UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission file number: 0-25232

APOLLO GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

4025 S. RIVERPOINT PARKWAY, PHOENIX, ARIZONA 85040

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code:

(480) 966-5394

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES þ    NO o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o    NO þ

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o

 

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.  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES o     NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).  YES o     NO þ

 

No shares of Apollo Group, Inc. Class B common stock, its voting stock, are held by non-affiliates. The holders of Apollo Group, Inc. Class A common stock are not entitled to any voting rights. The aggregate market value of Apollo Group Class A common stock held by non-affiliates as of February 28, 2009 (last day of the registrant’s most recently completed second fiscal quarter), was approximately $9.9 billion.

 

The number of shares outstanding for each of the registrant’s classes of common stock as of October 16, 2009 is as follows:

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Information Statement for the 2010 Annual Meeting of Shareholders (Part III)

 

 

APOLLO GROUP, INC. AND SUBSIDIARIES

 

FORM 10-K

 

INDEX

 

 

This Annual Report on Form 10-K, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contains certain 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. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and future results of Apollo Group, Inc. (the “Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our”) that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance or results. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “predict,” “target,” “potential,” “continue,” “objectives,” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. Such statements should be viewed with caution. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include but are not limited to:

 

 

The cautionary statements referred to above also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, for any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

 

 

Overview

 

Apollo Group, Inc. is one of the world’s largest private education providers and has been in the education business for more than 35 years. We offer innovative and distinctive educational programs and services both online and on-campus at the undergraduate, graduate and doctoral levels through our wholly-owned subsidiaries:

 

 

In addition to these wholly-owned subsidiaries, in October 2007, we formed a joint venture with The Carlyle Group (“Carlyle”), called Apollo Global, Inc. (“Apollo Global”), to pursue investments primarily in the international education services industry. Apollo Group currently owns 86.1% of Apollo Global, with Carlyle owning the remaining 13.9%. As of August 31, 2009, total cash contributions made to Apollo Global were approximately $511.8 million, of which $440.5 million was funded by us. Apollo Global is consolidated in our financial statements. Apollo Global has completed the following acquisitions:

 

 

University of Phoenix.  University of Phoenix has been accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools since 1978 and holds other programmatic accreditations. University of Phoenix offers associate’s, bachelor’s, master’s and doctoral degrees in a variety of program areas. University of Phoenix offers its educational programs worldwide through its online education delivery system and at its campus locations and learning centers in 39 states and the District of Columbia, and Puerto Rico. University of Phoenix’s online programs are designed to provide uniformity with University of Phoenix’s on-campus operations, which enhances University of Phoenix’s ability to expand into new markets while maintaining academic quality. University of Phoenix has customized computer programs for academic quality management, faculty recruitment and training, student tracking and marketing, which we believe provides us with a competitive advantage. University of Phoenix’s net revenue represented approximately 95% of our consolidated net revenue for the fiscal year ended August 31, 2009.

 

Western International University.  Western International University has been accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools since 1984. Western International University offers associate’s, bachelor’s and master’s degrees in a variety of program areas as well as certificate programs. Western International University offers its undergraduate program courses at its Arizona campus locations and online at Western International University Interactive Online.

 

IPD.  IPD provides program development, administration and management consulting services to private colleges and universities (“Client Institutions”) to establish or expand their programs for working learners. These services typically include degree program design, curriculum development, market research, student recruitment, accounting, and administrative services.

CFFP.  CFFP has been accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools since 1994. CFFP provides financial services education programs, including a Master of Science in three majors, and certification programs in retirement, asset management, and other financial planning areas. CFFP offers these programs online and from its headquarters in Colorado.

 

Meritus.  Meritus was designated by the Government of New Brunswick to grant degrees in May 2008. Meritus offers degree programs online to working learners throughout Canada and abroad and launched its first three programs in the fall of 2008.

 

BPP.  BPP College of Professional Studies is the first proprietary institution to have been granted degree awarding powers in the United Kingdom. BPP, acquired by Apollo Global in July 2009 and headquartered in London, England, is a provider of education and training to professionals in the legal and finance industries. It is organized into the following three divisions:

 

 

BPP provides these services through schools located in the United Kingdom, a European network of BPP offices, and the sale of books and other publications in over 150 countries.

 

UNIACC.  UNIACC is accredited by the Chilean Council of Higher Education. UNIACC is an arts and communications university which offers bachelor’s and master’s programs on campuses in Chile and online. UNIACC was acquired by Apollo Global in March 2008.

 

ULA.  ULA carries authorization from the Ministry of Public Education (Secretaría de Educación Publica) in Mexico, from the National Autonomous University of Mexico (Universidad Nacional Autónoma de México) for its high school and undergraduate psychology and law programs and by the Ministry of Education of the State of Morelos (Secretaría de Educación del Estado de Morelos) for its medicine and nutrition programs. ULA offers degree programs at its four campuses throughout Mexico. Apollo Global purchased a 65% ownership interest in ULA in August 2008 and purchased the remaining ownership interest in July 2009.

 

We also operate online high school programs through our Insight Schools, Inc. (“Insight Schools”) wholly-owned subsidiary, which is included in our Insight Schools reportable segment. Subsequent to our 2009 fiscal year end, we decided to explore the sale of Insight Schools.

 

Our schools described above are managed in the following five reportable segments:

 

 

The Apollo Global — Other segment includes UNIACC, ULA and Apollo Global corporate operations. The Other Schools segment includes Western International University, IPD, CFFP, and Meritus. The Corporate caption, as detailed in the table below, includes adjustments to reconcile segment results to consolidated results, which primarily consist of net revenue and corporate charges that are not allocated to our reportable segments. The following table presents the net revenue for fiscal years 2009, 2008 and 2007 for each of our reportable segments:

 

 

See Note 19, Segment Reporting, in Item 8, Financial Statements and Supplementary Data, for the segment and related geographic information required by Items 101(b) and 101(d) of Regulation S-K, which information is incorporated by this reference.

 

Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, seasonal fluctuations in our results of operations as a result of seasonal variations in the level of student enrollments. While University of Phoenix enrolls students throughout the year, our net revenue generally is lower in the second quarter (December through February) than the other quarters due to holiday breaks in December and January. Most of our other subsidiaries experience more significant seasonality, as they have limited enrollment during their respective summer breaks.

 

University of Phoenix degreed enrollment (“Degreed Enrollment”) for the quarter ended August 31, 2009 was 443,000. Degreed Enrollment for a quarter represents individual students enrolled in a University of Phoenix degree program who attended a course during the quarter and did not graduate as of the end of the quarter. Degreed Enrollment also includes any student who previously graduated from one degree program and started a new degree program in the quarter (for example, a graduate of the associate’s degree program returns for a bachelor’s degree or a bachelor’s degree graduate returns for a master’s degree). In addition, Degreed Enrollment includes students participating in University of Phoenix certificate programs of at least 18 credit hours in length with some course applicability into a related degree program.

 

University of Phoenix combined new degreed enrollment (“New Degreed Enrollment”) for the four quarters in fiscal year 2009 was 355,800. New Degreed Enrollment for a quarter represents any individual student enrolled in a University of Phoenix degree program who is a new student and started a course in the quarter, any individual student who previously graduated from one degree program and started a new degree program in the quarter (for example, a graduate of an associate’s degree program returns for a bachelor’s degree program, or a graduate of a bachelor’s degree program returns for a master’s degree program), as well as any individual student who started a program in the quarter and had been out of attendance for greater than 12 months. In addition, New Degreed Enrollment also includes students who during the quarter started participating in University of Phoenix certificate programs of at least 18 credit hours in length with some course applicability into a related degree program.

 

Students enrolled in or serviced by Apollo Global’s institutions, Insight Schools and Other Schools (Western International University, IPD, CFFP, and Meritus) are not included in Degreed Enrollment or New Degreed Enrollment.

We incorporated in Arizona in 1981 and maintain our principal executive offices at 4025 S. Riverpoint Parkway, Phoenix, Arizona 85040. Our telephone number is (480) 966-5394. Our website addresses are as follows:

 

 

Our fiscal year is from September 1 to August 31. Unless otherwise stated, references to the years 2009, 2008, 2007, 2006 and 2005 relate to fiscal years 2009, 2008, 2007, 2006 and 2005, respectively.

 

Strategy

 

Our goal is to strengthen and capitalize on our position as a leading provider of high quality, accessible education for individuals around the world by affording strong returns for all of our stakeholders: students, faculty, employees, and investors. Our principal focus is to provide high quality educational products and services to our students in order for them to maximize the benefit of their educational experience. We believe that a superior student experience, enabled by our engaged and energized faculty and employees, is essential for our shareholders to achieve attractive returns on their capital over time. We intend to pursue our goal in a manner that is consistent with our core organizational values: 1) operate with integrity and social responsibility; 2) change lives through education; 3) be the employer of choice and 4) build long-term value. These values provide the foundation for everything we do as a business.

 

In late fiscal year 2009, we embarked on a company-wide initiative to refresh and validate our strategic plan to further enhance our competitive situation and position the Company for continued growth into the future. The key themes of the plan are presented below:

 

 

We intend to use our expertise to enhance the quality, delivery and student outcomes associated with the respective curricula across our entire group of owned and operated institutions and companies. We believe we can leverage our organizational capabilities to offer innovative products, optimize our cost structure and create new growth opportunities. Finally, we intend to continue to invest in our people, systems and organization, as

they are the foundation for our future success. In our opinion, these efforts are the basis for enabling us to meet and exceed our customer’s expectations and further differentiate us from our competition.

 

Industry Background

 

Domestic Postsecondary Education

 

The domestic non-traditional education sector is a significant and growing component of the postsecondary degree-granting education industry, which was estimated to be a $386 billion industry in 2007, according to the Digest of Education Statistics published in 2009 by the U.S. Department of Education’s National Center for Education Statistics. According to the same study, in 2007, over 6.9 million, or 38%, of all students enrolled in higher education programs were over the age of 24, and enrollment in degree-granting institutions between 2008 and 2017 is expected to increase 19% for students over age 25. These students would not be classified as traditional (i.e., 18 to 24 years of age, living on campus, supported by parents, and not working full-time). The non-traditional students typically are looking to improve their skills and enhance their earnings potential within the context of their careers. We believe that the demand for non-traditional education will continue to increase, reflecting the knowledge-based economy in the U.S.

 

Many working learners seek accredited degree programs that provide flexibility to accommodate the fixed schedules and time commitments associated with their professional and personal obligations. The education formats offered by our institutions enable working learners to attend classes and complete coursework on a more convenient schedule than traditional universities offer. Although more colleges and universities are beginning to address some of the needs of working learners, many universities and institutions do not effectively address the needs of working learners for the following reasons:

 

 

 

 

International Education

 

There were approximately 153 million students enrolled in postsecondary education worldwide in 2007 according to the Global Education Digest 2009 published in 2009 by the United Nations Educational, Scientific and Cultural Organization Institute for Statistics.

 

We believe that private education is playing a critical role in advancing the development of education, specifically higher education and lifelong learning, in many countries around the world. While primary and

secondary education outside the U.S. are still funded mainly through government expenditures, we believe that postsecondary education outside of the U.S. is experiencing governmental funding constraints that create opportunities for a broader private sector role. The International Finance Corporation of the World Bank reported in May 2008 that governments around the world are embracing private sector participation as a way to increase quality and efficiency.

 

We believe that the following key trends are driving the growth in private education worldwide:

 

 

Our Programs

 

Our more than 35 years as a provider of education enables us to provide students with quality education and responsive customer service at the undergraduate, graduate and doctoral levels. Our institutions have gained expertise in designing curriculum, recruiting and training faculty, monitoring academic quality, and providing a high level of support services to students. Our institutions offer the following:

 

 

 

 

 

 

 

Teaching Model and Degree Programs and Services

 

Domestic Postsecondary

 

Teaching Model

 

While students over the age of 24 comprise approximately 38% of all higher education enrollments in the U.S., the primary mission of most accredited four-year colleges and universities is to serve 18- to 24-year-old students and conduct research. The teaching/learning models used by University of Phoenix were designed specifically to meet the educational needs of working learners, who seek accessibility, curriculum consistency, time- and cost-effectiveness, and learning that has immediate application to the workplace. The models are structured to enable students who are employed full-time to earn their degrees and still meet their personal and professional responsibilities. Our focus on working, non-residential students minimizes the need for capital-intensive facilities and services like dormitories, student unions, food service, personal and employment counseling, health care, sports and entertainment.

 

University of Phoenix online classes employ a proprietary online learning system. Online classes are small and have mandatory participation requirements for both the faculty and the students. Each class is instructionally designed so that students have learning outcomes that are consistent with the outcomes of their on-campus counterparts. All class materials are delivered electronically.

