UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: August 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number : 0-25232
APOLLO GROUP, INC.
(Exact name of registrant as specified in its charter)
ARIZONA 86-0419443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (480) 966-5394
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE NONE
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, NO PAR
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
No shares of the Company's Class B Common Stock, its voting stock, is held by
non-affiliates. The holders of the Company's Class A Common stock are not
entitled to any voting rights. Aggregate market value of Class A Common Stock
held by non-affiliates as of November 12, 1999, was approximately $1.2 billion.
The number of shares outstanding for each of the registrant's classes of common
stock, as of November 12, 1999, is as follows:
Class A Common Stock, no par 75,926,795 Shares
Class B Common Stock, no par 511,484 Shares
DOCUMENTS INCORPORATED BY REFERENCE
NONE
1<PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-K/A
INDEX
PAGE
PART I ----
Item 1. Business 3
Item 2. Properties 29
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 31
Item 6. Selected Consolidated Financial Data 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 34
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 42
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 64
PART III
Item 10. Directors and Executive Officers of the Registrant 65
Item 11. Executive Compensation 69
Item 12. Security Ownership of Certain Beneficial
Owners and Management 76
Item 13. Certain Relationships and Related Transactions 77
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 78
SIGNATURES 82
2<PAGE>
PART I
Item 1 -- Business
OVERVIEW
Apollo Group, Inc. has been providing higher education to working adults
for 25 years. Apollo Group, Inc. ("Apollo" or the "Company") operates
through its subsidiaries, the University of Phoenix, Inc. ("UOP"), the
Institute for Professional Development ("IPD"), the College for Financial
Planning Institutes Corporation (the "College"), Western International
University, Inc. ("WIU"), and Apollo Learning Group, Inc. ("ALG"). 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 51 campuses and 80
learning centers in 35 states, Puerto Rico and Vancouver, British Columbia.
The Company's degree enrollments have increased to approximately 86,800 at
August 31, 1999 from approximately 36,800 at August 31, 1995.
UOP had degree enrollments of over 66,700 adult students at August 31,
1999, and 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 28 campuses and 53 learning centers in
Arizona, California, Colorado, Florida, Hawaii, Louisiana, Maryland,
Michigan, Nevada, New Mexico, Oklahoma, Oregon, Pennsylvania, Utah,
Washington, Puerto Rico and Vancouver, British Columbia. UOP has customized
computer programs for student tracking, marketing, faculty recruitment and
training and academic quality management. These computer programs are
intended to provide uniformity among UOP's campuses and learning centers
thereby enhancing UOP's ability to expand into new markets while still
maintaining academic quality. Currently, approximately 59% of UOP's students
receive some level of tuition reimbursement from their employers.
ALG was established in 1997 to focus on education opportunities in
information technology ("IT") for enhancing the skills of IT professionals.
ALG curriculum includes courses for the administration of computer networks,
internetworking and customized technical training. ALG's curriculum is
currently available at twelve UOP locations, with a total of 26 computer
labs, offering Authorized Academic Training Programs to deliver Microsoft
Official Curriculum. These campuses offer lab-based computer courses to
prepare students for Microsoft Certified Systems Engineer exams.
IPD provides program development and management services to regionally
accredited private colleges and universities (client institutions) who are
interested in expanding or developing their programs for working adults.
These services typically include degree program development, curriculum
development, market research, student recruitment, and performing accounting
and administrative services. IPD provides these services to regionally
accredited private colleges and universities at 21 campuses and 25 learning
centers in 22 states in exchange for a contractual share of the tuition
revenues generated from these programs. IPD's contracts with its client
institutions generally range in length from five to ten years with provisions
for renewal. In addition, IPD has contracted to develop online degree
programs for the United States Marine Corps. 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
3<PAGE>
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 18,300 degree-seeking students are currently enrolled in
IPD-assisted programs.
The College provides financial planning education programs, including
the Certified Financial Planner Professional Education Program. The College
began piloting its non-degree programs at several UOP campuses in 1999. The
Company plans to expand these offerings to UOP students in 2000.
WIU currently offers graduate and undergraduate degree programs to
approximately 1,400 students in Phoenix, Fort Huachuca and Chandler, Arizona.
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 (480) 966-5394. The Company's
Internet Web Site addresses are as follows:
- Apollo http://www.apollogrp.edu
- UOP http://www.uophx.edu
- IPD http://www.ipd.org
- WIU http://www.wintu.edu
- the College http://www.fp.edu
- ALG http://www.mcse.com
The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 1999, 1998 and 1997 relate to the
fiscal years ended August 31, 1999, 1998 and 1997, respectively.
This Annual Report on Form 10-K/A contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements relating to future plans, expectations, events or
performances involve risks and uncertainties and a number of factors could
affect the validity of such forward-looking statements, including those set
forth in Item 1 of this Form 10-K/A under the sections "Regulatory
Environment," "Accreditation," "Federal Financial Aid Programs" and "State
Authorization."
MARKET
The United States education market may be divided into the following
distinct segments: kindergarten through twelfth grade schools ("K-12"),
vocational and technical training schools, workplace and consumer training,
and degree-granting colleges and universities ("higher education"). The
Company primarily operates in the higher education segment and, with the
acquisition of the College and the introduction of other non-degree programs,
also operates in the workplace and consumer training segment. The
U.S. Department of Education National Center for Education Statistics
("NCES") estimated that for 1998 (the most recent historical year reported),
adults over 24 years of age comprised approximately 6.1 million, or 39.2%, of
the 15.5 million students enrolled in higher education programs. Currently,
the U.S. Bureau of Census estimates that approximately 76% of students over
the age of 24 work while attending school. The NCES estimates that by the
year 2003, the number of adult students over the age of 24 will remain
approximately the same at 6.1 million, or 40.3%, of the 15.2 million students
projected to be enrolled in higher education programs.
4<PAGE>
The Company believes that the unique needs of working adults include the
following:
- Convenient access to a learning environment (including both location
and delivery system)
- Degree programs offered by regionally accredited institutions that
can be completed in a reasonable amount of time
- Programs that provide knowledge and skills with immediate practical
value in the workplace
- Education provided by academically qualified faculty with current
practical experience in fields related to the subjects they instruct
- Administrative services designed to accommodate the full-time
working adult's schedule
- Recognition of adult students as critical consumers of educational
programs and services
- A learning environment characterized by a low student-to-faculty
ratio
- Learning resources available electronically to all students
regardless of geographical location
The Company believes that the unique requirements of the adult working
population represent a significant market opportunity to regionally
accredited higher education institutions that can offer programs that meet
these unique needs.
Most regionally accredited colleges and universities are focused on
serving the 18 to 24 year old student market. This focus has resulted in a
capital-intensive teaching/learning model that may be characterized by: (1) a
high percentage of full-time tenured faculty with doctoral degrees;
(2) fully-configured library facilities and related full-time staff;
(3) dormitories, student unions and other significant plant assets to support
the needs of younger students and (4) an emphasis on research and the related
staff and facilities. In addition, the majority of accredited colleges and
universities continue to provide the bulk of their educational programming
from September to mid-December and from mid-January to May. As a result,
most full-time faculty members only teach during that limited period of time.
While this structure serves the needs of the full-time 18 to 24 year old
student, it limits the educational opportunity for working adults who must
delay their education for up to five months during these spring, summer and
winter breaks. In addition, this structure generally requires working adults
to attend one or more courses three times a week, commute to a central site,
take work time to complete administrative requirements and, in undergraduate
programs, participate passively in an almost exclusively lecture-based
learning format primarily focused on a theoretical presentation of the
subject matter. For the majority of working adults, earning an undergraduate
degree in this manner would take seven to ten years. In recent years, many
regionally accredited colleges and universities have begun offering more
flexible programs for working adults, although their focus appears to remain
on the 18 to 24 year old students.
5<PAGE>
BUSINESS STRATEGY
The Company's strategic goal is to become the preferred provider of
higher education programs for working adult students and the preferred
provider of workplace training to their employers. The Company is managed as
a for-profit corporation in a higher education industry served principally by
not-for-profit providers. By design, the Company treats its adult students
as its primary customers and the employers that provide tuition assistance to
their employees through tuition reimbursement plans or direct bill
arrangements as its secondary customers. Key elements of the Company's
business strategy include the following:
Establish New UOP Campuses and Learning Centers -----------------------------
UOP plans to continue the addition of campuses and learning centers
throughout the United States and Canada. New locations are selected based on
an analysis of various factors, including the population of working adults in
the area, the number of local employers and their educational reimbursement
policies and the availability of similar programs offered by other
institutions. Campuses consist of classroom and administrative facilities
with full student and administrative services. Learning centers differ from
campuses in that they consist primarily of classroom facilities with limited
on-site administrative staff.
The timing related to the establishment of new locations and the
expansion of programs may vary depending on regulatory requirements and
market conditions.
Establish New IPD Relationships ---------------------------------------------
IPD plans to enter into additional long-term contracts with private
colleges and universities in proximity to metropolitan areas throughout the
United States.
Expand Educational Programs -------------------------------------------------
The Company expects to continue to respond to the changing educational
needs of working adults and their employers primarily through the
introduction of new undergraduate and graduate degree programs and non-degree
programs in business and information technology. During fiscal year 1999,
UOP introduced a Bachelor of Science in Health Care Services and a Bachelor
of Science in Information Technology. The Company currently has a full-time
staff of over 60 persons involved in its centralized curriculum development
process.
The Company is also exploring international opportunities, where it can
leverage its educational expertise and/or delivery systems in a cost-
effective manner.
Expand Access to Programs ---------------------------------------------------
The Company plans to continue expanding its distance education programs
and services. Enrollments in distance education degree programs, primarily
UOP Online, have increased to approximately 10,700 in 1999 from approximately
2,400 in 1995. The Company has started the process of converting many of its
non-degree business and financial programs so that they can be delivered
through the Internet. The Company currently utilizes a customized version of
Microsoft Outlook Express as the technology for its UOP Online degree
programs.
6<PAGE>
International Expansion -----------------------------------------------------
The Company is conducting ongoing market and operations research in
various foreign countries where it believes there might be a demand for its
programs. The Company opened its first Canadian campus in Vancouver, British
Columbia, in February 1999, and is considering further expansion in Canada.
Additionally, the Company plans to offer the UOP educational model in
international markets pursuant to agreements with Apollo International, Inc.
as described in Item 13. The first offering under these agreements was
started in the Netherlands in September 1999. The Company will continue to
monitor and assess the feasibility of expanding its educational programs to
other international markets through similar licensing agreements. Currently
the Company does not plan to independently open facilities outside of North
America.
TEACHING/LEARNING MODEL-DEGREE PROGRAMS
The Company's teaching/learning model used by UOP and IPD client
institutions was designed for working adults. This model is structured to
enable students who are employed full-time to earn their degrees and still
meet their personal and professional responsibilities. Students attend
weekly classes, averaging 15 students in size, and also meet weekly as part
of a three to five person study group. The study group sessions, an integral
part of each course, are used for in-depth discussion and review of class
materials, work on assigned group projects, and work on communication and
teamwork skills. 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 professional experience in business,
industry, government or the professions. In this way, faculty members are
able to share their professional knowledge and skills with the students.
The Company's teaching/learning model has the following major
characteristics:
Curriculum The standardized curriculum for each degree program
is designed to provide students with specified
levels of knowledge and skills regardless of
delivery method or location. The curriculum
provides for the achievement of specific educational
outcomes and is designed to integrate academic
theory and professional practice with a focus on
application to the workplace. Although the Company
is responsible for degree requirements and
educational outcomes, our students and their
employers often provide input to our faculty in
designing curriculum, and class projects are
typically based on issues relevant to the companies
that employ our students.
7<PAGE>
Faculty Faculty applicants must possess an earned master's
or doctoral degree from a regionally accredited
institution and have a minimum of five years
recent professional experience in a field related to
the subject matter in which they seek to instruct.
To help promote quality delivery of the curriculum,
UOP faculty members are required to: (1) complete an
initial assessment conducted by staff and faculty;
(2) complete a series of certification workshops
related to grading, facilitation of the
teaching/learning model, oversight of
study group activities, adult learning theory, and
use of the Internet; (3) participate in ongoing
development activities and (4) receive ongoing
performance evaluations by students, peer faculty
and staff. The results of these evaluations are
used to establish developmental plans to improve
individual faculty performance and to determine
continued eligibility of faculty members to provide
instruction.
Interactive Learning Courses are designed to combine individual and group
activity with interaction between and among students
and the instructor. The curriculum requires a high
level of student participation for purposes of
increasing the student's ability to work as part of
a team.
Learning Resources Students and faculty members are provided with
electronic and other learning resources for their
information needs. These extensive electronic
resources minimize the Company's need for
capital-intensive library facilities and holdings.
Sequential Enrollment Students enroll in and complete courses
sequentially, rather than concurrently, thereby
allowing full-time working adults to focus their
attention and resources on one subject at a time,
thus balancing learning with ongoing personal and
professional responsibilities.
Academic Quality The Company has developed and operationalized an
Academic Quality Management System ("AQMS") that is
designed to maintain and improve the quality of
programs and academic and student services
regardless of the delivery method or location.
Included in the AQMS is the Adult Learning Outcomes
Assessment which seeks to measure student growth in
both the cognitive (subject matter) and affective
(educational, personal and professional values)
domains.
8<PAGE>
STRUCTURAL COMPONENTS OF TEACHING/LEARNING MODEL
Although adults over 24 years old comprise approximately 39.2% of all
higher education enrollments in the United States, the mission of most
accredited four-year 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 is designed for the 18 to 24 year old student.
The Company has found that working adults seek accessibility, curriculum
consistency, time and cost effectiveness and learning that has an immediate
application to the workplace. The Company's teaching/learning model differs
from the models used by most regionally accredited colleges and universities
because it is designed to enable adults to complete an undergraduate degree
in four years and a graduate degree in two years while working full-time.
The structural components of the Company's teaching/learning model
include:
Accessibility The Company offers standardized curriculum that can
be accessed through a variety of delivery methods
(e.g., campus-based or electronically delivered)
that make the educational programs accessible
regardless of where the students work and live.
Instructional Costs While the majority of the faculty at most accredited
colleges and universities are employed full-time,
most of the UOP and IPD client institutions' faculty
are part-time. All faculty are academically
qualified, are professionally employed, and are
contracted for instructional services on a
course-by-course basis.
Facility Costs The Company leases its campus and learning center
facilities and rents additional classroom space on a
short-term basis to accommodate growth in
enrollments.
Employed Students Substantially all of UOP's students are employed
full-time and approximately 69% 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).
9<PAGE>
Employer Support 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.
Approximately 59% of UOP's students currently
receive some level of tuition assistance from
their employers; approximately 49% receive at least
half of their tuition and approximately 12% receive
full tuition assistance.
The College currently offers text-based self-study programs for students
preparing for the Certified Financial Planner designation and other
financial-related designations, including a Master of Science in Financial
Planning. The College recently modularized the learning content for these
programs to position them for alternative delivery formats, including but not
limited to classroom and online modalities. The Company has recently started
offering these same programs in a classroom-based format through UOP campuses
and also plans to offer them through Internet or online-based formats. Most
of the College's students are employed, and over 75% have four or more years
of college education.
WIU's teaching/learning model has similar characteristics to the
teaching/learning model used by UOP and IPD client institutions, including
the use of part-time practitioner faculty, standardized curriculum,
computerized learning resources and leased facilities. However, WIU provides
educational programs in two-month sessions and does not focus exclusively on
working adult students.
PROGRAMS AND SERVICES
UOP Programs ----------------------------------------------------------------
UOP currently offers the following degree programs and related areas of
specialization at one or more campuses and learning centers or through its
distance education delivery systems:
DEGREE AND DEGREE CREDIT PROGRAMS
---------------------------------
Associate of Arts in General Studies
Bachelor of Science in Business
Bachelor of Science in Nursing
Bachelor of Science in Human Services
Bachelor of Science in Health Care Services
Bachelor of Science in Information Technology
Microsoft Certified Systems Engineer
Master of Arts in Education
Master of Arts in Organizational Management
Master of Business Administration
Master of Counseling
Master of Science in Nursing
Master of Science in Computer Information Systems
Doctor of Management
10<PAGE>
AREAS OF SPECIALIZATION AVAILABLE IN CERTAIN DEGREE PROGRAMS
------------------------------------------------------------
Undergraduate BUSINESS
Accounting
Administration
Management
Marketing
Project Management
COMPUTER INFORMATION SYSTEMS
Information Systems
Graduate BUSINESS
Administration
Global Management
Health Care Management
Organizational Management
COMPUTER INFORMATION SYSTEMS
Technology Management
Information Systems
EDUCATION
Administration and Supervision
Bilingual-Bicultural
Curriculum and Instruction
Diverse Learner
Educational Counseling
Elementary Education
English as a Second Language
Professional Development for Educators
Special Education
NURSING
Women's Health Care Nurse Practitioner
Family Nurse Practitioner
COUNSELING
Community Counseling
Marriage and Family Therapy
Mental Health Counseling
Marriage, Family and Child Counseling
UOP also offers professional education programs, including continuing
education for teachers, custom training, environmental training and many
programs leading to certification in the areas of business, technology and
nursing.
Undergraduate students may demonstrate and document college level
learning gained from experience through an assessment by faculty members
(according to the guidelines of the Council for Adult and Experiential
Learning ("CAEL")) for the potential award of credit. The average number of
credits awarded to the approximately 4,000 UOP undergraduate students who
utilized the process in 1999 was approximately 12 credits of the 120 required
to graduate. CAEL reports that over 1,200 regionally accredited colleges and
universities currently provide for the assessment mechanism of college level
learning gained through experience for the award of credit.
11<PAGE>
IPD Services ----------------------------------------------------------------
IPD's contracts with its client institutions are individually negotiated
and the actual services may vary from one client institution to another.
Services to its client institutions may include: (1) conducting market
research; (2) assisting with curriculum development; (3) developing and
executing marketing strategies; (4) marketing and recruiting of students; (5)
establishing operational and administrative infrastructures; (6) training of
faculty; (7) developing and implementing financial accounting and academic
quality management systems; (8) assessing the future needs of adult students;
(9) assisting in developing additional degree programs suitable for the adult
higher education market and (10) assisting in seeking approval from the
respective regional accrediting association for new programs. In
consideration for its services, IPD receives a contractual share of tuition
revenues, which are negotiated with each client institution, from students
enrolled in IPD-assisted programs.
