<PAGE> 1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 26, 1995
P R O S P E C T U S
2,750,000 SHARES
[LOGO] APOLLO GROUP, INC.
CLASS A COMMON STOCK
------------------
All of the shares of Class A Common Stock offered hereby (the "Offering")
are being sold by certain shareholders (the "Selling Shareholders") of Apollo
Group, Inc. ("Apollo" or the "Company"). See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. The Class A Common Stock is traded on the
Nasdaq National Market ("Nasdaq") under the symbol "APOL." On December 26, 1995,
the last reported sales price of the Class A Common Stock, as reported by
Nasdaq, was $37.875 per share. See "Price Range of Common Stock."
------------------
SEE "RISK FACTORS" ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE CLASS A COMMON
STOCK OFFERED HEREBY. THE HOLDERS OF CLASS A COMMON STOCK ARE NOT ENTITLED TO
ANY VOTING RIGHTS.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND THE SELLING
PUBLIC COMMISSIONS(1) SHAREHOLDERS(2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................... $ $ $
- -----------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
=====================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses estimated at $357,000, payable by the Selling
Shareholders.
(3) The Selling Shareholders have granted the Underwriters a 30-day option to
purchase up to 412,500 shares of Class A Common Stock on the same terms as
set forth above solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to the Selling Shareholders will be $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Class A Common Stock are offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by, the Underwriters
and subject to the right of the Underwriters to reject any order in whole or in
part and certain other conditions. It is expected that certificates for the
shares of Class A Common Stock offered hereby will be available for delivery on
or about January , 1996, at the office of Smith Barney Inc., 14 Wall Street,
New York, New York 10005.
------------------
SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
JANUARY , 1996
<PAGE> 2
[DESCRIPTION OF INSIDE FRONT COVER GRAPHICS]
Graphic indicates the various UOP, IPD and WIU locations throughout the
United States, Puerto Rico and London, England, as well as the location of the
corporate headquarters.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by independent auditors and
quarterly reports for the first three fiscal quarters of each year containing
unaudited summary financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN AN
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON NASDAQ OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON NASDAQ IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and consolidated financial statements appearing elsewhere
in this Prospectus or incorporated herein by reference. Unless otherwise
indicated, all information in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised and reflects a 4-for-3 stock split
distributed April 28, 1995 and a 3-for-2 stock split distributed September 22,
1995. Investors should consider carefully the information set forth under the
heading "Risk Factors."
THE COMPANY
Apollo Group, Inc. ("Apollo" or the "Company"), through its subsidiaries
The University of Phoenix, Inc. ("UOP"), the Institute for Professional
Development ("IPD") and Western International University, Inc. ("WIU"), is a
leading provider of higher education programs for working adults based on the
number of working adults enrolled in its programs. The Company believes that its
teaching/learning model differentiates its programs from those offered by the
majority of other accredited colleges and universities by providing full-time
working adults with a quality educational experience while enabling them to earn
a degree and still meet their personal and professional responsibilities. The
Company's teaching/learning model enables full-time working adult students to
earn an undergraduate degree within four years, as compared to a national
average of seven to ten years for working adults, or a graduate degree within
two years. The Company offers its programs and services at 78 campuses and
learning centers in 25 states, Puerto Rico and London, England.
The Company has added 46 locations since August 31, 1990 and has
experienced significant growth in both revenues and enrollments. Enrollments in
the Company's programs have increased from 17,571 at August 31, 1991 to 36,848
at August 31, 1995, while annual net revenues have increased from $69 million to
$163 million during the same period. The Company's consolidated enrollments
increased from 31,802 at November 30, 1994 to 40,158 at November 30, 1995.
Enrollments in UOP's distance education programs increased from 1,627 to 2,561
during the same period. The consolidated enrollments in the Company's
educational programs would make it the largest private institution of higher
education in the United States. Since November 30, 1994, the Company has added
17 new campuses and learning centers and established one new IPD contract.
UOP is a regionally accredited, private institution of higher education
offering bachelor's and master's degree programs such as business, management,
computer information systems, education and health care. With approximately
27,100 working adult students, UOP is currently the 6th largest regionally
accredited private university in the United States and has one of the nation's
largest private business schools. UOP has successfully replicated its
teaching/learning model while maintaining educational quality at its 45 campuses
and learning centers located in Arizona, California, Colorado, Hawaii,
Louisiana, Michigan, Nevada, New Mexico, Utah and Puerto Rico. UOP also offers
its educational programs worldwide through OnlineTM, its computer distance
education system. OnlineTM provides campus-based courses that have been modified
for computer delivery and are available wherever there is adequate telephone
service or access to CompuServe(R) or the Internet.
IPD provides program development and management services under long-term
contracts (five to ten years) to 15 regionally accredited private colleges and
universities. These contracts meet the guidelines of the client institutions'
respective regional accrediting associations. IPD assists these colleges and
universities in expanding and diversifying their programs for working adults and
shares in the tuition revenues generated from these programs. A majority of
these contracts have been extended beyond the year 2000. At November 30, 1995,
there were approximately 12,000 students enrolled in IPD-assisted programs at 29
campuses and learning centers.
WIU acquired the assets of Western International University ("Western") in
September 1995 for $2.1 million. WIU is a regionally accredited, private
institution of higher education with enrollments of approximately 1,000 at four
campuses and learning centers located in Phoenix, Fort Huachuca and Douglas,
Arizona and through Thames Lea College in London, England.
The average age of students enrolled in UOP and in IPD-assisted programs is
in the mid-thirties with an average annual household income of $53,000.
Approximately 74% of UOP students have been employed full-time for nine or more
years. Approximately 80% of UOP students also receive some level of tuition
reimbursement from their employers, many of which are Fortune 500 companies. Of
these students receiving reimbursement, approximately 83% receive at least one-
half tuition reimbursement and approximately 42% receive full tuition
reimbursement. This demographic profile results in a number of benefits to the
Company, including diversified sources of tuition revenues, low student loan
default rates, high student completion rates and a limited need for
capital-intensive services.
3
<PAGE> 4
To meet the increasing demand for higher education by working adults, the
Company plans to establish new UOP campuses and learning centers, negotiate new
IPD contracts, expand the number of degree offerings, improve access to the
Company's programs through new distance education technologies, establish
strategic relationships with major corporations and explore international
opportunities. The U.S. Department of Education National Center for Educational
Statistics ("NCES") estimates that by 2000 approximately 44% of the 15.5 million
students projected to be enrolled in institutions of higher education will be
adults over the age of 24. Currently, the U.S. Bureau of the Census estimates
that 70-75% of students over the age of 24 are working adults. The Company
believes that the demand for higher education by working adult students will
continue to grow, thereby creating a significant market opportunity to those who
can offer programs that meet the unique needs of working adult students.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered by the Selling Shareholders....... 2,750,000 shares
Common Stock to be outstanding immediately after the Offering:
Class A Common Stock(1)...................................... 21,527,299 shares
Class B Common Stock......................................... 575,769 shares
Use of Proceeds................................................ The Company will not receive any of
the proceeds from the sale of Class A
Common Stock offered hereby.
Nasdaq National Market Symbol.................................. APOL
</TABLE>
Relative rights of Class A and Class B Common Stock:
The Class A and Class B Common Stock (collectively, the "Common Stock") have
identical rights with respect to cash dividends and in the distribution of
proceeds in any sale or liquidation, but have different voting rights. The
Class A Common Stock is not entitled to any voting rights, while the Class B
Common Stock is entitled to one vote per share on all matters on which
shareholders are entitled to vote. See "Risk Factors" and "Description of
Capital Stock."
- ---------------
(1) Excludes 1,656,941 shares of Class A Common Stock issuable upon exercise
of stock options granted to certain directors, officers and key
employees of the Company.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1994 1995
------- ------- ------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues............................ $68,782 $81,865 $97,545 $124,720 $163,429 $36,465 $49,727
Total costs and expenses................ 67,881 81,368 95,533 116,425 141,600 32,260 41,882
Income before income taxes.............. 901 497 2,012 8,295 21,829 4,205 7,845
Net income.............................. 862 646 1,143 4,912 12,600 2,544 4,589
Net income per share.................... .06 .04 .08 .32 .62 .17 .20
OPERATING STATISTICS:
Enrollments at end of period............ 17,571 21,163 24,987 30,236 36,848 31,802 40,158
Locations at end of period.............. 35 42 51 60 68 61 78
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1995 1995
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............................................................... $102,132 $108,476
Current assets............................................................. 84,044 87,544
Current liabilities........................................................ 45,065 46,137
Long-term liabilities...................................................... 1,715 2,026
Shareholders' equity....................................................... 55,352 60,313
</TABLE>
4
<PAGE> 5
RISK FACTORS
THE PURCHASE OF SHARES OF CLASS A COMMON STOCK OFFERED HEREBY INVOLVES
SUBSTANTIAL RISK. THE FOLLOWING MATTERS, INCLUDING THOSE MENTIONED ELSEWHERE,
SHOULD BE CONSIDERED CAREFULLY BY A PROSPECTIVE INVESTOR IN EVALUATING A
PURCHASE OF CLASS A COMMON STOCK.
UNCERTAIN AND CHANGING REGULATORY ENVIRONMENT
UOP, WIU and IPD client institutions are subject to extensive state and
federal regulations, some of which have been effective only since July 1, 1995.
The Higher Education Act of 1965, as amended (the "HEA"), and the regulations
promulgated thereunder (the "Regulations"), subject UOP, WIU and IPD client
institutions and all other higher education institutions eligible to participate
in federal financial aid programs under Title IV of the HEA ("Title IV
Programs") to increased regulatory scrutiny. The HEA mandates specific
regulatory responsibilities for each of the following components of the higher
education regulatory triad: (1) the accrediting associations recognized by the
United States Department of Education (the "DOE"); (2) the federal government
through the DOE and (3) state higher education regulatory bodies, including each
applicable State Postsecondary Review Entity ("SPRE").
UOP derives approximately 68% of its net revenues from students who
participate in Title IV Programs. The Company believes that IPD derives a
similar percentage of its net revenues from students who participate in Title IV
Programs administered by the respective IPD client institution. Because the
Regulations impose new regulatory requirements on UOP, WIU and IPD client
institutions and because the DOE has not fully developed administrative
interpretations of the Regulations, there exists some uncertainty concerning the
application and interpretation of the new regulatory requirements imposed by the
Regulations. New or revised interpretations of such regulatory requirements
could have a material adverse effect on the Company. In addition, changes in or
new interpretations of other applicable laws, rules or regulations could have a
material adverse effect on the accreditation, authorization to operate in
various states, permissible activities and costs of doing business of UOP, WIU
and one or more of the IPD client institutions. The failure to maintain or renew
any required regulatory approvals, accreditation or state authorizations by UOP
or certain of the IPD client institutions could have a material adverse effect
on the Company. See "Business -- Regulatory Environment,"
"Business -- Accreditation," "Business -- Federal Financial Aid Programs" and
"Business -- State Authorization."
LIMITS ON TITLE IV PROGRAM FUNDING
Currently, the Regulations place limits on the amount of Title IV Program
funds that a student is eligible to receive in any one academic year (as defined
by the DOE). The Regulations also specify that, for undergraduate programs, an
academic year must consist of at least an equivalent 30 weeks of instruction and
a minimum of 24 credit hours. The new Regulations define an equivalent "week of
instruction" as 12 hours of regularly scheduled instruction, examinations or
preparation for examinations (the "12-Hour Rule"). For programs that consist of
eight hours per week of instruction, such as those offered by UOP and IPD client
institutions, the academic year must be a minimum of 45 calendar weeks to meet
the DOE's equivalent 30 weeks of instruction to qualify for Title IV funding. If
UOP were required by the DOE to increase the length of its undergraduate
academic year to more than the current 45 calendar weeks, it would reduce the
maximum amount of Title IV funding available to UOP's students, which could have
a material adverse effect on the Company.
FAILURE TO OBTAIN AUTHORIZATION IN NEW STATES
UOP, WIU and IPD client institutions are required to have authorization to
operate as degree-granting institutions in each state where they physically
provide educational programs. Certain states accept accreditation as evidence of
meeting minimum state standards for authorization. Other states, including
California, require separate evaluations for authorization. Depending on the
state, the addition of a degree program not offered previously or the addition
of a new location must be included in the institution's accreditation and be
approved by the appropriate state authorization agency. UOP, WIU and IPD client
institutions are
5
<PAGE> 6
currently authorized to operate in all states in which they have physical
locations. If UOP is unable to obtain authorization to operate in certain new
states, it may have a material adverse effect on the Company's ability to expand
UOP's business. See "Business -- Business and Growth Strategy" and
"Business -- State Authorization."
RELIANCE ON CURRENT MANAGEMENT
Dr. John Sperling, the founder of the Company, has been instrumental in the
development of the Company. The Company's development and operations to date
have been, and its continuing operations will be, substantially dependent on the
efforts of Dr. Sperling and the other members of current management. Dr.
Sperling's employment agreement allows him to terminate his employment at any
time upon 30 days notice. The loss of the services of any one or more members of
current management could have a material adverse effect on the Company's
business and results of operations.
REGULATORY CONSEQUENCES OF A CHANGE OF OWNERSHIP OR CONTROL
A change of ownership or control of the Company, depending on the type of
transaction that gives rise to a change, may have significant regulatory
consequences for UOP and WIU. Such a change of ownership or control could
trigger recertification by the DOE, reauthorization by certain state licensing
agencies or the evaluation of UOP's and WIU's accreditation by the Commission on
Institutions of Higher Education of the North Central Association of Colleges
and Schools ("NCA"). The DOE has adopted the change of ownership or control
standards used by the federal securities laws. Upon a change of ownership or
control sufficient to require the Company to file a Form 8-K with the
Commission, UOP and WIU would cease to be eligible to participate in Title IV
Programs until recertified by the DOE. This recertification would not be
required, however, if the transfer of ownership or control was made upon a
person's retirement or death and was made either to a member of the person's
immediate family or to a person with an ownership interest in the Company who
had been involved in its management for at least two years preceding the
transfer. In addition, certain states where UOP is presently authorized have
requirements governing change of ownership or control. Currently, Arizona and
California would require UOP and WIU, as applicable, to be reauthorized upon a
20% and 25% change of ownership or control of the Company, respectively. These
states require a new application to be filed for state authorization if such a
change of ownership or control occurs. Moreover, the Company is required to
report to NCA any change in stock ownership of UOP, WIU or Apollo. At that time,
NCA may seek to evaluate the effect of such a change of stock ownership on the
continuing operations of UOP and WIU. If UOP is not recertified by the DOE, does
not obtain reauthorization from the necessary state agencies or has its
accreditation withdrawn as a consequence of any change in ownership or control,
it would have a material adverse effect on the Company. See "Business -- Federal
Financial Aid Programs -- Change of Ownership or Control."
VOTING CONTROL BY CURRENT MANAGEMENT
The holders of Class A Common Stock are not entitled to any voting rights,
while the holders of Class B Common Stock are entitled to one vote per share on
all matters on which the shareholders of the Company are entitled to vote. As a
result, the holders of the Company's Class B Common Stock, who currently consist
of the management of the Company, control the election of all directors to the
Company's Board of Directors and thereby control the policies and operations of
the Company without the vote of the holders of Class A Common Stock. This
concentration of voting control may have the effect of delaying, deferring or
preventing a change of control of the Company, including any business
combination with an unaffiliated party, or of impeding the ability of the
shareholders to replace management even if factors warrant such a change. This
concentration of voting control may also affect the price that investors might
be willing to pay in the future for shares of the Company's Class A Common
Stock. See "Management," "Principal and Selling Shareholders" and "Description
of Capital Stock."
SEASONALITY IN RESULTS OF OPERATIONS
The Company has experienced seasonality in the results of its operations
primarily as a result of changes in student enrollments. Historically, the
Company has experienced lower revenues and net income in the second quarter
(December to February) of its fiscal year due to the holiday breaks in December
and January.
6
<PAGE> 7
The Company expects that these seasonal trends will continue. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of Class A
Common Stock offered hereby.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying dividends in the near future. It is the current policy of the
Company's Board of Directors to retain earnings to finance the operations and
expansion of the Company's business. If cash dividends were declared, however,
holders of Class A Common Stock and Class B Common Stock would be entitled to
equal per share cash dividends.
7
<PAGE> 8
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of November 30, 1995:
<TABLE>
<CAPTION>
NOVEMBER 30, 1995
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Long-term debt............................................................ $ 503
-------
Shareholders' equity:
Preferred Stock, no par value; 1,000,000 shares authorized; none issued
or outstanding....................................................... --
Class A Common Stock, no par value; 65,000,000 shares authorized;
21,527,000 shares issued and outstanding(1).......................... 28
Class B Common Stock, no par value; 3,000,000 shares authorized; 576,000
shares issued and outstanding........................................ 1
Additional paid-in capital.............................................. 37,740
Retained earnings....................................................... 22,544
-------
Total shareholders' equity.............................................. 60,313
-------
Total capitalization...................................................... $ 60,816
=======
</TABLE>
- ---------------
(1) Excludes 1,657,000 shares of Class A Common Stock issuable upon exercise of
stock options granted to certain directors, officers and key employees of
the Company.
8
<PAGE> 9
PRICE RANGE OF COMMON STOCK
The Company's Class A Common Stock began trading on Nasdaq under the symbol
"APOL"during the second quarter of 1995 on December 6, 1994. Prior to that date
the Company's Class A Common Stock was not listed or traded on any organized
market system. The table below sets forth for the Company's fiscal quarters the
high and low sales prices, adjusted for stock splits, for the Company's Class A
Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ------ ------
<S> <C> <C>
Second Quarter............................................. $11.31 $ 5.50
Third Quarter.............................................. 19.08 9.63
Fourth Quarter............................................. 23.00 16.17
</TABLE>
<TABLE>
<CAPTION>
1996
----
<S> <C> <C>
First Quarter.............................................. $30.75 $20.00
Second Quarter (through December 26, 1995)................. 38.50 30.00
</TABLE>
On December 26, 1995, the last reported sales price of the Class A Common
Stock was $37.875 per share. At that date, the approximate number of holders of
record of the Company's Class A Common Stock and Class B Common Stock were 93
and 10, respectively. The Company believes that there are a number of other
holders of Class A Common Stock whose shares are held in nominee accounts by
brokers.
There is no established public trading market for the Company's Class B
Common Stock and all shares of the Company's Class B Common Stock are
beneficially owned by the Company's executive officers.
9
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below are qualified by reference to and should be read
in conjunction with the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The following selected Balance Sheet Data
of the Company as of August 31, 1991, 1992, 1993, 1994 and 1995 and the Income
Statement Data for the five years ended August 31, 1995 are derived from the
consolidated financial statements of the Company audited by Price Waterhouse
LLP, independent accountants. Selected Income Statement and Balance Sheet data
as of November 30, 1994 and 1995 and for the three-month periods then ended have
been derived from unaudited interim financial statements on which Price
Waterhouse LLP has applied limited procedures in accordance with professional
standards for a review of such information. In the opinion of management of the
Company, such unaudited interim financial statements reflect all normal
recurring adjustments necessary for a fair presentation of the results for such
periods. The results for the three months ended November 30, 1995 are not
necessarily indicative of the results for the fiscal year ending August 31,
1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
--------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1994 1995
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues................ $68,782 $81,865 $97,545 $124,720 $163,429 $36,465 $49,727
------- ------- ------- -------- -------- ------- -------
Costs and expenses:
Instruction costs and
services................ 44,398 54,296 65,319 81,313 102,122 23,418 29,959
Selling and promotional... 13,251 14,442 15,812 17,918 21,016 4,987 6,328
General and
administrative.......... 10,232 12,630 14,402 17,194 18,462 3,855 5,595
------- ------- ------- -------- -------- ------- -------
Total costs and
expenses................ 67,881 81,368 95,533 116,425 141,600 32,260 41,882
------- ------- ------- -------- -------- ------- -------
Income before income
taxes(1).................. 901 497 2,012 8,295 21,829 4,205 7,845
Less provision for income
taxes..................... 390 240 869 3,383 9,229 1,661 3,256
------- ------- ------- -------- -------- ------- -------
Income before extraordinary
item and cumulative effect
of change in accounting
principle................. 511 257 1,143 4,912 12,600 2,544 4,589
Extraordinary item(2)....... 351
Change in accounting
principle(3).............. 389
------- ------- ------- -------- -------- ------- -------
Net income.................. $ 862 $ 646 $ 1,143 $ 4,912 $ 12,600 $ 2,544 $ 4,589
======= ======= ======= ======== ======== ======= =======
Net income per share........ $ .06 $ .04 $ .08 $ .32 $ .62 $ .17 $ .20
Weighted average shares
outstanding............... 14,845 14,845 15,136 15,281 20,485 15,281 22,504
</TABLE>
- ---------------
(1) In March 1992, the Company discontinued the operations of Apollo Education
Corporation ("AEC"), its technical training school subsidiary, which was
phased out over the period from March 1992 until October 1992. All assets
related to this subsidiary were disposed of by August 1993. Pretax losses
related to the operations of the technical training schools were $1.3
million, $837,000 and $265,000 in 1991, 1992 and 1993, respectively.