 

Components of our teaching/learning models at University of Phoenix for both online and on-campus classes include:

 

 

 

 

 

 

Degree Programs

 

University of Phoenix offers degrees in the following program areas:

 

 

Academic Annual Report

 

In 2008, University of Phoenix published its first Academic Annual Report which contains a transparent look at a variety of comparative performance measures related to student outcomes and university initiatives related to quality and accountability. The report was created within the framework set forth in the 2006 report commissioned by former U.S. Secretary of Education Margaret Spellings, entitled “A Test of Leadership: Charting the Future of U.S. Higher Education,” which focused on access, accountability, quality, and affordability. The Academic Annual Report is available on the University of Phoenix website at www.phoenix.edu.

 

International

 

Teaching Model

 

Our international operations include full-time, part-time and distance learning courses for professional examination preparation, professional development training and various degree programs. Our international operations faculty members consist of both full-time and part-time professors.

 

Degree Programs and Services

 

Our international operations offer bachelor’s, master’s and doctoral degrees, which include a variety of degree programs and related areas of specialization. Additionally, we offer training and published materials for qualifications in specific markets for accountancy (including tax), financial services and actuarial science. We also provide professional development through continuing education training and supplemental skills courses primarily in the legal and finance industries.

 

Admissions Standards

 

Domestic Postsecondary

 

To gain admission to undergraduate programs at University of Phoenix, students must have a high school diploma or a Certificate of General Educational Development, commonly referred to as GED, and satisfy employment requirements, if applicable, for their field of study. Applicants whose native language is not English must take and pass the Test of English as a Foreign Language or Test of English for International Communication. Non-U.S. citizens attending a campus located in the U.S. are required to hold an approved visa or to have been granted permanent residency. Additional requirements may apply to individual programs or to students who are attending a specific campus. Students already in undergraduate programs at other schools may petition to be

admitted to University of Phoenix on a provisional status if they do not meet certain criteria. Some programs have work requirements (e.g. nursing) such that students must have a certain amount of experience in given areas in order to be admitted. These vary by program, and not all programs have them.

 

To gain admission to graduate programs at University of Phoenix, students must have an undergraduate degree from a regionally or nationally accredited college or university, satisfy the minimum grade point average requirement, and have relevant work and employment experience, if applicable for their field of study. Applicants whose native language is not English must take and pass the Test of English as a Foreign Language or Test of English for International Communication. Non-U.S. citizens attending a campus located in the U.S. are required to hold an approved visa or have been granted permanent residency. Additional requirements may apply to individual programs or to students who are attending a specific campus. Students in graduate programs at other schools may be admitted to University of Phoenix on provisional status if they do not meet grade point average admission requirements.

 

To gain admission to doctoral programs at University of Phoenix, students must generally have a master’s degree from a regionally accredited college or university, satisfy the minimum grade point average requirement, satisfy employment requirements as appropriate to the program applied for, have a laptop computer and have membership in a research library. Applicants whose native language is not English must take and pass the Test of English as a Foreign Language, Test of English for International Communication or Berlitz^® Online English Proficiency Exam.

 

The admission requirements for our Other Schools are similar to University of Phoenix and vary depending on the respective degree program.

 

International

 

In general, postsecondary students in our international institutions must have obtained a high school or equivalent diploma from an approved school. Other requirements apply for graduate and other programs. Admissions requirements for our international institutions are appropriate for the respective markets in which we operate.

 

Students

 

University of Phoenix Degreed Enrollment

 

University of Phoenix Degreed Enrollment for the quarter ended August 31, 2009 was 443,000. See Item 1, Business, “Overview,” for a description of the manner in which we calculate Degreed Enrollment. The following table details Degreed Enrollment for the respective periods:

 

The following chart details quarterly Degreed Enrollment by degree type for the respective periods:

 

 

University of Phoenix New Degreed Enrollment

 

University of Phoenix combined New Degreed Enrollment for fiscal year 2009 was 355,800. See Item 1, Business, “Overview,” for a description of the manner in which we calculate New Degreed Enrollment. The following table details University of Phoenix combined New Degreed Enrollment for the respective fiscal years:

 

The following chart details quarterly New Degreed Enrollment by degree type for the respective periods:

 

 

We have a diverse student population. During fiscal years 2009 and 2008, approximately 66% of students enrolled in University of Phoenix degree programs who attended a course were women. Approximately 69% and 70% during fiscal years 2009 and 2008, respectively, of the students enrolled in University of Phoenix degree programs who attended a course provided us information on their race/ethnicity. The relative percentages by race/ethnicity category for those students who responded during the respective periods are as follows:

 

 

The relative percentages by age of incoming students that comprise New Degreed Enrollment during fiscal years 2009 and 2008 are as follows:

 

Marketing

 

In October 2007, we acquired Aptimus, Inc., an online advertising company, which has been successfully integrated into our marketing organization. Our primary purpose in acquiring Aptimus was to help us more effectively monitor, manage, and control our marketing investments and brands by leveraging its industry-specific knowledge and technology platform. Our marketing strategy is to increase awareness of and access to quality and affordable education through improved messaging and sharpened focus on our different communication channels and to attract students who are more likely to persist in our programs.

 

We engage in a broad range of marketing activities to inform potential students about our teaching/learning model and the programs offered, including online advertising, broadcast, outdoor advertising, print, and direct mail. In fiscal year 2009, we launched a national marketing campaign called “I am a Phoenix” to develop and strengthen our brand identity.

 

Internet Marketing

 

We advertise on the Internet using search engine keywords, banners, and custom advertising placements on targeted sites, such as education portals, career sites, and industry-specific websites. Our Internet and non-Internet advertising activities have improved the quality of the consumer traffic and interest on our owned and operated website, website www.phoenix.edu, which provides prospective students with relevant information and resources about University of Phoenix’s degrees and programs.

 

We intend to continue to leverage the unique qualities of the Internet and its emerging technologies to enhance our brand awareness among prospective students, and to improve our ability to deliver relevant messages to satisfy prospective students’ specific needs and requirements. New media technologies that we have begun to use to communicate with our current and prospective students include online social networks, search engine marketing and emerging video advertising.

 

Broadcast and Print

 

We utilize non-Internet marketing, primarily through broadcast and print advertising, to reach new prospects and to establish brand recognition among key segments of prospective students. Broadcast advertising includes advertisements on cable, local and national television networks. In addition, we advertise in select print publications, including national and local newspapers and publications with focused areas of content, to target programs and fields in which we provide classes and degrees.

 

Direct Mail

 

Direct mail is effective at reaching targeted individuals in specific career fields of interest including Accounting, Business, Education, Technology, Criminal Justice and Nursing. Direct mail also allows us to reach specific metropolitan areas for focused local marketing efforts. We currently purchase education-related mailing lists from various sources that specialize in this area. In addition, we track student prospects for every direct mail campaign by variety of methods including postage-paid reply cards, a specific toll-free number and dedicated online links.

 

Sponsorships and Other Advertising

 

We selectively sponsor and provide advertising to support specific activities, including local and national sports and entertainment events. We also utilize outdoor advertising, including billboards, to communicate the quality and affordability of our on campus educational offerings in regional markets.

 

Stadium Naming Rights

 

In 2006, we obtained naming and sponsorship rights on a stadium in Glendale, Arizona, which is home to the Arizona Cardinals team in the National Football League. These naming and sponsorship rights are in effect until 2026 with options to extend and include opportunities for signage, advertising, and other promotional rights and benefits to enhance the University of Phoenix brand awareness.

Relationships with Employers

 

We work closely with many businesses and governmental agencies to meet their specific educational and training 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 select military bases. University of Phoenix has formed educational partnerships with various corporations to provide programs specifically designed for their employees. BPP enrolls the majority of its students through relationships with employers. We consider the employers that provide tuition assistance to their employees through tuition reimbursement plans or direct bill arrangements to be our secondary customers.

 

Referrals

 

Referrals continue to be an important source of new students, including those from employers, co-workers, current students, alumni, family members and friends.

 

Competition

 

Domestic Postsecondary

 

The higher education industry is highly fragmented with no single private or public institution enjoying a significant market share. We compete primarily with traditional four- and two-year degree-granting public and private regionally accredited colleges and universities. While students over the age of 24 comprise approximately 38% of all higher education enrollments in the U.S., the primary mission of most accredited four-year colleges and universities is to serve 18- to 24-year-old students and conduct research. University of Phoenix acknowledges the differences in educational needs between working learners and traditional students and provides programs and services that allow students to earn their degrees without major disruption to their personal and professional lives.

 

An increasing number of colleges and universities enroll working learners in addition to the traditional 18- to 24-year-old students, and we expect that these colleges and universities will continue to modify their existing programs to serve working learners more effectively, including by offering more distance learning programs. We believe that the primary factors on which we compete are the following:

 

 

In our offerings of non-degree programs, we compete with a variety of business and information technology providers, primarily those in the for-profit training sector. Many of these competitors have significantly more market share in given geographical regions and longer-term relationships with key employers of potential students.

 

International

 

Competitive factors for our international schools vary by country and generally include the following:

 

 

In addition, BPP competes with other training providers, public and private colleges, and universities primarily in the United Kingdom. The primary factors on which BPP competes with these institutions include the following:

 

 

Employees

 

We believe that our employee relations are satisfactory. As of August 31, 2009, we had the following numbers of employees:

 

 

 

 

Accreditation and Jurisdictional Authorizations

 

Domestic Postsecondary

 

Accreditation

 

University of Phoenix is covered by regional accreditation, which provides the following:

 

 

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, authorization to operate as a degree-granting institution. Under the terms of a reciprocity agreement among the six senior regional accrediting associations, representatives of each region in which a regionally accredited institution operates may participate in the evaluations for reaffirmation of accreditation of which the North Central Association of Colleges and Schools is a member.

Accreditation information for University of Phoenix and applicable programs is described in the chart below:

 

 

The schools in our Other Schools segment maintain the requisite accreditations for their respective operations.

 

Jurisdictional Authorizations

 

In addition to accreditation by independent accrediting bodies, our schools must be authorized to operate by the appropriate regulatory authorities in many of the jurisdictions in which they operate.

 

In the U.S., institutions that participate in Title IV programs must be authorized to operate by the appropriate postsecondary regulatory authority in each state where the institution has a physical presence, or

be exempt from such regulatory authorization, usually based on recognized accreditation. As of August 31, 2009, University of Phoenix is authorized to operate and has a physical presence in 39 states and the District of Columbia. University of Phoenix has held these authorizations for periods ranging from less than two years to over 25 years. As of August 31, 2009, University of Phoenix has also been approved to operate in Alaska, Mississippi, Montana and South Dakota, but does not yet have a physical presence in these states.

 

All regionally accredited institutions, including University of Phoenix, are required to be evaluated separately for authorization to operate in Puerto Rico. University of Phoenix obtained authorization from the Puerto Rico Commission on Higher Education, and that authorization remains in effect.

 

Some 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. University of Phoenix has obtained licensure in these states.

 

The schools in our Other Schools segment maintain the requisite authorizations in the jurisdictions in which they operate.

 

International

 

Our international schools must be authorized by the relevant regulatory authorities under applicable local law, which in some cases requires accreditation, as described in the chart below:

 

 

Financial Aid Programs

 

Domestic Postsecondary

 

The Higher Education Act of 1965 and the related regulations govern all higher education institutions participating in U.S. Title IV federal financial aid programs. In August 2008, the Higher Education Act was

reauthorized through September 30, 2013 by the Higher Education Opportunity Act. Financial aid under Title IV of the Higher Education Act, as reauthorized (which we refer to generally as Title IV), is awarded every academic year to eligible students. Certain types of U.S. federal student aid are awarded on the basis of financial need, generally defined as the difference between the cost of attending an educational institution and the amount the student and/or the student’s family, as the case may be, can reasonably be expected to contribute to that cost. The amount of financial aid awarded per academic year is based on many factors, including, but not limited to, program of study, grade level, Title IV annual loan limits, and financial need. All recipients of Title IV program funds must maintain satisfactory academic progress within the guidelines published by the U.S. Department of Education.

 

We collected the majority of our fiscal year 2009 total consolidated net revenue from receipt of Title IV financial aid program funds, principally from federal Stafford loans, also known as Federal Family Education Loan Program (“FFELP”) loans, and Pell Grants. University of Phoenix represented approximately 95% of our fiscal year 2009 total consolidated net revenue and University of Phoenix generated 86% of its cash basis revenue for eligible tuition and fees during fiscal year 2009 from the receipt of Title IV financial aid program funds, as calculated under the 90/10 Rule, excluding the benefit from the temporary relief for loan limit increases, described further below.

