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0000950153-08-001796.txt : 20081028
0000950153-08-001796.hdr.sgml : 20081028
20081028160721
ACCESSION NUMBER: 0000950153-08-001796
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 14
CONFORMED PERIOD OF REPORT: 20080831
FILED AS OF DATE: 20081028
DATE AS OF CHANGE: 20081028
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: APOLLO GROUP INC
CENTRAL INDEX KEY: 0000929887
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200]
IRS NUMBER: 860419443
STATE OF INCORPORATION: AZ
FISCAL YEAR END: 0831
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-25232
FILM NUMBER: 081144905
BUSINESS ADDRESS:
STREET 1: 4615 EAST ELWOOD ST
CITY: PHOENIX
STATE: AZ
ZIP: 85040
BUSINESS PHONE: 6029665394
MAIL ADDRESS:
STREET 1: 4615 E ELWOOD STREET
CITY: PHOENIX
STATE: AZ
ZIP: 85040
10-K
1
p13405e10vk.htm
FORM 10-K
e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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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, 2008
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OR
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o
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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 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
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Securities 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 29, 2008 (last day of the registrants most
recently completed second fiscal quarter), was approximately
$8.2 billion.
The number of shares outstanding for each of the
registrants classes of common stock as of October 10,
2008 is as follows:
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Apollo Group, Inc. Class A common stock, no par value
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158,543,000 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 2009 Annual
Meeting of 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. These
statements 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, objective, 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 education industry, including
the regulatory and other requirements 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 in Item 1A, Risk Factors;
and
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those factors set forth 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, or 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 30 years. We offer innovative and distinctive
educational programs and services at the high school,
undergraduate and graduate levels online and on-campus through
our wholly-owned subsidiaries, The University of Phoenix, Inc.
(University of Phoenix), Institute for Professional
Development (IPD), The College for Financial
Planning Institutes Corporation (CFP), Western
International University, Inc. (Western International
University), and Insight Schools, Inc. (Insight
Schools), and through our 80.1% owned subsidiary, Apollo
Global, Inc. (Apollo Global). We recently
established a new Canadian institution, Meritus University
(Meritus), which began operations in September 2008.
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 its educational programs worldwide through its
online education delivery system and on the ground at its
campuses and learning centers in 39 states and the District
of Columbia, Puerto Rico, Alberta and British Columbia, Canada,
Mexico, and the Netherlands. University of Phoenixs online
programs are designed to provide uniformity with University of
Phoenixs on-campus operations, which enhances University
of Phoenixs ability to expand into new markets while
maintaining academic quality. University of Phoenix has
customized computer programs for student tracking, marketing,
faculty recruitment and training, and academic quality
management, which we believe provides us with a competitive
advantage. University of Phoenixs net revenue represented
approximately 95.1% of our consolidated net revenue for the year
ended August 31, 2008.
Apollo Global: In October 2007, we
established Apollo Global as a joint venture with The Carlyle
Group to pursue investments in the international education
services industry. Carlyle, based in Washington D.C., is one of
the worlds largest private equity firms. Through Apollo
Global, we intend to capitalize on the significant global demand
for education services by acquiring postsecondary and other
schools outside of the U.S. We have agreed to commit up to
$801 million in cash or contributed assets and own 80.1% of
Apollo Global. Carlyle has agreed to commit up to
$199 million in cash or contributed assets and own the
remaining 19.9%. As of August 31, 2008, total cash
contributions made to Apollo Global were $61.0 million, of
which $48.9 million was funded by us. Apollo Global is
consolidated in our financial statements.
In the third and fourth quarters of fiscal year 2008, Apollo
Global completed its first two acquisitions, Universidad de
Artes, Ciencias y Comunicación (UNIACC) and
related entities on March 28, 2008, and Universidad
Latinoamericana, S.C. (ULA) and its related entity
on August 4, 2008. Apollo Global purchased 100% of UNIACC
for cash, assumed debt, and a future payment based on a multiple
of earnings. Apollo Global purchased a 65% ownership interest in
ULA for cash and assumed debt.
Insight Schools: We acquired Insight
Schools in October 2006. Insight Schools offers curriculum and
administrative services to public schools to operate full-time
online high school programs serving students in 10 states.
In some states, Insight Schools contracts with school districts
or other government entities to provide these services. In other
states, Insight Schools contracts with charter schools. The
public schools that Insight Schools contracts with are
accredited or are seeking accreditation by various accrediting
entities. In performing their services under these contracts,
Insight Schools provides students with a laptop computer and
printer, an online curriculum with over 120 available course
offerings and the instruction and support of state certified
teachers and online mentors. These online schools provide an
option for students who are seeking an alternative to
traditional high school, and who benefit from the ability to
learn at their own time, pace and location.
Western International
University: Western International University
is accredited by The Higher Learning Commission of the North
Central Association of Colleges and Schools and offers
undergraduate and graduate
4
degree program courses at Arizona campus locations, online at
Western International University Interactive Online, and
also through various joint educational agreements in China and
India.
Institute for Professional
Development: IPD provides program
development, administration and management consulting services
to private colleges and universities (Client
Institutions) to establish or expand their programs for
working adults. These services typically include degree program
design, curriculum development, market research, student
recruitment, accounting, and administrative services. IPD, which
provides these services in 21 states, 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.
College for Financial Planning Institutes
Corporation: CFP provides financial planning
education programs, including a Master of Science in three
majors, the Certified Financial Planner Professional Education
Programtm
Certification, and certification programs in retirement, asset
management, and other financial planning areas. CFP offers these
programs online and from its on-campus operations in Colorado.
CFP is accredited by The Higher Learning Commission of the North
Central Association of Colleges and Schools.
Meritus University: In May 2008,
Meritus received approval from the New Brunswick Department of
Post-Secondary Education, Training and Labour to offer its first
three programs, thereby establishing degree-granting status in
Canada. Meritus offers degree programs online to working
professionals throughout Canada and abroad.
The seven businesses described above are managed in the
following four reportable segments: University of Phoenix,
Apollo Global, Insight Schools and Other Schools. The Other
Schools segment includes Western International University, IPD,
CFP 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 revenue for fiscal
years 2008, 2007, and 2006 for each of our reportable segments:
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Year Ended August 31,
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($ millions)
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2008
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2007
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2006
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University of Phoenix
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$
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2,987.7
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$
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2,537.8
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$
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2,074.4
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Apollo Global
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13.4
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Insight Schools
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7.5
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2.0
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Other Schools
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122.5
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182.6
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402.1
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Corporate
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9.8
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1.4
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1.0
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Net Revenue
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$
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3,140.9
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$
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2,723.8
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$
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2,477.5
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The information required by Items 101(b) and 101(d) of
Regulation S-K
is provided under Note 18, Segment Reporting, in
Item 8, Financial Statements and Supplementary Data,
regarding segment and related geographic information.
Our operations are generally subject to seasonal trends. We
experience, and expect to continue to experience, seasonal
fluctuations in our results of operations as a result of changes
in the level of student enrollments. While we enroll students
throughout the year, our domestic postsecondary second quarter
(December through February) enrollments and related revenues
generally are lower than other quarters due to holiday breaks in
December and January.
Our degreed enrollment (Degreed Enrollment) for the
quarter ended August 31, 2008 was 362,100. Degreed
Enrollment for a quarter represents individual students enrolled
in a University of Phoenix program or Western International
University associates degree program who attended a course
during the quarter and did not graduate as of the end of the
quarter. Degreed Enrollment for a quarter also includes any
student 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). In addition, Degreed
Enrollment includes students participating in certificate
programs of at least 18 credit hours in length with some course
applicability into a related degree program.
5
Our aggregate new degreed enrollment (New Degreed
Enrollment) for the four quarters in fiscal year 2008 was
288,200. New Degreed Enrollment for a quarter represents any
individual student enrolled in a University of Phoenix program
or Western International University associates degree
program who is a new student and started a course in the
quarter, any individual student who previously graduated from
one degree program and started a new degree program in the
quarter (for example, a graduate of an associates degree
program returns for a bachelors degree program, or a
graduate of a bachelors degree program returns for a
masters degree program), as well as any individual student
who started a program in the quarter and had been out of
attendance for greater than 12 months. In addition, New
Degreed Enrollment includes students who in the quarter started
participating in certificate programs of at least 18 credit
hours in length with some course applicability into a related
degree program.
Students enrolled in or serviced by Apollo Global institutions,
Insight Schools and Other Schools (Western International
Universitys non-associates degree programs, IPD, CFP
and Meritus) are not included in Degreed Enrollment or New
Degreed Enrollment. In April 2006, we began enrolling the
majority of new students for our associates degree
programs in University of Phoenix. From September 2004 through
March 2006, we enrolled most new associates degree
students in Western International University.
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
UNIACC
ULA
Insight Schools
Western International
University
CFP
IPD
Meritus
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www.apollogrp.edu
www.phoenix.edu
uniacc08eng.uniacc.cl
www.ula.edu.mx
www.insightschools.net
www.wintu.edu
www.cffp.edu
www.ipd.org
www.meritusu.ca
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Our fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 2008, 2007, 2006, 2005
and 2004 relate to fiscal years 2008, 2007, 2006, 2005 and 2004,
respectively.
Strategy
Our mission is to strengthen and capitalize on our position as a
leading provider of high quality, accessible education for
individuals around the world by affording strong returns for all
of our key stakeholders: students, faculty, employees, and
investors. Our principal focus is providing the highest quality
educational products and services for our students in order for
them to maximize the benefits of their educational experience. A
superior educational experience, combined with engaged and
energized faculty and employees, should, in turn, enable our
shareholders to achieve attractive returns on their capital over
time.
Accomplishing this strategic vision is consistent with adhering
to our internal core values: Operating with Integrity and Social
Responsibility, Changing Lives through Education, Creating
Long-Term Value for all of Our Stakeholders and Being the
Employer of Choice. Our Board of Directors and management team
have committed to a strategic plan in order to best ensure the
effective deployment of our resources and our capital. Key
highlights of the plan are presented below, which we believe is
consistent with our mission of providing attractive returns for
all of our stakeholders.
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Maximize the value of our core existing domestic
postsecondary business. This is our number one
strategic goal over the next several years. This includes
enhancing and expanding our current product offerings, improving
student success rates, increasing retention and maximizing the
leverage of our existing infrastructure. We believe that we can
strengthen our leading industry position and produce solid top-
and bottom-line organic growth through formalizing and sharing
best practices in instruction, curriculum and student support
across our existing learning platforms. In addition, we believe
our enhanced capabilities through our acquisition of Aptimus in
October 2007 will enable us to attract students in a cost
effective manner. Finally, we will continue to explore new
degree offerings and complementary programs.
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Expand beyond our core to leverage our core
expertise. We believe we can leverage our core
competencies in student services, technology, marketing and
brand to expand into markets that are complementary to our
mission of providing high quality, accessible education. For
example, in 2006, we acquired Insight Schools, a provider of
online high school education. Insight Schools provides full-time
online high school programs to public schools by contracting
with school districts and charter schools. We believe that this
will better position us to benefit from the growing momentum of
online learning in the K-12 arena. Insight Schools operates
schools in 10 states and is pursuing the ability to provide
services to additional schools in other states.
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Continue to pursue opportunities to expand into attractive
and rapidly growing markets, particularly
international. We believe that there is a growing
demand for high quality postsecondary and other education in
certain key geographies around the world, including Latin
America, Europe, and Asia, and that we have capabilities and
expertise that can be useful in providing these services beyond
our current reach. We intend to actively pursue quality
opportunities to partner with
and/or
acquire existing institutions of higher learning where we can
best position ourselves for longer-term attractive growth and
value creation by leveraging our more than 30 years of
domestic experience to enhance the quality, delivery, and
student outcomes associated with the respective curricula. We
formed Apollo Global in October 2007 to pursue investments in
the international education industry. As of August 31,
2008, Apollo Global has completed two acquisitions: UNIACC in
Chile and ULA in Mexico.
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Safeguard corporate and brand reputation by focusing on
academic quality, employee friendly policies and social
responsibility. In 2008, we published our first
Academic Annual Report for the University of Phoenix with the
express purpose of providing transparency into both student and
institutional academic outcomes at multiple levels. In October
2007, we began a project to better articulate Apollo
Groups employment brand. This project has helped to
differentiate Apollo from its competitors, accurately capture
the essence of what we stand for in our values and our policies
as well as to communicate our organizational brand to current
and prospective employees. Finally, we are continuing to focus
on environmentally sound business practices, putting human and
financial resources back into the communities where we operate
in the form of philanthropy, in-kind scholarships, promoting
employee volunteerism, and by maintaining the University of
Phoenix Foundation, which supports activities and organizations
that address educational access, underserved populations and the
environment.
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Industry
Background
Domestic
Postsecondary Education
The domestic non-traditional education sector is a significant
and growing component of the postsecondary education industry,
which was estimated to be a more than $373.0 billion
industry in 2006, according to the Digest of Education
Statistics published in 2007 by the U.S. Department of
Educations National Center for Education Statistics.
According to the same study, in 2005, over 6.8 million, or
39%, of all students enrolled in higher education programs were
over the age of 24, and enrollment in degree-granting
institutions between 2006 and 2016 is expected to increase
approximately 30% for students aged 25 to 34, and 7% for those
35 and over. These students would not be classified as
traditional (i.e., 18 to 24 years of age, living on campus,
supported by parents and not working full-time). 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 rapidly
expanding knowledge-based economy in the U.S.
Many working students 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 students to attend classes and complete
coursework on a more convenient schedule than traditional
universities offer. Although more colleges and universities are
beginning to address the needs of working students, many
universities and institutions offering technology-based
education do not effectively address the unique requirements of
working students due to the following specific constraints:
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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
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institutions. This focus has resulted in a capital-intensive
teaching/learning model that may be characterized by:
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a high percentage of full-time, tenured faculty;
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physically configured classrooms, library facilities and related
full-time staff;
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dormitories, student unions, and other significant plant 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
students who must delay their education for up to four months
during these spring, summer and winter breaks.
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Traditional universities and colleges may also be limited in
their ability to market to, or provide the necessary customer
service for, working students because they require the
development of additional administrative and enrollment
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 has made access
to public education more restrictive than ever.
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We believe that our track record for enrollment and revenue
growth is attributable to our offering comprehensive services
combining quality educational content, teaching resources, and
customer service with formats that are accessible and easy to
use for students as well as corporate clients. We maintain a
primary focus on providing quality education to serve the needs
of working students.
International
Education
There were approximately 132 million students enrolled in
postsecondary education worldwide and global government
education expenditures totaled the equivalent of $2.0 trillion
in 2004, according to the Global Education Digest 2007 published
in 2008 by the United Nations Educational, Scientific and
Cultural Organization Institute for Statistics. This does not
include capital expenditures on private education, which are
difficult to track, though acknowledged by United Nations
Educational, Scientific and Cultural Organization to be growing
around the world.
We believe that private education is playing a critical 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. The
International Finance Corporation of the World Bank reported in
May 2008 that governments around the world are embracing
private sector participation as a way to increase quality and
efficiency.
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 supplementary 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 reach of education.
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8
Domestic
High School Education
According to the Department of Educations National Center
for Education Statistics, based on data from 2005, there are
approximately 20 million high school-age students in the
U.S. Throughout the nation, nearly five million high
school-age children are not enrolled in school and the high
school dropout rate averages 25.3% across the nation based on
the average freshman graduation rate. These statistics are
illustrative of the large number of high school-age children
facing different challenges and with different needs in
todays environment, including:
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youth who must work, or who have child or family care
responsibilities;
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teens who are pursuing their dreams in sports, entertainment,
modeling, dancing or other careers that may not allow them to
attend traditional school regularly;
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students who do not function well in large, rigid classroom
settings, or who do not connect socially in a large school
setting;
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students who are challenged with health or physical issues, and
who may need flexibility of location;
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students who need more challenging coursework and want to move
at an accelerated pace, or those who need extra time to master a
concept or skill; and
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home-schooled students who may want subject matter help from a
certified teacher in advanced classes, but do not want to attend
in the traditional setting.
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Many parents and educators are seeking alternatives to
traditional classroom-based education that can help improve
academic achievement. Demand for these alternatives is evident
in the growing number of choices available to parents and
students. For example, charter schools emerged in 1992 to
provide an alternative to traditional public schools. As of May
2008, over 1.2 million students attend over 4,300 charter
schools in 40 states and the District of Columbia,
according to the National Alliance for Public Charter Schools.
At the same time, acceptance of online learning initiatives,
including not only online schools but also online testing and
Internet-based professional development, has increased. Online
schools can offer a comprehensive curriculum and flexible
delivery model; therefore, we believe that a growing number of
families will pursue online public schools as an attractive
traditional school alternative. We believe there is a
significant opportunity for a high-quality, trusted, national
education provider to serve online public schools.
Our
Programs
Our over
30-year
history as a provider of higher education enables us to provide
students with quality education and responsive customer service
at the high school, undergraduate and graduate 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 CFP are accredited
by The Higher Learning Commission of the North Central
Association of Colleges and Schools. Our other domestic and
international educational institutions are accredited by the
appropriate accrediting entity. See Accreditation and
Jurisdictional Authorizations, below.
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Experienced 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 grading and instructing
students, and a teaching mentorship with a more experienced
faculty member. Classes are designed to be small and engaging.
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International: Our recruitment
standards and processes for international faculty are
appropriate for the respective markets in which we operate and
reflect high standards of academic excellence that are
consistent with and in compliance with local accreditation and
regulatory requirements in these markets.
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9
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Domestic High School: Insight
Schools teachers must comply with all state certification
requirements in each state in which they provide instruction. At
a minimum, they are required to have a bachelors degree or
the equivalent, and many have advanced degrees and other
professional credentials.
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Current and Relevant Standardized Programs.
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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 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.
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International: Our international
postsecondary 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.
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Domestic High School: Our domestic high
school curriculum is aligned with state standards and the
students we teach are required to meet their specific
states graduation requirements.
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Benefits to Employers. The employers of
students enrolled in our domestic postsecondary institutions
often provide input to faculty members in designing curriculum,
and class projects are typically based on issues relevant to the
companies that employ our students. Classes are taught by
faculty members who emphasize the skills desired by employers.
In addition, the class time flexibility further benefits
employers since it minimizes conflict with their employees
work schedules.
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Many of our faculty members are practitioners and employers,
sensitive to the needs of the workplace. We conduct focus groups
with business professionals, students, and faculty members who
provide feedback on the relevancy of course work. The objective
is to gain insight from these groups so that we offer relevant
subject matter that reflects the changing needs of the
marketplace. The information provided by focus groups and course
surveys enables us to develop new courses, which prepares our
students for todays workplace.
Teaching
Model and Degree Programs and Services
Domestic
Postsecondary
Teaching
Model
While students over the age of 24 comprise approximately 39% of
all higher education enrollments in the United States, the
primary mission of most accredited four-year colleges and
universities is to serve 18- to
24-year-old
students and conduct research. The teaching/learning models used
by University of Phoenix were designed specifically to meet the
educational needs of working students, 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 to earn their degrees and still meet their personal
and professional responsibilities. Our focus on working,
non-residential students minimizes the need for
capital-intensive facilities and services like dormitories,
student unions, food services, personal and employment
counseling, health care, sports and entertainment.
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 an experience that is consistent with their
on-campus counterparts. All class materials are delivered
electronically.
10
Components of our teaching/learning models at University of
Phoenix for both online and on-campus classes include:
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Curriculum |
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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
students employers. The standardized curriculum for each
degree program is also designed to provide students with
specified levels of knowledge and skills. |
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Faculty |
|
All faculty applicants participate in a rigorous selection and
training process. In order to teach at University of Phoenix,
substantially all faculty applicants must have earned a
masters or doctoral degree from a regionally accredited
institution or international equivalents and have recent
professional experience in a field related to the subject matter
they seek to instruct. 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. |
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Accessibility |
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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. |
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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 (excluding 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 addition
to attending class, University of Phoenix students (excluding
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 by facilitating in-depth review of and
reflection on course materials. Members work together to
complete assigned group projects and develop communication and
teamwork skills. Associates degree program classes are
offered in pairs to complement each other. In the
associates degree programs, the courses are nine weeks and
have alternating emphasis: one week the emphasis is reading and
discussion; the next week a work project. |
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Library and Other Learning Resource Services |
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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. Historically, our students have used these
services at a high rate. |
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Academic Quality |
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The Academic Quality Management System at University of Phoenix
was designed to maintain and improve the quality of programs and
academic and student services. This system includes the Adult
Learning Outcomes Assessment, which measures student growth in
both cognitive and affective skills. |
11
Degree
Programs and Services
The following is a list of the degree programs that University
of Phoenix offers (available areas of specialization within
degree programs are not listed):
Associates
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Arts and Sciences
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Business and Management
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Criminal Justice and Security
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Education
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Human Services
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Nursing
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Health Care
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Technology
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Undergraduate
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Arts and Sciences
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Business and Management
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Criminal Justice and Security
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Education
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Human Services
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Nursing
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Health Care
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Technology
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Graduate
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Business and Management
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Communication
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Criminal Justice and Security
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Education
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Human Services
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Nursing
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Health Care
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Psychology
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Technology
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Undergraduate students may demonstrate and document
college-level learning gained from experience through an
assessment by faculty members, according to the guidelines of
the Council for Adult and Experiential Learning, for the
potential award of credit. The average number of credits awarded
to the approximately 5,080 University of Phoenix undergraduate
students who utilized the process in fiscal year 2008 was five
credits of the 120 required to graduate with a
bachelors degree. The Council reports that over 300
colleges and universities are members of the Council and
currently accept credits awarded for college-level learning
gained through experience.
Academic
Annual Report
In 2008, University of Phoenix published its first Academic
Annual Report which contains a transparent look at a variety of
ways in which University of Phoenix measures itself in relation
to its mission and social agenda of access and inclusion. The
report was created within the framework set forth in the report
commissioned by U.S. Secretary of Education Margaret
Spellings and issued in 2006, entitled A Test of
Leadership: Charting the Future of U.S. Higher
Education, focusing on access, accountability, quality,
and affordability. The report is available on the University of
Phoenix website at www.phoenix.edu.
12
International
Teaching
Model
Our international operations offer classes on a semester
schedule in multiple modalities, including campus-based, online
and a blend of both. Our international operations faculty
members consist of both full-time and part-time professors.
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. We also
offer various certificate programs.
Domestic
High School
Teaching
Model
Insight Schools offers curriculum and administrative services to
public high schools in 10 states through contractual
arrangements with either school districts or charter schools.
These schools are subject to the same requirements as
traditional public schools and operate on the same school
calendar as other public schools in each state, with two
semesters, a winter break and a summer break. In performing its
services under the contractual arrangements, Insight Schools
provides students with a laptop computer and printer, an online
curriculum with over 120 available course offerings and the
instruction and support of state certified teachers and online
mentors. The students in schools operated by Insight Schools can
work independently at their own time, pace and location, but are
required to participate in school on a regular basis and to
complete work according to their course schedule. The students
attend school via a secure learning platform that is accessible
only to students, teachers, and parents/guardians and interact
with teachers and other students online and via telephone. Most
course content is delivered electronically; however, some
courses have a physical text requirement. Graduation ceremonies
and other events are held at locations rented for these events.
High
School Programs and Services
Insight Schools offers courses to obtain a high school diploma
specifically designed to meet the requirements in those states
in which it operates. Many of the students we teach are also
required to participate in proctored state exams, which Insight
Schools administers.
Admissions
Standards
Domestic
Postsecondary
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 or Test of English for International
Communication.
Non-U.S. citizens
attending a campus located in the United States 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 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.
To gain admission to graduate 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, have relevant work and
employment experience, if applicable for their field of study,
have taken and passed the Test of English as a Foreign
Language/Test of English for International Communication
requirements, if the applicants native language is not
English, and, for applicants who are not U.S. citizens and
are attending a campus located in the United States, hold an
approved visa or have been granted permanent residency.
13
Additional requirements may apply to individual programs or to
students who are attending a specific campus. Students in
graduate programs at other schools may be admitted to University
of Phoenix on provisional status if they do not meet grade point
average admission requirements.
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 also must achieve a minimum
Test of English as a Foreign Language/Test of English for
International Communication or
Berlitz®
Online English Proficiency Exam score.
The admission requirements for our Other Schools are similar to
University of Phoenix and vary depending on the respective
degree program.
International
In general, postsecondary students in our international
institutions must have obtained a high school 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.
Domestic
High School
The online schools that Insight Schools operates under
contractual arrangements are public and generally any student
qualified to attend public high school in the relevant state may
enroll on a space available basis. The students we teach must
have reached high school in terms of prior educational
achievement, and most states limit access to free public school
to age 20 and under.
Students
Degreed
Enrollment
Our Degreed Enrollment for the quarter ended August 31,
2008 was 362,100. Degreed Enrollment for a quarter represents
individual students enrolled in a University of Phoenix degree
program or Western International University associates
degree program who attended a course during the quarter and did
not graduate as of the end of the quarter. Degreed Enrollment
for a quarter also includes any student 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). In addition, Degreed Enrollment includes students
participating in certificate programs of at least 18 credit
hours in length with some course applicability into a related
degree program. Students enrolled in or serviced by Apollo
Global institutions, Insight Schools and Other Schools (Western
International Universitys non-associates degree
programs, IPD, CFP and Meritus) are not included in Degreed
Enrollment. In April 2006, we began enrolling the majority of
new students for our associates degree programs in
University of Phoenix. From September 2004 through March 2006,
we enrolled most new associates degree students in Western
International University.
14
The following is a breakdown of our Degreed Enrollment (rounded
to the nearest hundred):
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Degreed Enrollment
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Quarter Ended:
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Associates
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Bachelors
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Masters
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Doctoral
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Total
|
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November 30, 2005
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49,000
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18.2
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%
|
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149,200
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|
55.4
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%
|
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68,000
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|
25.2
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%
|
|
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3,200
|
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|
|
1.2
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%
|
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269,400
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|
100.0
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%
|
February 28, 2006
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54,900
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|
20.3
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%
|
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|
145,500
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|
|
53.7
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%
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66,700
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|
|
24.6
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%
|
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3,700
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1.4
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%
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270,800
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100.0
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%
|
May 31, 2006
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63,600
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22.9
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%
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145,200
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52.4
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%
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64,500
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23.3
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%
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3,900
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|
1.4
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%
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|
277,200
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|
100.0
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%
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August 31, 2006
|
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|
74,000
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|
26.2
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%
|
|
|
140,700
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|
|
49.8
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%
|
|
|
63,400
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|
|
22.5
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%
|
|
|
4,200
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|
|
1.5
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%
|
|
|
282,300
|
|
|
|
100.0
|
%
|
November 30, 2006
|
|
|
83,000
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|
|
|
28.4
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%
|
|
|
139,900
|
|
|
|
47.9
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%
|
|
|
64,400
|
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|
|
22.1
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%
|
|
|
4,500
|
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|
|
1.6
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%
|
|
|
291,800
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|
|
|
100.0
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%
|
February 28, 2007
|
|
|
88,300
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|
|
|
29.6
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%
|
|
|
139,300
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|
|
|
46.7
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%
|
|
|
66,100
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|
|
|
22.2
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%
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|
|
4,700
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|
|
1.5
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%
|
|
|
298,400
|
|
|
|
100.0
|
%
|
May 31, 2007
|
|
|
98,600
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|
|
|
31.7
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%
|
|
|
141,400
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|
|
|
45.5
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%
|
|
|
66,200
|
|
|
|
21.3
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%
|
|
|
4,900
|
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|
|
1.5
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%
|
|
|
311,100
|
|
|
|
100.0
|
%
|
August 31, 2007
|
|
|
104,500
|
|
|
|
33.3
|
%
|
|
|
138,700
|
|
|
|
44.2
|
%
|
|
|
65,300
|
|
|
|
20.8
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%
|
|
|
5,200
|
|
|
|
1.7
|
%
|
|
|
313,700
|
|
|
|
100.0
|
%
|
November 30, 2007
|
|
|
114,300
|
|
|
|
35.2
|
%
|
|
|
137,800
|
|
|
|
42.4
|
%
|
|
|
67,300
|
|
|
|
20.7
|
%
|
|
|
5,600
|
|
|
|
1.7
|
%
|
|
|
325,000
|
|
|
|
100.0
|
%
|
February 29, 2008
|
|
|
121,200
|
|
|
|
36.7
|
%
|
|
|
136,400
|
|
|
|
41.3
|
%
|
|
|
67,000
|
|
|
|
20.3
|
%
|
|
|
5,600
|
|
|
|
1.7
|
%
|
|
|
330,200
|
|
|
|
100.0
|
%
|
May 31, 2008
|
|
|
134,300
|
|
|
|
38.9
|
%
|
|
|
137,900
|
|
|
|
39.9
|
%
|
|
|
67,300
|
|
|
|
19.5
|
%
|
|
|
5,800
|
|
|
|
1.7
|
%
|
|
|
345,300
|
|
|
|
100.0
|
%
|
August 31, 2008
|
|
|
146,500
|
|
|
|
40.5
|
%
|
|
|
141,800
|
|
|
|
39.1
|
%
|
|
|
67,700
|
|
|
|
18.7
|
%
|
|
|
6,100
|
|
|
|
1.7
|
%
|
|
|
362,100
|
|
|
|
100.0
|
%
|
New
Degreed Enrollment
Our aggregate New Degreed Enrollment for the four quarters in
fiscal year 2008 was 288,200. New Degreed Enrollment for a
quarter represents any individual student enrolled in a
University of Phoenix degree program or Western International
University associates degree program who is a new student
and started a course in the quarter, any individual student who
previously graduated from one degree program and started a new
degree program in the quarter (for example, a graduate of an
associates degree program returns for a bachelors
degree program, or a graduate of a bachelors degree
program returns for a masters degree program), as well as
any individual student who started a program in the quarter and
had been out of attendance for greater than 12 months. In
addition, New Degreed Enrollment includes students who in the
quarter started participating in certificate programs of at
least 18 credit hours in length with some course applicability
into a related degree program. Newly enrolled students in or
serviced by Apollo Global institutions, Insight Schools and
Other Schools (Western International Universitys
non-associates degree programs, IPD, CFP and Meritus) are
not included in New Degreed Enrollment. In April 2006, we began
enrolling the majority of new students for our associates
degree programs in University of Phoenix. From September 2004
through March 2006, we enrolled most new associates degree
students in Western International University.
15
The following is a breakdown of our aggregate New Degreed
Enrollment (rounded to the nearest hundred):
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|
|
|
|
|
|
|
|
|
|
|
|
New Degreed Enrollment
|
|
Quarter Ended:
|
|
Associates
|
|
|
Bachelors
|
|
|
Masters
|
|
|
Doctoral
|
|
|
Total
|
|
|
November 30, 2005
|
|
|
18,100
|
|
|
|
36.3
|
%
|
|
|
20,300
|
|
|
|
40.7
|
%
|
|
|
11,000
|
|
|
|
22.0
|
%
|
|
|
500
|
|
|
|
1.0
|
%
|
|
|
49,900
|
|
|
|
100.0
|
%
|
February 28, 2006
|
|
|
18,900
|
|
|
|
36.9
|
%
|
|
|
20,900
|
|
|
|
40.8
|
%
|
|
|
10,700
|
|
|
|
20.9
|
%
|
|
|
700
|
|
|
|
1.4
|
%
|
|
|
51,200
|
|
|
|
100.0
|
%
|
May 31, 2006
|
|
|
21,300
|
|
|
|
38.7
|
%
|
|
|
22,200
|
|
|
|
40.4
|
%
|
|
|
10,900
|
|
|
|
19.8
|
%
|
|
|
600
|
|
|
|
1.1
|
%
|
|
|
55,000
|
|
|
|
100.0
|
%
|
August 31, 2006
|
|
|
24,300
|
|
|
|
40.2
|
%
|
|
|
23,200
|
|
|
|
38.3
|
%
|
|
|
12,300
|
|
|
|
20.3
|
%
|
|
|
700
|
|
|
|
1.2
|
%
|
|
|
60,500
|
|
|
|
100.0
|
%
|
November 30, 2006
|
|
|
27,400
|
|
|
|
43.8
|
%
|
|
|
22,600
|
|
|
|
36.2
|
%
|
|
|
11,800
|
|
|
|
18.9
|
%
|
|
|
700
|
|
|
|
1.1
|
%
|
|
|
62,500
|
|
|
|
100.0
|
%
|
February 28, 2007
|
|
|
26,300
|
|
|
|
43.0
|
%
|
|
|
22,700
|
|
|
|
37.1
|
%
|
|
|
11,500
|
|
|
|
18.8
|
%
|
|
|
700
|
|
|
|
1.1
|
%
|
|
|
61,200
|
|
|
|
100.0
|
%
|
May 31, 2007
|
|
|
31,000
|
|
|
|
47.8
|
%
|
|
|
21,800
|
|
|
|
33.5
|
%
|
|
|
11,600
|
|
|
|
17.8
|
%
|
|
|
600
|
|
|
|
0.9
|
%
|
|
|
65,000
|
|
|
|
100.0
|
%
|
August 31, 2007
|
|
|
31,300
|
|
|
|
44.9
|
%
|
|
|
23,800
|
|
|
|
34.1
|
%
|
|
|
13,900
|
|
|
|
19.9
|
%
|
|
|
800
|
|
|
|
1.1
|
%
|
|
|
69,800
|
|
|
|
100.0
|
%
|
November 30, 2007
|
|
|
33,700
|
|
|
|
49.1
|
%
|
|
|
21,800
|
|
|
|
31.7
|
%
|
|
|
12,400
|
|
|
|
18.0
|
%
|
|
|
800
|
|
|
|
1.2
|
%
|
|
|
68,700
|
|
|
|
100.0
|
%
|
February 29, 2008
|
|
|
31,100
|
|
|
|
47.8
|
%
|
|
|
21,500
|
|
|
|
33.1
|
%
|
|
|
11,800
|
|
|
|
18.2
|
%
|
|
|
600
|
|
|
|
0.9
|
%
|
|
|
65,000
|
|
|
|
100.0
|
%
|
May 31, 2008
|
|
|
37,100
|
|
|
|
52.0
|
%
|
|
|
21,900
|
|
|
|
30.7
|
%
|
|
|
11,600
|
|
|
|
16.2
|
%
|
|
|
800
|
|
|
|
1.1
|
%
|
|
|
71,400
|
|
|
|
100.0
|
%
|
August 31, 2008
|
|
|
41,500
|
|
|
|
49.9
|
%
|
|
|
27,200
|
|
|
|
32.7
|
%
|
|
|
13,600
|
|
|
|
16.4
|
%
|
|
|
800
|
|
|
|
1.0
|
%
|
|
|
83,100
|
|
|
|
100.0
|
%
|
We have a diverse student population. Approximately 66% of
students enrolled in a University of Phoenix degree program or
Western International University associates degree program
who attended a course during fiscal year 2008 were women.
Approximately 70% of the students enrolled in a University of
Phoenix degree program or Western International University
associates degree program who attended a course during
fiscal year 2008 provided us information on their
race/ethnicity. The relative percentages by race/ethnicity
category for those students who responded are as follows:
|
|
|
|
|
Race/Ethnicity
|
|
2008
|
|
|
African-American
|
|
|
25.0
|
%
|
Asian/Pacific Islander
|
|
|
4.1
|
%
|
Caucasian
|
|
|
53.8
|
%
|
Hispanic
|
|
|
12.0
|
%
|
Native American/Alaskan
|
|
|
1.3
|
%
|
Other/Unknown
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
16
The approximate age of the incoming students that comprise New
Degreed Enrollment is as follows:
|
|
|
|
|
Age
|
|
2008
|
|
|
22 and under
|
|
|
14.0
|
%
|
23 to 29
|
|
|
34.0
|
%
|
30 to 39
|
|
|
31.0
|
%
|
40 to 49
|
|
|
15.0
|
%
|
50 and over
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
Marketing
On October 29, 2007, we completed the acquisition of all
the outstanding common stock of Aptimus, an online advertising
company. We successfully integrated Aptimus into our marketing
organization earlier this fiscal year. Our main purpose in
acquiring Aptimus was to help us more effectively monitor,
manage, and control our marketing investments and brands by
leveraging its industry-specific knowledge and technology
platform. Our marketing strategy is to increase awareness of and
access to quality and affordable education through improved
messaging and sharpened focus on our different communication
channels.
To generate interest among potential students, we engage in a
broad range of activities to inform the public about our
teaching/learning model and the programs offered, including
online advertising, broadcast, outdoor advertising, print, and
direct mail.
Internet
Marketing
We advertise extensively on the Internet using search engine
keyword advertising, banners, and custom advertising placements
on targeted sites, such as education portals, career sites, and
industry-specific websites. We also rely on the traffic and
interest generated by the University of Phoenixs own
website www.phoenix.edu, which provides prospective students
with relevant information and resources about the University of
Phoenixs degrees and programs.
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 are focusing on for use in the future
include online social networks that connect individuals across
the Internet, mobile telephone advertising systems and video
advertising networks.
Direct
Mail
Direct mail is effective at reaching targeted individuals in
specific career fields of interest including Accounting,
Business, Education, Information Technology, Criminal Justice
and Nursing. Direct mail also allows us to reach specific
metropolitan areas for focused local marketing efforts. We
currently purchase education-related mailing lists from numerous
suppliers that specialize in this area. In addition, we track
student prospects for every direct mail campaign by a variety of
methods including postage-paid reply cards, a specific toll-free
number and dedicated online links.
Print
and Broadcast
We rely on print and broadcast advertising to target new
prospects and to assist with building brand recognition. We air
various advertisements on network cable and local and national
TV for brand awareness campaigns to supplement our other
advertising activities.
Stadium
Naming Rights
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 for a period of 20 years with options to extend
and include opportunities for signage, advertising, and other
promotional rights and benefits to enhance the University of
Phoenix brand awareness locally and nationally.
17
Relationships
with Employers
We work closely with many businesses and governmental agencies
to meet their specific needs either by modifying existing
programs or, in some cases, by developing customized programs.
These programs are often held at the employers offices or
on-site at
select military bases. University of Phoenix has also formed
educational partnerships with various corporations to provide
programs specifically designed for their employees. We consider
the employers that provide tuition assistance to their employees
through tuition reimbursement plans or direct bill arrangements
our secondary customers.
Referrals
Referrals continue to be an important source of new students,
including those from employers, co-workers, current students,
alumni, family members and friends.
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 four- and two-year
degree-granting public and private regionally accredited
colleges and universities. While students over the age of 24
comprise approximately 39% of all higher education enrollments
in the United States, the primary mission of most accredited
four-year colleges and universities is to serve 18- to
24-year-old
students and conduct research. University of Phoenix
acknowledges the differences in educational needs between
working students 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
students 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
students more effectively. We believe that the primary factors
on which we compete with four- and two-year colleges and
universities include the following:
|
|
|
|
|
the ability to provide easy and convenient access to programs
and classes;
|
|
|
|
cost of the program;
|
|
|
|
breadth of programs offered;
|
|
|
|
active and relevant curriculum development that considers needs
of employers; and
|
|
|
|
the time necessary to earn a degree.
|
We also compete with proprietary educational institutions that
focus on distance learning. We believe that the primary factors
on which we compete with these institutions include the
following:
|
|
|
|
|
reliable and high-quality products and services;
|
|
|
|
qualified and experienced faculty;
|
|
|
|
cost of the program;
|
|
|
|
reputation of programs and classes;
|
|
|
|
comprehensive student support services;
|
|
|
|
breadth of programs offered; and
|
|
|
|
active and relevant curriculum development that considers needs
of employers.
|
In our offerings of non-degree programs, we compete with a
variety of business and information technology providers,
primarily those in the for-profit training sector. Many of these
competitors have significantly more market share in given
geographical regions and longer-term relationships with key
employers of potential students.
18
International
Although the competitive factors vary by country, we believe, in
general, that the competitive factors for our international
operations are similar to those noted above for our domestic
postsecondary operations.
Domestic
High School
Insight Schools competes with traditional public and private
high schools, public and private online schools and companies
that provide online curriculum and administrative services to
online public high schools. We believe that the primary factors
on which Insight Schools competes are:
|
|
|
|
|
quality of curriculum and online delivery platform; and
|
|
|
|
comprehensiveness of school management and administrative
services.
|
Employees
We believe that our employee relations are satisfactory. As of
August 31, 2008, we had the following numbers of employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Faculty
|
|
|
|
|
|
|
|
|
|
Full-Time
|
|
|
Part-Time
|
|
|
Faculty(1)
|
|
|
Total(2)
|
|
|
University of Phoenix
|
|
|
14,221
|
|
|
|
131
|
|
|
|
22,721
|
|
|
|
37,073
|
|
Apollo Global
|
|
|
934
|
|
|
|
255
|
|
|
|
1,361
|
|
|
|
2,550
|
|
Insight Schools
|
|
|
148
|
|
|
|
10
|
|
|
|
197
|
|
|
|
355
|
|
Other Schools
|
|
|
695
|
|
|
|
6
|
|
|
|
2,207
|
|
|
|
2,908
|
|
Corporate(3)
|
|
|
1,738
|
|
|
|
23
|
|
|
|
|
|
|
|
1,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,736
|
|
|
|
425
|
|
|
|
26,486
|
|
|
|
44,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes both full-time and part-time faculty. Also includes
275 employees counted as non-faculty that serve in both
roles. |
|
(2) |
|
Includes 275 employees counted in both non-faculty and
faculty as they serve in both roles. |
|
(3) |
|
Consists primarily of employees in executive management,
information systems, accounting and finance, financial aid, and
corporate human resources. |
Accreditation
and Jurisdictional Authorizations
Domestic
Postsecondary
Accreditation
University of Phoenix is covered by regional accreditation,
which provides the following:
|
|
|
|
|
recognition and acceptance by employers, other higher education
institutions and governmental entities of the degrees and
credits earned by students;
|
|
|
|
qualification to participate in Title IV programs; and
|
|
|
|
qualification for authorization in certain states.
|
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 senior regional accrediting associations,
representatives of each region in which a regionally accredited
institution operates may participate in the evaluations for
reaffirmation of accreditation of which the North Central
Association of Colleges and Schools is a member.
19
University of Phoenix was granted accreditation by The Higher
Learning Commission of the North Central Association of Colleges
and Schools in 1978. University of Phoenixs accreditation
was reaffirmed in 1982, 1987, 1992, 1997, and 2002. The next
comprehensive evaluation visit by The Higher Learning Commission
is scheduled to be conducted in 2012. This
10-year
period is the maximum period of reaffirmation granted by The
Higher Learning Commission. However, the North Central
Association of Colleges and Schools may require focused visits
between comprehensive visits as a part of its normal and
continuing relationship with institutions.
University of Phoenixs Bachelor of Science in Nursing
program received program accreditation from the National League
for Nursing Accrediting Commission in 1989. The Master of
Science in Nursing program earned the National League
accreditation in 1996. In 2000, both the Bachelor of Science in
Nursing and the Master of Science in Nursing programs received
reaccreditation status from the National League. In September
2005, both nursing degree programs received the full five-year
initial accreditation status from the Commission on Collegiate
Nursing Education. At the time that the two degree programs were
accredited by the Commission, University of Phoenix elected not
to renew its accreditation with the National League.
University of Phoenixs Master of Counseling in Community
Counseling degree received initial accreditation for its Phoenix
and Tucson campuses from the Council for Accreditation of
Counseling and Related Educational Programs in 1995, and the
accreditation was reaffirmed in 2002. The next reaffirmation
visit is expected in 2010. University of Phoenixs Master
of Counseling in Mental Health Counseling received initial
accreditation from the Council for its Utah campus in 2001, and
the next reaffirmation visit is expected in 2009.
The Master of Arts in Education program with options in
Elementary Teacher Education and Secondary Teacher Education is
preaccredited by the Teacher Education Accreditation Council for
a period of five years, from December 20, 2007 to
December 20, 2012.
University of Phoenixs business programs have been
reviewed and accredited by the Association of Collegiate
Business Schools and Programs. The next reaffirmation visit will
occur in 2017, with an interim focus report submitted in 2011.
University of Phoenix received approval from The Higher Learning
Commission to offer its first doctoral-level program in 1998 and
now offers accredited doctoral programs in Management in
Organizational Leadership, Business Administration, Education in
Educational Leadership, and Health Administration. All of the
doctoral programs are offered via distance learning technology
with annual residencies in Phoenix and other domestic or select
international locations. In September 2007, University of
Phoenix received approval from The Higher Learning Commission to
grant PhD degrees in Higher Education Administration and
Industrial and Organizational Psychology.
Jurisdictional
Authorizations
University of Phoenix is authorized to operate and has a
physical presence in 39 states and the District of
Columbia. University of Phoenix has held these authorizations
for periods ranging from less than two years to over
25 years. University of Phoenix has also been approved to
operate in Alaska, Montana and South Dakota, but does not yet
have a physical presence in these states. Applications for
approval to operate in Mississippi and New York have been
submitted and are pending approval.
All regionally accredited institutions, including University of
Phoenix, are required to be evaluated separately for
authorization to operate in Puerto Rico. University of Phoenix
obtained authorization from the Puerto Rico Commission on Higher
Education, and that authorization remains in effect.
University of Phoenix provides specific programs in British
Columbia under the written consent of the Minister of Advanced
Education. University of Phoenix operates in Alberta pursuant to
approval granted by Alberta Advanced Education.
In the Netherlands, University of Phoenix operates based upon
its accreditation from The Higher Learning Commission.
In Mexico, the University of Phoenix subsidiary operates as the
Instituto de Estudios Superiores de Phoenix and, in addition to
the Institutos degrees, University of Phoenix grants
degrees to Instituto graduates pursuant to an
20
articulation agreement between University of Phoenix and the
Instituto. The Instituto has received accreditation from the
Ministry of Education and Culture for the State of Chihuahua,
Mexico and operates a campus in Ciudad Juárez, Mexico
pursuant to that authority.
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 has
obtained licensure in these states.
The schools in our Other Schools segment maintain the requisite
authorizations in the jurisdictions in which they operate.
International
UNIACC operates under the authority of the Chilean Ministry of
Education (Ministerio de Educación de Chile) and is
accredited by the Council for Higher Education (Consejo
Superior de Educación) and the National Commission on
Accreditation (Comisión Nacional de
Acreditación). ULA operates under the authority of
Mexicos Secretary of Public Education (Secretaria de
Educación Pública) and the Secretary of Education
of the State of Morelos (Secretaria de Educación del
Estado de Morelos).
Domestic
High School
The online schools operated by Insight Schools are governed by
state regulatory requirements and are regionally accredited by
or are seeking regional accreditation from the Northwest
Association of Accredited Schools or the Western Association of
Colleges and Universities.
Financial
Aid Programs
Domestic
Postsecondary
Financial aid under the Higher Education Act Title IV
programs is awarded every academic year to students on the basis
of financial need, generally defined under the Higher Education
Act as the difference between the cost of attending an
educational institution and the amount the family can reasonably
expect to contribute to that cost. The amount of financial aid
awarded per academic year is based on many factors, including,
but not limited to, student program of study, student grade
level, U.S. federal annual loan limits, and expected family
contribution. All recipients of Title IV program funds must
maintain satisfactory academic progress within the guidelines
published by the Department of Education. See Item 1A,
Risk Factors Risks Related to the Highly
Regulated Industry in Which We Operate.
