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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: August 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to _____________
Commission file number : 0-25232
APOLLO GROUP, INC.
(Exact name of registrant as specified in its charter)
ARIZONA 86-0419443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (602) 966-5394
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE NONE
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, NO PAR
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required tobe 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. [ ]
The holders of the Company's Class A Common stock are not entitled to any voting
rights. No shares of the Company's Class B Common Stock, its voting stock, are
held by non-affiliates. The number of shares outstanding for each of the
registrant's classes of common stock, as of October 18, 1995, is as follows:
Class A Common Stock, no par 21,523,149 Shares
Class B Common Stock, no par 575,769 Shares
DOCUMENTS INCORPORATED BY REFERENCE
NONE
2
APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-K
INDEX
PAGE
PART I ----
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 29
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 6. Selected Consolidated Financial Data. . . . . . . . . . . . . . . . 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 33
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 42
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . 61
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . 62
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 66
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . 74
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . 75
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 76
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
3
PART I
Item 1 -- Business
OVERVIEW
Apollo Group, Inc. ("Apollo" or the "Company"), through its subsidiaries,
the University of Phoenix, Inc. ("UOP"), the Institute for Professional
Development ("IPD") and Western International University, Inc. ("WIU"), is a
leading provider of higher education programs for working adults based on the
number of working adults enrolled in its programs. The consolidated
enrollment in the Company's educational programs would make it the largest
private institution of higher education in the United States. The Company
currently offers its programs and services at 75 campuses and learning
centers in 25 states, Puerto Rico and London, England. The Company's
enrollment has increased to 36,848 at August 31, 1995 from 17,571 at
August 31, 1991.
Based on its enrollment of over 25,100 adult students, UOP is currently
the sixth largest regionally accredited private university in the United
States and has one of the nation's largest private business schools. UOP has
been accredited by the Commission on Institutions of Higher Education of the
North Central Association of Colleges and Schools ("NCA") since 1978 and has
successfully replicated its teaching/learning model while maintaining
educational quality at its 42 campuses and learning centers in Arizona,
California, Colorado, Hawaii, Louisiana, Michigan, Nevada, New Mexico, Utah
and Puerto Rico. UOP has developed specialized information systems for
student tracking, marketing, faculty recruitment and training, financial aid,
accounting and academic quality management. These systems enhance UOP's
ability to expand into new markets while still maintaining academic quality.
Currently, approximately 80% of UOP's students receive some level of tuition
reimbursement from their employers, many of which are Fortune 500 companies.
In 1989, UOP established Online (trademark), a computerized educational
delivery system, which currently serves approximately 1,300 degree-seeking
students. Online (trademark) provides campus-based courses that have been
modified for computer delivery. Online (trademark) enables the Company to
deliver educational programs and services internationally wherever there is
access to adequate telephone service, CompuServe (registered trademark) or
the Internet. The Online (trademark) faculty receive specialized training to
enable them to teach effectively in the electronic learning environment. The
same academic quality management standards applied to campus-based programs,
including the assessment of student learning outcomes, are applied to
programs delivered through Online (trademark).
IPD provides program development and management services under long-term
contracts (five to ten years) that meet the guidelines of the client
institutions' respective regional accrediting associations. IPD provides
these services to 15 regionally accredited private colleges and universities
at 29 campuses and learning centers in 16 states and shares in the tuition
revenues generated from these programs. IPD is able to assist these colleges
and universities in expanding and diversifying their programs for working
adults. IPD places a priority on institutions that: (1) are interested in
developing or expanding off-campus degree programs for working adults;
(2) recognize that working adults require a different teaching/learning model
than the 18 to 24 year old student; (3) desire to increase enrollments with a
4
limited investment in institutional capital and (4) recognize the unmet
educational needs of the working adult students in their market.
Approximately 11,700 students are currently enrolled in IPD-assisted
programs.
On June 30, 1995, the Company executed an agreement to purchase certain
assets of Western International University ("Western"). Western was a
private non-profit educational institution incorporated in 1978 and was
accredited by the NCA. The acquisition was completed on September 1, 1995
and accounted for under the purchase method. The Company formed a new
wholly-owned subsidiary named Western International University, Inc. ("WIU")
as the holding company for the net assets acquired from Western. WIU
acquired accounts receivable, notes receivable, furniture, fixtures,
equipment, certain contracts and student agreements, copyrights, trademarks,
securities, cash, goodwill and certain other assets of Western. In exchange,
WIU paid Western $237,000 in cash and assumed an additional $1.8 million in
liabilities. See "Business -- Federal Financial Aid Programs -- Western
International University, Inc." WIU currently offers certificate,
undergraduate and graduate degree programs to approximately 900 students and
has campuses in Phoenix, Fort Huachuca and Douglas, Arizona and London,
England.
The Company was incorporated in Arizona in 1981 and maintains its
principal executive offices at 4615 East Elwood Street, Phoenix, Arizona
85040. The Company's telephone number is (602) 966-5394. The Company's
Internet Web Site address is "http://www.uophx.edu."
MARKET
The United States education market may be divided into three distinct
segments: kindergarten through twelfth grade schools, vocational and
technical training schools, and degree-granting colleges and universities
("higher education"). The Company currently operates in the higher education
segment. The U.S. Department of Education National Center for Education
Statistics ("NCES") estimated that for 1993 (the most recent historical year
reported), adults over 24 years of age comprised approximately 6.5 million,
or 44%, of the 14.8 million students enrolled in higher education programs.
Currently, the U.S. Bureau of Census estimates that 70-75% of students over
the age of 24 work while attending school. The NCES estimates that by the
year 2000 the number of adult students over the age of 24 will increase to
6.8 million, or 44%, of the 15.5 million students projected to be enrolled in
higher education programs. The increase in demand for higher education from
working adults results from the increasing skills required by employers and
from a recognition by working adults of the value of an earned degree for
career advancement and change.
The Company believes that the unique needs of working adults include the
following:
- Convenient access to a learning environment (including both
location and delivery system)
- Degree programs offered by regionally accredited institutions that
can be completed in a reasonable amount of time
- Programs that provide knowledge and skills with immediate practical
value in the workplace
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- Education provided by academically qualified faculty with current
practical experience in fields related to the subjects they
instruct
- Administrative services designed to accommodate the full-time
working adult's schedule
- Recognition of adult students as critical consumers of educational
programs and services
- A learning environment characterized by a low student-to-faculty
ratio
- Learning resources available electronically to all students
regardless of geographical location
The Company also believes that the increasing demand from and the unique
requirements of the adult working population represent a significant market
opportunity to regionally accredited higher education institutions that can
offer programs that meet these unique needs.
Most regionally accredited colleges and universities are focused on
serving the 18 to 24 year old student market. This focus has resulted in a
capital-intensive teaching/learning model that may be characterized by: (1) a
high percentage of full-time tenured faculty with doctoral degrees;
(2) fully-configured library facilities and related full-time staff;
(3) dormitories, student unions and other significant plant assets to support
the needs of younger students and (4) an emphasis on research and the related
staff and facilities.
In addition, the majority of accredited colleges and universities
continue to provide the bulk of their educational programming from September
to mid-December and from mid-January to May. As a result, most full-time
faculty members only teach during that limited period of time. While this
structure serves the needs of the full-time 18 to 24 year old student, it
limits the educational opportunity for working adults who must delay their
education for up to five months during these spring, summer and winter
breaks. In addition, this structure generally requires working adults to
attend one course three times a week, commute to a central site, take work
time to complete administrative requirements and, in undergraduate programs,
participate passively in an almost exclusively lecture-based learning format
primarily focused on a theoretical presentation of the subject matter. For
the majority of working adults, earning an undergraduate degree in this
manner would take seven to ten years.
BUSINESS STRATEGY
The Company's strategic goal is to become the preferred provider of
higher education programs for working adult students. The Company is managed
as a for-profit corporation in an industry served principally by
not-for-profit providers. By design, the Company treats both its adult
students and their employers as customers. Key elements of the Company's
business strategy include the following:
6
Establish New UOP Campuses and Learning Centers -----------------------------
UOP plans to add campuses and learning centers throughout the United
States. New locations are selected based on an analysis of various factors,
including the population of working adults in the area, the number of local
employers and their educational reimbursement policies and the availability
of similar programs offered by other institutions. Campuses consist of
classroom and administrative facilities with full student and administrative
services. Learning centers differ from campuses in that they consist
primarily of classroom facilities with limited on-site administrative staff.
Establish New IPD Relationships ---------------------------------------------
IPD plans to enter into additional long-term contracts with private
colleges and universities in proximity to metropolitan areas throughout the
United States. In general, IPD seeks to establish relationships with
colleges and universities located in states where it is difficult for out-of-
state accredited institutions to obtain state authorizations. In this way,
the Company is able to optimize its campus-based penetration of potential new
markets.
Expand Degree Programs ------------------------------------------------------
The Company expects to continue to respond to the changing educational
needs of working adults through the introduction of new undergraduate and
graduate degree programs. The Company also is investigating the market
potential for professional doctoral degree programs and specializations. The
Company currently has a full-time staff of over 20 persons involved in its
centralized curriculum development process.
Expand Access to Programs ---------------------------------------------------
The Company plans to expand its distance education programs and
services. In 1994, the Company successfully completed its connection to the
Internet, thereby making the Company's programs more readily available
throughout the United States and worldwide. The Company also plans to
enhance its distance education delivery systems as new technologies become
cost-effective.
International Expansion -----------------------------------------------------
The Company has conducted market research in various foreign countries,
including Hungary, Japan, Costa Rica and Mexico. The Company will continue
to monitor and assess the feasibility of providing its educational programs
internationally. In addition, the Company plans to leverage WIU's
international contacts and related operations acquired as a result of the
acquisition of the assets of Western.
The timing related to the establishment of new locations and the
expansion of programs may vary depending on regulatory requirements and
market conditions.
