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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, 1996
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 to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
No shares of the Company's Class B Common Stock, its voting stock, is held by
non-affiliates. The holders of the Company's Class A Common stock are not
entitled to any voting rights. The number of shares outstanding for each of
the registrant's classes of common stock, as of October 10, 1996, is as
follows:
Class A Common Stock, no par 49,489,219 Shares
Class B Common Stock, no par 575,769 Shares
DOCUMENTS INCORPORATED BY REFERENCE
NONE
1
APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-K
INDEX
PAGE
PART I ----
Item 1. Business 3
Item 2. Properties 27
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 29
Item 6. Selected Consolidated Financial Data 30
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 62
PART III
Item 10. Directors and Executive Officers of the Registrant 63
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial
Owners and Management 75
Item 13. Certain Relationships and Related Transactions 76
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 77
SIGNATURES 80
2
PART I
Item 1 -- Business
OVERVIEW
Apollo Group, Inc. ("Apollo" or the "Company"), through its
subsidiaries, the University of Phoenix, Inc. ("UOP"), the Institute for
Professional Development ("IPD") 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 85 campuses and
learning centers in 29 states, Puerto Rico and London, England. The
Company's enrollment has increased to 46,935 at August 31, 1996 from 21,163
at August 31, 1992.
Based on its enrollment of over 33,000 adult students, UOP is currently
the second 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 47 campuses and learning centers in Arizona,
California, Colorado, Florida, Hawaii, Louisiana, Michigan, Nevada, New
Mexico, Utah and Puerto Rico. UOP has developed specialized 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 75% of UOP's students receive some level of tuition
reimbursement from their employers, many of which are Fortune 500 companies.
The Online (TM) campus was established by UOP in 1989 to provide
group-based, faculty-led instruction through computer-mediated communications.
The Online (TM) campus currently serves approximately 2,200 degree-seeking
students. Students can access their Online (TM) classes with a computer and
modem from anywhere in the world, on schedules that meet their individual
needs. Online's (TM) degree programs can be accessed though direct-dial,
local Internet providers or CompuServe(R). The Online (TM) faculty receive
specialized training to enable them to teach effectively in the electronic
learning environment. The same academic quality management standards applied
to campus-based programs, including the assessment of student learning
outcomes, are applied to programs delivered through Online (TM).
IPD provides program development and management services under long-term
contracts that meet the guidelines of the client institutions' respective
regional accrediting associations. IPD provides these services to 18
regionally accredited private colleges and universities at 34 campuses and
learning centers in 20 states and shares in the tuition revenues generated
from these programs. IPD is able to assist these colleges and universities
in expanding and diversifying their programs for working adults. IPD places
a priority on institutions that: (1) are interested in developing or
expanding off-campus degree programs for working adults; (2) recognize that
working adults require a different teaching/learning model than the 18 to 24
year old student; (3) desire to increase enrollments with a limited
3
investment in institutional capital and (4) recognize the unmet
educational needs of the working adult students in their market.
Approximately 12,600 students are currently enrolled in IPD-assisted
programs.
WIU currently offers graduate, undergraduate and certificate degree
programs to approximately 1,200 students and has a total of four campuses and
learning centers 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 addresses are as follows:
- Apollo and IPD -- http://www.apollogrp.com
- UOP -- http://www.uophx.edu
- WIU -- http://www.wintu.edu
The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 1996, 1995 and 1994 relate to the
fiscal years ended August 31, 1996, 1995 and 1994, respectively.
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements relating to future plans, expectations, events or
performances involve risks and uncertainties and a number of factors could
affect the validity of such forward-looking statements, including those set
forth under "Risk Factors" in the Company's Prospectus dated January 18,
1996.
MARKET
The United States education market may be divided into three distinct
segments: kindergarten through twelfth grade schools ("K-12"), 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 1994 (the most recent historical year
reported), adults over 24 years of age comprised approximately 6.3 million,
or 45%, of the 14.1 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 2001 the number of adult students over the age of 24 will increase to
6.6 million, or 42%, of the 15.7 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)
4
- Degree programs offered by regionally accredited institutions that
can be completed in a reasonable amount of time
- Programs that provide knowledge and skills with immediate practical
value in the workplace
- Education provided by academically qualified faculty with current
practical experience in fields related to the subjects they instruct
- Administrative services designed to accommodate the full-time
working adult's schedule
- Recognition of adult students as critical consumers of educational
programs and services
- A learning environment characterized by a low student-to-faculty
ratio
- Learning resources available electronically to all students
regardless of geographical location
The Company also believes that the increasing demand from and the unique
requirements of the adult working population represent a significant market
opportunity to regionally accredited higher education institutions that can
offer programs that meet these unique needs.
Most regionally accredited colleges and universities are focused on
serving the 18 to 24 year old student market. This focus has resulted in a
capital-intensive teaching/learning model that may be characterized by: (1) a
high percentage of full-time tenured faculty with doctoral degrees;
(2) fully-configured library facilities and related full-time staff;
(3) dormitories, student unions and other significant plant assets to support
the needs of younger students and (4) an emphasis on research and the related
staff and facilities. In addition, the majority of accredited colleges and
universities continue to provide the bulk of their educational programming
from September to mid-December and from mid-January to May. As a result,
most full-time faculty members only teach during that limited period of time.
While this structure serves the needs of the full-time 18 to 24 year old
student, it limits the educational opportunity for working adults who must
delay their education for up to five months during these spring, summer and
winter breaks. In addition, this structure generally requires working adults
to attend one course three times a week, commute to a central site, take work
time to complete administrative requirements and, in undergraduate programs,
participate passively in an almost exclusively lecture-based learning format
primarily focused on a theoretical presentation of the subject matter. For
the majority of working adults, earning an undergraduate degree in this
manner would take seven to ten years.
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 its primary customers. Key elements of the
Company's business strategy include the following:
5
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 Educational 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 and business and information technology ("IT")
training programs. The Company has also applied with NCA for approval of a
professional doctoral degree program. The Company currently has a full-time
staff of approximately 30 persons involved in its centralized curriculum
development process.
The Company is also exploring other educational areas, such as K-12 and
adult remedial education, where it can leverage its educational expertise
and/or delivery systems in a cost-effective manner.