 

FFELP loans are currently the most significant source of U.S. federal student aid and are low interest, federally guaranteed loans made by private lenders. Annual and aggregate loan limits apply based on the student’s grade level. There are two types of Stafford loans: subsidized Stafford loans, which are based on the U.S. federal statutory calculation of student need, and unsubsidized Stafford loans, which are not need-based. Neither type of Stafford loan is based on creditworthiness. The U.S. federal government pays the interest on subsidized Stafford loans while the student is enrolled in school; the borrower is responsible for the interest on unsubsidized Stafford loans regardless of school attendance. The student has the option to defer payment on the principal and interest while enrolled in school. Repayment on Stafford loans begins six months after the date the student ceases enrollment. The loan may be paid back to the lender over the course of up to 10 years or longer. Both graduate and undergraduate students may apply for Stafford loans. During fiscal year 2009, Stafford loans represented approximately 85% of the gross Title IV funds received by University of Phoenix.

 

In addition to FFELP loans made by private lenders, the U.S. Department of Education also administers the Federal Direct Loan Program (“FDLP”), which eliminates the private financial institution as the lender. Under the FDLP, the federal government makes the loans directly to the students with terms consistent with FFELP loans. During fiscal year 2009, we began participating in the FDLP for a small portion of our Title IV eligible students. During fiscal year 2009, FDLP loans represented less than 1% of the gross Title IV funds received by University of Phoenix. In U.S. President Barack Obama’s 2010 budget request delivered to Congress on February 26, 2009, the U.S. Department of Education proposed to eliminate FFELP loans and instead require all Title IV student loans to be administered through the FDLP commencing July 1, 2010. We expect to be able to fully transition from the FFELP program to the FDLP by the proposed July 1, 2010 phase-out date, if necessary. If this proposal is adopted, the transition would require us to develop and implement administrative capabilities and procedures for volume processing of loans under the FDLP. If we experience a disruption in our ability to process student loans through the FDLP, either because of administrative challenges on our part or the inability of the U.S. Department of Education to process the increased volume of direct loans on a timely basis, our results of operations and cash flows could be adversely and materially affected.

 

Federal Pell Grants are generally awarded based on need only to undergraduate students who have not earned a bachelor’s or professional degree. Unlike loans, Pell Grants do not have to be repaid. During fiscal year 2009, Pell Grants represented approximately 14% of the gross Title IV funds received by University of Phoenix.

 

Funding from student loans not guaranteed by the federal government represented approximately 1% of the cash basis revenue for eligible tuition and fees for University of Phoenix during fiscal year 2009. See Item 1A, Risk Factors — Risks Related to the Highly Regulated Industry in Which We Operate.

International

 

Government financial aid funding for students enrolled in our international institutions is not widely available.

 

Regulatory Environment

 

Domestic Postsecondary

 

Our domestic postsecondary operations are subject to significant regulations. New or revised interpretations of regulatory requirements could have a material adverse effect on us. In addition, changes in existing or new interpretations of applicable laws, rules, or regulations could have a material adverse effect on our accreditation, authorization to operate in various states, permissible activities, and operating costs. The failure to maintain or renew any required regulatory approvals, accreditation, or state authorizations could have a material adverse effect on us. See Item 1A, Risk Factors — Risks Related to the Highly Regulated Industry in Which We Operate.

 

The Higher Education Act, as reauthorized, and the related regulations govern all higher education institutions participating in U.S. Title IV federal financial aid programs, and provide for a regulatory triad by mandating specific regulatory responsibilities for each of the following:

 

 

To be eligible to participate in Title IV programs, a postsecondary institution must be accredited by an accrediting body recognized by the U.S. Department of Education and must comply with the Higher Education Act, as reauthorized, and all applicable regulations thereunder. University of Phoenix and Western International University currently meet the requirements for Title IV participation. The most significant regulatory requirements applicable to our domestic postsecondary operations are summarized below.

 

Eligibility and Certification Procedures.  The Higher Education Act, as reauthorized, specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification. University of Phoenix was recertified in June 2003 and its current certification for the Title IV programs expired in June 2007. In March 2007, University of Phoenix submitted its Title IV recertification application to the U.S. Department of Education. We have been collaborating with the U.S. Department of Education since that date and continue to supply additional follow-up information based on requests from the U.S. Department of Education. Our eligibility continues on a month-to-month basis until the U.S. Department of Education issues its decision on the application. We have no reason to believe that our application will not be renewed in due course.

 

In February 2009, unrelated to our recertification application, the U.S. Department of Education performed an ordinary course, focused program review of University of Phoenix’s policies and procedures involving Title IV programs. We have not yet received the program review report.

 

Western International University was recertified in October 2003 and its current certification for participation in Title IV programs expired on June 30, 2009. In March 2009, Western International University submitted its Title IV recertification application to the U.S. Department of Education and Western International University’s eligibility continues on a month-to-month basis until the U.S. Department of Education completes its review of the application and issues its decision. As with University of Phoenix, we have no reason to believe that the application will not be renewed in due course.

 

The “90/10 Rule.”  A requirement of the Higher Education Act, as reauthorized by the Higher Education Opportunity Act, commonly referred to as the “90/10 Rule,” applies only to proprietary institutions of higher education, which includes University of Phoenix and Western International University. Under this rule, a proprietary institution will be ineligible to participate in Title IV programs if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue, as defined in the rule, from Title IV programs. An

institution that derives more than 90% of its revenue from Title IV programs for any single fiscal year will be placed on provisional certification for two fiscal years and will be subject to possible additional sanctions determined to be appropriate under the circumstances by the U.S. Department of Education in the exercise of its broad discretion. An institution that derives more than 90% of its revenue from Title IV programs for two consecutive fiscal years will be ineligible to participate in Title IV programs. University of Phoenix and Western International University are required to calculate this percentage at the end of each fiscal year. If an institution violates the 90/10 Rule and becomes ineligible to participate in Title IV programs, any disbursements of Title IV program funds while ineligible must be repaid to the U.S. Department of Education.

 

The 90/10 Rule percentage for University of Phoenix has increased materially over the past several fiscal years and we expect the trend will continue in fiscal year 2010. The increase has been driven primarily by the following factors:

 

 

The Higher Education Opportunity Act provides temporary relief from the impact of the loan limit increases by excluding from the 90/10 Rule calculation any amounts received between July 1, 2008 and July 1, 2011 that are attributable to the increased annual loan limits. The implementing regulations for this temporary relief are being developed in a negotiated rulemaking process involving the U.S. Department of Education, industry representatives and other interested parties. The proposed rules were published for comment by the U.S. Department of Education in August 2009, and are expected to be published in final form by November 1, 2009. There is uncertainty about the manner and extent in which the temporary relief will apply to University of Phoenix and Western International University, which have atypical academic calendars. We continue to monitor the rulemaking process, as the resolution of the interpretive issues and subsequent guidance from the U.S. Department of Education could have an impact on the benefit derived from the temporary relief. The application of this temporary relief will decrease the 90/10 Rule percentages for University of Phoenix and Western International University for fiscal year 2009. However, at present given the evolving rule-making process as well as the complexity of such a calculation given our atypical academic calendars, we are unable to quantify precisely the benefit that we will derive in the 90/10 Rule percentage from the temporary relief. As such, our reported rates below exclude the benefits from the temporary relief, which we currently estimate will reduce our University of Phoenix rate between 50 and 300 basis points.

 

The 90/10 Rule percentages, excluding the benefit from the temporary relief for loan limit increases, for University of Phoenix and Western International University for fiscal year 2009 were 86% and 57%, respectively.

 

University of Phoenix is taking various measures to reduce the percentage of its cash basis revenue attributable to Title IV funds, including emphasizing employer-paid and other direct-pay education programs, encouraging students to carefully evaluate the amount of necessary Title IV borrowing, and increasing the focus on professional development and continuing education programs. Although we expect that these measures will favorably impact the 90/10 Rule calculation in the future, there is no assurance that these initiatives will be effective in reducing the 90/10 Rule calculation, or that they will be adequate to prevent the

90/10 Rule calculation from exceeding 90% in fiscal year 2010 or future fiscal years. We do not believe that these measures significantly impacted our 90/10 Rule calculation for fiscal year 2009.

 

In addition, we intend to consider other measures to favorably impact the 90/10 Rule calculation for University of Phoenix, including appropriate domestic acquisitions and tuition price increases. These efforts, and our other long-term initiatives to impact this calculation, may increase our operating expenses and/or reduce our revenue and may have a materially adverse effect on our results of operations, cash flows and financial condition.

 

Student Loan Defaults.  To remain eligible to participate in Title IV programs, educational institutions must maintain an appropriate student loan cohort default rate. The U.S. Department of Education reviews an educational institution’s cohort default rate annually as a measure of administrative capability. The cohort is the group of students who first enter into student loan repayment during a federal fiscal year (ending September 30). The currently applicable cohort default rate for each cohort is the percentage of the students in the cohort who default on their student loans prior to the end of the following federal fiscal year. The cohort default rates are published by the U.S. Department of Education approximately 12 months after the end of the measuring period. Thus, in September 2009 the U.S. Department of Education published the cohort default rates for the 2007 cohort, which measured the percentage of students who first entered into repayment during the year ended September 30, 2007 and defaulted prior to September 30, 2008. As discussed below, the measurement period for the cohort default rate has been increased to three years starting with the 2009 cohort.

 

If an educational institution’s cohort default rate exceeds 10% for any one of the three preceding years, it must delay for 30 days the release of the first disbursement of U.S. federal student loan proceeds to first time borrowers enrolled in the first year of an undergraduate program. Western International University implemented a 30 day delay for such disbursements in fiscal year 2007, and University of Phoenix proactively implemented a 30 day delay for such disbursements in July 2009. If an institution’s cohort default rate exceeds 25% for three consecutive years or exceeds 40% in any one year, it will be ineligible to participate in Title IV programs and, as a result, its students would not be eligible for federal student financial aid.

 

The cohort default rates for University of Phoenix, Western International University and for all proprietary postsecondary institutions for the federal fiscal year periods 2007, 2006 and 2005 were as follows:

 

 

 

 

The University of Phoenix cohort default rate has ranged from approximately 4% to 9.3% over the past several years. The increase in the rate is, in large measure, the result of our transitioning associate’s degree students from Western International University to University of Phoenix beginning in April 2006 and the general expansion of the University of Phoenix associate’s degree program. Student loan default rates tend to be higher in our associate’s degree student population than in our bachelor’s and graduate degree student populations. We believe that the 2008 University of Phoenix cohort default rate for the period ending September 30, 2009 will exceed 10%, although we do not expect that this will have a material impact on our business as we have already implemented a 30 day delay in the disbursement of Title IV loan proceeds for first time borrowers enrolled in the first year of an undergraduate program.

 

The increase in Western International University’s cohort default rate from 2005 to 2006 is due to the enrollment of associate’s degree students in Western International University from September 2004 through March 2006. The transition of the associate’s degree program to University of Phoenix in April 2006 has resulted in a decrease in Western International University’s cohort default rate from 2006 to 2007. We anticipate a further decrease in student loan defaults for Western International University based on this transition.

We have implemented initiatives to mitigate the increased risk of student loan defaults for University of Phoenix and Western International University students. We have dedicated resources focused on assisting the students who are at risk of default. These dedicated resources contact students and offer assistance, which includes providing students with specific loan repayment information, lender contact information and attempts to transfer these students to the lender to resolve their delinquency. In addition, we have refined and improved our student retention programs, resulting in improved student retention rates. Accordingly, we believe that the increase in cohort default rates for University of Phoenix arising from the increased proportion of associate’s degree students will be significantly less pronounced than it was for Western International University.

 

The cohort default rate calculation was modified by the Higher Education Opportunity Act enacted in August 2008. As modified, effective for the federal fiscal year 2009 cohort, the measuring period for the cohort default rate will be extended to the end of the second year after a student first enters repayment, rather than the end of the first year following the commencement of repayment. Accordingly, the cohort default rate for the 2009 cohort will measure the percentage of students entering student loan repayment during the year ended September 30, 2009 who default on their student loans on or before September 30, 2011 (rather than September 30, 2010).

 

The Higher Education Opportunity Act also modified several provisions to counterbalance the extended measurement period with increased threshold cohort default rates that trigger penalties along with the penalties imposed based on an institution’s cohort default rate effective with the federal fiscal year 2009 cohort as follows:

 

 

At this time we are unable to forecast the impact of these modifications on our business due to the uncertain impact on student loan defaults of the current adverse economic conditions.

 

Administrative Capability.  The Higher Education Opportunity Act directs the U.S. Department of Education 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 U.S. Department of Education to determine that the institution lacks administrative capability and, therefore, may be subject to additional scrutiny or denied eligibility for Title IV programs.