7
TEACHING/LEARNING MODEL
The Company's teaching/learning model used by UOP and IPD client
institutions was designed for working adults. This model is structured to
enable students who are employed full-time to earn their degrees and still
meet their personal and professional responsibilities. Students attend
weekly classes, averaging 15 students in size, and also meet weekly as part
of a three to five person study group. The study group meetings are used for
review, work on assigned group projects and preparation for in-class
presentations. Courses are designed to facilitate the application of
knowledge and skills to the workplace and are taught by faculty members who
possess advanced degrees and have an average of 16 years of professional
experience in business, industry, government and the professions. In this
way, faculty members are able to share their professional knowledge and
skills with the students.
The Company's teaching/learning model has the following major
characteristics:
Curriculum The curriculum provides for the achievement of
specific educational outcomes that are based on the
input from faculty, students and student employers.
The curriculum is designed to integrate academic
theory and professional practice and the
application to the workplace. The standardized
curriculum for each degree program is also designed
to provide students with specified levels of
knowledge and skills regardless of delivery method
or location.
Faculty Faculty applicants must possess an earned masters
or doctoral degree, and have a minimum of five
years recent professional experience in a field
related to the subject matter in which they seek to
instruct. To help promote quality delivery of the
curriculum, UOP faculty members are required to:
(1) complete an initial assessment conducted by
staff and faculty; (2) receive training in grading,
facilitation of the teaching/learning model and
oversight of study group activities; (3) serve an
internship with an experienced faculty mentor and
(4) receive ongoing performance evaluations by
students, peer faculty and staff. The results of
these evaluations are used to establish
developmental plans to improve individual faculty
performance and to determine continued eligibility
of faculty members to provide instruction.
Interactive Learning Courses are designed to combine individual and
group activity with interaction between and among
students and the instructor. The curriculum
requires a high level of student participation for
purposes of increasing the student's ability to
work as part of a team.
8
Learning Resources Students and faculty members are provided with
electronic and other learning resources for their
information needs. During 1995, the Company
expanded these services and provided additional
access through a connection to the Internet. This
minimizes the need for capital-intensive library
facilities and holdings.
Sequential Enrollment Students enroll in and complete courses
sequentially, rather than concurrently, thereby
allowing full-time working adults to focus their
attention and resources on one subject at a time,
thus balancing learning with ongoing personal and
professional responsibilities.
Academic Quality The Company has developed and operationalized an
Academic Quality Management System ("AQMS") that is
designed to maintain and improve the quality of
programs and academic and student services
regardless of the delivery method or location.
Included in the AQMS is the Adult Learning Outcomes
Assessment which seeks to measure student growth in
both the cognitive (subject matter) and affective
(educational, personal and professional values)
domains.
STRUCTURAL COMPONENTS OF TEACHING/LEARNING MODEL
Although adults over 24 currently comprise approximately 44% of all
higher education enrollments in the United States, the mission of many
accredited colleges and universities is to serve 18 to 24 year old students
and conduct research. UOP and IPD client institutions acknowledge the
differences in educational needs between older and younger students and
provide programs and services that allow working adult students to earn their
degrees while integrating the process with both their personal and
professional lives.
The Company believes that working adults require a different
teaching/learning model than that designed for the 18 to 24 year old student.
The Company has found that working adults seek accessibility, curriculum
consistency, time and cost effectiveness and learning that has an immediate
application to the workplace. The Company's teaching/learning model differs
from the models used by most regionally accredited colleges and universities
because it is designed to enable adults to complete an undergraduate degree
in four years and a graduate degree in two years while working full-time.
The structural components of the Company's teaching/learning model
include:
Accessibility Centrally developed standardized curricula that can
be accessed through a variety of delivery methods
(e.g., campus-based or electronically delivered),
that make the educational programs accessible
regardless of where the students work and live.
9
Instructional Costs While the faculty at most accredited colleges and
universities are employed full-time, UOP's and IPD
client institutions' part-time faculty are
academically qualified, professionally employed and
are contracted for instructional services on a
course-by-course basis. This policy keeps a
portion of the cost of instruction variable.
Facility Costs The Company leases its campus and learning center
facilities and rents additional classroom space on
a short-term basis to accommodate growth in
enrollments, thus keeping a portion of its
instructional costs variable.
Employed Students UOP's students are employed full-time and
approximately 74% have been employed for nine years
or more. This minimizes the need for
capital-intensive facilities and services (e.g.,
dormitories, student unions, food services,
personal and employment counseling, health care,
sports and entertainment).
Employer Support Approximately 80% of UOP's students currently
receive some level of tuition reimbursement from
their employers, many of which are Fortune 500
companies. The Company develops relationships with
key employers for purposes of recruiting students
and responding to specific employer needs. This
allows the Company to remain sensitive to the needs
and perceptions of employers, while helping both to
generate and sustain diverse sources of revenues.
WIU's teaching/learning model has similar characteristics to the
teaching/learning model used by UOP and IPD client institutions, including
the use of part-time practitioner faculty, standardized curriculum,
computerized learning resources and leased facilities. WIU provides
educational programs in a semester-based format and does not focus
exclusively on working adult students.
10
PROGRAMS AND SERVICES
UOP Programs ----------------------------------------------------------------
UOP currently offers the following degree programs, areas of
specialization and certificate programs at one or more campuses and learning
centers or through its distance education delivery systems:
DEGREE PROGRAMS AREAS OF SPECIALIZATION AVAILABLE
- ---------------------------------- IN CERTAIN DEGREE PROGRAMS
Associate of Arts in Business ----------------------------------
Bachelor of Arts in Management
Bachelor of Science in Business UNDERGRADUATE
Bachelor of Science in Nursing -------------
Master of Arts in Education Business:
Master of Arts in Organizational - Accounting
Management - Administration
Master of Business Administration - Environmental Management
Master of Counseling - Finance
Master of Nursing - Industrial Relations
Master of Science in Computer - Marketing
Information Systems - Operations Management
Computer Information Systems:
CERTIFICATE PROGRAMS - Information Systems
- ---------------------------------- - Technical Management
Alternative Dispute Resolution
Art of Negotiation
Authorized Certified Novell GRADUATE
Administrator (CNA) --------
Authorized Certified Novell Business:
Engineer (CNE) - Finance
Business and the Environment - Marketing
Configuration Management
Conflict Resolution Computer Information Systems:
Export Management - Technology Management
Foreign Languages
Global Management Education:
Government Contract Management - Administration and Supervision
Human Resource Management - Bilingual-Bicultural
Human Resources Professional - Curriculum
Development - Diverse Learner
International Management - Educational Counseling
Introduction to the Internet - Elementary Education
Management and Leadership - English as a Second Language
Marketing Management - Multidisciplinary Studies
Materials Management - Professional Development for
OB/GYN Nurse Practitioner Educators
OSHA Regulatory Compliance - Secondary Methodology
Post Baccalaureate Teacher Education - Special Education
Professional Sales Skills
Purchasing Nursing:
Risk Management - Management
Sales Management - Education
School Guidance Counselor - Women's Health Nurse Practitioner
School Nurse
TQM for Manufacturing Counseling:
TQM for Service - Marriage, Family and Child Therapy
11
Graduate level courses are also offered for students' continuing
professional education requirements, including state teacher certification
and state teacher renewal. Undergraduate students may demonstrate and
document college level learning gained from experience through the assessment
by faculty members (according to the guidelines of the Council for Adult and
Experiential Education ("CAEL")) for the potential award of credit. The
average number of credits awarded to UOP undergraduate students who utilized
the process between 1991 and 1995 was six credits of the 120 required to
graduate. Approximately 70% of these credits were attributable to
professional and nonregionally accredited course work. CAEL reports that
over 1,300 regionally accredited colleges and universities currently provide
for the assessment mechanism of college level learning gained through
experience for the award of credit.
IPD Services ----------------------------------------------------------------
IPD offers services to its client institutions including: (1) assisting
with curriculum development; (2) conducting market research; (3) developing
and executing marketing strategies; (4) training faculty; (5) establishing
administrative infrastructures; (6) developing and implementing financial
accounting and academic quality management systems; (7) assessing the future
needs of adult students and (8) helping develop additional degree programs
suitable for the adult higher education market. In consideration for its
services, IPD receives a contractual share of tuition revenues from students
enrolled in IPD-assisted programs.
IPD also assists its client institutions in identifying and developing
new degree programs and in seeking the required approvals from their
respective regional accrediting associations. In order to facilitate the
sharing of information related to the operations of their respective
programs, UOP and the IPD client institutions formed the Consortium for the
Advancement of Adult Higher Education ("CAAHE"). CAAHE meets semiannually to
address issues such as the recruitment and training of part-time,
professionally employed faculty, employer input in the curriculum development
process, assessment of the learning outcomes of adult students and regulatory
issues affecting the operation of programs for working adult students.
IPD client institutions offer the following programs with IPD
assistance:
No. of IPD
Degree Programs Client Institutions
- -------------------------------------------------- --------------------
Associate of Arts in General Studies 1
Associate of Arts in Liberal Arts 1
Associate of Science in Business 5
Bachelor of Business Administration 8
Bachelor of Science in Business Administration 4
Bachelor of Science in Nursing 1
Bachelor of Science in Management 7
Bachelor of Science in Organizational Leadership 1
Bachelor of Science in Human Resources Management 1
Master of Business Administration 7
Master of Science in Management 4
Master of Science in Health 1
Master of Arts in Education 1
The IPD-assisted programs also include a limited number of general
education courses, certificate programs and areas of specialization.