In order to facilitate the sharing of information related to the
operations of their respective programs, IPD, its client institutions and UOP
formed the Consortium for the Advancement of Adult Higher Education
("CAAHE"). CAAHE meets annually to address issues such as the recruitment
and training of part-time, professionally employed faculty, employer input in
the curriculum development process, assessment of the learning outcomes of
adult students and regulatory issues affecting the operation of programs for
working adult students.
IPD client institutions offer the following programs with IPD
assistance:
No. of IPD
Degree Programs Client Institutions
-------------------------------------------------- --------------------
Associate of Arts 5
Associate of Science in Business 10
Bachelor of Arts in Business Administration 2
Bachelor of Arts in Management 1
Bachelor of Business Administration 9
Bachelor of Science in Business Administration 8
Bachelor of Science in Management 8
Bachelor of Science in Management Information Systems 2
Bachelor of Science in Nursing 1
Master of Arts in Organizational Management 1
Master of Business Administration 12
Master of Business Administration - Online 1
Master of Science in Computer Information Systems 1
Master of Science in Management 7
Master of Science in Health Services Administration 1
The IPD-assisted programs also include a limited number of general
education courses, certificate programs and areas of specialization.
The College Programs --------------------------------------------------------
The College currently offers a Master of Science degree with a
concentration in Financial Planning and the following non-degree programs:
12<PAGE>
Accredited Asset Management Specialist
Certified Financial Planner Professional Education Program
Chartered Financial Analyst Study/Review Program
Chartered Mutual Fund Counselor
Foundations in Financial Planning
Chartered Retirement Plans Specialist
Chartered Retirement Planning Counselor
Accredited Tax Advisor
Accredited Tax Preparer
WIU Programs ----------------------------------------------------------------
WIU currently offers the following degree and certificate programs:
DEGREE PROGRAMS WITH RELATED MAJORS
---------------------------------------------
ASSOCIATE OF ARTS
BACHELOR OF SCIENCE
- Accounting
- Business Administration
- Finance
- Information Technology
- International Business
- Management
- Marketing
BACHELOR OF ARTS
- Administration of Justice
- Behavioral Science
MASTER OF BUSINESS ADMINISTRATION
- Finance
- International Business
- Management
- Management Information Technology
- Marketing
MASTER OF PUBLIC ADMINISTRATION
MASTER OF SCIENCE
- Information Technology
- Information Systems Engineering
WIU also offers a limited number of business-related certificate
programs.
Distance Education ----------------------------------------------------------
At August 31, 1999, there were approximately 10,700 degree seeking
students utilizing the Company's distance education delivery systems,
approximately 97% of whom are enrolled in the UOP Online campus. The
Company's distance education components consist primarily of the following:
13<PAGE>
Online Computer Conferencing
The UOP Online campus was established by UOP in 1989 to provide group-
based, faculty-led instruction through computer-mediated communications.
Students can access their UOP Online classes with a computer and modem from
anywhere in the world, on schedules that meet their individual needs. UOP
Online students work together in small groups of 8 to 13 to engage in class
discussion and study group activities that are focused on the same learning
outcomes and objectives required in UOP's classroom degree programs. This
enables the UOP Online students to enjoy the benefits of a study group, where
they can share their regional and cultural differences with each other in the
context of their coursework. Students are not required to participate at the
same time since the communication method is asynchronous in nature. UOP
Online's degree programs can be accessed though direct-dial or Internet
service providers. The same academic quality management standards applied to
campus-based programs, including the assessment of student learning outcomes,
are applied to programs delivered through the UOP Online campus.
Directed Study
Working adult students may also complete individual courses under the
direct weekly instructional supervision of a member of the faculty. These
directed study programs utilize the same courses, faculty and resources
available at UOP campuses. Course assignments are completed in a structured
environment that allows the student flexibility with their schedule.
Communication with the faculty member is by telephone, e-mail, fax or mail.
CPE Internet
Business and investment professionals that require continuing
professional education (CPE) as part of their professional certification or
for employment requirements may complete individual CPE courses through the
Internet utilizing most Internet browsers. These programs are short,
interactive courses designed to focus on relevant topics to the students'
trade or profession. The students interact primarily with the Company's web-
based software programs with little or no faculty involvement.
Distance education is currently subject to certain regulatory
constraints. See "Business -- Federal Financial Aid Programs -- Restrictions
on Distance Education Programs" and "Business -- State Authorization."
FACULTY ---------------------------------------------------------------------
UOP's faculty is comprised of approximately 126 full-time faculty and
6,600 part-time faculty. Substantially all faculty are working professionals
with earned master's or doctoral degrees and experience in business,
industry, government or the professions. To help promote quality delivery of
the curriculum, UOP faculty members are required to: (1) complete an initial
assessment conducted by staff and faculty; (2) complete a series of
certification workshops related to grading, facilitation of the
teaching/learning model, oversight of study group activities, adult learning
theory and use of the Internet; (3) participate in ongoing development
activities and (4) receive ongoing performance evaluations by students, peer
faculty and staff. The results of these evaluations are used to establish
developmental plans to improve individual faculty performance and to
determine continued eligibility of faculty members to provide instruction.
14<PAGE>
Most faculty members are recruited as the result of referrals from faculty,
students and corporate contacts. All part-time faculty are contracted on a
course-by-course basis (generally a five to ten week period).
The faculty teaching in IPD-assisted programs are comprised of full-time
faculty from the client institution as well as qualified part-time faculty
who instruct only in these adult programs. The part-time faculty must be
approved by each client institution. IPD makes the AQMS available to its
client institutions to evaluate faculty and academic and administrative
quality. The Company believes that both UOP and IPD will continue to be
successful in recruiting qualified faculty members.
The College's programs are developed internally by approximately 15
full-time faculty. These programs are primarily self-study, non-degree
programs that require little or no faculty involvement in the actual delivery
of the programs.
WIU's faculty consists of approximately 10 full-time faculty and 170 part-
time faculty. WIU's practitioner faculty are working professionals and
possess earned master's or doctoral degrees and participate in a selection
and training process that is similar to that at UOP.
Academic Accountability -----------------------------------------------------
UOP is one of the first regionally accredited universities in the nation
to create and utilize an institution-wide system for the assessment of the
educational outcomes of its students. The information generated is employed
by UOP to improve the quality of the curriculum, the instruction and the
Company's teaching/learning model. UOP's undergraduate and graduate students
complete a comprehensive cognitive (core degree subject matter) and affective
(educational, personal and professional values) assessment prior to and upon
the completion of their core degree requirements.
Students at UOP and IPD client institutions evaluate both academic and
administrative quality. This evaluation begins with a registration survey
and continues with the evaluation of the curriculum, faculty, delivery
method, instruction and administrative services upon the conclusion of each
course. The evaluation also includes a survey of a random selection of
graduates 2-3 years following their graduation. The results provide an
ongoing basis for improving the teaching/learning model, selection of
educational programs and instructional quality.
Admissions Standards --------------------------------------------------------
To gain admission to the undergraduate programs of UOP, WIU and the IPD
client institutions, applicants generally must have a high school diploma or
General Equivalency Diploma ("G.E.D.") and satisfy certain minimum grade
point average, employment and age requirements. Additional requirements may
apply to individual programs. Students already in undergraduate programs
elsewhere may petition to be admitted on provisional status if they do not
meet certain admission requirements.
To gain admission to the graduate programs of UOP, WIU, the College and
the IPD client institutions, students generally must have an undergraduate
degree from a regionally accredited college or university and satisfy minimum
grade point average, work experience and employment requirements. Additional
15<PAGE>
requirements may apply to individual programs. Students in graduate programs
may petition to be admitted on provisional status if they do not meet certain
admission requirements.
ACQUISITION STRATEGY
The Company periodically evaluates opportunities to acquire businesses
and facilities. In evaluating such opportunities, management considers,
among other factors, location, demographics, price, the availability of
financing on acceptable terms, competitive factors and the opportunity to
improve operating performance through the implementation of the Company's
operating strategies. The Company has no current commitments with regard to
potential acquisitions.
CUSTOMERS
The Company's customers consist of working adult students, colleges and
universities, governmental agencies and employers. Following is a percentage
breakdown of the Company's students by the level of program they are seeking,
at August 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Degree Programs:
Master's 27.8% 30.5%
Bachelor's 66.6% 68.7%
Associate 5.6% .8%
------ ------
Total degree programs 100.0% 100.0%
====== ======
</TABLE>
Based on student surveys, the average age of UOP students is in the
mid-thirties, approximately 57% are women and 43% are men, and the average
annual household income is $56,000. Approximately 69% of UOP students have
been employed on a full-time basis for nine years or more. The Company
believes that the demographics of students enrolled in IPD-assisted
programs are similar to those of UOP. The approximate age percentage
distribution of incoming UOP students is as follows:
<TABLE>
<CAPTION>
Age Percentage of Students
------------------------ -----------------------
<S> <C>
25 and under 13%
26 to 33 38%
34 to 45 38%
46 and over 11%
-------
100%
=======
</TABLE>
16<PAGE>
Based on student surveys, the average age of students at the College is
in the mid-thirties, approximately 31% are women and 69% are men. Most of the
College's students are employed, and over 75% have four or more years of
college education.
IPD client institutions have historically consisted of small private
colleges; however, IPD also targets larger institutions of higher education
that are in need of marketing and curriculum consulting. IPD understands
that to develop and manage educational programs for working adult students
effectively, these potential client institutions require both capital and
operational expertise. In response to these requirements, IPD
provides the start-up capital, the curriculum development expertise and the
ongoing management in support of the client institutions' provision of
quality programs for working adult students.
All of the Apollo Companies consider the employers of their students as
customers. Most of these employers provide tuition reimbursement programs in
order to educate and provide degree opportunities to their employees.
CORPORATE PARTNERSHIPS
The Company works closely with businesses and governmental agencies to
meet their specific needs either by modifying existing programs or, in some
cases, by developing customized programs. These programs are often held at
the employers' offices or on-site at military bases. UOP has also formed
educational partnerships with various corporations to provide programs
specifically designed for their employees.
MARKETING
To generate interest among potential UOP, WIU and IPD client institution
students, the Company engages in a broad range of activities to inform
potential students about the Company's teaching/learning model and the
programs offered. These activities include print and broadcast advertising,
advertising on Internet service providers, direct mail and informational
meetings at targeted organizations. The Company also attempts to locate its
campuses and learning centers near major highways to provide high visibility
and easy access. A substantial portion of new UOP and IPD client institution
students are referred by alumni, employers and currently enrolled students.
The Company also has Web Sites on the Internet World Wide Web
(http://www.apollogrp.edu, http://www.uophx.edu, http://www.ipd.org,
http://www.wintu.edu, http://www.fp.edu and http://www.mcse.com) that allow
electronic access to Company and product information.
UOP and WIU advertising is centrally monitored and is directed primarily
at local markets in which a campus or learning center is located. IPD client
institutions approve and monitor all advertising provided by IPD on their
behalf. Direct responses to advertising and direct mail are received,
tracked and forwarded promptly to the appropriate enrollment counselors. In
addition, all responses are analyzed to provide data for future marketing
efforts.
The College markets its programs and products primarily through
advertising, direct mail, informational meetings, trade shows, and corporate
17<PAGE>
sales efforts with financial service firms. Marketing activity is primarily
directed at professionals within the financial services industry. Enrollment
advisors are utilized in a comparable fashion to UOP enrollment staff. All
marketing activity is tracked to measure effectiveness and to provide
information for future activity.
The Company employs over 470 enrollment counselors who make visits and
presentations at various organizations and who follow up on leads generated
from referrals from customers and advertising efforts. These individuals
also pursue direct responses to interest from potential individual students
by arranging for interviews either at a UOP, WIU, or IPD location, at a
prospective student's place of employment, or via telephone. Interviews are
designed to establish a prospective student's qualifications, academic
background, course interests and professional goals. Student recruiting
policies and standards and procedures for hiring and training university
representatives are established centrally, but are implemented at the local
level through a director of enrollment or marketing at each location.
COMPETITION
The higher education market is highly fragmented and competitive with no
private or public institution enjoying a significant market share. The
Company competes primarily with four-year and two-year degree-granting public
and private regionally accredited colleges and universities. Many of these
colleges and universities enroll working adults in addition to the
traditional 18 to 24 year old students and some have greater financial and
personnel resources than the Company. The Company expects that these
colleges and universities will continue to modify their existing programs to
serve working adults more effectively. In addition, many colleges and
universities have announced various distance-education initiatives.
For its degree programs, the Company competes primarily at a local and
regional level with other regionally accredited colleges and universities
based on the quality of academic programs, the accessibility of programs and
learning resources available to working adults, the cost of the program, the
quality of instruction and the time necessary to earn a degree.
In terms of non-degree programs offered by UOP, IPD and WIU, the Company
competes with a variety of business and IT providers, primarily those in the
for-profit training sector. Many of these competitors have significantly more
market share, longer-term relationships with key vendors and, in some cases,
more financial resources. There is no assurance that UOP, IPD and WIU will
be able to gain market share in these more competitive non-degree markets to
the same extent it has done with its degree programs.
The College faces competition primarily with schools registering CFP
curriculum with the Certified Financial Planner Board of Standards, Inc. The
College offers all of its programs using the flexibility of its distance
education format while the majority of the other competing education programs
target local markets using classroom-based teaching formats. The College has
recently started offering its programs in a classroom-based format through
UOP campuses and also plans to offer them through Internet or online-based
formats.
IPD faces competition from other entities offering higher education
curriculum development and management services for adult education programs.
18<PAGE>
The majority of IPD's current competitors provide pre-packaged curriculum or
turn-key programs. IPD client institutions, however, face competition from
both private and public institutions offering degree and non-degree programs
to working adults.
EMPLOYEES
At September 30, 1999, the Company had the following numbers of
employees:
<TABLE>
<CAPTION>
Full-Time Part-Time Faculty Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Apollo 287 10 -- 297<F1>
UOP 2,409 91 6,771<F2> 9,271
IPD 262 7 --<F3> 269
The College 84 9 15<F4> 108
WIU 57 13 183<F2> 253
------ ------ ------ ------
Total 3,099 130 6,969 10,198
====== ====== ====== ======
______________
<FN>
<F1> Consists primarily of employees in executive administration,
information systems, corporate accounting, financial aid, and human
resources.
<F2> Consists primarily of part-time professional faculty contracted on a
course-by-course basis.
<F3> Faculty teaching IPD-assisted programs are employed by IPD client
institutions.
<F4> Consists primarily of faculty involved in curriculum development and
the instructional design process.
</FN>
</TABLE>
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 ("ED"); (2) the federal government through ED
and (3) state higher education regulatory bodies. All higher education
institutions participating in Title IV Programs must first be accredited by
an association recognized by ED. ED 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.
19<PAGE>
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 activities, and costs of doing business of UOP,
WIU, and one or more of the IPD client institutions. The failure to maintain
or renew any required regulatory approvals, accreditation or state
authorizations by UOP or certain of the IPD client institutions could have a
material adverse effect on the Company.
ACCREDITATION
UOP, WIU, the College, and the IPD client institutions are accredited by
regional accrediting associations recognized by ED. Accreditation provides
the basis for: (1) the recognition and acceptance by employers, other higher
education institutions and governmental entities of the degrees and credits
earned by students; (2) the qualification to participate in Title IV Programs
and (3) the qualification for authorization in certain states.
UOP was granted accreditation by NCA in 1978. UOP's accreditation was
reaffirmed in 1982, 1987, 1992 and 1997. The next focused evaluation visit
is scheduled to begin in May 2000, and the next NCA reaffirmation visit is
scheduled to begin in 2002. IPD-assisted programs offered by the IPD client
institutions are evaluated by the client institutions' respective regional
accrediting associations either as part of a reaffirmation or focused
evaluation visits. Current IPD client institutions are accredited by NCA,
Middle States, New England or Southern regional accrediting associations.
The College's graduate degree program is accredited by NCA and the
Accrediting Commission of the Distance Education and Training Council
("DETC"). NCA reaffirmed the accreditation of the graduate degree program in
August 1999, and their next reaffirmation visit is schedule for 2003-04.
DETC plans to schedule a focus-visit for the College in 2000.
WIU was accredited by NCA prior to the acquisition by the Company and
the accreditation was reaffirmed in 1998. WIU's next NCA reaffirmation visit
is scheduled to begin in 2004-05.
The withdrawal of accreditation from UOP or certain IPD client
institutions would have a material, adverse effect on the Company.
All accrediting agencies recognized by ED 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 the
20<PAGE>
UOP and WIU missions require them to employ academically qualified
practitioner faculty that are able to integrate academic theory with current
workplace practice. Because of UOP's and WIU's choice to utilize
practitioner faculty, they have not sought business school program
accreditation of the type found at many institutions whose primary missions
are to serve the 18 to 24 year old student and to conduct research.
UOP's Bachelor of Science in Nursing ("BSN") program received program
accreditation from the National League for Nursing Accrediting Commission
("NLNAC") in 1989. The accreditation was reaffirmed in October 1995. The
Master of Science in Nursing ("MSN") program earned NLNAC accreditation in
1996. The next NLNAC evaluation of both the BSN and MSN programs for
continuing accreditation is scheduled for Spring 2000. The Company believes
that accreditation of the BSN and MSN programs are in good standing.
UOP's Community Counseling program (Master of Counseling in Community
Counseling degree) received initial accreditation for its Phoenix and Tucson
campuses from the Council for Accreditation of Counseling and Related
Educational Programs in 1995 and the next reaffirmation visit is scheduled
for 2002.
UOP received approval from the NCA to offer its first doctoral level
program in 1998. The first students were enrolled in the Doctor of
Management degree beginning in 1999. The Doctor of Management degree is
offered via distance learning technology with annual two-week residencies in
Phoenix throughout the program. The program is limited to a total of 60 new
students per year.
