UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended:
August 31,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
[ ]
to
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Commission file
number: 0-25232
APOLLO GROUP, INC.
(Exact name of registrant as
specified in its charter)
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ARIZONA
(State or other jurisdiction
of
incorporation or organization)
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86-0419443
(I.R.S. Employer
Identification No.)
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4025 S. RIVERPOINT
PARKWAY, PHOENIX, ARIZONA 85040
(Address of principal executive
offices, including zip code)
Registrants telephone number, including area code:
(480) 966-5394
Securities registered pursuant to Section 12(b) of the
Act:
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(Title of Each Class)
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(Name of Each Exchange on Which Registered)
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Apollo Group, Inc.
Class A common stock, no par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES þ NO o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form
10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). YES o NO þ
No shares of Apollo Group, Inc. Class B common stock, its
voting stock, are held by non-affiliates. The holders of Apollo
Group, Inc. Class A common stock are not entitled to any
voting rights. The aggregate market value of Apollo Group
Class A common stock held by non-affiliates as of
February 28, 2010 (last day of the registrants most
recently completed second fiscal quarter), was approximately
$7.7 billion.
The number of shares outstanding for each of the
registrants classes of common stock as of October 12,
2010 is as follows:
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Apollo Group, Inc. Class A common stock, no par value
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147,331,000 Shares
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Apollo Group, Inc. Class B common stock, no par value
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475,000 Shares
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DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Information Statement for the 2011 Annual
Meeting of Class B Shareholders (Part III)
APOLLO
GROUP, INC. AND SUBSIDIARIES
FORM 10-K
INDEX
2
Special
Note Regarding Forward-Looking Statements
This Annual Report on
Form 10-K,
including Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations
(MD&A), contains certain forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements
other than statements of historical fact may be forward-looking
statements. Such forward-looking statements include, among
others, those statements regarding future events and future
results of Apollo Group, Inc. (the Company,
Apollo Group, Apollo, APOL,
we, us or our) that are
based on current expectations, estimates, forecasts, and the
beliefs and assumptions of us and our management, and speak only
as of the date made and are not guarantees of future performance
or results. In some cases, forward-looking statements can be
identified by terminology such as may,
will, should, could,
believe, expect, anticipate,
estimate, plan, predict,
target, potential, continue,
objectives, or the negative of these terms or other
comparable terminology. Such forward-looking statements are
necessarily estimates based upon current information and involve
a number of risks and uncertainties. Such statements should be
viewed with caution. Actual events or results may differ
materially from the results anticipated in these forward-looking
statements as a result of a variety of factors. While it is
impossible to identify all such factors, factors that could
cause actual results to differ materially from those estimated
by us include but are not limited to:
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changes in regulation of the U.S. education industry and
eligibility of proprietary schools to participate in
U.S. federal student financial aid programs, including the
factors discussed in Item 1, Business, under
Accreditation and Jurisdictional Authorizations,
Financial Aid Programs, and Regulatory
Environment;
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each of the factors discussed below in Item 1A, Risk
Factors; and
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those factors set forth below in Item 7,
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
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The cautionary statements referred to above also should be
considered in connection with any subsequent written or oral
forward-looking statements that may be issued by us or persons
acting on our behalf. We undertake no obligation to publicly
update or revise any forward-looking statements, for any facts,
events, or circumstances after the date hereof that may bear
upon forward-looking statements. Furthermore, we cannot
guarantee future results, events, levels of activity,
performance, or achievements.
3
Part I
Overview
Apollo Group, Inc. is one of the worlds largest private
education providers and has been in the education business for
more than 35 years. We offer innovative and distinctive
educational programs and services both online and on-campus at
the undergraduate, masters and doctoral levels through our
wholly-owned subsidiaries:
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The University of Phoenix, Inc. (University of
Phoenix);
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Institute for Professional Development (IPD);
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The College for Financial Planning Institutes Corporation
(CFFP); and
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Meritus University, Inc. (Meritus).
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In addition to these wholly-owned subsidiaries, in October 2007,
we formed a joint venture with The Carlyle Group
(Carlyle), called Apollo Global, Inc. (Apollo
Global), to pursue investments primarily in the
international education services industry. Apollo Group
currently owns 85.6% of Apollo Global, with Carlyle owning the
remaining 14.4%. As of August 31, 2010, total contributions
made to Apollo Global were approximately $555.3 million, of
which $475.3 million was funded by us. Apollo Global is
consolidated in our financial statements. Apollo Global
currently operates the following educational institutions:
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BPP Holdings plc (BPP) in the United Kingdom;
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Western International University, Inc. (Western
International University) in the U.S.;
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Universidad de Artes, Ciencias y Comunicación
(UNIACC) in Chile; and
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Universidad Latinoamericana (ULA) in Mexico.
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University of Phoenix. University of
Phoenix has been accredited by The Higher Learning Commission of
the North Central Association of Colleges and Schools since 1978
and holds other programmatic accreditations. University of
Phoenix offers associates, bachelors, masters
and doctoral degrees in a variety of program areas. University
of Phoenix offers its educational programs worldwide through its
online education delivery system and at its campus locations and
learning centers in 39 states, the District of Columbia and
Puerto Rico. University of Phoenixs online programs are
designed to provide uniformity with University of Phoenixs
on-campus programs, which enhances University of Phoenixs
ability to expand into new markets while maintaining academic
quality. University of Phoenix has customized systems for
academic quality management, faculty recruitment and training,
student tracking and marketing, which we believe provides us
with a competitive advantage. University of Phoenixs net
revenue represented approximately 91% of our consolidated net
revenue for the fiscal year ended August 31, 2010.
IPD. IPD provides program development,
administration and management consulting services to private
colleges and universities (Client Institutions) to
establish or expand their programs for working learners. These
services typically include degree program design, curriculum
development, market research, student recruitment, accounting,
and administrative services.
CFFP. CFFP has been accredited by The
Higher Learning Commission of the North Central Association of
Colleges and Schools since 1994. CFFP provides financial
services education programs, including a Master of Science in
three majors, and certification programs in retirement, asset
management, and other financial planning areas. CFFP offers
these programs online.
Meritus. Meritus was designated by the
Government of New Brunswick to grant degrees in May 2008.
Meritus offers degree programs online to working learners
throughout Canada and abroad and launched its first three
programs in the fall of 2008.
BPP. BPP University College is the
first proprietary institution to have been granted degree
awarding powers in the United Kingdom and in July 2010 became
the first private institution to be awarded the title of
University College by the U.K. since 1976. BPP,
acquired by Apollo Global in July 2009 and
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headquartered in London, England, is a provider of education and
training to professionals in the legal and finance industries.
BPP provides these services through schools located in the
United Kingdom, a European network of BPP offices, and the sale
of books and other publications globally.
Western International
University. Western International University
has been accredited by The Higher Learning Commission of the
North Central Association of Colleges and Schools since 1984.
Western International University offers associates,
bachelors and masters degrees in a variety of
program areas as well as certificate programs. Western
International University offers its undergraduate program
courses at its Arizona campus locations and online at Western
International University Interactive Online. Western
International University was previously a wholly-owned
subsidiary of Apollo. During fiscal year 2010, we contributed
all of the common stock of Western International University to
Apollo Global. See Note 4, Acquisitions, in Item 8,
Financial Statements and Supplementary Data, for further
discussion.
UNIACC. UNIACC is accredited by the
Chilean Council of Higher Education (Consejo Superior de
Educación). UNIACC is an arts and communications university
which offers bachelors and masters degree programs
on campuses in Chile and online. UNIACC was acquired by Apollo
Global in March 2008.
ULA. ULA carries authorization from
Mexicos Ministry of Public Education (Secretaría de
Educación Publica), from the National Autonomous University
of Mexico (Universidad Nacional Autónoma de México)
for its high school and undergraduate psychology and law
programs and by the Ministry of Education of the State of
Morelos (Secretaría de Educación del Estado de
Morelos) for its medicine and nutrition programs. ULA offers
degree programs at its four campuses throughout Mexico. Apollo
Global purchased a 65% ownership interest in ULA in August 2008
and purchased the remaining ownership interest in July 2009.
Our schools described above are managed in the following four
reportable segments:
1. University of Phoenix;
Apollo Global:
2. BPP;
3. Other; and
4. Other Schools.
The Apollo Global Other segment includes Western
International University, UNIACC, ULA and Apollo Global
corporate operations. The Other Schools segment includes IPD,
CFFP and Meritus. The Corporate caption, as detailed in the
table below, includes adjustments to reconcile segment results
to consolidated results, which primarily consist of net revenue
and corporate charges that are not allocated to our reportable
segments. The following table presents the net revenue for
fiscal years 2010, 2009 and 2008 for each of our reportable
segments:
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Year Ended August 31,
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($ in millions)
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2010
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2009
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2008
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University of Phoenix
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$
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4,498.3
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$
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3,766.6
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$
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2,987.7
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Apollo Global:
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BPP
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251.7
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13.1
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Other(1)
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78.3
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76.1
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42.3
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Total Apollo Global
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330.0
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89.2
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42.3
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Other Schools
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95.7
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95.0
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93.6
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Corporate
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1.8
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2.8
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9.8
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Net revenue(2)
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$
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4,925.8
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3,953.6
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$
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3,133.4
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(1) |
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As a result of contributing all of the common stock of Western
International University to Apollo Global during fiscal year
2010, we are presenting Western International University in the
Apollo Global Other |
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reportable segment for all periods presented. Refer to
Note 4, Acquisitions, in Item 8, Financial
Statements and Supplementary Data, for further discussion. |
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Insight Schools, Inc. (Insight Schools), as
discussed below, was classified as held for sale and as
discontinued operations beginning in fiscal year 2010.
Accordingly, Insight Schools revenue in fiscal years 2009
and 2008 has been reclassified to discontinued operations. |
See Note 20, Segment Reporting, in Item 8,
Financial Statements and Supplementary Data, for the
segment and related geographic information required by
Items 101(b) and 101(d) of
Regulation S-K,
which information is incorporated by this reference.
We also continue to operate online high school programs through
our Insight Schools, Inc. (Insight Schools)
wholly-owned subsidiary. In the second quarter of fiscal year
2010, we initiated a formal plan to sell Insight Schools,
engaged an investment bank and also began the process of
actively marketing Insight Schools as we determined that the
business was no longer consistent with our long-term strategic
objectives. Accordingly, we have presented Insight Schools as
held for sale and as discontinued operations. See Note 3,
Discontinued Operations, in Item 8, Financial Statements
and Supplementary Data, for further discussion.
Our operations are generally subject to seasonal trends. We
experience, and expect to continue to experience, fluctuations
in our results of operations, principally as a result of
seasonal variations in the level of University of Phoenix
enrollments. Although University of Phoenix enrolls students
throughout the year, its net revenue is generally lower in our
second fiscal quarter (December through February) than the other
quarters due to holiday breaks in December and January.
University of Phoenix degreed enrollment (Degreed
Enrollment) for the quarter ended August 31, 2010 was
470,800. Degreed Enrollment for a quarter is composed of:
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students enrolled in a University of Phoenix degree program who
attended a course during the quarter and had not graduated as of
the end of the quarter;
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students who previously graduated from one degree program and
started a new degree program in the quarter (for example, a
graduate of the associates degree program returns for a
bachelors degree or a bachelors degree graduate
returns for a masters degree); and
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students participating in certain certificate programs of at
least 18 credits with some course applicability into a related
degree program.
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University of Phoenix aggregate new degreed enrollment
(New Degreed Enrollment) for the four quarters in
fiscal year 2010 was 371,700. New Degreed Enrollment for each
quarter is composed of:
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new students and students who have been out of attendance for
more than 12 months who enroll in a University of Phoenix
degree program and start a course in the quarter;
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students who have previously graduated from a degree program and
start a new degree program in the quarter; and
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students who commence participation in certain certificate
programs of at least 18 credits with some course applicability
into a related degree program.
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Students enrolled in or serviced by Apollo Globals
institutions (BPP, Western International University, UNIACC and
ULA), Other Schools (IPD, CFFP, and Meritus) and Insight Schools
are not included in Degreed Enrollment or New Degreed Enrollment.
6
We incorporated in Arizona in 1981 and maintain our principal
executive offices at 4025 S. Riverpoint Parkway,
Phoenix, Arizona 85040. Our telephone number is
(480) 966-5394.
Our website addresses are as follows:
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Apollo
Group
University of
Phoenix
Apollo Global
BPP
Western
International University
UNIACC
ULA
IPD
CFFP
Meritus
Insight Schools
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www.apollogrp.edu
www.phoenix.edu
www.apolloglobal.us
www.bpp.com
www.west.edu
www.uniacc.cl
www.ula.edu.mx
www.ipd.org
www.cffp.edu
www.meritusu.ca
www.insightschools.net
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Our fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 2010, 2009, 2008, 2007
and 2006 relate to fiscal years 2010, 2009, 2008, 2007 and 2006,
respectively.
Strategy
Our goal is to strengthen our position as a leading provider of
high quality, accessible education for individuals around the
world by affording strong returns for all of our stakeholders:
students, faculty, employees and investors. Our principal focus
is to provide high quality educational products and services to
our students in order for them to maximize the benefit of their
educational experience. Our students receive an innovative,
energizing and compelling learning experience and a quality
academic outcome that provides the opportunity to improve their
lives. We believe that a superior student experience, achieved
through building a culture of always doing the right thing for
the student, is key to building value for our shareholders. We
intend to pursue our goal in a manner that is consistent with
our core organizational values: operate with integrity and
social responsibility; change lives through education; be the
employer of choice and build long-term value. These values
provide the foundation for everything we do as a business.
The key themes of our strategic plan are as follows:
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Maximize the value of our University of Phoenix
business. This is our highest priority over the
next several years and we believe that investing in University
of Phoenix will continue to produce the highest return on our
capital. We believe that we can strengthen our position and grow
our revenue and cash flow over time by continuing to deliver a
quality educational experience to our students, enhancing the
student experience, improving student outcomes, expanding access
in certain markets, and enhancing our brand. To balance with our
investment in education, we will strive to improve operating
efficiency and our ability to scale effectively.
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Expand intelligently beyond University of
Phoenix. We believe we can capitalize on
opportunities to utilize our core expertise and organizational
capabilities to grow in areas outside of University of Phoenix,
both domestically and internationally. In particular, we have
observed a growing demand for high quality postsecondary and
other education services outside of the U.S., including in
Europe, Latin America and Asia, and we believe that we have the
capabilities and expertise to provide these services beyond our
current reach. We intend to actively pursue quality
opportunities to partner with or acquire existing institutions
of higher learning where we believe we can achieve attractive
long-term growth and value creation.
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We intend to use our expertise to enhance the quality, delivery
and student outcomes associated with the respective curricula
across our entire group of owned and operated institutions and
companies. We believe we can utilize our organizational
capabilities to offer innovative products, create new growth
opportunities and optimize our cost structure. To enable this
strategy, we continue to invest in our people, systems and
organization, as they are the foundation for our future success.
7
To execute against our strategic vision, in fiscal year 2010 we
began to implement a number of important changes and initiatives
to transition our business to more effectively support our
students and improve their educational outcomes, which efforts
will continue into fiscal year 2011. These initiatives include
the following:
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Upgrading our learning and data platforms;
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Adopting new tools to better support students education
financing decisions, such as our Responsible Borrowing
Calculator, which is designed to help students calculate the
amount of student borrowing necessary to achieve their
educational objectives and to motivate them to not incur
unnecessary student loan debt;
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Transitioning our marketing approaches to more effectively
identify students who have the ability to succeed in our
educational programs, including reduced emphasis on the
utilization of third parties for lead generation;
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Requiring all students who enroll in University of Phoenix with
fewer than 24 incoming credits to first attend a free,
three-week University Orientation program which is designed to
help inexperienced prospective students understand the rigors of
higher education prior to enrollment. After piloting the program
for the past year, we plan to implement this policy
university-wide in November 2010; and
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Better aligning our enrollment, admissions and other employees
to our students success by redefining roles and
responsibilities, resetting individual objectives and measures
and implementing new compensation structures, including
eliminating all enrollment factors in our admissions personnel
compensation structure effective September 1, 2010.
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We believe that the changes in our marketing approaches and the
University Orientation pilot program implemented during fiscal
year 2010 contributed to the 9.8% reduction in University of
Phoenix New Degreed Enrollment in the fourth quarter of fiscal
year 2010 compared to the fourth quarter of fiscal year 2009. We
expect that the continuing changes in our marketing approaches
and the implementation of the additional initiatives described
above will significantly reduce fiscal year 2011 University of
Phoenix New Degreed Enrollment and will adversely impact our net
revenue, operating income and cash flow. However, we believe
that these efforts are in the best interests of our students
and, over the long-term, will improve student persistence and
completion rates, reduce bad debt expense, reduce the risks to
our business associated with our regulatory environment, and
position us for more stable long-term growth in the future.
Industry
Background
Domestic
Postsecondary Education
The domestic non-traditional education sector is a significant
and growing component of the postsecondary degree-granting
education industry, which was estimated to be a
$432 billion industry in 2008, according to the Digest of
Education Statistics published in 2010 by the
U.S. Department of Educations National Center for
Education Statistics (the NCES). According to the
National Postsecondary Student Aid Study published in 2000 by
the NCES, 73% of undergraduates in
1999-2000
were in some way non-traditional (defined as a student who
delays enrollment, attends part time, works full time, is
financially independent for purposes of financial aid
eligibility, has dependents other than a spouse, is a single
parent, or does not have a high school diploma). The
non-traditional students typically are looking to improve their
skills and enhance their earnings potential within the context
of their careers. We believe that the demand for non-traditional
education will continue to increase, reflecting the
knowledge-based economy in the U.S.
Many non-traditional students, who we refer to as working
learners, seek accredited degree programs that provide
flexibility to accommodate the fixed schedules and time
commitments associated with their professional and personal
obligations. The education formats offered by our institutions
enable working learners to attend classes and complete
coursework on a more flexible schedule than many traditional
universities offer.
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Although more colleges and universities are beginning to address
some of the needs of working learners, many universities and
institutions do not effectively address their needs for the
following reasons:
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Traditional universities and colleges were designed to fulfill
the educational needs of conventional, full-time students
ages 18 to 24, and that industry sector remains the primary
focus of these universities and institutions. This focus has
resulted in a capital-intensive teaching/learning model that
often is characterized by:
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a high percentage of full-time, tenured faculty;
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physical classrooms, library facilities and related full-time
staff;
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dormitories, student unions, and other significant physical
assets to support the needs of younger students; and
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an emphasis on research and related laboratories, staff, and
other facilities.
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The majority of accredited colleges and universities continue to
provide the bulk of their educational programming on an agrarian
calendar with time off for traditional breaks. The traditional
academic year runs 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 may serve the needs of the full-time, resident, 18 to
24-year-old
student, it limits the educational opportunity for working
learners who must delay their education for up to four months
during these traditional breaks.
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Traditional universities and colleges may also be limited in
their ability to provide the necessary customer service for
working learners because they lack the necessary administrative
and advisory infrastructure.
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Diminishing financial support for public colleges and
universities has required them to focus more tightly on their
existing student populations and missions, which in some cases
has reduced access to traditional education.
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International
Education
There were approximately 153 million students enrolled in
postsecondary education worldwide in 2007 according to the
Global Education Digest 2009 published in 2009 by the United
Nations Educational, Scientific and Cultural Organization
Institute for Statistics.
We believe that private education is playing an important role
in advancing the development of education, specifically higher
education and lifelong learning, in many countries around the
world. While primary and secondary education outside the
U.S. are still funded mainly through government
expenditures, we believe that postsecondary education outside of
the U.S. is experiencing governmental funding constraints
that create opportunities for a broader private sector role.
We believe that the following key trends are driving the growth
in private education worldwide:
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unmet demand for education;
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insufficient public funding to meet demand for education;
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shortcomings in the quality of higher education offerings,
resulting in the rise of supplemental training to meet industry
demands in the developing world;
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worldwide appreciation of the importance that knowledge plays in
economic progress;
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globalization of education; and
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increased availability and role of technology in education,
broadening the accessibility and reach of education.
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9
Our
Programs
Our more than 35 years as a provider of education enables
us to provide students with quality education and responsive
customer service at the undergraduate, masters and
doctoral levels. Our institutions have gained expertise in
designing curriculum, recruiting and training faculty,
monitoring academic quality, and providing a high level of
support services to students. Our institutions offer the
following:
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|
Accredited Degree Programs. University of
Phoenix, Western International University and CFFP are
accredited by The Higher Learning Commission of the North
Central Association of Colleges and Schools. BPPs
University College has been granted degree-awarding powers by
the United Kingdoms Privy Council. Additionally, certain
programs offered at our institutions and our other educational
institutions are accredited by appropriate accrediting entities.
See Accreditation and Jurisdictional Authorizations,
below.
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Professional Examinations Training and Professional
Development. BPP provides training and published materials
for qualifications in accountancy (including tax), financial
services, actuarial science, and insolvency. BPP also provides
professional development through continuing education training
and supplemental skills courses to post-qualification markets in
finance, law, and general management. University of Phoenix and
certain of our other institutions, including CFFP, also provide
various training and professional development education.
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Faculty.
|
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|
Domestic Postsecondary: Substantially
all University of Phoenix faculty possess either a masters
or doctoral degree. Faculty members typically have many years of
experience in the field in which they instruct. Our institutions
have well-developed methods for hiring and training faculty,
which include peer reviews of newly hired instructors by other
members of the faculty, training in student instruction and
grading, and teaching mentorships with more experienced faculty
members.
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|
International: Our recruitment
standards and processes for international faculty are
appropriate for the respective markets in which we operate and
are consistent with and in compliance with local accreditation
and regulatory requirements in these markets.
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|
Domestic Postsecondary: Faculty content
experts design curriculum for the majority of programs at our
domestic postsecondary institutions. This enables us to offer
current and relevant standardized programs to our students. We
also utilize standardized tests and institution-wide systems to
assess the educational outcomes of our students and improve the
quality of our curriculum and instructional model. These systems
evaluate the cognitive (subject matter) and affective
(educational, personal and professional values) skills of our
students upon registration and upon conclusion of the program,
and also survey students two years after graduation in order to
assess the quality of the education they received. Classes are
designed to be small and engaging.
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International: Our international
institutions typically follow a course development process in
which faculty members who are subject matter experts work with
instructional designers to develop curriculum materials based on
learning objectives provided by school academic officers.
Curriculum is tailored to the relevant standards applicable in
each local market within which we operate.
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Benefits to Employers. The employers of
students enrolled in our programs often provide input to faculty
members in designing curriculum, and class projects are based on
issues relevant to the companies that employ our students.
Classes are taught by faculty members, many of whom, in our
domestic postsecondary institutions, are practitioners and
employers who emphasize the skills desired by employers. We
conduct focus groups with business professionals, students, and
faculty members who provide feedback on the relevancy of course
work. Our objective is to gain insight from these groups so that
we can develop new courses and offer relevant subject matter
that reflect the changing needs of the marketplace and prepare
our students for todays workplace. In addition, the class
time flexibility further benefits employers since it minimizes
conflict with their employees work schedules.
|
10
Teaching
Model and Degree Programs and Services
Domestic
Postsecondary
Teaching
Model
While 73% of undergraduates in
1999-2000
were in some way non-traditional, the primary mission of most
accredited four-year colleges and universities is to serve
traditional students and in many cases, conduct research. The
teaching/learning models used by University of Phoenix were
designed specifically to meet the educational needs of working
learners, who seek accessibility, curriculum consistency, time
and cost-effectiveness, and learning that has immediate
application to the workplace. The models are structured to
enable students who are employed full-time or have other
commitments to earn their degrees and still meet their personal
and professional responsibilities. Our focus on working,
non-traditional, non-residential students minimizes the need for
capital-intensive facilities and services like dormitories,
student unions, food service, personal and employment
counseling, health care, sports and entertainment.
University of Phoenix has campus locations and learning centers
in 39 states, the District of Columbia and Puerto Rico and
offers many students the flexibility to attend both on-campus
and online classes. University of Phoenix online classes employ
a proprietary online learning system. Online classes are small
and have mandatory participation requirements for both the
faculty and the students. Each class is instructionally designed
so that students have learning outcomes that are consistent with
the outcomes of their on-campus counterparts. All class
materials are delivered electronically.
Components of our teaching/learning models at University of
Phoenix for both online and on-campus classes include:
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Curriculum |
|
Curriculum is designed by teams of academicians and
practitioners to integrate academic theory and professional
practice and their application to the workplace. The curriculum
provides for the achievement of specified educational outcomes
that are based on input from faculty, students, and employers. |
|
Faculty |
|
All faculty applicants participate in a rigorous selection and
training process. For substantially all University of Phoenix
faculty positions, the faculty member must have earned a
masters or doctoral degree from a regionally accredited
institution or international equivalent and have recent
professional experience in a field related to the relevant
course. With courses designed to facilitate the application of
knowledge and skills to the workplace, faculty members are able
to share their professional knowledge and skills with the
students. |
|
Accessibility |
|
Our academic programs may be accessed through a variety of
delivery modes (electronically delivered, campus-based or a
blend of both), which make our educational programs accessible
and even portable, regardless of where the students work and
live. |
|
Class Schedule and Active Learning Environment |
|
Courses are designed to encourage and facilitate collaboration
among students and interaction with the instructor. The
curriculum requires a high level of student participation for
purposes of enhancing learning and increasing the students
ability to work as part of a team. University of Phoenix
students (other than associates degree students) are
enrolled in five- to eight-week courses year round and complete
classes sequentially, rather than concurrently. This permits
students to focus their attention and resources on one subject
at a time and creates a better balance between learning and
ongoing personal and professional responsibilities. In |
11
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|
addition to attending class, University of Phoenix students
(other than associates degree students) meet weekly
(online or in-person) as part of a three- to five-person
learning team. Learning team sessions are an integral part of
each University of Phoenix course to facilitate in-depth review
of and reflection on course materials. Members work together to
complete assigned group projects and develop communication and
teamwork skills. |
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|
Our associates degree students attend nine week courses,
offered in complementary pairs, year-round. Students and
instructors interact electronically and non-simultaneously,
resulting in increased access for students by allowing them to
control the time and place of their participation. Courses are
designed with the same standards that are applied throughout
University of Phoenix. |
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Library and Other Learning Resource Services |
|
Students and faculty members are provided with electronic and
other learning resources for their information and research
needs. Students access these services directly through the
Internet or with the help of a learning resource services
research librarian. |
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Academic Quality |
|
University of Phoenix has an academic quality assessment plan
that measures whether the institution meets its mission and
purposes. A major component of this plan is the assessment of
student learning. To assess student learning, University of
Phoenix measures whether graduates meet its programmatic and
learning goals. The measurement is composed of the following
four ongoing and iterative steps: |
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preparing an annual assessment plan for academic
programs;
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preparing an annual assessment result report for
academic programs, based on student learning outcomes;
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implementing improvements based on assessment
results; and
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monitoring effectiveness of implemented improvements.
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By achieving programmatic competencies, University of Phoenix
graduates are expected to become proficient in the following
areas: |
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|
|
critical thinking and problem solving;
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collaboration;
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information utilization;
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communication; and
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professional competence and values.
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We have developed an assessment matrix which outlines specific
learning outcomes to measure whether students are meeting
University of Phoenix learning goals. Multiple methods have been
identified to assess each outcome. |
12
Degree
Programs
University of Phoenix offers degrees in the following program
areas:
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Associates
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Bachelors
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Masters
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Doctoral
|
Arts and Sciences
Business and Management
Criminal Justice and Security
Education
Health Care
Human Services
Psychology
Technology
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Arts and Sciences
Business and Management
Criminal Justice and Security
Education
Health Care
Human Services
Nursing
Psychology
Technology
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|
Business and Management
Counseling
Criminal Justice and Security
Education
Health Care
Nursing
Psychology
Technology
|
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|
Business and Management
Education
Health Care
Nursing
Psychology
Technology
|
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|
Academic
Annual Report
In December 2009, University of Phoenix published its second
Academic Annual Report which contains a variety of comparative
performance measures related to student outcomes and university
initiatives related to quality and accountability. The Academic
Annual Report is available on the University of Phoenix website
at www.phoenix.edu. University of Phoenix expects to publish its
third Academic Annual Report in fiscal year 2011.
International
Teaching
Model
Our international operations include full-time, part-time and
distance learning courses for professional examination
preparation, professional development training and various
degree/certificate/diploma programs. Our international
operations faculty members consist of both full-time and
part-time professors. Instructional models include
face-to-face
and online (simultaneous and non-simultaneous) methodologies.
Degree
Programs and Services
Our international operations offer bachelors,
masters and doctoral degrees, which include a variety of
degree programs and related areas of specialization.
Additionally, we offer training and published materials for
qualifications in specific markets for accountancy (including
tax), financial services, actuarial science, insolvency, human
resources, marketing, management and law. We also provide
professional development through continuing education training
and supplemental skills courses primarily in the legal and
finance industries.
Admissions
Standards
Domestic
Postsecondary
Undergraduate. To gain admission to
undergraduate programs at University of Phoenix, students must
have a high school diploma or a Certificate of General
Educational Development, commonly referred to as GED, and
satisfy employment requirements, if applicable, for their field
of study. Applicants whose native language is not English must
take and pass the Test of English as a Foreign Language, Test of
English for International Communication or the
Berlitz®
Online English Proficiency Exam.
Non-U.S. citizens
attending a campus located in the U.S. are required to hold
an approved visa or to have been granted permanent residency.
Additional requirements may apply to individual programs or to
students who are attending a specific campus. Students already
in undergraduate programs at other schools may petition to be
admitted to University of
13
Phoenix on a provisional status if they do not meet certain
criteria. Some programs have work requirements (e.g. nursing)
such that students must have a certain amount of experience in
given areas in order to be admitted. These vary by program, and
not all programs have them.
In addition to the above requirements, we intend to require all
prospective University of Phoenix students with less than 24
incoming credits to participate in University Orientation,
beginning in November 2010. This program is a free, three-week
orientation designed to help inexperienced prospective students
understand the rigors of higher education prior to enrollment.
Students practice using the University of Phoenix Learning
System, learn techniques to be successful in college, and
identify useful university services and resources.
Masters. To gain admission to
masters programs at University of Phoenix, students must
have an undergraduate degree from a regionally or nationally
accredited college or university, satisfy the minimum grade
point average requirement, and have relevant work and employment
experience, if applicable for their field of study. Applicants
whose native language is not English must take and pass the Test
of English as a Foreign Language, Test of English for
International Communication or the
Berlitz®
Online English Proficiency Exam.
Non-U.S. citizens
attending a campus located in the U.S. are required to hold
an approved visa or have been granted permanent residency.
Additional requirements may apply to individual programs or to
students who are attending a specific campus.
Doctoral. To gain admission to doctoral
programs at University of Phoenix, students must generally have
a masters degree from a regionally accredited college or
university, satisfy the minimum grade point average requirement,
satisfy employment requirements as appropriate to the program
applied for, have a laptop computer and have membership in a
research library. Applicants whose native language is not
English must take and pass the Test of English as a Foreign
Language, Test of English for International Communication or the
Berlitz®
Online English Proficiency Exam.
The admission requirements for our other domestic institutions
are similar to those detailed above and may vary depending on
the respective program.
International
In general, postsecondary students in our international
institutions must have obtained a high school or equivalent
diploma from an approved school. Other requirements apply for
graduate and other programs. Admissions requirements for our
international institutions are appropriate for the respective
markets in which we operate.
Students
University
of Phoenix Degreed Enrollment
University of Phoenix Degreed Enrollment for the quarter ended
August 31, 2010 was 470,800. See Overview above for
a description of the manner in which we calculate Degreed
Enrollment. The following table details Degreed Enrollment for
the respective periods:
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|
Quarter Ended August 31,
|
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%
|
(Rounded to the nearest hundred)
|
|
2010
|
|
2009
|
|
Change
|
|
Associates
|
|
|
200,800
|
|
|
|
201,200
|
|
|
|
(0.2
|
)%
|
Bachelors
|
|
|
193,600
|
|
|
|
163,600
|
|
|
|
18.3
|
%
|
Masters
|
|
|
68,700
|
|
|
|
71,200
|
|
|
|
(3.5
|
)%
|
Doctoral
|
|
|
7,700
|
|
|
|
7,000
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
|
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|
470,800
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|
443,000
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|
6.3
|
%
|
14
The following chart details quarterly Degreed Enrollment by
degree type for the respective periods:
University
of Phoenix New Degreed Enrollment
University of Phoenix aggregate New Degreed Enrollment for
fiscal year 2010 was 371,700. See Overview above for a
description of the manner in which we calculate New Degreed
Enrollment. The following table details University of Phoenix
aggregate New Degreed Enrollment for the respective fiscal years:
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|
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|
|
|
|
|
Year Ended August 31,
|
|
%
|
(Rounded to the nearest hundred)
|
|
2010
|
|
2009
|
|
Change
|
|
Associates
|
|
|
187,700
|
|
|
|
191,700
|
|
|
|
(2.1
|
)%
|
Bachelors
|
|
|
131,300
|
|
|
|
108,900
|
|
|
|
20.6
|
%
|
Masters
|
|
|
49,300
|
|
|
|
51,900
|
|
|
|
(5.0
|
)%
|
Doctoral
|
|
|
3,400
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|
|
|
3,300
|
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
|
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|
371,700
|
|
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|
355,800
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|
|
|
4.5
|
%
|
15
The following chart details quarterly New Degreed Enrollment by
degree type for the respective periods:
We believe growth in University of Phoenix Degreed Enrollment in
recent years is primarily attributable to the following:
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Enhancements in our marketing capabilities, along with continued
investments in enhancing and expanding University of Phoenix
service offerings and academic quality; and
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Economic uncertainties, as working learners seek to advance
their education to improve their job security or reemployment
prospects. This element of our growth may diminish as the
economy and the employment outlook improve in the U.S.
|
Partially offsetting the factors above are our efforts to better
identify and enroll students who have the ability to succeed in
our educational programs. Contributing to this effort are
refinements in our marketing strategy, including leveraging our
marketing analytics to identify and enroll those prospective
students and our University Orientation pilot program.
Although University of Phoenix aggregate New Degreed Enrollment
in fiscal year 2010 increased compared to fiscal year 2009, New
Degreed Enrollment for the fourth quarter of fiscal year 2010
decreased 9.8% compared to the fourth quarter of fiscal year
2009. Additionally, we have recently experienced an increase in
the percentage of bachelors degree students with fewer
than 24 incoming credits in our Degreed Enrollment. We believe
that the changes in our marketing approaches and the University
Orientation pilot program noted above, as well as other
initiatives to enhance the student experience contributed to
these changes. Refer to Strategy above for further
discussion.
University
of Phoenix Student Demographics
We have a diverse student population. The following tables show
the relative demographic characteristics of the students
attending University of Phoenix courses in our fiscal years 2010
and 2009:
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Gender
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|
2010
|
|
2009
|
|
Female
|
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|
67.7
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%
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66.0
|
%
|
Male
|
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|
32.3
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%
|
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|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
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|
16
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|
Race/Ethnicity(1)
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|
2010
|
|
|
2009
|
|
|
African-American
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|
28.1
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%
|
|
|
27.7
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%
|
Asian/Pacific Islander
|
|
|
3.3
|
%
|
|
|
3.6
|
%
|
Caucasian
|
|
|
51.9
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%
|
|
|
52.2
|
%
|
Hispanic
|
|
|
11.6
|
%
|
|
|
11.6
|
%
|
Native American/Alaskan
|
|
|
1.2
|
%
|
|
|
1.3
|
%
|
Other/Unknown
|
|
|
3.9
|
%
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on voluntary reporting by students. For 2010 and 2009, 66%
and 69%, respectively, of the students attending University of
Phoenix courses provided this information. |
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|
|
|
|
|
|
|
|
Age(1)
|
|
2010
|
|
|
2009
|
|
|
22 and under
|
|
|
12.1
|
%
|
|
|
14.9
|
%
|
23 to 29
|
|
|
32.6
|
%
|
|
|
34.3
|
%
|
30 to 39
|
|
|
32.7
|
%
|
|
|
31.0
|
%
|
40 to 49
|
|
|
16.2
|
%
|
|
|
14.5
|
%
|
50 and over
|
|
|
6.4
|
%
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on students included in New Degreed Enrollment. |
Marketing
While there is intense demand by working learners for a quality
education, not everyone realizes that there is an option to get
a degree while maintaining a job, a family, and other life
responsibilities. We engage in a broad range of advertising and
marketing activities to educate potential students about our
teaching/learning model and programs, including but not limited
to online, broadcast, outdoor, print, and direct mail. We are
focused on improving our perception and more precisely utilizing
our different communication channels to attract students who are
more likely to persist in our programs. Our marketing informs
and educates students of the options they have in higher
learning.
Brand
Brand advertising is intended to increase potential
students understanding of our academic quality,
innovations in 21st century post-secondary education,
commitment to service, academic outcomes and achievements of our
academic community. Our brand is advertised primarily through
national and regional broadcast, radio and print media. Brand
advertising also serves to expand the addressable market and
establish brand recognition and familiarity with our schools,
colleges and programs on both a national and a local basis.
Internet
Prospective students are identifying their education
opportunities online through search engines, information and
social network sites, various education portals on the Internet
and school-specific sites such as our own phoenix.edu. We
advertise on the Internet using search engine keywords, banners,
and custom advertising placements on targeted sites, such as
education portals, career sites, and industry-specific websites.
Our focused and selective Internet and non-Internet advertising
activities have improved our identification of students who have
the ability to succeed in our educational programs. Our owned
and operated website, phoenix.edu, provides prospective students
with relevant information about University of Phoenix.
We intend to continue to leverage the unique qualities of the
Internet and its emerging technologies to enhance our brand
awareness among prospective students, and to improve our ability
to deliver relevant messages to satisfy prospective
students specific needs and requirements. New media
technologies that we
17
have begun to use to communicate with our current and
prospective students include online social networks, search
engine marketing and emerging video advertising.
Sponsorships
and Other
University of Phoenix operates both nationally and locally. We
foster community and advocacy selectively through sponsorships,
advertising and event marketing to support specific activities,
including local and national career events, academic lecture
series, workshops focused on trends in the 21st century
economy and symposiums regarding the future of education in
America. In addition, we utilize direct mail to expand our local
presence by targeting individuals in specific career fields in
which we offer programs and degrees.
In 2006, we obtained naming and sponsorship rights on a stadium
in Glendale, Arizona, which is home to the Arizona Cardinals
team in the National Football League. These naming and
sponsorship rights are in effect until 2026 with options to
extend and include opportunities for signage, advertising, and
other promotional rights and benefits to enhance the University
of Phoenix brand awareness.
Relationships
with Employers
We work closely with many businesses and governmental agencies
to meet their specific educational and training needs either by
modifying existing programs or, in some cases, by developing
customized programs. These programs are often held at the
employers offices or on site at select military bases.
University of Phoenix has formed educational partnerships with
various corporations to provide programs specifically designed
for their employees. BPP enrolls the majority of its students
through relationships with employers. We consider the employers
that provide tuition assistance to their employees through
tuition reimbursement plans or direct bill arrangements to be
our secondary customers.
Competition
Domestic
Postsecondary
The higher education industry is highly fragmented with no
single private or public institution enjoying a significant
market share. We compete primarily with traditional four and
two-year degree-granting public and private regionally
accredited colleges and universities. While 73% of
undergraduates in
1999-2000
were in some way non-traditional, the primary mission of most
accredited four-year colleges and universities is to serve
traditional students and conduct research. University of Phoenix
acknowledges the differences in educational needs between
working learners and traditional students and provides programs
and services that allow students to earn their degrees without
major disruption to their personal and professional lives.
An increasing number of colleges and universities enroll working
learners in addition to the traditional 18 to
24-year-old
students, and we expect that these colleges and universities
will continue to modify their existing programs to serve working
learners more effectively, including by offering more distance
learning programs. We believe that the primary factors on which
we compete are the following:
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|
|
active and relevant curriculum development that considers the
needs of employers;
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|
|
the ability to provide flexible and convenient access to
programs and classes;
|
|
|
reliable and high-quality products and services;
|
|
|
comprehensive student support services;
|
|
|
breadth of programs offered;
|
|
|
the time necessary to earn a degree;
|
|
|
qualified and experienced faculty;
|
|
|
reputation of the institution and its programs;
|
|
|
the variety of geographic locations of campuses; and
|
|
|
cost of program.
|
In our offerings of non-degree programs, we compete with a
variety of business and information technology providers,
primarily those in the proprietary training sector. Many of
these competitors have
18
significantly more market share in given geographical regions
and longer-term relationships with key employers of potential
students.
International
Competitive factors for our international schools vary by
country and generally include the following:
|
|
|
|
|
breadth of programs offered;
|
|
|
active and relevant curriculum development that considers the
needs of employers; and
|
|
|
reputation of programs and classes.
|
In addition, BPP competes with other training providers, public
and private colleges, and universities primarily in the United
Kingdom. The primary factors on which BPP competes with these
institutions include the following:
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reputation of programs and classes;
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examination success;
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reliable and high-quality products and services;
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qualified and experienced faculty;
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flexible learning programs;
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active and relevant curriculum development that considers the
needs of employers;
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relationships with employers;
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university college status; and
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degree awarding powers.
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Employees
We believe that our employee relations are satisfactory. As of
August 31, 2010, we had the following employees:
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|
|
|
|
|
|
|
|
|
Non-Faculty
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|
|
|
|
|
|
Full-Time
|
|
|
Part-Time
|
|
|
Faculty(1)
|
|
|
University of Phoenix
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|
|
16,285
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|
|
|
91
|
|
|
|
32,596
|
|
Apollo Global:
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|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
756
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|
|
|
265
|
|
|
|
614
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|
Other
|
|
|
1,106
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|
|
|
16
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|
|
|
1,610
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
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|
1,862
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|
|
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281
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|
2,224
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Other Schools
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|
552
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|
9
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84
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Corporate(2)
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3,078
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|
62
|
|
|
|
290
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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|
21,777
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|
|
|
443
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|
35,194
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|
|
|
|
|
|
|
|
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|
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(1) |
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Includes both Full-Time and Part-Time faculty. Also includes
1,268 employees included in Non-Faculty who serve in both
roles. |
|
(2) |
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Consists primarily of employees in executive management,
information systems, accounting and finance, financial aid,
marketing and corporate human resources. Also includes 501 of
Insight Schools employees as Insight Schools was
classified as held for sale and as discontinued operations
beginning in fiscal year 2010. |
19
Accreditation
and Jurisdictional Authorizations
Domestic
Postsecondary
Accreditation
University of Phoenix is covered by regional accreditation,
which provides the following:
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recognition and acceptance by employers, other higher education
institutions and governmental entities of the degrees and
credits earned by students;
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qualification to participate in Title IV programs (in
combination with state higher education operating and degree
granting authority); and
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qualification for authority to operate in certain states.
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Regional accreditation is accepted nationally as the basis for
the recognition of earned credit and degrees for academic
purposes, employment, professional licensure and, in some
states, authorization to operate as a degree-granting
institution. Under the terms of a reciprocity agreement among
the six regional accrediting associations, including the Higher
Learning Commission (HLC) of the North Central
Association of Colleges and Schools, which is the primary
accrediting association of University of Phoenix,
representatives of each region in which a regionally accredited
institution operates may participate in the evaluations for
reaffirmation of accreditation of that institution by its
accrediting association.
In August 2010, University of Phoenix received a letter from HLC
requiring University of Phoenix to provide certain information
and evidence of compliance with HLC accreditation standards. The
letter related to the August 2010 report published by the
U.S. Government Accountability Office (GAO) of
its undercover investigation into the enrollment and recruiting
practices of a number of proprietary institutions of higher
education, including University of Phoenix. The letter required
that University of Phoenix submit a report to HLC addressing the
specific GAO allegations regarding University of Phoenix and any
remedial measures being undertaken in response to the GAO
report. In addition, the report was required to include
(i) evidence demonstrating that University of Phoenix, on a
university-wide basis, currently is meeting and in the future
will meet the HLC Criteria for Accreditation relating to
operating with integrity and compliance with all state and
federal laws, (ii) evidence that University of Phoenix has
adequate systems in place which currently and in the future will
assure appropriate control of all employees engaged in the
recruiting, marketing or admissions process, (iii) evidence
demonstrating that Apollo Group is not encouraging inappropriate
behavior on the part of recruiters and is taking steps to
encourage appropriate behavior, and (iv) detailed
information about University of Phoenix policies, procedures and
practices relating to marketing, recruiting, admissions and
other related matters. We submitted the response to HLC on
September 10, 2010 and subsequently received a request for
additional information. We have been informed that our response
will be evaluated by a special committee in early 2011, and that
the committee will make recommendations, if any, to the HLC
board. If, after review, HLC determines that our response is
unsatisfactory, HLC has informed us that it may impose
additional unspecified monitoring or sanctions. In addition, HLC
has recently imposed additional requirements on University of
Phoenix with respect to approval of new or relocated campuses
and additional locations. These requirements may lengthen or
make more challenging the approval process for these sites. See
Item 1A, Risk Factors Risks Related to the
Highly Regulated Industry in Which We Operate.
20
Accreditation information for University of Phoenix and
applicable programs is described in the chart below:
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Institution/Program
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Accrediting Body (Year Accredited)
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Status
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University of Phoenix
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The Higher Learning Commission of the North Central
Association of Colleges and Schools (1978, reaffirmed in 1982,
1987, 1992, 1997, and 2002)
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Next comprehensive evaluation visit by The Higher
Learning Commission is scheduled to be conducted in 2012.
North Central Association of Colleges and Schools
may require focused visits between comprehensive visits as part
of the normal and continuing relationship.
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Business programs
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Association of Collegiate Business Schools and Programs
(2007)
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Next reaffirmation visit expected in 2017, with interim
focus report to be submitted by us in 2011.
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Bachelor of Science in Nursing
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Commission on Collegiate Nursing Education (2005)
Previously accredited by National League for Nursing
Accrediting Commission from 1989 to 2005
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Reaccreditation due in 2010 by Commission on Collegiate
Nursing Education. On-site review has been conducted; report
pending.
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Master of Science in Nursing
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Commission on Collegiate Nursing Education (2005)
Previously accredited by National League for Nursing
Accrediting Commission from 1996 to 2005
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Reaccreditation due in 2010 by Commission on Collegiate
Nursing Education. On-site review has been conducted; report
pending.
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Master of Counseling in Community Counseling
(Phoenix and Tucson, Arizona campuses)
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Council for Accreditation of Counseling and Related
Educational Programs (1995, reaffirmed in 2002 and 2010)
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Reaffirmation visit expected in 2012.
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Master of Counseling in Mental Health Counseling
Salt Lake City, Utah campus
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Council for Accreditation of Counseling and Related
Educational Programs (2001, reaffirmed in 2010)
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Reaffirmation visit expected in 2012.
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Master of Arts in Education with options in
Elementary Teacher Education and Secondary Teacher Education
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Teacher Education Accreditation Council (reaccredited in
2007)
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Reaccreditation due in 2012.
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Our other domestic institutions maintain the requisite
accreditations for their respective operations.
Jurisdictional
Authorizations
In addition to accreditation by independent accrediting bodies,
our schools must be authorized to operate by the appropriate
regulatory authorities in many of the jurisdictions in which
they operate.
In the U.S., institutions that participate in Title IV
programs must be authorized to operate by the appropriate
postsecondary regulatory authority in each state where the
institution has a physical presence, or
21
be exempt from such regulatory authorization, usually based on
recognized accreditation. As of August 31, 2010, University
of Phoenix is authorized to operate or has confirmed an
exemption to operate based upon its accreditation and has a
physical presence in 39 states, Puerto Rico and the
District of Columbia. University of Phoenix has held these
authorizations or has confirmed an exemption for specific
authority to operate based upon its accreditation for periods
ranging from less than three years to over 25 years. As of
August 31, 2010, University of Phoenix has also been
approved to operate or has confirmed an exemption to operate
based upon its accreditation in Alaska, Mississippi, Montana and
South Dakota, but does not yet have a physical presence in these
states. In five states, including California, University of
Phoenix is qualified to operate without specific state
regulatory approval due to available state exemptions that
permit such operation if certain programmatic or other
accreditation criteria are met. Under new rules proposed by the
U.S. Department of Education, we may be required to seek
and obtain specific regulatory approval to operate in these
states and would not be entitled to rely on available exemptions
based on accreditation. If we experience a delay in obtaining or
cannot obtain these approvals, our business could be adversely
impacted. See Item 1A, Risk Factors Risks
Related to the Highly Regulated Industry in Which We
Operate Pending rulemaking by the
U.S. Department of Education could result in regulatory
changes that materially and adversely affect our business
for further discussion regarding jurisdictional
authorizations, which discussion is incorporated by this
reference.
All regionally accredited institutions, including University of
Phoenix, are required to be evaluated separately for
authorization to operate in Puerto Rico. University of Phoenix
has obtained authorization from the Puerto Rico Commission on
Higher Education, and that authorization remains in effect.
Some states assert authority to regulate all degree-granting
institutions if their educational programs are available to
their residents, whether or not the institutions maintain a
physical presence within those states. University of Phoenix and
Western International University have obtained licensure in
states which require such licensure and where students are
enrolled.
Our other domestic institutions maintain the requisite
authorizations in the jurisdictions in which they operate.
22
International
Our international schools must be authorized by the relevant
regulatory authorities under applicable local law, which in some
cases requires accreditation, as described in the chart below:
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School
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Accrediting Body
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Operational Authority
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BPP
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BPP Professional Education and BPP University College of
Professional Studies operate under a number of professional body
accreditations to offer training towards professional body
certifications
BPP has additional accreditations by country and/or
program as necessary
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The Privy Council for the United Kingdom has designated
BPP University College of Professional Studies Limited as an
awarding body for qualifications (including degrees) in the
United Kingdom.
BPP University College of Professional Studies
reauthorization will be due when its current authority expires
in August 2013.
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UNIACC
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Council for Higher Education (Consejo Superior de
Educación)
National Commission on Accreditation (Comisión
Nacional de Acreditación)
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Chilean Ministry of Education (Ministerio de
Educación de Chile).
Reaccreditation due in 2011.
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ULA
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Federation of Private Mexican Institutions of Higher
Education (Federación de Instituciones Mexicanas
Particulares de Educación Superior)
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Mexicos Ministry of Public Education (Secretaria de
Educación Pública).
Ministry of Education of the State of Morelos
(Secretaria de Educación del Estado de Morelos).
National Autonomous University of Mexico
(Universidad Nacional Autónoma de México).
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Financial
Aid Programs
Domestic
Postsecondary
The Higher Education Act of 1965 and the related regulations
govern all higher education institutions participating in
U.S. Title IV federal financial aid programs. In
August 2008, the Higher Education Act was reauthorized through
September 30, 2013 by the Higher Education Opportunity Act.
Financial aid under Title IV of the Higher Education Act,
as reauthorized (which we refer to generally as Title IV),
is awarded every academic year to eligible students. Certain
types of U.S. federal student aid are awarded on the basis
of financial need, generally defined as the difference between
the cost of attending an educational institution and the amount
the student
and/or the
students family, as the case may be, can reasonably be
expected to contribute to that cost. The amount of financial aid
awarded to a student per academic year is based on many factors,
including, but not limited to, program of study, grade level,
Title IV annual loan limits, and financial need. We have
substantially no control over the amount of Title IV
student loans or grants sought by or awarded to our students.
All recipients of Title IV program funds must maintain
satisfactory academic progress within the guidelines published
by the U.S. Department of Education.
We collected the substantial majority of our fiscal year 2010
total consolidated net revenue from receipt of Title IV
financial aid program funds, principally from federal student
loans and Pell Grants. University of Phoenix represented 91% of
our fiscal year 2010 total consolidated net revenue and
University of Phoenix
23
generated 88% of its cash basis revenue for eligible tuition and
fees during fiscal year 2010 from the receipt of Title IV
financial aid program funds, as calculated under the 90/10 Rule
described below, excluding the benefit from the temporary relief
for loan limit increases described below.
During fiscal year 2010, the Health Care and Education
Reconciliation Act was enacted and signed into law. This
legislation, among other things, eliminated the Federal Family
Education Loan Program (FFELP) and requires all Title IV
federal student loans to be administered through the Federal
Direct Loan Program (FDLP) commencing July 1, 2010. We
completed the transition of loan origination and related
servicing from the FFELP to the FDLP during the third quarter of
fiscal year 2010.
Student loans are currently the most significant source of
U.S. federal student aid and are administered through the
FDLP. Previously, these loans also were available under the
FFELP. Annual and aggregate loan limits apply based on the
students grade level. There are two types of federal
student loans: subsidized loans, which are based on the
U.S. federal statutory calculation of student need, and
unsubsidized loans, which are not need-based. Neither type of
student loan is based on creditworthiness. Students are not
responsible for interest on subsidized loans while the student
is enrolled in school. Students are responsible for the interest
on unsubsidized loans while enrolled in school, but have the
option to defer payment while enrolled. Repayment on federal
student loans begins six months after the date the student
ceases to be enrolled. The loans are repayable over the course
of 10 years and, in some cases, longer. Both graduate and
undergraduate students are eligible for loans. During fiscal
year 2010, federal student loans (both subsidized and
unsubsidized) represented approximately 79% of the gross
Title IV funds received by University of Phoenix.
Federal Pell Grants are awarded based on need and only to
undergraduate students who have not earned a bachelors or
professional degree. Unlike loans, Pell Grants do not have to be
repaid. During fiscal year 2010, Pell Grants represented
approximately 20% of the gross Title IV funds received by
University of Phoenix. The eligibility for and maximum amount of
Pell Grants have increased in each of the past three years.
Funding from student loans not provided by the federal
government represented approximately 1% of cash basis revenue
for eligible tuition and fees for University of Phoenix, as
calculated under the 90/10 Rule, during fiscal year 2010. See
Item 1A, Risk Factors Risks Related to the
Highly Regulated Industry in Which We Operate.
International
Government financial aid funding for students enrolled in our
international institutions historically has not been widely
available.
Regulatory
Environment
Domestic
Postsecondary
Our domestic postsecondary operations are subject to significant
regulations. Changes in or new interpretations of applicable
laws, rules, or regulations could have a material adverse effect
on our eligibility to participate in Title IV programs,
accreditation, authorization to operate in various states,
permissible activities, and operating costs. The failure to
maintain or renew any required regulatory approvals,
accreditation, or state authorizations could have a material
adverse effect on us. See Item 1A, Risk
Factors Risks Related to the Highly Regulated
Industry in Which We Operate.
The Higher Education Act, as reauthorized, and the related
regulations govern all higher education institutions
participating in Title IV financial aid programs, and
provide for a regulatory triad by mandating specific regulatory
responsibilities for each of the following:
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the accrediting agencies recognized by the U.S. Department
of Education;
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the federal government through the U.S. Department of
Education; and
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state higher education regulatory bodies.
|
To be eligible to participate in Title IV programs, a
postsecondary institution must be accredited by an accrediting
body recognized by the U.S. Department of Education and
must comply with the Higher Education Act, as reauthorized, and
all applicable regulations thereunder. We have summarized below
recent material
24
activity in the regulatory environment and the most significant
regulatory requirements applicable to our domestic postsecondary
operations.
New Rulemaking Initiative. In November 2009,
the U.S. Department of Education convened two new
negotiated rulemaking teams related to Title IV program
integrity issues and foreign school issues. The team addressing
program integrity issues, which included representatives of the
various higher education constituencies, was unable to reach
consensus on all of the rules addressed by that team.
Accordingly, under the negotiated rulemaking protocol, the
Department was free to propose rules without regard to the
tentative agreement reached regarding certain of the rules. The
proposed program integrity rulemaking addresses numerous topics.
The most significant proposals for our business are the
following:
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Modification of the standards relating to the payment of
incentive compensation to employees involved in student
recruitment and enrollment;
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Implementation of standards for state authorization of
proprietary institutions of higher education; and
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Adoption of a definition of gainful employment for
purposes of the requirement for Title IV student financial
aid that a program of study prepare students for gainful
employment in a recognized occupation.
|
On June 18, 2010, the Department issued a Notice of
Proposed Rulemaking (NPRM) in respect of the program
integrity issues, other than the metrics for determining
compliance with the gainful employment requirement. On
July 26, 2010, the Department published a separate NPRM in
respect of the gainful employment metrics. The Department has
stated that its goal is to publish final rules by
November 1, 2010, excluding significant sections related to
gainful employment which the Department expects to publish in
early 2011. The final rules, including some reporting and
disclosure rules related to gainful employment described below,
are expected to be effective July 1, 2011. See
Item 1A, Risk Factors Risks Related to the
Highly Regulated Industry in Which We Operate
Pending rulemaking by the U.S. Department of Education
could result in regulatory changes that materially and adversely
affect our business for further discussion regarding the
proposed rules, which discussion is incorporated by this
reference.
Incentive Compensation. A school participating
in Title IV programs may not pay any commission, bonus or
other incentive payments to any person involved in student
recruitment or admissions or awarding of Title IV program
funds, if such payments are based directly or indirectly on
success in enrolling students or obtaining student financial
aid. The law and regulations governing this requirement do not
establish clear criteria for compliance in all circumstances,
but there currently are twelve safe harbors that define specific
types of compensation that are deemed to constitute permissible
incentive compensation. Currently, we rely on several of these
safe harbors to ensure that our compensation and recruitment
practices comply with the applicable requirements.
In the rules proposed by the Department, these twelve safe
harbors would be eliminated and, in lieu of the safe harbors,
some of the relevant concepts relating to the incentive
compensation limitations would be defined. These changes would
increase the uncertainty about what constitutes incentive
compensation and which employees are covered by the regulation.
In response to the Departments concern about the impact of
compensation structures that rely on the current safe harbors
(reflected in the proposed rulemaking), and in order to enhance
the admissions process for our students, we began considering an
alternative compensation structure for our admissions personnel
in early 2009. We have been developing this new structure, which
complies with the Departments proposed rule, over the past
twelve months and expect to implement it on a broad scale during
the first quarter of fiscal year 2011. In connection with this,
we eliminated enrollment results as a component of compensation
for our admissions personnel effective September 1, 2010.
State Authorization. In the U.S., institutions
that participate in Title IV programs must be authorized to
operate by the appropriate postsecondary regulatory authority in
each state where the institution has a physical presence, or be
exempt from such regulatory authorization, usually based on
recognized accreditation. As of August 31, 2010, University
of Phoenix is authorized to operate or has confirmed an
exemption to operate based upon its accreditation and has a
physical presence in 39 states, Puerto Rico and the
District of
25
Columbia. University of Phoenix has held these authorizations or
has confirmed an exemption for specific authority to operate
based upon its accreditation for periods ranging from less than
three years to over 25 years. As of August 31, 2010,
University of Phoenix has also been approved to operate or has
confirmed an exemption to operate based upon its accreditation
in Alaska, Mississippi, Montana and South Dakota, but does not
yet have a physical presence in these states. In five states,
including California, University of Phoenix is qualified to
operate without specific state regulatory approval due to
available state exemptions that permit such operation if certain
programmatic or other accreditation criteria are met. Under new
rules proposed by the U.S. Department of Education, we may
be required to seek and obtain specific regulatory approval to
operate in these states and would not be entitled to rely on
available exemptions based on accreditation. If we experience a
delay in obtaining or cannot obtain these approvals, our
business could be adversely impacted.
Gainful Employment. Under the Higher Education
Act, as reauthorized, proprietary schools are eligible to
participate in Title IV programs only in respect of
educational programs that lead to gainful employment in a
recognized occupation. Historically, this concept has not
been defined in detail. In its July 26, 2010 NPRM, the
U.S. Department of Education published proposed rules that
would for the first time define gainful employment, which would
apply on a
program-by-program
basis.
Under the proposed rules, gainful employment in respect of a
particular program would be defined by reference to two
debt-related tests: one based on student debt
service-to-income
ratios for program graduates, and the other based on student
loan repayment rates for program enrollees. Based on the
application of these tests, a program may be eligible to
participate in Title IV programs without restriction, may
be eligible to participate with disclosure requirements, may be
on restricted status and only able to participate with material
restrictions (including enrollment limitations), or may be
ineligible to participate.
The proposed debt
service-to-income
test measures the median annual student loan debt service of
graduates of a program, as a percentage of their average annual
earnings
and/or their
discretionary income (as defined), in each case
measured over the preceding three years or, in some cases, the
three years prior to the preceding three years. The proposed
loan repayment test measures the loan repayment rate for former
enrollees in (and not just graduates of) a program. The
repayment rate is calculated as a percentage of all program
enrollee Title IV loans that entered into repayment during
the preceding four federal fiscal years that are in current
repayment status, determined on a dollar weighted basis by
reference to the original principal amount of such loans. A loan
would be considered to be in current status if it has been fully
repaid or debt service has been paid such that the outstanding
principal balance was reduced during the most recent federal
fiscal year.
The proposed rules provide for a two-year phase-in. For the
award year beginning July 1, 2012, only the
lowest-performing programs accounting for 5% of all graduates
during the prior year would be subject to losing eligibility.
The full application of the eligibility rules would commence
with the award year beginning July 1, 2013.
The Department has stated that it intends to publish final rules
by November 1, 2010 covering a portion of the proposed
gainful employment rules. These rules would require proprietary
institutions of higher education and postsecondary vocational
institutions to provide prospective students with each eligible
programs graduation and job placement rates, and require
colleges to provide the Department with information that will
allow determination of student debt levels and incomes after
program completion. Additionally, the rules would require
institutions to provide certain information to the Department
before new programs would be eligible to participate in
Title IV programs.
The above descriptions of the proposed gainful employment rules
are qualified in their entirety by the text of the proposed
rules, available at
http://www2.ed.gov/legislation/FedRegister/proprule/2010-3/072610a.pdf. These
proposed rules are complex and their application involves many
interpretive and other issues, not all of which may be addressed
in any final rulemaking.
If these rules are adopted in the form proposed, many of our
programs may be ineligible for Title IV funding or
restricted because they do not meet at least one of the
specified tests. In addition, the continuing eligibility of our
educational programs for Title IV funding would be at risk
due to factors beyond our control,
26
such as changes in the income level of our graduates, increases
in interest rates, changes in the federal poverty income level
relevant for calculating discretionary income, changes in the
percentage of our former students who are current in repayment
of their student loans, and other factors. The exposure to these
external factors would hinder our ability to effectively manage
our business. If a particular program ceased to be eligible for
Title IV funding, in most cases it would not be practical
to continue offering that program under our current business
model. Adoption of the regulations in the form proposed could
result in a significant realignment of the types of educational
programs that are offered by us and by other proprietary
institutions, in order to comply with the rules or, most
prominently, to avoid the uncertainty associated with compliance
over time. This realignment could reduce our enrollment, perhaps
materially.
The Department has not provided access to the income and debt
service information sufficient to determine the impact of these
proposed gainful employment rules on our programs.
We cannot predict the form of the final rules regarding program
integrity that may be adopted by the Department. Compliance with
these rules in the form proposed could reduce our enrollment,
increase our cost of doing business, and have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
U.S. Congressional Hearings. In recent
months, there has been increased focus by the U.S. Congress
on the role that proprietary educational institutions play in
higher education. On June 24, 2010, the U.S. Senate
Committee on Health, Education, Labor and Pensions (HELP
Committee) held the first in a series of hearings to
examine the proprietary education sector. The August 4,
2010 hearing included the presentation of results from a
Government Accountability Office (GAO) review of
various aspects of the proprietary sector, including recruitment
practices, educational quality, student outcomes, the
sufficiency of integrity safeguards against waste, fraud and
abuse in federal student aid programs and the degree to which
for-profit institutions revenue is composed of
Title IV and other federal funding sources. Following the
August 4, 2010 hearing, Sen. Harkin requested a broad range
of detailed information from 30 proprietary institutions,
including Apollo Group. We have been and intend to continue
being responsive to the requests of the HELP Committee. Sen.