Expand Access to Programs ---------------------------------------------------
The Company plans to expand its distance education programs and
services. Enrollments in distance education programs, including Online (TM),
have increased from 1,252 in 1991 to 3,691 in 1996. The Company also plans
to enhance its distance education delivery systems as new technologies become
cost-effective.
International Expansion -----------------------------------------------------
The Company is conducting ongoing market research in various foreign
countries. The Company will continue to monitor and assess the feasibility
of expanding its educational programs internationally.
The timing related to the establishment of new locations and the
expansion of programs may vary depending on regulatory requirements and
market conditions.
6
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 15 years of professional
experience in business, industry, government and the professions. In this
way, faculty members are able to share their professional knowledge and
skills with the students.
The Company's teaching/learning model has the following major
characteristics:
Curriculum The curriculum provides for the achievement of
specific educational outcomes that are based on the
input from faculty, students and student employers.
The curriculum is designed to integrate academic
theory and professional practice and the application
to the workplace. The standardized curriculum for
each degree program is also designed to provide
students with specified levels of knowledge and
skills regardless of delivery method or location.
Faculty Faculty applicants must possess an earned master's
or doctoral degree, and have a minimum of five years
recent professional experience in a field related to
the subject matter in which they seek to instruct.
To help promote quality delivery of the curriculum,
UOP faculty members are required to: (1) complete an
initial assessment conducted by staff and faculty;
(2) receive training in grading, facilitation of the
teaching/learning model and oversight of study group
activities; (3) serve an internship with an
experienced faculty mentor and (4) receive ongoing
performance evaluations by students, peer faculty
and staff. The results of these evaluations are
used to establish developmental plans to improve
individual faculty performance and to determine
continued eligibility of faculty members to provide
instruction.
Interactive Learning Courses are designed to combine individual and group
activity with interaction between and among students
and the instructor. The curriculum requires a high
level of student participation for purposes of
increasing the student's ability to work as part of
a team.
Learning Resources Students and faculty members are provided with
electronic and other learning resources for their
information needs. During 1996, the Company
substantially expanded these services including the
7
addition of research tools available on the
Internet. These extensive electronic resources
minimize the Company's need for capital-intensive
library facilities and holdings.
Sequential Enrollment Students enroll in and complete courses
sequentially, rather than concurrently, thereby
allowing full-time working adults to focus their
attention and resources on one subject at a time,
thus balancing learning with ongoing personal and
professional responsibilities.
Academic Quality The Company has developed and operationalized an
Academic Quality Management System ("AQMS") that is
designed to maintain and improve the quality of
programs and academic and student services
regardless of the delivery method or location.
Included in the AQMS is the Adult Learning Outcomes
Assessment which seeks to measure student growth in
both the cognitive (subject matter) and affective
(educational, personal and professional values)
domains.
STRUCTURAL COMPONENTS OF TEACHING/LEARNING MODEL
Although adults over 24 currently comprise approximately 45% of all
higher education enrollments in the United States, the mission of most
accredited colleges and universities is to serve 18 to 24 year old students
and conduct research. UOP and IPD client institutions acknowledge the
differences in educational needs between older and younger students and
provide programs and services that allow working adult students to earn their
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.
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
8
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 72% have been employed for nine years
or more. This minimizes the need for
capital-intensive facilities and services (e.g.,
dormitories, student unions, food services, personal
and employment counseling, health care, sports and
entertainment).
Employer Support Approximately 75% 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. However, WIU provides
educational programs in a semester-based format and does not focus
exclusively on working adult students.
PROGRAMS AND SERVICES
UOP Programs ----------------------------------------------------------------
UOP currently offers the following degree programs and related areas of
specialization at one or more campuses and learning centers or through its
distance education delivery systems:
DEGREE PROGRAMS
- ---------------
Associate of Arts in Business
Bachelor of Arts in Management
Bachelor of Science in Business
Bachelor of Science in Nursing
Master of Arts in Education
Master of Arts in Organizational Management
Master of Business Administration
Master of Counseling
Master of Nursing
Master of Science in Computer Information Systems
9
AREAS OF SPECIALIZATION AVAILABLE IN CERTAIN DEGREE PROGRAMS
- ------------------------------------------------------------
Undergraduate BUSINESS
Accounting
Administration
Environmental Management
Finance
Industrial Relations
Marketing
Operations Management
COMPUTER INFORMATION SYSTEMS
Information Systems
Technical Management
Graduate BUSINESS
Finance
Global Management
Marketing
Organizational Management
COMPUTER INFORMATION SYSTEMS
Technology Management
EDUCATION
Administration and Supervision
Bilingual-Bicultural
Curriculum
Diverse Learner
Educational Counseling
Elementary Education
English as a Second Language
Professional Development for Educators
Secondary Methodology
Special Education
NURSING
Education
Management
Women's Health Nurse Practitioner
COUNSELING
Community Counseling
Marriage and Family Therapy
Mental Health
UOP also offers over 28 certificate programs in the areas of business,
technology, nursing, continuing education for teachers, custom training and
the environment.
10
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 an assessment
by faculty members (according to the guidelines of the Council for Adult and
Experiential Learning ("CAEL")) for the potential award of credit. The
average number of credits awarded to UOP undergraduate students who utilized
the process between 1993 and 1996 was approximately 10 credits of the 120
required to graduate. CAEL reports that over 1,300 regionally accredited
colleges and universities currently provide for the assessment mechanism of
college level learning gained through experience for the award of credit.
IPD Services ----------------------------------------------------------------
IPD offers services to its client institutions including: (1) 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, the IPD client institutions and UOP formed the Consortium for the
Advancement of Adult Higher Education ("CAAHE"). CAAHE meets semiannually to
address issues such as the 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 1
Associate of Science in Business 4
Bachelor of Arts in Business Administration 2
Bachelor of Business Administration 7
Bachelor of Science in Business Administration 4
Bachelor of Science in Human Resources Management 1
Bachelor of Science in Management 7
Bachelor of Science in Nursing 1
Bachelor of Science in Organizational Leadership 1
Master of Business Administration 9
Master of Science in Management 5
Master of Science in Health Services Administration 1
11
The IPD-assisted programs also include a limited number of general
education courses, certificate programs and areas of specialization.
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
- - Information Services
- - Information Systems Engineering
WIU also offers a limited number of business-related certificate
programs.