The address and phone number for the accrediting bodies referred to
herein are as follows:
North Central Association of Colleges and Schools (NCA)
Commission on Institutions of Higher Education
30 North LaSalle Street, Suite 2400
Chicago, Illinois 60602-2504
(312) 263-0456
National League for Nursing Accrediting Commission (NLNAC)
61 Broadway, 33rd Floor
New York, New York 10006
(800) 669-1656
American Counseling Association
Council for Accreditation of Counseling and
Related Educational Programs
5999 Stevenson Avenue
Alexandria, VA 22304
(703) 823-9800
Accrediting Commission of the Distance Education and Training Council
1601 18th Street, NW
Washington, D.C. 20009-2529
(202) 234-5100
21<PAGE>
FEDERAL FINANCIAL AID PROGRAMS
Students at UOP, WIU and IPD client institutions may participate in
Title IV Programs. The College does not participate in Title IV Programs
because most of its students are enrolled in non-degree programs. UOP and
WIU derive approximately 48% and 22% of their net revenues from students who
participate in Title IV Programs, respectively. The IPD percentages are
estimated to be similar to those at UOP. The respective IPD client
institutions administer their own Title IV Programs. The Company's students
are eligible to receive Title IV financial aid because: (i) UOP, WIU and IPD
client institutions are accredited by an accrediting association recognized
by ED; (ii) ED has certified UOP's, WIU's, and IPD client institutions' Title
IV Program eligibility and (iii) UOP, WIU, and IPD client institutions have
applicable state authorization to operate.
ED has promulgated Regulations, the most recent of which became
effective on July 1, 1999, that amend certain provisions of the Title IV
Programs and the Regulations promulgated thereunder. Some of the more
important provisions of the Regulations include the following:
Limits on Title IV Program Funds --------------------------------------------
The Regulations define the types of educational programs offered by an
institution that qualify for Title IV Program funds. For students enrolled in
qualified programs, the Regulations place limits on the amount of Title IV
Program funds that a student is eligible to receive in any one academic year
(as defined by ED).
For undergraduate programs, an academic year must consist of at least 30
weeks of instructional time to include a minimum of 360 hours of
instructional time and a minimum of 24 credit hours. The Regulations define
a week of instruction as the equivalent of 12 hours of regularly scheduled
instruction, examinations or preparation for examinations (the "12-hour
Rule"). Most of the Company's degree programs meet this 360 hour minimum
and, therefore, qualify for Title IV Program funds. The programs that do not
qualify for Title IV Program funds consist primarily of certificate,
corporate training, and continuing professional education programs. These
programs are paid for directly by the students or their employers.
Authorizations for New Locations --------------------------------------------
UOP, WIU, the College and IPD client institutions are required to have
authorization to operate as degree-granting institutions in each state where
they physically provide educational programs. Certain states accept
accreditation as evidence of meeting minimum state standards for
authorization. Other states, including California, require separate
evaluations for authorization. Depending on the state, the addition of a
degree program not offered previously or the addition of a new location must
be included in the institution's accreditation and be approved by the
appropriate state authorization agency. UOP, WIU, the College, and IPD client
institutions are currently authorized to operate in all states in which they
have physical locations. If UOP is unable to obtain authorization to operate
in certain new states, it may have a material adverse effect on the Company's
ability to expand UOP's business.
22<PAGE>
In addition, NCA requires UOP and the College to obtain NCA's prior
approval before they are permitted to expand into new states or foreign
countries. If UOP is unable to obtain NCA's approval for any future
geographic expansion, it may have a material, adverse effect on the Company's
ability to expand UOP's business.
Restricted Cash -------------------------------------------------------------
ED places certain restrictions on Title IV Program funds collected for
unbilled tuition and funds transferred to the Company through electronic
funds transfer. Under certain circumstances, an institution is required to
submit an irrevocable letter of credit to ED in an amount equal to at least
25% of the total dollar amount of refunds paid by the institution in its most
recent fiscal year. The Company has established letters of credit of $2.7
million for UOP and $18,000 for WIU.
Standards of Financial Responsibility ---------------------------------------
Pursuant to the Regulations, as revised, all eligible higher education
institutions must satisfy the minimum standard established for three tests
which assess the financial condition of the institution at the end of the
institution's fiscal year. The tests provide a combined score which must
then satisfy a composite score standard. The maximum combined score is 3.0.
If the institution achieves a composite score of at least 1.5, it is
considered financially responsible. A composite score from 1.0 to 1.4 is
considered financially responsible, subject to additional monitoring, and the
institution may continue to participate as a financially responsible
institution for up to three years. An institution that does not achieve a
satisfactory composite score will fall under alternative standards. At
August 31, 1999, UOP's composite score was 3.0 and WIU's composite score was
3.0.
Branching and Classroom Locations -------------------------------------------
The Regulations contain specific requirements governing the
establishment of new main campuses, branch campuses, and classroom locations
at which the eligible institution offers at least 50% of an educational
program. In addition to classrooms at campuses and learning centers,
locations affected by these requirements include the business facilities of
client companies, military bases and conference facilities used by UOP and
WIU. ED has in the past stated that it requires written approval for each
location prior to offering Title IV program funds. Currently UOP has several
sites awaiting confirmation of ED approval.
The "90/10 Rule" (formerly the "85/15 Rule") --------------------------------
A requirement of the HEA, commonly referred to as the "90/10 Rule,"
applies only to for-profit institutions of higher education, which includes
UOP and WIU but not IPD client institutions. Under this rule, for-profit
institutions will be ineligible to participate in Title IV Programs if the
amount of Title IV Program funds used by the students or institution to
satisfy tuition, fees and other costs incurred by the students exceeds 90% of
the institution's cash-basis revenues from eligible programs. UOP's and
WIU's percentages were 53% and 23%, respectively, at August 31, 1999. UOP
and WIU are required to calculate this percentage at the end of each fiscal
year.
23<PAGE>
Student Loan Defaults -------------------------------------------------------
Eligible institutions must maintain a student loan cohort default rate
of less than 25% for fiscal year 1994 and all subsequent fiscal years. In
1997, the most recent ED cohort default rate reporting period, the national
cohort default rate average for all higher education institutions was 8.8%.
UOP and WIU students' cohort default rates for the Federal Family Education
Loans for fiscal 1997 as reported by ED were each 5.7%. IPD client
institution students' cohort default rates for fiscal 1997 ranged from 1.3%
to 12.9% with a median cohort default rate of 4.8%.
Compensation of Representatives ---------------------------------------------
The Regulations prohibit an institution from providing any commission,
bonus, or other incentive payment based directly or indirectly on success in
securing enrollments or financial aid to any person or entity engaged in any
student recruitment, admission or financial aid awarding activity. The
Company believes that its current method of compensating enrollment
counselors complies with the Regulations.
Eligibility and Certification Procedures ------------------------------------
The HEA specifies the manner in which ED reviews institutions for
eligibility and certification to participate in Title IV Programs. UOP
submitted its application on a timely basis to ED, and eligibility to
participate in Title IV Programs will continue until ED acts upon the
application. WIU's eligibility to participate in Title IV Programs was
renewed by ED in September 1999 for a four-year period. If ED does not renew
UOP's eligibility, it would have a material adverse effect on the Company.
Administrative Capability ---------------------------------------------------
The HEA directs ED 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 ED to determine that the institution lacks
administrative capability and, therefore, may be subject to additional
scrutiny or denied eligibility for Title IV Programs.
Title IV Audit --------------------------------------------------------------
UOP's most recent Department of Education program review began in March
1997, and a final program review determination letter was received in July
1999. UOP satisfactorily responded to the findings in ED's program review
report with no additional action required.
In January 1998, the Department of Education Office of the Inspector
General ("OIG") began performing an audit of UOP's administration of the
Title IV Programs. The team previously presented questions regarding UOP's
interpretation of the "12-hour rule," UOP's distance education programs, and
UOP's institutional refund obligations. UOP has received a draft report
addressing these issues and is currently in discussion with the OIG and ED.
Although the Company believes that the OIG audit will be resolved without any
negative impact on UOP's teaching/learning model, as with any program review
or audit, no assurance can be given as to the final outcome since the matters
are not yet resolved. Depending on the interpretation of the various
regulatory requirements, any resulting liability to the Company from the
final audit results will be recorded as an expense.
24<PAGE>
Restrictions on Distance Education Programs ---------------------------------
Distance education courses are deemed to be correspondence courses by
the Regulations if more than 50% of the courses offered at the University
were offered through distance education. 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. UOP, IPD and WIU do not plan to exceed this 50% level and believe
that this restriction will have no significant impact on their respective
business strategies.
Change of Ownership or Control ----------------------------------------------
A change of ownership or control of the Company, depending on the type
of change, may have significant regulatory consequences for UOP and WIU.
Such a change of ownership or control could trigger recertification by ED,
reauthorization by certain state licensing agencies or the evaluation of the
accreditation by NCA.
For institutions owned by publicly-held corporations, ED 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 ED. 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. Washington has a
similar reauthorization requirement triggered by a change of ownership, but
provides that a temporary certificate of authorization may be issued pending
the reauthorization process.
Moreover, the Company is required to report any change in stock
ownership of UOP, the College, WIU or Apollo to NCA. At that time, NCA may
seek to evaluate the effect of such a change of stock ownership on the
continuing operations of UOP, the College and WIU.
If UOP is not re-certified by ED, does not obtain reauthorization from
the necessary state agencies, or has its accreditation withdrawn as a
consequence of any change in ownership or control, there would be a material,
adverse effect on the Company.
25<PAGE>
STATE AUTHORIZATION
UOP currently is authorized to operate in all 15 states where there is a
physical presence. UOP has held these authorizations for periods ranging
from less than one year to twenty-one years. Other state applications have
been submitted and are awaiting approval in New York, Massachusetts,
Missouri, and Ohio.
All regionally accredited institutions, including UOP, are required to
be evaluated separately for authorization to operate in Puerto Rico. UOP was
granted its most recent authorization in Puerto Rico in December 1995 for a
period of five years.
UOP is registered with British Columbia's Private Post-Secondary
Education Commission and will pursue accreditation through the province of
British Columbia after the required one-year period of operation. An
application for approval to operate in Alberta, Canada is currently pending.
IPD client institutions possess authorization to operate in all states
in which they offer educational programs, which are subject to renewal. The
College is currently authorized to operate in Colorado and does not require
authorization for its self-study programs that are offered worldwide. WIU is
currently authorized to operate in Arizona.
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 the UOP Online campus
in those states.
TAX REFORM ACT OF 1997
In August 1997, Congress passed the Tax Reform Act of 1997 that added
several new tax credits and incentives for students and extended benefits
associated with the educational assistance program. The Hope Scholarship
Credit provides up to $1,500 tax credit per year per eligible student for
tuition expenses in the first two years of postsecondary education in a
degree or certificate program. The Lifetime Learning Credit provides up to
$1,000 tax credit per year per taxpayer return for tuition expenses for all
postsecondary education, including graduate studies. Both of these credits
are phased out for taxpayers with modified adjusted gross income between
$40,000 and $50,000 ($80,000 and $100,000 for joint returns) and are subject
to other restrictions and limitations. The Act also provides for the
deduction of interest from gross income on education loans and limited
educational IRA's for children under the age of 18. These deductions are
also subject to adjusted gross income limitations and other restrictions.
These new provisions became effective for 1998 individual tax returns.
EMPLOYER TUITION ASSISTANCE
Many of the Company's students receive some form of tuition assistance
from their employers. In certain situations, as defined by the Internal
Revenue Code (the "Code"), this tuition assistance qualifies as a
26<PAGE>
deductible business expense when adequately documented by the employer and
employee. The Code also provides a safe-harbor provision for an exclusion
from wages of up to $5,250 of tuition reimbursement per year per student
under the Educational Assistance Program ("EAP") provision. Although the EAP
provision of the Code expired in June 1997, the Tax Reform Act of 1997, which
was signed into law in August 1997, extended the EAP until June 2000. The
EAP provision does not apply to graduate level programs beginning after June
30, 1996. Employers or employees may still continue to deduct such tuition
assistance where it qualifies as a deductible business expense and is
adequately documented. The percentage of incoming students with access to
employer tuition assistance was 59% in 1999.
27<PAGE>
LOCATIONS
UOP currently has campuses and learning centers located in 15 states,
Puerto Rico and Vancouver, British Columbia. Following is a list of UOP main
campuses as of September 30, 1999, with the year the campus was first opened
and degree enrollments as of August 31, 1999:
<TABLE>
<CAPTION>
Number Fiscal Enroll-
Of Learning Year ment at
UOP Main Campuses Centers Opened 8/31/99
------------------------------------------ ----------- -------- --------
<S> <C> <C> <C>
ARIZONA
Phoenix Campus 6 1978 6,861
Tucson Campus 2 1983 2,877
CALIFORNIA
Fountain Valley (Southern California Campus) 9 1981 9,581
Sacramento Campus 4 1993 2,809
San Diego Campus 5 1989 3,403
San Jose Campus 7 1980 6,161
COLORADO
Greenwood Village (Denver Campus) 2 1982 3,910
Colorado Springs (Southern Colorado Campus) 2000 --
FLORIDA
Plantation (Fort Lauderdale Campus) 1999 414
Jacksonville Campus 1998 1,031
Maitland (Orlando Campus) 1 1996 1,703
Tampa Campus 1998 1,124
HAWAII
Honolulu Campus 2 1993 997
LOUISIANA
Metairie (New Orleans Campus) 1996 1,352
MARYLAND
Columbia (Baltimore Campus) 1999 178
MICHIGAN
Grand Rapids Campus 1999 51
Livonia (Detroit Campus) 1 1996 2,371
NEVADA
Las Vegas Campus 4 1994 1,879
NEW MEXICO
Albuquerque Campus 3 1985 3,104
OKLAHOMA
Oklahoma City Campus 1999 389
Tulsa Campus 1999 369
28<PAGE>
Number Fiscal Enroll-
Of Learning Year ment at
UOP Main Campuses Centers Opened 8/31/99
------------------------------------------ ----------- -------- --------
OREGON
Tigard (Portland Campus) 2 1998 1,024
PENNSYLVANIA
Malvern (Philadelphia Campus) 2000 --
UTAH
Salt Lake City Campus 3 1984 2,255
WASHINGTON
Tukwila (Seattle Campus) 1 1998 1,177
PUERTO RICO
Guaynabo Campus 1 1980 1,252
CANADA
Vancouver Campus 1999 129
ONLINE (Phoenix Campus)<FN1> 1989 10,382
------
TOTAL UOP ENROLLMENTS AT AUGUST 31, 1999 66,783
======
<FN>
<F1> Programs are offered throughout the United States and internationally.
</FN>
</TABLE>
IPD has 22 institutional contracts at August 31, 1999. IPD-assisted
programs are currently offered at 21 campuses and 25 learning centers in
Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New
York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia
and Wisconsin.
The College operations are located in Denver, Colorado.
WIU's main campus is located in Phoenix, Arizona. Additionally, WIU
operates two learning centers in Arizona.
Item 2 -- Properties
The Company leases all of its administrative and educational facilities.
In some cases, classes are held in the facilities of the students' employers
at no charge to the Company. Leases generally range from five to seven
years; however, the Company attempts to secure longer leases if it is
advantageous to do so. The Company also leases space from time-to-time on a
short-term basis in order to provide specific courses or programs. The lease
on the Company's corporate headquarters, which includes the UOP Phoenix Main
Campus, expires on August 31, 2003. As of August 31, 1999, the Company
leased approximately 2.4 million square feet.
The Company evaluates current utilization of the educational facilities
and projected enrollment growth to determine facility needs. The Company
anticipates that an additional 476,000 square feet will be leased in 2000.
29<PAGE>
Item 3 -- Legal Proceedings
The Company is not involved in any legal proceedings which it believes
would have a material effect on the Company's financial position or operating
results.
Item 4 -- Submission of Matters to a Vote of Security Holders
None
30<PAGE>
PART II
Item 5 -- Market for Registrant's Common Equity and Related Stockholder
Matters
There is no established public trading market for the Company's Class B
Common Stock, and all shares of the Company's Class B Common Stock are
beneficially owned by the Company's executive officers. The Company's Class
A Common Stock trades on the Nasdaq-Amex National Market ("Nasdaq") under the
symbol "APOL". The holders of the Company's Class A Common Stock are not
entitled to any voting rights. The table below sets forth the high and low
bid prices, adjusted for a 3-for-2 stock split effected in the form of a
stock dividend in April 1998, for the Company's Class A Common Stock as
reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
------ ------
Fiscal 1998
---------------------
<S> <C> <C>
First quarter $32.58 $22.42
Second quarter 32.75 25.92
Third quarter 35.92 28.04
Fourth quarter 43.25 29.25
Fiscal 1999
---------------------
First quarter $39.25 $20.50
Second quarter 36.25 22.13
Third quarter 34.25 20.13
Fourth quarter 31.13 21.50
</TABLE>
These over-the-counter market quotations may reflect inter-dealer prices
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
At September 30, 1999 there were approximately 200 and 4 holders of
record of shares of Class A and Class B Common Stock, respectively. The
Company estimates that, when you include shareholders whose shares are held
in nominee accounts by brokers, there were approximately 18,400 total holders
of its Class A Common Stock.
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends in the near future. It is the current
policy of the Company's Board of Directors to retain earnings to finance the
operations and expansion of the Company's business. Holders of Class A
Common Stock and Class B Common Stock are entitled to equal per share cash
dividends to the extent declared by the Board.
31<PAGE>
Item 6 -- Selected Consolidated Financial Data
The following selected financial and operating data 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." The Consolidated Statement of
Operations for each of the three years in the period ended August 31, 1999,
and the Consolidated Balance Sheet as of August 31, 1999 and 1998, and the
Report of Independent Accountants thereon are included in this Form 10-K/A.
Diluted net income per share and diluted weighted average shares outstanding
have been retroactively restated for stock splits.