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WIU Programs ----------------------------------------------------------------
WIU currently offers the following degree and certificate programs:
DEGREE PROGRAMS WITH RELATED MAJORS
- ---------------------------------------------
ASSOCIATE OF ARTS IN GENERAL STUDIES
BACHELOR OF SCIENCE
- - Accounting
- - Aviation Management
- - Finance
- - General Business
- - Information Systems
- - International Business
- - Management
- - Marketing
BACHELOR OF ARTS
- - Behavioral Science
- - General Studies
- - International Studies
MASTER OF BUSINESS ADMINISTRATION
- - Finance
- - Healthcare Management
- - International Business
- - Management
- - Management Information Services
- - Marketing
MASTER OF PUBLIC ADMINISTRATION
MASTER OF SCIENCE
- - Accounting
- - Healthcare Information Resources Management
- - Information Services
- - Information Systems Engineering
CERTIFICATE PROGRAMS
- ---------------------------------------------
Corporate Management
Finance
International Business
Management Information Systems
Marketing
13
Faculty ---------------------------------------------------------------------
UOP's faculty is comprised of approximately 2,800 working professionals
with earned masters or doctoral degrees and an average of 16 years of
experience in business, industry, government or the professions. To help
promote quality delivery of the curriculum, UOP faculty members are required
to: (1) complete an initial assessment conducted by staff and faculty;
(2) receive training in grading, facilitation of the teaching/learning model
and oversight of study group activities; (3) serve an internship with an
experienced faculty mentor and (4) receive ongoing performance evaluations by
students, peer faculty and staff. The results of these evaluations are used
to establish developmental plans to improve individual faculty performance
and to determine continued eligibility of faculty members to provide
instruction. Most faculty members are recruited as the result of referrals
from faculty, students and corporate contacts. All faculty are contracted on
a course-by-course basis (generally a five to ten week period).
The faculty teaching in IPD-assisted programs are comprised of full-time
faculty from the client institution as well as qualified part-time faculty
who instruct only in these adult programs. The part-time faculty must be
approved by each client institution. IPD makes the AQMS available to its
client institutions to evaluate faculty and academic and administrative
quality. Both UOP and IPD have been successful in recruiting faculty members
who meet these academic and professional requirements.
WIU's faculty consists of approximately 60 working professionals. WIU's
practitioner faculty possess earned masters or doctoral degrees and
participate in a selection and training process that is similar to that at
UOP.
Academic Accountability -----------------------------------------------------
UOP is one of the first regionally accredited universities in the nation
to create and utilize an institution-wide system for the assessment of the
educational outcomes of its students. The information generated is employed
by UOP to improve the quality of the curriculum, instruction and the
Company's teaching/learning model. UOP's undergraduate and graduate students
complete a comprehensive cognitive (core degree subject matter) and affective
(educational, personal and professional values) assessment prior to and upon
the completion of their core degree requirements.
Students at UOP and IPD client institutions evaluate both academic and
administrative quality. This evaluation begins with a registration survey
and continues with the evaluation of the curriculum, faculty, delivery
method, instruction and administrative services upon the conclusion of each
course. The evaluation also includes both a graduation survey and a survey
of a random selection of graduates two years after their graduation. The
results provide an ongoing basis for improving the teaching/learning model,
selection of educational programs and instructional quality. The Company
plans to implement similar quality control systems at WIU over the next year.
Admissions Standards --------------------------------------------------------
To gain admission to the undergraduate programs of UOP, WIU and the IPD
client institutions, students generally must have a high school diploma or
General Equivalency Degree ("G.E.D.") and satisfy certain minimum grade point
average, employment and age requirements. Additional requirements may apply
14
to individual programs. Students in undergraduate programs may petition to
be admitted on provisional status if they do not meet certain admission
requirements.
To gain admission to the graduate programs of UOP, WIU and the IPD
client institutions, students generally must have an undergraduate degree
from a regionally accredited college or university and satisfy minimum grade
point average, work experience and employment requirements. Additional
requirements may apply to individual programs. Students in graduate programs
may petition to be admitted on provisional status if they do not meet certain
admission requirements.
DISTANCE EDUCATION COMPONENTS
Online Computer Conferencing ------------------------------------------------
UOP established Online (trademark), its computer-based educational
delivery system, in 1989 by modifying its classroom courses for delivery at
the same level of quality through the use of computers. Online (trademark)
is currently accessible both nationally and internationally wherever there is
adequate phone service or access to CompuServe (registered trademark) or the
Internet. Online (trademark) utilizes a computer conferencing system that
enables students and faculty to participate in a learning group of 10 to 12
students. Online (trademark) students can complete their course requirements
at any time of the day, from locations where they have access to a computer
and a modem. Students and faculty interact daily in an electronic classroom
without having to be online at the same time. As required in campus-based
courses, Online (trademark) students also participate in weekly study groups.
Two-Way Voice and Data ------------------------------------------------------
UOP established its audiographic delivery system in 1989 in response to
requests from employers with operations in remote areas of the United States.
Students completing their degree requirements utilizing this system meet
weekly in a remote classroom and interact simultaneously with an instructor
in a centralized instructional studio through a two-way voice and data
communications system. These students can complete all their coursework in
this manner. They are required to achieve the same course outcomes, attend
weekly study groups and participate in the AQMS.
Directed Study --------------------------------------------------------------
Working adult students may also complete individual courses under the
direct weekly instructional supervision of a member of the faculty.
At August 31, 1995, there were approximately 2,400 students utilizing
the Company's distance education delivery systems, approximately 57% of whom
are enrolled in Online (trademark). Distance education is currently subject
to certain regulatory constraints. See "Business -- Federal Financial Aid
Programs --Restrictions on Distance Education Programs" and "Business --
State Authorization."
15
ACQUISITION STRATEGY
The Company periodically evaluates opportunities to acquire businesses
and facilities, such as Western, that complement the Company's business
strategy. In evaluating such opportunities, management considers, among
other factors, location, demographics, price, the availability of financing
on acceptable terms, competitive factors and the opportunity to improve
operating performance through the implementation of the Company's operating
strategies. The Company has no current commitments with regard to potential
acquisitions.
CUSTOMERS
The Company's customers consist of working adult students, colleges and
universities, governmental agencies and employers. Based on recent student
surveys, the average age of UOP students is in the mid-thirties,
approximately 54% are women and 46% are men, and the average annual household
income is $53,000. Approximately 74% of UOP students have been employed on a
full-time basis for nine years or more. Currently, 67% of UOP students are
seeking undergraduate degrees. The Company believes that the demographics of
students enrolled in IPD-assisted programs are similar to that of UOP. The
approximate age distribution of current UOP students is as follows:
Age Percentage of Students
------------------------ -----------------------
Under 25 12%
26 to 33 35%
34 to 45 42%
46 and over 11%
-------
100%
=======
IPD client institutions have historically consisted of small private
colleges; however, IPD also targets larger institutions of higher education
that are in need of marketing and curriculum consulting. The Company
believes that to develop and manage educational programs for working adult
students effectively, these potential client institutions require both
capital and operational expertise. In response to these requirements, IPD
provides the startup capital, the curriculum development expertise and the
ongoing management in support of the client institutions' provision of
quality programs for working adult students.
The Company also considers the employers of its students as customers.
Many of these employers provide tuition reimbursement programs in order to
educate and provide degree opportunities to their employees. Currently,
approximately 80% of UOP's students receive some level of tuition
reimbursement from their employers, many of which are Fortune 500 companies.
Of these students receiving reimbursement, approximately 83% receive at least
one-half tuition reimbursement and approximately 42% receive full tuition
reimbursement.
16
CORPORATE PARTNERSHIPS
The Company cooperates and interacts with businesses and governmental
agencies in offering programs designed to meet their specific needs either by
modifying existing programs or, in some cases, by developing customized
programs. These programs are often held at the employers' offices or on-site
at military bases.
In the fourth quarter of 1995, UOP formed an educational partnership
with Ingram Micro, Inc., a leading distributor of computer and software
products, to provide training and certification for Novell and Microsoft
software. These programs began in June 1995 at UOP's Northern and Southern
California campuses. UOP computer labs, equipped and maintained by Ingram
Micro, will serve as training sites for technical professionals who wish to
obtain or enhance skills as network administrators.
In addition, UOP recently formed an educational partnership with AT&T to
provide graduate and undergraduate degree and certificated learning programs
to AT&T's 200,000 employees worldwide. A significant aspect of the alliance
is an articulation agreement between UOP and the AT&T School of Business that
enables UOP to award undergraduate and graduate program credit for certain
course work completed through the AT&T School of Business. The partnership
will provide AT&T managers with a variety of ways to participate in UOP's
programs, depending on their individual schedules and availability, including
course work delivered on campus, at AT&T sites or through one or more of
UOP's distance education delivery systems.
MARKETING
To generate interest among potential UOP, WIU and IPD client institution
students, UOP, WIU and IPD engage in a broad range of activities to inform
potential students about the Company's teaching/learning model and the
programs offered. These activities include print and broadcast advertising,
advertising on services such as CompuServe (registered trademark), Prodigy
(registered trademark) and the Microsoft Network (registered servicemark),
direct mail and information meetings at targeted organizations (CompuServe is
a registered trademark of CompuServe Incorporated, Columbus, Ohio, Prodigy is
a registered trademark of Trintex, White Plains, New York, and Microsoft
Network is a registered servicemark of Microsoft Corporation, Redmond,
Washington). The Company also attempts to locate its campuses and learning
centers near major highways to provide high visibility and easy access. A
substantial portion of new UOP and IPD client institution students are
referred by alumni, employers and currently enrolled students. The Company
is currently implementing its proprietary marketing systems at WIU to help it
identify and manage lead sources and referral data.
The Company also has a "Web Site" on the Internet World Wide Web
(http://www.uophx.edu) that allows electronic access to Company information,
product information, research, etc. The Company's Web Site is accessible
from major online networks such as Prodigy (registered trademark), CompuServe
(registered trademark) and America OnLine (America OnLine is a registered
trademark of America Online, Inc.). The Company recently completed an
agreement to provide direct access to the Company's Web Site from the
Microsoft Network (registered servicemark).