Harkin has stated that another in this series of hearings will
be held in December 2010.
We cannot predict what legislation, if any, will emanate from
these Congressional committee hearings or what impact any such
legislation might have on the proprietary education sector and
our business in particular. Any action by Congress that
significantly reduces Title IV program funding or the
ability of our institutions or students to participate in
Title IV programs would have a material adverse effect on
our business, financial condition, results of operations and
cash flows. See Item 1A, Risk Factors Risks
Related to the Highly Regulated Industry in Which We
Operate Action by the U.S. Congress to revise
the laws governing the federal student financial aid programs or
reduce funding for those programs could reduce our student
population and increase our costs of operation for further
discussion regarding the HELP Committee hearings, which
discussion is incorporated by this reference.
The 90/10 Rule. A requirement of the Higher
Education Act, as reauthorized by the Higher Education
Opportunity Act, commonly referred to as the 90/10
Rule, applies only to proprietary institutions of higher
education, which includes University of Phoenix and Western
International University. Under this rule, a proprietary
institution will be ineligible to participate in Title IV
programs if for any two consecutive fiscal years it derives more
than 90% of its cash basis revenue, as defined in the rule, from
Title IV programs. An institution that derives more than
90% of its revenue from Title IV programs for any single
fiscal year will be automatically placed on provisional
certification for two fiscal years and will be subject to
possible additional sanctions determined to be appropriate under
the circumstances by the U.S. Department of Education in
the exercise of its broad discretion. While the Department has
broad discretion to impose additional sanctions on such an
institution, there is only limited precedent available to
predict what those sanctions might be, particularly in the
current regulatory environment. The Department could specify any
additional conditions as a part of the provisional certification
and the institutions continued participation in
Title IV programs. These conditions may include, among
other things, restrictions on the total amount of Title IV
program funds that may be distributed to students attending the
institution; restrictions on programmatic and geographic
expansion; requirements to obtain and post letters of credit;
additional reporting requirements to include
27
additional interim financial reporting; or any other conditions
imposed by the Department. Should an institution be subject to a
provisional certification at the time that its current program
participation agreement expired, the effect on recertification
of the institution or continued eligibility in Title IV
programs pending recertification is uncertain. An institution
that derives more than 90% of its revenue from Title IV
programs for two consecutive fiscal years will be ineligible to
participate in Title IV programs for at least two fiscal
years. University of Phoenix and Western International
University are required to calculate this percentage at the end
of each fiscal year. If an institution is determined to be
ineligible to participate in Title IV programs due to the
90/10 Rule, any disbursements of Title IV program funds
while ineligible must be repaid to the Department. See
Item 1A, Risk Factors Risks Related to the
Highly Regulated Industry in Which We Operate Our
schools and programs would lose their eligibility to participate
in federal student financial aid programs if the percentage of
our revenues derived from those programs is too high, in which
event we could not conduct our business as it is currently
conducted for further discussion regarding the 90/10 Rule,
which discussion is incorporated by this reference.
The 90/10 Rule percentage for University of Phoenix has
increased materially over the past several fiscal years and we
expect further increases in the near term. These increases are
primarily attributable to the increase in student loan limits
enacted by the Ensuring Continued Access to Student Loans Act of
2008 and expanded eligibility for and increases in the maximum
amount of Pell Grants.
The Higher Education Opportunity Act provides temporary relief
from the impact of the loan limit increases by excluding from
the 90/10 Rule calculation any amounts received between
July 1, 2008 and June 30, 2011 that are attributable
to the increased annual loan limits. We refer to this as the
LLI relief. The following table details the 90/10
Rule percentages for University of Phoenix and Western
International University, as well as the percentages for
University of Phoenix with the LLI relief, for fiscal years 2010
and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90/10 Rule Percentages for Fiscal Years Ended
August 31,
|
|
|
2010
|
|
2009
|
|
|
Including
|
|
Excluding
|
|
Including
|
|
Excluding
|
|
|
LLI Relief
|
|
LLI Relief
|
|
LLI Relief
|
|
LLI Relief
|
|
University of Phoenix
|
|
|
85
|
%
|
|
|
88
|
%
|
|
|
83
|
%
|
|
|
86
|
%
|
Western International University(1)
|
|
|
|
|
|
|
62
|
%
|
|
|
|
|
|
|
57
|
%
|
|
|
|
(1) |
|
We have not calculated the 90/10 Rule percentages for Western
International University with the LLI relief because of its
relatively low 90/10 Rule percentages. |
Based on currently available information, we expect that the
90/10 Rule percentage for University of Phoenix, net of the LLI
relief, will approach 90% for fiscal year 2011, principally
because of the expanded eligibility for and increases in the
amount of Pell Grants. We have implemented various measures
intended to reduce the percentage of University of
Phoenixs cash basis revenue attributable to Title IV
funds, including emphasizing employer-paid and other direct-pay
education programs, encouraging students to carefully evaluate
the amount of necessary Title IV borrowing, and continued
focus on professional development and continuing education
programs. Although we believe these measures will favorably
impact the 90/10 Rule calculation, they have had only limited
impact to date and there is no assurance that they will be
adequate to prevent the 90/10 Rule calculation from exceeding
90% in the future. We are considering other measures to
favorably impact the 90/10 Rule calculation for University of
Phoenix, including tuition price increases; however, we have
substantially no control over the amount of Title IV student
loans and grants sought by or awarded to our students.
Based on currently available information, we do not expect the
90/10 Rule percentage for University of Phoenix, net of the LLI
relief, to exceed 90% for fiscal year 2011. However, we believe
that, absent a change in recent trends or the implementation of
additional effective measures to reduce the percentage, the
90/10 Rule percentage for University of Phoenix is likely to
exceed 90% in fiscal year 2012 due to the expiration of the LLI
relief in July 2011.
28
We believe that the most effective long-term solution to address
the increasing 90/10 Rule percentage is a change in the 90/10
Rule itself. Because of the increases in Title IV student
loan limits and grants in recent years, we believe that many
proprietary institutions are experiencing pressure on their
90/10 Rule compliance. One potential unintended consequence of
this pressure is higher tuition rates. This is because one of
the more effective methods of reducing the 90/10 Rule percentage
is to increase tuition prices above the applicable maximums for
Title IV student loans and grants, requiring other sources
of funding to resolve the remaining tuition balance, in order to
reduce the percentage of revenue from Title IV sources.
However, this consequence directly undermines the Department of
Educations interest in promoting affordable postsecondary
education. Although modification of the rule could limit this
undesirable impact on tuition, there is no assurance that the
Department, or Congress, will address this problem by modifying
the rule or will address it in a manner that timely and
favorably impacts compliance by University of Phoenix.
Our efforts to reduce the 90/10 Rule percentage for University
of Phoenix, especially if the percentage exceeds 90% for a
fiscal year, may involve taking measures which reduce our
revenue, increase our operating expenses, or both, in each case
perhaps significantly. If the 90/10 Rule is not changed to
provide relief for proprietary institutions, we may be required
to make structural changes to our business in order to remain in
compliance, which changes may materially alter the manner in
which we conduct our business and materially and adversely
impact our business, financial condition, results of operations
and cash flows. Furthermore, these required changes could make
more difficult our ability to comply with other important
regulatory requirements, such as the cohort default rate
regulations discussed below under Student Loan
Defaults and Item 1A, Risk Factors
Risks Related to the Highly Regulated Industry in Which We
Operate An increase in student loan default rates
could result in the loss of eligibility to participate in
Title IV programs, which would materially and adversely
affect our business, as well as the proposed gainful
employment regulations discussed above under New
Rulemaking Initiative and Item 1A, Risk Factors
Risks Related to the Highly Regulated Industry in
Which We Operate Pending rulemaking by the
U.S. Department of Education could result in regulatory
changes that materially and adversely affect our business.
Student Loan Defaults. To remain eligible to
participate in Title IV programs, educational institutions
must maintain student loan cohort default rates below specified
levels. Each cohort is the group of students who first enter
into student loan repayment during a federal fiscal year (ending
September 30). Under the Higher Education Act, as reauthorized,
the currently applicable cohort default rate for each cohort is
the percentage of the students in the cohort who default on
their student loans prior to the end of the following federal
fiscal year, which represents a two-year measuring period. An
educational institution will lose its eligibility to participate
in some or all Title IV programs if its student loan cohort
default rate equals or exceeds 25% for three consecutive years
or 40% for any given year. If our student loan default rates
approach these limits, we may be required to increase efforts
and resources dedicated to improving these default rates. In
addition, because there is a lag between the funding of a
student loan and a default thereunder, many of the borrowers who
are in default or at risk of default are former students with
whom we may have only limited contact. Accordingly, there can be
no assurance that we would be able to effectively improve our
default rates or improve them in a timely manner to meet the
requirements for continued participation in Title IV
funding if we experience a substantial increase in our student
loan default rates. See Item 1A, Risk
Factors Risks Related to the Highly Regulated
Industry in Which We Operate An increase in student
loan default rates could result in the loss of eligibility to
participate in Title IV programs, which would materially
and adversely affect our business for further discussion
regarding student loan cohort default rates, which discussion is
incorporated by this reference.
If an educational institutions two-year cohort default
rate exceeds 10% for any one of the three preceding years, it
must delay for 30 days the release of the first
disbursement of U.S. federal student loan proceeds to first
time borrowers enrolled in the first year of an undergraduate
program. Western International University implemented a
30-day delay
for such disbursements in fiscal year 2007 and University of
Phoenix proactively implemented a
30-day delay
in fiscal year 2009.
29
The cohort default rates for University of Phoenix, Western
International University and for all proprietary postsecondary
institutions for the federal fiscal years 2008, 2007 and 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-Year Cohort Default Rates for
|
|
|
Cohort Years Ended September 30,
|
|
|
2008
|
|
2007
|
|
2006
|
|
University of Phoenix(1)
|
|
|
12.9
|
%
|
|
|
9.3
|
%
|
|
|
7.2
|
%
|
Western International University(1)
|
|
|
10.7
|
%
|
|
|
18.5
|
%
|
|
|
27.4
|
%
|
All proprietary postsecondary institutions(1)
|
|
|
11.6
|
%
|
|
|
11.0
|
%
|
|
|
9.7
|
%
|
|
|
|
(1) |
|
Based on information published by the U.S. Department of
Education. |
The University of Phoenix cohort default rates have been
increasing over the past several years, largely due to the
transitioning of our associates degree students from
Western International University to University of Phoenix
beginning in April 2006 and the general expansion of the
University of Phoenix associates degree program. Student
loan default rates tend to be higher in our associates
degree student population compared to our bachelors and
our graduate degree student populations. We expect this upward
trend to intensify due to the current challenging economic
climate and the continuing effect of the historical growth in
our associates degree student population. Consistent with
this, the available preliminary data for the University of
Phoenix 2009 cohort reflect a substantially higher default rate
than the 2008 cohort, although we do not expect the rate to
exceed 25%.
The cohort default rate requirements were modified by the Higher
Education Opportunity Act enacted in August 2008 to increase by
one year the measuring period for each cohort. Starting with the
2009 cohort, the U.S. Department of Education will
calculate both the current two-year and the new three-year
cohort default rates. Beginning with the 2011 three-year cohort
default rate published in September 2014, the three-year rates
will be applied for purposes of measuring compliance with the
requirements.
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|
|
|
|
Annual test. If the 2011 three-year cohort
default rate exceeds 40%, the institution will cease to be
eligible to participate in Title IV programs; and
|
|
|
|
Three consecutive years test. If the
institutions three-year cohort default rate exceeds 30%
(an increase from the current 25% threshold applicable to the
two-year cohort default rates) for three consecutive years,
beginning with the 2009 cohort, the institution will cease to be
eligible to participate in Title IV programs.
|
Eligibility and Certification Procedures. The
Higher Education Act, as reauthorized, specifies the manner in
which the U.S. Department of Education reviews institutions
for eligibility and certification to participate in
Title IV programs. Every educational institution involved
in Title IV programs must be certified to participate and
is required to periodically renew this certification. University
of Phoenix was recertified in November 2009 and entered into a
new Title IV Program Participation Agreement which expires
on December 31, 2012. Western International University was
recertified in May 2010 and entered into a new Title IV
Program Participation Agreement which expires on
September 30, 2014.
U.S. Department of Education Audits. The
U.S. Department of Education periodically reviews
institutions participating in Title IV programs for
compliance with applicable standards and regulations. In
February 2009, the U.S. Department of Education performed
an ordinary course, focused program review of University of
Phoenixs policies and procedures involving Title IV
programs. On December 31, 2009, University of Phoenix
received the Departments Program Review Report, which was
a preliminary report of the Departments findings. We
responded to the preliminary report in the third quarter of
fiscal year 2010. In June 2010, we posted a letter of credit in
the amount of approximately $126 million as required by the
Departments regulations when a program review report cites
untimely return of unearned Title IV funds for more than
10% of the sampled students in a period covered by the review.
The Department issued its Final Program Review Determination
Letter on June 16, 2010, which confirmed we had completed
the corrective actions and satisfied the obligations arising
from the review.
30
Of the six findings contained in the Final Program Review
Determination Letter, three related to University of
Phoenixs procedures for determining student withdrawal
dates and associated timing of the return of unearned
Title IV funds, which averaged no more than six days
outside the required timeframe in the affected sample files.
There were no findings that indicated incorrect amounts of
Title IV funds had been returned. In the second quarter of
fiscal year 2010, we made payments totaling $0.7 million to
reimburse the Department for the cost of Title IV funds
associated with these findings. The remaining findings involved
isolated clerical errors verifying student-supplied information
and, as self-reported by University of Phoenix in 2008, the
calculation of student financial need where students were
eligible for tuition and fee waivers and discounts, and the use
of Title IV funds for non-program purposes such as
transcripts, applications and late fees.
Administrative Capability. The Higher
Education Act, as reauthorized, directs the U.S. Department
of Education to assess the administrative capability of each
institution to participate in Title IV programs. The
failure of an institution to satisfy any of the criteria used to
assess administrative capability may cause the Department to
determine that the institution lacks administrative capability
and, therefore, subject the institution to additional scrutiny
or deny eligibility for Title IV programs.
Standards of Financial
Responsibility. Pursuant to the Title IV
regulations, each eligible higher education institution must
satisfy a measure of financial responsibility that is based on a
weighted average of three annual tests which assess the
financial condition of the institution. The three tests measure
primary reserve, equity, and net income ratios. The Primary
Reserve Ratio is a measure of an institutions financial
viability and liquidity. The Equity Ratio is a measure of an
institutions capital resources and its ability to borrow.
The Net Income Ratio is a measure of an institutions
profitability. These tests provide three individual scores which
are converted into a single composite score. The maximum
composite score is 3.0. If the institution achieves a composite
score of at least 1.5, it is considered financially responsible.
A composite score from 1.0 to 1.4 is considered financially
responsible, and the institution may continue to participate as
a financially responsible institution for up to three years,
subject to additional monitoring and other consequences. If an
institution does not achieve a composite score of at least 1.0,
it can be transferred from the advance system of
payment of Title IV funds to cash monitoring status or to
the reimbursement system of payment, under which the
institution must disburse its own funds to students and document
the students eligibility for Title IV program funds
before receiving such funds from the U.S. Department of
Education. The composite scores for Apollo Group, University of
Phoenix and Western International University exceed 1.5.
Limits on Title IV Program Funds. The
Title IV regulations place restrictions on the types of
programs offered and the amount of Title IV program funds
that a student is eligible to receive in any one academic year.
Only certain types of educational programs offered by an
institution qualify for Title IV program funds. For
students enrolled in qualified programs, the Title IV
regulations place limits on the amount of Title IV program
funds that a student is eligible to receive in any one academic
year, as defined by the U.S. Department of Education. An
academic year must consist of at least 30 weeks of
instructional time and a minimum of 24 credits. Most of
University of Phoenixs and Western International
Universitys degree programs meet the academic year minimum
definition of 30 weeks of instructional time and 24
credits. Substantially all of University of Phoenixs
degree programs qualify for Title IV program funds. The
programs that do not qualify for Title IV program funds
consist primarily of corporate training programs and certain
certificate and continuing professional education programs. The
tuition for these programs is often paid by employers.
Restricted Cash. The U.S. Department of
Education places restrictions on excess Title IV program
funds collected for unbilled tuition and fees transferred to
University of Phoenix, Western International University or IPD
Client Institutions. If an institution holds excess
Title IV program funds with student authorization, the
institution must maintain, at all times, cash in an amount at
least equal to the amount of funds the institution holds for
students. These funds are included in restricted cash and cash
equivalents in our Consolidated Balance Sheets in Item 8,
Financial Statements and Supplementary Data.
Authorizations for New Locations and
Programs. University of Phoenix, Western
International University and CFFP are required to have
authorization to operate as degree-granting institutions in each
state where they physically provide educational programs.
Certain states accept accreditation as evidence of meeting
31
minimum state standards for authorization or for exempting the
institution entirely from formal state licensure or approval.
Other states require separate evaluations for authorization.
Depending on the state, the addition of a degree program not
offered previously or the addition of a new location must be
included in the institutions accreditation and be approved
by the appropriate state authorization agency. University of
Phoenix, Western International University and CFFP are currently
authorized to operate or have confirmed an exemption to operate
based upon their accreditation in all states in which they have
physical locations and in all states in which they operate and
in which separate licensure is required for their distance
education programs.
Under new rules proposed by the U.S. Department of
Education, we may be required to seek and obtain specific
regulatory approval to operate in states in which University of
Phoenix is qualified to operate without specific state
regulatory approval, and would not be entitled to rely on
available exemptions based on accreditation. If we experience a
delay in obtaining or cannot obtain these approvals, our
business could be adversely impacted. See Item 1A, Risk
Factors Risks Related to the Highly Regulated
Industry in Which We Operate Pending rulemaking by
the U.S. Department of Education could result in regulatory
changes that materially and adversely affect our business
for further discussion regarding authorizations for new
locations and programs, which discussion is incorporated by this
reference.
University of Phoenix, Western International University and CFFP
also must obtain the prior approval of The Higher Learning
Commission before expanding into new locations to conduct
instructional activities. In addition, The Higher Learning
Commission has recently imposed additional requirements on
University of Phoenix with respect to approval of new or
relocated campuses and additional locations. These requirements
may lengthen or make more challenging the approval process for
these sites. See Item 1A, Risk Factors Risks
Related to the Highly Regulated Industry in Which We
Operate If we fail to maintain our institutional
accreditation or if our institutional accrediting body loses
recognition by the U.S. Department of Education, we could
lose our ability to participate in Title IV programs, which
would materially and adversely affect our business for
further discussion regarding The Higher Learning Commission.
Branching and Classroom Locations. The
Title IV regulations contain specific requirements
governing the establishment of new main campuses, branch
campuses and classroom locations at which the eligible
institution offers, or could offer, 50% or more of an
educational program. In addition to classrooms at campuses and
learning centers, locations affected by these requirements
include the business facilities of client companies, military
bases and conference facilities used by University of Phoenix
and Western International University. The U.S. Department
of Education requires that the institution notify the
U.S. Department of Education of each location offering 50%
or more of an educational program prior to disbursing
Title IV program funds to students at that location.
University of Phoenix and Western International University have
procedures in place to ensure timely notification and
acquisition of all necessary location approvals prior to
disbursing Title IV funds to students attending any new
location. In addition, The Higher Learning Commission requires
that each new campus or learning center of University of Phoenix
or Western International University be approved before offering
instruction. States in which the two universities operate have
varying requirements for approval of branch and classroom
locations.
Change of Ownership or Control. A change of
ownership or control, depending on the type of change, may have
significant regulatory consequences for University of Phoenix,
Western International University and CFFP. Such a change of
ownership or control could trigger recertification by the
U.S. Department of Education, reauthorization by state
licensing agencies, or the reevaluation of the accreditation by
The Higher Learning Commission.
The Department has adopted the change of ownership and control
standards used by the U.S. federal securities laws for
institutions owned by publicly-held corporations. If a change of
ownership and control occurs that requires us to file a
Form 8-K
with the Securities and Exchange Commission, or there is a
change in the identity of a controlling shareholder of Apollo
Group, University of Phoenix
and/or
Western International University may become ineligible to
participate in Title IV programs until recertified by the
Department. Under some circumstances, the Department may
continue an institutions participation in Title IV
programs on a temporary provisional basis pending completion of
the change in ownership approval process. In addition, some
states where University of Phoenix, Western International
University or CFFP are presently
32
licensed have requirements governing change of ownership or
control that require approval of the change to remain authorized
to operate in those states. See Item 1A, Risk
Factors Risks Related to the Highly Regulated
Industry in Which We Operate If regulators do not
approve or delay their approval of transactions involving a
change of control of our company, our state licenses,
accreditation, and ability to participate in Title IV programs
and state grant payments may be impaired. Moreover,
University of Phoenix, Western International University and CFFP
are required to report any material change in stock ownership to
The Higher Learning Commission. In the event of a material
change in stock ownership, The Higher Learning Commission may
seek to evaluate the effect of such a change on the continuing
operations of University of Phoenix, Western International
University and CFFP.
New U.S. Department of Education Reporting and
Disclosure Requirements. The Higher Education
Opportunity Act includes various provisions aimed at the rising
cost of postsecondary education and other efforts for more
transparency. Beginning July 1, 2011, the
U.S. Department of Education will publish national lists
disclosing the top five percent in each of nine institutional
categories with the highest college costs and largest percentage
cost increases. In addition, all Title IV eligible
institutions will be required to disclose their plans for
academic program improvement, institutional policies and
sanctions related to the unauthorized distribution of
copyrighted material, retention rates, placement information,
completion and graduation rates and campus/student safety
awareness provisions.
International
Governmental regulations in foreign countries significantly
affect our international operations. New or revised
interpretations of regulatory requirements could have a material
adverse effect on us. Changes in existing or new interpretations
of applicable laws, rules, or regulations in the foreign
jurisdictions in which we operate could have a material adverse
effect on our accreditation, authorization to operate,
permissible activities, and costs of doing business outside of
the U.S. The failure to maintain or renew any required
regulatory approvals, accreditation, or state authorizations
could have a material adverse effect on our international
operations. See Item 1A, Risk Factors Risks
Related to the Highly Regulated Industry in Which We Operate.
Other
Matters
We file annual, quarterly and current reports with the
Securities and Exchange Commission. You may read and copy any
document we file at the Securities and Exchange
Commissions Public Reference Room at
100 F Street N.E., Washington, D.C. 20549. Please
call the Securities and Exchange Commission at
1-800-SEC-0330
for information on the Public Reference Room. The Securities and
Exchange Commission maintains a website that contains annual,
quarterly and current reports that issuers file electronically
with the Securities and Exchange Commission. The Securities and
Exchange Commissions website is
http://www.sec.gov.
Our website address is www.apollogrp.edu. We make available free
of charge on our website our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
Information Statements on Schedule 14C, Forms 3, 4,
and 5 filed on behalf of directors and executive officers, and
all amendments to those reports filed or furnished pursuant to
the Securities Exchange Act of 1934, as soon as reasonably
practicable after such reports are electronically filed with, or
furnished to, the Securities and Exchange Commission.
Item 1A
Risk Factors
You should carefully consider the risks and uncertainties
described below and all other information contained in this
Annual Report on
Form 10-K.
In order to help assess the major risks in our business, we have
identified many, but not all, of these risks. Due to the scope
of our operations, a wide range of factors could materially
affect future developments and performance.
If any of the following risks are realized, our business,
financial condition, cash flow or results of operations could be
materially and adversely affected, and as a result, the trading
price of our Class A
33
common stock could be materially and adversely impacted. These
risk factors should be read in conjunction with other
information set forth in this Annual Report, including
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and
Item 8, Financial Statements and Supplementary Data,
including the related Notes to Consolidated Financial
Statements.
Risks
Related to the Control Over Our Voting Stock
Our
Class A common stock has no voting rights. Our Executive
Chairman and Vice Chairman of the Board control 100% of our
voting stock and control substantially all actions requiring the
vote or consent of our shareholders, which may have an adverse
effect on the trading price of our Class A common stock and
may discourage a takeover.
Dr. John G. Sperling, our Executive Chairman of the Board
and Founder, controls approximately 51% of our only class of
voting securities, the Apollo Group Class B common stock.
Dr. Sperlings son, Mr. Peter Sperling, the Vice
Chairman of our board of directors, controls the remainder of
our Class B common stock. Dr. Sperling and
Mr. Sperling together control the election of all members
of our Board of Directors and substantially all other actions
requiring a vote of our shareholders, except in certain limited
circumstances. Holders of our outstanding Apollo Group
Class A common stock do not have the right to vote for the
election of directors or for substantially any other action
requiring a vote of shareholders. In the event of
Dr. Sperlings passing, control of the John Sperling
Voting Stock Trust, which holds a majority of the outstanding
Apollo Group Class B common stock, will be exercised by a
majority of three successor trustees: Mr. Sperling, Terri
Bishop, who is employed by and is a Director of Apollo, and
Darby Shupp, an employee of an entity affiliated with
Dr. Sperling. No assurances can be given that the Apollo
Group Class B shareholders will exercise their control of
Apollo Group in the same manner that a majority of the
outstanding Class A shareholders would if they were
entitled to vote on actions currently reserved exclusively for
our Class B shareholders. In addition, the control of a
majority of our voting stock by Dr. Sperling makes it
impossible for a third party to acquire voting control of us
without Dr. Sperlings consent.
We are a Controlled Company as defined in
Rule 5615(c)(1) of the NASDAQ Listing Rules, because more
than 50% of the voting power of Apollo Group is held by the John
Sperling Voting Stock Trust. As a consequence, we are exempt
from certain requirements of NASDAQ Listing Rule 5605,
including that:
|
|
|
|
|
our Board be composed of a majority of Independent Directors (as
defined in NASDAQ Listing Rule 5605(a)(2));
|
|
|
|
the compensation of our officers be determined by a majority of
the independent directors or a compensation committee composed
solely of independent directors; and
|
|
|
|
nominations to the Board of Directors be made by a majority of
the independent directors or a nominations committee composed
solely of independent directors.
|
However, NASDAQ Listing Rule 5605(b)(2) does require that
our independent directors have regularly scheduled meetings at
which only independent directors are present (executive
sessions). In addition, Internal Revenue Code
Section 162(m) requires that a compensation committee of
outside directors (within the meaning of Section 162(m))
approve stock option grants to executive officers in order for
us to be able to claim deductions for the compensation expense
attributable to such stock options. Notwithstanding the
foregoing exemptions, we do have a majority of independent
directors on our Board of Directors and we do have an Audit
Committee, a Compensation Committee and a Nominating and
Governance Committee composed entirely of independent directors.
The charters for the Compensation, Audit and Nominating and
Governance Committees have been adopted by the Board of
Directors and are available on our website, www.apollogrp.edu.
These charters provide, among other items, that each member must
be independent as such term is defined by the rules of the
NASDAQ Stock Market LLC and the Securities and Exchange
Commission.
34
If
regulators do not approve or delay their approval of
transactions involving a change of control of our company, our
state licenses, accreditation, and ability to participate in
Title IV programs and state grant programs may be
impaired.
A change of ownership or control of Apollo Group, depending on
the type of change, may have significant regulatory consequences
for University of Phoenix and Western International University.
Such a change of ownership or control could require
recertification by the U.S. Department of Education,
reauthorization by state licensing agencies, or the reevaluation
of the accreditation by The Higher Learning Commission of the
North Central Association of Colleges and Schools. The
Department has adopted the change of ownership and control
standards used by the federal securities laws for institutions
owned by publicly-held corporations. Upon a change of ownership
and control sufficient to require us to file a
Form 8-K
with the Securities and Exchange Commission, or a change in the
identity of a controlling shareholder of Apollo Group,
University of Phoenix
and/or
Western International University may cease to be eligible to
participate in Title IV programs until recertified by the
Department. There can be no assurances that such recertification
would be obtained on a timely basis. Under some circumstances,
the Department may continue an institutions participation
in the Title IV programs on a temporary provisional basis
pending completion of the change in ownership approval process.
In addition, some states where University of Phoenix, Western
International University or CFFP is presently licensed have
requirements governing change of ownership or control that
require approval of the change to remain authorized to operate
in those states, and participation in grant programs in some
states may be interrupted or otherwise affected by a change of
ownership or control. Moreover, University of Phoenix, Western
International University and CFFP are required to report any
material change in stock ownership to The Higher Learning
Commission. In the event of a material change in stock ownership
of Apollo Group, The Higher Learning Commission may seek to
evaluate the effect of such a change of stock ownership on the
continuing operations of University of Phoenix, Western
International University and CFFP.
All of our voting stock is owned and controlled by Dr. John
Sperling and Mr. Peter Sperling. We cannot prevent a change
of ownership or control that would arise from a transfer of
voting stock by Dr. Sperling or Mr. Sperling,
including a transfer that may occur or be deemed to occur upon
the death of one or both of Dr. Sperling or
Mr. Sperling. Dr. and Mr. Sperling have
established voting stock trusts and other agreements with the
intent to maintain the Companys voting stock in such a way
as to prevent a change of ownership or control upon
eithers death, but we cannot assure you that these
arrangements will have the desired effect.
Risks
Related to the Highly Regulated Industry in Which We
Operate
U.S.
Operations
If we
fail to comply with the extensive regulatory requirements for
our business, we could face significant monetary liabilities,
fines and penalties, including loss of access to U.S. federal
student loans and grants for our students.
As a provider of higher education, we are subject to extensive
U.S. regulation on both the federal and state levels. In
particular, the Higher Education Act, as reauthorized by the
Higher Education Opportunity Act in August 2008, and related
regulations impose significant regulatory scrutiny on University
of Phoenix and Western International University, and all other
higher education institutions that participate in the various
federal student financial aid programs under Title IV of
the Higher Education Act (Title IV programs).
We collected the substantial majority of our fiscal year 2010
total consolidated net revenue from receipt of Title IV
financial aid program funds. University of Phoenix represented
approximately 91% of our fiscal year 2010 total consolidated net
revenue and University of Phoenix generated 88% of its cash
basis revenue for eligible tuition and fees during fiscal year
2010 from receipt of Title IV financial aid program funds
excluding temporary relief.
These regulatory requirements cover virtually all phases of our
U.S. operations, including educational program offerings,
branching and classroom locations, instructional and
administrative staff, administrative procedures, marketing and
recruiting, financial operations, payment of refunds to students
who withdraw,
35
maintenance of restricted cash, acquisitions or openings of new
schools, commencement of new educational programs and changes in
our corporate structure and ownership.
The Higher Education Act, as reauthorized, mandates specific
regulatory responsibilities for each of the following components
of the higher education regulatory triad: (1) the
U.S. federal government through the U.S. Department of
Education; (2) independent accrediting agencies recognized
by the U.S. Department of Education; and (3) state
higher education regulatory bodies.
The regulations, standards and policies of these regulatory
agencies frequently change and are subject to interpretation,
particularly where they are crafted for traditional, academic
term-based schools rather than our non-term academic delivery
model. Changes in, or new interpretations of, applicable laws,
regulations, or standards could have a material adverse effect
on our accreditation, authorization to operate in various
states, permissible activities, receipt of funds under
Title IV programs, or costs of doing business. We cannot
predict with certainty how all of the requirements applied by
these agencies will be interpreted or whether our schools will
be able to comply with these requirements in the future.
From time to time, we identify inadvertent compliance
deficiencies that we must address and, where appropriate, report
to the U.S. Department of Education. Such reporting, even
in regard to a minor compliance issue, could result in a more
significant compliance review by the Department or even a full
recertification review, which may require the expenditure of
substantial administrative time and resources to address. If the
Department concluded that these reported deficiencies reflect a
lack of administrative capability, we could be subject to
additional sanctions or even lose our eligibility to participate
in Title IV programs. See A failure to demonstrate
administrative capability or financial
responsibility may result in the loss of eligibility to
participate in Title IV programs, which would
materially and adversely affect our business, below.
If we are found not to be in compliance with any of these
regulations, standards or policies, any one of the relevant
regulatory agencies may be able to do one or more of the
following:
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impose monetary fines or penalties;
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limit or terminate our operations or ability to grant degrees
and diplomas;
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restrict or revoke our accreditation, licensure or other
approval to operate;
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limit, suspend or terminate our eligibility to participate in
Title IV programs or state financial aid programs;
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require repayment of funds received under Title IV programs
or state financial aid programs;
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require us to post a letter of credit with the
U.S. Department of Education;
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subject our schools to heightened cash monitoring by the
U.S. Department of Education;
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transfer us from the U.S. Department of Educations
advance system of receiving Title IV program funds to its
reimbursement system, under which a school must disburse its own
funds to students and document the students eligibility
for Title IV program funds before receiving such funds from
the U.S. Department of Education;
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subject us to other civil or criminal penalties; and/or
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subject us to other forms of censure.
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In addition, in some circumstances of noncompliance or alleged
noncompliance, we may be subject to qui tam lawsuits
under the Federal False Claims Act. In these actions, private
plaintiffs seek to enforce remedies under the Act on behalf of
the U.S. and, if successful, are entitled to recover their
costs and to receive a portion of any amounts recovered by the
U.S. in the lawsuit. These lawsuits can be prosecuted by a
private plaintiff in respect of some action taken by us, even if
the Department does not agree with plaintiffs theory of
liability.
Any of the penalties, injunctions, restrictions or other forms
of censure listed above could have a material adverse effect on
our business, financial condition, results of operations and
cash flows. If we lose our Title IV
36
eligibility, we would experience a dramatic decline in revenue
and we would be unable to continue our business as it currently
is conducted.
Pending
rulemaking by the U.S. Department of Education could result in
regulatory changes that materially and adversely affect our
business.
In November 2009, the U.S. Department of Education convened
two new negotiated rulemaking teams related to Title IV
program integrity issues and foreign school issues. The team
addressing program integrity issues, which included
representatives of the various higher education constituencies,
was unable to reach consensus on all of the rules addressed by
that team. Accordingly, under the negotiated rulemaking
protocol, the Department was free to propose rules without
regard to the tentative agreement reached regarding certain of
the rules. The proposed program integrity rulemaking addresses
numerous topics. The most significant proposals for our business
are the following:
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Modification of the standards relating to the payment of
incentive compensation to employees involved in student
recruitment and enrollment;
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Implementation of standards for state authorization of
proprietary institutions of higher education; and
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Adoption of a definition of gainful employment for
purposes of the requirement for Title IV student financial
aid that a program of study prepare students for gainful
employment in a recognized occupation.
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On June 18, 2010, the Department issued a Notice of
Proposed Rulemaking (NPRM) in respect of the program
integrity issues, other than the metrics for determining
compliance with the gainful employment requirement. On
July 26, 2010, the Department published a separate NPRM in
respect of the gainful employment metrics. The Department has
stated that its goal is to publish final rules by
November 1, 2010, excluding significant sections related to
gainful employment which the Department expects to publish in
early 2011. The final rules, including some reporting and
disclosure rules related to gainful employment described below,
are expected to be effective July 1, 2011.
Incentive
Compensation
A school participating in Title IV programs may not pay any
commission, bonus or other incentive payments to any person
involved in student recruitment or admissions or awarding of
Title IV program funds, if such payments are based directly
or indirectly on success in enrolling students or obtaining
student financial aid. The law and regulations governing this
requirement do not establish clear criteria for compliance in
all circumstances, but there currently are twelve safe harbors
that define specific types of compensation that are deemed to
constitute permissible incentive compensation. Currently, we
rely on several of these safe harbors to ensure that our
compensation and recruitment practices comply with the
applicable requirements.
In the rules proposed by the Department, these twelve safe
harbors would be eliminated and, in lieu of the safe harbors,
some of the relevant concepts relating to the incentive
compensation limitations would be defined. These changes would
increase the uncertainty about what constitutes incentive
compensation and which employees are covered by the regulation.
In response to the Departments concern about the impact of
compensation structures that rely on the current safe harbors
(reflected in the proposed rulemaking), and in order to enhance
the admissions process for our students, we began considering an
alternative compensation structure for our admissions personnel
in early 2009. We have been developing this new structure, which
complies with the Departments proposed rule, over the past
twelve months and expect to implement it on a broad scale during
the first quarter of fiscal year 2011. In connection with this,
we eliminated enrollment results as a component of compensation
for our admissions personnel effective September 1, 2010.
We expect that this change in our approach to recruiting, with
reduced emphasis on enrollment and increased emphasis on
improving the student experience, will adversely impact our
enrollment rates, particularly in the near-term, and increase
our operating costs, perhaps materially. We believe this is in
the
37
best interests of our students and it is consistent with our
on-going efforts to lead the industry in addressing the concerns
of the Department and others, including members of Congress,
about admissions practices in the proprietary sector. We
anticipate that this increased cost and the impact on our
revenue from reduced enrollment will be offset partly by the
benefits realized from improved student retention. However, we
are not able to precisely predict the impact.
The elimination of the existing twelve safe harbors also could
affect the manner in which we conduct our business in the
following additional ways:
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Our IPD business currently utilizes a revenue sharing model with
its client institutions, which is expressly permitted under one
of the twelve incentive compensation safe harbors. If this type
of revenue sharing becomes impermissible, we would need to
modify IPDs business model so as to comply with the new
requirements, which could materially and adversely affect this
business. IPDs net revenue and operating income represent
less than 2% of our consolidated net revenue and operating
income.
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We pay various third parties for Internet-based services related
to lead generation and marketing. As proposed, payments to a
third party for providing student contact information for
prospective students would still be permissible, provided that
such payments are not based on the number of students who apply
or enroll. If this regulation is adopted in the form proposed by
the Department, it could reduce our ability to manage the
quality of our leads and decrease our marketing efficiency,
which could materially increase our marketing costs and
adversely affect our business.
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State
Authorization
In the U.S., institutions that participate in Title IV
programs must be authorized to operate by the appropriate
postsecondary regulatory authority in each state where the
institution has a physical presence, or be exempt from such
regulatory authorization, usually based on recognized
accreditation. As of August 31, 2010, University of Phoenix
is authorized to operate or has confirmed an exemption to
operate based upon its accreditation and has a physical presence
in 39 states, Puerto Rico and the District of Columbia.
University of Phoenix has held these authorizations or has
confirmed an exemption for specific authority to operate based
upon its accreditation for periods ranging from less than three
years to over 25 years. As of August 31, 2010,
University of Phoenix has also been approved to operate or has
confirmed an exemption to operate based upon its accreditation
in Alaska, Mississippi, Montana and South Dakota, but does not
yet have a physical presence in these states. In five states,
including California, University of Phoenix is qualified to
operate without specific state regulatory approval due to
available state exemptions that permit such operation if certain
programmatic or other accreditation criteria are met. Under new
rules proposed by the U.S. Department of Education, we may
be required to seek and obtain specific regulatory approval to
operate in these states and would not be entitled to rely on
available exemptions based on accreditation. If we experience a
delay in obtaining or cannot obtain these approvals, our
business could be adversely impacted. Complicating this is the
fact that the State of California, the state in which we conduct
the most business by revenue, currently does not have a process
for regulating educational institutions such as University of
Phoenix. As a result, the manner in which the Departments
proposed regulation will apply to our business in California,
and the impact of such regulation on our business, is uncertain.
If we are unable to operate in California in a manner that would
preserve Title IV eligibility for our students, our
business would be materially and adversely impacted.
Gainful
Employment
Under the Higher Education Act, as reauthorized, proprietary
schools are eligible to participate in Title IV programs
only in respect of educational programs that lead to
gainful employment in a recognized occupation.
Historically, this concept has not been defined in detail. In
its July 26, 2010 NPRM, the U.S. Department of
Education published proposed rules that would for the first time
define gainful employment, which would apply on a
program-by-program
basis.
Under the proposed rules, gainful employment in respect of a
particular program would be defined by reference to two
debt-related tests: one based on student debt
service-to-income
ratios for program graduates, and the other based on student
loan repayment rates for program enrollees. Based on the
application of these
38
tests, a program may be eligible to participate in Title IV
programs without restriction, may be eligible to participate
with disclosure requirements, may be on restricted status and
only able to participate with material restrictions (including
enrollment limitations), or may be ineligible to participate.
The proposed debt
service-to-income
test measures the median annual student loan debt service of
graduates of a program, as a percentage of their average annual
earnings
and/or their
discretionary income (as defined), in each case
measured over the preceding three years or, in some cases, the
three years prior to the preceding three years. The proposed
loan repayment test measures the loan repayment rate for former
enrollees in (and not just graduates of) a program. The
repayment rate is calculated as a percentage of all program
enrollee Title IV loans that entered into repayment during
the preceding four federal fiscal years that are in current
repayment status, determined on a dollar weighted basis by
reference to the original principal amount of such loans. A loan
would be considered to be in current status if it has been fully
repaid or debt service has been paid such that the principal was
reduced during the preceding federal fiscal year.
Under the proposed tests, if a programs median annual
student loan debt service is less than 8% of average annual
earnings or less than 20% of average annual discretionary
income, and the programs loan repayment rate is at least
45%, the program would be eligible to participate in
Title IV programs with no new disclosure requirements. If a
programs median annual student loan debt service is above
12% of average annual earnings and above 30% of average annual
discretionary income based on the preceding three years, and the
programs loan repayment rate is below 35%, the program
would be ineligible to participate in Title IV programs.
Programs with test results between these two extremes would,
depending on the precise test outcomes, either be eligible to
participate with disclosure requirements, or be placed on
restricted status and only eligible to participate with material
restrictions (including enrollment limitations).
The proposed rules provide for a two-year phase-in. For the
award year beginning July 1, 2012, only the
lowest-performing programs accounting for 5% of all graduates
during the prior year would be subject to losing eligibility.
The full application of the eligibility rules would commence
with the award year beginning July 1, 2013.
The Department has stated that it intends to publish final rules
by November 1, 2010 covering a portion of the proposed
gainful employment rules. These rules would require proprietary
institutions of higher education and postsecondary vocational
institutions to provide prospective students with each eligible
programs graduation and job placement rates, and require
colleges to provide the Department with information that will
allow determination of student debt levels and incomes after
program completion. Additionally, the rules would require
institutions to provide certain information to the Department
before new educational programs would be eligible to participate
in Title IV programs, including five year enrollment
projections and documentation from employers not affiliated with
the institution that the new programs curriculum aligns
with recognized occupations at those employers businesses
and that there are projected job vacancies or expected demand
for such occupations at those businesses.
The above descriptions of the proposed gainful employment rules
are qualified in their entirety by the text of the proposed
rules, available at
http://www2.ed.gov/legislation/FedRegister/proprule/2010-3/072610a.pdf.
These proposed rules are complex and their application involves
many interpretive and other issues, not all of which may be
addressed in any final rulemaking.
If these rules are adopted in the form proposed, many of our
programs may be ineligible for Title IV funding or
restricted because they do not meet at least one of the
specified tests. In addition, the continuing eligibility of our
educational programs for Title IV funding would be at risk
due to factors beyond our control, such as changes in the income
level of our graduates, increases in interest rates, changes in
the federal poverty income level relevant for calculating
discretionary income, changes in the percentage of our former
students who are current in repayment of their student loans,
and other factors. The exposure to these external factors would
hinder our ability to effectively manage our business. If a
particular program ceased to be eligible for Title IV
funding, in most cases it would not be practical to continue
offering that program under our current business model. Adoption
of the regulations in the form proposed could result in a
significant realignment of the types of educational programs
that are offered by us and by other proprietary institutions, in
order to
39
comply with the rules or, most prominently, to avoid the
uncertainty associated with compliance over time. This
realignment could reduce our enrollment, perhaps materially.
The Department has not provided access to the income and debt
service information sufficient to determine the impact of these
proposed gainful employment rules on our programs. In August
2010, the Department published estimated loan repayment rates
for all educational institutions participating in Title IV
programs, determined on an institution-wide basis. The reported
estimated rate for University of Phoenix was 44.2%. The actual
application of the proposed loan repayment rate test would be
done on a
program-by-program
basis and, therefore, the estimated rate for the institution is
only a general guide for informational purposes.
We cannot predict the form of the final rules regarding program
integrity that may be adopted by the Department. Compliance with
these rules in the form proposed could reduce our enrollment,
increase our cost of doing business, and have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
Action
by the U.S. Congress to revise the laws governing the federal
student financial aid programs or reduce funding for those
programs could reduce our student population and increase our
costs of operation.
The U.S. Congress must periodically reauthorize the Higher
Education Act and annually determine the funding level for each
Title IV program. In 2008, the Higher Education Act was
reauthorized through September 30, 2013 by the Higher
Education Opportunity Act. Changes to the Higher Education Act
are likely to result from subsequent reauthorizations, and the
scope and substance of any such changes cannot be predicted. In
recent months, there has been increased focus by the
U.S. Congress on the role that proprietary educational
institutions play in higher education. On June 17, 2010,
the Education and Labor Committee of the U.S. House of
Representatives held a hearing to examine the manner in which
accrediting agencies review higher education institutions
policies on credit hours and program length. This followed a
report from the Office of the Inspector General of the
U.S. Department of Education in December 2009 criticizing
the accreditation of a proprietary school by a regional
accrediting body and requesting that the Department review the
appropriateness of its recognition of the accrediting body. On
June 24, 2010, the Health, Education, Labor and Pensions
Committee of the U.S. Senate (HELP Committee)
released a report, entitled, Emerging Risk?: An Overview
of Growth, Spending, Student Debt and Unanswered Questions in
For-Profit Higher Education and held the first in a series
of hearings to examine the proprietary education sector.
Earlier, the Chairmen of each of these education committees,
together with other members of Congress, requested the
Government Accountability Office (GAO) to conduct a
review and prepare a report with recommendations regarding
various aspects of the proprietary sector, including recruitment
practices, educational quality, student outcomes, the
sufficiency of integrity safeguards against waste, fraud and
abuse in federal student aid programs and the degree to which
proprietary institutions revenue is composed of
Title IV and other federal funding sources. The results of
a portion of this review by the GAO were reported at a HELP
Committee hearing on August 4, 2010, entitled, For
Profit Schools: The Student Recruitment Experience. Sen.
Tom Harkin, the Chairman of the HELP Committee, stated at the
August hearing that he is concerned about the practices of
proprietary schools, the increasing amount of Title IV
funding received by the proprietary sector and the effectiveness
of accrediting bodies in ensuring academic and other standards.
In addition, Sen. Harkin has stated that the recently proposed
regulations by the Department of Education regarding incentive
compensation of recruiting personnel, gainful employment
standards and other matters, while useful, are only a start to
addressing the problems he perceives in the sector. Following
the August hearing, Sen. Harkin requested a broad range of
detailed information from 30 proprietary institutions, including
Apollo Group. We have been and intend to continue being
responsive to the requests of the HELP Committee. On
September 30, 2010, the HELP Committee held a third hearing
and Sen. Harkins staff released a memorandum entitled
The Return on the Federal Investment in For-Profit
Education: Debt Without a Diploma. Sen. Harkin has stated
that another in this series of hearings will be held in December
2010.
We cannot predict what legislation, if any, will emanate from
these Congressional committee hearings or what impact any such
legislation might have on the proprietary education sector and
our business in particular. Any action by Congress that
significantly reduces Title IV program funding or the
eligibility of our institutions
40
or students to participate in Title IV programs would have
a material adverse effect on our financial condition, results of
operations and cash flows. Congressional action could also
require us to modify our practices in ways that could increase
our administrative costs and reduce our profit margin, which
could have a material adverse effect on our financial condition,
results of operations and cash flows.
If the U.S. Congress significantly reduced the amount of
available Title IV program funding, we would attempt to
arrange for alternative sources of financial aid for our
students, which may include lending funds directly to our
students, but it is unlikely that private sources would be able
to provide as much funding to our students on as favorable terms
as is currently provided by Title IV. In addition, private
organizations could require us to guarantee all or part of this
assistance and we might incur other additional costs. For these
reasons, private, alternative sources of student financial aid
would only partly offset, if at all, the impact on our business
of reduced Title IV program funding.
Our
schools and programs would lose their eligibility to participate
in federal student financial aid programs if the percentage of
our revenues derived from those programs is too high, in which
event we could not conduct our business as it is currently
conducted.
A requirement of the Higher Education Act, as reauthorized by
the Higher Education Opportunity Act, commonly referred to as
the 90/10 Rule, applies only to proprietary
institutions of higher education, which includes University of
Phoenix and Western International University. Under this rule, a
proprietary institution will be ineligible to participate in
Title IV programs if for any two consecutive fiscal years
it derives more than 90% of its cash basis revenue, as defined
in the rule, from Title IV programs. An institution that
derives more than 90% of its revenue from Title IV programs
for any single fiscal year will be automatically placed on
provisional certification for two fiscal years and will be
subject to possible additional sanctions determined to be
appropriate under the circumstances by the U.S. Department
of Education in the exercise of its broad discretion. While the
Department has broad discretion to impose additional sanctions
on such an institution, there is only limited precedent
available to predict what those sanctions might be, particularly
in the current regulatory environment. The Department could
specify any additional conditions as a part of the provisional
certification and the institutions continued participation
in Title IV programs. These conditions may include, among
other things, restrictions on the total amount of Title IV
program funds that may be distributed to students attending the
institution; restrictions on programmatic and geographic
expansion; requirements to obtain and post letters of credit;
additional reporting requirements to include additional interim
financial reporting; or any other conditions imposed by the
Department. Should an institution be subject to a provisional
certification at the time that its current program participation
agreement expired, the effect on recertification of the
institution or continued eligibility in Title IV programs
pending recertification is uncertain. An institution that
derives more than 90% of its revenue from Title IV programs
for two consecutive fiscal years will be ineligible to
participate in Title IV programs for at least two fiscal
years. University of Phoenix and Western International
University are required to calculate this percentage at the end
of each fiscal year. If an institution is determined to be
ineligible to participate in Title IV programs due to the
90/10 Rule, any disbursements of Title IV program funds
while ineligible must be repaid to the Department.
The 90/10 Rule percentage for University of Phoenix has
increased materially over the past several fiscal years and we
expect further increases in the near term. These increases are
primarily attributable to the following factors:
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Increased student loan limits. The Ensuring
Continued Access to Student Loans Act of 2008 increased the
annual loan limits on federal unsubsidized student loans by
$2,000 for the majority of our students enrolled in
associates and bachelors degree programs, and also
increased the aggregate loan limits (over the course of a
students education) on total federal student loans for
certain students. This increase in student loan limits has
increased the amount of Title IV program funds available to
and used by our students to pay tuition, fees and other costs,
which has increased the proportion of our revenue deemed to be
from Title IV programs.
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Increase in Pell Grants. The eligibility for
and maximum amount of Pell Grants have increased in each of the
past three years. In addition, the Higher Education Opportunity
Act of 2008 further
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increased the availability of Pell Grants by permitting
additional disbursements for students who are continuously
enrolled. These changes further increase the amount of
Title IV program funds available to and used by our
students to pay tuition, fees and other costs, which, in turn,
has further increased the proportion of our revenue deemed to be
from Title IV programs.
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The Higher Education Opportunity Act provides temporary relief
from the impact of the loan limit increases by excluding from
the 90/10 Rule calculation any amounts received between
July 1, 2008 and June 30, 2011 that are attributable
to the increased annual loan limits. We refer to this as the
LLI relief. The following table details the 90/10
Rule percentages for University of Phoenix and Western
International University, as well as the percentages for
University of Phoenix with the LLI relief, for fiscal years 2010
and 2009:
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90/10 Rule Percentages for Fiscal Years Ended
August 31,
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2010
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2009
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Including
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Excluding
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Including
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Excluding
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LLI Relief
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LLI Relief
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LLI Relief
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LLI Relief
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University of Phoenix
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85
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%
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88
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%
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83
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%
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86
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%
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Western International University(1)
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62
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%
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|
|
|
|
57
|
%
|
|
|
|
(1) |
|
We have not calculated the 90/10 Rule percentages for Western
International University with the LLI relief because of its
relatively low 90/10 Rule percentages. |
Based on currently available information, we expect that the
90/10 Rule percentage for University of Phoenix, net of the LLI
relief, will approach 90% for fiscal year 2011, principally
because of the expanded eligibility for and increases in the
amount of Pell Grants. We have implemented various measures
intended to reduce the percentage of University of
Phoenixs cash basis revenue attributable to Title IV
funds, including emphasizing employer-paid and other direct-pay
education programs, encouraging students to carefully evaluate
the amount of necessary Title IV borrowing, and continued
focus on professional development and continuing education
programs. Although we believe these measures will favorably
impact the 90/10 Rule calculation, they have had only limited
impact to date and there is no assurance that they will be
adequate to prevent the 90/10 Rule calculation from exceeding
90% in the future. We are considering other measures to
favorably impact the 90/10 Rule calculation for University of
Phoenix, including tuition price increases; however, we have
substantially no control over the amount of Title IV
student loans and grants sought by or awarded to our students.
Based on currently available information, we do not expect the
90/10 Rule percentage for University of Phoenix, net of the LLI
relief, to exceed 90% for fiscal year 2011. However, we believe
that, absent a change in recent trends or the implementation of
additional effective measures to reduce the percentage, the
90/10 Rule percentage for University of Phoenix is likely
to exceed 90% in fiscal year 2012 due to the expiration of the
LLI relief in July 2011.
We believe that the most effective long-term solution to address
the increasing 90/10 Rule percentage is a change in the 90/10
Rule itself. Because of the increases in Title IV student
loan limits and grants in recent years, we believe that many
proprietary institutions are experiencing pressure on their
90/10 Rule compliance. In our view, one potential unintended
consequence of this pressure is higher tuition rates. This is
because one of the more effective methods of reducing the 90/10
Rule percentage is to increase tuition prices above the
applicable maximums for Title IV student loans and grants,
requiring other sources of funding to resolve the remaining
tuition balance, in order to reduce the percentage of revenue
from Title IV sources. However, this consequence directly
undermines the Department of Educations interest in
promoting affordable postsecondary education. Although
modification of the rule could limit this undesirable impact on
tuition, there is no assurance that the Department, or Congress,
will address this problem by modifying the rule or will address
it in a manner that timely and favorably impacts compliance by
University of Phoenix.
Our efforts to reduce the 90/10 Rule percentage for University
of Phoenix, especially if the percentage exceeds 90% for a
fiscal year, may involve taking measures which reduce our
revenue, increase our operating expenses, or both, in each case
perhaps significantly. If the 90/10 Rule is not changed to
provide relief for
42
proprietary institutions, we may be required to make structural
changes to our business in order to remain in compliance, which
changes may materially alter the manner in which we conduct our
business and materially and adversely impact our business,
financial condition, results of operations and cash flows.
Furthermore, these required changes could make more difficult
our ability to comply with other important regulatory
requirements, such as the proposed gainful employment
regulations and the cohort default rate regulations discussed
under Pending rulemaking by the U.S. Department of
Education could result in regulatory changes that materially and
adversely affect our business, above, and An increase in
our student loan default rates could result in the loss of
eligibility to participate in Title IV programs, which
would materially and adversely affect our business, below.
An
increase in our student loan default rates could result in the
loss of eligibility to participate in Title IV programs,
which would materially and adversely affect our
business.
To remain eligible to participate in Title IV programs,
educational institutions must maintain student loan cohort
default rates below specified levels. The U.S. Department
of Education reviews an educational institutions cohort
default rate annually as a measure of administrative capability.
Each cohort is the group of students who first enter into
student loan repayment during a federal fiscal year (ending
September 30). The currently applicable cohort default rate for
each cohort is the percentage of the students in the cohort who
default on their student loans prior to the end of the following
federal fiscal year, which represents a two-year measuring
period. The cohort default rates are published by the Department
approximately 12 months after the end of the measuring
period. Thus, in September 2010 the Department published the
cohort default rates for the 2008 cohort, which measured the
percentage of students who first entered into repayment during
the year ended September 30, 2008 and defaulted prior to
September 30, 2009. As discussed below, the measurement
period for the cohort default rate has been increased to three
years starting with the 2009 cohort.
If an educational institutions two-year cohort default
rate exceeds 10% for any one of the three preceding years, it
must delay for 30 days the release of the first
disbursement of U.S. federal student loan proceeds to first
time borrowers enrolled in the first year of an undergraduate
program. Western International University implemented a
30-day delay
for such disbursements in fiscal year 2007 and University of
Phoenix proactively implemented a
30-day delay
in fiscal year 2009. If an institutions two-year cohort
default rate exceeds 25% for three consecutive years or 40% for
any given year, it will be ineligible to participate in
Title IV programs and, as a result, its students would not
be eligible for federal student financial aid.
The cohort default rates for University of Phoenix, Western
International University and for all proprietary postsecondary
institutions for the federal fiscal years 2008, 2007 and 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-Year Cohort Default Rates for
|
|
|
|
Cohort Years Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
University of Phoenix(1)
|
|
|
12.9
|
%
|
|
|
9.3
|
%
|
|
|
7.2
|
%
|
Western International University(1)
|
|
|
10.7
|
%
|
|
|
18.5
|
%
|
|
|
27.4
|
%
|
All proprietary postsecondary institutions(1)
|
|
|
11.6
|
%
|
|
|
11.0
|
%
|
|
|
9.7
|
%
|
|
|
|
(1) |
|
Based on information published by the U.S. Department of
Education. |
The University of Phoenix cohort default rates have been
increasing over the past several years, largely due to the
transitioning of our associates degree students from
Western International University to University of Phoenix
beginning in April 2006 and the general expansion of the
University of Phoenix associates degree program. Student
loan default rates tend to be higher in our associates
degree student population compared to our bachelors and
our graduate degree student populations. We expect this upward
trend to intensify due to the current challenging economic
climate and the continuing effect of the historical growth in
our associates degree student population. Consistent with
this, the available preliminary data for the University of
Phoenix 2009 cohort reflect a substantially higher default rate
than the 2008 cohort, although we do not expect the rate to
exceed 25%.
43
We have implemented initiatives to mitigate the increased risk
of student loan defaults for University of Phoenix and Western
International University students. We have engaged outside
resources to assist the students who are at risk of default.
These resources contact students and offer assistance, which
includes providing students with specific loan repayment
information, lender contact information and attempts to transfer
these students to the lender to resolve their delinquency. In
addition, we are intensely focused on student retention and
enrolling students who have a reasonable chance to succeed in
our programs, in part because the rate of default is higher
among students who do not complete their degree program compared
to students who graduate.
The July 2010 elimination of the Federal Family Education Loan
Program (FFELP), under which private lenders originated and
serviced federally guaranteed student loans, and the migration
of all federal student loans to the Federal Direct Loan Program,
under which the federal government lends directly to students,
could adversely impact loan repayment rates and our cohort
default rates, if the federal government is less effective in
promoting timely repayment of federal student loans than the
private lenders were under the FFELP.
If our student loan default rates approach the limits detailed
above, we may be required to increase our efforts and resources
dedicated to improving these default rates. In addition, because
there is a lag between the funding of a student loan and a
default thereunder, many of the borrowers who are in default or
at risk of default are former students with whom we may have
only limited contact. Accordingly, there can be no assurance
that we would be able to effectively improve our default rates
or improve them in a timely manner to meet the requirements for
continued participation in Title IV funding if we
experience a substantial increase in our student loan default
rates.
The cohort default rate requirements were modified by the Higher
Education Opportunity Act enacted in August 2008 to increase by
one year the measuring period for each cohort. Starting with the
2009 cohort, the U.S. Department of Education will
calculate both the current two-year and the new three-year
cohort default rates. Beginning with the 2011 three-year cohort
default rate published in September 2014, the three-year rates
will be applied for purposes of measuring compliance with the
requirements, as follows:
|
|
|
|
|
Annual test. If the 2011 three-year cohort
default rate exceeds 40%, the institution will cease to be
eligible to participate in Title IV programs; and
|
|
|
|
Three consecutive years test. If the
institutions three-year cohort default rate exceeds 30%
(an increase from the current 25% threshold applicable to the
two-year cohort default rates) for three consecutive years,
beginning with the 2009 cohort, the institution will cease to be
eligible to participate in Title IV programs.
|
The Department has published, for informational purposes,
trial rates to assist institutions in understanding
the impact of the new three-year cohort default rate
calculation. The trial three-year cohort default rates for prior
periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Year Cohort Default Rates for
|
|
|
|
Cohort Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
University of Phoenix
|
|
|
15.9
|
%
|
|
|
10.3
|
%
|
|
|
11.4
|
%
|
Western International University
|
|
|
26.5
|
%
|
|
|
36.9
|
%
|
|
|
28.7
|
%
|
All proprietary postsecondary institutions
|
|
|
17.8
|
%
|
|
|
15.2
|
%
|
|
|
12.0
|
%
|
If we
fail to maintain our institutional accreditation or if our
institutional accrediting body loses recognition by the U.S.
Department of Education, we could lose our ability to
participate in Title IV programs, which would materially
and adversely affect our business.
University of Phoenix and Western International University are
institutionally accredited by The Higher Learning Commission
(HLC) of the North Central Association of Colleges
and Schools, one of the six regional accrediting agencies
recognized by the U.S. Department of Education.
Accreditation by an accrediting
44
agency recognized by the U.S. Department of Education is
required in order for an institution to become and remain
eligible to participate in Title IV programs.
If the U.S. Department of Education ceased to recognize HLC
for any reason, University of Phoenix and Western International
University would not be eligible to participate in Title IV
programs beginning 18 months after the date such
recognition ceased unless HLC was again recognized or our
institutions were accredited by another accrediting body
recognized by the U.S. Department of Education. In December
2009, the Office of Inspector General of the
U.S. Department of Education (OIG) requested
that the U.S. Department of Education review the
appropriateness of the U.S. Department of Educations
recognition of HLC as an accrediting body, following the
OIGs unfavorable review of HLCs initial
accreditation of a non-traditional, proprietary postsecondary
educational institution. We cannot predict the outcome of the
U.S. Department of Educations review of HLCs
recognition. HLC accredits over 1,000 colleges and universities,
including some of the most highly regarded universities in the
U.S.
Regardless of the outcome of the U.S. Department of
Educations review of HLC, the focus by the OIG and the
U.S. Department of Education on the process pursuant to
which HLC accredited a non-traditional, proprietary
postsecondary educational institution may make the accreditation
review process more challenging for University of Phoenix and
Western International University when they undergo their normal
HLC accreditation review process in the future or in connection
with programmatic or location expansion.
In addition, in August 2010, University of Phoenix received a
letter from HLC requiring University of Phoenix to provide
certain information and evidence of compliance with HLC
accreditation standards. The letter related to the August 2010
report published by the U.S. Government Accountability
Office (GAO) of its undercover investigation into
the enrollment and recruiting practices of a number of
proprietary institutions of higher education, including
University of Phoenix. The letter required that University of
Phoenix submit a report to HLC addressing the specific GAO
allegations regarding University of Phoenix and any remedial
measures being undertaken in response to the GAO report. In
addition, the report was required to include (i) evidence
demonstrating that University of Phoenix, on a university-wide
basis, currently is meeting and in the future will meet the HLC
Criteria for Accreditation relating to operating with integrity
and compliance with all state and federal laws,
(ii) evidence that University of Phoenix has adequate
systems in place which currently and in the future will assure
appropriate control of all employees engaged in the recruiting,
marketing or admissions process, (iii) evidence
demonstrating that Apollo Group is not encouraging inappropriate
behavior on the part of recruiters and is taking steps to
encourage appropriate behavior, and (iv) detailed
information about University of Phoenix policies, procedures and
practices relating to marketing, recruiting, admissions and
other related matters. We submitted the response to the HLC on
September 10, 2010 and subsequently received a request for
additional information. We have been informed that our response
will be evaluated by a special committee in early 2011, and that
the committee will make recommendations, if any, to the HLC
board. If, after review, HLC determines that our response is
unsatisfactory, HLC has informed us that it may impose
additional unspecified monitoring or sanctions. In addition, HLC
has recently imposed additional requirements on University of
Phoenix with respect to approval of new or relocated campuses
and additional locations. These requirements may lengthen or
make more challenging the approval process for these sites.