(2) Realization of prior years' U.S. operating losses related to the operations
of the technical training schools.
(3) The Company adopted Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes," effective September 1, 1991.
10
<PAGE> 11
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
------------------------------------------------ ------------------
1991 1992 1993 1994 1995 1994 1995
------- ------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.................. $18,215 $22,369 $28,909 $43,638 $102,132 $47,262 $108,476
Current assets................ 8,763 12,231 18,453 31,893 84,044 34,107 87,544
Current liabilities........... 17,804 20,819 27,086 34,890 45,065 35,670 46,137
Long-term liabilities......... 1,661 2,154 1,203 1,347 1,715 1,646 2,026
Shareholders' equity
(deficit)................... (1,250) (604) 620 7,401 55,352 9,946 60,313
OPERATING STATISTICS:
Enrollments at end of
period(1)................... 17,571 21,163 24,987 30,236 36,848 31,802 40,158
Locations at end of
period(2)................... 35 42 51 60 68 61 78
</TABLE>
- ---------------
(1) Enrollments are defined as full-time equivalent students in attendance in a
program at the end of a period. Average enrollments represent the average of
the ending enrollments for each month in the period. Average enrollments
were 17,071, 20,087, 23,663, 27,469 and 34,021 for the years ended 1991,
1992, 1993, 1994 and 1995, respectively, and were 31,800 and 39,617 for the
three months ended November 30, 1994 and 1995, respectively. Ending and
average enrollments for 1991 include approximately 400 students enrolled at
AEC's technical training schools that were closed in 1992. Average
enrollments for 1992 include approximately 200 AEC students.
(2) Includes UOP and WIU campuses and learning centers and IPD contract sites.
Also includes two AEC sites in 1991.
The Company did not pay any cash dividends on its Common Stock during any
of the periods set forth in the table above.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND AND OVERVIEW
The Company's revenues, net of student discounts, have increased from $68.8
million in 1991 to $163.4 million in 1995. Average annual student enrollments
have increased from 17,071 in 1991 to 34,021 in 1995. Net income has increased
from $862,000 in 1991 to $12.6 million in 1995. At November 30, 1995, 40,158
students were enrolled at UOP and WIU and in IPD-assisted programs at IPD client
institutions. Average annual student enrollments increased from 31,800 during
the three months ended November 30, 1994 to 39,617 for the three months ended
November 30, 1995. Net income for the same period increased from $2.5 million to
$4.6 million.
From September 1990 to November 1995, the Company added 46 campuses and
learning centers. Startup costs in new markets for UOP campuses have averaged
from $200,000 to $400,000 per site over a 15-18 month period. Startup costs in
existing markets have been minimal on a per site basis. Historically, UOP has
been able to establish an enrollment base prior to opening new campuses and
learning centers in existing markets by holding classes in employers' offices
and conference facilities, or through its distance education delivery systems.
Startup costs for IPD contract sites have averaged from $400,000 to $500,000 per
site over a 15-24 month period, and consist primarily of administrative
salaries, marketing and advertising. Startup costs are expensed as incurred.
Approximately 90% of the Company's net revenues in 1995 consisted of
tuition revenues from UOP students and IPD's contractual share of tuition
revenues from students enrolled in IPD-assisted programs at IPD client
institutions. UOP tuition revenues currently represent approximately 84% of
consolidated tuition revenues. The Company's net revenues also include sales of
textbooks, computers and other education-related products, application fees,
other student fees, interest income and other income. The Company's net revenues
vary from period to period based on several factors that include: (1) the
aggregate number of students attending classes; (2) the number of classes held
during the period and (3) the weighted average tuition price per credit hour
(weighted by program and location). IPD's contracts with its respective client
institutions generally have terms of five to ten years with provisions for
renewal.
Instruction costs and services at UOP consist primarily of costs related to
the delivery and administration of the Company's educational programs that
include faculty compensation, administrative salaries for departments that
provide service directly to the students, the costs of educational materials
sold, facility leases and other occupancy costs, amortization of educational
program production costs, bad debt expense and depreciation and amortization of
property and equipment. UOP faculty members are contracted with and paid for one
course offering at a time. All classroom facilities are leased or, in some
cases, are provided by the students' employers at no charge to the Company.
Instruction costs and services at IPD consist primarily of program
administration, student services and classroom lease expense. Most of the other
instruction costs for IPD-assisted programs, including faculty, financial aid
processing and other administrative salaries, are the responsibility of the IPD
client institutions.
Selling and promotional costs for UOP and IPD consist primarily of
advertising, marketing salaries and other costs related to the selling and
promotional functions. These costs are expensed as incurred. General and
administrative costs consist primarily of administrative salaries, occupancy
costs, depreciation and amortization and other related costs for departments
such as executive management, information systems, corporate accounting, human
resources and other departments that do not provide direct services to the
Company's students. To the extent possible, the Company centralizes these
services to avoid duplication of effort.
WIU acquired the assets of Western in September 1995. WIU is a regionally
accredited, private institution of higher education with enrollments of
approximately 1,000 at four campuses and learning centers located in Phoenix,
Fort Huachuca and Douglas, Arizona and through Thames Lea College in London,
England.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data of the
Company expressed as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
---------------------------- -----------------
1993 1994 1995 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Costs and expenses:
Instruction costs and services.............. 67.0 65.2 62.5 64.2 60.2
Selling and promotional..................... 16.2 14.4 12.9 13.7 12.7
General and administrative.................. 14.7 13.8 11.3 10.6 11.3
----- ----- ----- ----- -----
Total costs and expenses.................... 97.9 93.4 86.7 88.5 84.2
----- ----- ----- ----- -----
Income before income taxes.................... 2.1 6.6 13.3 11.5 15.8
Less provision for income taxes............... .9 2.7 5.6 4.6 6.5
----- ----- ----- ----- -----
Net income.................................... 1.2% 3.9% 7.7% 6.9% 9.3%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED NOVEMBER 30, 1994 COMPARED WITH THREE MONTHS ENDED
NOVEMBER 30, 1995
Net revenues increased by 36.4% from $36.5 million for the three months
ended November 30, 1994 to $49.7 million for the three months ended November 30,
1995 due primarily to a 24.6% increase in average student enrollments from 1994
to 1995, tuition price increases averaging five to six percent, a higher
concentration of enrollments at locations that charge a higher rate per credit
hour and the acquisition of WIU. All UOP campuses, which include their
respective learning centers, and most of the IPD contract sites had increases in
net revenues and average student enrollments from 1994 to 1995. Average student
enrollments increased from 31,800 for the three months ended November 30, 1994
to 39,617 for the three months ended November 30, 1995. Ending student
enrollments at November 30, 1994 and 1995 were 31,802 and 40,158, respectively.
WIU had average student enrollments of 1,005 and revenues of $1.1 million for
the three months ended November 30, 1995. Interest income, which is included in
net revenues, increased from $141,000 for the three months ended November 30,
1994 to $745,000 for the three months ended November 30, 1995 due primarily to
increased cash generated from the Company's initial public offering of its Class
A Common Stock and from cash generated from operations.
Instruction costs and services increased by 27.9% from $23.4 million for
the three months ended November 30, 1994 to $30.0 million for the three months
ended November 30, 1995 due primarily to the direct costs necessary to support
the increase in average student enrollments. These costs consisted primarily of
faculty compensation, classroom lease expenses and related staff salaries. These
costs as a percentage of net revenues decreased from 64.2% for the three months
ended November 30, 1994 to 60.2% for the three months ended November 30, 1995
due to greater net revenues being spread over the fixed costs related to
centralized student services.
Selling and promotional expenses increased by 26.9% from $5.0 million for
the three months ended November 30, 1994 to $6.3 million for the three months
ended November 30, 1995 due primarily to increased marketing and advertising at
campuses and learning centers. These expenses as a percentage of net revenues
decreased from 13.7% for the three months ended November 30, 1994 to 12.7% for
the three months ended November 30, 1995 due to the Company's ability to
increase enrollments and open new learning centers in existing markets with a
proportionately lower increase in selling and promotional expenses. As the
Company expands into new markets, it may not be able to leverage its existing
selling and promotional expenses to the same extent.
General and administrative expenses increased by 45.1% from $3.9 million
for the three months ended November 30, 1994 to $5.6 million for the three
months ended November 30, 1995 due primarily to increased costs required to
support the increased number of campuses and learning centers and increases in
administrative compensation. These expenses as a percentage of net revenues
increased from 10.6% for the three months ended November 30, 1994 to 11.3% for
the three months ended November 30, 1995 due primarily to the
13
<PAGE> 14
overall growth of the Company in 1995. These expenses as a percentage of net
revenues were 11.3% for the fiscal year ended August 31, 1995.
Costs related to the startup of new UOP and IPD campuses and learning
centers are expensed as incurred and totaled approximately $300,000 for the
three months ended November 30, 1994 and $680,000 for the three months ended
November 30, 1995. Interest expense, which is allocated among all categories of
costs and expenses, was less than $20,000 for the three months ended November
30, 1994 and 1995.
The Company's effective tax rate increased from 39.5% for the three months
ended November 30, 1994 to 41.5% for the three months ended November 30, 1995.
The increase is due primarily to an increase in the federal tax rate from 34% to
35% as a result of the improved earnings and to the relative impact of expenses
that are nondeductible for tax purposes.
Net income increased by 80.4% from $2.5 million for the three months ended
November 30, 1994 to $4.6 million for the three months ended November 30, 1995
due primarily to increased enrollments, increased tuition rates (weighted by
location) and improved utilization of fixed instruction costs and selling and
promotional expenses in existing markets.
YEAR ENDED AUGUST 31, 1994 COMPARED WITH YEAR ENDED AUGUST 31, 1995
Net revenues increased by 31.0% from $124.7 million in 1994 to $163.4
million in 1995 due primarily to a 23.9% increase in average student enrollments
from 1994 to 1995 and tuition price increases averaging four to six percent,
depending on the geographic area and program. All UOP campuses, which include
their respective learning centers, and most of the IPD contract sites had
increases in net revenues and average student enrollments from 1994 to 1995.
Average student enrollments increased from 27,469 in 1994 to 34,021 in 1995.
Interest income, which is included in net revenues, increased from $280,000 in
1994 to $2.4 million in 1995 due primarily to increased cash generated from the
Company's initial public offering of its Class A Common Stock and to $22.3
million in cash generated from operations in 1995.
Instruction costs and services increased by 25.6% from $81.3 million in
1994 to $102.1 million in 1995 due primarily to the direct costs necessary to
support the increase in average student enrollments. These costs as a percentage
of net revenues decreased from 65.2% in 1994 to 62.5% in 1995 due to greater net
revenues being spread over the fixed costs related to centralized student
services.
Selling and promotional expenses increased by 17.3% from $17.9 million in
1994 to $21.0 million in 1995 due primarily to increased marketing and
advertising at UOP and IPD campuses and learning centers, including $1.2 million
related to locations opened in new markets during the past two years. These
expenses as a percentage of net revenues decreased from 14.4% in 1994 to 12.9%
in 1995 due to the Company's ability to increase enrollments and open new
learning centers in existing markets with a proportionately lower increase in
selling and promotional expenses. As the Company expands into new markets, it
may not be able to leverage its existing selling and promotional expenses to the
same extent.
General and administrative expenses increased by 7.4% from $17.2 million in
1994 to $18.5 million in 1995 due primarily to costs required to support the
increased number of UOP and IPD campuses and learning centers and increases in
general and administrative salaries. This increase was offset in part by $1.9
million in nonrecurring compensation expense in 1994 related to the issuance of
stock options and a $750,000 accrual of compensation expense in 1994 related to
a deferred compensation agreement with the Company's President. General and
administrative expenses include a $135,000 and $104,000 writedown of land held
for sale in 1994 and 1995, respectively. General and administrative expenses as
a percentage of net revenues decreased from 13.8% in 1994 to 11.3% in 1995 due
primarily to the nonrecurring compensation expense recorded in 1994 and larger
net revenues being spread over the fixed costs related to various centralized
functions such as information services, corporate accounting and human
resources.
Costs related to the start up of new UOP and IPD campuses and learning
centers are expensed as incurred and totaled approximately $1.0 million and $1.1
million in 1994 and 1995, respectively. Interest expense, which is allocated
among all categories of costs and expenses, was $153,000 and $96,000 in 1994 and
1995, respectively.
14
<PAGE> 15
The Company's effective tax rate increased from 40.8% in 1994 to 42.3% in
1995 due primarily to an increase in the federal tax rate from 34% to 35% as a
result of the improved earnings and to the relative impact of expenses that are
nondeductible for tax purposes.
Net income increased from $4.9 million in 1994 to $12.6 million in 1995 due
to increased enrollments, increased tuition rates, improved utilization of fixed
instructional and administrative costs, $2.7 million (pretax) of nonrecurring
compensation expense in 1994, improved utilization of selling and promotional
expenses in existing markets and increased interest income resulting from higher
cash levels.
YEAR ENDED AUGUST 31, 1993 COMPARED WITH YEAR ENDED AUGUST 31, 1994
Net revenues increased by 27.9% from $97.5 million in 1993 to $124.7
million in 1994 due primarily to a 16.1% increase in average student enrollments
from 1993 to 1994, a higher concentration of enrollments at locations that
charge a higher rate per credit hour and tuition price increases averaging four
to six percent, depending on the geographic area and program. All UOP campuses,
which include their respective learning centers, and substantially all of the
IPD contract sites had increases in net revenues and average student enrollments
from 1993 to 1994. Average student enrollments increased from 23,663 in 1993 to
27,469 in 1994.
Instruction costs and services increased by 24.5% from $65.3 million in
1993 to $81.3 million in 1994 due primarily to the direct costs necessary to
support the increase in average student enrollments. These costs as a percentage
of net revenues decreased from 67.0% in 1993 to 65.2% in 1994 due to greater net
revenues being spread over the fixed costs related to centralized student
services and, to a lesser degree, due to efficiencies resulting from
improvements to the Company's information systems.
Selling and promotional expenses increased by 13.3% from $15.8 million in
1993 to $17.9 million in 1994 due primarily to increased marketing and
advertising at UOP and IPD campuses and learning centers, including $678,000
related to locations opened in new markets during the past two years. These
expenses as a percentage of net revenues decreased from 16.2% in 1993 to 14.4%
in 1994 due to the Company's ability to increase enrollments and open new
learning centers in existing markets with a proportionately lower increase in
selling and promotional expenses.
General and administrative expenses increased by 19.4% from $14.4 million
in 1993 to $17.2 million in 1994 due primarily to increases in general and
administrative salaries, including $1.9 million in compensation expense related
to the grant of stock options and a $750,000 accrual of compensation expense
related to the deferred compensation agreement with the Company's President.
These expenses as a percentage of net revenues decreased from 14.7% in 1993 to
13.8% in 1994 due to larger net revenues being spread over the fixed costs
related to various centralized functions such as information services, corporate
accounting and human resources. In 1993, the Company recorded a $638,000
writedown related to land held for sale. As a result of further declines in
Northern California real estate values, the Company recorded an additional
$135,000 writedown in 1994.
Costs related to the start up of new UOP and IPD campuses and learning
centers totaled approximately $742,000 and $1.0 million in 1993 and 1994,
respectively. Interest expense, which is allocated among all categories of costs
and expenses, decreased from $255,000 in 1993 to $153,000 in 1994 primarily as a
result of improved cash flow resulting in a reduction of long-term debt and
lower seasonal borrowings on the Company's line of credit.
The Company's effective tax rate decreased from 43.2% in 1993 to 40.8% in
1994 due primarily to the relative impact of expenses that are nondeductible for
tax purposes.
Net income increased from $1.1 million in 1993 to $4.9 million in 1994 due
to increased enrollments, increased tuition rates (weighted by location),
improved utilization of fixed instructional and administrative costs and
improved utilization of selling and promotional expenses in existing markets.
15
<PAGE> 16
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial
information for each of the Company's last nine quarters. The Company believes
that this information includes all normal recurring adjustments necessary for a
fair presentation of such quarterly information when read in conjunction with
the consolidated financial statements included herein. The operating results for
any quarter are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
FY 1994 FY 1995 FY 1996
------------------------------------------ ----------------------------------------- -------
NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30,
1993 1994 1994 1994 1994 1995 1995 1995 1995
-------- -------- ------- -------- -------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IN DOLLARS:
Net revenues.................... $27,816 $26,953 $34,278 $35,673 $36,465 $36,029 $45,502 $45,433 $49,727
------- ------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Instruction costs and
services.................... 18,073 18,502 21,163 23,575 23,418 24,224 26,188 28,292 29,959
Selling and promotional....... 4,112 4,468 4,311 5,027 4,987 5,105 5,518 5,406 6,328
General and administrative.... 3,184 4,910 (1) 4,921 (2) 4,179 3,855 4,954 4,856 4,797 5,595
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses...... 25,369 27,880 30,395 32,781 32,260 34,283 36,562 38,495 41,882
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 2,447 (927 ) 3,883 2,892 4,205 1,746 8,940 6,938 7,845
Provision (credit) for income
taxes......................... 1,002 (381 ) 1,572 1,190 1,661 896 3,892 2,780 3,256
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $ 1,445 $ (546 ) $2,311 $ 1,702 $ 2,544 $ 850 $5,048 $ 4,158 $4,589
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share..... $ .10 $ (.04 ) $ .15 $ .11 $ .17 $ .04 $ .22 $ .19 $ .20
======= ======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUES:
Net revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Instruction costs and
services.................... 65.0 68.6 61.7 (3) 66.1 64.2 67.2 57.6 (3) 62.3 60.2
Selling and promotional....... 14.8 16.6 12.6 14.1 13.7 14.1 12.1 12.0 12.7
General and administrative.... 11.4 18.2 (1) 14.4 (2) 11.7 10.6 13.8 10.7 10.4 11.3
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses...... 91.2 103.4 88.7 91.9 88.5 95.1 80.4 84.7 84.2
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 8.8 (3.4 ) 11.3 8.1 11.5 4.9 19.6 15.3 15.8
Provision (credit) for income
taxes......................... 3.6 (1.4 ) 4.6 3.3 4.6 2.5 8.6 6.1 6.5
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............... 5.2% (2.0 )% 6.7% 4.8% 6.9% 2.4% 11.0% 9.2% 9.3%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes a $750,000 accrual of compensation expense related to the December
1993 deferred compensation agreement with the Company's President.
(2) Includes $1.9 million in compensation expense related to the grant of stock
options.
(3) The favorable margin realized in the third quarters of 1994 and 1995 is due
primarily to a significant increase in revenues with no significant increase
in the fixed costs related to centralized student services. The favorable
margin did not continue to the same extent in the fourth quarters of 1994
and 1995 because of the normal increase in instructional costs and services
in preparation for the August peak enrollments. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations -- Seasonality."
16
<PAGE> 17
SEASONALITY
The Company experiences seasonality in its results of operations primarily
as a result of changes in the level of student enrollments. While the Company
enrolls students throughout the year, second quarter (December to February)
average enrollments and related revenues generally are lower than other quarters
due to the holiday breaks in December and January. Second quarter costs and
expenses historically increase as a percentage of net revenues as a result of
certain fixed costs not significantly affected by the seasonal second quarter
declines in net revenues. The Company experiences a seasonal increase in new
enrollments in August of each year when most other colleges and universities
begin their fall semesters. As a result, instruction costs and services and
selling and promotional expenses historically increase as a percentage of net
revenues in the fourth quarter due to increased costs in preparation for the
August peak enrollments. The increased costs result in accounts payable levels
being higher in August than any other month in the year. The Company anticipates
that these seasonal trends in the second and fourth quarters will continue in
the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $39.0 million at August 31,
1995 to $41.4 million at November 30, 1995 due primarily to the $4.8 million in
cash generated from operations during the three months ended November 30, 1995,
offset in part by capital expenditures and the acquisition of the assets of
Western. In conjunction with the acquisition, WIU paid Western $237,000 in cash
and assumed $1.8 million in liabilities. The liability consisted of $1.3 million
of current liabilities, $393,000 of which was paid on the acquisition date, and
$503,000 of long-term debt. At November 30, 1995, the Company had no outstanding
borrowings on its $4.0 million line of credit, which bears interest at prime.