12
Faculty ---------------------------------------------------------------------
UOP's faculty is comprised of approximately 3,400 working professionals
with earned master's or doctoral degrees and an average of 15 years of
experience in business, industry, government or the professions. To help
promote quality delivery of the curriculum, UOP faculty members are required
to: (1) complete an initial assessment conducted by staff and faculty;
(2) receive training in grading, facilitation of the teaching/learning model
and oversight of study group activities and (3) 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 120 working professionals.
WIU's practitioner faculty possess earned master's or doctoral degrees and
participate in a selection and training process that is similar to that at
UOP.
Academic Accountability -----------------------------------------------------
UOP is one of the first regionally accredited universities in the nation
to create and utilize an institution-wide system for the assessment of the
educational outcomes of its students. The information generated is employed
by UOP to improve the quality of the curriculum, instruction and the
Company's teaching/learning model. UOP's undergraduate and graduate students
complete a comprehensive cognitive (core degree subject matter) and affective
(educational, personal and professional values) assessment prior to and upon
the completion of their core degree requirements.
Students at UOP and IPD client institutions evaluate both academic and
administrative quality. This evaluation begins with a registration survey
and continues with the evaluation of the curriculum, faculty, delivery
method, instruction and administrative services upon the conclusion of each
course. The evaluation also includes a survey of a random selection of
graduates 2-3 years following their graduation. The results provide an
ongoing basis for improving the teaching/learning model, selection of
educational programs and instructional quality. The Company plans to
implement similar quality control systems at WIU on an ongoing basis.
Admissions Standards --------------------------------------------------------
To gain admission to the undergraduate programs of UOP, WIU and the IPD
client institutions, students generally must have a high school diploma or
General Equivalency Diploma ("G.E.D.") and satisfy certain minimum grade
point average, employment and age requirements. Additional requirements may
13
apply to individual programs. Students in undergraduate programs may
petition to be admitted on provisional status if they do not meet certain
admission requirements.
To gain admission to the graduate programs of UOP, WIU and the IPD
client institutions, students generally must have an undergraduate degree
from a regionally accredited college or university and satisfy minimum grade
point average, work experience and employment requirements. Additional
requirements may apply to individual programs. Students in graduate programs
may petition to be admitted on provisional status if they do not meet certain
admission requirements.
DISTANCE EDUCATION COMPONENTS
At August 31, 1996, there were approximately 3,700 students utilizing
the Company's distance education delivery systems, approximately 60% of whom
are enrolled in Online (TM). The Company's distance education components
consist primarily of the following:
Online Computer Conferencing ------------------------------------------------
The Online (TM) campus was established by UOP in 1989 to provide group-
based, faculty-led instruction through computer-mediated communications.
Students can access their online classes with a computer and modem from
anywhere in the world, on schedules that meet their individual needs. Online
(TM) students work together in small groups of 8 to 13, to engage in class
discussion and study group activities that are focused on the same learning
outcomes and objectives required in UOP's classroom degree programs. This
enables the Online (TM) students to enjoy the benefits of a study group,
where they can share their regional and cultural differences with each other
in the context of their coursework. Since all communication is asynchronous,
students are not required to participate at the same time. Online's (TM)
degree programs can be accessed though direct-dial, local Internet providers
or CompuServe(R).
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. These
directed study programs utilize the same courses, faculty and resources
available at UOP campuses. Course assignments are completed in a structured
environment that allows flexibility of schedules. Communication with the
faculty member is by telephone, e-mail, fax or mail.
14
Distance education is currently subject to certain regulatory
constraints. See "Business -- Federal Financial Aid Programs -- Restrictions
on Distance Education Programs" and "Business -- State Authorization."
ACQUISITION STRATEGY
The Company periodically evaluates opportunities to acquire businesses
and facilities. In evaluating such opportunities, management considers,
among other factors, location, demographics, price, the availability of
financing on acceptable terms, competitive factors and the opportunity to
improve operating performance through the implementation of the Company's
operating strategies. The Company has no current commitments with regard to
potential acquisitions.
CUSTOMERS
The Company's customers consist of working adult students, colleges and
universities, governmental agencies and employers. Following is a breakdown
of the Company's students by the level of program they are seeking, at August
31:
1996 1995
------ ------
Master's 30.6% 30.5%
Bachelor's 61.1% 60.2%
Associate 4.2% 4.0%
Certificate, corporate training and
continuing professional education 4.1% 5.3%
------ ------
100.0% 100.0%
====== ======
Based on recent student surveys, the average age of UOP students is in
the mid-thirties, approximately 52% are women and 48% are men, and the
average annual household income is $53,000. Approximately 72% of UOP
students have been employed on a full-time basis for nine years or more. The
Company believes that the demographics of students enrolled in IPD-assisted
programs are similar to that of UOP. The approximate age distribution of
current UOP students is as follows:
Age Percentage of Students
------------------------ -----------------------
25 and under 12%
26 to 33 35%
34 to 45 42%
46 and over 11%
-------
100%
=======
15
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 start-up capital, the curriculum development expertise and the
ongoing management in support of the client institutions' provision of
quality programs for working adult students.
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 75% 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 62% receive at least
one-half tuition reimbursement and approximately 28% receive full tuition
reimbursement.
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. UOP has also formed educational partnerships with various
companies, including AT&T and Ingram Micro, to provide programs specifically
designed for their employees.
MARKETING
To generate interest among potential UOP, WIU and IPD client institution
students, the Company engages in a broad range of activities to inform
potential students about the Company's teaching/learning model and the
programs offered. These activities include print and broadcast advertising,
advertising on services such as CompuServe (R), Prodigy (R) and the Microsoft
Network (R), direct mail and information meetings at targeted organizations
(CompuServe (R) is a registered trademark of CompuServe Incorporated,
Columbus, Ohio, Prodigy (R) is a registered trademark of Trintex, White
Plains, New York, and Microsoft Network (R) 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 recently implemented 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.apollogrp.com) 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 (R), CompuServe (R),
America OnLine (R) (America OnLine (R) is a registered trademark of America
Online, Inc., Vienna, Virginia) and the Microsoft Network (R).
16
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 300 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. In addition, many colleges and
universities have announced various distance-education initiatives.
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.
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.