The loss of accreditation for any reason would, among other
things, render our schools and programs ineligible to
participate in Title IV programs, affect our authorization
to operate and to grant degrees in certain states and decrease
student demand. If University of Phoenix became ineligible to
participate in Title IV programs, we could not conduct our
business as it is currently conducted and it would have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
Our
business could be harmed if we experience a disruption in our
ability to process student loans because of the phase-out of
Family Education Loan Program loans and the corresponding
transition to direct student loans under the Federal Direct Loan
Program.
We collected the substantial majority of our fiscal year 2010
total consolidated net revenue from receipt of Title IV
financial aid program funds, principally from federally
guaranteed student loans under the Federal
45
Family Education Loan Program (FFELP). FFELP loans, which were
originated by private lenders, were phased out as of
July 1, 2010 pursuant to the federal Health Care and
Education Reconciliation Act passed by Congress in March 2010.
As of July 1, 2010, all new Title IV student loans are
administered under the Federal Direct Loan Program (FDLP), in
which the federal government lends directly to students. We
completed the transition of loan origination and related
servicing from the FFELP to the FDLP during the third quarter of
fiscal year 2010.
Because all Title IV student loans are now processed under
the FDLP, any processing disruptions by the U.S. Department
of Education may impact our students ability to obtain
student loans on a timely basis. If we experience a disruption
in our ability to process student loans through the FDLP, either
because of administrative challenges on our part or the
inability of the Department to process the increased volume of
direct loans on a timely basis, our business, financial
condition, results of operations and cash flows could be
adversely and materially affected.
If any
regulatory audit, investigation or other proceeding finds us not
in compliance with the numerous laws and regulations applicable
to the postsecondary education industry, we may not be able to
successfully challenge such finding and our business could
suffer.
Due to the highly regulated nature of the postsecondary
education industry, we are subject to audits, compliance
reviews, inquiries, complaints, investigations, claims of
non-compliance and lawsuits by federal and state governmental
agencies, regulatory agencies, accrediting agencies, present and
former students and employees, shareholders and other third
parties, any of whom may allege violations of any of the
regulatory requirements applicable to us. If the results of any
such claims or actions are unfavorable to us, we may be required
to pay monetary fines or penalties, be required to repay funds
received under Title IV programs or state financial aid
programs, have restrictions placed on or terminate our
schools or programs eligibility to participate in
Title IV programs or state financial aid programs, have
limitations placed on or terminate our schools operations
or ability to grant degrees and certificates, have our
schools accreditations restricted or revoked, or be
subject to civil or criminal penalties. Any one of these
sanctions could materially adversely affect our business,
financial condition, results of operations and cash flows and
result in the imposition of significant restrictions on us and
our ability to operate.
In February 2009, the Department performed a program review of
University of Phoenixs policies and procedures involving
Title IV programs. On December 31, 2009, University of
Phoenix received the Departments Program Review Report,
which was a preliminary report of the Departments
findings. We responded to the preliminary report in the third
quarter of fiscal year 2010. The Department issued its Final
Program Review Determination letter on June 16, 2010, which
confirmed we had completed the corrective actions and satisfied
the obligations arising from the review as described below.
On June 9, 2010, we posted a letter of credit in the amount
of approximately $126 million as required to comply with
the Departments standards of financial responsibility. The
Departments regulations require institutions to post a
letter of credit where a program review report cites untimely
return of unearned Title IV funds for more than 10% of the
sampled students in a period covered by the review. The letter
of credit is fully cash collateralized and must be maintained
until at least June 30, 2012.
Of the six findings contained in the Final Program Review
Determination Letter, three related to University of
Phoenixs procedures for determining student withdrawal
dates and associated timing of the return of unearned
Title IV funds, which averaged no more than six days
outside the required timeframe in the affected sample files.
There were no findings that indicated incorrect amounts of
Title IV funds had been returned. In the second quarter of
fiscal year 2010, we made payments totaling $0.7 million to
reimburse the Department for the cost of Title IV funds
associated with these findings.
The remaining findings involved isolated clerical errors
verifying student-supplied information and, as self-reported by
University of Phoenix in 2008, the calculation of student
financial need where students were eligible for tuition and fee
waivers and discounts, and the use of Title IV funds for
non-program purposes such as transcripts, applications and late
fees. See U.S. Department of Education Audits and Other
Matters in Note 19, Commitments and Contingencies, in
Part II, Item 8, Financial Statements and
Supplementary Data.
46
If we
fail to maintain any of our state authorizations, we would lose
our ability to operate in that state and to participate in
Title IV programs there.
University of Phoenix, Western International University and CFFP
are authorized to operate and to grant degrees by the applicable
state agency of each state where such authorization is required
and where we maintain a campus, or are exempt from such
regulatory authorization usually based on recognized
accreditation. In addition, several states require University of
Phoenix and Western International University to obtain separate
authorization for the delivery of distance education to
residents of those states. Compliance with these state
requirements is also necessary for students in the respective
states to participate in Title IV programs. The loss of
such authorization in one or more states would render students
resident in those states ineligible to participate in
Title IV programs and could have a material adverse effect
on our business, financial condition, results of operations and
cash flows. Loss of authorization in one or more states could
increase the likelihood of additional scrutiny and potential
loss of operating
and/or
degree granting authority in other states in which we operate,
which would further impact our business. In addition, under new
rules proposed by the U.S. Department of Education, we may
be required to seek and obtain specific regulatory approval to
operate in certain states in which we are currently exempt from
state authorization, and would not be entitled to rely on
available exemptions based on accreditation. If we experience a
delay in obtaining or cannot obtain these approvals, our
business could be adversely impacted. See Pending rulemaking
by the U.S. Department of Education could result in
regulatory changes that materially and adversely affect our
business, above.
A
failure to demonstrate administrative capability or
financial responsibility may result in the loss of
eligibility to participate in Title IV programs, which
would materially and adversely affect our
business.
The U.S. Department of Education regulations specify
extensive criteria an institution must satisfy to establish that
it has the requisite administrative capability to participate in
Title IV programs. The failure of an institution to satisfy
any of the criteria used to assess administrative capability may
cause the Department to determine that the institution lacks
administrative capability and, therefore, subject the
institution to additional scrutiny or deny eligibility for
Title IV programs. These criteria require, among other
things, that the institution:
|
|
|
|
|
comply with all applicable Title IV program regulations;
|
|
|
|
have capable and sufficient personnel to administer the federal
student financial aid programs;
|
|
|
|
have acceptable methods of defining and measuring the
satisfactory academic progress of its students;
|
|
|
|
not have a student loan cohort default rate above specified
levels;
|
|
|
|
have procedures in place for safeguarding federal funds;
|
|
|
|
not be, and not have any principal or affiliate who is, debarred
or suspended from federal contracting or engaging in activity
that is cause for debarment or suspension;
|
|
|
|
provide financial aid counseling to its students;
|
|
|
|
refer to the Office of Inspector General any credible
information indicating that any applicant, student, employee or
agent of the institution has been engaged in any fraud or other
illegal conduct involving Title IV programs;
|
|
|
|
submit in a timely manner all reports and financial statements
required by the regulations; and
|
|
|
|
not otherwise appear to lack administrative capability.
|
Furthermore, to participate in Title IV programs, an
eligible institution must satisfy specific measures of financial
responsibility prescribed by the Department, or post a letter of
credit in favor of the Department and possibly accept other
conditions on its participation in Title IV programs.
Pursuant to the Title IV regulations, each eligible higher
education institution must satisfy a measure of financial
responsibility that is based on a weighted average of three
annual tests which assess the financial condition of the
institution. The three tests measure primary reserve, equity,
and net income ratios. The Primary Reserve Ratio is a measure of
an
47
institutions financial viability and liquidity. The Equity
Ratio is a measure of an institutions capital resources
and its ability to borrow. The Net Income Ratio is a measure of
an institutions profitability. These tests provide three
individual scores which are converted into a single composite
score. The maximum composite score is 3.0. If the institution
achieves a composite score of at least 1.5, it is considered
financially responsible. A composite score from 1.0 to 1.4 is
considered financially responsible, and the institution may
continue to participate as a financially responsible institution
for up to three years, subject to additional monitoring and
other consequences. If an institution does not achieve a
composite score of at least 1.0, it can be transferred from the
advance system of payment of Title IV funds to
cash monitoring status or to the reimbursement
system of payment, under which the institution must disburse its
own funds to students and document the students
eligibility for Title IV program funds before receiving
such funds from the U.S. Department of Education. The
composite scores for Apollo Group, University of Phoenix and
Western International University exceed 1.5.
If our schools eligible to participate in Title IV programs
fail to maintain administrative capability or financial
responsibility, as defined by the Department, those schools
could lose their eligibility to participate in Title IV
programs or have that eligibility adversely conditioned, which
would have a material adverse effect on our business.
Limitations on, or termination of, participation in
Title IV programs as a result of the failure to demonstrate
administrative capability or financial responsibility would
limit students access to Title IV program funds,
which could significantly reduce the enrollments and revenues of
our schools eligible to participate in Title IV programs
and materially and adversely affect our business, financial
condition, results of operations and cash flows.
If we
are not recertified to participate in Title IV programs by
the U.S. Department of Education, we would lose eligibility to
participate in Title IV programs and could not conduct our
business as it is currently conducted.
University of Phoenix and Western International University are
eligible and certified to participate in Title IV programs.
University of Phoenix was recertified for Title IV programs
in November 2009 and its current certification expires in
December 2012. Western International University was recertified
in May 2010 and its current certification expires in September
2014.
Generally, the recertification process includes a review by the
Department of the institutions educational programs and
locations, administrative capability, financial responsibility,
and other oversight categories. The Department could limit,
suspend or terminate an institutions participation in
Title IV programs for violations of the Higher Education
Act, as reauthorized, or Title IV regulations.
Continued Title IV eligibility is critical to the operation
of our business. If University of Phoenix becomes ineligible to
participate in Title IV federal student financial aid
programs, we could not conduct our business as it is currently
conducted and it would have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
If
regulators do not approve our domestic acquisitions, the
acquired schools state licenses, accreditation, and
ability to participate in Title IV programs may be
impaired.
When we acquire an institution, we must seek approval from the
U.S. Department of Education, if the acquired institution
participates in Title IV programs, and from most applicable
state agencies and accrediting agencies because an acquisition
is considered a change of ownership or control of the acquired
institution under applicable regulatory standards. A change of
ownership or control of an institution under the
Departments standards can result in the temporary
suspension of the institutions participation in the
Title IV programs unless a timely and materially complete
application for recertification is filed with the Department and
the Department issues a temporary provisional certification. If
we are unable to obtain approvals from the state agencies,
accrediting agencies or Department for any institution we may
acquire in the future, depending on the size of that
acquisition, such a failure to obtain approval could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
48
We
will be subject to sanctions if we fail to properly calculate
and make timely payment of refunds of Title IV program
funds for students who withdraw before completing their
educational program.
The Higher Education Act, as reauthorized, and
U.S. Department of Education regulations require us to
calculate refunds of unearned Title IV program funds
disbursed to students who withdraw from their educational
program before completing it. If refunds are not properly
calculated or timely paid, we will be subject to sanctions
imposed by the U.S. Department of Education, which could
increase our cost of regulatory compliance and adversely affect
our business, financial condition, results of operations and
cash flows.
If
IPDs client institutions are sanctioned due to
non-compliance with Title IV requirements, our business
could be responsible for any resulting fines and
penalties.
Our subsidiary, Institute for Professional Development, Inc.
(IPD) provides to its client institutions numerous
consulting and administrative services, including services that
involve the handling and receipt of Title IV funds. As a
result of this, IPD may be jointly and severally liable for any
fines, penalties or other sanctions imposed by the
U.S. Department of Education on the client institution for
violation of applicable Title IV regulations, regardless of
the degree of fault, if any, on IPDs part. The imposition
of such fines, penalties or other sanctions could have a
material adverse impact on our business, financial condition,
results of operations and cash flows.
Government
regulations relating to the Internet could increase our cost of
doing business and affect our ability to grow.
The increasing popularity and use of the Internet and other
online services has led to and may lead to further adoption of
new laws and regulatory practices in the U.S. or foreign
countries and to new interpretations of existing laws and
regulations. These new laws and interpretations may relate to
issues such as online privacy, copyrights, trademarks and
service marks, sales taxes, value-added taxes, withholding
taxes, allocation and apportionment of income amongst various
state, local and foreign jurisdictions, fair business practices
and the requirement that online education institutions qualify
to do business as foreign corporations or be licensed in one or
more jurisdictions where they have no physical location or other
presence. New laws, regulations or interpretations related to
doing business over the Internet could increase our costs and
materially and adversely affect our enrollments, which could
have a material adverse affect on our business, financial
condition, results of operations and cash flows.
Non-U.S.
Operations
Our
non-U.S. operations
are subject to regulatory requirements of the applicable
countries in which we operate, and our failure to comply with
these requirements may result in substantial monetary
liabilities, fines and penalties and a loss of authority to
operate.
We operate physical and online educational institutions in the
United Kingdom, Europe, Canada, Chile, Mexico, and elsewhere,
and are actively seeking further expansion in other countries.
Our operations in each of the relevant foreign jurisdictions are
subject to educational and other regulations, which may differ
materially from the regulations applicable to our
U.S. operations.
Risks
Related to Our Business
Ongoing
and contemplated changes to our business may adversely affect
our growth rate, profitability, financial condition, results of
operations and cash flows.
Our ability to sustain our rate of growth or profitability
depends on a number of factors, including our ability to obtain
and maintain regulatory approvals, our ability to attract and
retain students, our ability to maintain operating margins, our
ability to recruit and retain high quality academic and
administrative personnel and competitive factors. In addition,
growth may place a significant strain on our resources and
increase demands on our management information and reporting
systems, financial management controls, and personnel. Although
we have made a substantial investment in augmenting our
financial and management
49
information systems and other resources to support future
growth, it cannot be assured that we will have adequate capacity
to accommodate substantial growth or that we will be able to
manage further growth effectively. Failure to do so could
adversely affect our business, financial condition, results of
operations and cash flows.
In order to increase our focus on improving the student
experience and attracting students who are more likely to
persist in our programs, we have recently implemented or plan to
implement various measures that are likely to adversely affect
our growth and profitability, at least in the near term,
including the following:
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Upgrading our learning and data platforms;
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Adopting new tools to better support students education
financing decisions, such as our Responsible Borrowing
Calculator, which is designed to help students calculate the
amount of student borrowing necessary to achieve their
educational objectives and to motivate them to not incur
unnecessary student loan debt;
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Transitioning our marketing approaches to more effectively
identify students who have the ability to succeed in our
educational programs, including reduced emphasis on the
utilization of third parties for lead generation;
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Requiring all students who enroll in University of Phoenix with
fewer than 24 credits to first attend a free, three-week
University Orientation program which is designed to help
inexperienced prospective students understand the rigors of
higher education prior to enrollment. After piloting the program
for the past year, we plan to implement this policy
university-wide in November 2010; and
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Better aligning our enrollment, admissions and other employees
to our students success by redefining roles and
responsibilities, resetting individual objectives and measures
and implementing new compensation structures, including
eliminating all enrollment factors in our admissions personnel
compensation structure effective September 1, 2010. See
Risks Related to the Highly Regulated Industry in Which We
Operate Pending rulemaking by the
U.S. Department of Education could result in regulatory
changes that materially and adversely affect our business,
above.
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Each of these changes could adversely impact our business,
especially in the near term. In combination, these changes may
have a more pronounced adverse impact on our business, financial
condition, results of operations and cash flows, particularly in
the near term.
Our
business may be adversely affected by a further economic
slowdown in the U.S. or abroad or by an economic recovery in the
U.S.
The U.S. and much of the world economy are experiencing
difficult economic circumstances. We believe the recent economic
downturn in the U.S., particularly the continuing high
unemployment rate, has contributed to a portion of our recent
enrollment growth as an increased number of working learners
seek to advance their education to improve job security or
reemployment prospects. This effect cannot be quantified.
However, to the extent that the economic downturn and the
associated unemployment have increased demand for our programs,
an improving economy and increased employment may eliminate this
effect and reduce such demand as fewer potential students seek
to advance their education. This reduction could have a material
adverse effect on our business, financial condition, results of
operations and cash flows. Conversely, a worsening of economic
and employment conditions may reduce the willingness of
employers to sponsor educational opportunities for their
employees, which could adversely impact our enrollment. In
addition, worsening economic and employment conditions could
adversely affect the ability or willingness of our former
students to repay student loans, which could increase our bad
debt expense and our student loan cohort default rate and
require increased time, attention and resources to manage these
defaults, which could have a material adverse effect on our
business. See Risks Related to the Highly Regulated Industry
in Which We Operate Student loan defaults
could result in the loss of eligibility to participate in
Title IV programs, which would materially and
adversely affect our business, above.
50
If we
are unable to successfully conclude pending litigation and
governmental inquiries, our business, financial condition,
results of operations and cash flows could be adversely
affected.
We, certain of our subsidiaries, and certain of our current and
former directors and executive officers have been named as
defendants in various lawsuits.
In August 2008, the U.S. District Court for the District
Court of Arizona vacated a judgment for damages against us in a
securities class action lawsuit, and the plaintiffs appealed to
the Ninth Circuit Court of Appeals. In connection with this
judgment, we initially estimated in the second quarter of fiscal
year 2008 that our loss would range from $120 million to
$216 million and we recorded a charge for estimated damages
at the midpoint of $168 million, which we reversed in the
fourth quarter of fiscal year 2008 when the trial court vacated
the judgment. On June 23, 2010, the Court of Appeals
reversed the District Courts ruling in our favor and
ordered the District Court to enter judgment against us in
accordance with the jury verdict. We intend to petition the
U.S. Supreme Court for review of the Court of Appeals
decision, but historically very few of such petitions are
granted. While we are seeking Supreme Court review, the judgment
in the District Court is stayed. If our petition to the Supreme
Court is not granted and we return to the District Court for
post-trial proceedings on class claims and an award of damages,
we believe that the actual amount of damages will not be known
until all court proceedings have been completed and eligible
members of the class present the necessary information and
documents to receive payment of the award. We have estimated for
financial reporting purposes, using statistically valid models
and a 60% confidence interval, that the damages could range from
$127.2 million to $228.0 million, which includes our
estimates of (a) damages payable to the plaintiff class;
(b) the amount we may be required to reimburse our
insurance carriers for amounts advanced for defense costs; and
(c) future defense costs. Accordingly, in the third quarter
of fiscal year 2010, we recorded a charge for estimated damages
in the amount of $132.6 million, which, together with the
existing reserve of $44.5 million recorded in the second
quarter of fiscal year 2010, represents the mid-point of the
estimated range of damages payable to the plaintiffs, plus the
other estimated costs and expenses. During the fourth quarter of
fiscal year 2010, we recorded a $0.9 million charge for
incremental post-judgment interest.
On August 16, 2010, a securities class action complaint was
filed in the U.S. District Court for the District of
Arizona by Douglas N. Gaer naming us, John G. Sperling, Gregory
W. Cappelli, Charles B. Edelstein, Joseph L. DAmico, Brian
L. Swartz and Gregory J. Iverson as defendants for allegedly
making false and misleading statements regarding our business
practices and prospects for growth. That complaint asserts a
putative class period stemming from December 7, 2009 to
August 3, 2010. A substantially similar complaint was also
filed in the same court by John T. Fitch on September 23,
2010 making similar allegations against the same defendants for
the same purported class period. Finally, on October 4,
2010, another purported securities class action complaint was
filed in the same court by Robert Roth against the same
defendants as well as Brian Mueller, Terri C. Bishop and Peter
V. Sperling based upon the same general set of allegations, but
with a defined class period of February 12, 2007 to
August 3, 2010. The complaints allege violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and
Rule 10b-5
promulgated thereunder. On October 15, 2010, three
additional parties filed motions to consolidate the related
actions and be appointed the lead plaintiff. Two of the proposed
lead plaintiffs identify themselves as the Apollo
Institutional Investors Group and the first consists of
the Oregon Public Employees Retirement Fund, the
Mineworkers Pension Scheme, and Amalgamated Bank. The
second Apollo Institutional Investors Group consists
of IBEW Local 640 and Arizona Chapter NECA Pension
Trust Fund and the City of Birmingham Retirement and Relief
System. The third proposed lead plaintiff is the Puerto Rico
Government Employees and Judiciary Retirement System
Administration. We have not yet responded to these complaints
and anticipate that pursuant to the Private Securities
Litigation Reform Act of 1995, the Court will appoint a lead
plaintiff and lead counsel pursuant to the provisions of that
law, and eventually a consolidated amended complaint will be
filed.
We are also subject to various other lawsuits, investigations
and claims, covering a range of matters, including, but not
limited to, claims involving shareholders and employment
matters. Refer to Note 19, Commitments and Contingencies,
in Part II, Item 8, Financial Statements and
Supplementary Data, which is incorporated herein by
reference, for further discussion of pending litigation and
other proceedings. In
51
addition, changes in our business and pending actions by
regulators and HLC may increase our risk of claims by
shareholders.
We cannot predict the ultimate outcome of these matters and
expect to incur significant defense costs and other expenses in
connection with them. Such costs and expenses could have a
material adverse effect on our business, financial condition,
results of operations and cash flows and the market price of our
common stock. We may be required to pay substantial damages or
settlement costs in excess of our insurance coverage related to
these matters, or may be required to pay substantial fines or
penalties, any of which could have a further material adverse
effect on our business, financial condition, results of
operations and cash flows. An adverse termination in any of
these matters could also materially and adversely affect our
licenses, accreditation, and eligibility to participate in
Title IV programs.
We are
subject to the oversight of the Securities and Exchange
Commission and other regulatory agencies, and investigations by
these agencies could divert managements focus and have a
material adverse impact on our reputation and financial
condition.
As a result of this government regulation and oversight, we may
be subject to legal and administrative proceedings. For example,
in October 2009, we received notification from the Enforcement
Division of the Securities and Exchange Commission indicating
that it had commenced an informal inquiry into our revenue
recognition practices. Based on the information and documents
that the Securities and Exchange Commission has requested from
us and/or
from our auditors, which relate to our revenue recognition
practices and other matters, including our policies and
practices relating to student refunds, the return of
Title IV funds to lenders and bad debt reserves, the
eventual scope, duration and outcome of the current inquiry
cannot be determined at this time. However, we have devoted
substantial time and incurred substantial legal and other
expenses in connection with this inquiry and we may have to
devote additional time and incur additional expenses in the
future. The costs of responding to, and the publicity
surrounding investigations or enforcement actions by the
Securities and Exchange Commission or the Department of Justice,
even if ultimately resolved favorably for us, could have a
material adverse impact on our business, financial condition,
results of operations and cash flows.
Our
financial performance depends on our ability to continue to
develop awareness among, and enroll and retain students; recent
adverse publicity may negatively impact demand for our
programs.
Building awareness of our schools and the programs we offer is
critical to our ability to attract prospective students. If our
schools are unable to successfully market and advertise their
educational programs, our schools ability to attract and
enroll prospective students in such programs could be adversely
affected. It is also critical to our success that we convert
these prospective students to enrolled students in a
cost-effective manner and that these enrolled students remain
active in our programs.
Recently, the proprietary postsecondary education sector has
been, and it remains, under intense regulatory and other
scrutiny which has led to media attention that in many instances
has portrayed the sector in an unflattering light. This negative
media attention may cause some prospective students to choose
educational alternatives outside of the proprietary sector or
may cause them to choose proprietary alternatives other than
University of Phoenix, either of which could negatively impact
our new enrollments.
Some of the additional factors that could prevent us from
successfully enrolling and retaining students in our programs
include:
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regulatory investigations that may damage our reputation;
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increased regulation of online education, including in states in
which we do not have a physical presence;
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a decrease in the perceived or actual economic benefits that
students derive from our programs or education in general;
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litigation that may damage our reputation;
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52
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inability to continue to recruit, train and retain quality
faculty;
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student or employer dissatisfaction with the quality of our
services and programs;
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student financial, personal or family constraints;
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tuition rate reductions by competitors that we are unwilling or
unable to match; and
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a decline in the acceptance of online education.
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If one or more of these factors reduces demand for our programs,
our enrollment could be negatively affected or our costs
associated with each new enrollment could increase, or both,
either of which could have a material adverse impact on our
business, financial condition, results of operations and cash
flows.
If the
proportion of our students who enroll with, and accumulate,
fewer than 24 credits continues to increase, we may experience
increased cost and reduced profitability.
In recent years, a substantial proportion of our overall growth
has arisen from the increase in associates degree students
enrolled in University of Phoenix. As a result of this, the
proportion of our Degreed Enrollment composed of
associates degree students has increased and may continue
to increase in the future. We have experienced certain adverse
effects from this shift, such as an increase in our student loan
cohort default rate. Although the proportion of our Degreed
Enrollment composed of associates degree students
decreased in the fourth quarter of fiscal year 2010, Degreed
Enrollment included an increased number of bachelors
degree students with fewer than 24 incoming credits, which may
contribute to a continued increase in our student loan cohort
default rate. If the proportion of students with fewer than 24
incoming credits continues to increase in the future, we may
experience additional consequences, such as higher cost per New
Degreed Enrollment, lower retention rates
and/or
higher student services costs, an increase in the percentage of
our revenue derived from Title IV funding under the
90/10
Rule, more limited ability to implement tuition price increases
and other effects that may adversely affect our business,
financial condition, results of operations and cash flows.
System
disruptions and security threats to our computer networks could
have a material adverse effect on our business.
The performance and reliability of our computer network
infrastructure at our schools, including our online programs, is
critical to our operations, reputation and ability to attract
and retain students. Any computer system error or failure,
regardless of cause, could result in outages that disrupt our
online and on-ground operations. We have only limited
redundancies in our core computer and network infrastructure,
which is concentrated in a single geographic area. Because we do
not have real-time comprehensive redundancies in our IT
infrastructure, a catastrophic failure or unavailability for any
reason of our principal data center may require us to replicate
the function of this data center at our existing remote data
facility or elsewhere. An event such as this may require
equipping and restoring activities that could take up to several
weeks to complete. The disruption from such an event could
significantly impact our operations and have a material adverse
effect on our business, financial condition, results of
operations and cash flows, and could adversely affect our
compliance with applicable regulations and accrediting body
standards.
In addition, we face the threat to our computer systems of
unauthorized access, computer hackers, computer viruses,
malicious code, organized cyber attacks and other security
problems and system disruptions. We have devoted and will
continue to devote significant resources to the security of our
computer systems, but they may still be vulnerable to these
threats. A user who circumvents security measures could
misappropriate proprietary information or cause interruptions or
malfunctions in operations. As a result, we may be required to
expend significant resources to protect against the threat of
these system disruptions and security breaches or to alleviate
problems caused by these disruptions and breaches. Any of these
events could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
53
We may
not be able to successfully identify, pursue or integrate
acquisitions; acquisitions may result in additional debt or
dilution to our shareholders.
As part of our growth strategy, we are actively considering
acquisition opportunities in the U.S. and worldwide. We
have acquired and expect to acquire additional proprietary
educational institutions that complement our strategic
direction, some of which could be material. Any acquisition
involves significant risks and uncertainties, including:
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inability to successfully integrate the acquired operations,
including the information technology systems, into our
institutions and maintain uniform standards, controls, policies
and procedures;
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inability to successfully operate and grow the acquired
businesses, including, with respect to BPP, risks related to:
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damage to BPPs reputation, including as a result of
unfavorable public opinion in the United Kingdom regarding
proprietary schools and ownership of BPP by a U.S. company;
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uncertainty of future enrollment, relating to BPPs newly
established Business School, reduced demand for professional
degrees, changes in the content of or procedures for
professional examinations or other factors;
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BPPs large fixed cost base; and
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uncertainty regarding reauthorization criteria for BPP
University Colleges degree awarding powers;
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distraction of managements attention from normal business
operations;
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challenges retaining the key employees of the acquired operation;
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operating, market or other challenges causing operating results
to be less than projected;
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expenses associated with the acquisition;
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challenges relating to conforming non-compliant financial
reporting procedures to those required of a subsidiary of a
U.S. reporting company, including procedures required by
the Sarbanes-Oxley Act; and
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unidentified issues not discovered in our due diligence process,
including commitments
and/or
contingencies.
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Acquisitions are inherently risky. We cannot be certain that our
previous or future acquisitions will be successful and will not
materially adversely affect our business, financial condition,
results of operations and cash flows. We may not be able to
identify suitable acquisition opportunities, acquire
institutions on favorable terms, or successfully integrate or
profitably operate acquired institutions. Future transactions
may involve use of our cash resources, issuance of equity or
debt securities, incurrence of other forms of debt or a
significant increase in our financial leverage, which could
adversely affect our business, financial condition, results of
operations and cash flows, especially if the cash flows
associated with any acquisition are not sufficient to cover the
additional debt service. If we issue equity securities as
consideration in an acquisition, current shareholders
percentage ownership and earnings per share may be diluted. In
addition, our acquisition of an educational institution could be
considered a change in ownership and control of the acquired
institution under applicable regulatory standards. For such an
acquisition in the U.S., we may need approval from the
U.S. Department of Education and applicable state agencies
and accrediting agencies and possibly other regulatory bodies.
Our inability to obtain such approvals with respect to a
completed acquisition could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.
Our
future operating results and the market price of our common
stock could be materially adversely affected if we are required
to further write down the carrying value of goodwill and/or
other intangible assets associated with any of our reporting
units in the future.
We review our goodwill and other indefinite-lived intangible
asset balances for impairment on at least an annual basis
through the application of a fair-value-based test. In assessing
the fair value of our reporting
54
units, we rely primarily on using a discounted cash flow
analysis which includes our estimates about the future cash
flows of our reporting units that are based on assumptions
consistent with our plans to manage the underlying businesses.
Other factors we consider include, but are not limited to,
significant underperformance relative to expected historical or
projected future operating results, significant changes in the
manner or use of the acquired assets or the overall business
strategy, and significant negative industry or economic trends.
We recorded the following goodwill and other intangible asset
impairments during fiscal year 2010:
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a $9.4 million charge for Insight Schools goodwill in
the second quarter, which is included in discontinued operations;
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an $8.7 million charge for ULAs goodwill in the third
quarter;
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a $156.3 million charge for BPPs goodwill in the
fourth quarter; and
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a $19.6 million charge for BPPs other intangibles in
the fourth quarter.
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For further discussion of these items, see Note 9, Goodwill
and Intangible Assets, in Part II, Item 8,
Financial Statements and Supplementary Data.
If our estimates or related assumptions change in the future, we
may be required to record additional non-cash impairment charges
for these assets. In the future, if we are required to
significantly write down the carrying value of goodwill
and/or other
intangible assets associated with any of our reporting units,
our operating results and the market price of our common stock
may be materially adversely affected.
If we
do not maintain existing, and develop additional, relationships
with employers, our future growth may be impaired.
We currently have relationships with large employers to provide
their employees with the opportunity to obtain degrees through
us while continuing their employment. These relationships are an
important part of our strategy as they provide us with a steady
source of potential working learners for particular programs and
also serve to increase our reputation among high-profile
employers. In addition, these programs have a beneficial impact
on our 90/10 Rule percentage calculation by reducing the
proportion of our cash-basis revenues attributable to
Title IV funds. If we are unable to develop new
relationships, or if our existing relationships deteriorate or
end, our efforts to seek these sources of potential working
learners may be impaired, and this could materially and
adversely affect our business, financial condition, results of
operations and cash flows.
Budget
constraints in states that provide state financial aid to our
students could reduce the amount of such financial aid that is
available to our students, which could reduce our enrollment and
adversely affect our 90/10 Rule calculation.
Many states are experiencing severe budget deficits and
constraints. Some of these states have reduced or eliminated
various student financial assistance programs, and additional
states may do so in the future. If our students who receive this
type of assistance cannot secure alternate sources of funding,
they may be forced to withdraw or reduce the rate at which they
seek to complete their education. Other students who would
otherwise have been eligible for state financial assistance may
not be able to enroll without such aid. This reduced funding
could decrease our enrollment and adversely affect our business,
financial condition, results of operations and cash flows.
In addition, the reduction or elimination of these
non-Title IV sources of student funding may adversely
affect our 90/10 Rule calculation by increasing the proportion
of the affected students funding needs satisfied by
Title IV programs. This could negatively impact or increase
the cost of our compliance with the 90/10 Rule, as discussed
under the Risk Factor, Our schools and programs would
lose their eligibility to participate in federal student
financial aid programs if the percentage of our revenues derived
from those programs is too high, above.
55
Our
principal credit agreement limits our ability to take various
actions.
Our principal credit agreement limits our ability to take
various actions, including paying dividends, repurchasing shares
and acquiring and disposing of assets or businesses.
Accordingly, we may be restricted from taking actions that
management believes would be desirable and in the best interests
of us and our shareholders. Our principal credit agreement also
requires us to satisfy specified financial and non-financial
covenants, including covenants relating to regulatory
compliance. A breach of any covenants contained in our credit
agreement would result in an event of default under the
agreement and allow the lenders to pursue various remedies,
including accelerating the repayment of any indebtedness
outstanding under the agreement, any of which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
Our
financial performance depends, in part, on our ability to keep
pace with changing market needs and technology; if we fail to
keep pace or fail in implementing or adapting to new
technologies, our business may be adversely
affected.
Increasingly, prospective employers of students who graduate
from our schools demand that their new employees possess
appropriate technological skills and also appropriate
soft skills, such as communication, critical
thinking and teamwork skills. These skills can evolve rapidly in
a changing economic and technological environment. Accordingly,
it is important for our schools educational programs to
evolve in response to these economic and technological changes.
The expansion of existing programs and the development of new
programs may not be accepted by current or prospective students
or the employers of our graduates. Even if our schools are able
to develop acceptable new programs, our schools may not be able
to begin offering those new programs as quickly as required by
prospective employers or as quickly as our competitors offer
similar programs. In addition, we may be unable to obtain
specialized accreditations or licensures that may make certain
programs desirable to students. To offer a new academic program,
we may be required to obtain federal, state and accrediting
agency approvals, which may be conditioned or delayed in a
manner that could significantly affect our growth plans. In
addition, to be eligible for Title IV programs, a new
academic program may need to be certified by the
U.S. Department of Education. If we are unable to
adequately respond to changes in market requirements due to
regulatory or financial constraints, unusually rapid
technological changes, or other factors, our ability to attract
and retain students could be impaired, the rates at which our
graduates obtain jobs involving their fields of study could
suffer, and our business, financial condition, results of
operations and cash flows could be adversely affected.
Establishing new academic programs or modifying existing
programs requires us to make investments in management and
capital expenditures, incur marketing expenses and reallocate
other resources. We may have limited experience with the courses
in new areas and may need to modify our systems and strategy or
enter into arrangements with other educational institutions to
provide new programs effectively and profitably. If we are
unable to increase the number of students or offer new programs
in a cost-effective manner, or are otherwise unable to manage
effectively the operations of newly established academic
programs, our business, financial condition, results of
operations and cash flows could be adversely affected.
We have invested and continue to invest significant resources in
information technology, which is a key element of our business
strategy. Our information technology systems and tools could
become impaired or obsolete due to our action or failure to act.
For instance, we could install new information technology
without accurately assessing its costs or benefits, or we could
experience delayed or ineffective implementation of new
information technology. Similarly, we could fail to respond in a
timely or sufficiently competitive way to future technological
developments in our industry. Should our action or failure to
act impair or otherwise render our information technology less
effective, this could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
56
A
failure of our information systems to properly store, process
and report relevant data may reduce our managements
effectiveness, interfere with our regulatory compliance and
increase our operating expenses.
We are heavily dependent on the integrity of our data management
systems. If these systems do not effectively collect, store,
process and report relevant data for the operation of our
business, whether due to equipment malfunction or constraints,
software deficiencies, or human error, our ability to
effectively plan, forecast and execute our business plan and
comply with applicable laws and regulations, including the
Higher Education Act, as reauthorized, and the regulations
thereunder, will be impaired, perhaps materially. Any such
impairment could materially and adversely affect our financial
condition, results of operations, and cash flows.
The
personal information that we collect may be vulnerable to
breach, theft or loss that could adversely affect our reputation
and operations.
Possession and use of personal information in our operations
subjects us to risks and costs that could harm our business. Our
educational institutions collect, use and retain large amounts
of personal information regarding our students and their
families, including social security numbers, tax return
information, personal and family financial data and credit card
numbers. We also collect and maintain personal information of
our employees in the ordinary course of our business. Some of
this personal information is held and managed by certain of our
vendors. Although we use security and business controls to limit
access and use of personal information, a third party may be
able to circumvent those security and business controls, which
could result in a breach of student or employee privacy. In
addition, errors in the storage, use or transmission of personal
information could result in a breach of student or employee
privacy, and the increased availability and use of portable data
devices by our employees and students increases the risk of
unintentional disclosure of personal information. Possession and
use of personal information in our operations also subjects us
to legislative and regulatory burdens that could require
notification of data breaches and restrict our use of personal
information. We cannot assure you that a breach, loss or theft
of personal information will not occur. A breach, theft or loss
of personal information regarding our students and their
families or our employees that is held by us or our vendors
could have a material adverse effect on our reputation and
results of operations and result in liability under state and
federal privacy statutes and legal actions by state attorneys,
general and private litigants, and any of which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
We
face intense competition in the postsecondary education market
from both public and private educational institutions, which
could adversely affect our business.
Postsecondary education in our existing and new market areas is
highly competitive. We compete with traditional public and
private two-year and four-year colleges, other proprietary
schools and alternatives to higher education. Some of our
competitors, both public and private, have greater financial and
other resources than we have. Our competitors, both public and
private, may offer programs similar to ours at a lower tuition
level as a result of government subsidies, government and
foundation grants, tax-deductible contributions and other
financial resources not available to proprietary institutions.
In addition, many of our competitors have begun to offer
distance learning and other online education programs. As the
online and distance learning segment of the postsecondary
education market matures, the intensity of the competition we
face will increase further. This intense competition could
adversely affect our business, financial condition, results of
operations and cash flows.
Our
expansion into new markets outside the U.S. subjects us to risks
inherent in international operations.
As part of our growth strategy, through Apollo Global, Inc., our
consolidated majority-owned subsidiary, we have acquired
additional universities outside the U.S. and we intend to
actively pursue further acquisitions. To the extent that we make
such acquisitions, we will face risks that are inherent in
international operations, including:
|
|
|
|
|
complexity of operations across borders;
|
|
|
|
compliance with foreign regulatory environments;
|
|
|
|
currency exchange rate fluctuations;
|
57
|
|
|
|
|
monetary policy risks, such as inflation, hyperinflation and
deflation;
|
|
|
|
price controls or restrictions on exchange of foreign currencies;
|
|
|
|
potential political and economic instability in the countries in
which we operate, including potential student uprisings;
|
|
|
|
expropriation of assets by local governments;
|
|
|
|
multiple and possibly overlapping and conflicting tax laws;
|
|
|
|
compliance with anti-corruption regulations such as the
U.S. Foreign Corrupt Practices Act and the
U.K. Bribery Act of 2010;
|
|
|
|
potential unionization of employees under local labor laws and
local labor laws that make it more expensive and complex to
negotiate with, retain or terminate employees;
|
|
|
|
greater difficulty in utilizing and enforcing our intellectual
property and contract rights;
|
|
|
|
failure to understand the local culture and market;
|
|
|
|
limitations on the repatriation of funds; and
|
|
|
|
acts of terrorism and war, epidemics and natural disasters.
|
We may
experience movements in foreign currency exchange rates which
could adversely affect our operating results.
We report revenues, costs and earnings in U.S. dollars.
Exchange rates between the U.S. dollar and the local
currency in the countries where we operate are likely to
fluctuate from period to period. Because consolidated financial
results are reported in U.S. dollars, we are subject to the
risk of translation losses for reporting purposes. When the
U.S. dollar appreciates against the applicable local
currency in any reporting period, our consolidated operating
results are adversely impacted due to translation.
As we continue to expand our international operations, we will
conduct more transactions in currencies other than the
U.S. Dollar. To the extent that foreign revenue and expense
transactions are not denominated in the local currency, we are
also subject to the risk of transaction losses. Given the
volatility of exchange rates, there is no assurance that we will
be able to effectively manage currency transaction
and/or
translation risks. Fluctuations in foreign currency exchange
rates could have a material adverse affect on our business,
financial condition, results of operations and cash flows.
We
rely on proprietary rights and intellectual property that may
not be adequately protected under current laws, and we encounter
disputes from time to time relating to our use of intellectual
property.
Our success depends in part on our ability to protect our
proprietary rights and intellectual property. We rely on a
combination of copyrights, trademarks, trade secrets, patents,
domain names and contractual agreements to protect our
proprietary rights. For example, we rely on trademark protection
in the U.S. and various foreign jurisdictions to protect
our rights to various marks as well as distinctive logos and
other marks associated with our services. We also rely on
agreements under which we obtain intellectual property to own or
license rights to use intellectual property developed by faculty
members, content experts and other third-parties. We cannot
assure you that these measures are adequate, that we have
secured, or will be able to secure, appropriate permissions or
protections for all of the intellectual property rights we use
or claim rights to in the U.S. or various foreign
jurisdictions, or that third parties will not terminate our
license rights or infringe upon or otherwise violate our
intellectual property rights or the intellectual property rights
of others. Despite our efforts to protect these rights,
unauthorized third parties may attempt to use, duplicate or copy
the proprietary aspects of our student recruitment and
educational delivery methods and systems, curricula, online
resource material or other content. Our managements
attention may be diverted by these attempts and we may need to
use funds in litigation to protect our proprietary rights
against any infringement or violation, which could have a
material adverse affect on our business, financial condition,
results of operations and cash flows.
58
We may become party to disputes from time to time over rights
and obligations concerning intellectual property, and we may not
prevail in these disputes. For example, third parties may allege
that we have infringed upon or not obtained sufficient rights in
the technologies used in our educational delivery systems, the
content of our courses or other training materials or in our
ownership or uses of other intellectual property claimed by that
third party. Some third party intellectual property rights may
prove to be extremely broad, and it may not be possible for us
to conduct our operations in such a way as to avoid violating
those intellectual property rights. Any such intellectual
property claim could subject us to costly litigation and impose
a significant strain on our financial resources and management
personnel regardless of whether such claim has merit. Our
various liability insurance coverages, if any, may not cover
potential claims of this type adequately or at all, and we may
be required to alter the design and operation of our systems or
the content of our courses or pay monetary damages or license
fees to third parties, which could have a material adverse
affect on our business, financial condition, results of
operations and cash flows.
We may
incur liability for the unauthorized duplication, distribution
or other use of materials posted online.
In some instances, our employees, including faculty members, or
our students may post various articles or other third-party
content online in class discussion boards or in other venues. We
may incur liability to third parties for the unauthorized
duplication, distribution or other use of this material. Any
such claims could subject us to costly litigation and impose a
significant strain on our financial resources and management
personnel regardless of whether the claims have merit. Our
various liability insurance coverages, if any, may not cover
potential claims of this type adequately or at all, and we may
be required to alter or cease our uses of such material (which
may include changing or removing content from our courses) or
pay monetary damages, which could have a material adverse affect
on our business, financial condition, results of operations and
cash flows.
We may
have unanticipated tax liabilities that could adversely impact
our results of operations and financial condition.
We are subject to multiple types of taxes in the U.S., United
Kingdom and various other foreign jurisdictions. The
determination of our worldwide provision for income taxes and
other tax accruals involves various judgments, and therefore the
ultimate tax determination is subject to uncertainty. In
addition, changes in tax laws, regulations, or rules may
adversely affect our future reported financial results, may
impact the way in which we conduct our business, or may increase
the risk of audit by the Internal Revenue Service or other tax
authority.
We are currently subject to an Internal Revenue Service audit
relating to our U.S. federal income tax returns for our
fiscal years 2006, 2007 and 2008, which was commenced in fiscal
year 2009. In addition to this audit, we are subject to numerous
ongoing audits by state, local and foreign tax authorities.
Although we believe our tax accruals are reasonable, the final
determination of tax audits in the U.S. or abroad and any
related litigation could be materially different from our
historical income tax provisions and accruals. The results of an
audit or litigation could have a material effect on our
business, financial condition, results of operations and cash
flows.
In addition, an increasing number of states are adopting new
laws or changing their interpretation of existing laws regarding
the apportionment of service revenues for corporate income tax
purposes in a manner that could result in a larger proportion of
our income being taxed by the states into which we sell
services. These legislative and administrative changes could
result in a portion of our income being taxed in both Arizona
and other states. The overall scope of this issue will depend on
the manner in which the Arizona Department of Revenue interprets
applicable Arizona tax law and on whether certain adverse
interpretations are upheld. The magnitude of this possible
double taxation could continue to increase as more states change
the manner in which they tax income from services. If we
experience double taxation by states for a substantial portion
of our income, it could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Item 1B
Unresolved Staff Comments
None.
59
Item 2
Properties
As of August 31, 2010, we utilized 472 facilities, the
majority of which were leased. As of August 31, 2010, we
were obligated to lease approximately 8.4 million square
feet and owned approximately 1.2 million square feet, as
follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
Owned
|
|
|
Total
|
|
Reportable Segment
|
|
Location
|
|
Type
|
|
Sq. Ft.
|
|
|
# of Properties
|
|
|
Sq. Ft.
|
|
|
# of Properties
|
|
|
Sq. Ft.
|
|
|
# of Properties
|
|
|
University of Phoenix
|
|
United States
|
|
Office
|
|
|
1,024,230
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
1,024,230
|
|
|
|
11
|
|
|
|
|
|
Dual Purpose
|
|
|
5,832,676
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
5,832,676
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,856,906
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
6,856,906
|
|
|
|
291
|
|
|
|
International
|
|
Office
|
|
|
3,455
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
3,455
|
|
|
|
1
|
|
|
|
|
|
Dual Purpose
|
|
|
32,730
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
32,730
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,185
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
36,185
|
|
|
|
3
|
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
International
|
|
Office
|
|
|
29,965
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
29,965
|
|
|
|
3
|
|
|
|
|
|
Dual Purpose
|
|
|
324,278
|
|
|
|
37
|
|
|
|
178,525
|
|
|
|
5
|
|
|
|
502,803
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,243
|
|
|
|
40
|
|
|
|
178,525
|
|
|
|
5
|
|
|
|
532,768
|
|
|
|
45
|
|
Other
|
|
United States
|
|
Office
|
|
|
3,557
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
3,557
|
|
|
|
1
|
|
|
|
|
|
Dual Purpose
|
|
|
93,709
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
93,709
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,266
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
97,266
|
|
|
|
6
|
|
|
|
International
|
|
Office
|
|
|
3,294
|
|
|
|
1
|
|
|
|
19,181
|
|
|
|
1
|
|
|
|
22,475
|
|
|
|
2
|
|
|
|
|
|
Dual Purpose
|
|
|
123,032
|
|
|
|
11
|
|
|
|
448,865
|
|
|
|
28
|
|
|
|
571,897
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,326
|
|
|
|
12
|
|
|
|
468,046
|
|
|
|
29
|
|
|
|
594,372
|
|
|
|
41
|
|
Other Schools
|
|
United States
|
|
Office
|
|
|
22,174
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
22,174
|
|
|
|
2
|
|
|
|
|
|
Dual Purpose
|
|
|
135,087
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
135,087
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,261
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
157,261
|
|
|
|
56
|
|
|
|
International
|
|
Office
|
|
|
14,673
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
14,673
|
|
|
|
2
|
|
Corporate(1)
|
|
United States
|
|
Office
|
|
|
752,902
|
|
|
|
25
|
|
|
|
599,664
|
|
|
|
3
|
|
|
|
1,352,566
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
8,395,762
|
|
|
|
435
|
|
|
|
1,246,235
|
|
|
|
37
|
|
|
|
9,641,997
|
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Corporate includes eight properties associated with Insight
Schools, which we classified as held for sale and as
discontinued operations beginning in fiscal year 2010. |
Dual purpose space includes office and classroom facilities.
Leases generally range from five to ten years with one to two
renewal options for extended terms. We also lease space from
time to time on a short-term basis in order to provide specific
courses or programs. We evaluate current utilization of the
educational facilities and projected enrollment growth to
determine facility needs.
In addition to the above properties, we executed a lease
agreement in fiscal year 2009 for two properties that are being
constructed for which we do not have the right to control the
use of the property under lease at August 31, 2010. When
completed, the properties will have approximately 439,000 of
aggregate square footage and we expect to begin using the
properties in fiscal year 2011.
Item 3
Legal Proceedings
We are subject to various claims and contingencies which are in
the scope of ordinary and routine litigation incidental to our
business, including those related to regulation, business
transactions, employee-related matters and taxes, among others.
While the outcomes of these matters are uncertain, management
does not expect that the ultimate costs to resolve these matters
will have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
When we become aware of a claim or potential claim, the
likelihood of any loss or exposure is assessed. If it is
probable that a loss will result and the amount of the loss can
be reasonably estimated, we record a
60
liability for the loss. The liability recorded includes probable
and estimable legal costs associated with the claim or potential
claim. If the loss is not probable or the amount of the loss
cannot be reasonably estimated, we disclose the claim if the
likelihood of a potential loss is reasonably possible and the
amount is material. For matters where no loss contingency is
recorded, our policy is to expense legal fees as incurred.
A description of pending litigation, settlements, and other
proceedings that are outside the scope of ordinary and routine
litigation incidental to our business is provided under
Note 19, Commitments and Contingencies, Pending
Litigation and Settlements and Regulatory and Other Legal
Matters, in Item 8, Financial Statements and
Supplementary Data, which is incorporated herein by
reference.
Item 4
(Removed and Reserved)
PART II
|
|
Item 5
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our Apollo Group Class A common stock trades on the NASDAQ
Global Select Market under the symbol APOL. The
holders of our Apollo Group Class A common stock are not
entitled to any voting rights.
There is no established public trading market for our Apollo
Group Class B common stock and all shares of our Apollo
Group Class B common stock are beneficially owned by
affiliates.
The table below sets forth the high and low bid share prices for
our Apollo Group Class A common stock as reported by the
NASDAQ Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
76.95
|
|
|
$
|
48.30
|
|
Second Quarter
|
|
|
90.00
|
|
|
|
70.17
|
|
Third Quarter
|
|
|
81.20
|
|
|
|
55.35
|
|
Fourth Quarter
|
|
|
72.50
|
|
|
|
59.49
|
|
2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
76.86
|
|
|
$
|
52.79
|
|
Second Quarter
|
|
|
65.72
|
|
|
|
53.59
|
|
Third Quarter
|
|
|
66.69
|
|
|
|
52.20
|
|
Fourth Quarter
|
|
|
53.21
|
|
|
|
38.39
|
|
Holders
As of August 31, 2010, there were approximately 259
registered holders of record of Apollo Class A common stock
and four registered holders of record of Apollo Class B
common stock. A substantially greater number of holders of
Apollo Group Class A common stock are street
name or beneficial holders, whose shares are held of
record by banks, brokers and other financial institutions.
Dividends
Although we are permitted to pay dividends on our Apollo
Class A and Apollo Class B common stock, subject to
the satisfaction of applicable financial covenants in our
principal credit facility, we have never paid cash dividends on
our common stock. Dividends are payable at the discretion of the
Board of Directors, and the Articles of Incorporation treat the
declaration of dividends on the Apollo Class A and Apollo
Class B common stock in an identical manner as follows:
holders of our Apollo Class A common stock and Apollo
Class B common stock are entitled to receive cash
dividends, if and to the extent declared by the Board of
Directors, payable to the holders of
61
either class or both classes of common stock in equal or unequal
per share amounts, at the discretion of the Board of Directors.
We have no current plan to pay dividends in the foreseeable
future. The decision of our Board of Directors to pay future
dividends will depend on general business conditions, the effect
of a dividend payment on our financial condition and other
factors the Board of Directors may consider relevant.
Recent
Sales of Unregistered Securities
None.
Securities
Authorized for Issuance under Equity Compensation
Plans
The information required by Item 201(d) of
Regulation S-K
is provided under Item 12, Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters, Equity Compensation Plan Information,
which is incorporated herein by reference.
Purchases
of Equity Securities
Our Board of Directors has authorized programs to repurchase
shares of Apollo Class A common stock, from time to time
depending on market conditions and other considerations. The
share repurchases under these programs for the three months
ended August 31, 2010 have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Repurchased as
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
Part of
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
Publicly
|
|
|
Available for
|
|
|
|
Total Number of
|
|
|
Average
|
|
|
Announced
|
|
|
Repurchase Under
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Plans or
|
|
|
the Plans or
|
|
(numbers in thousands, except per share data)
|
|
Repurchased(1)
|
|
|
per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
Treasury stock as of May 31, 2010
|
|
|
38,960
|
|
|
$
|
59.62
|
|
|
|
38,960
|
|
|
$
|
660,681
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
2,010
|
|
|
|
49.76
|
|
|
|
2,010
|
|
|
|
(100,000
|
)
|
Shares reissued
|
|
|
(18
|
)
|
|
|
59.14
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of June 30, 2010
|
|
|
40,952
|
|
|
$
|
59.14
|
|
|
|
40,952
|
|
|
$
|
560,681
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reissued
|
|
|
(176
|
)
|
|
|
59.14
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of July 31, 2010
|
|
|
40,776
|
|
|
$
|
59.14
|
|
|
|
40,776
|
|
|
$
|
560,681
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reissued
|
|
|
(62
|
)
|
|
|
59.14
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2010
|
|
|
40,714
|
|
|
$
|
59.14
|
|
|
|
40,714
|
|
|
$
|
560,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shares repurchased in the above table exclude approximately
118,000 shares repurchased for $5.3 million during the
three months ended August 31, 2010 related to tax
withholding requirements on restricted stock units. These
repurchase transactions do not fall under the repurchase program
described below, and therefore do not reduce the amount that is
available for repurchase under that program. Please refer to
Note 15, Shareholders Equity, in Item 8,
Financial Statements and Supplementary Data, for
additional information. |
On February 18, 2010, our Board of Directors authorized a
$500 million increase in the amount available under our
share repurchase program up to an aggregate amount of
$1 billion of Apollo Class A common stock. There is no
expiration date on the repurchase authorizations and repurchases
occur at our discretion. The amount and timing of future share
repurchases, if any, will be made as market and business
conditions warrant. Repurchases may be made on the open market
or in privately negotiated transactions, pursuant to the
applicable Securities and Exchange Commission rules, and may
include repurchases pursuant to Securities and Exchange
Commission
Rule 10b5-1
nondiscretionary trading programs.
62
Company
Stock Performance
The following graph compares the cumulative
5-year total
return attained by shareholders on Apollo Class A common
stock relative to the cumulative total returns of the S&P
500 index and a customized peer group of five companies that
includes: Career Education Corp., Corinthian Colleges Inc.,
DeVry Inc., ITT Educational Services Inc., and Strayer Education
Inc. An investment of $100 (with reinvestment of all dividends)
is assumed to have been made in our common stock, in the index,
and in the peer group on August 31, 2005, and its relative
performance is tracked through August 31, 2010.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
Apollo Group, Inc.,
The S&P 500 Index and a Peer Group
*$100 invested on
8/31/05 in
stock and index-including reinvestment of dividends.
Fiscal year ending August 31.
Source: Standard & Poors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/05
|
|
|
8/06
|
|
|
8/07
|
|
|
8/08
|
|
|
8/09
|
|
|
8/10
|
Apollo Group, Inc.
|
|
|
|
100
|
|
|
|
|
64
|
|
|
|
|
75
|
|
|
|
|
81
|
|
|
|
|
82
|
|
|
|
|
54
|
|
S&P 500
|
|
|
|
100
|
|
|
|
|
109
|
|
|
|
|
125
|
|
|
|
|
111
|
|
|
|
|
91
|
|
|
|
|
95
|
|
Peer Group
|
|
|
|
100
|
|
|
|
|
90
|
|
|
|
|
138
|
|
|
|
|
139
|
|
|
|
|
157
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The information contained in the performance graph shall not be
deemed soliciting material or to be
filed with the Securities and Exchange Commission
nor shall such information be deemed incorporated by reference
into any future filing under the Securities Act or the Exchange
Act, except to the extent that we specifically incorporate it by
reference into such filing.
The stock price performance included in this graph is not
necessarily indicative of future stock price performance.
63
Item 6
Selected Consolidated Financial Data
The following selected consolidated financial data is qualified
by reference to and should be read in conjunction with
Item 8, Financial Statements and Supplementary Data,
and Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
to fully understand factors that may affect the
comparability of the information presented below. The
consolidated statements of income data for fiscal years 2010,
2009 and 2008, and the consolidated balance sheets data as of
August 31, 2010 and 2009, were derived from the audited
consolidated financial statements, included herein.
We have made certain reclassifications to the financial data
presented below associated with our presentation of Insight
Schools as discontinued operations, and our adoption of
Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 160, Non-controlling
Interests in Consolidated Financial Statements An
Amendment of ARB No. 51 (codified in ASC 810,
Consolidation) on September 1, 2009. For
further discussion of these reclassifications, refer to
Note 2, Significant Accounting Policies, in Item 8,
Financial Statements and Supplementary Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and marketable securities
|
|
$
|
1,299,943
|
|
|
$
|
987,825
|
|
|
$
|
511,459
|
|
|
$
|
392,681
|
|
|
$
|
408,728
|
|
Restricted cash and cash equivalents
|
|
$
|
444,132
|
|
|
$
|
432,304
|
|
|
$
|
384,155
|
|
|
$
|
296,469
|
|
|
$
|
238,267
|
|
Long-term restricted cash and cash equivalents
|
|
$
|
126,615
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
$
|
3,601,451
|
|
|
$
|
3,263,377
|
|
|
$
|
1,860,412
|
|
|
$
|
1,449,863
|
|
|
$
|
1,283,005
|
|
Current liabilities
|
|
$
|
1,793,511
|
|
|
$
|
1,755,278
|
|
|
$
|
865,609
|
|
|
$
|
743,835
|
|
|
$
|
595,756
|
|
Long-term debt
|
|
|
168,039
|
|
|
|
127,701
|
|
|
|
15,428
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
251,161
|
|
|
|
155,785
|
|
|
|
133,210
|
|
|
|
72,188
|
|
|
|
82,876
|
|
Total equity
|
|
|
1,388,740
|
|
|
|
1,224,613
|
|
|
|
846,165
|
|
|
|
633,840
|
|
|
|
604,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,601,451
|
|
|
$
|
3,263,377
|
|
|
$
|
1,860,412
|
|
|
$
|
1,449,863
|
|
|
$
|
1,283,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
(In thousands, except per share data)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
4,925,819
|
|
|
$
|
3,953,566
|
|
|
$
|
3,133,436
|
|
|
$
|
2,721,812
|
|
|
$
|
2,477,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
2,125,082
|
|
|
|
1,567,754
|
|
|
|
1,349,879
|
|
|
|
1,230,253
|
|
|
|
1,109,584
|
|
Selling and promotional
|
|
|
1,112,666
|
|
|
|
952,884
|
|
|
|
800,989
|
|
|
|
658,012
|
|
|
|
544,706
|
|
General and administrative
|
|
|
314,795
|
|
|
|
286,493
|
|
|
|
215,192
|
|
|
|
201,546
|
|
|
|
153,004
|
|
Goodwill and other intangibles impairment
|
|
|
184,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,205
|
|
Estimated litigation loss
|
|
|
177,982
|
|
|
|
80,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
3,915,095
|
|
|
|
2,887,631
|
|
|
|
2,366,060
|
|
|
|
2,089,811
|
|
|
|
1,827,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,010,724
|
|
|
|
1,065,935
|
|
|
|
767,376
|
|
|
|
632,001
|
|
|
|
650,034
|
|
Interest income
|
|
|
2,920
|
|
|
|
12,591
|
|
|
|
30,078
|
|
|
|
31,172
|
|
|
|
18,465
|
|
Interest expense
|
|
|
(11,891
|
)
|
|
|
(4,448
|
)
|
|
|
(3,450
|
)
|
|
|
(232
|
)
|
|
|
(326
|
)
|
Other, net
|
|
|
(685
|
)
|
|
|
(7,151
|
)
|
|
|
6,772
|
|
|
|
672
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,001,068
|
|
|
|
1,066,927
|
|
|
|
800,776
|
|
|
|
663,613
|
|
|
|
668,088
|
|
Provision for income taxes
|
|
|
(464,063
|
)
|
|
|
(456,720
|
)
|
|
|
(314,025
|
)
|
|
|
(250,961
|
)
|
|
|
(253,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
537,005
|
|
|
|
610,207
|
|
|
|
486,751
|
|
|
|
412,652
|
|
|
|
414,833
|
|
Loss from discontinued operations, net of tax
|
|
|
(15,424
|
)
|
|
|
(16,377
|
)
|
|
|
(10,824
|
)
|
|
|
(3,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
521,581
|
|
|
|
593,830
|
|
|
|
475,927
|
|
|
|
408,810
|
|
|
|
414,833
|
|
Net loss attributable to noncontrolling interests
|
|
|
31,421
|
|
|
|
4,489
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Apollo
|
|
$
|
553,002
|
|
|
$
|
598,319
|
|
|
$
|
476,525
|
|
|
$
|
408,810
|
|
|
$
|
414,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to Apollo
|
|
$
|
3.72
|
|
|
$
|
3.85
|
|
|
$
|
2.94
|
|
|
$
|
2.38
|
|
|
$
|
2.35
|
|
Discontinued operations attributable to Apollo
|
|
|
(0.10
|
)
|
|
|
(0.10
|
)
|
|
|
(0.07
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share attributable to Apollo
|
|
$
|
3.62
|
|
|
$
|
3.75
|
|
|
$
|
2.87
|
|
|
$
|
2.35
|
|
|
$
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
152,906
|
|
|
|
159,514
|
|
|
|
165,870
|
|
|
|
173,603
|
|
|
|
176,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
This Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) is
intended to help investors understand our results of operations,
financial condition and present business environment. The
MD&A is provided as a supplement to, and should be read in
conjunction with, our consolidated financial statements and
related notes included in Item 8, Financial Statements
and Supplementary Data. The MD&A is organized as
follows:
|
|
|
|
|
Overview: From managements point of view, we
discuss the following:
|
|
|
|
|
|
An overview of our business and the sectors of the education
industry in which we operate;
|
|
|
Key trends, developments and challenges; and
|
|
|
Significant events from the current period.
|
|
|
|
|
|
Critical Accounting Policies and Estimates: A discussion
of our accounting policies that require critical judgments and
estimates.
|
|
|
|
Recent Accounting Pronouncements: A discussion of
recently issued accounting pronouncements.
|
|
|
|
Results of Operations: An analysis of our results of
operations as reflected in our consolidated financial statements.
|
|
|
|
Liquidity, Capital Resources, and Financial Position: An
analysis of cash flows and contractual obligations and other
commercial commitments.
|
Overview
Apollo is one of the worlds largest private education
providers and has been a provider of education services for more
than 35 years. We offer innovative and distinctive
educational programs and services at the undergraduate,
masters and doctoral levels at our various campuses and
learning centers, and online throughout the world. Our principal
wholly-owned subsidiaries and subsidiaries that we control
include the following:
|
|
|
|
|
The University of Phoenix, Inc. (University of
Phoenix),
|
|
|
Apollo Global, Inc. (Apollo Global):
|
|
|
|
|
|
BPP Holdings, plc (BPP),
|
|
|
Western International University, Inc. (Western
International University),
|
|
|
Universidad de Artes, Ciencias y Comunicación
(UNIACC),
|
|
|
Universidad Latinoamericana (ULA),
|
|
|
|
|
|
Institute for Professional Development (IPD),
|
|
|
The College for Financial Planning Institutes Corporation
(CFFP), and
|
|
|
Meritus University, Inc. (Meritus).
|
Substantially all of our net revenue is composed of tuition and
fees for educational services. In fiscal year 2010, University
of Phoenix accounted for approximately 91% of our total
consolidated net revenue. University of Phoenix generated 88% of
its cash basis revenue for eligible tuition and fees during
fiscal year 2010 from receipt of Title IV financial aid
program funds, as calculated under the 90/10 Rule, excluding the
benefit from the permitted temporary exclusion of revenue
associated with the recently increased annual student loan
limits.