 

Standards of Financial Responsibility.  Pursuant to the Title IV regulations, as revised, each eligible higher education institution 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 measure primary reserve, equity, and net income ratios by using information from the institution’s audited financial statements. These ratios take into account the total financial resources of the school. The Primary Reserve Ratio is a measure of an institution’s financial viability and liquidity. The Equity Ratio is a measure of an institution’s capital resources and its ability to borrow. The Net Income Ratio is a measure of an institution’s profitability. These tests provide three individual scores which are converted into a single composite score. The maximum composite score is 3.0. 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 other consequences, and the institution may continue to participate as a financially responsible institution for up to three years. If an institution does not achieve a composite score of at least 1.0, it can be transferred from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment, under which the institution must disburse its own funds to students and document the students’ eligibility for Title IV program funds before receiving such funds from the U.S. Department of Education. The composite scores for Apollo Group, University of Phoenix and Western International University exceed the required minimum of 1.5.

Limits on Title IV Program Funds.  The Title IV regulations place restrictions on the types of programs offered and the amount of Title IV program funds that a student is eligible to receive in any one academic year. Only certain types of educational programs offered by an institution qualify for Title IV program funds. For students enrolled in qualified programs, the Title IV 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 U.S. Department of Education. An academic year must consist of at least 30 weeks of instructional time and a minimum of 24 credit hours. Most of University of Phoenix’s and Western International University’s degree programs meet the academic year minimum definition of 30 weeks of instructional time and 24 credit hours. Substantially all of University of Phoenix’s degree programs qualify for Title IV program funds. The programs that do not qualify for Title IV program funds consist primarily of corporate training programs and certain certificate and continuing professional education programs. These programs are paid directly by the students or their employers.

 

Restricted Cash.  The U.S. Department of Education places restrictions on excess Title IV program funds collected for unbilled tuition and fees transferred to University of Phoenix, Western International University or IPD Client Institutions. If an institution holds excess Title IV program funds with student authorization, the institution must maintain, at all times, cash in its bank account (not an escrow account) in an amount at least equal to the amount of funds the institution holds for students.

 

Compensation of Representatives.  The Higher Education Opportunity Act prohibits 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. Title IV regulations provide safe harbors for activities and arrangements that an institution may carry out without violating the Higher Education Act, as reauthorized, which include, but are not limited to, the payment of fixed compensation (annual salary), as long as that compensation is not adjusted up or down more than twice during any 12-month period, and any adjustment is not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid. University of Phoenix, Western International University, and IPD believe that their current methods of compensating enrollment counselors and financial aid staff comply with the Title IV regulations. See Note 18, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, regarding the Incentive Compensation False Claims Act lawsuit.

 

Authorizations for New Locations and Programs.  University of Phoenix, Western International University and CFFP 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 or for exempting the institution entirely from formal state licensure or approval. Other states 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. University of Phoenix, Western International University and CFFP are currently authorized to operate in all states in which they have physical locations.

 

University of Phoenix, Western International University and CFFP also must obtain the prior approval of The Higher Learning Commission before expanding into new locations to conduct instructional activities.

 

Branching and Classroom Locations.  The Title IV regulations contain specific requirements governing the establishment of new main campuses, branch campuses and classroom locations at which the eligible institution offers, or could offer, 50% or more of an educational program. 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 University of Phoenix and Western International University. The U.S. Department of Education requires that the institution notify the U.S. Department of Education of each location offering 50% or more of an educational program prior to disbursing Title IV program funds to students at that location. University of Phoenix and Western International University have procedures in place to ensure timely notification and acquisition of all necessary location approvals prior to disbursing Title IV funds to students attending any new location. In addition, The Higher Learning

Commission requires that each new campus or learning center of University of Phoenix or Western International University be approved before offering instruction. States in which the two universities operate have varying requirements for approval of branch and classroom locations.

 

Change of Ownership or Control.  A change of ownership or control, depending on the type of change, may have significant regulatory consequences for University of Phoenix, Western International University and CFFP. Such a change of ownership or control could trigger recertification by the U.S. Department of Education, reauthorization by state licensing agencies, or the reevaluation of the accreditation by The Higher Learning Commission.

 

The U.S. Department of Education has adopted the change of ownership and control standards used by the U.S. federal securities laws for institutions owned by publicly-held corporations. If a change of ownership and control occurs that requires us to file a Form 8-K with the Securities and Exchange Commission, or there is a change in the identity of a controlling shareholder of Apollo Group, the University of Phoenix and/or Western International University may become ineligible to participate in Title IV programs until recertified by the U.S. Department of Education. Under some circumstances, the U.S. Department of Education may continue an institution’s participation in Title IV programs on a temporary provisional basis pending completion of the change in ownership approval process. In addition, some states where University of Phoenix, Western International University or CFFP are presently licensed have requirements governing change of ownership or control that require approval of the change to remain authorized to operate in those states. See Item 1A, Risk Factors — Our Executive Chairman and Vice Chairman of the Board control 100% of our voting stock and control substantially all actions requiring the vote or consent of our shareholders. Moreover, University of Phoenix, Western International University and CFFP are required to report any material change in stock ownership to The Higher Learning Commission. In the event of a material change in stock ownership, The Higher Learning Commission may seek to evaluate the effect of such a change on the continuing operations of University of Phoenix, Western International University and CFFP.

 

New U.S. Department of Education Reporting and Disclosure requirements.  The Higher Education Opportunity Act includes various provisions aimed at the rising cost of postsecondary education and other efforts for more transparency. Beginning July 1, 2011, the U.S. Department of Education will publish national lists disclosing the top five percent in each of nine institutional categories with the highest college costs and largest percentage increases. Additional consumer information disclosures required of all Title IV eligible institutions, include, but are not limited to, plans for improving the academic program, institutional policies and sanctions related to the unauthorized distribution of copyrighted material, retention rates, placement information, completion and graduation rates and campus/student safety awareness provisions.

 

U.S. Department of Education Audits and Other Matters.  From time to time as part of the normal course of business, University of Phoenix and Western International University are subject to program reviews and audits by regulating bodies as a result of their participation in Title IV programs. In February 2009, the U.S. Department of Education performed an ordinary course, focused program review of University of Phoenix’s policies and procedures involving Title IV programs. We have not received the program review report resulting from this visit.

 

U.S. Department of Education regulations require institutions and third-party servicers to submit annually to the Secretary of Education their student financial aid compliance audit, prepared by an independent auditor, no later than six months after the last day of the institution’s or third-party servicer’s fiscal year. University of Phoenix, Western International University and IPD have timely submitted their respective fiscal year 2008 annual student financial aid compliance audits.

 

During a previous internal review of certain Title IV policies and procedures, it came to our attention that certain Satisfactory Academic Progress calculations performed by University of Phoenix and Western International University failed to properly identify students who should have been placed on financial aid disqualification status and therefore were ineligible to participate in Title IV financial aid programs. Additionally, we determined that University of Phoenix was incorrectly disbursing certain funds under a grant program. These matters were self-reported to the U.S. Department of Education in October 2008. In February 2009, after completing our review of these practices, we reported to the U.S. Department of Education the

results of our review and paid the U.S. Department of Education our best estimate of the liability, which was $8.4 million. Approximately half of this amount was recorded in our Consolidated Statements of Income in fiscal year 2008, which was our best estimate based on the information available when we identified the matter. We recorded the remaining amount in our Consolidated Statements of Income in the first half of fiscal year 2009 following completion of our review. The U.S. Department of Education has informed us that this matter has been resolved.

 

International

 

Governmental regulations in foreign countries significantly affect our international operations. New or revised interpretations of regulatory requirements could have a material adverse effect on us. Changes in existing or new interpretations of applicable laws, rules, or regulations in the foreign jurisdictions in which we operate could have a material adverse effect on our accreditation, authorization to operate, permissible activities, and costs of doing business outside of the U.S. The failure to maintain or renew any required regulatory approvals, accreditation, or state authorizations could have a material adverse effect on our international operations. See Item 1A, Risk Factors — Risks Related to the Highly Regulated Industry in Which We Operate.

 

Other Matters

 

We file annual, quarterly and current reports with the Securities and Exchange Commission. You may read and copy any document we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for information on the Public Reference Room. The Securities and Exchange Commission maintains a website that contains annual, quarterly and current reports that issuers file electronically with the Securities and Exchange Commission. The Securities and Exchange Commission’s website is http://www.sec.gov.

 

Our website address is www.apollogrp.edu. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Information Statements on Schedule 14C, Forms 3, 4, and 5 filed on behalf of directors and executive officers, and all amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission.

 

 

You should carefully consider the risks and uncertainties described below and all other information contained in this Annual Report on Form 10-K. In order to help assess the major risks in our business, we have identified many, but not all, of these risks. Due to the scope of our operations, a wide range of factors could materially affect future developments and performance.

 

If any of the following risks are realized, our business, financial condition, cash flow or results of operations could be materially and adversely affected, and as a result, the trading price of our Class A common stock could be materially and adversely impacted. These risk factors should be read in conjunction with other information set forth in this Annual Report, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, including the related Notes to Consolidated Financial Statements.

 

Risks Related to the Control Over Our Voting Stock

 

Our Executive Chairman and Vice Chairman of the Board control 100% of our voting stock and control substantially all actions requiring the vote or consent of our shareholders.

 

Dr. John G. Sperling, our Executive Chairman of the Board and Founder, and his son, Mr. Peter V. Sperling, our Vice Chairman of the Board, control the John Sperling Voting Stock Trust and the Peter Sperling

Voting Stock Trust. Dr. Sperling, Mr. Sperling and the two trusts collectively own 100% of our voting securities, the Apollo Group Class B common stock. Through their individual holdings and their control of these trusts, Dr. Sperling and Mr. Sperling together control the election of all members of our Board of Directors and substantially all other actions requiring a vote of our shareholders, except in certain limited circumstances. Holders of our outstanding Apollo Group Class A common stock do not have the right to vote for the election of directors or for substantially any other action requiring a vote of shareholders, except in certain limited circumstances. In the event of Dr. Sperling’s passing, control of the John Sperling Voting Stock Trust, which holds a majority of the outstanding Apollo Group Class B common stock, will be exercised by a majority of three successor trustees: Mr. Sperling, Terri Bishop, who is an executive officer and Director of Apollo, and Darby Shupp, an employee of an entity affiliated with Dr. Sperling. No assurances can be given that the Apollo Group Class B shareholders will exercise their control of Apollo Group in the same manner that a majority of the outstanding Class A shareholders would if they were entitled to vote on actions currently reserved exclusively for our Class B shareholders. In addition, the control of 100% of our voting stock by Dr. Sperling and Mr. Sperling makes it impossible for a third party to acquire voting control of us without Dr. Sperling’s consent.

 

We are a “Controlled Company” as defined in Rule 5615(c)(1) of the NASDAQ Listing Rules, since more than 50% of the voting power of Apollo Group is held by the John Sperling Voting Stock Trust. As a consequence, we are exempt from certain requirements of NASDAQ Listing Rule 5605, including that:

 

 

However, NASDAQ Listing Rule 5605(b)(2) does require that our independent directors have regularly scheduled meetings at which only independent directors are present (“executive sessions”). In addition, Internal Revenue Code Section 162(m) requires that a compensation committee of outside directors (within the meaning of Section 162(m)) approve stock option grants to executive officers in order for us to be able to claim deductions for the compensation expense attributable to such stock options. Notwithstanding the foregoing exemptions, we do have a majority of independent directors on our Board of Directors and we do have an Audit Committee, a Compensation Committee and a Nominating and Governance Committee composed entirely of independent directors.

 

The charters for the Compensation, Audit and Nominating and Governance Committees have been adopted by the Board of Directors and are available on our website, www.apollogrp.edu. These charters provide, among other items, that each member must be independent as such term is defined by the applicable rules of the NASDAQ Stock Market LLC and the Securities and Exchange Commission.

 

Risks Related to the Highly Regulated Industry in Which We Operate

 

U.S. Operations

 

If we fail to comply with the extensive regulatory requirements for our business, we could face significant monetary liabilities, fines and penalties, including loss of access to U.S. federal student loans and grants for our students.

 

As a provider of higher education, we are subject to extensive U.S. regulation on both the federal and state levels. In particular, the Higher Education Act, as reauthorized by the Higher Education Opportunity Act in August 2008, and related regulations impose significant regulatory scrutiny on University of Phoenix and Western International University, and all other higher education institutions that participate in the various federal student financial aid programs under Title IV of the Higher Education Act (“Title IV programs”). We collected the majority of our fiscal year 2009 total consolidated net revenue from receipt of Title IV financial

aid program funds. University of Phoenix represented approximately 95% of our fiscal year 2009 total consolidated net revenue and University of Phoenix generated 86% of its cash basis revenue for eligible tuition and fees during fiscal year 2009 from receipt of Title IV financial aid program funds, as calculated under the 90/10 Rule, excluding the benefit from the temporary relief for loan limit increases.

 

These regulatory requirements cover virtually all phases of our U.S. operations, including educational program offerings, facilities, instructional and administrative staff, administrative procedures, marketing and recruiting, financial operations, payment of refunds to students who withdraw, maintenance of restricted cash, acquisitions or openings of new schools, commencement of new educational programs and changes in our corporate structure and ownership.