We collected approximately 77% of our fiscal year 2008 revenues
from receipt of Title IV funds, principally from Federal
Stafford Loans, commonly referred to as FFELP loans, and Pell
Grants.
Federal Stafford Loans are the most significant source of
U.S. federal student aid and are low interest, federally
guaranteed loans made by private lenders. Annual and aggregate
loan limits apply based on the students grade level. There
are two types of Stafford Loans: subsidized Stafford Loans,
which are based on the U.S. federal statutory calculation
of student need, and unsubsidized Stafford Loans, which are not
need-based. Neither Stafford Loan is based on creditworthiness.
The U.S. federal government pays the interest on subsidized
Stafford Loans while the student is enrolled in school; the
borrower is responsible for the interest on unsubsidized
Stafford Loans regardless of school attendance. The student has
the option to defer payment on the principal and interest while
enrolled in school. Repayment on Stafford Loans begins six
months after the date the student ceases enrollment. The loan
may be paid back to the lender over the course of up to
10 years or longer. Both graduate and undergraduate
students may apply for Stafford Loans. During fiscal year 2008,
Stafford Loans represented approximately 67% of our revenue.
Federal Pell Grants are generally awarded based on need 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 2008, Pell Grants represented
approximately 9% of our revenue.
During fiscal year 2008, all other Title IV programs
represented less than 1% of our revenue.
21
International
Government financial aid funding for students enrolled in our
international institutions generally is not widely available.
Domestic
High School
The online schools that Insight Schools operates under
contractual arrangements are tuition-free to students and
families and no financial aid is required. These schools are
governed and overseen by either a school district or other state
education authority, or an independent charter school board. We
receive funds for products and services rendered to operate
online schools under detailed service agreements with that
governing authority. Online public schools are typically funded
by state or local governments on a per student basis.
Regulatory
Environment
Domestic
Postsecondary
Regulatory provisions in the U.S. significantly affect our
domestic operations. New or revised interpretations of
regulatory requirements could have a material adverse effect on
us. In addition, changes in or new interpretations of applicable
laws, rules, or regulations could have a material adverse effect
on our accreditation, authorization to operate in various
states, permissible activities, and costs of doing business. 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 of 1965, as reauthorized by the Higher
Education Opportunity Act, and the related regulations govern
all higher education institutions participating in
U.S. Title IV federal financial aid programs. The
Higher Education Act was reauthorized by the Higher Education
Opportunity Act through September 30, 2013 by Congress and
signed into law by the President on August 14, 2008. The
Higher Education Act mandates specific additional regulatory
responsibilities for each of the following:
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the accrediting agencies recognized by the Department of
Education;
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the federal government through the Department of
Education; and
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state higher education regulatory bodies.
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All higher education institutions participating in Title IV
programs must be accredited by an accrediting body recognized by
the Department of Education. The Department of Education
periodically reviews all participating institutions for
compliance with all applicable standards and regulations under
the Higher Education Act. In the course of other discussions
with the Department of Education, we were informed that we
likely will be the subject of an ordinary course, focused
program review during fiscal 2009.
University of Phoenix and Western International University
currently meet the requirements for Title IV participation.
As eligible institutions, University of Phoenix and Western
International University must comply with Title IV
regulatory requirements. The most significant requirements are
summarized below.
Eligibility and Certification Procedures. The
Higher Education Act specifies the manner in which the
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 June 2003 and its current certification for the Title IV
programs expired in June 2007. However, in March 2007 University
of Phoenix submitted its Title IV program participation
recertification application to the Department of Education. We
have been collaborating with the Department of Education
regarding the University of Phoenix recertification application.
Although we have submitted our application for renewal, we are
continuing to supply additional
follow-up
information based on requests from the Department of Education.
Our eligibility continues on a month-to-month basis until the
Department of Education issues its decision on the application.
A month-to-month status is not unusual considering the process
is multi-faceted and iterative. We have no reason to believe
that the application will not be renewed and
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expect that the renewal process will be completed
satisfactorily. Western International University was recertified
in October 2003 and its current certification for the
Title IV programs expires in June 2009.
Student Loan Defaults. To remain eligible to
participate in Title IV programs, educational institutions
must maintain an appropriate student loan cohort default rate.
The Department of Education reviews an educational
institutions cohort default rate annually as a measure of
administrative capability. The cohort is the group of students
who first enter into student loan repayment during a federal
fiscal year (ending September 30). The 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. The cohort default rates are published by
the Department of Education approximately 12 months after
the end of the measuring period. Thus, in September 2008 the
Department of Education published the cohort default rates for
the 2006 cohort, which measured the percentage of students who
first entered into repayment during the year ended
September 30, 2006 and defaulted prior to
September 30, 2007.
If an educational institutions 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. If an
institutions cohort default rate exceeds 25% for three
consecutive years or exceeds 40% in any one 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 year periods 2006, 2005 and
2004 were as follows:
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Year Ended September 30,
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2006
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2005
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2004
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University of Phoenix
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7.2
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%
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7.3
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%
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7.5
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%
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Western International University
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27.4
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%
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11.4
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%
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5.6
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%
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All proprietary postsecondary institutions(1)
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9.7
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%
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8.2
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%
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8.6
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%
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(1) |
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Information published by the U.S. Department of Education. |
The University of Phoenix cohort default rate has ranged from
approximately 4% to 7.5% over the past 13 years. We
anticipate that the 2007 University of Phoenix cohort default
rate for the period ending September 30, 2008 will be
higher than in prior periods, but lower than 10%. However, this
cohort default rate is not yet finalized and could exceed 10%.
This expected increase in the rate is the result of our
transitioning 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 than in our bachelors and graduate degree
student populations. Should the University of Phoenix cohort
default rate exceed 10%, we do not expect a significant impact
on our operations or financial condition since the resulting
delay of up to 30 days in the disbursement of Title IV
funds would apply only to the first disbursement to first time
borrowers in a first year undergraduate program. The total
amount of these first disbursements during fiscal year 2008 that
would have been affected by this delay was less than 10% of our
fiscal year 2008 revenues.
The recent increase in Western International Universitys
cohort default rate is due to the enrollment of associates
degree students in Western International University from
September 2004 through March 2006. With the transition of the
associates degree program to University of Phoenix in
April 2006, we anticipate a decrease in student loan defaults
for Western International University beginning in the 2007
cohort default rate reporting period ending September 30,
2008. We do not expect that the consequences to us of Western
International Universitys 27.4% cohort default rate will
be material.
We have implemented initiatives to mitigate the increased risk
of student loan defaults for University of Phoenix and Western
International University students. We have dedicated resources
focused on assisting the students who are at risk of default.
These dedicated 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 have refined and improved our student retention
programs, resulting in improved student retention rates.
Accordingly, we believe that the increase in
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cohort default rates for University of Phoenix arising from the
increased proportion of associates degree students will be
significantly less pronounced than it was for Western
International University.
The cohort default rate requirements were modified by the Higher
Education Opportunity Act enacted in August 2008. As modified,
effective for the federal fiscal year 2009 cohort, the measuring
period for the cohort default rate will be increased to the end
of the second year after a student first enters repayment,
rather than the end of the first year following the commencement
of repayment. Accordingly, the cohort default rate for the 2009
cohort will measure the percentage of students entering student
loan repayment during the year ended September 30, 2009 who
default on their student loans prior to September 30, 2011.
The Higher Education Opportunity Act also increased the cohort
default rate thresholds for imposition of penalties for the
federal fiscal year 2009 cohort as follows:
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The single-year 10% cohort default rate trigger, which would
result in a required
30-day delay
in disbursing loan proceeds to first year, first time borrowers,
will be increased to 15%;
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The three-year 25% cohort default rate trigger, which would
result in Title IV ineligibility, will be increased to 30%
per year for three consecutive years; and
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The single-year 40% cohort default rate trigger, which would
result in Title IV ineligibility, is unchanged.
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We cannot at this point predict the impact of this change,
including whether the increase in cohort default rates due to
the additional one year measuring period will exceed the
increases in permitted cohort default rate levels for imposition
of penalties.
Administrative Capability. The Higher
Education Act directs the 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
allow the Department of Education to determine that the
institution lacks administrative capability and, therefore, may
be subject to additional scrutiny or denied eligibility for
Title IV programs.
Standards of Financial
Responsibility. Pursuant to the Title IV
regulations, as revised, each eligible higher education
institution must satisfy the minimum standard established for
three tests which assess the financial condition of the
institution at the end of the institutions fiscal year.
The three tests measure primary reserve, equity, and net income
ratios by using information from the institutions audited
financial statements. These ratios take into account the total
financial resources of the school. 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, subject to additional monitoring and other
consequences, and the institution may continue to participate as
a financially responsible institution for up to three years. 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 Department of
Education. As of August 31, 2008 and 2007, Apollos
composite score was 2.7 and 2.6, respectively.
Limits on Title IV Program Funds. The
Title IV regulations define the types of educational
programs offered by an institution that qualify for
Title IV program funds. For students enrolled in qualified
programs, the 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
Department of Education. An academic year must consist of at
least 30 weeks of instructional time and a minimum of 24
credit hours. 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 credit hours and, therefore,
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. These programs are
paid for directly by the students or their employers.
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Restricted Cash. The 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 its bank
account (not an escrow account) in an amount at least equal to
the amount of funds the institution holds for students.
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 for profit institutions
of higher education, which includes University of Phoenix and
Western International University. Under this rule, a for profit
institution will be ineligible to participate in Title IV
programs if it derives more than 90% of its cash basis revenue,
as defined pursuant to the Higher Education Act and Department
of Education regulations, from Title IV programs for any
two consecutive fiscal years. An institution that derived more
than 90% of its revenue from Title IV programs for any
single fiscal year will be placed on provisional certification
and will be subject to possible additional sanctions by the
Department of Education. University of Phoenix and Western
International University are required to calculate this
percentage at the end of each fiscal year. University of
Phoenixs and Western International Universitys
percentages were 82% and 50%, respectively, for the fiscal year
ended August 31, 2008. In May 2008, the Ensuring Continued
Access to Student Loans Act increased the annual loan limits on
federal unsubsidized student loans by $2,000 for certain
students, 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
could increase the amount of Title IV program funds used or
deemed to be used by students to satisfy tuition, fees and other
costs incurred, which may increase the proportion of our revenue
deemed to be from Title IV programs. The Higher Education
Opportunity Act provides temporary relief from the impact of
these loan limit increases by allowing the exclusion from the
calculation of the
90/10 Rule
amounts received arising from the increased annual loan limits
between July 1, 2008 and July 1, 2011. The Act makes
additional changes to the
90/10 Rule
calculation that will have the effect, if any, of reducing the
proportion of revenue deemed to be from Title IV programs.
Because there are various uncertainties about the manner in
which these changes to the calculation should be implemented, we
calculated the above percentages without regard to the temporary
relief or other changes. As a result, we believe if we took into
account the temporary relief and other changes the above
percentages may be reduced by an immaterial amount.
Compensation of Representatives. The Higher
Education Act prohibits an institution from providing any
commission, bonus or other incentive payment based directly or
indirectly on success in securing enrollments or financial aid
to any person or entity engaged in any student recruitment,
admission, or financial aid awarding activity. Title IV
regulations provide safe harbors for activities and arrangements
that an institution may carry out without violating the Higher
Education Act, which include, but are not limited to, the
payment of fixed compensation (annual salary), as long as that
compensation is not adjusted up or down more than twice during
any 12-month
period, and any adjustment is not based solely on the number of
students recruited, admitted, enrolled, or awarded financial
aid. University of Phoenix, Western International University,
and IPD believe that their current methods of compensating
enrollment counselors and financial aid staff comply with the
Title IV regulations. See Note 17, Commitments and
Contingencies, in Item 8, Financial Statements and
Supplementary Data, regarding the Incentive Compensation
False Claims Act lawsuit.
Authorizations for New Locations. University
of Phoenix and Western International University are required to
have authorization to operate as degree-granting institutions in
each state where they physically provide educational programs.
Certain states accept accreditation as evidence of meeting
minimum state standards for authorization 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 and Western International University are currently
authorized to operate in all states in which they have physical
locations.
The Higher Learning Commission requires University of Phoenix
and Western International University to obtain its prior
approval before it is permitted to expand into new locations to
conduct instructional activities.
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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 Department of
Education requires that the institution notify the Department of
Education of each location 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.
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
and Western International University. Such a change of ownership
or control could trigger recertification by the Department of
Education, reauthorization by state licensing agencies, or the
reevaluation of the accreditation by The Higher Learning
Commission.
The Department of Education has adopted the change of ownership
and control standards used by the U.S. 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 SEC, or a change in the identity of a controlling
shareholder of the 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 of Education. Under some circumstances, the
Department of Education may continue the 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 CFP are presently
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 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. Moreover, University of Phoenix, Western
International University and CFP 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 CFP.
New 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 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 increases.
Department of Education Audits and Other
Matters. From time to time as part of the normal
course of business, University of Phoenix and Western
International University are subject to periodic program reviews
and audits by regulating bodies as a result of their
participation in Title IV programs. On December 22,
2005, the Department of Educations Office of Inspector
General issued an audit report on its review of University of
Phoenixs policies and procedures for the calculation and
return of Title IV funds. The Office of Inspector General
concluded that University of Phoenix had policies and procedures
that provided reasonable assurance that it properly identified
withdrawn students, appropriately determined whether a return of
Title IV funds was required, returned Title IV funds
for withdrawn students in a timely manner and used appropriate
methodologies for most aspects of calculating the return of
Title IV funds. The Office of Inspector General did
conclude, however, that University of Phoenix did not use
appropriate methodologies for calculating the percentage of
Title IV financial aid earned from September 1, 2002
through December 7, 2004. Since December 8, 2004,
University of Phoenix has adopted the methodologies deemed
appropriate by the Department of Education. On November 3,
2006, the Department of Education issued a preliminary audit
determination letter concerning University of Phoenixs
administration of the Title IV federal student aid programs
regarding this matter and requested University of Phoenix to
conduct a file review of all students who received Title IV
funds and for whom a return of funds calculation was performed,
or should have been performed, during the period from
March 1, 2004 through December 7, 2004. On
June 7, 2007, University of Phoenix responded to the
preliminary audit determination letter request with results of
the file review. On January 10, 2008, the Department of
Education issued a final audit determination letter regarding
the return of Title IV funds. As of August 31, 2007,
University of Phoenix had
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accrued $3.7 million related to the refund liability and in
the second quarter of fiscal year 2008 recorded an additional
charge of $0.5 million. Under the final audit determination
letter, University of Phoenix returned approximately
$4.2 million for the recalculated Title IV funds,
which included the repayment of interest and special allowance
of approximately $0.5 million, as calculated by the
Department of Education as of February 29, 2008, which
satisfied our obligation under the final audit determination
letter.
U.S. federal regulations require institutions and
third-party servicers to submit annually to the Secretary of
Education their student financial aid compliance audit, prepared
by an independent auditor, no later than six months after the
last day of the institutions or third-party
servicers fiscal year. University of Phoenix and Western
International University have timely submitted their respective
fiscal year 2007 annual student financial aid compliance audits.
The IPD student financial aid compliance audit for fiscal year
2007 was submitted late in June 2008. We do not expect this
late submission to have a material adverse effect on our
business, financial position, results of operations, or cash
flows.
During an internal review of certain Title IV policies and
procedures, it came to our attention that certain Satisfactory
Academic Progress calculations being performed by the University
of Phoenix and Western Internal University systems may have
failed to properly identify students who should have been placed
on financial aid suspension. Additionally, we determined that we
may have been inadvertently disbursing certain funds under one
minor Federal grant program. These matters have been
self-reported to the U.S. Department of Education and are
pending further action. We have accrued our best estimate of the
losses that may arise from these compliance issues in our
consolidated financial statements as of August 31, 2008.
Such amount is not material for separate disclosure.
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 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 Accreditation and Jurisdictional
Authorizations, above, and Item 1A, Risk
Factors Risks Related to the Highly Regulated
Industry in Which We Operate.
Domestic
High School
The online public schools that Insight Schools operates under
contractual arrangements are subject to state regulations that
authorize or restrict Insight Schools ability to operate
such schools. Insight Schools operates programs that are
designed to comply with state educational and fiscal standards.
Each state independently determines its own requirements, and
Insight Schools must modify its program as required. Several
states mandate compulsory proctored examinations, which Insight
Schools administers at rented locations. In addition, there are
state laws and regulations applicable to online public schools
that directly impact our business by restricting online public
school growth and funding, and indirectly affect our business by
affecting online public schools ability to receive
government funding. Finally, to the extent an online school
obtains federal funds, such as through a grant program or
financial support dedicated for the education of low-income
families, these schools then become subject to additional
federal regulation. For additional information on regulations
related to online public schools, see Item 1A, Risk
Factors Risks Related to the Highly Regulated
Industry in Which We Operate.
State Laws Authorizing or Restricting Online Public
Schools. The authority to operate an online
public school is dependent on the laws and regulations of each
state. Laws and regulations vary significantly from one state to
the next and are constantly evolving.
The online public schools that Insight Schools operates under
contractual arrangements are often governed and overseen by
either a school district or other state education authority, or
a not-for-profit charter school board. We receive funds for
products and services rendered to operate online schools under
detailed service agreements with that governing authority.
Online public schools are typically funded by state or local
governments on a per student basis. An online school that fails
to comply with the state laws and regulations applicable to it
may be required to repay these funds and could become ineligible
for receipt of future state funds.
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To be eligible for state funding, some states require that the
charter for an online school be held by a not-for-profit entity
exempt from taxation under Section 501(c)(3) of the
Internal Revenue Code. The schools must then be operated
exclusively for charitable educational purposes, and not for the
benefit of private, for-profit management companies. The board
or governing authority of the not-for-profit entity must retain
ultimate accountability for the schools operations to
retain its tax-exempt status. It may not delegate its
responsibility and accountability for the schools
operations. Accordingly, our contractual arrangements with these
online schools must be structured to ensure the full
independence of the not-for-profits board and preserve the
boards ability to exercise its fiduciary obligations to
operate an online public school. If our contracts or course of
performance causes the IRS to successfully challenge a
not-for-profit entitys status as exempt under
Section 501(c)(3), the school may be rendered ineligible to
hold the charter and receive public funds and may be required to
refund previous payments.
States have additional laws and regulations for online public
schools concerning faculty requirements, benefit regulations,
background checks and reporting criminal activity including
child abuse or neglect, among other requirements.
Regulations Restricting Online Public School Growth and
Funding. As a new public schooling alternative,
some state and regulatory authorities have elected to proceed
cautiously with online public schools while providing
opportunities for taxpayer families seeking this alternative.
Regulations that control the growth of online public schools
range from prescribing the number of schools in a state to
limiting the percentage of time students may receive instruction
online. Funding regulations can also have an impact.
Federal and State Grants. We have worked with
certain entities to secure public and grant funding that flows
to online public schools that we serve. These grants are awarded
to the not-for-profit entity that holds the charter of the
online public school on a competitive basis in some instances
and on an entitlement basis in other instances. Grants awarded
to public schools and programs whether by a federal
or state agency or nongovernmental organization
often include reporting requirements, procedures, and
obligations.
Federal Laws and Regulations Applicable to Education
Programs. Some of the online public schools we
serve may receive federal funds under Title I (funding for
education of children from low-income families), Title II
(funding for the professional development of teachers),
Title III (funding for technology programs), Title VII
(funding for bilingual education programs) and Title X
(start-up
funding for charter schools) of the Elementary and Secondary
Education Act. The schools must comply with applicable federal
laws and regulations to remain eligible for receipt of federal
funds. The schools we manage could lose all or part of these
funds if they fail to comply with the applicable statutes or
regulations, if the federal authorities reduce the funding for
the programs or if the schools are determined to be ineligible
to receive funds under such programs. Under the terms of our
contractual arrangements, we assist online public schools in
fulfilling these reporting requirements.
Four primary federal laws are directly applicable to the
day-to-day provision of educational services we provide to
online public schools:
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No Child Left Behind Act;
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Individuals with Disabilities Education Act;
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Section 504 of the Rehabilitation Act of 1973; and
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Family Educational Rights and Privacy Act.
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If we fail to comply with any federal or state laws, we could be
determined ineligible to receive funds from federal programs or
face criminal or civil penalties. 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
28
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,
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.
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 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
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.
Dr. John G. Sperling, our Executive Chairman of the Board
and Founder, and his son, Mr. Peter V. Sperling, our Vice
Chairman of the Board, control the John Sperling Voting Stock
Trust and the Peter Sperling Voting Stock Trust.
Dr. Sperling, Mr. Sperling and the two trusts
collectively own 100% of our voting securities, the Apollo Group
Class B common stock. Through their individual holdings and
their control of these trusts, Dr. Sperling, or
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,
except in certain limited circumstances. 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, an executive officer 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 100% of our voting
stock by Dr. Sperling and Mr. Sperling could make it
difficult for a third party to acquire voting control of us.
We are a Controlled Company as defined in
Rule 4350(c) of the Marketplace Rules of the NASDAQ Stock
Market LLC, since 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
Marketplace Rule 4350, including that:
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our Board be composed of a majority of Independent Directors (as
defined in Marketplace Rule 4200);
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the compensation of our officers be determined by a majority of
the independent directors or a compensation committee composed
solely of independent directors; and
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nominations to the Board of Directors be made by a majority of
the independent directors or a nominations committee composed
solely of independent directors.
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However, Marketplace Rule 4350(c)(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 applicable rules
of the NASDAQ Stock Market LLC and the Securities and Exchange
Commission.
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 subject 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) to
significant regulatory scrutiny. We collected approximately 77%
of our 2008 revenues from receipt of Title IV funds.
These regulatory requirements cover virtually all phases of our
U.S. operations, including educational program offerings,
facilities, instructional and administrative staff,
administrative procedures, marketing and recruiting, financial
operations, payment of refunds to students who withdraw,
acquisitions or openings of new schools or programs, addition of
new educational programs and changes in our corporate structure
and ownership.
The Higher Education Act mandates specific regulatory
responsibilities for each of the following components of the
higher education regulatory triad: (1) the federal
government through the Department of Education;
(2) independent accrediting agencies recognized by the
U.S. Secretary of Education; and (3) state 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, standard
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 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 we are found to be in noncompliance with any of these
regulations, standards or policies, any one of the relevant
regulatory agencies could 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 Department of
Education;
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subject our schools to heightened cash monitoring by the
Department of Education;
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transfer us from the 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 Department of Education;
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subject us to other civil or criminal penalties; and
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subject us to other forms of censure.
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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 eligibility, we would
experience a dramatic and adverse decline in revenue and we
would be unable to continue our business as it currently is
conducted.
The
recent reauthorization of the federal Higher Education Act,
signed by the President in August 2008, includes substantially
increased reporting and other requirements which may impair our
reputation and adversely affect our enrollments. In addition,
not all of these new requirements are clear on their face. Our
failure to accurately interpret these new requirements may
subject us to penalties and other sanctions imposed by the
Department of Education.
The Higher Education Opportunity Act, enacted on August 14,
2008, extends the Higher Education Act through
September 30, 2013. Among other things, the Higher
Education Opportunity Act imposes more than 100 new
reporting requirements. Beginning July 1, 2011, the
Department of Education will publish national lists disclosing
various statistics including the top five percent in each of
nine institutional categories with the highest college costs and
largest percentage increases. If University of Phoenix or
Western International University is highlighted negatively on
one or more of these lists, our reputation may be impaired and
our enrollments may be adversely affected. In addition, many of
the Higher Education Opportunity Act provisions will be further
specified in regulations promulgated by the Department of
Education. The Department of Education currently is evaluating
which provisions in the law should be the subject of regulation.
This regulatory process may impose additional or apparently
different reporting and other requirements on institutions that
participate in Title IV programs. It will be some time
before the Department of Education determines which provisions
of the Higher Education Opportunity Act will be the subject of
administrative rulemaking and issues final rules. In the
interim, the uncertainty about various requirements of the
Higher Education Opportunity Act will remain. Any failure by us
to properly interpret the effect of the Higher Education
Opportunity Act could subject us to the consequences, penalties
and other sanctions imposed by the Department of Education
discussed in the preceding risk factor, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows. The prospect of such
sanctions may cause us to conservatively interpret the Higher
Education Opportunity Acts requirements pending
interpretive guidance, which may limit our flexibility in
operating our business.
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 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 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 of
Education 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 SEC, or a change in the identity of a controlling
shareholder of the Apollo Group, University of Phoenix
and/or
Western International University
31
may cease to be eligible to participate in Title IV
programs until recertified by the Department of Education. There
can be no assurances that such recertification would be obtained
on a timely basis. Under some circumstances, the Department of
Education 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 CFP 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. Moreover, University of Phoenix, Western
International University and CFP 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 CFP.
Substantially 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.
If
regulators do not approve our acquisitions, the acquired
schools state licenses, accreditation, and ability to
participate in Title IV programs may be
impaired.
When we acquire an institution that participates in
Title IV programs, we must seek approval from the
Department of Education and 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 Department of Education
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 of Education and
the Department of Education issues a temporary certification
document. If we are unable to obtain approvals from the state
agencies, accrediting agencies or Department of Education 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.
If we
are not recertified to participate in Title IV programs by
the Department of Education, we would lose eligibility to
participate in Title IV programs.
University of Phoenix and Western International University are
eligible and certified to participate in Title IV programs.
Although University of Phoenixs current certification for
Title IV programs expired in June 2007, University of
Phoenix submitted its Title IV program recertification
application to the Department of Education in March 2007 and we
have been collaborating with the Department of Education
regarding the University of Phoenix recertification application.
As we continue to supply additional
follow-up
information based on requests from the Department of Education,
our eligibility continues on a month-to-month basis until the
Department of Education issues its decision on the application.
Western International Universitys current certification
for Title IV programs expires in June 2009 and we will seek
recertification before its certification expires. Generally, the
recertification process includes a review by the Department of
Education of the institutions educational programs and
locations, administrative capability, financial responsibility,
and other oversight categories. The Department of Education
could limit, suspend or terminate an institutions
participation in Title IV programs for violations of the
Higher Education Act or Title IV regulations. Title IV
eligibility is critical to the continued operation of our
business. If one of our institutions is not recertified, it
would 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. The Higher Education Act was recently
reauthorized by the Higher Education Opportunity Act through
September 30, 2013 by Congress and signed into law by the
President on August 14, 2008. Changes to the Higher
Education Act are likely to result from any further
reauthorization and,
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possibly, from any extension of the remaining provisions of the
Higher Education Act, but at this time we cannot predict all of
the changes that the U.S. Congress will ultimately make.
Any action by the U.S. Congress that significantly reduces
Title IV program funding or the ability of our institutions
or students to participate in Title IV programs could have
a material adverse effect on our financial condition, results of
operations and cash flows. Congressional action may 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. We cannot assure you that one or more private
organizations would be willing or able to provide sufficient
loans to students attending one of our schools or programs, or
that the interest rate and other terms of such loans would be as
favorable as Title IV program loans or acceptable to our
students and therefore our enrollment could be materially
adversely affected. In addition, private organizations could
require us to guarantee all or part of this assistance and we
might incur other additional costs. If we provided more direct
financial assistance to our students, we would incur additional
costs and assume increased credit risks, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
Student
loan defaults could result in the loss of eligibility to
participate in Title IV programs.
In general, under the Higher Education Act, 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 expend substantial effort
and resources to improve 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 begin to
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 and increase the
threshold rates that trigger penalties. We cannot at this point
predict the impact of this change, which will be effective with
the reporting of the 2009 cohort default rates in September 2012.
If we lose our eligibility to participate in Title IV
programs because of high student loan default rates, it would
have a material adverse effect on our business, financial
condition, results of operations and cash flows. See the
discussion of student loan cohort default rates, including the
changes enacted by the Higher Education Opportunity Act, in
Item 1, Business Regulatory
Environment Domestic Postsecondary
Student Loan Defaults, which discussion is incorporated by
this reference.
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, 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 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.
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If we
fail to maintain our institutional accreditation, we would lose
our ability to participate in Title IV
programs.
University of Phoenix and Western International University are
institutionally accredited by The Higher Learning Commission,
one of the six regional accrediting agencies recognized by the
Secretary of Education. Accreditation by an accrediting agency
recognized by the Secretary of Education is required in order
for an institution to become and remain eligible to participate
in Title IV programs. The loss of accreditation would,
among other things, render our schools and programs ineligible
to participate in Title IV programs and would have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
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 and Western International University are
authorized to operate and to grant degrees or diplomas by the
applicable state agency of each state where such authorization
is required and where we maintain a campus. In addition, several
states require University of Phoenix to obtain separate
authorization for the delivery of distance education to
residents of those states. Such state authorization is required
for the campus located in the state or, in the case of states
that require it, for University of Phoenix Online to offer
postsecondary education and, in either case, for students at the
on-campus operations or University of Phoenix Online to be
eligible to participate in Title IV programs. The loss of
such authorization would preclude the on-campus operations or
University of Phoenix Online from offering postsecondary
education and render students ineligible to participate in
Title IV programs at least at those state campus locations
or, in states that require it, at University of Phoenix Online
and could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
A
failure to demonstrate administrative capability or
financial responsibility may result in the loss of
eligibility to participate in Title IV
programs.
If our schools eligible to participate in Title IV programs
fail to maintain administrative capability as
defined by the Department of Education, 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. The 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. These criteria require, among other
things, that the institution:
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comply with all applicable Title IV program regulations;
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have capable and sufficient personnel to administer the federal
student financial aid programs;
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have acceptable methods of defining and measuring the
satisfactory academic progress of its students;
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not have a student loan cohort default rate above specified
levels;
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have various procedures in place for safeguarding federal funds;
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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;
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provide financial aid counseling to its students;
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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;
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submit in a timely manner all reports and financial statements
required by the regulations; and
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not otherwise appear to lack administrative capability.
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Furthermore, if our schools eligible to participate in
Title IV programs fail to demonstrate financial
responsibility under the Department of Educations
regulations, those schools could lose their eligibility to
participate in Title IV programs or have that eligibility
adversely conditioned, which would have a material adverse
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effect on our business. To participate in Title IV
programs, an eligible institution must satisfy specific measures
of financial responsibility prescribed by the Department of
Education, or post a letter of credit in favor of the Department
of Education and possibly accept other conditions on its
participation in Title IV programs. Limitations on, or
termination of, participation in Title IV programs as a
result of the failure to demonstrate 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. See
the discussion of financial responsibility in Item 1,
Business Regulatory Environment
Domestic Postsecondary Standards of Financial
Responsibility, which discussion is incorporated by this
reference.
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.
Under a provision of the Higher Education Act commonly referred
to as the 90/10 Rule, as revised by the Higher
Education Opportunity Act, a for-profit institution would no
longer be eligible to participate in Title IV programs if,
it derived more than 90% of its cash-basis revenues, as defined
pursuant to the Higher Education Act and Department of Education
regulations, from Title IV programs for any two consecutive
fiscal years. An institution that violates this
90/10 Rule
for two consecutive fiscal years becomes ineligible to
participate in Title IV programs for a period of not less
than two institutional fiscal years. An institution that derived
more than 90% of its revenue from Title IV programs for any
single fiscal year will be placed on provisional certification
and will be subject to possible additional sanctions by the
Department of Education. If an institution violated the
90/10 Rule
and became ineligible to participate in Title IV programs
but continued to disburse Title IV program funds, the
Department of Education would require the institution to repay
all Title IV program funds received by the institution
after the effective date of the loss of eligibility. University
of Phoenixs and Western International Universitys
percentages were approximately 82% and 50%, respectively for the
year ended August 31, 2008. In May 2008, the Ensuring
Continued Access to Student Loans Act increased the annual loan
limits on federal unsubsidized student loans by $2,000 for
certain students, 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 will increase the amount of Title IV program
funds used by students to satisfy tuition, fees and other costs
incurred, which will increase the proportion of our revenue from
Title IV programs. However, the Higher Education
Opportunity Act excludes from the calculation of the
90/10 Rule
the amounts received from these increased annual loan limits
between July 1, 2008 and July 1, 2011, providing some
temporary relief. Absent any extension of this temporary relief,
our 90/10 percentages will increase when the exclusion of
these funds from the calculation expires in 2011. If we become
ineligible to participate in Title IV federal student
financial aid programs, it would have a material adverse effect
on our business, financial condition, results of operations and
cash flows.
We
will be subject to sanctions if we fail to 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 and 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 for 5% or more of students
sampled on the institutions annual compliance audit,
generally within 45 days of the date the school determines
that the student has withdrawn, we may have to post a letter of
credit in favor of the Department of Education or otherwise be
subject to adverse actions by the Department of Education, which
could increase our cost of regulatory compliance and have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
We are
subject to sanctions if we pay impermissible commissions,
bonuses, or other incentive payments to individuals involved in
certain recruiting, admission, or financial aid
activities.
A school participating in Title IV programs may not provide
any commission, bonus, or other incentive payment based directly
or indirectly on success in securing enrollments or financial
aid to any person or entity engaged in any student recruitment
or admission activity or in making decisions regarding the
awarding of Title IV program funds. The law and regulations
governing this requirement do not establish clear criteria for
compliance in
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all circumstances. If the Department of Education determined
that our compensation practices violated these standards, the
Department of Education could subject us to monetary fines,
penalties, or other sanctions. Any substantial fine, penalty, or
other sanction could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. In 2004, we settled for $9.8 million a pending
review by the Department of Education relating to these types of
compensation arrangements.
Increased
scrutiny by various governmental agencies regarding
relationships between student loan providers and educational
institutions and their employees have produced significant
uncertainty concerning restrictions applicable to the
administration of the Title IV loan programs and the
funding for those programs which, if not satisfactorily or
timely resolved, could result in increased regulatory burdens
and costs for us and could adversely affect our student
enrollments.
During 2007 and 2008, student loan programs, including the
Title IV programs, have come under increased scrutiny by
the Department of Education, Congress, state attorneys general,
and other parties. Issues that have received extensive attention
include allegations of conflicts of interest between some
institutions and lenders that provide Title IV loans,
questionable incentives given by lenders to some schools and
school employees, allegations of deceptive practices in the
marketing of student loans, and schools leading students to use
certain lenders. Several institutions and lenders have been
cited for these problems and have paid several million dollars
in the aggregate to settle those claims. The practices of
numerous other schools and lenders are being examined by
government agencies at the federal and state level. We have
cooperated with various state agencies and attorneys general
regarding their investigations on student loan practices and do
not anticipate any adverse consequences to us as a result of
these investigations. As a result of this scrutiny, Congress has
passed new laws, the Department of Education has enacted
stricter regulations, and several states have adopted codes of
conduct or enacted state laws that further regulate the conduct
of lenders, schools, and school personnel. These new laws and
regulations, among other things, limit schools
relationships with lenders, restrict the types of services that
schools may receive from lenders, prohibit lenders from
providing other types of loans to students in exchange for
Title IV loan volume from schools, require schools to
provide additional information to students concerning
institutionally preferred lenders, and significantly reduce the
amount of federal payments to lenders who participate in the
Title IV loan programs. The environment surrounding access
to and cost of student loans remains in a state of flux, with
additional legislation and regulatory changes being actively
considered at the federal and state levels. The uncertainty
surrounding these issues, and any resolution of these issues
that increases loan costs or reduces students access to
Title IV loans, may adversely affect our student
enrollments, which could have an adverse effect on our business,
financial condition, results of operations and cash flows.
If
IPDs Client Institutions were sanctioned due to
non-compliance with Title IV requirements, we could suffer
adverse impacts on our business.
IPD provides to its Client Institutions numerous consulting
services in exchange for a contractual share of the Client
Institutions tuition revenue. If one or more Client
Institutions were sanctioned for noncompliance with
Title IV requirements and such sanction(s) were to have a
material adverse effect on enrollments and tuition revenue of
such Client Institutions, IPD may no longer provide services to
such Client Institutions, and it could have a material adverse
effect on our business.
The
online public high schools that Insight Schools operates under
contractual arrangements are subject to uncertain regulatory
implications that could materially and adversely affect Insight
Schools business. These risks include the
following:
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Online public schools are relatively new, and enabling
legislation varies widely among states. Enabling legislation is
often ambiguous and subject to discrepancies in interpretation
by regulatory authorities. The failure of the online public
schools Insight Schools serves to comply with applicable
government regulations, both state and federal, could result in
a loss of funding and an obligation to repay funds previously
received.
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States have laws and regulations for public schools, including
online public schools, concerning faculty requirements, benefit
regulations, background checks and reporting criminal activity
including child abuse,
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among other requirements. The failure of the online public
schools Insight Schools serves to comply with such state
regulations could result in penalties or other liability.
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Failure to comply with applicable government procurement rules
may void Insight Schools contractual agreements.
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Our ability to satisfy the regulatory requirements in one or
more states may limit our ability to expand our Insight Schools
business and realize the benefits of greater scale.
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The operation of some of the online public schools Insight
Schools serves depends on the maintenance of the authorizing
charter and compliance with applicable laws. If these charters
are not renewed or are otherwise terminated by the charter
granting authority, or a school ceases to maintain its status as
a not-for-profit, exempt from federal taxation under Internal
Revenue Code Section 501(c)(3), whether because of Insight
Schools involvement or otherwise, Insight Schools
contract with the school could be terminated and Insight Schools
may be subject to a claim for damages. In addition, if a
states charter school statute is not reauthorized, Insight
Schools contract with a charter school in that state would
be terminated.
The
complexity of regulatory environments in which we operate has
increased and may continue to increase our costs, and failure to
comply with applicable laws and regulations could have a
material adverse effect on our business.
Our business is subject to increasingly complex corporate
governance, public disclosure, accounting and tax requirements
and environmental legislation that have increased both our costs
and the risk of noncompliance. Because our Class A common
stock is publicly traded, we are subject to certain rules and
regulations for federal, state and financial market exchange
entities (including the SEC and NASDAQ). We continue to evaluate
and update our policies and procedures in response to corporate
scandals and laws enacted by Congress. Without limiting the
generality of the foregoing, we are subject to, and required to
comply with, the provisions of the Sarbanes-Oxley Act of 2002
(including, among other things, the development of policies and
procedures designed to satisfy the provisions thereof regarding
internal control over financial reporting, disclosure controls
and procedures and certification of financial statements
appearing in periodic reports) and we have a compliance function
which develops policies and monitors compliance with laws
(including, among others, privacy laws, export control laws,
rules and regulations of the Office of Foreign Asset Controls
and the Foreign Corrupt Practices Act). Our effort to comply
with these new regulations have resulted in, and are likely to
continue resulting in, increased general and administrative
expenses and diversion of management time and attention from
revenue generating activities to compliance activities. If we
fail to comply with applicable laws and regulations, our
business, financial condition, results of operations and cash
flows could be adversely affected.
Government
regulations relating to the Internet could increase our cost of
doing business, affect our ability to grow or otherwise have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
The increasing popularity and use of the Internet and other
online services has led and may lead to the adoption of new laws
and regulatory practices in the United States 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, 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 country
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.
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We operate physical and online educational institutions in
Canada, Chile, Mexico, the Netherlands 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
If we
are unable to successfully conclude the litigation, governmental
investigations and inquiries pending against us, 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 lawsuits alleging violations of the federal
securities laws and the federal False Claims Act. The
U.S. District Court for the District Court of Arizona
recently vacated a judgment for damages against us in a
securities class action, and plaintiffs have appealed to the
Ninth Circuit Court of Appeals. We are awaiting trial in a qui
tam action against us alleging violations of the federal
securities laws and the federal False Claims Act. In addition,
certain government agencies are conducting inquiries regarding
us, including the U.S. Department of Justice and the
Internal Revenue Service. 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 17,
Commitments and Contingencies, in Item 8, Financial
Statements and Supplementary Data, in this Annual Report on
Form 10-K
for further discussion of pending litigation and other
proceedings.
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, which could have a further material adverse
effect on our financial condition, results of operations and
cash flows.
While we continue in our efforts to cooperate with the
government investigations, we cannot predict the duration or
outcome of the investigations, and the investigations may
expand, and other regulatory agencies may become involved. The
outcome and costs associated with these investigations could
have a material adverse effect on our business, financial
condition, results of operations and cash flows. Further, the
investigations could result in adverse publicity and divert the
efforts and attention of our management team from our ordinary
business operations. The government investigations and any
related legal and administrative proceedings could also include
the institution of administrative, civil injunctive, or criminal
proceedings against us
and/or our
current or former directors, officers or employees; the
imposition of fines and penalties; suspensions
and/or other
remedies and sanctions.
We may
not be able to sustain our recent growth rate or profitability,
and we may not be able to manage future growth
effectively.
Our ability to sustain our current rate of growth or
profitability depends on a number of factors, including our
ability to obtain and maintain regulatory approvals, our ability
to maintain operating margins, our ability to recruit and retain
high quality academic and administrative personnel and
competitive factors. Over the past three years, our growth has
been predominately in our associates degree programs. If
we are not able to sustain our growth rate in the
associates degree programs, or fail to transition this
growth to our bachelors degree, advanced degree and other
potential new programs, our business could be adversely
affected. In addition, growth and expansion of our international
and high school operations 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 information systems and other resources
to support future growth, we cannot assure you that we will be
able to manage further expansion effectively. Failure to do so
could adversely affect our business, financial condition,
results of operations and cash flows.
If we
cannot maintain student enrollments, our results of operations
may be adversely affected.
Our strategy for growth and profitability depends, in part, upon
managing attrition rates as well as increasing student
enrollments in our schools and programs. Attrition rates are
often due to factors outside our control. Many
38
students face financial, personal, or family constraints that
require them to withdraw from the school or the program. If we
are unable to control the rate of student attrition, the overall
enrollment levels are likely to decline. Also, to attract more
students, we must develop and implement marketing and student
recruitment programs, which may not succeed. If we cannot
maintain and increase student enrollments, including retention
of students in one or more degree programs, our business,
financial condition, results of operations and cash flows may be
adversely affected.
Our
financial performance depends on our ability to continue to
develop awareness among, and recruit and retain
students.
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, and, consequently, our ability to increase revenue or
maintain profitability could be impaired. 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. Some of the
factors that could prevent us from successfully enrolling and
retaining students in our programs include:
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the emergence of more successful competitors;
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factors related to our marketing, including the cost and
effectiveness of Internet advertising and broad-based branding
campaigns;
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performance problems with our online systems;
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failure to maintain accreditation;
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inability to continue to recruit, train and retain quality
certified teachers;
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student or employer dissatisfaction with our services and
programs;
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adverse publicity regarding us, our competitors or online or
for-profit education generally;
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tuition rate reductions by competitors that we are unwilling or
unable to match;
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a decline in the acceptance of online education;
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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; and
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litigation or regulatory investigations that may damage our
reputation.
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If the
proportion of our students who are enrolled in our
associates degree programs continues to increase, we may
experience increased cost and reduced margins.
In recent years, 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 effects from this shift, such as an increase in our
student loan cohort default rate. If this mix shift continues,
we may experience additional consequences, such as higher cost
per start, lower retention rates
and/or
higher student services costs, an increase in the percentage of
our revenue derived from Title IV funding under the
so-called
90/10 Rule,
more limited ability to implement tuition price increases and
other effects that may adversely affect our operating results.
The
significant uncertainty about the asset portfolios of companies
in both the U.S. and worldwide financial services sector,
dramatic volatility in trading markets and recent failures and
near failures of financial institutions may adversely impact our
investment portfolio and investment returns.
The recent failures, bankruptcies, rescues and distressed
acquisitions of previously highly rated financial institutions
such as Federal National Mortgage Association (Fannie Mae),
Federal Home Loan Mortgage Corporation (Freddie Mac), American
International Group, Inc., Lehman Brothers Holdings Inc., The
Bear Stearns
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Companies Inc., Merrill Lynch & Co., Inc., Washington
Mutual Savings Bank and Wachovia Corporation, indicate a
possibly dramatic realignment of companies in the financial
services sector and reflect the markets lack of a clear
understanding of the financial health of financial institutions.
Many widely-held investments previously rated investment grade
have declined in value precipitously and unexpectedly in recent
months, resulting in substantial trading and investment losses
for corporate and other investors. In order to avoid these
risks, investors have favored securities issued or guaranteed by
the U.S. government, which has resulted in reduced yields
on these and other investments considered to be lower risk.
Although we generally employ a conservative investment strategy,
we may incur investment losses as a result of these unusual and
unpredictable market developments and we may experience reduced
investment earnings if the yields on investments deemed to be
low risk remain low or decline further in this time of economic
uncertainty.
Our
business may be adversely affected by a general economic
slowdown or recession in the U.S. or abroad.
The U.S. economy and the economies of other key
industrialized countries currently are characterized by reduced
economic activity, increased unemployment and substantial
uncertainty about their financial services markets. The
U.S. and other key economies may be in or heading toward
recession. In addition, homeowners in the U.S. have
experienced an unprecedented reduction in wealth due to the
decline in residential real estate values across much of the
country. These events may reduce the demand for our programs
among students and the willingness of employers to sponsor
educational opportunities for their employees, either of which
could materially and adversely affect our business, financial
condition, results of operations and cash flows. In addition,
these events could adversely affect the ability or willingness
of our former students to repay student loans, which could
increase our student loan cohort default rate and require
increased time, attention and resources to manage these
defaults. 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, above.
The
current unprecedented disruptions in the credit and equity
markets worldwide may impede or prevent our access to the
capital markets for additional funding to expand or operate our
business and may affect the availability or cost of borrowing
under our existing credit facilities.
The credit and equity markets of both mature and developing
economies have experienced extraordinary volatility, asset
erosion and uncertainty in the last several months, leading to
governmental intervention in the banking sector in the
U.S. and abroad on an unprecedented scale. Until these
market disruptions diminish, we may not be able to access the
capital markets to obtain funding needed for expansion of our
business in furtherance of our strategic plan. In addition,
changes in the capital or other legal requirements applicable to
commercial lenders may affect the availability or increase the
cost of borrowing under our principal credit facility. If we are
unable to obtain needed capital in this manner on terms
acceptable to us, we may have to limit our growth initiatives or
take other actions that materially adversely affect our
business, financial condition, results of operations and cash
flows.
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, to the extent we have outstanding borrowings under
our credit agreement in the future, 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. A breach of any covenants contained
in our credit agreement could 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. As of
August 31, 2008, we had no outstanding borrowings under our
principal credit facility.
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
40
they provide us with a steady source of potential working adult
students for particular programs and also serve to increase our
reputation among high-profile employers. 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 adult students will be impaired, and this
could materially and adversely affect our business, prospects,
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, financial condition, results of
operations and cash flows 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 those 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 appropriate 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 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.
Capacity
constraints of our computer networks and changes to the
acceptance and regulation of online programs could have a
material adverse effect on our ability to recruit and retain
students and grow our online programs.