The line of credit is renewable annually and is payable upon its termination in
February 1996. The Company expects to renew this line of credit.
Net cash flow received from operating activities increased by $15.8 million
from fiscal 1994 to fiscal 1995 due primarily to the $7.7 million increase in
net income during the same period, improved collections of accounts receivable
and the timing of various tax payments and payments to suppliers. Net cash flow
received from operating activities increased by $3.0 million from the three
months ended November 30, 1994 to the three months ended November 30, 1995 due
primarily to a $2.0 million increase in net income. Capital expenditures,
including additions to educational program production costs, increased from $6.1
million for fiscal 1994 to $11.5 million for fiscal 1995 primarily to support
the increase in student enrollments and number of locations. Total purchases of
property and equipment for the year ended August 31, 1996 are expected to total
approximately $12.0 million. Additions to educational program production costs
are not expected to exceed $2.0 million for the year ended August 31, 1996.
Start up costs are expected to increase from $1.1 million in fiscal 1995 to
approximately $3.5 million for fiscal 1996 due to planned expansion into new
geographic markets.
The lease on the Company's corporate headquarters, which includes the UOP
Phoenix Main Campus, was renewed in December 1995 for another five year term. In
December 1995, the Company acquired land for a purchase price of $2.9 million
which it may use in the future for the possible relocation of its corporate
headquarters. The Company does not currently have any material commitments for
any capital expenditures in 1996. The Company currently leases all of its
educational and administrative facilities.
The Company's net receivables as a percent of net revenues decreased from
11.4% in fiscal 1994 to 9.7% in fiscal 1995 and bad debt expense as a percent of
net revenues decreased from 1.5% in fiscal 1994 to 1.1% in fiscal 1995. These
decreases are due primarily to an increased focus on accounts receivable
collections in 1995.
The DOE requires that Title IV Program funds collected by an institution
for unbilled tuition be kept in a separate cash or cash equivalent account until
the students are billed for the portion of their program related to these Title
IV Program funds. In addition, all funds transferred to the Company through
electronic funds transfer programs are held in a separate cash account until
certain conditions are satisfied. As of November 30, 1995, the Company had
approximately $10.8 million in these separate accounts, which are reflected as
restricted cash, to comply with these requirements. These funds generally remain
in these separate accounts for an average of 60-75 days from the date of
collection. These restrictions on cash have not significantly affected the
Company's ability to fund daily operations.
17
<PAGE> 18
The Regulations require all higher education institutions to meet an acid
test ratio (defined as the ratio of cash, cash equivalents, restricted cash and
current accounts receivable to total current liabilities) of at least 1 to 1,
which is calculated at the end of the institution's fiscal year. If an
institution, including UOP or WIU, fails to meet the acid test ratio, it may be
deemed not financially responsible by the DOE, which could result in a loss of
its eligibility to participate in Title IV Programs. UOP's acid test ratio was
1.16 to 1 at August 31, 1994 and 1.31 to 1 at August 31, 1995. WIU's acid test
ratio was 2.73 to 1 on September 1, 1995. These requirements apply to the
separate financial statements of UOP, WIU and to each of the respective IPD
client institutions, but not to the Company's consolidated financial statements.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
18
<PAGE> 19
BUSINESS
OVERVIEW
Apollo Group, Inc. ("Apollo" or the "Company"), through its subsidiaries,
the University of Phoenix, Inc. ("UOP"), the Institute for Professional
Development ("IPD") and Western International University, Inc. ("WIU"), is a
leading provider of higher education programs for working adults based on the
number of working adults enrolled in its programs. The consolidated enrollment
in the Company's educational programs would make it the largest private
institution of higher education in the United States. The Company currently
offers its programs and services at 78 campuses and learning centers in 25
states, Puerto Rico and London, England. The Company's enrollment has increased
from 17,571 at August 31, 1991 to 36,848 at August 31, 1995. At November 30,
1995, the Company's enrollment was 40,158.
Based on its enrollment of over 27,100 adult students at November 30, 1995,
UOP is currently the sixth largest regionally accredited private university in
the United States and has one of the nation's largest private business schools.
UOP has been accredited by the Commission on Institutions of Higher Education of
the North Central Association of Colleges and Schools ("NCA") since 1978 and has
successfully replicated its teaching/learning model while maintaining
educational quality at its 45 campuses and learning centers in Arizona,
California, Colorado, Hawaii, Louisiana, Michigan, Nevada, New Mexico, Utah and
Puerto Rico. To enhance its ability to expand into new markets, UOP has
developed specialized information systems for student tracking, marketing,
faculty recruitment and training, financial aid, accounting and academic quality
management. Currently, approximately 80% of UOP's students receive some level of
tuition reimbursement from their employers, many of which are Fortune 500
companies.
In 1989, UOP established Online(TM), a computerized educational delivery
system, which currently serves approximately 1,400 degree-seeking students.
Online(TM) provides campus-based courses that have been modified for computer
delivery. Online(TM) enables the Company to deliver educational programs and
services internationally wherever there is access to adequate telephone service,
CompuServe(R) or the Internet. The Online(TM) faculty receive specialized
training to enable them to teach effectively in the electronic learning
environment. The same academic quality management standards applied to campus-
based programs, including the assessment of student learning outcomes, are
applied to programs delivered through Online(TM).
IPD provides program development and management services under long-term
contracts (five to ten years) that meet the guidelines of the client
institutions' respective regional accrediting associations. IPD provides these
services to 15 regionally accredited private colleges and universities at 29
campuses and learning centers in 16 states and shares in the tuition revenues
generated from these programs. IPD is able to assist these colleges and
universities in expanding and diversifying their programs for working adults.
IPD places a priority on institutions that: (1) are interested in developing or
expanding off-campus degree programs for working adults; (2) recognize that
working adults require a different teaching/learning model than the 18 to 24
year old student; (3) desire to increase enrollments with a limited investment
in institutional capital and (4) recognize the unmet educational needs of the
working adult students in their market. Approximately 12,000 students are
currently enrolled in IPD-assisted programs.
WIU acquired the assets of Western in September 1995. WIU is a regionally
accredited, private institution of higher education with enrollments of
approximately 1,000 at four campuses and learning centers located in Phoenix,
Fort Huachuca and Douglas, Arizona and through Thames Lea College in London,
England.
The Company was incorporated in Arizona in 1981 and maintains its principal
executive offices at 4615 East Elwood Street, Phoenix, Arizona 85040. The
Company's telephone number is (602) 966-5394. The Company's Internet Web Site
address is "http://www.apollogrp.com."
19
<PAGE> 20
MARKET
The United States education market may be divided into three distinct
segments: kindergarten through twelfth grade schools, vocational and technical
training schools, and degree-granting colleges and universities ("higher
education"). The Company currently operates in the higher education segment. The
U.S. Department of Education National Center for Education Statistics ("NCES")
estimated that for 1993 (the most recent historical year reported), adults over
24 years of age comprised approximately 6.5 million, or 44%, of the 14.8 million
students enrolled in higher education programs. Currently, the U.S. Bureau of
Census estimates that 70-75% of students over the age of 24 work while attending
school. The demand for higher education from working adults results from the
increasing skills required by employers and from a recognition by working adults
of the value of an earned degree for career advancement and change.
The Company believes that the unique needs of working adults include the
following:
- Convenient access to a learning environment (including both location and
delivery system)
- Degree programs offered by regionally accredited institutions that can be
completed in a reasonable amount of time
- Programs that provide knowledge and skills with immediate practical value
in the workplace
- Education provided by an academically qualified faculty with current
practical experience in fields related to the subjects they instruct
- Administrative services designed to accommodate the full-time working
adult's schedule
- Recognition of adult students as critical consumers of educational
programs and services
- A learning environment characterized by a low student-to-faculty ratio
- Learning resources available electronically to all students regardless of
geographical location
The Company also believes that the demand from and the unique requirements
of the working adult population represent a significant market opportunity to
regionally accredited higher education institutions that can offer programs that
meet these unique needs.
Most regionally accredited colleges and universities are focused on serving
the 18 to 24 year old student market. This focus has resulted in a
capital-intensive teaching/learning model that may be characterized by: (1) a
high percentage of full-time tenured faculty with doctoral degrees; (2)
fully-configured library facilities and related full-time staff; (3)
dormitories, student unions and other significant plant assets to support the
needs of younger students and (4) an emphasis on research and the related staff
and facilities.
In addition, the majority of accredited colleges and universities continue
to provide the bulk of their educational programming from September to
mid-December and from mid-January to May. As a result, most full-time faculty
members only teach during that limited period of time. While this structure
serves the needs of the full-time 18 to 24 year old student, it limits the
educational opportunity for working adults who must delay their education for up
to five months during these spring, summer and winter breaks. In addition, this
structure generally requires working adults to attend one course three times a
week, commute to a central site, take work time to complete administrative
requirements and, in undergraduate programs, participate passively in an almost
exclusively lecture-based learning format primarily focused on a theoretical
presentation of the subject matter. For the majority of working adults, earning
an undergraduate degree in this manner would take seven to ten years.
BUSINESS AND GROWTH STRATEGY
The Company's strategic goal is to become the preferred provider of higher
education programs for working adult students. The Company is managed as a
for-profit corporation in an industry served principally
20
<PAGE> 21
by not-for-profit providers. By design, the Company treats both its adult
students and their employers as customers. Key elements of the Company's
business and growth strategy include the following:
ESTABLISH NEW UOP CAMPUSES AND LEARNING CENTERS. UOP plans to add campuses
and learning centers throughout the United States. During the past three years,
the Company has opened an average of nine campuses and learning centers each
year. New locations are selected based on an analysis of various factors,
including the general population of working adults in the area, the number of
local employers and their educational reimbursement policies and the
availability of similar programs offered by other institutions. Campuses consist
of classroom and administrative facilities with full student and administrative
services. Learning centers differ from campuses in that they consist primarily
of classroom facilities with limited on-site administrative staff.
ESTABLISH NEW IPD RELATIONSHIPS. IPD plans to enter into additional
long-term contracts with private colleges and universities in proximity to
metropolitan areas throughout the United States. In general, IPD seeks to
establish relationships with colleges and universities located in states where
it is difficult for out-of-state accredited institutions to obtain state
authorizations. In this way, the Company is able to optimize its campus-based
penetration of potential new markets.
EXPAND DEGREE PROGRAMS. The Company expects to continue to respond to the
changing educational needs of working adults through the introduction of new
undergraduate and graduate degree programs. The Company also is investigating
the market potential for professional doctoral degree programs and
specializations. The Company currently has a full-time staff of over 20 persons
involved in its centralized curriculum development process.
EXPAND DISTANCE EDUCATION PROGRAMS. The Company plans to expand its
distance education programs and services. In 1994, the Company successfully
completed its connection to the Internet, thereby making the Company's programs
more readily available throughout the United States and worldwide. The Company
also plans to enhance its distance education delivery systems as new
technologies become cost-effective.
ESTABLISH CORPORATE PARTNERSHIPS. The Company seeks to establish
educational partnerships with major corporations to provide training and degree
programs to their employees both on site and at the Company's campuses and
learning centers. To meet the unique learning needs of its different partners,
the Company modifies its existing programs or, in some cases, develops
customized programs. The Company believes that the establishment of corporate
partnerships is an effective way to enhance the products and services offered to
its customers. The Company recently entered into educational partnerships with
AT&T and Ingram Micro, Inc.
INTERNATIONAL EXPANSION. The Company monitors and assesses the feasibility
of providing its educational programs internationally and has conducted market
research in various foreign countries, including Hungary, Japan, Costa Rica and
Mexico. The Company currently offers its programs to international students
through Online(TM) and WIU.
The timing related to the establishment of new locations and the expansion
of programs may vary depending on regulatory requirements and market conditions.
HISTORICAL ENROLLMENTS IN THE COMPANY'S FIVE LARGEST MARKETS
In addition to opening campuses in new markets, the Company's growth also
has resulted from increased enrollments in its existing markets. The table below
sets forth a summary of enrollments in the Company's five largest markets over
the last five years.
<TABLE>
<CAPTION>
AT AUGUST 31,
--------------------------------------
MARKET 1991 1992 1993 1994 1995
- ----------------------------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Southern California........................................ 2,284 2,895 3,988 5,218 6,466
Arizona.................................................... 3,207 4,059 4,632 5,023 5,559
Northern California........................................ 709 1,001 1,477 2,429 3,586
Colorado................................................... 1,386 1,608 1,697 2,005 2,661
Distance Education......................................... 1,252 1,655 1,114 1,618 2,366
</TABLE>
21
<PAGE> 22
TEACHING/LEARNING MODEL
The Company's teaching/learning model used by UOP and IPD client
institutions was designed for working adults. This model is structured to enable
students who are employed full-time to earn their degrees and still meet their
personal and professional responsibilities. Students attend weekly classes,
averaging 15 students in size, and also meet weekly as part of a three to five
person study group. The study group meetings are used for review, work on
assigned group projects and preparation for in-class presentations. Courses are
designed to facilitate the application of knowledge and skills to the workplace
and are taught by faculty members who possess advanced degrees and have an
average of 16 years of professional experience in business, industry, government
and the professions. In this way, faculty members are able to share their
professional knowledge and skills with the students.
The Company's teaching/learning model has the following major
characteristics:
<TABLE>
<S> <C>
CURRICULUM The curriculum provides for the achievement of specific
educational outcomes that are based on the input from faculty,
students and student employers. The curriculum is designed to
integrate academic theory and professional practice and their
application to the workplace. The standardized curriculum for each
degree program is also designed to provide students with specified
levels of knowledge and skills regardless of delivery method or
location.
FACULTY Faculty applicants must possess an earned masters or doctoral
degree, and have a minimum of five years recent professional
experience in a field related to the subject matter in which they
seek to instruct. To help promote quality delivery of the
curriculum, UOP faculty members are required to: (1) complete an
initial assessment conducted by staff and faculty; (2) receive
training in grading, facilitation of the teaching/learning model
and oversight of study group activities; (3) serve an internship
with an experienced faculty mentor and (4) receive ongoing
performance evaluations by students, peer faculty and staff. The
results of these evaluations are used to establish developmental
plans to improve individual faculty performance and to determine
continued eligibility of faculty members to provide instruction.
INTERACTIVE LEARNING Courses are designed to combine individual and group activity with
interaction between and among students and the instructor. The
curriculum requires a high level of student participation for
purposes of increasing the student's ability to work as part of a
team.
LEARNING RESOURCES Students and faculty members are provided with electronic and
other learning resources for their information needs. During 1995,
the Company expanded these services and provided additional access
through a connection to the Internet. This minimizes the need for
capital-intensive library facilities and holdings.
SEQUENTIAL ENROLLMENT Students enroll in and complete courses sequentially, rather than
concurrently, thereby allowing full-time working adults to focus
their attention and resources on one subject at a time, thus
balancing learning with ongoing personal and professional
responsibilities.
ACADEMIC QUALITY The Company has developed and operationalized an Academic Quality
Management System ("AQMS") that is designed to maintain and
improve the quality of programs and academic and student services
regardless of the delivery method or location. Included in the
AQMS is the Adult Learning Outcomes Assessment which seeks to
measure student growth in both the cognitive (subject matter) and
affective (educational, personal and professional values) domains.
</TABLE>
22
<PAGE> 23
STRUCTURAL COMPONENTS OF TEACHING/LEARNING MODEL
Although adults over 24 currently comprise approximately 44% of all higher
education enrollments in the United States, the mission of many accredited
colleges and universities is to serve 18 to 24 year old students and conduct
research. UOP and IPD client institutions acknowledge the differences in
educational needs between older and younger students and provide programs and
services that allow working adult students to earn their degrees while
integrating the process with both their personal and professional lives.
The Company believes that working adults require a different
teaching/learning model than that designed for the 18 to 24 year old student.
The Company has found that working adults seek accessibility, curriculum
consistency, time and cost effectiveness and learning that has an immediate
application to the workplace. The Company's teaching/learning model differs from
the models used by most regionally accredited colleges and universities because
it is designed to enable adults to complete an undergraduate degree in four
years and a graduate degree in two years while working full-time.
The structural components of the Company's teaching/learning model include:
<TABLE>
<S> <C>
ACCESSIBILITY Centrally developed standardized curricula that can be accessed
through a variety of delivery methods (e.g., campus-based or
electronically delivered), that make the educational programs
accessible regardless of where the students work and live.
INSTRUCTIONAL COSTS While the faculty at most accredited colleges and universities are
employed full-time, UOP's and IPD client institutions' part-time
faculty are academically qualified, professionally employed and
are contracted for instructional services on a course-by-course
basis. This policy keeps a portion of the cost of instruction
variable.
FACILITY COSTS The Company leases its campus and learning center facilities and
rents additional classroom space on a short-term basis to
accommodate growth in enrollments, thus keeping a portion of its
instructional costs variable.
EMPLOYED STUDENTS UOP's students are employed full-time and approximately 74% have
been employed for nine years or more. This minimizes the need for
capital-intensive facilities and services (e.g., dormitories,
student unions, food services, personal and employment counseling,
health care, sports and entertainment).
EMPLOYER SUPPORT Approximately 80% of UOP's students currently receive some level
of tuition reimbursement from their employers, many of which are
Fortune 500 companies. The Company develops relationships with key
employers for purposes of recruiting students and responding to
specific employer needs. This allows the Company to remain
sensitive to the needs and perceptions of employers, while helping
both to generate and sustain diverse sources of revenues.
</TABLE>
23
<PAGE> 24
PROGRAMS AND SERVICES
UOP PROGRAMS. UOP currently offers the following degree programs, areas of
specialization and certificate programs at one or more campuses and learning
centers or through its distance education delivery systems:
DEGREE PROGRAMS WITH RELATED MAJORS
- ------------------------------------------------------
ASSOCIATE OF ARTS IN BUSINESS
BACHELOR OF ARTS IN MANAGEMENT
BACHELOR OF SCIENCE IN BUSINESS
Accounting
Administration
Information Systems
Management
BACHELOR OF SCIENCE IN NURSING
MASTER OF ARTS IN EDUCATION
MASTER OF ARTS IN ORGANIZATIONAL MANAGEMENT
MASTER OF BUSINESS ADMINISTRATION
Technology Management
MASTER OF COUNSELING
Marriage, Family and Child Therapy
Community Counseling
Mental Health Counseling
MASTER OF NURSING
MASTER OF SCIENCE IN COMPUTER INFORMATION SYSTEMS
AREAS OF SPECIALIZATION AVAILABLE
IN CERTAIN DEGREE PROGRAMS
- ------------------------------------------------------
BUSINESS
Environmental Management
Finance
Industrial Relations
Marketing
Operations Management
Technical Management
EDUCATION
Administration and Supervision
Diverse Learner
Educational Counseling
NURSING
Management
Education
Women's Health Nurse Practitioner
CERTIFICATE PROGRAMS, CUSTOM TRAINING AND CONTINUING EDUCATION
- ------------------------------------------------------
Alternative Dispute Resolution
Art of Negotiation
Authorized Certified Novell Administrator (CNA)
Authorized Certified Novell Engineer (CNE)
Bilingual -- Bicultural
Business and the Environment
Configuration Management
Conflict Resolution
Curriculum
Elementary Certification
English as a Second Language
Export Management
Foreign Languages
Global Management
Government Contract Management
Human Resource Management
Human Resources Professional Development
International Management
Introduction to the Internet
Management and Leadership
Marketing Management
Materials Management
Multidisciplinary Studies
OB/GYN Nurse Practitioner
OSHA Regulatory Compliance
Post Baccalaureate Teacher Education
Professional Development for Educators
Professional Sales Skills
Purchasing
Risk Management
Sales Management
School Guidance Counselor
School Nurse
Secondary Methodology
Special Education
TQM for Manufacturing
TQM for Service
Graduate level courses are also offered for students' continuing
professional education requirements, including state teacher certification and
state teacher renewal. Undergraduate students may demonstrate and document
college level learning gained from experience through the assessment by faculty
members (according to the guidelines of the Council for Adult and Experiential
Education ("CAEL")) for the potential award of credit. The average number of
credits awarded to UOP undergraduate students who utilized the process between
1991 and 1995 was six credits of the 120 required to graduate. Approximately 70%
of these credits were attributable to professional and nonregionally accredited
course work. CAEL reports that over 1,300 regionally accredited colleges and
universities currently provide for the assessment mechanism of college level
learning gained through experience for the award of credit.
