully
vested six months and one day after the date of grant and are exercisable in
full thereafter until the date that is ten years after the date of grant.
The exercise price per share under the Director Plan is equal to the fair
market value of such shares upon the date of grant. In addition, on September
1 of each year, non-employee Directors receive an annual grant of options to
purchase 20,250 shares of the Company's Class A Common Stock. Mr. DeConcini
has elected not to receive this annual grant because of his position with the
U.S. Department of the Treasury.
EXECUTIVE COMPENSATION
The following table discloses the annual and long-term compensation
earned for services rendered in all capacities by the Company's Chairman of
the Board and Chief Executive Officer and the Company's four other most
highly compensated executive officers for 1998, 1997, and 1996:
73
-- SUMMARY COMPENSATION TABLE --
Long-Term
Annual Compensation
Compensation Awards
--------------------------------- ---------------------
Other Restrict- Securities All Other
Annual ed Stock Underlying LTIP Compen-
Name and Principal Salary Bonus Compensation Awards Options Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------------ ------- --------- -------- ------------ --------- ---------- -------- -----------
John G. Sperling
Chairman of the Board 1998 $387,500 $ -- $72,373 $ -- -- $ -- $ --
and Chief Executive 1997 387,500 290,625 62,463 -- -- -- --
Officer 1996 310,000 232,500 -- -- 205,875 -- --
Todd S. Nelson
President 1998 247,917 200,000 -- -- -- -- --
1997 175,000 131,250 -- -- -- -- --
1996 140,000 105,000 -- -- 205,875 -- --
Jorge Klor de Alva
Senior Vice President, 1998 218,750 175,000 -- -- -- -- 1,850
and President of UOP 1997 175,000 131,250 -- -- 112,500 -- --
1996 23,400 -- -- -- -- -- --
Jerry F. Noble
Senior Vice President 1998 225,000 168,750 -- -- -- -- 3,073
and President of IPD 1997 225,000 84,375 -- -- -- -- 2,980
1996 180,000 135,000 -- -- 205,875 -- 2,980
William H. Gibbs
Senior Vice President 1998 225,000 169,000 -- -- -- -- 2,502
1997 225,000 168,750 -- -- -- -- 2,409
1996 180,000 135,000 -- -- 205,875 -- 2,409
_______________
Messrs. Gibbs, Noble, Nelson and Klor de Alva also received certain
perquisites, the value of which did not exceed the lesser of $50,000
for each person or 10% of their cash compensation. Dr. John Sperling
received perquisites primarily in the form of a Company provided car,
available for business and personal use, and tax consulting services.
Amounts shown consist of contributions made by the Company to the
Company's Savings and Investment Plan paid in fiscal years 1998, 1997
and 1996.
74
The following table discloses options granted by the Company to the
Chairman of the Board and Chief Executive Officer and the four other most
highly compensated executive officers of the Company for 1998:
-- OPTION GRANTS IN THE LAST FISCAL YEAR --
Option Grants in Fiscal Year 1998 Potential Realizable
---------------------------------------------------- Value at Assumed
% of Total Annual Rates of
Number of Options/SARs Stock Price
Securities Granted to Exercise Appreciation for
Underlying Employees or Base Option Term
Options/SARs in Fiscal Price Expiration ----------------------
Name Granted Year ($/Share) Date 5% 10%
- ------------------ ---------- ----------- --------- --------- -------- ----------
John G. Sperling -- -- $ -- -- $ -- $ --
Todd S. Nelson -- -- -- -- -- --
Jorge Klor de Alva -- -- -- -- -- --
Jerry F. Noble -- -- -- -- -- --
William H. Gibbs -- -- -- -- -- --
_______________
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 Chief Executive Officer and the four other most
highly compensated officers of the Company for 1998:
-- AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 --
AND OPTION VALUES AT AUGUST 31, 1998
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 -- $ -- 461,707 154,406 $ 13,294,787 $ 3,527,112
Todd S. Nelson 45,000 992,313 6,469 154,406 147,772 3,527,112
Jorge Klor de Alva -- -- 48,375 84,375 858,546 1,093,357
Jerry F. Noble 192,273 5,639,787 51,469 154,406 1,175,712 3,527,112
William H. Gibbs 51,469 1,259,349 -- 154,406 -- 3,527,112
75
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 Chief Executive Officer of the Company. The term of the Employment
Agreement was for four years, and expired on December 31, 1997. It
automatically renewed for an additional one-year period through December 31,
1998 and will automatically renew for additional one-year periods thereafter.
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 provide
substantial rewards to executives based on stock price appreciation and
improved overall financial performance. The vesting of the options can be
accelerated if certain profit and stock price goals are achieved.