Our schools and the schools to which we provide services,
including their online campuses, intend to increase student
enrollments, and more resources will be required to support this
growth, including additional faculty, admissions, academic, and
financial aid personnel. This growth may place a significant
strain on the operational resources of these schools and
restrict our ability to recruit and retain students and grow our
online programs.
Our success depends, in part, on our ability to expand the
content of programs, develop new programs in a cost-effective
manner, maintain good standing with our regulators and
accreditors, and meet our students needs in a timely
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manner. The expansion of our online programs and the development
of new programs may not be accepted by students or the online
education market. In addition, a general decline in Internet use
for any reason, including due to security or privacy concerns,
the cost of Internet service or changes in government regulation
of Internet use, may result in less demand for online
educational services, in which case we may not be able to
recruit and retain students and grow our online programs as
planned. The failure to recruit and retain students and grow our
online programs may have a material adverse effect on 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 ability to attract and
retain students.
The performance and reliability of our computer network
infrastructure at our schools, including our online programs, is
critical to our reputation and ability to attract and retain
students. Any computer system error or failure, or a sudden and
significant increase in traffic on our computer networks,
including those that host our online programs, may cause network
outages and may damage our reputation and disrupt our online and
on-ground operations. Our two existing data centers in Phoenix,
Arizona are not currently geographically dispersed, which
increases the risk of network outages and operations
disruptions. We are currently constructing a third data center
that is approximately 30 miles from our existing data
centers and is served by a different electrical utility and
power grid. We expect this third data center to be operational
in 2009.
In addition, we face the threat to our computer systems of
unauthorized access, computer hackers, computer viruses 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,
which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
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 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. 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.
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If a
substantial number of our students cannot secure Title IV
loans as a result of decreased lender participation in the
Title IV programs or if lenders increase the costs or
reduce the benefits associated with the Title IV loans they
provide, we could be materially adversely
affected.
The cumulative impact of recent regulatory and market
developments and conditions has caused some lenders to cease
providing Title IV loans to students, including some
lenders that have previously provided Title IV loans to our
students. Other lenders have reduced the benefits and increased
the fees associated with the Title IV loans they provide.
We and other schools have had to modify student loan practices
in ways that could result in higher administrative costs. If the
costs of their Title IV loans increase, some students may
decide not to take out loans and not enroll in a postsecondary
institution. In May 2008, the Ensuring Continued Access to
Student Loans Act was enacted to attempt to ensure that all
eligible students will be able to obtain Title IV loans in
the future and that a sufficient number of lenders will continue
to provide Title IV loans. Among other things, the new
legislation:
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extends authorization for the Department of Education to
purchase Title IV loans from lenders through June 30,
2010, thereby providing capital to the lenders to enable them to
continue making Title IV loans to students;
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increases the annual and aggregate loan limits on federal
student loans; and
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permits the Department of Education to designate institutions
eligible to participate in a lender of last resort
program, under which federally recognized student loan guaranty
agencies will be required to make Title IV loans to all
otherwise eligible students at those institutions.
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We cannot predict if this legislation will be effective in
ensuring students access to Title IV loans. If a
substantial number of lenders cease to participate in the
Title IV loan programs, increase the costs of student
access to such programs, or reduce the benefits available under
such programs, our students may not have access to such loans,
which could cause our enrollments to decline and have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
A
substantial decrease in private student financing options,
including Title IV programs, or a significant increase in
financing costs for our students, could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
The consumer credit markets in the United States have recently
suffered from increases in default rates and foreclosures on
mortgages. Providers of alternative student loans have also
experienced recent increases in default rates. Adverse market
conditions for private student loans could result in lenders
reducing the attractiveness
and/or
decreasing the availability of alternative loans to
postsecondary students, including students with low credit
scores who would not otherwise be eligible for credit-based
alternative loans. Prospective students may find that these
increased financing costs make borrowing prohibitively expensive
and abandon or delay enrollment in postsecondary education
programs, or may seek lower cost alternatives.
In addition, increasing interest rates as a result of the
current consumer credit environment could also contribute to
higher default rates with respect to students repayment of
funds and private loans. Higher default rates may, in turn,
adversely impact the willingness of private lenders to make
private loan programs available to students who attend our
schools. Private lenders could also require that our schools pay
them new or increased fees in order to provide alternative loans
to prospective students.
A significant number of states in which our schools operate have
faced budget constraints that have caused or may cause them to
reduce state appropriations in a number of areas. These states
may decide to reduce the amount of state financial aid that they
provide to students, but we cannot predict how significant any
future reductions in financial aid will be or how long any such
reductions will persist.
If any of these scenarios were to occur, our students
ability to finance their education could be adversely affected
and our student population could decrease, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
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We
face intense competition in the postsecondary education
market.
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 for-profit
schools and alternatives to higher education, such as employment
and military service. Some of our competitors, both public and
private, have substantially 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 sources not available to for-profit 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 competition is expected to increase.
This intense competition could adversely affect our business,
financial condition, results of operations and cash flows.
Our
expansion into new markets outside the United States, if
successful, will subject us to risks inherent in international
operations.
As part of our growth strategy, through Apollo Global, Inc., our
consolidated 80.1% owned joint venture, we intend to acquire or
establish campuses or universities outside the United States. To
the extent that we make such acquisitions, we will face risks
that are inherent in international operations, including:
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complexity of operations across borders;
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compliance with foreign regulatory environments;
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currency exchange rate fluctuations;
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monetary policy risks, such as inflation, hyperinflation and
deflation;
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price controls or restrictions on exchange of foreign currencies;
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potential political and economic instability in the countries in
which we operate, including potential student uprisings;
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expropriation of assets by local governments;
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multiple and possibly overlapping and conflicting tax laws;
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compliance with United States regulations such as the Foreign
Corrupt Practices Act;
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potential unionization of employees under local labor
laws; and
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acts of war, epidemics and natural disasters.
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We may
experience movements in foreign currency exchange rates which
could negatively affect our operating results.
As we expand our international operations, we will conduct more
transactions in currencies other than the U.S. Dollar.
Additionally, the volume of transactions in the various foreign
currencies will continue to increase, thus increasing our
exposure to foreign currency exchange rate fluctuations.
Fluctuations in foreign currency exchange rates could have a
material adverse affect on our business, financial condition,
results of operations and cash flows.
Our
investments in auction rate securities are subject to market
risks which may cause losses and affect the liquidity of these
investments.
As of August 31, 2008, we had $26.8 million of
principal invested in auction rate securities that experienced
failed auctions. Approximately $16.8 million of our
auction-rate securities are invested in tax-exempt municipal
bond funds, which carry AA credit ratings for the underlying
issuer and at least an A credit rating for the insurers. The
remaining $10.0 million are invested in securities
collateralized by student loans, which are rated AAA and are
guaranteed by the U.S. government. 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. The auction or reset dates occur at
44
intervals established at the time of issuance that are generally
between 7 and 35 days. Auction-rate securities
fail when there are not enough buyers to absorb the
amount of securities available for sale for that particular
auction period. Historically, auction-rate securities auctions
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 mid-February 2008, due to
uncertainty in the global credit and capital markets and other
factors, investment banks and broker dealers have been less
willing to support auction-rate securities and many auction-rate
securities auctions have failed. As of August 31, 2008, we
recorded a $1.6 million unrealized pre-tax loss on these
securities. If the global credit market continues to deteriorate
and broker-dealers do not renew their support of auctions for
auction rate securities, the liquidity of our auction-rate
securities investments may be further impacted and we may be
required to record further declines in value of these
investments.
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:
|
|
|
|
|
inability to successfully integrate the acquired operations into
our institutions and maintain uniform standards, controls,
policies and procedures;
|
|
|
|
distraction of managements attention from normal business
operations;
|
|
|
|
challenges retaining the key employees of the acquired operation;
|
|
|
|
insufficient revenue generation to offset liabilities assumed;
|
|
|
|
expenses associated with the acquisition; and
|
|
|
|
unidentified issues not discovered in our due diligence process,
including commitments
and/or
contingencies.
|
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 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 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.
As a
relatively new type of school, online public high schools that
Insight Schools operates under contractual arrangements are
subject to uncertain funding implications and operational issues
that could materially and adversely affect Insight Schools
business. These risks include the following:
|
|
|
|
|
Insight Schools revenues are derived principally from
taxpayer funded sources. Accordingly, the availability of
continued funding for Insight Schools business is subject
to the availability of tax revenue and the political process and
is not predictable.
|
|
|
|
Insight Schools faces intense competition from traditional
public and private high schools and increasing competition from
other online public school operators.
|
45
|
|
|
|
|
Insight Schools contracts with the online public schools
it serves are subject to periodic renewal. The renewal of some
state contracts may be subject to a statutory competitive
bidding process. The renewal of contracts with charter schools
must be approved by the schools independent board.
|
|
|
|
Highly qualified teachers are critical to the success of Insight
Schools learning system. If Insight Schools is not able to
continue to recruit, train and retain quality certified
teachers, Insight Schools curriculum might not be
effectively delivered to students, compromising their academic
performance and Insight Schools reputation with the online
public schools Insight Schools serves.
|
|
|
|
If student performance falls or parent and student satisfaction
declines, a significant number of students may not remain
enrolled in an online public school that Insight Schools serves.
|
|
|
|
The poor performance or misconduct of other online public school
operators could tarnish the reputation of all online public
school operators.
|
|
|
|
If we are unable to effectively expand into additional states,
whether due to regulatory constraints or otherwise, we may not
realize the benefits of greater scale and the spreading of fixed
costs over a larger revenue base.
|
The schools Insight Schools contracts with and serves are
governed by independent governing bodies who may shift their
priorities or change objectives in ways adverse to Insight
Schools.
Our
future operating results and the market price of our common
stock could be materially adversely affected if we are required
to write down the carrying value of goodwill and other
indefinite-lived intangible assets associated with any of our
reporting units in the future.
In accordance with the SFAS No. 142, Goodwill
and Other Intangible Assets (SFAS 142),
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 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. If our
estimates or related assumptions change in the future, we may be
required to record non-cash impairment charges for these assets.
In the future, if we are required to significantly write down
the carrying value of goodwill associated with any of our
reporting units in accordance with SFAS 142, our operating
results and the market price of our common stock may be
materially adversely affected.
We
rely on exclusive 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 of third parties.
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, domain
names and contractual agreements to protect our proprietary
rights. We rely on trademark protection in the United States and
select 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 or license rights to own or use
content 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 protections for all of our proprietary rights in the
United States or select foreign jurisdictions, or that third
parties will not terminate our license rights or infringe upon
or otherwise violate our proprietary rights. 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, curricula, online
resource material and 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.
46
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. Third parties may allege that we have
not obtained sufficient rights in the content of a course or
other intellectual property. Third parties may also raise claims
against us alleging an infringement or violation of the
intellectual property of that third party. Some third party
intellectual property rights may 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 general liability and cyber liability
insurance, if any, may not cover potential claims of this type
adequately or at all, and we may be required to alter 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 or distribution
of class materials posted online for class
discussions.
In some instances, our faculty members or our students may post
various articles or other third-party content on class
discussion boards. We may incur liability for the unauthorized
duplication or distribution of this material posted online for
class discussions. Third parties may raise claims against us for
the unauthorized duplication 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 general
liability insurance may not cover potential claims of this type
adequately or at all, and we may be required to alter the
content of our courses or pay monetary damages, which could have
a material adverse affect on our business, financial condition,
results of operations and cash flows.
Our
investment portfolio is sensitive to interest rate changes and a
significant decrease in interest rates could adversely impact
the performance of our investment portfolio.
As of August 31, 2008, we held $895.6 million in cash
and cash equivalents, restricted cash and cash equivalents and
marketable securities. A decrease in interest rates of more than
one percentage point could result in a significant reduction in
the income we receive from these assets. When the Federal
Reserve Bank lowers the Federal Funds Rate, it generally results
in a reduction in the rate of return we receive on our
investments. Therefore, the lower interest rates and the
possibility of future Federal Funds Rate reductions, among other
things, may significantly reduce our investment income in the
future.
If
students fail to pay their outstanding balances, our business
may be harmed.
Students may carry balances on portions of their education
expense not covered by financial aid programs. These balances
are unsecured and not guaranteed. Losses related to unpaid
student balances in excess of the amounts we have reserved for
bad debts could have a material adverse effect on our business.
Terrorist
attacks and other acts of violence or war, natural disasters or
breaches of security could have an adverse effect on our
operations.
Terrorist attacks and other acts of violence or war, hurricanes,
earthquakes, floods, tornados and other natural disasters or
breaches of security at our physical campuses could disrupt our
operations. Terrorist attacks and other acts of violence or war,
natural disasters or breaches of security that directly impact
our physical facilities or ability to recruit and retain
students and employees could adversely affect our ability to
deliver our programs to our students and, thereby, adversely
affect our results of operations. Furthermore, terrorist attacks
and other acts of violence or war, natural disasters or breaches
of security could adversely affect the economy and demographics
of the affected region, which could cause significant declines
in the number of students who attend our schools in that region
and have a material adverse effect on our business, financial
condition, results of operations and cash flows.
47
Risks
Related to the Use of Incorrect Measurement Dates for Stock
Option Grants and the Restatement of our Consolidated Financial
Statements
The
matters relating to an investigation by the Special Committee of
the Board of Directors and the restatement of our consolidated
financial statements may result in additional litigation and
governmental enforcement actions.
A Special Committee of our Board of Directors (the Special
Committee), with the assistance of independent legal
counsel and forensic accountants, conducted in 2006 an
independent review of our historical practices related to stock
option grants (the Independent Review). Based on the
Independent Review and our internal review of every stock option
grant since our initial public offering (the Internal
Review), we determined that incorrect measurement dates
had been used for financial accounting purposes for many stock
option grants made during the period June 1994 through August
2006. As a result, we recorded additional share-based
compensation expense, and related tax effects, with regard to
certain past stock option grants, and we restated certain
previously issued financial statements as set forth in our
Annual Report on
Form 10-K
for the year ended August 31, 2006 and our Quarterly
Reports on
Form 10-Q
for the quarters ended May 31, 2006, November 30, 2006
and February 28, 2007.
The Internal Review, the Independent Review and related
activities resulted in substantial expenses for legal,
accounting, tax and other professional services, have diverted
managements attention from our business; and could in the
future harm our business, financial condition, results of
operations and cash flows.
We believe we made appropriate judgments in determining the
correct measurement dates for our stock option grants. There is
a risk, however, that we may have to further restate our
previously issued financial statements, amend prior filings with
the SEC, or take other actions not currently contemplated in
connection with any of the other restated items.
Our past stock option practices and the resulting restatement of
previously issued financial statements have resulted in greater
risks associated with litigation, regulatory proceedings and
government enforcement actions. Litigation is now pending in
state and federal courts against certain of our current and
former directors and executive officers pertaining to
allegations relating to stock option grants. We have fully
cooperated with the government inquiries into these matters. We
intend to continue full cooperation. No assurance can be given
regarding the outcome of litigation, regulatory proceedings or
government enforcement actions relating to our past stock option
practices. The resolution of these matters may be time consuming
and expensive and may distract management from the conduct of
our business. Furthermore, if we are subject to adverse findings
in litigation, regulatory proceedings or government enforcement
actions, we could be required to pay damages or penalties or
have other remedies imposed, which could harm our business,
financial condition, results of operations and cash flows.
We did not historically maintain effective controls over our
activities related to accounting for tax liability under
Internal Revenue Code Section 162(m). In connection with
the administration of our stock option plans, we may have
claimed deductions with respect to compensation attributable to
the exercise of certain stock options, which may not qualify as
performance-based compensation under Section 162(m). As a
result of this control deficiency, we may have claimed
deductions with respect to those exercised options that were in
excess of the limit imposed under Section 162(m). We have
accrued our best estimate, representing the high end of our
estimated potential exposure, with respect to uncertain tax
positions, including interest for the taxable years fiscal year
2003 through fiscal year 2007 (which are currently our only open
years subject to adjustment for federal tax purposes) of
approximately $47.6 million as of August 31, 2008. Our
taxable years 2003 2005 are the subject of an
Internal Revenue Service Audit, in connection with which we have
agreed to extend the statute of limitations. The ultimate amount
we will be required to pay to settle all of our tax liabilities
for prior years may differ from the amount accrued. For prior
periods where a liability existed and where the statute of
limitations has expired, the accrual relating to that period has
been reversed in the period in which the statute expired.
We are
subject to the oversight of the Securities and Exchange
Commission and other regulatory agencies, and investigations by
those 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,
during fiscal year 2007, we were the subject of a Securities and
Exchange Commission
48
inquiry and a Department of Justice investigation related to our
historical stock option grant practices. We devoted a
substantial amount of senior executive time and incurred
significant legal costs in connection this inquiry and our
related internal review. The Securities and Exchange Commission
has notified us that it has closed its inquiry without
recommending enforcement action and we are informed by counsel
that the Department of Justice investigation no longer is
active. 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.
|
|
Item 1B
|
Unresolved
Staff Comments
|
None.
As of August 31, 2008, we utilized 385 facilities, the
majority of which were leased. As of August 31, 2008, we
were obligated to lease approximately 7.0 million square
feet and owned approximately 1.0 million square feet, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
Owned
|
|
|
Total
|
|
Segment
|
|
Location
|
|
Type
|
|
Sq. Ft.
|
|
|
# of Properties
|
|
|
Sq. Ft.
|
|
|
# of Properties
|
|
|
Sq. Ft.
|
|
|
# of Properties
|
|
|
University of Phoenix
|
|
United States
|
|
Office
|
|
|
726,098
|
|
|
|
8
|
|
|
|
0
|
|
|
|
0
|
|
|
|
726,098
|
|
|
|
8
|
|
|
|
|
|
Dual Purpose
|
|
|
5,150,041
|
|
|
|
243
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,150,041
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,876,139
|
|
|
|
251
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,876,139
|
|
|
|
251
|
|
|
|
International
|
|
Office
|
|
|
3,455
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,455
|
|
|
|
1
|
|
|
|
|
|
Dual Purpose
|
|
|
103,078
|
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
|
|
103,078
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,533
|
|
|
|
5
|
|
|
|
0
|
|
|
|
0
|
|
|
|
106,533
|
|
|
|
5
|
|
Apollo Global
|
|
International
|
|
Office
|
|
|
3,557
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,557
|
|
|
|
1
|
|
|
|
|
|
Dual Purpose
|
|
|
99,733
|
|
|
|
13
|
|
|
|
351,061
|
|
|
|
23
|
|
|
|
450,794
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,290
|
|
|
|
14
|
|
|
|
351,061
|
|
|
|
23
|
|
|
|
454,351
|
|
|
|
37
|
|
Insight Schools
|
|
United States
|
|
Office
|
|
|
30,457
|
|
|
|
8
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30,457
|
|
|
|
8
|
|
|
|
|
|
Dual Purpose
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,457
|
|
|
|
8
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30,457
|
|
|
|
8
|
|
Other Schools
|
|
United States
|
|
Office
|
|
|
35,192
|
|
|
|
2
|
|
|
|
0
|
|
|
|
0
|
|
|
|
35,192
|
|
|
|
2
|
|
|
|
|
|
Dual Purpose
|
|
|
277,987
|
|
|
|
62
|
|
|
|
0
|
|
|
|
0
|
|
|
|
277,987
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,179
|
|
|
|
64
|
|
|
|
0
|
|
|
|
0
|
|
|
|
313,179
|
|
|
|
64
|
|
Corporate
|
|
United States
|
|
Office
|
|
|
567,989
|
|
|
|
17
|
|
|
|
599,664
|
|
|
|
3
|
|
|
|
1,167,653
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
6,997,587
|
|
|
|
359
|
|
|
|
950,725
|
|
|
|
26
|
|
|
|
7,948,312
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dual purpose space includes office and classroom facilities. In
some cases, classes are held in the facilities of the
students employers at no charge to us. 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. We
anticipate that an additional 0.9 million square feet will
be leased in 2009.
|
|
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, litigation,
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.
49
In accordance with SFAS No. 5, Accounting for
Contingencies (SFAS 5), 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 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 17, 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
|
Submission
of Matters to a Vote of Security Holders
|
None.
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
|
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
52.89
|
|
|
$
|
33.70
|
|
Second Quarter
|
|
|
48.56
|
|
|
|
38.26
|
|
Third Quarter
|
|
|
49.22
|
|
|
|
42.92
|
|
Fourth Quarter
|
|
|
64.01
|
|
|
|
47.23
|
|
2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
80.38
|
|
|
$
|
53.82
|
|
Second Quarter
|
|
|
80.64
|
|
|
|
61.38
|
|
Third Quarter
|
|
|
60.93
|
|
|
|
41.21
|
|
Fourth Quarter
|
|
|
65.50
|
|
|
|
44.26
|
|
Holders
As of August 31, 2008, there were approximately 275
registered holders of record of Apollo Group Class A common
stock and four registered holders of record of Apollo Group
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 Group
Class A and Apollo Group 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 Group Class A and
Apollo Group Class B common stock in an identical manner as
follows: holders of our Apollo Group Class A common stock
and Apollo
50
Group 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 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 Group Class A common stock. The share
repurchases under these programs for the three months ended
August 31, 2008 have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Part of
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Publicly
|
|
|
Value of
|
|
|
|
|
|
|
Total # of
|
|
|
Average
|
|
|
Announced
|
|
|
Shares
|
|
|
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Plans or
|
|
|
Available for
|
|
|
|
|
(Numbers in thousands, except per share data)
|
|
Repurchased
|
|
|
per Share
|
|
|
Programs
|
|
|
Repurchase
|
|
|
|
|
|
Treasury stock as of May 31, 2008
|
|
|
29,978
|
|
|
$
|
59.50
|
|
|
|
29,978
|
|
|
$
|
45,638
|
|
|
|
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reissued
|
|
|
(7
|
)
|
|
|
59.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of June 30, 2008
|
|
|
29,971
|
|
|
$
|
59.50
|
|
|
|
29,978
|
|
|
$
|
45,638
|
|
|
|
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
454,362
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reissued
|
|
|
(338
|
)
|
|
|
59.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of July 31, 2008
|
|
|
29,633
|
|
|
$
|
59.50
|
|
|
|
29,978
|
|
|
$
|
500,000
|
|
|
|
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reissued
|
|
|
(97
|
)
|
|
|
59.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2008
|
|
|
29,536
|
|
|
$
|
59.50
|
|
|
|
29,978
|
|
|
$
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. There is no expiration date on the repurchase
authorizations and repurchases occur at our discretion.
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. The amount and timing of
future share repurchases, if any, will be made as market and
business conditions warrant.
51
Company
Stock Performance
The following graph compares the cumulative
5-year total
return attained by shareholders on Apollo Group Class A
common stock relative to the cumulative total returns of
University of Phoenix Online, 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, 2003, and its relative
performance is tracked through August 31, 2008. The value
shown for University of Phoenix Online common stock is shown
through August 27, 2004, the date of its conversion to
Apollo Group Class A common stock.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
Apollo Group, Inc., University of Phoenix Online,
The S&P 500 Index And A Peer Group
*$100 invested on 8/31/03 in stock and index-including
reinvestment of dividends.
Fiscal year ending August 31.
Copyright
©
2008 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/03
|
|
|
8/04
|
|
|
8/05
|
|
|
8/06
|
|
|
8/07
|
|
|
8/08
|
Apollo Group, Inc.
|
|
|
|
100.00
|
|
|
|
|
121.74
|
|
|
|
|
122.77
|
|
|
|
|
78.37
|
|
|
|
|
91.57
|
|
|
|
|
99.39
|
|
University of Phoenix Online
|
|
|
|
100.00
|
|
|
|
|
129.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
111.46
|
|
|
|
|
125.45
|
|
|
|
|
136.59
|
|
|
|
|
157.27
|
|
|
|
|
139.75
|
|
Peer Group
|
|
|
|
100.00
|
|
|
|
|
68.66
|
|
|
|
|
81.60
|
|
|
|
|
73.22
|
|
|
|
|
112.47
|
|
|
|
|
113.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
52
|
|
Item 6
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data and operating
statistics are 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 statement
of income data for fiscal years 2008, 2007, and 2006, and the
balance sheet data as of August 31, 2008 and 2007, were
derived from the audited consolidated financial statements,
included herein. Diluted income per share and diluted weighted
average shares outstanding have been retroactively restated for
stock splits. We restated the financial results of prior periods
in our Annual Report on
Form 10-K
for 2006. Our annual report on
Form 10-K
for 2006 included a restated Consolidated Balance Sheet as of
August 31, 2005 and related Consolidated Statements of
Income for fiscal years 2005 and 2004. The Consolidated Balance
Sheet as of August 31, 2004 has been restated, but such
restated data have not been audited and are derived from our
books and records.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and marketable securities
|
|
$
|
511,459
|
|
|
$
|
392,681
|
|
|
$
|
408,728
|
|
|
$
|
458,646
|
|
|
$
|
915,462
|
|
Restricted cash and cash equivalents
|
|
|
384,155
|
|
|
|
296,469
|
|
|
|
238,267
|
|
|
|
227,102
|
|
|
|
78,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,860,412
|
|
|
$
|
1,449,863
|
|
|
$
|
1,283,005
|
|
|
$
|
1,281,548
|
|
|
$
|
1,487,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
865,609
|
|
|
$
|
743,835
|
|
|
$
|
595,756
|
|
|
$
|
566,745
|
|
|
$
|
525,239
|
|
Long-term liabilities
|
|
|
148,638
|
|
|
|
72,188
|
|
|
|
82,876
|
|
|
|
80,583
|
|
|
|
67,546
|
|
Minority interest
|
|
|
11,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
834,209
|
|
|
|
633,840
|
|
|
|
604,373
|
|
|
|
634,220
|
|
|
|
894,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,860,412
|
|
|
$
|
1,449,863
|
|
|
$
|
1,283,005
|
|
|
$
|
1,281,548
|
|
|
$
|
1,487,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,140,931
|
|
|
$
|
2,723,793
|
|
|
$
|
2,477,533
|
|
|
$
|
2,251,114
|
|
|
$
|
1,800,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
1,370,878
|
|
|
|
1,237,491
|
|
|
|
1,109,584
|
|
|
|
952,474
|
|
|
|
781,437
|
|
Selling and promotional
|
|
|
805,395
|
|
|
|
659,059
|
|
|
|
544,706
|
|
|
|
485,451
|
|
|
|
383,800
|
|
General and administrative
|
|
|
215,192
|
|
|
|
201,546
|
|
|
|
153,004
|
|
|
|
98,642
|
|
|
|
84,326
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
20,205
|
|
|
|
|
|
|
|
|
|
Share-based compensation(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,895
|
|
|
|
100,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,391,465
|
|
|
|
2,098,096
|
|
|
|
1,827,499
|
|
|
|
1,553,462
|
|
|
|
1,349,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
749,466
|
|
|
|
625,697
|
|
|
|
650,034
|
|
|
|
697,652
|
|
|
|
450,201
|
|
Interest income and other, net
|
|
|
33,388
|
|
|
|
31,600
|
|
|
|
18,054
|
|
|
|
16,787
|
|
|
|
16,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
782,854
|
|
|
|
657,297
|
|
|
|
668,088
|
|
|
|
714,439
|
|
|
|
466,506
|
|
Provision for income taxes
|
|
|
(306,927
|
)
|
|
|
(248,487
|
)
|
|
|
(253,255
|
)
|
|
|
(286,506
|
)
|
|
|
(186,421
|
)
|
Minority interest, net of tax
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
476,525
|
|
|
$
|
408,810
|
|
|
$
|
414,833
|
|
|
$
|
427,933
|
|
|
$
|
280,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Share-based compensation in fiscal years 2005 and 2004 is
related to the fiscal year 2004 conversion of the University of
Phoenix Online stock options into Apollo Group Class A
stock options. |
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Common Stock and Earnings per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributed to Apollo Group common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
476,525
|
|
|
$
|
408,810
|
|
|
$
|
414,833
|
|
|
$
|
427,933
|
|
|
$
|
280,085
|
|
Stock dividends paid(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114,155
|
)
|
Net income attributed to University of Phoenix Online common
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributed to Apollo Group common shareholders
|
|
$
|
476,525
|
|
|
$
|
408,810
|
|
|
$
|
414,833
|
|
|
$
|
427,933
|
|
|
$
|
141,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributed to University of Phoenix Online common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,195
|
|
Stock dividends paid(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributed to University of Phoenix Online common
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
138,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributed to Apollo Group common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
2.87
|
|
|
$
|
2.35
|
|
|
$
|
2.35
|
|
|
$
|
2.30
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
165,870
|
|
|
|
173,603
|
|
|
|
176,205
|
|
|
|
186,066
|
|
|
|
178,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributed to University of Phoenix Online
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock dividends paid in fiscal year 2004 are related to the
fiscal year 2004 conversion of the University of Phoenix Online
common stock outstanding into Apollo Group Class A common
stock. |
|
|
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 Apollo Group, Inc.
(the Company, Apollo Group,
Apollo, APOL, we,
us, or our), our operations, and our
present business environment. The MD&A is provided as a
supplement to and should be read in conjunction
with our consolidated financial statements and the
accompanying notes (Notes). The following overview
provides a summary of the sections included in our MD&A:
|
|
|
|
|
Executive Summary a general description of
our business and the education industry, as well as key
highlights of the current year.
|
|
|
|
Critical Accounting Policies and Estimates a
discussion of our significant accounting policies that require
critical judgments and estimates.
|
|
|
|
Results of Operations an analysis of our
results of operations in our consolidated financial statements.
We operate primarily in one business sector: education. Except
to the extent that differences among our
|
54
|
|
|
|
|
reportable segments are material to an understanding of our
business as a whole, we present the discussion in our MD&A
on a consolidated basis.
|
|
|
|
|
|
Liquidity, Capital Resources, and Financial
Position an analysis of cash flows, sources and
uses of cash, commitments and contingencies, seasonality in the
results of our operations, the impact of inflation, and
quantitative and qualitative disclosures about market risk.
|
Executive
Summary
Apollo Group, Inc. is one of the worlds largest private
education providers and has been in the education business for
more than 30 years. We offer innovative and distinctive
educational programs and services at the high school,
undergraduate and graduate levels online and on-campus through
our wholly-owned subsidiaries, The University of Phoenix, Inc.
(University of Phoenix), Institute for Professional
Development (IPD), The College for Financial
Planning Institutes Corporation (CFP), Western
International University, Inc. (Western International
University), and Insight Schools, Inc. (Insight
Schools), and through our 80.1% owned subsidiary, Apollo
Global, Inc. (Apollo Global). We recently
established a new Canadian institution, Meritus University
(Meritus), which began operations in September 2008.
Our Degreed Enrollment for the quarter ended August 31,
2008 was 362,100. Degreed Enrollment for a quarter represents
individual students enrolled in a University of Phoenix degree
program or Western International University associates
degree program who attended a course during the quarter and did
not graduate as of the end of the quarter. Degreed Enrollment
for a quarter also includes any student 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). In addition, Degreed Enrollment includes students
participating in certificate programs of at least 18 credit
hours in length with some course applicability into a related
degree program.
Our aggregate New Degreed Enrollment for the four quarters in
fiscal year 2008 was 288,200. New Degreed Enrollment for a
quarter represents any individual student enrolled in a
University of Phoenix degree program or Western International
University associates degree program who is a new student
and started a course in the quarter, any individual student who
previously graduated from one degree program and started a new
degree program in the quarter (for example, a graduate of an
associates degree program returns for a bachelors
degree program, or a graduate of a bachelors degree
program returns for a masters degree program), as well as
any individual student who started a program in the quarter and
had been out of attendance for greater than 12 months. In
addition, New Degreed Enrollment includes students who in the
quarter started participating in certificate programs of at
least 18 credit hours in length with some course applicability
into a related degree program.
Students enrolled in or serviced by Apollo Global institutions,
Insight Schools and Other Schools (Western International
Universitys non-associates degree programs, IPD, CFP
and Meritus) are not included in Degreed Enrollment or New
Degreed Enrollment. In April 2006, we began enrolling the
majority of new students for our associates degree
programs in University of Phoenix. From September 2004 through
March 2006, we enrolled most new associates degree
students in Western International University.
Domestic
Postsecondary Education
The domestic non-traditional education industry is a significant
and growing component of the postsecondary education market,
which was estimated to be a more than $373.0 billion
industry in 2006, according to the Digest of Education
Statistics published in 2007 by the U.S. Department of
Educations National Center for Education Statistics.
According to the same study, in 2005, over 6.8 million, or
39%, of all students enrolled in higher education programs were
over the age of 24, and enrollment in degree-granting
institutions between 2006 and 2016 is expected to increase
approximately 30% for students aged 25 to 34 and 7% for those 35
and over. These students would not be classified as traditional
(i.e., living on campus, supported by parents and not working
full-time). 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 rapidly expanding knowledge-based economy in the
U.S.
55
International
Education
There were approximately 132 million students enrolled in
postsecondary education worldwide and global government
education expenditures totaled the equivalent of $2.0 trillion
in 2004, according to the Global Education Digest 2007 published
by the United Nations Educational, Scientific and Cultural
Organization Institute for Statistics. This does not include
capital expenditures on private education, which are difficult
to track, though acknowledged by United Nations Educational,
Scientific and Cultural Organization to be growing around the
world.
We believe that private education is playing a critical role in
advancing 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. The
International Finance Corporation of the World Bank reported in
May 2008 that governments around the world are embracing private
sector participation as a way to increase quality and efficiency.
Domestic
High School Education
According to the Department of Educations National Center
for Education Statistics, based on data from 2005, there are
approximately 20 million high school-age students in the
U.S. Throughout the nation, nearly five million high
school-age children are not enrolled in school and the high
school dropout rate averages 25.3% across the nation based on
the average freshman graduation rate. These statistics are
illustrative of the large number of high school-age children
facing different challenges and with different needs in
todays environment.
Many parents and educators are seeking alternatives to
traditional classroom-based education that can help improve
academic achievement. Demand for these alternatives is evident
in the growing number of choices available to parents and
students. For example, charter schools emerged in 1992 to
provide an alternative to traditional public schools. As of May
2008, over 1.2 million students attend over 4,300 charter
schools in 40 states and the District of Columbia,
according to the National Alliance for Public Charter Schools.
At the same time, acceptance of online learning initiatives has
increased. Online schools can offer a comprehensive curriculum
and flexible delivery model; therefore, we believe that a
growing number of families will pursue online public schools as
an attractive public school alternative. We believe there is a
significant opportunity for a high-quality, trusted, national
education provider to serve online public schools.
During fiscal year 2008, we experienced the following
significant events:
|
|
|
|
1.
|
Enrollment and Net Revenue Growth We
achieved 12.1% growth in average quarterly Degreed Enrollment
for the fiscal year ended August 31, 2008 as compared to
fiscal year ended August 31, 2007, which, coupled with
selective tuition price increases, depending on geographic area
and program, were the primary factors contributing to a 15.3%
increase in net revenue over the same period.
|
|
|
2.
|
Apollo Global On October 22,
2007, we formed a joint venture with Carlyle, called Apollo
Global, Inc., to pursue investments in the international
education services industry. Carlyle, based in Washington D.C.,
is one of the worlds largest private equity firms. Through
Apollo Global, we intend to capitalize on the significant global
demand for education services. We have agreed to commit up to
$801 million in cash or contributed assets and own 80.1% of
Apollo Global. Carlyle has agreed to commit up to
$199 million in cash or contributed assets and own the
remaining 19.9%. Apollo Global is consolidated in our financial
statements. As of August 31, 2008, total cash contributions
made to Apollo Global were $61.0 million, of which
$48.9 million was funded by us.
|
In the third and fourth quarters of fiscal year 2008, Apollo
Global completed its first two acquisitions, Universidad de
Artes, Ciencias y Comunicación (UNIACC) and
related entities on March 28, 2008, and Universidad
Latinoamericana, S.C. (ULA) and its related entity
on August 4, 2008. Apollo Global purchased 100% of UNIACC
for cash, assumed debt, and a future payment based on a multiple
of earnings. Apollo Global purchased a 65% ownership interest in
ULA for cash and assumed debt.
56
Please refer to Note 3, Acquisitions and Joint Venture, in
Item 8, Financial Statements and Supplementary Data,
for further discussion.
|
|
|
|
3.
|
Aptimus On October 29, 2007, we
completed the acquisition of all outstanding common stock of
online advertising company Aptimus, Inc. 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. We have integrated
Aptimus as part of our corporate marketing function. Please
refer to Note 3, Acquisitions and Joint Venture, in
Item 8, Financial Statements and Supplementary Data,
for further discussion.
|
|
|
4.
|
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
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 occurred on August 4, 2008 as part of
our post-trial motions, 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 filed a Notice of
Appeal with the Ninth Circuit Court of Appeals on
August 29, 2008. The plaintiffs brief is due on
December 15, 2008, and the defendants brief is due on
January 13, 2009.
|
In the second quarter of fiscal year 2008, we recorded a charge
for estimated damages of $168.4 million as a result of the
jury verdict awarded in favor of the plaintiffs. The original
charge was recorded at the mid-point of the range of
$120.5 million to $216.4 million and was estimated for
financial reporting purposes, using statistically valid models
and a 60% confidence interval which included our estimate of
damages based on the verdict, our estimate of potential amounts
we expected to reimburse our insurance carriers, our estimate of
future defense costs and legal and other professional fees
incurred during the second quarter of fiscal year 2008. At that
time, we elected to record the mid-point of the range because
under statistically valid modeling techniques, the mid-point of
the range was a more likely estimate than other points in the
range, and was the point at which there was an equal probability
that the ultimate loss could be toward the lower end or the
higher end of the range.
In the fourth quarter of fiscal year 2008, we reversed the
original estimated charge and related pre- and post-judgment
interest totaling $170.0 million because the District Court
vacated the earlier judgment and entered judgment in favor of
Apollo. Applying similar assumptions used to estimate the
original charge, including if the plaintiffs were to prevail in
a judgment on appeal, we currently estimate our range of loss
for this matter to be between zero and $219.6 million, with
the high end of the range including pre- and post-judgment
interest through August 31, 2008. Damages, if any, will not
be known until all court proceedings, including the plaintiffs
appeal, have been completed. Based on
57
information available to us at present, our management does not
expect a material adverse effect on our business to result from
this action.
|
|
|
|
5.
|
Bank Facility On January 4, 2008,
we entered into a syndicated $500 million credit agreement
(the Bank Facility). The Bank Facility is an
unsecured revolving credit facility that will be 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 up to
$300 million. The Bank Facility fees are determined based
on a pricing grid that varies according to our leverage ratio.
The 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. There were no
outstanding borrowings under the Bank Facility as of
August 31, 2008.
|
|
|
6.
|
Meritus In May 2008, Meritus received
approval from the New Brunswick Department of Post-Secondary
Education, Training and Labour to offer its first three
programs, thereby establishing degree-granting status in Canada.
Meritus offers degree programs online to working professionals
throughout Canada and abroad. Meritus began operations in
September 2008.
|
|
|
7.
|
University of Phoenix Operating
Realignment During the third quarter of
fiscal year 2008, we announced a management and reporting
realignment within University of Phoenix. Historically,
University of Phoenix on-campus operations have been managed by
region and then by campus within each region. The global online
operation was managed centrally. This realignment takes our
online operation and shifts reporting responsibility to our
regional management. University of Phoenix will retain an
independently operating online campus under this new reporting
structure. We believe this realignment will allow us to promote
the sharing of common goals and best practices while maximizing
efficiencies, and most importantly help us remain student
focused.
|
|
|
8.
|
Changes in Management On June 24,
2008, Brian E. Mueller resigned from his position as President
and Director. Also, on June 24, 2008, our Board of
Directors appointed Joseph L. DAmico as interim President,
in addition to serving as our Chief Financial Officer and
Treasurer. On October 10, 2008, the Board determined that
Mr. DAmico would continue to serve as President and
no longer would be deemed to be serving in an interim capacity.
On July 7, 2008, our Board of Directors appointed Charles
B. Edelstein as Chief Executive Officer and a Director,
effective August 26, 2008.
|
|
|
9.
|
Academic Summary In 2008, University
of Phoenix published its first Academic Annual Report which
contains a transparent look at a variety of ways in which
University of Phoenix measures itself in relation to its mission
and social agenda of access and inclusion. The report was
created within the framework set forth in the report
commissioned by U.S. Secretary of Education Margaret
Spellings and issued in 2006, entitled A Test of
Leadership: Charting the Future of U.S. Higher
Education, focusing on access, accountability, quality,
and affordability. The report is available on our University of
Phoenix website at www.phoenix.edu.
|
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 comprised of University of
Phoenix programs, range in length from
one-day
seminars to degree programs lasting up to four years. Students
in University of Phoenix degree programs
58
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. Students generally fund their
education through grants
and/or loans
under various Title IV programs, tuition assistance from
their employers, or personal funds.
Net revenue consists largely of tuition and fees associated with
different educational programs as well as related educational
resources such as access to online materials. Net revenue is
shown net of discounts. Tuition benefits for our employees and
their eligible dependants are included in net revenue and as a
part of employee compensation and related expenses within
instructional costs and services. Total employee tuition
benefits were $77.9 million, $63.8 million and
$52.9 million for fiscal years 2008, 2007 and 2006,
respectively.
The following table presents the most significant components of
net revenue, and each component as percentage of total net
revenue, for the fiscal years 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Tuition and educational services revenue
|
|
$
|
2,996.1
|
|
|
|
95
|
%
|
|
$
|
2,553.1
|
|
|
|
94
|
%
|
|
$
|
2,304.3
|
|
|
|
93
|
%
|
|
|
|
|
Services revenue
|
|
|
77.7
|
|
|
|
3
|
%
|
|
|
73.6
|
|
|
|
2
|
%
|
|
|
74.4
|
|
|
|
3
|
%
|
|
|
|
|
Online course material revenue
|
|
|
184.4
|
|
|
|
6
|
%
|
|
|
161.0
|
|
|
|
6
|
%
|
|
|
138.7
|
|
|
|
6
|
%
|
|
|
|
|
Other revenue
|
|
|
43.9
|
|
|
|
1
|
%
|
|
|
48.5
|
|
|
|
2
|
%
|
|
|
65.5
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Revenue
|
|
|
3,302.1
|
|
|
|
105
|
%
|
|
|
2,836.2
|
|
|
|
104
|
%
|
|
|
2,582.9
|
|
|
|
104
|
%
|
|
|
|
|
Less: Discounts
|
|
|
(161.2
|
)
|
|
|
(5
|
)%
|
|
|
(112.4
|
)
|
|
|
(4
|
)%
|
|
|
(105.4
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,140.9
|
|
|
|
100
|
%
|
|
$
|
2,723.8
|
|
|
|
100
|
%
|
|
$
|
2,477.5
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition and educational services revenue encompasses both
online and classroom-based learning. For our University of
Phoenix and Western International University operations, tuition
revenue is recognized pro rata, on a weekly basis, over the
period of instruction as services are delivered to students. For
our Apollo Global operations, tuition revenue is recognized over
the length of the course, which is typically over a period of a
semester. During certain periods of the year and in certain
businesses, our revenue recognition considers holiday breaks
such as Christmas and Thanksgiving.
For Insight Schools, which has recently expanded its operations
in fiscal year 2008, we generate the majority of our tuition and
educational services revenue through long-term contracts with
various school districts or online charter schools that
generally have terms that range from 5 to 10 years with
provisions for renewal. The school districts and online charter
schools are generally funded by state or local governments
primarily on a per student basis. Revenue is recognized on a
monthly basis in the period earned over the length of the school
year, which is generally from September through June.
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
adults. These services typically include degree program design,
curriculum development, market research, student recruitment,
accounting, and administrative services. IPD, which provides
these services in 21 states, 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 on a pro rata basis over the service
period.
Online course material 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.
Other revenue consist 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
59
average length of time it takes for a student to complete a
program of study. Other revenue also includes non-tuition
generating revenues, such as renting classroom space and other
student support services. This revenue is recognized as the
services are provided.
Discounts reflect reductions in tuition or other revenue
including military, corporate, and other employer discounts,
grants, and promotions.
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
and the tuition price per credit hour.
Net revenue excludes any applicable state and city sales taxes.
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
may 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 look at 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 from University of
Phoenix or Western International University, we are sometimes
required to return a portion of Title IV funds to the
lenders. We are generally entitled to collect these funds from
the students, but collection of these receivables is
significantly lower than our collection of receivables for
students who remain in our educational programs. Management
periodically evaluates the standard allowance estimation
methodology for appropriateness and modifies as necessary. 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.
For the purpose of sensitivity, a one percentage point change in
our allowance for doubtful accounts as a percentage of gross
student receivables as of August 31, 2008 would have
resulted in a pre-tax change in income of $2.8 million.
Additionally, if our bad debt expense were to change by one
percentage point of total net revenue for the fiscal year ended
August 31, 2008, we would have recorded a pre-tax change in
income of approximately $31.4 million.
Marketable
Securities
Marketable securities consist primarily of auction-rate
securities, municipal bonds, U.S. government-sponsored
enterprises, and corporate obligations. We account for
marketable securities in accordance with the provisions of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities (SFAS 115).
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, due
to recent credit market tightening conditions, auction-rate
securities began experiencing failed auctions in mid-February
2008 resulting in a lack of liquidity for these instruments that
has reduced the estimated fair market value for these securities
below par value. Please refer to Note 4, Marketable
Securities, in Item 8, Financial Statements and
Supplementary Data, for further discussion. Those marketable
securities, which we have the ability and intent to hold until
maturity, are classified as held-to-maturity and reported at
amortized cost. Marketable securities with a maturity date
greater than one year and our auction-rate securities
instruments, due to the lack of liquidity, are classified as
non-current. Interest and dividend income, including the
amortization of any premium or discount, is included in interest
income and other, net in our Consolidated Statements of Income.
As of August 31, 2008, our marketable securities totaled
$28.3 million primarily consisting of $26.8 million of
principal invested in auction-rate securities. In the fourth
quarter of fiscal year 2008, we completed a fair value analysis
of our auction-rate securities in response to the prolonged and
continued lack of liquidity for these
60
investments. Based on our analysis, we determined that our
auction-rate securities carrying value exceeded the estimated
fair value. As a result, we recorded an unrealized loss of
$1.6 million ($1.0 million after-tax) on our
auction-rate securities, with the offset included in accumulated
other comprehensive loss in our Consolidated Balance Sheets. We
determined the fair market value of our auction-rate securities
using a discounted cash flow model that encompassed unobservable
inputs including 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. Additionally, as the market for these
securities continues to be inactive and the secondary market
remains in developmental stages, our discounted cash flow model
also factored the illiquidity of the auction-rate securities
market by adding a spread of 450 basis points to the
applicable discount rate. An increase of 100 basis points
in our discount rate assumption would have caused an additional
decline in the fair market value of approximately
$0.4 million.