17
UOP and WIU advertising is centrally monitored and is directed primarily
at local markets in which a campus is located. IPD client institutions
approve and monitor all advertising provided by IPD on their behalf. Direct
responses to advertising and direct mail are received, tracked and forwarded
promptly to the appropriate representatives. In addition, all responses are
analyzed to provide data for future marketing efforts.
The Company employs over 200 enrollment representatives in its marketing
system who make visits and presentations at various organizations and who
follow up on leads generated from the Company's advertising efforts and
referrals. These individuals also pursue direct responses to interest from
potential individual students by arranging for interviews either at a UOP,
WIU or IPD location or at a prospective student's place of employment.
Interviews are designed to establish a prospective student's qualifications,
academic background, course interests and professional goals. Student
recruiting policies and standards and procedures for hiring and training
university representatives are established centrally, but are implemented at
the local level through a director of enrollment or marketing at each location.
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.
The Company competes primarily at a local and regional level with other
regionally accredited colleges and universities based on the quality of
academic programs, the accessibility of programs and learning resources
available to working adults, the cost of the program, the quality of
instruction and the time necessary to earn a degree. Although adult students
currently comprise approximately 44% of all college and university
enrollments, few of these institutions have modified their educational
delivery systems to meet the unique needs of working adult students.
Institutions providing programs designed for working adults typically target
executives or other subsets of the working adult population and tend to
provide those programs at only a few sites.
IPD faces competition from other entities offering higher education
curriculum development and management services for adult education programs.
The majority of IPD's current competitors provide pre-packaged curricula or
turn-key programs. IPD client institutions, however, face competition from
both private and public institutions offering degree and non-degree programs
to working adults.
18
EMPLOYEES
At September 30, 1995, the Company had the following numbers of
employees:
Full-Time Part-Time Faculty Total
--------- --------- --------- ---------
Apollo 180 3 -- 183 (1)
UOP 964 98 2,775 (2) 3,837
IPD 180 9 -- (3) 189
WIU 33 13 60 (2) 106
------ ------ ------ ------
Total 1,357 123 2,835 4,315
====== ====== ====== ======
(1) Consists primarily of employees in corporate accounting, payroll and
human resources, information systems, financial aid and Apollo Press.
(2) Consists primarily of part-time professional faculty contracted on a
course-by-course basis.
(3) Faculty teaching IPD-assisted programs are employed by IPD client
institutions.
The Company considers its relations with its employees to be good.
REGULATORY ENVIRONMENT
The Higher Education Act of 1965, as amended (the "HEA") and the
regulations promulgated thereunder (the "Regulations") subject all higher
education institutions eligible to participate in Federal Financial Aid
programs under Title IV of the HEA ("Title IV Programs") to increased
regulatory scrutiny. The HEA mandates specific additional regulatory
responsibilities for each of the following components of the higher education
regulatory triad: (1) the accrediting agencies recognized by the United
States Department of Education (the "DOE"); (2) the federal government
through the DOE and (3) state higher education regulatory bodies, including,
if applicable, a State Postsecondary Review Entity ("SPRE"). All higher
education institutions participating in Title IV Programs must first be
accredited by an association recognized by the DOE. The DOE reviews all such
participating institutions for compliance with all applicable HEA standards
and regulations. Under the HEA, accrediting associations are required to
include the monitoring of certain aspects of Title IV Program compliance as
part of their accreditation evaluations.
New or revised interpretations of regulatory requirements could have a
material adverse effect on the Company. In addition, changes in or new
interpretations of other applicable laws, rules or regulations could have a
material adverse effect on the accreditation, authorization to operate in
various states, permissible 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.
19
ACCREDITATION
UOP and the IPD client institutions are accredited by regional
accrediting associations recognized by the DOE. Accreditation provides the
basis for: (1) the recognition and acceptance by employers, other higher
education institutions and governmental entities of the degrees and credits
earned by students; (2) the qualification to participate in Title IV Programs
and (3) the qualification for authorization in certain states.
UOP was granted accreditation by NCA in 1978. UOP's accreditation was
reaffirmed in 1982, 1987 and 1992. The next NCA reaffirmation visit is
scheduled for 1996-97. IPD-assisted programs offered by the IPD client
institutions are evaluated by the client institutions' respective regional
accrediting associations either as part of a reaffirmation or focused
evaluation visits. Current IPD client institutions are accredited by NCA,
New England or Southern regional accrediting associations. UOP is required
to receive approval from NCA for the addition of new degree programs and the
addition of any campuses or learning centers in new states or countries.
Most IPD client institutions are subject to similar policies. In addition,
all IPD contracts must meet the guidelines of the client institutions'
respective regional accrediting associations. The withdrawal of
accreditation from UOP or certain IPD client institutions would have a
material adverse effect on the Company.
WIU has applied for approval of the transfer of NCA accreditation from
Western and expects to receive the approval in the next few months (see
"Business -- Federal Financial Aid Programs -- Western International
University, Inc.").
All accrediting agencies recognized by the DOE are required to include
certain aspects of Title IV Program compliance in their evaluations of
accredited institutions. As a result, all regionally accredited
institutions, including UOP, WIU (if approved) and IPD client institutions,
will be subject to a Title IV Program compliance review as part of
accreditation visits.
Regional accreditation is accepted nationally as the basis for the
recognition of earned credit and degrees for academic purposes, employment,
professional licensure and, in some states, for authorization to operate as a
degree-granting institution. Under the terms of a reciprocity agreement
among the six regional accrediting associations, representatives of each
region in which a regionally accredited institution operates participate in
the evaluations for reaffirmation of accreditation. The achievement of UOP's
and WIU's missions require them to employ academically qualified practitioner
faculty that are able to integrate academic theory with current workplace
practice. Because of UOP's and WIU's choice to utilize all practitioner
faculty, they have not sought business school program accreditation of the
type found at many institutions whose primary missions are to serve the 18 to
24 year old student and to conduct research.
UOP's Bachelor of Science in Nursing ("BSN") program received program
accreditation from the National League for Nursing ("NLN") in 1989. The
accreditation was reaffirmed in October 1995 and the next NLN reaffirmation
is scheduled for 2003. The Company believes that the BSN program
accreditation is in good standing. If the NLN accreditation is not
reaffirmed, UOP's BSN program could be adversely affected.
20
UOP's Master of Counseling ("MC") degree received program accreditation
from the Council for Accreditation of Counseling and Related Educational
Programs ("CACREP") in May 1995. The next CACREP reaffirmation is scheduled
for 1997.
FEDERAL FINANCIAL AID PROGRAMS
UOP and IPD client institution students participate in Title IV
Programs. UOP derives approximately 68% of its net revenues from students
who participate in Title IV Programs. The Company believes that IPD derives
a similar percentage of its net revenues from students who participate in
Title IV Programs administered by the respective IPD client institutions.
These students are eligible for Title IV financial aid because: (1) UOP and
IPD client institutions are accredited by an accrediting association
recognized by the DOE; (2) the DOE has certified UOP's and IPD client
institutions' Title IV Program eligibility and (3) UOP and IPD client
institutions have applicable state authorization to operate and their
operating sites have been approved by the DOE. As a result of the Company's
acquisition of certain assets of Western, WIU currently is not eligible to
participate in Title IV Programs. Upon approval of the transfer of NCA
accreditation from Western to WIU, WIU will apply for DOE approval to resume
participation in Title IV Programs. See "Business -- Federal Financial Aid
Programs -- Western International University, Inc."
The DOE has promulgated regulations, the most recent of which became
effective on July 1, 1995, that amend certain provisions of the Title IV
Programs and the regulations promulgated thereunder. Some of the more
important provisions of these regulations include the following:
The "12-Hour Rule" ----------------------------------------------------------
Currently, the Regulations place limits on the amount of Title IV
Program funds that a student is eligible to receive in any one academic year
(as defined by the DOE). The Regulations also specify that, for
undergraduate programs, an academic year must consist of at least 30 weeks of
instruction or a minimum of 24 credit hours. The new Regulations define an
equivalent "week of instruction" as 12 hours of regularly scheduled
instruction, examinations or preparation for examinations (the "12-Hour
Rule"). The Company believes that, under the 12-Hour Rule, a calendar week
of UOP or WIU instruction time would be equivalent to 8/12ths (67%) of a DOE
week of instruction, because the programs offered by UOP and WIU consist of a
minimum of eight hours per week of regularly scheduled instruction,
examinations and preparations for examinations.
To comply with the new 12-Hour Rule, UOP and WIU have increased the
length of their undergraduate academic years to 45 calendar weeks to meet the
equivalent 30 weeks of instruction (45 weeks times 67% = 30 weeks) required
by the DOE. Although this change has not increased the length of the entire
undergraduate program, it has in some cases reduced the maximum amount of
Title IV funding available to the applicable students for their entire
program (for undergraduate programs, these limits range from $2,625 to
$10,500 per academic year per student depending primarily on the student's
financial need). The change in the length of the academic years to 45
calendar weeks has had no significant effect on the Company's operations to
date.
21
Restricted Cash -------------------------------------------------------------
The DOE places certain restrictions on Title IV Program funds collected
for unbilled tuition and funds transferred to the Company through electronic
funds transfer. Prior to July 1, 1995, higher education institutions were
also required to maintain a minimum cash reserve in an amount equal to at
least 25% of the total dollar amount of refunds paid by the institution in
its most recent fiscal year. Effective July 1, 1995, an institution is
required to submit an irrevocable letter of credit to the DOE, rather than
maintain the cash reserve. However, the letter of credit requirement is
waived if an institution meets the DOE's standards related to timeliness of
refunds, financial responsibility, and other criteria. The Company believes
that it meets these applicable DOE standards and will not need to supply the
letter of credit.