We believe that a critical element of generating successful
long-term growth and attractive returns for our stakeholders is
to provide high quality educational products and services for
our students in order for them to maximize the benefits of their
educational experience. Accordingly, we are intensely focused on
student success and better identifying and enrolling students
who have a reasonable chance to succeed in our programs. We are
continuously enhancing and expanding our current service
offerings and investing in academic quality. We have developed
customized systems for academic quality management, faculty
recruitment and training, student tracking, and marketing to
help us more effectively manage toward this objective. We
believe we utilize one of the most comprehensive postsecondary
learning assessment programs
65
in the U.S. We seek to improve student retention by
enhancing student services, promoting instructional innovation
and improving academic support. All of these efforts are
designed to help our students stay in school and succeed.
Key
Trends, Developments and Challenges
The following developments and trends present opportunities,
challenges and risks as we work toward our goal of providing
attractive returns for all of our stakeholders:
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Initiative to Enhance Student Experience and
Outcomes. We are intensely focused on improving
student outcomes. In furtherance of this focus, in fiscal year
2010 we began to implement a number of important changes and
initiatives to transition our business to more effectively
support our students and improve their educational outcomes,
which efforts will continue into fiscal year 2011. These
initiatives include the following:
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Upgrading our learning and data platforms;
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Adopting new tools to better support students education
financing decisions, such as our Responsible Borrowing
Calculator, which is designed to help students calculate the
amount of student borrowing necessary to achieve their
educational objectives and to motivate them to not incur
unnecessary student loan debt;
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Transitioning our marketing approaches to more effectively
identify students who have the ability to succeed in our
educational programs, including reduced emphasis on the
utilization of third parties for lead generation;
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Requiring all students who enroll in University of Phoenix with
fewer than 24 credits to first attend a free, three-week
University Orientation program which is designed to help
inexperienced prospective students understand the rigors of
higher education prior to enrollment. After piloting the program
for the past year, we plan to implement this policy
university-wide in November 2010; and
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Better aligning our enrollment, admissions and other employees
to our students success by redefining roles and
responsibilities, resetting individual objectives and measures
and implementing new compensation structures, including
eliminating all enrollment factors in our admissions personnel
compensation structure effective September 1, 2010.
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We believe that the changes in our marketing approaches and the
University Orientation pilot program implemented during fiscal
year 2010 contributed to the 9.8% reduction in University of
Phoenix New Degreed Enrollment in the fourth quarter of fiscal
year 2010 compared to the fourth quarter of fiscal year 2009. We
expect that the continuing changes in our marketing approaches
and the implementation of the additional initiatives described
above will significantly reduce fiscal year 2011 University of
Phoenix New Degreed Enrollment and will adversely impact our net
revenue, operating income and cash flow. However, we believe
that these efforts are in the best interests of our students
and, over the long-term, will improve student persistence and
completion rates, reduce bad debt expense, reduce the risks to
our business associated with our regulatory environment, and
position us for more stable long-term growth in the future.
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Compliance. Our domestic business is highly
regulated by the U.S. Department of Education, the
applicable academic accreditation agencies and state education
regulatory authorities. Compliance with these regulatory
requirements is a significant part of our administrative effort.
In August 2008, the U.S. Congress reauthorized the Higher
Education Act through September 2013 by enacting the Higher
Education Opportunity Act, which resulted in a large number of
new and modified requirements that ultimately will be
implemented through the Department rulemaking. Final regulations
for implementing the Higher Education Opportunity Act provisions
were published in October 2009 with an effective date of
July 1, 2010. We have developed and implemented the
necessary procedural and substantive changes to enable us to
comply with the provisions.
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New Rulemaking Initiative. In November 2009,
the Department convened two new negotiated rulemaking teams
related to Title IV program integrity issues and foreign
school issues. The team addressing program integrity issues,
which included representatives of the various higher education
constituencies, was unable to reach consensus on all of the
rules addressed by that team. Accordingly, under the negotiated
rulemaking protocol, the Department was free to propose rules
without regard to the tentative agreement reached regarding
certain of the rules. The proposed program integrity rulemaking
addresses numerous topics. The most significant proposals for
our business are the following:
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Modification of the standards relating to the payment of
incentive compensation to employees involved in student
recruitment and enrollment;
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Implementation of standards for state authorization of
proprietary institutions of higher education; and
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Adoption of a definition of gainful employment for
purposes of the requirement of Title IV student financial
aid that a program of study prepare students for gainful
employment in a recognized occupation.
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On June 18, 2010, the Department issued a Notice of
Proposed Rulemaking (NPRM) in respect of the program
integrity issues, other than the metrics for determining
compliance with the gainful employment requirement. On
July 26, 2010, the Department published a separate NPRM in
respect of the gainful employment metrics. The Department has
stated that its goal is to publish final rules by
November 1, 2010, excluding significant sections related to
gainful employment which the Department expects to publish in
early 2011. The final rules, including some reporting and
disclosure rules related to gainful employment, are expected to
be effective July 1, 2011.
We cannot predict the form of the rules that ultimately may be
adopted by the Department following public comment. Compliance
with these rules, some of which could be effective as early as
July 1, 2011, could reduce our enrollment, increase our
cost of doing business, and have a material adverse effect on
our business, financial condition, results of operations and
cash flows. See Item 1A, Risk Factors Risks
Related to the Highly Regulated Industry in Which We
Operate Pending rulemaking by the
U.S. Department of Education could result in regulatory
changes that materially and adversely affect our business,
for further discussion of the Departments proposals,
which discussion is incorporated by this reference.
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U.S. Congressional Hearings. In recent
months, there has been increased focus by the U.S. Congress
on the role that proprietary educational institutions play in
higher education. On June 24, 2010, the U.S. Senate
Committee on Health, Education, Labor and Pensions (HELP
Committee) held the first in a series of hearings to
examine the proprietary education sector. The August 4,
2010 hearing included the presentation of results from a
Government Accountability Office (GAO) review of
various aspects of the proprietary sector, including recruitment
practices, educational quality, student outcomes, the
sufficiency of integrity safeguards against waste, fraud and
abuse in federal student aid programs and the degree to which
proprietary institutions revenue is composed of
Title IV and other federal funding sources. Following the
August 4, 2010 hearing, Sen. Tom Harkin, the Chairman of
the HELP Committee, requested a broad range of detailed
information from 30 proprietary institutions, including Apollo
Group. We have been and intend to continue being responsive to
the requests of the HELP Committee. Sen. Harkin has stated that
another in this series of hearings will be held in December
2010. See Item 1A, Risk Factors Risks
Related to the Highly Regulated Industry in Which We
Operate Action by the U.S. Congress to revise
the laws governing the federal student financial aid programs or
reduce funding for those programs could reduce our student
population and increase our costs of operation for further
discussion regarding the HELP Committee hearings, which
discussion is incorporated by this reference.
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90/10 Rule. One requirement of the Higher
Education Act, commonly referred to as the 90/10
Rule, applies to proprietary institutions such as
University of Phoenix and Western International
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University. Under this rule, a proprietary institution will be
ineligible to participate in Title IV programs if for any
two consecutive fiscal years it derives more than 90% of its
cash basis revenue, as defined in the rule, from Title IV
programs. An institution that exceeds this limit for any single
fiscal year will be automatically placed on provisional
certification for two fiscal years and will be subject to
possible additional sanctions determined to be appropriate under
the circumstances by the U.S. Department of Education in
the exercise of its broad discretion. While the Department has
broad discretion to impose additional sanctions on such an
institution, there is only limited precedent available to
predict what those sanctions might be, particularly in the
current regulatory environment. The Department could specify any
additional conditions as a part of the provisional certification
and the institutions continued participation in
Title IV programs. These conditions may include, among
other things, restrictions on the total amount of Title IV
program funds that may be distributed to students attending the
institution; restrictions on programmatic and geographic
expansion; requirements to obtain and post letters of credit;
additional reporting requirements to include additional interim
financial reporting; or any other conditions imposed by the
Department. Should an institution be subject to a provisional
certification at the time that its current program participation
agreement expired, the effect on recertification of the
institution or continued eligibility in Title IV programs
pending recertification is uncertain. In recent years, the 90/10
Rule percentages for University of Phoenix have trended closer
to 90% and for fiscal year 2010, the percentage for University
of Phoenix was 88%, excluding the benefit from the permitted
temporary exclusion of revenue associated with the recently
increased annual student loan limits. This temporary relief
expires in July 2011, and including this relief the percentage
for University of Phoenix was 85%.
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Based on currently available information, we expect that the
90/10 Rule percentage for University of Phoenix, net of the
temporary relief, will approach 90% for fiscal year 2011. We
have implemented various measures intended to reduce the
percentage of University of Phoenixs cash basis revenue
attributable to Title IV funds, including emphasizing
employer-paid and other direct-pay education programs,
encouraging students to carefully evaluate the amount of
necessary Title IV borrowing, and continued focus on
professional development and continuing education programs.
Although we believe these measures will favorably impact the
90/10 Rule calculation, they have had only limited impact to
date and there is no assurance that they will be adequate to
prevent the 90/10 Rule calculation from exceeding 90% in the
future. We are considering other measures to favorably impact
the 90/10 Rule calculation for University of Phoenix, including
tuition price increases; however, we have substantially no
control over the amount of Title IV student loans and
grants sought by or awarded to our students.
Based on currently available information, we do not expect the
90/10 Rule percentage for University of Phoenix, net of the
temporary relief, to exceed 90% for fiscal year 2011. However,
we believe that, absent a change in recent trends or the
implementation of additional effective measures to reduce the
percentage, the 90/10 Rule percentage for University of Phoenix
is likely to exceed 90% in fiscal year 2012 due to the
expiration of the temporary relief in July 2011.
Our efforts to reduce the 90/10 Rule percentage for University
of Phoenix, especially if the percentage exceeds 90% for a
fiscal year, may involve taking measures which reduce our
revenue, increase our operating expenses, or both, in each case
perhaps significantly. If the 90/10 Rule is not changed to
provide relief for proprietary institutions, we may be required
to make structural changes to our business in order to remain in
compliance, which changes may materially alter the manner in
which we conduct our business and materially and adversely
impact our business, financial condition, results of operations
and cash flows. Furthermore, these required changes could make
more difficult our ability to comply with other important
regulatory requirements, such as the cohort default rate
regulations discussed below under Student Loan Cohort
Default Rates and Item 1A, Risk Factors
Risks Related to the Highly Regulated Industry in
Which We Operate An increase in student loan default
rates could result in the loss of eligibility to participate in
Title IV programs, which would materially and adversely
affect our business, as well as the proposed gainful
employment regulations discussed above under New
Rulemaking Initiative and Item 1A, Risk
Factors Risks Related to the Highly Regulated
Industry in Which We Operate Pending rulemaking by
the
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U.S. Department of Education could result in regulatory
changes that materially and adversely affect our business.
See Item 1A, Risk Factors Risks Related to
the Highly Regulated Industry in Which We Operate
Our schools and programs would lose their eligibility to
participate in federal student financial aid programs if the
percentage of our revenues derived from those programs is too
high, in which event we could not conduct our business as it is
currently conducted, for further discussion of the 90/10
Rule, which discussion is incorporated by this reference.
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Student Loan Cohort Default Rates. To remain
eligible to participate in Title IV programs, an
educational institutions student loan cohort default rates
must remain below certain specified levels. An educational
institution will lose its eligibility to participate in some or
all Title IV programs if its student loan cohort default
rate equals or exceeds 25% for three consecutive years or 40%
for any given year. If our student loan default rates approach
these limits, we may be required to increase efforts and
resources dedicated to improving these default rates.
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The cohort default rate for University of Phoenix was 12.9% for
the 2008 federal fiscal year and has been increasing over the
past several years. We expect this upward trend to intensify due
to the current challenging economic climate and the continuing
effect of the historical growth in our associates degree
student population. Consistent with this, the available
preliminary data for the University of Phoenix 2009 cohort
reflect a substantially higher default rate than the 2008
cohort, although we do not expect the rate to exceed 25%. See
Item 1A, Risk Factors Risks Related to the
Highly Regulated Industry in Which We Operate An
increase in our student loan default rates could result in the
loss of eligibility to participate in Title IV programs,
which would materially and adversely affect our business,
for further discussion of the University of Phoenix cohort
default rates, which discussion is incorporated by this
reference.
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Higher Learning Commission
(HLC). In August 2010, University of
Phoenix received a letter from HLC requiring University of
Phoenix to provide certain information and evidence of
compliance with HLC accreditation standards. The letter related
to the August 2010 report published by the GAO of its undercover
investigation into the enrollment and recruiting practices of a
number of proprietary institutions of higher education,
including University of Phoenix. We submitted the response to
HLC on September 10, 2010 and subsequently received a
request for additional information. We have been informed that
our response will be evaluated by a special committee in early
2011, and that the committee will make recommendations, if any,
to the HLC board. If, after review, HLC determines that our
response is unsatisfactory, HLC has informed us that it may
impose additional unspecified monitoring or sanctions. In
addition, HLC has recently imposed additional requirements on
University of Phoenix with respect to approval of new or
relocated campuses and additional locations. These requirements
may lengthen or make more challenging the approval process for
these sites. See Item 1A, Risk Factors Risks
Related to the Highly Regulated Industry in Which We
Operate If we fail to maintain our institutional
accreditation or if our institutional accrediting body loses
recognition by the U.S. Department of Education, we could
lose our ability to participate in Title IV programs, which
would materially and adversely affect our business, for
further discussion of this HLC review, which discussion is
incorporated by this reference.
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Securities and Exchange Commission Informal
Inquiry. During October 2009, we received
notification from the Enforcement Division of the Securities and
Exchange Commission indicating that they had commenced an
informal inquiry into our revenue recognition practices. Based
on the information and documents that the Securities and
Exchange Commission has requested from us
and/or our
auditors, which relate to our revenue recognition practices and
other matters, including our policies and practices relating to
student refunds, the return of Title IV funds to lenders
and bad debt reserves, the eventual scope, duration and outcome
of the inquiry cannot be predicted at this time. We are
cooperating fully with the Securities and Exchange Commission in
connection with the inquiry.
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Economic Downturn. The U.S. and much of
the world economy have been in the midst of an economic downturn
with uncertain prospects for recovery. These conditions have
contributed to a
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portion of our recent enrollment growth as an increased number
of working learners seek to advance their education to improve
their job security or reemployment prospects. One of our
challenges is to adequately and effectively service our
increased student population without over-building our
infrastructure and delivery platform in a manner that might
result in excess capacity when the portion of our growth related
to the economic downturn subsides. In contrast to this positive
impact, the economic downturn has adversely affected our bad
debt expense and allowance for doubtful accounts and reduced the
availability of state-funded student financial aid as many
states face revenue shortfalls. We believe that the availability
of state-funded student financial aid will continue to decline,
which may adversely impact our enrollment and, to the extent
that Title IV funds replace these state funding sources for
our students, may adversely impact our 90/10 Rule calculation.
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Opportunities to Expand into New Markets. We
believe that there is a growing demand for high quality
education outside the U.S. and that we have capabilities
and expertise that can be useful in providing these services
beyond our current reach. We believe we can deploy our key
capabilities in student services, technology and marketing to
expand into new markets to further our mission of providing high
quality, accessible education. We intend to actively pursue
quality opportunities to acquire
and/or
partner with existing institutions of higher learning where we
believe we can achieve long-term attractive growth and value
creation.
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Integration. We continue our efforts to
integrate our acquired educational institutions and seek to use
our experience to enhance the quality, delivery and student
outcomes of their respective education programs. As with all
acquisitions, there are significant risks, uncertainties and
challenges inherent with integration. During fiscal year 2010,
we recorded impairment charges relating to acquired entities as
follows:
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We acquired Insight Schools in fiscal year 2007. In the second
quarter of fiscal year 2010, we initiated a formal plan to sell
Insight Schools as we determined that the business was no longer
consistent with our long-term strategic objectives. We recorded
a $9.4 million impairment charge for Insight Schools
goodwill in the second quarter of fiscal year 2010, which is
included in discontinued operations.
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We acquired ULA in fiscal year 2008 and recorded an
$8.7 million impairment charge for ULAs goodwill in
the third quarter of fiscal year 2010.
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We acquired BPP in fiscal year 2009 and recorded impairment
charges of $156.3 million and $19.6 million for
BPPs goodwill and other intangibles, respectively, in the
fourth quarter of fiscal year 2010.
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For a more detailed discussion of our business, industry and
risks, refer to Item 1, Business, and Item 1A,
Risk Factors.
Fiscal
Year 2010 Events
In addition to the items mentioned above, we experienced the
following significant events during the fiscal year 2010:
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1.
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Degreed Enrollment and New Degreed Enrollment
Growth. We achieved 13.1% growth in average
University of Phoenix Degreed Enrollment in fiscal year 2010
compared to fiscal year 2009. University of Phoenix aggregate
New Degreed Enrollment increased 4.5% in fiscal year 2010
compared to fiscal year 2009, although New Degreed Enrollment
for the fourth quarter of fiscal year 2010 decreased 9.8%
compared to the fourth quarter of fiscal year 2009. Refer to
Results of Operations in MD&A for further discussion.
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2.
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Net Revenue Growth. Our net revenue increased
24.6% in fiscal year 2010 compared to fiscal year 2009 with
University of Phoenixs net revenue increasing 19.4%
primarily from its Degreed Enrollment growth and selective
tuition increases. Apollo Globals acquisition of BPP in
the
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fourth quarter of fiscal year 2009 also contributed
6.0 percentage points of the overall increase in
consolidated net revenue in fiscal year 2010 compared to fiscal
year 2009.
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3.
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University of Phoenix Program Participation
Agreement. The Higher Education Act, as
reauthorized, specifies the manner in which the
U.S. Department of Education reviews institutions for
eligibility and certification to participate in Title IV
programs. Every educational institution involved in
Title IV programs must be certified to participate and is
required to periodically renew this certification. University of
Phoenix was recertified in November 2009 and entered into a new
Title IV Program Participation Agreement which expires on
December 31, 2012.
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4.
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Settlement of Internal Revenue Service Dispute Related to
Stock Option Compensation. On November 25,
2009, we executed a Closing Agreement with the Internal Revenue
Service Office of Appeals to settle a dispute related to certain
stock option compensation deducted on our U.S. federal
income tax returns for fiscal years 2003 through 2005. Refer to
Note 14, Income Taxes, in Item 8, Financial
Statements and Supplementary Data, for additional
information.
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5.
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Addition of Director. On December 10,
2009, the holders of our Class B common stock elected
Samuel A. DiPiazza, Jr. to our Board of Directors at a
special meeting convened for such purpose.
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6.
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Settlement of Incentive Compensation False Claims Act
Lawsuit. On December 14, 2009, we
entered into an agreement, effective December 11, 2009, to
resolve the Incentive Compensation False Claims Act
Lawsuit. Under the terms of the agreement, in December 2009,
we paid $67.5 million to the United States and, under a
separate agreement, we paid $11.0 million in
attorneys fees to the relators in this qui tam action, as
required by the False Claims Act. The agreement makes clear that
we do not acknowledge, admit or concede any liability,
wrongdoing, noncompliance or violation as a result of the
settlement. Refer to Note 19, Commitments and
Contingencies, in Item 8, Financial Statements and
Supplementary Data, for additional information.
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7.
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University of Phoenix Program Review. On
December 31, 2009, University of Phoenix received the
U.S. Department of Educations Program Review Report,
which was a preliminary report of the Departments
findings. We responded to the preliminary report in the third
quarter of fiscal year 2010. The Department issued its Final
Program Review Determination letter on June 16, 2010, which
confirmed we had completed the corrective actions and satisfied
the obligations arising from the review. We posted a
$126 million letter of credit in favor of the Department in
connection with this review. Refer to Note 19, Commitments
and Contingencies, in Item 8, Financial Statements and
Supplementary Data, for additional information.
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8.
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Securities Class Action Lawsuit. On
June 23, 2010, the U.S. Circuit Court of Appeals for
the Ninth Circuit reversed the District Courts prior
ruling in our favor in the securities class action lawsuit,
In re Apollo Group, Inc. Securities Litigation, Case No.
CV04-2147-PHX-JAT, and ordered the trial court to enter judgment
against us in accordance with the prior jury verdict. The actual
amount of damages payable will not be known until all court
proceedings have been completed and eligible members of the
class have presented the necessary information and documents to
receive payment of the award. We have estimated for financial
reporting purposes, using statistically valid models and a 60%
confidence interval, that the damages could range from
$127.2 million to $228.0 million, which includes our
estimates of (a) damages payable to the plaintiff class;
(b) the amount we may be required to reimburse our
insurance carriers for amounts advanced for defense costs; and
(c) future defense costs. Accordingly, in the third quarter
of fiscal year 2010, we recorded a charge for estimated damages
in the amount of $132.6 million, which, together with the
existing reserve of $44.5 million recorded in the second
quarter of fiscal year 2010, represents the mid-point of the
estimated range of damages payable to the plaintiffs, plus the
other estimated costs and expenses. We elected to record an
amount based on the mid-point of the range of damages payable to
the plaintiff class because under statistically valid modeling
techniques the mid-point of the range is in fact a more likely
estimate
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than other points in the range, and the point at which there is
an equal probability that the ultimate loss could be toward the
lower end or the higher end of the range. During the fourth
quarter of fiscal year 2010, we recorded a $0.9 million
charge for incremental post-judgment interest.
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On August 23, 2010, we filed a motion to stay the mandate
while we seek review by the U.S. Supreme Court, which was
granted. Our petition for certiorari to the U.S. Supreme
Court is due on or before November 15, 2010. We believe we
have adequate liquidity to fund the amount of any required bond,
or if necessary, the satisfaction of the judgment. Refer to
Note 19, Commitments and Contingencies, in Item 8,
Financial Statements and Supplementary Data, for
additional information.
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9.
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Western International University. In April
2010, we contributed all of the common stock of Western
International University, which was previously our wholly-owned
subsidiary, to Apollo Global. Refer to Note 4,
Acquisitions, in Item 8, Financial Statements and
Supplementary Data, for additional information.
Additionally, Western International University was recertified
by the U.S. Department of Education in May 2010 and entered
into a new Title IV Program Participation Agreement which
expires on September 30, 2014.
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Higher Education at a Crossroads. In August
2010, we released a report entitled, Higher Education at a
Crossroads, which examined the significant challenges
facing Americas higher education system and the
fundamental transformations that must occur to meet President
Obamas mandate that the U.S. produce the highest
percentage of college graduates of any developed nation by 2020.
The report includes an analysis of the vital role proprietary
colleges and universities play in meeting the Presidents
goals and reaffirms University of Phoenixs commitment to
advancing quality education, innovations in learning, and
industry-leading student protections. The report presents the
ways we believe our institutions are uniquely positioned to
increase access to higher education for all Americans at a
significantly lower cost to society and without compromising
quality.
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11.
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Appointment of Sean B.W. Martin. On
September 24, 2010, we announced the appointment of Sean
B.W. Martin as our Senior Vice President, General Counsel and
Secretary. Mr. Martin succeeds P. Robert Moya, who earlier
this year announced his retirement as our Executive Vice
President, General Counsel and Secretary. As previously
announced, Mr. Moya will serve as Executive Vice President,
Special Projects, until October 31, 2010; he will then
serve as a Senior Advisor until August 31, 2011.
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Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United
States. The preparation of these consolidated financial
statements requires the use of estimates, judgments, and
assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
periods presented. Our critical accounting policies involve a
higher degree of judgments, estimates and complexity, and are as
follows:
Revenue
Recognition
Our educational programs, primarily composed of University of
Phoenix programs, are designed to range in length from
one-day
seminars to degree programs lasting up to four years. Students
in University of Phoenix degree programs generally enroll in a
program of study encompassing a series of five- to nine-week
courses taken consecutively over the length of the program.
Generally, students are billed on a
course-by-course
basis when the student first attends a session, resulting in the
recording of a receivable from the student and deferred revenue
in the amount of the billing. University of Phoenix students
generally fund their education through loans
and/or
grants under various Title IV programs, tuition assistance
from their employers, or personal funds.
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Net revenue consists principally of tuition and fees associated
with different educational programs as well as related
educational resources such as access to online materials, books,
and study texts. Net revenue is shown net of discounts. Tuition
benefits for our employees and their eligible dependants are
included in net revenue and instructional costs and services.
Total employee tuition benefits were $100.3 million,
$90.5 million and $77.9 million for fiscal years 2010,
2009 and 2008, respectively.
The following table presents the components of our net revenue,
and each component as a percentage of total net revenue, for the
fiscal years 2010, 2009 and 2008:
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Year Ended August 31,
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($ in millions)
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2010
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2009
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2008
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Tuition and educational services revenue
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$
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4,757.9
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97
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%
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$
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3,815.0
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96
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%
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$
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2,988.6
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96
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%
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Educational materials revenue
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324.9
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6
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%
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226.4
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6
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%
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184.4
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6
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%
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Services revenue
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84.2
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2
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%
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83.2
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2
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%
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77.7
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2
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%
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Other revenue
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22.4
|
|
|
|
|
|
|
|
28.3
|
|
|
|
1
|
%
|
|
|
43.9
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Revenue
|
|
|
5,189.4
|
|
|
|
105
|
%
|
|
|
4,152.9
|
|
|
|
105
|
%
|
|
|
3,294.6
|
|
|
|
105
|
%
|
|
|
|
|
Less: Discounts
|
|
|
(263.6
|
)
|
|
|
(5
|
)%
|
|
|
(199.3
|
)
|
|
|
(5
|
)%
|
|
|
(161.2
|
)
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
4,925.8
|
|
|
|
100
|
%
|
|
$
|
3,953.6
|
|
|
|
100
|
%
|
|
$
|
3,133.4
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition and educational services revenue encompasses both
online and classroom-based learning. For our University of
Phoenix operations, tuition revenue is recognized pro rata over
the period of instruction as services are delivered to students.
|
BPP recognizes tuition revenue as services are provided over the
course of the program, which varies depending on the program
structure. For our remaining Apollo Global operations, tuition
revenue is generally recognized over the length of the course
and/or
program as applicable.
|
|
|
|
|
Educational materials revenue relates to online course
materials delivered to students over the period of instruction.
Revenue associated with these materials is recognized pro rata
over the period of the related course to correspond with
delivery of the materials to students. Educational materials
also includes the sale of various books, study texts, course
notes, and CDs for which we recognize revenue when the materials
have been delivered to and accepted by students or other
customers.
|
|
|
|
Services revenue consists principally of the contractual
share of tuition revenue from students enrolled in IPD programs
at private colleges and universities (Client
Institutions). IPD provides program development,
administration and management consulting services to Client
Institutions to establish or expand their programs for working
learners. These services typically include degree program
design, curriculum development, market research, student
recruitment, accounting, and administrative services. IPD
typically is paid a portion of the tuition revenue generated
from these programs. IPDs contracts with its Client
Institutions generally range in length from five to ten years,
with provisions for renewal. The portion of service revenue to
which we are entitled under the terms of the contracts is
recognized as the services are provided.
|
|
|
|
Other revenue consists of the fees students pay when
submitting an enrollment application, which, along with the
related application costs associated with processing the
applications, are deferred and recognized over the average
length of time a student remains enrolled in a program of study.
Other revenue also includes non-tuition generating revenues,
such as renting classroom space and other student support
services. Revenue from these sources is recognized as the
services are provided.
|
|
|
|
Discounts reflect reductions in tuition or other revenue
including military, corporate, and other employer discounts,
along with institutional scholarships, grants and promotions.
|
Effective March 1, 2008, University of Phoenix changed its
refund policy whereby students who attend 60% or less of a
course are eligible for a refund for the portion of the course
they did not attend. Under the prior refund policy, if a student
dropped or withdrew after attending one class of a course,
University of Phoenix earned 25% of the tuition for the course,
and if they dropped or withdrew after attending two classes
73
of a course, University of Phoenix earned 100% of the tuition
for the course. Refunds are recorded as a reduction in deferred
revenue during the period that a student drops or withdraws from
a class. This refund policy applies to students in most, but not
all states, as some states require different policies.
During the second quarter of fiscal year 2010, we began
presenting Insight Schools operating results as
discontinued operations. Accordingly, Insight Schools net
revenue is included in loss from discontinued operations, net of
tax in our Consolidated Statements of Income. Insight Schools
generates the majority of its tuition and educational services
revenue through long-term contracts with school districts or
not-for-profit
organizations. The term for these contracts ranges from five to
ten years with provisions for renewal thereafter. We recognize
revenue under these contracts over the period during which
educational services are provided to students, which generally
commences in August or September and ends in May or June.
Generally, net revenue varies from period to period based on
several factors, including the aggregate number of students
attending classes, the number of classes held during the period,
the tuition price per credit and seasonality.
Sales tax collected from students is excluded from net revenue.
Collected but unremitted sales tax is included as a liability in
our Consolidated Balance Sheets and is not material to our
consolidated financial statements.
Allowance
for Doubtful Accounts
We reduce accounts receivable by an allowance for amounts that
we expect to become uncollectible in the future. Estimates are
used in determining the allowance for doubtful accounts and are
based on historical collection experience and current trends. In
determining these amounts, we consider and evaluate the
historical write-offs of our receivables. We monitor our
collections and write-off experience to assess whether
adjustments are necessary.
When a student with Title IV loans withdraws, Title IV
rules determine if we are required to return a portion of
Title IV funds to the lenders. We are then entitled to
collect these funds from the students, but collection rates for
these types of receivables is significantly lower than our
collection rates for receivables for students who remain in our
educational programs.
We routinely evaluate our estimation methodology for adequacy
and modify it as necessary. In doing so, our objective is to
cause our allowance for doubtful accounts to reflect the amount
of receivables that will become uncollectible by considering our
most recent collections experience, changes in trends and other
relevant facts. In doing so, we believe our allowance for
doubtful accounts reflects the most recent collections
experience and is responsive to changes in trends. Our accounts
receivable are written off once the account is deemed to be
uncollectible. This typically occurs once we have exhausted all
efforts to collect the account, which include collection
attempts by our employees and outside collection agencies.
We recorded bad debt expense of $282.6 million,
$152.5 million and $104.2 million during fiscal years
2010, 2009 and 2008, respectively. Our allowance for doubtful
accounts was $192.9 million and $110.4 million as of
August 31, 2010 and 2009, respectively. For the purpose of
sensitivity, a one percent change in our allowance for doubtful
accounts as a percentage of gross student receivables as of
August 31, 2010 would have resulted in a pre-tax change in
income of $4.2 million. Additionally, if our bad debt
expense were to change by one percent of total net revenue for
the fiscal year ended August 31, 2010, we would have
recorded a pre-tax change in income of approximately
$49.3 million.
Goodwill
and Intangible Assets
|
|
|
|
|
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase
price of an acquired business over the fair value assigned to
the underlying assets acquired and assumed liabilities. At the
time of an acquisition, we allocate the goodwill and related
assets and liabilities to our respective reporting units. We
identify our reporting units by assessing whether the components
of our operating segments constitute businesses for which
discrete financial information is available and segment
management regularly reviews the operating results of those
components.
|
74
Indefinite-lived intangible assets are recorded at fair market
value on their acquisition date and primarily include trademarks
and foreign regulatory accreditations and designations as a
result of the BPP, UNIACC and ULA acquisitions. We assign
indefinite lives to acquired trademarks, accreditations and
designations that we believe have the continued ability to
generate cash flows indefinitely; have no legal, regulatory,
contractual, economic or other factors limiting the useful life
of the respective intangible asset; and when we intend to renew
the respective trademark, accreditation or designation and
renewal can be accomplished at little cost.
We assess goodwill and indefinite-lived intangible assets at
least annually for impairment or more frequently if events occur
or circumstances change between annual tests that would more
likely than not reduce the fair value of the respective
reporting unit below its carrying amount. We test for goodwill
impairment at the reporting unit level by applying a two-step
test. In the first step, we compare the fair value of the
reporting unit to the carrying value of its net assets. If the
fair value of the reporting unit exceeds the carrying value of
the net assets of the reporting unit, goodwill is not impaired
and no further testing is required. If the carrying value of the
net assets of the reporting unit exceeds the fair value of the
reporting unit, we perform a second step which involves using a
hypothetical purchase price allocation to determine the implied
fair value of the goodwill and compare it to the carrying value
of the goodwill. An impairment loss is recognized to the extent
the implied fair value of the goodwill is less than the carrying
amount of the goodwill.
The annual impairment test for indefinite-lived intangible
assets involves a comparison of the estimated fair value of the
intangible asset with its carrying value. If the carrying value
of the intangible asset exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess. We perform
our annual indefinite-lived intangible asset impairment tests on
the same dates that we perform our annual goodwill impairment
tests for the respective reporting units.
Our goodwill and indefinite-lived intangible assets by
reportable segment are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
|
|
Indefinite-lived
|
|
|
Impairment
|
|
Goodwill as of August 31,
|
|
Intangibles as of August 31,
|
($ in thousands)
|
|
Test Date
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
University of Phoenix
|
|
May 31
|
|
$
|
37,018
|
|
|
$
|
37,018
|
|
|
$
|
|
|
|
$
|
|
|
Apollo Global BPP(3)
|
|
July 1
|
|
|
241,204
|
|
|
|
421,836
|
|
|
|
114,330
|
|
|
|
138,602
|
|
Apollo Global Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNIACC
|
|
May 31
|
|
|
12,132
|
|
|
|
11,197
|
|
|
|
4,919
|
|
|
|
4,539
|
|
ULA(3)
|
|
May 31
|
|
|
14,914
|
|
|
|
22,674
|
|
|
|
2,395
|
|
|
|
2,349
|
|
Western International University(1)
|
|
May 31
|
|
|
1,581
|
|
|
|
1,581
|
|
|
|
|
|
|
|
|
|
Other Schools
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFFP
|
|
August 31
|
|
|
15,310
|
|
|
|
15,310
|
|
|
|
|
|
|
|
|
|
Insight Schools(2),(3)
|
|
May 31
|
|
|
3,342
|
|
|
|
12,742
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of contributing all of the common stock of Western
International University to Apollo Global during the third
quarter of fiscal year 2010, we are presenting Western
International University in the Apollo Global Other
reportable segment for all periods presented. Refer to
Note 4, Acquisitions, in Item 8, Financial
Statements and Supplementary Data, for further discussion. |
|
(2) |
|
As of August 31, 2010, Insight Schools goodwill
balance is included in assets held for sale in our Consolidated
Balance Sheets. See further discussion below. |
|
(3) |
|
We recorded goodwill impairment charges for BPP, ULA and Insight
Schools and impairment charges for BPPs intangible assets
during fiscal year 2010. See further discussion below. |
The process of evaluating the potential impairment of goodwill
is subjective and requires significant judgment at many points
during the analysis, including identification of our reporting
units,
75
identification and allocation of assets and liabilities to each
of our reporting units and determination of fair value of our
reporting units. Our established goodwill testing process
includes the use of industry accepted valuation methods,
involvement of various levels of management in different
operating functions to review and approve certain criteria and
assumptions and, in certain instances, engaging third-party
valuation specialists to assist with our analysis.
To determine the fair value of our reporting units, we primarily
rely on an income-based approach using the discounted cash flow
valuation method. For our reporting units valued using this
method, we generally project cash flows, as well as a terminal
value, by calculating cash flow scenarios, applying a reasonable
weighting to these scenarios and discounting such cash flows by
a risk-adjusted rate of return. When appropriate, we may also
incorporate the use of a market-based approach in combination
with the discounted cash flow analysis. Generally, the
market-based approach incorporates information from comparable
transactions in the market and publicly traded companies with
similar operating and investment characteristics of the
reporting unit to develop a multiple which is then applied to
the operating performance of the reporting unit to determine
value. The determination of fair value of our reporting units
consists primarily of using unobservable inputs under the fair
value measurement standards.
We believe the most critical assumptions and estimates in
determining the estimated fair value of our reporting units,
include, but are not limited to, the amounts and timing of
expected future cash flows for each reporting unit, the
probability weightings between scenarios, the discount rate
applied to those cash flows, long-term growth rates and
selection of comparable market multiples. The assumptions used
in determining our expected future cash flows consider various
factors such as historical operating trends particularly in
student enrollment and pricing, the political environment the
reporting unit operates in, anticipated economic and regulatory
conditions and planned business and operating strategies over a
long-term planning horizon. The discount rate used by each
reporting unit is based on our assumption of a prudent
investors required rate of return of assuming the risk of
investing in a particular company in a specific country. Our
goodwill impairment tests used discount rates ranging from 13.0%
to 15.5%. The perpetual long-term growth rate reflects the
sustainable operating income a reporting unit could generate in
a perpetual state as a function of revenue growth, inflation and
future margin expectations. Our goodwill impairment tests used
long-term growth rates ranging from 3% to 5%. We also believe
our goodwill impairment tests incorporate the use of reasonable
market participant assumptions and employ the concept of highest
and best use of the asset. If we determine our critical
assumptions discussed above require revision or are adversely
impacted a potential goodwill impairment may result in the
future.
To determine the fair value of our trademark intangible assets
we use the relief-from-royalty method. This method estimates the
benefit of owning the intangible assets rather than paying
royalties for the right to use a comparable asset. This method
incorporates the use of significant judgments in determining
both the projected revenues attributable to the asset, as well
as the appropriate discount rate and royalty rates applied to
those revenues to determine fair value. To fair value the
accreditations and designations we primarily use the cost
savings method which estimates the cost savings of owning the
intangible asset rather than either creating the asset or not
having the asset in place to be used in current operations. This
method incorporates the use of significant judgments in
determining the projected profit or replacement cost
attributable to the asset and the appropriate discount rate. The
determination of fair value of our indefinite-lived intangible
assets consists primarily of using unobservable inputs under the
fair value measurement standards.
During fiscal year 2010, we completed our annual goodwill
impairment tests for each of our reporting units and our annual
indefinite-lived intangible asset impairment tests, as
applicable. During fiscal year 2010, we recorded goodwill
impairment charges for our BPP, ULA and Insight Schools
reporting units and intangible impairment charges for our BPP
reporting unit, as further discussed below. As of their
respective annual impairment test date, the fair value of our
University of Phoenix, UNIACC, Western International University
and CFFP reporting units exceeded the carrying value of their
respective net assets by at least 25% resulting in no goodwill
impairment. For our University of Phoenix and Western
76
International University reporting units we used market multiple
information of comparable sized companies to determine the fair
value at the respective test dates. For our UNIACC and CFFP
reporting units, we used the discounted cash flow valuation
method to determine the fair value at the respective test dates.
Additionally, for UNIACC, we completed our annual impairment
tests of its indefinite-lived intangible assets and determined
there was no impairment.
BPP
Reporting Unit
On July 1, 2010, we conducted our first annual goodwill
impairment test for BPP. To determine the fair value of our BPP
reporting unit in our step one analysis, we used a combination
of the discounted cash flow valuation method and the
market-based approach and applied an 80%/20% weighting factor to
these valuation methods, respectively. In October 2010, BPP
concluded its fall enrollment period which we believe was
adversely impacted by the continued economic downturn in the
U.K. Accordingly, we revised our forecast for BPP, which caused
our step one annual goodwill impairment analysis to result in a
lower estimated fair value for the BPP reporting unit as
compared to its carrying value due to the effects of the
economic downturn in the U.K. on BPPs operations and
financial performance and increased uncertainty as to when these
conditions will recover. Specifically, the assumptions used in
our cash flow estimates assume no near-term recovery in the
markets in which BPP operates, modest overall long-term growth
in BPPs core programs and a significant increase in
revenues over a long-term horizon at BPPs University
College. We also utilized a 13.0% discount rate and 3.0%
long-term growth rate in the analysis. Although our projections
assume that these markets will ultimately stabilize, we may be
required to record additional impairment charges for BPP if
there are further deteriorations in these markets, if economic
conditions in the U.K. further decline, or we are unable to
achieve the growth in future enrollments at BPPs
University College.
Accordingly, we performed a step two analysis which required us
to fair value BPPs assets and liabilities, including
identifiable intangible assets, using the fair value derived
from the step one analysis as the purchase price in a
hypothetical acquisition of the BPP reporting unit. As discussed
above, the amount of the goodwill impairment charge is derived
by comparing the implied fair value of goodwill from the
hypothetical purchase price allocation to its carrying value.
The significant hypothetical purchase price adjustments included
in the step two analysis consisted of:
|
|
|
|
|
Adjusting the carrying value of land and buildings included in
property and equipment to estimated fair value using the market
approach and based on recent appraisals.
|
|
|
|
Adjusting the carrying value of the trademark and accreditations
and designation indefinite-lived intangible assets to estimated
fair value using the valuation methods discussed above. Our
annual impairment tests for these indefinite-lived intangible
assets utilized the same revenue, margin and discount rate
assumptions used in the BPP reporting unit goodwill impairment
step one analysis which resulted in a lower fair value estimate
for BPPs trademark. Accordingly, in the fourth quarter of
fiscal year 2010, we recorded a $17.6 million impairment
charge for these indefinite-lived intangible assets.
|
|
|
|
Adjusting all other finite-lived intangible assets to estimated
fair value using a variety of methods under the income approach
specifically the costs savings method, with and without method
and excess earnings method, or replacement cost approach. As a
result of this analysis, we determined that one of our student
relationship intangible assets was not recoverable resulting in
recording an impairment charge of $2.0 million in the
fourth quarter of fiscal year 2010.
|
Based on our analysis, we recorded a $156.3 million
impairment charge for BPPs goodwill in the fourth quarter
of fiscal year 2010. As BPPs goodwill is not deductible
for tax purposes, we did not record a tax benefit associated
with the goodwill impairment charge. In the fourth quarter of
fiscal year 2010, BPPs goodwill and intangible asset
impairment charges in the aggregate approximate
$170.4 million (net of $5.5 million benefit for income
taxes associated with the intangible asset impairment charges).
77
ULA
Reporting Unit
For our ULA reporting unit, we used a discounted cash flow
valuation method to determine the fair value of the reporting
unit at May 31, 2010. ULA continues to delay the launch of
its online program due to challenges with developing and
designing the technology infrastructure to support the online
platform. We have considered these uncertainties in the future
cash flows used in our annual goodwill impairment test which
resulted in an estimated lower fair value for the ULA reporting
unit. Accordingly, we performed a step two analysis which
required us to fair value ULAs assets and liabilities,
including identifiable intangible assets, using the fair value
derived from the step one analysis as the purchase price in a
hypothetical acquisition of the ULA reporting unit. As discussed
above, the amount of the goodwill impairment charge is derived
from comparing the implied fair value of goodwill from the
hypothetical purchase price allocation to its carrying value.
Based on our analysis, in the third quarter of fiscal year 2010,
we recorded an $8.7 million impairment charge for
ULAs goodwill. As ULAs goodwill is not deductible
for tax purposes, we did not record a tax benefit associated
with the goodwill impairment charge. Additionally, we completed
our annual impairment tests for indefinite-lived intangible
assets at ULA and determined there was no impairment.
Insight
Schools Reporting Unit
In the second quarter of fiscal year 2010, we began presenting
Insight Schools assets and liabilities as held for sale
and its operating results as discontinued operations. We
recorded a $9.4 million impairment of Insight Schools
goodwill during the second quarter of fiscal year 2010, which is
reflected in our loss from discontinued operations. As Insight
Schools goodwill is not deductible for tax purposes, we
did not record a tax benefit associated with the goodwill
impairment charge. We reevaluated Insight Schools goodwill at
its annual May 31 test date which resulted in no additional
goodwill impairment based on recent exit price information
received from engaging in non-binding negotiations with
interested parties. Refer to Note 3, Discontinued
Operations, in Item 8, Financial Statements and
Supplementary Data, for further discussion.
|
|
|
|
|
Finite-Lived Intangible Assets Finite-lived
intangible assets that are acquired in business combinations are
recorded at fair market value on their acquisition date and are
amortized on either a straight-line basis or using an
accelerated method to reflect the economic useful life of the
asset. The weighted average useful life of our finite-lived
intangible assets at August 31, 2010 is 4.6 years.
|
At August 31, 2010 and 2009, our finite-lived intangible
asset balances were $28.9 million and $58.2 million,
respectively.
Other
Long-Lived Asset Impairments
We evaluate the carrying amount of our major long-lived assets,
including property and equipment and finite-lived intangible
assets, whenever changes in circumstances or events indicate
that the value of such assets may not be fully recoverable.
Excluding consideration of BPPs finite-lived intangible
assets discussed above, we did not recognize any impairment
charges for our long-lived assets during fiscal year 2010. At
August 31, 2010, we believe the carrying amounts of our
remaining long-lived assets are fully recoverable and no
impairment exists.
Loss
Contingencies
We are subject to various claims and contingencies which are in
the scope of ordinary and routine litigation incidental to our
business, including those related to regulation, litigation,
business transactions, employee-related matters and taxes, among
others. When we become aware of a claim or potential claim, the
likelihood of any loss or exposure is assessed. If it is
probable that a loss will result and the amount of the loss can
be reasonably estimated, we record a liability for the loss. The
liability recorded includes probable and estimable legal costs
incurred to date and future legal costs to the point in the
legal matter where we believe a conclusion to the matter will be
reached. If the loss is not probable or the amount of the loss
cannot be reasonably estimated, we disclose the claim if the
likelihood of a potential loss is reasonably possible and
78
the amount of the potential loss could be material. For matters
where no loss contingency is recorded, our policy is to expense
legal fees as incurred. The assessment of the likelihood of a
potential loss and the estimation of the amount of a loss are
subjective and require judgment.
On June 23, 2010, the U.S. Circuit Court of Appeals
for the Ninth Circuit reversed the District Courts prior
ruling in our favor in the securities class action lawsuit, In
re Apollo Group, Inc. Securities Litigation, Case
No. CV04-2147-PHX-JAT,
and ordered the trial court to enter judgment against us in
accordance with the prior jury verdict. The actual amount of
damages payable will not be known until all court proceedings
have been completed and eligible members of the class have
presented the necessary information and documents to receive
payment of the award. We have estimated for financial reporting
purposes, using statistically valid models and a 60% confidence
interval, that the damages could range from $127.2 million
to $228.0 million, which includes our estimates of
(a) damages payable to the plaintiff class; (b) the
amount we may be required to reimburse our insurance carriers
for amounts advanced for defense costs; and (c) future
defense costs. Accordingly, in the third quarter of fiscal year
2010, we recorded a charge for estimated damages in the amount
of $132.6 million, which, together with the existing
reserve of $44.5 million recorded in the second quarter of
fiscal year 2010, represents the mid-point of the estimated
range of damages payable to the plaintiffs, plus the other
estimated costs and expenses. We elected to record an amount
based on the mid-point of the range of damages payable to the
plaintiff class because under statistically valid modeling
techniques the mid-point of the range is in fact a more likely
estimate than other points in the range, and the point at which
there is an equal probability that the ultimate loss could be
toward the lower end or the higher end of the range. During the
fourth quarter of fiscal year 2010, we recorded a
$0.9 million charge for incremental post-judgment interest.
Refer to Note 19, Commitments and Contingencies, in
Item 8, Financial Statements and Supplementary Data,
for additional information.
Accounting
for Income Taxes
The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an
entitys financial statements or tax returns. Deferred tax
assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
earnings in the period when the new rate is enacted.
The determination of our uncertain tax positions requires us to
make significant judgments. We evaluate and account for
uncertain tax positions using a two-step approach. Recognition
(step one) occurs when we conclude that a tax position, based
solely on its technical merits, is more-likely-than-not to be
sustained upon examination. Measurement (step two) determines
the amount of benefit that is greater than 50% likely to be
realized upon ultimate settlement with a taxing authority that
has full knowledge of all relevant information. Derecognition of
a tax position that was previously recognized would occur when
we subsequently determine that a tax position no longer meets
the more-likely-than-not threshold of being sustained. We do not
use a valuation allowance as a substitute for derecognition of
tax positions. Our total unrecognized tax benefits, excluding
interest and penalties, were $166.0 million and
$84.9 million as of August 31, 2010 and 2009,
respectively.
Share-Based
Compensation
We measure and recognize compensation expense for all
share-based awards issued to faculty, employees and directors
based on estimated fair values of the share awards on the date
of grant. We record compensation expense, net of forfeitures,
for all share-based awards over the expected vesting period
using the straight-line method for awards with only a service
condition, and the graded vesting attribution method for awards
with service and performance conditions.
We calculate the fair value of share-based awards on the date of
grant. For stock options, we typically use the
Black-Scholes-Merton option pricing model to estimate fair
value. The Black-Scholes-Merton option pricing model requires us
to estimate key assumptions such as expected term, volatility,
risk-free interest rates
79
and dividend yield to determine the fair value of stock options,
based on both historical information and management judgment
regarding market factors and trends. In the absence of reliable
historical data, we generally use the simplified mid-point
method to estimate expected term of stock options. The
simplified method uses the mid-point between the vesting term
and the contractual term of the share option. We have analyzed
our historical data and believe that the structure and exercise
behavior of our stock options has changed significantly,
resulting in a lack of reliable historical exercise data that
can be used to estimate expected term for stock options granted
in recent fiscal years. We will continue to use the simplified
method until reliable historical data is available, or until
circumstances change such that the use of alternative methods
for estimating expected term is more appropriate.
For share-based awards with performance conditions, such as our
Performance Share Awards described in Note 17, Stock and
Savings Plans, Item 8, Financial Statements and
Supplementary Data, we measure the fair value of such awards
as of the date of grant and amortize share-based compensation
expense for our estimate of the number of shares expected to
vest. Our estimate of the number of shares that will vest is
based on our determination of the probable outcome of the
performance condition, which requires considerable judgment.
We estimate expected forfeitures of share-based awards at the
grant date and recognize compensation cost only for those awards
expected to vest. We estimate our forfeiture rate based on
several factors including historical forfeiture activity,
expected future employee turnover, and other qualitative
factors. We ultimately adjust this forfeiture assumption to
actual forfeitures. Therefore, changes in the forfeiture
assumptions do not impact the total amount of expense ultimately
recognized over the vesting period. Rather, different forfeiture
assumptions only impact the timing of expense recognition over
the vesting period. If the actual forfeitures differ from
management estimates, additional adjustments to compensation
expense are recorded.
We used the following weighted average assumptions in the
Black-Scholes-Merton option pricing model for stock options
granted in the respective fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected volatility
|
|
|
48.6
|
%
|
|
|
47.7
|
%
|
|
|
44.2
|
%
|
Expected life (years)
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
4.2
|
|
Risk-free interest rate
|
|
|
1.5
|
%
|
|
|
2.2
|
%
|
|
|
2.9
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The assumptions that have the most significant effect on the
fair value of the stock option grants and therefore, share-based
compensation expense, are the expected life and expected
volatility. The following table illustrates how changes to these
assumptions would affect the weighted average fair value per
option as of the grant date for the approximately 850,000
options granted during fiscal year 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Volatility
|
|
Expected Life (Years)
|
|
43.7%
|
|
|
48.6%
|
|
|
53.5%
|
|
|
3.7
|
|
$
|
14.86
|
|
|
$
|
16.29
|
|
|
$
|
17.67
|
|
4.2
|
|
|
15.81
|
|
|
|
17.30
|
|
|
|
18.74
|
|
4.7
|
|
|
16.69
|
|
|
|
18.25
|
|
|
|
19.74
|
|
Recent
Accounting Pronouncements
Please refer to Note 2, Significant Accounting Policies, in
Item 8, Financial Statements and Supplementary Data,
for recent accounting pronouncements.
Results
of Operations
We have included below a discussion of our operating results and
significant items which explain the material changes in our
operating results during fiscal years 2010, 2009 and 2008. Our
operations are generally subject to seasonal trends. We
experience, and expect to continue to experience, fluctuations
in our results of operations, principally as a result of
seasonal variations in the level of University of Phoenix
enrollments.
80
Although University of Phoenix enrolls students throughout the
year, its net revenue is generally lower in our second fiscal
quarter (December through February) than the other quarters due
to holiday breaks in December and January.
As discussed in the Overview of this MD&A, we expect
our initiatives to enhance the student experience and outcomes
will adversely impact our fiscal year 2011 net revenue,
operating income, and cash flow, as well as University of
Phoenix New Degreed Enrollment and Degreed Enrollment. However,
we believe that these efforts are in the best interests of our
students and, over the long-term, will improve student
persistence and completion rates and therefore reduce bad debt
expense, reduce our risk associated with our regulatory
environment, and position us for more stable long-term growth.
We categorize our operating expenses as instructional costs and
services, selling and promotional, and general and
administrative.
|
|
|
|
|
Instructional costs and services consist
primarily of costs related to the delivery and administration of
our educational programs and include costs related to faculty
and administrative compensation, classroom and administration
lease expenses and depreciation, bad debt expense, financial aid
processing costs, costs related to the development of our
educational programs and other related costs. Tuition costs for
all employees and their eligible family members are recorded as
an expense within instructional costs and services.
|
|
|
|
Selling and promotional costs consist
primarily of compensation for admissions personnel, management
and support staff and corporate marketing, advertising expenses,
production of marketing materials, and other costs directly
related to selling and promotional functions. Selling and
promotional costs are expensed when incurred.
|
|
|
|
General and administrative costs consist
primarily of corporate compensation, occupancy costs,
depreciation and amortization of property and equipment, legal
and professional fees, and other related costs.
|
81
Fiscal
Year 2010 Compared to Fiscal Year 2009
Analysis
of Consolidated Statements of Income
The table below details our consolidated results of operations.
For a more detailed discussion by reportable segment, refer to
our Analysis of Operating Results by Segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
Year Ended August 31,
|
|
|
%
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Net revenue
|
|
$
|
4,925.8
|
|
|
$
|
3,953.6
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
2,125.1
|
|
|
|
1,567.8
|
|
|
|
43.1
|
%
|
|
|
39.7
|
%
|
|
|
35.5
|
%
|
Selling and promotional
|
|
|
1,112.6
|
|
|
|
952.9
|
|
|
|
22.6
|
%
|
|
|
24.1
|
%
|
|
|
16.8
|
%
|
General and administrative
|
|
|
314.8
|
|
|
|
286.5
|
|
|
|
6.4
|
%
|
|
|
7.2
|
%
|
|
|
9.9
|
%
|
Goodwill and other intangibles impairment
|
|
|
184.6
|
|
|
|
|
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
*
|
Estimated litigation loss
|
|
|
178.0
|
|
|
|
80.5
|
|
|
|
3.6
|
%
|
|
|
2.0
|
%
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
3,915.1
|
|
|
|
2,887.7
|
|
|
|
79.5
|
%
|
|
|
73.0
|
%
|
|
|
35.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,010.7
|
|
|
|
1,065.9
|
|
|
|
20.5
|
%
|
|
|
27.0
|
%
|
|
|
(5.2
|
)%
|
Interest income
|
|
|
2.9
|
|
|
|
12.6
|
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
|
|
(77.0
|
)%
|
Interest expense
|
|
|
(11.9
|
)
|
|
|
(4.4
|
)
|
|
|
(0.3
|
)%
|
|
|
(0.1
|
)%
|
|
|
(170.5
|
)%
|
Other, net
|
|
|
(0.6
|
)
|
|
|
(7.2
|
)
|
|
|
0.0
|
%
|
|
|
(0.2
|
)%
|
|
|
91.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,001.1
|
|
|
|
1,066.9
|
|
|
|
20.3
|
%
|
|
|
27.0
|
%
|
|
|
(6.2
|
)%
|
Provision for income taxes
|
|
|
(464.1
|
)
|
|
|
(456.7
|
)
|
|
|
(9.4
|
)%
|
|
|
(11.6
|
)%
|
|
|
(1.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
537.0
|
|
|
|
610.2
|
|
|
|
10.9
|
%
|
|
|
15.4
|
%
|
|
|
(12.0
|
)%
|
Loss from discontinued operations, net of tax
|
|
|
(15.4
|
)
|
|
|
(16.4
|
)
|
|
|
(0.3
|
)%
|
|
|
(0.4
|
)%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
521.6
|
|
|
|
593.8
|
|
|
|
10.6
|
%
|
|
|
15.0
|
%
|
|
|
(12.2
|
)%
|
Net loss attributable to noncontrolling interests
|
|
|
31.4
|
|
|
|
4.5
|
|
|
|
0.6
|
%
|
|
|
0.1
|
%
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Apollo
|
|
$
|
553.0
|
|
|
$
|
598.3
|
|
|
|
11.2
|
%
|
|
|
15.1
|
%
|
|
|
(7.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* not meaningful
Net
Revenue
Our net revenue increased $972.2 million, or 24.6%, in
fiscal year 2010 compared to fiscal year 2009. University of
Phoenixs 19.4% net revenue growth was the primary
contributor to the increase, mainly due to its growth in Degreed
Enrollment and selective tuition price increases. Apollo
Globals acquisition of BPP also contributed
$238.6 million, or 6.0 percentage points, of the
overall increase in net revenue in fiscal year 2010 compared to
fiscal year 2009. For a more detailed discussion, refer to our
Analysis of Operating Results by Reportable Segment.
Instructional
Costs and Services
Instructional costs and services increased $557.3 million,
or 35.5%, in fiscal year 2010 compared to fiscal year 2009,
which represents a 340 basis point increase as a percentage
of net revenue. The increase as a percentage of net revenue is
primarily due to BPPs cost structure, and an increase in
bad debt expense as a percentage of net revenue. Bad debt
expense has increased as a result of the economic downturn and
an increase in the proportion of our aged receivables that are
attributable to students enrolled in degree programs with fewer
than 24 incoming credits. Our collection rates for such students
are lower compared to students enrolled in
82
graduate level programs and bachelors students with a
higher level of incoming credits. Our bad debt expense was 5.7%
of net revenue in fiscal year 2010 compared to 3.8% of net
revenue in fiscal year 2009.
Selling
and Promotional
Selling and promotional expenses increased $159.7 million,
or 16.8%, in fiscal year 2010 compared to fiscal year 2009, but
represents a 150 basis point decrease as a percentage of
net revenue. The increase in expense mainly resulted from
University of Phoenixs increased spending on non-Internet
long-term branding and program driven marketing initiatives. The
decrease as a percentage of net revenue is due the following:
|
|
|
|
|
BPPs cost structure, as BPP incurs lower selling and
promotional costs as a percentage of net revenue compared to our
other businesses;
|
|
|
|
reduced reliance on Internet marketing; and
|
|
|
|
improved admissions personnel effectiveness at University of
Phoenix.
|
General
and Administrative
General and administrative expenses increased
$28.3 million, or 9.9%, in fiscal year 2010 compared to
fiscal year 2009, but represents an 80 basis point decrease
as a percentage of net revenue. The decrease as a percentage of
net revenue is primarily due to the following:
|
|
|
|
|
a reduction in share-based compensation;
|
|
|
|
a reduction in legal costs in connection with defending
ourselves in various legal matters. Refer to Note 19,
Commitments and Contingencies, in Item 8, Financial
Statements and Supplementary Data, for discussion of our
legal matters;
|
|
|
|
the write-off in fiscal year 2009 of $9.4 million of
information technology fixed assets that resulted primarily from
our rationalization of software; and
|
|
|
|
expense in fiscal year 2009 resulting from our internal review
of certain Satisfactory Academic Progress calculations.
|
Estimated
Litigation Loss
The estimated litigation loss in fiscal year 2010 represents
charges associated with the Securities Class Action matter.
The loss in fiscal year 2009 represents a charge associated with
the Incentive Compensation False Claims Act Lawsuit. For
discussion of the respective legal matters, refer to
Note 19, Commitments and Contingencies, in Item 8,
Financial Statements and Supplementary Data.
Goodwill
and Other Intangibles Impairment
We recorded an $8.7 million impairment of ULAs
goodwill in the third quarter of fiscal year 2010, and
impairments of $156.3 million and $19.6 million for
BPPs goodwill and other intangibles, respectively, in the
fourth quarter of fiscal year 2010. Refer to Critical
Accounting Policies and Estimates in this MD&A for
further discussion.
Interest
Income
Interest income decreased $9.7 million in fiscal year 2010
compared to fiscal year 2009 primarily due to lower interest
rates during fiscal year 2010.
Interest
Expense
Interest expense increased $7.5 million in fiscal year 2010
compared to fiscal year 2009 primarily due to an increase in
average borrowings principally at subsidiaries of Apollo Global,
and an increase in average borrowings on our syndicated
$500 million credit agreement (the Bank
Facility).
83
Other,
Net
The loss in fiscal year 2010 was primarily attributable to net
foreign currency losses related to our international operations.
The loss in fiscal year 2009 was primarily attributable to
$6.9 million of expense incurred for the purchase of a call
option to hedge against foreign currency fluctuations related to
the BPP acquisition.
Provision
for Income Taxes
Our effective income tax rate for fiscal year 2010 was 46.4%
compared to 42.8% for fiscal year 2009. The increase was
primarily attributable to the following:
|
|
|
|
|
The BPP and ULA goodwill impairments, discussed above, for which
we do not receive a tax benefit;
|
|
|
|
An increase in other foreign losses for which we do not receive
a tax benefit; and
|
|
|
|
An increase in our state effective rate principally due to the
decrease in pre-tax income associated with the BPP and ULA
goodwill impairment charges noted above. Our state effective
rate has also been adversely impacted by a number of state law
changes or interpretations that have resulted in a larger
portion of our income generated from online operations being
subject to state income tax in both Arizona and other states.
Furthermore, as the percentage of our online revenues shift into
or out of jurisdictions that source online revenues to the
destination of our customers, or as states aggressively
interpret existing laws or enact new laws that would begin
sourcing our online revenues to the destination of our
customers, our state effective tax rate could change. We are
also currently under audit by the Arizona Department of Revenue.
Refer to Note 14, Income Taxes, in Item 8,
Financial Statements and Supplementary Data, for further
discussion.
|
The above items were partially offset by the following:
|
|
|
|
|
A tax benefit recorded in the first quarter of fiscal year 2010
associated with our settlement of a dispute with the Internal
Revenue Service relating to the deduction of certain stock
option compensation on our U.S. federal income tax returns
beginning in fiscal year 2003;
|
|
|
|
The estimated tax impact on the estimated litigation loss
recorded in fiscal year 2009 associated with the Incentive
Compensation False Claims Act Lawsuit; and
|
|
|
|
Certain compensation in fiscal year 2009 for which the tax
benefit was uncertain under Internal Revenue Code
Section 162(m).
|
Loss from
Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax, relates to our
Insight Schools business, which we classified as held for sale
and as discontinued operations in the second quarter of fiscal
year 2010. The decrease in the loss in fiscal year 2010 compared
to fiscal year 2009 was primarily due to growth in net revenue
resulting from increased enrollment in the schools operated by
Insight Schools. This was partially offset by a
$9.4 million impairment of Insight Schools goodwill
recorded in the second quarter of fiscal year 2010. Refer to
Note 3, Discontinued Operations, in Item 8,
Financial Statements and Supplementary Data, for further
discussion.