Goodwill
and Intangible Assets
Goodwill represents the excess of the purchase price over the
amount assigned to the net assets acquired and assumed
liabilities. Our goodwill is a result of our acquisitions of
Aptimus, included in our University of Phoenix segment, UNIACC
and ULA, included in our Apollo Global segment, Insight Schools,
its own segment, and Western International University and CFP,
included in our Other Schools segment. Indefinite-lived
intangible assets are recorded at fair market value on their
acquisition date and primarily include foreign regulatory
accreditations, designations and trademarks as a result of the
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. Goodwill and indefinite-lived
intangible assets are not amortized, but rather are tested for
impairment at least annually, unless events occur or
circumstances change between annual tests that would more likely
than not reduce the fair value of the respective asset below its
carrying amount. We perform our annual goodwill and indefinite
lived intangible asset impairment tests, if applicable, as of
August 31 for CFP and May 31 for University of Phoenix, UNIACC
and ULA, Insight Schools and Western International University.
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 lives
range from two to 15 years.
At August 31, 2008 and 2007, we had total goodwill of
$86.0 million and $29.6 million, respectively, and
intangible assets of $23.1 million and $2.2 million,
respectively.
Asset
Impairments
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|
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|
|
Marketable Securities Our marketable
securities consist of available-for-sale securities,
specifically auction-rate securities instruments, and
held-to-maturity securities. We regularly review these
securities for impairment based on criteria that include the
extent to which the carrying value exceeds fair market value.
For our auction-rate securities instruments, we use a discounted
cash flow model to determine the fair market value of the
instruments. For our held-to-maturity securities, which include
municipal bonds, we use broker pricing services to determine the
fair market value of the instruments. As of August 31,
2008, our
held-to-maturity
securities are not material to our Consolidated Balance Sheets
and all held-to-maturity instruments outstanding as of
August 31, 2007 either matured or were called at par value
during fiscal year 2008. For all of our marketable securities,
we consider several factors to determine if an
other-than-temporary decline has occurred such as the market
value of each individual security in relation to its cost basis,
the financial condition of the investee, and our intent and
ability to retain the investment for a sufficient period to
allow for the recovery in any market value of the investment.
Temporary declines in fair market value for our
available-for-sale securities are recorded in accumulated other
comprehensive loss in our Consolidated Balance Sheets.
Other-than-temporary declines in fair market value for our
available-for-sale and held-to-maturity securities are recorded
in our Consolidated Statements of Income.
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61
|
|
|
|
|
Long-Lived Assets In accordance with
SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets (SFAS 144),
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. At
August 31, 2008, we believe the carrying amounts of our
long-lived assets are fully recoverable and no impairment exists.
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Goodwill and Indefinite-Lived Intangible Assets
We apply the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142), which requires that a two-step
impairment test be performed on goodwill. In the first step, the
fair value of the reporting unit is compared 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,
then a second step must be performed in order 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. In assessing the fair
value of our reporting 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. Our analysis may also include using market-based
approach valuation techniques. To assess the reasonableness of
our fair value analysis, when appropriate, we evaluate our
results against other measurement indicators such as comparable
company public trading values, analyst estimates and values
observed in private market transactions. At the time of an
acquisition, we allocate the goodwill and related assets to our
respective reporting units. Please refer to Note 18,
Segment Reporting, in Item 8, Financial Statements and
Supplementary Data, for further discussion.
|
The 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. To
determine the fair value of these intangible assets, we use
various valuation models, such as discounted cash flow analysis
or the relief-from-royalty method.
Goodwill and indefinite-lived intangible assets are tested
annually for impairment unless events occur or circumstances
change between annual tests that would more likely than not
reduce the fair value of the respective asset below its carrying
amount.
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. In accordance with SFAS No. 5,
Accounting for Contingencies
(SFAS 5), 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 is material. For matters where no loss
contingency is recorded, our policy is to expense legal fees as
incurred.
Accounting
for Income Taxes
We account for income taxes pursuant to SFAS No. 109,
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.
62
On September 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB No. 109
(FIN 48). This interpretation, among other
things, prescribes a two-step approach for evaluating uncertain
tax positions. Recognition (step one) occurs when an enterprise
concludes 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 more-likely-than-not will be realized upon
settlement. Derecognition of a tax position that was previously
recognized would occur when a company subsequently determines
that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN 48 specifically prohibits
the use of a valuation allowance as a substitute for
derecognition of tax positions, and it has expanded disclosure
requirements. Upon adoption of FIN 48, we did not recognize
an adjustment to our liability for unrecognized income tax
benefits or make a cumulative adjustment to our beginning
retained earnings; however, we reclassified our unrecognized tax
benefits from income taxes payable to long-term liabilities in
our Consolidated Balance Sheets.
Share-Based
Compensation
On September 1, 2005, we adopted the provisions of
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)), which is a
revision of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123). In
March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107, Share-Based
Payment (SAB 107), relating to
SFAS 123(R), which we applied in our adoption of
SFAS 123(R). SFAS 123(R) requires the measurement and
recognition of compensation expense for all share-based awards
issued to employees and directors, based on estimated fair
values of the share award on the date of grant. We adopted the
fair value recognition provisions of SFAS 123(R) using the
modified prospective transition method, which requires
compensation expense to be recorded for all share-based awards
granted after September 1, 2005 and for all unvested stock
options outstanding as of September 1, 2005. For all
unvested options outstanding as of September 1, 2005, the
remaining unrecognized compensation expense, based on the fair
value as determined under the provisions of SFAS 123, will
be recognized as share-based compensation in the Consolidated
Statements of Income over the remaining vesting period. For
share-based awards granted subsequent to September 1, 2005,
compensation expense is based on the fair value as determined
under the provisions of SFAS 123(R) and will be recognized
in the Consolidated Statements of Income over the vesting
period. Under the modified prospective transition method, prior
periods are not restated for the effect of SFAS 123(R).
In December 2007, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin No. 110,
Share-Based Payment (SAB 110).
SAB 110 allows companies to continue to use the simplified
method, as defined in SAB 107 to estimate the expected term
of stock options under certain circumstances. The simplified
method for estimating expected term is to use the mid-point
between the vesting term and the contractual term of the share
option. We have analyzed the circumstances in which the use of
the simplified method is allowed. We have opted to use the
simplified method for options granted to management in fiscal
year 2008 because the options granted in prior fiscal years had
different terms, such as contractual lives and acceleration
provisions. Thus, historical data is not comparable in order to
determine the expected term of current awards.
SFAS 123(R) requires us to calculate the fair value of
share-based awards on the date of grant. We 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 life, volatility,
risk-free interest rates and dividend yield to determine the
fair value of share-based awards, based on both historical
information and management judgment regarding market factors and
trends. We amortize the share-based compensation expense over
the period that the awards are expected to vest, net of
estimated forfeiture rates. If the actual forfeitures differ
from management estimates, additional adjustments to
compensation expense are recorded.
63
We used the following weighted average assumptions in the
Black-Scholes-Merton option pricing model:
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|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected volatility
|
|
|
44.2
|
%
|
|
|
32.7
|
%
|
|
|
34.6
|
%
|
Expected life (years)
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
5.9
|
|
Risk-free interest rate
|
|
|
2.9
|
%
|
|
|
4.9
|
%
|
|
|
4.8
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The assumptions that have the most significant affect on the
fair value of the grants and therefore, share-based compensation
expense, are the expected life and expected volatility. The
following table illustrates how changes to the
Black-Scholes-Merton option pricing model assumptions would
affect the weighted average per option fair values as of the
grant date for grants made during fiscal year 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Volatility
|
|
Expected Life (Years)
|
|
39.8%
|
|
|
44.2%
|
|
|
48.6%
|
|
|
3.7
|
|
$
|
20.68
|
|
|
$
|
22.48
|
|
|
$
|
24.26
|
|
4.2
|
|
|
22.07
|
|
|
|
23.95
|
|
|
|
25.80
|
|
4.7
|
|
|
23.37
|
|
|
|
25.32
|
|
|
|
27.24
|
|
Results
of Operations
We have included below a discussion of our operating results and
significant items that explain the material changes in our
operating results during the last three fiscal years ending
August 31, 2008, 2007 and 2006.
The following table sets forth an analysis of our Consolidated
Statements of Income for fiscal years 2008, 2007, and 2006:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
% Change
|
|
|
|
Year Ended August 31,
|
|
|
Year Ended August 31,
|
|
|
2008 vs.
|
|
|
2007 vs.
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net revenue
|
|
$
|
3,140.9
|
|
|
$
|
2,723.8
|
|
|
$
|
2,477.5
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
15.3
|
%
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
1,370.9
|
|
|
|
1,237.5
|
|
|
|
1,109.6
|
|
|
|
43.6
|
%
|
|
|
45.4
|
%
|
|
|
44.8
|
%
|
|
|
10.8
|
%
|
|
|
11.5
|
%
|
Selling and promotional
|
|
|
805.4
|
|
|
|
659.1
|
|
|
|
544.7
|
|
|
|
25.6
|
%
|
|
|
24.2
|
%
|
|
|
22.0
|
%
|
|
|
22.2
|
%
|
|
|
21.0
|
%
|
General and administrative
|
|
|
215.2
|
|
|
|
201.5
|
|
|
|
153.0
|
|
|
|
6.9
|
%
|
|
|
7.4
|
%
|
|
|
6.2
|
%
|
|
|
6.8
|
%
|
|
|
31.7
|
%
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
%
|
|
|
0.0
|
%
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,391.5
|
|
|
|
2,098.1
|
|
|
|
1,827.5
|
|
|
|
76.1
|
%
|
|
|
77.0
|
%
|
|
|
73.8
|
%
|
|
|
14.0
|
%
|
|
|
14.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
749.4
|
|
|
|
625.7
|
|
|
|
650.0
|
|
|
|
23.9
|
%
|
|
|
23.0
|
%
|
|
|
26.2
|
%
|
|
|
19.8
|
%
|
|
|
(3.7
|
)%
|
Interest income and other, net
|
|
|
33.4
|
|
|
|
31.6
|
|
|
|
18.1
|
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
|
0.7
|
%
|
|
|
5.7
|
%
|
|
|
74.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
782.8
|
|
|
|
657.3
|
|
|
|
668.1
|
|
|
|
25.0
|
%
|
|
|
24.1
|
%
|
|
|
26.9
|
%
|
|
|
19.1
|
%
|
|
|
(1.6
|
)%
|
Provision for income taxes
|
|
|
(306.9
|
)
|
|
|
(248.5
|
)
|
|
|
(253.3
|
)
|
|
|
(9.8
|
)%
|
|
|
(9.1
|
)%
|
|
|
(10.2
|
)%
|
|
|
23.5
|
%
|
|
|
(1.9
|
)%
|
Minority interest, net of tax
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
476.5
|
|
|
$
|
408.8
|
|
|
$
|
414.8
|
|
|
|
15.2
|
%
|
|
|
15.0
|
%
|
|
|
16.7
|
%
|
|
|
16.6
|
%
|
|
|
(1.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We categorize our expenses as instructional costs and services,
selling and promotional, and general and administrative.
Instructional costs and services at University of Phoenix,
Apollo Global, Insight Schools, and Other Schools consist
primarily of costs related to the delivery and administration of
our educational programs and include faculty compensation
(full-time and contract), administrative compensation for
departments that provide service directly and indirectly to the
students, financial aid processing costs, costs for collections
efforts, bad debt expense and costs
64
of educational materials sold. Additionally, instructional costs
include those costs such as rents and other occupancy costs, IT
costs in support of student systems, and depreciation and
amortization of property and equipment that support both the
recruitment and retention of our students. Classroom facilities
are primarily leased or, in some cases, are provided by the
students employers at no charge to us. Instructional costs
and services at IPD (included in Other Schools) consist
primarily of program administration, student services, and
classroom lease expense. Most of the other instructional costs
for IPD-assisted programs, including faculty, financial aid
processing, and other administrative salaries, are the
responsibility of IPDs Client Institutions. Tuition costs
for all employees and their eligible dependants are recorded as
a fringe benefit within instructional costs and services.
Selling and promotional costs consist primarily of compensation
for enrollment counselors, 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 as 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 for departments such as executive management,
information systems infrastructure, corporate accounting and
finance, corporate human resources, and other departments that
perform functions unrelated to the core business of recruiting
and servicing our students.
Net
Revenue
The following table presents net revenue by reportable segment,
and net revenue for each reportable segment as percentage of
total net revenue, for the fiscal years 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
|
Year Ended August 31,
|
|
|
Year Ended August 31,
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
University of Phoenix
|
|
$
|
2,987.7
|
|
|
$
|
2,537.8
|
|
|
$
|
2,074.4
|
|
|
|
95.2
|
%
|
|
|
93.1
|
%
|
|
|
83.7
|
%
|
Apollo Global
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
Insight Schools
|
|
|
7.5
|
|
|
|
2.0
|
|
|
|
|
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
|
|
Other Schools
|
|
|
122.5
|
|
|
|
182.6
|
|
|
|
402.1
|
|
|
|
3.9
|
%
|
|
|
6.7
|
%
|
|
|
16.2
|
%
|
Corporate
|
|
|
9.8
|
|
|
|
1.4
|
|
|
|
1.0
|
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,140.9
|
|
|
$
|
2,723.8
|
|
|
$
|
2,477.5
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2008 compared to Fiscal Year 2007
Our net revenue increased 15.3%, primarily in our University of
Phoenix segment, due to our 12.1% increase in average quarterly
Degreed Enrollment and selective tuition price increases,
depending on geographic area and program, which were partially
offset by a continued shift in our student body mix to a higher
percentage of students attending associates degree
programs with lower tuition prices and an increase in
scholarship and grant programs. The primary tuition price
increase by program type was in our associates degree
programs. In May 2007, we increased our associates degree
tuition price by approximately 9%. Notwithstanding this tuition
price increase, our associates degree programs have a
lower tuition price than our other programs. We continued to
experience a shift in our student body mix as our
associates Degreed Enrollment represented 40.5% of our
Degreed Enrollment at August 31, 2008, compared to 33.3% at
August 31, 2007. In addition, our associates average
quarterly Degreed Enrollment increased 37.9% in fiscal year 2008
compared to fiscal year 2007.
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 our prior refund policy, if a student
attended one class of a course, University of Phoenix earned 25%
of the tuition for the course, and if they attended two classes
of a course, University of Phoenix earned 100% of the tuition
for the course. This new refund policy applies to students in
most states, as some states have their own mandated policies.
University of Phoenix elected to change its refund policy
because we believe it is a more reasonable policy from our
students perspective.
65
In July 2008, University of Phoenix increased tuition
approximately 10% for its associates degree programs and
implemented selective tuition increases averaging 4% to 5%,
depending on geographic area and program, for bachelors
and masters degree programs. The impact of these price
changes on future net revenue and operating income will depend
on several factors including, but not limited to, changes in
enrollment, changes in student mix within programs and degree
levels, and discounts.
Net revenue increased in our Apollo Global segment due to
acquisitions. See Note 3, Acquisitions and Joint Venture,
in Item 8, Financial Statements and Supplementary
Data, for further discussion.
Net revenue increased in our Insight Schools segment as a result
of fiscal year 2008 including a full year of operating results
following the acquisition of Insight Schools and an increase in
the number of schools we were operating.
Net revenue decreased in our Other Schools segment both in
dollars and as a percentage of consolidated net revenue due to
Western International University associates degree program
students graduating or withdrawing from the program. We began
offering associates degree programs at Western
International University in September 2004; however, in
April 2006 (our third quarter of fiscal year 2006) we began
offering the majority of new enrollments in our associates
degree programs at University of Phoenix instead of Western
International University.
Net revenue in Corporate increased as a result of our
acquisition of Aptimus, which is discussed in Note 3,
Acquisitions and Joint Venture, in Item 8, Financial
Statements and Supplementary Data. We successfully
integrated Aptimus into our marketing organization in fiscal
year 2008. Upon acquisition and subsequent integration, a
portion of our corporate marketing function generates revenue
from Internet-based advertising activities performed for
third-party customers.
Fiscal
Year 2007 compared to Fiscal Year 2006
Our net revenue increased by 9.9% primarily due to our 10.5%
increase in average quarterly Degreed Enrollment and selective
tuition price increases, depending on geographic area and
program, which were partially offset by a continued shift in our
student body mix to a higher percentage of students attending
associate degree programs with lower tuition prices. The primary
tuition price increase by program type was in our
associates degree programs. In May 2007, we increased our
associates degree tuition price by approximately 9%.
Notwithstanding this tuition price increase, our
associates degree programs have a lower tuition price than
our other programs. Accordingly, we continued to experience a
shift in our student body mix as our associates Degreed
Enrollment represented 33.3% of our Degreed Enrollment at
August 31, 2007 compared to 26.2% at August 31, 2006.
In addition, our associates average quarterly Degreed
Enrollment increased 55.0% in fiscal year 2007 compared to
fiscal year 2006.
Net revenue increased in our Insight Schools segment as result
of our acquisition of Insight Schools in October 2006.
Net revenue at our Other Schools segment decreased both in
dollars and as a percentage of consolidated net revenue due to
Western International University associates degree program
students graduating or withdrawing from the program. We began
offering associates degree programs at Western
International University in September 2004; however, in April
2006 (our third quarter of fiscal year 2006) we began
offering the majority of new enrollments in our associates
degree programs at University of Phoenix instead of Western
International University.
66
Instructional
Costs and Services
Instructional costs and services increased by 10.8% in fiscal
year 2008 versus fiscal year 2007, and 11.5% in fiscal year 2007
versus fiscal year 2006. The following table sets forth the
significant components of instructional costs and services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
% Change
|
|
|
|
Year Ended August 31,
|
|
|
Year Ended August 31,
|
|
|
2008 vs.
|
|
|
2007 vs.
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Employee compensation and related expenses
|
|
$
|
491.1
|
|
|
$
|
424.4
|
|
|
$
|
378.3
|
|
|
|
15.6
|
%
|
|
|
15.6
|
%
|
|
|
15.3
|
%
|
|
|
15.7
|
%
|
|
|
12.2
|
%
|
Faculty compensation
|
|
|
272.5
|
|
|
|
236.9
|
|
|
|
212.3
|
|
|
|
8.7
|
%
|
|
|
8.7
|
%
|
|
|
8.6
|
%
|
|
|
15.0
|
%
|
|
|
11.6
|
%
|
Classroom lease expenses and depreciation
|
|
|
214.2
|
|
|
|
205.2
|
|
|
|
194.3
|
|
|
|
6.8
|
%
|
|
|
7.5
|
%
|
|
|
7.8
|
%
|
|
|
4.4
|
%
|
|
|
5.6
|
%
|
Other instructional costs and services
|
|
|
189.9
|
|
|
|
173.3
|
|
|
|
158.8
|
|
|
|
6.0
|
%
|
|
|
6.4
|
%
|
|
|
6.4
|
%
|
|
|
9.6
|
%
|
|
|
9.1
|
%
|
Bad debt expense
|
|
|
104.2
|
|
|
|
120.6
|
|
|
|
101.0
|
|
|
|
3.3
|
%
|
|
|
4.4
|
%
|
|
|
4.1
|
%
|
|
|
(13.6
|
)%
|
|
|
19.4
|
%
|
Financial aid processing costs
|
|
|
78.4
|
|
|
|
63.8
|
|
|
|
52.5
|
|
|
|
2.5
|
%
|
|
|
2.3
|
%
|
|
|
2.1
|
%
|
|
|
22.9
|
%
|
|
|
21.5
|
%
|
Share-based compensation
|
|
|
20.6
|
|
|
|
13.3
|
|
|
|
12.4
|
|
|
|
0.7
|
%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
54.9
|
%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
$
|
1,370.9
|
|
|
$
|
1,237.5
|
|
|
$
|
1,109.6
|
|
|
|
43.6
|
%
|
|
|
45.4
|
%
|
|
|
44.8
|
%
|
|
|
10.8
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2008 compared to Fiscal Year 2007
Instructional costs and services decreased 180 basis points
as a percentage of net revenue primarily due to decreases as a
percentage of net revenue in classroom lease expenses and
depreciation, other instructional costs and services and bad
debt expense.
Classroom lease expenses and depreciation decreased
70 basis points as a percentage of net revenue due to a
larger percentage of our student body choosing to enroll in our
online modality.
Other instructional costs and services decreased 40 basis
points as a percentage of net revenue primarily due to lower
negotiated contract costs from third-party vendors.
Bad debt expense decreased 110 basis points as a percentage
of net revenue primarily due to a continued focus on front end
collection efforts and improved student retention rates.
Additionally, in the first quarter of fiscal year 2008, we
performed a review of the components of bad debt expense and
identified certain items that should have been classified as
discounts or refunds (reduction of net revenue) as opposed to
bad debt expense. No reclassification was made for prior periods
as the amounts were not material to prior period financial
statements and had no effect on reported net income. For the
fiscal year 2007, our reported bad debt expense as a percentage
of net revenue would have been lower by approximately
70 basis points as a result of this reclassification.
Excluding the reclassification discussed above, we experienced a
decrease in bad debt expense as a percentage of net revenue of
40 basis points.
During fiscal year 2008, we renegotiated our contract with our
outsourced financial aid processing vendor. We expect these
costs as a percentage of revenue to decrease beginning in fiscal
2009.
Fiscal
Year 2007 compared to Fiscal Year 2006
Instructional costs and services increased 60 basis points
as a percentage of net revenue primarily due to higher employee
compensation and related expenses and an increase in bad debt
expense.
Employee compensation and related expenses increased
30 basis points primarily to support the 10.5% increase in
average quarterly Degreed Enrollments.
67
Bad debt expense increased 30 basis points as a result of
higher days sales outstanding (38 days as of
August 31, 2007 compared to 31 days as of
August 31, 2006), longer receivable collection periods, and
higher
write-offs
primarily from our associates degree program students.
Selling
and Promotional Expenses
Selling and promotional expenses increased by 22.2% in fiscal
year 2008 versus fiscal year 2007, and 21.0% in fiscal year 2007
versus fiscal year 2006. The following table sets forth the
increases in significant components of selling and promotional
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
% Change
|
|
|
|
Year Ended August 31,
|
|
|
Year Ended August 31,
|
|
|
2008 vs.
|
|
|
2007 vs.
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Enrollment counselors compensation and related expenses
|
|
$
|
385.8
|
|
|
$
|
320.3
|
|
|
$
|
254.3
|
|
|
|
12.3
|
%
|
|
|
11.8
|
%
|
|
|
10.3
|
%
|
|
|
20.4
|
%
|
|
|
26.0
|
%
|
Advertising
|
|
|
322.5
|
|
|
|
277.7
|
|
|
|
231.6
|
|
|
|
10.3
|
%
|
|
|
10.2
|
%
|
|
|
9.3
|
%
|
|
|
16.1
|
%
|
|
|
19.9
|
%
|
Other selling and promotional expenses
|
|
|
93.5
|
|
|
|
58.0
|
|
|
|
56.5
|
|
|
|
2.9
|
%
|
|
|
2.1
|
%
|
|
|
2.3
|
%
|
|
|
61.2
|
%
|
|
|
2.7
|
%
|
Share-based compensation
|
|
|
3.6
|
|
|
|
3.1
|
|
|
|
2.3
|
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
16.1
|
%
|
|
|
34.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and promotional
|
|
$
|
805.4
|
|
|
$
|
659.1
|
|
|
$
|
544.7
|
|
|
|
25.6
|
%
|
|
|
24.2
|
%
|
|
|
22.0
|
%
|
|
|
22.2
|
%
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2008 compared to Fiscal Year 2007
Selling and promotional expenses increased 140 basis points
as a percentage of net revenue primarily due to an increase as a
percentage of net revenue in enrollment counselors
compensation and related expenses and other selling and
promotional expenses.
Enrollment counselors compensation and related expenses
increased 50 basis points as a percentage of net revenue
primarily due to the hiring of additional enrollment counselors
to support our growth during fiscal year 2008.
Other selling and promotional expenses increased 80 basis
points as a percentage of net revenue primarily due to the
acquisition of Aptimus that closed on October 29, 2007. We
believe this acquisition, as discussed in Note 3,
Acquisitions and Joint Venture, in Item 8, Financial
Statements and Supplementary Data, will help us increase the
effectiveness and efficiency of our advertising and branding
efforts.
The overall increase in total selling and promotional expenses
represents investments made to drive and support future growth
of New Degreed Enrollment. In order to support future growth, we
hired additional enrollment counselors in markets and segments
where there is strong demand. We believe these additional hires
are an investment in growing New Degreed Enrollment over time.
Selling and promotional expenses per New Degreed Enrollment has
increased as a result of a decrease in enrollment counselor
effectiveness due to newly hired enrollment counselors. This
trend of decreased effectiveness may continue; however, we
believe our efforts and investments will help us reduce these
costs as a percent of net revenue over the long-term (we are
seeing some improvement in enrollment counselor turnover).
Fiscal
Year 2007 compared to Fiscal Year 2006
Selling and promotional expenses increased 220 basis points
as a percentage of net revenue primarily due to an increase as a
percentage of net revenue in enrollment counselors
compensation and related expenses and advertising expenses.
Enrollment counselors compensation and related expenses
increased 150 basis point as a percentage of net revenue
primarily due to the hiring of additional enrollment counselors.
68
Advertising costs increased 90 basis points as a percentage
of net revenue as a result of our continued investment in
Internet-based advertising campaigns and the launch of our
nationally televised branding campaign.
We experienced a slight increase in our cost per New Degreed
Enrollment. The hiring of additional enrollment counselors in
the fourth quarter of fiscal year 2006 increased our enrollment
counselor compensation and related expenses during fiscal year
2007.
General
and Administrative Expenses
General and administrative expenses increased by 6.8% in fiscal
year 2008 versus fiscal year 2007, and 31.7% in fiscal year 2007
versus fiscal year 2006. The following table sets forth the
increases in significant components of general and
administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
% Change
|
|
|
|
Year Ended August 31,
|
|
|
Year Ended August 31,
|
|
|
2008 vs.
|
|
|
2007 vs.
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Employee compensation and related expenses
|
|
$
|
93.8
|
|
|
$
|
71.9
|
|
|
$
|
77.7
|
|
|
|
3.0
|
%
|
|
|
2.6
|
%
|
|
|
3.1
|
%
|
|
|
30.5
|
%
|
|
|
(7.5
|
)%
|
Share-based compensation
|
|
|
29.4
|
|
|
|
37.6
|
|
|
|
13.0
|
|
|
|
0.9
|
%
|
|
|
1.4
|
%
|
|
|
0.5
|
%
|
|
|
(21.8
|
)%
|
|
|
189.2
|
%
|
Legal, audit, and corporate insurance
|
|
|
25.8
|
|
|
|
15.5
|
|
|
|
13.3
|
|
|
|
0.8
|
%
|
|
|
0.6
|
%
|
|
|
0.6
|
%
|
|
|
66.5
|
%
|
|
|
16.5
|
%
|
Administrative space and depreciation
|
|
|
24.8
|
|
|
|
21.1
|
|
|
|
21.8
|
|
|
|
0.8
|
%
|
|
|
0.8
|
%
|
|
|
0.9
|
%
|
|
|
17.5
|
%
|
|
|
(3.2
|
)%
|
Other general and administrative expenses
|
|
|
41.4
|
|
|
|
55.4
|
|
|
|
27.2
|
|
|
|
1.4
|
%
|
|
|
2.0
|
%
|
|
|
1.1
|
%
|
|
|
(25.3
|
)%
|
|
|
103.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
215.2
|
|
|
$
|
201.5
|
|
|
$
|
153.0
|
|
|
|
6.9
|
%
|
|
|
7.4
|
%
|
|
|
6.2
|
%
|
|
|
6.8
|
%
|
|
|
31.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The items detailed below are included in the above table and are
unusual in nature. We did not have any such unusual items during
fiscal year 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Line Item Included in Above
|
|
Former CEO severance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26.0
|
|
|
Employee compensation and related expense
|
Stock option investigation/financial statement restatement
|
|
|
|
|
|
|
14.7
|
|
|
|
1.6
|
|
|
Other general and administrative expenses
|
Stock option modifications
|
|
|
|
|
|
|
12.1
|
|
|
|
|
|
|
Share-based compensation
|
Fair value adjustment for former employee stock options
|
|
|
|
|
|
|
7.0
|
|
|
|
|
|
|
Other general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
|
|
|
$
|
33.8
|
|
|
$
|
27.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
For comparison purposes, the following table presents the
significant components of general and administrative expenses
excluding the unusual items listed in the table above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
% Change
|
|
|
|
Year Ended August 31,
|
|
|
Year Ended August 31,
|
|
|
2008 vs.
|
|
|
2007 vs.
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Employee compensation and related expenses
|
|
$
|
93.8
|
|
|
$
|
71.9
|
|
|
$
|
51.7
|
|
|
|
3.0
|
%
|
|
|
2.6
|
%
|
|
|
2.1
|
%
|
|
|
30.5
|
%
|
|
|
39.1
|
%
|
Share-based compensation
|
|
|
29.4
|
|
|
|
25.5
|
|
|
|
13.0
|
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
0.5
|
%
|
|
|
15.3
|
%
|
|
|
96.2
|
%
|
Legal, audit, and corporate insurance
|
|
|
25.8
|
|
|
|
15.5
|
|
|
|
13.3
|
|
|
|
0.8
|
%
|
|
|
0.6
|
%
|
|
|
0.6
|
%
|
|
|
66.5
|
%
|
|
|
16.5
|
%
|
Administrative space and depreciation
|
|
|
24.8
|
|
|
|
21.1
|
|
|
|
21.8
|
|
|
|
0.8
|
%
|
|
|
0.8
|
%
|
|
|
0.9
|
%
|
|
|
17.5
|
%
|
|
|
(3.2
|
)%
|
Other general and administrative expenses
|
|
|
41.4
|
|
|
|
33.7
|
|
|
|
25.6
|
|
|
|
1.4
|
%
|
|
|
1.3
|
%
|
|
|
1.0
|
%
|
|
|
22.8
|
%
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
215.2
|
|
|
$
|
167.7
|
|
|
$
|
125.4
|
|
|
|
6.9
|
%
|
|
|
6.2
|
%
|
|
|
5.1
|
%
|
|
|
28.3
|
%
|
|
|
33.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2008 compared to Fiscal Year 2007
Excluding the unusual items above, general and administrative
expenses increased 70 basis points as a percentage of net
revenue. This increase as a percentage of net revenue is
primarily due to:
|
|
|
|
|
salary and related payroll costs due to the hiring of additional
employees in our information technology, corporate development,
legal, and finance functions to support our strategic growth
initiatives and enhance corporate governance;
|
|
|
|
increased legal costs in connection with defending ourselves in
the legal matters described elsewhere in this report; and
|
|
|
|
increased other general and administrative expenses to support
our strategic growth initiatives.
|
Fiscal
Year 2007 compared to Fiscal Year 2006
Excluding the unusual items above, general and administrative
expense increased 110 basis points as a percentage of net
revenue. This increase as a percentage of net revenue is
primarily due to higher employee headcount to support our growth
and higher share-based compensation expense from additional
stock option grants.
Goodwill
Impairment
As of August 31, 2006, we concluded that the goodwill for
our CFP reporting unit was impaired in the amount of
$20.2 million. This impairment was included in our Other
Schools segment. In performing our annual impairment test, we
assessed the recoverability of the goodwill by evaluating the
future discounted cash flows and the fair value of CFPs
tangible and intangible assets. The total discounted future cash
flows was determined to be significantly less than our original
expectations due to slower than forecasted net revenue growth.
There are no other long-lived assets at CFP that we believe are
impaired.
70
Interest
Income and Other, Net
The following table sets forth the changes in the significant
components of interest income and other, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest income
|
|
$
|
30.1
|
|
|
$
|
31.2
|
|
|
$
|
18.5
|
|
Interest expense
|
|
|
(3.5
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
Other income (expense), net
|
|
|
9.6
|
|
|
|
0.6
|
|
|
|
(0.1
|
)
|
Foreign currency transaction loss, net
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other, net
|
|
$
|
33.4
|
|
|
$
|
31.6
|
|
|
$
|
18.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2008 compared to Fiscal Year 2007
Interest income and other, net increased by $1.8 million.
This increase was primarily attributable to other income of
$9.5 million in fiscal year 2008 from the forfeiture of the
escrow deposit (including interest) by Macquarie as discussed in
Note 7, Property and Equipment, net, of Item 8,
Financial Statements and Supplementary Data, primarily
offset by:
|
|
|
|
|
$2.8 million in net foreign currency losses related to our
international operations;
|
|
|
|
$3.5 million of interest expense on borrowings under our
Bank Facility, capital lease obligations and Credit Facilities
at UNIACC and ULA; and
|
|
|
|
$1.1 million decrease in interest income due to lower
average balances and lower yields on our cash and cash
equivalents, restricted cash and cash equivalents, and
marketable securities.
|
Fiscal
Year 2007 compared to Fiscal Year 2006
Interest income and other, net increased by $13.5 million.
This increase was primarily due to an increase in average cash
balances and higher yields on our cash and cash equivalents,
restricted cash and cash equivalents, and marketable securities.
Provision
for Income Taxes
Fiscal
Year 2008 compared to Fiscal Year 2007
Our effective income tax rate increased to 39.2% in fiscal year
2008, compared to 37.8% in fiscal year 2007. This increase was
the result of a decrease in tax exempt interest and an increase
in non-deductible foreign losses.
Fiscal
Year 2007 compared to Fiscal Year 2006
Our effective income tax rate remained essentially the same at
37.8% in fiscal year 2007, compared to 37.9% in fiscal year 2006.
Liquidity,
Capital Resources, and Financial Position
Based on past performance and current expectations, we believe
that our cash and cash equivalents, short-term marketable
securities, cash generated from operations, available borrowings
under our Bank Facility and our capacity for additional
borrowings will be adequate to satisfy our working capital
needs, capital expenditures, marketing and advertising program
expenditures, share repurchases, interest and principal payments
under our Bank Facility, other credit facilities and capital
lease obligations, commitments, acquisitions, discretionary
investments under our investment policy and other liquidity
requirements associated with our existing operations through at
least the next 12 months and the foreseeable future. We
believe that the most strategic uses of our cash resources
include potential acquisition opportunities, including our
commitment to Apollo Global, possible share
71
repurchases, investments in the continued enhancement and
expansion of our student offerings, and investments in marketing
initiatives.
However, in light of the current volatility and uncertainty in
the capital markets, there is no assurance that we could obtain
additional financing beyond our current credit facility on terms
acceptable to us, or at all, before the capital markets
stabilize.
Cash
and Cash Equivalents and Marketable Securities
Cash and cash equivalents and marketable securities increased
$118.8 million, or 30.2%, to $511.5 million as of
August 31, 2008, from $392.7 million as of
August 31, 2007. Cash and cash equivalents and marketable
securities represented 27.5% and 27.1% of our total assets as of
August 31, 2008 and August 31, 2007, respectively. The
increase was primarily due to $726.0 million of cash
generated from operations and $103.0 million from stock
option exercises, which was partially offset by
$454.4 million used for the repurchase of 9.8 million
shares of our Class A common stock, $104.9 million
used for capital expenditures (including $12.4 million for
our new corporate headquarters), and $93.8 million used for
acquisitions, including Aptimus and Apollo Globals
purchases of UNIACC and ULA.
We have a long history of investing excess cash under a
conservative corporate policy that only allows investments in
highly rated securities, with preservation of capital and
liquidity as the primary objectives. Our investment policy also
limits the amount of our credit exposure to any one issue or
issuer. We have historically invested a portion of our
unrestricted investment portfolio in high quality (A rated and
above) tax-exempt municipal securities, preferred stock and
other 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. The auction or reset dates occur at intervals
established at the time of issuance that are generally between 7
and 35 days.
Auction-rate securities fail when there are not
enough buyers to absorb the amount of securities available for
sale for that particular auction period. Historically,
auction-rate securities auctions 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 mid-February 2008, due to uncertainty in the global
credit and capital markets and other factors, investment banks
and broker dealers have been less willing to support
auction-rate securities and many auction-rate securities
auctions have failed.
As of August 31, 2008, we had $26.8 million of
principal invested in auction-rate securities that experienced
failed auctions. Approximately $16.8 million of our
auction-rate securities are invested in tax-exempt municipal
bond funds, which carry AA credit ratings for the underlying
issuer and at least an A credit rating for the insurers. The
remaining $10.0 million are invested in securities
collateralized by student loans, which are rated AAA and are
guaranteed by the U.S. government. None of the auction-rate
securities held by us are mortgage-backed securities.
In the fourth quarter of fiscal year 2008, we completed a fair
value analysis of our auction-rate securities in response to the
prolonged and continued lack of liquidity for these investments.
At August 31, 2008, we used a discounted cash flow model
that encompassed unobservable inputs including 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. Additionally, as the market for these
securities continues to be inactive and the secondary market
remains in developmental stages, our discounted cash flow model
also factored the illiquidity of the auction-rate securities
market by adding a spread of 450 basis points to the
applicable discount rate. Based on our analysis, we determined
that our auction-rate securities carrying value exceeded the
estimated fair value. As a result, we recorded an unrealized
loss of $1.6 million ($1.0 million after-tax) on our
auction-rate securities, with the offset included in accumulated
other comprehensive loss in our Consolidated Balance Sheet. We
assessed this decline in value to be temporary due to the
following:
|
|
|
|
|
our belief that we have the ability and the intent to hold these
securities until the market stabilizes in order to sell the
securities at par based on our cash and cash equivalents balance
at August 31, 2008 and our operating cash flow;
|
|
|
|
the high quality of the underlying collateral;
|
72
|
|
|
|
|
the high credit quality of the issuers;
|
|
|
|
the fact that the issuers continue to pay interest in a timely
manner; and
|
|
|
|
the lack of defaults in the underlying debt.
|
At August 31, 2008, we have classified the entire balance
of our auction-rate securities totaling $25.2 million, net
of the unrealized loss of $1.6 million, as non-current
marketable securities due to the lack of liquidity of these
instruments.
We will continue to monitor our investment portfolio, and given
the uncertainties in the global credit and capital markets, we
are no longer investing in auction-rate securities instruments
at this time, which may contribute to reduced investment income
in the future. 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.
Cash
Flows
Operating
Activities
During fiscal years 2008, 2007 and 2006, cash provided by
operating activities was $726.0 million,
$588.6 million, and $551.0 million, respectively. The
following table provides a summary of our operating cash flows
during the respective fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
476.5
|
|
|
$
|
408.8
|
|
|
$
|
414.8
|
|
Non-cash items
|
|
|
212.8
|
|
|
|
194.2
|
|
|
|
178.3
|
|
Changes in certain operating assets and liabilities
|
|
|
36.7
|
|
|
|
(14.4
|
)
|
|
|
(42.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
726.0
|
|
|
$
|
588.6
|
|
|
$
|
551.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2008 Our non-cash items primarily
consisted of a $104.2 million provision for uncollectible
accounts receivable, $79.7 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.
Fiscal year 2007 Our non-cash items primarily
consisted of a $120.6 million provision for uncollectible
accounts receivable, $71.1 million for depreciation and
amortization, and $54.0 million for share-based
compensation, which was partially offset by a $46.0 million
increase in deferred income taxes. The changes in certain
operating assets and liabilities primarily consisted of a
$150.9 million increase in accounts receivable, primarily
due to increased enrollment, which was partially offset by a
$73.9 million increase in student deposits and a
$31.0 million increase in deferred revenue, also primarily
due to increased enrollment, and a $31.2 million increase
in accounts payable and accrued liabilities.
Fiscal year 2006 Our non-cash items primarily
consisted of an $101.0 million provision for uncollectible
accounts receivable, $67.3 million for depreciation and
amortization, $27.7 million for share-based compensation
and $20.2 million for an impairment of goodwill at our CFP
reporting unit. These increases were partially offset by a
$19.7 million increase in deferred income taxes and
$17.5 million of excess tax benefits from share-based
compensation. The changes in certain operating assets and
liabilities primarily consisted of an $89.0 million
increase in accounts receivable, partially offset by a
$20.4 million increase in accounts payable and accrued
liabilities, and an $11.5 million increase in student
deposits.
Accounts receivable is a significant component of our working
capital. We monitor our accounts receivable through a variety of
metrics, including days sales outstanding. We calculate our days
sales outstanding by
73
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. For
purposes of this calculation, we have excluded student accounts
receivable for UNIACC and ULA which was $29.9 million in
the aggregate as of August 31, 2008, as well as the
associated revenue. As of August 31, 2008, our days sales
outstanding was 29 days as compared to 38 days as of
August 31, 2007. The decrease in days sales outstanding is
primarily due to improvements in our processing time for the
receipt of student financial aid and the write-off of
approximately $125.7 million in previously reserved
uncollectible accounts receivable during fiscal year 2008.
Investing
Activities
During fiscal years 2008 and 2007, cash used for investing
activities was $260.8 million and $131.9 million,
respectively. During fiscal year 2006, cash provided by
investing activities was $95.6 million.
Fiscal year 2008 Cash used for investing
activities primarily consisted of $104.9 million for
capital expenditures (including $12.4 million for our new
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.
Fiscal year 2007 Cash used for investing
activities primarily consisted of $104.6 million used for
capital expenditures (including $43.4 million for our new
corporate headquarters), a $58.2 million increase in
restricted cash and cash equivalents, and $15.1 million
used for the purchase of Insight Schools. This was partially
offset by $46.0 million provided by net maturities of
marketable securities.
Fiscal year 2006 Cash provided by investing
activities primarily consisted of $216.2 million provided
by net maturities of marketable securities. This was partially
offset by $111.2 million used for capital expenditures
(including $66.6 million for our new corporate
headquarters).
All interests in our new headquarters land and buildings are
held by wholly-owned subsidiaries formed as limited liability
entities. On June 20, 2006, we entered into an option
agreement (which was amended on March 7, 2007) with
Macquarie Riverpoint AZ, LLC. The option agreement granted
Macquarie the option to purchase all membership interests in the
consolidated subsidiaries that own our new headquarters land and
buildings for approximately $170.0 million and
simultaneously have the owning entities enter into a
12-year
lease of these facilities with us. Macquarie made a deposit of
$9.0 million in connection with this option. On
March 6, 2008, we provided the final completion notices to
Macquarie. In March 2008, we agreed to extend the option until
May 1, 2008 for additional consideration of approximately
$0.3 million. With our approval, Macquarie assigned its
interest under the option agreement to a third party and the
option agreement was further amended to extend the exercise date
to June 6, 2008. The third party did not exercise the
option. As a result, the option agreement expired and we
retained the initial $9.0 million option payment plus
interest of $0.5 million, which is included in interest
income and other, net in our Consolidated Statement of Income
for the fiscal year ended August 31, 2008.
Financing
Activities
During fiscal years 2008, 2007 and 2006, cash used in financing
activities was $321.0 million, $426.0 million, and
$474.8 million, respectively.
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
provided by stock option exercises.
Fiscal year 2007 Cash used for financing
activities primarily consisted of $437.7 million used for
the repurchase of 7.2 million shares of our Class A
common stock.
Fiscal year 2006 Cash used for financing
activities primarily consisted of $514.9 million used for
the repurchase of 8.2 million shares of our Class A
common stock, which was partially offset by $29.0 million
provided by stock option exercises.
74
Shares of Apollo Group 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Value of
|
|
|
|
Total # of Shares
|
|
|
|
|
|
Average Price Paid
|
|
|
Shares Available
|
|
(Numbers in millions, except per share data)
|
|
Repurchased
|
|
|
Cost
|
|
|
per Share
|
|
|
for Repurchase
|
|
|
Treasury stock as of August 31, 2005
|
|
|
8.8
|
|
|
$
|
645.7
|
|
|
$
|
73.23
|
|
|
$
|
51.0
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600.0
|
|
Shares repurchased
|
|
|
8.2
|
|
|
|
514.9
|
|
|
|
63.00
|
|
|
|
(514.9
|
)
|
Shares reissued
|
|
|
(1.5
|
)
|
|
|
(106.6
|
)
|
|
|
69.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2006
|
|
|
15.5
|
|
|
$
|
1,054.0
|
|
|
$
|
68.23
|
|
|
$
|
136.1
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363.9
|
|
Shares repurchased
|
|
|
7.2
|
|
|
|
437.7
|
|
|
|
61.08
|
|
|
|
(437.7
|
)
|
Shares reissued
|
|
|
(0.5
|
)
|
|
|
(30.3
|
)
|
|
|
67.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. There is no expiration date on the repurchase
authorizations and repurchases occur at our discretion.
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. The amount and timing of
future share repurchases, if any, will be made as market and
business conditions warrant.
Contractual
Obligations and Other Commercial Commitments
The following table lists our contractual cash obligations as of
August 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year
|
|
Contractual Obligations
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
Thereafter
|
|
|
Total
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facilities UNIACC and ULA(1)
|
|
$
|
13.0
|
|
|
$
|
2.0
|
|
|
$
|
2.0
|
|
|
$
|
6.2
|
|
|
$
|
23.2
|
|
Operating lease obligations
|
|
|
139.3
|
|
|
|
229.5
|
|
|
|
128.1
|
|
|
|
70.8
|
|
|
|
567.7
|
|
Stadium naming rights(2)
|
|
|
6.1
|
|
|
|
12.9
|
|
|
|
13.6
|
|
|
|
108.7
|
|
|
|
141.3
|
|
Capital lease obligations(1)
|
|
|
2.4
|
|
|
|
3.3
|
|
|
|
1.3
|
|
|
|
0.8
|
|
|
|
7.8
|
|
Uncertain tax positions(3)
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
49.8
|
|
|
|
55.3
|
|
Other long-term obligations(4)
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
2.5
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
166.3
|
|
|
$
|
247.7
|
|
|
$
|
145.9
|
|
|
$
|
238.8
|
|
|
$
|
798.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are included in current and long-term liabilities in our
August 31, 2008 Consolidated Balance Sheet. |
|
(2) |
|
Amounts consist of an agreement for
20-year
naming rights to the Glendale, Arizona Sports Complex. |
|
(3) |
|
Amounts consist of unrecognized tax benefits that have been
recorded in accordance with FIN 48. The amounts are
included in current and long-term liabilities in our
August 31, 2008 Consolidated Balance Sheet. We are
uncertain as to if or when such amounts may be settled. |
|
(4) |
|
Amount consists of 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.
75
Federal
and Private Student Loans
During 2008, there were reports of various educational entities
experiencing interruption of Title IV student loan funding,
which includes federal loans guaranteed by the government under
the Federal Family Education Loan Program. We have not
experienced any significant interruptions. In May 2008, the
Ensuring Continued Access to Student Loans Act was signed into
law by the President. This Act gives the Department of Education
temporary authority through June 30, 2010 to purchase
student loans when there is inadequate capital to meet borrower
demand. Additionally, the Act requires the Department of
Education to implement a Lender of Last Resort program to be
administered by a state designated guarantor. As an alternative
to federally guaranteed loans, students may access Title IV
loans through the Federal Direct Loan Program, which essentially
eliminates the lender and the guarantor. Under this program, the
federal government makes the loans directly to the students in
partnership with the schools.