17
EMPLOYEES
At September 30, 1996, the Company had the following numbers of
employees:
Full-Time Part-Time Faculty Total
--------- --------- --------- ---------
Apollo 223 4 -- 227
UOP 1,185 89 3,418 4,692
IPD 200 15 -- 215
WIU 38 25 122 185
------ ------ ------ ------
Total 1,646 133 3,540 5,319
====== ====== ====== ======
______________
Consists primarily of employees in information systems, corporate
accounting, financial aid, human resources and Apollo Press.
Consists primarily of part-time professional faculty contracted on a
course-by-course basis.
Faculty teaching IPD-assisted programs are employed by IPD client
institutions.
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,
18
WIU and one or more of the IPD client institutions. The failure to maintain
or renew any required regulatory approvals, accreditation or state
authorizations by UOP or certain of the IPD client institutions could have a
material adverse effect on the Company.
ACCREDITATION
UOP, WIU 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 to begin in October 1996. IPD-assisted programs offered by the IPD
client institutions are evaluated by the client institutions' respective
regional accrediting associations either as part of a reaffirmation or
focused evaluation visits. Current IPD client institutions are accredited by
NCA, Middle States, New England or Southern regional accrediting
associations. 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 is accredited by NCA and is scheduled to have its next reaffirmation
visit in the spring of 1998.
All accrediting agencies recognized by the DOE are required to include
certain aspects of Title IV Program compliance in their evaluations of
accredited institutions. As a result, all regionally accredited
institutions, including UOP, WIU and IPD client institutions, will be subject
to a Title IV Program compliance review as part of accreditation visits.
Regional accreditation is accepted nationally as the basis for the
recognition of earned credit and degrees for academic purposes, employment,
professional licensure and, in some states, for authorization to operate as a
degree-granting institution. Under the terms of a reciprocity agreement
among the six regional accrediting associations, representatives of each
region in which a regionally accredited institution operates participate in
the evaluations for reaffirmation of accreditation. The achievement of UOP's
and WIU's missions require them to employ academically qualified practitioner
faculty that are able to integrate academic theory with current workplace
practice. Because of UOP's and WIU's choice to utilize all practitioner
faculty, they have not sought business school program accreditation of the
type found at many institutions whose primary missions are to serve the 18 to
24 year old student and to conduct research.
UOP's Bachelor of Science in Nursing ("BSN") program received program
accreditation from the National League for Nursing ("NLN") in 1989. The
accreditation was reaffirmed in October 1995 and the next NLN reaffirmation
is scheduled for 2003. The Company believes that the BSN program
accreditation is in good standing.
19
UOP's Community Counseling program (Master of Counseling degree)
received initial accreditation from the Council for Accreditation of
Counseling and Related Educational Programs in 1995, effective through 2002.
The address and phone number for the accrediting bodies referred to
herein are as follows:
North Central Association of Colleges and Schools
Commission on Institutions of Higher Education
30 North LaSalle Street, Suite 2400
Chicago, Illinois 60602-2504
(312) 263-0456
National League for Nursing
350 Hudson Street
New York, New York 10014
(212) 989-9393
American Counseling Association
Council for Accreditation of Counseling and
Related Educational Programs
5999 Stevenson Avenue
Alexandria, VA 22304
(703) 823-9800
FEDERAL FINANCIAL AID PROGRAMS
Most UOP, WIU and IPD client institution students participate in
Title IV Programs. UOP and WIU derive approximately 44% and 8% of their net
revenues from students who participate in Title IV Programs, respectively.
The IPD percentages are estimated to be similar to those at UOP. The
respective IPD client institutions administer their own Title IV programs.
The Company's students are eligible for Title IV financial aid because:
(1) UOP, WIU and IPD client institutions are accredited by an accrediting
association recognized by the DOE; (2) the DOE has certified UOP's, WIU's and
IPD client institutions' Title IV Program eligibility and (3) UOP, WIU and
IPD client institutions have applicable state authorization to operate and
their operating sites have been approved by the DOE.
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:
Limits on Title IV Program Funds --------------------------------------------
The Regulations define the types of educational programs offered by an
institution that qualify for Title IV Program funds. For students enrolled
in qualified programs, the Regulations also place limits on the amount of
Title IV Program funds that they are eligible to receive in any one academic
year.
For undergraduate programs, an academic year must consist of at least 30
weeks of instruction or a minimum of 24 credit hours. Because the
Regulations define a week of instruction as the equivalent of 12 hours of
regularly scheduled instruction, examinations or preparation for
examinations, an academic year would require a minimum of 360 hours (30 weeks
20
times 12 hours per week). Most of the Company's programs meet this 360 hour
minimum and, therefore, qualify for Title IV Program funds. The programs
that do not qualify for Title IV Program funds consist primarily of
certificate, corporate training and continuing professional education
programs. These programs are paid for directly by the students or their
employers.
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. Effective July 1, 1995, an institution is required to submit
an irrevocable letter of credit to the DOE in an amount equal to at least 25%
of the total dollar amount of refunds paid by the institution in its most
recent fiscal year. 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 several factors of financial responsibility including 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, 1996, UOP's acid
test ratio was 1.19 to 1 and WIU's acid test ratio was 1.50 to 1.
The DOE announced in September 1996 that it intends to issue new
regulations by December 1996 with respect to institutional oversight. The
rules, if adopted, will be effective July 1, 1997. The DOE is proposing a
new system of evaluating each institution's audited financial statements for
determining financial stability. Rather than using the current limited ratio
analysis, including the acid test ratio, the DOE is proposing five separate
elements covering liquidity, viability, profitability, ability to borrow and
capital resources. Although it is uncertain whether the new system will be
adopted in its present form, it does not appear at this time that the Company
will be significantly impacted by the proposal.
Additionally, the proposed Regulations contemplate special rules for an
institution that undergoes a change in ownership. The proposal would require
a personal financial guarantee or a letter of credit to be submitted by the
new owners until a financial audit is completed that demonstrates the
institution's compliance with the DOE's financial responsibility
requirements. The DOE is also considering requiring owners to post personal
financial guarantees when institutions add additional locations. These
guarantees would remain in place until the annual audits are submitted
showing that the institution demonstrates financial responsibility under its
expanded operations. It is uncertain at this time what effect these rules,
if adopted in any form, will have on the Company's operations.