Net Loss
Attributable to Noncontrolling Interests
The increase in net loss attributable to noncontrolling
interests was primarily due to Apollo Globals
noncontrolling shareholders portion of the following
impairment charges recorded during fiscal year 2010:
|
|
|
|
|
a $156.3 million charge for BPPs goodwill in the
fourth quarter;
|
|
|
|
a $19.6 million charge for BPPs other intangibles in
the fourth quarter; and
|
|
|
|
|
an $8.7 million charge for ULAs goodwill
in the third quarter.
|
|
84
Analysis
of Operating Results by Reportable Segment
The table below details our operating results by segment for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
$
|
|
|
%
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
4,498.3
|
|
|
$
|
3,766.6
|
|
|
$
|
731.7
|
|
|
|
19.4
|
%
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
251.7
|
|
|
|
13.1
|
|
|
|
238.6
|
|
|
|
|
*
|
Other(1)
|
|
|
78.3
|
|
|
|
76.1
|
|
|
|
2.2
|
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
330.0
|
|
|
|
89.2
|
|
|
|
240.8
|
|
|
|
|
*
|
Other Schools
|
|
|
95.7
|
|
|
|
95.0
|
|
|
|
0.7
|
|
|
|
0.7
|
%
|
Corporate(2)
|
|
|
1.8
|
|
|
|
2.8
|
|
|
|
(1.0
|
)
|
|
|
(35.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
4,925.8
|
|
|
$
|
3,953.6
|
|
|
$
|
972.2
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
1,447.6
|
|
|
$
|
1,131.3
|
|
|
$
|
316.3
|
|
|
|
28.0
|
%
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
(186.6
|
)
|
|
|
(6.6
|
)
|
|
|
(180.0
|
)
|
|
|
|
*
|
Other(1)
|
|
|
(31.1
|
)
|
|
|
(11.4
|
)
|
|
|
(19.7
|
)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
(217.7
|
)
|
|
|
(18.0
|
)
|
|
|
(199.7
|
)
|
|
|
|
*
|
Other Schools
|
|
|
9.2
|
|
|
|
6.9
|
|
|
|
2.3
|
|
|
|
33.3
|
%
|
Corporate(2)
|
|
|
(228.4
|
)
|
|
|
(54.3
|
)
|
|
|
(174.1
|
)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
1,010.7
|
|
|
$
|
1,065.9
|
|
|
$
|
(55.2
|
)
|
|
|
(5.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
not meaningful |
|
(1) |
|
As a result of contributing all of the common stock of Western
International University to Apollo Global during fiscal year
2010, we are presenting Western International University in the
Apollo Global Other reportable segment for all
periods presented. |
|
(2) |
|
The Corporate caption in our segment reporting includes
adjustments to reconcile segment results to consolidated
results, which primarily consist of net revenue and corporate
charges that are not allocated to our segments. The operating
loss for Corporate in fiscal year 2010 includes
$178.0 million of charges associated with the Securities
Class Action matter. |
University
of Phoenix
The $731.7 million, or 19.4%, increase in net revenue in
our University of Phoenix segment was primarily due to
enrollment growth as detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate New Degreed
|
|
|
|
Degreed Enrollment(1)
|
|
|
|
Enrollment(1), (2)
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
August 31,
|
|
|
%
|
|
|
|
August 31,
|
|
|
%
|
|
(rounded to the nearest hundred)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
Associates
|
|
|
200,800
|
|
|
|
201,200
|
|
|
|
(0.2
|
)%
|
|
|
|
187,700
|
|
|
|
191,700
|
|
|
|
(2.1
|
)%
|
Bachelors
|
|
|
193,600
|
|
|
|
163,600
|
|
|
|
18.3
|
%
|
|
|
|
131,300
|
|
|
|
108,900
|
|
|
|
20.6
|
%
|
Masters
|
|
|
68,700
|
|
|
|
71,200
|
|
|
|
(3.5
|
)%
|
|
|
|
49,300
|
|
|
|
51,900
|
|
|
|
(5.0
|
)%
|
Doctoral
|
|
|
7,700
|
|
|
|
7,000
|
|
|
|
10.0
|
%
|
|
|
|
3,400
|
|
|
|
3,300
|
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
470,800
|
|
|
|
443,000
|
|
|
|
6.3
|
%
|
|
|
|
371,700
|
|
|
|
355,800
|
|
|
|
4.5
|
%
|
85
|
|
|
(1) |
|
Refer to Item 1, Business, for definitions of
Degreed Enrollment and New Degreed Enrollment. |
|
(2) |
|
Aggregate New Degreed Enrollment represents the sum of quarterly
New Degreed Enrollment during the fiscal year. |
We believe the enrollment growth is primarily attributable to
the following:
|
|
|
|
|
Enhancements in our marketing capabilities, along with continued
investments in enhancing and expanding University of Phoenix
academic quality and service offerings; and
|
|
|
Economic uncertainties, as working learners seek to advance
their education to improve their job security or reemployment
prospects. This element of our growth may diminish as the
economy and the employment outlook improve in the U.S.
|
Partially offsetting the factors above are our efforts to better
identify and enroll students who have the ability to succeed in
our educational programs. Contributing to this effort are
refinements in our marketing strategy, including leveraging our
marketing analytics to identify and enroll those prospective
students and our University Orientation pilot program. Decreased
enrollment in masters degree programs also offsets this
growth. For further discussion of University Orientation, refer
to Overview in this MD&A.
In addition to the growth in Degreed Enrollment, net revenue
increased due to selective tuition price and other fee changes
implemented July 1, 2009, which varied by geographic area,
program, and degree level. In the aggregate, these selective
price and other fee changes, including increases in discounts
for military and veteran students, averaged approximately 4%.
We also implemented selective tuition price and other fee
changes at University of Phoenix depending on geographic area,
program, and degree level effective July 1, 2010. In
aggregate, these tuition price and other fee changes, including
increased discounts to military and other veteran students in
selective programs, were generally in the range of 4-6%. Future
net revenue and operating income will continue to be impacted by
these price and other fee changes, along with changes in
enrollment, student mix within programs and degree levels, and
discounts.
Operating income in our University of Phoenix segment increased
$316.3 million, or 28.0%, during fiscal year 2010 compared
to fiscal year 2009. The increase was primarily attributable to
the following:
|
|
|
|
|
The 19.4% increase in University of Phoenix net revenue;
|
|
|
Employee headcount has grown at a lower rate than the increase
in net revenue; and
|
|
|
The $80.5 million charge recorded in fiscal year 2009
associated with the Incentive Compensation False Claims Act
Lawsuit. Refer to Note 19, Commitments and
Contingencies, in Item 8, Financial Statements and
Supplementary Data, for further discussion.
|
The above factors were partially offset by increased bad debt
expense as a percentage of net revenue. Bad debt expense has
increased as a result of the economic downturn and an increase
in the proportion of our aged receivables that are attributable
to students enrolled in degree programs with fewer than 24
incoming credits. Our collection rates for such students are
lower compared to students enrolled in graduate level programs
and bachelors students with a higher level of incoming
credits.
Apollo
Global
Apollo Globals net revenue increased $240.8 million
during fiscal year 2010 compared to fiscal year 2009. Apollo
Globals acquisition of BPP during the fourth quarter of
fiscal year 2009 contributed $238.6 million of the increase
in net revenue in fiscal year 2010.
Apollo Globals operating loss increased
$199.7 million during fiscal year 2010 compared to fiscal
year 2009 primarily due to the following:
|
|
|
|
|
Goodwill and other intangible impairments in fiscal year 2010 of
$175.9 million and $8.7 million at BPP and ULA,
respectively;
|
86
|
|
|
|
|
Amortization of BPP intangible assets, certain expenditures at
BPP associated with the integration process, and an adverse
impact on BPPs operations from the global economic
downturn.
|
|
|
Expenditures at Western International University, UNIACC and ULA
including, but not limited to, initiatives to enhance academic
quality and the respective brands.
|
Other
Schools
The increase in Other Schools net revenue and operating
income was primarily due to increased enrollment at Meritus and
a contract termination fee earned by IPD during the third
quarter of fiscal year 2010. Operating income also increased due
to a decrease in selling and promotional expense at Meritus,
which is primarily the result of more expenditures in fiscal
year 2009 related to its launch of programs early in fiscal year
2009.
Fiscal
Year 2009 Compared to Fiscal Year 2008
Analysis
of Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
Year Ended August 31,
|
|
|
%
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Net revenue
|
|
$
|
3,953.6
|
|
|
$
|
3,133.4
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
26.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
1,567.8
|
|
|
|
1,349.9
|
|
|
|
39.7
|
%
|
|
|
43.1
|
%
|
|
|
16.1
|
%
|
Selling and promotional
|
|
|
952.9
|
|
|
|
801.0
|
|
|
|
24.1
|
%
|
|
|
25.6
|
%
|
|
|
19.0
|
%
|
General and administrative
|
|
|
286.5
|
|
|
|
215.1
|
|
|
|
7.2
|
%
|
|
|
6.8
|
%
|
|
|
33.2
|
%
|
Estimated litigation loss
|
|
|
80.5
|
|
|
|
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,887.7
|
|
|
|
2,366.0
|
|
|
|
73.0
|
%
|
|
|
75.5
|
%
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,065.9
|
|
|
|
767.4
|
|
|
|
27.0
|
%
|
|
|
24.5
|
%
|
|
|
38.9
|
%
|
Interest income
|
|
|
12.6
|
|
|
|
30.1
|
|
|
|
0.3
|
%
|
|
|
1.0
|
%
|
|
|
(58.1
|
)%
|
Interest expense
|
|
|
(4.4
|
)
|
|
|
(3.5
|
)
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
|
|
(25.7
|
)%
|
Other, net
|
|
|
(7.2
|
)
|
|
|
6.7
|
|
|
|
(0.2
|
)%
|
|
|
0.2
|
%
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,066.9
|
|
|
|
800.7
|
|
|
|
27.0
|
%
|
|
|
25.6
|
%
|
|
|
33.2
|
%
|
Provision for income taxes
|
|
|
(456.7
|
)
|
|
|
(314.0
|
)
|
|
|
(11.6
|
)%
|
|
|
(10.1
|
)%
|
|
|
(45.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
610.2
|
|
|
|
486.7
|
|
|
|
15.4
|
%
|
|
|
15.5
|
%
|
|
|
25.4
|
%
|
Loss from discontinued operations, net of tax
|
|
|
(16.4
|
)
|
|
|
(10.8
|
)
|
|
|
(0.4
|
)%
|
|
|
(0.3
|
)%
|
|
|
(51.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
593.8
|
|
|
|
475.9
|
|
|
|
15.0
|
%
|
|
|
15.2
|
%
|
|
|
24.8
|
%
|
Net loss attributable to noncontrolling interests
|
|
|
4.5
|
|
|
|
0.6
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Apollo
|
|
$
|
598.3
|
|
|
$
|
476.5
|
|
|
|
15.1
|
%
|
|
|
15.2
|
%
|
|
|
25.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
Our net revenue increased $820.2 million, or 26.2%, in
fiscal year 2009 compared to fiscal year 2008. University of
Phoenix represented approximately 95% of our net revenue during
this period, and contributed the majority of the increase
primarily due to growth in Degreed Enrollment and selective
tuition price and other fee changes. Net revenue also increased
$46.9 million primarily from Apollo Global earning a full
year
87
of revenue from acquisitions completed in fiscal year 2008. For
a more detailed discussion, refer to our Analysis of
Operating Results by Reportable Segment.
Instructional
Costs and Services
Instructional costs and services increased $217.9 million,
or 16.1%, in fiscal year 2009 compared to fiscal year 2008, but
represents a 340 basis point decrease as a percentage of
net revenue. The decrease as a percentage of net revenue is
primarily due to University of Phoenix leveraging its fixed
costs, such as certain employee wages, classroom space and
depreciation expense, and a decrease in financial aid processing
costs from the favorable renegotiation, effective September
2008, of our contract with our outsourced financial aid
processing vendor. This was partially offset by increases in
expense as a percentage of net revenue at Apollo Global
associated with its
start-up,
development and other infrastructure and support costs, as well
as an increase as a percentage of net revenue in bad debt
expense. Our bad debt expense was 3.8% of net revenue in fiscal
year 2009 compared to 3.3% of net revenue in fiscal year 2008.
Selling
and Promotional
Selling and promotional expenses increased $151.9 million,
or 19.0%, in fiscal year 2009 compared to fiscal year 2008
representing a 150 basis point decrease as a percentage of
net revenue. The decrease as a percentage of net revenue is
primarily due to University of Phoenix improved admissions
personnel effectiveness. Additionally, investments we made in
our corporate marketing function resulted in more effective
advertising.
General
and Administrative
General and administrative expenses increased
$71.4 million, or 33.2%, in fiscal year 2009 compared to
fiscal year 2008 representing a 40 basis point increase as
a percentage of net revenue. The increase as a percentage of net
revenue is primarily due to the following:
|
|
|
|
|
administrative expenses to support our strategic growth
initiatives and enhance our corporate governance,
|
|
|
|
increased legal costs in connection with defending ourselves in
legal matters, and
|
|
|
|
the write-off of $9.4 million of information technology
fixed assets that resulted primarily from our rationalization of
software.
|
Estimated
Litigation Loss
In connection with the Incentive Compensation False Claims
Act Lawsuit, we accrued $80.5 million in fiscal year
2009 based on settlement discussions to resolve this matter. We
settled this legal matter in fiscal year 2010. See Note 19,
Commitments and Contingencies, in Item 8, Financial
Statements and Supplementary Data, for further discussion.
Interest
Income
Interest income decreased $17.5 million in fiscal year 2009
compared to fiscal year 2008. The decrease is primarily due to
lower interest rate yields, which was partially offset by
increases in average cash and cash equivalents balances
(including restricted cash) during the respective periods. When
the Federal Reserve Bank lowers the Federal Funds Rate, it
generally results in a reduction in our interest rates. The
reduction of the Federal Funds Rate in December 2008 to the
range of 0.0% 0.25% lowered our average interest
rate yield for fiscal year 2009 below 1%.
88
Interest
Expense
Interest expense increased $0.9 million in fiscal year 2009
compared to fiscal year 2008 due to an increase in average
borrowings during the respective periods, principally due to
debt incurred by subsidiaries of Apollo Global and borrowings on
our syndicated $500 million credit agreement (the
Bank Facility).
Other,
Net
The loss in fiscal year 2009 was primarily attributable to
$6.9 million of expense incurred for the purchase of a call
option to hedge against foreign currency fluctuations related to
the BPP acquisition. The remaining loss primarily relates to net
foreign currency losses related to our international operations.
The income in fiscal year 2008 was primarily attributable to
other income of $9.5 million from the forfeiture of an
escrow deposit provided in connection with a now cancelled
agreement to sell and leaseback our headquarters, which was
partially offset by net foreign currency losses related to our
international operations.
Provision
for Income Taxes
Our effective income tax rate for fiscal year 2009 was 42.8%
compared to 39.2% for fiscal year 2008. The increase was
primarily attributable to the following:
|
|
|
|
|
The estimated tax impact on the estimated litigation loss
recorded in fiscal year 2009 associated with the Incentive
Compensation False Claims Act Lawsuit;
|
|
|
|
An increase in state taxes due to the allocation of our online
operations income amongst various U.S. state and local
jurisdictions;
|
|
|
|
A reduction in our tax exempt interest income;
|
|
|
|
An increase in net operating losses for which we cannot
currently take a tax benefit; and
|
|
|
|
Certain compensation in fiscal year 2009 for which the tax
benefit was uncertain under Internal Revenue Code
Section 162(m).
|
Loss from
Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax, relates to our
Insight Schools business, which we classified as held for sale
and as discontinued operations in the second quarter of fiscal
year 2010. The increase in the loss generated by Insight Schools
during fiscal year 2009 compared to fiscal year 2008 was
primarily due to increased regulatory compliance costs and
additional costs to grow the business. See Note 3,
Discontinued Operations, in Item 8, Financial Statements
and Supplementary Data, for further discussion.
89
Analysis
of Operating Results by Reportable Segment
The table below details our operating results by segment for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
$
|
|
|
%
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
3,766.6
|
|
|
$
|
2,987.7
|
|
|
$
|
778.9
|
|
|
|
26.1
|
%
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
13.1
|
|
|
|
|
|
|
|
13.1
|
|
|
|
|
*
|
Other(1)
|
|
|
76.1
|
|
|
|
42.3
|
|
|
|
33.8
|
|
|
|
79.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
89.2
|
|
|
|
42.3
|
|
|
|
46.9
|
|
|
|
110.9
|
%
|
Other Schools
|
|
|
95.0
|
|
|
|
93.6
|
|
|
|
1.4
|
|
|
|
1.5
|
%
|
Corporate(2)
|
|
|
2.8
|
|
|
|
9.8
|
|
|
|
(7.0
|
)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
3,953.6
|
|
|
$
|
3,133.4
|
|
|
$
|
820.2
|
|
|
|
26.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
1,131.3
|
|
|
$
|
817.6
|
|
|
$
|
313.7
|
|
|
|
38.4
|
%
|
Apollo Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
(6.6
|
)
|
|
|
|
*
|
Other(1)
|
|
|
(11.4
|
)
|
|
|
1.3
|
|
|
|
(12.7
|
)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
(18.0
|
)
|
|
|
1.3
|
|
|
|
(19.3
|
)
|
|
|
|
*
|
Other Schools
|
|
|
6.9
|
|
|
|
17.1
|
|
|
|
(10.2
|
)
|
|
|
(59.6
|
)%
|
Corporate(2)
|
|
|
(54.3
|
)
|
|
|
(68.6
|
)
|
|
|
14.3
|
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
1,065.9
|
|
|
$
|
767.4
|
|
|
$
|
298.5
|
|
|
|
38.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
not meaningful |
|
(1) |
|
As a result of contributing all of the common stock of Western
International University to Apollo Global during the third
quarter of fiscal year 2010, we are presenting Western
International University in the Apollo Global Other
reportable segment for all periods presented. |
|
(2) |
|
The Corporate caption in our segment reporting includes
adjustments to reconcile segment results to consolidated
results, which primarily consist of net revenue and corporate
charges that are not allocated to our segments. |
University
of Phoenix
The $778.9 million, or 26.1%, increase in net revenue in
our University of Phoenix segment was primarily due to
enrollment growth as detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate New Degreed
|
|
|
|
Degreed Enrollment(1)
|
|
|
|
Enrollment(1), (2)
|
|
|
|
Quarter Ended August 31,
|
|
|
%
|
|
|
|
Year Ended August 31,
|
|
|
%
|
|
(rounded to the nearest hundred)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Associates
|
|
|
201,200
|
|
|
|
146,500
|
|
|
|
37.3
|
%
|
|
|
|
191,700
|
|
|
|
143,400
|
|
|
|
33.7
|
%
|
Bachelors
|
|
|
163,600
|
|
|
|
141,800
|
|
|
|
15.4
|
%
|
|
|
|
108,900
|
|
|
|
92,400
|
|
|
|
17.9
|
%
|
Masters
|
|
|
71,200
|
|
|
|
67,700
|
|
|
|
5.2
|
%
|
|
|
|
51,900
|
|
|
|
49,400
|
|
|
|
5.1
|
%
|
Doctoral
|
|
|
7,000
|
|
|
|
6,100
|
|
|
|
14.8
|
%
|
|
|
|
3,300
|
|
|
|
3,000
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
443,000
|
|
|
|
362,100
|
|
|
|
22.3
|
%
|
|
|
|
355,800
|
|
|
|
288,200
|
|
|
|
23.5
|
%
|
|
|
|
(1) |
|
Refer to Item 1, Business, for definitions of
Degreed Enrollment and New Degreed Enrollment. |
90
|
|
|
(2) |
|
Aggregate New Degreed Enrollment represents the sum of quarterly
New Degreed Enrollment during the fiscal year. |
Enrollment growth in Degreed Enrollment and New Degreed
Enrollment is in part the result of investments in enhancing and
expanding University of Phoenix academic quality and service
offerings, which has attracted new students and increased
student retention. Enhancements in our marketing effectiveness
have also contributed to the increases. Also, we believe that a
portion of the increase is due to the economic downturn, as
working learners seek to advance their education to improve
their job security or reemployment prospects.
In addition to the growth in Degreed Enrollment, net revenue
increased due to selective tuition price and other fee changes
implemented in July 2009 and July 2008, depending on geographic
area, program, and degree level. In the aggregate, the July 2009
selective price and other fee changes, including increases in
discounts for military and veteran students, averaged
approximately 4%. The July 2008 selective tuition price and
other fee changes included an approximate 10% increase in
associates degree tuition price and increases averaging 4%
to 5% for bachelors and masters degree programs. The
increase in net revenue was partially offset by a continued
shift in our student body mix to a higher percentage of students
enrolled in associates degree programs, which have tuition
prices generally lower than other degree programs.
Associates Degreed Enrollment represented 45.4% of Degreed
Enrollment during the quarter ended August 31, 2009,
compared to 40.5% during the quarter ended August 31, 2008.
In addition, associates Degreed Enrollment increased 37.3%
in the quarter ended August 31, 2009 compared to the
quarter ended August 31, 2008.
Operating income in our University of Phoenix segment increased
$313.7 million, or 38.4%, during fiscal year 2009 compared
to fiscal year 2008. The increase in operating income was
positively impacted by the following:
|
|
|
|
|
Economies of scale associated with the 26.1% increase in
University of Phoenix net revenue as many costs remain
relatively fixed such as certain employee wages, classroom space
and depreciation when University of Phoenix grows its net
revenue. Additionally, variable employee headcount has grown at
a lower rate than the increase in net revenue;
|
|
|
A decrease in financial aid processing costs from the favorable
renegotiation, effective September 2008, of our contract with
our outsourced financial aid processing vendor;
|
|
|
Investments in our corporate marketing function that produced
more effective and efficient advertising resulting in a decrease
in advertising expense as a percentage of net revenue; and
|
|
|
An increase in admissions personnel effectiveness as a result of
internal initiatives to assist admissions personnel in their
jobs, as well as an increase in the average tenure of admissions
personnel.
|
Operating income was negatively impacted by the
$80.5 million estimated litigation loss recorded in
connection with the Incentive Compensation False Claims Act
Lawsuit. See Note 19, Commitments and Contingencies, in
Item 8, Financial Statements and Supplementary Data,
for further discussion. Operating income was also negatively
impacted by increased bad debt expense as a percentage of net
revenue resulting from the economic downturn and an increase in
the proportion of our aged receivables that are attributable to
students enrolled in degree programs with fewer than 24 incoming
credits. Our collection rates for such students are lower
compared to students enrolled in graduate level programs and
bachelors students with a higher level of incoming credits.
Apollo
Global
Apollo Global net revenue increased $46.9 million during
fiscal year 2009 compared to fiscal year 2008. The net revenue
was generated by BPP, which was acquired on July 30, 2009,
and UNIACC and ULA, which were acquired in the third and fourth
quarters of fiscal year 2008, respectively.
The $18.0 million operating loss for Apollo Global during
fiscal year 2009 was primarily due to the following:
|
|
|
|
|
General and administrative expenses associated with the pursuit
of opportunities to partner with
and/or
acquire existing institutions of higher learning where we
believe we can achieve long-term attractive growth and value
creation; and
|
91
|
|
|
|
|
Expenditures at BPP, UNIACC and ULA including, but not limited
to, initiatives to expand offerings and enhance academic quality
and marketing.
|
Other
Schools
The decrease in operating income in our Other Schools segment
was primarily due to our expenditures related to developing
Meritus University, which launched its first programs early in
fiscal year 2009.
Liquidity,
Capital Resources, and Financial Position
We believe that our cash and cash equivalents and available
liquidity will be adequate to satisfy our working capital and
other liquidity requirements associated with our existing
operations through at least the next 12 months. We believe
that the most strategic uses of our cash resources include
investments in the continued enhancement and expansion of our
student offerings, share repurchases, acquisition opportunities
including our commitment to Apollo Global, investments to
further transition our marketing approaches to more effectively
identify students who have the ability to succeed in our
educational programs, and investments in information technology
initiatives. Additionally, we may be required to post a bond to
stay enforcement of the judgment in our Securities
Class Action matter or pay damages awarded in that action.
Although we currently have substantial available liquidity, our
ability to access the credit markets and other sources of
liquidity may be adversely affected if we experience regulatory
compliance challenges, reduced availability of Title IV funding
or other adverse effects on our business from regulatory or
legislative changes.
Cash
and Cash Equivalents and Restricted Cash and Cash
Equivalents
The following table provides a summary of our cash and cash
equivalents and restricted cash and cash equivalents (including
long-term) at August 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Assets at
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
%
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Cash and cash equivalents
|
|
$
|
1,284.8
|
|
|
$
|
968.2
|
|
|
|
35.7
|
%
|
|
|
29.7
|
%
|
|
|
32.7
|
%
|
Restricted cash and cash equivalents
|
|
|
444.1
|
|
|
|
432.3
|
|
|
|
12.3
|
%
|
|
|
13.2
|
%
|
|
|
2.7
|
%
|
Long-term restricted cash and cash equivalents
|
|
|
126.6
|
|
|
|
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,855.5
|
|
|
$
|
1,400.5
|
|
|
|
51.5
|
%
|
|
|
42.9
|
%
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (excluding restricted cash) increased
$316.6 million primarily due to $1,045.1 million of
cash provided by operating activities, which was partially
offset by $446.4 million used for share repurchases,
$168.2 million used for capital expenditures, and a
$138.4 million increase in restricted cash (including
long-term restricted cash). Cash provided by operating
activities was adversely impacted by our $80.5 million
settlement payment, including legal fees, in the second quarter
of fiscal year 2010 for the Incentive Compensation False
Claims Act Lawsuit.
During the fourth quarter of fiscal year 2010, we received an
unfavorable ruling by the Ninth Circuit Court of Appeals in the
Securities Class Action matter. We are evaluating our
available options and may be required to post a bond to stay
enforcement of the judgment. We have estimated that the damages
for this matter could range from $127.2 million to
$228.0 million. We believe we have adequate liquidity to
fund the amount of any required bond, or if necessary, the
satisfaction of the judgment. Refer to Note 19, Commitments
and Contingencies, in Item 8, Financial Statements and
Supplementary Data for further discussion.
Also during the fourth quarter of fiscal year 2010, we posted a
$126 million letter of credit in favor of the
U.S. Department of Education as required in connection with
a program review of University of Phoenix by the Department. The
letter of credit is fully cash collateralized and must be
maintained until at least June 30, 2012. The long-term
restricted cash at August 31, 2010 represents the funds
used to collateralize this
92
letter of credit. Refer to Note 19, Commitments and
Contingencies, in Item 8, Financial Statements and
Supplementary Data, for additional information.
We measure our money market funds included in cash equivalents
and restricted cash equivalents at fair value. At
August 31, 2010, we had money market funds totaling
$1,469.0 million that were valued primarily using real-time
quotes for transactions in active exchange markets involving
identical assets, and $386.5 million of cash held in bank
overnight deposit accounts that approximate fair value. As of
August 31, 2010, we did not record any material adjustments
to reflect our money market funds at fair value.
Debt
Bank Facility In fiscal year 2008, we entered
into a syndicated $500 million credit agreement (the
Bank Facility). The Bank Facility is an unsecured
revolving credit facility used for general corporate purposes
including acquisitions and stock buybacks. The Bank Facility has
an expansion feature for an aggregate principal amount of up to
$250 million. The term is five years and will expire on
January 4, 2013. The Bank Facility provides a
multi-currency
sub-limit
facility for borrowings in certain specified foreign currencies.
We borrowed our entire credit line under the Bank Facility, as
of August 31, 2010 and 2009, which included
£63.0 million denominated in British Pounds
(equivalent to $97.9 million and $102.6 million
U.S. dollars as of August 31, 2010 and August 31,
2009, respectively) related to the BPP acquisition. We repaid
the U.S. dollar denominated debt on our Bank Facility of
$393 million during the first quarter of fiscal year 2010
and $400.1 million during the first quarter of fiscal year
2011. We have classified the U.S. dollar denominated
portion of our Bank Facility borrowings as short-term borrowings
and the current portion of long-term debt in our Consolidated
Balance Sheets because it was repaid subsequent to our
respective fiscal year-ends.
The Bank Facility fees are determined based on a pricing grid
that varies according to our leverage ratio. The Bank Facility
fee ranges from 12.5 to 17.5 basis points and the
incremental fees for borrowings under the facility range from
LIBOR + 50.0 to 82.5 basis points. The weighted average
interest rate on outstanding borrowings under the Bank Facility
at August 31, 2010 and 2009 was 2.9% and 1.0%, respectively.
The Bank Facility contains affirmative and negative covenants,
including the following financial covenants: maximum leverage
ratio, minimum coverage interest and rent expense ratio, and a
U.S. Department of Education financial responsibility
composite score. In addition, there are covenants restricting
indebtedness, liens, investments, asset transfers and
distributions. We were in compliance with all covenants related
to the Bank Facility at August 31, 2010.
BPP Credit Facility In the fourth quarter of
fiscal year 2010, we refinanced BPPs debt by entering into
a £52.0 million (equivalent to $80.8 million
based on the August 31, 2010 exchange rate) credit
agreement (the BPP Credit Facility). The BPP Credit
Facility contains term debt, which was used to refinance
BPPs existing debt, and revolving credit facilities used
for working capital and general corporate purposes. The term of
the agreement is three years and will expire on August 31,
2013. The interest rate on borrowings varies according to a
financial ratio and range from LIBOR + 250 to 325 basis
points. The weighted average interest rate on BPPs
outstanding borrowings at August 31, 2010 and 2009 was 4.0%
and 1.3%, respectively.
The BPP Credit Facility contains financial covenants that
include minimum cash flow coverage ratio, minimum fixed charge
coverage ratio, maximum leverage ratio, and maximum capital
expenditure ratio. We were in compliance with all covenants
related to the BPP Credit Facility at August 31, 2010.
Other Other debt includes $8.7 million
of variable rate debt and $17.0 million of fixed rate debt
at the subsidiaries of Apollo Global. The weighted average
interest rate of these debt instruments at August 31, 2010
and 2009 was 6.7% and 7.2%, respectively.
93
Cash
Flows
Operating
Activities
The following table provides a summary of our operating cash
flows during the respective fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
521.6
|
|
|
$
|
593.8
|
|
|
$
|
475.9
|
|
Non-cash items
|
|
|
719.5
|
|
|
|
376.9
|
|
|
|
213.4
|
|
Changes in certain operating assets and liabilities
|
|
|
(196.0
|
)
|
|
|
(10.5
|
)
|
|
|
36.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
1,045.1
|
|
|
$
|
960.2
|
|
|
$
|
726.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2010 Our non-cash items primarily
consisted of a $282.6 million provision for uncollectible
accounts receivable, $194.0 million for goodwill and other
intangibles impairments (including Insight Schools
goodwill impairment included in discontinued operations),
$178.0 million for an estimated litigation loss,
$147.0 million for depreciation and amortization, and
$64.3 million for share-based compensation. This was
partially offset by $125.4 million of deferred income
taxes. The changes in certain operating assets and liabilities
primarily consisted of a $266.0 million increase in
accounts receivable principally due to increased enrollment and
tuition price increases at University of Phoenix, and a
$44.7 million decrease in accounts payable and accrued
liabilities primarily due to the settlement payment for the
Incentive Compensation False Claims Act Lawsuit. This was
partially offset by a $65.7 million increase in other
liabilities principally due to an increase in uncertain tax
positions associated with state taxes, and a $32.9 million
increase in deferred revenue principally due to increased
enrollment and tuition price increases.
Fiscal year 2009 Our non-cash items primarily
consisted of a $152.5 million provision for uncollectible
accounts receivable, $113.4 million for depreciation and
amortization, $80.5 million for an estimated litigation
loss for the Incentive Compensation False Claims Act
Lawsuit, and $68.0 million for share-based
compensation, which was partially offset by $18.5 million
of excess tax benefits from share-based compensation. The
changes in certain operating assets and liabilities primarily
consisted of a $192.3 million increase in accounts
receivable, primarily due to increased enrollment, as well as a
delay in disbursements of certain Title IV funds prior to
year end (see further discussion below). This was partially
offset by an $80.3 million increase in deferred revenue and
a $59.5 million increase in student deposits, both of which
were primarily due to increased enrollment, and an increase of
$45.4 million in accounts payable and accrued liabilities.
Fiscal year 2008 Our non-cash items primarily
consisted of a $104.2 million provision for uncollectible
accounts receivable, $92.5 million for depreciation and
amortization, and $53.6 million for share-based
compensation, which was partially offset by $18.6 million
of excess tax benefits from share-based compensation. The
changes in certain operating assets and liabilities primarily
consisted of an $85.3 million increase in student deposits
and a $35.3 million increase in deferred revenue, both of
which were primarily due to increased enrollment. This was
partially offset by a $105.7 million increase in accounts
receivable, also primarily due to increased enrollment.
We monitor our accounts receivable through a variety of metrics,
including days sales outstanding. We calculate our days sales
outstanding by determining average daily student revenue based
on a rolling twelve month analysis and divide it into the gross
student accounts receivable balance as of the end of the period.
As of August 31, 2010, excluding accounts receivable and
the related net revenue for Apollo Global, our days sales
outstanding was 30 days as compared to 32 days as of
August 31, 2009. The decrease in days sales outstanding
versus a year ago is primarily attributable to a more pronounced
seasonal increase in accounts receivable at August 31, 2009
due to University of Phoenix annual student financial aid system
enhancements and upgrades.
94
Investing
Activities
The following table provides a summary of our investing cash
flows during the respective fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Capital expenditures
|
|
$
|
(168.2
|
)
|
|
$
|
(127.3
|
)
|
|
$
|
(104.9
|
)
|
Increase in restricted cash and cash equivalents
|
|
|
(138.4
|
)
|
|
|
(48.2
|
)
|
|
|
(87.7
|
)
|
Acquisitions, net of cash acquired
|
|
|
(5.5
|
)
|
|
|
(523.8
|
)
|
|
|
(93.8
|
)
|
Other
|
|
|
5.0
|
|
|
|
8.0
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(307.1
|
)
|
|
$
|
(691.3
|
)
|
|
$
|
(260.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2010 Cash used for investing
activities primarily consisted of $168.2 million for
capital expenditures principally related to investments in our
computer equipment and software, and a $138.4 million
increase in restricted cash and cash equivalents. The increase
in restricted cash and cash equivalents includes the
collateralization of a $126 million letter of credit posted
in favor of the U.S. Department of Education as required in
connection with a program review of University of Phoenix by the
Department.
We anticipate that our capital expenditures in fiscal year 2011
will be approximately twice the fiscal year 2010 amount as we
invest in our core information technology and network
infrastructure.
Fiscal year 2009 Cash used for investing
activities primarily consisted of $523.8 million for Apollo
Globals acquisitions (including $510.1 related to the
acquisition of BPP), $127.3 million for capital
expenditures, and a $48.2 million increase in restricted
cash and cash equivalents. This was partially offset by
$8.0 million provided by net maturities of marketable
securities.
Fiscal year 2008 Cash used for investing
activities primarily consisted of $104.9 million for
capital expenditures (including $12.4 million for our
corporate headquarters), $93.8 million for acquisitions,
including Aptimus and Apollo Globals purchases of UNIACC
and ULA, and an $87.7 million increase in restricted cash
and cash equivalents. This was partially offset by
$25.5 million provided by net maturities of marketable
securities.
Financing
Activities
The following table provides a summary of our financing cash
flows during the respective fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Purchase of Apollo Group Class A common stock
|
|
$
|
(446.4
|
)
|
|
$
|
(452.5
|
)
|
|
$
|
(454.4
|
)
|
(Payments) proceeds related to borrowings, net
|
|
|
(2.1
|
)
|
|
|
475.8
|
|
|
|
(0.4
|
)
|
Issuance of Apollo Group Class A common stock
|
|
|
19.7
|
|
|
|
117.1
|
|
|
|
103.0
|
|
Noncontrolling interest contributions
|
|
|
2.5
|
|
|
|
59.0
|
|
|
|
12.1
|
|
Other
|
|
|
6.6
|
|
|
|
18.5
|
|
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(419.7
|
)
|
|
$
|
217.9
|
|
|
$
|
(321.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2010 Cash used in financing
activities primarily consisted of $446.4 million used for
the repurchase of 8.0 million shares of our Class A
common stock. This was partially offset by $19.7 million of
cash received for stock option exercises.
Fiscal year 2009 Cash provided by financing
activities primarily consisted of $475.8 million of net
proceeds from borrowings, $117.1 million of cash received
for stock option exercises and $59.0 million related to
minority interest contributions. This was partially offset by
$452.5 million of cash used for the repurchase of
7.3 million shares of our Class A common stock.
95
Fiscal year 2008 Cash used for financing
activities primarily consisted of $454.4 million used for
the repurchase of 9.8 million shares of our Class A
common stock. This was partially offset by $103.0 million
of cash received for stock option exercises.
Shares of our Class A common stock newly authorized for
repurchase, repurchased and reissued, and the related total
cost, for the last three fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
Maximum Value of
|
|
|
|
of Shares
|
|
|
|
|
|
Average Price Paid
|
|
|
Shares Available
|
|
|
|
Repurchased
|
|
|
Cost
|
|
|
per Share
|
|
|
for Repurchase
|
|
(numbers in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2007
|
|
|
22.2
|
|
|
$
|
1,461.4
|
|
|
$
|
65.94
|
|
|
$
|
62.3
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892.1
|
|
Shares repurchased
|
|
|
9.8
|
|
|
|
454.4
|
|
|
|
46.25
|
|
|
|
(454.4
|
)
|
Shares reissued
|
|
|
(2.5
|
)
|
|
|
(158.5
|
)
|
|
|
64.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2008
|
|
|
29.5
|
|
|
$
|
1,757.3
|
|
|
$
|
59.50
|
|
|
$
|
500.0
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
444.4
|
|
Shares repurchased
|
|
|
7.2
|
|
|
|
444.4
|
|
|
|
61.62
|
|
|
|
(444.4
|
)
|
Other share repurchases(1)
|
|
|
0.1
|
|
|
|
8.1
|
|
|
|
68.11
|
|
|
|
|
|
Shares reissued
|
|
|
(3.1
|
)
|
|
|
(187.2
|
)
|
|
|
59.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2009
|
|
|
33.7
|
|
|
$
|
2,022.6
|
|
|
$
|
59.94
|
|
|
$
|
500.0
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500.0
|
|
Shares repurchased
|
|
|
7.9
|
|
|
|
439.3
|
|
|
|
55.78
|
|
|
|
(439.3
|
)
|
Other share repurchases(1)
|
|
|
0.1
|
|
|
|
7.1
|
|
|
|
47.45
|
|
|
|
|
|
Shares reissued
|
|
|
(1.0
|
)
|
|
|
(61.2
|
)
|
|
|
57.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2010
|
|
|
40.7
|
|
|
$
|
2,407.8
|
|
|
$
|
59.14
|
|
|
$
|
560.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In connection with the release of vested shares of restricted
stock, we repurchased approximately 149,000 and
119,000 shares for $7.1 million and $8.1 million
during fiscal years 2010 and 2009, respectively. These
repurchases relate to tax withholding requirements on the
restricted stock units and do not fall under the repurchase
program described below, and therefore do not reduce the amount
that is available for repurchase under that program. We did not
have any such repurchases during fiscal year 2008. |
On February 18, 2010, our Board of Directors authorized a
$500 million increase in the amount available under our
share repurchase program up to an aggregate amount of
$1 billion of Apollo Class A common stock. There is no
expiration date on the repurchase authorizations and repurchases
occur at our discretion. The amount and timing of future share
repurchases, if any, will be made as market and business
conditions warrant. Repurchases may be made on the open market
or in privately negotiated transactions, pursuant to the
applicable Securities and Exchange Commission rules, and may
include repurchases pursuant to Securities and Exchange
Commission
Rule 10b5-1
nondiscretionary trading programs.
96
Contractual
Obligations and Other Commercial Commitments
The following table lists our contractual obligations and other
commercial commitments as of August 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year
|
|
($ in millions)
|
|
2011
|
|
|
2012-2013
|
|
|
2014-2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
Debt(1)
|
|
$
|
418.7
|
|
|
$
|
160.5
|
|
|
$
|
2.8
|
|
|
$
|
5.6
|
|
|
$
|
587.6
|
|
Operating lease obligations
|
|
|
162.9
|
|
|
|
278.3
|
|
|
|
211.7
|
|
|
|
278.3
|
|
|
|
931.2
|
|
Capital lease obligations
|
|
|
2.6
|
|
|
|
2.7
|
|
|
|
1.2
|
|
|
|
2.8
|
|
|
|
9.3
|
|
Stadium naming rights(2)
|
|
|
6.5
|
|
|
|
13.6
|
|
|
|
14.5
|
|
|
|
94.2
|
|
|
|
128.8
|
|
Uncertain tax positions(3)
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
117.4
|
|
|
|
127.0
|
|
Other obligations(4)
|
|
|
1.0
|
|
|
|
2.9
|
|
|
|
3.9
|
|
|
|
3.2
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
601.3
|
|
|
$
|
458.0
|
|
|
$
|
234.1
|
|
|
$
|
501.5
|
|
|
$
|
1,794.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include expected future interest payments. Refer to
Note 12, Debt, in Item 8, Financial Statements and
Supplementary Data, for additional information on our
outstanding debt. |
|
(2) |
|
Amounts consist of an agreement for naming rights to the
Glendale, Arizona Sports Complex until 2026. |
|
(3) |
|
Amounts consist of unrecognized tax benefits, including interest
and penalties, that are included in other current and other
long-term liabilities in our August 31, 2010 Consolidated
Balance Sheets. We are uncertain as to if or when such amounts
may be settled. |
|
(4) |
|
Amount consists of unconditional purchase obligations and
undiscounted deferred compensation payments due to Dr. John
G. Sperling, our founder. |
We have no other material commercial commitments not included in
the above table.
Off-Balance
Sheet Arrangements
As part of our normal operations, our insurers issue surety
bonds for us that are required by various states where we
operate. We are obligated to reimburse our insurers for any
surety bonds that are paid by the insurers. As of
August 31, 2010, the total face amount of these surety
bonds was approximately $49.8 million.
During the fourth quarter of fiscal year 2010, we posted a
$126 million letter of credit in favor of the
U.S. Department of Education as required in connection with
a program review of University of Phoenix by the Department. The
letter of credit is fully cash collateralized and must be
maintained until at least June 30, 2012. Refer to
Note 19, Commitments and Contingencies, in Item 8,
Financial Statements and Supplementary Data, for
additional information.
Financial
Aid Program Funds
See the discussion of financial aid program funds in
Item 1, Business, Financial Aid
Programs Domestic Postsecondary.
Item 7A
Quantitative and Qualitative Disclosures about Market
Risk
Impact of
Inflation
Inflation has not had a significant impact on our historical
operations.
97
Foreign
Currency Exchange Risk
We use the U.S. dollar as our reporting currency. The
functional currencies of our foreign subsidiaries are generally
the local currencies. Accordingly, our foreign currency exchange
risk is related to the following exposure areas:
|
|
|
|
|
Adjustments resulting from the translation of assets and
liabilities of the foreign subsidiaries into U.S. dollars
using exchange rates in effect at the balance sheet dates. These
translation adjustments are recorded in accumulated other
comprehensive income (loss);
|
|
|
|
Earnings volatility from the translation of income and expense
items of the foreign subsidiaries using an average monthly
exchange rate for the respective periods; and
|
|
|
|
Gains and losses resulting from foreign currency exchange rate
changes related to intercompany receivables and payables that
are not of a long-term investment nature, as well as gains and
losses from foreign currency transactions. These items are
recorded in Other, net in our Consolidated Statements of Income.
|
In fiscal year 2010, we recorded $20.8 million in net
foreign currency translation losses, net of tax, that are
included in other comprehensive income. These losses are
primarily the result of the strengthening of the
U.S. dollar relative to the British Pound during fiscal
year 2010.
As we continue to expand our international operations, we will
conduct more transactions in currencies other than the
U.S. Dollar, thus increasing our exposure to foreign
currency exchange rate fluctuations. The following table
outlines our net asset exposure by foreign currency (defined as
foreign currency assets less foreign currency liabilities and
excluding intercompany balances) denominated in
U.S. dollars for foreign currencies in which we have
significant assets
and/or
liabilities as of August 31:
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
British Pound Sterling
|
|
$
|
162.4
|
|
|
$
|
369.6
|
|
Euro
|
|
|
31.9
|
|
|
|
36.0
|
|
Mexican Peso
|
|
|
20.6
|
|
|
|
29.2
|
|
Chilean Peso
|
|
|
19.5
|
|
|
|
18.4
|
|
Apollo has not generally used derivative contracts to hedge
foreign currency exchange rate fluctuations.
Interest
Rate Risk
Interest
Income
As of August 31, 2010, we held $1,870.7 million in
cash and cash equivalents, restricted cash and cash equivalents
(including long-term), and marketable securities. During fiscal
year 2010, we earned interest income of $2.9 million. When
the Federal Reserve Bank lowers the Federal Funds Rate, it
generally results in a reduction in our interest rates. The
reduction of the Federal Funds Rate in December 2008 to the
range of 0.0% 0.25% has lowered our interest rate
yields in fiscal year 2010 below 1%. Based on the current
Federal Funds Rate, we do not believe any further reduction
would have a material impact on us.
98
Interest
Expense
We have exposure to changing interest rates primarily associated
with our variable rate debt. At August 31, 2010, we had a
total outstanding debt balance of $584.4 million. The
following table presents the weighted-average interest rates and
our scheduled maturities of principal by fiscal year for our
outstanding debt at August 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, except percentages)
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fixed-rate debt
|
|
$
|
8.5
|
|
|
$
|
3.2
|
|
|
$
|
2.8
|
|
|
$
|
1.5
|
|
|
$
|
1.6
|
|
|
$
|
7.2
|
|
|
$
|
24.8
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.2
|
%
|
Variable-rate debt
|
|
$
|
407.9
|
|
|
$
|
18.0
|
|
|
$
|
133.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
559.6
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
%
|
We have an interest rate swap with a notional amount of
£32.0 million ($49.7 million) used to minimize
the interest rate exposure on a portion of BPPs variable
rate debt. The interest rate swap is used to fix the variable
interest rate on the associated debt. As of August 31,
2010, the fair value of the swap is a liability of
$5.1 million and is included in other liabilities in our
Consolidated Balance Sheets.
For the purpose of sensitivity, based on our outstanding
variable rate debt exposed to changes in interest rates as of
August 31, 2010, an increase of 100 basis points in
our weighted average interest rate would increase interest
expense by approximately $5.1 million on an annual basis.
Substantially all of our debt is variable interest rate and the
carrying amount approximates fair value.
Auction-Rate
Securities Risk
At August 31, 2010, our auction-rate securities totaled
$15.2 million. Our auction-rate securities are
insignificant to our total assets that require fair value
measurements and thus, the use and possible changes in the use
of these unobservable inputs would not have a material impact on
our liquidity and capital resources.
We will continue to monitor our investment portfolio. We will
also continue to evaluate any changes in the market value of the
failed auction-rate securities that have not been liquidated and
depending upon existing market conditions, we may be required to
record
other-than-temporary
impairment charges in the future.
For further discussion of our fair value measurements, refer to
Note 10, Fair Value Measurements, in Item 8,
Financial Statements and Supplementary Data.
99
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Apollo Group, Inc. and Subsidiaries
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of
Apollo Group, Inc. and subsidiaries (the Company) as
of August 31, 2010 and 2009, and the related consolidated
statements of income, comprehensive income, shareholders
equity, and cash flows for each of the three years in the period
ended August 31, 2010. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Apollo Group, Inc. and subsidiaries as of August 31, 2010
and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended
August 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
August 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated October 20, 2010 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ DELOITTE &
TOUCHE LLP
Phoenix, Arizona
October 20, 2010
101
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
ASSETS:
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,284,769
|
|
|
$
|
968,246
|
|
Restricted cash and cash equivalents
|
|
|
444,132
|
|
|
|
432,304
|
|
Accounts receivable, net
|
|
|
264,377
|
|
|
|
298,270
|
|
Deferred tax assets, current portion
|
|
|
166,549
|
|
|
|
88,022
|
|
Prepaid taxes
|
|
|
39,409
|
|
|
|
57,658
|
|
Other current assets
|
|
|
38,031
|
|
|
|
35,517
|
|
Assets held for sale from discontinued operations
|
|
|
15,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,253,212
|
|
|
|
1,880,017
|
|
Property and equipment, net
|
|
|
619,537
|
|
|
|
557,507
|
|
Long-term restricted cash and cash equivalents
|
|
|
126,615
|
|
|
|
|
|
Marketable securities
|
|
|
15,174
|
|
|
|
19,579
|
|
Goodwill
|
|
|
322,159
|
|
|
|
522,358
|
|
Intangible assets, net
|
|
|
150,593
|
|
|
|
203,671
|
|
Deferred tax assets, less current portion
|
|
|
99,071
|
|
|
|
66,254
|
|
Other assets
|
|
|
15,090
|
|
|
|
13,991
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,601,451
|
|
|
$
|
3,263,377
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
|
$
|
416,361
|
|
|
$
|
461,365
|
|
Accounts payable
|
|
|
90,830
|
|
|
|
66,928
|
|
Accrued liabilities
|
|
|
375,461
|
|
|
|
268,418
|
|
Student deposits
|
|
|
493,245
|
|
|
|
491,639
|
|
Deferred revenue
|
|
|
359,724
|
|
|
|
333,041
|
|
Other current liabilities
|
|
|
53,416
|
|
|
|
133,887
|
|
Liabilities held for sale from discontinued operations
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,793,511
|
|
|
|
1,755,278
|
|
Long-term debt
|
|
|
168,039
|
|
|
|
127,701
|
|
Deferred tax liabilities
|
|
|
38,875
|
|
|
|
55,636
|
|
Other long-term liabilities
|
|
|
212,286
|
|
|
|
100,149
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,212,711
|
|
|
|
2,038,764
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 19)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, 1,000 shares authorized;
none issued
|
|
|
|
|
|
|
|
|
Apollo Group Class A nonvoting common stock, no par value,
400,000 shares authorized; 188,007 issued as of
August 31, 2010 and 2009, and 147,293 and 154,260
outstanding as of August 31, 2010 and 2009, respectively
|
|
|
103
|
|
|
|
103
|
|
Apollo Group Class B voting common stock, no par value,
3,000 shares authorized; 475 issued and outstanding as of
August 31, 2010 and 2009
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
46,865
|
|
|
|
1,139
|
|
Apollo Group Class A treasury stock, at cost, 40,714 and
33,746 shares as of August 31, 2010 and 2009,
respectively
|
|
|
(2,407,788
|
)
|
|
|
(2,022,623
|
)
|
Retained earnings
|
|
|
3,748,045
|
|
|
|
3,195,043
|
|
Accumulated other comprehensive loss
|
|
|
(31,176
|
)
|
|
|
(13,740
|
)
|
|
|
|
|
|
|
|
|
|
Total Apollo shareholders equity
|
|
|
1,356,050
|
|
|
|
1,159,923
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
32,690
|
|
|
|
64,690
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
1,388,740
|
|
|
|
1,224,613
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,601,451
|
|
|
$
|
3,263,377
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
102
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
(In thousands, except per share data)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
4,925,819
|
|
|
$
|
3,953,566
|
|
|
$
|
3,133,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
2,125,082
|
|
|
|
1,567,754
|
|
|
|
1,349,879
|
|
Selling and promotional
|
|
|
1,112,666
|
|
|
|
952,884
|
|
|
|
800,989
|
|
General and administrative
|
|
|
314,795
|
|
|
|
286,493
|
|
|
|
215,192
|
|
Goodwill and other intangibles impairment
|
|
|
184,570
|
|
|
|
|
|
|
|
|
|
Estimated litigation loss
|
|
|
177,982
|
|
|
|
80,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
3,915,095
|
|
|
|
2,887,631
|
|
|
|
2,366,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,010,724
|
|
|
|
1,065,935
|
|
|
|
767,376
|
|
Interest income
|
|
|
2,920
|
|
|
|
12,591
|
|
|
|
30,078
|
|
Interest expense
|
|
|
(11,891
|
)
|
|
|
(4,448
|
)
|
|
|
(3,450
|
)
|
Other, net
|
|
|
(685
|
)
|
|
|
(7,151
|
)
|
|
|
6,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,001,068
|
|
|
|
1,066,927
|
|
|
|
800,776
|
|
Provision for income taxes
|
|
|
(464,063
|
)
|
|
|
(456,720
|
)
|
|
|
(314,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
537,005
|
|
|
|
610,207
|
|
|
|
486,751
|
|
Loss from discontinued operations, net of tax
|
|
|
(15,424
|
)
|
|
|
(16,377
|
)
|
|
|
(10,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
521,581
|
|
|
|
593,830
|
|
|
|
475,927
|
|
Net loss attributable to noncontrolling interests
|
|
|
31,421
|
|
|
|
4,489
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Apollo
|
|
$
|
553,002
|
|
|
$
|
598,319
|
|
|
$
|
476,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to Apollo
|
|
$
|
3.74
|
|
|
$
|
3.90
|
|
|
$
|
2.97
|
|
Discontinued operations attributable to Apollo
|
|
|
(0.10
|
)
|
|
|
(0.11
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share attributable to Apollo
|
|
$
|
3.64
|
|
|
$
|
3.79
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to Apollo
|
|
$
|
3.72
|
|
|
$
|
3.85
|
|
|
$
|
2.94
|
|
Discontinued operations attributable to Apollo
|
|
|
(0.10
|
)
|
|
|
(0.10
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share attributable to Apollo
|
|
$
|
3.62
|
|
|
$
|
3.75
|
|
|
$
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
151,955
|
|
|
|
157,760
|
|
|
|
164,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
152,906
|
|
|
|
159,514
|
|
|
|
165,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
103
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
521,581
|
|
|
$
|
593,830
|
|
|
$
|
475,927
|
|
Other comprehensive income (loss) (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation loss
|
|
|
(20,844
|
)
|
|
|
(11,705
|
)
|
|
|
(1,704
|
)
|
Change in fair value of auction-rate securities
|
|
|
369
|
|
|
|
(390
|
)
|
|
|
(973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
501,106
|
|
|
|
581,735
|
|
|
|
473,250
|
|
Comprehensive loss attributable to noncontrolling
interests
|
|
|
34,460
|
|
|
|
6,625
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Apollo
|
|
$
|
535,566
|
|
|
$
|
588,360
|
|
|
$
|
474,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
104
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apollo Group
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
|
|
|
Apollo Group
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Nonvoting
|
|
|
Voting
|
|
|
Additional
|
|
|
Class A
|
|
|
|
|
|
Other
|
|
|
Apollo
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
|
|
|
Stated
|
|
|
Paid-in
|
|
|
|
|
|
Stated
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
controlling
|
|
|
Total
|
|
(In thousands)
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Shares
|
|
|
Value
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
Interests
|
|
|
Equity
|
|
|
Balance as of August 31, 2007
|
|
|
188,007
|
|
|
$
|
103
|
|
|
|
475
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
22,163
|
|
|
$
|
(1,461,368
|
)
|
|
$
|
2,096,385
|
|
|
$
|
(1,281
|
)
|
|
$
|
633,840
|
|
|
$
|
|
|
|
$
|
633,840
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,824
|
|
|
|
(454,362
|
)
|
|
|
|
|
|
|
|
|
|
|
(454,362
|
)
|
|
|
|
|
|
|
(454,362
|
)
|
Treasury stock issued under stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
(103
|
)
|
|
|
6,339
|
|
|
|
|
|
|
|
|
|
|
|
5,566
|
|
|
|
|
|
|
|
5,566
|
|
Treasury stock issued under stock incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,141
|
)
|
|
|
(2,348
|
)
|
|
|
152,114
|
|
|
|
22,430
|
|
|
|
|
|
|
|
97,403
|
|
|
|
|
|
|
|
97,403
|
|
Tax effect for stock incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,907
|
|
|
|
|
|
|
|
5,907
|
|
Reclassification of liability awards to equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,655
|
|
|
|
|
|
|
|
16,655
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,570
|
|
|
|
|
|
|
|
53,570
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,527
|
)
|
|
|
(1,527
|
)
|
|
|
(177
|
)
|
|
|
(1,704
|
)
|
Change in fair value of auction-rate securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(973
|
)
|
|
|
(973
|
)
|
|
|
|
|
|
|
(973
|
)
|
Noncontrolling interest contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,149
|
|
|
|
12,149
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,782
|
|
|
|
405
|
|
|
|
2,187
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476,525
|
|
|
|
|
|
|
|
476,525
|
|
|
|
(598
|
)
|
|
|
475,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2008
|
|
|
188,007
|
|
|
$
|
103
|
|
|
|
475
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
29,536
|
|
|
$
|
(1,757,277
|
)
|
|
$
|
2,595,340
|
|
|
$
|
(3,781
|
)
|
|
$
|
834,386
|
|
|
$
|
11,779
|
|
|
$
|
846,165
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,331
|
|
|
|
(452,487
|
)
|
|
|
|
|
|
|
|
|
|
|
(452,487
|
)
|
|
|
|
|
|
|
(452,487
|
)
|
Treasury stock issued under stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
(90
|
)
|
|
|
5,384
|
|
|
|
|
|
|
|
|
|
|
|
5,461
|
|
|
|
|
|
|
|
5,461
|
|
Treasury stock issued under stock incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,526
|
)
|
|
|
(3,031
|
)
|
|
|
181,757
|
|
|
|
1,384
|
|
|
|
|
|
|
|
111,615
|
|
|
|
|
|
|
|
111,615
|
|
Tax effect for stock incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,550
|
|
|
|
|
|
|
|
4,550
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,038
|
|
|
|
|
|
|
|
68,038
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,569
|
)
|
|
|
(9,569
|
)
|
|
|
(2,136
|
)
|
|
|
(11,705
|
)
|
Change in fair value of auction-rate securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(390
|
)
|
|
|
(390
|
)
|
|
|
|
|
|
|
(390
|
)
|
Noncontrolling interest contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,980
|
|
|
|
58,980
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556
|
|
|
|
556
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
598,319
|
|
|
|
|
|
|
|
598,319
|
|
|
|
(4,489
|
)
|
|
|
593,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2009
|
|
|
188,007
|
|
|
$
|
103
|
|
|
|
475
|
|
|
$
|
1
|
|
|
$
|
1,139
|
|
|
|
33,746
|
|
|
$
|
(2,022,623
|
)
|
|
$
|
3,195,043
|
|
|
$
|
(13,740
|
)
|
|
$
|
1,159,923
|
|
|
$
|
64,690
|
|
|
$
|
1,224,613
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,024
|
|
|
|
(446,398
|
)
|
|
|
|
|
|
|
|
|
|
|
(446,398
|
)
|
|
|
|
|
|
|
(446,398
|
)
|
Treasury stock issued under stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(447
|
)
|
|
|
(100
|
)
|
|
|
5,967
|
|
|
|
|
|
|
|
|
|
|
|
5,520
|
|
|
|
|
|
|
|
5,520
|
|
Treasury stock issued under stock incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,115
|
)
|
|
|
(956
|
)
|
|
|
55,266
|
|
|
|
|
|
|
|
|
|
|
|
14,151
|
|
|
|
|
|
|
|
14,151
|
|
Tax effect for stock incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,501
|
)
|
|
|
|
|
|
|
(4,501
|
)
|
Tax benefit related to IRS dispute settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,484
|
|
|
|
|
|
|
|
27,484
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,305
|
|
|
|
|
|
|
|
64,305
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,805
|
)
|
|
|
(17,805
|
)
|
|
|
(3,039
|
)
|
|
|
(20,844
|
)
|
Change in fair value of auction-rate securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369
|
|
|
|
369
|
|
|
|
|
|
|
|
369
|
|
Noncontrolling interest contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,460
|
|
|
|
2,460
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
553,002
|
|
|
|
|
|
|
|
553,002
|
|
|
|
(31,421
|
)
|
|
|
521,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2010
|
|
|
188,007
|
|
|
$
|
103
|
|
|
|
475
|
|
|
$
|
1
|
|
|
$
|
46,865
|
|
|
|
40,714
|
|
|
$
|
(2,407,788
|
)
|
|
$
|
3,748,045
|
|
|
$
|
(31,176
|
)
|
|
$
|
1,356,050
|
|
|
$
|
32,690
|
|
|
$
|
1,388,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
105
APOLLO
GROUP, INC. AND SUBSIDIARIES
FROM
CONTINUING AND DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
521,581
|
|
|
$
|
593,830
|
|
|
$
|
475,927
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
64,305
|
|
|
|
68,038
|
|
|
|
53,570
|
|
Excess tax benefits from share-based compensation
|
|
|
(6,648
|
)
|
|
|
(18,543
|
)
|
|
|
(18,648
|
)
|
Depreciation and amortization
|
|
|
147,035
|
|
|
|
113,350
|
|
|
|
92,496
|
|
Amortization of lease incentives
|
|
|
(13,358
|
)
|
|
|
(12,807
|
)
|
|
|
(12,680
|
)
|
Impairment on discontinued operations
|
|
|
9,400
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles impairment
|
|
|
184,570
|
|
|
|
|
|
|
|
|
|
Loss on fixed assets write-off
|
|
|
|
|
|
|
9,416
|
|
|
|
|
|
Amortization of deferred gain on sale-leasebacks
|
|
|
(1,705
|
)
|
|
|
(1,715
|
)
|
|
|
(1,786
|
)
|
Non-cash foreign currency loss (gain), net
|
|
|
643
|
|
|
|
(62
|
)
|
|
|
2,825
|
|
Provision for uncollectible accounts receivable
|
|
|
282,628
|
|
|
|
152,490
|
|
|
|
104,201
|
|
Estimated litigation loss
|
|
|
177,982
|
|
|
|
80,500
|
|
|
|
|
|
Deferred income taxes
|
|
|
(125,399
|
)
|
|
|
(13,799
|
)
|
|
|
(6,624
|
)
|
Changes in assets and liabilities, excluding the impact of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(265,996
|
)
|
|
|
(192,289
|
)
|
|
|
(105,726
|
)
|
Other assets
|
|
|
2,183
|
|
|
|
9,945
|
|
|
|
(7,285
|
)
|
Accounts payable and accrued liabilities
|
|
|
(44,653
|
)
|
|
|
45,406
|
|
|
|
(14,155
|
)
|
Income taxes payable
|
|
|
10,421
|
|
|
|
(30,848
|
)
|
|
|
21,667
|
|
Student deposits
|
|
|
3,445
|
|
|
|
59,458
|
|
|
|
85,294
|
|
Deferred revenue
|
|
|
32,887
|
|
|
|
80,315
|
|
|
|
35,281
|
|
Other liabilities
|
|
|
65,749
|
|
|
|
17,542
|
|
|
|
21,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,045,070
|
|
|
|
960,227
|
|
|
|
726,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(168,177
|
)
|
|
|
(127,356
|
)
|
|
|
(104,879
|
)
|
Acquisitions, net of cash acquired
|
|
|
(5,497
|
)
|
|
|
(523,795
|
)
|
|
|
(93,763
|
)
|
Purchase of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(875,205
|
)
|
Maturities of marketable securities
|
|
|
5,000
|
|
|
|
8,035
|
|
|
|
900,715
|
|
Increase in restricted cash and cash equivalents
|
|
|
(138,443
|
)
|
|
|
(48,149
|
)
|
|
|
(87,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(307,117
|
)
|
|
|
(691,265
|
)
|
|
|
(260,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on borrowings
|
|
|
(477,568
|
)
|
|
|
(37,341
|
)
|
|
|
(251,435
|
)
|
Proceeds from borrowings
|
|
|
475,454
|
|
|
|
513,170
|
|
|
|
250,991
|
|
Apollo Class A common stock purchased for treasury
|
|
|
(446,398
|
)
|
|
|
(452,487
|
)
|
|
|
(454,362
|
)
|
Issuance of Apollo Class A common stock
|
|
|
19,671
|
|
|
|
117,076
|
|
|
|
102,969
|
|
Noncontrolling interest contributions
|
|
|
2,460
|
|
|
|
58,980
|
|
|
|
12,149
|
|
Excess tax benefits from share-based compensation
|
|
|
6,648
|
|
|
|
18,543
|
|
|
|
18,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(419,733
|
)
|
|
|
217,941
|
|
|
|
(321,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange rate effect on cash and cash equivalents
|
|
|
(1,697
|
)
|
|
|
(1,852
|
)
|
|
|
(272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
316,523
|
|
|
|
485,051
|
|
|
|
143,876
|
|
Cash and cash equivalents, beginning of year
|
|
|
968,246
|
|
|
|
483,195
|
|
|
|
339,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,284,769
|
|
|
$
|
968,246
|
|
|
$
|
483,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds
|
|
$
|
514,532
|
|
|
$
|
472,241
|
|
|
$
|
289,630
|
|
Cash paid for interest
|
|
$
|
7,837
|
|
|
$
|
3,683
|
|
|
$
|
2,874
|
|
Supplemental disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units vested and released
|
|
$
|
19,868
|
|
|
$
|
22,617
|
|
|
$
|
|
|
Credits received for tenant improvements
|
|
$
|
17,372
|
|
|
$
|
12,674
|
|
|
$
|
9,604
|
|
Accrued purchases of property and equipment
|
|
$
|
10,136
|
|
|
$
|
5,081
|
|
|
$
|
4,072
|
|
Settlement and reclassification of liability awards
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,655
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
106
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
Note 1.