24
<PAGE> 25
IPD SERVICES. IPD offers services to its client institutions including:
(1) assisting with curriculum development; (2) conducting market research; (3)
developing and executing marketing strategies; (4) training faculty; (5)
establishing administrative infrastructures; (6) developing and implementing
financial accounting and academic quality management systems; (7) assessing the
future needs of adult students and (8) helping develop additional degree
programs suitable for the adult higher education market. In consideration for
its services, IPD receives a contractual share of tuition revenues from students
enrolled in IPD-assisted programs.
IPD also assists its client institutions in identifying and developing new
degree programs and in seeking the required approvals from their respective
regional accrediting associations. In order to facilitate the sharing of
information related to the operations of their respective programs, UOP and the
IPD client institutions formed the Consortium for the Advancement of Adult
Higher Education ("CAAHE"). CAAHE meets semiannually to address issues such as
the recruitment and training of part-time, professionally employed faculty,
employer input in the curriculum development process, assessment of the learning
outcomes of adult students and regulatory issues affecting the operation of
programs for working adult students.
IPD client institutions offer the following programs with IPD assistance:
<TABLE>
<CAPTION>
NUMBER OF IPD
DEGREE PROGRAMS CLIENT INSTITUTIONS
-------------------------------------------------------- --------------------
<S> <C>
Associate of Arts in General Studies.................... 1
Associate of Arts in Liberal Arts....................... 1
Associate of Science in Business........................ 5
Bachelor of Business Administration..................... 8
Bachelor of Science in Business Administration.......... 4
Bachelor of Science in Nursing.......................... 1
Bachelor of Science in Management....................... 7
Bachelor of Science in Human Resources Management....... 1
Bachelor of Science in Organizational Leadership........ 1
Bachelor of Science in Supervision and Leadership....... 1
Master of Business Administration....................... 7
Master of Science in Management......................... 4
Master of Science in Health............................. 1
Master of Arts in Education............................. 2
</TABLE>
The IPD-assisted programs also include a limited number of general
education courses, certificate programs and areas of specialization.
25
<PAGE> 26
WIU PROGRAMS. WIU currently offers the following degree and certificate
programs:
DEGREE PROGRAMS WITH
RELATED MAJORS
- ------------------------------------------------------
ASSOCIATE OF ARTS IN GENERAL STUDIES
BACHELOR OF SCIENCE
Accounting
Aviation Management
Finance
General Business
Information Systems
International Business
Management
Marketing
BACHELOR OF ARTS
Behavioral Science
General Studies
International Studies
MASTER OF BUSINESS ADMINISTRATION
Finance
Health Care Management
International Business
Management
Management Information Services
Marketing
MASTER OF PUBLIC ADMINISTRATION
MASTER OF SCIENCE
Accounting
Health Care Information Resources Management
Information Services
Information Systems Engineering
ADVANCED CERTIFICATE PROGRAMS
- ------------------------------------------------------
Corporate Management
Finance
International Business
Management Information Systems
Marketing
WIU's teaching/learning model has similar characteristics to the
teaching/learning model used by UOP and IPD client institutions, including the
use of part-time practitioner faculty, standardized curriculum, computerized
learning resources and leased facilities. WIU provides educational programs in a
semester-based format and does not focus exclusively on working adult students.
FACULTY. UOP's faculty is comprised of approximately 3,000 working
professionals with earned masters or doctoral degrees and an average of 16 years
of experience in business, industry, government or the professions. To help
promote quality delivery of the curriculum, UOP faculty members are required to:
(1) complete an initial assessment conducted by staff and faculty; (2) receive
training in grading, facilitation of the teaching/learning model and oversight
of study group activities; (3) serve an internship with an experienced faculty
mentor and (4) receive ongoing performance evaluations by students, peer faculty
and staff. The results of these evaluations are used to establish developmental
plans to improve individual faculty performance and to determine continued
eligibility of faculty members to provide instruction. Most faculty members are
recruited as the result of referrals from faculty, students and corporate
contacts. All faculty are contracted on a course-by-course basis (generally a
five to ten week period).
The faculty teaching in IPD-assisted programs are comprised of full-time
faculty from the client institution as well as qualified part-time faculty who
instruct only in these adult programs. The part-time faculty must be approved by
each client institution. IPD makes the AQMS available to its client institutions
to evaluate faculty and academic and administrative quality. Both UOP and IPD
have been successful in recruiting faculty members who meet these academic and
professional requirements.
WIU's faculty consists of approximately 80 working professionals. WIU's
practitioner faculty possess earned masters or doctoral degrees and participate
in a selection and training process that is similar to that at UOP.
26
<PAGE> 27
ACADEMIC ACCOUNTABILITY. UOP is one of the first regionally accredited
universities in the nation to create and utilize an institution-wide system for
the assessment of the educational outcomes of its students. The information
generated is employed by UOP to improve the quality of the curriculum,
instruction and the Company's teaching/learning model. UOP's undergraduate and
graduate students complete a comprehensive cognitive (core degree subject
matter) and affective (educational, personal and professional values) assessment
prior to and upon the completion of their core degree requirements.
Students at UOP and IPD client institutions evaluate both academic and
administrative quality. This evaluation begins with a registration survey and
continues with the evaluation of the curriculum, faculty, delivery method,
instruction and administrative services upon the conclusion of each course. The
evaluation also includes both a graduation survey and a survey of a random
selection of graduates two years after their graduation. The results provide an
ongoing basis for improving the teaching/learning model, selection of
educational programs and instructional quality. The Company plans to implement
similar quality control systems at WIU over the next year.
ADMISSIONS STANDARDS. To gain admission to the undergraduate programs of
UOP, WIU and the IPD client institutions, students generally must have a high
school diploma or General Equivalency Degree ("G.E.D.") and satisfy certain
minimum grade point average, employment and age requirements. Additional
requirements may apply to individual programs. Students in undergraduate
programs may petition to be admitted on provisional status if they do not meet
certain admission requirements.
To gain admission to the graduate programs of UOP, WIU and the IPD client
institutions, students generally must have an undergraduate degree from a
regionally accredited college or university and satisfy minimum grade point
average, work experience and employment requirements. Additional requirements
may apply to individual programs. Students in graduate programs may petition to
be admitted on provisional status if they do not meet certain admission
requirements.
DISTANCE EDUCATION COMPONENTS
ONLINE(TM) COMPUTER CONFERENCING. UOP established Online(TM), its
computer-based educational delivery system, in 1989 by modifying its classroom
courses for delivery at the same level of quality through the use of computers.
Online(TM) is currently accessible both nationally and internationally wherever
there is adequate phone service or access to CompuServe(R) or the Internet.
Online(TM) utilizes a computer conferencing system that enables students and
faculty to participate in a learning group of 10 to 12 students. Online(TM)
students can complete their course requirements at any time of the day, from
locations where they have access to a computer and a modem. Students and faculty
interact daily in an electronic classroom without having to be online at the
same time. As required in campus-based courses, Online(TM) students also
participate in weekly study groups.
TWO-WAY VOICE AND DATA. UOP established its audiographic delivery system
in 1989 in response to requests from employers with operations in remote areas
of the United States. Students completing their degree requirements utilizing
this system meet weekly in a remote classroom and interact simultaneously with
an instructor in a centralized instructional studio through a two-way voice and
data communications system. These students can complete all their coursework in
this manner. They are required to achieve the same course outcomes, attend
weekly study groups and participate in the AQMS.
DIRECTED STUDY. Working adult students may also complete individual
courses under the direct weekly instructional supervision of a member of the
faculty.
At November 30, 1995, there were approximately 2,600 students utilizing the
Company's distance education delivery systems, approximately half of whom are
enrolled in Online(TM). Distance education is currently subject to certain
regulatory constraints. See "Business -- Federal Financial Aid Programs --
Restrictions on Distance Education Programs" and "Business -- State
Authorization."
27
<PAGE> 28
CUSTOMERS
The Company's customers consist of working adult students, colleges and
universities, governmental agencies and employers. Based on recent student
surveys, the average age of UOP students is in the mid-thirties, approximately
54% are women and 46% are men, and the average annual household income is
$53,000. Approximately 74% of UOP students have been employed on a full-time
basis for nine years or more. Currently, 67% of UOP students are seeking
undergraduate degrees. The Company believes that the demographics of students
enrolled in IPD-assisted programs are similar to that of UOP. The approximate
age distribution of current UOP students is as follows:
<TABLE>
<CAPTION>
AGE PERCENTAGE OF STUDENTS
- ----------- ----------------------
<S> <C>
Under 25 12%
26 to 33 35%
34 to 45 42%
46 and over 11%
---
100%
================
</TABLE>
IPD client institutions have historically consisted of small private
colleges; however, IPD also targets larger institutions of higher education that
are in need of marketing and curriculum consulting. The Company believes that to
develop and manage educational programs for working adult students effectively,
these potential client institutions require both capital and operational
expertise. In response to these requirements, IPD provides the startup capital,
the curriculum development expertise and the ongoing management in support of
the client institutions' provision of quality programs for working adult
students.
The Company also considers the employers of its students as customers. Many
of these employers provide tuition reimbursement programs in order to educate
and provide degree opportunities to their employees. Currently, approximately
80% of UOP's students receive some level of tuition reimbursement from their
employers, many of which are Fortune 500 companies. Of these students receiving
reimbursement, approximately 83% receive at least one-half tuition reimbursement
and approximately 42% receive full tuition reimbursement.
CORPORATE PARTNERSHIPS
The Company seeks to establish strategic relationships with businesses and
governmental agencies in offering programs designed to meet their specific needs
either by modifying existing programs or, in some cases, by developing
customized programs. These programs are often held at the employers' offices or
on-site at military bases.
In the fourth quarter of 1995, UOP formed an educational partnership with
AT&T to provide graduate and undergraduate degree and certificated learning
programs to AT&T's 200,000 employees worldwide. A significant aspect of the
alliance is an articulation agreement between UOP and the AT&T School of
Business that enables UOP to award undergraduate and graduate program credit for
certain course work completed through the AT&T School of Business. The
partnership will provide AT&T managers with a variety of ways to participate in
UOP's programs, depending on their individual schedules and availability,
including course work delivered on campus, at AT&T sites or through one or more
of UOP's distance education delivery systems.
In the fourth quarter of 1995, UOP also formed an educational partnership
with Ingram Micro, Inc., a leading distributor of computer and software
products, to provide training and certification for Novell and Microsoft
software. These programs began in June 1995 at UOP's Northern and Southern
California campuses. UOP computer labs, equipped and maintained by Ingram Micro,
Inc., will serve as training sites for technical professionals who wish to
obtain or enhance skills as network administrators.
28
<PAGE> 29
MARKETING
To generate interest among potential UOP, WIU and IPD client institution
students, UOP, WIU and IPD engage in a broad range of activities to inform
potential students about the Company's teaching/learning model and the programs
offered. These activities include print and broadcast advertising, advertising
on services such as CompuServe(R)*, Prodigy(R) and the Microsoft Network(R),
direct mail and information meetings at targeted organizations. The Company also
attempts to locate its campuses and learning centers near major highways to
provide high visibility and easy access. A substantial portion of new UOP and
IPD client institution students are referred by alumni, employers and currently
enrolled students. The Company is currently implementing its proprietary
marketing systems at WIU to help it identify and manage lead sources and
referral data.
UOP and WIU advertising is centrally monitored and is directed primarily at
local markets in which a campus is located. IPD client institutions approve and
monitor all advertising provided by IPD on their behalf. Direct responses to
advertising and direct mail are received, tracked and forwarded promptly to the
appropriate representatives. In addition, all responses are analyzed to provide
data for future marketing efforts.
The Company employs over 200 enrollment representatives in its marketing
system who make visits and presentations at various organizations and who follow
up on leads generated from the Company's advertising efforts and referrals.
These individuals also pursue direct responses to interest from potential
individual students by arranging for interviews either at a UOP, WIU or IPD
location or at a prospective student's place of employment. Interviews are
designed to establish a prospective student's qualifications, academic
background, course interests and professional goals. Student recruiting policies
and standards and procedures for hiring and training university representatives
are established centrally, but are implemented at the local level through a
director of enrollment or marketing at each location.
The Company also has a "Web Site" on the Internet World Wide Web
(http://www.apollogrp.com) that allows electronic access to Company and product
information and research. The Company's Web Site is accessible from major online
networks such as Prodigy(R)*, CompuServe(R) and America OnLine(R). The Company
recently completed an agreement to provide direct access to the Company's Web
Site from the Microsoft Network(R).
ACQUISITION STRATEGY
The Company periodically evaluates opportunities to acquire businesses and
facilities that complement the Company's business strategy. In evaluating such
opportunities, management considers, among other factors, location,
demographics, price, the availability of financing on acceptable terms,
competitive factors and the opportunity to improve operating performance through
the implementation of the Company's operating strategies. The Company has no
current commitments with regard to potential acquisitions.
COMPETITION
The higher education market is highly fragmented and competitive with no
private or public institution enjoying a significant market share. The Company
competes primarily with four-year and two-year degree-granting public and
private regionally accredited colleges and universities. Many of these colleges
and universities enroll working adults in addition to the traditional 18 to 24
year old students and some have greater financial and personnel resources than
the Company. The Company expects that these colleges and universities will
continue to modify their existing programs to serve working adults more
effectively. In addition, the Company competes to a lesser extent with other
for-profit degree granting institutions on a regional basis.
- ---------------
*CompuServe(R) is a registered trademark of CompuServe Incorporated,
Columbus, Ohio, Prodigy(R) is a registered trademark of Trintex, White Plains,
New York, Microsoft Network(R) is a registered servicemark of Microsoft
Corporation, Redmond, Washington and America OnLine(R) is a registered trademark
of America Online, Inc., Vienna, Virginia.
29
<PAGE> 30
The Company competes primarily at a local and regional level with other
regionally accredited colleges and universities based on the quality of academic
programs, the accessibility of programs and learning resources available to
working adults, the cost of the program, the quality of instruction and the time
necessary to earn a degree. Although adult students currently comprise
approximately 44% of all college and university enrollments, few of these
institutions have modified their educational delivery systems to meet the unique
needs of working adult students. Institutions providing programs designed for
working adults typically target executives or other subsets of the working adult
population and tend to provide those programs at only a few sites.
IPD faces competition from other entities offering higher education
curriculum development and management services for adult education programs. The
majority of IPD's current competitors provide pre-packaged curricula or turn-key
programs. IPD client institutions, however, face competition from both private
and public institutions offering degree and non-degree programs to working
adults.
LEGAL PROCEEDINGS
As of the date of this Prospectus, the Company is not a party to any legal
proceedings, the adverse outcome of which, in management's opinion, would have a
material adverse effect on the Company's operating results.
EMPLOYEES
At November 30, 1995, the Company had the following numbers of employees:
<TABLE>
<CAPTION>
FULL-TIME PART-TIME FACULTY TOTAL
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Apollo...................................... 189 5 -- 194(1)
UOP......................................... 977 97 2,967(2) 4,041
IPD......................................... 178 10 --(3) 188
WIU......................................... 24 24 85(2) 133
--------- --------- ------- -------
Total............................. 1,368 136 3,052 4,556
======= ======= ===== =======
</TABLE>
- ------------------------
(1) Consists primarily of employees in corporate accounting, payroll and human
resources, information systems, financial aid and Apollo Press.
(2) Consists primarily of part-time professional faculty contracted on a
course-by-course basis.
(3) Faculty teaching IPD-assisted programs are employed by IPD client
institutions.
The Company considers its relations with its employees to be good.
REGULATORY ENVIRONMENT
The Higher Education Act of 1965, as amended (the "HEA") and the
regulations promulgated thereunder (the "Regulations") subject all higher
education institutions eligible to participate in Federal Financial Aid programs
under Title IV of the HEA ("Title IV Programs") to increased regulatory
scrutiny. The HEA mandates specific additional regulatory responsibilities for
each of the following components of the higher education regulatory triad: (1)
the accrediting agencies recognized by the United States Department of Education
(the "DOE"); (2) the federal government through the DOE and (3) state higher
education regulatory bodies, including, if applicable, a State Postsecondary
Review Entity ("SPRE"). All higher education institutions participating in Title
IV Programs must first be accredited by an association recognized by the DOE.
The DOE reviews all such participating institutions for compliance with all
applicable HEA standards and regulations. Under the HEA, accrediting
associations are required to include the monitoring of certain aspects of Title
IV Program compliance as part of their accreditation evaluations.
New or revised interpretations of regulatory requirements could have a
material adverse effect on the Company. In addition, changes in or new
interpretations of other applicable laws, rules or regulations could have a
material adverse effect on the accreditation, authorization to operate in
various states, permissible
30
<PAGE> 31
activities and costs of doing business of UOP, WIU and one or more of the IPD
client institutions. The failure to maintain or renew any required regulatory
approvals, accreditation or state authorizations by UOP or certain of the IPD
client institutions could have a material adverse effect on the Company.
ACCREDITATION
UOP and the IPD client institutions are accredited by regional accrediting
associations recognized by the DOE. Accreditation provides the basis for: (1)
the recognition and acceptance by employers, other higher education institutions
and governmental entities of the degrees and credits earned by students; (2) the
qualification to participate in Title IV Programs and (3) the qualification for
authorization in certain states.
UOP was granted accreditation by NCA in 1978. UOP's accreditation was
reaffirmed in 1982, 1987 and 1992. The next NCA reaffirmation visit is scheduled
for 1996-97. IPD-assisted programs offered by the IPD client institutions are
evaluated by the client institutions' respective regional accrediting
associations either as part of a reaffirmation or focused evaluation visits.
Current IPD client institutions are accredited by NCA, New England or Southern
regional accrediting associations. UOP is required to receive approval from NCA
for the addition of new degree programs and the addition of any campuses or
learning centers in new states or countries. Most IPD client institutions are
subject to similar policies. In addition, all IPD contracts must meet the
guidelines of the client institutions' respective regional accrediting
associations. The withdrawal of accreditation from UOP or certain IPD client
institutions would have a material adverse effect on the Company.
WIU received approval of the transfer of NCA accreditation from Western in
October 1995. Western originally received its accreditation from NCA in 1984.
See "Business -- Federal Financial Aid Programs -- Western International
University, Inc.".
All accrediting agencies recognized by the DOE are required to include
certain aspects of Title IV Program compliance in their evaluations of
accredited institutions. As a result, all regionally accredited institutions,
including UOP, WIU and IPD client institutions, will be subject to a Title IV
Program compliance review as part of accreditation visits.
Regional accreditation is accepted nationally as the basis for the
recognition of earned credit and degrees for academic purposes, employment,
professional licensure and, in some states, for authorization to operate as a
degree-granting institution. Under the terms of a reciprocity agreement among
the six regional accrediting associations, representatives of each region in
which a regionally accredited institution operates participate in the
evaluations for reaffirmation of accreditation. The achievement of UOP's and
WIU's missions require them to employ academically qualified practitioner
faculty that are able to integrate academic theory with current workplace
practice. Because of UOP's and WIU's choice to utilize all practitioner faculty,
they have not sought business school program accreditation of the type found at
many institutions whose primary missions are to serve the 18 to 24 year old
student and to conduct research.
UOP's Bachelor of Science in Nursing ("BSN") program received program
accreditation from the National League for Nursing ("NLN") in 1989. The
accreditation was reaffirmed in October 1995 and the next NLN reaffirmation is
scheduled for 2003. If the NLN accreditation is not reaffirmed, UOP's BSN
program could be adversely affected.
UOP's Master of Counseling ("MC") degree received program accreditation
from the Council for Accreditation of Counseling and Related Educational
Programs ("CACREP") in May 1995. The next CACREP reaffirmation is scheduled for
1997.
FEDERAL FINANCIAL AID PROGRAMS
UOP and IPD client institution students participate in Title IV Programs.
UOP derives approximately 68% of its net revenues from students who participate
in Title IV Programs. The Company believes that IPD derives a similar percentage
of its net revenues from students who participate in Title IV Programs
administered by the respective IPD client institutions. These students are
eligible for Title IV financial aid because: (1) UOP and IPD client institutions
are accredited by an accrediting association recognized by the
31
<PAGE> 32
DOE; (2) the DOE has certified UOP's and IPD client institutions' Title IV
Program eligibility and (3) UOP and IPD client institutions have applicable
state authorization to operate and their operating sites have been approved by
the DOE. As a result of the Company's acquisition of certain assets of Western,
WIU currently is not eligible to participate in Title IV Programs. WIU has
applied for DOE approval to resume participation in Title IV Programs. See
"Business -- Federal Financial Aid Programs -- Western International University,
Inc."