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
21
by these requirements include the business facilities of client companies,
military bases and conference facilities used by UOP and WIU. The Company
believes that it has obtained approval for all UOP and WIU locations required
to be approved by the Regulations. 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 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
WIU's percentage was 51% and 8%, respectively, at August 31, 1996. WIU's
rate was low in 1996 due to the loss of Title IV eligibility from September
1995 to February 1996 resulting from the change in ownership. 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 1993, the most recent DOE cohort default rate reporting period,
the national cohort default rate average for all higher education
institutions was 11.6%. UOP and WIU students' cohort default rates for the
Federal Family Education Loans for fiscal 1993 as reported by the DOE were
5.0% and 4.2%, respectively, and IPD client institution students' cohort
default rates averaged 5.9% 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 and 1996.
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.
22
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. UOP's and WIU's eligibility to
participate in Title IV Programs expires in 1999 and 1998, respectively. If
the DOE does not renew UOP's eligibility, it would have a material adverse
effect on the Company.
Restrictions on Distance Education Programs ---------------------------------
The Regulations specify that an institution is not eligible to
participate in Title IV Programs funding if 50% or more of its courses are
correspondence courses, or if 50% or more of its regular students are
enrolled in the institution's correspondence courses. Although the Company
does not offer correspondence courses, the Regulations currently consider
most distance education courses to be correspondence courses if the number of
distance education courses exceeds 50% of the sum of courses offered in
campus-based delivery systems and courses offered through distance education.
The Company does not plan to exceed this 50% level and believes that this
restriction will have no significant impact on its business strategy.
Direct Lending Programs -----------------------------------------------------
The DOE instituted a new direct lending program several years ago and
various institutions are participating in the program. The direct lending
program eliminates third-party lending institutions and guarantee agencies
from the loan disbursement process. The goal of the DOE is to streamline the
financial aid lending process through this program, but there is uncertainty
as to when this goal will be fully attained. Recently, certain members of
Congress have proposed to limit the expansion of 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
23
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. 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.
STATE AUTHORIZATION
UOP currently is authorized to operate in 12 states and Puerto Rico.
UOP has held these authorizations for periods ranging from one month to
eighteen years. UOP's NCA accreditation is accepted as evidence of
compliance with applicable state regulations in Arizona, Colorado, Louisiana,
Michigan, 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 the second quarter
of 1997. All regionally accredited institutions, including UOP, are required
to be evaluated separately for authorization to operate in Puerto Rico. UOP
was granted its most recent authorization in Puerto Rico in December 1995 for
a period of five years. UOP received a provisional license to operate in
Florida in October 1995 and expects to file an application for full licensure
in the second quarter of 1997 following the Florida State Board of
Independent Colleges and Universities' site inspection. There is no
assurance that UOP will receive full licensure in the State of Florida. UOP
is authorized to operate in Washington and Oregon and is seeking approval
from NCA to open campuses in these states. 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
telecommunicated learning, UOP may be required to obtain authorization for,
or restrict access to, its programs available through Online (TM) in those
states.
24
EMPLOYER TUITION REIMBURSEMENT
Many of the Company's students receive some form of tuition
reimbursement from their employers. In certain situations, as defined by the
Internal Revenue Code (the "Code"), this tuition assistance qualifies as a
deductible business expense when adequately documented by the employer and
employee. The Code also provides a safe-harbor provision for an exclusion
from wages of up to $5,250 of tuition reimbursement per year per student
under the Educational Assistance Program ("EAP") provision. Although the EAP
provision of the Code expired in December 1994, in August 1996 it was
extended retroactively from January 1, 1995 through May 31, 1997. The
"safe-harbor" provision does not apply to graduate classes beginning after
June 30, 1996. During 1996, the percentage of students with access to
employer tuition reimbursement declined to 75% from 80% in the prior year,
part of which is attributable to the delay in extending the EAP provision.
The Company is unable to determine what effect, if any, the exemption for
graduate classes under the "safe harbor" will have in the future. Employers
or employees may still continue to deduct such tuition assistance where it
qualifies as a deductible business expense and is adequately documented.
LOCATIONS
UOP currently has campuses and learning centers located throughout 10
states and Puerto Rico. Following is a current list of UOP main campuses and
learning centers, the year the campus was first opened and enrollments as of
August 31, 1996:
Fiscal Enroll-
Year ment at
UOP Main Campuses and Respective Learning Centers Opened 8/31/96
- -----------------------------------------------------------------------------
ARIZONA: Phoenix Campus 1978 5,151
Mesa
Northwest Phoenix
Scottsdale
Tucson Campus 1983 1,947
Fort Huachuca
CALIFORNIA: Orange County (Fountain Valley Campus) 1981 5,749
Diamond Bar
Edwards Air Force Base
Lawndale/South Bay
Van Nuys
Pasadena
Ontario
Gardena*
Ventura*
La Mirada*
Woodland Hills*
San Jose Campus 1980 3,771
San Francisco
Pleasanton/San Ramon
Fresno
Walnut Creek*
San Diego Campus 1989 1,902
Vista
25
Fiscal Enroll-
Year ment at
UOP Main Campuses and Respective Learning Centers Opened 8/31/96
- -----------------------------------------------------------------------------
Chula Vista*
Sacramento Campus 1993 1,044
Fairfield*
COLORADO: Denver Campus 1982 3,309
Aurora
Colorado Springs
Northglenn
FLORIDA: Maitland Campus* 1996 48
HAWAII: Honolulu Campus 1993 574
LOUISIANA: New Orleans* 1996 214
MICHIGAN: Detroit* 1996 610
NEVADA: Las Vegas Campus 1994 646
Nellis Air Force Base
NEW MEXICO: Albuquerque Campus 1985 1,693
Kirtland Air Force Base
Santa Fe
Santa Teresa/Las Cruces
UTAH: Salt Lake City Campus 1984 1,745
Ogden
Provo*/Orem
PUERTO RICO: Guaynabo Campus 1980 1,002
DISTANCE EDUCATION: Online (TM), San Francisco, CA 1989 2,179
Center for Distance Education, 1989 1,512
Phoenix, AZ
------
TOTAL UOP ENROLLMENT AT AUGUST 31, 1996: 33,096
======
______________
Programs are offered throughout the United States and internationally.
Programs are offered in various states throughout the United States.
* Opened in 1996.