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Tuition and other, net $498,846 $384,877 $279,195 $211,247 $161,013
-------- -------- -------- -------- --------
Costs and expenses:
Instructional costs and services 291,062 232,592 167,720 130,039 102,122
Selling and promotional 75,205 49,035 35,187 27,896 21,016
General and administrative 39,826 33,064 25,481 21,266 18,366
-------- -------- -------- -------- --------
406,093 314,691 228,388 179,201 141,504
-------- -------- -------- -------- --------
Income from operations 92,753 70,186 50,807 32,046 19,509
Interest income, net 5,229 6,086 4,174 2,951 2,320
-------- -------- -------- -------- --------
Income before income taxes 97,982 76,272 54,981 34,997 21,829
Provision for income taxes 38,977 29,975 21,602 13,605 9,229
-------- -------- -------- -------- --------
Net income $ 59,005 $ 46,297 $ 33,379 $ 21,392 $ 12,600
======== ======== ======== ======== ========
Diluted net income per share $ .75 $ .59 $ .43 $ .28 $ .18
======== ======== ======== ======== ========
Diluted weighted average shares
outstanding 78,834 79,086 77,726 76,763 68,872
======== ======== ======== ======== ========
</TABLE>
32<PAGE>
<TABLE>
<CAPTION>
August 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents, and
restricted cash $ 77,332 $ 75,039 $ 78,855 $ 63,267 $ 62,601
Marketable securities 39,571 45,467 41,429 13,273
-------- -------- -------- -------- --------
Total cash and marketable securities $116,903 $120,506 $120,284 $ 76,540 $ 62,601
======== ======== ======== ======== ========
Total assets $348,342 $305,160 $194,910 $137,850 $102,132
======== ======== ======== ======== ========
Current liabilities $108,787 $ 95,574 $ 67,394 $ 54,804 $ 45,065
Long-term liabilities 8,435 9,778 3,199 2,432 1,715
Shareholders' equity 231,120 199,808 124,317 80,614 55,352
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $348,342 $305,160 $194,910 $137,850 $102,132
======== ======== ======== ======== ========
Operating Statistics:
Degree enrollments at end of period<F1> 86,800 71,400 56,200 46,900 36,800
======== ======== ======== ======== ========
Average degree enrollments at end of
Period<F1> 79,000 64,100 50,500 41,500 34,000
======== ======== ======== ======== ========
Number of locations:
Campuses 49 42 35 35 28
Learning centers 80 71 60 49 39
-------- -------- -------- -------- --------
Total number of locations<F2> 129 113 95 84 67
======== ======== ======== ======== ========
<FN>
<F1> Degree enrollments are defined as students in attendance in a degree
program at the end of a period. Average degree enrollments represent
the average of the ending degree enrollments for each month in the
period.
<F2> At September 30, 1999, there were 51 campuses and 80 learning centers.
</FN>
</TABLE>
The Company did not pay any cash dividends on its Common Stock during
any of the periods set forth in the table above.
33<PAGE>
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to
future plans, expectations, events, or performances that involve risks and
uncertainties. The Company's actual results of operations could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors. The following discussion should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto.
BACKGROUND AND OVERVIEW
The Company's tuition and other revenues, net of student discounts, have
increased to $498.8 million in 1999 from $161.0 million in 1995. Average
annual degree seeking student enrollments have increased to 79,000 students
in 1999 from approximately 34,000 in 1995. Net income has increased to $59.0
million in 1999 from $12.6 million in 1995. At August 31, 1999, 86,800
degree seeking students were enrolled in UOP, WIU, the College, and IPD
client institutions.
From September 1995 through August 1999, UOP opened 13 campuses, and IPD
established operations at 8 campuses with its client institutions. Start-up
losses for UOP campuses in new markets average $700,000 to $900,000 per site.
These start-up losses are incurred over a 17 to 20 month period, at which
time the enrollments at these new campuses average 200 to 300 students.
Losses for establishing a learning center in a market currently served by UOP
average $200,000. Start-up losses for IPD contract sites average from
$300,000 to $400,000 per site over a 21 to 24 month period.
Approximately 94% of the Company's tuition and other net revenues in
1999 consist of tuition revenues. Tuition revenue is recognized on a weekly
basis, pro rata over the period of instruction. The Company's tuition and
other net revenues also include sales of textbooks and other
education-related products, application fees, other student fees, and other
income. The Company's tuition and other net revenues vary from period to
period based on several factors that include (1) the aggregate number of
students attending classes, (2) the number of classes held during the period,
and (3) the weighted average tuition price per credit hour (weighted by
program and location). UOP tuition revenues currently represent
approximately 88% of consolidated tuition revenues. IPD tuition revenues
consist of the contractual share of tuition revenues from students enrolled
in programs at IPD client institutions. IPD's contracts with its respective
client institutions generally have terms of five to ten years with provisions
for renewal.
The Company categorizes its expenses as instructional costs and
services, selling and promotional, and general and administrative.
Instructional costs and services at UOP, WIU, and the College consist
primarily of costs related to the delivery and administration of the
Company's educational programs that include faculty compensation,
administrative salaries for departments that provide service directly to the
students, financial aid processing costs, the costs of educational materials
sold, facility leases and other occupancy costs, bad debt expense, and
34<PAGE>
depreciation and amortization of property and equipment. UOP and WIU faculty
members are contracted with and paid for one course offering at a time. All
classroom facilities are leased or, in some cases, are provided by the
students' employers at no charge to the Company. Instructional costs and
services at IPD consist primarily of program administration, student
services, and classroom lease expense. Most of the other instructional costs
for IPD-assisted programs, including faculty, financial aid processing, and
other administrative salaries, are the responsibility of the IPD client
institutions.
Selling and promotional costs consist primarily of compensation for
enrollment advisors and corporate marketing, advertising costs, production of
marketing materials, and other costs related to selling and promotional
functions.
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.
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data of the
Company expressed as a percentage of tuition and other net revenues for the
periods indicated:
<TABLE>
<CAPTION> Year Ended August 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Tuition and other, net 100.0% 100.0% 100.0%
------- ------- -------
Costs and expenses:
Instructional costs and services 58.3 60.5 60.1
Selling and promotional 15.1 12.7 12.6
General and administrative 8.0 8.6 9.1
------- ------- -------
81.4 81.8 81.8
------- ------- -------
Income from operations 18.6 18.2 18.2
Interest income, net 1.0 1.6 1.5
------- ------- -------
Income before income taxes 19.6 19.8 19.7
Less provision for income taxes 7.8 7.8 7.7
------- ------- -------
Net income 11.8% 12.0% 12.0%
======= ======= =======
</TABLE>
35<PAGE>
Year Ended August 31, 1999, Compared with the Year Ended August 31, 1998 ----
Tuition and other net revenues increased by 29.6% to $498.8 million in
1999 from $384.9 million in 1998 due primarily to a 23.3% increase in average
degree student enrollments, tuition price increases averaging four to six
percent (depending on the geographic area and program), and a higher
concentration of enrollments at locations that charge a higher rate per
credit hour. Most of the Company's campuses, which include their respective
learning centers, had increases in net revenues and average degree student
enrollments from 1998 to 1999.
Tuition and other net revenues for the year ended August 31, 1999 and
1998, consist primarily of $442.0 million and $334.2 million, respectively,
of net tuition revenues from students enrolled in degree programs and $24.8
million and $23.1 million, respectively, of net tuition revenues from
students enrolled in non-degree programs. Average degree student enrollments
increased to 79,000 in 1999 from approximately 64,100 in 1998.
Instructional costs and services increased by 25.1% to $291.1 million in
1999 from $232.6 million in 1998 due primarily to the direct costs necessary
to support the increase in degree student enrollments. Direct costs consist
primarily of faculty compensation, related staff salaries at each respective
location, classroom lease expenses, and financial aid processing costs.
These costs as a percentage of tuition and other net revenues decreased to
58.3% in 1999 from 60.5% in 1998 due primarily to the exclusion of certain
enrollment staff salaries and greater tuition and other net revenues being
spread over the fixed costs related to centralized student services. As the
Company expands into new markets, it may not be able to leverage its existing
instructional costs and services to the same extent.
Selling and promotional expenses increased by 53.4% to $75.2 million in
1999 from $49.0 million in 1998 due primarily to the inclusion of certain
enrollment staff salaries, additional advertising and marketing related to
six new UOP campuses opened during the year, and increased advertising and
marketing for distance education. These expenses as a percentage of net
revenues increased to 15.1% in 1999 from 12.7% in 1998 due to an increase in
the number of campuses opened in new markets in the last two years and the
inclusion of certain enrollment staff salaries.
General and administrative expenses increased by 20.5% to $39.8 million
in 1999 from $33.1 million in 1998 due primarily to costs required to support
the increased number of campuses and learning centers, increased information
services expenditures, and overall increases in general and administrative
salaries. General and administrative expenses as a percentage of tuition and
other net revenues decreased to 8.0% in 1999 from 8.6% in 1998 due primarily
to higher tuition and other net revenues being spread over the fixed costs
related to various centralized functions such as information services,
corporate accounting, and human resources. The Company may not be able to
leverage its costs to the same extent as it faces increased costs related to
the development and implementation of new information systems and expansion
into additional markets.
Costs related to the start-up of new campuses and learning centers are
expensed as incurred. These start-up costs are primarily included in
instructional costs and services and selling and promotional expenses.
Start-up losses totaled approximately $9.0 million and $7.2 million in 1999
and 1998, respectively.
36<PAGE>
Net interest income was $5.2 million and $6.1 million in 1999 and 1998,
respectively. Net interest income decreased in 1999 due primarily to lower
average cash balances as a result of stock repurchases and lower interest
rates in effect during 1999. Interest expense was $57,000 and $119,000 in
1999 and 1998, respectively.
The Company's effective tax rate increased to 39.8% in 1999 from 39.3%
in 1998. The increase is due primarily to the relative impact of tax-exempt
interest income and of expenses that are non-deductible for tax purposes.
Net income increased to $59.0 million in 1999 from $46.3 million in 1998
due primarily to increased enrollments, increased tuition rates, and improved
utilization in instructional costs and services and general and
administrative costs.
Year Ended August 31, 1998, Compared with the Year Ended August 31, 1997-----
Tuition and other net revenues increased by 37.9% to $384.9 million in
1998 from $279.2 million in 1997 due primarily to a 26.9% increase in average
degree student enrollments, tuition price increases averaging four to five
percent (depending on the geographic area and program), a higher
concentration of enrollments at locations that charge a higher rate per
credit hour, and net revenues from the College. Most of the Company's
campuses, which include their respective learning centers, had increases in
net revenues and average degree student enrollments from 1997 to 1998.
Tuition and other net revenues for the year ended August 31, 1998 and
1997, consists primarily of $334.2 million and $244.7 million, respectively,
of net tuition revenues from students enrolled in degree programs and $23.1
million and $13.2 million, respectively, of net tuition revenues from
students enrolled in non-degree programs. Average degree student enrollments
increased to 64,100 in 1998 from approximately 50,500 in 1997.
Instructional costs and services increased by 38.7% to $232.6 million in
1998 from $167.7 million in 1997 due primarily to the direct costs necessary
to support the increase in average degree student enrollments, consisting
primarily of faculty compensation, classroom lease expenses and related staff
salaries at each respective location, and added expenses related to the
College. These costs as a percentage of tuition and other net revenues
increased to 60.5% in 1998 from 60.1% in 1997 due primarily to the increase
in the number of new locations.
Selling and promotional expenses increased by 39.4% to $49.0 million in
1998 from $35.2 million in 1997 due primarily to an increase in the number of
marketing and enrollment staff, additional advertising and marketing related
to newly opened campuses and learning centers, and expenses related to the
College. These expenses as a percentage of tuition and other net revenues
increased to 12.7% in 1998 from 12.6% in 1997 due to an increase in the
number of campuses opened in new markets in the last two years and an
increase in the number of marketing and enrollment staff, partially offset by
the ability to increase enrollments and open new learning centers in existing
markets with a proportionally lower increase in selling and promotional
expenses.
General and administrative expenses increased by 29.8% to $33.1 million
in 1998 from $25.5 million in 1997 due primarily to costs required to support
the increased number of campuses and learning centers, costs associated with
37<PAGE>
the implementation of new information systems, and overall increases in
general and administrative salaries. General and administrative expenses as
a percentage of tuition and other net revenues decreased to 8.6% in 1998 from
9.1% in 1997 due primarily to higher tuition and other net revenues being
spread over the fixed costs related to various centralized functions such as
information services, corporate accounting, and human resources.
Costs related to the start-up of new campuses and learning centers are
expensed as incurred. These start-up costs are primarily included in
instructional costs and services and selling and promotional expenses.
Start-up losses totaled approximately $7.2 million and $3.6 million in 1998
and 1997, respectively.
Net interest income increased to $6.1 million in 1998 from $4.2 million
in 1997 due to the increase in cash and investments during the year.
Interest expense was $119,000 and $167,000 in 1998 and 1997, respectively.
The Company's effective tax rate was 39.3% in both 1998 and 1997.
Net income increased to $46.3 million in 1998 from $33.4 million in 1997
due primarily to increased enrollments, increased tuition rates, and improved
utilization of general and administrative costs.
SEASONALITY IN RESULTS OF OPERATIONS
The Company experiences seasonality in its results of operations
primarily as a result of changes in the level of student enrollments. While
the Company enrolls students throughout the year, second quarter (December to
February) average enrollments and related revenues generally are lower than
other quarters due to the holiday breaks in December and January. Second
quarter costs and expenses historically increase as a percentage of tuition
and other 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, instructional costs and services and selling and
promotional expenses historically increase as a percentage of tuition and
other net revenues in the fourth quarter due to increased costs in
preparation for the August peak enrollments.
The Company anticipates that these seasonal trends in the second and
fourth quarters will continue in the future.
38<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial
information for each of the Company's last eight quarters. The Company
believes that this information includes all normal recurring adjustments
necessary for a fair presentation of such quarterly information when read in
conjunction with the Consolidated Financial Statements included in Item 8 of
this Form 10-K/A. The operating results for any quarter are not necessarily
indicative of the results for any future period. Diluted net income per
share and diluted weighted average shares outstanding have been retroactively
restated for stock splits.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------
FY 1999 FY 1998
-------------------------------------- --------------------------------------
Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 28, Nov. 30,
1999 1999 1999 1998 1998 1998 1998 1997
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Tuition and other, net $135,685 $138,107 $109,356 $115,698 $106,723 $105,201 $ 85,078 $ 87,875
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Instructional costs and services 78,902 78,873 65,619 67,668 64,096 61,093 54,780 52,623
Selling and promotional 19,973 18,783 18,517 17,932 16,195 11,504 10,770 10,566
General and administrative 11,131 10,063 9,507 9,125 8,071 8,457 8,093 8,443
-------- -------- -------- -------- -------- -------- -------- --------
110,006 107,719 93,643 94,725 88,362 81,054 73,643 71,632
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 25,679 30,388 15,713 20,973 18,361 24,147 11,435 16,243
Interest income, net 1,290 1,352 1,275 1,312 1,841 1,560 1,363 1,322
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 26,969 31,740 16,988 22,285 20,202 25,707 12,798 17,565
Provision for income taxes 10,617 12,780 6,833 8,747 7,766 10,185 5,068 6,956
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 16,352 $ 18,960 $ 10,155 $ 13,538 $ 12,436 $ 15,522 $ 7,730 $ 10,609
======== ======== ======== ======== ======== ======== ======== ========
Diluted net income per share $ .21 $ .24 $ .13 $ .17 $ .16 $ .20 $ .10 $ .13
======== ======== ======== ======== ======== ======== ======== ========
Diluted weighted average shares
outstanding 78,068 78,914 79,195 79,159 79,372 79,250 79,035 78,689
======== ======== ======== ======== ======== ======== ======== ========
As a percentage of tuition and
other net revenues:
Revenues:
Tuition and other, net 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Instructional costs and services 58.2 57.1 60.0 58.5 60.0 58.1 64.4 59.9
Selling and promotional 14.7 13.6 16.9 15.5 15.2 10.9 12.7 12.0
General and administrative 8.2 7.3 8.7 7.9 7.5 8.0 9.5 9.6
-------- -------- -------- -------- -------- -------- -------- --------
81.1 78.0 85.6 81.9 82.7 77.0 86.6 81.5
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 18.9 22.0 14.4 18.1 17.3 23.0 13.4 18.5
Interest income, net 1.0 1.0 1.1 1.2 1.7 1.5 1.6 1.5
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 19.9 23.0 15.5 19.3 19.0 24.5 15.0 20.0
Provision for income taxes 7.8 9.3 6.2 7.6 7.3 9.7 5.9 7.9
-------- -------- -------- -------- -------- -------- -------- --------
Net income 12.1% 13.7% 9.3% 11.7% 11.7% 14.8% 9.1% 12.1%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
39<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to $75.6 million in
1999 from $56.9 million in 1998. The increase resulted primarily from
increased net income and increased non-cash charges for depreciation and
amortization and a smaller increase in accounts receivable offset in part by
a decrease in accounts payable and accrued liabilities.
Capital expenditures increased to $44.7 million in 1999 from $30.9
million in 1998 primarily due to the installation of computer labs related to
the expansion of Information Technology programs, continued development of
the financial aid processing software, the installation of new phone systems
at the corporate offices and several campuses, and leasehold improvements.
Total purchases of property and equipment for the year ended August 31, 2000,
are expected to range from $38.0 to $42.0 million. These expenditures will
primarily be related to new campuses and learning centers, the continued
expansion of computer labs designed to support the Information Technology
programs, hardware and software related to the Company's conversion to a new
human resource system, and increases in normal recurring capital expenditures
due to the overall increase in student and employee levels resulting from the
growth in the business. During 1998, the Company used $19.4 million of cash
for its acquisition of the assets and related business operations of the
College for Financial Planning and $10.8 million for its investment in
Interactive Distance Learning, Inc.
Start-up losses for new campuses and learning centers are expected to
range from $11.0 to $13.0 million in 2000, as compared to $9.0 million in
1999, due to recent and planned expansion into new geographic markets.
At August 31, 1999, the Company had no outstanding borrowings on its
$10.0 million line of credit. Borrowings under the line of credit bear
interest at LIBOR plus .75% or prime at the Company's election. At August
31, 1999, availability under the line of credit was reduced by outstanding
letters of credit of $4.0 million. The line of credit is renewable annually,
and any amounts borrowed under the line are payable upon its termination in
February 2001.
On September 25, 1998, the Company's Board of Directors authorized a
program allocating up to $40 million in Company funds to repurchase shares of
its Class A Common Stock. On May 13, 1999, an additional $20 million was
authorized by the Board of Directors to repurchase shares of its Class A
Common Stock. As of August 31, 1999, the Company had repurchased
approximately 1,876,000 shares at a total cost of approximately $46.2
million.
The Company believes that cash flow from operations along with its
existing cash balances and availability under its line of credit will be
adequate to fund the Company's capital and operating needs for the next 12 to
18 months.
The Department of Education ("ED") requires that Title IV Program funds
collected by an institution in advance of student billing 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
received by the Company through electronic funds transfer are subject to
certain holding period restrictions. These funds generally remain in these
separate accounts for an average of 60-75 days from receipt. As of
August 31, 1999, the Company had approximately $25.8 million in these
separate accounts, which are reflected in the Consolidated Balance Sheet as
restricted cash, to comply with these requirements. These restrictions on
cash have not affected the Company's ability to fund daily operations.