The DOE has promulgated regulations, the most recent of which became
effective on July 1, 1995, that amend certain provisions of the Title IV
Programs and the regulations promulgated thereunder. Some of the more important
provisions of these regulations include the following:
THE "12-HOUR RULE". Currently, the Regulations place limits on the amount
of Title IV Program funds that a student is eligible to receive in any one
academic year (as defined by the DOE). The Regulations also specify that, for
undergraduate programs, an academic year must consist of at least an equivalent
30 weeks of instruction and a minimum of 24 credit hours. The new Regulations
define an equivalent "week of instruction" as 12 hours of regularly scheduled
instruction, examinations or preparation for examinations (the "12-Hour Rule").
For programs that consist of eight hours per week of instruction, such as those
offered by UOP and IPD client institutions, the academic year must be a minimum
of 45 calendar weeks to meet the DOE's equivalent 30 weeks of instruction to
qualify for Title IV funding. If UOP were required by the DOE to increase the
length of its undergraduate academic year to more than the current 45 calendar
weeks, it would reduce the maximum amount of Title IV funding available to UOP's
students, which could have a material adverse effect on the Company.
RESTRICTED CASH. The DOE places certain restrictions on Title IV Program
funds collected for unbilled tuition and funds transferred to the Company
through electronic funds transfer. Prior to July 1, 1995, higher education
institutions were also required to maintain a minimum cash reserve in an amount
equal to at least 25% of the total dollar amount of refunds paid by the
institution in its most recent fiscal year. Effective July 1, 1995, an
institution is required to submit an irrevocable letter of credit to the DOE,
rather than maintain the cash reserve. However, the letter of credit requirement
is waived if an institution meets the DOE's standards related to timeliness of
refunds, financial responsibility, and other criteria. The Company believes that
it meets these applicable DOE standards and will not need to supply the letter
of credit.
STANDARDS OF FINANCIAL RESPONSIBILITY. Pursuant to the Regulations, all
eligible higher education institutions must meet an acid test ratio (defined as
the ratio of cash, cash equivalents, restricted cash and current accounts
receivable to total current liabilities) of at least 1 to 1 at the end of the
institution's fiscal year. At August 31, 1995, UOP's acid test ratio was 1.31 to
1. On September 1, 1995, WIU's acid test ratio was 2.73 to 1.
BRANCHING AND CLASSROOM LOCATIONS. The Regulations contain specific
requirements governing the establishment of new main campuses, branch campuses
and classroom locations at which any student receives more than 50% of his or
her instruction. In addition to classrooms at campuses and learning centers,
locations affected by these requirements include the business facilities of
client companies, military bases and conference facilities used by UOP and WIU.
The Company has obtained approval for all UOP locations required to be approved
by the Regulations and is seeking reaffirmation of approval for WIU's locations.
Should the DOE change its regulations with respect to this approval process or
delay approvals of new locations beyond the current approval time rate, the
Company's business strategy may be impacted negatively.
THE "85/15 RULE." A new requirement of the HEA, commonly referred to as
the "85/15 Rule," applies only to for-profit institutions of higher education,
which includes UOP and WIU but not IPD client institutions. Under this rule,
for-profit institutions will be ineligible to participate in Title IV Programs
if the amount of Title IV Program funds used by the students or institution to
satisfy tuition, fees and other costs incurred by the students exceed 85% of the
institution's cash-basis revenues from eligible programs (UOP's and Western's
percentage was 72% and 66% at August 31, 1995, respectively). UOP and WIU are
required to calculate this percentage at the end of each fiscal year.
32
<PAGE> 33
STUDENT LOAN DEFAULTS. Eligible institutions must maintain a student loan
cohort default rate of less than 35% for each of the federal fiscal years 1991
and 1992, 30% for fiscal year 1993 and 25% for fiscal year 1994 and all
subsequent fiscal years. In 1992, the most recent DOE cohort default rate
reporting period, the national cohort default rate average for all higher
education institutions was 15%. UOP and WIU students' cohort default rates as
reported by the DOE were 5% and 4.7%, respectively, and IPD client institution
students' cohort default rates averaged 5% over that same period.
STATE POSTSECONDARY REVIEW ENTITIES ("SPRES"). The Regulations mandate
that each state establish a SPRE to review institutions referred by the DOE and
eligible institutions the SPRE believes are engaged in Title IV Program fraud
and abuse. Each institution will be reviewed against standards developed by the
applicable SPRE to determine whether it is eligible to continue to participate
in Title IV Programs. The states are required to implement the SPRE portion of
the HEA only to the extent to which their costs are covered through
Congressional appropriation. On July 27, 1995, President Clinton signed into law
a package of spending cuts that rescinded the funding of the SPREs for fiscal
year 1995. The HEA specifies that the states are not required to operate the
SPREs without Federal funding, and the Company believes that without such
funding the SPREs will not operate.
COMPENSATION OF REPRESENTATIVES. The Regulations prohibit an institution
from providing any commission, bonus, or other incentive payment based directly
or indirectly on success in securing enrollments or financial aid to any person
or entity engaged in any student recruitment, admission or financial aid
awarding activity. The Company believes that its current method of compensating
representatives complies with the Regulations.
ADMINISTRATIVE CAPABILITY. The HEA directs the DOE to assess the
administrative capability of each institution to participate in Title IV
Programs. The failure of an institution to satisfy any of the criteria used to
assess administrative capability may allow the DOE to determine that the
institution lacks administrative capability and, therefore, may be subject to
additional scrutiny or denied eligibility for Title IV Programs.
ELIGIBILITY AND CERTIFICATION PROCEDURES. The HEA specifies the manner in
which the DOE reviews institutions for eligibility and certification to
participate in Title IV Programs and the Regulations include detailed new
standards. Under the HEA and the Regulations, the eligibility to participate in
Title IV Programs of each currently participating institution will expire in
1997 or earlier and each institution will be required to reapply for continued
eligibility every four years thereafter. The DOE will assess each institution's
compliance with the HEA and the Regulations. UOP's eligibility to participate in
Title IV Programs expires in 1997. If the DOE does not renew UOP's eligibility,
it will have a material adverse effect on the Company.
RESTRICTIONS ON DISTANCE EDUCATION PROGRAMS. The Regulations specify that
an institution is not eligible to participate in Title IV Programs funding if
50% or more of its courses are correspondence courses, or if 50% or more of its
regular students are enrolled in the institution's correspondence courses.
Although the Company does not offer correspondence courses, the Regulations
currently consider most distance education courses to be correspondence courses
if the number of distance education courses exceeds 50% of the sum of courses
offered in campus-based delivery systems and courses offered through distance
education. The Company does not plan to exceed this 50% level and believes that
this restriction will have no impact on its business strategy.
DIRECT LENDING PROGRAMS. The DOE has instituted a new direct lending
program and various institutions have been invited to participate in the initial
phases of the program. The direct lending program, as currently defined by the
DOE, would have the effect of eliminating third-party lending institutions and
guarantee agencies from the loan disbursement process. The goal of the DOE is to
streamline the financial aid lending process, but there is uncertainty as to
when this goal will be fully attained. Recently, certain members of Congress
have proposed to limit and/or eliminate the direct lending program. The Company
has not yet been required to implement the new direct lending process and it is
uncertain as to what effect this new process, if implemented, will have on its
cash flow.
CHANGE OF OWNERSHIP OR CONTROL. A change of ownership or control of the
Company, depending on the type of change, may have significant regulatory
consequences for UOP and WIU. Such a change of ownership
33
<PAGE> 34
or control could trigger recertification by the DOE, reauthorization by certain
state licensing agencies or the evaluation of the accreditation by NCA.
For institutions owned by publicly-held corporations, the DOE has adopted
the change of ownership and control standards used by the federal securities
laws. Upon a change of ownership and control sufficient to require the Company
to file a Form 8-K with the Securities and Exchange Commission, UOP and WIU
would cease to be eligible to participate in Title IV Programs until recertified
by the DOE. This recertification would not be required, however, if the transfer
of ownership and control was made upon a person's retirement or death and was
made either to a member of the person's immediate family or to a person with an
ownership interest in the Company who had been involved in its management for at
least two years preceding the transfer.
In addition, certain states where the Company is presently licensed have
requirements governing change of ownership or control. Currently, Arizona and
California would require UOP and WIU, as applicable, to be reauthorized upon a
20% and 25% change of ownership or control of the Company, respectively. These
states require a new application to be filed for state licensing if such a
change of ownership or control occurs. Moreover, the Company is required to
report any change in stock ownership of UOP, WIU or Apollo to NCA. At that time,
NCA may seek to evaluate the effect of such a change of stock ownership on the
continuing operations of UOP and WIU.
If UOP is not recertified by the DOE, or does not obtain reauthorization
from the necessary state agencies or has its accreditation withdrawn as a
consequence of any change in ownership or control, it would have a material
adverse effect on the Company.
WESTERN INTERNATIONAL UNIVERSITY, INC. Prior to its acquisition by the
Company, Western participated in Title IV Programs. However, the acquisition of
Western by the Company is considered a change in ownership and control which
results in the termination of Western's participation in the Title IV Programs.
Under the HEA, and the Regulations, WIU can resume participation in the Title IV
Programs if the DOE certifies its eligibility to participate. WIU has received
approval to operate under new ownership by the Arizona State Board for
Post-Secondary Education and has received approval from NCA for the transfer of
accreditation to WIU. WIU has applied with the DOE to resume participation in
Title IV programs. Prior to obtaining approval from the DOE, WIU will not be
able to disburse funds awarded by Western or process new Title IV financial aid.
The Company has arranged for a temporary alternative lender to provide
non-recourse financing to credit-qualifying students during this interim period.
If the DOE does not certify that WIU is eligible to participate in Title IV
Programs, it would have a material adverse effect on WIU. In conjunction with
the acquisition, WIU assumed the Title IV liabilities of Western in the
estimated amount of $210,000. This amount and the goodwill recorded related to
the acquisition is subject to change based on the DOE's audit of Western's Title
IV Programs to commence in January 1996.
STATE AUTHORIZATION
UOP currently is authorized to operate in nine states and Puerto Rico. UOP
has held these authorizations for periods ranging from three months to eighteen
years. UOP's NCA accreditation is accepted as evidence of compliance with
applicable state regulations in Arizona, Colorado, New Mexico, Nevada and Utah.
Hawaii does not have authorization provisions for regionally accredited
degree-granting institutions. California law, enacted in 1985, requires an
on-site visit to all out-of-state accredited institutions of higher education
every five years to determine if the institution is in compliance with the State
of California regulations. All institutions, including UOP, that operate in
California and are accredited by a regional accrediting association other than
the Western Association of Schools and Colleges are required to be evaluated
separately for authorization to operate. UOP was granted its most recent
California authorization in 1989 and expects to renew its license by February
1996. All regionally accredited institutions, including UOP, are required to be
evaluated separately for authorization to operate in Puerto Rico. UOP was
granted its most recent authorization in Puerto Rico in 1990 and expects to
renew its authorization in early 1996. IPD client institutions possess
authorization to operate in all states in which they offer educational programs,
which are subject to renewal. WIU is currently authorized to operate in Arizona
and London, England.
34
<PAGE> 35
Certain states assert authority to regulate all degree-granting
institutions if their educational programs are available to their residents,
whether or not the institutions maintain a physical presence within those
states. If a state were to establish grounds for asserting authority over
telecommunicated learning, UOP may be required to obtain authorization for, or
restrict access to, its programs available through Online(TM) in those states.
LOCATIONS
UOP currently has campuses and learning centers located throughout nine
states and Puerto Rico. The following is a current list of UOP main campuses,
divisions and learning centers and the respective opening dates and enrollments
as of November 30, 1995:
<TABLE>
<CAPTION>
MAIN CAMPUSES, DIVISIONS
AND FISCAL
RESPECTIVE LEARNING YEAR ENROLLMENT
CENTERS OPENED AT 11/30/95
- -------------------------- ------ -----------
<S> <C> <C>
ARIZONA
Phoenix Campus............ 1978 4,265
Mesa.................... 1986
Northwest Phoenix....... 1990
Scottsdale.............. 1994
Tucson Campus............. 1983 1,655
East Tucson............. 1993
Fort Huachuca........... 1993
CALIFORNIA
Orange County
(Fountain Valley)
Campus............... 1981 5,638
Diamond Bar............. 1992
Edwards Air Force
Base................. 1992
Lawndale................ 1992
Van Nuys................ 1990
Pasadena................ 1995
Ontario................. 1995
Gardena................. 1996
Ventura................. 1996
San Jose Campus........... 1980 2,853
San Ramon............... 1985
San Francisco........... 1994
Pleasanton.............. 1995
Fresno Campus............. 1995 54
San Diego Campus.......... 1989 1,439
Vista................... 1994
Chula Vista............. 1996
Sacramento Campus......... 1993 689
Fairfield............... 1996
COLORADO
Denver Campus............. 1982 3,196
Aurora.................. 1988
Colorado Springs........ 1993
Northglenn.............. 1995
HAWAII
Honolulu Campus........... 1993 395
LOUISIANA
New Orleans Campus........ 1996 13
MICHIGAN
Detroit (Southfield)
Campus.................. 1996 43
NEVADA
Las Vegas Campus.......... 1994 425
Nellis Air Force Base... 1993
NEW MEXICO
Albuquerque Campus........ 1985 1,257
Kirkland Air Force
Base................. 1993
Santa Fe................ 1994
Santa Teresa -- Las
Cruces............... 1995
UTAH
Salt Lake City Campus..... 1984 1,627
Ogden................... 1992
Orem.................... 1988
PUERTO RICO
Guaynabo Campus........... 1980 1,029
DISTANCE EDUCATION
Online(TM), San Francisco,
CA(1)................... 1989 1,360
Center for Distance
Education, Phoenix,
AZ(2)................... 1989 1,201
------
Total UOP enrollment at
November 30, 1995....... 27,139
======
</TABLE>
- ---------------
(1) Programs are offered throughout the United States and internationally.
(2) Programs are offered in various states throughout the United States.
35
<PAGE> 36
IPD currently has contracts with 15 institutions that offer programs at 29
campuses and learning centers in Connecticut, Georgia, Illinois, Indiana,
Kansas, Kentucky, Massachusetts, Minnesota, Mississippi, Missouri, North
Carolina, Ohio, South Carolina, Texas, Virginia and Wisconsin.
WIU currently offers its programs at four campuses and learning centers
located in Phoenix, Fort Huachuca and Douglas, Arizona and through Thames Lea
College in London, England.
PROPERTIES
The Company leases all of its administrative and educational facilities. In
some cases, classes are held in the facilities of the students' employers at no
charge to the Company. Leases generally range from five to seven years; however,
the Company attempts to secure longer leases if it is advantageous to do so. The
Company also leases space from time-to-time on a short-term basis in order to
provide specific courses or programs. The table below sets forth certain
information as of November 30, 1995, with respect to properties leased by the
Company in excess of 5,000 square feet:
<TABLE>
<CAPTION>
LOCATION SQUARE
(CITY/STATE) FEET
- ----------------------------------- -------
<S> <C>
Phoenix, AZ........................ 124,552
Phoenix, AZ........................ 38,086
San Jose, CA....................... 37,876
Fountain Valley, CA................ 34,545
San Diego, CA...................... 33,097
Englewood, CO...................... 32,000
Tucson, AZ......................... 30,000
Murray, UT......................... 30,000
Albuquerque, NM.................... 23,400
Gardena, CA........................ 23,077
Mesa, AZ........................... 22,450
Marietta, GA....................... 21,634
Overland Park, KS.................. 21,210
San Francisco, CA.................. 20,649
San Francisco, CA.................. 20,324
Colorado Springs, CO............... 20,138
Pleasanton, CA..................... 18,560
Van Nuys, CA ...................... 18,467
Sacramento, CA..................... 18,419
Costa Mesa, CA..................... 18,397
Aurora, CO......................... 16,807
Diamond Bar, CA.................... 15,280
Ontario, CA........................ 14,899
Lawndale, CA....................... 14,041
Quincy, MA......................... 12,863
Northglenn, CO..................... 11,971
Ogden, UT.......................... 11,265
Crestview Hills, KY................ 10,303
Phoenix, AZ........................ 10,066
Charlotte, NC...................... 9,898
Scottsdale, AZ..................... 9,588
Pasadena, CA....................... 9,376
Richmond, VA....................... 9,229
Vista, CA.......................... 9,224
New Haven, CT...................... 9,131
Guaynabo, PR....................... 9,000
Tucson, AZ......................... 7,708
Phoenix, AZ........................ 7,617
Phoenix, AZ........................ 6,120
Fresno, CA......................... 5,944
Las Vegas, NV...................... 5,647
Overland Park, KS.................. 5,625
San Ramon, CA...................... 5,526
Vienna, VA......................... 5,508
Murray, UT......................... 5,340
</TABLE>
The lease on the Company's corporate headquarters, which includes the UOP
Phoenix Main Campus, was renewed in December 1995 for another five year term. In
December 1995, the Company acquired land for a purchase price of $2.9 million
which it may use in the future for the possible relocation of its corporate
headquarters. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
36
<PAGE> 37
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Company's directors serve one year terms and are elected each year by
the holders of the Company's Class B Common Stock. The following sets forth
information as of November 30, 1995 concerning the Company's directors and
executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------- --- ----------------------------------------------------------
<S> <C> <C>
John G. Sperling, Ph.D...... 74 Chairman of the Board and President
William H. Gibbs............ 45 Senior Vice President and Director
Jerry F. Noble.............. 53 Senior Vice President and Director
John D. Murphy.............. 49 Senior Vice President-Institutional Affairs and Director
Peter V. Sperling........... 35 Vice President of Administration, Secretary and Treasurer
and Director
James W. Hoggatt............ 38 Vice President of Finance and Chief Financial Officer
Todd S. Nelson.............. 36 Executive Vice President of UOP
Dino D. DeConcini........... 61 Director
J. Jorge Klor de Alva, J.D.,
Ph.D. .................... 47 Director
Thomas C. Weir.............. 62 Director
</TABLE>
JOHN G. SPERLING, PH.D., is the founder, President and Chairman of the
Board of Directors of the Company. Prior to his involvement with the Company,
from 1961 to 1973, Dr. Sperling was a professor of Humanities at San Jose State
University where he was the Director of the Right to Read Project and the
Director of the NSF Cooperative College-School Science Program in Economics. At
various times from 1955 to 1961, Dr. Sperling was a member of the faculty at the
University of Maryland, Ohio State University and Northern Illinois University.
Dr. Sperling received his Ph.D. from Cambridge University, an M.A. from the
University of California at Berkeley and a B.A. from Reed College. Dr. Sperling
is the father of Peter V. Sperling.
WILLIAM H. GIBBS has been with the Company since 1980. Mr. Gibbs has been
the President of UOP and a Senior Vice President of the Company since 1987. From
1985 to 1987, Mr. Gibbs was the President of Apollo Education Corporation
("AEC"). From 1980 to 1985, Mr. Gibbs held various positions with the Company,
including Chief Financial Officer and faculty member. From 1975 to 1984, Mr.
Gibbs was with the accounting firm of Price Waterhouse and, from 1982 to 1984,
served as a management advisory manager. Mr. Gibbs currently serves as a
director of the Arizona State Board of Private Post-Secondary Education and the
Arizona Commission for Post-Secondary Education. Mr. Gibbs received his M.B.A.
from the University of Illinois and his B.A. from Arizona State University. Mr.
Gibbs is a Certified Public Accountant in the State of Arizona.
JERRY F. NOBLE has been with the Company since 1981. Mr. Noble has been a
Senior Vice President of the Company since 1987 and the President of IPD since
1984. From 1981 to 1987, Mr. Noble also was the controller of the Company. From
1977 to 1981, Mr. Noble was the corporate accounting manager for Southwest
Forest Industries, a forest products company. Mr. Noble received his M.B.A. from
UOP and his B.A. from the University of Montana. Mr. Noble is a Certified Public
Accountant in the Commonwealth of Virginia.
JOHN D. MURPHY has been with the Company since 1976. Mr. Murphy has been
the Senior Vice President-Institutional Affairs since 1987. From 1981 to 1987,
Mr. Murphy was the Vice President of Public Affairs of the Company. From 1991 to
1994 Mr. Murphy also served as Vice President-Academic Affairs of UOP. From 1972
to 1976, Mr. Murphy was an instructor at San Jose State University. Mr. Murphy
is the founder and current Vice President of the Independent Colleges and
Universities of Arizona and the founder and current Chairman of the Accredited
Out-of-State Colleges and Universities of California. Mr. Murphy is a member of
the Council for Private Post-Secondary and Vocational Education in California.