During 1996, IPD increased the number of institutional contracts to 18
at August 31, 1996 from 15 at August 31, 1995. IPD-assisted programs are
currently offered at 34 campuses and learning centers (29 at August 31, 1995)
in Connecticut, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New York, North
Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia and Wisconsin.
WIU currently has four campuses and learning centers located in Phoenix,
Fort Huachuca and Douglas, Arizona and London, England.
26
Item 2 -- Properties
The Company leases all of its administrative and educational facilities.
In some cases, classes are held in the facilities of the students' employers
at no charge to the Company. Leases generally range from five to seven
years; however, the Company attempts to secure longer leases if it is
advantageous to do so. The Company also leases space from time-to-time on a
short-term basis in order to provide specific courses or programs. The table
below sets forth certain information as of August 31, 1996, with respect to
properties leased by the Company in excess of 10,000 square feet:
LOCATION (CITY/STATE) SQUARE FEET
---------------------- -------------
Phoenix, AZ 137,259
Tucson, AZ 49,469
Phoenix, AZ 38,086
San Jose, CA 37,876
Fountain Valley, CA 34,545
San Diego, CA 33,097
Englewood, CO 32,000
Marietta, GA 31,274
San Francisco, CA 31,146
Murray, UT 30,000
Mesa, AZ 23,914
Albuquerque, NM 23,400
Gardena, CA 23,077
Overland Park, KS 21,210
Sacramento, CA 20,813
San Francisco, CA 20,324
Colorado Springs, CO 20,138
Pleasanton, CA 18,560
Van Nuys, CA 18,467
Costa Mesa, CA 18,397
Woodland Hills, CA 17,038
Aurora, CO 16,807
Guaynabo, Puerto Rico 16,000
Walnut Creek, CA 15,445
Diamond Bar, CA 15,280
Ontario, CA 14,899
Lawndale, CA 14,041
Southfield, MI 13,467
Lawrenceville, GA 13,320
Northglenn, CO 13,109
Diamond Bar, CA 12,979
Quincy, MA 12,863
Charlotte, NC 11,502
Ogden, UT 11,265
Santa Teresa, NM 10,910
Crestview Hills, KY 10,303
Phoenix, AZ 10,066
27
The lease on the Company's corporate headquarters, which includes the
UOP Phoenix Main Campus, expires on August 31, 2001. The Company acquired
13 acres of land in December 1995 in the Phoenix area for possible relocation
of its corporate headquarters and/or the UOP Phoenix Main Campus at the
expiration of the lease term.
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.
28
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. Prior to that time, 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.
High Low
------ ------
Fiscal 1995
---------------------
Second quarter $ 5.03 $ 2.45
Third quarter 8.48 4.28
Fourth quarter 10.22 7.19
Fiscal 1996
---------------------
First quarter 13.67 8.89
Second quarter 19.67 13.33
Third quarter 32.33 16.92
Fourth quarter 33.38 23.13
The holders of the Company's Class A Common Stock are not entitled to
any voting rights.
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, 1996, there were approximately 139 and 7 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 11,000 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.
29
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, 1996 and the Consolidated Balance Sheet as of
August 31, 1996 and 1995, and the independent auditors' report thereon are
included in Item 8 of this Form 10-K.
Year Ended August 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Income Statement Data:
Net revenues $214,275 $163,429 $124,720 $ 97,545 $ 81,865
-------- -------- -------- -------- --------
Costs and expenses:
Instruction costs and services 130,039 102,122 81,313 65,319 54,296
Selling and promotional 27,896 21,016 17,918 15,812 14,442
General and administrative 21,343 18,462 17,194 14,402 12,630
-------- -------- -------- -------- --------
Total costs and expenses 179,278 141,600 116,425 95,533 81,368
-------- -------- -------- -------- --------
Income before income taxes 34,997 21,829 8,295 2,012 497
Less provision for income taxes 13,605 9,229 3,383 869 240
-------- -------- -------- -------- --------
Income before cumulative effect
of change in accounting principle 21,392 12,600 4,912 1,143 257
Change in accounting principle 389
-------- -------- -------- -------- --------
Net income $ 21,392 $ 12,600 $ 4,912 $ 1,143 $ 646
======== ======== ======== ======== ========
Net income per share $ .42 $ .27 $ .14 $ .03 $ .02
Weighted average shares outstanding 51,194 46,090 34,383 34,056 33,402
_______________
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 and $837,000 in 1993 and 1992,
respectively.
The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," effective September 1, 1991.
30
August 31,
---------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance Sheet Data:
Cash, cash equivalents and
restricted cash $ 63,267 $ 62,601 $ 12,816 $ 4,839 $ 1,391
Short-term investments 13,273
-------- -------- -------- -------- --------
Total cash and investments $ 76,540 $ 62,601 $ 12,816 $ 4,839 $ 1,391
======== ======== ======== ======== ========
Total assets $137,850 $102,132 $ 43,638 $ 28,909 $ 22,369
======== ======== ======== ======== ========
Current liabilities $ 54,804 $ 45,065 $ 34,890 $ 27,086 $ 20,819
Long-term liabilities 2,432 1,715 1,347 1,203 2,154
Shareholders' equity (deficit) 80,614 55,352 7,401 620 (604)
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $137,850 $102,132 $ 43,638 $ 28,909 $ 22,369
======== ======== ======== ======== ========
Operating Statistics:
Enrollments at end of period 46,935 36,848 30,236 24,987 21,163
Number of locations at end
of period 85 68 60 51 42
_______________
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 42,377, 34,021, 27,469, 23,663 and 20,174 for
the years ended 1996, 1995, 1994, 1993 and 1992, respectively. Average
enrollments for 1992 include approximately 200 AEC students.
Includes UOP and WIU campuses and learning centers and IPD contract
sites.
The Company did not pay any cash dividends on its Common Stock during
any of the periods set forth in the table above.
31
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
relating to future plans, expectations, events or performances that involve
risks and uncertainties. The Company's actual results of operations could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including those set forth under "Risk
Factors" in the Company's Prospectus dated January 18, 1996. The following
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included in this Annual Report on Form 10-K.
BACKGROUND AND OVERVIEW
The Company's revenues, net of student discounts, have increased to
$214.3 million in 1996 from $81.9 million in 1992. Average annual student
enrollments have increased to 42,377 students in 1996 from 20,174 in 1992.