Standards of Financial Responsibility ---------------------------------------
Pursuant to the Regulations, all eligible higher education institutions
must meet an acid test ratio (defined as the ratio of cash, cash equivalents,
restricted cash and current accounts receivable to total current liabilities)
of at least 1 to 1 at the end of the institution's fiscal year. At
August 31, 1995, UOP's acid test ratio was 1.31 to 1. On September 1, 1995,
WIU's acid test ratio was 2.73 to 1.
Branching and Classroom Locations -------------------------------------------
The Regulations contain specific requirements governing the
establishment of new main campuses, branch campuses and classroom locations
at which any student receives more than 50% of his or her instruction. In
addition to classrooms at campuses and learning centers, locations affected
by these requirements include the business facilities of client companies,
military bases and conference facilities used by UOP and WIU. The Company
has obtained approval for all UOP locations required to be approved by the
Regulations and is seeking reaffirmation of approval for WIU's locations.
Should the DOE change its regulations with respect to this approval process
or delay approvals of new locations beyond the current approval time rate,
the Company's business strategy may be impacted negatively.
The "85/15 Rule" ------------------------------------------------------------
A new requirement of the HEA, commonly referred to as the "85/15 Rule,"
applies only to for-profit institutions of higher education, which includes
UOP and WIU but not IPD client institutions. Under this rule, for-profit
institutions will be ineligible to participate in Title IV Programs if the
amount of Title IV Program funds used by the students or institution to
satisfy tuition, fees and other costs incurred by the students exceed 85% of
the institution's cash-basis revenues from eligible programs (UOP's and
Western's percentage was 72% and 66% at August 31, 1995, respectively). UOP
and WIU are required to calculate this percentage at the end of each fiscal
year.
Student Loan Defaults -------------------------------------------------------
Eligible institutions must maintain a student loan cohort default rate
of less than 35% for each of the federal fiscal years 1991 and 1992, 30% for
fiscal year 1993 and 25% for fiscal year 1994 and all subsequent fiscal
years. In 1992, the most recent DOE cohort default rate reporting period,
the national cohort default rate average for all higher education
22
institutions was 15%. UOP and WIU students' cohort default rates for the
Federal Family Education Loans as reported by the DOE were 5% and 4.7%,
respectively, and IPD client institution students' cohort default rates
averaged 5% over that same period.
State Postsecondary Review Entities ("SPREs") -------------------------------
The Regulations mandate that each state establish a SPRE to review
institutions referred by the DOE and eligible institutions the SPRE believes
are engaged in Title IV Program fraud and abuse. Each institution will be
reviewed against standards developed by the applicable SPRE to determine
whether it is eligible to continue to participate in Title IV Programs. The
states are required to implement the SPRE portion of the HEA only to the
extent to which their costs are covered through Congressional appropriation.
On July 27, 1995, President Clinton signed into law a package of spending
cuts that rescinded the funding of the SPREs for fiscal year 1995. The HEA
specifies that the states are not required to operate the SPREs without
Federal funding.
Compensation of Representatives ---------------------------------------------
The Regulations prohibit an institution from providing any commission,
bonus, or other incentive payment based directly or indirectly on success in
securing enrollments or financial aid to any person or entity engaged in any
student recruitment, admission or financial aid awarding activity. The
Company believes that its current method of compensating representatives
complies with the Regulations.
Administrative Capability ---------------------------------------------------
The HEA directs the DOE to assess the administrative capability of each
institution to participate in Title IV Programs. The failure of an
institution to satisfy any of the criteria used to assess administrative
capability may allow the DOE to determine that the institution lacks
administrative capability and, therefore, may be subject to additional
scrutiny or denied eligibility for Title IV Programs.
Eligibility and Certification Procedures ------------------------------------
The HEA specifies the manner in which the DOE reviews institutions for
eligibility and certification to participate in Title IV Programs and the
Regulations include detailed new standards. Under the HEA and the
Regulations, the eligibility to participate in Title IV Programs of each
currently participating institution will expire in 1997 or earlier and each
institution will be required to reapply for continued eligibility every four
years thereafter. The DOE will assess each institution's compliance with the
HEA and the Regulations. UOP's eligibility to participate in Title IV
Programs expires in 1997. If the DOE does not renew UOP's eligibility, it
will have a material adverse effect on the Company.
Restrictions on Distance Education Programs ---------------------------------
The Regulations specify that an institution is not eligible to
participate in Title IV Programs funding if 50% or more of its courses are
correspondence courses, or if 50% or more of its regular students are
enrolled in the institution's correspondence courses. Although the Company
does not offer correspondence courses, the Regulations currently consider
most distance education courses to be correspondence courses if the number of
23
distance education courses exceeds 50% of the sum of courses offered in
campus-based delivery systems and courses offered through distance education.
The Company does not plan to exceed this 50% level and believes that this
restriction will have no impact on its business strategy.
Direct Lending Programs -----------------------------------------------------
The DOE has instituted a new direct lending program and various
institutions have been invited to participate in the initial phases of the
program. The direct lending program, as currently defined by the DOE, would
have the effect of eliminating third-party lending institutions and guarantee
agencies from the loan disbursement process. The goal of the DOE is to
streamline the financial aid lending process, but there is uncertainty as to
when this goal will be fully attained. Recently, certain members of Congress
have proposed to limit and/or eliminate the direct lending program. The
Company has not yet been required to implement the new direct lending process
and it is uncertain as to what effect this new process, if implemented, will
have on its cash flow.
Change of Ownership or Control ----------------------------------------------
A change of ownership or control of the Company, depending on the type
of change, may have significant regulatory consequences for UOP and WIU.
Such a change of ownership or control could trigger recertification by the
DOE, reauthorization by certain state licensing agencies or the evaluation of
the accreditation by NCA.
For institutions owned by publicly-held corporations, the DOE has
adopted the change of ownership and control standards used by the federal
securities laws. Upon a change of ownership and control sufficient to
require the Company to file a Form 8-K with the Securities and Exchange
Commission, UOP and WIU would cease to be eligible to participate in Title IV
Programs until recertified by the DOE. This recertification would not be
required, however, if the transfer of ownership and control was made upon a
person's retirement or death and was made either to a member of the person's
immediate family or to a person with an ownership interest in the Company who
had been involved in its management for at least two years preceding the
transfer.
In addition, certain states where the Company is presently licensed have
requirements governing change of ownership or control. Currently, Arizona
and California would require UOP and WIU, as applicable, to be reauthorized
upon a 20% and 25% change of ownership or control of the Company,
respectively. These states require a new application to be filed for state
licensing if such a change of ownership or control occurs. Moreover, the
Company is required to report any change in stock ownership of UOP, WIU or
Apollo to NCA. At that time, NCA may seek to evaluate the effect of such a
change of stock ownership on the continuing operations of UOP and WIU.
If UOP is not recertified by the DOE, or does not obtain reauthorization
from the necessary state agencies or has its accreditation withdrawn as a
consequence of any change in ownership or control, there would be a material
adverse effect on the Company.
24
Western International University, Inc. --------------------------------------
Prior to its acquisition by the Company, Western participated in Title
IV Programs. However, the acquisition of Western by the Company is
considered a change in ownership and control which results in the termination
of Western's participation in the Title IV Programs. Under the HEA, and the
Regulations, WIU (the newly formed subsidiary of Apollo) can resume
participation in the Title IV Programs if the DOE certifies its eligibility
to participate. This certification process consists primarily of: (1)
notifying the DOE, the state licensing agency and the accrediting agency of
the change in ownership, (2) filing an application for certification with the
DOE and supplying required financial statements and information to the DOE
evidencing compliance with the DOE's standards of financial responsibility
and (3) signing a new Title IV Program participation agreement with the DOE.
In addition, as part of the application process, WIU must provide to the DOE
proof that its accreditation is continued under the new ownership or control
and that it has legal authorization from the state licensing agency. WIU has
received approval to operate under new ownership by the Arizona State Board
for Post-Secondary Education. WIU expects the approval of the transfer of
NCA accreditation to WIU to occur in the next few months and DOE approval is
expected shortly thereafter. Prior to obtaining approval from the DOE, WIU
will not be able to disburse funds awarded by Western or process new Title IV
financial aid. The Company has arranged for a temporary alternative lender
to provide non-recourse financing to credit-qualifying students during this
interim period. If the DOE does not certify that WIU is eligible to
participate in Title IV Programs, it would have a material adverse effect on
WIU.
STATE AUTHORIZATION
UOP currently is authorized to operate in nine states and Puerto Rico.
UOP has held these authorizations for periods ranging from one month to
seventeen years. UOP's NCA accreditation is accepted as evidence of
compliance with applicable state regulations in Arizona, Colorado, New
Mexico, Nevada and Utah. Hawaii does not have authorization provisions for
regionally accredited degree-granting institutions. California law, enacted
in 1985, requires an on-site visit to all out-of-state accredited
institutions of higher education every five years to determine if the
institution is in compliance with the State of California regulations. All
institutions, including UOP, that operate in California and are accredited by
a regional accrediting association other than the Western Association of
Schools and Colleges are required to be evaluated separately for
authorization to operate. UOP was granted its most recent California
authorization in 1989 and expects to renew its license by February 1996. All
regionally accredited institutions, including UOP, are required to be
evaluated separately for authorization to operate in Puerto Rico. UOP was
granted its most recent authorization in Puerto Rico in 1990 and expects to
renew its authorization by November 1995. IPD client institutions possess
authorization to operate in all states in which they offer educational
programs, which are subject to renewal. WIU is currently authorized to
operate in Arizona and London, England.
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
25
telecommunicated learning, UOP may be required to obtain authorization for,
or restrict access to, its programs available through Online (trademark) in
those states.
EMPLOYER TUITION REIMBURSEMENT
Many of the Company's students receive some form of tuition
reimbursement from their employers. In certain situations, as defined by the
Internal Revenue Code (the "Code"), this tuition assistance qualifies as a
deductible business expense when adequately documented by the employer and
employee. The Code also provided 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. The EAP
provision of the Code expired in December 1994. Since 1979, Congress has
retroactively reinstated the EAP provision in each year that the provision
has expired. Although there is no assurance that Congress will continue to
retroactively reinstate this safe-harbor provision, employers or employees
may still continue to deduct tuition assistance where it qualifies as a
deductible business expense and is adequately documented.