While 77% of our revenues come from Title IV funds, private
student loan funding only represented approximately 3% of our
net revenue and 5% of our net revenue during fiscal years 2008
and 2007, respectively. Student eligibility is based on
creditworthiness. The current credit market conditions make it
more difficult for our students to obtain financing for direct
costs beyond the Title IV annual loan limits established by
Congress (in May 2008, the Act increased the annual loan limits
on federal unsubsidized student loans by $2,000, and also
increased the aggregate loan limits on total federal student
loans.). Third-party private loans are generally utilized by
students in the University of Phoenix bachelors degree
programs. The fastest growing sector of our student body,
University of Phoenix associates degree students, do not
require private loans to cover the cost of their program as the
tuition levels are below Title IV loan limits. To meet any
shortfall in financing, we are exploring the utilization of
institutional grant and scholarship programs as necessary to
assist our students who may need private loans and cannot obtain
them with remaining enrolled.
Management does not expect a material adverse effect on our
business, financial position, results of operations or cash
flows to result from reduced student access to private loans.
Recent
Accounting Pronouncements
See Note 2, Significant Accounting Policies, in
Item 8, Financial Statements and Supplementary Data.
|
|
Item 7A
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Impact of
Inflation
Inflation has not had a significant impact on our historical
operations.
Foreign
Currency Exchange Risk
In fiscal year 2008, we recorded $2.8 million in foreign
currency transaction losses. As we expand our international
operations, we will conduct more transactions in currencies
other than the U.S. Dollar. Additionally, the volume of
transactions in the various foreign currencies will continue to
increase, thus increasing our exposure to foreign currency
exchange rate fluctuations. We monitor foreign currency exchange
rate risk through the analysis of market conditions and our
foreign operations.
Interest
Rate Risk
As of August 31, 2008, we held $895.6 million in cash
and cash equivalents, restricted cash and cash equivalents, and
marketable securities. During the fiscal year ended
August 31, 2008, we earned interest income of
$30.1 million. When the Federal Reserve Bank lowers the
Federal Funds Rate, it generally results in a reduction in our
interest rates. A decrease of 100 basis points in interest
rates would have reduced our interest income by approximately
$6.4 million in fiscal year 2008. Lower interest rates and
the possibility of future Federal Funds Rate reductions may
significantly reduce our interest income for fiscal year 2009.
We monitor the interest rate risk by monitoring market
conditions and the value of these assets.
76
As of August 31, 2008, we did not have significant
short-term or long-term borrowings. Any future borrowings under
our Bank Facility will be subject to interest rate risk and may
be subject to foreign currency exchange risk. Please refer to
Note 15, Financing, in Item 8, Financial Statements
and Supplementary Data, for additional information.
Auction-Rate
Securities Risk
We have historically invested a portion of our unrestricted
investment portfolio in high quality (A rated and above)
tax-exempt municipal securities, preferred stock and other
auction-rate securities. As of August 31, 2008, we had
$26.8 million of principal invested in auction-rate
securities that experienced failed auctions. Due to uncertainty
in the global credit and capital markets and other factors,
investment banks and broker dealers have been less willing to
support auction-rate securities and many auction-rate securities
auctions have failed. We have completed a fair value analysis of
our auction-rate securities in response to the prolonged and
continued lack of liquidity for these investments. Based on our
analysis, we determined that our auction-rate securities
carrying value exceeded the estimated fair value. As a result,
we recorded an unrealized loss of $1.6 million
($1.0 million after-tax) on our auction-rate securities,
with the offset included in accumulated other comprehensive loss
in our Consolidated Balance Sheets. Our discounted cash flow
model factored the illiquidity of the auction-rate securities
market by adding a spread of 450 basis points to the
applicable discount rate. An increase of 100 basis points
in our discount rate assumption would have caused an additional
decline in the fair market value of approximately
$0.4 million.
We will continue to monitor our investment portfolio, and given
the uncertainties in the global credit and capital markets, we
are no longer investing in auction-rate securities instruments
at this time, which may contribute to reduced investment income
in the future. 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.
77
|
|
Item 8
|
Financial
Statements and Supplementary Data
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
79
|
|
|
|
|
80
|
|
|
|
|
81
|
|
|
|
|
82
|
|
|
|
|
83
|
|
|
|
|
84
|
|
|
|
|
85
|
|
78
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, 2008 and 2007, 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, 2008. 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, 2008
and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended
August 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial
statements, in the year ended August 31, 2008 the Company
changed its method of accounting for income taxes to comply with
Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement
No. 109.
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, 2008, 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 28, 2008 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ DELOITTE &
TOUCHE LLP
Phoenix, Arizona
October 28, 2008
79
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
ASSETS:
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
483,195
|
|
|
$
|
339,319
|
|
Restricted cash and cash equivalents
|
|
|
384,155
|
|
|
|
296,469
|
|
Marketable securities, current portion
|
|
|
3,060
|
|
|
|
31,278
|
|
Accounts receivable, net
|
|
|
221,919
|
|
|
|
190,912
|
|
Deferred tax assets, current portion
|
|
|
55,434
|
|
|
|
50,885
|
|
Other current assets
|
|
|
21,780
|
|
|
|
16,515
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,169,543
|
|
|
|
925,378
|
|
Property and equipment, net
|
|
|
439,135
|
|
|
|
364,207
|
|
Marketable securities, less current portion
|
|
|
25,204
|
|
|
|
22,084
|
|
Goodwill
|
|
|
85,968
|
|
|
|
29,633
|
|
Intangible assets, net
|
|
|
23,096
|
|
|
|
2,214
|
|
Deferred tax assets, less current portion
|
|
|
89,499
|
|
|
|
80,077
|
|
Other assets (includes receivable from related party of $17,762
and $16,730 as of 2008 and 2007, respectively)
|
|
|
27,967
|
|
|
|
26,270
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,860,412
|
|
|
$
|
1,449,863
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
46,589
|
|
|
$
|
80,729
|
|
Accrued liabilities
|
|
|
121,200
|
|
|
|
103,651
|
|
Current portion of long-term liabilities
|
|
|
47,228
|
|
|
|
21,093
|
|
Income taxes payable
|
|
|
6,111
|
|
|
|
43,351
|
|
Student deposits
|
|
|
413,302
|
|
|
|
328,008
|
|
Current portion of deferred revenue
|
|
|
231,179
|
|
|
|
167,003
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
865,609
|
|
|
|
743,835
|
|
Deferred revenue, less current portion
|
|
|
104
|
|
|
|
295
|
|
Deferred tax liabilities
|
|
|
2,743
|
|
|
|
|
|
Long-term liabilities, less current portion
|
|
|
145,791
|
|
|
|
71,893
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,014,247
|
|
|
|
816,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 11, 17 and 20)
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
11,956
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, 1,000,000 shares authorized;
none issued
|
|
|
|
|
|
|
|
|
Apollo Group Class A nonvoting common stock, no par value,
400,000,000 shares authorized; 188,007,000 issued as of
August 31, 2008 and 2007 and 158,471,000 and 165,844,000
outstanding as of August 31, 2008 and 2007, respectively
|
|
|
103
|
|
|
|
103
|
|
Apollo Group Class B voting common stock, no par value,
3,000,000 shares authorized; 475,000 issued and outstanding
as of August 31, 2008 and 2007
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Apollo Group Class A treasury stock, at cost, 29,536,000
and 22,163,000 shares as of August 31, 2008 and 2007,
respectively
|
|
|
(1,757,277
|
)
|
|
|
(1,461,368
|
)
|
Retained earnings
|
|
|
2,595,340
|
|
|
|
2,096,385
|
|
Accumulated other comprehensive loss
|
|
|
(3,958
|
)
|
|
|
(1,281
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
834,209
|
|
|
|
633,840
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,860,412
|
|
|
$
|
1,449,863
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
80
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net revenue
|
|
$
|
3,140,931
|
|
|
$
|
2,723,793
|
|
|
$
|
2,477,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
1,370,878
|
|
|
|
1,237,491
|
|
|
|
1,109,584
|
|
Selling and promotional
|
|
|
805,395
|
|
|
|
659,059
|
|
|
|
544,706
|
|
General and administrative
|
|
|
215,192
|
|
|
|
201,546
|
|
|
|
153,004
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
20,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,391,465
|
|
|
|
2,098,096
|
|
|
|
1,827,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
749,466
|
|
|
|
625,697
|
|
|
|
650,034
|
|
Interest income and other, net
|
|
|
33,388
|
|
|
|
31,600
|
|
|
|
18,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
782,854
|
|
|
|
657,297
|
|
|
|
668,088
|
|
Provision for income taxes
|
|
|
(306,927
|
)
|
|
|
(248,487
|
)
|
|
|
(253,255
|
)
|
Minority interest, net of tax
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
476,525
|
|
|
$
|
408,810
|
|
|
$
|
414,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
2.90
|
|
|
$
|
2.37
|
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
2.87
|
|
|
$
|
2.35
|
|
|
$
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
164,109
|
|
|
|
172,309
|
|
|
|
174,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
165,870
|
|
|
|
173,603
|
|
|
|
176,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
81
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
476,525
|
|
|
$
|
408,810
|
|
|
$
|
414,833
|
|
Other comprehensive gain (loss) (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation gain (loss)
|
|
|
(1,704
|
)
|
|
|
(247
|
)
|
|
|
104
|
|
Unrealized loss on auction-rate securities
|
|
|
(973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
473,848
|
|
|
$
|
408,563
|
|
|
$
|
414,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
82
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apollo Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
Apollo Group
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Class A Nonvoting
|
|
|
Voting
|
|
|
Class A
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Stated
|
|
|
|
|
|
Stated
|
|
|
|
|
|
Stated
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
($ in thousands)
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)(1)
|
|
|
Equity
|
|
|
Balance as of August 31, 2005
|
|
|
188,005
|
|
|
$
|
103
|
|
|
|
477
|
|
|
$
|
1
|
|
|
|
8,818
|
|
|
$
|
(645,742
|
)
|
|
$
|
|
|
|
$
|
1,280,996
|
|
|
$
|
(1,138
|
)
|
|
$
|
634,220
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,173
|
|
|
|
(514,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(514,931
|
)
|
Treasury stock issued under stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(147
|
)
|
|
|
10,102
|
|
|
|
(2,389
|
)
|
|
|
|
|
|
|
|
|
|
|
7,713
|
|
Treasury stock issued under stock option plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,395
|
)
|
|
|
96,525
|
|
|
|
(38,787
|
)
|
|
|
(36,480
|
)
|
|
|
|
|
|
|
21,258
|
|
Tax benefits of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,772
|
|
|
|
|
|
|
|
|
|
|
|
19,772
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,735
|
|
|
|
|
|
|
|
|
|
|
|
27,735
|
|
Cash paid for cancellation of vested stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,331
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,331
|
)
|
Conversion of Apollo Group Class B common stock
|
|
|
2
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
104
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414,833
|
|
|
|
|
|
|
|
414,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2006
|
|
|
188,007
|
|
|
$
|
103
|
|
|
|
475
|
|
|
$
|
1
|
|
|
|
15,449
|
|
|
$
|
(1,054,046
|
)
|
|
$
|
|
|
|
$
|
1,659,349
|
|
|
$
|
(1,034
|
)
|
|
$
|
604,373
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,167
|
|
|
|
(437,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(437,735
|
)
|
Treasury stock issued under stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
2,137
|
|
|
|
(605
|
)
|
|
|
|
|
|
|
|
|
|
|
1,532
|
|
Treasury stock issued under stock option plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(352
|
)
|
|
|
23,605
|
|
|
|
(45,625
|
)
|
|
|
28,226
|
|
|
|
|
|
|
|
6,206
|
|
Tax benefits of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,021
|
|
|
|
|
|
|
|
|
|
|
|
2,021
|
|
Settlement of liability-classified awards through the issuance
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70
|
)
|
|
|
4,671
|
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
7,011
|
|
Cash settlement of stock options through tender offer repricing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
(358
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,027
|
|
|
|
|
|
|
|
|
|
|
|
54,027
|
|
Reclassification of equity awards to a liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,800
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,800
|
)
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(247
|
)
|
|
|
(247
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408,810
|
|
|
|
|
|
|
|
408,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2007
|
|
|
188,007
|
|
|
$
|
103
|
|
|
|
475
|
|
|
$
|
1
|
|
|
|
22,163
|
|
|
$
|
(1,461,368
|
)
|
|
$
|
|
|
|
$
|
2,096,385
|
|
|
$
|
(1,281
|
)
|
|
$
|
633,840
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,824
|
|
|
|
(454,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(454,362
|
)
|
Treasury stock issued under stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
6,339
|
|
|
|
(773
|
)
|
|
|
|
|
|
|
|
|
|
|
5,566
|
|
Treasury stock issued under stock option plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,348
|
)
|
|
|
152,114
|
|
|
|
(77,141
|
)
|
|
|
22,430
|
|
|
|
|
|
|
|
97,403
|
|
Tax benefits of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,907
|
|
|
|
|
|
|
|
|
|
|
|
5,907
|
|
Reclassification of liability awards to equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,655
|
|
|
|
|
|
|
|
|
|
|
|
16,655
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,570
|
|
|
|
|
|
|
|
|
|
|
|
53,570
|
|
Options assumed through acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,782
|
|
|
|
|
|
|
|
|
|
|
|
1,782
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,704
|
)
|
|
|
(1,704
|
)
|
Unrealized loss on auction-rate securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(973
|
)
|
|
|
(973
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476,525
|
|
|
|
|
|
|
|
476,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2008
|
|
|
188,007
|
|
|
$
|
103
|
|
|
|
475
|
|
|
$
|
1
|
|
|
|
29,536
|
|
|
$
|
(1,757,277
|
)
|
|
$
|
|
|
|
$
|
2,595,340
|
|
|
$
|
(3,958
|
)
|
|
$
|
834,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of August 31, 2008, this balance consists of
$3.0 million of currency translation adjustments, net of
tax, and $1 million of unrealized losses on auction-rate
securities, net of tax. |
The accompanying notes are an integral part of these
consolidated financial statements.
83
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
476,525
|
|
|
$
|
408,810
|
|
|
$
|
414,833
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
53,570
|
|
|
|
54,027
|
|
|
|
27,735
|
|
Excess tax benefits from share-based compensation
|
|
|
(18,648
|
)
|
|
|
(4,022
|
)
|
|
|
(17,476
|
)
|
Depreciation and amortization
|
|
|
79,726
|
|
|
|
71,115
|
|
|
|
67,290
|
|
Amortization of deferred gain on sale-leaseback
|
|
|
(1,786
|
)
|
|
|
(1,763
|
)
|
|
|
(1,732
|
)
|
Non-cash foreign currency losses, net
|
|
|
2,825
|
|
|
|
|
|
|
|
|
|
Amortization of marketable securities discount and premium, net
|
|
|
90
|
|
|
|
268
|
|
|
|
929
|
|
Provision for uncollectible accounts receivable
|
|
|
104,201
|
|
|
|
120,614
|
|
|
|
101,038
|
|
Minority interest, net of tax
|
|
|
(598
|
)
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
20,205
|
|
Deferred income taxes
|
|
|
(6,624
|
)
|
|
|
(46,040
|
)
|
|
|
(19,705
|
)
|
Changes in assets and liabilities, excluding the impact of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(105,726
|
)
|
|
|
(150,943
|
)
|
|
|
(89,019
|
)
|
Other assets
|
|
|
(7,285
|
)
|
|
|
(1,912
|
)
|
|
|
5,609
|
|
Accounts payable and accrued liabilities
|
|
|
(14,155
|
)
|
|
|
31,174
|
|
|
|
20,424
|
|
Income taxes payable
|
|
|
21,667
|
|
|
|
(2,440
|
)
|
|
|
(1,579
|
)
|
Student deposits
|
|
|
85,294
|
|
|
|
73,878
|
|
|
|
11,455
|
|
Deferred revenue
|
|
|
35,281
|
|
|
|
31,003
|
|
|
|
1,947
|
|
Other liabilities
|
|
|
21,649
|
|
|
|
4,853
|
|
|
|
9,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
726,006
|
|
|
|
588,622
|
|
|
|
551,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(92,471
|
)
|
|
|
(61,185
|
)
|
|
|
(44,629
|
)
|
Additions to land and buildings related to new headquarters
|
|
|
(12,408
|
)
|
|
|
(43,366
|
)
|
|
|
(66,611
|
)
|
Acquisitions, net of cash acquired
|
|
|
(93,763
|
)
|
|
|
(15,079
|
)
|
|
|
|
|
Purchase of marketable securities
|
|
|
(875,205
|
)
|
|
|
(1,575,635
|
)
|
|
|
(1,420,055
|
)
|
Maturities of marketable securities
|
|
|
900,715
|
|
|
|
1,621,636
|
|
|
|
1,636,283
|
|
Increase in restricted cash and cash equivalents
|
|
|
(87,686
|
)
|
|
|
(58,163
|
)
|
|
|
(6,530
|
)
|
Purchase of other assets
|
|
|
|
|
|
|
(143
|
)
|
|
|
(2,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(260,818
|
)
|
|
|
(131,935
|
)
|
|
|
95,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(1,043
|
)
|
|
|
|
|
|
|
|
|
Payments on lines of credit
|
|
|
(250,392
|
)
|
|
|
|
|
|
|
|
|
Borrowings under lines of credit
|
|
|
250,991
|
|
|
|
|
|
|
|
|
|
Purchase of Apollo Group Class A common stock
|
|
|
(454,362
|
)
|
|
|
(437,735
|
)
|
|
|
(514,931
|
)
|
Issuance of Apollo Group Class A common stock
|
|
|
102,969
|
|
|
|
7,738
|
|
|
|
28,971
|
|
Cash paid for cancellation of vested options
|
|
|
|
|
|
|
|
|
|
|
(6,331
|
)
|
Minority interest contributions
|
|
|
12,149
|
|
|
|
|
|
|
|
|
|
Excess tax benefits from share-based compensation
|
|
|
18,648
|
|
|
|
4,022
|
|
|
|
17,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(321,040
|
)
|
|
|
(425,975
|
)
|
|
|
(474,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange rate effect on cash and cash equivalents
|
|
|
(272
|
)
|
|
|
(451
|
)
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
143,876
|
|
|
|
30,261
|
|
|
|
171,874
|
|
Cash and cash equivalents, beginning of year
|
|
|
339,319
|
|
|
|
309,058
|
|
|
|
137,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
483,195
|
|
|
$
|
339,319
|
|
|
$
|
309,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes
|
|
$
|
289,630
|
|
|
$
|
293,089
|
|
|
$
|
273,915
|
|
Cash paid during the year for interest
|
|
$
|
2,874
|
|
|
$
|
231
|
|
|
$
|
326
|
|
Supplemental disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Credits received for tenant improvements
|
|
$
|
9,604
|
|
|
$
|
5,378
|
|
|
$
|
11,709
|
|
Purchases of property and equipment included in accounts payable
|
|
$
|
4,072
|
|
|
$
|
6,169
|
|
|
$
|
12,934
|
|
Settlement and reclassification of liability awards
|
|
$
|
16,655
|
|
|
$
|
7,011
|
|
|
$
|
|
|
Fair value adjustments for liability-classified awards
|
|
$
|
|
|
|
$
|
6,952
|
|
|
$
|
|
|
Unrealized loss on auction-rate securities
|
|
$
|
1,621
|
|
|
$
|
|
|
|
$
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
84
APOLLO
GROUP, INC. AND SUBSIDIARIES
|
|
Note 1.
|
Nature of
Operations
|
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 30 years, operating The University
of Phoenix, Inc. (University of Phoenix), Institute
for Professional Development (IPD), The College for
Financial Planning Institutes Corporation (CFP),
Western International University, Inc. (Western
International University) and Insight Schools, Inc.
(Insight Schools), all of which are our wholly-owned
subsidiaries. In addition to these wholly-owned subsidiaries, on
October 22, 2007, we formed a joint venture with The
Carlyle Group, called Apollo Global, Inc. (Apollo
Global), of which we own 80.1% and which we consolidate in
our financial statements to pursue investments in the
international education services industry. Apollo Global has
subsequently completed two transactions with the acquisitions of
Universidad de Artes, Ciencias y Comunicación
(UNIACC) in Chile, and Universidad Latinoamericana
(ULA) in Mexico. We also established a new Canadian
institution, Meritus University, which began operations in
September 2008. Through these subsidiaries we are able to offer
innovative and distinctive educational programs and services at
the high school, undergraduate, and graduate levels, at our
campuses and learning centers, as well as online throughout the
world.
On October 29, 2007, we completed the acquisition of
Aptimus, Inc., an online advertising company. The acquisition
enables us to more effectively monitor, manage and control our
marketing investments and brands.
Our fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 2008, 2007 and 2006
relate to fiscal years 2008, 2007 and 2006, respectively.
|
|
Note 2.
|
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. and its wholly-owned and majority-owned
subsidiaries. Interests in our majority-owned subsidiaries are
reported using the full-consolidation method. We fully
consolidate the results of operations and the assets and
liabilities of these subsidiaries in our consolidated financial
statements. All material intercompany transactions and balances
have been eliminated in consolidation.
The financial position and operating results of Apollo
Globals wholly and majority-owned entities, UNIACC and
ULA, are reported on a one-month lag. The net effect of this
reporting lag is not material to our consolidated financial
statements.
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.
85
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
Our educational programs, primarily comprised of University of
Phoenix programs, 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. Students generally fund their
education through grants
and/or loans
under various Title IV programs, tuition assistance from
their employers, or personal funds.
Net revenue consists largely of tuition and fees associated with
different educational programs as well as related educational
resources such as access to online materials. Net revenues are
shown net of discounts. Tuition benefits for our employees and
their eligible dependants are included in net revenue and as a
part of employee compensation and related expenses within
instructional costs and services. Total employee tuition
benefits were $77.9 million, $63.8 million and
$52.9 million for fiscal years 2008, 2007 and 2006,
respectively.
The following table presents the most significant components of
net revenue, and each component as percentage of total net
revenue, for the fiscal years 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Tuition and educational services revenue
|
|
$
|
2,996,072
|
|
|
|
95
|
%
|
|
$
|
2,553,075
|
|
|
|
94
|
%
|
|
$
|
2,304,288
|
|
|
|
93
|
%
|
Services revenue
|
|
|
77,707
|
|
|
|
3
|
%
|
|
|
73,577
|
|
|
|
2
|
%
|
|
|
74,442
|
|
|
|
3
|
%
|
Online course material revenue
|
|
|
184,430
|
|
|
|
6
|
%
|
|
|
160,973
|
|
|
|
6
|
%
|
|
|
138,661
|
|
|
|
6
|
%
|
Other revenue
|
|
|
43,881
|
|
|
|
1
|
%
|
|
|
48,614
|
|
|
|
2
|
%
|
|
|
65,523
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
|
3,302,090
|
|
|
|
105
|
%
|
|
|
2,836,239
|
|
|
|
104
|
%
|
|
|
2,582,914
|
|
|
|
104
|
%
|
Less: discounts
|
|
|
(161,159
|
)
|
|
|
(5
|
)%
|
|
|
(112,446
|
)
|
|
|
(4
|
)%
|
|
|
(105,381
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,140,931
|
|
|
|
100
|
%
|
|
$
|
2,723,793
|
|
|
|
100
|
%
|
|
$
|
2,477,533
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition and educational services revenue encompasses both
online and classroom-based learning. For our University of
Phoenix and Western International University operations, tuition
revenue is recognized pro rata, on a weekly basis, over the
period of instruction as services are delivered to students. For
our Apollo Global operations, tuition revenue is recognized over
the length of the course, which is typically over a period of a
semester. During certain periods of the year and in certain
businesses, our revenue recognition considers holiday breaks
such as Christmas and Thanksgiving.
For Insight Schools, which has recently expanded its operations
in fiscal year 2008, we generate the majority of our tuition and
educational services revenue through long-term contracts with
various school districts or online charter schools that
generally have terms that range from 5 to 10 years with
provisions for renewal. The school districts and online charter
schools are generally funded by state or local governments
primarily on a per student basis. Revenue is recognized on a
monthly basis in the period earned over the length of the school
year, which is generally from September through June.
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
adults. These services typically include degree program design,
curriculum development, market research, student recruitment,
accounting, and administrative services. IPD, which provides
these services in 21 states, 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
86
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revenue to which we are entitled under the terms of the
contracts is recognized on a pro rata basis over the service
period.
Online course material 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.
Other revenue consist 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 it takes for a student to complete a program of
study. Other revenue also includes non-tuition generating
revenues, such as renting classroom space and other student
support services. This revenue is recognized as the services are
provided.
Discounts reflect reductions in tuition or other revenue
including military, corporate, and other employer discounts,
grants, and promotions.
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
and the tuition price per credit hour.
Net revenue excludes any applicable state and city sales taxes.
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.
Concentration
of Funding Sources
A substantial portion of credit extended to students is paid
through the students participation in various
U.S. federal financial aid programs authorized by
Title IV of the Higher Education Act of 1965, as
reauthorized by the Higher Education Opportunity Act, which we
refer to as Title IV. The following table
summarizes total revenues from Title IV programs for fiscal
years 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total Title IV funding received
|
|
$
|
2,408,522
|
|
|
$
|
1,765,642
|
|
|
$
|
1,536,616
|
|
Total net revenue
|
|
|
3,140,931
|
|
|
|
2,723,793
|
|
|
|
2,477,533
|
|
Total Title IV funding as a percentage of total net revenue
|
|
|
76.7
|
%
|
|
|
64.8
|
%
|
|
|
62.0
|
%
|
All U.S. federal financial aid programs are established by
the Higher Education Act and regulations promulgated thereunder.
The Higher Education Act was recently reauthorized through
September 30, 2013 by Congress and signed into law by the
President on August 14, 2008.
The Higher Education 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. University of
Phoenix was recertified in June 2003 and its current
certification for the Title IV programs expired in June
2007. However, in March 2007, University of Phoenix submitted
its Title IV program participation recertification
application to the Department of Education. We have been
collaborating with the Department of Education regarding the
University of Phoenix recertification application. Although we
have submitted our application for renewal, we are continuing to
supply additional
follow-up
information based on requests from the Department of Education.
Our eligibility continues on a month-to-month basis until the
Department of Education issues its decision on the application.
A month-to-month status is not unusual considering the process
is multi-faceted and iterative. We have no reason to believe
that the application will not be renewed and expect that the
renewal process will be completed satisfactorily. Western
International University was recertified in October 2003 and its
current certification for the Title IV programs expires in
June 2009.
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 tuition receivable and the customer
base is geographically diverse.
Allowance
for Doubtful Accounts
We reduce accounts receivable by an allowance for amounts that
may 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 look at 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 from University of
Phoenix or Western International University, we are sometimes
required to return a portion of Title IV funds to the
lenders. We are generally entitled to collect these funds from
the students, but collection of these receivables is
significantly lower than our collection of receivables for
students who remain in our educational programs. Management
periodically evaluates the standard allowance estimation
methodology for propriety and modifies as necessary. 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 5, 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. We
have not experienced any losses on our cash and cash equivalents.
Restricted
Cash and Cash Equivalents
A significant portion of our revenue is received from students
who participate in U.S. government financial aid and
assistance programs. Restricted cash and cash equivalents
primarily represents amounts 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 Department of Education and other
regulations. We also classify as restricted cash and cash
equivalents certain additional funds that we may be required to
return if a student who receives Title IV program funds
withdraws from a program. Restricted cash and cash equivalents
are not legally restricted or otherwise segregated from our
other assets. Restricted cash and cash equivalents are excluded
from cash and cash equivalents in the Consolidated Balance
Sheets and Statements of Cash Flows. 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 primarily of auction-rate
securities, municipal bonds, U.S. government-sponsored
enterprises, and corporate obligations. We account for
marketable securities in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt
and Equity Securities (SFAS 115).
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, due
to recent credit market tightening conditions, auction-rate
securities began experiencing failed auctions in mid-February
2008 resulting in a lack of liquidity for these instruments that
has reduced the estimated fair market value for these securities
below par value. Those marketable securities which we have the
ability and intent to hold until maturity are classified as
held-to-maturity and reported
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
at amortized cost. Marketable securities with a maturity date
greater than one year and our auction-rate securities
instruments, due to the lack of liquidity, are classified as
non-current. Interest and dividend income, including the
amortization of any premium or discount, is included in interest
income and other, net in our Consolidated Statements of Income.
Please refer to Note 4, 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 three 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 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 in
accordance with Statement of Position
98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use
(SOP 98-1).
Such costs consist primarily of the direct labor associated with
building the internally developed software. Capitalized costs
are amortized using the straight-line method over the estimated
lives of the software, not to exceed five years.
SOP 98-1
describes three stages of software development projects: 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 7, Property and
Equipment, net, for further discussion.
Goodwill
and Intangible Assets
Goodwill represents the excess of the purchase price over the
amount assigned to the net assets acquired and assumed
liabilities. Our goodwill is a result of our acquisitions of
Aptimus, included in our University of Phoenix segment, UNIACC
and ULA, included in our Apollo Global segment, Insight Schools,
its own segment, and Western International University and CFP,
included in our Other Schools segment. Indefinite-lived
intangible assets are recorded at fair market value on their
acquisition date and primarily include foreign regulatory
accreditations, designations and trademarks as a result of the
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. Goodwill and indefinite-lived
intangible assets are not amortized, but rather are tested for
impairment at least annually, unless events occur or
circumstances change between annual tests that would more likely
than not reduce the fair value of the respective asset below its
carrying amount. We perform our annual goodwill and indefinite
lived intangible asset impairment tests, if applicable, as of
August 31 for CFP and May 31 for University of Phoenix, UNIACC
and ULA, Insight Schools and Western International University.
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 lives
range from 2 to 15 years.
Please refer to Note 8, Goodwill and Intangible Assets, for
further discussion.
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Asset
Impairments
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Marketable Securities Our marketable
securities consist of available-for-sale securities,
specifically auction-rate securities instruments, and
held-to-maturity securities. We regularly review these
securities for impairment based on criteria that include the
extent to which the carrying value exceeds fair market value.
For our auction-rate securities instruments, we use a discounted
cash flow model to determine the fair market value of the
instruments. For our held-to-maturity securities, which include
municipal bonds, we use broker pricing services to determine the
fair market value of the instruments. As of August 31,
2008, our held-to-maturity securities are not material to our
Consolidated Balance Sheets and all held-to-maturity instruments
outstanding as of August 31, 2007 either matured or were
called at par value during fiscal year 2008. For all of our
marketable securities, we consider several factors to determine
if an other-than-temporary decline has occurred such as the
market value of each individual security in relation to its cost
basis, the financial condition of the investee, and our intent
and ability to retain the investment for a sufficient period to
allow for the recovery in any market value of the investment.
Temporary declines in fair market value for our
available-for-sale securities are recorded in accumulated other
comprehensive loss in our Consolidated Balance Sheets.
Other-than-temporary declines in fair market value for our
available-for-sale and held-to-maturity securities are recorded
in our Consolidated Statements of Income.
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Long-Lived Assets In accordance with
SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets (SFAS 144),
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. At
August 31, 2008, we believe the carrying amounts of our
long-lived assets are fully recoverable and no impairment exists.
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Goodwill and Indefinite-Lived Intangible Assets
We apply the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142), which requires that a two-step
impairment test be performed on goodwill. In the first step, the
fair value of the reporting unit is compared 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,
then a second step must be performed in order 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. In assessing the fair
value of our reporting 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. Our analysis may also include using market-based
approach valuation techniques. To assess the reasonableness of
our fair value analysis, when appropriate, we evaluate our
results against other measurement indicators such as comparable
company public trading values, analyst estimates and values
observed in private market transactions. At the time of an
acquisition, we allocate the goodwill and related assets to our
respective reporting units. Please refer to Note 18,
Segment Reporting, for further discussion.
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The impairment test for indefinite-lived intangible assets
involves 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. To
determine the fair value of these intangible assets, we use
various valuation models, such as discounted cash flow analysis
or the relief-from-royalty method.
Goodwill and indefinite-lived intangible assets are tested
annually for impairment unless events occur or circumstances
change between annual tests that would more likely than not
reduce the fair value of the respective asset below its carrying
amount.
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Share-Based
Compensation
On September 1, 2005, we adopted the provisions of
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)), which is a
revision of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123). In
March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107, Share Based
Payment (SAB 107), relating to
SFAS 123(R), which we applied in our adoption of
SFAS 123(R). SFAS 123(R) requires the measurement and
recognition of compensation expense for all share-based awards
issued to employees and directors, based on estimated fair
values of the share award on the date of grant. We adopted the
fair value recognition provisions of SFAS 123(R) using the
modified prospective transition method, which requires
compensation expense to be recorded for all share-based awards
granted after September 1, 2005 and for all unvested stock
options outstanding as of September 1, 2005. For all
unvested options outstanding as of September 1, 2005, the
remaining unrecognized compensation expense, based on the fair
value as determined under the provisions of SFAS 123, will
be recognized as share-based compensation in the Consolidated
Statements of Income over the remaining vesting period. For
share-based awards granted subsequent to September 1, 2005,
compensation expense is based on the fair value as determined
under the provisions of SFAS 123(R) and will be recognized
in the Consolidated Statements of Income over the vesting
period. Under the modified prospective transition method, prior
periods are not restated for the effect of SFAS 123(R).
In December 2007, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin No. 110,
Share-Based Payment (SAB 110).
SAB 110 allows companies to continue to use the simplified
method, as defined in SAB 107 to estimate the expected term
of stock options under certain circumstances. The simplified
method for estimating expected term is to use the mid-point
between the vesting term and the contractual term of the share
option. We have analyzed the circumstances in which the use of
the simplified method is allowed. We have opted to use the
simplified method for options granted to management in fiscal
year 2008 because the options granted in prior fiscal years had
different terms, such as contractual lives and acceleration
provisions. Thus, historical data is not comparable in order to
determine the expected term of current awards.
SFAS 123(R) requires us to calculate the fair value of
share-based awards on the date of grant. We 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 life, volatility,
risk-free interest rates and dividend yield to determine the
fair value of share-based awards, based on both historical
information and management judgment regarding market factors and
trends. We amortize the share-based compensation expense over
the period that the awards are expected to vest, net of
estimated forfeiture rates. If the actual forfeitures differ
from management estimates, additional adjustments to
compensation expense are recorded. Please refer to Note 14,
Share-Based Compensation Plans, for further discussion.
Income
Taxes
We account for income taxes pursuant to SFAS No. 109,
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.
On September 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB No. 109
(FIN 48). This interpretation, among other
things, prescribes a two-step approach for evaluating uncertain
tax positions. Recognition (step one) occurs when an enterprise
concludes 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 more-likely-than-not will be realized upon
settlement. Derecognition of a tax position that was previously
recognized would occur when a company subsequently determines
that a tax position no longer meets the more-likely-than-not
threshold of being
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sustained. FIN 48 specifically prohibits the use of a
valuation allowance as a substitute for derecognition of tax
positions, and it has expanded disclosure requirements. Upon
adoption of FIN 48, we did not recognize an adjustment to
our liability for unrecognized income tax benefits or make a
cumulative adjustment to our beginning retained earnings;
however, we reclassified our unrecognized tax benefits from
income taxes payable to long-term liabilities in our
Consolidated Balance Sheets. Please refer to Note 11,
Income Taxes, for further discussion.
Earnings
per Share
Earnings per share have been calculated in accordance with
SFAS No. 128, Earnings per Share
(SFAS 128). 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 options and restricted stock units issuable under
our stock option plans. The amount of any tax benefit to be
credited to additional paid-in capital related to the exercise
of options is included when applying the treasury stock method
to stock options in the computation of diluted earnings per
share. Please refer to Note 13, Earnings Per Share, for
further discussion.
Leases
We lease substantially all of our administrative and educational
facilities, with the exception of our corporate headquarters and
a few 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 in accordance with
SFAS No. 13, Accounting for Leases
(SFAS 13). 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 on the
Consolidated Balance Sheets and record the rent expense evenly
over the term of the lease in accordance with SFAS 13.
Leasehold improvements are reflected under investing activities
as additions to property and equipment on the Consolidated
Statements of Cash Flows. Credits received against rent for
tenant improvement allowances are reflected as a component of
non-cash investing activities on the Consolidated Statements of
Cash Flows. 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 17,
Commitments and Contingencies, for further discussion.
We are also required to make additional payments under operating
lease terms for taxes, insurance, and other operating expenses
incurred during the operating 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 expense selling and promotional costs as incurred.
Start-Up
Costs
We expense costs such as advertising, marketing, temporary
services, employee relocation, and supplies related to the
start-up of
new campuses and learning centers as incurred.
Foreign
Currency Translation
The U.S. dollar is the functional currency of our entities
operating in the United States. In accordance with
SFAS No. 52, Foreign Currency Translation
(SFAS 52), the functional currency of our
entities operating
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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). 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 interest income and other, net
in our Consolidated Statements of Income. These items amounted
to a net $2.8 million loss in fiscal year 2008, and were
not significant in fiscal years 2007 and 2006.
Fair
Value of Financial Instruments
The carrying amount reported in the Consolidated Balance Sheets
for cash and cash equivalents, restricted cash and cash
equivalents, accounts receivable and accounts payable
approximate fair value because of the short-term nature of these
financial instruments. The estimated fair value of certain
marketable securities, including auction-rate securities
instruments, are valued using a discounted cash flow approach.
The fair values of our held-to-maturity investments are
estimated based on quoted market prices for those or similar
investments. Please refer to Note 4, Marketable Securities,
for further information.
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. In accordance with SFAS No. 5,
Accounting for Contingencies
(SFAS 5), 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 is material. For matters where no loss
contingency is recorded, our policy is to expense legal fees as
incurred. Please refer to Note 17, Commitments and
Contingencies, for further discussion.
Certain
Reclassifications
We revised the presentation of intangible assets on our
Consolidated Balance Sheets. The effect of this reclassification
on our August 31, 2007 Consolidated Balance Sheets was a
$2.2 million increase in intangibles assets, net, with an
offsetting decrease in other assets. We also revised the
presentation of amortization of deferred gains on sale-leaseback
transactions on our Consolidated Statements of Cash Flows. The
effect of this reclassification was a $1.8 million and
$1.7 million increase in amortization of deferred gain on
sale-leaseback in fiscal years 2007 and 2006, respectively, with
offsetting decreases in the change in other liabilities.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157),
which provides enhanced guidance for using fair value to measure
assets and liabilities. SFAS 157 establishes a common
definition of fair value and provides a framework for measuring
fair value under GAAP and expands disclosure requirements about
fair value measurements. SFAS 157 is effective for
financial statements issued in fiscal years beginning after
November 15, 2007, and interim periods within those years.
On February 12, 2008, the FASB issued FASB Staff Position
(FSP)
No. FAS 157-2,
Effective Date of FASB Statement No. 157, which
partially delays
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the effective date of SFAS 157 for non-financial assets or
liabilities that are not required or permitted to be measured at
fair value on a recurring basis to fiscal years beginning after
November 15, 2008, and interim periods within those years.
On October 10, 2008, the FASB issued FSP
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, which clarifies the
application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market
for that financial asset is not active. FSP
FAS 157-3
is effective upon issuance, including prior periods for which
financial statements are not issued. The provisions of
SFAS 157 and FSP
FAS 157-3
for fair valuing financial assets and liabilities are effective
for us on September 1, 2008. The provisions of
SFAS 157 for fair valuing non-financial assets and
liabilities are effective for us on September 1, 2009. We
are currently evaluating the impact that the adoption of
SFAS 157 will have on our financial condition, results of
operations and disclosures.
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS 159). Under
SFAS 159, companies have an opportunity to use fair value
measurements in financial reporting and permits entities to
choose to measure many financial instruments and certain other
items at fair value. If elected, SFAS 159 is effective for
us on September 1, 2008. We do not anticipate that we will
elect to use the fair value measurement option for certain items
as permitted under SFAS 159. Thus, we do not expect the
adoption of SFAS 159 to have a material impact on our
financial condition, results of operations, and disclosures.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)), which is a revision of
SFAS 141, Business Combinations
(SFAS 141). The primary requirements of
SFAS 141(R) are as follows:
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upon initially obtaining control, the acquiring entity in a
business combination must recognize 100% of the fair values of
the acquired assets, including goodwill, and assumed
liabilities, with only limited exceptions even if the acquirer
has not acquired 100% of its target as a
consequence, the current step acquisition model will be
eliminated;
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contingent consideration arrangements will be fair valued at the
acquisition date and included in the purchase price
consideration the concept of recognizing contingent
consideration at a later date when the amount of that
consideration is determinable beyond a reasonable doubt, will no
longer be applicable;
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for prior business combinations, adjustments for previously
recognized changes in acquired tax uncertainties are to be
recognized in accordance with the provisions of FIN 48 and
adjustments for previously recognized changes in the valuation
allowance for acquired deferred tax assets are to be recognized
in income tax expense in accordance with the provisions of
SFAS No. 109; and
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all transaction costs will be expensed as incurred.
SFAS 141(R) applies prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. SFAS 141(R) is effective for us on
September 1, 2009. We are currently evaluating the impact
that the adoption of SFAS 141(R) will have on our financial
condition, results of operations, and disclosures.
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In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51
(SFAS 160). 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 or
minority interests to be treated as a separate component of
equity and any changes in the parents ownership interest
(in which control is retained) are to be 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
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APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
on or after December 15, 2008. SFAS 160 is effective
for us on September 1, 2009. We are currently evaluating
the impact that the adoption of SFAS 160 will have on our
financial condition, results of operations, and disclosures.
In December 2007, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin No. 110,
Share-Based Payment (SAB 110).
SAB 110 allows companies to continue to use the simplified
method, as defined in Staff Accounting
Bulletin No. 107, Share-Based Payment, to
estimate the expected term of stock options under certain
circumstances. The simplified method for estimating expected
term is to use the mid-point between the vesting term and the
contractual term of the share option. We have analyzed the
circumstances in which the use of the simplified method is
allowed. We have opted to use the simplified method for options
granted to management in fiscal year 2008 because the options
granted in prior fiscal years had different terms, such as
contractual lives and acceleration provisions. Thus, historical
data is not comparable in order to determine the expected term
of current awards.
In April 2008, the FASB issued FSP
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS 142. The
intent of the position is to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142
and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141(R), and other
GAAP. FSP
FAS 142-3
is effective for fiscal years beginning after December 15,
2008. FSP
FAS 142-3
is effective for us on September 1, 2009. We are currently
evaluating the impact that the adoption of FSP
FAS 142-3
will have on our financial condition, results of operations, and
disclosures.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity
with GAAP. This statement shall be effective 60 days
following the Securities and Exchange Commissions approval
of the Public Company Accounting Oversight Board amendments to
AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
We do not expect the adoption of SFAS 162 to have a
material impact on our financial condition, results of
operations, or disclosures.
In June 2008, the Emerging Issues Task Force (EITF)
issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-6-1).
FSP
EITF 03-6-1
clarifies unvested share-based payment awards that entitle
holders to receive nonforfeitable dividends or dividend
equivalents (whether paid or unpaid) are considered
participating securities and should be included in the
computation of EPS pursuant to the two-class method. The
two-class method of computing EPS is an earnings allocation
formula that determines EPS for each class of common stock and
participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings.
FSP
EITF 03-6-1
requires retrospective application and is effective for fiscal
years beginning after December 15, 2008, and interim
periods within those years. FSP
EITF 03-6-1
is effective for us on September 1, 2009. We are currently
evaluating the impact that the adoption of FSP
EITF 03-6-1
will have on our calculation of EPS and related disclosures.
|
|
Note 3.
|
Acquisitions
and Joint Venture
|
Apollo
Global
In October 2007, we established Apollo Global as a joint venture
with Carlyle to pursue investments in the international
education services industry. Carlyle, based in Washington D.C.,
is one of the worlds largest private equity firms. Through
Apollo Global, we intend to capitalize on the significant global
demand for education services by acquiring private secondary,
undergraduate and graduate schools outside of the U.S. We
have agreed to commit up to $801 million in cash or
contributed assets and own 80.1% of Apollo Global. Carlyle has
agreed to commit up to $199 million in cash or contributed
assets and own the remaining 19.9%. Apollo Global is
95
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consolidated in our financial statements. As of August 31,
2008, total cash contributions made to Apollo Global were
$61.0 million, of which $48.9 million was funded by
Apollo.
In the third and fourth quarters of fiscal year 2008, Apollo
Global completed its first two acquisitions, Universidad de
Artes, Ciencias y Comunicación (UNIACC) and
related entities on March 28, 2008 and Universidad
Latinoamericana, S.C. (ULA) and related entity on
August 4, 2008. UNIACC is a private arts and communications
university based in Santiago, Chile and offers bachelors
and masters degree programs, as well as a doctoral degree
in communications. UNIACC operates under the authority of the
Chilean Ministry of Education (Ministerio de Educación
de Chile) and is accredited by the Council for Higher
Education (Consejo Superior de Educación) and the
National Commission on Accreditation (Comisión Nacional
de Acreditación). Apollo Global purchased 100% of
UNIACC for $44.5 million composed of cash and assumed debt,
plus a future payment based on a multiple of earnings. ULA
operates under the authority of Mexicos Secretary of
Public Education (Secretaria de Educación
Pública) and the Secretary of Education of the State of
Morelos (Secretaria de Educación del Estado de
Morelos). Apollo Global purchased a 65% ownership interest
in ULA for $35.8 million, composed of cash and assumed
debt. Both UNIACC and ULAs operating results are included
in the consolidated financial statements from the date of
acquisition on a one-month lag basis, as described in
Note 2, Significant Accounting Policies.
The UNIACC and ULA acquisitions have been accounted for pursuant
to SFAS 141. To value the acquired assets and assumed
liabilities, we used the following valuation methodologies:
|
|
|
|
|
the income approach using the relief-from-royalty method for
trademarks, which represents the benefit of owning this
intangible asset rather than paying royalties for its use;
|
|
|
|
the income approach using the multi-period excess earnings
method for our student relationship intangible assets, which
discounts the estimated after tax cash associated with the
existing base of students as of the acquisition date, factoring
in expected attrition;
|
|
|
|
the combination of discounted cash flow and replacement cost
approaches with respect to the other identified intangible
assets; and
|
|
|
|
a combination of the market and replacement cost approaches with
respect to the property and equipment. We have used current
discount rates and growth rates in our analysis. The carrying
value of the majority of the other net assets and liabilities
approximated fair value at the time of the acquisition.
|
In connection with the UNIACC and ULA acquisitions, we recorded
$2.1 million and $17.7 million of goodwill,
respectively. The majority of this goodwill is not expected to
be deductible for tax purposes. Goodwill from these acquisitions
is primarily attributable to potential strategic and financial
benefits expected to be realized associated with future student
growth. For goodwill impairment testing purposes, we have
assigned the goodwill balance to the UNIACC and ULA reporting
units within the Apollo Global segment.