 

The Higher Education Act, as reauthorized, mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the U.S. federal government through the U.S. Department of Education; (2) independent accrediting agencies recognized by the U.S. Secretary of Education; and (3) state education regulatory bodies.

 

The regulations, standards and policies of these regulatory agencies frequently change and are subject to interpretation, particularly where they are crafted for traditional, academic term-based schools rather than our non-term academic delivery model. Changes in, or new interpretations of, applicable laws, regulations, or standards could have a material adverse effect on our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs, or costs of doing business. We cannot predict with certainty how all of the requirements applied by these agencies will be interpreted or whether our schools will be able to comply with these requirements in the future.

 

From time to time, we identify inadvertent compliance deficiencies that we must address and, where appropriate, report to the U.S. Department of Education. Such reporting, even in regard to a minor compliance issue, could result in a more significant compliance review by the U.S. Department of Education or even a full recertification review, which may require the expenditure of substantial administrative time and resources to address. If the U.S. Department of Education concluded that these reported deficiencies reflect a lack of administrative capability, we could be subject to additional sanctions or even lose our eligibility to participate in Title IV programs. See “A failure to demonstrate “administrative capability” or “financial responsibility” may result in the loss of eligibility to participate in Title IV programs,” below.

 

If we are found to be in noncompliance with any of these regulations, standards or policies, any one of the relevant regulatory agencies may be able to do one or more of the following:

 

 

In addition, in some circumstances of noncompliance or alleged noncompliance, we may be subject to qui tam lawsuits under the Federal False Claims Act. In these actions, private plaintiffs seek to enforce remedies under the Act on behalf of the U.S. and, if successful, are entitled to recover their costs and to receive a portion of any amounts recovered by the U.S. in the lawsuit. These lawsuits can be prosecuted by a private plaintiff in respect of some action taken by us, even if the Department of Education does not agree with plaintiff’s theory of liability.

 

Any of the penalties, injunctions, restrictions or other forms of censure listed above could have a material adverse effect on our business, financial condition, results of operations and cash flows. If we lose our Title IV eligibility, we would experience a dramatic and adverse decline in revenue and we would be unable to continue our business as it currently is conducted.

 

The reauthorization of the federal Higher Education Act in August 2008 includes substantially increased reporting and other requirements which may impair our reputation and adversely affect our enrollments. In addition, not all of these new requirements are clear on their face. Our failure to accurately interpret these new requirements may subject us to penalties and other sanctions imposed by the U.S. Department of Education.

 

The Higher Education Opportunity Act, enacted on August 14, 2008, extends the Higher Education Act through September 30, 2013. Among other things, the Higher Education Opportunity Act imposes more than 100 new reporting requirements. Beginning July 1, 2011, the U.S. Department of Education will publish national lists disclosing various statistics including the top five percent of schools in each of nine institutional categories with the highest college costs and largest percentage increases. If University of Phoenix or Western International University is highlighted negatively on one or more of these lists, our reputation may be impaired and our enrollments may be adversely affected. In addition, many of the Higher Education Opportunity Act provisions will be further specified in regulations promulgated by the U.S. Department of Education. The U.S. Department of Education currently is evaluating which provisions in the law should be the subject of regulation. This regulatory process may impose additional or apparently different reporting and other requirements on institutions that participate in Title IV programs. Some period will elapse before the U.S. Department of Education determines which provisions of the Higher Education Opportunity Act will be the subject of administrative rulemaking and issues final rules. In the interim, the uncertainty about various requirements of the Higher Education Opportunity Act will remain. Any failure by us to properly interpret the effect of the Higher Education Opportunity Act could subject us to the consequences, penalties and other sanctions imposed by the U.S. Department of Education discussed in the preceding risk factor, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. The prospect of such sanctions may cause us to conservatively interpret the Higher Education Opportunity Act’s requirements pending interpretive guidance, which may limit our flexibility in operating or growing our business.

 

Our schools and programs would lose their eligibility to participate in federal student financial aid programs if the percentage of our revenues derived from those programs is too high.

 

The “90/10 Rule.” A requirement of the Higher Education Act, as reauthorized by the Higher Education Opportunity Act, commonly referred to as the “90/10 Rule,” applies only to proprietary institutions of higher education, which includes University of Phoenix and Western International University. Under this rule, a proprietary institution will be ineligible to participate in Title IV programs if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue, as defined in the rule, from Title IV programs. An institution that derives more than 90% of its revenue from Title IV programs for any single fiscal year will be placed on provisional certification for two fiscal years and will be subject to possible additional sanctions determined to be appropriate under the circumstances by the U.S. Department of Education in the exercise of its broad discretion. An institution that derives more than 90% of its revenue from Title IV programs for two consecutive fiscal years will be ineligible to participate in Title IV programs. University of Phoenix and Western International University are required to calculate this percentage at the end of each fiscal year. If an

institution violates the 90/10 Rule and becomes ineligible to participate in Title IV programs, any disbursements of Title IV program funds while ineligible must be repaid to the U.S. Department of Education.

 

The 90/10 Rule percentage for University of Phoenix has increased materially over the past several fiscal years and we expect the trend will continue in fiscal year 2010. The increase has been driven primarily by the following factors:

 

 

The Higher Education Opportunity Act provides temporary relief from the impact of the loan limit increases by excluding from the 90/10 Rule calculation any amounts received between July 1, 2008 and July 1, 2011 that are attributable to the increased annual loan limits. The implementing regulations for this temporary relief are being developed in a negotiated rulemaking process involving the U.S. Department of Education, industry representatives and other interested parties. The proposed rules were published for comment by the U.S. Department of Education in August 2009, and are expected to be published in final form by November 1, 2009. There is uncertainty about the manner and extent in which the temporary relief will apply to University of Phoenix and Western International University, which have atypical academic calendars. We continue to monitor the rulemaking process, as the resolution of the interpretive issues and subsequent guidance from the U.S. Department of Education could have an impact on the benefit derived from the temporary relief. The application of this temporary relief will decrease the 90/10 Rule percentages for University of Phoenix and Western International University for fiscal year 2009. However, at present given the evolving rule-making process as well as the complexity of such a calculation given our atypical academic calendars, we are unable to quantify precisely the benefit that we will derive in the 90/10 Rule percentage from the temporary relief. As such, our reported rates below exclude the benefits from the temporary relief, which we currently estimate will reduce our University of Phoenix rate between 50 and 300 basis points.

 

The 90/10 Rule percentages, excluding the benefit from the temporary relief for loan limit increases, for University of Phoenix and Western International University for fiscal year 2009 were 86% and 57%, respectively.

 

University of Phoenix is taking various measures to reduce the percentage of its cash basis revenue attributable to Title IV funds, including emphasizing employer-paid and other direct-pay education programs, encouraging students to carefully evaluate the amount of necessary Title IV borrowing, and increasing the focus on professional development and continuing education programs. Although we expect that these measures will favorably impact the 90/10 Rule calculation in the future, there is no assurance that these initiatives will be effective in reducing the 90/10 Rule calculation, or that they will be adequate to prevent the 90/10 Rule calculation from exceeding 90% in fiscal year 2010 or future fiscal years. We do not believe that these measures significantly impacted our 90/10 Rule calculation for fiscal year 2009.

 

In addition, we intend to consider other measures to favorably impact the 90/10 Rule calculation for University of Phoenix, including appropriate domestic acquisitions and tuition price increases. These efforts, and our other long-term initiatives to impact this calculation, may increase our operating expenses and/or

reduce our revenue and may have a materially adverse effect on our results of operations, cash flows and financial condition.

 

If the U.S. Congress acts to further increase the student loan limits or to increase the amount of Pell or other grants available to students, the 90/10 Rule percentage for University of Phoenix could increase. Absent corresponding changes in the 90/10 Rule to address the effects of any such increase, such an increase may require us to accelerate our efforts to manage the proportion of our cash basis revenue composed of Title IV funds.

 

We collected the majority of our fiscal year 2009 total consolidated net revenue from receipt of Title IV financial aid program funds, and continued Title IV eligibility is critical to the operation of our business. If University of Phoenix becomes ineligible to participate in Title IV federal student financial aid programs, we could not conduct our business as it is currently conducted and it would have a material adverse effect on our business, financial condition, results of operations and cash flows. See the discussion of the 90/10 Rule, including the changes enacted by the Higher Education Opportunity Act, in Item 1, Business, Regulatory Environment — Domestic Postsecondary — The “90/10 Rule,” which discussion is incorporated by this reference.

 

If we are not recertified to participate in Title IV programs by the U.S. Department of Education, we would lose eligibility to participate in Title IV programs.

 

University of Phoenix and Western International University are eligible and certified to participate in Title IV programs. University of Phoenix was recertified for Title IV programs in June 2003 and its current certification expired in June 2007. In March 2007, University of Phoenix submitted its Title IV recertification application to the U.S. Department of Education. We have been collaborating with the U.S. Department of Education since that date and continue to supply additional follow-up information based on requests from the U.S. Department of Education. Our eligibility continues on a month-to-month basis until the U.S. Department of Education issues its decision on the application. We have no reason to believe that our application will not be renewed in due course.

 

In February 2009, unrelated to our recertification application, the U.S. Department of Education performed an ordinary course, focused program review of University of Phoenix’s policies and procedures involving Title IV programs. We have not yet received the program review report.

 

Western International University was recertified in October 2003 and its current certification for participation in Title IV programs expired on June 30, 2009. In March 2009, Western International University submitted its Title IV recertification application to the U.S. Department of Education. Western International University’s eligibility continues on a month-to-month basis until the U.S. Department of Education completes it review of the application and issues its decision. As with University of Phoenix, we have no reason to believe that the application will not be renewed in due course.

 

Generally, the recertification process includes a review by the U.S. Department of Education of the institution’s educational programs and locations, administrative capability, financial responsibility, and other oversight categories. The U.S. Department of Education could limit, suspend or terminate an institution’s participation in Title IV programs for violations of the Higher Education Act, as reauthorized, or Title IV regulations.

 

We collected the majority of our fiscal year 2009 total consolidated net revenue from receipt of Title IV financial aid program funds. University of Phoenix represented approximately 95% of our fiscal year 2009 total consolidated net revenue and University of Phoenix generated 86% of its cash basis revenue for eligible tuition and fees during fiscal year 2009 from receipt of Title IV financial aid program funds, as calculated under the 90/10 Rule, excluding the benefit from the temporary relief for loan limit increases. Continued Title IV eligibility is critical to the operation of our business. If University of Phoenix becomes ineligible to participate in Title IV federal student financial aid programs, we could not conduct our business as it is currently conducted and it would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our business could be harmed if we experience a disruption in our ability to process student loans because of the proposed phase-out of Family Education Loan Program loans and the corresponding transition to direct student loans under the Federal Direct Loan Program.

 

Student loans under the Federal Family Education Loan Program (“FFELP”) are currently the most significant source of U.S. federal student aid and are low interest, federally guaranteed loans made by private lenders. We collected the majority of our fiscal year 2009 total consolidated net revenue from receipt of Title IV financial aid program funds, principally from FFELP student loans. In addition to FFELP loans made by private lenders, the U.S. Department of Education also administers the Federal Direct Loan Program (“FDLP”), which eliminates the private financial institution as the lender. Under the FDLP, the federal government makes the loans directly to the students on terms consistent with FFELP loans. During fiscal year 2009, FDLP loans represented less than 1% of the gross Title IV funds received by University of Phoenix.

 

In U.S. President Barack Obama’s 2010 budget request to Congress, the U.S. Department of Education proposed to eliminate FFELP loans and instead require all Title IV student loans to be administered through the FDLP commencing July 1, 2010. We expect to be able to fully transition from the FFELP program to the FDLP by the proposed July 1, 2010 phase-out date, if necessary. If this proposal is adopted, the transition would require us to develop and implement administrative capabilities and procedures for volume processing of loans under the FDLP. If we experience a disruption in our ability to process student loans through the FDLP, either because of administrative challenges on our part or the inability of the U.S. Department of Education to process the increased volume of direct student loans on a timely basis, our business, financial condition, results of operations and cash flows could be adversely and materially affected.

 

If regulators do not approve or delay their approval of transactions involving a change of control of our company, our state licenses, accreditation, and ability to participate in Title IV programs may be impaired.