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Nature of
Operations
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Apollo Group, Inc. and its wholly-owned subsidiaries and
majority-owned subsidiaries, collectively referred to herein as
the Company, Apollo Group,
Apollo, APOL, we,
us or our, has been an education
provider for more than 35 years. We offer innovative and
distinctive educational programs and services both online and
on-campus at the undergraduate, masters and doctoral
levels through our wholly-owned subsidiaries:
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|
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|
|
The University of Phoenix, Inc. (University of
Phoenix);
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|
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Institute for Professional Development (IPD);
|
|
|
The College for Financial Planning Institutes Corporation
(CFFP); and
|
|
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Meritus University, Inc. (Meritus).
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In addition to these wholly-owned subsidiaries, in October 2007,
we formed a joint venture with The Carlyle Group
(Carlyle), called Apollo Global, Inc. (Apollo
Global), to pursue investments primarily in the
international education services industry. Apollo Group
currently owns 85.6% of Apollo Global, with Carlyle owning the
remaining 14.4%. As of August 31, 2010, total contributions
made to Apollo Global were approximately $555.3 million, of
which $475.3 million was funded by us. Apollo Global is
consolidated in our financial statements. Apollo Global has
completed the following acquisitions:
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|
|
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BPP Holdings plc (BPP) in the United Kingdom;
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Universidad de Artes, Ciencias y Comunicación
(UNIACC) in Chile; and
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Universidad Latinoamericana (ULA) in Mexico.
|
In addition, in April 2010, we contributed all of the common
stock of Western International University, Inc. (Western
International University), which was previously our
wholly-owned subsidiary, to Apollo Global. Refer to Note 4,
Acquisitions, for further discussion. This transaction was
accounted for as a transfer between entities under common
control and no gain or loss was recognized.
We also operate online high school programs through our Insight
Schools, Inc. (Insight Schools) wholly-owned
subsidiary. In the second quarter of fiscal year 2010, we
initiated a formal plan to sell Insight Schools, engaged an
investment bank and also began the process of actively marketing
Insight Schools as we determined that the business was no longer
consistent with our long-term strategic objectives. Accordingly,
we have presented Insight Schools as held for sale and as
discontinued operations. Refer to Note 3, Discontinued
Operations, for further discussion.
Our fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 2010, 2009 and 2008
relate to fiscal years 2010, 2009 and 2008, respectively.
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|
Note 2.
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Significant
Accounting Policies
|
Basis
of Presentation
These financial statements have been prepared pursuant to the
rules and regulations of the U.S. Securities and Exchange
Commission and, in the opinion of management, contain all
adjustments necessary to fairly present the financial condition,
results of operations and cash flows for the periods presented.
Information and note disclosures included in these consolidated
financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America
(GAAP). We believe that the disclosures made are
adequate to make the information presented not misleading.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Apollo Group, Inc., its wholly-owned subsidiaries, and
subsidiaries that we control. Interests in our subsidiaries that
we control are reported using the full-consolidation method. We
fully consolidate the results of operations and the assets and
liabilities of
107
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
these subsidiaries in our consolidated financial statements. All
material intercompany transactions and balances have been
eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in accordance with GAAP
requires management to make certain estimates and assumptions
that affect the reported amount of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could
differ from these estimates.
Revenue
Recognition
Our educational programs, primarily composed of University of
Phoenix programs, are designed to range in length from
one-day
seminars to degree programs lasting up to four years. Students
in University of Phoenix degree programs generally enroll in a
program of study encompassing a series of five- to nine-week
courses taken consecutively over the length of the program.
Generally, students are billed on a
course-by-course
basis when the student first attends a session, resulting in the
recording of a receivable from the student and deferred revenue
in the amount of the billing. University of Phoenix students
generally fund their education through loans
and/or
grants under various Title IV programs, tuition assistance
from their employers, or personal funds.
Net revenue consists principally of tuition and fees associated
with different educational programs as well as related
educational resources such as access to online materials, books,
and study texts. Net revenue is shown net of discounts. Tuition
benefits for our employees and their eligible dependants are
included in net revenue and instructional costs and services.
Total employee tuition benefits were $100.3 million,
$90.5 million and $77.9 million for fiscal years 2010,
2009 and 2008, respectively.
The following describes the components of our net revenue:
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Tuition and educational services revenue represents
approximately 92% of our gross consolidated revenue before
discounts, and encompasses both online and classroom-based
learning. For our University of Phoenix operations, tuition
revenue is recognized pro rata over the period of instruction as
services are delivered to students.
|
BPP recognizes tuition revenue as services are provided over the
course of the program, which varies depending on the program
structure. For our remaining Apollo Global operations, tuition
revenue is generally recognized over the length of the course
and/or
program as applicable.
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Educational materials revenue represents approximately 6%
of our gross consolidated revenue before discounts, and relates
to online course materials delivered to students over the period
of instruction. Revenue associated with these materials is
recognized pro rata over the period of the related course to
correspond with delivery of the materials to students.
Educational materials also includes the sale of various books,
study texts, course notes, and CDs for which we recognize
revenue when the materials have been delivered to and accepted
by students or other customers.
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Services revenue represents approximately 2% of our gross
consolidated revenue before discounts. Services revenue consists
principally of the contractual share of tuition revenue from
students enrolled in IPD programs at private colleges and
universities (Client Institutions). IPD provides
program development, administration and management consulting
services to Client Institutions to establish or expand their
programs for working learners. These services typically include
degree program design, curriculum development, market research,
student recruitment, accounting, and administrative services.
IPD typically is paid a portion of the tuition revenue generated
from these programs. IPDs contracts with its Client
Institutions generally range in length from five to ten years,
with provisions for renewal.
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108
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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The portion of service revenue to which we are entitled under
the terms of the contracts is recognized as the services are
provided.
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Other revenue represents less than 1% of our gross
consolidated revenue before discounts. Other revenue consists of
the fees students pay when submitting an enrollment application,
which, along with the related application costs associated with
processing the applications, are deferred and recognized over
the average length of time a student remains enrolled in a
program of study. Other revenue also includes non-tuition
generating revenues, such as renting classroom space and other
student support services. Revenue from these sources is
recognized as the services are provided.
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Discounts represent approximately 5% of our gross
consolidated revenue. Discounts reflect reductions in tuition or
other revenue including military, corporate, and other employer
discounts, along with institutional scholarships, grants and
promotions.
|
Effective March 1, 2008, University of Phoenix changed its
refund policy whereby students who attend 60% or less of a
course are eligible for a refund for the portion of the course
they did not attend. Under the prior refund policy, if a student
dropped or withdrew after attending one class of a course,
University of Phoenix earned 25% of the tuition for the course,
and if they dropped or withdrew after attending two classes of a
course, University of Phoenix earned 100% of the tuition for the
course. Refunds are recorded as a reduction in deferred revenue
during the period that a student drops or withdraws from a
class. This refund policy applies to students in most, but not
all states, as some states require different policies.
During the second quarter of fiscal year 2010, we began
presenting Insight Schools operating results as
discontinued operations. Accordingly, Insight Schools net
revenue is included in loss from discontinued operations, net of
tax in our Consolidated Statements of Income. Insight Schools
generates the majority of its tuition and educational services
revenue through long-term contracts with school districts or
not-for-profit
organizations. The term for these contracts ranges from five to
ten years with provisions for renewal thereafter. We recognize
revenue under these contracts over the period during which
educational services are provided to students, which generally
commences in August or September and ends in May or June.
Generally, net revenue varies from period to period based on
several factors, including the aggregate number of students
attending classes, the number of classes held during the period,
the tuition price per credit and seasonality.
Sales tax collected from students is excluded from net revenue.
Collected but unremitted sales tax is included as a liability in
our Consolidated Balance Sheets and is not material to our
consolidated financial statements.
Allowance
for Doubtful Accounts
We reduce accounts receivable by an allowance for amounts that
we expect to become uncollectible in the future. Estimates are
used in determining the allowance for doubtful accounts and are
based on historical collection experience and current trends. In
determining these amounts, we consider and evaluate the
historical write-offs of our receivables. We monitor our
collections and write-off experience to assess whether
adjustments are necessary.
When a student with Title IV loans withdraws, Title IV
rules determine if we are required to return a portion of
Title IV funds to the lenders. We are then entitled to
collect these funds from the students, but collection rates for
these types of receivables is significantly lower than our
collection rates for receivables for students who remain in our
educational programs.
We routinely evaluate our estimation methodology for adequacy
and modify it as necessary. In doing so, our objective is to
cause our allowance for doubtful accounts to reflect the amount
of receivables that will become uncollectible by considering our
most recent collections experience, changes in trends and other
109
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
relevant facts. In doing so, we believe our allowance for
doubtful accounts reflects the most recent collections
experience and is responsive to changes in trends. Our accounts
receivable are written off once the account is deemed to be
uncollectible. This typically occurs once we have exhausted all
efforts to collect the account, which include collection
attempts by our employees and outside collection agencies.
Please refer to Note 6, Accounts Receivable, net, for
further discussion.
Cash
and Cash Equivalents
We consider all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents. Cash and cash equivalents include money market
funds, bank overnight deposits, and tax-exempt commercial paper,
which are all placed with high-credit-quality institutions in
the U.S. and internationally. We have not experienced any
losses on our cash and cash equivalents.
Restricted
Cash and Cash Equivalents
Short-term restricted cash and cash equivalents primarily
represents amounts held for students that were received from
federal and state governments under various student aid grant
and loan programs, such as Title IV program funds, that we
are required to maintain pursuant to U.S. Department of
Education and other regulations. Restricted cash and cash
equivalents also includes certain funds that we may be required
to return if a student who receives Title IV program funds
withdraws from a program. These components of our restricted
cash and cash equivalents are not legally restricted or
otherwise segregated from our other assets. Long-term restricted
cash and cash equivalents consist of funds used to collateralize
a letter of credit as further discussed at Note 7,
Long-Term Restricted Cash and Cash Equivalents. Restricted cash
and cash equivalents are excluded from cash and cash equivalents
in the Consolidated Balance Sheets and Consolidated Statements
of Cash Flows from Continuing and Discontinued Operations. Our
restricted cash and cash equivalents are primarily held in money
market funds that are invested in municipal bonds, securities
issued by or guaranteed by the U.S. government, and
repurchase agreements.
Marketable
Securities
Marketable securities consist of auction-rate securities.
Auction-rate securities are investments with interest rates that
reset periodically through an auction process. Auction-rate
securities are classified as
available-for-sale
and are stated at fair value, which had historically been
consistent with amortized cost or par value due to interest
rates which reset periodically, typically between 7 and
35 days. However, beginning in February 2008 and continuing
through fiscal year 2010, due to uncertainty in the global
credit and capital markets and other factors, auction-rate
securities have experienced failed auctions resulting in a lack
of liquidity for these instruments that has reduced the
estimated fair market value for these securities below par
value. Our auction-rate securities instruments, due to the lack
of liquidity, are classified as non-current. Interest is
included in interest income in our Consolidated Statements of
Income. Please refer to Note 5, Marketable Securities, for
further discussion.
Property
and Equipment, net
Property and equipment is recorded at cost less accumulated
depreciation. Property and equipment under capital leases, and
the related obligation, is recorded at an amount equal to the
present value of future minimum lease payments. Buildings,
furniture, equipment, and software, including internally
developed software, are depreciated using the straight-line
method over the estimated useful lives of the related assets,
which range from 3 to 40 years. Capital leases, leasehold
improvements and tenant improvement allowances are amortized
using the straight-line method over the shorter of the lease
term or the estimated useful lives of the related assets.
Construction in progress, excluding software, is recorded at
cost until the corresponding
110
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
asset is placed into service and depreciation begins. Software
is recorded at cost and is amortized once the related asset is
ready for its intended use. Maintenance and repairs are expensed
as incurred.
We capitalize certain internal software development costs
consisting primarily of the direct labor associated with
creating the internally developed software. Capitalized costs
are amortized using the straight-line method over the estimated
lives of the software. Software development projects generally
include three stages: the preliminary project stage (all costs
expensed as incurred), the application development stage
(certain costs capitalized, certain costs expensed as incurred),
and the post-implementation/operation stage (all costs expensed
as incurred). The costs capitalized in the application
development stage include the costs of designing the
application, coding, installation of hardware, and testing. We
capitalize costs incurred during the application development
phase of the project as permitted. Please refer to Note 8,
Property and Equipment, net, for further discussion.
Goodwill
and Intangible Assets
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|
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|
|
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase
price of an acquired business over the fair value assigned to
the underlying assets acquired and assumed liabilities. At the
time of an acquisition, we allocate the goodwill and related
assets and liabilities to our respective reporting units. We
identify our reporting units by assessing whether the components
of our operating segments constitute businesses for which
discrete financial information is available and segment
management regularly reviews the operating results of those
components.
|
Indefinite-lived intangible assets are recorded at fair market
value on their acquisition date and primarily include trademarks
and foreign regulatory accreditations and designations as a
result of the BPP, UNIACC and ULA acquisitions. We assign
indefinite lives to acquired trademarks, accreditations and
designations that we believe have the continued ability to
generate cash flows indefinitely; have no legal, regulatory,
contractual, economic or other factors limiting the useful life
of the respective intangible asset; and when we intend to renew
the respective trademark, accreditation or designation and
renewal can be accomplished at little cost.
We assess goodwill and indefinite-lived intangible assets at
least annually for impairment or more frequently if events occur
or circumstances change between annual tests that would more
likely than not reduce the fair value of the respective
reporting unit below its carrying amount.
We test for goodwill impairment at the reporting unit level by
applying a two-step test. In the first step, we compare the fair
value of the reporting unit to the carrying value of its net
assets. If the fair value of the reporting unit exceeds the
carrying value of the net assets of the reporting unit, goodwill
is not impaired and no further testing is required. If the
carrying value of the net assets of the reporting unit exceeds
the fair value of the reporting unit, we perform a second step
which involves using a hypothetical purchase price allocation to
determine the implied fair value of the goodwill and compare it
to the carrying value of the goodwill. An impairment loss is
recognized to the extent the implied fair value of the goodwill
is less than the carrying amount of the goodwill. To determine
the fair value of our reporting units, we primarily rely on an
income-based approach using the discounted cash flow valuation
method. For our reporting units valued using this method, we
generally project cash flows, as well as a terminal value, by
calculating cash flow scenarios, applying a reasonable weighting
to these scenarios and discounting such cash flows by a
risk-adjusted rate of return. When appropriate, we may also
incorporate the use of a market-based approach in combination
with the discounted cash flow analysis. Generally, the
market-based approach incorporates information from comparable
transactions in the market and publicly traded companies with
similar operating and investment characteristics of the
reporting unit to develop a multiple which is then applied to
the operating performance of the reporting unit to determine
value. We believe the most critical assumptions and estimates in
determining the estimated fair value of our reporting units,
include, but are not limited to, the amounts and
111
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
timing of expected future cash flows for each reporting unit,
the probability weightings between scenarios, the discount rate
applied to those cash flows, long-term growth rates and
selection of comparable market multiples. The assumptions used
in determining our expected future cash flows consider various
factors such as historical operating trends particularly in
student enrollment and pricing, the political environment the
reporting unit operates in, anticipated economic and regulatory
conditions and planned business and operating strategies over a
long-term planning horizon.
The annual impairment test for indefinite-lived intangible
assets involves a comparison of the estimated fair value of the
intangible asset with its carrying value. If the carrying value
of the intangible asset exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess. We perform
our annual indefinite-lived intangible asset impairment tests on
the same dates that we perform our annual goodwill impairment
tests for the respective reporting units. To determine the fair
value of our trademark intangible assets we use the
relief-from-royalty method. This method estimates the benefit of
owning the intangible assets rather than paying royalties for
the right to use a comparable asset. This method incorporates
the use of significant judgments in determining both the
projected revenues attributable to the asset, as well as the
appropriate discount rate and royalty rates applied to those
revenues to determine fair value. To fair value the
accreditations and designations we primarily use the cost
savings method which estimates the cost savings of owning the
intangible asset rather than either creating the asset or not
having the asset in place to be used in current operations. This
method incorporates the use of significant judgments in
determining the projected profit or replacement cost
attributable to the asset and the appropriate discount rate.
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Finite-Lived Intangible Assets Finite-lived
intangible assets that are acquired in business combinations are
recorded at fair market value on their acquisition date and are
amortized on either a straight-line basis or using an
accelerated method to reflect the economic useful life of the
asset. The weighted average useful life of our finite-lived
intangible assets at August 31, 2010 is 4.6 years.
|
Other
Long-Lived Asset Impairments
We evaluate the carrying amount of our major long-lived assets,
including property and equipment and finite-lived intangible
assets, whenever changes in circumstances or events indicate
that the value of such assets may not be fully recoverable.
Excluding consideration of BPPs finite-lived intangible
assets discussed at Note 9, Goodwill and Intangible Assets,
we did not recognize any impairment charges for our long-lived
assets during fiscal year 2010. At August 31, 2010, we
believe the carrying amounts of our long-lived assets are fully
recoverable and no impairment exists.
Share-Based
Compensation
We measure and recognize compensation expense for all
share-based awards issued to faculty, employees and directors
based on estimated fair values of the share awards on the date
of grant. We record compensation expense, net of forfeitures,
for all share-based awards over the expected vesting period
using the straight-line method for awards with only a service
condition, and the graded vesting attribution method for awards
with service and performance conditions.
We calculate the fair value of share-based awards on the date of
grant. For stock options, we typically use the
Black-Scholes-Merton option pricing model to estimate fair
value. The Black-Scholes-Merton option pricing model requires us
to estimate key assumptions such as expected term, volatility,
risk-free interest rates and dividend yield to determine the
fair value of stock options, based on both historical
information and management judgment regarding market factors and
trends. In the absence of reliable historical data, we generally
use the simplified mid-point method to estimate expected term of
stock options. The simplified method uses the mid-point between
the vesting term and the contractual term of the share option.
We have analyzed our historical data and believe that the
structure and exercise behavior of our stock options has
112
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
changed significantly, resulting in a lack of reliable
historical exercise data that can be used to estimate expected
term for stock options granted in recent fiscal years. We will
continue to use the simplified method until reliable historical
data is available, or until circumstances change such that the
use of alternative methods for estimating expected term is more
appropriate.
For share-based awards with performance conditions, such as our
Performance Share Awards described in Note 17, Stock and
Savings Plans, we measure the fair value of such awards as of
the date of grant and amortize share-based compensation expense
for our estimate of the number of shares expected to vest. Our
estimate of the number of shares that will vest is based on our
determination of the probable outcome of the performance
condition, which requires considerable judgment.
We estimate expected forfeitures of share-based awards at the
grant date and recognize compensation cost only for those awards
expected to vest. We estimate our forfeiture rate based on
several factors including historical forfeiture activity,
expected future employee turnover, and other qualitative
factors. We ultimately adjust this forfeiture assumption to
actual forfeitures. Therefore, changes in the forfeiture
assumptions do not impact the total amount of expense ultimately
recognized over the vesting period. Rather, different forfeiture
assumptions only impact the timing of expense recognition over
the vesting period. If the actual forfeitures differ from
management estimates, additional adjustments to compensation
expense are recorded.
Income
Taxes
The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an
entitys financial statements or tax returns. Deferred tax
assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
earnings in the period when the new rate is enacted.
The determination of our uncertain tax positions requires us to
make significant judgments. We evaluate and account for
uncertain tax positions using a two-step approach. Recognition
(step one) occurs when we conclude that a tax position, based
solely on its technical merits, is more-likely-than-not to be
sustained upon examination. Measurement (step two) determines
the amount of benefit that is greater than 50% likely to be
realized upon ultimate settlement with a taxing authority that
has full knowledge of all relevant information. Derecognition of
a tax position that was previously recognized would occur when
we subsequently determine that a tax position no longer meets
the more-likely-than-not threshold of being sustained. We do not
use a valuation allowance as a substitute for derecognition of
tax positions. Please refer to Note 14, Income Taxes, for
further discussion.
Earnings
per Share
Basic income per share is calculated using the weighted average
number of Apollo Group Class A and Class B common
shares outstanding during the period. Diluted income per share
is calculated similarly except that it includes the dilutive
effect of the assumed exercise of stock options and release of
restricted stock units and performance share awards issuable
under our stock compensation plans. The amount of any tax
benefit to be credited to additional paid-in capital related to
the exercise of stock options, release of restricted stock units
and release of performance share awards, and unrecognized
share-based compensation expense is included when applying the
treasury stock method in the computation of diluted earnings per
share. Please refer to Note 16, Earnings Per Share, for
further discussion.
113
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Leases
We lease substantially all of our administrative and educational
facilities, with the exception of our corporate headquarters and
several Apollo Global facilities, and we enter into various
other lease agreements in conducting our business. At the
inception of each lease, we evaluate the lease agreement to
determine whether the lease is an operating or capital lease.
Additionally, most of our lease agreements contain renewal
options, tenant improvement allowances, rent holidays,
and/or rent
escalation clauses. When such items are included in a lease
agreement, we record a deferred rent asset or liability in our
Consolidated Balance Sheets and record the rent expense evenly
over the term of the lease. Leasehold improvements are reflected
under investing activities as additions to property and
equipment in our Consolidated Statements of Cash Flows from
Continuing and Discontinued Operations. Credits received against
rent for tenant improvement allowances are reflected as a
component of non-cash investing activities in our Consolidated
Statements of Cash Flows from Continuing and Discontinued
Operations. Lease terms generally range from five to ten years
with one to two renewal options for extended terms. For leases
with renewal options, we record rent expense and amortize the
leasehold improvements on a straight-line basis over the initial
non-cancelable lease term (in instances where the lease term is
shorter than the economic life of the asset) unless we intend to
exercise the renewal option. Please refer to Note 19,
Commitments and Contingencies, for further discussion.
We are also required to make additional payments under lease
terms for taxes, insurance, and other operating expenses
incurred during the lease period, which are expensed as
incurred. Rental deposits are provided for lease agreements that
specify payments in advance or deposits held in security that
are refundable, less any damages at lease end.
Selling
and Promotional Costs
We generally expense selling and promotional costs, including
advertising, as incurred.
Foreign
Currency Translation
The U.S. dollar is the functional currency of our entities
operating in the United States. The functional currency of our
entities operating outside the United States is the currency of
the primary economic environment in which the entity primarily
generates and expends cash, which is generally the local
currency. The assets and liabilities of these operations are
translated to U.S. dollars using exchange rates in effect
at the balance sheet dates. Income and expense items are
translated monthly at the average exchange rate for that period.
The resulting translation adjustments and the effect of exchange
rate changes on intercompany transactions of a long-term
investment nature are included in shareholders equity as a
component of accumulated other comprehensive income (loss) or
noncontrolling interests, as applicable. We report gains and
losses from foreign exchange rate changes related to
intercompany receivables and payables that are not of a
long-term investment nature, as well as gains and losses from
foreign currency transactions in other, net in our Consolidated
Statements of Income. These items amounted to a net
$0.6 million loss, net $0.1 million gain and net
$2.8 million loss in fiscal years 2010, 2009 and 2008,
respectively.
Fair
Value
The carrying amount of cash and cash equivalents, restricted
cash and cash equivalents, accounts receivable and accounts
payable reported in our Consolidated Balance Sheets approximate
fair value because of the short-term nature of these financial
instruments.
For fair value measurements of assets and liabilities that are
recognized or disclosed at fair value, we consider fair value to
be an exit price, which represents the amount that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. As such, fair value is a market-based
measurement that should be determined based on assumptions that
market
114
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
participants would use in pricing an asset or liability. We use
valuation techniques to determine fair value consistent with
either the market approach, income approach
and/or cost
approach, and we prioritize the inputs used in our valuation
techniques using the following three-tier fair value hierarchy:
|
|
|
|
|
Level 1 Observable inputs that reflect quoted
market prices (unadjusted) for identical assets and liabilities
in active markets;
|
|
|
|
Level 2 Observable inputs, other than quoted
market prices, that are either directly or indirectly observable
in the marketplace for identical or similar assets and
liabilities, quoted prices in markets that are not active, or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets and liabilities; and
|
|
|
|
Level 3 Unobservable inputs that are supported
by little or no market activity that are significant to the fair
value of assets or liabilities.
|
In measuring fair value, our valuation techniques maximize the
use of observable inputs and minimize the use of unobservable
inputs. We use prices and inputs that are current as of the
measurement date, including during periods of market volatility.
Therefore, classification of inputs within the hierarchy may
change from period to period depending upon the observability of
those prices and inputs. Our assessment of the significance of a
particular input to the fair value measurement requires
judgment, and may affect the valuation of fair value for certain
assets and liabilities and their placement within the fair value
hierarchy. Refer to Note 10, Fair Value Measurements, for
further discussion.
Loss
Contingencies
We are subject to various claims and contingencies which are in
the scope of ordinary and routine litigation incidental to our
business, including those related to regulation, litigation,
business transactions, employee-related matters and taxes, among
others. When we become aware of a claim or potential claim, the
likelihood of any loss or exposure is assessed. If it is
probable that a loss will result and the amount of the loss can
be reasonably estimated, we record a liability for the loss. The
liability recorded includes probable and estimable legal costs
incurred to date and future legal costs to the point in the
legal matter where we believe a conclusion to the matter will be
reached. If the loss is not probable or the amount of the loss
cannot be reasonably estimated, we disclose the claim if the
likelihood of a potential loss is reasonably possible and the
amount of the potential loss could be material. For matters
where no loss contingency is recorded, our policy is to expense
legal fees as incurred. The assessment of the likelihood of a
potential loss and the estimation of the amount of a loss are
subjective and require judgment. Please refer to Note 19,
Commitments and Contingencies, for further discussion.
Discontinued
Operations
Assets and liabilities expected to be sold or disposed of are
presented separately in our Consolidated Balance Sheets as
assets or liabilities held for sale. If we determine we will not
have significant continuing involvement with components that are
classified as held for sale, the results of operations of these
components are presented separately as income (loss) from
discontinued operations, net of tax, in the current and prior
periods. Refer to Note 3, Discontinued Operations, for
further discussion.
Concentration
of Revenue Source
U.S. federal financial aid programs are authorized by
Title IV of the Higher Education Act of 1965, as
reauthorized by the Higher Education Opportunity Act. The Higher
Education Act, as reauthorized, specifies the manner in which
the U.S. Department of Education reviews institutions for
eligibility and certification to participate in Title IV
programs. Every educational institution involved in
Title IV programs must be certified to participate and is
required to periodically renew this certification. Please refer
to Note 19, Commitments
115
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and Contingencies, for further information regarding regulatory
matters affecting our business. Continued Title IV
eligibility is critical to the operations of our business.
We collected the substantial majority of our fiscal year 2010
total consolidated net revenue from receipt of Title IV
financial aid program funds, principally from federal student
loans and Pell Grants. University of Phoenix represented 91% of
our fiscal year 2010 total consolidated net revenue and
University of Phoenix generated 88% of its cash basis revenue
for eligible tuition and fees during fiscal year 2010 from the
receipt of Title IV financial aid program funds, as
calculated under the 90/10 Rule described below, excluding the
benefit from the temporary relief for loan limit increases
described below.
A requirement of the Higher Education Act, commonly referred to
as the 90/10 Rule, applies to proprietary
institutions such as University of Phoenix. Under this rule, a
proprietary institution will be ineligible to participate in
Title IV programs if for any two consecutive fiscal years
it derives more than 90% of its cash basis revenue, as defined
in the rule, from Title IV programs. An institution that
exceeds this limit for any single fiscal year will be
automatically placed on provisional certification for two fiscal
years and will be subject to possible additional sanctions
determined to be appropriate under the circumstances by the
U.S. Department of Education in the exercise of its broad
discretion. While the Department has broad discretion to impose
additional sanctions on such an institution, there is only
limited precedent available to predict what those sanctions
might be, particularly in the current regulatory environment.
The Department could specify any additional conditions as a part
of the provisional certification and the institutions
continued participation in Title IV programs. These
conditions may include, among other things, restrictions on the
total amount of Title IV program funds that may be
distributed to students attending the institution; restrictions
on programmatic and geographic expansion; requirements to obtain
and post letters of credit; additional reporting requirements to
include additional interim financial reporting; or any other
conditions imposed by the Department. Should an institution be
subject to a provisional certification at the time that its
current program participation agreement expired, the effect on
recertification of the institution or continued eligibility in
Title IV programs pending recertification is uncertain. In
recent years, the 90/10 Rule percentages for University of
Phoenix have trended closer to 90% and for fiscal year 2010, the
percentage for University of Phoenix was 88%, excluding the
benefit from the permitted temporary exclusion of revenue
associated with the recently increased annual student loan
limits. This temporary relief expires in July 2011, and
including this relief the percentage for University of Phoenix
was 85%.
Based on currently available information, we expect that the
90/10 Rule percentage for University of Phoenix, net of the
temporary relief, will approach 90% for fiscal year 2011. We
have implemented various measures intended to reduce the
percentage of University of Phoenixs cash basis revenue
attributable to Title IV funds, including emphasizing
employer-paid and other direct-pay education programs,
encouraging students to carefully evaluate the amount of
necessary Title IV borrowing, and continued focus on
professional development and continuing education programs.
Although we believe these measures will favorably impact the
90/10 Rule calculation, they have had only limited impact to
date and there is no assurance that they will be adequate to
prevent the 90/10 Rule calculation from exceeding 90% in the
future. We are considering other measures to favorably impact
the 90/10 Rule calculation for University of Phoenix, including
tuition price increases; however, we have substantially no
control over the amount of Title IV student loans and
grants sought by or awarded to our students.
Based on currently available information, we do not expect the
90/10 Rule percentage for University of Phoenix, net of the
temporary relief, to exceed 90% for fiscal year 2011. However,
we believe that, absent a change in recent trends or the
implementation of additional effective measures to reduce the
percentage, the 90/10 Rule percentage for University of Phoenix
is likely to exceed 90% in fiscal year 2012 due to the
expiration of the temporary relief in July 2011. Our efforts to
reduce the 90/10 Rule percentage for University of Phoenix,
especially if the percentage exceeds 90% for a fiscal year, may
involve taking measures which reduce our revenue, increase our
operating expenses, or both, in each case perhaps significantly.
If the
90/10 Rule
is not changed to provide relief for proprietary institutions,
we may be required to make structural
116
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
changes to our business in order to remain in compliance, which
changes may materially alter the manner in which we conduct our
business and materially and adversely impact our business,
financial condition, results of operations and cash flows.
Other
Concentrations
We maintain our cash and cash equivalents accounts in financial
institutions. Only a negligible portion of these deposits are
insured by the Federal Deposit Insurance Corporation.
Our student receivables are not collateralized; however, credit
risk is reduced as the amount owed by any individual student is
small relative to the total student receivables and the customer
base is geographically diverse.
Certain
Reclassifications
We separately presented depreciation and amortization and
amortization of lease incentives on our Consolidated Statements
of Cash Flows from Continuing and Discontinued Operations. The
effects of this reclassification were increases in depreciation
and amortization of $12.8 and $12.7 million in fiscal years
2009 and 2008, respectively, with an offsetting separate
presentation of amortization of lease incentives.
We also made certain reclassifications associated with the
following:
|
|
|
|
|
our presentation of Insight Schools as discontinued
operations, and
|
|
|
|
our adoption of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards
(SFAS) No. 160, Non-controlling Interests
in Consolidated Financial Statements An Amendment of
ARB No. 51 (SFAS 160) (codified in
ASC 810, Consolidation (ASC 810))
on September 1, 2009.
|
For further discussion of these reclassifications, refer to
Note 3, Discontinued Operations, and Recent Accounting
Pronouncements below, respectively.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)) (codified in ASC 805,
Business Combinations (ASC 805)), and in
April 2009, issued FSP No. FAS 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in
a Business Combination That Arise from Contingencies
(FSP FAS 141(R)-1) (codified in ASC 805),
which modified business combinations accounting. On
September 1, 2009, we adopted both SFAS 141(R) and
this amendment which did not have a material impact on our
financial condition, results of operations, and disclosures. At
adoption, deferred acquisition costs were not significant and
were expensed as of August 31, 2009.
In December 2007, the FASB issued SFAS 160 (codified in
ASC 810). SFAS 160 establishes new accounting and
reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 requires non-controlling interests to be treated
as a separate component of equity and any changes in the
parents ownership interest (in which control is retained)
are accounted for as equity transactions. However, a change in
ownership of a consolidated subsidiary that results in
deconsolidation triggers gain or loss recognition, with the
establishment of a new fair value basis in any remaining
non-controlling ownership interests. SFAS 160 also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the
non-controlling interests. SFAS 160 is effective for fiscal
years beginning on or after December 15, 2008 and the
provisions are prospective upon adoption, except for the
presentation and disclosure requirements, which must be applied
retrospectively for all periods presented. Accordingly, we
adopted SFAS 160 on September 1, 2009 and
retrospectively adjusted the following statements:
|
|
|
|
|
Consolidated Balance Sheets as of August 31, 2009;
|
|
|
Consolidated Statements of Income for fiscal years 2009 and 2008;
|
117
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Consolidated Statements of Comprehensive Income for fiscal years
2009 and 2008;
|
|
|
Consolidated Statements of Changes in Shareholders Equity
for fiscal years 2009 and 2008; and
|
|
|
Consolidated Statements of Cash Flows from Continuing and
Discontinued Operations for fiscal years 2009 and 2008.
|
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS 167) (codified in ASC 810), which
modifies how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other
things, an entitys purpose and design and a companys
ability to direct the activities of the entity that most
significantly impact the entitys economic performance.
SFAS 167 requires an ongoing reassessment of whether a
company is the primary beneficiary of a variable interest
entity. SFAS 167 also requires additional disclosures about
a companys involvement in variable interest entities and
any significant changes in risk exposure due to that
involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009 and was effective for us
on September 1, 2010. The adoption of SFAS 167 did not
have a material impact on our financial condition, results of
operations, and disclosures.
In October 2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable
Revenue Arrangements a consensus of the FASB
Emerging Issues Task Force (ASU
2009-13),
which provides guidance on whether multiple deliverables exist,
how the arrangement should be separated, and the consideration
allocated. ASU
2009-13
requires an entity to allocate revenue in an arrangement using
estimated selling prices of deliverables if a vendor does not
have vendor-specific objective evidence or third-party evidence
of selling price. ASU
2009-13 is
effective for the first annual reporting period beginning on or
after June 15, 2010 and may be applied retrospectively for
all periods presented or prospectively to arrangements entered
into or materially modified after the adoption date. ASU
2009-13 was
effective for us on September 1, 2010. The adoption of ASU
2009-13 did
not have a material impact on our financial condition, results
of operations, and disclosures.
In January 2010, the FASB issued ASU
No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements
(ASU
2010-06).
ASU 2010-06
is an interpretation of the fair value guidance that we fully
adopted on September 1, 2009 and amends ASC 820 to add
new disclosure requirements for significant transfers in and out
of Level 1 and 2 measurements and to provide a gross
presentation of the activities within the Level 3
rollforward. ASU
2010-06 also
clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to
measure fair value. We adopted the disclosure requirements in
ASU 2010-06
on March 1, 2010, which did not have a material impact on
our fair value measurement disclosures. The requirement to
present the Level 3 rollforward on a gross basis is
effective for fiscal years beginning after December 15,
2010, and is effective for us on September 1, 2011. We do
not believe that the full adoption of ASU
2010-06,
with respect to the Level 3 rollforward, will have a
material impact on our fair value measurement disclosures.
|
|
Note 3.
|
Discontinued
Operations
|
In the second quarter of fiscal year 2010, we initiated a formal
plan to sell Insight Schools, engaged an investment bank and
also began the process of actively marketing Insight Schools as
we determined that the business was no longer consistent with
our long-term strategic objectives. We do not expect to have
significant continuing involvement with Insight Schools after it
is sold. Based on these factors, we concluded that we met the
criteria for presenting Insight Schools as held for sale and as
discontinued operations and began presenting Insight
Schools assets and liabilities as held for sale in our
Consolidated Balance Sheets and Insight Schools operating
results as discontinued operations in our Consolidated
Statements of Income for all periods presented. We determined
cash flows from discontinued operations are not material and are
included with cash
118
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
flows from continuing operations in our Consolidated Statements
of Cash Flows from Continuing and Discontinued Operations.
Insight Schools was previously presented as its own reportable
segment.
Since Insight Schools meets the held for sale criteria, we are
required to present its assets and liabilities held for sale at
the lower of the carrying amount or fair value less cost to
sell. Accordingly, in the second quarter of fiscal year 2010, we
evaluated Insight Schools respective assets held for sale,
including goodwill and other long-lived assets for impairment.
Our goodwill impairment analysis as of February 28, 2010
resulted in recognizing a $9.4 million goodwill impairment
charge. This charge was recorded in the second quarter of fiscal
year 2010 and is reflected as a component of loss from
discontinued operations in our Consolidated Statements of Income.
At February 28, 2010, our fair value estimate was derived
from obtaining exit price information from advisors and
interested parties specific to the sale of Insight Schools. We
considered this information in revising our estimate of fair
value as a result of our intent to sell Insight Schools.
Historically, our fair value analysis used a combination of the
discounted cash flow and market-based approaches by applying a
75%/25% weighting factor to these respective valuation methods.
The non-binding offers received for Insight Schools were
significantly lower than the estimated fair value derived from
our prior valuation methods. The non-binding offers received for
Insight Schools were based on Insight Schools recent
operating performance, which has generated and is expected to
continue to generate operating losses in the near term. Refer to
Note 9, Goodwill and Intangible Assets, and Note 10,
Fair Value Measurements, for further discussion.
We have continued to progress with sale activities for Insight
Schools, including engaging in non-binding negotiations with
interested parties. We believe the sale continues to be probable
within a year from the date on which we classified Insight
Schools as held for sale. At each period end, we are required to
evaluate our fair value less cost to sell estimate to determine
whether an adjustment to the carrying value of Insight Schools
is required. As of August 31, 2010, our fair value estimate
for Insight Schools was derived from recent exit price
information received specific to our non-binding negotiations.
Based on this evaluation, we determined that the fair value less
cost to sell continues to approximate the carrying value of
Insight Schools resulting in no additional impairment.
The major components of assets and liabilities of Insight
Schools presented separately in the Consolidated Balance
Sheets as held for sale as of August 31, 2010 are outlined
below. For comparability purposes, we have also presented below
Insight Schools assets and liabilities as of
August 31, 2009, which are included in the respective
financial statement line items.
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Accounts receivable, net
|
|
$
|
3,851
|
|
|
$
|
6,564
|
|
Property and equipment, net
|
|
|
6,037
|
|
|
|
5,721
|
|
Goodwill
|
|
|
3,342
|
|
|
|
12,742
|
|
Other
|
|
|
2,715
|
|
|
|
1,563
|
|
|
|
|
|
|
|
|
|
|
Total Insight Schools assets
|
|
$
|
15,945
|
|
|
$
|
26,590
|
|
|
|
|
|
|
|
|
|
|
Total Insight Schools liabilities
|
|
$
|
4,474
|
|
|
$
|
3,066
|
|
|
|
|
|
|
|
|
|
|
119
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes Insight Schools operating
results for the years ended August 31, 2010, 2009 and 2008,
which are presented in loss from discontinued operations, net of
tax in our Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
32,240
|
|
|
$
|
20,636
|
|
|
$
|
7,495
|
|
Goodwill impairment(1)
|
|
|
(9,400
|
)
|
|
|
|
|
|
|
|
|
Other costs and expenses
|
|
|
(42,541
|
)
|
|
|
(47,111
|
)
|
|
|
(25,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations loss
|
|
|
(19,701
|
)
|
|
|
(26,475
|
)
|
|
|
(17,910
|
)
|
Other, net
|
|
|
(11
|
)
|
|
|
(637
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes(1)
|
|
|
(19,712
|
)
|
|
|
(27,112
|
)
|
|
|
(17,922
|
)
|
Benefit from income taxes
|
|
|
4,288
|
|
|
|
10,735
|
|
|
|
7,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(15,424
|
)
|
|
$
|
(16,377
|
)
|
|
$
|
(10,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As Insight Schools goodwill is not deductible for tax
purposes, we did not record a tax benefit associated with the
goodwill impairment charge. |
We include only revenues and costs, including the goodwill
impairment charge discussed above, directly attributable to the
discontinued operations, and not those attributable to the
ongoing entity. Accordingly, no interest expense or general
corporate overhead have been allocated to Insight Schools.
Additionally, we have ceased depreciation and amortization on
property and equipment and finite-lived intangible assets at
Insight Schools.
On April 8, 2010, we contributed all of the common stock of
Western International University, which was previously our
wholly-owned subsidiary, to Apollo Global. We believe Western
International University will better leverage the capabilities
of Apollo Globals international resources to serve both
its U.S. and international students. The transaction was
structured as an asset transfer from Apollo Group to Apollo
Global with Apollo Globals noncontrolling shareholder, The
Carlyle Group (Carlyle), contributing
$2.5 million, plus potential future performance-based
payments, based on the estimated fair market value. The
transaction does not meet the definition of a business
combination because it was a transfer of assets between entities
under common control. Accordingly, Western International
Universitys net assets were recorded at carrying value of
approximately $8 million as of the date of the transfer. As
a result of the transfer, our ownership in Apollo Global was
reduced in fiscal year 2010 from 86.1% to 85.6%.
The following table presents a summary of acquisitions during
the respective fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
($ in thousands)
|
|
BPP
|
|
|
UNIACC
|
|
|
ULA
|
|
|
Aptimus
|
|
|
Tangible assets (net of acquired liabilities)
|
|
$
|
(15,346
|
)
|
|
$
|
27,718
|
|
|
$
|
14,130
|
|
|
$
|
3,459
|
|
Finite-lived intangible assets
|
|
|
51,304
|
|
|
|
9,120
|
|
|
|
2,140
|
|
|
|
7,600
|
|
Indefinite-lived intangible assets
|
|
|
139,990
|
|
|
|
5,487
|
|
|
|
1,797
|
|
|
|
|
|
Goodwill
|
|
|
425,638
|
|
|
|
2,135
|
|
|
|
17,683
|
|
|
|
37,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated purchase price
|
|
$
|
601,586
|
|
|
$
|
44,460
|
|
|
$
|
35,750
|
|
|
$
|
48,077
|
|
Less: Debt assumed
|
|
|
(84,306
|
)
|
|
|
(19,910
|
)
|
|
|
(11,000
|
)
|
|
|
|
|
Less: Cash acquired
|
|
|
(7,214
|
)
|
|
|
(1,303
|
)
|
|
|
(1,289
|
)
|
|
|
(1,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition, net of cash acquired
|
|
$
|
510,066
|
|
|
$
|
23,247
|
|
|
$
|
23,461
|
|
|
$
|
47,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
BPP
On July 30, 2009, Apollo Global, through a wholly-owned
United Kingdom subsidiary, acquired the entire issued and to be
issued ordinary share capital of BPP, a company registered in
England and Wales, for cash and assumed debt as detailed in the
summary purchase price allocation above. BPP is a provider of
education and training to professionals in the legal and finance
industries and the BPP University College is the first
proprietary institution to have been granted degree awarding
powers in the United Kingdom.
We accounted for the BPP acquisition using the purchase method
of accounting prior to our September 1, 2009 adoption of
SFAS 141(R) (codified in ASC 805) noted in
Recent Accounting Pronouncements in Note 2,
Significant Accounting Policies. BPPs operating results
are included in the consolidated financial statements from the
date of acquisition.
Unaudited
Pro Forma Financial Results
The following unaudited pro forma financial results of
operations for fiscal year 2009 are presented as if the
acquisition of BPP had been completed as of September 1,
2008:
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Year Ended
|
|
(in thousands, except per share data)
|
|
August 31, 2009
|
|
|
Pro forma net revenue
|
|
$
|
4,220,298
|
|
|
|
|
|
|
Pro forma net income attributable to Apollo
|
|
$
|
616,323
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
Basic income per share attributable to Apollo
|
|
$
|
3.91
|
|
|
|
|
|
|
Diluted income per share attributable to Apollo
|
|
$
|
3.86
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
157,760
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
159,514
|
|
|
|
|
|
|
The unaudited pro forma financial information is presented for
informational purposes and includes certain adjustments that are
factual and supportable, consisting of increased interest
expense on debt used to fund the acquisition, adjustments to
depreciation expense related to the fair value adjustment for
property and equipment, and amortization related to acquired
intangible assets, as well as the related tax effect of these
adjustments. The unaudited pro forma information is not
indicative of the results of operations that would have been
achieved if the acquisition and related borrowings had taken
place at the beginning of the applicable presented period, or of
future results of the consolidated entities.
UNIACC
In March 2008, Apollo Global purchased 100% of UNIACC for cash
and assumed debt as detailed in the summary purchase price
allocation above, plus a future payment based on a multiple of
earnings. UNIACC is an arts and communications university which
offers bachelors and masters programs on campuses in
Chile and online.
In January 2009, we executed an amendment to the purchase
agreement with the former owner of UNIACC, which modified both
the timing of the future payment and the period of earnings on
which the future payment calculation is based. In fiscal year
2009, we recorded the estimated obligation as an additional
purchase price adjustment increasing goodwill, as the amount
became determinable during that period. This obligation is
denominated in Chilean Pesos, which translated to
$7.1 million based on the exchange rate on the date we
recorded the obligation. During fiscal year 2009, we paid
$2.7 million of the obligation, and we paid the remaining
obligation of $5.5 million in the fourth quarter of fiscal
year 2010. The total amount paid for the obligation increased
compared to the original accrual due to the weakening of the
U.S. dollar relative to the Chilean Peso during the period.
121
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ULA
In August 2008, Apollo Global acquired a 65% ownership interest
in ULA for cash and assumed debt as detailed in the summary
purchase price allocation above. ULA is an educational
institution that offers degree programs at its campuses in
Mexico.
In July 2009, Apollo Global purchased the remaining ownership
interest in ULA for $11.0 million, plus a future payment
based on a multiple of earnings not to exceed $2.0 million.
This transaction was accounted for as a step acquisition in
accordance with the purchase method of accounting and resulted
in an additional $7.0 million of goodwill.
Aptimus,
Inc. (Aptimus)
In October 2007, we completed the acquisition of all the
outstanding common stock of online advertising company Aptimus.
Prior to the acquisition, Aptimus operated as a results-based
advertising company that distributed advertisements for direct
marketing advertisers across a network of third-party web sites.
The acquisition enables us to more effectively monitor, manage
and control our marketing investments and brands, with the goal
of increasing awareness of and access to affordable quality
education. We have integrated Aptimus as part of our corporate
marketing function.
For goodwill impairment testing purposes, we assigned the
goodwill balance to our University of Phoenix segment as
Aptimus primary function is to monitor, manage, and
control University of Phoenixs marketing investments.
|
|
Note 5.
|
Marketable
Securities
|
Marketable securities as of August 31, 2010 and 2009
consist of auction-rate securities. Auction-rate securities have
historically traded on a shorter term than the underlying debt
based on an auction bid that resets the interest rate of the
security. Investments in auction-rate securities were intended
to provide liquidity in an auction process that resets the
applicable interest rate at predetermined calendar intervals,
generally between 7 and 35 days, allowing investors to
either roll over their holdings or gain immediate liquidity by
selling such interests at par value. Historically, the fair
value of auction-rate securities approximated par value due to
the frequent resets through the auction process and have rarely
failed since the investment banks and broker dealers have been
willing to purchase the security when investor demand was weak.
However, beginning in February 2008 and continuing through
fiscal year 2010, due to uncertainty in the global credit and
capital markets and other factors, auction-rate securities have
experienced failed auctions resulting in a lack of liquidity for
these instruments that has reduced the estimated fair market
value for these securities below par value.
The following table details our auction-rate securities
classified as
available-for-sale
as of August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Amortized cost
|
|
$
|
16,850
|
|
|
$
|
21,850
|
|
Gross unrealized losses:
|
|
|
|
|
|
|
|
|
Continuous unrealized loss position less than 12 months
|
|
|
|
|
|
|
(650
|
)
|
Continuous unrealized loss position greater than 12 months
|
|
|
(1,676
|
)
|
|
|
(1,621
|
)
|
|
|
|
|
|
|
|
|
|
Total gross unrealized losses(1)
|
|
|
(1,676
|
)
|
|
|
(2,271
|
)
|
|
|
|
|
|
|
|
|
|
Fair market value
|
|
$
|
15,174
|
|
|
$
|
19,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The cumulative unrealized loss net of tax included in
accumulated other comprehensive loss in our Consolidated Balance
Sheets as of August 31, 2010 and 2009 was $1.0 million
and $1.4 million, respectively. |
122
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The principal invested in auction-rate securities detailed in
the above table have experienced failed auctions. Approximately
$10.0 million of our auction-rate securities are invested
in securities collateralized by federal student loans, which are
rated AAA and are guaranteed by the U.S. government. The
remaining portion is invested in tax-exempt municipal bond
funds, which carry at least A- credit ratings for the underlying
issuer. We used a discounted cash flow model to determine the
fair value of our auction-rate securities as of August 31,
2010. Please refer to Note 10, Fair Value Measurements, for
further discussion of the estimates and unobservable inputs used
in our valuation technique.
We determined that credit related losses with respect to our
auction-rate securities as of August 31, 2010 were
insignificant. Therefore, we did not recognize credit related
losses in earnings and no adjustments were made to the
cumulative net unrealized loss included in accumulated other
comprehensive loss in our Consolidated Balance Sheets. We
consider several factors to differentiate between temporary
impairment and
other-than-temporary
impairment including the projected future cash flows, credit
quality of the issuers and of the underlying collateral, as well
as the other factors as further described in Note 10, Fair
Value Measurements.
We have continued to classify the entire balance of our
auction-rate securities as non-current marketable securities due
to the lack of liquidity of these instruments and our continuing
inability to determine when these investments will settle.
The cost of liquidated securities is based on the specific
identification method. During fiscal years 2010, 2009 and 2008,
none of our marketable securities have been liquidated below par
value, and thus no realized gains or losses have been recognized.
We will continue to monitor our investment portfolio. Given the
uncertainties in the global credit and capital markets, we are
no longer investing in auction-rate securities instruments at
this time. We will also continue to evaluate any changes in the
market value of the failed auction-rate securities that have not
been liquidated and depending upon existing market conditions,
we may be required to recognize additional impairment charges in
the future.
|
|
Note 6.
|
Accounts
Receivable, Net
|
Accounts receivable, net consist of the following as of August
31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Student accounts receivable
|
|
$
|
419,714
|
|
|
$
|
380,226
|
|
Less allowance for doubtful accounts
|
|
|
(192,857
|
)
|
|
|
(110,420
|
)
|
|
|
|
|
|
|
|
|
|
Net student accounts receivable
|
|
|
226,857
|
|
|
|
269,806
|
|
Other receivables
|
|
|
37,520
|
|
|
|
28,464
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
264,377
|
|
|
$
|
298,270
|
|
|
|
|
|
|
|
|
|
|
Student accounts receivable is composed primarily of amounts due
related to tuition. In fiscal year 2010, we began presenting
Insight Schools assets and liabilities as held for sale
and its operating results as discontinued operations. Refer to
Note 3, Discontinued Operations, for further discussion and
disclosure of the components of Insight Schools assets and
liabilities.
123
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For discussion of our accounting policy related to allowance for
doubtful accounts, refer to Note 2, Significant Accounting
Policies. The following table summarizes the activity in
allowance for doubtful accounts for the fiscal years 2010, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning allowance for doubtful accounts
|
|
$
|
110,420
|
|
|
$
|
78,362
|
|
|
$
|
99,818
|
|
Provision for uncollectible accounts receivable
|
|
|
282,628
|
|
|
|
152,490
|
|
|
|
104,201
|
|
Write-offs, net of recoveries
|
|
|
(199,332
|
)
|
|
|
(120,432
|
)
|
|
|
(125,657
|
)
|
Included in assets held for sale
|
|
|
(859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for doubtful accounts
|
|
$
|
192,857
|
|
|
$
|
110,420
|
|
|
$
|
78,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense is included in instructional costs and services
in our Consolidated Statements of Income.
|
|
Note 7.
|
Long-Term
Restricted Cash and Cash Equivalents
|
During the fourth quarter of fiscal year 2010, we posted a
letter of credit of approximately $126 million in favor of
the U.S. Department of Education as required in connection
with a program review of University of Phoenix by the
Department. The long-term restricted cash at August 31,
2010 represents funds used to collateralize this letter of
credit. The letter of credit and associated collateral must be
maintained until at least June 30, 2012. Refer to
Note 19, Commitments and Contingencies, for additional
information.
|
|
Note 8.
|
Property
and Equipment, Net
|
Property and equipment, net consist of the following as of
August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
46,641
|
|
|
$
|
44,045
|
|
Buildings
|
|
|
195,699
|
|
|
|
198,152
|
|
Furniture and equipment
|
|
|
368,162
|
|
|
|
303,872
|
|
Leasehold improvements (includes tenant improvement allowances)
|
|
|
295,058
|
|
|
|
256,350
|
|
Internally developed software
|
|
|
83,011
|
|
|
|
75,772
|
|
Software
|
|
|
68,666
|
|
|
|
67,532
|
|
Less accumulated depreciation and amortization
|
|
|
(474,780
|
)
|
|
|
(407,803
|
)
|
|
|
|
|
|
|
|
|
|
Depreciable property and equipment, net
|
|
|
582,457
|
|
|
|
537,920
|
|
Construction in progress
|
|
|
37,080
|
|
|
|
19,587
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
619,537
|
|
|
$
|
557,507
|
|
|
|
|
|
|
|
|
|
|
The following amounts, which are included in the above table,
relate to property and equipment leased under capital leases as
of August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Buildings and land
|
|
$
|
6,029
|
|
|
$
|
6,082
|
|
Furniture and equipment
|
|
|
5,157
|
|
|
|
4,459
|
|
Less accumulated depreciation and amortization
|
|
|
(3,340
|
)
|
|
|
(4,342
|
)
|
|
|
|
|
|
|
|
|
|
Capital lease assets, net
|
|
$
|
7,846
|
|
|
$
|
6,199
|
|
|
|
|
|
|
|
|
|
|
124
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation expense was $122.2 million,
$103.4 million and $87.8 million for fiscal years
2010, 2009 and 2008, respectively. Included in these amounts is
depreciation of capitalized internally developed software of
$16.1 million, $12.5 million and $7.9 million for
the fiscal years 2010, 2009 and 2008, respectively.
Additionally, we recorded a loss of $9.4 million in fiscal
year 2009 that is included in general and administrative
expenses in our Consolidated Statements of Income for the
write-off of information technology fixed assets resulting
primarily from our rationalization of software.
|
|
Note 9.
|
Goodwill
and Intangible Assets
|
Goodwill represents the excess of the purchase price over the
fair value assigned to the underlying assets acquired and
liabilities assumed. The following table presents changes in the
net carrying amount of goodwill by reportable segment during
fiscal years 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apollo Global
|
|
|
|
|
|
|
|
|
|
|
|
|
University of
|
|
|
|
|
|
|
|
|
Insight
|
|
|
Other
|
|
|
Total
|
|
($ in thousands)
|
|
Phoenix
|
|
|
BPP
|
|
|
Other(1)
|
|
|
Schools
|
|
|
Schools
|
|
|
Goodwill
|
|
|
Goodwill as of August 31, 2008
|
|
$
|
37,018
|
|
|
$
|
|
|
|
$
|
20,898
|
|
|
$
|
12,742
|
|
|
$
|
15,310
|
|
|
$
|
85,968
|
|
Goodwill acquired(2)
|
|
|
|
|
|
|
425,638
|
|
|
|
14,108
|
|
|
|
|
|
|
|
|
|
|
|
439,746
|
|
Purchase price allocation adjustments(3)
|
|
|
|
|
|
|
|
|
|
|
4,110
|
|
|
|
|
|
|
|
|
|
|
|
4,110
|
|
Currency translation adjustment
|
|
|
|
|
|
|
(3,802
|
)
|
|
|
(3,664
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill as of August 31, 2009
|
|
|
37,018
|
|
|
|
421,836
|
|
|
|
35,452
|
|
|
|
12,742
|
|
|
|
15,310
|
|
|
|
522,358
|
|
Impairment on discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,400
|
)
|
|
|
|
|
|
|
(9,400
|
)
|
Impairment
|
|
|
|
|
|
|
(156,321
|
)
|
|
|
(8,712
|
)
|
|
|
|
|
|
|
|
|
|
|
(165,033
|
)
|
Included in assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,342
|
)
|
|
|
|
|
|
|
(3,342
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
(24,311
|
)
|
|
|
1,887
|
|
|
|
|
|
|
|
|
|
|
|
(22,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill as of August 31, 2010
|
|
$
|
37,018
|
|
|
$
|
241,204
|
|
|
$
|
28,627
|
|
|
$
|
|
|
|
$
|
15,310
|
|
|
$
|
322,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of contributing all of the common stock of Western
International University to Apollo Global during the third
quarter of fiscal year 2010, we are presenting Western
International University in the Apollo Global Other
reportable segment for all periods presented. Refer to
Note 4, Acquisitions, for further discussion. |
|
(2) |
|
For discussion of additions to goodwill during fiscal year 2009,
refer to Note 4, Acquisitions. |
|
(3) |
|
The purchase price allocation adjustments primarily related to
Apollo Globals acquisition of ULA as additional
information about the valuation of certain acquired assets and
liabilities became available. The related purchase price
allocation was preliminary as the acquisition was completed in
August 2008. |
The following table presents the components of the net carrying
amount of goodwill by reportable segment as of August 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apollo Global
|
|
|
|
|
|
|
|
|
|
|
|
|
University of
|
|
|
|
|
|
|
|
|
Insight
|
|
|
Other
|
|
|
Total
|
|
($ in thousands)
|
|
Phoenix
|
|
|
BPP
|
|
|
Other
|
|
|
Schools
|
|
|
Schools
|
|
|
Goodwill
|
|
|
August 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
37,018
|
|
|
$
|
425,638
|
|
|
$
|
39,617
|
|
|
$
|
12,742
|
|
|
$
|
35,515
|
|
|
$
|
550,530
|
|
Accumulated impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,205
|
)
|
|
|
(20,205
|
)
|
Effect of foreign currency translation
|
|
|
|
|
|
|
(3,802
|
)
|
|
|
(4,165
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
37,018
|
|
|
$
|
421,836
|
|
|
$
|
35,452
|
|
|
$
|
12,742
|
|
|
$
|
15,310
|
|
|
$
|
522,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apollo Global
|
|
|
|
|
|
|
|
|
|
University of
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
($ in thousands)
|
|
Phoenix
|
|
|
BPP
|
|
|
Other
|
|
|
Schools
|
|
|
Goodwill
|
|
|
August 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
37,018
|
|
|
$
|
425,638
|
|
|
$
|
39,617
|
|
|
$
|
35,515
|
|
|
$
|
537,788
|
|
Accumulated impairments
|
|
|
|
|
|
|
(156,321
|
)
|
|
|
(8,712
|
)
|
|
|
(20,205
|
)
|
|
|
(185,238
|
)
|
Effect of foreign currency translation
|
|
|
|
|
|
|
(28,113
|
)
|
|
|
(2,278
|
)
|
|
|
|
|
|
|
(30,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
37,018
|
|
|
$
|
241,204
|
|
|
$
|
28,627
|
|
|
$
|
15,310
|
|
|
$
|
322,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consist of the following as of August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Gross
|
|
|
|
|
|
Effect of Foreign
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Effect of Foreign
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Currency
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Currency
|
|
|
Carrying
|
|
($ in thousands)
|
|
Amount
|
|
|
Amortization
|
|
|
Translation Loss
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Translation Loss
|
|
|
Amount
|
|
|
Finite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student and customer relationships(1)
|
|
$
|
19,935
|
|
|
$
|
(12,891
|
)
|
|
$
|
(1,624
|
)
|
|
$
|
5,420
|
|
|
$
|
26,515
|
|
|
$
|
(4,224
|
)
|
|
$
|
(1,282
|
)
|
|
$
|
21,009
|
|
Copyrights
|
|
|
20,891
|
|
|
|
(6,039
|
)
|
|
|
(1,066
|
)
|
|
|
13,786
|
|
|
|
20,891
|
|
|
|
(488
|
)
|
|
|
(198
|
)
|
|
|
20,205
|
|
Other
|
|
|
20,676
|
|
|
|
(9,342
|
)
|
|
|
(1,591
|
)
|
|
|
9,743
|
|
|
|
23,317
|
|
|
|
(5,233
|
)
|
|
|
(1,117
|
)
|
|
|
16,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
|
61,502
|
|
|
|
(28,272
|
)
|
|
|
(4,281
|
)
|
|
|
28,949
|
|
|
|
70,723
|
|
|
|
(9,945
|
)
|
|
|
(2,597
|
)
|
|
|
58,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks(1)
|
|
|
121,879
|
|
|
|
|
|
|
|
(7,191
|
)
|
|
|
114,688
|
|
|
|
140,797
|
|
|
|
|
|
|
|
(2,441
|
)
|
|
|
138,356
|
|
Accreditations and designations
|
|
|
7,456
|
|
|
|
|
|
|
|
(500
|
)
|
|
|
6,956
|
|
|
|
7,456
|
|
|
|
|
|
|
|
(322
|
)
|
|
|
7,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indefinite-lived intangible assets
|
|
|
129,335
|
|
|
|
|
|
|
|
(7,691
|
)
|
|
|
121,644
|
|
|
|
148,253
|
|
|
|
|
|
|
|
(2,763
|
)
|
|
|
145,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
190,837
|
|
|
$
|
(28,272
|
)
|
|
$
|
(11,972
|
)
|
|
$
|
150,593
|
|
|
$
|
218,976
|
|
|
$
|
(9,945
|
)
|
|
$
|
(5,360
|
)
|
|
$
|
203,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During fiscal year 2010, we recorded impairments of BPPs
trademark and student relationships. See below for further
discussion. |
Finite-lived intangible assets are amortized on either a
straight-line basis or using an accelerated method to reflect
the economic useful life of the asset. The weighted average
useful life of our finite-lived intangible assets at
August 31, 2010 is 4.6 years. Amortization expense for
intangible assets for fiscal years 2010, 2009 and 2008 was
$24.8 million, $9.3 million and $3.4 million,
respectively.
Estimated future amortization expense of intangible assets is as
follows:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
2011
|
|
$
|
13,750
|
|
2012
|
|
|
8,485
|
|
2013
|
|
|
4,192
|
|
2014
|
|
|
1,406
|
|
2015
|
|
|
436
|
|
Thereafter
|
|
|
680
|
|
|
|
|
|
|
Total estimated amortization expense
|
|
$
|
28,949
|
|
|
|
|
|
|
126
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Estimated future amortization expense may vary as acquisitions
and dispositions occur in the future and as a result of foreign
currency translation adjustments.