A summary of the UNIACC and ULA purchase prices are as follows:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
UNIACC
|
|
|
ULA
|
|
|
Cash paid
|
|
$
|
23,650
|
|
|
$
|
23,962
|
|
Debt assumed
|
|
|
19,910
|
|
|
|
11,000
|
|
Transaction-related costs
|
|
|
900
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
44,460
|
|
|
$
|
35,750
|
|
|
|
|
|
|
|
|
|
|
96
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the UNIACC and ULA purchase price allocations are
as follows:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
UNIACC
|
|
|
ULA
|
|
|
Net working capital (deficit)
|
|
$
|
2,862
|
|
|
$
|
(2,387
|
)
|
Property and equipment
|
|
|
24,102
|
|
|
|
20,798
|
|
Intangibles
|
|
|
14,607
|
|
|
|
3,937
|
|
Goodwill
|
|
|
2,135
|
|
|
|
17,683
|
|
Deferred taxes, net
|
|
|
754
|
|
|
|
(2,227
|
)
|
Other long-term liabilities
|
|
|
|
|
|
|
(1,649
|
)
|
Minority interests
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
Total allocated purchase price
|
|
|
44,460
|
|
|
|
35,750
|
|
Less: Debt assumed
|
|
|
(19,910
|
)
|
|
|
(11,000
|
)
|
Less: Cash acquired
|
|
|
(1,303
|
)
|
|
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
Acquisition, net of cash acquired
|
|
$
|
23,247
|
|
|
$
|
23,461
|
|
|
|
|
|
|
|
|
|
|
The purchase price allocations for the UNIACC and ULA
acquisitions are preliminary and subject to revision as we
finalize the valuation of intangible assets, property and
equipment and as additional information about the fair value of
assets and liabilities becomes available. In accordance with
SFAS 141, we have not recorded the contingent consideration
liability associated with the future earnings payout in our
preliminary purchase price allocation, but rather, we will
record this obligation when the contingency is resolved and the
consideration is issued.
A summary of the identifiable intangible assets acquired, based
on our preliminary purchase price allocations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNIACC
|
|
|
ULA
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Estimated
|
|
|
Average
|
|
|
Estimated
|
|
|
Average
|
|
($ in thousands)
|
|
Fair Value
|
|
|
Useful Life
|
|
|
Fair Value
|
|
|
Useful Life
|
|
|
Trademarks
|
|
$
|
4,200
|
|
|
|
indefinite
|
|
|
$
|
1,625
|
|
|
|
indefinite
|
|
Accreditations and designations
|
|
|
1,287
|
|
|
|
indefinite
|
|
|
|
172
|
|
|
|
indefinite
|
|
Student relationships
|
|
|
4,600
|
|
|
|
2 years
|
|
|
|
1,170
|
|
|
|
4 years
|
|
Non-compete agreement
|
|
|
2,300
|
|
|
|
5 years
|
|
|
|
|
|
|
|
n/a
|
|
Broadcast rights and license
|
|
|
1,500
|
|
|
|
15 years
|
|
|
|
|
|
|
|
n/a
|
|
Curriculum
|
|
|
569
|
|
|
|
5 years
|
|
|
|
970
|
|
|
|
4 years
|
|
Technology
|
|
|
151
|
|
|
|
4 years
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
$
|
14,607
|
|
|
|
|
|
|
$
|
3,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We assigned indefinite lives to the acquired trademarks and
accreditations and designations as we believe that each of these
intangible assets has the continued ability to generate cash
flows indefinitely. In addition, there are no legal, regulatory,
contractual, economic or other factors to limit the useful life
of these intangible assets and we intend to renew trademarks and
accreditations and designations, which can be accomplished at
little cost.
Aptimus
On October 29, 2007, we completed the acquisition of all
the outstanding common stock of online advertising company
Aptimus for $48.1 million. 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.
97
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Aptimus operating results are included
in the consolidated financial statements from the date of
acquisition.
The acquisition has been accounted for pursuant to
SFAS 141. To value the acquired assets and assumed
liabilities, we used the income approach using the
relief-from-royalty method for trademarks, which represents the
benefit of owning this intangible asset rather than paying
royalties for its use and a discounted cash flow approach, based
on estimated future cash flows for the other identified
intangible assets. The carrying value for all other net assets
approximated fair value at the time of the acquisition. In
connection with the acquisition, the excess of the purchase
price over the estimated fair value of the net assets acquired
resulted in recording $37.0 million of goodwill, which is
not expected to be deductible for tax purposes. For goodwill
impairment testing purposes, we assigned the goodwill balance to
our University of Phoenix segment as Aptimus primary
function is to monitor, manage, and control University of
Phoenixs marketing investments. Goodwill is primarily
attributable to potential strategic benefits expected to be
realized associated with managing and controlling our marketing
investments while reducing future advertising costs.
A summary of the purchase price is as follows:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Cash paid for the outstanding common stock of Aptimus
|
|
$
|
41,486
|
|
Cash paid for certain common stock equivalents of Aptimus
|
|
|
4,672
|
|
Transaction-related costs
|
|
|
1,919
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
48,077
|
|
|
|
|
|
|
A summary of the purchase price allocation is as follows:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Net working capital
|
|
$
|
(1,920
|
)
|
Property and equipment
|
|
|
654
|
|
Intangibles
|
|
|
7,600
|
|
Deferred tax assets
|
|
|
6,507
|
|
Goodwill
|
|
|
37,018
|
|
Employee stock options assumed
|
|
|
(1,782
|
)
|
|
|
|
|
|
Total allocated purchase price
|
|
|
48,077
|
|
Less: Cash acquired
|
|
|
(1,022
|
)
|
|
|
|
|
|
Acquisition, net of cash acquired
|
|
$
|
47,055
|
|
|
|
|
|
|
A summary of the identifiable intangible assets acquired is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Estimated
|
|
|
Average
|
|
($ in thousands)
|
|
Fair Value
|
|
|
Useful Life
|
|
|
Technology
|
|
$
|
3,600
|
|
|
|
4 years
|
|
Trademarks
|
|
|
1,300
|
|
|
|
2 years
|
|
Customer relationships
|
|
|
1,900
|
|
|
|
3 years
|
|
Non-compete agreement
|
|
|
800
|
|
|
|
2 years
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
$
|
7,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The results of operations of UNIACC, ULA and Aptimus are not
significant individually or in the aggregate to our consolidated
results of operations and therefore, pro forma information for
the years ended August 31, 2007 and 2006 have not been
provided.
|
|
Note 4.
|
Marketable
Securities
|
Marketable securities consist of the following as of August 31:
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
Current marketable securities:
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
3,060
|
|
|
$
|
16,278
|
|
U.S. government-sponsored enterprises
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Total current marketable securities
|
|
|
3,060
|
|
|
|
31,278
|
|
|
|
|
|
|
|
|
|
|
Noncurrent marketable securities:
|
|
|
|
|
|
|
|
|
Auction-rate securities
|
|
|
25,204
|
|
|
|
|
|
Municipal bonds due 1-3 years
|
|
|
|
|
|
|
3,096
|
|
U.S. government-sponsored enterprises
|
|
|
|
|
|
|
12,000
|
|
Corporate obligations
|
|
|
|
|
|
|
6,988
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent marketable securities
|
|
|
25,204
|
|
|
|
22,084
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
28,264
|
|
|
$
|
53,362
|
|
|
|
|
|
|
|
|
|
|
The table below details our marketable securities classified as
available-for-sale as of August 31, 2008. We did not hold
any marketable securities that were classified as
available-for-sale as of August 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2008
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair Market
|
|
($ in thousands)
|
|
Cost
|
|
|
Losses
|
|
|
Value
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities
|
|
$
|
26,825
|
|
|
$
|
(1,621
|
)
|
|
$
|
25,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
26,825
|
|
|
$
|
(1,621
|
)
|
|
$
|
25,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost and estimated fair market value for marketable
securities classified as held-to-maturity as of August 31,
2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2008
|
|
|
August 31, 2007
|
|
|
|
Amortized
|
|
|
Fair Market
|
|
|
Amortized
|
|
|
Fair Market
|
|
($ in thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
3,060
|
|
|
$
|
3,071
|
|
|
$
|
16,278
|
|
|
$
|
16,193
|
|
Municipal bonds due 1-3 years
|
|
|
|
|
|
|
|
|
|
|
3,096
|
|
|
|
3,060
|
|
U.S. government-sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
27,000
|
|
|
|
26,621
|
|
Corporate obligations
|
|
|
|
|
|
|
|
|
|
|
6,988
|
|
|
|
6,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities
|
|
$
|
3,060
|
|
|
$
|
3,071
|
|
|
$
|
53,362
|
|
|
$
|
52,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Auction-Rate
Securities
We have a long history of investing excess cash under a
conservative corporate policy that only allows investments in
highly rated securities, with preservation of capital and
liquidity as the primary objectives. Our investment policy also
limits the amount of our credit exposure to any one issue or
issuer. We have historically invested a portion of our
unrestricted investment portfolio in high quality (A rated and
above) tax-exempt municipal securities, preferred stock and
other 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. The auction or reset dates occur at intervals
established at the time of issuance that are generally between 7
and 35 days.
Auction-rate securities fail when there are not
enough buyers to absorb the amount of securities available for
sale for that particular auction period. Historically,
auction-rate securities auctions 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 mid-February 2008, due to uncertainty in the global
credit and capital markets and other factors, investment banks
and broker dealers have been less willing to support
auction-rate securities and many auction-rate securities
auctions have failed.
As of August 31, 2008, we had $26.8 million of
principal invested in auction-rate securities that experienced
failed auctions. Approximately $16.8 million of our
auction-rate securities are invested in tax-exempt municipal
bond funds, which carry AA credit ratings for the underlying
issuer and at least an A credit rating for the insurers. The
remaining $10.0 million are invested in securities
collateralized by student loans, which are rated AAA and are
guaranteed by the U.S. government. None of the auction-rate
securities held by us are mortgage-backed securities.
In the fourth quarter of fiscal year 2008, we completed a fair
value analysis of our auction-rate securities in response to the
prolonged and continued lack of liquidity for these investments.
At August 31, 2008, we used a discounted cash flow model
that encompassed unobservable inputs including 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. Additionally, as the market for these
securities continues to be inactive and the secondary market
remains in developmental stages, our discounted cash flow model
also factored the illiquidity of the auction-rate securities
market by adding a spread of 450 basis points to the
applicable discount rate. Based on our analysis, we determined
that our auction-rate securities carrying value exceeded the
estimated fair value. As a result, we recorded an unrealized
loss of $1.6 million ($1.0 million after-tax) on our
auction-rate securities, with the offset included in accumulated
other comprehensive loss in our Consolidated Balance Sheets. We
assessed this decline in value to be temporary due to the
following:
|
|
|
|
|
our belief that we have the ability and the intent to hold these
securities until the market stabilizes in order to sell the
securities at par based on our cash and cash equivalents balance
at August 31, 2008 and our operating cash flow;
|
|
|
|
the high quality of the underlying collateral;
|
|
|
|
the high credit quality of the issuers;
|
|
|
|
the fact that the issuers continue to pay interest in a timely
manner; and
|
|
|
|
the lack of defaults in the underlying debt.
|
At August 31, 2008, we have classified the entire balance
of our auction-rate securities totaling $25.2 million, net
of the unrealized loss of $1.6 million, as non-current
marketable securities due to the lack of liquidity of these
instruments.
We will continue to monitor our investment portfolio, and given
the uncertainties in the global credit and capital markets, we
are no longer investing in auction-rate securities instruments
at this time, which may contribute to reduced investment income
in the future. We will also continue to evaluate any changes in
the market value of the
100
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
The cost of liquidated securities is based on the specific
identification method. The liquidated available-for-sale
securities that consisted of auction-rate securities were sold
at par value and thus, no realized gains or losses have been
recognized from the sales of these securities in fiscal years
2008, 2007 and 2006. Additionally, we did not record an
unrealized loss for any of the auction-rate securities
instruments that had been liquidated during fiscal year 2008.
Municipal
Bonds
Municipal bonds represent debt obligations issued by states,
cities, counties, and other governmental entities, which earn
federally tax-exempt interest. We have the ability and intention
to hold municipal bonds until maturity and therefore classify
these investments as held-to-maturity, reported at amortized
cost. During fiscal years 2008, 2007 and 2006, municipal bonds
matured at par value and, thus, no realized gains or losses have
been recorded in connection with liquidating these investments.
U.S.
Government-Sponsored Enterprises and Corporate
Obligations
U.S. government-sponsored enterprises consisted of
fixed-income investments that include the Federal Farm Credit
Note, Federal Home Loan Banks, and Federal National Mortgage
Association (Fannie Mae). Corporate obligations consisted of
secured commercial paper with the Royal Bank of Canada. At
August 31, 2007, both our U.S. government-sponsored
enterprise investments and corporate obligations were classified
as held-to-maturity, reported at amortized cost. During fiscal
years 2008, 2007 and 2006, these investments had either matured
or had been called by the issuer at par value and, thus, no
realized gains or losses have been recorded in connection with
liquidating these securities.
Marketable securities are exposed to various risks and rewards,
such as interest rate, market and credit risk. Due to the risks
and rewards associated with marketable security investments, it
is possible that changes in the values of these investments may
occur and that such changes could affect the amounts reported in
the Consolidated Balance Sheets.
|
|
Note 5.
|
Accounts
Receivable, net
|
Accounts receivable, net consist of the following as of August
31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
Student accounts receivable
|
|
$
|
279,841
|
|
|
$
|
281,834
|
|
Less allowance for doubtful accounts
|
|
|
(78,362
|
)
|
|
|
(99,818
|
)
|
|
|
|
|
|
|
|
|
|
Net student accounts receivable
|
|
|
201,479
|
|
|
|
182,016
|
|
Other receivables
|
|
|
20,440
|
|
|
|
8,896
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
221,919
|
|
|
$
|
190,912
|
|
|
|
|
|
|
|
|
|
|
Student accounts receivable is composed primarily of amounts due
related to tuition.
101
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Bad debt expense is included in Instructional Costs and Services
in our Consolidated Statements of Income. The following table
summarizes the activity in the related allowance for doubtful
accounts for the fiscal years 2008, 2007, and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Beginning allowance for doubtful accounts
|
|
$
|
99,818
|
|
|
$
|
65,184
|
|
|
$
|
45,785
|
|
Provision for uncollectible accounts receivable
|
|
|
104,201
|
|
|
|
120,614
|
|
|
|
101,038
|
|
Write-offs, net of recoveries
|
|
|
(125,657
|
)
|
|
|
(85,980
|
)
|
|
|
(81,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for doubtful accounts
|
|
$
|
78,362
|
|
|
$
|
99,818
|
|
|
$
|
65,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets consist of the following as of August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
Prepaid expenses
|
|
$
|
21,789
|
|
|
$
|
19,943
|
|
Related party receivable
|
|
|
17,762
|
|
|
|
16,730
|
|
Textbook inventories, deposits and other
|
|
|
6,717
|
|
|
|
2,779
|
|
Other investments
|
|
|
3,479
|
|
|
|
3,333
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
49,747
|
|
|
|
42,785
|
|
Less current portion
|
|
|
(21,780
|
)
|
|
|
(16,515
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term other assets
|
|
$
|
27,967
|
|
|
$
|
26,270
|
|
|
|
|
|
|
|
|
|
|
The related party receivable represents a promissory note due
from Dr. John G. Sperling. See Note 16, Related Person
Transactions.
Other investments represent an investment in a related entity,
Apollo International, Inc. and other investments.
|
|
Note 7.
|
Property
and Equipment, net
|
Property and equipment, net consist of the following as of
August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
Furniture and equipment
|
|
$
|
330,481
|
|
|
$
|
310,532
|
|
Land
|
|
|
30,331
|
|
|
|
21,803
|
|
Buildings
|
|
|
157,010
|
|
|
|
|
|
Leasehold improvements
|
|
|
105,741
|
|
|
|
89,628
|
|
Tenant improvement allowances
|
|
|
104,901
|
|
|
|
109,547
|
|
Software
|
|
|
81,862
|
|
|
|
73,171
|
|
Internally developed software
|
|
|
48,595
|
|
|
|
27,522
|
|
Less accumulated depreciation and amortization
|
|
|
(434,805
|
)
|
|
|
(401,962
|
)
|
|
|
|
|
|
|
|
|
|
Depreciable property and equipment, net
|
|
|
424,116
|
|
|
|
230,241
|
|
Construction in progress
|
|
|
15,019
|
|
|
|
133,966
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
439,135
|
|
|
$
|
364,207
|
|
|
|
|
|
|
|
|
|
|
102
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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)
|
|
2008
|
|
|
2007
|
|
|
Buildings
|
|
$
|
7,038
|
|
|
$
|
6,343
|
|
Furniture and equipment
|
|
|
2,090
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(2,546
|
)
|
|
|
(5,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,582
|
|
|
$
|
981
|
|
|
|
|
|
|
|
|
|
|
All interests in our new headquarters land and buildings are
held by wholly-owned subsidiaries formed as limited liability
entities. On June 20, 2006, we entered into an option
agreement (which was amended on March 7, 2007) with
Macquarie Riverpoint AZ, LLC. The option agreement granted
Macquarie the option to purchase all membership interests in the
consolidated subsidiaries that own our new headquarters land and
buildings for approximately $170.0 million and
simultaneously have the owning entities enter into a
12-year
lease of these facilities with us. Macquarie made a deposit of
$9.0 million in connection with this option. On
March 6, 2008, we provided the final completion notices to
Macquarie. In March 2008, we agreed to extend the option until
May 1, 2008 for additional consideration of approximately
$0.3 million, which is included in interest income and
other, net in our Consolidated Statements of Income for the
fiscal year ended August 31, 2008. With our approval,
Macquarie assigned its interest under the option agreement to a
third party and the option agreement was further amended to
extend the exercise date to June 6, 2008. The third party
did not exercise the option. As a result, the option agreement
expired and we retained the initial $9.0 million option
payment plus interest of $0.5 million, which is included in
interest income and other, net in our Consolidated Statements of
Income for the fiscal year ended August 31, 2008.
Depreciation expense, net of the amortization of tenant
improvement allowances, was $75.0 million,
$68.4 million and $66.3 million for fiscal years 2008,
2007 and 2006, respectively. Included in these amounts is
depreciation of capitalized internally developed software of
$7.9 million, $4.3 million and $2.5 million for
the fiscal years 2008, 2007 and 2006, respectively.
|
|
Note 8.
|
Goodwill
and Intangible Assets
|
Changes in the carrying amount of goodwill by reportable segment
during our 2008 and 2007 fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of
|
|
|
Apollo
|
|
|
|
|
|
Other
|
|
|
Total
|
|
($ in thousands)
|
|
Phoenix
|
|
|
Global
|
|
|
Insight
|
|
|
Schools
|
|
|
Goodwill
|
|
|
Goodwill as of August 31, 2006
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,891
|
|
|
$
|
16,891
|
|
Goodwill acquired
|
|
|
|
|
|
|
|
|
|
|
12,742
|
|
|
|
|
|
|
|
12,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill as of August 31, 2007
|
|
|
|
|
|
|
|
|
|
|
12,742
|
|
|
|
16,891
|
|
|
|
29,633
|
|
Goodwill acquired
|
|
|
37,018
|
|
|
|
19,818
|
|
|
|
|
|
|
|
|
|
|
|
56,836
|
|
Currency translation adjustment
|
|
|
|
|
|
|
(501
|
)
|
|
|
|
|
|
|
|
|
|
|
(501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill as of August 31, 2008
|
|
$
|
37,018
|
|
|
$
|
19,317
|
|
|
$
|
12,742
|
|
|
$
|
16,891
|
|
|
$
|
85,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill represents the excess of the purchase price over the
amount assigned to the net assets acquired and liabilities
assumed. During fiscal year 2008, goodwill acquired at our
University of Phoenix segment resulted from our Aptimus
acquisition completed on October 29, 2007 totaling
$37.0 million. Goodwill acquired at our Apollo Global
segment resulted from our UNIACC acquisition completed
March 28, 2008 totaling $2.1 million and from our ULA
acquisition completed August 4, 2008 totaling
$17.7 million. Any changes in the fair value of the net
103
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets of the acquired companies will change the amount of the
purchase price allocable to goodwill. Please refer to
Note 3, Acquisitions and Joint Venture, for further
discussion.
Intangible assets consist of the following as of August 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2008
|
|
|
August 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
Effect of Foreign
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Currency
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
($ in thousands)
|
|
Amount
|
|
|
Amortization
|
|
|
Translation Loss
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Finite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student and customer relationships
|
|
$
|
7,670
|
|
|
$
|
(1,208
|
)
|
|
$
|
(543
|
)
|
|
$
|
5,919
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Technology
|
|
|
3,751
|
|
|
|
(764
|
)
|
|
|
(17
|
)
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
|
5,082
|
|
|
|
(1,205
|
)
|
|
|
(284
|
)
|
|
|
3,593
|
|
|
|
1,982
|
|
|
|
(297
|
)
|
|
|
1,685
|
|
Broadcast rights and license
|
|
|
1,500
|
|
|
|
(31
|
)
|
|
|
(191
|
)
|
|
|
1,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
1,722
|
|
|
|
(530
|
)
|
|
|
|
|
|
|
1,192
|
|
|
|
422
|
|
|
|
(63
|
)
|
|
|
359
|
|
Curriculum
|
|
|
1,539
|
|
|
|
|
|
|
|
|
|
|
|
1,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
237
|
|
|
|
(141
|
)
|
|
|
(71
|
)
|
|
|
25
|
|
|
|
237
|
|
|
|
(67
|
)
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
|
21,501
|
|
|
|
(3,879
|
)
|
|
|
(1,106
|
)
|
|
|
16,516
|
|
|
|
2,641
|
|
|
|
(427
|
)
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
5,825
|
|
|
|
|
|
|
|
(539
|
)
|
|
|
5,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accreditations and designations
|
|
|
1,459
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indefinite-lived intangible assets
|
|
|
7,284
|
|
|
|
|
|
|
|
(704
|
)
|
|
|
6,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
28,785
|
|
|
$
|
(3,879
|
)
|
|
$
|
(1,810
|
)
|
|
$
|
23,096
|
|
|
$
|
2,641
|
|
|
$
|
(427
|
)
|
|
$
|
2,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 lives range from 2 to 15 years. Amortization expense
for intangible assets for fiscal years 2008 and 2007 was
$3.4 million and $0.4 million, respectively.
Estimated future amortization expense of intangible assets is as
follows:
|
|
|
|
|
($ in thousands)
|
|
Amount
|
|
|
2009
|
|
$
|
6,749
|
|
2010
|
|
|
3,812
|
|
2011
|
|
|
3,077
|
|
2012
|
|
|
1,578
|
|
2013
|
|
|
458
|
|
Thereafter
|
|
|
842
|
|
|
|
|
|
|
Total estimated amortization expense
|
|
$
|
16,516
|
|
|
|
|
|
|
Estimated future amortization expense may vary as acquisitions
and dispositions occur in the future, purchase price allocations
are finalized and as a result of foreign currency translation
adjustments.
104
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During fiscal years 2008 and 2007, we performed annual
impairment tests on all applicable goodwill and indefinite-lived
intangible assets. These tests resulted in no impairment charges
recorded during fiscal years 2008 and 2007. In fiscal year 2006,
we recorded a goodwill impairment charge of $20.2 million
at our CFP reporting unit included in our Other Schools segment.
Please refer to Note 2, Significant Accounting Policies,
for our policy and methodology for evaluating potential
impairment of goodwill and indefinite-lived intangible assets.
|
|
Note 9.
|
Accrued
Liabilities
|
Accrued liabilities consist of the following as of August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
Salaries, wages, and benefits
|
|
$
|
39,381
|
|
|
$
|
48,407
|
|
Accrued advertising
|
|
|
31,780
|
|
|
|
23,900
|
|
Accrued professional fees
|
|
|
22,534
|
|
|
|
11,826
|
|
Student refunds, grants and scholarships
|
|
|
12,658
|
|
|
|
12,488
|
|
Other accrued liabilities
|
|
|
14,847
|
|
|
|
7,030
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
121,200
|
|
|
$
|
103,651
|
|
|
|
|
|
|
|
|
|
|
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 include
sales and business taxes.
|
|
Note 10.
|
Long-Term
Liabilities
|
Long-term liabilities consist of the following as of August 31:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
Deferred rent and other lease incentives
|
|
$
|
72,512
|
|
|
$
|
77,755
|
|
Reserve for uncertain tax positions
|
|
|
55,319
|
|
|
|
|
|
Credit facilities UNIACC and ULA
|
|
|
23,145
|
|
|
|
|
|
Deferred vendor incentive
|
|
|
12,293
|
|
|
|
|
|
Deferred gains on sale-leasebacks
|
|
|
8,739
|
|
|
|
10,602
|
|
Capital lease obligations
|
|
|
7,771
|
|
|
|
1,404
|
|
Deferred compensation
|
|
|
2,326
|
|
|
|
2,197
|
|
Other long-term liabilities
|
|
|
10,914
|
|
|
|
1,028
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
193,019
|
|
|
|
92,986
|
|
Less current portion
|
|
|
(47,228
|
)
|
|
|
(21,093
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
$
|
145,791
|
|
|
$
|
71,893
|
|
|
|
|
|
|
|
|
|
|
Deferred rent and other lease incentives represent amounts
included in lease agreements and are amortized on a
straight-line basis over the term of the leases. Please refer to
Note 11, Income Taxes, for additional discussion on our
uncertain tax positions. Borrowings under UNIACC and ULA credit
facilities primarily include term-debt and other short-term
borrowings of the respective schools. Please refer to
Note 3, Acquisitions and Joint Venture, for further
discussion of Apollo Global and the acquisitions of UNIACC and
ULA. Deferred gains on sale-leasebacks are deferred and
recognized over the respective lease terms. Deferred vendor
incentive relates to a long-term
105
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreement with a vendor and is amortized on a straight-line
basis over the term of the agreement. The deferred compensation
agreement relates to an agreement between the Company and
Dr. John G. Sperling.
Incomes tax expense (benefit) consists of the following for
fiscal years 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
271,434
|
|
|
$
|
253,048
|
|
|
$
|
226,578
|
|
State and other
|
|
|
51,894
|
|
|
|
42,294
|
|
|
|
46,185
|
|
Foreign
|
|
|
786
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
324,114
|
|
|
|
296,007
|
|
|
|
272,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(15,328
|
)
|
|
|
(43,236
|
)
|
|
|
(17,364
|
)
|
State and other
|
|
|
(1,859
|
)
|
|
|
(4,076
|
)
|
|
|
(2,144
|
)
|
Foreign
|
|
|
|
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(17,187
|
)
|
|
|
(47,520
|
)
|
|
|
(19,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
306,927
|
|
|
$
|
248,487
|
|
|
$
|
253,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
2008
|
|
|
2007
|
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
30,936
|
|
|
$
|
39,324
|
|
Deferred tuition revenue
|
|
|
558
|
|
|
|
607
|
|
Reserves
|
|
|
13,822
|
|
|
|
6,223
|
|
Share-based compensation
|
|
|
66,070
|
|
|
|
63,049
|
|
Deferred gain on sale-leaseback
|
|
|
2,922
|
|
|
|
3,899
|
|
Deferred tenant improvement allowances
|
|
|
16,080
|
|
|
|
17,289
|
|
Other
|
|
|
20,322
|
|
|
|
15,271
|
|
Net operating loss carry-forward
|
|
|
6,277
|
|
|
|
|
|
Valuation allowance
|
|
|
(3,245
|
)
|
|
|
(2,665
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
153,742
|
|
|
|
142,997
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
2,222
|
|
|
|
1,100
|
|
Depreciation of fixed assets
|
|
|
2,909
|
|
|
|
9,361
|
|
Other
|
|
|
6,421
|
|
|
|
1,574
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
11,552
|
|
|
|
12,035
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
142,190
|
|
|
$
|
130,962
|
|
|
|
|
|
|
|
|
|
|
We have recorded a valuation allowance related to foreign tax
credit carry-forwards, as it is more likely than not that these
credits will expire unutilized. In light of our history of
profitable operations, management has
106
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
concluded that it is more likely than not that we will
ultimately realize the full benefit of our deferred tax assets
other than the foreign tax credits mentioned above. Accordingly,
we believe that a valuation allowance should not be recorded for
our remaining net deferred tax assets, including net operating
loss carry-forwards from the acquisition of Aptimus. The foreign
tax credits will begin to expire August 31, 2012 through
August 31, 2017.
Upon adoption of FIN 48, we did not recognize an adjustment
to our liability for unrecognized income tax benefits or make a
cumulative adjustment to our beginning retained earnings;
however, we reclassified our unrecognized tax benefits from
income taxes payable to long-term liabilities in our
Consolidated Balance Sheets. Further, we elected to continue to
classify additional interest and penalties related to uncertain
tax positions for continuing operations as a component of income
tax expense in our Consolidated Statements of Income.
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 the period for fiscal year 2008:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Balance at September 1, 2007
|
|
$
|
36,500
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
Additions for tax positions taken in prior years
|
|
|
|
|
Settlement with tax authorities
|
|
|
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Reductions due to lapse of applicable statute of limitations
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2008
|
|
$
|
36,500
|
|
|
|
|
|
|
As of August 31, 2008, we also had $18.8 million of
accrued interest and penalties related to these uncertain tax
positions. We have included $5.5 million of our uncertain
tax positions in the current portion of long-term liabilities in
our Consolidated Balance Sheets because we believe that it is
reasonably possible that this portion of our uncertain tax
positions could be resolved or settled within the next
12 months. Our remaining uncertain tax positions and
related accrued interest and penalties are included in long-term
liabilities in our Consolidated Balance Sheets.
As of August 31, 2008, $24.5 million of the total
amount of 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 2003 through 2007 U.S. federal tax years and various
state tax years from 2001 through 2007 remain subject to income
tax examinations by tax authorities. In addition, tax years from
2001 through 2007 related to our foreign taxing jurisdictions
also remain subject to examination. We do not expect any
significant increases or decreases to the amount of unrecognized
tax benefits within 12 months of August 31, 2008.
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 2008, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory U.S. federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
|
4.1
|
%
|
|
|
3.6
|
%
|
|
|
4.3
|
%
|
Non-deductible compensation
|
|
|
0.0
|
%
|
|
|
0.5
|
%
|
|
|
(0.6
|
)%
|
Tax-exempt interest
|
|
|
(0.9
|
)%
|
|
|
(1.4
|
)%
|
|
|
(0.8
|
)%
|
Other, net
|
|
|
1.0
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
39.2
|
%
|
|
|
37.8
|
%
|
|
|
37.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Non-deductible compensation is composed of amounts limited by
Internal Revenue Code Section 162(m) and related interest
and penalties.
Certain tax deductions in prior years with respect to
compensation attributable to the exercise of certain stock
options by executive officers are in question. Under Internal
Revenue Code 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. Accordingly, we may have claimed
deductions with respect to those exercised options that were in
excess of the limit imposed under Section 162(m). As a
result, we expensed an additional $3.0 million in the year
ended August 31, 2008 related to interest and penalties,
for a total accrual of $47.6 million as of August 31,
2008 with respect to this uncertain tax position for the taxable
years 2003 through 2007 (which are currently our only open years
subject to adjustment for federal tax purposes). Our taxable
years 2003 2005 are the subject of an Internal
Revenue Service Audit, in connection with which we have agreed
to extend the statute of limitations. For prior periods where a
liability existed and where the statute of limitations has
expired, any accruals relating to that period have been reversed
in the period in which the statute expired. In addition, the IRS
audit may result in additional tax, penalties and interest, the
amount of which may or may not be material, but this will not be
known until the IRS audit is complete.
|
|
Note 12.
|
Stockholders
Equity
|
Treasury
Stock
Shares of Apollo Group 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Value
|
|
|
|
Total # of
|
|
|
|
|
|
Average Price
|
|
|
of Shares
|
|
|
|
Shares
|
|
|
|
|
|
Paid per
|
|
|
Available for
|
|
(Numbers in thousands, except per share data)
|
|
Repurchased
|
|
|
Cost
|
|
|
Share
|
|
|
Repurchase
|
|
|
Treasury stock as of August 31, 2005
|
|
|
8,818
|
|
|
$
|
645,742
|
|
|
$
|
73.23
|
|
|
$
|
51,023
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
Shares repurchased
|
|
|
8,173
|
|
|
|
514,931
|
|
|
|
63.00
|
|
|
|
(514,931
|
)
|
Shares reissued
|
|
|
(1,542
|
)
|
|
|
(106,627
|
)
|
|
|
69.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2006
|
|
|
15,449
|
|
|
|
1,054,046
|
|
|
|
68.23
|
|
|
$
|
136,092
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363,908
|
|
Shares repurchased
|
|
|
7,167
|
|
|
|
437,735
|
|
|
|
61.08
|
|
|
|
(437,735
|
)
|
Shares reissued
|
|
|
(453
|
)
|
|
|
(30,413
|
)
|
|
|
67.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2007
|
|
|
22,163
|
|
|
|
1,461,368
|
|
|
$
|
65.94
|
|
|
$
|
62,265
|
|
New authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892,097
|
|
Shares repurchased
|
|
|
9,824
|
|
|
|
454,362
|
|
|
|
46.25
|
|
|
|
(454,362
|
)
|
Shares reissued
|
|
|
(2,451
|
)
|
|
|
(158,453
|
)
|
|
|
64.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock as of August 31, 2008
|
|
|
29,536
|
|
|
$
|
1,757,277
|
|
|
$
|
59.50
|
|
|
$
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. There is no expiration date on the repurchase
authorizations and repurchases occur at our discretion.
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. The amount and timing of
future share repurchases, if any, will be made as market and
business conditions warrant.
108
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 13.
|
Earnings
Per Share
|
Apollo
Group Common Stock
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.
A reconciliation of the basic and diluted earnings per share
computations for our common stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Per Share
|
|
|
|
|
|
Average
|
|
|
Per Share
|
|
|
|
|
|
Average
|
|
|
Per Share
|
|
(Numbers in thousands, except per share data)
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic income per share
|
|
$
|
476,525
|
|
|
|
164,109
|
|
|
$
|
2.90
|
|
|
$
|
408,810
|
|
|
|
172,309
|
|
|
$
|
2.37
|
|
|
$
|
414,833
|
|
|
|
174,351
|
|
|
$
|
2.38
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
1,598
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
1,293
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
1,854
|
|
|
|
(0.03
|
)
|
Restricted stock units
|
|
|
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
476,525
|
|
|
|
165,870
|
|
|
$
|
2.87
|
|
|
$
|
408,810
|
|
|
|
173,603
|
|
|
$
|
2.35
|
|
|
$
|
414,833
|
|
|
|
176,205
|
|
|
$
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding include the
incremental effect of shares that would be issued upon the
assumed exercise of stock options and the vesting of restricted
stock units. For the years ended August 31, 2008, 2007 and
2006, approximately 2,276,900, 6,321,800, and 4,322,000,
respectively, of our stock options outstanding were excluded
from the calculation of diluted earnings per share because their
inclusion would have been anti-dilutive. These options could be
dilutive in the future.
|
|
Note 14.
|
Share-Based
Compensation Plans
|
401(k)
Plan
We sponsor a 401(k) plan for certain qualifying employees which
provides for employee contributions. Participant contributions
are subject to certain restrictions as set forth in the Internal
Revenue Code. Upon completion of one year of service and
1,000 hours worked, we match, at our discretion, eligible
participants contributions up to 15% of the
participants gross compensation per paycheck. Our matching
contributions, at 30% of the eligible contributions, totaled
$8.1 million, $6.7 million and $5.6 million for
fiscal years ended August 31, 2008, 2007 and 2006,
respectively.
Employee
Stock Purchase Plan
Our Third Amended and Restated 1994 Employee Stock Purchase Plan
allows our employees to purchase shares of Apollo Group
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. Under the applicable
accounting principles of FAS 123(R), this plan is deemed to
be non-compensatory, and we do not recognize any share-based
compensation expense with respect to the shares of Apollo Group
Class A common stock purchased under the plan.
Share-Based
Compensation Plans
We maintain the following three share-based compensation plans:
the Apollo Group, Inc. Second Amended and Restated Director
Stock Plan, the Apollo Group, Inc. Long Term Incentive Plan, and
the Apollo Group, Inc. Amended and Restated 2000 Stock Incentive
Plan. In addition, we have assumed outstanding stock options and
109
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock appreciation rights under the following two plans in
connection with our acquisition of Aptimus: the Aptimus, Inc.
1997 Stock Option Plan, as amended, and the Aptimus, Inc. 2001
Stock Plan.
The Second Amended and Restated Director Stock Plan provided for
an annual grant to the non-employee members of our Board of
Directors of options to purchase shares of Apollo Group
Class A common stock on September 1 of each year through
2003. No additional options are available for issuance under
this plan.
Under the Long Term Incentive Plan, we may grant non-qualified
stock options, stock appreciation rights, restricted stock
units, and other share-based awards covering shares of Apollo
Group Class A common stock to certain officers, key
employees and the non-employee members of our Board of
Directors. Most of the options granted under the Long Term
Incentive Plan vest 25% per year over four years. The vesting
may be accelerated for certain grants if certain operational
goals are met.
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, and other
share-based awards covering shares of Apollo Group Class A
common stock to certain officers, key employees and the
non-employee members of our Board of Directors. Most of the
options granted under the Amended and Restated 2000 Stock
Incentive Plan vest 25% per year over four years, and the
options have contractual terms of 10 years or less. For
certain grants, vesting may be tied to the attainment of
prescribed performance goals, or the service vesting
requirements for those grants may be accelerated if certain
performance goals are attained.
Under each of the three Apollo Group Plans, the exercise price
for stock options may not be less than 100% of the fair market
value of the Class A common stock on the date of grant.
Options are granted for terms of up to ten years and can vest
over periods from six months up to four years. The requisite
service period for all options is equal to the vesting period.
Under the Plans currently in effect (the Long Term Incentive
Plan and Amended and Restated 2000 Stock Incentive Plan), we are
authorized to grant up to 40.8 million shares of Apollo
Group Class A common stock in the aggregate. Restricted
stock units issued under the Plans may have both performance
vesting and service vesting components (for grants made to
executive officers) or service vesting only (for other
recipients). Shares issued under the Plans are issued from
treasury shares or our authorized but unissued shares of Apollo
Group Class A common stock. As of August 31, 2008,
approximately 19.2 million authorized and unissued shares
of Apollo Group Class A common stock were reserved for
issuance in the aggregate under the Long Term Incentive Plan and
the Amended and Restated 2000 Stock Incentive Plan.
Assumed
Options and Stock Appreciation Rights
In connection with our acquisition of Aptimus on
October 29, 2007, we assumed the outstanding stock options
and stock appreciation rights under the Aptimus, Inc. 1997 Stock
Option Plan, as amended and the Aptimus, Inc. 2001 Stock Plan.
Each of those assumed options and stock appreciation rights were
converted into the right to purchase or acquire shares of Apollo
Group Class A common stock. The conversion was effected by
(i) multiplying the number of shares of Aptimus common
stock subject to each such assumed stock option and stock
appreciation right outstanding on the effective date of the
acquisition by the applicable exchange ratio and
(ii) dividing the exercise price per share in effect for
each such stock option and stock appreciation right at that time
by the applicable exchange ratio. The numerator of such exchange
ratio was the $6.25 cash consideration paid per outstanding
share of Aptimus common stock in consummation of the
acquisition, and the denominator was the average closing price
per share of the Apollo Group Class A common stock for the
five trading days immediately preceding the effective date of
the acquisition. The assumed stock options and stock
appreciation rights have maximum terms of up to ten years and
generally vest in increments over a defined period of service.
However, a number of assumed stock options and stock
appreciation rights vested in whole or in part on an accelerated
basis upon the consummation of the acquisition. The assumed
stock appreciation rights can only be settled in shares of
Apollo Group Class A common stock. As of August 31,
2008, the total number of shares of Apollo Group Class A
common stock subject to the assumed stock options and stock
appreciation rights was 0.1 million shares.
110
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restatement
of Share-Based Compensation and Stock Option
Modifications
In May 2007, we restated prior period financial results due to
errors that occurred in the accounting for share-based
compensation. As a result of the restatement, we had to take the
following actions with respect to certain outstanding options
under our plans.
Stock
Option Modifications
On January 12, 2007, our Compensation Committee of the
Board of Directors approved a resolution to modify the terms of
the stock option grants for approximately 50 individuals. These
modifications extended the normal
90-day
post-employement exercise period in effect for options held by
former employees, including officers, whose employment
terminated on or after November 3, 2006, and allowed those
individuals an additional period of time to exercise any of
their options that were in the money at the end of
that 90-day
period. We extended the exercise periods of these options
because we were unable, during the financial statement
restatement process as described in our 2007 Annual Report on
Form 10-K,
to issue shares of our Class A common stock to such
individuals, in compliance with the applicable registration
requirements of the Securities Act of 1933, as amended. Absent
the extension, the options would have expired before the former
employees had the opportunity to exercise their in the
money options, since the
90-day
post-termination exercise period would have expired prior to us
completing our financial statement restatement process.
As a result of these modifications, we recorded a non-cash
charge to share-based compensation of $12.1 million during
the second quarter of fiscal year 2007. In addition, the
modified awards held by former employees whose employment
terminated prior to the January 12, 2007 modification are
subject to the provisions of EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
(EITF 00-19).
Of the $12.1 million in expense recognized upon
modification of the awards, $11.8 million related to awards
subject to the provisions of
EITF 00-19.
EITF 00-19
requires that we report the awards classified as liabilities at
their fair value as of each balance sheet date. Any increase or
decrease in this fair value is recorded in general and
administrative expense in our Consolidated Statements of Income.
The fair value adjustments recorded as expense for the year
ended August 31, 2008 totaled $2.7 million. As all
awards had been exercised as of November 30, 2007, there
are no liabilities in our Consolidated Balance Sheets as of
August 31, 2008 associated with these modifications.
111
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Apollo
Group Class A Stock Options
A summary of the activity and changes related to stock options
and stock appreciation rights covering Apollo Group Class A
common stock granted under our plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Stock Options/Stock Appreciation Rights
Outstanding
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Total
|
|
|
Price per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
(Numbers in thousands, except per share data)
|
|
Shares
|
|
|
Share
|
|
|
Term (Years)
|
|
|
Value ($)(1)
|
|
|
Outstanding as of August 31, 2005
|
|
|
8,716
|
|
|
$
|
38.30
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,874
|
|
|
|
57.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,395
|
)
|
|
|
15.32
|
|
|
|
|
|
|
|
|
|
Forfeited, canceled or expired
|
|
|
(1,871
|
)
|
|
|
61.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of August 31, 2006
|
|
|
9,324
|
|
|
|
44.96
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7,089
|
|
|
|
58.48
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(409
|
)
|
|
|
26.80
|
|
|
|
|
|
|
|
|
|
Forfeited, canceled or expired
|
|
|
(2,635
|
)
|
|
|
64.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
4.84
|
|
|
$
|
155,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of August 31, 2008
|
|
|
11,065
|
|
|
$
|
51.84
|
|
|
|
4.78
|
|
|
$
|
146,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of August 31, 2008
|
|
|
5,702
|
|
|
$
|
46.45
|
|
|
|
4.31
|
|
|
$
|
111,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for issuance as of August 31, 2008
|
|
|
6,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Aggregate intrinsic value represents the value of our closing
stock price on August 31, 2008 ($63.68) in excess of the
exercise price multiplied by the number of options outstanding
or exercisable. |
As of August 31, 2008, there was approximately
$93.5 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
2.84 years.
112
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information related to
outstanding and exercisable options and stock appreciation
rights as of August 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.27 to $30.77
|
|
|
1,862
|
|
|
|
2.34
|
|
|
$
|
16.70
|
|
|
|
1,863
|
|
|
$
|
16.70
|
|
$41.83 to $50.68
|
|
|
1,530
|
|
|
|
4.62
|
|
|
$
|
46.93
|
|
|
|
665
|
|
|
$
|
45.32
|
|
$50.69 to $57.54
|
|
|
1,958
|
|
|
|
6.89
|
|
|
$
|
53.01
|
|
|
|
745
|
|
|
$
|
51.37
|
|
$58.03 to $58.03
|
|
|
3,127
|
|
|
|
4.53
|
|
|
$
|
58.03
|
|
|
|
197
|
|
|
$
|
58.03
|
|
$58.43 to $70.02
|
|
|
2,510
|
|
|
|
5.64
|
|
|
$
|
62.17
|
|
|
|
1,077
|
|
|
$
|
62.25
|
|
$70.03 to $83.40
|
|
|
1,334
|
|
|
|
4.87
|
|
|
$
|
74.32
|
|
|
|
1,102
|
|
|
$
|
74.17
|
|
$83.41 to $173.32
|
|
|
56
|
|
|
|
2.46
|
|
|
$
|
96.50
|
|
|
|
53
|
|
|
$
|
96.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.27 to $173.32
|
|
|
12,377
|
|
|
|
|
|
|
|
|
|
|
|
5,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information related to stock
options and stock appreciation rights exercised for fiscal years
2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amounts related to options exercised:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value realized by optionee
|
|
$
|
65,198
|
|
|
$
|
10,824
|
|
|
$
|
58,962
|
|
Actual tax benefit realized by Company for tax deductions
|
|
$
|
25,516
|
|
|
$
|
2,095
|
|
|
$
|
19,161
|
|
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
2008, 2007, and 2006, totaled approximately $97.4 million,
$6.2 million, and $21.3 million, respectively.
113
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Stock Unit Awards
During fiscal years 2008 and 2007, 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 management employees. We measure
the fair value of restricted stock units at the date of the
grant. We amortize the 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 ranges from three months to four
years.
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
(Numbers in thousands, except per share data)
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested balance at August 31, 2006
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
338
|
|
|
|
58.03
|
|
Vested and released
|
|
|
(13
|
)
|
|
|
58.03
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2008, there was approximately
$22.6 million of total unrecognized share based
compensation cost, net of forfeitures, related to unvested
restricted stock units. These costs are expected to be
recognized over a weighted average period of 2.76 years. No
restricted stock units vested during fiscal year 2008.
Share-based
Compensation Expense
The table below outlines share-based compensation expense for
fiscal years 2008, 2007, and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
(Numbers in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Instructional costs and services
|
|
$
|
20,609
|
|
|
$
|
13,346
|
|
|
$
|
12,418
|
|
Selling and promotional
|
|
|
3,603
|
|
|
|
3,069
|
|
|
|
2,287
|
|
General and administrative
|
|
|
29,358
|
|
|
|
37,612
|
|
|
|
13,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense included in operating
expenses
|
|
|
53,570
|
|
|
|
54,027
|
|
|
|
27,735
|
|
Tax effect of share-based compensation
|
|
|
(21,013
|
)
|
|
|
(21,189
|
)
|
|
|
(10,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense, net of tax
|
|
$
|
32,557
|
|
|
$
|
32,838
|
|
|
$
|
16,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Share-based
Compensation Expense Assumptions
Fair Value. We 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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average fair value
|
|
$
|
23.95
|
|
|
$
|
18.84
|
|
|
$
|
26.06
|
|
Expected volatility
|
|
|
44.2
|
%
|
|
|
32.7
|
%
|
|
|
34.6
|
%
|
Expected life (years)
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
5.9
|
|
Risk-free interest rate
|
|
|
2.9
|
%
|
|
|
4.9
|
%
|
|
|
4.8
|
%
|
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 consistent with
SFAS 123(R) and SAB 107.