 

A change of ownership or control of Apollo Group, depending on the type of change, may have significant regulatory consequences for University of Phoenix and Western International University. Such a change of ownership or control could require recertification by the U.S. Department of Education, reauthorization by state licensing agencies, or the reevaluation of the accreditation by The Higher Learning Commission of the North Central Association of Colleges and Schools. The U.S. Department of Education has adopted the change of ownership and control standards used by the federal securities laws for institutions owned by publicly-held corporations. Upon a change of ownership and control sufficient to require us to file a Form 8-K with the Securities and Exchange Commission, or a change in the identity of a controlling shareholder of the Apollo Group, University of Phoenix and/or Western International University may cease to be eligible to participate in Title IV programs until recertified by the U.S. Department of Education. There can be no assurances that such recertification would be obtained on a timely basis. Under some circumstances, the U.S. Department of Education may continue an institution’s participation in the Title IV programs on a temporary provisional basis pending completion of the change in ownership approval process. In addition, some states where University of Phoenix, Western International University or CFFP is presently licensed have requirements governing change of ownership or control that require approval of the change to remain authorized to operate in those states. Moreover, University of Phoenix, Western International University and CFFP are required to report any material change in stock ownership to The Higher Learning Commission. In the event of a material change in stock ownership of Apollo Group, The Higher Learning Commission may seek to evaluate the effect of such a change of stock ownership on the continuing operations of University of Phoenix, Western International University and CFFP.

 

Substantially all of our voting stock is owned and controlled by Dr. John Sperling and Mr. Peter Sperling. We cannot prevent a change of ownership or control that would arise from a transfer of voting stock by Dr. Sperling or Mr. Sperling, including a transfer that may occur or be deemed to occur upon the death of one or both of Dr. Sperling or Mr. Sperling. Dr. and Mr. Sperling have established voting stock trusts and other agreements with the intent to maintain the Company’s voting stock in such a way as to prevent a change of ownership or control upon either’s death, but we cannot assure you that these arrangements will have the desired effect.

If regulators do not approve our domestic acquisitions, the acquired schools’ state licenses, accreditation, and ability to participate in Title IV programs may be impaired.

 

When we acquire an institution, we must seek approval from the U.S. Department of Education, if the acquired institution participates in Title IV programs, and from most applicable state agencies and accrediting agencies because an acquisition is considered a change of ownership or control of the acquired institution under applicable regulatory standards. A change of ownership or control of an institution under the U.S. Department of Education standards can result in the temporary suspension of the institution’s participation in the Title IV programs unless a timely and materially complete application for recertification is filed with the U.S. Department of Education and the U.S. Department of Education issues a temporary provisional certification. If we are unable to obtain approvals from the state agencies, accrediting agencies or U.S. Department of Education for any institution we may acquire in the future, depending on the size of that acquisition, such a failure to obtain approval could have a material adverse effect on our business.

 

Action by the U.S. Congress to revise the laws governing the federal student financial aid programs or reduce funding for those programs could reduce our student population and increase our costs of operation.

 

The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. In 2008, the Higher Education Act was reauthorized through September 30, 2013 by the Higher Education Opportunity Act. Changes to the Higher Education Act are likely to result from subsequent reauthorizations, and the scope and substance of any such changes cannot be predicted. Any action by the U.S. Congress that significantly reduces Title IV program funding or the ability of our institutions or students to participate in Title IV programs would have a material adverse effect on our financial condition, results of operations and cash flows. Congressional action may also require us to modify our practices in ways that could increase our administrative costs and reduce our profit margin, which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

If the U.S. Congress significantly reduced the amount of available Title IV program funding, we would attempt to arrange for alternative sources of financial aid for our students, but it is unlikely that private sources would be able to provide as much funding to our students on as favorable terms as is currently provided by Title IV. In addition, private organizations could require us to guarantee all or part of this assistance and we might incur other additional costs. For these reasons, private, alternative sources of student financial aid would only partly offset, if at all, the impact on our business of reduced Title IV program funding.

 

Student loan defaults could result in the loss of eligibility to participate in Title IV programs.

 

Currently, under the Higher Education Act, as reauthorized, an educational institution will lose its eligibility to participate in some or all Title IV programs if its student loan cohort default rate equals or exceeds 25% for three consecutive years or 40% for any given year. If our student loan default rates approach these limits, we may be required to expend substantial effort and resources to improve these default rates. In addition, because there is a lag between the funding of a student loan and a default thereunder, many of the borrowers who are in default or at risk of default are former students with whom we may have only limited contact. Accordingly, there can be no assurance that we would be able to effectively improve our default rates or improve them in a timely manner to meet the requirements for continued participation in Title IV funding if we begin to experience a substantial increase in our student loan default rates.

 

The cohort default rate requirements were modified by the Higher Education Opportunity Act enacted in August 2008 to increase by one year the measuring period for each cohort and increase some of the threshold rates that trigger penalties. We do not expect the change in the measurement period for the calculation of the cohort default rate and the related thresholds to have a material impact on our business, financial condition, results of operations and cash flows.

 

If we lose our eligibility to participate in Title IV programs because of high student loan default rates, we could not conduct our business as it is currently being conducted and it would have a material adverse effect on our business, financial condition, results of operations and cash flows. See the discussion of student loan cohort default rates, including the changes enacted by the Higher Education Opportunity Act, in Item 1,

Business — Regulatory Environment — Domestic Postsecondary — Student Loan Defaults, which discussion is incorporated by this reference.

 

If any regulatory audit, investigation or other proceeding finds us not in compliance with the numerous laws and regulations applicable to the postsecondary education industry, we may not be able to successfully challenge such finding and our business could suffer.

 

Due to the highly regulated nature of the postsecondary education industry, we are subject to audits, compliance reviews, inquiries, complaints, investigations, claims of non-compliance and lawsuits by federal and state governmental agencies, regulatory agencies, accrediting agencies, present and former students and employees, shareholders and other third parties, any of whom may allege violations of any of the regulatory requirements applicable to us. If the results of any such claims or actions are unfavorable to us, we may be required to pay monetary fines or penalties, be required to repay funds received under Title IV programs or state financial aid programs, have restrictions placed on or terminate our schools’ or programs’ eligibility to participate in Title IV programs or state financial aid programs, have limitations placed on or terminate our schools’ operations or ability to grant degrees and certificates, have our schools’ accreditations restricted or revoked, or be subject to civil or criminal penalties. Any one of these sanctions could materially adversely affect our business, financial condition, results of operations and cash flows and result in the imposition of significant restrictions on us and our ability to operate.

 

If we fail to maintain our institutional accreditation, we would lose our ability to participate in Title IV programs.

 

University of Phoenix and Western International University are institutionally accredited by The Higher Learning Commission, one of the six regional accrediting agencies recognized by the Secretary of Education. Accreditation by an accrediting agency recognized by the U.S. Secretary of Education is required in order for an institution to become and remain eligible to participate in Title IV programs. The loss of accreditation would, among other things, render our schools and programs ineligible to participate in Title IV programs, affect our authorization to operate in certain states and decrease student demand. If University of Phoenix becomes ineligible to participate in Title IV federal student financial aid programs, we could not conduct our business as it is currently conducted and it would have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

If we fail to maintain any of our state authorizations, we would lose our ability to operate in that state and to participate in Title IV programs there.

 

University of Phoenix and Western International University are authorized to operate and to grant degrees by the applicable state agency of each state where such authorization is required and where we maintain a campus. In addition, several states require University of Phoenix to obtain separate authorization for the delivery of distance education to residents of those states. Compliance with these state requirements is also necessary for students in the respective states to participate in Title IV programs. The loss of such authorization in one or more states would render students resident in those states ineligible to participate in Title IV programs and could have a material adverse effect on our business, financial condition, results of operations and cash flows. Loss of authorization in one or more states could increase the likelihood of additional scrutiny and potential loss of operating and/or degree granting authority in other states in which we operate, which would further impact our business.

 

A failure to demonstrate “administrative capability” or “financial responsibility” may result in the loss of eligibility to participate in Title IV programs.

 

The U.S. Department of Education regulations specify extensive criteria an institution must satisfy to establish that it has the requisite administrative capability to participate in Title IV programs. These criteria require, among other things, that the institution:

 

 

 

Furthermore, to participate in Title IV programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the U.S. Department of Education, or post a letter of credit in favor of the U.S. Department of Education and possibly accept other conditions on its participation in Title IV programs. If our schools eligible to participate in Title IV programs fail to maintain administrative capability or financial responsibility, as defined by the U.S. Department of Education, those schools could lose their eligibility to participate in Title IV programs or have that eligibility adversely conditioned, which would have a material adverse effect on our business. Limitations on, or termination of, participation in Title IV programs as a result of the failure to demonstrate administrative capability or financial responsibility would limit students’ access to Title IV program funds, which could significantly reduce the enrollments and revenues of our schools eligible to participate in Title IV programs and materially and adversely affect our business, financial condition, results of operations and cash flows. See the discussion of financial responsibility in Item 1, Business — Regulatory Environment — Domestic Postsecondary — Standards of Financial Responsibility, which discussion is incorporated by this reference.

 

We will be subject to sanctions if we fail to properly calculate and make timely payment of refunds of Title IV program funds for students who withdraw before completing their educational program.

 

The Higher Education Act, as reauthorized, and U.S. Department of Education regulations require us to calculate refunds of unearned Title IV program funds disbursed to students who withdraw from their educational program before completing it. If refunds are not properly calculated or timely paid for 5% or more of students sampled in the institution’s annual compliance audit or in a program review, generally within 45 days of the date the school determines that the student has withdrawn, we may have to post a letter of credit in favor of the U.S. Department of Education or otherwise be subject to adverse actions by the U.S. Department of Education, which could increase our cost of regulatory compliance and adversely affect our business, financial condition, results of operations and cash flows.

 

We are subject to sanctions if we pay impermissible commissions, bonuses, or other incentive payments to individuals involved in certain recruiting, admission, or financial aid activities.

 

A school participating in Title IV programs may not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment or admission activity or in making decisions regarding the awarding of Title IV program funds. The law and regulations governing this requirement do not establish clear criteria for compliance in all circumstances. If the U.S. Department of Education determined that our compensation practices violated these standards, the U.S. Department of Education could subject us to monetary fines, penalties, or other sanctions, which could adversely affect our business, financial condition, results of operations and cash flows.

If IPD’s Client Institutions are sanctioned due to non-compliance with Title IV requirements, our business could be responsible for any resulting fines and penalties.

 

IPD provides to its Client Institutions numerous consulting and administrative services, including services that involve the handling and receipt of Title IV funds. As a result of this, IPD may be jointly and severally liable for any fines, penalties or other sanctions imposed by the U.S. Department of Education on the Client Institution for violation of applicable Title IV regulations, regardless of the degree of fault, if any, on IPD’s part. The imposition of such fines, penalties or other sanctions could have a material adverse impact on our business, financial condition, results of operations and cash flows.

 

Government regulations relating to the Internet could increase our cost of doing business, affect our ability to grow or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

The increasing popularity and use of the Internet and other online services has led and may lead to further adoption of new laws and regulatory practices in the U.S. or foreign countries and to new interpretations of existing laws and regulations. These new laws and interpretations may relate to issues such as online privacy, copyrights, trademarks and service marks, sales taxes, value-added taxes, withholding taxes, allocation and apportionment of income amongst various state, local and foreign jurisdictions, fair business practices and the requirement that online education institutions qualify to do business as foreign corporations or be licensed in one or more jurisdictions where they have no physical location or other presence. New laws, regulations or interpretations related to doing business over the Internet could increase our costs and materially and adversely affect our enrollments, which could have a material adverse affect on our business, financial condition, results of operations and cash flows.

 

Non-U.S. Operations

 

Our non-U.S. operations are subject to regulatory requirements of the applicable countries in which we operate, and our failure to comply with these requirements may result in substantial monetary liabilities, fines and penalties and a loss of authority to operate.

 

We operate physical and online educational institutions in the United Kingdom, Europe, China, India, Canada, Chile, Mexico, and elsewhere, and are actively seeking further expansion in other countries. Our operations in each of the relevant foreign jurisdictions are subject to educational and other regulations, which may differ materially from the regulations applicable to our U.S. operations.

 

Risks Related to Our Business

 

Our business may be adversely affected by a further economic slowdown in the U.S. or abroad or by an economic recovery in the U.S.

 

The U.S and much of the world economy are in the midst of an economic downturn. We believe the current economic downturn has contributed to a portion of our recent enrollment growth as an increased number of working learners seek to advance their education to improve job security or reemployment prospects. This effect cannot be quantified. However, to the extent that the economic downturn has increased demand for our programs, a subsequent economic recovery may eliminate this effect and reduce such demand as fewer potential students seek to advance their education. This reduction could have a material adverse effect on our business, financial condition, results of operations and cash flows. A worsening of the economic downturn may reduce the demand for our programs among students and the willingness of employers to sponsor educational opportunities for their employees, either of which could materially and adversely affect our business, financial condition, results of operations and cash flows. In addition, these events could adversely affect the ability or willingness of our former students to repay student loans, which could increase our bad debt expense and our student loan cohort default rate and require increased time, attention and resources to manage these defaults, either of which could have a material adverse effect on our business. See Risks Related to the Highly Regulated Industry in Which We Operate — Student loan defaults could result in the loss of eligibility to participate in Title IV programs, above.