26
LOCATIONS
UOP currently has campuses and learning centers located throughout nine
states and Puerto Rico. The following is a current list of UOP main
campuses, divisions and learning centers and the respective opening dates and
enrollments as of August 31, 1995:
Fiscal Enroll-
Main Campuses, Divisions and Year ment at
Respective Learning Centers Opened 8/31/95
- -----------------------------------------------------------------------------
ARIZONA: Phoenix Campus 1978 3,896
Mesa 1986
Northwest Phoenix 1990
Scottsdale 1994
Tucson Campus 1983 1,663
East Tucson 1993
Fort Huachuca 1993
CALIFORNIA: Orange County (Fountain Valley Campus) 1981 5,063
Diamond Bar 1992
Edwards Air Force Base 1992
Lawndale 1992
Van Nuys 1990
Pasadena 1995
Ontario 1995
Gardena(1) 1996
San Jose Campus 1980 2,907
San Ramon 1985
San Francisco 1994
Pleasanton 1995
Fresno Campus 1995 20
San Diego Campus 1989 1,403
Vista 1994
Sacramento Campus 1993 659
COLORADO: Denver Campus 1982 2,661
Aurora 1988
Colorado Springs 1993
Northglenn 1995
HAWAII: Honolulu Campus 1993 365
LOUISIANA: New Orleans(1) 1996 --
MICHIGAN: Detroit(1) 1996 --
NEVADA: Las Vegas Campus 1994 380
Nellis Air Force Base 1993
NEW MEXICO: Albuquerque Campus 1985 1,307
Kirtland Air Force Base 1993
Santa Fe 1994
Santa Teresa - Las Cruces 1995
UTAH: Salt Lake City Campus 1984 1,658
Ogden 1992
Orem 1988
PUERTO RICO: Guaynabo Campus 1980 817
DISTANCE EDUCATION: Online (trademark), San Francisco, CA(2) 1989 1,346
Center for Distance Education, 1989 1,020
Phoenix, AZ(3)
------
TOTAL UOP ENROLLMENT AT AUGUST 31, 1995: 25,165
======
27
(1) Opened in September 1995.
(2) Programs are offered throughout the United States and internationally.
(3) Programs are offered in various states throughout the United States.
IPD currently has contracts with 15 institutions that offer programs at
29 campuses and learning centers in Connecticut, Georgia, Illinois, Indiana,
Kansas, Kentucky, Massachusetts, Minnesota, Mississippi, Missouri, North
Carolina, Ohio, South Carolina, Texas, Virginia and Wisconsin.
WIU currently has four campuses and learning centers located in Phoenix,
Fort Huachuca and Douglas, Arizona and London, England.
28
Item 2 -- Properties
The Company leases all of its administrative and educational facilities.
In some cases, classes are held in the facilities of the students' employers
at no charge to the Company. Leases generally range from five to seven
years; however, the Company attempts to secure longer leases if it is
advantageous to do so. The Company also leases space from time-to-time on a
short-term basis in order to provide specific courses or programs. The table
below sets forth certain information as of September 30, 1995, with respect
to properties leased by the Company in excess of 5,000 square feet:
LOCATION (CITY/STATE) SQUARE FEET
---------------------- -------------
Phoenix, AZ 124,552
Phoenix, AZ 38,086
San Jose, CA 37,876
Fountain Valley, CA 34,545
San Diego, CA 33,097
Englewood, CO 32,000
Tucson, AZ 30,000
Murray, UT 30,000
Albuquerque, NM 23,400
Gardena, CA 23,077
Marietta, GA 21,634
Pleasanton, CA 18,560
Van Nuys, CA 18,467
Sacramento, CA 18,419
Costa Mesa, CA 18,397
Mesa, AZ 18,088
Aurora, CO 16,807
Diamond Bar, CA 15,280
Ontario, CA 14,899
Colorado Springs, CO 14,775
Overland Park, KS 14,120
Lawndale, CA 14,041
Quincy, MA 12,863
Northglenn, CO 11,971
San Francisco, CA 10,414
Crestview Hills, KY 10,303
Phoenix, AZ 10,066
Charlotte, NC 9,898
Scottsdale, AZ 9,588
Pasadena, CA 9,376
Richmond, VA 9,229
Vista, CA 9,224
New Haven, CT 9,131
Guaynabo, PR 9,000
Ogden, UT 7,765
Tucson, AZ 7,708
Phoenix, AZ 7,617
San Francisco, CA 6,183
Phoenix, AZ 6,120
Fresno, CA 5,944
Las Vegas, NV 5,647
Overland Park, KS 5,625
San Ramon, CA 5,526
Vienna, VA 5,508
Murray, UT 5,340
29
The lease on the Company's corporate headquarters, which includes the
UOP Phoenix Main Campus, expires in August 1996. The Company currently has
the option to renew the lease for two additional five-year terms at a market
rate to be determined at the beginning of each of these respective five-year
terms. Depending on the market rate, the Company may consider other options
for relocation, including separate or additional leased facilities or the
construction of a new building.
Item 3 -- Legal Proceedings
The Company is not a party to any legal proceedings, the adverse outcome
of which, in management's opinion, would have a material averse effect on the
Company's operating results.
Item 4 -- Submission of Matters to a Vote of Security Holders
None.
30
PART II
Item 5 -- Market for Registrant's Common Equity and Related Stockholder
Matters
There is no established public trading market for the Company's Class B
Common Stock, and all shares of the Company's Class B Common Stock are
beneficially owned by the Company's executive officers. The Company's Class
A Common Stock began trading on the Nasdaq National Market ("Nasdaq") under
the symbol "APOL" during the second quarter of 1995 on December 6, 1994. The
holders of the Company's Class A Common Stock are not entitled to any voting
rights. Prior to December 6, 1994, the Company's Class A Common Stock was
not listed or traded on any organized market system. The table below sets
forth the high and low bid prices, adjusted for stock splits effected in the
form of stock dividends, for the Company's Class A Common Stock as reported
by Nasdaq.
1995 High Low
--------------------- -------- -------
Second Quarter $11.31 $ 5.50
Third Quarter 19.08 9.63
Fourth Quarter 23.00 16.17
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, 1995, there were approximately 73 and 10 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 3,000 total holders
of its Class A Common Stock.
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends in the near future. It is the current
policy of the Company's Board of Directors to retain earnings to finance the
operations and expansion of the Company's business. Holders of Class A
Common Stock and Class B Common Stock are entitled to equal per share cash
dividends to the extent declared by the Board.
31
Item 6 -- Selected Consolidated Financial Data
The following selected financial and operating data is qualified by
reference to and should be read in conjunction with the financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Items 7 and 8 of this form
10-K. The Consolidated Statement of Operations for each of the three years
in the period ended August 31, 1995 and the Consolidated Balance Sheet as of
August 31, 1995 and 1994, and the independent auditors' report thereon are
included in Item 8 of this Form 10-K.
Year Ended August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Income Statement Data:
Net revenues $163,429 $124,720 $ 97,545 $ 81,865 $ 68,782
-------- -------- -------- -------- --------
Costs and expenses:
Instruction costs and services 102,122 81,313 65,319 54,296 44,398
Selling and promotional 21,016 17,918 15,812 14,442 13,251
General and administrative 18,462 17,194 14,402 12,630 10,232
-------- -------- -------- -------- --------
Total costs and expenses 141,600 116,425 95,533 81,368 67,881
-------- -------- -------- -------- --------
Income before income taxes 21,829 8,295 2,012 497 901
Less provision for income taxes 9,229 3,383 869 240 390
-------- -------- -------- -------- --------
Income before extraordinary
item and cumulative effect of
change in accounting principle 12,600 4,912 1,143 257 511
Extraordinary item 351
Change in accounting principle 389
-------- -------- -------- -------- --------
Net income $ 12,600 $ 4,912 $ 1,143 $ 646 $ 862
======== ======== ======== ======== ========
Net income per share $ .62 $ .32 $ .08 $ .04 $ .06
Weighted average shares outstanding 20,485 15,281 15,136 14,845 14,845
In March 1992, the Company discontinued the operations of Apollo
Education Corporation ("AEC"), its technical training school subsidiary,
which was phased out over the period from March 1992 until October 1992.
All assets related to this subsidiary were disposed of by August 1993.
Pretax losses related to the operations of the technical training
schools were $265,000, $837,000 and $1.3 million in 1993, 1992 and 1991,
respectively.
Realization of prior years' U.S. operating losses related to the
operations of the technical training schools.
The Company adopted Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes," effective September 1, 1991.
32
August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents $ 50,726 $ 4,722 $ 2,843 $ 1,302 $ 671
Restricted cash 11,875 8,094 1,996 89
Total assets $102,132 $ 43,638 $ 28,909 $ 22,369 $ 18,215
======== ======== ======== ======== ========
Current liabilities $ 45,065 $ 34,890 $ 27,086 $ 20,819 $ 17,804
Long-term liabilities 1,715 1,347 1,203 2,154 1,661
Shareholders' equity (deficit) 55,352 7,401 620 (604) (1,250)
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $102,132 $ 43,638 $ 28,909 $ 22,369 $ 18,215
-------- -------- -------- -------- --------
Operating Statistics:
Enrollments at end of period 36,848 30,236 24,987 21,163 17,571
Number of locations at end
of period 68 60 51 42 35
Enrollments are defined as full-time equivalent students in attendance
in a program at the end of a period. Average enrollments represent the
average of the ending enrollments for each month in the period. Average
enrollments were 34,021, 27,469, 23,663, 20,087 and 17,071 for the years
ended 1995, 1994, 1993, 1992 and 1991, respectively. Ending and average
enrollments for 1991 include approximately 400 students enrolled at
AEC's technical training schools that were closed in 1992. Average
enrollments for 1992 include approximately 200 AEC students.