Mr. Murphy received an M.A. from the University of San Francisco and a B.A. from
San Jose State University.
37
<PAGE> 38
PETER V. SPERLING has been with the Company since 1983. Mr. Sperling has
been the Vice President of Administration since 1992 and the Secretary and
Treasurer of the Company since 1988. From 1987 to 1992, Mr. Sperling was the
Director of Operations at AEC. From 1983 to 1987, Mr. Sperling was Director of
Management Information Services of the Company. Mr. Sperling received his M.B.A.
from UOP and his B.A. from the University of California at Santa Barbara. Mr.
Sperling is the son of John G. Sperling.
JAMES W. HOGGATT has been with the Company since 1986. Mr. Hoggatt has been
the Vice President of Finance and Chief Financial Officer of the Company since
1990. From 1987 to 1990, Mr. Hoggatt was the Vice President-Controller of the
Company. From 1986 to 1987, Mr. Hoggatt was the Director of Financial Reporting
of the Company. From 1979 to 1986, Mr. Hoggatt was with the accounting firm of
Price Waterhouse and, from 1984 to 1986, served as an audit manager. Mr. Hoggatt
received a B.S. from Abilene Christian University. Mr. Hoggatt is a Certified
Public Accountant in the State of Arizona.
TODD S. NELSON has been with the Company since 1987. Mr. Nelson has been a
Vice President of the Company since 1994 and the Executive Vice President of UOP
since 1989. From 1987 to 1989, Mr. Nelson was the Director of UOP's Utah campus.
From 1985 to 1987, Mr. Nelson was the General Manager at Amembal and Isom, a
management training company. From 1984 to 1985, Mr. Nelson was a General Manager
for Vickers & Company, a diversified holding company. From 1983 to 1984, Mr.
Nelson was a Marketing Director at Summa Corporation, a recreational properties
company. Mr. Nelson received an M.B.A. from the University of Nevada at Las
Vegas and a B.S. from Brigham Young University. Mr. Nelson was a member of the
faculty at University of Nevada at Las Vegas from 1983 to 1984.
DINO J. DECONCINI has been a director of the Company since 1981. Mr.
DeConcini is currently Executive Director, Savings Bonds Marketing Office, U.S.
Department of the Treasury. From 1979 to 1995, Mr. DeConcini was a shareholder
in DeConcini, McDonald, Brammer, Yetwin and Lacy, P.C., Attorneys at Law. From
1993 to 1995, Mr. DeConcini was a Vice President and Senior Associate of Project
International Associates, Inc., an international business consulting firm. From
1991 to 1993 and 1980 to 1990, Mr. DeConcini was a Vice President and partner of
Paul R. Gibson & Associates, an international business consulting firm.
J. JORGE KLOR DE ALVA, J.D., PH.D., has been a director of the Company
since 1991 and is a member of the Audit and Compensation Committees of the Board
of Directors of the Company and is a director of UOP. Dr. Klor de Alva has been
the Class of 1940 Professor of Comparative Ethnic Studies and Anthropology at
the University of California at Berkeley since July 1994. From 1989 to 1994, Dr.
Klor de Alva was a Professor of Anthropology at Princeton University. From 1984
to 1989, Dr. Klor de Alva was the Director of the Institute for Mesoamerican
Studies at the State University of New York at Albany. From 1982 to 1989, Dr.
Klor de Alva was also an Associate Professor of Anthropology and Latin American
Studies at the State University of New York at Albany. From 1971 to 1982, Dr.
Klor de Alva served at various times as associate professor, assistant professor
or lecturer at San Jose State University, the University of California at Santa
Cruz, Instituto de Investigaciones Historicas, Universidad Nacional Autonoma de
Mexico and the University of California at Berkeley.
THOMAS C. WEIR has been a director of the Company since 1983 and is a
member of the Audit and Compensation Committees of the Board of Directors of the
Company. During 1994, Mr. Weir became the President of Dependable Nurses, Inc.,
a provider of temporary nursing services, W.D. Enterprises, Inc., a financial
services company and Dependable Personnel, Inc., a provider of temporary
clerical personnel. In addition, Mr. Weir has been an independent financial
consultant since 1990. From 1989 to 1990, Mr. Weir was President of Tucson
Electric Power Company. From 1979 to 1987, Mr. Weir was Chairman and Chief
Executive Officer of Home Federal Savings & Loan Association, Tucson, Arizona.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two principal committees: (1) an Audit Committee
comprised of J. Jorge Klor de Alva (Chairperson) and Thomas C. Weir and (2) a
Compensation Committee comprised of Thomas C. Weir (Chairperson) and J. Jorge
Klor de Alva.
38
<PAGE> 39
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of December 19, 1995, and as
adjusted to reflect the sale of 2,750,000 shares of Class A Common Stock offered
hereby, assuming that the Underwriters' over-allotment option is not exercised
by: (i) each of the Company's directors; (ii) all directors and officers as a
group and (iii) the Selling Shareholders. Except as otherwise indicated, to the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares, except to the extent that
authority is shared by spouses under applicable law or as otherwise noted below.
<TABLE>
<CAPTION>
CLASS B SHARES
CLASS A SHARES CLASS A SHARES BENEFICIALLY OWNED
CLASS A SHARES BENEFICIALLY TO BE SOLD BENEFICIALLY OWNED BEFORE AND AFTER
OWNED PRIOR TO THE OFFERING IN THE OFFERING AFTER THE OFFERING THE OFFERING
NAME AND ADDRESS OF ----------------------------- ---------------- ---------------------- ---------------------
BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER NUMBER PERCENT NUMBER PERCENT
- --------------------- ---------- ---------- ---------------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
John G. Sperling..... 5,993,096(2)(3) 27.7% 1,000,000(3) 4,993,096(3) 23.2% 243,081(12) 42.2%
Peter V. Sperling.... 6,447,081(2)(4) 29.8 1,000,000(4) 5,447,081(4) 25.2% 232,068(13) 40.3
William H. Gibbs..... 661,857(5) 3.1 225,000(5) 436,857(5) 2.0% 27,950(14) 4.9
Jerry F. Noble....... 705,189(6) 3.3 225,000(6) 480,189(6) 2.2% 27,950 4.9
John D. Murphy....... 732,147(7) 3.4 225,000(7) 507,147(7) 2.3% 27,950 4.9
Dino J. DeConcini.... 18,700(8) * -- 18,700(8) * -- --
J. Jorge Klor de
Alva............... 20,000(9) * -- 20,000(9) * -- --
Thomas C. Weir....... 20,000(9) * -- 20,000(9) * -- --
Todd S. Nelson....... 243,288(10) 1.1 75,000(10) 168,288(10) 0.8% 8,385 1.5
Total for All
Directors and
Executive Officers
as a Group (10
persons)........... 14,159,916(11) 64.0% 2,750,000 11,409,916(11) 51.5% 575,769 100.0%
</TABLE>
- ---------------
* Less than 1%.
(1) The address of each of the listed shareholders, unless noted otherwise, is
in care of Apollo Group, Inc., 4615 East Elwood Street, Phoenix, Arizona
85040.
(2) Includes 828,438 shares held by the John Sperling 1994 Irrevocable Trust
dated April 27, 1994 ("1994 Irrevocable Trust") for which Messrs. John and
Peter Sperling are the co-trustees.
(3) Includes 121,551 shares that Mr. John Sperling has the right to acquire
within 60 days of the date of the table set forth above. If the
Underwriters' over-allotment option is exercised, an additional 162,500
shares will be sold by the 1994 Irrevocable Trust for which Messrs. John
and Peter Sperling serve as co-trustees and thereafter Mr. John Sperling
will beneficially own 4,830,596 shares representing 22.3% of the total
shares outstanding after the Offering.
(4) Includes 73,664 shares that Mr. Peter Sperling has the right to acquire
within 60 days of the date of the table set forth above. If the
Underwriters' over-allotment option is exercised, an additional 162,500
shares will be sold by the 1994 Irrevocable Trust for which Messrs. John
and Peter Sperling serve as co-trustees, and thereafter Mr. Peter Sperling
will beneficially own 5,284,581 shares representing 24.5% of the total
shares outstanding after the Offering.
(5) Includes 72,484 shares that Mr. Gibbs has the right to acquire within 60
days of the date of the table set forth above. If the Underwriters'
over-allotment option is exercised, an additional 75,000 shares will be
sold by the Gibbs Family Trust dated July 14, 1994 for which Mr. Gibbs
serves as trustee, and thereafter Mr. Gibbs will beneficially own 361,857
shares representing 1.7% of the total shares outstanding after the
Offering.
(6) Includes 79,192 shares that Mr. Noble has the right to acquire within 60
days of the date of the table set forth above. If the Underwriters'
over-allotment option is exercised, an additional 75,000 shares will be
sold by Jerry Noble, and thereafter Mr. Noble will beneficially own 405,189
shares representing 1.9% of the total shares outstanding after the
Offering.
(7) Includes 85,900 shares that Mr. Murphy has the right to acquire within 60
days of the date of the table set forth above. If the Underwriters'
over-allotment option is exercised, an additional 75,000 shares will be
sold by the Murphy 1993 Revocable Trust dated February 26, 1993 for which
Mr. Murphy serves as
39
<PAGE> 40
trustee, and thereafter Mr. Murphy will beneficially own 432,147 shares
representing 2.0% of the total shares outstanding after the Offering.
(8) Includes 18,500 shares that Mr. DeConcini has the right to acquire within
60 days of the date of the table set forth above.
(9) Includes 20,000 shares that Mr. Klor de Alva and Mr. Weir have the right to
acquire within 60 days of the date of the table set forth above.
(10) Includes 73,664 shares that Mr. Nelson has the right to acquire within 60
days of the date of the table set forth above. If the Underwriters'
over-allotment option is exercised, an additional 25,000 shares will be
sold by Todd Nelson and thereafter Mr. Nelson will beneficially own 143,288
shares representing 0.7% of the total shares outstanding after the
Offering.
(11) Includes 609,639 shares that the Directors and Executive Officers as a
group have the right to acquire within 60 days of the date of the table set
forth. If the Underwriters' over-allotment option is exercised, an
additional 412,500 shares will be sold by the Directors and Officers as a
group, and thereafter the Directors and Executive Officers as a group will
beneficially own 10,997,416 shares representing 49.7% of the total shares
outstanding after the Offering.
(12) Includes 243,080 shares held by the John G. Sperling Revocable Trust dated
January 31, 1995.
(13) Includes 232,067 shares held by the Peter V. Sperling Revocable Trust dated
January 31, 1995.
(14) Includes 27,949 shares held by the William H. Gibbs Revocable Trust dated
March 8, 1995.
40
<PAGE> 41
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 65,000,000 shares
of Class A Common Stock, no par value ("Class A Common Stock"); 3,000,000 shares
of Class B Common Stock, no par value ("Class B Common Stock"); and 1,000,000
shares of preferred stock, no par value ("Preferred Stock").
CLASS A COMMON STOCK
As of the date of this Prospectus there are outstanding 21,527,299 shares
of the Class A Common Stock. The holders of Class A Common Stock do not have any
voting rights with respect to shares of the Class A Common Stock. The holders of
the Class A Common Stock have no preemptive, subscription or additional
conversion rights. Upon a liquidation or dissolution of the Company, holders of
Class A Common Stock are entitled to share ratably with the holders of Class B
Common Stock in any corporate assets remaining after the payment of all debts,
subject to any preferential rights of any outstanding Preferred Stock. The Class
A Common Stock is not subject to assessment or further calls, has no redemption
provisions and is entitled only to such dividends as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy."
CLASS B COMMON STOCK
As of the date of this Prospectus, there are outstanding 575,769 shares of
the Class B Common Stock. The holders of Class B Common Stock are entitled to
one vote for each share held of record on all matters on which shareholders are
entitled to vote. The holders of the Class B Common Stock have no preemptive,
subscription or additional conversion rights. Upon a liquidation or dissolution
of the Company holders of Class B Common Stock are entitled to share ratably
with the holders of Class A Common Stock in any corporate assets remaining after
the payment of all debts, subject to any preferential rights of any outstanding
Preferred Stock. The Class B Common Stock is not subject to assessment or
further calls, has no redemption provisions and is entitled only to such
dividends as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." Each share of Class B
Common Stock is freely convertible into one share of Class A Common Stock at the
option of the Class B shareholder. All shares of Class B Common Stock will
automatically convert to shares of Class A Common Stock (on a share-for-share
basis) at such time as the number of shares of Class B Common Stock outstanding
is less than 115,154, in which case holders of Class A Common Stock will be
entitled to one vote per share (including the Class A Common Stock issued upon
the conversion of the Class B Common Stock). No additional shares of Class B
Common Stock may be issued by the Company except pursuant to a recapitalization
or stock split. All of the Class B Common Stock is currently held by the
Company's management and is subject to a Shareholders' Agreement, dated as of
September 7, 1994 (the "Shareholders' Agreement"). Subject to the Shareholders'
Agreement, shares of the Class B Common Stock must first be offered to the
Company and then to the other holders of the Class B Common Stock before such
shares may be transferred, except in the case of transfers to existing holders
of Class B Common Stock, executive officers of the Company or to a trust created
by a shareholder of Class B Common Stock. Upon transfer to any party, other than
an existing holder of Class B Common Stock or a an executive officer of the
Company, shares of Class B Common Stock must be converted to shares of Class A
Common Stock (on a share-for-share basis). Upon the death of any holder of Class
B Common Stock, that person's shares must be offered first to the Company and
then to the other Class B shareholders at the then fair market value. In
addition, parties to the Shareholders' Agreement agreed not to amend such
agreement before December 5, 1999 without the prior consent of Smith Barney Inc.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
shareholders, to issue from time to time up to 1,000,000 shares of Preferred
Stock in one or more series and to fix the number of shares, designations,
voting powers, preferences, optional and other special rights and the
restrictions or qualifications thereof. The rights, preferences, privileges and
restrictions or qualifications of different series of Preferred Stock may differ
with respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions and other
matters. The issuance of Preferred Stock
41
<PAGE> 42
could decrease the amount of earnings and assets available for distribution to
holders of Class A Common Stock or Class B Common Stock or could adversely
affect the rights and powers, including voting rights, if applicable, of holders
of Class A Common Stock or Class B Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. As of the
date of this Prospectus there are no shares of Preferred Stock outstanding. The
Company has no present intention to issue any shares of Preferred Stock.
CERTAIN CHARTER PROVISIONS
The Company's Articles of Incorporation limit personal liability of
directors, to the Corporation or its shareholders, for monetary damages for
breach of their fiduciary duty as a director except to the extent such
limitation of liability is not permitted under Arizona law. Arizona law provides
that the liability of a director may not be eliminated or limited for: (1)
transactions in which a director receives a financial benefit to which the
director is not entitled; (2) an intentional infliction of harm on the
corporation or the shareholders; (3) liability for unlawful distributions in
violation of Arizona law or the Articles of Incorporation or (4) an intentional
violation of criminal law. In addition, the Company's Bylaws provide that the
Company may indemnify any and all of its directors and officers, or former
directors and officers, to the fullest extent permitted by law or by the
Articles of Incorporation against claims and liabilities to which such persons
may become subject. Arizona law generally provides that indemnification is
permissible only when the director or officer acted in good faith and in a
manner reasonably believed to be in the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct was unlawful. Subject to that standard of care,
indemnification is mandatory under Arizona law for "outside directors" as
defined under Arizona law. The Company's outside directors are Messrs.
DeConcini, Klor de Alva and Weir. Indemnification of directors is precluded in
connection with a proceeding by or in the right of the corporation in which the
director was adjudged liable to the corporation or in connection with any other
proceeding charging improper personal benefit to the director, whether or not
involving action in the director's official capacity, in which the director was
adjudged liable on the basis that personal benefit was improperly received by
the director.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is First
Interstate Bank of California.
42
<PAGE> 43
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 21,527,299 shares
of Class A Common Stock outstanding, all of which will be freely tradeable
except: (1) 10,387,777 shares which are held by persons who are "affiliates" of
the Company for purposes of Rule 144 and (2) all or any portion of the 412,500
shares held by the Selling Shareholders which are not sold to the Underwriters
pursuant to their over-allotment option, which will continue to be "restricted
securities" for purposes of Rule 144.
In general, as Rule 144 currently provides, a person (or persons whose
shares are aggregated) who has beneficially owned "restricted" shares for at
least two years, including persons who may be deemed "affiliates" of the
Company, as that term is defined under Rule 144, would be entitled to sell (in
accordance with the provisions specified in the rule) within any three month
period a number of shares that does not exceed the greater of 1% of the then
outstanding shares of the Class A Common Stock (approximately 215,270 shares
immediately following the Offering) or the average weekly trading volume of each
class of such shares in the over-the-counter market during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission (the "Commission"). An "affiliate" of the
Company may sell securities that are not "restricted" without regard to the
period of beneficial ownership but subject to the volume limitations described
above and other conditions of Rule 144, subject to restrictions on affiliates. A
person who is not deemed an "affiliate" of the Company (and has not been for at
least 90 days) and who has beneficially owned his or her shares for at least
three years, would be entitled to sell such shares under Rule 144 without regard
to the volume limitations described above, manner of sale provisions, notice
requirements or availability of public information.
All of the Company's officers and directors and the Selling Shareholders
have agreed that they will not, without the prior written consent of Smith
Barney Inc., sell, offer, contract to sell, or otherwise dispose of, any shares
of Class A Common Stock or any other securities convertible into or exercisable
or exchangeable for Class A Common Stock for a period of 180 days after the date
of this Prospectus. See "Underwriting" and "Principal and Selling Shareholders."
No prediction can be made of the effect, if any, that sales of share or the
availability of such shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales by the existing shareholders of
substantial amounts of the Class A Common Stock in the public market could
adversely affect prevailing market conditions.
43
<PAGE> 44
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below (the
"Underwriters") has severally agreed to purchase, and the Selling Shareholders
have agreed to sell to such Underwriter, the number of shares of Class A Common
Stock set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------- ---------
<S> <C>
Smith Barney Inc..................
Alex. Brown & Sons Incorporated...
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------- ---------
<S> <C>
Montgomery Securities.............
---------
TOTAL........................... 2,750,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Class A Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Alex. Brown & Sons
Incorporated and Montgomery Securities are acting as the Representatives,
propose to offer part of the shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and part of the
shares to certain dealers at a price which represents a concession not in excess
of $ per share under the public offering price. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain other dealers.
The Selling Shareholders have granted to the Underwriters an option,
exercisable for thirty days from the date of this Prospectus, to purchase up to
412,500 additional shares of Class A Common Stock at the price to public set
forth on the cover page of this Prospectus minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the offering of the shares
offered hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
The Company, its officers and directors and the Selling Shareholders have
agreed that, for a period of 180 days from the date of this Prospectus, they
will not, without the prior written consent of Smith Barney Inc., offer, sell,
contract to sell, or otherwise dispose of, any shares of Class A Common Stock of
the Company or any securities convertible into, or exercisable or exchangeable
for, Class A Common Stock of the Company.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The rules of the Securities and Exchange Commission ("Commission")
generally prohibit the Underwriters from making a market in the Class A Common
Stock during the two business days prior to commencement of sales in this
Offering (the "Cooling Off Period"). The Commission has, however, adopted Rule
10b-6A of the Exchange Act ("Rule 10b-6A"), which provides an exemption from
such prohibition for certain passive market making transactions. Such passive
market making transactions must comply with applicable price and volume limits
and must be identified as passive market making transactions. In general,
pursuant to Rule 10b-6A, a passive market maker must display its bid for a
security at a price not in excess of the highest independent bid for the
security. If all independent bids are lowered below the passive market maker's
bid, however, such bid must then be lowered when certain purchase limits are
exceeded. Further, net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market maker's
average daily trading volume in a security during a specified prior period and
must be discontinued when such limit is reached. Pursuant to the exemption
provided by Rule 10b-6A, certain of the Underwriters and selling group members
may engage in passive market making in the Class A Common Stock during the
Cooling Off Period. Passive market making may stabilize the market price of the
Class A Common Stock at a level above that which might otherwise prevail, and if
commenced, may be discontinued at any time.
44
<PAGE> 45
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Selling Shareholders by Snell & Wilmer L.L.P. Certain legal matters relating to
the Offering will be passed upon for the Underwriters by O'Melveny & Myers. As
to matters of Arizona law, O'Melveny & Myers will rely on the opinion of Snell &
Wilmer L.L.P.
EXPERTS
The consolidated financial statements as of August 31, 1995 and 1994 and
for each of the three years in the period ended August 31, 1995 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
45
<PAGE> 46
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, information statements and other
information with the Commission. The reports, information statements and other
information filed by the Company with the Commission can be inspected and copied
at the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at its regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such information can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Company's Class A Common Stock
is listed on Nasdaq and similar information can be inspected and copied at the
offices of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act.