The Title IV Regulations, as revised, require all higher education
institutions to meet a minimum composite score to be deemed financially
responsible by the ED. If the minimum composite score of 1.0 is not met, an
institution would fall under alternative standards and may lose its
eligibility to participate in Title IV Programs. As of August 31, 1999,
UOP's and WIU's composite scores were each 3.0. These requirements apply
separately to UOP and WIU and to each of the respective IPD client
institutions, but not to the Company on a consolidated basis.
UOP's most recent Department of Education program review began in March
1997, and a final program review determination letter was received in July
1999. UOP satisfactorily responded to the findings in ED's program review
report with no additional action required.
In January 1998, the Department of Education Office of the Inspector
General ("OIG") began performing an audit of UOP's administration of the
Title IV Programs. The team previously presented questions regarding UOP's
interpretation of the "12-hour rule," UOP's distance education programs, and
UOP's institutional refund obligations. UOP has received a draft report
addressing these issues and is currently in discussions with the OIG and ED.
Although the Company believes that the OIG audit will be resolved without any
negative impact on UOP's teaching/learning model, as with any program review
or audit, no assurance can be given as to the final outcome since the matters
are not yet resolved. Depending on the interpretation of the various
regulatory requirements, any resulting liability to the Company from the
final audit results will be recorded as an expense.
YEAR 2000 COMPLIANCE
The Year 2000 computer issue refers to a condition in computer software
where a two digit field rather than a four digit field is used to distinguish
a calendar year. Unless corrected, some computer programs, hardware ("IT")
and non-information technology systems ("non-IT") could be unable to process
information containing dates subsequent to December 31, 1999. As a result,
such programs and systems could experience miscalculations, malfunctions, or
disruptions.
The Company has completed the inventory, assessment, and testing phases
of its Year 2000 readiness program with respect to its major IT systems.
Although the Company currently expects that all of its major IT systems are
Year 2000 compliant, appropriate contingency plans are in the process of
being developed for those systems that cannot be remediated by December 31,
1999. The Company does not have any significant non-IT Year 2000 issues.
The Company has substantially completed the inventory, assessment, and
testing phases of its Year 2000 readiness program with respect to significant
suppliers to determine the extent to which the Company may be vulnerable in
the event that such parties are unable to remediate their own Year 2000
issues. Assessment procedures with respect to such parties, who include,
among others, the U.S. Department of Education, accreditation agencies,
financial institutions and lessors, have consisted primarily of
correspondence with such parties. The Company is in the process of
developing appropriate contingency plans, if possible, in the event that
these suppliers are not Year 2000 compliant.
41<PAGE>
The Company believes that the most likely worst-case scenario for the
Year 2000 issue would be the failure of a significant supplier to
successfully complete its Year 2000 remediation efforts. The Company could
be significantly impacted by widespread economic or financial market
disruption caused by Year 2000 issues. If such events were to occur, the
Company would encounter disruptions to its business that could have a
material adverse effect on its financial position, results of operations, or
cash flows. As previously mentioned, the Company will develop contingency
plans, if possible, in the event that these suppliers are not Year 2000
compliant.
Costs incurred to date in connection with the Company's Year 2000
efforts have not been material. Additionally, the Company does not expect
that remaining costs required to complete such efforts will be material.
Although the Company is unable to predict the impact of any Year 2000-related
disruptions on its business, management does not currently believe that such
disruptions will have a material adverse impact on the Company's financial
position, results of operations, or cash flows.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
Item 7a -- Quantitative and Qualitative Disclosures about Market Risk
The Company's portfolio of marketable securities includes numerous issuers,
varying types of securities, and varying maturities. The Company intends to
hold these securities to maturity. The fair value of the Company's portfolio
of marketable securities would not be significantly impacted by either a 100
basis point increase or decrease in interest rates due primarily to the
short-term nature of the portfolio. The Company does not hold or issue
derivative financial instruments.
42<PAGE>
Item 8 -- Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . 44
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . 45
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . 46
Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . 47
Consolidated Statement of Changes in Shareholders' Equity. . . . . . . . . 48
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . 49
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 50
43<PAGE>
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 comprehensive income, 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
August 31, 1999, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Apollo Group, Inc.'s
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with generally accepted auditing standards, which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Phoenix, Arizona
September 30, 1999
44<PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(Dollars in thousands)
<TABLE>
<CAPTION> August 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Assets:
Current assets
Cash and cash equivalents $ 51,534 $ 52,326
Restricted cash 25,798 22,713
Marketable securities 31,064 27,538
Receivables, net 75,664 61,282
Deferred tax assets, net 7,346 6,203
Other current assets 6,807 3,945
-------- --------
Total current assets 198,213 174,007
Property and equipment, net 74,826 46,618
Marketable securities 8,507 17,929
Investment in IDL 10,701 10,807
Cost in excess of fair value of assets purchased, net 39,917 41,398
Other assets 16,178 14,401
-------- --------
Total assets $348,342 $305,160
======== ========
Liabilities and Shareholders' Equity:
Current liabilities
Current portion of long-term liabilities $ 300 $ 333
Accounts payable 12,105 11,807
Accrued liabilities 14,340 19,188
Income taxes payable 535 1,007
Student deposits and current portion of deferred revenue 81,507 63,239
-------- --------
Total current liabilities 108,787 95,574
-------- --------
Deferred tuition revenue, less current portion 2,139 4,592
-------- --------
Long-term liabilities, less current portion 4,222 3,750
-------- --------
Deferred tax liabilities, net 2,074 1,436
-------- --------
Commitments and contingencies -- --
-------- --------
Shareholders' equity
Preferred stock, no par value, 1,000,000 shares authorized;
none issued -- --
Class A common stock, no par value, 400,000,000
shares authorized; 76,628,000 and 77,112,000 issued and
outstanding at August 31, 1999 and 1998, respectively 102 101
Class B common stock, no par value, 3,000,000
shares authorized; 512,000 issued and outstanding at
August 31, 1999 and 1998 1 1
Additional paid-in capital 99,190 80,677
Treasury stock, at cost, 1,876,000 shares (46,197)
Retained earnings 178,028 119,023
Accumulated other comprehensive income (loss) (4) 6
-------- --------
Total shareholders' equity 231,120 199,808
-------- --------
Total liabilities and shareholders' equity $348,342 $305,160
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45<PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Tuition and other, net $498,846 $384,877 $279,195
-------- -------- --------
Costs and expenses:
Instructional costs and services 291,062 232,592 167,720
Selling and promotional 75,205 49,035 35,187
General and administrative 39,826 33,064 25,481
-------- -------- --------
406,093 314,691 228,388
-------- -------- --------
Income from operations 92,753 70,186 50,807
Interest income, net 5,229 6,086 4,174
-------- -------- --------
Income before income taxes 97,982 76,272 54,981
Provision for income taxes 38,977 29,975 21,602
-------- -------- --------
Net income $ 59,005 $ 46,297 $ 33,379
======== ======== ========
Basic net income per share $ .76 $ .60 $ .44
======== ======== ========
Diluted net income per share $ .75 $ .59 $ .43
======== ======== ========
Basic weighted average shares outstanding 77,683 77,245 75,625
Diluted weighted average shares outstanding 78,834 79,086 77,726
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46<PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income
(In thousands)
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net income $59,005 $46,297 $33,379
Other comprehensive income:
Currency translation gain (loss) (10) 3 3
------- ------- -------
Comprehensive income $58,995 $46,300 $33,382
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47<PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Common Stock
--------------------------------
Class A Class B Accum.
--------------- --------------- Addi- Other Total
tional Compre- Share-
Stated Stated Paid-In Treasury Retained hensive holders'
Shares Value Shares Value Capital Stock Earnings Income Equity
------ ------- ------ ------ ------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1996 49,476 $ 65 576 $ 1 $41,201 $ -- $ 39,347 $ -- $ 80,614
Stock issued under stock
purchase plan 80 1,834 1,834
Stock issued under stock
option plans 643 1 978 979
Exchange Class A shares for
Class B shares 28 (28) --
Tax benefits of stock options
exercised 7,508 7,508
Currency translation gain 3 3
Net income 33,379 33,379
------ ------- ------ ------ ------- -------- -------- ------ --------
Balance at August 31, 1997 50,227 66 548 1 51,521 -- 72,726 3 124,317
Stock issued for College
acquisition 445 15,944 15,944
Stock issued under stock
purchase plan 75 2,457 2,457
Stock issued under stock
option plans 475 1 3,542 3,543
Exchange Class A shares for
Class B shares 36 (36) --
Tax benefits of stock options
exercised 7,249 7,249
3-for-2 stock split 25,854 34 (34) --
Fractional shares paid out (2) (2)
Currency translation gain 3 3
Net income 46,297 46,297
------ ------- ------ ------ ------- -------- -------- ------ --------
Balance at August 31, 1998 77,112 101 512 1 80,677 -- 119,023 6 199,808
Stock issued under stock
purchase plan 159 3,374 3,374
Stock issued under stock
option plans 1,233 1 5,456 5,457
Tax benefits of stock options
exercised 9,683 9,683
Treasury stock purchase (1,876) (46,197) (46,197)
Currency translation loss (10) (10)
Net income 59,005 59,005
------ ------- ------ ------ ------- -------- -------- ------ --------
Balance at August 31, 1999 76,628 $ 102 512 $ 1 $99,190 $(46,197) $178,028 $ (4) $231,120
====== ======= ====== ====== ======= ======== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48<PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows provided by (used for) operating
activities:
Net income $ 59,005 $ 46,297 $ 33,379
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,588 12,786 8,291
Provision for uncollectible accounts 6,906 5,479 2,523
Deferred income taxes (505) (2,599) 145
Tax benefits of stock options exercised 9,683 7,249 7,508
Decrease (increase) in assets:
Restricted cash (3,085) (2,786) (8,642)
Receivables, net (21,288) (29,733) (8,578)
Other assets (5,902) (2,491) 970
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (5,022) 9,542 488
Student deposits and deferred revenue 15,815 12,955 11,947
Other liabilities (633) 192 927
-------- -------- --------
Net cash provided by operating activities 75,562 56,891 48,958
-------- -------- --------
Cash flows provided by (used for) investing
activities:
Net additions to property and equipment (44,732) (30,855) (12,699)
Purchase of marketable securities (24,644) (43,277) (51,634)
Maturities of marketable securities 29,922 38,556 22,983
Purchase of other assets (3,642) (3,685) (3,427)
Proceeds from sale of land 4,212
Investment in IDL 106 (10,807)
Cash paid for acquisition, net of cash
acquired (19,378)
-------- -------- --------
Net cash used for investing activities (38,778) (69,446) (44,777)
-------- -------- --------
Cash flows provided by (used for) financing
activities:
Purchase of common stock (46,197)
Payments on long-term debt (200) (50) (50)
Issuance of common stock 8,831 6,000 2,812
-------- -------- --------
Net cash provided by (used for) financing
activities (37,566) 5,950 2,762
-------- -------- --------
Currency translation gain (loss) (10) 3 3
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (792) (6,602) 6,946
Cash and cash equivalents at beginning
of year 52,326 58,928 51,982
-------- -------- --------
Cash and cash equivalents at end of year $ 51,534 $ 52,326 $ 58,928
======== ======== ========
Supplemental disclosure of cash flow
information
Cash paid during the year for:
Income taxes $ 30,224 $ 24,235 $ 13,953
Interest $ 48 $ 9 $ 11
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49<PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Apollo Group, Inc. ("Apollo" or the "Company"), through its wholly-owned
subsidiaries, The University of Phoenix, Inc. ("UOP"), the Institute for
Professional Development ("IPD"), the College for Financial Planning
Institutes Corporation (the "College"), and Western International University,
Inc. ("WIU"), is a leading provider of higher education programs for working
adults.
UOP is a regionally accredited, private institution of higher education
offering bachelor's and master's degree programs in business, management,
computer information systems, education, and health care. UOP currently has
28 campuses and 53 learning centers located in Arizona, California, Colorado,
Florida, Hawaii, Louisiana, Maryland, Michigan, Nevada, New Mexico, Oklahoma,
Oregon, Pennsylvania, Utah, Washington, Puerto Rico, and Vancouver, British
Columbia. UOP also offers its educational programs worldwide through Online,
its computerized educational delivery system. UOP is accredited by the
Commission on Institutions of Higher Education of the North Central
Association of Colleges and Schools ("NCA").
IPD provides program development and management services under long-term
contracts to 21 regionally accredited private colleges and universities. IPD
currently operates at 21 campuses and 25 learning centers in 22 states. IPD
has contracted to develop online degree programs for the United States Marine
Corps.
The College, located in Denver, Colorado, was acquired in September 1997
and provides financial planning education programs, as well as a regionally
accredited graduate degree program in financial planning.
WIU, which is accredited by NCA, currently offers undergraduate and
graduate degree programs in Phoenix, Chandler, and Fort Huachuca, Arizona.
The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 1999, 1998, and 1997 relate to the
fiscal years ended August 31, 1999, 1998, and 1997, respectively.
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 in consolidation.
Cash and cash equivalents ---------------------------------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted cash -------------------------------------------------------------
The U.S. Department of Education requires that Title IV Program funds
collected in advance of student billings be kept in a separate cash or cash
50<PAGE>
equivalent account until the students are billed for that portion of their
program. In addition, all Title IV Program funds received by the Company
through electronic funds transfer are subject to certain holding period
restrictions. These funds generally remain in these separate accounts for an
average of 60-75 days from date of receipt. Restricted cash is excluded from
cash and cash equivalents in the Consolidated Statement of Cash Flows until
the cash is transferred from these restricted accounts to the Company's
operating accounts. The Company's restricted cash is invested primarily in
U.S. Agency-backed securities and auction market preferred stock with
maturities of ninety days or less.
Investments -----------------------------------------------------------------
Investments in marketable securities such as municipal bonds and U.S.
agency obligations are stated at amortized cost, which approximates fair
value. It is the Company's intention to hold its marketable securities until
maturity. Investments in joint ventures and other long-term investments are
carried at cost.
Property and equipment ------------------------------------------------------
Property and equipment is recorded at cost less accumulated
depreciation. The Company capitalizes the cost of software used for internal
operations once technological feasibility of the software has been
demonstrated. Such costs consist primarily of custom-developed and packaged
software and the direct labor costs of internally developed software.
Depreciation is provided on all buildings, furniture, equipment, and related
software using the straight-line method over the estimated useful lives of
the related assets which range from three to seven years, except software
which is depreciated over three to five years and buildings which are
depreciated over 30 years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated
useful lives of the related assets. Maintenance and repairs are expensed as
incurred.
Revenues, receivables, and related liabilities ------------------------------
The Company's educational programs range in length from one-day seminars
to degree programs lasting up to four years. Students in the Company's
degree programs generally enroll in a program of study that encompasses a
series of five to six week courses that are taken consecutively over the
length of the program. Students are billed on a course-by-course basis when
the student first attends a session, resulting in the recording of a
receivable from the student and deferred tuition revenue in the amount of the
billing. The related revenue for each course, including that portion of
tuition revenues to which the Company is entitled under the terms of its
revenue-sharing contracts with IPD client institutions, are recognized on a
pro rata basis over the period of instruction for each course. Seminars,
continuing education programs, and many of the College's non-degree programs
are usually billed in one installment with the related revenue also
recognized on a pro rata basis over the period of instruction.
Tuition and other revenues are shown net of discounts relating to a
variety of promotional programs. Such discounts totaled $7.0 million, $6.7
million, and $6.7 million in 1999, 1998, and 1997, respectively.
51<PAGE>
Many of the Company's students participate in government sponsored
financial aid programs under Title IV of the Higher Education Act of 1965.
These financial aid programs generally consist of guaranteed student loans
and direct grants to students. Guaranteed student loans are issued directly
to the student by external financial institutions, to whom the student is
obligated, and are non-recourse to the Company.
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.
Cost in excess of fair value of assets purchased ----------------------------
The Company amortizes cost in excess of fair value of assets purchased
on a straight-line method over the estimated useful life. At August 31,
1999, the Company's cost in excess of fair value of assets purchased related
primarily to the acquisition of certain assets of the College for Financial
Planning and Western International University, which are being amortized over
35 years and 15 years, respectively.
Statement of Financial Accounting Standards 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets, including cost in excess of fair value of
assets purchased, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. The carrying value of cost in excess of fair value of assets
purchased is assessed for any permanent impairment by evaluating the
operating performance and future undiscounted cash flows of the underlying
businesses. Adjustments are made if the sum of the expected future net cash
flows is less than book value. As of August 31, 1999, there have been no
impairment adjustments recognized.
Fair value of financial instruments -----------------------------------------
The carrying amount reported in the Consolidated Balance Sheet for cash
and cash equivalents, restricted cash, marketable securities, accounts
receivable, accounts payable, accrued liabilities, and student deposits and
deferred revenue approximate fair value because of the short-term nature of
these financial instruments.
Earnings per share ----------------------------------------------------------
Basic net income per share is computed using the weighted average number
of Class A and Class B common shares outstanding during the period. Diluted
net income per share is computed using the weighted average number of Class A
and Class B common and common equivalent shares outstanding during the
period. Both basic and diluted weighted average shares have been
retroactively restated for stock splits effected in the form of stock
dividends. The amount of any tax benefit to be credited to capital related
52<PAGE>
to the exercise of options is included when applying the treasury stock
method to stock options in the computation of earnings per share.
Deferred rental payments and deposits ---------------------------------------
The Company records rent expense using the straight-line method over the
term of the lease agreement. Accordingly, deferred rental liabilities are
provided for lease agreements that specify scheduled rent increases over the
lease term. Rental deposits are provided for lease agreements that specify
payments in advance or scheduled rent decreases over the lease term.
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.
Start-up costs --------------------------------------------------------------
Costs related to the start-up of new campuses and learning centers are
expensed as incurred.
Stock-based compensation ----------------------------------------------------
The Company has elected to continue to account for its stock-based
awards in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and has provided the
pro forma disclosures as required by Statement of Financial Accounting
Standards 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), for
the years ended August 31, 1999, 1998, and 1997.
New accounting pronouncements -----------------------------------------------
During 1999, the Company adopted the American Institute of Certified
Public Accountants Statement of Position No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
The adoption of SOP 98-1 did not have a material impact on its financial
statements.
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.
Comprehensive income --------------------------------------------------------
The Company adopted Statement of Financial Accounting Standards 130,
"Reporting Comprehensive Income" ("SFAS 130"), which requires additional
reporting with respect to certain changes in assets and liabilities that
previously were reported in shareholders' equity. Accordingly, the Company
has included a Consolidated Statement of Comprehensive Income for the years
ended August 31, 1999, 1998, and 1997.