Includes UOP campuses and learning centers and IPD contract sites. Also
includes two AEC sites in 1991. As of September 30, 1995, the number of
locations, including WIU locations, was 75.
The Company did not pay any cash dividends on its Common Stock during
any of the periods set forth in the table above.
33
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
BACKGROUND AND OVERVIEW
The Company's revenues, net of student discounts, have increased to
$163.4 million in 1995 from $68.8 million in 1991. Average annual student
enrollments have increased to 34,021 students in 1995 from 17,071 in 1991.
Net income has increased to $12.6 million in 1995 from $862,000 in 1991. At
August 31, 1995, 36,848 students were enrolled in UOP and in IPD-assisted
programs at IPD client institutions.
From September 1990 to August 1995, UOP opened 24 campuses and learning
centers and IPD established operations at 15 campuses and learning centers
with its client institutions. Startup costs in new markets for UOP campuses
and learning centers have averaged from $200,000 to $400,000 per site over a
15-18 month period. These costs have been substantially less in new markets
where UOP established an enrollment base through contracts with the military
or through its distance education delivery systems. Costs for establishing
new sites in existing markets have been minimal where UOP previously
developed an enrollment base. UOP has established this enrollment base prior
to opening a new campus by holding classes in employers' offices and
conference facilities, or through its distance education delivery systems.
Startup costs for IPD contract sites have averaged from $400,000 to $500,000
per site over a 15-24 month period, and consist primarily of administrative
salaries, marketing and advertising. Startup costs are expensed as incurred.
Approximately 90% of the Company's net revenues in 1995 consist of
tuition revenues from UOP students and IPD's contractual share of tuition
revenues from students enrolled in IPD-assisted programs at IPD client
institutions. UOP tuition revenues currently represent approximately 85% of
consolidated tuition revenues. The Company's net revenues also include sales
of textbooks, computers and other education-related products, application
fees, other student fees and other income. The Company's net revenues vary
from period to period based on several factors that include: (1) the
aggregate number of students attending classes; (2) the number of classes
held during the period and (3) the weighted average tuition price per credit
hour (weighted by program and location). IPD's contracts with its respective
client institutions generally have terms of five to ten years with provisions
for renewal.
Instruction costs and services at UOP consist primarily of costs related
to the delivery and administration of the Company's educational programs that
include faculty compensation, administrative salaries for departments that
provide service directly to the students, the costs of educational materials
sold, facility leases and other occupancy costs, amortization of educational
program production costs, bad debt expense and depreciation and amortization
of property and equipment. UOP faculty members are contracted with and paid
for one course offering at a time. All classroom facilities are leased or,
in some cases, are provided by the students' employers at no charge to the
Company. Instruction costs and services at IPD consist primarily of program
administration, student services and classroom lease expense. Most of the
other instruction costs for IPD-assisted programs, including faculty,
financial aid processing and other administrative salaries, are the
responsibility of the IPD client institutions.
34
Selling and promotional costs for UOP and IPD consist primarily of
advertising, marketing salaries and other costs related to the selling and
promotional functions. These costs are expensed as incurred. General and
administrative costs consist primarily of administrative salaries, occupancy
costs, depreciation and amortization and other related costs for departments
such as executive management, information systems, corporate accounting,
human resources and other departments that do not provide direct services to
the Company's students. To the extent possible, the Company centralizes
these services to avoid duplication of effort.
In September 1995, the Company, through WIU, acquired certain assets of
Western for $2.1 million. WIU acquired accounts receivable, notes
receivable, furniture, fixtures, equipment, certain contracts and student
agreements, copyrights, trademarks, securities, cash, goodwill and certain
other assets of Western. In exchange, WIU paid Western $237,000 in cash and
assumed $1.8 million in liabilities. The acquisition was accounted for as a
purchase. As a result of the change in control of Western precipitated by
its acquisition by WIU, WIU currently is not eligible to participate in Title
IV Program funding. See "Business -- Federal Financial Aid Programs --
Western International University, Inc." The Company has applied with the DOE
for WIU to participate in Title IV Program funding and is awaiting DOE
certification. The Company has arranged for a temporary alternative lender
to provide non-recourse financing. If the Company is not successful in
getting the DOE's approval in a timely fashion, the Company may need to
provide additional short-term financing to WIU students. The Company does
not anticipate that this will have any significant effect on its liquidity.
In 1992, the Company adopted a plan to discontinue the operations of its
technical training schools. These operations were phased out over the period
from 1992 to 1993 and all related assets were disposed of by August 1993.
Pretax losses related to the operations of the technical training schools
were $265,000, $837,000 and $1.3 million in 1993, 1992 and 1991,
respectively. In 1991, the Company realized an extraordinary gain from the
realization of tax benefits resulting from the net operating losses of the
technical training schools.
In 1992, the Company recorded a $389,000 gain representing the
cumulative effect of the adoption of Statement of Financial Accounting
Standard ("SFAS") No. 109, "Accounting for Income Taxes."
35
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data of the
Company expressed as a percentage of net revenues for the periods indicated:
Year Ended August 31,
------------------------
1995 1994 1993
------ ------ ------
Net revenues 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Instruction costs and services 62.5 65.2 67.0
Selling and promotional 12.9 14.4 16.2
General and administrative 11.3 13.8 14.7
------ ------ ------
Total costs and expenses 86.7 93.4 97.9
------ ------ ------
Income before income taxes 13.3 6.6 2.1
Less provision for income taxes 5.6 2.7 .9
------ ------ ------
Net income 7.7% 3.9% 1.2%
====== ====== ======
Year Ended August 31, 1995 Compared with Year Ended August 31, 1994 ---------
Net revenues increased by 31.0% to $163.4 million in 1995 from $124.7
million in 1994 due primarily to a 23.9% increase in average student
enrollments from 1994 to 1995 and tuition price increases averaging four to
six percent, depending on the geographic area and program. All UOP campuses,
which include their respective learning centers, and most of the IPD contract
sites had increases in net revenues and average student enrollments from 1994
to 1995. Average student enrollments increased to 34,021 in 1995 from 27,469
in 1994. Interest income, which is included in net revenues, increased to
$2.4 million in 1995 from $280,000 in 1994 due primarily to increased cash
generated from the Company's initial public offering of its Class A Common
Stock and from $22.3 million in cash generated from operations in 1995.
Instruction costs and services increased by 25.6% to $102.1 million in
1995 from $81.3 million in 1994 due primarily to the direct costs necessary
to support the increase in average student enrollments, consisting primarily
of faculty compensation, classroom lease expenses and related staff salaries
at each respective location. These costs as a percentage of net revenues
decreased to 62.5% in 1995 from 65.2% in 1994 due to greater net revenues
being spread over the fixed costs related to centralized student services.
Selling and promotional expenses increased by 17.3% to $21.0 million in
1995 from $17.9 million in 1994 due primarily to increased marketing and
advertising at UOP and IPD campuses and learning centers, including $1.2
million related to locations opened in new markets during the past two years.
These expenses as a percentage of net revenues decreased to 12.9% in 1995
from 14.4% in 1994 due to the Company's ability to increase enrollments and
open new learning centers in existing markets with a proportionately lower
increase in selling and promotional expenses. As the Company expands into
new markets, it may not be able to leverage its existing selling and
promotional expenses to the same extent.
36
General and administrative expenses increased by 7.4% to $18.5 million
in 1995 from $17.2 million in 1994 due primarily to costs required to support
the increased number of UOP and IPD campuses and learning centers and
increases in general and administrative salaries. This increase was offset
in part by $1.9 million in nonrecurring compensation expense in 1994 related
to the issuance of stock options and a $750,000 accrual of compensation
expense in 1994 related to a deferred compensation agreement with the
Company's President. See "Executive Compensation." General and
administrative expenses include a $105,000 and $135,000 writedown of land
held for sale in 1995 and 1994, respectively. Although the Company does not
expect any significant writedowns in the near future, it cannot predict what
impact the changing economic conditions in California will have on future
real estate values. General and administrative expenses as a percentage of
net revenues decreased to 11.3% in 1995 from 13.8% in 1994 due primarily to
the nonrecurring compensation expense recorded in 1994 and larger net
revenues being spread over the fixed costs related to various centralized
functions such as information services, corporate accounting and human
resources.
Costs related to the start up of new UOP and IPD campuses and learning
centers are expensed as incurred and totaled approximately $1.1 million and
$1.0 million in 1995 and 1994, respectively. Interest expense, which is
allocated among all categories of costs and expenses, was $96,000 and
$153,000 in 1995 and 1994, respectively.
The Company's effective tax rate increased to 42.3% in 1995 from 40.8%
in 1994 due primarily to an increase in the federal tax rate from 34% to 35%
as a result of the improved earnings and an increase in the relative impact
of expenses that are nondeductible for tax purposes.
Net income increased to $12.6 million in 1995 from $4.9 million in 1994
due to increased enrollments, increased tuition rates, improved utilization
of fixed instructional and administrative costs, $2.7 million (pretax) of
nonrecurring compensation expense in 1994, improved utilization of selling
and promotional expenses in existing markets and increased interest income
resulting from higher cash levels.
Year Ended August 31, 1994 Compared with Year Ended August 31, 1993 ---------
Net revenues increased by 27.9% to $124.7 million in 1994 from $97.5
million in 1993 due primarily to a 16.1% increase in average student
enrollments from 1993 to 1994, a higher concentration of enrollments at
locations that charge a higher rate per credit hour, and tuition price
increases averaging four to six percent, depending on the geographic area and
program. All UOP campuses, which include their respective learning centers,
and substantially all of the IPD contract sites had increases in net revenues
and average student enrollments from 1993 to 1994. Average student
enrollments increased to 27,469 in 1994 from 23,663 in 1993.