Net income has increased to $21.4 million in 1996 from $646,000 in 1992. At
August 31, 1996, 46,935 students were enrolled in UOP, WIU and IPD-assisted
programs at IPD client institutions.
From September 1991 through August 1996, UOP opened 26 campuses and
learning centers and IPD established operations at 13 campuses and learning
centers with its client institutions. Historically, start-up costs for new
UOP campuses in new markets have averaged $200,000 to $400,000 per site over
a 15-18 month period, at which time the enrollments at these new campuses
averaged 200 to 300 students. However, due to increased demand in Florida,
Michigan and Louisiana, the Company has stepped-up its marketing effort in
these new markets. As a result, the start-up costs for these three campuses
(opened in 1996) are expected to average approximately $900,000 per site over
an 18 month period at which time enrollments are expected to average over 600
students per campus. Start-up costs for campuses in new markets are expected
to range from $400,000 to $1.5 million depending on the individual market's
demand. Costs for establishing a learning center in an existing market are
minimal. Start-up costs for IPD contract sites have averaged from $400,000
to $500,000 per site over a 18-24 month period, and consist primarily of
administrative salaries, marketing and advertising. Start-up
costs are expensed as incurred.
Approximately 90.9% of the Company's net revenues in 1996 consist of
tuition revenues from UOP and WIU students and IPD's contractual share of
tuition revenues from students enrolled in IPD-assisted programs at IPD
client institutions. UOP tuition revenues currently represent approximately
84.8% of consolidated tuition revenues. The Company's net revenues also
include sales of textbooks, computers and other education-related products,
application fees, other student fees, interest 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.
32
Instruction costs and services at UOP and WIU 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 and WIU faculty
members are contracted with and paid for one course offering at a time. All
classroom facilities are leased or, in some cases, are provided by the
students' employers at no charge to the Company. Instruction costs and
services at IPD consist primarily of program administration, student services
and classroom lease expense. Most of the other instruction costs for
IPD-assisted programs, including faculty, financial aid processing and other
administrative salaries, are the responsibility of the IPD client
institutions.
Selling and promotional costs consist primarily of advertising,
marketing salaries and other costs related to the selling and promotional
functions. These costs are expensed as incurred. General and administrative
costs consist primarily of administrative salaries, occupancy costs,
depreciation and amortization and other related costs for departments such as
executive management, information systems, corporate accounting, human
resources and other departments that do not provide direct services to the
Company's students. To the extent possible, the Company centralizes these
services to avoid duplication of effort.
In September 1995, the Company, through WIU, acquired certain assets of
Western International University ("Western"), a private non-profit
educational institution. The original acquisition price of $2.1 million,
including $237,000 paid in cash at or prior to closing, was adjusted to $3.0
million due to an increase in the estimated liability to the DOE related to
Western's processing of Title IV financial aid and other liabilities assumed
in the acquisition whose values were subject to adjustment subsequent to the
date of acquisition. The excess of cost over the value of tangible assets
acquired of $2.6 million is being amortized over 15 years.
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 and $837,000 in 1993 and 1992, respectively.
In 1992, the Company recorded a $389,000 gain representing the
cumulative effect of the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
33
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,
---------------------------
1996 1995 1994
------- ------- -------
Net revenues 100.0% 100.0% 100.0%
------- ------- -------
Costs and expenses:
Instruction costs and services 60.7 62.5 65.2
Selling and promotional 13.0 12.9 14.4
General and administrative 10.0 11.3 13.8
------- ------- -------
Total costs and expenses 83.7 86.7 93.4
------- ------- -------
Income before income taxes 16.3 13.3 6.6
Less provision for income taxes 6.3 5.6 2.7
------- ------- -------
Net income 10.0% 7.7% 3.9%
======= ======= =======
Year Ended August 31, 1996 Compared with the Year Ended August 31, 1995 -----
Net revenues increased by 31.1% to $214.3 million in 1996 from $163.4
million in 1995 due primarily to a 24.6% increase in average student
enrollments from 1995 to 1996 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 1995
to 1996. Average student enrollments increased to 42,377 in 1996 from 34,021
in 1995. Interest income, which is included in net revenues, increased to
$3.0 million in 1996 from $2.4 million in 1995.
Instruction costs and services increased by 27.3% to $130.0 million in
1996 from $102.1 million in 1995 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 60.7% in 1996 from 62.5% in 1995 due to greater net revenues
being spread over the fixed costs related to centralized student services.
As the Company expands into new markets, it may not be able to leverage its
instruction costs and services to the same extent.
Selling and promotional expenses increased by 32.7% to $27.9 million in
1996 from $21.0 million in 1995 due primarily to increased marketing and
advertising at UOP and IPD campuses and learning centers, including $2.2
million related to locations opened in new markets during the past two years.
These expenses as a percentage of net revenues remained relatively the same
at 13.0% in 1996 and 12.9% in 1995.
34
General and administrative expenses increased by 15.6% to $21.3 million
in 1996 from $18.5 million in 1995 due primarily to costs required to support
the increased number of UOP and IPD campuses and learning centers and
increases in general and administrative salaries. General and administrative
expenses as a percentage of net revenues decreased to 10.0% in 1996 from
11.3% in 1995 due primarily to higher net revenues being spread over the
fixed costs related to various centralized functions such as information
services, corporate accounting and human resources.
Costs related to the start-up of new UOP and IPD campuses and learning
centers are expensed as incurred and totaled approximately $3.6 million and
$1.1 million in 1996 and 1995, respectively. Interest expense, which is
allocated among all categories of costs and expenses, was $77,000 and $96,000
in 1996 and 1995, respectively.
The Company's effective tax rate decreased to 38.9% in 1996 from 42.3%
in 1995 due primarily to an increase in tax-exempt interest income.
Net income increased to $21.4 million in 1996 from $12.6 million in 1995
due to increased enrollments, increased tuition rates and improved
utilization of general and administrative costs and fixed instruction costs
and services.
Year Ended August 31, 1995 Compared with the 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.
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
35
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 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 higher net revenues being spread over the fixed
costs related to various centralized functions such as information services,
corporate accounting and human resources.
Costs related to the start-up of new 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.