53<PAGE>
Reclassifications -----------------------------------------------------------
Certain amounts reported for the years ended August 31, 1998 and 1997,
have been reclassified to conform to the 1999 presentation, having no effect
on net income.
NOTE 3. ACQUISITIONS
In September 1997, the Company acquired the assets and related business
operations of the College for Financial Planning and related divisions that
include the Institute for Wealth Management, the Institute for Retirement
Planning, the American Institute for Retirement Planners, Inc., and the
Institute for Tax Studies. The adjusted purchase price consisted of $19.4
million in cash, $15.9 million in stock, and the assumption of approximately
$11.4 million in liabilities. The excess of cost over the value of tangible
assets of $40.0 million is being amortized over 35 years.
The acquisition was accounted for under the purchase method and,
accordingly, the results of operations related to this new subsidiary has
been included with those of the Company for periods subsequent to the date of
the acquisition. Results of operations for the College for Financial
Planning prior to the acquisition were not material in relation to the
Company's operations as a whole.
NOTE 4. BALANCE SHEET COMPONENTS
Marketable securities consist of the following, in thousands:
<TABLE>
<CAPTION>
August 31, 1999 August 31, 1998
------------------------ -----------------------
Estimated Amortized Estimated Amortized
Type Market Value Cost Market Value Cost
---------- ------------ -------- ------------ -------
<S> <C> <C> <C> <C>
Classified as current:
Municipal bonds $22,507 $22,497 $26,969 $26,898
U.S. agency obligations 7,863 7,881 640 640
Commercial paper 684 686
------- ------- ------- -------
Total current marketable securities 31,054 31,064 27,609 27,538
------- ------- ------- -------
Classified as noncurrent:
Municipal bonds due in 1-2 years 8,232 8,259 17,975 17,929
U.S. agency obligations 246 248
------- ------- ------- -------
Total noncurrent marketable securities 8,478 8,507 17,975 17,929
------- ------- ------- -------
Total marketable securities $39,532 $39,571 $45,584 $45,467
======= ======= ======= =======
</TABLE>
54<PAGE>
Receivables consist of the following, in thousands:
<TABLE>
<CAPTION>
August 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Trade receivables $84,743 $67,160
Interest receivable 533 671
Income tax refunds receivable 32 79
------- -------
85,308 67,910
Less allowance for doubtful accounts (9,644) (6,628)
------- -------
Total receivables, net $75,664 $61,282
======= =======
</TABLE>
Bad debt expense was $6.9 million, $5.5 million, and $2.5 million for
1999, 1998, and 1997, respectively.
Property and equipment consist of the following, in thousands:
<TABLE>
<CAPTION>
August 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Furniture and equipment $79,363 $52,698
Software 19,394 11,061
Leasehold improvements 16,549 7,432
Land and buildings 350 350
------- -------
115,656 71,541
Less accumulated depreciation and amortization (40,830) (24,923)
------- -------
Property and equipment, net $74,826 $46,618
======= =======
</TABLE>
Depreciation and amortization expense was $16.5 million, $9.9 million,
and $6.4 million for 1999, 1998, and 1997, respectively.
55<PAGE>
Cost in excess of fair value of assets purchased consist of the
following, in thousands:
<TABLE>
<CAPTION>
August 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Cost in excess of fair value of assets purchased $42,831 $42,831
Less accumulated amortization (2,914) (1,433)
------- -------
Total cost in excess, net $39,917 $41,398
======= =======
</TABLE>
Total amortization expense was $1.5 million, $1.2 million, and $176,000
in 1999, 1998, and 1997, respectively.
Accrued liabilities consist of the following, in thousands:
<TABLE>
<CAPTION>
August 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Salaries, wages, and benefits $ 9,355 $ 9,816
Other accrued liabilities 4,985 9,372
------- -------
Total accrued liabilities $14,340 $19,188
======= =======
</TABLE>
Student deposits and current portion of deferred revenue consist of the
following, in thousands:
<TABLE>
<CAPTION>
August 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Student deposits $44,260 $35,794
Current portion of deferred tuition revenue 35,399 26,067
Other deferred revenue 1,848 1,378
------- -------
Total student deposits and current portion of
deferred revenue $81,507 $63,239
======= =======
</TABLE>
56<PAGE>
NOTE 5. INVESTMENT IN IDL
In August 1998, the Company together with Hughes Network Systems and
Hermes Onetouch LLC ("Hermes") formed Interactive Distance Learning, Inc.
("IDL"), a new corporation to acquire One Touch Systems, a leading provider
of interactive distance learning solutions. The Company contributed $10.8
million and provided a $1.2 million letter of credit which will be paid in
October 1999, in exchange for a 19% interest in the newly formed corporation.
This investment is accounted for under the cost method of accounting.
Hermes is wholly-owned by the Company's Chairman and a Senior Vice President.
NOTE 6. SHORT-TERM BORROWINGS
At August 31, 1999, the Company had no outstanding borrowings on its
$10.0 million line of credit. Borrowings under the line of credit bear
interest at LIBOR plus .75% or prime at the Company's election. At August
31, 1999, availability under the line of credit was reduced by outstanding
letters of credit of $4.0 million. Any amounts borrowed under the line are
payable upon its termination in February 2001. The Company's line of credit
agreement prohibits the Company from paying cash dividends or making other
cash distributions without the lender's consent.
NOTE 7. LONG-TERM LIABILITIES
Long-term liabilities consist of the following, in thousands:
<TABLE>
<CAPTION>
August 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Deferred compensation and note agreements
discounted at 7.5% to 12% $1,350 $1,495
Deferred rent 1,900 1,436
Other long-term liabilities 1,272 1,152
------ ------
Total long-term liabilities 4,522 4,083
Less current portion (300) (333)
------ ------
Total long-term liabilities, net $4,222 $3,750
====== ======
</TABLE>
The undiscounted deferred compensation liability was $1.6 million at
August 31, 1999 and 1998. The undiscounted note payable related to the WIU
acquisition was $400,000 and $600,000 at August 31, 1999 and 1998,
respectively. The discount rates for these agreements were determined at the
date of each respective agreement based on the estimated long-term rate of
return on high-quality fixed income investments with cash flows similar to
the respective agreements.
The aggregate maturities of the deferred compensation and note
agreements for each of the five fiscal years subsequent to August 31, 1999,
are as follows: 2000--$300,000; 2001--$298,000; 2002--$384,000; 2003--
$317,000; 2004--$292,000.
57<PAGE>
NOTE 8. INCOME TAXES
The related components of the income tax provision are as follows, in
thousands:
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $32,304 $26,546 $17,877
State and other 7,178 6,028 3,870
------- ------- -------
Total current 39,482 32,574 21,747
------- ------- -------
Deferred:
Federal (361) (2,004) (123)
State and other (144) (595) (22)
------- ------- -------
Total deferred (505) (2,599) (145)
------- ------- -------
Total provision for income taxes $38,977 $29,975 $21,602
======= ======= =======
</TABLE>
The income tax provision differs from the tax that would result from
application of the statutory federal and state corporate tax rates. The
rates for the tax provision are as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 5.2 5.1 5.0
Other, net (.4) (.8) (.7)
------ ------ ------
Effective income tax rate 39.8% 39.3% 39.3%
====== ====== ======
</TABLE>
58<PAGE>
Deferred tax assets and liabilities consist of the following, in
thousands:
<TABLE>
<CAPTION>
August 31,
-------------------
1999 1998
------ ------
<S> <C> <C>
Gross deferred tax assets:
Allowance for doubtful accounts $4,502 $2,869
Deferred tuition revenue 1,299 2,264
Other 3,124 2,096
------ ------
Total gross deferred tax assets 8,925 7,229
------ ------
Gross deferred tax liabilities:
Depreciation and amortization of property
and equipment 2,286 1,542
Amortization of goodwill 1,289 674
Other 78 246
------ ------
Total gross deferred tax liabilities 3,653 2,462
------ ------
Net deferred tax assets $5,272 $4,767
====== ======
</TABLE>
Net deferred tax assets are reflected in the accompanying balance sheet
as follows, in thousands:
<TABLE>
<CAPTION>
August 31,
-----------------
1999 1998
------ ------
<S> <C> <C>
Current deferred tax assets, net $7,346 $6,203
Noncurrent deferred tax liabilities, net (2,074) (1,436)
------ ------
Net deferred tax assets $5,272 $4,767
====== ======
</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 a valuation
allowance is not required for its net deferred tax assets.
59<PAGE>
NOTE 9. COMMON STOCK
On September 25, 1998, the Company's Board of Directors authorized a
program allocating up to $40 million in Company funds to repurchase shares of
its Class A Common Stock. On May 13, 1999, an additional $20 million was
authorized by the Board of Directors to repurchase shares of its Class A
Common Stock. As of August 31, 1999, the Company had repurchased
approximately 1,876,000 shares at a total cost of approximately $46.2
million.
NOTE 10. EARNINGS PER SHARE
A reconciliation of the basic and diluted per share computations for
1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
For the Year Ended August 31,
(In thousands, except per share amounts)
---------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Per Share Average Per Share Average Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income
per share $59,005 77,683 $ .76 $46,297 77,245 $ .60 $33,379 75,625 $ .44
===== ===== =====
Effect of dilutive
securities:
Stock options 1,151 1,841 2,101
------- ------ ------- ------ ------- ------
Diluted net income
per share $59,005 78,834 $ .75 $46,297 79,086 $ .59 $33,379 77,726 $ .43
======= ====== ===== ======= ====== ===== ======= ====== =====
</TABLE>
NOTE 11. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for the way that public business
enterprises report certain information about operating segments in the
financial reports. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
The Company's operations are aggregated into a single reportable segment
based upon their similar economic and operating characteristics. The
Company's educational operations are conducted in similar markets and produce
similar economic results. These operations provide higher education programs
for working adults. The Company's operations are also subject to a similar
regulatory environment, which includes licensing and accreditation.
60<PAGE>
NOTE 12. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company provides various health, welfare, and disability benefits to
its full-time, salaried employees which are funded primarily by Company
contributions. The Company does not provide post-employment or post-
retirement health care and life insurance benefits to its employees.
401(k) Plan -----------------------------------------------------------------
The Company sponsors a 401(k) plan which is available to all employees
who have completed one year and at least 1,000 hours of continuous service.
The Company matches 100% of the contributions from the first $10,000 of a
participant's annual pre-tax earnings. Contributions from the participant's
earnings in excess of $10,000 are matched by the Company at 18.5%.
Participant contributions are subject to certain restrictions as set forth in
the Internal Revenue Code. The Company's matching contributions totaled $2.2
million, $1.8 million, and $1.3 million for 1999, 1998, and 1997,
respectively.
Stock-Based Compensation Plans ----------------------------------------------
The Company has three stock-based compensation plans that were adopted
in 1994: the Apollo Group, Inc., Director Stock Plan ("Director Stock Plan"),
the Apollo Group, Inc., Long-Term Incentive Plan ("LTIP"), and the Apollo
Group, Inc., 1994 Employee Stock Purchase Plan ("Purchase Plan").
The Director Stock Plan currently provides for an annual grant to the
Company's non-employee directors of options to purchase shares of the
Company's Class A Common Stock on September 1 of each year. Under the LTIP,
the Company may grant options, incentive stock options, stock appreciation
rights, and other stock-based awards to certain officers or key employees of
the Company. Many of the options granted under the LTIP vest 25% per year
starting at the end of the year 2002. The vesting may be accelerated for
individual employees if the stock price reaches defined goals for at least
three trading days, and if certain profit goals, defined for groups of
individuals, are also achieved. The Purchase Plan allows employees of the
Company to purchase shares of the Company's Class A Common Stock at quarterly
intervals through periodic payroll deductions. The purchase price per share,
in general, is 85% of the lower of 1) the fair market value (as defined in
the Purchase Plan) on the enrollment date into the respective quarterly
offering period or 2) the fair market value on the purchase date.
The Company applies APB 25 and related interpretations in accounting for
its stock-based compensation, and has adopted the disclosure-only provisions
of SFAS 123. Accordingly, no compensation cost has been recognized for these
plans. Had compensation cost for the plans been determined based on the fair
61<PAGE>
value at the grant date consistent with SFAS 123, the Company's net income,
income per share, and weighted average shares outstanding would have been as
follows, in thousands except per share amounts:
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Pro forma:
Net income $55,395 $43,986 $31,551
Diluted income per share $ .71 $ .55 $ .40
Diluted weighted average shares outstanding 77,634 79,889 78,365
As reported:
Net income $59,005 $46,297 $33,379
Diluted income per share $ .75 $ .59 $ .43
Diluted weighted average shares outstanding 78,834 79,086 77,726
</TABLE>
The effects of applying SFAS 123 in the above pro forma disclosure are
not necessarily indicative of future amounts. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes method with
the following weighted-average assumptions for grants in 1999, 1998, and
1997, respectively: (1) dividend yield of 0.00% in all years; (2) expected
volatility of 73.0%, 40.0%, and 37.0%; (3) risk-free interest rates of 4.5%,
5.9%, and 6.0%, and (4) expected lives of 7.5, 5.4, and 6.9 years.
62<PAGE>
A summary of the activity related to the stock options granted under the
Director Stock Plan and the LTIP is as follows, in thousands except per share
amounts:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Shares per Share
------ --------------
<S> <C> <C>
Outstanding at August 31, 1996 5,162 $ 4.913
Granted 314 17.336
Exercised (965) 1.014
Canceled (264) 9.158
------
Outstanding at August 31, 1997 4,247 6.453
Granted 370 26.101
Exercised (694) 5.100
Canceled (42) 13.650
------
Outstanding at August 31, 1998 3,881 8.492
Granted 1,171 25.981
Exercised (1,233) 4.426
Canceled (384) 10.324
------
Outstanding at August 31, 1999 3,435 15.709
======
Exercisable at August 31, 1999 1,611
======
Available for issuance at August 31, 1999 1,243
======
</TABLE>
The following table summarizes information about the Company's stock
options at August 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -------------------------
Weighted Avg. Weighted Avg.
Number Contractual Exercise Number Exercise
Range of Outstanding Years Price Exercisable Price
Exercise Prices (In thousands) Remaining per Share (In thousands) per Share
------------------- ------------ ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$ 1.630 to $ 5.975 124 5.45 $ 2.691 124 $ 2.691
$ 7.532 to $ 7.532 1,684 6.06 $ 7.532 1,027 $ 7.532
$17.000 to $23.792 237 6.97 $19.407 167 $19.739
$25.625 to $33.313 1,390 9.05 $26.152 293 $27.584
--------- -----------
$ 1.630 to $33.313 3,435 7.31 $15.709 1,611 $12.068
========= ===========
</TABLE>
63<PAGE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company is obligated under facility and equipment leases that are
classified as operating leases. Following is a schedule of future minimum
lease commitments as of August 31, 1999, in thousands:
<TABLE>
<CAPTION> Operating Leases
---------------------------
Equipment
Facilities & Other
---------- ---------
<S> <C> <C>
2000 $ 42,173 $ 973
2001 41,060 676
2002 40,396 188
2003 37,826
2004 28,167
Thereafter 55,893
---------- ---------
$ 245,515 $ 1,837
========== =========
</TABLE>
Facility and equipment rent expense totaled $44.8 million, $32.1
million, and $23.4 million for 1999, 1998, and 1997, respectively.
In January 1998, the Department of Education Office of the Inspector
General ("OIG") began performing an audit of UOP's administration of the
Title IV Programs. The team previously presented questions regarding UOP's
interpretation of the "12-hour rule," UOP's distance education programs, and
UOP's institutional refund obligations. UOP has received a draft report
addressing these issues and is currently in discussions with the OIG and ED.
Although the Company believes that the OIG audit will be resolved without any
negative impact on UOP's teaching/learning model, as with any program review
or audit, no assurance can be given as to the final outcome since the matters
are not yet resolved. Depending on the interpretation of the various
regulatory requirements, any resulting liability to the Company from the
final audit results will be recorded as an expense. Management believes that
an estimate of the possible amount or range of liability cannot be made.
The Company is involved in various legal proceedings occurring in the
normal course of business. The Company believes that the disposition of
these cases will not have a material adverse impact on the financial position
or results of operations of the Company.
Item 9 -- Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
64<PAGE>
PART III
Item 10 -- Directors and Executive Officers of the Registrant
The Company's directors serve one year terms and are elected each year
by the holders of the Company's Class B Common Stock. The following sets
forth information as of October 31, 1999 concerning the Company's directors
and executive officers:
<TABLE>
<CAPTION>
Name Age Position
---------------------------------- --- ---------------------------
<S> <C> <C>
John G. Sperling, Ph.D. 78 Chairman of the Board and Chief Executive
Officer
Todd S. Nelson 40 President and Director
J. Jorge Klor de Alva, J.D., Ph.D. 51 Senior Vice President and Director
Jerry F. Noble 57 Senior Vice President and Director
Peter V. Sperling 40 Senior Vice President, Secretary,
Treasurer and Director
Kenda B. Gonzales 42 Chief Financial Officer
Thomas C. Weir 65 Director
Dino J. DeConcini 65 Director
Hedy F. Govenar 54 Director
John R. Norton III 70 Director
</TABLE>
JOHN G. SPERLING, Ph.D., is the founder, Chief Executive Officer and
Chairman of the Board of Directors of the Company. Dr. Sperling was also
President of the Company from its inception until February 1998. Prior to
his involvement with the Company, from 1961 to 1973, Dr. Sperling was a
professor of Humanities at San Jose State University where he was the
Director of the Right to Read Project and the Director of the NSF Cooperative
College-School Science Program in Economics. At various times from 1955 to
1961, Dr. Sperling was a member of the faculty at the University of Maryland,
Ohio State University and Northern Illinois University. Dr. Sperling
received his Ph.D. from Cambridge University, an M.A. from the University of
California at Berkeley and a B.A. from Reed College. Dr. Sperling is the
father of Peter V. Sperling.
TODD S. NELSON has been with the Company since 1987. Mr. Nelson has
been the President of the Company since February 1998. Mr. Nelson was Vice
President of the Company from 1994 to February 1998 and the Executive Vice
President of UOP from 1989 to February 1998. From 1987 to 1989, Mr. Nelson
was the Director of UOP's Utah campus. From 1985 to 1987, Mr. Nelson was the
General Manager at Amembal and Isom, a management training company. From
1984 to 1985, Mr. Nelson was a General Manager for Vickers & Company, a
diversified holding company. From 1983 to 1984, Mr. Nelson was a Marketing
Director at Summa Corporation, a recreational properties company. Mr. Nelson
received an M.B.A. from the University of Nevada at Las Vegas and a B.S. from
Brigham Young University. Mr. Nelson was a member of the faculty at
University of Nevada at Las Vegas from 1983 to 1984.