Expected Life (years). In December 2007, the
Securities and Exchange Commission staff issued SAB 110.
SAB 110 allows companies to continue to use the simplified
method, as defined in SAB 107 to estimate the expected term
of stock options under certain circumstances. The simplified
method for estimating expected term is to use the mid-point
between the vesting term and the contractual term of the share
option. We have analyzed the circumstances in which the use of
the simplified method is allowed. We have opted to use the
simplified method for options granted to management in fiscal
year 2008 because the options granted in prior fiscal years had
different terms, such as contractual lives and acceleration
provisions. Thus, historical data is not comparable in order to
determine the expected term of current awards.
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.
Forfeitures. Forfeitures are estimated at the
time of grant based on historical forfeiture activity adjusted
for any known nonrecurring activity. If necessary, management
estimates are trued up at the end of each vesting period if
actual forfeitures differ from those estimates.
Expected Vesting Period. We amortize the
share-based compensation expense, net of forfeitures, over the
expected vesting period using the accelerated recognition method
for pre-September 1, 2005 grants, the straight-line method
for awards with only service conditions, and the graded vesting
attribution method for awards with performance conditions for
post-September 1, 2005 grants in accordance with
SFAS 123(R).
On January 4, 2008, we entered into a syndicated
$500 million credit agreement (the Bank
Facility). The Bank Facility is an unsecured revolving
credit facility that will be 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 up to $300 million. The Bank
Facility fees are determined based on a pricing grid that varies
according to our leverage ratio. The 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. There were no outstanding borrowings
under the Bank Facility as of August 31, 2008.
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
Department of Education
115
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial responsibility composite score. In addition, there are
covenants restricting indebtedness, liens, investments, asset
transfers and distributions.
Interest expense for fiscal years 2008, 2007 and 2006 was
$3.5 million, $0.2 million and $0.3 million,
respectively, and is included in interest income and other, net
in our Consolidated Statements of Income.
|
|
Note 16.
|
Related
Person Transactions
|
Dr. John
G. Sperling Note Receivable
In August 1998, we, together with Hughes Network Systems and
Hermes Onetouch, LLC, formed Interactive Distance Learning,
Inc., a new corporation, to acquire One Touch Systems, a
provider of interactive distance learning solutions. We
contributed $10.8 million in October 1999 and
$1.2 million in December 1999, in exchange for a 19%
interest in Interactive Distance Learning. We accounted for our
investment in Interactive Distance Learning under the cost
method. Hermes is owned by Dr. John G. Sperling, our
Founder, Executive Chairman of the Board and Director.
On December 14, 2001, Hermes acquired our investment in
Interactive Distance Learning in exchange for a promissory note
in the principal amount of $11.9 million, which represented
the related carrying value. The promissory note accrues interest
at a fixed annual rate of six percent and is due at the earlier
of December 14, 2021 or nine months after
Dr. Sperlings death. The promissory note is included
in other assets as a receivable from a related party in the
Consolidated Balance Sheets as of August 31, 2008 and 2007.
Apollo
International, Inc.
As of August 31, 2008, we directly own approximately 3.8%
of the preferred stock of Apollo International, Inc., which
provides educational products and services in India.
Dr. John G. Sperling was a director of Apollo International
until November 2005. In addition, we beneficially own shares of
Apollo International stock indirectly through our 17% investment
in a venture capital fund that owns approximately 4.1% of Apollo
International stock. We received shareholder distributions of
$0.6 million in 2007, and no distributions in 2008 and 2006.
Effective September 2002, Western International University
entered into an agreement with Apollo International that allows
for Western International Universitys educational
offerings to be made available in India through a joint venture
between Apollo International and K.K. Modi Investment and
Financial Services Private Limited. The joint venture company is
named Modi Apollo International Group Private Limited. Apollo
International is responsible for the relationship with the
entities in India that are offering the Western International
University programs while Western International University
maintains the educational content and other academic aspects of
the programs pursuant to an agreement with Apollo International.
Western International University received approximately
$0.2 million during the fiscal years 2008, 2007 and 2006 in
connection with its agreement with Apollo International.
Governmental
Advocates, Inc.
Effective July 1, 1989, we entered into an agreement with
Governmental Advocates, Inc. to provide consulting services to
us with respect to matters concerning legislation, regulations,
public policy, electoral politics, and any other topics of
concern to us relating to state government in the state of
California. Hedy F. Govenar, who served as a director of Apollo
through May 2007, is the founder and Chairwoman of Governmental
Advocates, Inc. Pursuant to the agreement, we paid consulting
fees to Governmental Advocates, Inc. of $0.1 million in
fiscal years 2007 and 2006, while Ms. Govenar served as a
director of Apollo.
116
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2008, 2007, and 2006 were
$0.4 million, $0.3 million, and $0.4 million,
respectively. These amounts are included in general and
administrative expenses in the Consolidated Statements of
Income. Additionally, through May 2007 the pilots were employed
by us and the costs of salaries and fringe benefits were paid
through our payroll and are included in general and
administrative expenses in the Consolidated Statements of
Income. The cost to us, including payments made to Yo Pegasus
and the cost of pilots wages (including fringe benefits)
during fiscal years 2008, 2007 and 2006 were $0.4 million,
$0.5 million, and $0.6 million, respectively.
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 years 2008, 2007, and 2006 were
$0.3 million, $0.9 million, and $0.2 million,
respectively.
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 2008, 2007, and 2006 were $37,000,
$37,000, and $39,000, respectively.
PoliPoint
Press, LLC
PoliPoint Press, LLC, an entity controlled by Dr. John G.
Sperling, provides editorial services for Apollo. Payments made
to PoliPoint Press during fiscal year 2008 were $5,000.
Credit
Suisse Share Repurchase Services
During fiscal years 2008 and 2007, Credit Suisse Securities
(USA) LLC, an affiliate of the previous employer of Charles B.
Edelstein, our Chief Executive Officer, and Gregory W. Cappelli,
our Executive Vice President, Global Strategy and Assistant to
the Executive Chairman, managed a share repurchase program for
Apollo. We paid Credit Suisse Securities approximately $196,000
and $143,000 in commissions for this service during fiscal years
2008 and 2007, respectively. 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
During fiscal year 2008, University of Phoenix Foundation, a
non-profit entity affiliated with the University of Phoenix,
provided a grant of $50,000 to Earth Day Network in response to
a grant request received in May 2008. Art Edelstein, the
Director of Development of Earth Day Network, is the brother of
Charles B. Edelstein, our Chief Executive Officer. The
Foundation received and approved this grant request prior to the
time Mr. Edelstein accepted employment with Apollo in July
2008.
Deferred
Compensation Agreement with Dr. John G.
Sperling
See Note 10, Long-Term Liabilities.
117
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 17.
|
Commitments
and Contingencies
|
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. In accordance with
SFAS 5, 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 is material. For matters where no
loss contingency is recorded, our policy is to expense legal
fees as incurred.
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 leases and operating leases. The following is a schedule
of future minimum lease commitments as of August 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Operating Leases
|
|
|
Capital Leases
|
|
|
Total
|
|
|
2009
|
|
$
|
139,336
|
|
|
$
|
2,361
|
|
|
$
|
141,697
|
|
2010
|
|
|
123,200
|
|
|
|
2,031
|
|
|
|
125,231
|
|
2011
|
|
|
106,237
|
|
|
|
1,249
|
|
|
|
107,486
|
|
2012
|
|
|
77,480
|
|
|
|
760
|
|
|
|
78,240
|
|
2013
|
|
|
50,591
|
|
|
|
530
|
|
|
|
51,121
|
|
Thereafter
|
|
|
70,827
|
|
|
|
840
|
|
|
|
71,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
567,671
|
|
|
$
|
7,771
|
|
|
$
|
575,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility and equipment expense under leases totaled
$156.2 million, $150.0 million and $141.2 million
for fiscal years 2008, 2007 and 2006, respectively.
We have entered into five separate sale-leaseback agreements
with unrelated third parties. These agreements were related to
property located throughout Phoenix, Arizona, which we currently
use to support our operations. The property is subject to
ten-year lease terms expiring between 2010 and 2014. In total we
received approximately $46.2 million in cash for the
property, which generated a combined gain of approximately
$17.5 million that is being deferred over the respective
lease terms. We recognized total gains in our income statement
of $1.8 million, $1.8 million and $1.7 million in
fiscal years 2008, 2007 and 2006, respectively. The balance of
the total deferred gain was $8.7 million as of
August 31, 2008 and $10.6 million as of
August 31, 2007, included in long-term liabilities on the
Consolidated Balance Sheets.
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,
118
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 20 years 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. 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.
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, 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, relators allege that our entry into Program
Participation Agreements with the Department of Education under
Title IV of the Higher Education Act constitutes a false
claim because we did not intend to comply with the employee
compensation requirements applicable to us as a result of such
participation. On or about October 20, 2003, a motion to
dismiss the action was filed and was subsequently granted with
leave to amend the complaint. Subsequently, a second amended
complaint was filed on or about March 3, 2004. A motion to
dismiss this amended complaint was filed on or about
March 22, 2004, and the case was subsequently dismissed
with prejudice. On June 11, 2004, an appeal was filed with
the U.S. Court of Appeals for the Ninth Circuit. On
September 5, 2006, the Ninth Circuit reversed the ruling of
the District Court and held that the relators had adequately
alleged the elements of a False Claims Act cause of action. On
January 22, 2007, University of Phoenix filed a Petition
for Writ of Certiorari with the U.S. Supreme Court. On
April 23, 2007, the U.S. Supreme Court denied
University of Phoenixs petition. As a result, the case has
been remanded to the District Court in accordance with the order
of the Ninth Circuit. In addition, on March 23, 2007,
University of Phoenix filed a motion in the District Court to
dismiss the complaint on the grounds that the September 7,
2004 settlement agreement between University of Phoenix and the
Department of Education, resolving the Office of Inspector
General audits of IPD and Client Institutions and a University
of Phoenix program review, constituted an alternate remedy under
the False Claims Act. That motion was denied on August 20,
2007. On January 7, 2008, the District Court denied a
University of Phoenix motion to certify the Courts order
regarding the motion to dismiss for purposes of bringing an
interlocutory appeal. The District Court has issued a Scheduling
Order pursuant to which trial is set for September 2009. Initial
disclosures have been made and discovery is proceeding. We
believe that our compensation programs and practices at all
relevant times were in compliance with the requirements imposed
in our Program Participation Agreements. 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.
119
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Axia
False Claims Act Lawsuit
On August 15, 2005, a relator filed a qui tam complaint
under seal in the U.S. District Court for the District of
Columbia. On April 12, 2006, the U.S. Department of
Justice filed The Governments Notice of Election to
Decline Intervention in this qui tam lawsuit and on
June 15, 2006, the Court entered an order unsealing the
complaint. An amended complaint was served on or about
November 1, 2006. The qui tam action alleges violations of
the False Claims Act by University of Phoenix in connection with
federal student aid programs, and asserts that University of
Phoenix improperly compensates its employees. On
November 15, 2006, the relator filed a Voluntary Notice of
Dismissal. On November 17, 2006, the Court ordered that the
relator comply with the statutory requirements for dismissal of
a qui tam False Claims Act action by December 1, 2006. On
December 1, 2006, the United States consented to the
dismissal of the action with prejudice as to the relator, so
long as the dismissal is without prejudice as to the United
States. On February 2, 2007, the Court ordered the United
States to articulate its reasons for consenting to the dismissal
of the action. On February 21, 2007, the United States
filed a Statement of Reasons for Consenting to Dismissal. On
July 7, 2008 the action was dismissed by the Court.
Alaska
Electrical Pension Fund Derivative Action
On September 5, 2006, the Alaska Electrical Pension Fund
filed a shareholder derivative suit in the U.S. District
Court for the District of Arizona, alleging on behalf of us that
certain of our current and former officers and directors engaged
in misconduct regarding stock option grants. Similar derivative
complaints were filed in the same Court on or about
September 19, 2006 and November 11, 2006 by other of
our purported shareholders, and the three cases were
consolidated by the Court under the caption Alaska Electrical
Pension Fund v. Sperling, Case
No. CV06-02124-PHX-ROS,
on January 9, 2007. The defendants in the consolidated case
are Apollo, J. Jorge Klor de Alva, Daniel E. Bachus, John M.
Blair, Dino J. DeConcini, Anthony F. Digiovanni, Kenda B.
Gonzales, Hedy F. Govenar, Brian E. Mueller, Todd S. Nelson,
Jerry F. Noble, Laura Palmer Noone, John R. Norton III, John G.
Sperling, and Peter V. Sperling. An independent committee of our
Board of Directors (Special Committee), consisting
of Hedy F. Govenar and Daniel D. Diethelm, was
appointed and authorized to determine whether it is in our best
interest to pursue the allegations made on our behalf. Effective
December 8, 2006, in response to an order by the Court on
December 4, 2006, K. Sue Redman, who is not a party to the
case, replaced Hedy F. Govenar on the Special Committee. As of
March 13, 2007, James R. Reis joined the Special Committee
in place of Daniel D. Diethelm. On July 2, 2007, all
defendants and Apollo filed motions to dismiss the case, and the
Special Committee filed notice of its intent to terminate the
action. On August 1, 2007, the Court appointed as lead
plaintiff Louisiana Municipal Police Employees Retirement
System, and lead plaintiff filed a Second Amended Complaint on
August 15, 2007. On August 17, 2007, the Special
Committee filed a motion to terminate the action, based in part
upon its conclusion that pursuit of the claims is not in our
best interest. Through mediation, the parties reached an
agreement to resolve this action. Notices of the proposed
settlement were filed with the Court on April 7, 2008. The
Court granted preliminary approval to the settlement on
April 18, 2008. The Court approved the settlement on
August 21, 2008, and entered a final signed judgment on
September 5, 2008. We have performed our obligations under
the settlement. We accrued for the obligation under the
settlement in our consolidated financial statements as of
August 31, 2008, in an amount that is not material for
separate disclosure.
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
120
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
a preliminary 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 occurred on August 4, 2008 as part of
our post-trial motions, 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. The plaintiffs brief is due on
December 15, 2008, and the defendants brief is due on
January 13, 2009.
In the second quarter of fiscal year 2008, we recorded a charge
for estimated damages of $168.4 million as a result of the
jury verdict awarded in favor of the plaintiffs. The original
charge was recorded at the mid-point of the range of
$120.5 million to $216.4 million and was estimated for
financial reporting purposes, using statistically valid models
and a 60% confidence interval which included our estimate of
damages based on the verdict, our estimate of potential amounts
we expected to reimburse our insurance carriers, our estimate of
future defense costs and legal and other professional fees
incurred during the second quarter of fiscal year 2008. At that
time, we elected to record the mid-point of the range because
under statistically valid modeling techniques the mid-point of
the range was a more likely estimate than other points in the
range, and the point at which there was an equal probability
that the ultimate loss could be toward the lower end or the
higher end of the range.
In the fourth quarter of fiscal year 2008, we reversed the
original estimated charge and related pre- and post-judgment
interest totaling $170.0 million because the District Court
vacated the earlier judgment and entered judgment in favor of
Apollo. Applying similar assumptions used to estimate the
original charge, including if the plaintiffs were to prevail in
a judgment on appeal, we currently estimate our range of loss
for this matter to be between zero and $219.6 million, with
the high end of the range including pre- and post-judgment
interest through August 31, 2008. Damages, if any, will not
be known until all court proceedings, including the plaintiffs
appeal, have been completed. Based on information available to
us at present, our management does not expect a material adverse
effect on our business to result from this action.
Equal
Employment Opportunity Commission v. University of
Phoenix
On September 25, 2006, the Equal Employment Opportunity
Commission filed a Title VII action against University of
Phoenix captioned Equal Employment Opportunity
Commission v. University of Phoenix, Inc.,
No. CV-06-2303-PHX-MHM,
in the U.S. District Court for the District of Arizona on
behalf of four identified former employees and an asserted class
of unidentified former and current employees who were allegedly
discriminated against because they were not members of the
Church of Jesus Christ of
Latter-day
Saints. The Complaint also alleges that some of the employees
were retaliated against after complaining about the alleged
discrimination. University of Phoenix answered the Complaint on
December 8, 2006, denying the material allegations
asserted. An initial Scheduling Conference was held on
February 15, 2007. During the course of discovery, the
Equal Employment Opportunity Commission identified approximately
54 additional class members on whose behalf it was seeking
relief. University of Phoenix filed motions to strike almost all
of these additional class members on the basis that they failed
to timely exhaust their administrative remedies
and/or meet
other statutory prerequisites to filing suit under
Title VII. The District Court denied University of
Phoenixs motions to strike on May 2, 2008 and
University of Phoenix subsequently filed a motion for
certification to file an interlocutory appeal with the Ninth
Circuit. On May 20, 2008, the District Court granted
University of Phoenixs motion for certification and stayed
discovery regarding the additional class members pending the
Ninth Circuits ruling. On August 15, 2008, the Ninth
Circuit denied University of Phoenixs request to file an
interlocutory appeal. As a
121
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
result, on August 19, 2008, the District Court reopened
discovery on all class members and extended the discovery
deadline for 90 days. The parties subsequently reached a
tentative settlement resolving this action and have submitted a
proposed consent decree to the District Court for approval. The
settlement will not be effective until approved by the District
Court. Management does not expect a material adverse effect on
our business to result from the proposed settlement. The amount
of the proposed settlement is not material for separate
disclosure.
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
Department of Education that led to the issuance of the
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 breach 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 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 August 21, 2006, we filed a Motion to Stay the case
arguing that it is not in our best interest to prosecute
plaintiffs purported derivative claims prior to resolution
of the federal Securities Class Action.
On October 10, 2006, plaintiff amended his complaint to
include new allegations pertaining to our alleged backdating of
stock option grants to Todd S. Nelson, Kenda B. Gonzales, Laura
Palmer Noone, John G. Sperling and three additional defendants:
J. Jorge Klor de Alva, Jerry F. Noble and Anthony F. Digiovanni.
This First Amended Complaint alleges, among other things, that
the individual defendants breached their fiduciary duties to us
and that certain of them were unjustly enriched by their receipt
of backdated stock option grants. The plaintiff seeks, among
other things, an award of unspecified damages and reasonable
costs and expenses, including attorneys fees.
On November 10, 2006, after plaintiff filed the First
Amended Complaint and added allegations of stock option
backdating, we filed an Amended Motion to Stay arguing that the
action should be stayed pending resolution of the federal
Securities Class Action and pending the Special
Committees investigation into the allegations of stock
option backdating. On January 29, 2007, the Court granted
the Amended Motion to Stay pending the resolution of the trial
in the federal Securities Class Action.
On March 7, 2008, following the entry of judgment in the
federal Securities Class Action, we filed a motion to stay
discovery regarding the Department of Education claims pending
the disposition of post-trial motions in the federal Securities
Class Action and informed the Superior Court of an imminent
settlement regarding the stock option claims. On March 10,
2008, the Superior Court stayed the stock option claims pending
submission of a stipulation of settlement in a related federal
derivative action that also raised stock option claims
(described under Alaska Electrical Pension
Fund Derivative Litigation), the approval of the
settlement by the Federal Court, and dismissal of the federal
derivative action. On April 22, 2008, the plaintiff filed a
request for preliminary approval of the settlement regarding the
stock option claims. On April 28, 2008, the Superior Court
granted preliminary approval of the settlement. The Federal
Court approved the settlement on August 21, 2008, and
entered a final signed judgment on September 5, 2008. On
August 26, 2008, plaintiff filed a request for entry of an
order of dismissal regarding the stock option backdating claims.
On September 17, 2008, the Superior Court dismissed the
stock option backdating claims. The settlement does not apply to
the Department of Education claims.
With respect to the Department of Education claims, on
April 10, 2008, the plaintiff filed his Second Amended
Complaint. On May 9, 2008, we moved for a continued stay of
Counts 1-2 and for dismissal of Counts 3-5. In addition, we
moved to continue the pre-trial conference until the Federal
Court hearing the federal Securities Class Action has ruled
on the post-trial motions pending in that case, and in the
alternative, for appointment of an
122
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
independent panel of outside directors to review any claims that
survive motions to dismiss. Also on May 9, 2008, the
individual defendants moved to dismiss the Second Amended
Complaint on the ground that it failed to state a claim upon
which relief may be granted. Plaintiffs filed their responses to
these motions on June 12, 2008, and defendants filed their
replies on June 27, 2008. Oral argument on the motions to
dismiss filed by the defendants were heard by the Superior Court
on July 14, 2008, and on July 30, 2008, the Superior
Court granted our motion to dismiss Counts 3-5, and stayed
Counts 1-2, until the next pre-trial conference, which the
Superior Court has continued from August 18, 2008 to
October 27, 2008. At the continued pretrial conference on
October 27, 2008, the Superior Court lifted the discovery
stay and set some long-range deadlines for completion of
discovery, dispositive motions, and disclosure of experts, the
earliest of which is not until May 31, 2010. A trial, if
any, will not be set until sometime in 2011. Based on
information available to us at present, our management does not
expect a material adverse effect on our business to result from
this action. In addition, we cannot reasonably estimate a range
of loss for this action and accordingly have not accrued any
liability associated with this action.
Bamboo
Partners Derivative Action
On August 15, 2006, Bamboo Partners, one of our
shareholders, filed a shareholder derivative complaint on our
behalf and on behalf of the University of Phoenix, Inc. The
lawsuit was filed in the U.S. District Court for the
District of Arizona and is entitled Bamboo Partners v.
Nelson et al., Case Number CIV-06-1973-PHX-SRB. The
complaint names as defendants Apollo Group, Inc., University of
Phoenix, Inc., Todd S. Nelson, Kenda B. Gonzales, Daniel E.
Bachus, John G. Sperling, Peter V. Sperling, Laura Palmer Noone,
John M. Blair, Dino J. DeConcini, Hedy F. Govenar and John
Norton III. The complaint seeks contribution from defendants
Nelson, Gonzales and Bachus pursuant to Sections 10(b) and
21D of the Exchange Act for damages incurred by Apollo and
University of Phoenix in connection with the federal securities
class action described above under Securities
Class Action, and also alleges that all defendants
committed numerous breaches of fiduciary duties associated with
the facts underlying the federal Securities Class Action.
In addition, the complaint asserts claims relating to Laura
Palmer Noones sale of our stock and Todd S. Nelsons
separation agreement executed with us in January 2006. In
addition to damages, the complaint seeks attorneys fees,
reasonable costs and disbursements.
On November 13, 2006, we filed a Motion to Stay the case
arguing that it is not in our best interest to prosecute
plaintiffs purported derivative claims prior to resolution
of the federal Securities Class Action. The individual
defendants joined in the Motion to Stay. The Court granted our
motion to stay on May 18, 2007. Following entry of judgment
in the federal Securities Class Action, on January 31,
2008, the Court issued an order to show cause why the stay
should not be dissolved. On February 13, 2008, we filed a
motion to extend the stay until the Federal Court in the federal
Securities Class Action rules on defendants
post-trial motions. On March 3, 2008, the plaintiff filed a
motion to lift the stay in order to file an amended complaint.
The proposed amended complaint, among other things, does not
include two defendants named in the initial complaint (Daniel E.
Bachus and Hedy F. Govenar) and adds new jurisdictional
allegations based on the parties diversity of citizenship.
On April 11, 2008, the Court granted our motion to stay the
case pending disposition of the post-trial motions and ordered
that defendants file a status report within 10 days
following the resolution of the post-trial motions in the
federal Securities Class Action. In addition, the Court
granted plaintiffs motion to file an amended complaint,
but ordered that no responsive pleading be filed while the stay
remains in place. We submitted a status report on
August 18, 2008 notifying the Court that judgment had been
entered in favor of defendants in the Securities
Class Action. Plaintiff filed a response on August 25,
2008 notifying the Court of its intention to file a Second
Amended Complaint by September 26, 2008 and informing the
Court that its counsel would be contacting plaintiffs
counsel in the Barnett case to determine whether their
respective claims could be pursued in a single forum. The Court
dissolved the stay on September 25, 2008, and ordered
plaintiff to file its Second Amended Complaint by
October 15, 2008. Discovery in this case has not yet begun.
Plaintiff did not file the Second Amended Complaint. Instead,
counsel for plaintiff, by letter dated September 25, 2008,
advised the Court and defendants counsel of its intention
to take the necessary steps to obtain an order dismissing this
action. Based on information available to us at present, our
management does not expect a material adverse effect on our
business to result from this action. In addition, we cannot
reasonably estimate a range of loss for this action and
accordingly have not accrued any liability associated with this
action.
123
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
All defendants filed motions to dismiss the case on
January 22, 2008, which are now pending before the Court.
Discovery in this case has not yet begun. We intend to
vigorously oppose plaintiffs allegations. 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, our management does not
expect a material adverse effect on our business to result from
this action. In addition, we cannot reasonably estimate a range
of loss for this action and accordingly have not accrued any
liability associated with this action.
Patent
Infringement Litigation
On March 3, 2008, Digital-Vending Services International
Inc. filed a complaint against The University of Phoenix, Inc.
and Apollo Group Inc., as well as Capella Education Company,
Laureate Education Inc., and Walden University Inc. in the
United States 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.
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.
Regulatory
and Other Legal Matters
Student
Financial Aid
All U.S. federal financial aid programs are established by
the Higher Education Act and regulations promulgated thereunder.
The Higher Education Act was recently reauthorized through
September 30, 2013 by Congress and signed into law by the
President on August 14, 2008.
The Higher Education Act specifies the manner in which the
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 June 2003 and its current certification for the Title IV
programs expired in June 2007. However, in March 2007,
University of Phoenix submitted its Title IV program
participation recertification
124
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
application to the Department of Education. We have been
collaborating with the Department of Education regarding the
University of Phoenix recertification application. Although we
have submitted our application for renewal, we are continuing to
supply additional
follow-up
information based on requests from the Department of Education.
Our eligibility continues on a month-to-month basis until the
Department of Education issues its decision on the application.
A month-to-month status is not unusual considering the process
is multi-faceted and iterative. We have no reason to believe
that the application will not be renewed and expect that the
renewal process will be completed satisfactorily. Western
International University was recertified in October 2003 and its
current certification for the Title IV programs expires in
June 2009.
Department
of Education Audits and Other Matters
From time to time as part of the normal course of business,
University of Phoenix and Western International University are
subject to periodic program reviews and audits by regulating
bodies as a result of their participation in Title IV
programs. On December 22, 2005, the Department of
Education, Office of Inspector General, issued an audit report
on their review of University of Phoenixs policies and
procedures for the calculation and return of Title IV
funds. The Office of Inspector General concluded that University
of Phoenix had policies and procedures that provided reasonable
assurance that it properly identified withdrawn students,
appropriately determined whether a return of Title IV funds
was required, returned Title IV funds for withdrawn
students in a timely manner and used appropriate methodologies
for most aspects of calculating the return of Title IV
funds. The Office of Inspector General did conclude, however,
that University of Phoenix did not use appropriate methodologies
for calculating the percentage of Title IV financial aid
earned from September 1, 2002 through December 7,
2004. Since December 8, 2004, University of Phoenix has
adopted the methodologies deemed appropriate by the Department
of Education. On November 3, 2006, the Department of
Education issued a preliminary audit determination letter
concerning University of Phoenixs administration of the
Title IV federal student aid programs regarding this matter
and requested University of Phoenix to conduct a file review of
all students who received Title IV funds and for whom a
return of funds calculation was performed, or should have been
performed, during the period from March 1, 2004 through
December 7, 2004. On June 7, 2007, University of
Phoenix responded to the preliminary audit determination letter
request with results of the file review. On January 10,
2008, the Department of Education issued a final audit
determination letter regarding the return of Title IV
funds. As of August 31, 2007, University of Phoenix had
accrued $3.7 million related to the refund liability and in
the second quarter of fiscal year 2008 recorded an additional
charge of $0.5 million. Under the final audit determination
letter, University of Phoenix returned approximately
$4.2 million for the recalculated Title IV funds,
which included the repayment of interest and special allowance
of approximately $0.5 million, as calculated by the
Department of Education, as of February 29, 2008, which
satisfied our obligation under the final audit determination
letter.
U.S. federal regulations require institutions and
third-party servicers to submit annually to the Secretary of
Education their student financial aid compliance audit, prepared
by an independent auditor, no later than six months after the
last day of the institutions or third-party
servicers fiscal year. University of Phoenix and Western
International University have timely submitted their respective
fiscal year 2007 annual student financial aid compliance audits.
The IPD student financial aid compliance audit for fiscal year
2007 was submitted late in June 2008. We do not expect this late
submission to have a material adverse effect on our business,
financial position, results of operations, or cash flows.
During an internal review of certain Title IV policies and
procedures, it came to our attention that certain Satisfactory
Academic Progress calculations being performed by the University
of Phoenix and Western Internal University systems may have
failed to properly identify students who should have been placed
on financial aid suspension. Additionally, we determined that we
may have been inadvertently disbursing certain funds under one
minor Federal grant program. These matters have been
self-reported to the U.S. Department of Education and are
pending further action. We have accrued our best estimate of the
losses that may arise from these compliance issues in our
consolidated financial statements as of August 31, 2008.
Such amount is not material for separate disclosure.
125
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SEC
Informal Inquiry and Department of Justice
Investigation
In June 2006, we were notified by letter from the Securities and
Exchange Commission of an informal inquiry and the Securities
and Exchange Commissions request for the production of
documents relating to our stock option grants. In July 2007, the
Securities and Exchange Commission notified us that it had
closed its inquiry into our stock option grants, without
recommending any enforcement action. Also in June 2006, we
received a grand jury subpoena from the
U.S. Attorneys Office for the Southern District of
New York requesting that we provide documents relating to our
stock option grants. We cooperated fully with the
U.S. Attorneys Office investigation. We have not
received any additional requests for information from any
representative of the U.S. Attorneys Office or the
Department of Justice since that time, and have been advised by
the U.S. Attorneys Office that no further requests
are contemplated. Although we understand that the
U.S. Attorneys Office for the Southern District of
New York, as a matter of internal policy, does not comment
on the status of such investigations, our counsel has advised us
that the investigation is no longer active and our management
does not expect a material adverse effect on our business to
result from this action.
Internal
Revenue Service Audit
An Internal Revenue Service audit relating to our
U.S. federal income tax returns for fiscal years 2003
through 2005 commenced in September 2006. The audit relates to
income and deductions previously claimed by us, including
deductions potentially limited by Internal Revenue Code
Section 162(m). Certain tax deductions in prior years with
respect to compensation attributable to the exercise of certain
stock options by executive officers are in question. 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. Accordingly, we may have claimed
deductions with respect to those exercised options that were in
excess of the limit imposed under Section 162(m). As a
result, we expensed an additional $3.0 million in the year
ended August 31, 2008 related to interest and penalties,
for a total accrual of $47.6 million as of August 31,
2008 with respect to this uncertain tax position for the taxable
years 2003 through 2007 (which are currently our only open years
subject to adjustment for federal tax purposes). Our taxable
years 2003 2005 are the subject of an Internal
Revenue Service Audit, in connection with which we have agreed
to extend the statute of limitations. For prior periods where a
liability existed and where the statute of limitations has
expired, any accruals relating to that period have been reversed
in the period in which the statute expired. In addition, the IRS
audit may result in additional tax, penalties and interest, the
amount of which may or may not be material, but this will not be
known until the IRS audit is complete.
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Note 18.
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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 seven businesses are managed in the
following four reportable segments: University of Phoenix,
Apollo Global, Insight Schools and Other Schools. The Other
Schools segment includes Western International University, IPD,
CFP and Meritus. 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 University of
Phoenix, Apollo Global, Insight Schools and Other Schools
segments. Operations for each of our reportable segments are
described below. Please refer to Item 1, Business,
for further discussion.
University of Phoenix: The University of
Phoenix segment offers educational services to undergraduate and
graduate levels through its online education delivery system and
on the ground at its campuses and learning centers. University
of Phoenix offers its degrees domestically and at certain
international locations. In April 2006, we began enrolling the
majority of new associates degree program students in
University of Phoenix. From September 2004 through March 2006,
we enrolled most new associates degree students in Western
International University.
126
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Apollo Global: The Apollo Global segment
includes the results of operations for UNIACC and ULA, our
investments in international educational services, and costs
incurred related to our global expansion. During the third
quarter of fiscal year 2008, as a result of Apollo Global
receiving capital contributions and acquiring UNIACC, we began
reporting it as a separate reportable segment. Please refer to
Note 3, Acquisitions and Joint Venture, for further
discussion.
Insight Schools: The Insight Schools segment
includes our investments in domestic high school education
services and costs incurred related to our domestic high school
expansion. During the fourth quarter of fiscal year 2008, as a
result of our intentions for further expansion in the high
school education market, we are reporting Insight Schools as a
separate reportable segment which was previously reported in the
Other Schools segment. In accordance with
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information
(SFAS 131), segment information for fiscal year
2007 has been revised to conform to fiscal year 2008
presentation. Since Insight Schools was acquired in October
2006, there was no impact on fiscal year 2006 presentation.
Other Schools: The Other Schools segment
includes the operations of Western International University,
IPD, CFP and Meritus. Western International University offers
undergraduate and graduate degree program courses at Arizona
on-campus operations, online at Western International University
Interactive Online, and also through various joint
educational agreements in China and India. IPD provides program
development, administration and management consulting services
to private colleges and universities to establish and expand
their programs for working adults. CFP provides financial
planning education programs, including the Master of Science
degree, the Certified Financial Planner Professional Education
Program Certification, and certification programs in retirement,
asset management, and other financial planning areas online and
on the ground at its campus. Meritus is our newly established
Canadian institution, which began operations in September 2008.
Meritus offers degree programs online to working professionals
throughout Canada and abroad.
Consistent with SFAS 131 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 a general allocation, but excludes interest
income and expense 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 University of
Phoenix, Apollo Global, Insight Schools and Other Schools
segments. Included in the Corporate function is the operating
results for Aptimus, acquired on October 29, 2007, which
operates as an integral part of our corporate marketing
function. Please refer to Note 3, Acquisitions and Joint
Venture, for further discussion of the Aptimus acquisition.
During fiscal years 2008, 2007, and 2006, no individual customer
accounted for more than 10% of our consolidated net revenue.
127
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of financial information by reportable segment is as
follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Year Ended August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
2,987,656
|
|
|
$
|
2,537,815
|
|
|
$
|
2,074,443
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|
Apollo Global
|
|
|
13,435
|
|
|
|
|
|
|
|
|
|
Insight Schools
|
|
|
7,495
|
|
|
|
1,981
|
|
|
|
|
|
Other Schools
|
|
|
122,495
|
|
|
|
182,638
|
|
|
|
402,051
|
|
Corporate
|
|
|
9,850
|
|
|
|
1,359
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,140,931
|
|
|
$
|
2,723,793
|
|
|
$
|
2,477,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
817,609
|
|
|
$
|
656,322
|
|
|
$
|
620,708
|
|
Apollo Global
|
|
|
(1,879
|
)
|
|
|
|
|
|
|
|
|
Insight Schools
|
|
|
(18,906
|
)
|
|
|
(6,304
|
)
|
|
|
|
|
Other Schools
|
|
|
20,336
|
|
|
|
42,671
|
|
|
|
69,475
|
|
Corporate
|
|
|
(67,694
|
)
|
|
|
(66,992
|
)
|
|
|
(40,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
749,466
|
|
|
|
625,697
|
|
|
|
650,034
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other, net
|
|
|
33,388
|
|
|
|
31,600
|
|
|
|
18,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
$
|
782,854
|
|
|
$
|
657,297
|
|
|
$
|
668,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
41,659
|
|
|
$
|
38,539
|
|
|
$
|
40,239
|
|
Apollo Global
|
|
|
1,929
|
|
|
|
|
|
|
|
|
|
Insight Schools
|
|
|
1,682
|
|
|
|
630
|
|
|
|
|
|
Other Schools
|
|
|
1,220
|
|
|
|
4,949
|
|
|
|
4,720
|
|
Corporate
|
|
|
33,236
|
|
|
|
26,997
|
|
|
|
22,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
79,726
|
|
|
$
|
71,115
|
|
|
$
|
67,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
37,119
|
|
|
$
|
41,444
|
|
|
$
|
42,655
|
|
Apollo Global
|
|
|
341
|
|
|
|
|
|
|
|
|
|
Insight Schools
|
|
|
3,758
|
|
|
|
959
|
|
|
|
|
|
Other Schools
|
|
|
630
|
|
|
|
456
|
|
|
|
1,497
|
|
Corporate
|
|
|
63,031
|
|
|
|
61,692
|
|
|
|
67,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
104,879
|
|
|
$
|
104,551
|
|
|
$
|
111,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Capital expenditures exclude non-cash fixed asset additions of
$13.7 million, $11.5 million and $24.6 million in
fiscal years 2008, 2007 and 2006, respectively. Non-cash fixed
assets additions include credits received for tenant
improvements and accrued purchases in accounts payable. |
128
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of our consolidated assets by reportable segment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
833,511
|
|
|
$
|
732,646
|
|
Apollo Global
|
|
|
123,688
|
|
|
|
|
|
Insight Schools
|
|
|
20,294
|
|
|
|
16,575
|
|
Other Schools
|
|
|
46,914
|
|
|
|
68,942
|
|
Corporate
|
|
|
836,005
|
|
|
|
631,700
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,860,412
|
|
|
$
|
1,449,863
|
|
|
|
|
|
|
|
|
|
|
A summary of financial information by geographical area based on
country of domicile is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,122,272
|
|
|
$
|
2,718,525
|
|
|
$
|
2,471,870
|
|
Latin America
|
|
|
13,712
|
|
|
|
258
|
|
|
|
103
|
|
Other
|
|
|
4,947
|
|
|
|
5,010
|
|
|
|
5,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,140,931
|
|
|
$
|
2,723,793
|
|
|
$
|
2,477,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
Long-lived assets(1)
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
470,092
|
|
|
$
|
395,526
|
|
Latin America
|
|
|
77,247
|
|
|
|
226
|
|
Other
|
|
|
860
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
548,199
|
|
|
$
|
396,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-lived assets include property and equipment, net, goodwill,
and intangible assets, net. |
|
|
Note 19.
|
Quarterly
Results of Operations (Unaudited)
|
Seasonality
Our operations are generally subject to seasonal trends. We
experience, and expect to continue to experience, seasonal
fluctuations in our results of operations as a result of changes
in the level of student enrollments. While we enroll students
throughout the year, our domestic postsecondary second quarter
(December through February) enrollments and related revenues
generally are lower than other quarters due to holiday breaks in
December and January.
129
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
($ in thousands, except per share data)
|
|
November 30
|
|
|
February 29
|
|
|
May 31
|
|
|
August 31
|
|
|
Consolidated Quarterly Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
780,674
|
|
|
$
|
693,643
|
|
|
$
|
835,217
|
|
|
$
|
831,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
333,289
|
|
|
|
327,723
|
|
|
|
347,598
|
|
|
|
362,268
|
|
Selling and promotional
|
|
|
176,909
|
|
|
|
201,705
|
|
|
|
203,644
|
|
|
|
223,137
|
|
General and administrative
|
|
|
51,281
|
|
|
|
55,011
|
|
|
|
60,910
|
|
|
|
47,990
|
|
Estimated securities litigation loss (Note 17)
|
|
|
|
|
|
|
168,400
|
|
|
|
1,566
|
|
|
|
(169,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
561,479
|
|
|
|
752,839
|
|
|
|
613,718
|
|
|
|
463,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
219,195
|
|
|
|
(59,196
|
)
|
|
|
221,499
|
|
|
|
367,968
|
|
Interest income and other, net
|
|
|
9,650
|
|
|
|
8,059
|
|
|
|
3,329
|
|
|
|
12,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
228,845
|
|
|
|
(51,137
|
)
|
|
|
224,828
|
|
|
|
380,318
|
|
(Provision) benefit for income taxes
|
|
|
(88,980
|
)
|
|
|
19,098
|
|
|
|
(85,951
|
)
|
|
|
(151,094
|
)
|
Minority interest, net of tax
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
139,865
|
|
|
$
|
(32,039
|
)
|
|
$
|
139,106
|
|
|
$
|
229,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share(1)
|
|
$
|
0.84
|
|
|
$
|
(0.19
|
)
|
|
$
|
0.85
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share(1)
|
|
$
|
0.83
|
|
|
$
|
(0.19
|
)
|
|
$
|
0.85
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
167,036
|
|
|
|
168,005
|
|
|
|
162,751
|
|
|
|
158,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
169,289
|
|
|
|
168,005
|
|
|
|
163,841
|
|
|
|
160,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The sum of quarterly income per share may not equal annual
income per share due to rounding and second quarter net loss. |
130
APOLLO
GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
($ in thousands, except per share data)
|
|
November 30
|
|
|
February 28
|
|
|
May 31
|
|
|
August 31
|
|
|
Consolidated Quarterly Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
667,786
|
|
|
$
|
608,693
|
|
|
$
|
733,392
|
|
|
$
|
713,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
294,755
|
|
|
|
294,439
|
|
|
|
321,050
|
|
|
|
327,247
|
|
Selling and promotional
|
|
|
155,435
|
|
|
|
166,940
|
|
|
|
162,901
|
|
|
|
173,783
|
|
General and administrative
|
|
|
37,615
|
|
|
|
55,514
|
|
|
|
46,069
|
|
|
|
62,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
487,805
|
|
|
|
516,893
|
|
|
|
530,020
|
|
|
|
563,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
179,981
|
|
|
|
91,800
|
|
|
|
203,372
|
|
|
|
150,544
|
|
Interest income and other, net
|
|
|
6,432
|
|
|
|
6,978
|
|
|
|
8,530
|
|
|
|
9,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
186,413
|
|
|
|
98,778
|
|
|
|
211,902
|
|
|
|
160,204
|
|
Provision for income taxes
|
|
|
(72,539
|
)
|
|
|
(38,440
|
)
|
|
|
(80,464
|
)
|
|
|
(57,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,874
|
|
|
$
|
60,338
|
|
|
$
|
131,438
|
|
|
$
|
103,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share(1)
|
|
$
|
0.66
|
|
|
$
|
0.35
|
|
|
$
|
0.76
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share(1)
|
|
$
|
0.65
|
|
|
$
|
0.35
|
|
|
$
|
0.75
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
173,122
|
|
|
|
173,185
|
|
|
|
173,188
|
|
|
|
169,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
174,521
|
|
|
|
174,624
|
|
|
|
174,620
|
|
|
|
171,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The sum of quarterly income per share may not equal annual
income per share due to rounding. |
131
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
Chief Executive Officer (Principal Executive
Officer) and President, Chief Financial Officer and
Treasurer (Principal Financial Officer), as
appropriate, to allow timely decisions regarding required
disclosure.
Our management, under the supervision and with the participation
of our Principal Executive Officer 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 Officer 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 control and
procedures referred to in those certifications and, as such,
should be read in conjunction with the certifications of our
Principal Executive Officer 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,
2008, 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, 2008. Based on our assessment,
management believes that, as of August 31, 2008, the
Companys internal control over financial reporting is
effective.
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,
2008, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
132
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, 2008, 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 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, 2008, 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,
2008 and 2007, 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, 2008 of the Company, and our report dated
October 28, 2008 expressed an unqualified opinion on those
financial statements and included an explanatory paragraph
regarding the Companys change in its method of accounting
for income taxes to comply with Financial Accounting Standards
Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109.
/s/ DELOITTE &
TOUCHE LLP
Phoenix, Arizona
October 28, 2008
133
PART III
Item 10
Directors, Executive Officers and Corporate
Governance
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,
2008) 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 Chief Executive Officer, President,
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,
2008) 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,
2008) and such information is incorporated herein by
reference.
Item 13
Certain Relationships and Related Transactions, and Director
Independence
See Note 16, 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,
2008) 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,
2008) and such information is incorporated herein by
reference.
134
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
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
79
|
|
Consolidated Balance Sheets
|
|
|
80
|
|
Consolidated Statements of Income
|
|
|
81
|
|
Consolidated Statements of Comprehensive Income
|
|
|
82
|
|
Consolidated Statements of Changes in Shareholders Equity
|
|
|
83
|
|
Consolidated Statements of Cash Flows
|
|
|
84
|
|
Notes to Consolidated Financial Statements
|
|
|
85
|
|
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
135
Index
to Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Number
|
|
Filing Date
|
|
Herewith
|
|
|
2
|
.1
|
|
Asset Purchase Agreement between National Endowment for
Financial Education, (R) College for Financial Planning, Inc.,
as assignee of Apollo Online, Inc., as Buyer, and Apollo Group,
Inc., dated August 21, 1997
|
|
S-3
|
|
No. 333-35465
|
|
10
|
|
September 11, 1997
|
|
|
|
2
|
.2
|
|
Assignment and Amendment of Asset Purchase Agreement between
National Endowment for Financial Education, Inc., the College
for Financial Planning, Inc., Apollo Online, Inc., and Apollo
Group, Inc., dated September 23, 1997
|
|
S-3/A
|
|
No. 333-35465
|
|
10.2
|
|
September 23, 1997
|
|
|
|
3
|
.1
|
|
Amended and Restated Articles of Incorporation of Apollo Group,
Inc.
|
|
Proxy
Statement
|
|
No. 000-25232
|
|
Annex B
|
|
August 1, 2000
|
|
|
|
3
|
.1a
|
|
Articles of Amendment to the Articles of Incorporation of Apollo
Group, Inc.
|
|
8-K
|
|
No. 000-25232
|
|
99.1
|
|
June 27, 2007
|
|
|
|
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. Amended and Restated Savings and Investment
Plan*
|
|
10-Q
|
|
No. 000-25232
|
|
10.4
|
|
January 14, 2002
|
|
|
|
10
|
.4
|
|
Apollo Group, Inc. Third Amended and Restated 1994 Employee
Stock Purchase Plan*
|
|
10-K
|
|
No. 000-25232
|
|
10.5
|
|
November 14, 2005
|
|
|
|
10
|
.5
|
|
Apollo Group, Inc. Amended and Restated 2000 Stock Incentive
Plan*
|
|
10-Q
|
|
No. 000-25232
|
|
10.2
|
|
July 1, 2008
|
|
|
|
10
|
.6
|
|
Apollo Group, Inc. 2000 Stock Incentive Plan Plan Amendment*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.7
|
|
Form of Apollo Group, Inc. Non-Employee Director Stock Option
Agreement*
|
|
10-Q
|
|
No. 000-25232
|
|
10.6
|
|
June 28, 2007
|
|
|
|
10
|
.8
|
|
Form of Apollo Group, Inc. Non-Employee Director Restricted
Stock Unit Award Agreement*
|
|
10-Q
|
|
No. 000-25232
|
|
10.7
|
|
June 28, 2007
|
|
|
|
10
|
.9
|
|
Form of Apollo Group, Inc. Non-Statutory Stock Option Agreement*
|
|
10-Q
|
|
No. 000-25232
|
|
10.8
|
|
June 28, 2007
|
|
|
|
10
|
.10
|
|
Form of Apollo Group, Inc. Restricted Stock Unit Award Agreement*
|
|
10-Q
|
|
No. 000-25232
|
|
10.9
|
|
June 28, 2007
|
|
|
|
10
|
.11
|
|
Aptimus, Inc. 2001 Stock Plan*
|
|
S-8
|
|
No. 333-147151
|
|
99.1
|
|
November 5, 2007
|
|
|
|
10
|
.12
|
|
Apollo Group, Inc. Stock Option Assumption Agreement Aptimus,
Inc. 2001 Stock Plan*
|
|
S-8
|
|
No. 333-147151
|
|
99.2
|
|
November 5, 2007
|
|
|
|
10
|
.13
|
|
Apollo Group, Inc. Stock Appreciation Right Assumption Agreement
Aptimus, Inc. 2001 Stock Plan*
|
|
S-8
|
|
No. 333-147151
|
|
99.3
|
|
November 5, 2007
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Number
|
|
Filing Date
|
|
Herewith
|
|
|
10
|
.14
|
|
Aptimus, Inc. 1997 Stock Option Plan, as amended*
|
|
S-8
|
|
No. 333-147151
|
|
99.4
|
|
November 5, 2007
|
|
|
|
10
|
.15
|
|
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
|
.16
|
|
Apollo Group, Inc. Executive Officer Performance Incentive Plan*
|
|
10-Q
|
|
No. 000-25232
|
|
10.1
|
|
January 8, 2008
|
|
|
|
10
|
.17
|
|
Employment Agreement between Apollo Group, Inc. and John G.