Instruction costs and services increased by 24.5% to $81.3 million in
1994 from $65.3 million in 1993 due primarily to the direct costs necessary
to support the increase in average student enrollments. These costs as a
percentage of net revenues decreased to 65.2% in 1994 from 67.0% in 1993 due
to greater net revenues being spread over the fixed costs related to
centralized student services and, to a lesser degree, due to efficiencies
resulting from improvements to the Company's information systems.
37
Selling and promotional expenses increased by 13.3% to $17.9 million in
1994 from $15.8 million in 1993 due primarily to increased marketing and
advertising at UOP and IPD campuses and learning centers, including $678,000
related to locations opened in new markets during the past two years. These
expenses as a percentage of net revenues decreased to 14.4% in 1994 from
16.2% in 1993 due to the Company's ability to increase enrollments and open
new learning centers in existing markets with a proportionately lower
increase in selling and promotional expenses.
General and administrative expenses increased by 19.4% to $17.2 million
in 1994 from $14.4 million in 1993 due primarily to increases in general and
administrative salaries, including $1.9 million in compensation expense
related to the grant of stock options and a $750,000 accrual of compensation
expense related to the deferred compensation agreement with the Company's
President. These expenses as a percentage of net revenues decreased to 13.8%
in 1994 from 14.7% in 1993 due to larger net revenues being spread over the
fixed costs related to various centralized functions such as information
services, corporate accounting and human resources. In 1993, the Company
recorded a $638,000 writedown related to land held for sale. As a result of
further declines in Northern California real estate values, the Company
recorded an additional $135,000 writedown in 1994. The Company began
disposing of portions of this land in July 1991 and currently is holding the
remaining portion of the land for sale. The Company does not intend to incur
significant costs related to further development prior to sale.
Interest expense, which is allocated among all categories of costs and
expenses, decreased to $153,000 in 1994 from $255,000 in 1993 primarily as a
result of improved cash flow resulting in a reduction of long-term debt and
lower seasonal borrowings on the Company's line of credit.
Costs related to the start up of new UOP and IPD campuses and learning
centers totaled approximately $1.0 million and $742,000 in 1994 and 1993,
respectively. The Company's effective tax rate decreased to 40.8% in 1994
from 43.2% in 1993 due primarily to the relative impact of expenses that are
non-deductible for tax purposes.
Net income increased to $4.9 million in 1994 from $1.1 million in 1993
due to increased enrollments, increased tuition rates (weighted by location),
improved utilization of fixed instructional and administrative costs and
improved utilization of selling and promotional expenses in existing markets.
38
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth selected unaudited quarterly financial
information for each of the Company's last eight quarters. The Company
believes that this information includes all adjustments (including normal
recurring adjustments) necessary for a fair presentation of such quarterly
information when read in conjunction with the consolidated financial
statements included in Item 8 of this Form 10-K. The operating results for
any quarter are not necessarily indicative of the results for any future
period.
Quarter Ended
---------------------------------------------------------------------------------
FY 1995 FY 1994
------------------------------------- -----------------------------------------
Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 28, Nov. 30,
1995 1995 1995 1994 1994 1994 1994 1993
-------- ------- -------- -------- -------- -------- -------- --------
(In thousands, except per share amounts)
In dollars:
Net revenues $45,433 $45,502 $36,029 $36,465 $35,673 $34,278 $26,953 $27,816
-------- ------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Instruction costs and services 28,292 26,188 24,224 23,418 23,575 21,163 18,502 18,073
Selling and promotional 5,406 5,518 5,105 4,987 5,027 4,311 4,468 4,112
General and administrative 4,797 4,856 4,954 3,855 4,179 4,921 4,910 3,184
-------- ------- -------- -------- -------- -------- -------- --------
Total costs and expenses 38,495 36,562 34,283 32,260 32,781 30,395 27,880 25,369
-------- ------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 6,938 8,940 1,746 4,205 2,892 3,883 (927) 2,447
Provision (credit) for
income taxes 2,780 3,892 896 1,661 1,190 1,572 (381) 1,002
-------- ------- -------- -------- -------- -------- -------- --------
Net income (loss) $4,158 $5,048 $850 $2,544 $1,702 $2,311 $(546) $1,445
======== ======= ======== ======== ======== ======== ======== ========
Net income (loss) per share $.19 $.22 $.04 $.17 $.11 $.15 $(.04) $.10
======== ======= ======== ======== ======== ======== ======== ========
As a percentage of net revenues:
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------- ------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Instruction costs and services 62.3 57.6 67.2 64.2 66.1 61.7 68.6 65.0
Selling and promotional 12.0 12.1 14.1 13.7 14.1 12.6 16.6 14.8
General and administrative 10.4 10.7 13.8 10.6 11.7 14.4 18.2 11.4
-------- ------- -------- -------- -------- -------- -------- --------
Total costs and expenses 84.7 80.4 95.1 88.5 91.9 88.7 103.4 91.2
-------- ------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 15.3 19.6 4.9 11.5 8.1 11.3 (3.4) 8.8
Provision (credit) for
income taxes 6.1 8.6 2.5 4.6 3.3 4.6 (1.4) 3.6
-------- ------- -------- -------- -------- -------- -------- --------
Net income (loss) 9.2% 11.0% 2.4% 6.9% 4.8% 6.7% (2.0)% 5.2%
======== ======= ======== ======== ======== ======== ======== ========
Includes $1.9 million in compensation expense related to the grant of
stock options.
Includes a $750,000 accrual of compensation expense related to the
December 1993 deferred compensation agreement with the Company's
President.
The favorable margin realized in the third quarter of 1995 and 1994 is
due primarily to a significant increase in revenues with no significant
increase in the fixed costs related to centralized student services.
The favorable margin did not continue to the same extent in the fourth
quarter of 1995 and 1994 because of the normal increase in instructional
costs and services in preparation for the August peak enrollments. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Seasonality."
39
SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS
The Company experiences seasonality in its results of operations
primarily as a result of changes in the level of student enrollments. While
the Company enrolls students throughout the year, second quarter (December to
February) average enrollments and related revenues generally are lower than
other quarters due to the holiday breaks in December and January. Second
quarter costs and expenses historically increase as a percentage of net
revenues as a result of certain fixed costs not significantly affected by the
seasonal second quarter declines in net revenues.
The Company experiences a seasonal increase in new enrollments in August
of each year when most other colleges and universities begin their fall
semesters. As a result, net revenues in the fourth quarter have historically
been higher than other quarters. In addition, fourth quarter revenues are
supplemented by a significant increase in UOP continuing professional
education students enrolled each summer. In the fourth quarter of 1995,
however, revenues were slightly lower than the third quarter primarily as a
result of enrollment declines in July caused by a higher number of student
graduations and vacation breaks. This decline in enrollments in July was
temporary and enrollments rebounded in August 1995. Instructional costs and
services and selling and promotional expenses generally increase as a
percentage of 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.
There was an increase in net income and net income per share from the
first quarter of 1994 to the first quarter of 1995. Although the Company
does not expect a decrease in net income from the first quarter of 1995 to
the first quarter of 1996, net income per share may be lower due to the
increase in weighted average shares outstanding resulting primarily from the
December 1994 initial public offering. Weighted average shares outstanding
are expected to exceed 22.5 million shares in the first quarter of 1996, as
compared to 15.3 million shares in the first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $39.0 million of working capital at August 31, 1995 as
compared to a working capital deficit of $3.0 million at August 31, 1994.
The increase in working capital is due primarily to the $34.9 million
increase in cash and cash equivalents related to the Company's initial public
offering in December 1994 and to $22.3 million in cash generated from
operations during the year, offset in part by capital expenditures during the
year. At August 31, 1995, the Company had no outstanding borrowings on its
$4.0 million line of credit, which bears interest at prime. The line of
credit is renewable annually and is payable upon its termination in February
1996. The Company expects to renew this line of credit.
On December 6, 1994, the Company completed an initial public offering of
its Class A Common Stock. The Company received total net proceeds, after
deduction of expenses payable by the Company and underwriting discounts, of
approximately $34.9 million. As of August 31, 1995, approximately $16.0
million of the proceeds have been used for normal recurring capital
expenditures, start up costs of new locations and general corporate purposes.
40
The remaining proceeds have been invested in short-term (maturities of 90
days or less) securities backed by the United States government or its
agencies, investment grade commercial paper and similar types of securities.
Net cash flow received from operating activities increased by $15.8
million from 1994 to 1995 due primarily to the $7.7 million increase in net
income from 1994 to 1995, improved collections of accounts receivable and the
timing of various tax payments and payments to suppliers. Capital
expenditures, including additions to educational program production costs,
increased to $11.5 million for 1995 from $6.1 million for 1994 primarily to
support the increase in student enrollments and number of locations. Total
purchases of property and equipment for the year ended August 31, 1996 are
expected to total approximately $12.0 million. Additions to educational
program production costs are not expected to exceed $2.5 million for the year
ended August 31, 1996. Start up costs for 1996 are expected to increase $3.5
million due to planned expansion into new geographic markets.
The Company is currently negotiating the renewal of its lease for its
corporate headquarters located in Phoenix, Arizona. Depending on the outcome
of those negotiations, the Company may consider relocating its corporate
headquarters, including the UOP Phoenix Main Campus, to additional or
alternative leased facilities or may consider the construction of a new
facility. Such a facility is estimated to cost between $20 to $25 million.
The Company does not currently have any material commitments for any capital
expenditures in 1996. The Company currently leases all of its educational
and administrative facilities.
The Company's net receivables as a percent of net revenues decreased to
9.7% in 1995 from 11.4% in 1994 and bad debt expense as a percent of net
revenues decreased to 1.1% in 1995 from 1.5% in 1994. These decreases are
due primarily to an increased focus on accounts receivable collections in
1995.
The DOE require