65<PAGE>
J. JORGE KLOR DE ALVA, J.D., Ph.D., has been President of UOP and a
Senior Vice President of the Company since February 1998 and has been a
director of the Company since 1991. Dr. Klor de Alva was Vice President of
Business Development of the Company from 1996 to 1998. Dr. Klor de Alva was
a Professor at the University of California at Berkeley from July 1994 until
July 1996. From 1989 to 1994, Dr. Klor de Alva was a Professor at Princeton
University. From 1984 to 1989, Dr. Klor de Alva was the Director of the
Institute for Mesoamerican Studies, and from 1982 to 1989, was an Associate
Professor at the State University of New York at Albany. From 1971 to 1982,
Dr. Klor de Alva served at various times as associate professor, assistant
professor or lecturer at San Jose State University and the University of
California at Santa Cruz. Dr. Klor de Alva received a B.A. and J.D. from the
University of California at Berkeley and a Ph.D. from the University of
California at Santa Cruz.
JERRY F. NOBLE has been with the Company since 1981. Mr. Noble has been
a Senior Vice President of the Company since 1987 and the President of IPD
since 1984. From 1981 to 1987, Mr. Noble also was the controller of the
Company. From 1977 to 1981, Mr. Noble was the corporate accounting manager
for Southwest Forest Industries, a forest products company. Mr. Noble
received his M.B.A. from UOP and his B.A. from the University of Montana.
PETER V. SPERLING has been with the Company since 1983. Mr. Sperling
has been a Senior Vice President since June 1998. Mr. Sperling was the Vice
President of Administration from 1992 to June 1998 and has been the Secretary
and Treasurer of the Company since 1988. From 1987 to 1992, Mr. Sperling was
the Director of Operations at AEC. From 1983 to 1987, Mr. Sperling was
Director of Management Information Services of the Company. Mr. Sperling
received his M.B.A from UOP and his B.A. from the University of California at
Santa Barbara. Mr. Sperling is the son of John G. Sperling.
KENDA B. GONZALES has been with the Company since October 1998. Ms.
Gonzales is the Chief Financial Officer of the Company. Prior to joining
Apollo, Ms. Gonzales was the Senior Executive Vice President and Chief
Financial Officer of UDC Homes, Inc., a home builder, from 1996. From 1985
to 1996, Ms. Gonzales was the Senior Vice President and Chief Financial
Officer of Continental Homes Holding Corp., a home builder. Ms. Gonzales
began her career as a Certified Public Accountant with Peat, Marwick,
Mitchell and Company and is a graduate of the University of Oklahoma with a
Bachelor of Accountancy.
66<PAGE>
THOMAS C. WEIR has been a director of the Company since 1983 and is a
member of the Audit and Compensation Committees of the Board of Directors of
the Company. During 1994, Mr. Weir became the President of Dependable
Nurses, Inc., a provider of temporary nursing services, W.D. Enterprises,
Inc., a financial services company and Dependable Personnel, Inc., a provider
of temporary clerical personnel. In 1996, Mr. Weir became the President of
Dependable Nurses of Phoenix, Inc., a provider of temporary nursing services.
In addition, Mr. Weir has been an independent financial consultant since
1990. From 1989 to 1990, Mr. Weir was President of Tucson Electric Power
Company. From 1979 to 1987, Mr. Weir was Chairman and Chief Executive
Officer of Home Federal Savings & Loan Association, Tucson, Arizona.
DINO J. DECONCINI has been a director of the Company since 1981 and is
currently a member of the Audit Committee of the Board of Directors of the
Company. Mr. DeConcini has been the Executive Director of the Savings Bonds
Marketing Office, U.S. Department of the Treasury since February, 1995. From
1979 to 1995, Mr. DeConcini was a shareholder and employee in DeConcini,
McDonald, Brammer, Yetwin and Lacy, P.C., Attorneys at Law. From 1993 to
1995, Mr. DeConcini was a Vice President and Senior Associate of Project
International Associates, Inc., an international business consulting firm.
From 1991 to 1993 and 1980 to 1990, Mr. DeConcini was a Vice President and
partner of Paul R. Gibson & Associates, an international business consulting
firm.
HEDY F. GOVENAR has been a director of the Company since March of 1997.
Ms. Govenar is founder and President of Governmental Advocates, Inc., a
lobbying and political consulting firm in Sacramento, California. An active
lobbyist with the firm since 1979, she represents a variety of corporate and
trade association clients. From 1989 to 1999, Ms. Govenar served as a
Commissioner on the California Film Commission as an appointee of the
California State Assembly. Ms. Govenar received an M.A. from California
State University, and a B.A. from UCLA.
JOHN R. NORTON III has been a director of the Company since March of
1997 and is currently a member of the Audit and Compensation Committees of
the Board of Directors of the Company. Mr. Norton founded his own Company,
the J. R. Norton Company, an agricultural producer, in 1955 engaged in
diversified agriculture including crop production and cattle feeding. He
served as the Deputy Secretary of the United States Department of Agriculture
in 1985 and 1986. Mr. Norton is also on the Board of Directors of Terra
Industries, Inc. He attended Stanford University and the University of
Arizona where he received a B.S. in Agriculture in 1950.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than 10% of a registered class of the Company's equity securities, to
file with the Securities and Exchange Commission ("SEC") initial reports of
ownership and reports of changes in ownership. Officers, directors and
greater than 10% shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file. Based solely upon
a review of the copies of such forms furnished to the Company, or written
representations that no Forms 5 were required, the Company believes that
during the fiscal year ended August 31, 1999, its officers and directors
complied with all Section 16(a) filing requirements with the following
exception: Jerry F. Noble filed a late Form 4 for July 1999, related to
transactions involving the selling of 35,900 and 8,000 shares of Class A
Common Stock on July 2, 1999, and July 27, 1999, respectively.
67<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two principal committees: (1) an Audit
Committee comprised of Thomas C. Weir (Chairperson), Dino J. DeConcini, and
John R. Norton III and (2) a Compensation Committee comprised of Thomas
C. Weir (Chairperson) and John R. Norton III.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the year ended August 31, 1999, the Board of Directors of the
Company met on four occasions. All of the directors attended 75% or more of
the Board of Directors meetings and meetings of each of the committees on
which they served.
Compensation Committee ------------------------------------------------------
The Compensation Committee of the Board of Directors, which met three
times during 1999, reviews all aspects of compensation of executive officers
of the Company and determines or makes recommendations on such matters to the
full Board of Directors. The report of the Compensation Committee for 1999
is set forth in Item 11.
Audit Committee -------------------------------------------------------------
The Audit Committee, which met on five occasions in 1999, represents the
Board of Directors in evaluating the quality of the Company's financial
reporting process and internal financial controls through consultations with
the Company's independent accountants, internal management and the Board of
Directors.
Other Committees ------------------------------------------------------------
The Company does not maintain a standing nominating committee or other
committee performing similar functions.
68<PAGE>
Item 11 -- Executive Compensation
DIRECTOR COMPENSATION
Fees ------------------------------------------------------------------------
In 1999, non-employee directors of the Company received a $18,000 annual
retainer, $1,500 for each board meeting attended, and $750 for each committee
meeting attended. Mr. DeConcini has elected not to receive any director
compensation because of his position with the U.S. Department of the
Treasury. In addition, non-employee directors are reimbursed for
out-of-pocket expenses. Ms. Govenar was retained by the Company as a
consultant and received a consulting fee of $100,000 and $62,000 in 1999 and
1998, respectively.
Apollo Group, Inc. Director Stock Plan --------------------------------------
In August 1994, the Board of Directors of the Company adopted the Apollo
Group, Inc. Director Stock Plan (the "Director Plan") to attract and retain
independent directors for the Company. The aggregate number of shares of
Class A Common Stock subject to the Director Plan may not exceed 675,000,
subject to adjustment. Options granted under the Director Plan are fully
vested six months and one day after the date of grant and are exercisable in
full thereafter until the date that is ten years after the date of grant.
The exercise price per share under the Director Plan is equal to the fair
market value of such shares upon the date of grant. In addition, on September
1 of each year, non-employee Directors receive an annual grant of options to
purchase 20,250 shares of the Company's Class A Common Stock. Mr. DeConcini
has elected not to receive this annual grant because of his position with the
U.S. Department of the Treasury.
69<PAGE>
EXECUTIVE COMPENSATION
The following table discloses the annual and long-term compensation
earned for services rendered in all capacities by the Company's Chairman of
the Board and Chief Executive Officer and the Company's four other most
highly compensated executive officers for 1999, 1998, and 1997:
-- SUMMARY COMPENSATION TABLE --
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
--------------------------------- ---------------------
Other Restrict- Securities All Other
Annual ed Stock Underlying LTIP Compen-
Name and Principal Salary Bonus Compensation Awards Options Payouts sation
Position Year ($) ($) ($)<F1> ($) (#) ($) ($)
------------------------ ------- --------- -------- ------------ --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John G. Sperling
Chairman of the Board 1999 $400,000 $ -- $64,141 $ -- 125,000 $ -- $ --
and Chief Executive 1998 387,500 -- 72,373 -- -- -- --
Officer 1997 387,500 290,625 62,463 -- -- -- --
Todd S. Nelson
President 1999 350,000 262,500 -- -- 100,000 -- --
1998 247,917 200,000 -- -- -- -- --
1997 175,000 131,250 -- -- -- -- --
Jorge Klor de Alva
Senior Vice President, 1999 275,000 206,250 -- -- 75,000 -- 3,072<F2>
and President of UOP 1998 218,750 175,000 -- -- -- -- 1,850<F2>
1997 175,000 131,250 -- -- 112,500 -- --
Jerry F. Noble
Senior Vice President 1999 250,000 161,752 -- -- 50,000 -- 3,072<F2>
and President of IPD 1998 225,000 168,750 -- -- -- -- 3,073<F2>
1997 225,000 84,375 -- -- -- -- 2,980<F2>
Kenda B. Gonzales
Chief Financial Officer 1999 174,359 90,000 -- -- 42,000 -- --
1998 -- -- -- -- -- -- --
1997 -- -- -- -- -- -- --
_______________
<FN>
<F1> Messrs. Klor de Alva, Nelson, and Noble also received certain
perquisites, the value of which did not exceed the lesser of $50,000
for each person or 10% of their cash compensation. Dr. John Sperling
received perquisites primarily in the form of a Company provided car,
available for business and personal use, and tax consulting services.
<F2> Amounts shown consist of contributions made by the Company to the
Company's Savings and Investment Plan paid in fiscal years 1999, 1998
and 1997.
</FN>
</TABLE>
70<PAGE>
The following table discloses options granted by the Company to the
Chairman of the Board and Chief Executive Officer and the four other most
highly compensated executive officers of the Company for 1999:
-- OPTION GRANTS IN THE LAST FISCAL YEAR --
<TABLE>
<CAPTION>
Option Grants in Fiscal Year 1999 Potential Realizable
---------------------------------------------------- Value at Assumed
% of Total Annual Rates of
Number of Options/SARs Stock Price
Securities Granted to Exercise Appreciation for
Underlying Employees or Base Option Term
Options/SARs in Fiscal Price Expiration ----------------------
Name Granted Year ($/Share) Date 5% 10%
------------------ ---------- ----------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John G. Sperling 125,000 11.3 $25.63 12/18/08 $2,014,428 $5,104,956
Todd S. Nelson 100,000 9.0 25.63 12/18/08 1,611,542 4,083,965
Jorge Klor de Alva 75,000 6.8 25.63 12/18/08 1,208,657 3,062,974
Jerry F. Noble 50,000 4.5 25.63 12/18/08 805,771 2,041,983
Kenda B. Gonzales 22,000 2.0 25.63 12/18/08 354,539 898,472
Kenda B. Gonzales 20,000 1.8 23.00 04/19/09 289,292 733,122
</TABLE>
The following table discloses the number of shares received from the
exercise of Company options, the value received therefrom and the number and
value of in-the-money and out-of-the-money options held by the Company's
Chairman of the Board and Chief Executive Officer and the four other most
highly compensated officers of the Company for 1999:
-- AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 --
AND OPTION VALUES AT AUGUST 31, 1999
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In-the-Money Options at
Acquired Value Options at Fiscal Year-End Fiscal Year-End
on Exercise Realized --------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
----------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John G. Sperling 513,176 $10,910,340 51,469 176,468 $ 741,442 $ 741,427
Todd S. Nelson -- -- 109,407 151,468 1,576,073 741,427
Jorge Klor de Alva 76,500 692,280 28,125 103,125 127,148 --
Jerry F. Noble -- -- 154,407 101,468 2,224,325 741,427
Kenda B. Gonzales -- -- -- 42,000 -- --
</TABLE>
71<PAGE>
Employment and Deferred Compensation Agreements ----------------------------
In December 1993, the Company entered into an employment agreement (the
"Employment Agreement") and deferred compensation agreement (the "Deferred
Compensation Agreement") with Dr. John G. Sperling, the Chairman of the Board
and Chief Executive Officer of the Company. The term of the Employment
Agreement was for four years, and expired on December 31, 1997. The
Employment Agreement has automatically renewed for two additional one-year
periods through December 31, 1999, and will automatically renew for
additional one-year periods thereafter. Under the terms of the Employment
Agreement, Dr. Sperling received an annual salary for 1997 and 1998 of
$387,500. Effective for 1999, Dr. Sperling's salary was increased to
$400,000. This salary is subject to annual review by the Compensation
Committee. The Company may terminate the Employment Agreement only for
cause, and Dr. Sperling may terminate the Employment Agreement at any time
upon 30 days written notice.
The Deferred Compensation Agreement provides that upon his termination
of employment with the Company and until his death, Dr. Sperling shall
receive monthly payments equal to one-twelfth of his highest annual base
salary paid by the Company during any one of the three calendar years
preceding the calendar year in which Dr. Sperling's employment is terminated.
In addition, upon Dr. Sperling's death, his designated beneficiary shall be
paid an amount equal to three times his highest annual base salary in 36
equal monthly installments with the first such installment due on the first
day of the month following the month of Dr. Sperling's death.
The Company does not have employment agreements with any of its other
executive officers.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's Compensation Committee (the "Committee") is composed
entirely of independent outside members of the Company's Board of Directors.
The Committee reviews and approves each of the elements of the executive
compensation program of the Company related to John G. Sperling, Todd S.
Nelson, J. Jorge Klor de Alva, Peter V. Sperling, and Jerry F. Noble ("Senior
Executives") and periodically assesses the effectiveness and competitiveness
of the program in total. In addition, the Committee administers the key
provisions of the executive compensation program and reviews with the Board
of Directors in detail all aspects of compensation for the Senior Executives.
The Committee has furnished the following report on executive compensation:
Overview and Philosophy -----------------------------------------------------
The Company's compensation program for Senior Executives is primarily
comprised of base salary, annual bonus, and long-term incentives in the form
of stock option grants. Senior Executives also participate in various other
benefit plans, including medical and retirement plans, generally available to
all employees of the Company.
Each of the Company's Senior Executives receives a base salary, which
when aggregated with their maximum bonus amount, is intended to be
competitive with similarly situated executives in comparable industries,
including those companies in the peer group described under "the peer group -
current" contained in the Stock Performance Graph. The companies surveyed
had annual revenues ranging from approximately $74.0 million to $420.6
million, with an average of $192.0 million and a median of $144.2 million.
72<PAGE>
This data was used to target annual cash compensation for the Company's
Senior Executives at the higher end of companies surveyed.
The Company's philosophy is to pay base salaries to Senior Executives
that enable the Company to attract, motivate and retain highly qualified
executives. The annual bonus program is designed to reward for performance
based on financial results. Stock option grants are intended to provide
substantial rewards to executives based on stock price appreciation and
improved overall financial performance. The vesting of the options can be
accelerated if certain profit and stock price goals are achieved.
Base Salary -----------------------------------------------------------------
Salary increases for the Senior Executives were based on a review of the
competitive data described above. We target base pay at the level required
to attract and retain highly qualified executives. In determining salaries,
the Committee also takes into account position within the Company, individual
experience and performance, and specific needs particular to the Company.
Annual Bonus Program --------------------------------------------------------
In addition to a base salary, Senior Executives were eligible to receive
a bonus of up to seventy-five percent (75%) of their respective base
salaries. All annual bonuses are tied to the Company's financial performance.
At the beginning of each fiscal year, the Committee establishes an
after-tax net income goal for the Company and operating profit goals for the
Company's subsidiaries. The annual bonuses are calculated differently for
(i) Senior Executives who also serve as executive officers of either The
University of Phoenix, Inc. ("UOP") or the Institute for Professional
Development ("IPD") (collectively, the "Division Executives") and (ii) Senior
Executives who do not serve as executive officers of either UOP or IPD
(collectively, the "Company Executives").
The annual bonuses for the Company Executives are tied solely to the
after-tax net income goal for the Company. If that goal is achieved, the
Company Executives earn a bonus equal to fifty percent (50%) of their
respective annual maximum bonus. If the after-tax net income goal is
exceeded, the Company Executives earn a larger percentage of their annual
bonus depending on the amount by which the after-tax net income goal is
exceeded up to a maximum annual bonus equal to seventy-five percent (75%) of
their respective base salaries. These goals were exceeded for 1999.
The annual bonuses for the Division Executives are earned (1) fifty
percent (50%) if their division operating profit goal is achieved, (2) an
additional twenty-five percent (25%) if the after-tax income goal for the
Company is achieved and (3) up to another twenty-five percent (25%) depending
on the amount by which the after-tax net income goal is exceeded up to a
maximum annual bonus equal to seventy-five percent (75%) of their respective
base salaries. These goals were generally exceeded for 1999.
Options ---------------------------------------------------------------------
The Company believes that it is important for Senior Executives to have
an equity stake in the Company and, toward this end, makes option grants to
73<PAGE>
key Senior Executives from time to time under the Apollo Group, Inc. Long-
Term Incentive Plan. In making option awards, the Committee reviews the
Company's financial performance during the past fiscal year, the awards
granted to other executives within the Company and the individual officer's
specific role at the Company.
Other Benefits --------------------------------------------------------------
Senior Executives are eligible to participate in benefit programs
designed for all full-time employees of the Company and also received certain
perquisites primarily including Company cars and Company paid tax consulting.