Sperling*
|
|
S-1
|
|
No. 33-83804
|
|
10.6
|
|
September 9, 1994
|
|
|
|
10
|
.18
|
|
Deferred Compensation Agreement between Apollo Group, Inc. and
John G. Sperling*
|
|
S-1
|
|
No. 33-83804
|
|
10.7
|
|
September 9, 1994
|
|
|
|
10
|
.19
|
|
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
|
.19b
|
|
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
|
.19c
|
|
Amendment to Shareholder Agreement among Apollo Group, Inc. and
holders of Apollo Group Class B common stock, dated
May 8, 2007
|
|
10-K
|
|
No. 000-25232
|
|
10.7c
|
|
May 22, 2007
|
|
|
|
10
|
.20
|
|
Independent Contractor Agreement between Apollo Group, Inc. and
Governmental Advocates, Inc., dated June 1, 2006
|
|
10-K
|
|
No. 000-25232
|
|
10.12
|
|
May 22, 2007
|
|
|
|
10
|
.21
|
|
Promissory Note from Hermes Onetouch, L.L.C. dated
December 14, 2001
|
|
10-Q
|
|
No. 000-25232
|
|
10.14
|
|
April 12, 2002
|
|
|
|
10
|
.21a
|
|
Corrected Promissory Note from Hermes Onetouch, L.L.C., dated
December 14, 2001
|
|
10-K
|
|
No. 000-25232
|
|
10.13a
|
|
May 22, 2007
|
|
|
|
10
|
.22
|
|
Contract for Construction between Apollo Development Corporation
and Sundt Construction, Inc., dated June 18, 2004
|
|
10-K
|
|
No. 000-25232
|
|
10.14
|
|
May 22, 2007
|
|
|
|
10
|
.23
|
|
Engagement Letter Agreement between Apollo Group, Inc. and FTI
Consulting, Inc., dated November 14, 2006*
|
|
10-K
|
|
No. 000-25232
|
|
10.16
|
|
May 22, 2007
|
|
|
|
10
|
.24
|
|
Consulting Agreement between Apollo Group, Inc. and Brian L.
Swartz, dated February 13, 2007*
|
|
10-K
|
|
No. 000-25232
|
|
10.17
|
|
May 22, 2007
|
|
|
|
10
|
.25
|
|
Employment Agreement between Apollo Group, Inc. and Gregory W.
Cappelli, dated March 31, 2007*
|
|
10-K
|
|
No. 000-25232
|
|
10.18
|
|
May 22, 2007
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Number
|
|
Filing Date
|
|
Herewith
|
|
|
10
|
.26
|
|
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
|
.27
|
|
Employment Agreement between Apollo Group, Inc. and Joseph L.
DAmico, dated June 5, 2007*
|
|
10-Q
|
|
No. 000-25232
|
|
10.1
|
|
June 28, 2007
|
|
|
|
10
|
.28
|
|
Amendment to Employment Agreement between Apollo Group, Inc. and
Joseph L. DAmico, dated June 5, 2007*
|
|
10-Q
|
|
No. 000-25232
|
|
10.2
|
|
June 28, 2007
|
|
|
|
10
|
.29
|
|
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
|
.30
|
|
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
|
.31
|
|
Employment Agreement between Apollo Group, Inc. and Rob
Wrubel, dated August 7, 2007*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.32
|
|
Stock Option Repricing Agreement between Apollo Group, Inc. and
John G. Sperling, dated August 25, 2008*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.33
|
|
Stock Option Repricing Agreement between Apollo Group, Inc. and
Peter V. Sperling, dated August 25, 2008*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.34
|
|
Joint Venture Agreement between Apollo Group, Inc. and Carlyle
Ventures Partners III, L.P., dated October 22, 2007
|
|
10-K
|
|
No. 000-25232
|
|
10.27
|
|
October 29, 2007
|
|
|
|
10
|
.35
|
|
Shareholders Agreement among Apollo Group, Inc., Carlyle
Ventures Partners III, L.P. and Apollo Global, Inc., dated
October 22, 2007
|
|
10-K
|
|
No. 000-25232
|
|
10.28
|
|
October 29, 2007
|
|
|
|
10
|
.36
|
|
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
|
.37
|
|
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
|
|
|
|
10
|
.38
|
|
Rule 62(b) Bond and Supersedeas Bond, dated
February 15, 2008
|
|
10-Q
|
|
No. 000-25232
|
|
10.1
|
|
March 27, 2008
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Number
|
|
Filing Date
|
|
Herewith
|
|
|
10
|
.39
|
|
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
|
.40
|
|
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
|
.41
|
|
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
|
.42
|
|
Option Agreement by and between Apollo Group, Inc. and Macquarie
Riverpoint AZ, LLC, dated June 20, 2006
|
|
10-Q
|
|
No. 000-25232
|
|
10.6
|
|
March 27, 2008
|
|
|
|
10
|
.43
|
|
First Amendment to Option Agreement by and between Apollo Group,
Inc. and Macquarie Riverpoint AZ, LLC, dated March 7, 2007
|
|
10-Q
|
|
No. 000-25232
|
|
10.7
|
|
March 27, 2008
|
|
|
|
10
|
.44
|
|
Second Amendment to Option Agreement by and between Apollo
Group, Inc. and Macquarie Riverpoint AZ, LLC, dated
March 17, 2008
|
|
10-Q
|
|
No. 000-25232
|
|
10.8
|
|
March 27, 2008
|
|
|
|
10
|
.45
|
|
Third Amendment to Option Agreement and Joint Order to
Title Company by and between Apollo Group, Inc. and
Macquarie Riverpoint AZ, LLC, dated April 28, 2008
|
|
10-Q
|
|
No. 000-25232
|
|
10.1
|
|
July 1, 2008
|
|
|
|
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 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 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. |
139
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
|
|
|
|
By:
|
/s/ Charles
B. Edelstein
|
Charles B. Edelstein
Chief Executive Officer and Director
Date: October 28, 2008
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ John
G. Sperling
John
G. Sperling
|
|
Founder, Executive Chairman of the Board and Director
|
|
October 28, 2008
|
|
|
|
|
|
/s/ Peter
V. Sperling
Peter
V. Sperling
|
|
Vice Chairman of the Board and Director
|
|
October 28, 2008
|
|
|
|
|
|
/s/ Charles
B. Edelstein
Charles
B. Edelstein
|
|
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
October 28, 2008
|
|
|
|
|
|
/s/ Gregory
W. Cappelli
Gregory
W. Cappelli
|
|
Assistant to the Executive Chairman, Executive Vice President,
Global Strategy and Director
|
|
October 28, 2008
|
|
|
|
|
|
/s/ Joseph
L. DAmico
Joseph
L. DAmico
|
|
President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
|
|
October 28, 2008
|
|
|
|
|
|
/s/ Brian
L. Swartz
Brian
L. Swartz
|
|
Senior Vice President of Finance and Chief Accounting Officer
(Principal Accounting Officer)
|
|
October 28, 2008
|
|
|
|
|
|
/s/ Dino
J. DeConcini
Dino
J. DeConcini
|
|
Director
|
|
October 28, 2008
|
|
|
|
|
|
/s/ K.
Sue Redman
K.
Sue Redman
|
|
Director
|
|
October 28, 2008
|
|
|
|
|
|
/s/ James
R. Reis
James
R. Reis
|
|
Director
|
|
October 28, 2008
|
140
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ George
A. Zimmer
George
A. Zimmer
|
|
Director
|
|
October 28, 2008
|
|
|
|
|
|
/s/ Roy
A. Herberger
Roy
A. Herberger
|
|
Director
|
|
October 28, 2008
|
|
|
|
|
|
/s/ Ann
Kirschner
Ann
Kirschner
|
|
Director
|
|
October 28, 2008
|
141
EX-10.6
2
p13405exv10w6.htm
EX-10.6
exv10w6
EXHIBIT 10.6
APOLLO GROUP, INC.
2000 STOCK INCENTIVE PLAN
PLAN AMENDMENT
The Apollo Group, Inc. 2000 Stock Incentive Plan, as previously amended and restated (the
Plan), is hereby further amended, effective September 26, 2008, as follows:
1. Section 5.4 of the Plan is hereby amended in its entirety to read as follows:
Notwithstanding any provision in the Plan to the contrary, and subject to
adjustment as provided in Section 14.1, the maximum number of shares of Stock
for which one or more Awards may be granted to any one Participant during a
fiscal year of the Company shall be limited to one million (1,000,000) shares
in the aggregate; provided, however, that such limit shall be increased to one
million five hundred thousand (1,500,000) shares of Stock in the aggregate for
any Awards made to the Participant during the fiscal year of the Company in
which such Participant first commences employment or service with the Company.
2. Except as modified by this Plan Amendment, all the terms and provisions of the Plan
as in effect immediately prior to such amendment shall continue in full force and
effect.
IN WITNESS WHEREOF, Apollo Group, Inc. has caused this Plan Amendment to be executed on its
behalf by its duly-authorized officer on the date indicated below.
|
|
|
|
|
|
APOLLO GROUP, INC.
|
|
|
By: |
/s/ Joseph L. DAmico
|
|
|
Title: |
President and CFO |
|
|
Dated: |
September 26, 2008 |
|
|
EX-10.31
3
p13405exv10w31.htm
EX-10.31
exv10w31
EXHIBIT 10.31
APOLLO GROUP, INC.
EMPLOYMENT AGREEMENT
ROB WRUBEL
August 6, 2007
Dear Rob:
As you know, Apollo Group, Inc. (Apollo) proposes to purchase all of the stock and interest
in your current employer, Aptimus, Inc. (Aptimus). If this acquisition is completed, Apollo will
hold Aptimus as a wholly-owned subsidiary of Apollo (such subsidiary to be referred to herein as
Apollo Marketing) which will likely be re-named some time after the closing of the acquisition
(the Closing). We are pleased to offer you employment with Apollo or Apollo Marketing effective
upon the Closing pursuant to the terms of this Employment Agreement (the Agreement). If you
accept this offer, and the contingencies of this offer are satisfied, the terms of your employment
will be as follows after the date of the Closing (the Closing Date).
1. Your Position
You will initially have the full-time regular position of Chief Executive Officer of Apollo
Marketing and will report to the Vice President of Marketing of Apollo. You shall have such duties
as are commensurate with your position and such duties as may be assigned to you by the Vice
President of Marketing of Apollo.
2. Compensation
You will be paid as compensation for services a base salary at the annual rate of $275,000, or
at such higher rate as Apollo may determine from time to time. Such salary shall be payable in
accordance with the standard payroll procedures of Apollo. The annual compensation specified in
this Section 2, together with any increases in such compensation that may be granted from time to
time, is referred to in this Agreement as base salary.
3. Annual Performance Bonus
You shall be eligible to receive a bonus of up to 75% of your base salary each fiscal year
(September 1 August 31) (the Annual Performance Bonus). This bonus shall be paid quarterly
based upon the achievement of certain individual and Apollo Marketing performance criteria as
agreed upon by Apollo and you. Payment of the bonus, if any, shall be made within sixty (60)
calendar days following the end of the relevant quarter.
Your performance targets for fiscal year 2008 shall be as agreed upon by Apollo and you within
thirty (30) days following the date that the merger agreement between Aptimus and Apollo is signed.
Performance targets for any years after FY08 shall be as agreed upon by Apollo and you.
- 1 -
4. One-Time Integration/Retention Bonus
You shall be eligible to receive a one-time integration/retention bonus of up to Two Hundred
Six Thousand Two Hundred and Fifty Dollars ($206,250). 50% of this one-time integration/retention
bonus will be paid based upon the achievement of certain quarterly performance targets related to
the transition and integration of Aptimus into Apollo during the first four full quarters (based on
Apollos fiscal quarters) following the Closing Date (the Integration Bonus). These performance
targets shall be as agreed upon by Apollo and you within thirty (30) days following the date that
the merger agreement between Aptimus and Apollo is signed. Because employee retention is one of
the objectives of this bonus, you must be actively employed by Apollo/Apollo Marketing on the last
day of each quarter to earn a bonus for the preceding quarter. The determination of whether a
quarterly Integration Bonus has been earned and the amount of the bonus earned, if any, will be
made by Apollo in its discretion which shall be exercised in good faith. Such a determination
shall be made and the bonus paid, if any, within sixty (60) calendar days following the end of the
relevant quarter.
Except as set forth in Section 8, the remaining 50% of this bonus shall be earned if you
remain actively employed on a full time basis by Apollo/Apollo Marketing through the end of the
sixth (6th) full month following the Closing Date (the Retention Bonus). This bonus, if earned,
shall be paid by no later than the end of the seventh (7th) month following the Closing Date.
5. Benefits
It is currently anticipated that Apollo/Apollo Marketing will continue Aptimus employee
benefit plans until employees can be transitioned onto Apollos benefit plans. Notwithstanding the
forgoing, you will be entitled to no less than three (3) weeks vacation per year, which shall be
accrued in accordance with Apollos vacation accrual policies. After you have transitioned to
Apollos benefit plans, you will receive credit for the period of your service with Aptimus for
purposes of eligibility and vesting under such plans. The benefits you will be eligible to receive
will be equivalent to those generally applicable to Apollos management employees.
6. Equity
(a) Apollo Four-Year Options
The Compensation Committee of Apollos Board of Directors (the Compensation Committee) will
grant you a stock option to purchase up to 75,000 shares of Apollo Group Inc. Class A common stock
(the Four Year Option) on the Closing Date or as soon as practicable thereafter. The per share
exercise price of the Four Year Option will be equal to the fair market value of the common stock
at the close of business on the date the option grant is made to you. The Four Year Option will be
evidenced by a standard stock option agreement (a copy of which is attached as Exhibit A), and will
be subject to the terms and conditions of that agreement and the stock option plan under which the
option is granted. Such terms and conditions will include, but not be limited to, vesting annually
over four (4) years of active service following the Closing Date and will expire six (6) years from
the date of grant.
(b) Apollo Two-Year Options
The Compensation Committee will grant you a second stock option to purchase up to 25,000
shares of Apollo Group Inc. Class A common stock (the Two Year Option) on the Closing Date or as
soon as practicable thereafter. The per share exercise price of the Two Year Option will be equal
to the fair market value of the common stock at the close of business on the date the option grant
is made to you. The Two Year Option will be evidenced by a stock option agreement (a copy of which
is attached as Exhibit B), and will be subject to the terms and conditions of that agreement and
the stock option plan under which the option is granted. The shares subject to the Two Year Option
shall vest in full after you have provided two years of active service following the Closing Date.
Except as provided in Section 8, no shares subject to the Two Year Option shall vest on a pro-rata
basis or otherwise unless and until you have provided two years of active service to Apollo, Apollo
Marketing (or any of their affiliates) after the Closing Date.
(c) Apollo Marketing Options/Other Benefits
The mission of Apollo Marketing is to establish a world class internet and direct advertising
company by: (i) maximizing the efficiency, effectiveness and cost savings of generating the
highest quality leads for the University of Phoenix and other Apollo education institutions, and
(ii) building a substantial, high quality lead generation business targeted at companies other than
educational companies. Apollo recognizes the importance of the people who will execute the mission
described above and will consider implementing a program that enables such individuals to share in
the value created by Apollo Marketing that is in excess of the value contributed by Apollo. While
it will take some time to finalize the appropriate incentive device and to evaluate the proper
individual incentive potentials, as soon as practicable after the Closing, Apollo, in consultation
with you, will evaluate the feasibility of such a program, taking into consideration such factors
that it deems appropriate. If such a bonus is implemented, Apollo will consider creating a pool
representing such incremental enterprise value and distributing this pool among appropriate members
of Apollo Marketing, Apollo management and key contributors, in the form of phantom equity,
additional Apollo options, Apollo Marketing options or some other appropriate incentive grant, as
determined in good faith by Apollo. The final structure of any such program is dependent on many
variables and factors, but Apollo understands the importance of aligning goals and rewards to
motivate a high performing team.
(d) Future Grants
Apollo generally issues stock options or other equity awards to its managers and key employees
once a year. Such option awards vary in number from year to year, and may not be granted at all in
a year, depending upon a number of factors, including individual performance and the performance of
Apollo Marketing. If you are granted such stock options, you will be notified by Apollo. It is
possible that the amount and/or frequency of such grants may be reduced, or such grants eliminated
entirely, if the program described in Section 6(c) above is implemented.
(e) Assumed Aptimus Awards
Pursuant to the Merger Agreement, Apollo will assume certain Aptimus Awards previously
granted by Aptimus. For this purpose, Aptimus Awards shall mean any prior grant of an Aptimus
restricted stock award, stock appreciation right or an option to purchase Aptimus common stock that
was made to you prior to the Closing Date. One-half (1/2) of the unvested Aptimus Awards
outstanding on the Closing Date shall immediately vest on the Closing Date.
7. Term of Employment
This Agreement is entered into in connection with Apollos acquisition of Aptimus and your
continuing services to Apollo/Apollo Marketing after the Closing is a material inducement for
Apollo to complete the acquisition. Therefore, because your service to Apollo/Apollo Marketing
following the Closing is critical to the success of the acquisition, you agree that you will remain
actively employed by Apollo or Apollo Marketing for at least two (2) years following the Closing
Date. This period will be referred to herein as the Term. Notwithstanding the foregoing, your
employment may be terminated by Apollo or Apollo Marketing at any time for any reason, with or
without cause during or after the Term by giving you thirty (30) days advance notice of termination
in the case of a termination without Cause (defined below) and pursuant to Section 8 below in the
case of a termination for Cause. You agree that the only reason you may terminate your
employment during the Term is for Good Reason in accordance with Section 8 of this Agreement.
8. Severance Benefits
If your employment is terminated by Apollo (or Apollo Marketing) with Cause, or by you without
Good Reason, then you will receive your salary and benefits (including accrued, but unused vacation
time) earned up to the effective date of your termination and nothing else.
If your employment is terminated by Apollo (or Apollo Marketing) without Cause (as defined
below) during the first twenty-four (24) months following the Closing Date or by you with Good
Reason (as defined below), during the first twelve (12) months following the Closing Date, and you
execute and deliver to Apollo a signed settlement agreement and general release in a form and
manner provided by Apollo (hereafter Release) within thirty (30) days following your termination
of employment and the Release becomes effective and enforceable in accordance with its terms
following any applicable revocation period, in addition to the amounts described in the preceding
paragraph, Apollo will provide you with the additional benefits set forth in this paragraph.
First, Apollo will continue to pay you your base salary as a severance payment for twelve (12)
months following the date on which the Release becomes effective. Such payments shall be made in
accordance with Apollos regularly scheduled payroll beginning with the first payroll date
coincident with or following the date the Release becomes effective. Second, if your employment
termination occurs prior to the expiration of the first six (6) months following the Closing Date,
you shall also be paid the Retention Bonus no later than fifteen (15) business days following the
date on which the Release becomes effective. Third, Apollo shall also reimburse you for any COBRA
premiums you pay during the twelve (12) months following such a termination of employment. Any
such reimbursement shall be made within thirty (30) days of your submission for reimbursement, but
no event later than the last day of your taxable
year following the taxable year in which the premiums are paid. Fourth, (A) the Two Year
Option (to the extent not fully vested) shall become fully vested; (B) any Aptimus Awards (to the
extent not fully vested) shall become fully vested, and (C) you shall immediately be credited with
additional employment with Apollo/Apollo Marketing for purposes of the vesting schedule in effect
for the Four Year Option so that you shall be immediately vested in such option to the same extent
as if you had completed an additional twelve (12) months of employment with Apollo/Apollo Marketing
prior to your termination date.
Following the expiration of the twenty-fourth (24th) month following the Closing Date in the
case of a termination by Apollo/Apollo Marketing without Cause and the twelfth (12th) month
following the Closing Date in the case of a termination by you for Good Reason, you will no longer
be eligible for severance benefits hereunder. Instead, you will be eligible to participate in any
severance benefit plan or program that Apollo makes generally available to its management
employees, if any, subject to the terms of such severance benefit plans and programs.
For purposes of this Agreement, Cause shall be defined as:
(i) Repeated failure to meet the reasonable and lawful directives of the Vice President of
Marketing of Apollo (or an officer in a higher position than the Vice President of Marketing of
Apollo to whom you have been directed to report);
(ii) Conviction of a felony (or a plea of guilty or nolo contendere by the Executive to a
felony) or any other crime against or involving Apollo or Apollo Marketing;
(iii) Acts of fraud, dishonesty or misappropriation committed by you with respect to or that
is harmful to Apollo or Apollo Marketing;
(iv) Willful, reckless or negligent misconduct by you with respect to or that is harmful to
Apollo, Apollo Marketing or any of its officers, directors, employees, clients, partners, insurers,
subsidiaries, parents, or affiliates;
(v) A material breach of this Agreement or the PIIA (defined below).
The foregoing is an exclusive list of the acts or omissions that shall be considered Cause
for the termination of your employment by Apollo/Apollo Marketing. With respect to the acts or
omissions set forth in clauses (i), (iii), (iv) and (v) above, (x) you shall be provided with
thirty (30) days advance written notice detailing the basis for the termination of employment for
Cause, (y) during the thirty (30) day period after you have received such notice, you shall be on
leave status, you shall not report to work, unless instructed otherwise by Apollo, and shall have
the opportunity to present your case to a committee of independent directors of Apollos Board of
Directors (the Board) before any termination for Cause is finalized and (z) you shall continue to
receive the compensation and benefits provided by this Agreement during the 30-day period. In
addition, no act or omission shall give rise to a termination for Cause if performed in good faith
and with an objectionably reasonable belief that the action or inaction was in the best interest of
Apollo or Apollo Marketing.
For purposes of this Agreement, Good Reason shall be defined as one or more of the following
conditions arising without your written consent:
(i) A material diminution in your base salary or Annual Performance Bonus target;
(ii) A material diminution in your authority, duties, or responsibilities as compared to the
authority, duties, and responsibilities described in this Agreement;
(iii) A requirement that you report to a corporate officer or employee instead of reporting
directly to the Vice President of Marketing of Apollo (or an officer in an equal or higher position
than the Vice President of Marketing of Apollo);
(iv) A requirement that you relocate your principal place of business by more than fifty (50)
miles; or
(v) Any other action or inaction that constitutes a material breach of this Agreement by
Apollo or Apollo Marketing.
In order for a termination of employment to be for Good Reason, you must provide written
notice to the Board of the condition described above and your intent to resign for Good Reason
hereunder within a period not to exceed ninety (90) days of your knowledge of the initial existence
of the condition. Following your providing this Notice, Apollo (and, as appropriate, Apollo
Marketing) shall be provided a period of at least thirty (30) days during which to remedy the
condition. You shall continue to receive the compensation and benefits provided by this Agreement
during the 30-day cure period and if the condition is not cured at the end of such period your
employment shall cease and you will become entitled to the severance benefits described above. If
the condition is cured, you shall not be deemed to have Good Reason to terminate your employment.
9. Compliance with Company Policies
As an employee of Apollo/Apollo Marketing, you will be expected to comply with Apollos
personnel and other policies as are in effect from time to time including, but not limited to,
Apollos policy prohibiting discrimination and unlawful harassment, insider trading, conflicts of
interest and violation of applicable laws in the course of performing services to Apollo and/or
Apollo Marketing.
10. Full-time Services to the Company
As a full-time employee, Apollo/Apollo Marketing requires that you devote your full business
time, attention, skills and efforts to the duties and responsibilities of your position. However,
you will not be precluded from providing services to others, so long as such services will not be
to the benefit of a competitor of Apollo or Apollo Marketing and will not otherwise interfere with
your ability to satisfactorily fulfill your duties and responsibilities to Apollo/Apollo Marketing.
You are currently sitting as a member of the board of directors, acting as an advisor to and/or
have an ownership interest in the entities set forth in Exhibit C hereto.
You shall be permitted to continue such services and ownership interests so long as they do
not interfere or conflict with your duties hereunder or become competitive in any manner with the
business of Apollo or Apollo Marketing; if you wish to perform services (for any or no form of
compensation) to any other person or business entity while employed by Apollo/Apollo Marketing,
please contact and discuss your plans with the Vice President of Marketing of Apollo in advance of
providing such services so that no problem later arises that could have been avoided from the
outset. Notwithstanding the preceding sentence, you may serve in any capacity with any civic,
educational or charitable organization without such prior authorization provided such service does
not adversely impact your ability to satisfactorily fulfill your duties and responsibilities to
Apollo/Apollo Marketing or benefit a competitor of Apollo or Apollo Marketing.
11. Documentation/Contingencies
This offer is contingent upon the Closing, your consent to, and results satisfactory to Apollo
of, a background check (to be completed prior to the Closing) and your execution of the Apollo
Proprietary Information and Inventions Agreement (PIIA) (a copy of which is attached as
Exhibit D). The Immigration Reform and Control Act of 1986 requires that Apollo review proof of
all new employees identity and authorization to work in the U.S. Accordingly, this offer is
necessarily contingent upon Apollos receipt of satisfactory evidence that it can comply with these
legal requirements with respect to you.
12. Tax Withholdings
With respect to any and all cash compensation and other benefits paid to you under this
Agreement, Apollo/Apollo Marketing shall comply with all applicable tax withholding requirements,
and shall make such other deductions as may be required and/or allowed by applicable law and/or as
authorized in writing by you.
13. Change in Control Agreement/Bonus Payment
Effective as of the Closing Date, you will cease to be subject to the Change in Control
Agreement between you and Aptimus dated May 14, 2007 or any other change in control agreements that
preceded it (collectively, the CIC Agreement) and the CIC Agreement will terminate. In addition
to the bonus payments described above, you shall also receive, within thirty (30) calendar days
following the Closing Date, a lump sum bonus of Forty Two Thousand One Hundred and Eighty Eight
Dollars ($42,188) for the period of October 1, 2007 through December 31, 2007. If the Closing Date
occurs after October 1, 2007, you will receive a pro-rata share of this bonus based upon the number
days between the Closing Date and December 31, 2007. You acknowledge and agree that this payment
is in full satisfaction of any and all bonuses that you are or might have become due to under any
and all Aptimus bonus program, plan or arrangement through the end of the 2007 calendar year.
14. Legal Fees.
Aptimus or Apollo will pay all reasonable legal fees and expenses not to exceed $15,000
incurred in connection with the negotiation, preparation and execution of this Agreement and
you will be responsible for the remainder, if any. Aptimus or Apollo shall directly make full
payment to your legal counsel within thirty (30) days after the receipt of any applicable invoice.
15. Section 409A.
Notwithstanding any provision to the contrary in this Agreement, no payments or benefits to
which you become entitled under Section 8 of this Agreement shall be made or paid to you prior to
the earlier of (i) the expiration of the 6-month period measured from the date of your separation
from service with Apollo/Apollo Marketing (as such term is defined in Treasury Regulations issued
under Section 409A of the Internal revenue Code of 1986, as amended (the Code)) or (ii) the date
of your death, if you are deemed at the time of such separation from service a key employee
within the meaning of that term under Code Section 416(i) and such delayed commencement is
otherwise required in order to avoid a prohibited distribution under Code Section 409A(a)(2). Upon
the expiration of the applicable Code Section 409A(a)(2) deferral period, all payments deferred
pursuant to this Section 15 shall be paid in a lump sum to you, and any remaining payments due
under this Agreement shall be paid in accordance with the normal payment dates specified for them
herein.
16. Arbitration
Any dispute, controversy, or claim, whether contractual or non-contractual, between you and
Apollo or Apollo Marketing, unless mutually settled, shall be resolved by binding arbitration in
accordance with the Employment Arbitration Rules of the American Arbitration Association (the
AAA). You and Apollo each agree that before proceeding to arbitration, we will mediate disputes
before the AAA by a mediator approved by the AAA. If mediation fails to resolve the matter, any
subsequent arbitration shall be conducted by arbitrators approved by the AAA and mutually
acceptable to you and Apollo. All disputes, controversies, and claims shall be conducted by a
single arbitrator. If you and Apollo are unable to agree on the mediator or the arbitrator(s),
then the AAA shall select the mediator(s)/arbitrator(s). The resolution of the dispute by the
arbitrator(s) shall be final, binding, nonappealable, and fully enforceable by a court of competent
jurisdiction under the Federal Arbitration Act. The arbitration award shall be in writing and
shall include a statement of the reasons for the award. The arbitration shall be held in either
San Francisco, California or Phoenix, Arizona at your election. Apollo shall pay all AAA,
mediation, and arbitrators fees and costs.
17. Miscellaneous
You acknowledge and agree that in deciding to sign this Agreement you have not relied on any
representations, promises or commitments concerning your employment, whether spoken or in writing,
made to you by any Aptimus, Apollo or any other representative, except for what is expressly stated
in this Agreement, and the PIIA. This Agreement can only be changed by another written agreement
signed by you and an authorized representative of Apollo and, to be effective, must specifically
state that it is intended to alter or modify this Agreement. Except as provided for herein, this
Agreement and the PIIA supersede and replace (i) any prior verbal or written agreements between you
and Apollo and (ii) any prior verbal or written agreements between you and Aptimus and between you
and the shareholders of Aptimus, relating to the subject matter hereof, including, but not limited
to any and all prior employment agreements, the
CIC Agreement, bonus agreements and/or agreements regarding equity in Aptimus and/or Apollo.
Upon the Closing, this Agreement, and the PIIA will be the entire agreement relating to your
employment with Apollo/Apollo Marketing. In addition, any confidential/proprietary/trade secrets
information and inventions agreement(s) between you and Aptimus, or any predecessor thereto, shall
remain in effect as it pertains to subject matters existing prior to the Closing Date.
This Agreement shall be construed and interpreted in accordance with the laws of the State of
California. Each provision of this agreement is severable from the others, and if any provision
hereof shall be to any extent unenforceable, it and the other provisions shall continue to be
enforceable to the full extent allowable, as if such offending provision had not been a part of
this agreement.
If you have any questions about this offer, please contact me. If you find this offer
acceptable, please sign and date this letter below and return it to me.
|
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Sincerely,
APOLLO GROUP, INC.
|
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|
/s/ Joseph L. DAmico
|
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|
Joseph L. DAmico |
|
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Executive Vice President &
Chief Financial Officer |
|
|
I have read, understand and voluntarily accept the terms and conditions in this offer.
|
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|
Date: August 7, 2007 |
/s/ Rob Wrubel
|
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Rob Wrubel |
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|
EXHIBIT C
1) Yoga Works, Founder & Chairman of the Board of Directors. Ownership of 10% of the company
2) Pixsy, Advisor and stock option holder. San Francisco based video search network company.
3) Double Feature, Advisor and stock option holder. New York based online movie ticketing
business.
4) Zubio, Advisor and stock option holder. Startup chair massage company based in San Francisco.
5) LeapFrog, Consultant. Consultant for childrens educational company regarding produce
development.
6) Investor in entrepreneur funds for Greylock, Redpoint, and Highland capital.
EX-10.32
4
p13405exv10w32.htm
EX-10.32
exv10w32
EXHIBIT 10.32
STOCK OPTION REPRICING AGREEMENT
This Stock Option Repricing Agreement (the Agreement) is entered into as of August 25, 2008 by
and between John G. Sperling (Sperling), on the one hand, and Apollo Group, Inc. (Apollo), on
the other hand (collectively, the Parties).
WHEREAS, on or about September 21, 2001, Apollo granted to Sperling Apollo Stock Option No. 1726,
an option to purchase 225,000 shares of Apollo Class A common stock with an exercise price of
$23.33 per share (the September 2001 Apollo Option);
WHEREAS, on or about September 21, 2001, Apollo granted to Sperling University of Phoenix Online
(UOPX) Stock Option No. 165, an option to purchase 150,000 shares of UOPX common stock at an
exercise price of $19.00 per share, which on or about August 27, 2004 was converted into Apollo
Stock Option No. 9584, an option to purchase 215,311 shares of Apollo Class A common stock at an
exercise price of $17.65 (the September 2001 UOPX Option, and together with the September 2001
Apollo Options, the Options);
WHEREAS, as of the date of this Agreement, the Options are fully vested and have not been cancelled
or exercised;
WHEREAS, Sperling is one of the defendants in the following derivative lawsuits filed on behalf of
Apollo: Alaska Electrical Pension Fund v. Sperling, et al, No. CV06-02124-PHX-ROS, pending in the
United States District Court for the District of Arizona; and Larry Barnett v. John Blair, et al.,
Case No. CV2006-0521558, pending in the Superior Court for the State of Arizona in and for the
County of Maricopa (together, the Actions);
WHEREAS, the parties to the Actions have agreed to settle the Federal Action and the State Action
Stock Option Claims through the Stipulation of Settlement dated April 7, 2008, the terms and
definitions of which are explicitly incorporated herein; and
WHEREAS, in accordance with paragraph 2.1 of the Stipulation of Settlement, and solely in order to
facilitate the settlement of the Federal Action and the State Action Stock Option Claims, the
Parties have agree to reprice the Options as follows:
NOW, THEREFORE, in consideration of the foregoing recitals, the terms and conditions set forth
herein and for other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
1. On the date the Federal Action and State Action Stock Option Claims are settled pursuant to
the Stipulation of Settlement (the Effective Date), the Options shall be repriced as follows:
(a) The exercise price of the September 2001 Apollo Option for each of the 225,000 shares of
Apollo Class A common stock subject thereto shall be increased from $23.33 to $30.77 per share.
(b) The exercise price per share for 50,000 shares of Apollo Class A common stock subject to
the September 2001 UOPX Option shall be increased from $17.65 to $23.29 per share. The exercise
price per share for the remainder of the shares of Apollo Class A common stock subject to the
September 2001 UOPX Option shall not be repriced and shall not be affected by this Agreement.
2. In the event the Effective Date does not occur, the Options will not be repriced, and this
Agreement shall be null and void and of no force or effect whatsoever.
3. The Parties are entering into this Agreement and performing the foregoing repricing of
stock options solely in order to induce the settlement of the Actions and to avoid continued
litigation in the Actions, and for no other reason. The Parties deny all allegations of wrongdoing
of any kind whatsoever in connection with the Options. Each of the Parties maintains that the
Options were properly granted and that there was no misconduct whatsoever by any of them in
connection therewith. Nothing in this Agreement shall construed as an admission by any Party of
liability, wrongdoing or any other misconduct whatsoever, all of which is generally and
specifically denied.
4. Each Party hereto acknowledges that such Party executed this Agreement freely and
voluntarily and is not acting under coercion, duress, menace, economic compulsion, nor is entering
into this Agreement because of any supposed disparity in bargaining power; rather, each is freely
and voluntarily signing this Agreement for such Partys own benefit. Each of the Parties have
consulted with or had the opportunity to consult with legal counsel of their choosing regarding
this agreement
5. Each Party has entered into this Agreement solely upon the representations, covenants and
warranties contained and referred to in this Agreement and the Stipulation of Settlement. Neither
Party has placed any reliance on any representation not expressed in this Agreement or the
Stipulation of Settlement.
6. This Agreement contains the entire agreement between the Parties with respect to its
subject matter. This Agreement may not be altered, amended, modified, or otherwise changed in any
respect or particular whatsoever, except by a writing duly executed by each party which expressly
refers to this Paragraph.
BY AFFIXING HIS SIGNATURE BELOW, EACH OF THE PARTIES SIGNING THIS AGREEMENT REPRESENTS THAT HE HAS
READ AND UNDERSTANDS THIS AGREEMENT, THAT HE IS AUTHORIZED TO SIGN THIS AGREEMENT, AND THAT THE
PARTY ON BEHALF OF WHOM HE SIGNS THIS AGREEMENT AGREES TO BE BOUND BY ITS TERMS.
Apollo Group, Inc.
|
|
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By:
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John G. Sperling
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/s/ John G. Sperling
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[Name]
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John G. Sperling |
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Title :
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Executive Chairman |
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EX-10.33
5
p13405exv10w33.htm
EX-10.33
exv10w33
EXHIBIT 10.33
STOCK OPTION REPRICING AGREEMENT
This Stock Option Repricing Agreement (the Agreement) is entered into as of August 25, 2008 by
and between Peter V. Sperling (Sperling), on the one hand, and Apollo Group, Inc. (Apollo), on
the other hand (collectively, the Parties).
WHEREAS, on or about September 21, 2001, Apollo granted to Sperling Apollo Stock Option No. 1727,
an option to purchase 37,500 shares of Apollo Class A common stock with an exercise price of $23.33
(the Option);
WHEREAS, as of the date of this Agreement, the Option is fully vested and has not been cancelled or
exercised;
WHEREAS, Sperling is one of the defendants in the following derivative lawsuits filed on behalf of
Apollo: Alaska Electrical Pension Fund v. Sperling, et al, No. CV06-02124-PHX-ROS, pending in the
United States District Court for the District of Arizona; and Larry Barnett v. John Blair, et al.,
Case No. CV2006-0521558, pending in the Superior Court for the State of Arizona in and for the
County of Maricopa (together, the Actions);
WHEREAS, the parties to the Actions have agreed to settle the Federal Action and the State Action
Stock Option Claims through the Stipulation of Settlement dated April 7, 2008, the terms and
definitions of which are explicitly incorporated herein; and
WHEREAS, in accordance with paragraph 2.1 of the Stipulation of Settlement, and solely in order to
facilitate the settlement of the Federal Action and the State Action Stock Option Claims, the
Parties have agree to reprice the Options as follows:
NOW, THEREFORE, in consideration of the foregoing recitals, the terms and conditions set forth
herein and for other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
1. On the date the Federal Action and State Action Stock Option Claims are settled pursuant to
the Stipulation of Settlement (the Effective Date), the exercise price of the Option for each of
the 37,500 shares of Apollo Class A common stock subject thereto shall be increased from $23.33 to
$30.77 per share.
2. In the event the Effective Date does not occur, the Option will not be repriced, and this
Agreement shall be null and void and of no force or effect whatsoever.
3. The Parties are entering into this Agreement and performing the foregoing repricing of
stock options solely in order to induce the settlement of the Actions and to avoid continued
litigation in the Actions, and for no other reason. The Parties deny all allegations of wrongdoing
of any kind whatsoever in connection with the Option. Each of the Parties maintains that the
Option was properly granted and that there was no misconduct whatsoever by any of them in
connection therewith. Nothing in this Agreement shall construed as an admission by any Party of
liability, wrongdoing or any other misconduct whatsoever, all of which is generally and
specifically denied.
4. Each Party hereto acknowledges that such Party executed this Agreement freely and
voluntarily and is not acting under coercion, duress, menace, economic compulsion, nor is entering
into this Agreement because of any supposed disparity in bargaining power; rather, each is freely
and voluntarily signing this Agreement for such Partys own benefit. Each of the Parties have
consulted with or had the opportunity to consult with legal counsel of their choosing regarding
this agreement
5. Each Party has entered into this Agreement solely upon the representations, covenants and
warranties contained and referred to in this Agreement and the Stipulation of Settlement. Neither
Party has placed any reliance on any representation not expressed in this Agreement or the
Stipulation of Settlement.
6. This Agreement contains the entire agreement between the Parties with respect to its
subject matter. This Agreement may not be altered, amended, modified, or otherwise changed in any
respect or particular whatsoever, except by a writing duly executed by each party which expressly
refers to this Paragraph.
BY AFFIXING HIS SIGNATURE BELOW, EACH OF THE PARTIES SIGNING THIS AGREEMENT REPRESENTS THAT HE HAS
READ AND UNDERSTANDS THIS AGREEMENT, THAT HE IS AUTHORIZED TO SIGN THIS AGREEMENT, AND THAT THE
PARTY ON BEHALF OF WHOM HE SIGNS THIS AGREEMENT AGREES TO BE BOUND BY ITS TERMS.
Apollo Group, Inc.
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By:
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Peter V. Sperling
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/s/ Peter V. Sperling
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[Name]
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Peter V. Sperling |
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Title :
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Vice Chairman |
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EX-21
6
p13405exv21.htm
EX-21
exv21
EXHIBIT 21
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Subsidiaries of Apollo Group, Inc. |
Entity |
|
Jurisdiction of Incorporation |
Apollo Development Corp.
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Arizona |
Apollo Education Corporation
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Arizona |
Apollo Global, Inc.*
|
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Delaware |
Apollo Group International Development, LLC
|
|
Arizona |
Apollo Investments, Inc.
|
|
Arizona |
Apollo NB Holding Company
|
|
Arizona |
Apollo Online, Inc.
|
|
Arizona |
Apollo Publishing and Learning Technologies, Inc.
|
|
Arizona |
Apollo University and Graduate Institute, Inc.
|
|
Arizona |
Aptimus, Inc.
|
|
Washington |
Computer Aided Learning Corporation, Inc.
|
|
Arizona |
Global Education Partner, Inc.
|
|
Arizona |
Insight Schools, Inc.
|
|
Oregon |
Institute for Professional Development
|
|
California |
International Education Partner, Inc.
|
|
Arizona |
Riverpoint Lot 2, LLC
|
|
Arizona |
Riverpoint Lots 1/3/5, LLC
|
|
Arizona |
The College for Financial Planning Institutes
Corporation
|
|
Arizona |
The University of Phoenix, Inc.
|
|
Arizona |
Western International University, Inc.
|
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Arizona |
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* |
|
Apollo Group, Inc. owns 80.1% of Apollo Global, Inc. |
|
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|
Assumed Names |
Corporate Name |
|
Assumed Name |
|
State(s) where used |
Apollo Group, Inc.
|
|
Apollo Education
|
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California |
Institute for
Professional
Development
|
|
Institute for
Professional
Development of
California, Inc.
|
|
Connecticut, New Jersey |
Institute for
Professional
Development
|
|
Institute for
Professional
Development, Inc.
|
|
Arizona, Florida,
Illinois, Indiana,
Kentucky, North
Carolina, Oregon,
Pennsylvania,
Tennessee, Virginia |
Institute for
Professional
Development
|
|
Institute for
Professional
Development
Corporation
|
|
Iowa |
126
EX-23.1
7
p13405exv23w1.htm
EX-23.1
exv23w1
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-149933, 333-147151,
333-144129, 333-46834, 33-63429, 33-88984, 33-88982 and 33-87638 on Form S-8 of (i) our report
dated October 28, 2008 related to the consolidated balance sheets as of August 31, 2008 and 2007,
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, 2008 of Apollo
Group, Inc. and subsidiaries, which we expressed an unqualified opinion on those financial
statements and included an explanatory paragraph on the Companys change in method of accounting
for income taxes to comply with Financial Accounting Standards Board (FASB) Interpretation No.
48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 and
(ii) our report dated October 28, 2008 on the effectiveness of internal control over financial
reporting of Apollo Group, Inc. and subsidiaries, appearing in this Annual Report on Form 10-K of
Apollo Group, Inc. and subsidiaries for the year ended August 31, 2008.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 28, 2008
127
EX-31.1
8
p13405exv31w1.htm
EX-31.1
exv31w1
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Charles B. Edelstein, certify that:
1. I have reviewed this Form 10-K of Apollo Group, Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrants internal control over financial reporting.
Date: October 28, 2008
|
|
|
|
|
|
|
|
|
/s/ Charles B. Edelstein
|
|
|
Charles B. Edelstein |
|
|
Chief Executive Officer and
Director
(Principal Executive Officer) |
|
|
128
EX-31.2
9
p13405exv31w2.htm
EX-31.2
exv31w2
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph L. DAmico, certify that:
1. I have reviewed this Form 10-K of Apollo Group, Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrants internal control over financial reporting.
Date: October 28, 2008
|
|
|
|
|
|
|
|
|
/s/ Joseph L. DAmico
|
|
|
Joseph L. DAmico |
|
|
President, Chief Financial
Officer and Treasurer
(Principal Financial Officer) |
|
|
129
EX-32.1
10
p13405exv32w1.htm
EX-32.1
exv32w1
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Apollo Group, Inc. (the Company) on Form 10-K for
the fiscal year ended August 31, 2008, as filed with the Securities and Exchange Commission on the
date hereof (the Report), I, Charles B. Edelstein, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
|
(1) |
|
the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
(2) |
|
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
Date: October 28, 2008
|
|
|
|
|
|
|
|
|
/s/ Charles B. Edelstein
|
|
|
Charles B. Edelstein |
|
|
Chief Executive Officer and
Director
(Principal Executive Officer) |
|
|
A signed original of this written statement required by Section 906 has been provided to
Apollo Group, Inc. and will be retained by Apollo Group, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
130
EX-32.2
11
p13405exv32w2.htm
EX-32.2
exv32w2
EXHIBIT 32.2
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
In connection with the Annual Report of Apollo Group, Inc. (the Company) on Form 10-K for
the fiscal year ended August 31, 2008, as filed with the Securities and Exchange Commission on the
date hereof (the Report), I, Joseph L. DAmico, President, Chief Financial Officer and Treasurer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge:
|
(1) |
|
the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
(2) |
|
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
Date: October 28, 2008
|
|
|
|
|
|
|
|
|
/s/ Joseph L. DAmico
|
|
|
Joseph L. DAmico |
|
|
President, Chief Financial
Officer and Treasurer
(Principal Financial Officer) |
|
|
A signed original of this written statement required by Section 906 has been provided to
Apollo Group, Inc. and will be retained by Apollo Group, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
131
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12
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