As permitted by the rules and regulations of the Commission, this Prospectus
omits certain of the information contained in the Registration Statement and
reference is hereby made to the Registration Statement and related exhibits for
further information with respect to the Company and the securities offered
hereby. Statements contained herein concerning the provisions of any documents
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission are not necessarily complete, and in each instance reference is made
to the copy of such document so filed. Each such statement is qualified in its
entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
and are hereby incorporated by reference into this Prospectus: (1) Annual Report
on Form 10-K for the fiscal year ended August 31, 1995; (2) the Quarterly Report
on Form 10-Q for the quarter ended November 30, 1995 and (3) the description of
the Class A Common Stock contained in the Company's Registration Statement on
Form 8-A/A1 filed with the Commission pursuant to Section 12(g) of the Exchange
Act. All other documents and reports filed pursuant to Sections 13, 14 or 15(d)
of the Exchange Act (except information included in any such document in
response to Items 402(i), 402(k) or 402(l) of Regulation S-K under the
Securities Act) from the date of this Prospectus and prior to the termination of
this offering of the securities shall be deemed to be incorporated by reference
herein and shall be deemed to be a part hereof from the date of the filing of
such reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in the document which this Prospectus incorporates).
Requests should be directed to Mr. James W. Hoggatt, Vice President of Finance
and Chief Financial Officer, Apollo Group, Inc., 4615 East Elwood Street,
Phoenix, Arizona 85040, telephone number (602) 966-5394.
46
<PAGE> 47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Statement of Operations.................................................. F-3
Consolidated Balance Sheet............................................................ F-4
Consolidated Statement of Changes in Shareholders' Equity............................. F-5
Consolidated Statement of Cash Flows.................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Apollo Group, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Apollo Group, Inc. and its subsidiaries at August 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Apollo Group, Inc.'s management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
October 12, 1995
F-2
<PAGE> 49
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
--------------------------------- -------------------
1993 1994 1995 1994 1995
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
NET REVENUES.......................... $97,545 $124,720 $163,429 $36,465 $49,727
------- -------- -------- ------- -------
COSTS AND EXPENSES:
Instruction costs and services...... 65,319 81,313 102,122 23,418 29,959
Selling and promotional............. 15,812 17,918 21,016 4,987 6,328
General and administrative.......... 14,402 17,194 18,462 3,855 5,595
------- -------- -------- ------- -------
95,533 116,425 141,600 32,260 41,882
------- -------- -------- ------- -------
Income before income taxes............ 2,012 8,295 21,829 4,205 7,845
Less provision for income taxes....... 869 3,383 9,229 1,661 3,256
------- -------- -------- ------- -------
NET INCOME............................ $ 1,143 $ 4,912 $ 12,600 $ 2,544 $ 4,589
======= ======== ======== ======= =======
NET INCOME PER SHARE.................. $ .08 $ .32 $ .62 $ .17 $ .20
======= ======== ======== ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING... 15,136 15,281 20,485 15,281 22,504
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 50
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
AUGUST 31,
-------------------- NOVEMBER 30,
1994 1995 1995
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS --
Cash and cash equivalents............................... $ 4,722 $ 50,726 $ 52,609
Restricted cash......................................... 8,094 11,875 10,797
Receivables, net........................................ 14,236 15,883 17,386
Inventory............................................... 2,656 2,723 2,813
Deferred tax asset, net................................. 1,321 2,352 3,088
Prepaids and other current assets....................... 864 485 851
------- -------- --------
TOTAL CURRENT ASSETS...................................... 31,893 84,044 87,544
Property and equipment, net............................... 6,799 13,390 14,843
Educational program production costs, net................. 1,914 1,963 1,945
Deferred tax asset, net................................... 306
Other assets.............................................. 2,726 2,735 4,144
------- -------- --------
TOTAL ASSETS.............................................. $43,638 $102,132 $108,476
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES --
Current portion of long-term liabilities................ $ 183 $ 118 $ 118
Accounts payable........................................ 5,325 6,261 3,569
Other accrued liabilities............................... 6,840 9,962 10,424
Income taxes payable.................................... 310 96 3,617
Student deposits and deferred tuition................... 22,232 28,628 28,409
------- -------- --------
TOTAL CURRENT LIABILITIES................................. 34,890 45,065 46,137
------- -------- --------
Long-term liabilities, less current portion............... 1,347 1,201 1,723
------- -------- --------
Deferred tax liability, net............................... 514 303
------- -------- --------
Commitments and contingencies............................. -- -- --
------- -------- --------
SHAREHOLDERS' EQUITY --
Preferred stock, no par value, 1,000,000 shares
authorized, none issued.............................. -- -- --
Class A nonvoting common stock, no par value, 65,000,000
shares authorized; 14,394,000 and 21,492,000 issued
and outstanding at August 31, 1994 and 1995,
respectively, and 21,527,000 issued and outstanding
at November 30, 1995................................. 9 18 28
Class B voting common stock, no par value, 3,000,000
shares authorized; 576,000 issued and outstanding.... 1 1 1
Additional paid-in capital.............................. 1,982 37,378 37,740
Retained earnings....................................... 5,409 17,955 22,544
------- -------- --------
TOTAL SHAREHOLDERS' EQUITY................................ 7,401 55,352 60,313
------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $43,638 $102,132 $108,476
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 51
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------
CLASS A
COMMON NONVOTING CLASS B VOTING
--------------- --------------- --------------- ADDITIONAL RETAINED
STATED STATED STATED PAID-IN EARNINGS
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL (DEFICIT)
------ ------ ------ ------ ------ ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1992................. 1,118 $ 10 -- $ -- -- $ -- $ 32 $ (646)
New issue.................................. 34 81
Net income................................. 1,143
------ --- ------ --- --- ---- ------- -------
BALANCE AT AUGUST 31, 1993................. 1,152 10 -- -- -- -- 113 497
Recapitalization:
6,909 shares of Class A Common Stock
and 576 shares of Class B Common
Stock issued in exchange for
1,152 shares of common stock.......... (1,152) (10) 6,909 9 576 1
Grant of stock options..................... 1,869
Net income................................. 4,912
------ --- ------ --- --- ---- ------- -------
BALANCE AT AUGUST 31, 1994................. -- -- 6,909 9 576 1 1,982 5,409
Stock issued by public offering............ 3,516 4 34,854
Stock issued under stock purchase plans.... 29 388
Stock issued under stock option plans...... 12 97
Stock canceled under stock option plans.... (3) (22) (54)
4-for-3 stock split........................ 3,673 5 (5)
Tax benefit related to stock options
exercised................................ 84
Net income................................. 12,600
------ --- ------ --- --- ---- ------- -------
BALANCE AT AUGUST 31, 1995................. -- -- 14,136 18 576 1 37,378 17,955
3-for-2 stock split........................ 7,356 10 (10)
Stock issued under stock purchase plans.... 13 201
Stock issued under stock option plans...... 22 39
Tax benefit related to stock options
exercised................................ 132
Net income................................. 4,589
------ --- ------ --- --- ---- ------- -------
BALANCE AT NOVEMBER 30, 1995 (UNAUDITED)... -- $ -- 21,527 $ 28 576 $ 1 $ 37,740 $ 22,544
====== === ====== === === ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 52
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
------------------------------------ ---------------------
1993 1994 1995 1994 1995
-------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET CASH RECEIVED FROM (USED FOR) OPERATING
ACTIVITIES:
Cash received from customers.............. $ 96,787 $ 117,187 $ 159,349 $ 34,578 $ 46,155
Cash paid to employees and suppliers...... (90,460) (105,858) (129,442) (32,239) (41,522)
Interest received......................... 95 280 2,207 132 692
Interest paid............................. (279) (153) (96) (16) (20)
Net income taxes received (paid).......... 78 (4,962) (9,692) (689) (546)
-------- --------- --------- --------- ---------
Net cash received from operating
activities............................. 6,221 6,494 22,326 1,766 4,759
-------- --------- --------- --------- ---------
NET CASH RECEIVED FROM (USED FOR) INVESTING
ACTIVITIES:
Purchase of property and equipment........ (2,547) (4,724) (9,944) (2,052) (2,357)
Additions to educational program
production costs....................... (1,527) (1,380) (1,548) (261) (307)
Decrease in notes receivable.............. 145
Cash paid at acquisition of Western, net
of cash acquired....................... (584)
-------- --------- --------- --------- ---------
Net cash used for investing activities.... (3,929) (6,104) (11,492) (2,313) (3,248)
-------- --------- --------- --------- ---------
NET CASH RECEIVED FROM (USED FOR) FINANCING
ACTIVITIES:
Borrowings on line of credit.............. 12,875 11,190
Repayments of borrowings on line of
credit................................. (13,075) (11,190)
Proceeds from sale-leaseback of assets.... 2,401
Principal payments on long-term debt...... (632) (912) (181) (10)
Issuance of stock......................... 81 35,321 240
Retirement of stock....................... (54)
Tax benefits related to exercise of
options................................ 84 132
-------- --------- --------- --------- ---------
Net cash received from (used for)
financing activities................... (751) 1,489 35,170 (10) 372
-------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................... 1,541 1,879 46,004 (557) 1,883
Cash and cash equivalents, beginning of
period.................................... 1,302 2,843 4,722 4,722 50,726
-------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.... $ 2,843 $ 4,722 $ 50,726 $ 4,165 $ 52,609
======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 53
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
NOTE 1. NATURE OF OPERATIONS
Apollo Group, Inc. ("Apollo" or the "Company"), through its subsidiaries
The University of Phoenix, Inc. ("UOP"), the Institute for Professional
Development ("IPD") and Western International University, Inc. ("WIU"), is a
leading provider of higher education programs for working adults. The Company's
fiscal year is from September 1 to August 31. Unless otherwise stated,
references to the years 1993, 1994 and 1995 relate to the fiscal years ended
August 31, 1993, 1994 and 1995, respectively.
UOP is a regionally accredited, private institution of higher education
offering bachelor's and master's degree programs in business, management,
computer information systems, education and health care. UOP currently has 45
campuses and learning centers located in Arizona, California, Colorado, Hawaii,
Louisiana, Michigan, Nevada, New Mexico, Utah and Puerto Rico. UOP also offers
its educational programs nationally and internationally through OnlineTM, its
computerized educational delivery system wherever there is adequate phone
service or access to CompuServe(R) or the Internet. UOP is accredited by the
Commission on Institutions of Higher Education of the North Central Association
of Colleges and Schools ("NCA").
IPD provides program development and management services under long-term
contracts to 15 regionally accredited private colleges and universities. IPD is
currently operating in 16 states.
WIU was acquired on September 1, 1995. See Note 3.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Apollo and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. The carrying value of cash, cash equivalents and restricted
cash approximates fair value due to the short-term maturities of these
instruments.
RESTRICTED CASH. The U.S. Department of Education (the "DOE") requires
that Title IV Program funds collected for unbilled tuition be kept in a separate
cash or cash equivalent account until the students are billed for that portion
of their program. In addition, all Title IV Program funds transferred to the
Company through electronic funds transfer are subject to certain holding period
restrictions. These funds generally remain in these separate accounts for an
average of 60-75 days from date of collection. Restricted cash is excluded from
cash received from operating activities in the Consolidated Statement of Cash
Flows until the cash is transferred from these restricted accounts to the
Company's operating accounts. The Company's restricted cash is invested in U.S.
Treasury backed securities with maturities of ninety days or less.
REVENUES, RECEIVABLES AND RELATED LIABILITIES. The Company's educational
programs range in length from one-day seminars to degree programs lasting up to
46 months. Long-term programs are billed in blocks of time ranging in length
from five weeks to three months. Seminars and other shorter term programs are
usually billed in one installment. Billings occur when the student first attends
a session resulting in the recording of a receivable and a deferred tuition
revenue liability for the amount billed. The deferred tuition revenue liability
is recognized into income pro rata over the period of instruction. If a student
withdraws from a course or program, the unearned portion of the program that the
student has paid for is refunded, generally on a pro rata basis. Because most of
the Company's educational programs are billed in short blocks of time ranging
from
F-7
<PAGE> 54
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
five to six weeks, most of the deferred tuition revenue liability at the end of
each period will be recognized into income within five to six weeks following
the end of that period.
Student deposits consist of payments made in advance of billings. As the
student is billed, the student deposit is applied against the resulting student
receivable.
The Company does not record the unbilled portion of educational programs
for existing students because the students are not usually financially obligated
for the unbilled portion. A majority of these students do, however, remain in
their programs until completion.
Receivables consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------- NOVEMBER 30,
1994 1995 1995
------- ------- ------------
<S> <C> <C> <C>
Trade receivables.................................. $15,678 $17,991 $ 20,561
Interest receivable................................ 208 261
Income tax receivable.............................. 15 137
------- ------- -------
15,693 18,336 20,822
Less allowance for doubtful accounts............... (1,457) (2,453) (3,436)
------- ------- -------
Total receivables, net................... $14,236 $15,883 $ 17,386
======= ======= =======
</TABLE>
Bad debt expense was $1.1 million, $1.8 million and $1.8 million for 1993,
1994 and 1995, respectively.
Student deposits and deferred tuition consist of the following, in
thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------- NOVEMBER 30,
1994 1995 1995
------- ------- ------------
<S> <C> <C> <C>
Student deposits................................... $12,689 $17,756 $ 17,616
Deferred tuition revenue........................... 9,543 10,872 10,793
------- ------- -------
Total student deposits and deferred
tuition................................ $22,232 $28,628 $ 28,409
======= ======= =======
</TABLE>
The carrying value of the student deposit liabilities approximates fair
value due to the short-term nature of these instruments.
INVENTORY. Inventory consists primarily of curriculum materials.
Inventories are stated at the lower of cost, determined using the FIFO
(first-in, first-out) method, or market.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost less
accumulated depreciation. The Company capitalizes the cost of software used for
internal operations once technological feasibility of the software has been
demonstrated. Such costs consist primarily of custom-developed and packaged
software and the direct labor costs of internally developed software.
Depreciation is provided on all buildings, furniture, equipment and related
software using the straight-line method over the estimated useful lives of the
related assets which range from three to seven years, except software which is
depreciated over three to five years and buildings which are depreciated over 30
years. Leasehold improvements and capital lease assets are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the related assets. Depreciation and amortization expense was $1.8
million, $2.0 million and $2.8 million for 1993, 1994 and 1995, respectively.
Maintenance and repairs are expensed as incurred.
EDUCATIONAL PROGRAM PRODUCTION COSTS. Direct costs incurred in the
original production of, and improvements to, educational courses are
capitalized, then recognized as expense using the 150% declining balance method
over a three-year period beginning in the month the courses are placed in
service. Courses are
F-8
<PAGE> 55
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
generally placed in service within four to six months after the program
production commences. These direct costs primarily include contract-based
curriculum development, salaries and wages for staff directly engaged in the
development process and the costs of royalties and reprint permissions. Any
unamortized cost is charged to expense whenever a course or program is
discontinued. From 1993 through 1995, less than 4% of these courses were
discontinued within three years of being placed in service. Indirect costs
related to the curriculum development process, such as space rent and supplies,
are expensed as incurred. Amortization expense was $1.1 million, $1.4 million
and $1.4 million for 1993, 1994 and 1995, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible assets
consist primarily of the excess of costs over the fair value of the assets
acquired from Western. These assets are being amortized on a straight-line basis
over the estimated life of 15 years.
DEFERRED RENTAL PAYMENTS AND DEPOSITS. The Company records rent expense
using the straight-line method over the term of the lease agreement.
Accordingly, deferred rental payment liabilities are provided for lease
agreements that specify scheduled rent increases over the lease term and rental
deposits are provided for lease agreements that specify payments in advance or
scheduled rent decreases over the lease term.
DEFERRED COMPENSATION AGREEMENTS. The Company has various deferred
compensation agreements with individuals that are accounted for individually on
an accrual basis in accordance with the terms of the underlying contract. The
expected future benefits are accrued over the period of service required to be
rendered in exchange for the benefits. All individuals covered by deferred
compensation agreements were fully eligible to receive the benefits at the
contract date and as a result, the deferred compensation liability reflects the
present value of all future benefits expected to be paid, as determined at the
contract date.
SELLING AND PROMOTIONAL COSTS. The Company expenses selling and
promotional costs as incurred. Selling and promotional costs include marketing
salaries, direct-response and other advertising, promotional materials and
related marketing costs. Direct-response advertising is not presently
capitalized because all the criteria of Statement of Position 93-7, "Reporting
on Advertising Costs," were not satisfied.
STARTUP COSTS. Costs related to the startup of new campuses and learning
centers are expensed as incurred.
NON-OPERATING INCOME AND EXPENSE. Interest income is included in net
revenues and totaled $84,000, $280,000 and $2.4 million for 1993, 1994 and 1995,
respectively. For the three-month period ended November 30, 1994 and 1995,
interest income totaled $141,000 and $745,000, respectively. Interest expense,
including the imputed interest on deferred compensation agreements, is expensed
as incurred. Interest expense totaled $255,000, $153,000 and $96,000 for 1993,
1994 and 1995, respectively.
INCOME TAXES. Deferred income taxes have been provided for all significant
temporary differences. These temporary differences arise principally from
compensation not yet deductible for tax purposes, limitations on bad debt
deductions for tax purposes, capitalization of educational program production
costs for financial reporting purposes, loss reserves not deductible for tax
purposes and the use of accelerated depreciation methods.
When options granted under the Company's stock option plans are exercised,
the Company receives a tax deduction related to the difference between the
market value of its Class A Common Stock at the date of exercise and the sum of
the exercise price and any compensation expense recognized for financial
reporting purposes. The tax benefit resulting from this tax deduction is
reflected as a decrease in the Company's income tax liability and an increase to
additional paid-in capital.
RECAPITALIZATION AND STOCK SPLITS. In June 1994, the Company issued six
shares of Class A Common Stock and .5 shares of Class B Common Stock in exchange
for each share of common stock outstanding at
F-9
<PAGE> 56
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
that date. In September 1994, the Company's Class A and Class B Common Stock
underwent a 1.118 to 1 stock split. On March 24, 1995, the Board of Directors
authorized a 4-for-3 stock split, effected in the form of a stock dividend of
1/3 additional shares of Class A Common Stock for each share of Class A or
Class B Common Stock owned by shareholders of record on April 7, 1995, to be
distributed on April 28, 1995. On August 25, 1995, the Board of Directors
authorized a 3-for-2 stock split, effected in the form of a stock dividend of
1/2 additional shares of Class A Common Stock for each share of Class A or
Class B Common Stock owned by shareholders of record on September 8, 1995, to be
distributed on September 22, 1995.
The June 1994 recapitalization and the three subsequent stock splits have
been given retroactive recognition in each period presented in the accompanying
consolidated financial statements.
EARNINGS PER SHARE. Net income per share is computed using the weighted
average number of Class A and Class B common and common equivalent shares
outstanding during the period after giving retroactive effect to the
recapitalization and stock splits described above. Shares subject to stock
options issued during the 12-month period prior to the initial public offering
are considered common equivalent shares for all periods prior to the initial
public offering, pursuant to the requirements of the Securities and Exchange
Commission (the "SEC"). The amount of any tax benefit to be credited to capital
related to the exercise of options is included when applying the treasury stock
method to stock options in the computation of earnings per share. The exercise
of outstanding stock options would not result in a material dilution of earnings
per share.
RECLASSIFICATIONS. Certain amounts reported for the year ended August 31,
1994 and 1995 have been reclassified to conform to the current presentation,
having no effect on net income.
NOTE 3. ACQUISITION OF CERTAIN ASSETS OF WESTERN INTERNATIONAL UNIVERSITY
Effective September 1, 1995, the Company completed the acquisition of
certain assets of Western International University ("Western"). Western was a
private non-profit educational institution incorporated in 1978 that was
accredited by NCA. The Company formed a new wholly-owned subsidiary called
Western International University, Inc. ("WIU") as the holding company for the
net assets acquired from Western. WIU acquired accounts receivable, notes
receivable, furniture, fixtures, equipment, certain contracts and student
agreements, copyrights, trademarks, securities, cash, goodwill and certain other
assets of Western. In exchange, WIU paid Western $237,000 in cash, including
amounts advanced to Western prior to the closing, and assumed an additional $1.8
million in liabilities. The liabilities consisted of $1.3 million of current
liabilities, $393,000 of which was paid on the acquisition date, and $503,000 of
long-term debt. WIU assumed the Title IV liabilities of Western in the estimated
amount of $210,000. This amount and the goodwill recorded related to the
acquisition is subject to change based on the DOE's audit of Western's Title IV
Programs to commence in January 1996. The excess of costs over the fair value of
the assets acquired was $1.6 million and will be amortized on a straight-line
basis over fifteen years.