36
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 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 1996 FY 1995
------------------------------------- ------------------------------------
Aug. 31, May 31, Feb. 29, Nov. 30, Aug. 31, May 31, Feb. 28, Nov. 30,
1996 1996 1996 1995 1995 1995 1995 1994
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands, except per share amounts)
Net revenues $59,199 $58,991 $46,358 $49,727 $45,433 $45,502 $36,029 $36,465
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Instruction costs and services 36,808 33,978 29,294 29,959 28,292 26,188 24,224 23,418
Selling and promotional 7,497 7,431 6,640 6,328 5,406 5,518 5,105 4,987
General and administrative 5,402 4,641 5,705 5,595 4,797 4,856 4,954 3,855
------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses 49,707 46,050 41,639 41,882 38,495 36,562 34,283 32,260
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 9,492 12,941 4,719 7,845 6,938 8,940 1,746 4,205
Provision for income taxes 3,275 5,241 1,833 3,256 2,780 3,892 896 1,661
------- ------- ------- ------- ------- ------- ------- -------
Net income $6,217 $7,700 $2,886 $4,589 $4,158 $5,048 $850 $2,544
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $.12 $.15 $.06 $.09 $.08 $.10 $.02 $.07
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding 51,614 51,457 51,071 50,633 50,557 50,457 48,963 34,383
======= ======= ======= ======= ======= ======= ======= =======
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 62.2 57.6 63.2 60.2 62.3 57.6 67.2 64.2
Selling and promotional 12.7 12.6 14.3 12.7 12.0 12.1 14.1 13.7
General and administrative 9.1 7.9 12.3 11.3 10.4 10.7 13.8 10.6
------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses 84.0 78.1 89.8 84.2 84.7 80.4 95.1 88.5
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 16.0 21.9 10.2 15.8 15.3 19.6 4.9 11.5
Provision for income taxes 5.5 8.9 4.0 6.5 6.1 8.6 2.5 4.6
------- ------- ------- ------- ------- ------- ------- -------
Net income 10.5% 13.0% 6.2% 9.3% 9.2% 11.0% 2.4% 6.9%
======= ======= ======= ======= ======= ======= ======= =======
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. Because this buildup in enrollments occurs at the end of the
37
quarter, revenues in the fourth quarter during the past two years were not
significantly impacted. However, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $54.3 million of working capital at August 31, 1996 as
compared to $39.0 million at August 31, 1995. The increase in working
capital is due primarily to $25.8 million in cash generated from operations
during the year, offset in part by capital expenditures during the year. At
August 31, 1996, the Company had no outstanding borrowings on its $4.0
million unsecured line of credit, which bears interest at prime. The line of
credit is renewable annually and any amounts borrowed under the line are
payable upon its termination in December 1997.
Net cash received from operating activities increased to $25.8 million
in 1996 from $22.3 million in 1995 due primarily to the $8.8 million increase
in net income from 1995 to 1996, offset in part by the timing of receipts
from customers and payments to suppliers. Capital expenditures, including
additions to educational program production costs, increased to $14.7 million
in 1996 from $11.5 million in 1995 primarily due to the purchase of $2.9
million of land to be used if and when the corporate headquarters is
relocated (see discussion below). Total purchases of property, equipment and
land for the year ended August 31, 1997 are expected to total approximately
$12 million. Additions to educational program production costs are not
expected to exceed $2 million for the year ended August 31, 1997. Start-up
costs are expected to increase from $3.6 million in 1996 to $5.5 million in
1997 due to recent and planned expansion into new geographic markets.
The lease on the Company's corporate headquarters, which includes the
UOP Phoenix Main Campus, was renewed in December 1995 for a five year term.
During 1996, the Company acquired land for a purchase price of $2.9 million
which it may use in the future for the possible relocation of its corporate
headquarters. Such a facility is estimated to cost between $20 to $25
million. The Company currently has approximately $2.8 million in commitments
for capital expenditures in 1997. The Company currently leases all of its
educational and administrative facilities.
The Company's net receivables as a percent of net revenues increased to
12.1% in 1996 from 9.7% in 1995 due primarily to a $5.8 million increase in
receivables from students who were awaiting financial aid loans. Financial
aid applications in process were backlogged in the fourth quarter of 1996 due
primarily to the substantial growth in new enrollments during that period. A
significant portion of the backlog was eliminated in September and it is
anticipated to be at normal levels by the end of October 1996. Bad debt
expense as a percent of net revenues decreased to .8% in 1996 from 1.1% in
1995 due primarily to improved collection rates on delinquent accounts.
The DOE requires that Title IV Program funds collected by an institution
for unbilled tuition be kept in a separate cash or cash equivalent account
until the students are billed for the portion of their program related to
these Title IV Program funds. In addition, all funds transferred to the
38
Company through electronic funds transfer programs are held in a separate
cash account until certain conditions are satisfied. As of August 31, 1996,
the Company had approximately $11.3 million in these separate accounts, which
are reflected as restricted cash, to comply with these requirements. These
funds generally remain in these separate accounts for an average of 60-75
days from the date of collection. These restrictions on cash have not
significantly affected the Company's ability to fund daily operations.
The Regulations require all higher education institutions to meet an
acid test ratio (defined as the ratio of cash, cash equivalents, restricted
cash and current accounts receivable to total current liabilities) of at
least 1 to 1, which is calculated at the end of the institution's fiscal
year. If an institution, including UOP or WIU, fails to meet the acid test
ratio, it may be deemed not financially responsible by the DOE, which could
result in a loss of its eligibility to participate in Title IV Programs.
UOP's acid test ratio was 1.19 to 1 at August 31, 1996 and 1.31 to 1 at
August 31, 1995. WIU's acid test ratio was 1.50 to 1 at August 31, 1996 and
2.73 to 1 on September 1, 1995. These requirements apply to the separate
financial statements of UOP, WIU and each of the respective IPD client
institutions, but not to the Company's consolidated financial statements.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
39
Item 8 -- Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . .41
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . .42
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . .43
Consolidated Statement of Changes in Shareholders' Equity. . . . . . . . . . .44
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . .45
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .46
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Apollo Group, Inc.:
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of changes in shareholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Apollo Group, Inc. and its subsidiaries at August 31,
1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended August 31, 1996, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of Apollo Group, Inc.'s management; our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
October 14, 1996
41
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(In thousands, except per share amounts)
Year Ended August 31,
-------------------------------