If we are unable to successfully conclude pending litigation and governmental inquiries, our business, financial condition, results of operations and cash flows could be adversely affected.

 

We, certain of our subsidiaries, and certain of our current and former directors and executive officers have been named as defendants in lawsuits alleging violations of the federal securities laws and the federal False Claims Act. In August 2008, the U.S. District Court for the District Court of Arizona vacated a judgment for damages against us in a securities class action, and the plaintiffs have appealed to the Ninth Circuit Court of Appeals. We also are awaiting trial in a separate qui tam action against us alleging violations of the Higher Education Act, as reauthorized, and federal securities laws and the federal False Claims Act. We are also subject to various other lawsuits, investigations and claims, covering a range of matters, including, but not limited to, claims involving shareholders and employment matters and an informal inquiry by the Enforcement Division of the Securities and Exchange Commission regarding our revenue recognition practices. Refer to Note 18, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, for further discussion of pending litigation and other proceedings.

 

We cannot predict the ultimate outcome of these matters and expect to incur significant defense costs and other expenses in connection with them. Such costs and expenses could have a material adverse effect on our business, financial condition, results of operations and cash flows and the market price of our common stock. We may be required to pay substantial damages or settlement costs in excess of our insurance coverage related to these matters, or may be required to pay substantial fines or penalties, any of which could have a further material adverse effect on our business, financial condition, results of operations and cash flows.

 

We may not be able to sustain our recent growth rate or profitability, and we may not be able to manage future growth effectively.

 

Our ability to sustain our current rate of growth or profitability depends on a number of factors, including our ability to obtain and maintain regulatory approvals, our ability to attract and retain students, our ability to maintain operating margins, our ability to recruit and retain high quality academic and administrative personnel and competitive factors. Over the past three years, our growth has been predominately in our associate’s degree programs. If we do not sustain our growth rate in the associate’s degree programs, or fail to transition students to our bachelor’s degree, advanced degree and other potential new programs, our business could be adversely affected. In addition, growth may place a significant strain on our resources and increase demands on our management information and reporting systems, financial management controls, and personnel. Although we have made a substantial investment in augmenting our financial and management information systems and other resources to support future growth, we cannot assure you that we will have adequate capacity to accommodate substantial growth or that we will be able to manage further growth effectively. Failure to do so could adversely affect our business, financial condition, results of operations and cash flows.

 

In addition, our growth could be adversely impacted by a reduction in the growth rate of overall postsecondary enrollment. According to the U.S. Department of Education, enrollment in degree-granting, postsecondary institutions is projected to grow approximately 10% over the ten-year period ending in 2017, to approximately 20.1 million students. This growth compares with a 25.5% increase reported in the prior ten-year period ended in 2007, when enrollment increased from 14.5 million students in 1997 to 18.2 million students in 2007. This projected reduction in the growth rate of postsecondary enrollment could negatively affect our ability to grow our business in the U.S.

 

Our financial performance depends on our ability to continue to develop awareness among, and recruit and retain students.

 

Building awareness of our schools and the programs we offer is critical to our ability to attract prospective students. If our schools are unable to successfully market and advertise their educational programs, our schools’ ability to attract and enroll prospective students in such programs could be adversely affected, and, consequently, our ability to increase revenue or maintain profitability could be impaired. It is also critical to our success that we convert these prospective students to enrolled students in a cost-effective manner and

that these enrolled students remain active in our programs. Some of the factors that could prevent us from successfully enrolling and retaining students in our programs include:

 

 

If the proportion of our students who are enrolled in our associate’s degree programs continues to increase, we may experience increased cost and reduced margins.

 

In recent years, a substantial proportion of our overall growth has arisen from the increase in associate’s degree students enrolled in University of Phoenix. As a result of this, the proportion of our Degreed Enrollment composed of associate’s degree students has increased and may continue to increase in the future. While this growth has generated significant financial returns, we have experienced certain negative effects from this shift, such as an increase in our student loan cohort default rate. If this mix shift continues, we may experience additional consequences, such as higher cost per New Degreed Enrollment, lower retention rates and/or higher student services costs, an increase in the percentage of our revenue derived from Title IV funding under the 90/10 Rule, more limited ability to implement tuition price increases and other effects that may adversely affect our operating results.

 

System disruptions and security threats to our computer networks could have a material adverse effect on our business.

 

The performance and reliability of our computer network infrastructure at our schools, including our online programs, is critical to our operations, reputation and ability to attract and retain students. Any computer system error or failure, regardless of cause, could cause network outages that disrupt our online and on-ground operations. We have only limited redundancies in our core computer network infrastructure, which is concentrated in a single geographic area. If we experience a catastrophic failure or unavailability for any reason of our principal data center, we may need to replicate the function of this data center at our existing remote data facility or elsewhere, which may require equipping and restoring activities that could take a week or more to complete. The disruption from such an event could significantly impact our operations and have a material adverse effect on our business, financial condition, results of operations and cash flows.

In addition, we face the threat to our computer systems of unauthorized access, computer hackers, computer viruses and other security problems and system disruptions. We have devoted and will continue to devote significant resources to the security of our computer systems, but they may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

We may not be able to successfully identify, pursue or integrate acquisitions; acquisitions may result in additional debt or dilution to our shareholders.

 

As part of our growth strategy, we are actively considering acquisition opportunities in the U.S. and worldwide. We have acquired and expect to acquire additional proprietary educational institutions that complement our strategic direction, some of which could be material. Any acquisition involves significant risks and uncertainties, including:

 

 

Acquisitions are inherently risky. We cannot be certain that our previous or future acquisitions will be successful and will not materially adversely affect our business, financial condition, results of operations and cash flows. We may not be able to identify suitable acquisition opportunities, acquire institutions on favorable terms, or successfully integrate or profitably operate acquired institutions. Future transactions may involve use of our cash resources, issuance of equity or debt securities, incurrence of other forms of debt or a significant increase in our financial leverage, which could adversely affect our financial condition, results of operations and cash flows, especially if the cash flows associated with any acquisition are not sufficient to cover the additional debt service. If we issue equity securities as consideration in an acquisition, current shareholders’ percentage ownership and earnings per share may be diluted. In addition, our acquisition of an educational institution could be considered a change in ownership and control of the acquired institution under applicable regulatory standards. For such an acquisition in the U.S., we may need approval from the U.S. Department of Education and applicable state agencies and accrediting agencies and possibly other regulatory bodies. Our inability to obtain such approvals with respect to a completed acquisition could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our future operating results and the market price of our common stock could be materially adversely affected if we are required to write down the carrying value of goodwill and other intangible assets associated with any of our reporting units in the future.

 

We review our goodwill and other indefinite-lived intangible asset balances for impairment on at least an annual basis through the application of a fair-value-based test. In assessing the fair value of our reporting units, we rely primarily on using a discounted cash flow analysis which includes our estimates about the future cash flows of our reporting units that are based on assumptions consistent with our plans to manage the underlying businesses. Other factors we consider include, but are not limited to, significant underperformance

relative to expected historical or projected future operating results, significant changes in the manner or use of the acquired assets or the overall business strategy, and significant negative industry or economic trends. If our estimates or related assumptions change in the future, we may be required to record non-cash impairment charges for these assets. In the future, if we are required to significantly write down the carrying value of goodwill or other intangible assets associated with any of our reporting units, our operating results and the market price of our common stock may be materially adversely affected.

 

If we do not maintain existing, and develop additional, relationships with employers, our future growth may be impaired.

 

We currently have relationships with large employers to provide their employees with the opportunity to obtain degrees through us while continuing their employment. These relationships are an important part of our strategy as they provide us with a steady source of potential working learners for particular programs and also serve to increase our reputation among high-profile employers. In addition, these programs have a beneficial impact on our 90/10 Rule percentage calculation by reducing the proportion of our cash-basis revenues attributable to Title IV funds. If we are unable to develop new relationships, or if our existing relationships deteriorate or end, our efforts to seek these sources of potential working learners may be impaired, and this could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

Our principal credit agreement limits our ability to take various actions.

 

Our principal credit agreement limits our ability to take various actions, including paying dividends, repurchasing shares and acquiring and disposing of assets or businesses. Accordingly, to the extent we have outstanding borrowings under our credit agreement, we may be restricted from taking actions that management believes would be desirable and in the best interests of us and our shareholders. Our principal credit agreement also requires us to satisfy specified financial and non-financial covenants. A breach of any covenants contained in our credit agreement could result in an event of default under the agreement and allow the lenders to pursue various remedies, including accelerating the repayment of any indebtedness outstanding under the agreement, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our financial performance depends, in part, on our ability to keep pace with changing market needs and technology; if we fail to keep pace or fail in implementing or adapting to new technologies, our business may be adversely affected.

 

Increasingly, prospective employers of students who graduate from our schools demand that their new employees possess appropriate technological skills and also appropriate “soft” skills, such as communication, critical thinking and teamwork skills. These skills can evolve rapidly in a changing economic and technological environment. Accordingly, it is important for our schools’ educational programs to evolve in response to these economic and technological changes. The expansion of existing programs and the development of new programs may not be accepted by current or prospective students or the employers of our graduates. Even if our schools are able to develop acceptable new programs, our schools may not be able to begin offering those new programs as quickly as required by prospective employers or as quickly as our competitors offer similar programs. In addition, we may be unable to obtain specialized accreditations or licensures that may make certain programs desirable to students. To offer a new academic program, we may be required to obtain federal, state and accrediting agency approvals, which may be conditioned or delayed in a manner that could significantly affect our growth plans. In addition, to be eligible for Title IV programs, a new academic program may need to be certified by the U.S. Department of Education. If we are unable to adequately respond to changes in market requirements due to regulatory or financial constraints, unusually rapid technological changes, or other factors, our ability to attract and retain students could be impaired, the rates at which our graduates obtain jobs involving their fields of study could suffer, and our business, financial condition, results of operations and cash flows could be adversely affected.

 

Establishing new academic programs or modifying existing programs requires us to make investments in management and capital expenditures, incur marketing expenses and reallocate other resources. We may have

limited experience with the courses in new areas and may need to modify our systems and strategy or enter into arrangements with other educational institutions to provide new programs effectively and profitably. If we are unable to increase the number of students or offer new programs in a cost-effective manner, or are otherwise unable to manage effectively the operations of newly established academic programs, our business, financial condition, results of operations and cash flows could be adversely affected.

 

We have invested and continue to invest significant resources in information technology, which is a key element of our business strategy. Our information technology systems and tools could become impaired or obsolete due to our action or failure to act. For instance, we could install new information technology without accurately assessing its costs or benefits, or we could experience delayed or ineffective implementation of new information technology. Similarly, we could fail to respond in a timely or sufficiently competitive way to future technological developments in our industry. Should our action or failure to act impair or otherwise render our information technology less effective, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

A failure of our information systems to properly store, process and report relevant data may reduce our management’s effectiveness, interfere with our regulatory compliance and increase our operating expenses.

 

We are heavily dependent on the integrity of our data management systems. If these systems do not effectively collect, store, process and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, or human error, our ability to effectively plan, forecast and execute our business plan and comply with applicable laws and regulations, including the Higher Education Act, as reauthorized, and the regulations thereunder, will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results of operations, and cash flows.

 

The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation and operations.

 

Possession and use of personal information in our operations subjects us to risks and costs that could harm our business. Our educational institutions collect, use and retain large amounts of personal information regarding our students and their families, including social security numbers, tax return information, personal and family financial data and credit card numbers. We also collect and maintain personal information of our employees in the ordinary course of our business. Some of this personal information is held and managed by certain of our vendors. Although we use security and business controls to limit access and use of personal information, a third party may be able to circumvent those security and business controls, which could result in a breach of student or employee privacy. In addition, errors in the storage, use or transmission of personal information could result in a breach of student or employee privacy. Possession and use of personal information in our operations also subjects us to legislative and regulatory burdens that could require notification of data breaches and restrict our use of personal information. We cannot assure you that a breach, loss or theft of personal information will not occur. A breach, theft or loss of personal information regarding our students and their families or our employees that is held by us or our vendors could have a material adverse effect on our reputation and results of operations and result in liability under state and federal privacy statutes and legal actions by state attorneys, general and private litigants, and any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

We face intense competition in the postsecondary education market from both public and private educational institutions, which could adversely affect our business.

 

Postsecondary education in our existing and new market areas is highly competitive. We compete with traditional public and private two-year and four-year colleges, other for-profit schools and alternatives to higher education, such as employment and military service. Some of our competitors, both public and private, have greater financial and other resources than we have. Our competitors, both public and private, may offer programs similar to ours at a lower tuition level as a result of government subsidies, government and foundation grants, tax-deductible contributions and other financial resources not available to for-profit institutions. In addition, many of our competitors have begun to offer distance learning and other online

education programs. As the online and distance learning segment of the postsecondary education market matures, the intensity of the competition we face will increase further. This intense competition could adversely affect our business, financial condition, results of operations and cash flows.