WIU has received approval to operate under new ownership by the Arizona
State Board for Post-Secondary Education and has received approval from NCA for
the transfer of accreditation to WIU. WIU has applied with the DOE to resume
participation in Title IV programs. Prior to obtaining approval from the DOE,
WIU will not be able to disburse funds awarded by Western or process new Title
IV financial aid.
The acquisition was accounted for under the purchase method and,
accordingly, the results of operations related to this new subsidiary are
included with those of the Company for periods subsequent to the date of
acquisition. Results of operations for periods prior to the acquisition were
immaterial. Western had consolidated net revenues of $4.3 million and pretax
income of $216,000 for the year ended August 31, 1995.
F-10
<PAGE> 57
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
NOTE 4. DISCONTINUED TECHNICAL TRAINING SCHOOLS
In March 1992, the Company adopted a plan to discontinue the operations of
its technical training schools. The operations of these schools were phased out
over the period from March 1992 through October 1992. Pretax losses related to
the operations of the technical training schools were $265,000 in 1993.
NOTE 5. FINANCIAL AID PROGRAMS
Approximately 50%-60% of the Company's net revenues was received from
students who participated in government-sponsored financial aid programs under
Title IV of the Higher Education Act of 1965, as amended. These financial aid
programs consist generally of: (1) guaranteed student loans that are issued
directly to the students and are non-recourse to the Company and (2) direct
grants to students. Annually, the DOE publishes the default rates of students
participating in the FFEL programs.
The latest student default rates as reported by the DOE for these
guaranteed student loans are as follows:
<TABLE>
<CAPTION>
FOR LOANS ENTERING
REPAYMENT DURING THE
DOE FISCAL YEAR ENDED
SEPTEMBER 30,
----------------------
1990 1991 1992
---- ---- ----
<S> <C> <C> <C>
Students attending:
UOP campuses................................................. 2.6% 3.5% 5.0%
IPD client institutions...................................... 4.1% 5.6% 5.3%
Western campuses............................................. 7.0% 7.4% 4.7%
National average............................................... 22.4% 17.8% 15.0%
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------- NOVEMBER 30,
1994 1995 1995
------- ------- ------------
<S> <C> <C> <C>
Land............................................... $ 125 $ 125 $ 125
Buildings.......................................... 225 225 225
Furniture and equipment............................ 9,088 16,494 18,369
Software........................................... 3,084 3,196 3,392
Capitalized equipment leases....................... 377
Leasehold improvements............................. 1,188 1,032 1,132
------- ------- -------
14,087 21,072 23,243
Less accumulated depreciation...................... (7,059) (7,682) (8,400)
Less accumulated amortization of capitalized
equipment leases................................. (229)
------- ------- -------
Property and equipment, net.............. $ 6,799 $13,390 $ 14,843
======= ======= =======
</TABLE>
During 1994, the Company sold furniture and equipment under a
sale-leaseback arrangement. The assets were sold for $2.4 million in cash,
resulting in a $351,000 gain that is being recognized pro rata over the term of
the related operating lease. In 1994 and 1995, the Company recognized a gain of
$88,000 and $117,000, respectively. In addition, the Company sold a house
located on leased land to the Company's Secretary and Treasurer for $140,000 in
1994. The book value of the building and related improvements, net of
accumulated
F-11
<PAGE> 58
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
depreciation, was $148,000. The Company believes that the terms of this sale
were as favorable as could have been obtained from an unaffiliated party.
NOTE 7. EDUCATIONAL PROGRAM PRODUCTION COSTS
Educational program production costs consist of the following, in
thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------- NOVEMBER 30,
1994 1995 1995
------- ------- ------------
<S> <C> <C> <C>
Educational program production costs............... $ 6,823 $ 7,722 $ 8,004
Less accumulated amortization...................... (4,909) (5,759) (6,059)
------- ------- -------
Educational program production costs,
net.................................... $ 1,914 $ 1,963 $ 1,945
======= ======= =======
</TABLE>
The net effect on pre-tax income of the capitalization and amortization of
educational program production costs amounts to an increase of $429,000 in 1993,
a decrease of $36,000 in 1994 and an increase of $49,000 in 1995.
NOTE 8. DEPOSITS AND OTHER ASSETS
Deposits and other assets consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
----------------- NOVEMBER 30,
1994 1995 1995
------ ------ ------------
<S> <C> <C> <C>
Goodwill and other intangible assets, net............ $ 257 $ 494 $2,062
Land held for sale................................... 1,414 1,310 1,183
Rental deposits...................................... 540 493 693
Other deposits....................................... 515 438 206
------- ------- -------
Total other assets......................... $2,726 $2,735 $4,144
======= ======= =======
</TABLE>
Goodwill and other intangible assets consist primarily of the excess of
costs over the fair value of the assets acquired from Western. Land held for
sale consists of approximately 105 acres of undeveloped land located in Santa
Cruz County, California, a substantial portion of which was acquired from a
related party in 1991. As a result of poor market conditions in Northern
California, the Company recorded a $638,000 writedown in 1993 ($359,000 after
related tax benefit), a $135,000 writedown in 1994 ($80,000 after related tax
benefit) and a $104,000 writedown in 1995 ($60,000 after related tax benefit),
based on independent appraisals dated June 1993, August 1994 and May 1995,
respectively.
NOTE 9. SHORT-TERM BORROWINGS
At August 31, 1995, the Company had no amounts borrowed against its $4.0
million line of credit. The line of credit is secured by receivables, inventory,
land held for sale and property and equipment and bears interest at prime (7.87%
at August 31, 1995). The line of credit is renewable annually and is payable
upon its termination in February 1996. The Company expects to renew this credit
line. The Company is in compliance with the restrictive covenants contained in
its line of credit agreement. The Company's line of credit agreement prohibits
the Company from paying cash dividends or making other cash distributions
without the lender's consent.
F-12
<PAGE> 59
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
NOTE 10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
----------------- ------------
1994 1995 1995
------ ------ ------------
<S> <C> <C> <C>
Salaries and wages................................... $3,186 $4,252 $ 4,251
Employee benefits and payroll withholdings........... 1,166 1,856 1,537
Other accruals....................................... 2,488 3,854 4,636
------ ------ -------
Total other accrued liabilities............ $6,840 $9,962 $ 10,424
====== ====== =======
</TABLE>
NOTE 11. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company provides various health, welfare and disability benefits to its
full-time salaried employees which are funded primarily by contributions. The
Company does not provide postemployment or postretirement health care and life
insurance benefits to its employees.
The Company sponsors a 401(k) plan which is available to all employees of
the Company who have completed one year and at least 1,000 hours of continuous
service. The Company matches 100% of the contributions from the first $10,000 of
a participant's annual pre-tax earnings. Contributions from the participant's
earnings in excess of $10,000 are matched by the Company at 18.5%. Participant
contributions are subject to certain restrictions as set forth in the Internal
Revenue Code. The Company's matching contributions totaled $668,000, $745,000
and $848,000 for 1993, 1994 and 1995, respectively.
In addition, the Company has three stock-based compensation plans that were
adopted in 1994: the Apollo Group, Inc. Director Stock Plan ("Director Stock
Plan"), the Apollo Group, Inc. Long-Term Incentive Plan ("LTIP") and the Apollo
Group, Inc. 1994 Employee Stock Purchase Plan ("Purchase Plan"). The Director
Stock Plan provides for an annual grant of options to the Company's nonemployee
directors to purchase 6,000 shares, adjusted for stock splits, of the Company's
Class A Common Stock on September 1 of each year. Under the LTIP, the Company
may grant options, incentive stock options, stock appreciation rights and other
stock based awards to certain officers or key employees of the Company. At
November 30, 1995, there were 122,000 and 581,000 shares available for issuance
under the Director Stock Plan and LTIP, respectively, and, to date, only
non-qualified stock options have been granted. A
F-13
<PAGE> 60
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
summary of the activity related to the stock options granted under the Director
Stock Plan and LTIP follows, in thousands:
<TABLE>
<S> <C>
OPTIONS OUTSTANDING --
Balance at August 31, 1993................................................. --
June 2, 1994 grant at $.935 per share................................... 369
-----
Balance at August 31, 1994................................................. 369
December 6, 1994 grant at $5.50 per share............................... 402
Exercised at $5.50 per share............................................ (18)
Canceled at $5.50 per share............................................. (4)
-----
Balance at August 31, 1995................................................. 749
September 1995 grants at $20.17 to 25.42 per share...................... 942
Exercised at $.935 to $5.50 per share................................... (22)
Canceled at $25.42 per share............................................ (12)
-----
Balance at November 30, 1995............................................... 1,657
=====
OPTIONS EXERCISABLE --
Balance at August 31, 1993 and 1994........................................ --
=====
Balance at August 31, 1995................................................. 749
=====
Balance at November 30, 1995............................................... 727
=====
OPTIONS AVAILABLE FOR ISSUANCE --
Balance at August 31, 1994................................................. 1,400
Less options granted.................................................... (771)
Plus options canceled................................................... 4
-----
Balance at August 31, 1995................................................. 633
Increase in available shares............................................ 1,000
Less options granted.................................................... (942)
Plus options canceled................................................... 12
-----
Balance at November 30, 1995............................................... 703
=====
</TABLE>
The June 2, 1994 grant to certain key employees was based on the fair value
of such options at the date of grant as determined by an independent valuation.
Pursuant to SEC requirements, the Company recorded $1.9 million in compensation
expense and additional paid-in capital in 1994 related to these options,
representing the difference between the exercise price per share and the assumed
initial public offering price multiplied by the total number of shares granted.
In September 1995, the Company increased the number of shares of Class A
Common Stock available for issuance under the LTIP from 493,000 to 1.5 million.
At the same time, the Company granted an additional 924,000 options to purchase
shares of Class A Common Stock, at $25.42 per share, to officers and certain key
employees under the LTIP. The options vest 25% at the end of seven years and
ratably thereafter over the eighth to approximate tenth year. This vesting
period may be accelerated for individual employees if the stock price reaches
defined goals for at least three trading days and if certain profit goals,
defined for groups of individuals, are also achieved.
F-14
<PAGE> 61
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
The Purchase Plan allows employees of the Company to purchase up to 1.0
million shares of the Company's Class A Common Stock at quarterly intervals
through periodic payroll deductions. The purchase price per share, in general,
is 85% of the lower of: (1) the fair market value (as defined in the Purchase
Plan) of a share of Class A Common Stock on the participant's enrollment date
into the respective quarterly offering period or (2) the fair market value of a
share of Class A Common Stock on the purchase date. During the year ended August
31, 1995, 53,000 shares were purchased by eligible employees at prices ranging
from $5.58 to $11.32 per share. At August 31, 1995, there are 947,000 shares
available for purchase under the Purchase Plan.
NOTE 12. LONG-TERM LIABILITIES
Long-term liabilities consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
----------------- NOVEMBER 30,
1994 1995 1995
------ ------ ------------
<S> <C> <C> <C>
Deferred compensation agreements, discounted at 7.5% to
12%........................................................ $ 998 $1,004 $1,007
Deferred rental payments..................................... 351 315 331
Note payable related to acquisition of WIU, discounted at
9%......................................................... 503
Mortgage notes and capital lease obligations paid in full in
1995....................................................... 181
------ ------ ------
Total long-term liabilities........................ 1,530 1,319 1,841
Less current portion......................................... (183) (118) (118)
------ ------ ------
Total long-term liabilities, net................... $1,347 $1,201 $1,723
====== ====== ======
</TABLE>
The aggregate maturities of all long-term liabilities for each of the five
fiscal years subsequent to August 31, 1995 are: 1996 -- $118,000;
1997 -- $126,000; 1998 -- $95,000; 1999 -- $49,000; 2000 -- $50,000.
The undiscounted deferred compensation liability was $1.8 million at both
August 31, 1994 and 1995. The discount rate for deferred compensation agreements
was determined at the date of each respective agreement based on the estimated
long-term rate of return on high-quality fixed income investments with cash
flows similar to the respective agreements.
NOTE 13. LEASES
The Company is obligated under facility and equipment leases that are
classified as operating leases. Following is a schedule of future minimum lease
commitments as of August 31, 1995, in thousands:
<TABLE>
<CAPTION>
OPERATING LEASES
-----------------------
EQUIPMENT
BUILDINGS AND OTHER
--------- ---------
<S> <C> <C>
1996............................................................ $ 11,704 $ 1,611
1997............................................................ 9,770 670
1998............................................................ 8,667 119
1999............................................................ 7,260 4
2000............................................................ 6,115 1
Thereafter...................................................... 7,906
------- ------
$ 51,422 $ 2,405
======= ======
</TABLE>
F-15
<PAGE> 62
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
Facility and equipment rent expense totaled $11.5 million, $13.8 million
and $16.5 million for 1993, 1994 and 1995, respectively.
NOTE 14. INCOME TAXES
Pre-tax earnings (loss) and the related components of the income tax
provision are as follows, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
------------------------------- -------------------
1993 1994 1995 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRE-TAX EARNINGS (LOSS):
United States.................... $ 2,091 $ 8,104 $21,401 $ 4,127 $ 7,563
Puerto Rico...................... (79) 191 428 78 282
------ ------ ------- ------ ------
Total pre-tax
earnings............. $ 2,012 $ 8,295 $21,829 $ 4,205 $ 7,845
====== ====== ======= ====== ======
INCOME TAX PROVISION (CREDIT):
Current -- state................. $ 244 $ 1,072 $ 2,550 $ 336 $ 1,057
Current -- federal............... 559 3,399 7,103 1,635 2,787
Deferred......................... 66 (1,088) (424) (310) (588)
------ ------ ------- ------ ------
Total provision for
income taxes......... $ 869 $ 3,383 $ 9,229 $ 1,661 $ 3,256
====== ====== ======= ====== ======
</TABLE>
The income tax provision differs from the tax that would result from
application of the statutory federal corporate tax rate. The reasons for the
differences are as follows, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
------------------------------- -------------------
1993 1994 1995 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income tax provision at expected
rate of 34% for 1993 and 1994
and 35% for 1995............... $ 684 $ 2,820 $ 7,640 $ 1,472 $ 2,746
Nondeductible business meals..... 37 46 172 45 38
Non-taxable interest income...... (193) (71)
State taxes, net of federal
benefit........................ 141 536 1,518 133 531
Other, net....................... 7 (19) 92 11 12
---- ------ ------ ------ ------
Total provision for
income taxes......... $ 869 $ 3,383 $ 9,229 $ 1,661 $ 3,256
==== ====== ====== ====== ======
</TABLE>
F-16
<PAGE> 63
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
The current and non-current deferred tax assets and liabilities consist of
the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
----------------- ------------
1994 1995 1995
------ ------ ------------
<S> <C> <C> <C>
GROSS DEFERRED TAX ASSETS:
Compensation not yet deductible for tax purposes... $1,353 $1,455 $1,568
Difference in bad debt deductions for financial
reporting purposes.............................. 583 981 1,426
Loss reserves not deductible for tax purposes...... 567 554 311
Difference in lease expense deductions............. 318 272 630
Other.............................................. 66 262
------ ------ ------
Total gross deferred tax assets.................... 2,821 3,328 4,197
------ ------ ------
GROSS DEFERRED TAX LIABILITIES:
Deduction of educational program production costs
for tax purposes................................ 786 785 546
Depreciation and amortization of property and
equipment....................................... 349 547 633
State taxes........................................ 158 233
Other.............................................. 59
------ ------ ------
Total gross deferred tax liabilities............... 1,194 1,490 1,412
------ ------ ------
NET DEFERRED TAX ASSET............................... $1,627 $1,838 $2,785
====== ====== ======
The net tax asset is reflected in the accompanying
balance sheet as follows:
Current deferred tax asset, net...................... $1,321 $2,352 $3,088
Noncurrent deferred tax asset (liability), net....... 306 (514) (303)
------ ------ ------
NET DEFERRED TAX ASSET............................... $1,627 $1,838 $2,785
====== ====== ======
</TABLE>
In light of the Company's history of profitable operations, management has
concluded that it is more likely than not that the Company will ultimately
realize the full benefit of its deferred tax assets related to future deductible
items. Accordingly, the Company believes that no valuation allowance is required
for deferred tax assets in excess of deferred tax liabilities.
F-17
<PAGE> 64
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF AND FOR THE PERIODS ENDED
NOVEMBER 30, 1994 AND 1995 IS UNAUDITED
NOTE 15. CASH RECEIVED FROM OPERATING ACTIVITIES
Following is a reconciliation of net income to net cash received from
operating activities, as shown on the consolidated statement of cash flows, in
thousands:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
------------------------------- -------------------
1993 1994 1995 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income............................... $ 1,143 $ 4,912 $12,600 $ 2,544 $ 4,589
Asset write down......................... 638 135 104 133
Depreciation and amortization of:
Property and equipment................. 1,819 1,997 2,751 569 1,058
Educational program production costs... 1,098 1,365 1,375 337 322
Goodwill and other intangible assets... 35
Writeoff of unamortized cost of
discontinued educational courses....... 51 124 3
Bad debt expense......................... 1,116 1,822 1,849 1,004 761
Compensation expense related to grant of
options................................ 1,869
Net loss (gain) on disposal of assets.... (30) (141) 602 6 52
Change in assets and liabilities, net of
effect from purchase of Western:
Decrease (increase) in restricted
cash................................ (1,907) (6,098) (3,781) (1,727) 1,078
Increase in receivables, net of
write-offs.......................... (4,128) (5,894) (3,496) (1,019) (2,079)
Decrease (increase) in deferred tax
asset............................... 157 (757) (725) (702) (736)
Decrease (increase) in other current
assets.............................. 26 (940) 312 (21) (433)
Decrease (increase) in other assets.... 186 (687) (113) (314) 26
Increase (decrease) in deferred rent... (269) 10 (36) (32) 17
Increase (decrease) in deferred
compensation contracts.............. (46) 753 6 5 3
Increase (decrease) in accounts payable
and accrued liabilities............. 468 2,727 4,058 (2,107) (2,507)
Increase (decrease) in student deposits
and deferred tuition................ 5,329 6,192 6,396 1,554 (872)
Increase (decrease) in deferred
taxes............................... (170) (331) 514 336 (211)
Increase (decrease) in taxes payable... 791 (491) (214) 1,333 3,520
------- ------- ------- ------- -------
Net cash received from
operating activities......... $ 6,221 $ 6,494 $22,326 $ 1,766 $ 4,759
======= ======= ======= ======= =======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company purchased certain assets of Western for a total purchase price
of $2.1 million. In conjunction with the acquisition, liabilities were assumed
as follows:
<TABLE>
<S> <C>
Fair value of assets acquired............................................... $2,065
Less cash paid to Western and on behalf of Western for the assets
acquired.................................................................. (630)
------
Net liabilities assumed........................................... $1,435
======
</TABLE>
F-18
<PAGE> 65
[DESCRIPTION OF INSIDE BACK COVER GRAPHICS]
<TABLE>
<S> <C>
Top left
photo: A picture showing campus activity with caption reading: "In 2000, 6.8 million
of the nation's 15.5 million college students are projected to be adults over
the age of 24."
Top right
photo: A picture of the University of Phoenix building located in Phoenix, Arizona
with caption reading: "The University of Phoenix is the 6th largest
regionally accredited private university in the United States."
Bottom left
photo: A picture showing classroom activity with caption reading: "The
professionally-employed faculty help integrate academic theory and current
practice."
Bottom right
photo: A picture showing graduation activity with caption reading: "A college degree
is necessary for career advancement and change."
</TABLE>
<PAGE> 66
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE
TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 7
Dividend Policy....................... 7
Capitalization........................ 8
Price Range of Common Stock........... 9
Selected Consolidated Financial
Data................................ 10
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 12
Business.............................. 19
Management............................ 37
Principal and Selling Shareholders.... 39
Description of Capital Stock.......... 41
Shares Eligible for Future Sale....... 43
Underwriting.......................... 44
Legal Matters......................... 45
Experts............................... 45
Available Information................. 46
Incorporation of Certain Documents by
Reference........................... 46
Index to Consolidated Financial
Statements.......................... F-1
Report of Independent Accountants..... F-2
Consolidated Financial Statements..... F-3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,750,000 Shares
APOLLO GROUP, INC.
CLASS A COMMON STOCK
------------
PROSPECTUS
JANUARY , 1996
------------
SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