76
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 Company
targets base pay at the level required to attract and retain highly qualified
executives. In determining salaries, the Committee also takes into account
position within the Company, individual experience and performance and
specific needs particular to the Company.
Annual Bonus Program --------------------------------------------------------
In addition to a base salary, executives were 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 the Company Executives are tied solely to the
after-tax net income goal for the Company. If that goal is achieved, the
Company Executives earn a bonus equal to fifty percent (50%) of their
respective annual maximum bonus. 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 up to a maximum annual bonus equal to seventy-five percent (75%) of
their respective base salaries.
The annual bonuses for the Division Executives are earned (1) fifty
percent (50%) if their division operating profit goal is achieved, (2) an
additional twenty-five percent (25%) if the after-tax income goal for the
Company is achieved and (3) up to another twenty-five percent (25%) depending
on the amount by which the after-tax net income goal is exceeded up to a
maximum annual bonus equal to seventy-five percent (75%) of their respective
base salaries.
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 under the Apollo Group, Inc. Long-Term Incentive
Plan. 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.
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.
77
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, Chief Executive Officer 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 terminated on December 31, 1997. It
automatically renewed for an additional one-year period through December 31,
1998 and will automatically renew for additional one-year periods thereafter.
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 1998, 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 eligible for a bonus of $290,625 for 1998.
Dr. Sperling has elected to forego this bonus in exchange for options that
will be granted in Fiscal 1999. Dr. Sperling also was granted options in
September 1995 to purchase a total of 205,875 shares of Class A Common Stock
in connection with the 1995 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 $7.5319 per share with various
vesting periods.
Under Dr. Sperling's leadership, the Company's net revenues increased
37.9%, to $391.1 million in 1998 from $283.5 million in 1997. In addition,
diluted earnings per share increased to $.59 in 1998 from $.43 in 1997.
Shareholder value also has increased over this same period. For example, the
closing price at August 28, 1997 was $23.792 per share whereas the closing
price for the Company's Class A Common Stock on August 31, 1998, as reported
on the Nasdaq National Market, was $30.375 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
78
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, 1998. 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 Aug. 31
1994 1995 1996 1997 1998
-------- -------- -------- --------- ----------
Apollo Group, Inc.
Class A Common Stock $100.00 $336.80 $966.30 $1,352.40 $1,726.60
S&P 400 100.00 121.20 140.70 193.10 207.30
Education Peer Group 100.00 135.30 211.70 238.90 262.50
The education peer group is composed of the publicly-traded common stock
of 13 education-related companies that include Berlitz International, Inc.
(BTZ), California Culinary Academy, Inc. (COOK), Canterbury Information
Technology, Inc. (XCEL), Children?s Discovery Centers of America, Inc. (CDCR),
DeVry Inc. (DV), Education Alternatives, Inc. (EAIN), ITC Learning
Corporation (ITCC), 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).
79
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,
1998. 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 13,936,989 17.7% 243,081 47.5%
Peter V. Sperling 14,420,362 18.3 232,068 45.4
William H. Gibbs 218,400 .3 -- --
Jerry F. Noble 546,835 .7 27,950 5.5
Todd S. Nelson 131,447 .2 8,385 1.6
J. Jorge Klor de Alva 76,812 .1 -- --
Thomas C. Weir 90,750 .1 -- --
Dino J. DeConcini 33,113 -- -- --
Total for All Directors and Executive
Officers as a Group (11 persons) 28,066,059 35.7% 511,484 100.0
_______________
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 1,435,040 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 186,157 shares held by the John G. Sperling Revocable Trust
dated January 31, 1995.
Includes 1,350,000 shares held by The Sperling Foundation.
Includes 513,176 shares that Dr. John Sperling has the right to
acquire within 60 days of the date of the table set forth above.
Includes 290,090 shares held by the Peter V. Sperling Revocable Trust
dated January 31, 1995.
Includes 351,554 shares that Mr. Peter Sperling has the right to
acquire within 60 days of the date of the table set forth above.
Includes 154,957 shares held by the Gibbs Family Trust dated July 14,
1994.
Includes 13,974 shares held by the William H. Gibbs Revocable Trust
dated March 8, 1995
Includes 51,469 shares that Mr. Gibbs has the right to acquire within
60 days of the date of the table set forth above.
80
Includes 102,938 shares that Mr. Noble has the right to acquire within
60 days of the date of the table set forth above.
Includes 57,938 shares that Mr. Nelson has the right to acquire
within 60 days of the date of the table set forth above.
Represents 76,500 shares that Dr. Klor de Alva has the right to
acquire within 60 days of the date of the table set forth above.
Includes 80,250 shares that Mr. Weir has the right to acquire within
60 days of the date of the table set forth above.
Includes 32,438 shares that Mr. DeConcini has the right to acquire
within 60 days of the date of the table set forth above.
Includes 1,307,924 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.
Item 13 -- Certain Relationships and Related Transactions
On August 14, 1998, the Company, Hughes Network Systems ("Hughes"), and
Hermes Onetouch L.L.C. ("Hermes") formed Interactive Distance Learning, Inc.
for the purpose of acquiring One Touch Systems, Inc. ("One Touch"). In
connection with the transaction, the Company, Hughes, and Hermes entered into
certain agreements regarding the relationships among the parties. As
contemplated in the agreements, it is anticipated that the Company will from
time to time engage in transactions with One Touch for the provision of
distance learning products and services. Hermes, which owns 30% of the
outstanding shares of Interactive Distance Learning, Inc., is wholly-owned by
Dr. John G. Sperling, the Company's Chairman, and Peter V. Sperling, the
Company's Senior Vice President.
81
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 PricewaterhouseCoopers LLP Page 47
(2) Consolidated Financial Statements
(a) Statement of Operations for the Years
Ended August 31, 1998, 1997 and 1996 Page 48
(b) Balance Sheet as of August 31, 1998
and 1997 Page 49
(c) Statement of Changes in Shareholders?
Equity for the Years Ended August 31,
1998, 1997 and 1996 Page 50
(d) Statement of Cash Flows for the Years
Ended August 31, 1998, 1997 and 1996 Page 51
(e) Notes to Consolidated Financial Statements Page 52
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
82
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 No.
333-35465 on
Form S-3 filed
September 11,
1997
3.1 Restated and Amended Articles of Incorporated by
Incorporation of the Company reference to
(As Amended Through September 18, 1997) Exhibit 3.1 of
the August 31,
1997 Form 10-K
3.2 Amended Bylaws of the Company Incorporated by
(As Amended Through June 1996) reference to
Exhibit 3.2 of
the August 31,
1996 Form 10-K
10.1a Business Loan Agreement between Apollo Incorporated by
Group, Inc. and Wells Fargo Bank, National reference to
Association Exhibit 10.1a of
the November 30,
1997 Form 10-Q.
10.1c Revolving Promissory Note between Apollo Incorporated by
Group, Inc. and Wells Fargo Bank, National reference to
Association Exhibit 10.1c of
the November 30,
1997 Form 10-Q.
10.1d Modification Agreement between Apollo Group, Incorporated by
Inc. and Wells Fargo Bank, National reference to
Association Exhibit 10.1d of
the February 28,
1998 Form 10-Q.
10.2 Apollo Group, Inc. Director Stock Incorporated by
Plan reference to
Exhibit 10.2 of
the August 31,
1995 Form 10-K
83
Sequentially
Numbered
Exhibit Page or Method
Number Description of Exhibit of Filing
------- --------------------------------------- ----------------
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.
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.
84
Sequentially
Numbered
Exhibit Page or Method
Number Description of Exhibit of Filing
------- --------------------------------------- ----------------
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 Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
24 Power of Attorney Filed herewith
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 1998 fiscal year, the Company filed no
reports on Form 8-K.
85
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 November 11, 1998.
APOLLO GROUP, INC.
An Arizona Corporation
By: /s/ John G. Sperling
--------------------------------
John G. Sperling
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 Todd S. Nelson, 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 November 11, 1998
- ------------------------- of Directors and Chief
John G. Sperling Executive Officer
(Principal Executive Officer)
/s/ Todd S. Nelson President and Director November 11, 1998
- -------------------------
Todd S. Nelson
/s/ J. Jorge Klor de Alva Senior Vice President November 11, 1998
- -------------------------- and Director
J. Jorge Klor de Alva
86
Signature Title Date
- -----------------------------------------------------------------------------
/s/ Jerry F. Noble Senior Vice President and November 11, 1998
- ------------------------- Director
Jerry F. Noble
/s/ Peter V. Sperling Senior Vice President, November 11, 1998
- ------------------------- Secretary, Treasurer and
Peter V. Sperling Director
/s/ William H. Gibbs Senior Vice President and November 11, 1998
- ------------------------- Director
William H. Gibbs
/s/ Kenda B. Gonzales Chief Financial Officer November 11, 1998
- ------------------------- (Principal Financial Officer)
Kenda B. Gonzales
/s/ Junette C. West Vice President and Controller November 11, 1998
- ------------------------- (Chief Accounting Officer)
Junette C. West
/s/ Dino J. DeConcini Director November 11, 1998
- -------------------------
Dino J. DeConcini
/s/ Thomas C. Weir Director November 11, 1998
- -------------------------
Thomas C. Weir
/s/ John R. Norton III Director November 11, 1998
- -------------------------
John R. Norton III
/s/ Hedy F. Govenar Director November 11, 1998
- -------------------------
Hedy F. Govenar
87