We completed goodwill and indefinite lived intangible asset
impairment tests for each of our reporting units as follows
during fiscal year 2010:
|
|
|
|
|
University of Phoenix
|
|
|
BPP
|
|
|
UNIACC (included in Apollo Global Other)
|
|
|
ULA (included in Apollo Global Other)
|
|
|
Western International University (included in Apollo
Global Other)
|
|
|
CFFP (included in Other Schools)
|
|
|
Insight Schools
|
During fiscal year 2010, we completed our annual goodwill
impairment tests for each of our reporting units and our annual
indefinite-lived intangible asset impairment tests, as
applicable. During fiscal year 2010, we recorded goodwill
impairment charges for our BPP, ULA and Insight Schools
reporting units and intangible impairment charges for our BPP
reporting unit, as further discussed below. As of their
respective annual impairment test date, the fair value of our
University of Phoenix, UNIACC, Western International University
and CFFP reporting units exceeded the carrying value of their
respective net assets by at least 25% resulting in no goodwill
impairment. For our University of Phoenix and Western
International University reporting units we used market multiple
information of comparable sized companies to determine the fair
value at the respective test dates. For our UNIACC and CFFP
reporting units, we used the discounted cash flow valuation
method to determine the fair value at the respective test dates.
Additionally, for UNIACC, we completed our annual impairment
tests of its indefinite-lived intangible assets and determined
there was no impairment.
BPP
Reporting Unit
On July 1, 2010, we conducted our first annual goodwill
impairment test for BPP. To determine the fair value of our BPP
reporting unit in our step one analysis, we used a combination
of the discounted cash flow valuation method and the
market-based approach and applied an 80%/20% weighting factor to
these valuation methods, respectively. In October 2010, BPP
concluded its fall enrollment period which we believe was
adversely impacted by the continued economic downturn in the
U.K. Accordingly, we revised our forecast for BPP, which caused
our step one annual goodwill impairment analysis to result in a
lower estimated fair value for the BPP reporting unit as
compared to its carrying value due to the effects of the
economic downturn in the U.K. on BPPs operations and
financial performance and increased uncertainty as to when these
conditions will recover. Specifically, the assumptions used in
our cash flow estimates assume no near-term recovery in the
markets in which BPP operates, modest overall long-term growth
in BPPs core programs and a significant increase in
revenues over a long-term horizon at BPPs University
College. We also utilized a 13.0% discount rate and 3.0%
long-term growth rate in the analysis. Although our projections
assume that these markets will ultimately stabilize, we may be
required to record additional impairment charges for BPP if
there are further deteriorations in these markets, if economic
conditions in the U.K. further decline, or we are unable to
achieve the growth in future enrollments at BPPs
University College.
Accordingly, we performed a step two analysis which required us
to fair value BPPs assets and liabilities, including
identifiable intangible assets, using the fair value derived
from the step one analysis as the purchase price in a
hypothetical acquisition of the BPP reporting unit. As discussed
above, the amount of the goodwill impairment charge is derived
by comparing the implied fair value of goodwill from the
hypothetical purchase
127
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
price allocation to its carrying value. The significant
hypothetical purchase price adjustments included in the step two
analysis consisted of:
|
|
|
|
|
Adjusting the carrying value of land and buildings included in
property and equipment to estimated fair value using the market
approach and based on recent appraisals.
|
|
|
|
Adjusting the carrying value of the trademark and accreditations
and designation indefinite-lived intangible assets to estimated
fair value using the valuation methods discussed above. Our
annual impairment tests for these indefinite-lived intangible
assets utilized the same revenue, margin and discount rate
assumptions used in the BPP reporting unit goodwill impairment
step one analysis which resulted in a lower fair value estimate
for BPPs trademark. Accordingly, in the fourth quarter of
fiscal year 2010, we recorded a $17.6 million impairment
charge for these indefinite-lived intangible assets.
|
|
|
|
Adjusting all other finite-lived intangible assets to estimated
fair value using a variety of methods under the income approach
specifically the costs savings method, with and without method
and excess earnings method, or replacement cost approach. As a
result of this analysis, we determined that one of our student
relationship intangible assets was not recoverable resulting in
recording an impairment charge of $2.0 million in the
fourth quarter of fiscal year 2010.
|
Based on our analysis, we recorded a $156.3 million
impairment charge for BPPs goodwill in the fourth quarter
of fiscal year 2010. As BPPs goodwill is not deductible
for tax purposes, we did not record a tax benefit associated
with the goodwill impairment charge. In the fourth quarter of
fiscal year 2010, BPPs goodwill and intangible asset
impairment charges in the aggregate approximate
$170.4 million (net of $5.5 million benefit for income
taxes associated with the intangible asset impairment charges).
ULA
Reporting Unit
For our ULA reporting unit, we used a discounted cash flow
valuation method to determine the fair value of the reporting
unit at May 31, 2010. ULA continues to delay the launch of
its online program due to challenges with developing and
designing the technology infrastructure to support the online
platform. We have considered these uncertainties in the future
cash flows used in our annual goodwill impairment test which
resulted in an estimated lower fair value for the ULA reporting
unit. Accordingly, we performed a step two analysis which
required us to fair value ULAs assets and liabilities,
including identifiable intangible assets, using the fair value
derived from the step one analysis as the purchase price in a
hypothetical acquisition of the ULA reporting unit. As discussed
above, the amount of the goodwill impairment charge is derived
from comparing the implied fair value of goodwill from the
hypothetical purchase price allocation to its carrying value.
Based on our analysis, in the third quarter of fiscal year 2010,
we recorded an $8.7 million impairment charge for
ULAs goodwill. As ULAs goodwill is not deductible
for tax purposes, we did not record a tax benefit associated
with the goodwill impairment charge. Additionally, we completed
our annual impairment tests for indefinite-lived intangible
assets at ULA and determined there was no impairment.
Insight
Schools Reporting Unit
In the second quarter of fiscal year 2010, we began presenting
Insight Schools assets and liabilities as held for sale
and its operating results as discontinued operations. We
recorded a $9.4 million impairment of Insight Schools
goodwill during the second quarter of fiscal year 2010, which is
reflected in our loss from discontinued operations. As Insight
Schools goodwill is not deductible for tax purposes, we
did not record a tax benefit associated with the goodwill
impairment charge. We reevaluated Insight Schools goodwill at
its annual May 31 test date which resulted in no additional
goodwill impairment based on recent exit price information
received from engaging in non-binding negotiations with
interested parties. Refer to Note 3, Discontinued
Operations, for further discussion.
128
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Please refer to Note 2, Significant Accounting Policies,
for our policy and methodology for evaluating potential
impairment of goodwill and indefinite-lived intangible assets.
|
|
Note 10.
|
Fair
Value Measurements
|
Assets and liabilities measured at fair value on a recurring
basis consist of the following as of August 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical Assets/
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
August 31,
|
|
|
Liabilities
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
($ in thousands)
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (including restricted cash equivalents):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,468,992
|
|
|
$
|
1,468,992
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities
|
|
|
15,174
|
|
|
|
|
|
|
|
|
|
|
|
15,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a recurring basis:
|
|
$
|
1,484,166
|
|
|
$
|
1,468,992
|
|
|
$
|
|
|
|
$
|
15,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
5,148
|
|
|
$
|
|
|
|
$
|
5,148
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value on a recurring basis:
|
|
$
|
5,148
|
|
|
$
|
|
|
|
$
|
5,148
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We measure our money market funds included in cash and
restricted cash equivalents, auction-rate securities included in
marketable securities and interest rate swap included in other
liabilities on a recurring basis at fair value. For our assets
and liabilities measured on a recurring basis, we did not
significantly change our valuation techniques associated with
fair value measurements from prior periods. As of
August 31, 2010, cash equivalents disclosed in the table
above excludes $386.5 million of cash held in bank
overnight deposit accounts that approximate fair value.
|
|
|
|
|
Money market funds Classified within
Level 1 and were valued primarily using real-time quotes
for transactions in active exchange markets involving identical
assets.
|
|
|
|
Auction-rate securities Classified within
Level 3 due to the illiquidity of the market and were
valued using a discounted cash flow model that encompassed
significant unobservable inputs to determine probabilities of
default and timing of auction failure, probabilities of a
successful auction at par
and/or
repurchase at par value for each auction period,
collateralization of the underlying security and credit
worthiness of the issuer. The assumptions used to prepare the
discounted cash flows include estimates for interest rates,
credit spreads, timing and amount of cash flows, liquidity
premiums, expected holding periods and default risk. These
assumptions are subject to change as the underlying data sources
and market conditions evolve. Additionally, as the market for
auction-rate securities continues to be inactive, our discounted
cash flow model also factored the illiquidity of the
auction-rate securities market by adding a spread of 450 to
500 basis points to the applicable discount rate.
|
|
|
|
Interest rate swap We have an interest rate
swap with a notional amount of £32.0 million
($49.7 million) used to minimize the interest rate exposure
on a portion of BPPs variable rate debt. The interest
|
129
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
rate swap is used to fix the variable interest rate on the
associated debt. The swap is classified within Level 2 and
is valued using readily available pricing sources which utilize
market observable inputs including the current variable interest
rate for similar types of instruments.
|
At August 31, 2010, the carrying value of our debt,
excluding capital leases, was $576.6 million. Substantially
all of our debt is variable interest rate and the carrying
amount approximates fair value.
Changes in the assets measured at fair value on a recurring
basis using significant unobservable inputs
(Level 3) during the year ended August 31, 2010
are as follows:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Balance at August 31, 2009
|
|
$
|
19,579
|
|
Reversal of unrealized loss on redemption
|
|
|
595
|
|
Redemptions at par value
|
|
|
(5,000
|
)
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2010
|
|
$
|
15,174
|
|
|
|
|
|
|
Net unrealized gains (losses) included in earnings related to
assets held as of August 31, 2010
|
|
$
|
|
|
|
|
|
|
|
Assets measured at fair value on a non-recurring basis during
fiscal year 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
|
|
|
Losses for Year
|
|
|
|
Fair Value at
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Significant
|
|
|
Ended
|
|
|
|
Measurement
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Unobservable Inputs
|
|
|
August 31,
|
|
($ in thousands)
|
|
Date
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2010
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,342
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,342
|
|
|
$
|
(9,400
|
)
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ULA
|
|
|
15,669
|
|
|
|
|
|
|
|
|
|
|
|
15,669
|
|
|
|
(8,712
|
)
|
BPP
|
|
|
241,204
|
|
|
|
|
|
|
|
|
|
|
|
241,204
|
|
|
|
(156,321
|
)
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP trademark
|
|
|
108,738
|
|
|
|
|
|
|
|
|
|
|
|
108,738
|
|
|
|
(17,523
|
)
|
BPP student relationships
|
|
|
4,373
|
|
|
|
|
|
|
|
|
|
|
|
4,373
|
|
|
|
(2,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
373,326
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
373,326
|
|
|
$
|
(193,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of fiscal year 2010, we began presenting
Insight Schools as held for sale. Accordingly, we measured
Insight Schools goodwill at fair value on a non-recurring
basis as of February 28, 2010 using Level 3 inputs.
The Level 3 inputs were primarily based on exit price
information we received from third parties to purchase Insight
Schools. The Insight Schools goodwill balance was written
down to the implied fair value, resulting in the impairment
charge detailed above that is included in loss from discontinued
operations, net of tax. Refer to Note 3, Discontinued
Operations, for further discussion.
In the third quarter of fiscal year 2010, ULAs goodwill
balance was written down to the implied fair value in connection
with our annual goodwill impairment test performed at
May 31, resulting in the impairment charge detailed above.
The implied fair value of ULAs goodwill was determined
using Level 3 inputs included in our discounted cash flow
valuation method. Refer to Note 9, Goodwill and Intangible
Assets, for further discussion.
130
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the fourth quarter of fiscal year 2010, we recorded
impairment charges for BPPs goodwill, trademark and
student relationships intangible assets in connection with our
annual goodwill impairment test performed on July 1, 2010.
Accordingly, BPPs goodwill balance was written down to the
implied fair value and BPPs trademark and student
relationships intangible assets were measured at fair value. We
measured the implied fair value for BPPs goodwill and the
fair value of BPPs intangible assets using Level 3
inputs included in the valuation methods used to determine fair
value for the respective assets. Refer to Note 9, Goodwill
and Intangible Assets, for further discussion.
|
|
Note 11.
|
Accrued
Liabilities
|
Accrued liabilities consist of the following as of August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Estimated litigation loss
|
|
$
|
177,982
|
|
|
$
|
80,500
|
|
Salaries, wages and benefits
|
|
|
80,773
|
|
|
|
76,583
|
|
Accrued advertising
|
|
|
52,472
|
|
|
|
35,974
|
|
Accrued professional fees
|
|
|
30,895
|
|
|
|
25,287
|
|
Student refunds, grants and scholarships
|
|
|
9,842
|
|
|
|
11,287
|
|
Other accrued liabilities
|
|
|
23,497
|
|
|
|
38,787
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
375,461
|
|
|
$
|
268,418
|
|
|
|
|
|
|
|
|
|
|
Please refer to Note 19, Commitments and Contingencies, for
discussion of the estimated litigation losses. Salaries, wages
and benefits represent amounts due to employees, faculty and
third parties for salaries, bonuses, vacation pay and health
insurance. Accrued advertising represents amounts due for
Internet marketing, direct mail campaigns, and print and
broadcast advertising. Accrued professional fees represent
amounts due to third parties for outsourced student financial
aid processing and other accrued professional and legal
obligations. Student refunds, grants and scholarships represent
amounts due to students for tuition refunds, federal and state
grants payable, scholarships, and other related items. Other
accrued liabilities primarily includes sales and business taxes,
facilities costs such as rent and utilities, and certain accrued
purchases.
Debt and short-term borrowings consist of the following as of
August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Bank Facility, see terms below
|
|
$
|
497,968
|
|
|
$
|
495,608
|
|
BPP Credit Facility, see terms below
|
|
|
52,925
|
|
|
|
63,644
|
|
Capital lease obligations
|
|
|
7,827
|
|
|
|
7,763
|
|
Other, interest rates ranging from 4.3% to 9.4% with various
maturities from 2011 to 2019
|
|
|
25,680
|
|
|
|
22,051
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
584,400
|
|
|
|
589,066
|
|
Less short-term borrowings and current portion of long-term debt
|
|
|
(416,361
|
)
|
|
|
(461,365
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
168,039
|
|
|
$
|
127,701
|
|
|
|
|
|
|
|
|
|
|
131
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Aggregate debt maturities for each of the years ended August 31
are as follows:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
2011
|
|
$
|
416,361
|
|
2012
|
|
|
21,180
|
|
2013
|
|
|
136,480
|
|
2014
|
|
|
1,557
|
|
2015
|
|
|
1,603
|
|
Thereafter
|
|
|
7,219
|
|
|
|
|
|
|
|
|
$
|
584,400
|
|
|
|
|
|
|
|
|
|
|
|
Bank Facility In fiscal year 2008, we entered
into a syndicated $500 million credit agreement (the
Bank Facility). The Bank Facility is an unsecured
revolving credit facility used for general corporate purposes
including acquisitions and stock buybacks. The Bank Facility has
an expansion feature for an aggregate principal amount of up to
$250 million. The term is five years and will expire on
January 4, 2013. The Bank Facility provides a
multi-currency
sub-limit
facility for borrowings in certain specified foreign currencies.
|
We borrowed our entire credit line under the Bank Facility, as
of August 31, 2010 and 2009, which included
£63.0 million denominated in British Pounds
(equivalent to $97.9 million and $102.6 million
U.S. dollars as of August 31, 2010 and August 31,
2009, respectively) related to the BPP acquisition. We repaid
the U.S. dollar denominated debt on our Bank Facility of
$393 million during the first quarter of fiscal year 2010
and $400.1 million during the first quarter of fiscal year
2011. We have classified the U.S. dollar denominated
portion of our Bank Facility borrowings as short-term borrowings
and the current portion of long-term debt in our Consolidated
Balance Sheets because it was repaid subsequent to our
respective fiscal year-ends.
The Bank Facility fees are determined based on a pricing grid
that varies according to our leverage ratio. The Bank Facility
fee ranges from 12.5 to 17.5 basis points and the
incremental fees for borrowings under the facility range from
LIBOR + 50.0 to 82.5 basis points. The weighted average
interest rate on outstanding borrowings under the Bank Facility
at August 31, 2010 and 2009 was 2.9% and 1.0%, respectively.
The Bank Facility contains affirmative and negative covenants,
including the following financial covenants: maximum leverage
ratio, minimum coverage interest and rent expense ratio, and a
U.S. Department of Education financial responsibility
composite score. In addition, there are covenants restricting
indebtedness, liens, investments, asset transfers and
distributions. We were in compliance with all covenants related
to the Bank Facility at August 31, 2010.
|
|
|
|
|
BPP Credit Facility In the fourth quarter of
fiscal year 2010, we refinanced BPPs debt by entering into
a £52.0 million (equivalent to $80.8 million
based on the August 31, 2010 exchange rate) credit
agreement (the BPP Credit Facility). The BPP Credit
Facility contains term debt, which was used to refinance
BPPs existing debt, and revolving credit facilities used
for working capital and general corporate purposes. The term of
the agreement is three years and will expire on August 31,
2013. The interest rate on borrowings varies according to a
financial ratio and range from LIBOR + 250 to 325 basis
points. The weighted average interest rate on BPPs
outstanding borrowings at August 31, 2010 and 2009 was 4.0%
and 1.3%, respectively.
|
The BPP Credit Facility contains financial covenants that
include minimum cash flow coverage ratio, minimum fixed charge
coverage ratio, maximum leverage ratio, and maximum capital
expenditure ratio. We were in compliance with all covenants
related to the BPP Credit Facility at August 31, 2010.
132
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Other Other debt includes $8.7 million
of variable rate debt and $17.0 million of fixed rate debt
at the subsidiaries of Apollo Global. The weighted average
interest rate of these debt instruments at August 31, 2010
and 2009 was 6.7% and 7.2%, respectively.
|
Please refer to Note 10, Fair Value Measurements, for
discussion of the fair value of our debt.
|
|
Note 13.
|
Other
Liabilities
|
Other liabilities consist of the following as of August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Reserve for uncertain tax positions
|
|
$
|
126,999
|
|
|
$
|
97,619
|
|
Deferred rent and other lease incentives
|
|
|
81,218
|
|
|
|
71,579
|
|
Other
|
|
|
57,485
|
|
|
|
64,838
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
|
265,702
|
|
|
|
234,036
|
|
Less current portion
|
|
|
(53,416
|
)
|
|
|
(133,887
|
)
|
|
|
|
|
|
|
|
|
|
Total other long-term liabilities
|
|
$
|
212,286
|
|
|
$
|
100,149
|
|
|
|
|
|
|
|
|
|
|
Deferred rent represents the difference between the cash rental
payments and the straight-line recognition of the expense over
the term of the leases. Other lease incentives represent amounts
included in lease agreements and are amortized on a
straight-line basis over the term of the leases. The change in
the current and long-term portion of other liabilities primarily
relates to the classification of our uncertain tax positions.
Refer to Note 14, Income Taxes, for discussion of our
uncertain tax positions.
Geographic sources of income (loss) from continuing operations
before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
1,227,794
|
|
|
$
|
1,085,704
|
|
|
$
|
808,055
|
|
Foreign
|
|
|
(226,726
|
)
|
|
|
(18,777
|
)
|
|
|
(7,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from continuing operations before income
taxes
|
|
$
|
1,001,068
|
|
|
$
|
1,066,927
|
|
|
$
|
800,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) consists of the following for
fiscal years 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
458,375
|
|
|
$
|
377,911
|
|
|
$
|
277,610
|
|
State
|
|
|
131,284
|
|
|
|
93,350
|
|
|
|
53,118
|
|
Foreign
|
|
|
(218
|
)
|
|
|
(1,025
|
)
|
|
|
786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
589,441
|
|
|
|
470,236
|
|
|
|
331,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(106,834
|
)
|
|
|
(8,667
|
)
|
|
|
(15,597
|
)
|
State
|
|
|
(7,574
|
)
|
|
|
(4,872
|
)
|
|
|
(1,892
|
)
|
Foreign
|
|
|
(10,970
|
)
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(125,378
|
)
|
|
|
(13,516
|
)
|
|
|
(17,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
464,063
|
|
|
$
|
456,720
|
|
|
$
|
314,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets and liabilities result primarily from
temporary differences in book versus tax basis accounting.
Deferred tax assets and liabilities consist of the following as
of August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
72,344
|
|
|
$
|
42,602
|
|
Deferred rent and tenant improvement allowances
|
|
|
28,921
|
|
|
|
24,037
|
|
Net operating loss carry-forward
|
|
|
17,629
|
|
|
|
14,332
|
|
Estimated litigation loss
|
|
|
70,383
|
|
|
|
23,580
|
|
Share-based compensation
|
|
|
63,168
|
|
|
|
62,784
|
|
Other
|
|
|
73,821
|
|
|
|
38,725
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
326,266
|
|
|
|
206,060
|
|
Valuation allowance
|
|
|
(14,645
|
)
|
|
|
(11,447
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
|
311,621
|
|
|
|
194,613
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
39,276
|
|
|
|
35,795
|
|
Intangible assets
|
|
|
40,069
|
|
|
|
54,399
|
|
Other
|
|
|
5,531
|
|
|
|
5,779
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
84,876
|
|
|
|
95,973
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
226,745
|
|
|
$
|
98,640
|
|
|
|
|
|
|
|
|
|
|
The increase in our valuation allowance during fiscal year 2010
was primarily a result of an increase in net operating losses of
certain foreign subsidiaries. We have recorded a valuation
allowance related to these net operating losses, as it is more
likely than not that these carry-forwards will expire unused. In
light of our history of profitable operations, we have concluded
that it is more likely than not that we will ultimately realize
the full benefit of our deferred tax assets other than the items
mentioned above. Accordingly, we believe that a valuation
allowance should not be recorded for our remaining net deferred
tax assets.
The net operating loss carry-forward in the above table
represents $22.6 million of U.S. net operating losses
that will begin to expire August 31, 2021. We also have
$36.1 million of net operating losses in various foreign
jurisdictions. The majority of the losses from foreign
jurisdictions will begin to expire on August 31, 2027 and
the remaining losses do not expire.
We have not provided deferred taxes on unremitted earnings
attributable to international companies that have been
considered permanently reinvested. As of August 31, 2010,
any earnings related to the operations of these foreign
subsidiaries are not significant.
134
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We exercise significant judgment in determining our income tax
provision due to transactions, credits and calculations where
the ultimate tax determination is uncertain. The following is a
tabular reconciliation of the total amount of unrecognized tax
benefits, excluding interest and penalties, at the beginning and
the end of fiscal years 2010 and 2009:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Balance at September 1, 2008
|
|
$
|
36,453
|
|
Additions based on tax positions taken in the current year
|
|
|
41,440
|
|
Additions for tax positions taken in prior years
|
|
|
3,007
|
|
Additions related to acquisition
|
|
|
4,289
|
|
Settlement with tax authorities
|
|
|
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(328
|
)
|
|
|
|
|
|
Balance at August 31, 2009
|
|
|
84,861
|
|
Additions based on tax positions taken in the current year
|
|
|
99,590
|
|
Additions for tax positions taken in prior years
|
|
|
18,323
|
|
Settlement with tax authorities
|
|
|
(20,665
|
)
|
Reductions for tax positions of prior years
|
|
|
(11,733
|
)
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(4,328
|
)
|
|
|
|
|
|
Balance at August 31, 2010
|
|
$
|
166,048
|
|
|
|
|
|
|
The increase in unrecognized tax benefits during fiscal year
2009 was primarily due to uncertainty on the deductibility of a
portion of the $80.5 million estimated litigation loss
associated with the Incentive Compensation False Claims Act
Lawsuit recorded during fiscal year 2009, and uncertainty
related to allocation and apportionment of income among states.
Refer to Note 19, Commitments and Contingencies, for
discussion of estimated litigation loss.
The increase in our unrecognized tax benefits during fiscal year
2010 was primarily due to uncertainty related to the
apportionment of income for Arizona corporate income tax
purposes. The increase was partially offset by decreases in
unrecognized tax benefits primarily due to the final
determination of our U.S federal income tax audit for fiscal
years 2003 through 2005.
We classify interest and penalties related to uncertain tax
positions as a component of provision for income taxes in our
Consolidated Statements of Income. We recognized a benefit of
$10.4 million in fiscal year 2010, and expense of
$4.4 million and $3.9 million in fiscal years 2009 and
2008, respectively, related to interest and penalties. The
$10.4 million benefit in 2010 is mainly due to the
reduction of interest accrued related to the I.R.S. 162(m)
settlement which occurred in November 2009. For more
information, please refer to the discussion in the Internal
Revenue Service Audits section below. The total amount of
interest and penalties included in our Consolidated Balance
Sheets was $5.4 million and $23.2 million as of
August 31, 2010 and 2009, respectively. In addition, we
have $44.4 million of unrecognized assets that are included
in our unrecognized tax benefits as of August 31, 2010.
We believe that it is reasonably possible that $9.9 million
of our unrecognized tax benefits could be resolved or otherwise
settled within the next 12 months. The unrecognized tax
benefits relate to deductibility of a litigation settlement and
state tax apportionment that we expect to resolve either through
negotiations with the relevant tax authorities or the expiration
of statutes. Prior to fiscal year 2010, we classified uncertain
tax positions related to the allocation and apportionment of our
income amongst various state and local jurisdictions in other
current liabilities in our Consolidated Balance Sheets. We no
longer believe these
135
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amounts will be paid in the next year and accordingly have
classified them in other long-term liabilities in our
Consolidated Balance Sheets.
As of August 31, 2010, $115.4 million of our total
unrecognized tax benefits would favorably affect our effective
tax rate if recognized. However, if amounts accrued are less
than amounts ultimately assessed by the taxing authorities, we
would record additional income tax expense in our Consolidated
Statements of Income.
Our U.S. federal tax years and various state tax years from
2006 remain subject to income tax examinations by tax
authorities. In addition, tax years from 2006 related to our
foreign taxing jurisdictions also remain subject to examination.
The provision for income taxes differs from the tax computed
using the statutory U.S. federal income tax rate as a
result of the following items for fiscal years 2010, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory U.S. federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
|
6.3
|
%
|
|
|
5.1
|
%
|
|
|
4.1
|
%
|
Non-deductible compensation
|
|
|
(1.1
|
)%
|
|
|
0.4
|
%
|
|
|
0.0
|
%
|
Tax-exempt interest
|
|
|
0.0
|
%
|
|
|
(0.1
|
)%
|
|
|
(0.8
|
)%
|
Foreign taxes
|
|
|
1.1
|
%
|
|
|
0.6
|
%
|
|
|
0.4
|
%
|
Estimated litigation loss
|
|
|
0.0
|
%
|
|
|
0.9
|
%
|
|
|
0.0
|
%
|
Goodwill impairments
|
|
|
5.8
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Other, net
|
|
|
(0.7
|
)%
|
|
|
0.9
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
46.4
|
%
|
|
|
42.8
|
%
|
|
|
39.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
Revenue Service Audits
An audit relating to our U.S. federal income tax returns
for fiscal years 2003 through 2005 commenced in September 2006.
In February 2009, the Internal Revenue Service issued an
examination report and proposed to disallow deductions relating
to stock option compensation in excess of the limitations of
Internal Revenue Code Section 162(m). Under
Section 162(m), the amount of such deduction per covered
executive officer is limited to $1.0 million per year,
except to the extent the compensation qualifies as
performance-based. Compensation attributable to options with
revised measurement dates may not have qualified as
performance-based compensation. The Internal Revenue Service
examination report also proposed the additions of penalties and
interest. On March 6, 2009, we commenced administrative
proceedings with the Office of Appeals of the Internal Revenue
Service challenging the proposed adjustments, including
penalties and interest. On November 25, 2009, we executed a
Closing Agreement with the Internal Revenue Service Office of
Appeals to settle this matter. The settlement resolves only the
disputed tax issues between the Internal Revenue Service and us
and is not an admission by us of liability, wrongdoing, legal
compliance or non-compliance for any other purpose.
We had a total accrual of $50.5 million included in our
reserve for uncertain tax positions relating to this issue prior
to settlement. As a result of this settlement, we reclassified
$27.3 million to income taxes payable as of
November 30, 2009. We paid $22.6 million during the
second quarter of fiscal year 2010 and we paid the majority of
the remainder in the fourth quarter of fiscal year 2010. The
remaining accrual of $23.2 million, relating to the amount
in excess of the settlement, was reversed during the first
quarter of fiscal year 2010 through a reduction in the provision
for income taxes, a decrease in deferred tax assets, and an
increase in additional paid-in capital in the amounts of
$10.2 million, $1.5 million and $11.5 million,
respectively.
Based on the agreed upon settlement, we believe that we are
entitled to certain deductions related to stock option
compensation that were not claimed on our tax returns for the
years ended in 2006 through 2009. During the first quarter of
fiscal year 2010, we recorded the benefit of these deductions
through provision for
136
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income taxes, deferred taxes, and additional
paid-in-capital
in the amounts of $1.2 million, $0.9 million and
$16.0 million, respectively. We have submitted claims to
the Internal Revenue Service for the deductions that were not
taken on our tax returns for the years ended in 2006, 2007 and
2008. We claimed the deductions related to stock option
compensation in fiscal year 2009 on our tax return for the year
ended in 2009.
During fiscal year 2009, the Internal Revenue Service commenced
an examination of our tax returns for the years ended in 2006,
2007 and 2008.
Arizona
Department of Revenue Audit
The Arizona Department of Revenue commenced an audit during the
fourth quarter of fiscal year 2010 relating to our Arizona
income tax returns for fiscal years 2003 through 2009. During
fiscal year 2010, we filed amended Arizona income tax returns
for fiscal years 2003 through 2007 to change our method of
sourcing service income to a destination basis, rather than on
an origin basis, for sales factor apportionment purposes. In
general for state sales factor apportionment purposes,
destination sourcing assigns revenue to the state of
the customer or market, while origin sourcing
assigns revenue to the state of production. We also reported the
final audit adjustments made by the Internal Revenue Service for
fiscal years 2003 through 2005. The resulting impact from these
adjustments is a net claim for refund of $51.5 million,
excluding interest, for fiscal years 2003 through 2007. For
fiscal years 2008 and 2009, we filed our original Arizona income
tax returns sourcing our service revenues on a destination
basis. We have not taken a benefit related to our Arizona market
sourcing position in our financial statements.
In addition to the audits discussed above, we are subject to
numerous ongoing audits by state, local and foreign tax
authorities. Although we believe our tax accruals to be
reasonable, the final determination of tax audits in the
U.S. or abroad and any related litigation could be
materially different from our historical income tax provisions
and accruals.
|
|
Note 15.
|
Shareholders
Equity
|
Share
Reissuances
During fiscal years 2010, 2009 and 2008, we issued approximately
1.1 million, 3.1 million and 2.5 million shares,
respectively, of our Class A common stock from our treasury
stock as a result of stock option exercises, release of shares
covered by vested restricted stock units, and purchases under
our employee stock purchase plan.
Share
Repurchases
Our Board of Directors has authorized us to repurchase
outstanding shares of Apollo Group Class A common stock,
from time to time, depending on market conditions and other
considerations. On February 18, 2010, our Board of
Directors authorized a $500 million increase in the amount
available under our share repurchase program up to an aggregate
amount of $1 billion of Apollo Group Class A common
stock. There is no expiration date on the repurchase
authorizations and repurchases occur at our discretion.
We repurchased approximately 7.9 million, 7.2 million
and 9.8 million shares of our Class A common stock
during fiscal years 2010, 2009 and 2008, respectively, at a
total cost of $439.3 million, $444.4 million and
$454.4 million during the respective fiscal years. This
represented weighted average purchase prices of $55.78, $61.62
and $46.25 per share during the respective fiscal years.
As of August 31, 2010, approximately $560.7 million
remained available under our share repurchase authorization. The
amount and timing of future share repurchases, if any, will be
made as market and business conditions warrant. Repurchases may
be made on the open market or in privately negotiated
transactions,
137
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
pursuant to the applicable Securities and Exchange Commission
rules, and may include repurchases pursuant to Securities and
Exchange Commission
Rule 10b5-1
nondiscretionary trading programs.
In connection with the release of vested shares of restricted
stock, we repurchased approximately 149,000 and
119,000 shares for $7.1 million and $8.1 million
during fiscal years 2010 and 2009, respectively. We did not have
any such repurchases during fiscal year 2008. These repurchases
relate to tax withholding requirements on the restricted stock
units and do not fall under the repurchase program described
above, and therefore do not reduce the amount that is available
for repurchase under that program.
Accumulated
Other Comprehensive Loss
The following table summarizes the components of accumulated
other comprehensive loss at August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Foreign currency translation losses
|
|
$
|
(30,182
|
)
|
|
$
|
(12,377
|
)
|
Unrealized loss on auction-rate securities
|
|
|
(994
|
)
|
|
|
(1,363
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss(1)
|
|
$
|
(31,176
|
)
|
|
$
|
(13,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Accumulated other comprehensive loss is net of $1.2 million
and $1.5 million of taxes as of August 31, 2010 and
2009, respectively. The tax effect on each component of other
comprehensive income during fiscal years 2010, 2009 and 2008 is
not significant. |
The increase in foreign currency translation losses is primarily
the result of a general strengthening of the U.S. dollar
relative to the British Pound during fiscal year 2010.
|
|
Note 16.
|
Earnings
Per Share
|
Our outstanding shares consist of Apollo Group Class A and
Class B common stock. Our Articles of Incorporation treat
the declaration of dividends on the Apollo Group Class A
and Class B common stock in an identical manner. As such,
both the Apollo Group Class A and Class B common stock
are included in the calculation of our earnings per share.
Diluted weighted average shares outstanding includes the
incremental effect of shares that would be issued upon the
assumed exercise of stock options and the vesting and release of
restricted stock units and performance share awards. The
components of basic and diluted earnings per share are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income attributable to Apollo (basic and diluted)
|
|
$
|
553,002
|
|
|
$
|
598,319
|
|
|
$
|
476,525
|
|
Basic weighted average shares outstanding
|
|
|
151,955
|
|
|
|
157,760
|
|
|
|
164,109
|
|
Dilutive effect of stock options
|
|
|
652
|
|
|
|
1,482
|
|
|
|
1,598
|
|
Dilutive effect of restricted stock units and performance share
awards
|
|
|
299
|
|
|
|
272
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
152,906
|
|
|
|
159,514
|
|
|
|
165,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share attributable to Apollo
|
|
$
|
3.64
|
|
|
$
|
3.79
|
|
|
$
|
2.90
|
|
Diluted income per share attributable to Apollo
|
|
$
|
3.62
|
|
|
$
|
3.75
|
|
|
$
|
2.87
|
|
During fiscal years 2010, 2009 and 2008, approximately
7.2 million, 3.6 million and 6.5 million,
respectively, of our stock options outstanding and approximately
6,000, 6,000 and 1,000, respectively, of our restricted stock
units and performance share awards were excluded from the
calculation of diluted earnings per
138
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
share because their inclusion would have been anti-dilutive.
These options and restricted stock units could be dilutive in
the future.
|
|
Note 17.
|
Stock and
Savings Plans
|
401(k)
Plan
We sponsor a 401(k) plan for eligible employees which provides
them the opportunity to make pre-tax employee contributions.
Such contributions are subject to certain restrictions as set
forth in the Internal Revenue Code. Upon a participating
employees completion of one year of service and
1,000 hours worked, we will match, at our discretion, 30%
of such employees contributions up to the lesser of 15% of
his or her gross compensation or the maximum participant
contribution permitted under the Internal Revenue Code. Our
matching contributions totaled $11.3 million,
$9.6 million and $8.1 million for fiscal years 2010,
2009 and 2008, respectively.
Employee
Stock Purchase Plan
Our Third Amended and Restated 1994 Employee Stock Purchase Plan
allows eligible employees to purchase shares of our Class A
common stock at quarterly intervals through periodic payroll
deductions at a price per share equal to 95% of the fair market
value on the purchase date. This plan is deemed to be
non-compensatory, and accordingly, we do not recognize any
share-based compensation expense with respect to the shares of
our Class A common stock purchased under the plan.
Share-Based
Compensation Plans
We currently have outstanding awards under the following two
share-based compensation plans: the Apollo Group, Inc. Second
Amended and Restated Director Stock Plan and the Apollo Group,
Inc. Amended and Restated 2000 Stock Incentive Plan.
Under the Second Amended and Restated Director Stock Plan, the
non-employee members of our Board of Directors received on
September 1 of each year through 2003 options to purchase shares
of our Class A common stock. No additional shares are
available for issuance under this plan, and no grants have been
made under such plan since the 2003 calendar year grants.
Under the Amended and Restated 2000 Stock Incentive Plan, we may
grant non-qualified stock options, incentive stock options,
stock appreciation rights, restricted stock units, performance
share awards, and other share-based awards covering shares of
our Class A common stock to officers, key employees and
faculty members, and the non-employee members of our Board of
Directors. In general, the awards granted under the Amended and
Restated 2000 Stock Incentive Plan vest over periods ranging
from six months to four years. Stock options granted have
contractual terms of 10 years or less. For certain
outstanding stock options, vesting may be tied to the attainment
of prescribed market conditions based on stock price
appreciation in addition to service-vesting requirements.
Restricted stock units issued under the Plan may have both
performance-vesting and service-vesting components (for grants
generally made to executive officers) or service-vesting only
(for other recipients). Performance share awards have both
performance-vesting and service-vesting components tied to a
defined performance period. Approximately 25.1 million
shares of our Class A common stock have been reserved for
issuance over the term of this plan. The shares may be issued
from treasury shares or from our authorized but unissued shares
of our Class A common stock. As of August 31, 2010,
approximately 15.4 million authorized and unissued shares
of our Class A common stock were available for issuance
under the Amended and Restated 2000 Stock Incentive Plan,
including the shares subject to outstanding equity awards under
such plan.
139
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under each of the two Apollo Group Plans, the exercise price for
stock options may not be less than 100% of the fair market value
of our Class A common stock on the date of the grant. The
requisite service period for all awards is equal to the vesting
period.
Stock
Options
During fiscal years 2010, 2009 and 2008, we granted stock
options with a service vesting condition to the members of our
Board of Directors, officers, and certain faculty and management
employees. During fiscal year 2009, we also granted stock
options with both a service and a market vesting condition to
certain members of our management team. We measure the fair
value of stock options as of the date of grant. We amortize
share-based compensation expense, net of forfeitures, over the
expected vesting period using the straight-line method for
awards with only a service condition, and the graded vesting
attribution method for awards with a service and a market
vesting condition. The vesting period of the stock options
granted generally ranges from six months to four years. A
summary of the activity and changes related to stock options and
stock appreciation rights granted under our plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Total
|
|
|
Price per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
(numbers in thousands, except per share and contractual term
data)
|
|
Shares
|
|
|
Share
|
|
|
Term (Years)
|
|
|
Value ($)(1)
|
|
|
Outstanding as of August 31, 2007
|
|
|
13,369
|
|
|
$
|
48.90
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,508
|
|
|
|
62.08
|
|
|
|
|
|
|
|
|
|
Assumed upon acquisition
|
|
|
106
|
|
|
|
72.15
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,348
|
)
|
|
|
41.46
|
|
|
|
|
|
|
|
|
|
Forfeited, canceled or expired
|
|
|
(1,258
|
)
|
|
|
51.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of August 31, 2008
|
|
|
12,377
|
|
|
|
52.41
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,164
|
|
|
|
68.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,707
|
)
|
|
|
41.18
|
|
|
|
|
|
|
|
|
|
Forfeited, canceled or expired
|
|
|
(572
|
)
|
|
|
64.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of August 31, 2009
|
|
|
10,262
|
|
|
|
56.49
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
850
|
|
|
|
43.28
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(521
|
)
|
|
|
27.33
|
|
|
|
|
|
|
|
|
|
Forfeited, canceled or expired
|
|
|
(442
|
)
|
|
|
62.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of August 31, 2010
|
|
|
10,149
|
|
|
$
|
56.62
|
|
|
|
3.59
|
|
|
$
|
7,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of August 31, 2010
|
|
|
9,899
|
|
|
$
|
56.65
|
|
|
|
3.57
|
|
|
$
|
7,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of August 31, 2010
|
|
|
6,717
|
|
|
$
|
56.67
|
|
|
|
3.27
|
|
|
$
|
7,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant as of August 31, 2010
|
|
|
3,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Aggregate intrinsic value represents the total amount obtained
by multiplying the portion of our closing stock price of $42.49
on August 31, 2010 in excess of the applicable exercise
prices by the number of options outstanding or exercisable with
an exercise price less than that closing stock price. |
As of August 31, 2010, there was approximately
$55.7 million of total unrecognized share-based
compensation cost, net of forfeitures, related to unvested stock
options and stock appreciation rights. These costs are expected
to be recognized over a weighted average period of
2.06 years. The fair value of stock
140
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
options and stock appreciation rights that vested during fiscal
years 2010, 2009 and 2008 was $45.4 million,
$54.1 million, and $35.5 million, respectively.
The following table summarizes information related to
outstanding and exercisable options and stock appreciation
rights as of August 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
Weighted Avg.
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Range of
|
|
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
Price
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Remaining
|
|
|
per Share
|
|
|
Exercisable
|
|
|
per Share
|
|
(options in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.83 to $42.27
|
|
|
1,483
|
|
|
|
3.80
|
|
|
$
|
37.39
|
|
|
|
700
|
|
|
$
|
31.93
|
|
$43.94 to $51.33
|
|
|
1,753
|
|
|
|
3.75
|
|
|
$
|
49.32
|
|
|
|
1,459
|
|
|
$
|
49.53
|
|
$51.67 to $57.54
|
|
|
733
|
|
|
|
3.86
|
|
|
$
|
55.42
|
|
|
|
345
|
|
|
$
|
55.33
|
|
$58.03 to $58.03
|
|
|
2,209
|
|
|
|
2.57
|
|
|
$
|
58.03
|
|
|
|
1,689
|
|
|
$
|
58.03
|
|
$58.43 to $62.51
|
|
|
1,682
|
|
|
|
3.48
|
|
|
$
|
61.47
|
|
|
|
1,047
|
|
|
$
|
61.25
|
|
$62.78 to $70.02
|
|
|
1,451
|
|
|
|
4.65
|
|
|
$
|
67.22
|
|
|
|
742
|
|
|
$
|
65.91
|
|
$71.21 to $169.47
|
|
|
838
|
|
|
|
3.77
|
|
|
$
|
75.22
|
|
|
|
735
|
|
|
$
|
75.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,149
|
|
|
|
|
|
|
|
|
|
|
|
6,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information related to stock
options and stock appreciation rights exercised during fiscal
years 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
($ in thousands)
|
|
2010
|
|
2009
|
|
2008
|
|
Amounts related to options exercised:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value realized by optionees
|
|
$
|
18,020
|
|
|
$
|
94,638
|
|
|
$
|
65,198
|
|
Actual tax benefit realized by Apollo for tax deductions
|
|
$
|
7,175
|
|
|
$
|
21,732
|
|
|
$
|
25,516
|
|
The shares issued upon the exercise of stock options and stock
appreciation rights were drawn from treasury shares or from our
authorized but unissued shares of Class A common stock.
Cash received from stock option exercises during fiscal years
2010, 2009 and 2008 was approximately $14.1 million,
$103.5 million and $97.4 million, respectively.
Stock
Option Valuation Assumptions
Fair Value We typically use the
Black-Scholes-Merton option pricing model to estimate the fair
value of our options as of the grant dates using the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Weighted average fair value
|
|
$
|
17.30
|
|
|
$
|
27.32
|
|
|
$
|
23.95
|
|
Expected volatility
|
|
|
48.6
|
%
|
|
|
47.7
|
%
|
|
|
44.2
|
%
|
Expected life (years)
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
4.2
|
|
Risk-free interest rate
|
|
|
1.5
|
%
|
|
|
2.2
|
%
|
|
|
2.9
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected Volatility We use an average of our
historical volatility and the implied volatility of long-lived
call options to estimate expected volatility.
141
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expected Term (years) In the absence of
reliable historical data, we generally use the simplified
mid-point method to estimate expected term of stock options. The
simplified method uses the mid-point between the vesting term
and the contractual term of the share option. We have analyzed
our historical data and believe that the structure and exercise
behavior of our stock options has changed significantly,
resulting in a lack of reliable historical exercise data that
can be used to estimate expected term for stock options granted
in recent fiscal years. We will continue to use the simplified
method until reliable historical data is available, or until
circumstances change such that the use of alternative methods
for estimating expected term is more appropriate.
Risk-Free Interest Rate We use the
U.S. constant maturity treasury rates as the risk-free rate
interpolated between the years commensurate with the expected
life assumptions.
Dividend Yield The dividend yield assumption
is based on the fact that we have not historically paid
dividends and do not expect to pay dividends in the future.
Restricted
Stock Units and Performance Share Awards
(PSAs)
During fiscal years 2010, 2009 and 2008, we granted restricted
stock units covering shares of our Class A common stock
with a service and a performance vesting condition to several of
our officers. We also granted restricted stock units with only a
service vesting condition to the members of our Board of
Directors, officers, and certain faculty and management
employees. We measure the fair value of restricted stock units
as of the date of grant. We amortize share-based compensation
expense, net of forfeitures, over the expected vesting period
using the straight-line method for awards with only a service
condition, and the graded vesting attribution method for awards
with a service and a performance condition. The vesting period
of the restricted stock units granted generally ranges from six
months to four years. See summary of the activity and changes
related to restricted stock units granted under our plans below.
During fiscal year 2010, we granted performance share awards to
certain members of our executive management that vest based on
performance and service vesting conditions. The level at which
the performance condition is attained will determine the actual
number of shares of our Class A common stock into which the
PSAs will be converted. The conversion percentage will range
from 40% at threshold level attainment to 100% at target level
and 200% at maximum level attainment or above. The award holder
will vest in one-third of the shares of our Class A common
stock into which his or her PSAs are so converted for each
fiscal year the award holder remains employed during the three
year performance period. However, the PSAs will immediately
convert into fully-vested shares of our Class A common
stock at target level or above upon certain changes in control
or ownership. The shares of our Class A common stock into
which the PSAs are converted will be issued upon the completion
of the applicable performance period.
142
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We measure the fair value of PSAs as of the date of grant and
amortize share-based compensation expense for our estimate of
the number of shares of our Class A common stock expected
to vest and become issuable under those awards over the three
year performance period. Our estimate of the number of shares
that will vest and become issuable under the PSA awards is based
on our determination of the probable outcome of the performance
condition and requires considerable judgment. The following
schedule includes activity and changes related to the PSAs
(granted PSAs are assumed to convert into shares of our
Class A common stock at the 100% target level):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
(numbers in thousands, except per share data)
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested balance at August 31, 2007
|
|
|
325
|
|
|
$
|
58.03
|
|
Granted
|
|
|
522
|
|
|
|
58.20
|
|
Vested and released
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(132
|
)
|
|
|
57.95
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at August 31, 2008
|
|
|
715
|
|
|
|
58.17
|
|
Granted
|
|
|
645
|
|
|
|
69.49
|
|
Vested and released
|
|
|
(324
|
)
|
|
|
60.96
|
|
Forfeited
|
|
|
(38
|
)
|
|
|
57.58
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at August 31, 2009
|
|
|
998
|
|
|
|
62.88
|
|
Granted
|
|
|
1,057
|
|
|
|
44.27
|
|
Vested and released
|
|
|
(435
|
)
|
|
|
61.29
|
|
Forfeited
|
|
|
(70
|
)
|
|
|
60.97
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at August 31, 2010(1)
|
|
|
1,550
|
|
|
$
|
50.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The nonvested balance at August 31, 2010 includes
approximately 69,000 PSAs. |
As of August 31, 2010, there was approximately
$59.0 million of total unrecognized share-based
compensation cost, net of forfeitures, related to unvested
restricted stock units and performance share awards. These costs
are expected to be recognized over a weighted average period of
2.94 years. The fair value of restricted stock units that
vested during fiscal years 2010 and 2009 was $24.8 million
and $23.2 million, respectively. We did not have restricted
stock units that vested during fiscal year 2008.
Share-based
Compensation Expense
The table below outlines share-based compensation expense for
fiscal years 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Instructional costs and services
|
|
$
|
23,549
|
|
|
$
|
22,071
|
|
|
$
|
20,609
|
|
Selling and promotional
|
|
|
8,211
|
|
|
|
5,657
|
|
|
|
3,603
|
|
General and administrative
|
|
|
32,545
|
|
|
|
40,310
|
|
|
|
29,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense included in operating
expenses
|
|
|
64,305
|
|
|
|
68,038
|
|
|
|
53,570
|
|
Tax effect of share-based compensation
|
|
|
(25,290
|
)
|
|
|
(26,603
|
)
|
|
|
(21,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense, net of tax
|
|
$
|
39,015
|
|
|
$
|
41,435
|
|
|
$
|
32,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 18.
|
Related
Person Transactions
|
Yo
Pegasus, LLC
Yo Pegasus, LLC, an entity controlled by Dr. John G.
Sperling, leases an aircraft to us as well as to other entities.
Payments to Yo Pegasus for the business use of the airplane,
including hourly flight charges, fuel, and direct operating
expenses during fiscal years 2010, 2009 and 2008 were
$0.3 million, $0.2 million and $0.4 million,
respectively. These amounts are included in general and
administrative expenses in our Consolidated Statements of Income.
TKG
Contact Center, Inc.
We entered into a sublease with TKG Contact Center, Inc., an
entity controlled by Dr. John G. Sperling, to lease
56,410 square feet of office space in Tempe, Arizona, for
the period from July 1, 2006 to November 30, 2007. We
extended the lease to December 7, 2007. Payments to this
entity during fiscal year 2008 were $0.3 million.
Sperling
Gallery
We lease certain artwork pursuant to a contract between Apollo
Group and an art gallery owned by Virginia Sperling. Virginia
Sperling is the former wife of Dr. John G. Sperling and the
mother of Mr. Peter V. Sperling. Lease payments under the
contract during fiscal years 2010, 2009 and 2008 were $8,000,
$34,000 and $37,000, respectively. On January 13, 2010, we
terminated our rental contract and purchased the leased artwork
for $88,000.
Credit
Suisse Share Repurchase Services
During fiscal year 2008, Credit Suisse Securities (USA) LLC, an
affiliate of the previous employer of Charles B. Edelstein and
Gregory W. Cappelli, our Co-Chief Executive Officers, managed a
share repurchase program for Apollo. We paid Credit Suisse
Securities approximately $196,000 in commissions for this
service during fiscal year 2008. Our engagement of Credit Suisse
Securities and payment of these fees occurred after
Mr. Cappelli joined Apollo in March 2007, and prior to the
time Mr. Edelstein accepted employment with Apollo in July
2008.
Earth
Day Network
We have provided grants directly or through University of
Phoenix Foundation, a non-profit entity affiliated with
University of Phoenix, to Earth Day Network totaling
$0.5 million, $0.1 million and $0.1 million in
fiscal years 2010, 2009 and 2008, respectively. Art Edelstein,
the Director of Development of Earth Day Network, is the brother
of Charles B. Edelstein, our Co-Chief Executive Officer.
Cisco
Systems, Inc.
During fiscal years 2010 and 2009, we purchased goods and
services from Cisco Systems, Inc., directly and through third
party sellers, in the normal course of our business, and we
expect to do so in the future. Manuel F. Rivelo, a member of our
Board of Directors, is employed by Cisco Systems, Inc. as Senior
Vice President of Enterprise Systems and Operations.
Deferred
Compensation Agreement with Dr. John G.
Sperling
The deferred compensation agreement relates to an agreement
between Apollo and Dr. John G. Sperling. The related
$2.9 million liability balance is included in other
long-term liabilities in our Consolidated Balance Sheets.
144
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 19.
|
Commitments
and Contingencies
|
Guarantees
We have agreed to indemnify our officers and directors for
certain events or occurrences. The maximum potential amount of
future payments we could be required to make under these
indemnification agreements is unlimited; however, we have
director and officer liability insurance policies that mitigate
our exposure and enable us to recover a portion of any future
amounts paid. As a result of our insurance policy coverage,
management believes the estimated fair value of these
indemnification agreements is minimal.
Lease
Commitments
We are obligated under property and equipment leases under both
capital and operating leases. The following is a schedule of
future minimum lease commitments as of August 31, 2010:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Capital Leases
|
|
|
Operating Leases(1)
|
|
|
2011
|
|
$
|
2,549
|
|
|
$
|
162,946
|
|
2012
|
|
|
1,615
|
|
|
|
151,548
|
|
2013
|
|
|
1,112
|
|
|
|
126,714
|
|
2014
|
|
|
614
|
|
|
|
113,170
|
|
2015
|
|
|
607
|
|
|
|
98,503
|
|
Thereafter
|
|
|
2,781
|
|
|
|
278,318
|
|
|
|
|
|
|
|
|
|
|
Total future minimum lease obligation(2)
|
|
$
|
9,278
|
|
|
$
|
931,199
|
|
Less: imputed interest on capital leases
|
|
|
(1,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net present value of lease obligations
|
|
$
|
7,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total future minimum lease obligation associated with
operating leases includes lease payments for a lease agreement
executed in fiscal year 2009 for a building to be constructed
and for which we do not have the right to control the use of the
property under the lease at August 31, 2010. The future
minimum lease payments associated with this lease are
$140.5 million. |
|
(2) |
|
The total future minimum lease obligation excludes noncancelable
sublease rental income of $2.1 million. |
Facility and equipment expense under leases totaled
$194.6 million, $162.5 million and $156.2 million
for fiscal years 2010, 2009 and 2008, respectively.
We have entered into sale-leaseback agreements related to
properties that we currently use to support our operations. From
these agreements, we received approximately $46.9 million
in cash for the properties, which generated a combined gain of
approximately $17.7 million that is being deferred over the
respective lease terms. We recognized total gains of
$1.7 million, $1.7 million and $1.8 million in
fiscal years 2010, 2009 and 2008, respectively, in the
Consolidated Statements of Income. The total deferred gain
included in other liabilities in our Consolidated Balance Sheets
was $5.6 million and $7.0 million as of
August 31, 2010 and 2009, respectively.
Naming
Rights to Glendale, Arizona Sports Complex
On September 22, 2006, we entered into a Naming and
Sponsorship Rights Agreement with New Cardinals Stadium, L.L.C.
and B&B Holdings, Inc. doing business as the Arizona
Cardinals, third parties unrelated to Apollo, for naming and
sponsorship rights on a stadium in Glendale, Arizona, which is
home to the Arizona Cardinals team in the National Football
League. The agreement includes naming, sponsorship, signage,
advertising and other promotional rights and benefits. The
initial agreement term is in effect until
145
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2026 with options to extend. Pursuant to the agreement, we were
required to pay a total of $5.8 million for the 2006
contract year, which is increased 3% per year until 2026. As of
August 31, 2010, our remaining contractual obligation
pursuant to this agreement is $128.8 million. Other
payments apply if certain events occur, such as if the Cardinals
play in the Super Bowl or if all of the Cardinals regular
season home games are sold-out.
Surety
Bonds
As part of our normal operations, our insurers issue surety
bonds for us that are required by various states where we
operate. We are obligated to reimburse our insurers for any
surety bonds that are paid by the insurers. As of
August 31, 2010, the total face amount of these surety
bonds was approximately $49.8 million.
Contingencies
Related to Litigation and Other Proceedings
The following is a description of pending litigation,
settlements, and other proceedings that fall outside the scope
of ordinary and routine litigation incidental to our business.
Pending
Litigation and Settlements
Incentive
Compensation False Claims Act Lawsuit
On August 29, 2003, we were notified that a qui tam action
had been filed against us on March 7, 2003, in the
U.S. District Court for the Eastern District of California
by two then-current employees on behalf of themselves and the
federal government. When the federal government declines to
intervene in a qui tam action, as it has done in this case, the
relators may elect to pursue the litigation on behalf of the
federal government and, if they are successful, are entitled to
receive a portion of the federal governments recovery. The
qui tam action alleges, among other things, violations of the
False Claims Act, 31 U.S.C. § 3729(a)(1) and (2),
by University of Phoenix through submission of a knowingly false
or fraudulent claim for payment or approval, and submission of
knowingly false records or statements to get a false or
fraudulent claim paid or approved in connection with federal
student aid programs. The qui tam action also asserts that
University of Phoenix improperly compensates its employees.
Specifically, the relators allege that our entry into Program
Participation Agreements with the U.S. Department of
Education under Title IV of the Higher Education Act, as
reauthorized, constitutes a false claim because we did not
intend to comply with the applicable employee compensation
requirements and, therefore, we should be required to pay to the
U.S. Department of Education treble the amount of costs
incurred by the U.S. Department of Education in student
loan defaults, student loan subsidies and student financial aid
grants from January 1997 to the present, plus statutory
penalties and forfeiture amounts. We believe that at all
relevant times our compensation programs and practices were in
compliance with the applicable legal requirements. Under the
District Courts current Scheduling Order, trial was set
for March 2010.
In September 2009, the parties to the action, along with the
U.S. Department of Justice, participated in a private
mediation in which the parties reached an agreement in principle
regarding the financial terms of a potential settlement. During
the fourth quarter of fiscal year 2009, based on the settlement
discussions to resolve this matter, we recorded a pre-tax charge
of $80.5 million which represented our best estimate of the
loss related to this matter.
The settlement was finalized by all parties on December 14,
2009. The agreement makes clear that we do not acknowledge,
admit or concede any liability, wrongdoing, noncompliance or
violation as a result of the settlement. Under the terms of the
agreement, we paid $67.5 million to the United States in
December 2009. Under a separate agreement, we paid
$11.0 million in attorneys fees to the plaintiffs, as
required by the False Claims Act, in December 2009. The
remaining portion of the $80.5 million pre-tax charge
recorded in fiscal
146
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
year 2009 represented our estimate of future legal costs as of
August 31, 2009. On December 17, 2009, the Court
entered the order dismissing the lawsuit with prejudice.
Securities
Class Action
In October 2004, three class action complaints were filed in the
U.S. District Court for the District of Arizona. The
District Court consolidated the three pending class action
complaints under the caption In re Apollo Group, Inc.
Securities Litigation, Case
No. CV04-2147-PHX-JAT
and a consolidated class action complaint was filed on
May 16, 2005 by the lead plaintiff. The consolidated
complaint named us, Todd S. Nelson, Kenda B. Gonzales and Daniel
E. Bachus as defendants. On March 1, 2007, by stipulation
and order of the Court, Daniel E. Bachus was dismissed as a
defendant from the case. Lead plaintiff represents a class of
our shareholders who acquired their shares between
February 27, 2004 and September 14, 2004. The
complaint alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and
Rule 10b-5
promulgated under the Act by us for defendants allegedly
material false and misleading statements in connection with our
failure to publicly disclose the contents of a preliminary
U.S. Department of Education program review report. The
case proceeded to trial on November 14, 2007. On
January 16, 2008, the jury returned a verdict in favor of
the plaintiffs awarding damages of up to $5.55 for each share of
common stock in the class suit, plus pre-judgment and
post-judgment interest. The class shares are those purchased
after February 27, 2004 and still owned on
September 14, 2004. The judgment was entered on
January 30, 2008, subject to an automatic stay until
February 13, 2008. On February 13, 2008, the District
Court granted our motion to stay execution of the judgment
pending resolution of our motions for post-trial relief, which
were also filed on February 13, 2008, provided that we post
a bond in the amount of $95.0 million. On February 19,
2008, we posted the $95.0 million bond with the District
Court. Oral arguments on our post-trial motions occurred on
August 4, 2008, during which the District Court vacated the
earlier judgment based on the jury verdict and entered judgment
in favor of Apollo and the other defendants. The
$95.0 million bond posted in February was subsequently
released on August 11, 2008. Plaintiffs lawyers filed
a Notice of Appeal with the Ninth Circuit Court of Appeals on
August 29, 2008. A hearing before a panel of the Court of
Appeals took place on March 3, 2010. On June 23, 2010,
the Court of Appeals reversed the District Courts ruling
in our favor and ordered the District Court to enter judgment
against us in accordance with the jury verdict.
Liability in the case is joint and several, which means that
each defendant, including us, is liable for the entire amount of
the judgment. As a result, we may be responsible for payment of
the full amount of damages as ultimately determined. We do not
expect to receive material amounts of insurance proceeds from
our insurers to satisfy any amounts ultimately payable to the
plaintiff class and we expect our insurers to seek repayment of
amounts advanced to us to date for defense costs. The actual
amount of damages will not be known until all court proceedings
have been completed and eligible members of the class have
presented the necessary information and documents to receive
payment of the award. We have estimated for financial reporting
purposes, using statistically valid models and a 60% confidence
interval, that the damages could range from $127.2 million
to $228.0 million, which includes our estimates of
(a) damages payable to the plaintiff class; (b) the
amount we may be required to reimburse our insurance carriers
for amounts advanced for defense costs; and (c) future
defense costs. Accordingly, in the third quarter of fiscal year
2010, we recorded a charge for estimated damages in the amount
of $132.6 million, which, together with the existing
reserve of $44.5 million recorded in the second quarter of
fiscal year 2010, represents the mid-point of the estimated
range of damages payable to the plaintiffs, plus the other
estimated costs and expenses. We elected to record an amount
based on the mid-point of the range of damages payable to the
plaintiff class because under statistically valid modeling
techniques the mid-point of the range is in fact a more likely
estimate than other points in the range, and the point at which
there is an equal probability that the ultimate loss could be
toward the lower end or the higher end of the range. During the
fourth quarter of fiscal year 2010, we recorded a
$0.9 million charge for incremental post-judgment interest.
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On July 21, 2010, we filed a petition for a rehearing en
banc by the Ninth Circuit, which was denied on August 17,
2010. On August 23, 2010, we filed a motion to stay the
mandate while we seek review by the U.S. Supreme Court. Our
motion to stay the mandate was granted on August 24, 2010
and we are preparing a petition for certiorari to the
U.S. Supreme Court. Our petition for certiorari is due on
or before November 15, 2010.
We believe we have adequate liquidity to fund the amount of any
required bond or, if necessary, the satisfaction of the judgment.
Gaer,
Fitch and Roth Securities Class Actions
On August 16, 2010, a securities class action complaint was
filed in the U.S. District Court for the District of
Arizona by Douglas N. Gaer naming us, John G. Sperling, Gregory
W. Cappelli, Charles B. Edelstein, Joseph L. DAmico, Brian
L. Swartz and Gregory J. Iverson as defendants for allegedly
making false and misleading statements regarding our business
practices and prospects for growth. That complaint asserts a
putative class period stemming from December 7, 2009 to
August 3, 2010. A substantially similar complaint was also
filed in the same court by John T. Fitch on September 23,
2010 making similar allegations against the same defendants for
the same purported class period. Finally, on October 4,
2010, another purported securities class action complaint was
filed in the same court by Robert Roth against the same
defendants as well as Brian Mueller, Terri C. Bishop and Peter
V. Sperling based upon the same general set of allegations, but
with a defined class period of February 12, 2007 to
August 3, 2010. The complaints allege violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and
Rule 10b-5
promulgated thereunder. On October 15, 2010, three
additional parties filed motions to consolidate the related
actions and be appointed the lead plaintiff. Two of the proposed
lead plaintiffs identify themselves as the Apollo
Institutional Investors Group and the first consists of
the Oregon Public Employees Retirement Fund, the
Mineworkers Pension Scheme, and Amalgamated Bank. The
second Apollo Institutional Investors Group consists
of IBEW Local 640 and Arizona Chapter NECA Pension Trust Fund
and the City of Birmingham Retirement and Relief System. The
third proposed lead plaintiff is the Puerto Rico Government
Employees and Judiciary Retirement System Administration.
We have not yet responded to these complaints and anticipate
that pursuant to the Private Securities Litigation Reform Act of
1995, the Court will appoint a lead plaintiff and lead counsel
pursuant to the provisions of that law, and eventually a
consolidated amended complaint will be filed. Because of the
many questions of fact and law that may arise, the outcome of
this legal proceeding is uncertain at this point. Based on
information available to us at present, we cannot reasonably
estimate a range of loss for this action and accordingly have
not accrued any liability associated with these actions.
Teamsters
Local Union Putative Class Action
On November 2, 2006, the Teamsters Local 617 Pension and
Welfare Funds filed a class action complaint purporting to
represent a class of shareholders who purchased our stock
between November 28, 2001 and October 18, 2006. The
complaint, filed in the U.S. District Court for the
District of Arizona, is entitled Teamsters Local 617
Pension & Welfare Funds v. Apollo Group, Inc. et
al., Case Number 06-cv-02674-RCB, and alleges that we and
certain of our current and former directors and officers
violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and
Rule 10b-5
promulgated thereunder by purportedly making misrepresentations
concerning our stock option granting policies and practices and
related accounting. The defendants are Apollo Group, Inc., J.
Jorge Klor de Alva, Daniel E. Bachus, John M. Blair, Dino J.
DeConcini, Kenda B. Gonzales, Hedy F. Govenar, Brian E. Mueller,
Todd S. Nelson, Laura Palmer Noone, John R. Norton III, John G.
Sperling and Peter V. Sperling. Plaintiff seeks unstated
compensatory damages and other relief. On January 3, 2007,
other shareholders, through their separate attorneys, filed
motions seeking appointment as lead plaintiff and approval of
their designated counsel as lead counsel to pursue this action.
On September 11, 2007, the Court
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
appointed The Pension Trust Fund for Operating Engineers as
lead plaintiff and approved lead plaintiffs selection of
lead counsel and liaison counsel. Lead plaintiff filed an
amended complaint on November 23, 2007, asserting the same
legal claims as the original complaint and adding claims for
violations of Section 20A of the Securities Exchange Act of
1934 and allegations of breach of fiduciary duties and civil
conspiracy.
On January 22, 2008, all defendants filed motions to
dismiss. On March 31, 2009, the Court dismissed the case
with prejudice as to Daniel Bachus, Hedy Govenar, Brian E.
Mueller, Dino J. DeConcini, and Laura Palmer Noone. The Court
also dismissed the case as to John Sperling and Peter Sperling,
but granted plaintiffs leave to file an amended complaint
against them. Finally, the Court dismissed all of
plaintiffs claims concerning misconduct before November
2001 and all of the state law claims for conspiracy and breach
of fiduciary duty. On April 30, 2009, plaintiffs filed
their Second Amended Complaint, which alleges similar claims for
alleged securities fraud against the same defendants. On
June 15, 2009, all defendants filed another motion to
dismiss the Second Amended Complaint. On February 22, 2010,
the Court partially granted the plaintiffs motion for
reconsideration, but withheld a final determination on the
individual defendants pending the Courts ruling on the
motion to dismiss the Second Amended Complaint.
Discovery in this case has not yet begun. Because of the many
questions of fact and law that may arise, the outcome of this
legal proceeding is uncertain at this point. Based on
information available to us at present, we cannot reasonably
estimate a range of loss for this action and accordingly have
not accrued any liability associated with this action.
Barnett
Derivative Action
On April 24, 2006, Larry Barnett, one of our shareholders,
filed a shareholder derivative complaint on behalf of Apollo.
The allegations in the complaint pertain to the matters that
were the subject of the investigation performed by the
U.S. Department of Education that led to the issuance of
the U.S. Department of Educations February 5,
2004 Program Review Report. The complaint was filed in the
Superior Court for the State of Arizona, Maricopa County and is
entitled Barnett v. John Blair et al, Case Number
CV2006-051558.
In the complaint, plaintiff asserts a derivative claim, on our
behalf, for breaches of fiduciary duty against the following
nine of our current or former officers and directors: John M.
Blair, Dino J. DeConcini, Hedy F. Govenar, Kenda B. Gonzales,
Todd S. Nelson, Laura Palmer Noone, John R. Norton III, John G.
Sperling and Peter V. Sperling. Plaintiff contends that we are
entitled to recover from these individuals the amount of the
settlement that we paid to the U.S. Department of Education
and our losses (both litigation expenses and any damages
awarded) stemming from the federal securities class actions
pending against us in Federal District Court as described above
under Securities Class Action.
On April 10, 2008, the plaintiff filed a Second Amended
Complaint. In addition to the damages previously sought,
plaintiff added a request that we recover from defendants the
expenses associated with the qui tam action in the
U.S. District Court for the Eastern District of California.
On May 9, 2008, we moved for a continued stay of Counts 1-2
and dismissal of Counts 3-5 added in the Second Amended
Complaint. On July 30, 2008, the Superior Court dismissed
Counts 3-5, and stayed Counts 1-2, until the next pre-trial
conference. At the continued pre-trial conference on
October 27, 2008, the Superior Court lifted the discovery
stay and set certain long-range deadlines for completion of
discovery, dispositive motions, and disclosure of experts.
On April 3, 2009, we filed a motion seeking the appointment
of an independent panel consisting of Dr. Roy A.
Herberger, Jr. and Stephen J. Giusto. The Court granted our
motion on July 31, 2009.
On March 22, 2010, the parties filed a stipulation of
settlement with the Court wherein they agreed to resolve this
action. The proposed stipulation of settlement requires Apollo
to implement a series of corporate governance reforms and pay an
immaterial amount to the plaintiffs counsel for their fees
and expenses. On July 12, 2010, the Court approved the
settlement reached by the parties and the case is now closed.
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Patent
Infringement Litigation
On March 3, 2008, Digital-Vending Services International
Inc. filed a complaint against University of Phoenix and Apollo
Group Inc., as well as Capella Education Company, Laureate
Education Inc., and Walden University Inc. in the
U.S. District Court for the Eastern District of Texas. The
complaint alleges that we and the other defendants have
infringed and are infringing various patents relating to
managing courseware in a shared use operating environment. We
filed an answer to the complaint on May 27, 2008, in which
we denied that Digital-Vending Services Internationals
patents were duly and lawfully issued, and asserted defenses of
non-infringement and patent invalidity, among others. We also
asserted a counterclaim seeking a declaratory judgment that the
patents are invalid, unenforceable, and not infringed by us.
Together with the other defendants, we filed a motion to
transfer venue from the Eastern District of Texas to
Washington, D.C. on February 27, 2009. On
September 30, 2009, the Court granted plaintiffs
motion to transfer the case to the Eastern District of Virginia
and denied the defendants motion to transfer the case to
the District of Columbia.
On March 18, 2010, we filed our opening claim construction
brief and on June 10, 2010, the Court issued its claim
construction ruling. Discovery is not concluded and we filed a
motion for summary judgment on August 13, 2010. A hearing
on our motion for summary judgment is scheduled for
November 12, 2010, and trial has been postponed
indefinitely pending a ruling on this motion.
Because of the many questions of fact and law that may arise,
the outcome of this legal proceeding is uncertain at this point.
Based on information available to us at present, we cannot
reasonably estimate a range of loss for this action. However, we
accrued an immaterial amount pursuant to settlement discussions
during fiscal year 2010 associated with this action.
Student
Loan Class Action
On December 9, 2008, three former University of Phoenix
students filed a complaint against Apollo Group, Inc. and
University of Phoenix in the U.S. District Court for the
Eastern District of Arkansas. The complaint alleges that with
regard to students who dropped from their courses shortly after
enrolling, University of Phoenix improperly returned the entire
amount of the students undisbursed federal loan funds to
the lender. The students purport to be bringing the complaint on
behalf of themselves and a proposed class of similarly-situated
student loan borrowers. On January 21, 2009, the plaintiffs
voluntarily filed a dismissal without prejudice to
re-filing. The plaintiffs then filed a similar complaint
in the U.S. District Court for the Central District of
California (Western Division Los Angeles) on
February 5, 2009. We filed an answer denying all of the
asserted claims on March 30, 2009. The plaintiffs filed
their motion for class certification and an amended complaint on
July 14, 2009. On March 22, 2010, the Court denied
plaintiffs Motion for Class Certification. The
Courts action encompasses a denial to certify the class
action for all purported nationwide classes and California
sub-classes.
The plaintiffs subsequently agreed to dismiss their allegations
and settle the case for an immaterial amount. On August 31,
2010, the Court entered the order dismissing the lawsuit with
prejudice.
Brodale
Employment and False Claims Lawsuit
On August 1, 2008, former employee, Stephen Lee Brodale,
filed a lawsuit in Federal District Court in San Diego
against Apollo, University of Phoenix, and several individual
employees. The complaint alleges various employment claims and
also includes claims under the Federal and California false
claims acts. The U.S. Department of Justice declined to
participate in the lawsuit and it was served on Apollo on
August 10, 2009. On September 16, 2009, the Court
dismissed the employment claims without prejudice, upon joint
motion by the parties, so that they could proceed to binding
arbitration. On September 14, 2009, we filed a motion to
dismiss the remaining false claims act allegations. The Court
granted our motion and dismissed the remaining claims on
November 6, 2009. On January 5, 2010, plaintiff filed
a Notice of Appeal with the Ninth Circuit. Plaintiff
subsequently agreed to voluntarily dismiss the appeal and the
Court ordered the appeal dismissed on February 10, 2010.
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Wage and
Hour Class Actions
During fiscal year 2009 and 2010, five lawsuits, each styled as
a class action, were commenced by various former and current
employees against Apollo
and/or
University of Phoenix alleging wage and hour claims for failure
to pay minimum wages and overtime and certain other violations.
These lawsuits are as follows:
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Sabol. Action filed July 31, 2009, by
several former employees in Federal District Court in
Philadelphia. We filed an answer denying the asserted claim on
September 29, 2009. During the course of the action, all
but one of the former employees voluntarily opted out of the
lawsuit. On January 24, 2010, we filed a motion for partial
summary judgment with respect to plaintiffs claim that the
Academic Counselor position is incorrectly
classified as exempt. On February 9, 2010, plaintiff filed
a Rule 56(f) motion seeking leave to conduct additional
discovery before response to our motion for partial summary
judgment. On March 3, 2010, the Court granted plaintiff
leave to conduct additional discovery on issues related to the
motion for partial summary judgment until April 5, 2010.
The Court also ordered plaintiff to file his response to the
motion for summary judgment on or before April 20, 2010. On
February 15, 2010, plaintiff filed a motion for class
certification and we filed our opposition on March 5, 2010.
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On April 19, 2010, the parties agreed to dismiss with
prejudice their claims regarding employment as an Academic
Counselor and to withdraw their pending motion for conditional
certification to the extent it seeks to certify a class of
Academic Counselors. On May 12, 2010, the Court granted
plaintiffs motion to conditionally certify a collective
action to include current and former admissions personnel at all
of University of Phoenixs nationwide locations. Although
the potential class is significant, the extent to which
prospective class members will choose to opt in to
participate in the lawsuit is unknown. The deadline for
prospective class members to submit a claim form and opt
in is December 9, 2010. We believe that the claims do
not support conditional certification as a collective action and
will move the Court to de-certify the class following additional
discovery.
Because of the many questions of fact and law that may arise,
the outcome of this legal proceeding is uncertain at this point.
Based on information available to us at present, we cannot
reasonably estimate a range of loss for this action and
accordingly have not accrued any liability associated with this
action.
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Adoma. Action filed January 8, 2010 by
Diane Adoma in United States District Court, Eastern District of
California. On March 5, 2010, we filed a motion to dismiss,
or in the alternative to stay or transfer, the case based on the
previously filed Sabol and Juric actions. On May 3, 2010,
the Court denied the motion to dismiss
and/or
transfer. On April 12, 2010, plaintiff filed her motion for
conditional collective action certification. The Court denied
class certification under the Fair Labor Standards Act and
transferred these claims to the District Court in Pennsylvania.
On August 31, 2010, the Court granted plaintiffs
motion for class action certification of the California claims.
On September 14, 2010, we filed a petition for permission
to appeal the class certification order with the Ninth Circuit.
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Because of the many questions of fact and law that may arise,
the outcome of this legal proceeding is uncertain at this point.
Based on information available to us at present, we cannot
reasonably estimate a range of loss for this action and,
accordingly, we have not accrued any liability associated with
this action.
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Juric. Action filed April 3, 2009, by
former employee Dejan Juric in California State Court in Los
Angeles. We filed an answer denying all of the asserted claims
on May 4, 2009 and then removed the case to the Federal
District Court in Los Angeles. On December 30, 2009,
plaintiff filed an amended complaint dismissing the California
class allegations and inserting nation-wide class allegations
under the Fair Labor Standards Act. On February 16, 2010,
we filed a motion to dismiss, or in the alternative
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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to stay or transfer, the case based on the previously filed
Sabol action. On June 6, 2010, the parties agreed to settle
the case for an immaterial amount. On June 21, 2010, the
Court entered the order dismissing the lawsuit with prejudice.
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Tranchita. Action filed August 10, 2009,
by several former employees in Federal District Court in
Chicago. On September 2, 2009, we filed a motion to
dismiss, or in the alternative to stay or transfer, the case
based on the previously filed Sabol action. The plaintiffs
subsequently agreed to dismiss their class allegations and
settle the case for an immaterial amount. On May 13, 2010,
the Court entered the order dismissing the lawsuit with
prejudice.
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Davis. Action filed September 28, 2009,
by former employee Adonijah Davis in Federal District Court in
Tampa, Florida. On November 2, 2009, we filed a motion to
dismiss, or in the alternative to stay or transfer, the case
based on the previously filed Sabol action. On November 17,
2009, plaintiff filed an amended complaint removing the class
action allegations and electing to proceed on a single plaintiff
basis. As a result, the Court denied our motion to dismiss as
moot on November 18, 2009. On January 28, 2010, the
parties agreed to settle the case for an immaterial amount. On
June 17, 2010, the Court entered the order dismissing the
lawsuit with prejudice.
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Other
We are subject to various claims and contingencies in the
ordinary course of business, including those related to
regulation, litigation, business transactions, employee-related
matters and taxes, among others. We do not believe any of these
are material for separate disclosure.
Regulatory
Matters
Our domestic postsecondary operations are subject to significant
regulations. Changes in or new interpretations of applicable
laws, rules, or regulations could have a material adverse effect
on our eligibility to participate in Title IV programs,
accreditation, authorization to operate in various states,
permissible activities, and operating costs. The failure to
maintain or renew any required regulatory approvals,
accreditation, or state authorizations could have a material
adverse effect on us.
These federal and state regulatory requirements cover virtually
all phases of our U.S. operations, including educational
program offerings, branching and classroom locations,
instructional and administrative staff, administrative
procedures, marketing and recruiting, financial operations,
payment of refunds to students who withdraw, maintenance of
restricted cash, acquisitions or openings of new schools,
commencement of new educational programs and changes in our
corporate structure and ownership.
Student
Financial Aid
All U.S. federal financial aid programs are established by
Title IV of the Higher Education Act and regulations
promulgated thereunder. In August 2008, the Higher Education Act
was reauthorized through September 30, 2013 by the Higher
Education Opportunity Act. The U.S. Congress must
periodically reauthorize the Higher Education Act and annually
determine the funding level for each Title IV program.
Changes to the Higher Education Act are likely to result from
subsequent reauthorizations, and the scope and substance of any
such changes cannot be predicted.
The Higher Education Opportunity Act specifies the manner in
which the U.S. Department of Education reviews institutions
for eligibility and certification to participate in
Title IV programs. Every educational institution involved
in Title IV programs must be certified to participate and
is required to periodically renew this certification.
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
University of Phoenix was recertified in November 2009 and
entered into a new Title IV Program Participation Agreement
which expires on December 31, 2012.
Western International University was recertified in May 2010 and
entered into a new Title IV Program Participation Agreement
which expires on September 30, 2014.
U.S.
Department of Education New Rulemaking Initiative
In November 2009, the U.S. Department of Education convened
two new negotiated rulemaking teams related to Title IV
program integrity issues and foreign school issues. The team
addressing program integrity issues, which included
representatives of the various higher education constituencies,
was unable to reach consensus on all of the rules addressed by
that team. Accordingly, under the negotiated rulemaking
protocol, the Department was free to propose rules without
regard to the tentative agreement reached regarding certain of
the rules. The proposed program integrity rulemaking addresses
numerous topics. The most significant proposals for our business
are the following:
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Modification of the standards relating to the payment of
incentive compensation to employees involved in student
recruitment and enrollment;
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Implementation of standards for state authorization of
proprietary institutions of higher education; and
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Adoption of a definition of gainful employment for
purposes of the requirement of Title IV student financial
aid that a program of study prepare students for gainful
employment in a recognized occupation.
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On June 18, 2010, the Department issued a Notice of
Proposed Rulemaking (NPRM) in respect of the program
integrity issues, other than the metrics for determining
compliance with the gainful employment requirement. On
July 26, 2010, the Department published a separate NPRM in
respect of the gainful employment metrics. The Department has
stated that its goal is to publish final rules by
November 1, 2010, excluding significant sections related to
gainful employment which the Department expects to publish in
early 2011. The final rules, including some reporting and
disclosure rules related to gainful employment, are expected to
be effective July 1, 2011.
We cannot predict the form of the rules that ultimately may be
adopted by the Department following public comment. Compliance
with these rules, some of which could be effective as early as
July 1, 2011, could reduce our enrollment, increase our
cost of doing business, and have a material adverse effect on
our business, financial condition, results of operations and
cash flows.
U.S.
Congressional Hearings
In recent months, there has been increased focus by the
U.S. Congress on the role that proprietary educational
institutions play in higher education. On June 24, 2010,
the U.S. Senate Committee on Health, Education, Labor and
Pensions (HELP Committee) held the first in a series
of hearings to examine the proprietary education sector. The
August 4, 2010 hearing included the presentation of results
from a Government Accountability Office (GAO) review
of various aspects of the proprietary sector, including
recruitment practices, educational quality, student outcomes,
the sufficiency of integrity safeguards against waste, fraud and
abuse in federal student aid programs and the degree to which
proprietary institutions revenue is composed of
Title IV and other federal funding sources. Following the
August 4, 2010 hearing, Sen. Tom Harkin, the Chairman of
the HELP Committee, requested a broad range of detailed
information from 30 proprietary institutions, including Apollo
Group. We have been and intend to continue being responsive to
the requests of the HELP Committee. Sen. Harkin has stated that
another in this series of hearings will be held in December 2010.
We cannot predict what legislation, if any, will emanate from
these Congressional committee hearings or what impact any such
legislation might have on the proprietary education sector and
our business in particular. Any action by Congress that
significantly reduces Title IV program funding or the
eligibility of our institutions or students to participate in
Title IV programs would have a material adverse effect on our
financial condition, results of operations and cash flows.
Congressional action could also require us to modify our
practices in
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ways that could increase our administrative costs and reduce our
operating income, which could have a material adverse effect on
our financial condition, results of operations and cash flows.
90/10
Rule
One requirement of the Higher Education Act, commonly referred
to as the 90/10 Rule, applies to proprietary
institutions such as University of Phoenix and Western
International University. Under this rule, a proprietary
institution will be ineligible to participate in Title IV
programs if for any two consecutive fiscal years it derives more
than 90% of its cash basis revenue, as defined in the rule, from
Title IV programs. An institution that exceeds this limit
for any single fiscal year will be placed on provisional
certification for two fiscal years and will be subject to
additional sanctions. Please refer to Note 2, Significant
Accounting Policies, for further discussion.
Cohort
Default Rates
To remain eligible to participate in Title IV programs,
educational institutions must maintain student loan cohort
default rates below specified levels. Each cohort is the group
of students who first enter into student loan repayment during a
federal fiscal year (ending September 30). The currently
applicable cohort default rate for each cohort is the percentage
of the students in the cohort who default on their student loans
prior to the end of the following federal fiscal year, which
represents a two-year measuring period. An educational
institution will lose its eligibility to participate in some or
all Title IV programs if its student loan cohort default
rate equals or exceeds 25% for three consecutive years or 40%
for any given year. If our student loan default rates approach
these limits, we may be required to increase efforts and
resources dedicated to improving these default rates.
The cohort default rate for University of Phoenix was 12.9% for
the 2008 federal fiscal year and has been increasing over the
past several years. We expect this upward trend to intensify due
to the current challenging economic climate and the continuing
effect of the historical growth in our associates degree
student population. Consistent with this, the available
preliminary data for the University of Phoenix 2009 cohort
reflect a substantially higher default rate than the 2008
cohort, although we do not expect the rate to exceed 25%.
U.S.
Department of Education Audits and Other Matters
The U.S. Department of Education periodically reviews
institutions participating in Title IV programs for
compliance with applicable standards and regulations. In
February 2009, the Department performed a program review of
University of Phoenixs policies and procedures involving
Title IV programs. On December 31, 2009, University of
Phoenix received the Departments Program Review Report,
which was a preliminary report of the Departments
findings. We responded to the preliminary report in the third
quarter of fiscal year 2010.
In June 2010, we posted a letter of credit in the amount of
approximately $126 million as required to comply with the
Departments standards of financial responsibility. The
Departments regulations require institutions to post a
letter of credit where a program review report cites untimely
return of unearned Title IV funds for more than 10% of the
sampled students in a period covered by the review. The letter
of credit is fully cash collateralized and must be maintained
until at least June 30, 2012. The Department issued its
Final Program Review Determination Letter on June 16, 2010,
which confirmed we had completed the corrective actions and
satisfied the obligations arising from the review as described
below.
Of the six findings contained in the Final Program Review
Determination Letter, three related to University of
Phoenixs procedures for determining student withdrawal
dates and associated timing of the return of unearned
Title IV funds, which averaged no more than six days
outside the required timeframe in the affected sample files.
There were no findings that indicated incorrect amounts of
Title IV funds had been
154
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
returned. In the second quarter of fiscal year 2010, we made
payments totaling $0.7 million to reimburse the Department
for the cost of Title IV funds associated with these
findings.
The remaining findings involved isolated clerical errors
verifying student-supplied information and, as self-reported by
University of Phoenix in 2008, the calculation of student
financial need where students were eligible for tuition and fee
waivers and discounts, and the use of Title IV funds for
non-program purposes such as transcripts, applications and late
fees.
Higher
Learning Commission (HLC)
In August 2010, University of Phoenix received a letter from HLC
requiring University of Phoenix to provide certain information
and evidence of compliance with HLC accreditation standards. The
letter related to the August 2010 report published by the GAO of
its undercover investigation into the enrollment and recruiting
practices of a number of proprietary institutions of higher
education, including University of Phoenix. We submitted the
response to HLC on September 10, 2010 and subsequently
received a request for additional information. We have been
informed that our response will be evaluated by a special
committee in early 2011, and that the committee will make
recommendations, if any, to the HLC board. If, after review, HLC
determines that our response is unsatisfactory, HLC has informed
us that it may impose additional unspecified monitoring or
sanctions. In addition, HLC has recently imposed additional
requirements on University of Phoenix with respect to approval
of new or relocated campuses and additional locations. These
requirements may lengthen or make more challenging the approval
process for these sites.
State
Regulatory Matters
From time to time as part of the normal course of business, our
domestic post-secondary education institutions are subject to
audits and reviews by various state higher education regulatory
bodies. During the third quarter of fiscal year 2010, we
recorded a $5.0 million charge included in instructional
costs and services in our Consolidated Statements of Income,
which represented our best estimate of an expected loss related
to a state audit. During the fourth quarter of fiscal year 2010,
we reversed the $5.0 million charge as the respective
regulator concluded we do not have an associated financial
exposure.
Securities
and Exchange Commission Informal Inquiry
During October 2009, we received notification from the
Enforcement Division of the Securities and Exchange Commission
indicating that they had commenced an informal inquiry into our
revenue recognition practices. Based on the information and
documents that the Securities and Exchange Commission has
requested from us
and/or our
auditors, which relate to our revenue recognition practices and
other matters, including our policies and practices relating to
student refunds, the return of Title IV funds to lenders
and bad debt reserves, the eventual scope, duration and outcome
of the inquiry cannot be predicted at this time. We are
cooperating fully with the Securities and Exchange Commission in
connection with the inquiry.
Internal
Revenue Service Audit
Please refer to Note 14, Income Taxes, for discussion of
Internal Revenue Service audits.
|
|
Note 20.
|
Segment
Reporting
|
We operate primarily in the education industry. We have
organized our segments using a combination of factors primarily
focusing on the type of educational services provided and
products delivered. Our six operating segments are managed in
the following four reportable segments:
|
|
|
|
1.
|
University of Phoenix;
|
Apollo Global:
155
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The University of Phoenix segment offers
associates, bachelors, masters and doctoral
degrees in a variety of program areas. University of Phoenix
offers its educational programs worldwide through its online
education delivery system and at its campus locations and
learning centers.
The Apollo Global BPP segment is a
provider of education and training to professionals in the legal
and finance industries. BPP provides these services through
schools located in the United Kingdom, a European network of BPP
offices, and the sale of books and other publications globally.
We began reporting Apollo Global BPP as a separate
reportable segment during the fourth quarter of fiscal year 2009
following Apollo Globals acquisition of BPP on
July 30, 2009.
The Apollo Global Other segment
includes Western International University, UNIACC, ULA and the
Apollo Global corporate operations. Western International
University offers associates, bachelors and
masters degrees in a variety of program areas as well as
certificate programs at its Arizona campus locations and online
at Western International University Interactive Online. UNIACC
offers bachelors and masters programs on campuses in
Chile and online. ULA offers degree programs at its four
campuses throughout Mexico. We began presenting Western
International University in the Apollo Global Other
reportable segment in the third quarter of fiscal year 2010
following our contribution of all of the common stock of Western
International University, which was previously our wholly-owned
subsidiary, to Apollo Global. We have revised our financial
information by reportable segment for all periods presented to
conform to our current presentation. Please refer to
Note 4, Acquisitions, for further discussion.
The Other Schools segment includes IPD, CFFP and
Meritus. IPD provides program development, administration and
management consulting services to private colleges and
universities to establish or expand their programs for working
learners. CFFP provides financial services education programs,
including the Master of Science in three majors and
certification programs in retirement, asset management, and
other financial planning areas. Meritus offers degree programs
online to students throughout Canada and abroad.
In the second quarter of fiscal year 2010, we began presenting
Insight Schools as held for sale and discontinued operations.
Insight Schools was previously reported as its own reportable
segment. As Insight Schools is presented in discontinued
operations in our Consolidated Statements of Income for all
periods presented, we have revised our financial information by
segment to conform to our current presentation.
Our reportable segments have been determined based on the method
by which management evaluates performance and allocates
resources. Management evaluates performance based on reportable
segment profit. This measure of profit includes allocating
corporate support costs to each segment as part of transfer
pricing arrangements
and/or a
general allocation, but excludes taxes, interest income and
expense, foreign currency fluctuations and certain revenue and
unallocated corporate charges. At the discretion of management,
certain corporate costs are not allocated to the subsidiaries
due to their designation as special charges because of their
infrequency of occurrence, the non-cash nature of the expense
and/or the
determination that the allocation of these costs to the
subsidiaries will not result in an appropriate measure of the
subsidiaries results. These costs include such items as
unscheduled or significant management bonuses, unusual severance
pay and stock-based compensation expense attributed to corporate
management and administrative employees. The Corporate caption
includes adjustments to reconcile segment results to
consolidated results which primarily consist of net revenue and
corporate charges that are not allocated to our reportable
segments.
During fiscal years 2010, 2009 and 2008, no individual customer
accounted for more than 10% of our consolidated net revenue.
156
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of financial information by reportable segment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
4,498,325
|
|
|
$
|
3,766,600
|
|
|
$
|
2,987,656
|
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
251,743
|
|
|
|
13,062
|
|
|
|
|
|
Other
|
|
|
78,253
|
|
|
|
76,083
|
|
|
|
42,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
329,996
|
|
|
|
89,145
|
|
|
|
42,301
|
|
Other Schools
|
|
|
95,706
|
|
|
|
95,045
|
|
|
|
93,629
|
|
Corporate
|
|
|
1,792
|
|
|
|
2,776
|
|
|
|
9,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
4,925,819
|
|
|
$
|
3,953,566
|
|
|
$
|
3,133,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix(1)
|
|
$
|
1,447,636
|
|
|
$
|
1,131,331
|
|
|
$
|
817,609
|
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP(2)
|
|
|
(186,552
|
)
|
|
|
(6,607
|
)
|
|
|
|
|
Other(3)
|
|
|
(31,147
|
)
|
|
|
(11,431
|
)
|
|
|
1,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
(217,699
|
)
|
|
|
(18,038
|
)
|
|
|
1,337
|
|
Other Schools
|
|
|
9,201
|
|
|
|
6,931
|
|
|
|
17,120
|
|
Corporate(4)
|
|
|
(228,414
|
)
|
|
|
(54,289
|
)
|
|
|
(68,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
1,010,724
|
|
|
|
1,065,935
|
|
|
|
767,376
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,920
|
|
|
|
12,591
|
|
|
|
30,078
|
|
Interest expense
|
|
|
(11,891
|
)
|
|
|
(4,448
|
)
|
|
|
(3,450
|
)
|
Other, net
|
|
|
(685
|
)
|
|
|
(7,151
|
)
|
|
|
6,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
1,001,068
|
|
|
$
|
1,066,927
|
|
|
$
|
800,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
50,770
|
|
|
$
|
59,337
|
|
|
$
|
53,390
|
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
32,917
|
|
|
|
3,115
|
|
|
|
|
|
Other
|
|
|
7,998
|
|
|
|
6,801
|
|
|
|
2,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
40,915
|
|
|
|
9,916
|
|
|
|
2,775
|
|
Other Schools
|
|
|
982
|
|
|
|
1,405
|
|
|
|
842
|
|
Corporate
|
|
|
54,368
|
|
|
|
42,692
|
|
|
|
35,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
147,035
|
|
|
$
|
113,350
|
|
|
$
|
92,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
39,623
|
|
|
$
|
49,031
|
|
|
$
|
37,119
|
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
10,287
|
|
|
|
504
|
|
|
|
|
|
Other
|
|
|
5,994
|
|
|
|
6,490
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
16,281
|
|
|
|
6,994
|
|
|
|
546
|
|
Other Schools
|
|
|
456
|
|
|
|
639
|
|
|
|
425
|
|
Corporate
|
|
|
111,817
|
|
|
|
70,692
|
|
|
|
66,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
168,177
|
|
|
$
|
127,356
|
|
|
$
|
104,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
University of Phoenix operating
income for fiscal year 2009 includes $80.5 million in
charges associated with an estimated litigation loss. Please
refer to Note 19, Commitments and Contingencies, for
further discussion.
|
|
(2)
|
|
BPPs fiscal year 2010
operating loss includes goodwill and other intangibles
impairments totaling $175.9 million. Refer to Note 9,
Goodwill and Intangible Assets, for further discussion.
|
|
(3)
|
|
The Apollo Global Other
fiscal year 2010 operating loss includes an $8.7 million
impairment of ULAs goodwill. Refer to Note 9,
Goodwill and Intangible Assets, for further discussion.
|
|
(4)
|
|
The Corporate fiscal year 2010
operating loss includes $178.0 million in charges
associated with the Securities Class Action matter. Refer
to Note 19, Commitments and Contingencies, for further
discussion.
|
157
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of our consolidated assets by reportable segment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
1,263,024
|
|
|
$
|
1,112,002
|
|
|
$
|
920,553
|
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
511,124
|
|
|
|
778,416
|
|
|
|
|
|
Other
|
|
|
116,483
|
|
|
|
148,125
|
|
|
|
131,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
627,607
|
|
|
|
926,541
|
|
|
|
131,689
|
|
Insight Schools(1)
|
|
|
|
|
|
|
26,590
|
|
|
|
20,294
|
|
Other Schools
|
|
|
33,114
|
|
|
|
37,590
|
|
|
|
39,735
|
|
Corporate(1)
|
|
|
1,677,706
|
|
|
|
1,160,654
|
|
|
|
748,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,601,451
|
|
|
$
|
3,263,377
|
|
|
$
|
1,860,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Insight Schools assets are held for sale and included in
our Corporate caption as of August 31, 2010. Please refer
to Note 3, Discontinued Operations, for further discussion. |
A summary of financial information by geographical area based on
country of domicile for our respective operating locations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4,617,533
|
|
|
$
|
3,879,615
|
|
|
$
|
3,114,777
|
|
United Kingdom
|
|
|
228,177
|
|
|
|
13,062
|
|
|
|
|
|
Latin America
|
|
|
53,765
|
|
|
|
54,536
|
|
|
|
13,712
|
|
Other
|
|
|
26,344
|
|
|
|
6,353
|
|
|
|
4,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
4,925,819
|
|
|
$
|
3,953,566
|
|
|
$
|
3,133,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Long-lived assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
547,715
|
|
|
$
|
496,493
|
|
|
$
|
470,092
|
|
United Kingdom
|
|
|
430,475
|
|
|
|
698,273
|
|
|
|
|
|
Latin America
|
|
|
81,870
|
|
|
|
86,137
|
|
|
|
77,247
|
|
Other
|
|
|
32,229
|
|
|
|
2,633
|
|
|
|
860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
1,092,289
|
|
|
$
|
1,283,536
|
|
|
$
|
548,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-lived assets include property and equipment, net, goodwill,
and intangible assets, net. |
|
|
Note 21.
|
Quarterly
Results of Operations (Unaudited)
|
Seasonality
Our operations are generally subject to seasonal trends. We
experience, and expect to continue to experience, fluctuations
in our results of operations, principally as a result of
seasonal variations in the level of University of Phoenix
enrollments. Although University of Phoenix enrolls students
throughout the year, its
158
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
net revenue is generally lower in our second fiscal quarter
(December through February) than the other quarters due to
holiday breaks in December and January.
Quarterly
Results of Operations
The following unaudited consolidated interim financial
information presented should be read in conjunction with other
information included in our consolidated financial statements.
The following unaudited consolidated financial information
reflects all adjustments necessary for the fair presentation of
the results of interim periods. The following tables set forth
selected unaudited quarterly financial information for each of
our last eight quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
2010
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
(In thousands, except per share data)
|
|
November 30(1)
|
|
|
February 28
|
|
|
May 31
|
|
|
August 31(3)
|
|
|
Consolidated Quarterly Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,258,659
|
|
|
$
|
1,070,336
|
|
|
$
|
1,337,404
|
|
|
$
|
1,259,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
519,444
|
|
|
|
517,344
|
|
|
|
540,594
|
|
|
|
547,700
|
|
Selling and promotional
|
|
|
274,075
|
|
|
|
263,549
|
|
|
|
273,480
|
|
|
|
301,562
|
|
General and administrative
|
|
|
72,081
|
|
|
|
71,953
|
|
|
|
79,712
|
|
|
|
91,049
|
|
Goodwill and other intangibles impairment
|
|
|
|
|
|
|
|
|
|
|
8,712
|
|
|
|
175,858
|
|
Estimated litigation loss
|
|
|
|
|
|
|
44,500
|
|
|
|
132,600
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
865,600
|
|
|
|
897,346
|
|
|
|
1,035,098
|
|
|
|
1,117,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
393,059
|
|
|
|
172,990
|
|
|
|
302,306
|
|
|
|
142,369
|
|
Interest income
|
|
|
932
|
|
|
|
525
|
|
|
|
827
|
|
|
|
636
|
|
Interest expense
|
|
|
(2,908
|
)
|
|
|
(3,220
|
)
|
|
|
(1,979
|
)
|
|
|
(3,784
|
)
|
Other, net
|
|
|
(670
|
)
|
|
|
(79
|
)
|
|
|
(1,312
|
)
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
390,413
|
|
|
|
170,216
|
|
|
|
299,842
|
|
|
|
140,597
|
|
Provision for income taxes
|
|
|
(149,981
|
)
|
|
|
(69,064
|
)
|
|
|
(122,390
|
)
|
|
|
(122,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
240,432
|
|
|
|
101,152
|
|
|
|
177,452
|
|
|
|
17,969
|
|
(Loss) income from discontinued operations, net of tax
|
|
|
(300
|
)
|
|
|
(10,638
|
)
|
|
|
2,084
|
|
|
|
(6,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
240,132
|
|
|
|
90,514
|
|
|
|
179,536
|
|
|
|
11,399
|
|
Net loss (income) attributable to noncontrolling interests
|
|
|
10
|
|
|
|
2,092
|
|
|
|
(253
|
)
|
|
|
29,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Apollo
|
|
$
|
240,142
|
|
|
$
|
92,606
|
|
|
$
|
179,283
|
|
|
$
|
40,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share Basic:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to Apollo
|
|
$
|
1.55
|
|
|
$
|
0.67
|
|
|
$
|
1.17
|
|
|
$
|
0.32
|
|
Discontinued operations attributable to Apollo
|
|
|
|
|
|
|
(0.07
|
)
|
|
|
0.02
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share attributable to Apollo
|
|
$
|
1.55
|
|
|
$
|
0.60
|
|
|
$
|
1.19
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share Diluted:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to Apollo
|
|
$
|
1.54
|
|
|
$
|
0.67
|
|
|
$
|
1.16
|
|
|
$
|
0.32
|
|
Discontinued operations attributable to Apollo
|
|
|
|
|
|
|
(0.07
|
)
|
|
|
0.02
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share attributable to Apollo
|
|
$
|
1.54
|
|
|
$
|
0.60
|
|
|
$
|
1.18
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
154,824
|
|
|
|
154,119
|
|
|
|
151,127
|
|
|
|
147,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
156,045
|
|
|
|
155,168
|
|
|
|
152,291
|
|
|
|
148,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have made certain reclassifications to the consolidated
quarterly statement of operations for the first quarter of
fiscal year 2010 based on our presentation of Insight Schools as
discontinued operations. Refer to Note 3, Discontinued
Operations, for further discussion. |
159
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(2) |
|
The sum of quarterly income per share may not equal annual
income per share due to rounding. |
|
(3) |
|
The effective income tax rate and net loss attributable to
noncontrolling interests was significantly affected in the
fourth quarter of fiscal year 2010 as a result of an
impairment charge for the BPP reportable segment. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
2009(1)
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
($ in thousands, except per share data)
|
|
November 30
|
|
|
February 28
|
|
|
May 31
|
|
|
August 31
|
|
|
Consolidated Quarterly Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
963,282
|
|
|
$
|
869,543
|
|
|
$
|
1,047,574
|
|
|
$
|
1,073,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
368,976
|
|
|
|
364,416
|
|
|
|
390,642
|
|
|
|
443,720
|
|
Selling and promotional
|
|
|
226,363
|
|
|
|
224,567
|
|
|
|
241,259
|
|
|
|
260,695
|
|
General and administrative
|
|
|
57,866
|
|
|
|
69,450
|
|
|
|
70,862
|
|
|
|
88,315
|
|
Estimated litigation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
653,205
|
|
|
|
658,433
|
|
|
|
702,763
|
|
|
|
873,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
310,077
|
|
|
|
211,110
|
|
|
|
344,811
|
|
|
|
199,937
|
|
Interest income
|
|
|
5,377
|
|
|
|
3,430
|
|
|
|
2,395
|
|
|
|
1,389
|
|
Interest expense
|
|
|
(1,429
|
)
|
|
|
(621
|
)
|
|
|
(509
|
)
|
|
|
(1,889
|
)
|
Other, net
|
|
|
(2,432
|
)
|
|
|
(201
|
)
|
|
|
1,782
|
|
|
|
(6,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
311,593
|
|
|
|
213,718
|
|
|
|
348,479
|
|
|
|
193,137
|
|
Provision for income taxes
|
|
|
(129,345
|
)
|
|
|
(85,190
|
)
|
|
|
(142,537
|
)
|
|
|
(99,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
182,248
|
|
|
|
128,528
|
|
|
|
205,942
|
|
|
|
93,489
|
|
Loss from discontinued operations, net of tax
|
|
|
(1,940
|
)
|
|
|
(3,452
|
)
|
|
|
(5,330
|
)
|
|
|
(5,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
180,308
|
|
|
|
125,076
|
|
|
|
200,612
|
|
|
|
87,834
|
|
Net loss attributable to noncontrolling interests
|
|
|
52
|
|
|
|
270
|
|
|
|
492
|
|
|
|
3,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Apollo
|
|
$
|
180,360
|
|
|
$
|
125,346
|
|
|
$
|
201,104
|
|
|
$
|
91,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share Basic:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to Apollo
|
|
$
|
1.15
|
|
|
$
|
0.80
|
|
|
$
|
1.31
|
|
|
$
|
0.63
|
|
Discontinued operations attributable to Apollo
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share attributable to Apollo
|
|
$
|
1.13
|
|
|
$
|
0.78
|
|
|
$
|
1.28
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share Diluted:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to Apollo
|
|
$
|
1.13
|
|
|
$
|
0.79
|
|
|
$
|
1.30
|
|
|
$
|
0.62
|
|
Discontinued operations attributable to Apollo
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share attributable to Apollo
|
|
$
|
1.12
|
|
|
$
|
0.77
|
|
|
$
|
1.26
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
159,138
|
|
|
|
160,153
|
|
|
|
157,616
|
|
|
|
154,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
160,762
|
|
|
|
162,757
|
|
|
|
159,305
|
|
|
|
155,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have made certain reclassifications to the fiscal year 2009
consolidated quarterly statements of operations based on our
presentation of Insight Schools as discontinued operations.
Refer to Note 3, Discontinued Operations, for further
discussion. |
|
(2) |
|
The sum of quarterly income per share may not equal annual
income per share due to rounding. |
160
Item 9
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
Item 9A
Controls and Procedures
Disclosure
Controls and Procedures
We intend to maintain disclosure controls and procedures
designed to provide reasonable assurance that information
required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the specified time periods and
accumulated and communicated to our management, including our
Co-Chief Executive Officers (Principal Executive
Officers) and our Senior Vice President and Chief
Financial Officer (Principal Financial Officer), as
appropriate, to allow timely decisions regarding required
disclosure. We have established a Disclosure Committee,
consisting of certain members of management, to assist in this
evaluation. Our Disclosure Committee meets on a quarterly basis
and more often if necessary.
Our management, under the supervision and with the participation
of our Principal Executive Officers and Principal Financial
Officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in
Rules 13a-15(e)
or 15d-15(e)
promulgated under the Securities Exchange Act), as of the end of
the period covered by this report. Based on that evaluation,
management concluded that, as of that date, our disclosure
controls and procedures were effective at the reasonable
assurance level.
Attached as exhibits to this Annual Report on
Form 10-K
are certifications of our Principal Executive Officers and
Principal Financial Officer, which are required in accordance
with
Rule 13a-14
of the Securities Exchange Act. This Disclosure Controls and
Procedures section includes information concerning
managements evaluation of disclosure controls and
procedures referred to in those certifications and, as such,
should be read in conjunction with the certifications of our
Principal Executive Officers and Principal Financial Officer.
Managements
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining
effective internal control over financial reporting.
Managements intent is to design a process to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with GAAP in the United States
of America.
Our internal control over financial reporting includes those
policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and
expenditures are being made only in accordance with
authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on
the financial statements.
Management performed an assessment of the effectiveness of our
internal control over financial reporting as of August 31,
2010, utilizing the criteria described in the Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The objective of this assessment was to determine
whether our internal control over financial reporting was
effective as of August 31, 2010. Based on our assessment,
management believes that, as of August 31, 2010, the
Companys internal control over financial reporting is
effective.
161
Our independent registered public accounting firm,
Deloitte & Touche LLP, independently assessed the
effectiveness of the Companys internal control over
financial reporting. Deloitte & Touche LLP has issued
a report, which is included at the end of Part II,
Item 9A of this Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
There have not been any changes in our internal control over
financial reporting during the quarter ended August 31,
2010, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
162
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Apollo Group, Inc. and Subsidiaries
Phoenix, Arizona
We have audited the internal control over financial reporting of
Apollo Group, Inc. and subsidiaries (the Company) as
of August 31, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of August 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of August 31,
2010 and 2009, and the related consolidated statements of
income, comprehensive income, changes in shareholders
equity, and cash flows for each of the three years in the period
ended August 31, 2010 of the Company, and our report dated
October 20, 2010 expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE &
TOUCHE LLP
Phoenix, Arizona
October 20, 2010
163
PART III
Information relating to our Board of Directors, Executive
Officers, and Corporate Governance required by this item appears
in the Information Statement for Apollo Group, Inc., to be filed
within 120 days of our fiscal year end (August 31,
2010) and such information is incorporated herein by
reference.
Our employees must act ethically at all times and in accordance
with the policies in our Code of Business Conduct and Ethics. We
require full compliance with this policy from all designated
employees including our Co-Chief Executive Officers, Chief
Financial Officer, and Chief Accounting Officer. We publish the
policy, and any amendments or waivers to the policy, in the
Corporate Governance section of our website located at
www.apollogrp.edu/CorporateGovernance.
The charters of our Audit Committee, Compensation Committee,
Equity Award Subcommittee, and Nominating and Governance
Committee are also available in the Corporate Governance section
our website located at www.apollogrp.edu/CorporateGovernance.
Item 11
Executive Compensation
Information relating to this item appears in the Information
Statement for Apollo Group, Inc., to be filed within
120 days of our fiscal year end (August 31,
2010) and such information is incorporated herein by
reference.
Item 12
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Information relating to this item appears in the Information
Statement for Apollo Group, Inc., to be filed within
120 days of our fiscal year end (August 31,
2010) and such information is incorporated herein by
reference.
Item 13
Certain Relationships and Related Transactions, and Director
Independence
See Note 18, Related Person Transactions in Item 8,
Financial Statements and Supplementary Data, which is
incorporated by reference in this Item 13.
Other information relating to this item appears in the
Information Statement for Apollo Group, Inc., to be filed within
120 days of our fiscal year end (August 31,
2010) and such information is incorporated herein by
reference.
Item 14
Principal Accounting Fees and Services
Information relating to this item appears in the Information
Statement for Apollo Group, Inc., to be filed within
120 days of our fiscal year end (August 31,
2010) and such information is incorporated herein by
reference.
164
PART IV
Item 15
Exhibits, Financial Statement Schedules
(a) The
following documents are filed as part of this Annual Report on
Form 10-K:
1. Financial Statements filed as part of this
report
|
|
|
|
|
Index to Consolidated Financial Statements
|
|
Page
|
|
|
|
|
101
|
|
|
|
|
102
|
|
|
|
|
103
|
|
|
|
|
104
|
|
|
|
|
105
|
|
|
|
|
106
|
|
|
|
|
107
|
|
2. Financial Statement Schedules
All financial statement schedules have been omitted since the
required information is not applicable or is not present in
amounts sufficient to require submission of the schedule, or
because the information required is included in the Consolidated
Financial Statements and Notes thereto.
3. Exhibits
165
Index
to Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Number
|
|
Filing Date
|
|
Herewith
|
|
3.1
|
|
Amended and Restated Articles of Incorporation of Apollo Group,
Inc., as amended through June 20, 2007
|
|
10-Q
|
|
No. 000-25232
|
|
3.1
|
|
January 7, 2010
|
|
|
3.2
|
|
Amended and Restated Bylaws of Apollo Group, Inc.
|
|
10-Q
|
|
No. 000-25232
|
|
3.2
|
|
April 10, 2006
|
|
|
10.1
|
|
Apollo Group, Inc. Long-Term Incentive Plan*
|
|
S-1
|
|
No. 33-83804
|
|
10.3
|
|
September 9, 1994
|
|
|
10.2
|
|
Apollo Group, Inc. Plan Amendment to Long-Term Incentive Plan*
|
|
10-Q
|
|
No. 000-25232
|
|
10.5
|
|
June 28, 2007
|
|
|
10.3
|
|
Apollo Group, Inc. Plan Amendment to Long-Term Incentive Plan*
|
|
10-K
|
|
No. 000-25232
|
|
10.3
|
|
October 27, 2009
|
|
|
10.4
|
|
Apollo Group, Inc. Amended and Restated Savings and Investment
Plan*
|
|
10-Q
|
|
No. 000-25232
|
|
10.4
|
|
January 14, 2002
|
|
|
10.5
|
|
Apollo Group, Inc. Third Amended and Restated 1994 Employee
Stock Purchase Plan*
|
|
10-K
|
|
No. 000-25232
|
|
10.5
|
|
November 14, 2005
|
|
|
10.6
|
|
Apollo Group, Inc. 2000 Stock Incentive Plan (as amended and
restated June 25, 2009)*
|
|
10-Q
|
|
No. 000-25232
|
|
10.3
|
|
June 29, 2009
|
|
|
10.7
|
|
Apollo Group, Inc. 2000 Stock Incentive Plan Amendment
|
|
10-Q
|
|
No. 000-25232
|
|
10.3
|
|
June 30, 2010
|
|
|
10.8
|
|
Form of Apollo Group, Inc. Non-Employee Director Stock Option
Agreement*
|
|
10-Q
|
|
No. 000-25232
|
|
10.6
|
|
June 28, 2007
|
|
|
10.9
|
|
Form of Apollo Group, Inc. Non-Employee Director Restricted
Stock Unit Award Agreement*
|
|
10-Q
|
|
No. 000-25232
|
|
10.7
|
|
June 28, 2007
|
|
|
10.10
|
|
Form of Apollo Group, Inc. Stock Option Agreement (for officers
with an employment agreement)*
|
|
10-Q
|
|
No. 000-25232
|
|
10.3
|
|
January 8, 2009
|
|
|
10.11
|
|
Form of Non-Statutory Stock Option Agreement (for officers
without an employment agreement)*
|
|
10-Q
|
|
No. 000-25232
|
|
10.4
|
|
January 8, 2009
|
|
|
10.12
|
|
Form of Apollo Group, Inc. Restricted Stock Unit Award Agreement
(for officers with an employment agreement)*
|
|
10-Q
|
|
No. 000-25232
|
|
10.1
|
|
January 8, 2009
|
|
|
10.13
|
|
Form of Apollo Group, Inc. Restricted Stock Unit Award Agreement
(for officers without an employment agreement)*
|
|
10-Q
|
|
No. 000-25232
|
|
10.2
|
|
January 8, 2009
|
|
|
10.14
|
|
Aptimus, Inc. 2001 Stock Plan*
|
|
S-8
|
|
No. 333-147151
|
|
99.1
|
|
November 5, 2007
|
|
|
10.15
|
|
Apollo Group, Inc. Stock Option Assumption Agreement Aptimus,
Inc. 2001 Stock Plan*
|
|
S-8
|
|
No. 333-147151
|
|
99.2
|
|
November 5, 2007
|
|
|
10.16
|
|
Apollo Group, Inc. Stock Appreciation Right Assumption Agreement
Aptimus, Inc. 2001 Stock Plan*
|
|
S-8
|
|
No. 333-147151
|
|
99.3
|
|
November 5, 2007
|
|
|
10.17
|
|
Aptimus, Inc. 1997 Stock Option Plan, as amended*
|
|
S-8
|
|
No. 333-147151
|
|
99.4
|
|
November 5, 2007
|
|
|
10.18
|
|
Apollo Group, Inc. Stock Option Assumption Agreement Aptimus,
Inc. 1997 Stock Option Plan, as amended*
|
|
S-8
|
|
No. 333-147151
|
|
99.5
|
|
November 5, 2007
|
|
|
10.19
|
|
Apollo Group, Inc. Executive Officer Performance Incentive Plan*
|
|
10-Q
|
|
No. 000-25232
|
|
10.1
|
|
January 8, 2008
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Number
|
|
Filing Date
|
|
Herewith
|
|
10.20
|
|
Apollo Group, Inc. Deferral Election Program for Non-Employee
Board Members*
|
|
10-K
|
|
No. 000-25232
|
|
10.20
|
|
October 27, 2009
|
|
|
10.21
|
|
Apollo Group, Inc. Senior Executive Severance Pay Plan*
|
|
10-Q
|
|
No. 000-25232
|
|
10.1
|
|
June 30, 2010
|
|
|
10.22
|
|
Form of Performance Share Award Agreement*
|
|
10-Q
|
|
No. 000-25232
|
|
10.2
|
|
June 30, 2010
|
|
|
10.23
|
|
Form of Indemnification Agreement Employee Director*
|
|
10-K
|
|
|
|
|
|
|
|
X
|
10.24
|
|
Form of Indemnification Agreement Outside Director*
|
|
10-K
|
|
|
|
|
|
|
|
X
|
10.25
|
|
Amended and Restated Employment Agreement between Apollo Group,
Inc. and John G. Sperling, dated December 31, 2008*
|
|
10-Q
|
|
No. 000-25232
|
|
10.10
|
|
January 8, 2009
|
|
|
10.26
|
|
Amended and Restated Deferred Compensation Agreement between
Apollo Group, Inc. and John G. Sperling, dated December 31,
2008*
|
|
10-Q
|
|
No. 000-25232
|
|
10.11
|
|
January 8, 2009
|
|
|
10.27
|
|
Shareholder Agreement among Apollo Group, Inc. and holders of
Apollo Group Class B common stock, dated September 7,
1994
|
|
S-1
|
|
No. 33-83804
|
|
10.10
|
|
September 9, 1994
|
|
|
10.27b
|
|
Amendment to Shareholder Agreement among Apollo Group, Inc. and
holders of Apollo Group Class B common stock, dated
May 25, 2001
|
|
10-K
|
|
No. 000-25232
|
|
10.10b
|
|
November 28, 2001
|
|
|
10.27c
|
|
Amendment to Shareholder Agreement among Apollo Group, Inc. and
holders of Apollo Group Class B common stock, dated
June 23, 2006
|
|
10-K
|
|
No. 000-25232
|
|
10.23c
|
|
October 27, 2009
|
|
|
10.27d
|
|
Amendment to Shareholder Agreement among Apollo Group, Inc. and
holders of Apollo Group Class B common stock, dated
May 19, 2009
|
|
10-K
|
|
No. 000-25232
|
|
10.23d
|
|
October 27, 2009
|
|
|
10.28
|
|
Employment Agreement between Apollo Group, Inc. and Gregory W.
Cappelli, dated March 31, 2007*
|
|
10-K
|
|
No. 000-25232
|
|
10.18
|
|
May 22, 2007
|
|
|
10.29
|
|
Stock Option Agreement between Apollo Group, Inc. and Gregory W.
Cappelli, dated June 28, 2007*
|
|
10-Q
|
|
No. 000-25232
|
|
10.10
|
|
June 28, 2007
|
|
|
10.30
|
|
Amendment to Employment Agreement between Apollo Group, Inc. and
Gregory Cappelli, dated December 12, 2008*
|
|
10-Q
|
|
No. 000-25232
|
|
10.6
|
|
January 8, 2009
|
|
|
10.31
|
|
Amendment No. 2 to Employment Agreement between Apollo
Group, Inc. and Gregory Cappelli, dated April 24, 2009*
|
|
8-K
|
|
No. 000-25232
|
|
10.1
|
|
April 27, 2009
|
|
|
10.32
|
|
Amended and Restated Employment Agreement between Apollo Group,
Inc. and Joseph L. DAmico, dated May 18, 2010*
|
|
8-K
|
|
No. 000-25232
|
|
10.2
|
|
May 17, 2010
|
|
|
10.33
|
|
Employment Agreement between Apollo Group, Inc. and P. Robert
Moya, dated August 31, 2007*
|
|
10-K
|
|
No. 000-25232
|
|
10.26
|
|
October 29, 2007
|
|
|
10.34
|
|
Amendment to Employment Agreement between Apollo Group, Inc. and
P. Robert Moya, dated December 12, 2008*
|
|
10-Q
|
|
No. 000-25232
|
|
10.9
|
|
January 8, 2009
|
|
|
10.35
|
|
Transition Agreement between Apollo Group, Inc. and P. Robert
Moya, dated May 17, 2010*
|
|
8-K
|
|
No. 000-25232
|
|
10.1
|
|
May 17, 2010
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Number
|
|
Filing Date
|
|
Herewith
|
|
10.36
|
|
Employment Agreement between Apollo Group, Inc. and Charles B.
Edelstein, dated July 7, 2008*
|
|
8-K
|
|
No. 000-25232
|
|
10.1
|
|
July 8, 2008
|
|
|
10.37
|
|
Amendment to Employment Agreement between Apollo Group, Inc. and
Charles B. Edelstein, dated December 12, 2008*
|
|
10-Q
|
|
No. 000-25232
|
|
10.8
|
|
January 8, 2009
|
|
|
10.38
|
|
Amendment No. 2 to Employment Agreement between Apollo
Group, Inc. and Charles B. Edelstein, dated February 23,
2009*
|
|
10-Q
|
|
No. 000-25232
|
|
10.2
|
|
March 31, 2009
|
|
|
10.39
|
|
Amendment No. 3 to Employment Agreement between Apollo
Group, Inc. and Charles B. Edelstein, dated April 24, 2009*
|
|
8-K
|
|
No. 000-25232
|
|
10.2
|
|
April 27, 2009
|
|
|
10.40
|
|
Employment Agreement between Apollo Group, Inc. and Rob Wrubel,
dated August 7, 2007*
|
|
10-K
|
|
No. 000-25232
|
|
10.31
|
|
October 28, 2008
|
|
|
10.41
|
|
Amendment to Employment Agreement between Apollo Group, Inc. and
Rob Wrubel, dated October 31, 2008*
|
|
10-Q
|
|
No. 000-25232
|
|
10.5
|
|
January 8, 2009
|
|
|
10.42
|
|
Stock Option Repricing Agreement between Apollo Group, Inc. and
John G. Sperling, dated August 25, 2008*
|
|
10-K
|
|
No. 000-25232
|
|
10.32
|
|
October 28, 2008
|
|
|
10.43
|
|
Stock Option Repricing Agreement between Apollo Group, Inc. and
Peter V. Sperling, dated August 25, 2008*
|
|
10-K
|
|
No. 000-25232
|
|
10.33
|
|
October 28, 2008
|
|
|
10.44
|
|
Amended and Restated Capital Contribution Agreement among Apollo
Group, Inc., Carlyle Ventures Partners III, L.P. and Apollo
Global, Inc., dated July 28, 2009
|
|
10-K
|
|
No. 000-25232
|
|
10.46
|
|
October 27, 2009
|
|
|
10.45
|
|
Amended and Restated Shareholders Agreement among Apollo
Group, Inc., CVP III Coinvestment, L.P., Carlyle Ventures
Partners III, L.P. and Apollo Global, Inc., dated July 28,
2009
|
|
10-K
|
|
No. 000-25232
|
|
10.47
|
|
October 27, 2009
|
|
|
10.46
|
|
Registration Rights Agreement among Apollo Group, Inc., Carlyle
Ventures Partners III, L.P. and Apollo Global, Inc., dated
October 22, 2007
|
|
10-K
|
|
No. 000-25232
|
|
10.29
|
|
October 29, 2007
|
|
|
10.47
|
|
Amendment No. 1 to Registration Rights Agreement among
Apollo Group, Inc., Carlyle Ventures Partners III, L.P. and
Apollo Global, Inc., dated July 28, 2009
|
|
10-K
|
|
No. 000-25232
|
|
10.49
|
|
October 27, 2009
|
|
|
10.48
|
|
Agreement and Plan of Exchange among Apollo Global, Inc., Apollo
Group, Inc., Carlyle Ventures Partners III, L.P. and CVP III
Coinvestment, L.P., dated July 28, 2009
|
|
10-K
|
|
No. 000-25232
|
|
10.50
|
|
October 27, 2009
|
|
|
10.49
|
|
Credit Agreement among Apollo Group, Inc., the Lenders from time
to time party thereto, Bank of America, N.A. and BNP Paribas, as
Co-Documentation Agents, Wells Fargo Bank, N.A., as Syndication
Agent and JPMorgan Chase Bank, N.A., as Administrative Agent,
dated January 4, 2008
|
|
10-Q
|
|
No. 000-25232
|
|
10.2
|
|
January 8, 2008
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Number
|
|
Filing Date
|
|
Herewith
|
|
10.50
|
|
Rule 62(b) Bond and Supersedeas Bond, dated
February 15, 2008
|
|
10-Q
|
|
No. 000-25232
|
|
10.1
|
|
March 27, 2008
|
|
|
10.51
|
|
Registered Pledge and Master Security Agreement by and between
Travelers Casualty and Surety Company of America and Apollo
Group, Inc., entered into by Apollo Group, Inc. on
February 14, 2008
|
|
10-Q
|
|
No. 000-25232
|
|
10.2
|
|
March 27, 2008
|
|
|
10.52
|
|
General Contract of Indemnity by Apollo Group, Inc. for the
benefit of Travelers Casualty and Surety Company of America,
entered into by Apollo Group, Inc. on February 14, 2008
|
|
10-Q
|
|
No. 000-25232
|
|
10.3
|
|
March 27, 2008
|
|
|
10.53
|
|
Control Agreement by and among Apollo Group, Inc., Travelers
Casualty and Surety Company of America, and Smith Barney Inc.,
entered into by Apollo Group, Inc. on February 14, 2008
|
|
10-Q
|
|
No. 000-25232
|
|
10.4
|
|
March 27, 2008
|
|
|
10.54
|
|
Implementation Agreement, dated June 7, 2009, by and among
Apollo Global, Inc., Apollo UK Acquisition Company Limited and
BPP Holdings plc.
|
|
8-K
|
|
No. 000-25232
|
|
2.1
|
|
June 8, 2009
|
|
|
10.55
|
|
Rule 2.5 Announcement, dated June 8, 2009
|
|
8-K
|
|
No. 000-25232
|
|
2.2
|
|
June 8, 2009
|
|
|
10.56
|
|
Irrevocable Letter of Credit, dated June 9, 2010
|
|
10-Q
|
|
No. 000-25232
|
|
10.3
|
|
June 30, 2010
|
|
|
21
|
|
List of Subsidiaries
|
|
|
|
|
|
|
|
|
|
X
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
X
|
31.1
|
|
Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
X
|
31.2
|
|
Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
X
|
31.3
|
|
Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
X
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
32.2
|
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
32.3
|
|
Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
* |
|
Indicates a management contract or compensation plan. |
169
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
APOLLO GROUP, INC.
An Arizona Corporation
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By:
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/s/ Charles
B. Edelstein
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Charles B. Edelstein
Co-Chief Executive Officer and Director
(Principal Executive Officer)
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By:
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/s/ Gregory
W. Cappelli
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Gregory W. Cappelli
Co-Chief Executive Officer and Director
(Principal Executive Officer)
Date: October 20, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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/s/ John
G. Sperling
John
G. Sperling
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Founder, Executive Chairman of the Board and Director
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October 20, 2010
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/s/ Peter
V. Sperling
Peter
V. Sperling
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Vice Chairman of the Board and Director
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October 20, 2010
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/s/ Charles
B. Edelstein
Charles
B. Edelstein
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Co-Chief Executive Officer and Director (Principal Executive
Officer)
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October 20, 2010
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/s/ Gregory
W. Cappelli
Gregory
W. Cappelli
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Co-Chief Executive Officer and Director (Principal Executive
Officer)
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October 20, 2010
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/s/ Brian
L. Swartz
Brian
L. Swartz
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Senior Vice President and Chief Financial Officer (Principal
Financial Officer)
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October 20, 2010
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/s/ Gregory
J. Iverson
Gregory
J. Iverson
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Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
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October 20, 2010
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/s/ Terri
C. Bishop
Terri
C. Bishop
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Senior Advisor to the Office of Chief Executive Officer and
Director
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October 20, 2010
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/s/ Dino
J. DeConcini
Dino
J. DeConcini
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Director
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October 20, 2010
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170
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Signature
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Title
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Date
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/s/ K.
Sue Redman
K.
Sue Redman
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Director
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October 20, 2010
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/s/ James
R. Reis
James
R. Reis
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Director
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October 20, 2010
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/s/ George
A. Zimmer
George
A. Zimmer
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Director
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October 20, 2010
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/s/ Roy
A. Herberger
Roy
A. Herberger
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Director
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October 20, 2010
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/s/ Ann
Kirschner
Ann
Kirschner
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Director
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October 20, 2010
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/s/ Stephen
J. Giusto
Stephen
J. Giusto
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Director
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October 20, 2010
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/s/ Manuel
F. Rivelo
Manuel
F. Rivelo
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Director
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October 20, 2010
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/s/ Samuel
A. DiPiazza, Jr.
Samuel
A. DiPiazza, Jr.
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Director
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October 20, 2010
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171