These programs include medical, disability and life insurance, and a
qualified retirement program allowed under Section 401(k) of the Internal
Revenue Code, as amended (the "Code").
Chief Executive Officer Compensation ----------------------------------------
Dr. John G. Sperling is the founder, Chief Executive Officer and
Chairman of the Board of Directors of the Company. In December 1993, the
Company entered into an employment agreement (the "Employment Agreement") and
deferred compensation agreement (the "Deferred Compensation Agreement") with
Dr. Sperling. The Employment Agreement terminated on December 31, 1997. The
Employment Agreement has automatically renewed for two additional one-year
periods through December 31, 1999, and will automatically renew for
additional one-year periods thereafter. The Deferred Compensation Agreement
provides that upon Dr. Sperling's termination of employment with the Company
and until his death, Dr. Sperling shall receive monthly payments equal to
1/12 of his highest annual base salary paid by the Company during any one of
the three calendar years preceding the calendar year in which Dr. Sperling's
employment is terminated. In addition, upon Dr. Sperling's death, his
designated beneficiary shall be paid an amount equal to three times his
highest annual base salary in 36 equal monthly installments with the first
installment due on the first day of the month following the month of Dr.
Sperling's death.
Dr. Sperling's base salary and bonus are determined annually on the same
basis discussed above for Senior Executives. During fiscal year 1999, Dr.
Sperling received an annual base salary of $400,000. In addition, because
the after-tax net income goal for the Company was exceeded, Dr. Sperling was
eligible for a bonus for 1999. Dr. Sperling has elected to forego this bonus
in exchange for options in the Company's Class A Common Stock that will be
granted in Fiscal 2000. The amount of options to be granted will be
determined at the discretion of the Compensation Committee and will be
granted at fair market value and expire ten years after the grant date. The
Compensation Committee does not apply a mathematical formula to determine the
number of options granted but considers Dr. Sperling's contribution to the
Company's performance during the fiscal year.
All share numbers and prices contained in this report have been
adjusted for the stock splits effected in the form of stock dividends that
were approved by the Company's Board of Directors.
-- COMPENSATION COMMITTEE --
Thomas C. Weir
John R. Norton III
74<PAGE>
STOCK PERFORMANCE GRAPH
The line graph below compares the cumulative total shareholder return on
the Company's Class A Common Stock with the cumulative total return for the
Standard & Poor's 400 Index and an index of Company-selected peer group
companies for the period from December 6, 1994 (the effective date of the
Company's initial public offering) through August 31, 1999. The graph
assumes that the value of the investment in the Company's Class A Common
Stock and each index was $100 at December 6, 1994, and that all dividends
paid by those companies included in the indexes were reinvested.
<TABLE>
<CAPTION>
Dec. 6, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1994 1995 1996 1997 1998 1999
------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Apollo Group, Inc.
Class A Common Stock $100.00 $336.80 $966.30 $1,352.40 $1,726.60 $1,246.97
S&P 400 100.00 128.27 143.51 197.02 178.54 252.76
Education Peer Group-
Current 100.00 146.02 297.28 362.08 418.97 384.06
Education Peer Group-
Prior 100.00 129.95 212.49 233.50 257.58 235.92
</TABLE>
The education peer group - current is composed of the publicly-traded
common stock of 9 education-related companies that include Career Education
Corporation (CECO), Corinthian Colleges, Inc. (COCO), DeVry Inc. (DV),
Education Management Corporation (EDMC), ITT Educational Services, Inc.
(ESI), Quest Education Corporation (QEDC), Sylvan Learning Systems, Inc.
(SLVN), Strayer Education, Inc. (STRA), Whitman Education Group, Inc. (WIX).
The education peer group - prior is composed of the publicly-traded
common stock of 12 education-related companies that include Berlitz
International, Inc. (BTZ), California Culinary Academy, Inc. (COOK),
Canterbury Information Technology, Inc. (XCEL), DeVry Inc. (DV), ITC Learning
Corporation (ITCC), ITT Educational Services, Inc. (ESI), Nobel Learning
Communities, Inc. (NLCI) (formerly Nobel Education Dynamics, Inc.), Sylvan
Learning Systems, Inc. (SLVN), TesseracT Group, Inc. (TSST) (formerly
Education Alternatives, Inc.), TRO Learning, Inc. (TUTR), Wave Technologies
International, Inc. (WAVT), and Whitman Education Group, Inc. (WIX).
Children's Discovery Centers of America, Inc. (CDCR) was acquired by KBI
Acquisitions and is no longer included in the peer group.
The Company believes that the education peer group - current is more
representative of the education industry in which the Company operates than
the education peer group - prior. The companies in the education peer group
- prior are involved in areas where the Company does not participate -
language instruction, training, training software development, and preschool
through eighth grade. Similar to the Company, all of the companies in the
education peer group - current participate in the for profit, post-secondary
education market.
75<PAGE>
Item 12 -- Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of September 30,
1999. 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 A Class B
Shares Shares
of Common of Common
Name and Address of Beneficial Owner<F1> Stock % Owned Stock % Owned
--------------------------------------- ---------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
John G. Sperling 13,885,158<F2><F3><F4><F5> 17.7% 243,081<F16> 47.5%
Peter V. Sperling 14,371,831<F2><F6><F7> 18.3 232,068<F17> 45.4
Jerry F. Noble 554,407<F8> .7 27,950 5.5
Todd S. Nelson 179,616<F9> .2 8,385 1.6
J. Jorge Klor de Alva 104,937<F10> .1 -- --
Thomas C. Weir 107,000<F11> .1 -- --
Hedy F. Govenar 41,550<F12> .1 -- --
John R. Norton III 41,500<F13> .1 -- --
Dino J. DeConcini 28,113<F14> -- -- --
Kenda B. Gonzales -- -- -- --
Total for All Directors and Executive
Officers as a Group (11 persons) 27,987,155<F15> 35.7% 511,484 100.0
_______________
<FN>
<F1> 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.
<F2> Includes 1,335,040 shares held by the John Sperling 1994 Irrevocable
Trust dated April 27, 1994 for which Messrs. John and Peter Sperling
are the co-trustees.
<F3> Includes 186,157 shares held by the John G. Sperling Revocable Trust
dated January 31, 1995.
<F4> Includes 1,350,000 shares held by The Sperling Foundation.
<F5> Includes 51,469 shares that Dr. John Sperling has the right to
acquire within 60 days of the date of the table set forth above.
<F6> Includes 290,090 shares held by the Peter V. Sperling Revocable Trust
dated January 31, 1995.
<F7> Includes 51,469 shares that Mr. Peter Sperling has the right to
acquire within 60 days of the date of the table set forth above.
<F8> Includes 154,407 shares that Mr. Noble has the right to acquire within
60 days of the date of the table set forth above.
<F9> Includes 109,407 shares that Mr. Nelson has the right to acquire
within 60 days of the date of the table set forth above.
76<PAGE>
<F10> Includes 28,125 shares that Dr. Klor de Alva has the right to
acquire within 60 days of the date of the table set forth above.
<F11> Includes 93,500 shares that Mr. Weir has the right to acquire within
60 days of the date of the table set forth above.
<F12> Includes 37,500 shares that Ms. Govenar has the right to acquire
within 60 days of the date of the table set forth above.
<F13> Includes 40,500 shares that Mr. Norton has the right to acquire within
60 days of the date of the table set forth above.
<F14> Includes 27,438 shares that Mr. DeConcini has the right to acquire
within 60 days of the date of the table set forth above.
<F15> Includes 608,099 shares that all Directors and Executive Officers as
a group have the right to acquire within 60 days of the date of the
table set forth.
<F16> Includes 243,080 shares held by the John G. Sperling Revocable Trust
dated January 31, 1995.
<F17> Includes 232,067 shares held by the Peter V. Sperling Revocable Trust
dated January 31, 1995.
</FN>
</TABLE>
Item 13 -- Certain Relationships and Related Transactions
On August 14, 1998, the Company, Hughes Network Systems ("Hughes"), and
Hermes Onetouch L.L.C. ("Hermes") formed Interactive Distance Learning, Inc.
for the purpose of acquiring One Touch Systems, Inc. ("One Touch"). In
connection with the transaction, the Company, Hughes, and Hermes entered into
certain agreements regarding the relationships among the parties. As
contemplated in the agreements, it is anticipated that the Company may from
time to time engage in transactions with One Touch for the provision of
distance learning products and services. Currently, there are no
transactions with One Touch. Hermes, which owns 30% of the outstanding
shares of Interactive Distance Learning, Inc., is wholly-owned by Dr. John G.
Sperling, the Company's Chairman, and Peter V. Sperling, the Company's Senior
Vice President.
Effective July 15, 1999, the Company entered into contracts with Apollo
International, Inc. ("AI") to provide educational products and services in
certain locations outside of the United States, Canada, and Puerto Rico.
John G. Sperling, Jorge Klor de Alva, and Todd Nelson are directors of the
Company and also directors of AI. Jorge Klor de Alva is Senior Vice
President of the Company and is acting as Chief Executive Officer of AI until
AI selects a permanent chief executive officer. Shares of AI stock are
beneficially owned by the Company (2.6% for which it paid $999,989) and by an
investment entity controlled by John G. Sperling and Peter V. Sperling, son
of John G. Sperling, and a Vice President and Director of the Company (26%).
In addition, the Company has an option to acquire additional shares in AI.
During the fiscal year ended August 31, 1999, the Company received no revenue
from AI for educational products and services.
77<PAGE>
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Apollo Group,
Inc. and Subsidiaries, included in the Annual Report to Shareholders
for the year ended August 31, 1999, are incorporated by reference in
Item 8.
Page
Report of Independent Accountants. . . . . . . . . . . . . . . . .44
Consolidated Balance Sheet as of August 31, 1999 and 1998. . . . .45
Consolidated Statement of Operations for the Years Ended August 31,
1999, 1998, and 1997 . . . . . . . . . . . . . . . . . . . . . .46
Consolidated Statement of Comprehensive Income for the Years Ended
August 31, 1999, 1998, and 1997. . . . . . . . . . . . . . . . .47
Consolidated Statement of Changes in Shareholders' Equity for the
Years Ended August 31, 1999, 1998, and 1997. . . . . . . . . . .48
Consolidated Statement of Cash Flows for the Years Ended August 31,
1999, 1998, and 1997 . . . . . . . . . . . . . . . . . . . . . .49
Notes to Consolidated Financial Statements . . . . . . . . . . . .50
2. Financial Statement Schedules:
Report of Independent Accountants on Financial Statement
Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . .S-1
Schedule II-Valuation and Qualifying Accounts and Reserves for the
Years Ended August 31, 1999, 1998, and 1997 . . . . . . . . . . .S-2
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
3. Exhibits
Sequentially
Numbered
Exhibit Page or Method
Number Description of Exhibit of Filing
------- --------------------------------------- ----------------
2.1 Asset Purchase Agreement by and among Incorporated by
National Endowment for Financial Educa- reference to
tion, (R) College for Financial Planning, Exhibit 10.1 of
Inc., as assignee of Apollo Online, Inc., the Company's
as Buyer, and Apollo Group, Inc. dated Registration
August 21, 1997 Statement No.
333-35465 on
Form S-3 filed
September 11,
1997
78<PAGE>
Sequentially
Numbered
Exhibit Page or Method
Number Description of Exhibit of Filing
------- --------------------------------------- ----------------
2.2 Assignment and Amendment of Asset Purch- Incorporated by
ase Agreement by and among National reference to
Endowment for Financial Education, Inc., the Exhibit 10.2 of
the College for Financial Planning, Inc., the Company's
Apollo Online, Inc., and Apollo Group, Inc., Registration
dated September 23, 1997 Statement No.
333-35465 on
Form S-3 filed
September 11,
1997
3.1 Restated and Amended Articles of Incorporated by
Incorporation of the Company reference to
(As Amended Through September 18, 1997) Exhibit 3.1 of
the August 31,
1997 Form 10-K
3.2 Amended Bylaws of the Company Incorporated by
(As Amended Through June 1996) reference to
Exhibit 3.2 of
the August 31,
1996 Form 10-K
10.1a Business Loan Agreement between Apollo Incorporated by
Group, Inc. and Wells Fargo Bank, National reference to
Association Exhibit 10.1a of
the November 30,
1997 Form 10-Q.
10.1b Revolving Promissory Note between Apollo Incorporated by
Group, Inc. and Wells Fargo Bank, National reference to
Association Exhibit 10.1c of
the November 30,
1997 Form 10-Q.
10.1c Modification Agreement between Apollo Group, Incorporated by
Inc. and Wells Fargo Bank, National reference to
Association Exhibit 10.1d of
the February 28,
1998 Form 10-Q.
10.1d Second Modification Agreement between Apollo Incorporated by
Group, Inc. and Wells Fargo Bank, National reference to
Association dated August 13, 1998 Exhibit 10.1e of
the February 28,
1999 Form 10-Q.
10.1e Third Modification Agreement between Apollo Incorporated by
Group, Inc. and Wells Fargo Bank, National reference to
Association dated April 30, 1999 Exhibit 10.1f of
the May 31, 1999
Form 10-Q.
79<PAGE>
Sequentially
Numbered
Exhibit Page or Method
Number Description of Exhibit of Filing
------- --------------------------------------- ----------------
10.1f Fourth Modification Agreement between Apollo Filed herewith
Group, Inc. and Wells Fargo Bank, National
Association dated August 3, 1999
10.1g Fifth Modification Agreement between Apollo Filed herewith
Group, Inc. and Wells Fargo Bank, National
Association dated November 1, 1999
10.2 Apollo Group, Inc. Director Stock Incorporated by
Plan reference to
Exhibit 10.2 of
the August 31,
1995 Form 10-K
10.3 Apollo Group, Inc. Long-Term Incorporated by
Incentive Plan reference to
Exhibit 10.3 of
Form S-1 No.
33-83804
10.4 Apollo Group, Inc. Savings and Incorporated by
Investment Plan reference to
Exhibit 10.4 of
the August 31,
1996 Form 10-K.
10.5 Apollo Group, Inc. 1994 Employee Incorporated by
Stock Purchase Plan (As Amended reference to
Through August 1996) Exhibit 10.5 of
the August 31,
1996 Form 10-K.
10.6 Employment Agreement between Apollo Incorporated by
Group, Inc. and John G. Sperling reference to
Exhibit 10.6 of
Form S-1 No.
33-83804
10.7 Deferred Compensation Agreement between Incorporated by
John G. Sperling and Apollo Group, Inc. reference to
Exhibit 10.7 of
Form S-1 No.
33-83804
10.8 Shareholder Agreement Dated September Incorporated by
7, 1994, by and between the Company and reference to
each holder of the Company's Class B Exhibit 10.10 of
Common Stock Form S-1 No.
33-83804
80<PAGE>
Sequentially
Numbered
Exhibit Page or Method
Number Description of Exhibit of Filing
------- --------------------------------------- ----------------
10.9 Agreement of Purchase and Sale of Incorporated by
Assets of Western International reference to
University Dated June 30, 1995 Exhibit 10.11 of
(without schedules and exhibits) the August 31,
1995 Form 10-K.
10.10 Purchase and Sale Agreement Dated Incorporated by
October 10, 1995 reference to
Exhibit 10.12 of
the August 31,
1996 Form 10-K.
21 List of Subsidiaries Filed herewith
23 Consent of Independent Accountants Filed herewith
27 Financial Data Schedule Filed herewith
27.1 Restated Financial Data Schedule for the Filed herewith
periods ending November 30, 1998, February
28, 1999, and May 31, 1999
27.2 Restated Financial Data Schedule for the Filed herewith
periods ending November 30, 1997, February
28, 1998, May 31, 1998, and August 31, 1998
27.3 Restated Financial Data Schedule for the Filed herewith
period ending August 31, 1997
99.1 Form of Agreement of Institute for Incorporated by
Professional Development reference to
Exhibit 99.1 of
Form S-1 No.
33-83804
(b) Reports on Form 8-K
During the last quarter of the 1999 fiscal year, the Company filed no
reports on Form 8-K.
81<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form
10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on July 20, 2000.
APOLLO GROUP, INC.
An Arizona Corporation
By: /s/ John G. Sperling
--------------------------------
John G. Sperling
Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K/A has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date
-----------------------------------------------------------------------------
/s/ John G. Sperling Chairman of the Board July 20, 2000
------------------------- of Directors and Chief
John G. Sperling Executive Officer
(Principal Executive Officer)
/s/ Todd S. Nelson President and Director July 20, 2000
-------------------------
Todd S. Nelson
* Senior Vice President July 20, 2000
-------------------------- and Director
J. Jorge Klor de Alva
* Senior Vice President and July 20, 2000
------------------------- Director
Jerry F. Noble
* Senior Vice President, July 20, 2000
------------------------- Secretary, Treasurer and
Peter V. Sperling Director
/s/ Kenda B. Gonzales Chief Financial Officer July 20, 2000
------------------------- (Principal Financial Officer)
Kenda B. Gonzales
82<PAGE>
Signature Title Date
-----------------------------------------------------------------------------
* Director July 20, 2000
-------------------------
Dino J. DeConcini
* Director July 20, 2000
-------------------------
Thomas C. Weir
* Director July 20, 2000
-------------------------
John R. Norton III
* Director July 20, 2000
-------------------------
Hedy F. Govenar
*By: /s/ Todd S. Nelson
-------------------------
Todd s. Nelson
Attorney-in-Fact
83<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Apollo Group, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated September 30, 1999 appearing in this Annual Report on Form 10-K/A of
Apollo Group, Inc. also included an audit of the financial statement schedule
listed in Item 14(a)(2) of this Form 10-K/A. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Phoenix, Arizona
September 30, 1999
S-1<PAGE>
<TABLE>
SCHEDULE II
APOLLO GROUP, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
<CAPTION>
Balance at Charged to Charged to Balance at
beginning costs and other Deductions/ end
of year expenses accounts Writeoffs of year
<S> <C> <C> <C> <C> <C>
August 31, 1999:
Allowance for
doubtful accounts $6,628 $6,906 $ 820 $(4,710) $9,644
====== ====== ====== ======== ======
August 31, 1998:
Allowance for
doubtful accounts $4,521 $5,479 $ 442 $(3,814) $6,628
====== ====== ====== ======== ======
August 31, 1997:
Allowance for
doubtful accounts $3,694 $2,523 $ 330 $(2,026) $4,521
====== ====== ====== ======== ======
</TABLE>
S-2<PAGE>