 

Our expansion into new markets outside the U.S. subjects us to risks inherent in international operations.

 

As part of our growth strategy, through Apollo Global, Inc., our consolidated majority-owned subsidiary, we have acquired additional universities outside the U.S. and we intend to actively pursue further acquisitions. To the extent that we make such acquisitions, we will face risks that are inherent in international operations, including:

 

 

Our acquisition and operation of BPP Holdings plc may not result in increased value.

 

We acquired BPP in the fourth quarter of fiscal 2009. BPP faces several risks which may adversely impact our ability to successfully operate and grow its businesses, including:

 

 

 

We may experience movements in foreign currency exchange rates which could negatively affect our operating results.

 

We report revenues, costs and earnings in U.S. dollars. Exchange rates between the U.S. dollar and the local currency in the countries where we operate are likely to fluctuate from period to period. Because consolidated financial results are reported in U.S. dollars, we are subject to the risk of translation losses for reporting purposes. When the U.S. dollar appreciates against the applicable local currency in any reporting period, the actual earnings generated by our business in that country are diminished in the translation.

 

As we continue to expand our international operations, we will conduct more transactions in currencies other than the U.S. Dollar. Additionally, the volume of transactions in the various foreign currencies will continue to increase. To the extent that foreign revenue and expense transactions are not denominated in the local currency and/or to the extent foreign earnings are reinvested in a currency other than their functional currency, we are also subject to the risk of transaction losses. Given the volatility of exchange rates, there is no assurance that we will be able to effectively manage currency transaction and/or translation risks. Fluctuations in foreign currency exchange rates could have a material adverse affect on our business, financial condition, results of operations and cash flows.

 

We rely on proprietary rights and intellectual property that may not be adequately protected under current laws, and we encounter disputes from time to time relating to our use of intellectual property.

 

Our success depends in part on our ability to protect our proprietary rights and intellectual property. We rely on a combination of copyrights, trademarks, trade secrets, patents, domain names and contractual agreements to protect our proprietary rights. For example, we rely on trademark protection in the U.S. and various foreign jurisdictions to protect our rights to various marks as well as distinctive logos and other marks associated with our services. We also rely on agreements under which we obtain intellectual property to own or license rights to use intellectual property developed by faculty members, content experts and other third-parties. We cannot assure you that these measures are adequate, that we have secured, or will be able to secure, appropriate permissions or protections for all of the intellectual property rights we use or claim rights to in the U.S. or various foreign jurisdictions, or that third parties will not terminate our license rights or infringe upon or otherwise violate our intellectual property rights or the intellectual property rights of others. Despite our efforts to protect these rights, unauthorized third parties may attempt to use, duplicate or copy the proprietary aspects of our student recruitment and educational delivery methods and systems, curricula, online resource material or other content. Our management’s attention may be diverted by these attempts and we may need to use funds in litigation to protect our proprietary rights against any infringement or violation, which could have a material adverse affect on our business, financial condition, results of operations and cash flows.

 

We may become party to disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in these disputes. For example, third parties may allege that we have infringed upon or not obtained sufficient rights in the technologies used in our educational delivery systems, the content of our courses or other training materials or in our ownership or uses of other intellectual property

claimed by that third party. Some third party intellectual property rights may prove to be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid violating those intellectual property rights. Any such intellectual property claim could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether such claim has merit. Our various liability insurance coverages, if any, may not cover potential claims of this type adequately or at all, and we may be required to alter the design and operation of our systems or the content of our courses or pay monetary damages or license fees to third parties, which could have a material adverse affect on our business, financial condition, results of operations and cash flows.

 

We may incur liability for the unauthorized duplication, distribution or other use of materials posted online.

 

In some instances, our employees, including faculty members, or our students may post various articles or other third-party content online in class discussion boards or in other venues. We may incur liability to third parties for the unauthorized duplication, distribution or other use of this material. Any such claims could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether the claims have merit. Our various liability insurance coverages, if any, may not cover potential claims of this type adequately or at all, and we may be required to alter or cease our uses of such material (which may include changing or removing content from our courses) or pay monetary damages, which could have a material adverse affect on our business, financial condition, results of operations and cash flows.

 

Our Insight Schools business faces regulatory and administrative challenges in various states which may result in the imposition of fines and other penalties and may reduce the value we receive upon disposition of that business.

 

Most of Insight Schools’ online public high schools have undergone or expect to undergo compliance audits by state regulatory authorities. Adverse audit findings could result in a reduction in the amount of state funding, repayment of previously received state funding or other economic sanctions. In extreme circumstances, adverse findings could result in termination of agreements with Insight Schools by governing authorities or by not-for-profit charter holders. Additionally, materially adverse findings could result in revocation or termination of a charter school’s charter. Each of these events could have a materially adverse effect on Insight Schools’ business.

 

We have made the decision to explore the disposition of our Insight Schools operations. There is no assurance that we can dispose of these operations on terms acceptable to us or at all, and we may experience a loss upon any such disposition or, in lieu thereof, discontinuation. If we are not successful in correcting Insight Schools’ compliance challenges, the value of Insight Schools may be diminished, perhaps substantially. The reduction in the value of Insight Schools or the disposition or discontinuation of Insight Schools at a loss could have a material adverse effect our financial condition.

 

We may have unanticipated tax liabilities that could adversely impact our financial position.

 

We are subject to multiple types of taxes in the U.S., United Kingdom and various other foreign jurisdictions. The determination of our worldwide provision for income taxes and other tax accruals involve various judgments, and therefore the ultimate tax determination is subject to uncertainty. We are currently subject to the following Internal Revenue Service audits:

 

 

 

In addition to the above audits, we are subject to numerous ongoing audits by state, local and foreign tax authorities. Although we believe our tax accruals are reasonable, the final determination of tax audits in the U.S. or abroad and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our business, financial condition, results of operations and cash flows.

 

Changes in tax rules may adversely affect our future reported financial results or the way we conduct our business. In May 2009, President Obama’s administration proposed significant changes to the U.S. international tax laws, including changes that would limit U.S. tax deductions for expenses related to un-repatriated foreign-source income and modify the U.S. foreign tax credit and “check-the-box” rules. We cannot determine whether these proposals will be enacted into law or what, if any, changes may be made to such proposals prior to their being enacted into law. If these or other changes to the U.S. international tax laws are enacted they could have a material effect on our business, financial condition, results of operations and cash flows.

 

We are subject to the oversight of the Securities and Exchange Commission and other regulatory agencies, and investigations by these agencies could divert management’s focus and have a material adverse impact on our reputation and financial condition.

 

As a result of this government regulation and oversight, we may be subject to legal and administrative proceedings. For example, during fiscal year 2007, we were the subject of a Securities and Exchange Commission inquiry and a Department of Justice investigation related to our historical stock option grant practices. In addition, during October 2009, we received notification from the Enforcement Division of the Securities and Exchange Commission indicating that they had commenced an informal inquiry into our revenue recognition practices. We devoted a substantial amount of senior executive time and incurred significant legal costs in connection with the 2007 inquiry and, while the scope, duration and outcome of the current inquiry cannot be determined at this time, we may have to devote substantial time and incur substantial legal and other expenses in connection with the current inquiry. The costs of responding to, and the publicity surrounding investigations or enforcement actions by the Securities and Exchange Commission or the Department of Justice, even if ultimately resolved favorably for us, could have a material adverse impact on our business, financial condition, results of operations and cash flows.

 

 

None.

 

As of August 31, 2009, we utilized 448 facilities, the majority of which were leased. As of August 31, 2009, we were obligated to lease approximately 7.6 million square feet and owned approximately 1.2 million square feet, as follows:

 

 

Dual purpose space includes office and classroom facilities. In some cases, classes are held in the facilities of the students’ employers at no charge to us. Leases generally range from five to ten years with one to two renewal options for extended terms. We also lease space from time to time on a short-term basis in order to provide specific courses or programs.

 

We evaluate current utilization of the educational facilities and projected enrollment growth to determine facility needs. We anticipate that an additional 0.7 million square feet will be leased in 2010.

 

 

We are subject to various claims and contingencies which are in the scope of ordinary and routine litigation incidental to our business, including those related to regulation, business transactions, employee-related matters and taxes, among others. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

When we become aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we record a liability for the loss. The liability recorded includes probable and estimable legal costs associated with the claim or potential claim. If the loss is not probable or the amount of the loss cannot be reasonably estimated, we disclose the claim if the likelihood of a potential loss is reasonably possible and the amount is material. For matters where no loss contingency is recorded, our policy is to expense legal fees as incurred.

 

A description of pending litigation, settlements, and other proceedings that are outside the scope of ordinary and routine litigation incidental to our business is provided under Note 18, Commitments and Contingencies, Pending Litigation and Settlements and Regulatory and Other Legal Matters, in Item 8, Financial Statements and Supplementary Data, which is incorporated herein by reference.

 

 

None.

 

 

 

Market Information

 

Our Apollo Group Class A common stock trades on the NASDAQ Global Select Market under the symbol “APOL.” The holders of our Apollo Group Class A common stock are not entitled to any voting rights.

 

There is no established public trading market for our Apollo Group Class B common stock and all shares of our Apollo Group Class B common stock are beneficially owned by affiliates.

 

The table below sets forth the high and low bid share prices for our Apollo Group Class A common stock as reported by the NASDAQ Global Select Market.

 

 

Holders

 

As of August 31, 2009, there were approximately 266 registered holders of record of Apollo Group Class A common stock and four registered holders of record of Apollo Group Class B common stock. A substantially greater number of holders of Apollo Group Class A common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

 

Dividends

 

Although we are permitted to pay dividends on our Apollo Group Class A and Apollo Group Class B common stock, subject to the satisfaction of applicable financial covenants in our principal credit facility, we have never paid cash dividends on our common stock. Dividends are payable at the discretion of the Board of Directors, and the Articles of Incorporation treat the declaration of dividends on the Apollo Group Class A and Apollo Group Class B common stock in an identical manner as follows: holders of our Apollo Group Class A common stock and Apollo Group Class B common stock are entitled to receive cash dividends, if and to the extent declared by the Board of Directors, payable to the holders of either class or both classes of common stock in equal or unequal per share amounts, at the discretion of the Board of Directors. We have no current plan to pay dividends in the foreseeable future. The decision of our Board of Directors to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition and other factors the Board of Directors may consider relevant.

 

Recent Sales of Unregistered Securities

 

None.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, “Equity Compensation Plan Information,” which is incorporated herein by reference.

 

Purchases of Equity Securities

 

Our Board of Directors has authorized programs to repurchase shares of Apollo Group Class A common stock, from time to time depending on market conditions and other considerations. The share repurchases under these programs for the three months ended August 31, 2009 have been as follows:

 

 

 

 

On June 25, 2009, our Board of Directors authorized an increase in the amount available under our stock repurchase program of up to an aggregate amount of $500 million of Apollo Group Class A common stock. There is no expiration date on the repurchase authorizations and repurchases occur at our discretion. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant. Repurchases may be made on the open market or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules, and may include repurchases pursuant to Securities and Exchange Commission Rule 10b5-1 nondiscretionary trading programs.

Company Stock Performance

 

The following graph compares the cumulative 5-year total return attained by shareholders on Apollo Group Class A common stock relative to the cumulative total returns of the S&P 500 index and a customized peer group of five companies that includes: Career Education Corp., Corinthian Colleges Inc., DeVry Inc., ITT Educational Services Inc., and Strayer Education Inc. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in the index, and in the peer group on August 31, 2004, and its relative performance is tracked through August 31, 2009.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Apollo Group, Inc.,
The S&P 500 Index and a Peer Group

 

 

*$100 invested on 8/31/04 in stock and index-including reinvestment of dividends.

Fiscal year ending August 31.

Source: Standard & Poor’s.

 

 

The information contained in the performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission nor shall such information be deemed incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

 

The following selected consolidated financial data and operating statistics are qualified by reference to and should be read in conjunction with Item 8, Financial Statements and Supplementary Data, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, to fully understand factors that may affect the comparability of the information presented below. The statement of income data for fiscal years 2009, 2008, and 2007, and the balance sheet data as of August 31, 2009 and 2008, were derived from the audited consolidated financial statements, included herein. Diluted income per share and diluted weighted average shares outstanding have been retroactively restated for stock splits. We restated the financial results of prior periods in our Annual Report on Form 10-K for 2006. Our annual report on Form 10-K for 2006 included a restated Consolidated Balance Sheet as of August 31, 2005 and related Consolidated Statement of Income for fiscal year 2005.

 

 

 

 

 

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help investors understand our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and related notes included in Item 8, Financial Statements and Supplementary Data. The MD&A is organized as follows: