-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UUpHmq8t5lzbQZq9pCr7q2INnfJyzklqf83rTX4al2+RKFnHXIq5RLsNbNf/2uT2 gnCRy37JHWtDtiPc/RRE3Q== 0000950153-95-000419.txt : 19951222 0000950153-95-000419.hdr.sgml : 19951222 ACCESSION NUMBER: 0000950153-95-000419 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19951221 SROS: NASD 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: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-65211 FILM NUMBER: 95603197 BUSINESS ADDRESS: STREET 1: 4615 EAST ELWOOD ST CITY: PHOENIX STATE: AZ ZIP: 85040 BUSINESS PHONE: 6029665394 MAIL ADDRESS: STREET 2: 4615 E ELWOOD STREET CITY: PHOENIX STATE: AZ ZIP: 85040 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 1995. REGISTRATION NO. - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ APOLLO GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ARIZONA 86-0419443 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
------------------------ 4615 EAST ELWOOD STREET PHOENIX, ARIZONA 85040 (602) 966-5394 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ JAMES W. HOGGATT VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER APOLLO GROUP, INC. 4615 EAST ELWOOD STREET PHOENIX, ARIZONA 85040 (602) 966-5394 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JON S. COHEN, ESQ. GARY J. SINGER, ESQ. CHRISTOPHER J. LITTLEFIELD, ESQ. MARK D. PETERSON, ESQ. SNELL & WILMER L.L.P. O'MELVENY & MYERS ONE ARIZONA CENTER 610 NEWPORT DRIVE, SUITE 1700 PHOENIX, ARIZONA 85004-0001 NEWPORT BEACH, CALIFORNIA 92660-6429 (602) 382-6247
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the "Securities Act"), other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same filing: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------------ CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE(2) PRICE(2) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------- Class A Common Stock, no par value per share.......................... 3,162,500(1) $33.375 $105,548,438 $36,397 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
(1) Includes 412,500 shares of Class A Common Stock subject to the Underwriters' over-allotment option. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c), based on the last reported sales price of the Class A Common Stock on December 15, 1995, as reported by the Nasdaq National Market. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 21, 1995 P R O S P E C T U S 2,750,000 SHARES APOLLO GROUP, INC. [APOLLO GROUP LOGO] CLASS A COMMON STOCK ------------------ All of the shares of Class A Common Stock offered hereby (the "Offering") are being sold by certain shareholders (the "Selling Shareholders") of Apollo Group, Inc. ("Apollo" or the "Company"). See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. The Class A Common Stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol "APOL." On December 20, 1995, the last reported sales price of the Class A Common Stock, as reported by Nasdaq, was $34.625 per share. See "Price Range of Common Stock." ------------------ SEE "RISK FACTORS" ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY. THE HOLDERS OF CLASS A COMMON STOCK ARE NOT ENTITLED TO ANY VOTING RIGHTS. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND THE SELLING PUBLIC COMMISSIONS(1) SHAREHOLDERS(2) - ----------------------------------------------------------------------------------------------------- Per Share........................... $ $ $ - ----------------------------------------------------------------------------------------------------- Total(3)............................ $ $ $ - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
(1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses estimated at $357,000, payable by the Selling Shareholders. (3) The Selling Shareholders have granted the Underwriters a 30-day option to purchase up to 412,500 shares of Class A Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to the Selling Shareholders will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Class A Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by, the Underwriters and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for the shares of Class A Common Stock offered hereby will be available for delivery on or about January , 1996, at the office of Smith Barney Inc., 14 Wall Street, New York, New York 10005. ------------------ SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED MONTGOMERY SECURITIES JANUARY , 1996 3 [DESCRIPTION OF INSIDE FRONT COVER GRAPHICS] Graphic indicates the various UOP, IPD and WIU locations throughout the United States, Puerto Rico and London, England, as well as the location of the corporate headquarters. The Company intends to furnish its shareholders with annual reports containing consolidated financial statements audited by independent auditors and quarterly reports for the first three fiscal quarters of each year containing unaudited summary financial information. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN AN OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON NASDAQ OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and consolidated financial statements appearing elsewhere in this Prospectus or incorporated herein by reference. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised and reflects a 4-for-3 stock split distributed April 28, 1995 and a 3-for-2 stock split distributed September 22, 1995. Investors should consider carefully the information set forth under the heading "Risk Factors." THE COMPANY Apollo Group, Inc. ("Apollo" or the "Company"), through its subsidiaries The University of Phoenix, Inc. ("UOP"), the Institute for Professional Development ("IPD") and Western International University, Inc. ("WIU"), is a leading provider of higher education programs for working adults based on the number of working adults enrolled in its programs. The Company believes that its teaching/learning model differentiates its programs from those offered by the majority of other accredited colleges and universities by providing full-time working adults with a quality educational experience while enabling them to earn a degree and still meet their personal and professional responsibilities. The Company's teaching/learning model enables full-time working adult students to earn an undergraduate degree within four years, as compared to a national average of seven to ten years for working adults, or a graduate degree within two years. The Company offers its programs and services at 78 campuses and learning centers in 25 states, Puerto Rico and London, England. The Company has added 46 locations since August 31, 1990 and has experienced significant growth in both revenues and enrollments. Enrollments in the Company's programs have increased from 17,571 at August 31, 1991 to 36,848 at August 31, 1995, while annual net revenues have increased from $69 million to $163 million during the same period. The Company's consolidated enrollments increased from 31,802 at November 30, 1994 to 40,158 at November 30, 1995. Enrollments in UOP's distance education programs increased from 1,627 to 2,561 during the same period. The consolidated enrollments in the Company's educational programs would make it the largest private institution of higher education in the United States. Since November 30, 1994, the Company has added 17 new campuses and learning centers and established one new IPD contract. UOP is a regionally accredited, private institution of higher education offering bachelor's and master's degree programs such as business, management, computer information systems, education and health care. With approximately 27,100 working adult students, UOP is currently the 6th largest regionally accredited private university in the United States and has one of the nation's largest private business schools. UOP has successfully replicated its teaching/learning model while maintaining educational quality at its 45 campuses and learning centers located in Arizona, California, Colorado, Hawaii, Louisiana, Michigan, Nevada, New Mexico, Utah and Puerto Rico. UOP also offers its educational programs worldwide through OnlineTM, its computer distance education system. OnlineTM provides campus-based courses that have been modified for computer delivery and are available wherever there is adequate telephone service or access to CompuServe(R) or the Internet. IPD provides program development and management services under long-term contracts (five to ten years) to 15 regionally accredited private colleges and universities. These contracts meet the guidelines of the client institutions' respective regional accrediting associations. IPD assists these colleges and universities in expanding and diversifying their programs for working adults and shares in the tuition revenues generated from these programs. A majority of these contracts have been extended beyond the year 2000. At November 30, 1995, there were approximately 12,000 students enrolled in IPD-assisted programs at 29 campuses and learning centers. WIU acquired the assets of Western International University ("Western") in September 1995 for $2.1 million. WIU is a regionally accredited, private institution of higher education with enrollments of approximately 1,000 at four campuses and learning centers located in Phoenix, Fort Huachuca and Douglas, Arizona and through Thames Lea College in London, England. The average age of students enrolled in UOP and in IPD-assisted programs is in the mid-thirties with an average annual household income of $53,000. Approximately 74% of UOP students have been employed full-time for nine or more years. Approximately 80% of UOP students also receive some level of tuition reimbursement from their employers, many of which are Fortune 500 companies. Of these students receiving reimbursement, approximately 83% receive at least one- half tuition reimbursement and approximately 42% receive full tuition reimbursement. This demographic profile results in a number of benefits to the Company, including diversified sources of tuition revenues, low student loan default rates, high student completion rates and a limited need for capital-intensive services. 3 5 To meet the increasing demand for higher education by working adults, the Company plans to establish new UOP campuses and learning centers, negotiate new IPD contracts, expand the number of degree offerings, improve access to the Company's programs through new distance education technologies, establish strategic relationships with major corporations and explore international opportunities. The U.S. Department of Education National Center for Educational Statistics ("NCES") estimates that by 2000 approximately 44% of the 15.5 million students projected to be enrolled in institutions of higher education will be adults over the age of 24. Currently, the U.S. Bureau of the Census estimates that 70-75% of students over the age of 24 are working adults. The Company believes that the demand for higher education by working adult students will continue to grow, thereby creating a significant market opportunity to those who can offer programs that meet the unique needs of working adult students. THE OFFERING Class A Common Stock offered by the Selling Shareholders....... 2,750,000 shares Common Stock to be outstanding immediately after the Offering: Class A Common Stock(1)...................................... 21,527,299 shares Class B Common Stock......................................... 575,769 shares Use of Proceeds................................................ The Company will not receive any of the proceeds from the sale of Class A Common Stock offered hereby. Nasdaq National Market Symbol.................................. APOL
Relative rights of Class A and Class B Common Stock: The Class A and Class B Common Stock (collectively, the "Common Stock") have identical rights with respect to cash dividends and in the distribution of proceeds in any sale or liquidation, but have different voting rights. The Class A Common Stock is not entitled to any voting rights, while the Class B Common Stock is entitled to one vote per share on all matters on which shareholders are entitled to vote. See "Risk Factors" and "Description of Capital Stock." - --------------- (1) Excludes 1,656,941 shares of Class A Common Stock issuable upon exercise of stock options granted to certain directors, officers and key employees of the Company. SUMMARY CONSOLIDATED FINANCIAL INFORMATION
THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, ------------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1994 1995 ------- ------- ------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net revenues............................ $68,782 $81,865 $97,545 $124,720 $163,429 $36,465 $49,727 Total costs and expenses................ 67,881 81,368 95,533 116,425 141,600 32,260 41,882 Income before income taxes.............. 901 497 2,012 8,295 21,829 4,205 7,845 Net income.............................. 862 646 1,143 4,912 12,600 2,544 4,589 Net income per share.................... .06 .04 .08 .32 .62 .17 .20 OPERATING STATISTICS: Enrollments at end of period............ 17,571 21,163 24,987 30,236 36,848 31,802 40,158 Locations at end of period.............. 35 42 51 60 68 61 78
AUGUST 31, NOVEMBER 30, 1995 1995 -------------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Total assets............................................................... $102,132 $108,476 Current assets............................................................. 84,044 87,544 Current liabilities........................................................ 45,065 46,137 Long-term liabilities...................................................... 1,715 2,026 Shareholders' equity....................................................... 55,352 60,313
4 6 RISK FACTORS THE PURCHASE OF SHARES OF CLASS A COMMON STOCK OFFERED HEREBY INVOLVES SUBSTANTIAL RISK. THE FOLLOWING MATTERS, INCLUDING THOSE MENTIONED ELSEWHERE, SHOULD BE CONSIDERED CAREFULLY BY A PROSPECTIVE INVESTOR IN EVALUATING A PURCHASE OF CLASS A COMMON STOCK. UNCERTAIN AND CHANGING REGULATORY ENVIRONMENT UOP, WIU and IPD client institutions are subject to extensive state and federal regulations, some of which have been effective only since July 1, 1995. The Higher Education Act of 1965, as amended (the "HEA"), and the regulations promulgated thereunder (the "Regulations"), subject UOP, WIU and IPD client institutions and all other higher education institutions eligible to participate in federal financial aid programs under Title IV of the HEA ("Title IV Programs") to increased regulatory scrutiny. The HEA mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the accrediting associations recognized by the United States Department of Education (the "DOE"); (2) the federal government through the DOE and (3) state higher education regulatory bodies, including each applicable State Postsecondary Review Entity ("SPRE"). UOP derives approximately 68% of its net revenues from students who participate in Title IV Programs. The Company believes that IPD derives a similar percentage of its net revenues from students who participate in Title IV Programs administered by the respective IPD client institution. Because the Regulations impose new regulatory requirements on UOP, WIU and IPD client institutions and because the DOE has not fully developed administrative interpretations of the Regulations, there exists some uncertainty concerning the application and interpretation of the new regulatory requirements imposed by the Regulations. New or revised interpretations of such regulatory requirements could have a material adverse effect on the Company. In addition, changes in or new interpretations of other applicable laws, rules or regulations could have a material adverse effect on the accreditation, authorization to operate in various states, permissible activities and costs of doing business of UOP, WIU and one or more of the IPD client institutions. The failure to maintain or renew any required regulatory approvals, accreditation or state authorizations by UOP or certain of the IPD client institutions could have a material adverse effect on the Company. See "Business -- Regulatory Environment," "Business -- Accreditation," "Business -- Federal Financial Aid Programs" and "Business -- State Authorization." LIMITS ON TITLE IV PROGRAM FUNDING Currently, the Regulations place limits on the amount of Title IV Program funds that a student is eligible to receive in any one academic year (as defined by the DOE). The Regulations also specify that, for undergraduate programs, an academic year must consist of at least an equivalent 30 weeks of instruction and a minimum of 24 credit hours. The new Regulations define an equivalent "week of instruction" as 12 hours of regularly scheduled instruction, examinations or preparation for examinations (the "12-Hour Rule"). For programs that consist of eight hours per week of instruction, such as those offered by UOP and IPD client institutions, the academic year must be a minimum of 45 calendar weeks to meet the DOE's equivalent 30 weeks of instruction to qualify for Title IV funding. If UOP were required by the DOE to increase the length of its undergraduate academic year to more than the current 45 calendar weeks, it would reduce the maximum amount of Title IV funding available to UOP's students, which could have a material adverse effect on the Company. FAILURE TO OBTAIN AUTHORIZATION IN NEW STATES UOP, WIU and IPD client institutions are required to have authorization to operate as degree-granting institutions in each state where they physically provide educational programs. Certain states accept accreditation as evidence of meeting minimum state standards for authorization. Other states, including California, require separate evaluations for authorization. Depending on the state, the addition of a degree program not offered previously or the addition of a new location must be included in the institution's accreditation and be approved by the appropriate state authorization agency. UOP, WIU and IPD client institutions are 5 7 currently authorized to operate in all states in which they have physical locations. If UOP is unable to obtain authorization to operate in certain new states, it may have a material adverse effect on the Company's ability to expand UOP's business. See "Business -- Business and Growth Strategy" and "Business -- State Authorization." RELIANCE ON CURRENT MANAGEMENT Dr. John Sperling, the founder of the Company, has been instrumental in the development of the Company. The Company's development and operations to date have been, and its continuing operations will be, substantially dependent on the efforts of Dr. Sperling and the other members of current management. Dr. Sperling's employment agreement allows him to terminate his employment at any time upon 30 days notice. The loss of the services of any one or more members of current management could have a material adverse effect on the Company's business and results of operations. REGULATORY CONSEQUENCES OF A CHANGE OF OWNERSHIP OR CONTROL A change of ownership or control of the Company, depending on the type of transaction that gives rise to a change, may have significant regulatory consequences for UOP and WIU. Such a change of ownership or control could trigger recertification by the DOE, reauthorization by certain state licensing agencies or the evaluation of UOP's and WIU's accreditation by the Commission on Institutions of Higher Education of the North Central Association of Colleges and Schools ("NCA"). The DOE has adopted the change of ownership or control standards used by the federal securities laws. Upon a change of ownership or control sufficient to require the Company to file a Form 8-K with the Commission, UOP and WIU would cease to be eligible to participate in Title IV Programs until recertified by the DOE. This recertification would not be required, however, if the transfer of ownership or control was made upon a person's retirement or death and was made either to a member of the person's immediate family or to a person with an ownership interest in the Company who had been involved in its management for at least two years preceding the transfer. In addition, certain states where UOP is presently authorized have requirements governing change of ownership or control. Currently, Arizona and California would require UOP and WIU, as applicable, to be reauthorized upon a 20% and 25% change of ownership or control of the Company, respectively. These states require a new application to be filed for state authorization if such a change of ownership or control occurs. Moreover, the Company is required to report to NCA any change in stock ownership of UOP, WIU or Apollo. At that time, NCA may seek to evaluate the effect of such a change of stock ownership on the continuing operations of UOP and WIU. If UOP is not recertified by the DOE, does not obtain reauthorization from the necessary state agencies or has its accreditation withdrawn as a consequence of any change in ownership or control, it would have a material adverse effect on the Company. See "Business -- Federal Financial Aid Programs -- Change of Ownership or Control." VOTING CONTROL BY CURRENT MANAGEMENT The holders of Class A Common Stock are not entitled to any voting rights, while the holders of Class B Common Stock are entitled to one vote per share on all matters on which the shareholders of the Company are entitled to vote. As a result, the holders of the Company's Class B Common Stock, who currently consist of the management of the Company, control the election of all directors to the Company's Board of Directors and thereby control the policies and operations of the Company without the vote of the holders of Class A Common Stock. This concentration of voting control may have the effect of delaying, deferring or preventing a change of control of the Company, including any business combination with an unaffiliated party, or of impeding the ability of the shareholders to replace management even if factors warrant such a change. This concentration of voting control may also affect the price that investors might be willing to pay in the future for shares of the Company's Class A Common Stock. See "Management," "Principal and Selling Shareholders" and "Description of Capital Stock." SEASONALITY IN RESULTS OF OPERATIONS The Company has experienced seasonality in the results of its operations primarily as a result of changes in student enrollments. Historically, the Company has experienced lower revenues and net income in the second quarter (December to February) of its fiscal year due to the holiday breaks in December and January. 6 8 The Company expects that these seasonal trends will continue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality." USE OF PROCEEDS The Company will not receive any of the proceeds from the sale of Class A Common Stock offered hereby. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock and does not anticipate paying dividends in the near future. It is the current policy of the Company's Board of Directors to retain earnings to finance the operations and expansion of the Company's business. If cash dividends were declared, however, holders of Class A Common Stock and Class B Common Stock would be entitled to equal per share cash dividends. 7 9 CAPITALIZATION The following table sets forth the capitalization of the Company as of November 30, 1995:
NOVEMBER 30, 1995 ---------------------- (DOLLARS IN THOUSANDS) Long-term debt............................................................ $ 503 ------- Shareholders' equity: Preferred Stock, no par value; 1,000,000 shares authorized; none issued or outstanding....................................................... -- Class A Common Stock, no par value; 65,000,000 shares authorized; 21,527,000 shares issued and outstanding(1).......................... 28 Class B Common Stock, no par value; 3,000,000 shares authorized; 576,000 shares issued and outstanding........................................ 1 Additional paid-in capital.............................................. 37,740 Retained earnings....................................................... 22,544 ------- Total shareholders' equity.............................................. 60,313 ------- Total capitalization...................................................... $ 60,816 =======
- --------------- (1) Excludes 1,657,000 shares of Class A Common Stock issuable upon exercise of stock options granted to certain directors, officers and key employees of the Company. 8 10 PRICE RANGE OF COMMON STOCK The Company's Class A Common Stock began trading on Nasdaq under the symbol "APOL"during the second quarter of 1995 on December 6, 1994. Prior to that date the Company's Class A Common Stock was not listed or traded on any organized market system. The table below sets forth for the Company's fiscal quarters the high and low sales prices, adjusted for stock splits, for the Company's Class A Common Stock as reported by Nasdaq.
1995 HIGH LOW - --------------------------------------------------------------------------- ------ ------ Second Quarter............................................................. $11.31 $ 5.50 Third Quarter.............................................................. 19.08 9.63 Fourth Quarter............................................................. 23.00 16.17
1996 - --------------------------------------------------------------------------- First Quarter.............................................................. $30.75 $20.00 Second Quarter (through December 20, 1995)................................. 36.50 30.00
On December 20, 1995, the last reported sales price of the Class A Common Stock was $34.625 per share. At that date, the approximate number of holders of record of the Company's Class A Common Stock and Class B Common Stock were 93 and 10, respectively. The Company believes that there are a number of other holders of Class A Common Stock whose shares are held in nominee accounts by brokers. There is no established public trading market for the Company's Class B Common Stock and all shares of the Company's Class B Common Stock are beneficially owned by the Company's executive officers. 9 11 SELECTED CONSOLIDATED FINANCIAL DATA The data set forth below are qualified by reference to and should be read in conjunction with the financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The following selected Balance Sheet Data of the Company as of August 31, 1991, 1992, 1993, 1994 and 1995 and the Income Statement Data for the five years ended August 31, 1995 are derived from the consolidated financial statements of the Company audited by Price Waterhouse LLP, independent accountants. Selected Income Statement and Balance Sheet data as of November 30, 1994 and 1995 and for the three-month periods then ended have been derived from unaudited interim financial statements on which Price Waterhouse LLP has applied limited procedures in accordance with professional standards for a review of such information. In the opinion of management of the Company, such unaudited interim financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for such periods. The results for the three months ended November 30, 1995 are not necessarily indicative of the results for the fiscal year ending August 31, 1996.
THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, --------------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1994 1995 ------- ------- ------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net revenues................ $68,782 $81,865 $97,545 $124,720 $163,429 $36,465 $49,727 ------- ------- ------- -------- -------- ------- ------- Costs and expenses: Instruction costs and services................ 44,398 54,296 65,319 81,313 102,122 23,418 29,959 Selling and promotional... 13,251 14,442 15,812 17,918 21,016 4,987 6,328 General and administrative.......... 10,232 12,630 14,402 17,194 18,462 3,855 5,595 ------- ------- ------- -------- -------- ------- ------- Total costs and expenses................ 67,881 81,368 95,533 116,425 141,600 32,260 41,882 ------- ------- ------- -------- -------- ------- ------- Income before income taxes(1).................. 901 497 2,012 8,295 21,829 4,205 7,845 Less provision for income taxes..................... 390 240 869 3,383 9,229 1,661 3,256 ------- ------- ------- -------- -------- ------- ------- Income before extraordinary item and cumulative effect of change in accounting principle................. 511 257 1,143 4,912 12,600 2,544 4,589 Extraordinary item(2)....... 351 Change in accounting principle(3).............. 389 ------- ------- ------- -------- -------- ------- ------- Net income.................. $ 862 $ 646 $ 1,143 $ 4,912 $ 12,600 $ 2,544 $ 4,589 ======= ======= ======= ======== ======== ======= ======= Net income per share........ $ .06 $ .04 $ .08 $ .32 $ .62 $ .17 $ .20 Weighted average shares outstanding............... 14,845 14,845 15,136 15,281 20,485 15,281 22,504
- --------------- (1) In March 1992, the Company discontinued the operations of Apollo Education Corporation ("AEC"), its technical training school subsidiary, which was phased out over the period from March 1992 until October 1992. All assets related to this subsidiary were disposed of by August 1993. Pretax losses related to the operations of the technical training schools were $1.3 million, $837,000 and $265,000 in 1991, 1992 and 1993, respectively. (2) Realization of prior years' U.S. operating losses related to the operations of the technical training schools. (3) The Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes," effective September 1, 1991. 10 12
AUGUST 31, NOVEMBER 30, ------------------------------------------------ ------------------ 1991 1992 1993 1994 1995 1994 1995 ------- ------- ------- ------- -------- ------- -------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Total assets.................. $18,215 $22,369 $28,909 $43,638 $102,132 $47,262 $108,476 Current assets................ 8,763 12,231 18,453 31,893 84,044 34,107 87,544 Current liabilities........... 17,804 20,819 27,086 34,890 45,065 35,670 46,137 Long-term liabilities......... 1,661 2,154 1,203 1,347 1,715 1,646 2,026 Shareholders' equity (deficit)................... (1,250) (604) 620 7,401 55,352 9,946 60,313 OPERATING STATISTICS: Enrollments at end of period(1)................... 17,571 21,163 24,987 30,236 36,848 31,802 40,158 Locations at end of period(2)................... 35 42 51 60 68 61 78
- --------------- (1) Enrollments are defined as full-time equivalent students in attendance in a program at the end of a period. Average enrollments represent the average of the ending enrollments for each month in the period. Average enrollments were 17,071, 20,087, 23,663, 27,469 and 34,021 for the years ended 1991, 1992, 1993, 1994 and 1995, respectively, and were 31,800 and 39,617 for the three months ended November 30, 1994 and 1995, respectively. Ending and average enrollments for 1991 include approximately 400 students enrolled at AEC's technical training schools that were closed in 1992. Average enrollments for 1992 include approximately 200 AEC students. (2) Includes UOP and WIU campuses and learning centers and IPD contract sites. Also includes two AEC sites in 1991. The Company did not pay any cash dividends on its Common Stock during any of the periods set forth in the table above. 11 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND AND OVERVIEW The Company's revenues, net of student discounts, have increased from $68.8 million in 1991 to $163.4 million in 1995. Average annual student enrollments have increased from 17,071 in 1991 to 34,021 in 1995. Net income has increased from $862,000 in 1991 to $12.6 million in 1995. At November 30, 1995, 40,158 students were enrolled at UOP and WIU and in IPD-assisted programs at IPD client institutions. Average annual student enrollments increased from 31,800 during the three months ended November 30, 1994 to 39,617 for the three months ended November 30, 1995. Net income for the same period increased from $2.5 million to $4.6 million. From September 1990 to November 1995, the Company added 46 campuses and learning centers. Startup costs in new markets for UOP campuses have averaged from $200,000 to $400,000 per site over a 15-18 month period. Startup costs in existing markets have been minimal on a per site basis. Historically, UOP has been able to establish an enrollment base prior to opening new campuses and learning centers in existing markets by holding classes in employers' offices and conference facilities, or through its distance education delivery systems. Startup costs for IPD contract sites have averaged from $400,000 to $500,000 per site over a 15-24 month period, and consist primarily of administrative salaries, marketing and advertising. Startup costs are expensed as incurred. Approximately 90% of the Company's net revenues in 1995 consisted of tuition revenues from UOP students and IPD's contractual share of tuition revenues from students enrolled in IPD-assisted programs at IPD client institutions. UOP tuition revenues currently represent approximately 84% of consolidated tuition revenues. The Company's net revenues also include sales of textbooks, computers and other education-related products, application fees, other student fees, interest income and other income. The Company's net revenues vary from period to period based on several factors that include: (1) the aggregate number of students attending classes; (2) the number of classes held during the period and (3) the weighted average tuition price per credit hour (weighted by program and location). IPD's contracts with its respective client institutions generally have terms of five to ten years with provisions for renewal. Instruction costs and services at UOP consist primarily of costs related to the delivery and administration of the Company's educational programs that include faculty compensation, administrative salaries for departments that provide service directly to the students, the costs of educational materials sold, facility leases and other occupancy costs, amortization of educational program production costs, bad debt expense and depreciation and amortization of property and equipment. UOP faculty members are contracted with and paid for one course offering at a time. All classroom facilities are leased or, in some cases, are provided by the students' employers at no charge to the Company. Instruction costs and services at IPD consist primarily of program administration, student services and classroom lease expense. Most of the other instruction costs for IPD-assisted programs, including faculty, financial aid processing and other administrative salaries, are the responsibility of the IPD client institutions. Selling and promotional costs for UOP and IPD consist primarily of advertising, marketing salaries and other costs related to the selling and promotional functions. These costs are expensed as incurred. General and administrative costs consist primarily of administrative salaries, occupancy costs, depreciation and amortization and other related costs for departments such as executive management, information systems, corporate accounting, human resources and other departments that do not provide direct services to the Company's students. To the extent possible, the Company centralizes these services to avoid duplication of effort. WIU acquired the assets of Western in September 1995. WIU is a regionally accredited, private institution of higher education with enrollments of approximately 1,000 at four campuses and learning centers located in Phoenix, Fort Huachuca and Douglas, Arizona and through Thames Lea College in London, England. 12 14 RESULTS OF OPERATIONS The following table sets forth consolidated income statement data of the Company expressed as a percentage of net revenues for the periods indicated:
THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, ---------------------------- ----------------- 1993 1994 1995 1994 1995 ------ ------ ------ ------ ------ Net revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- Costs and expenses: Instruction costs and services.............. 67.0 65.2 62.5 64.2 60.2 Selling and promotional..................... 16.2 14.4 12.9 13.7 12.7 General and administrative.................. 14.7 13.8 11.3 10.6 11.3 ----- ----- ----- ----- ----- Total costs and expenses.................... 97.9 93.4 86.7 88.5 84.2 ----- ----- ----- ----- ----- Income before income taxes.................... 2.1 6.6 13.3 11.5 15.8 Less provision for income taxes............... .9 2.7 5.6 4.6 6.5 ----- ----- ----- ----- ----- Net income.................................... 1.2% 3.9% 7.7% 6.9% 9.3% ===== ===== ===== ===== =====
THREE MONTHS ENDED NOVEMBER 30, 1994 COMPARED WITH THREE MONTHS ENDED NOVEMBER 30, 1995 Net revenues increased by 36.4% from $36.5 million for the three months ended November 30, 1994 to $49.7 million for the three months ended November 30, 1995 due primarily to a 24.6% increase in average student enrollments from 1994 to 1995, tuition price increases averaging five to six percent, a higher concentration of enrollments at locations that charge a higher rate per credit hour and the acquisition of WIU. All UOP campuses, which include their respective learning centers, and most of the IPD contract sites had increases in net revenues and average student enrollments from 1994 to 1995. Average student enrollments increased from 31,800 for the three months ended November 30, 1994 to 39,617 for the three months ended November 30, 1995. Ending student enrollments at November 30, 1994 and 1995 were 31,802 and 40,158, respectively. WIU had average student enrollments of 1,005 and revenues of $1.1 million for the three months ended November 30, 1995. Interest income, which is included in net revenues, increased from $141,000 for the three months ended November 30, 1994 to $745,000 for the three months ended November 30, 1995 due primarily to increased cash generated from the Company's initial public offering of its Class A Common Stock and from cash generated from operations. Instruction costs and services increased by 27.9% from $23.4 million for the three months ended November 30, 1994 to $30.0 million for the three months ended November 30, 1995 due primarily to the direct costs necessary to support the increase in average student enrollments. These costs consisted primarily of faculty compensation, classroom lease expenses and related staff salaries. These costs as a percentage of net revenues decreased from 64.2% for the three months ended November 30, 1994 to 60.2% for the three months ended November 30, 1995 due to greater net revenues being spread over the fixed costs related to centralized student services. Selling and promotional expenses increased by 26.9% from $5.0 million for the three months ended November 30, 1994 to $6.3 million for the three months ended November 30, 1995 due primarily to increased marketing and advertising at campuses and learning centers. These expenses as a percentage of net revenues decreased from 13.7% for the three months ended November 30, 1994 to 12.7% for the three months ended November 30, 1995 due to the Company's ability to increase enrollments and open new learning centers in existing markets with a proportionately lower increase in selling and promotional expenses. As the Company expands into new markets, it may not be able to leverage its existing selling and promotional expenses to the same extent. General and administrative expenses increased by 45.1% from $3.9 million for the three months ended November 30, 1994 to $5.6 million for the three months ended November 30, 1995 due primarily to increased costs required to support the increased number of campuses and learning centers and increases in administrative compensation. These expenses as a percentage of net revenues increased from 10.6% for the three months ended November 30, 1994 to 11.3% for the three months ended November 30, 1995 due primarily to the 13 15 overall growth of the Company in 1995. These expenses as a percentage of net revenues were 11.3% for the fiscal year ended August 31, 1995. Costs related to the startup of new UOP and IPD campuses and learning centers are expensed as incurred and totaled approximately $300,000 for the three months ended November 30, 1994 and $680,000 for the three months ended November 30, 1995. Interest expense, which is allocated among all categories of costs and expenses, was less than $20,000 for the three months ended November 30, 1994 and 1995. The Company's effective tax rate increased from 39.5% for the three months ended November 30, 1994 to 41.5% for the three months ended November 30, 1995. The increase is due primarily to an increase in the federal tax rate from 34% to 35% as a result of the improved earnings and to the relative impact of expenses that are nondeductible for tax purposes. Net income increased by 80.4% from $2.5 million for the three months ended November 30, 1994 to $4.6 million for the three months ended November 30, 1995 due primarily to increased enrollments, increased tuition rates (weighted by location) and improved utilization of fixed instruction costs and selling and promotional expenses in existing markets. YEAR ENDED AUGUST 31, 1994 COMPARED WITH YEAR ENDED AUGUST 31, 1995 Net revenues increased by 31.0% from $124.7 million in 1994 to $163.4 million in 1995 due primarily to a 23.9% increase in average student enrollments from 1994 to 1995 and tuition price increases averaging four to six percent, depending on the geographic area and program. All UOP campuses, which include their respective learning centers, and most of the IPD contract sites had increases in net revenues and average student enrollments from 1994 to 1995. Average student enrollments increased from 27,469 in 1994 to 34,021 in 1995. Interest income, which is included in net revenues, increased from $280,000 in 1994 to $2.4 million in 1995 due primarily to increased cash generated from the Company's initial public offering of its Class A Common Stock and to $22.3 million in cash generated from operations in 1995. Instruction costs and services increased by 25.6% from $81.3 million in 1994 to $102.1 million in 1995 due primarily to the direct costs necessary to support the increase in average student enrollments. These costs as a percentage of net revenues decreased from 65.2% in 1994 to 62.5% in 1995 due to greater net revenues being spread over the fixed costs related to centralized student services. Selling and promotional expenses increased by 17.3% from $17.9 million in 1994 to $21.0 million in 1995 due primarily to increased marketing and advertising at UOP and IPD campuses and learning centers, including $1.2 million related to locations opened in new markets during the past two years. These expenses as a percentage of net revenues decreased from 14.4% in 1994 to 12.9% in 1995 due to the Company's ability to increase enrollments and open new learning centers in existing markets with a proportionately lower increase in selling and promotional expenses. As the Company expands into new markets, it may not be able to leverage its existing selling and promotional expenses to the same extent. General and administrative expenses increased by 7.4% from $17.2 million in 1994 to $18.5 million in 1995 due primarily to costs required to support the increased number of UOP and IPD campuses and learning centers and increases in general and administrative salaries. This increase was offset in part by $1.9 million in nonrecurring compensation expense in 1994 related to the issuance of stock options and a $750,000 accrual of compensation expense in 1994 related to a deferred compensation agreement with the Company's President. General and administrative expenses include a $135,000 and $104,000 writedown of land held for sale in 1994 and 1995, respectively. General and administrative expenses as a percentage of net revenues decreased from 13.8% in 1994 to 11.3% in 1995 due primarily to the nonrecurring compensation expense recorded in 1994 and larger net revenues being spread over the fixed costs related to various centralized functions such as information services, corporate accounting and human resources. Costs related to the start up of new UOP and IPD campuses and learning centers are expensed as incurred and totaled approximately $1.0 million and $1.1 million in 1994 and 1995, respectively. Interest expense, which is allocated among all categories of costs and expenses, was $153,000 and $96,000 in 1994 and 1995, respectively. 14 16 The Company's effective tax rate increased from 40.8% in 1994 to 42.3% in 1995 due primarily to an increase in the federal tax rate from 34% to 35% as a result of the improved earnings and to the relative impact of expenses that are nondeductible for tax purposes. Net income increased from $4.9 million in 1994 to $12.6 million in 1995 due to increased enrollments, increased tuition rates, improved utilization of fixed instructional and administrative costs, $2.7 million (pretax) of nonrecurring compensation expense in 1994, improved utilization of selling and promotional expenses in existing markets and increased interest income resulting from higher cash levels. YEAR ENDED AUGUST 31, 1993 COMPARED WITH YEAR ENDED AUGUST 31, 1994 Net revenues increased by 27.9% from $97.5 million in 1993 to $124.7 million in 1994 due primarily to a 16.1% increase in average student enrollments from 1993 to 1994, a higher concentration of enrollments at locations that charge a higher rate per credit hour and tuition price increases averaging four to six percent, depending on the geographic area and program. All UOP campuses, which include their respective learning centers, and substantially all of the IPD contract sites had increases in net revenues and average student enrollments from 1993 to 1994. Average student enrollments increased from 23,663 in 1993 to 27,469 in 1994. Instruction costs and services increased by 24.5% from $65.3 million in 1993 to $81.3 million in 1994 due primarily to the direct costs necessary to support the increase in average student enrollments. These costs as a percentage of net revenues decreased from 67.0% in 1993 to 65.2% in 1994 due to greater net revenues being spread over the fixed costs related to centralized student services and, to a lesser degree, due to efficiencies resulting from improvements to the Company's information systems. Selling and promotional expenses increased by 13.3% from $15.8 million in 1993 to $17.9 million in 1994 due primarily to increased marketing and advertising at UOP and IPD campuses and learning centers, including $678,000 related to locations opened in new markets during the past two years. These expenses as a percentage of net revenues decreased from 16.2% in 1993 to 14.4% in 1994 due to the Company's ability to increase enrollments and open new learning centers in existing markets with a proportionately lower increase in selling and promotional expenses. General and administrative expenses increased by 19.4% from $14.4 million in 1993 to $17.2 million in 1994 due primarily to increases in general and administrative salaries, including $1.9 million in compensation expense related to the grant of stock options and a $750,000 accrual of compensation expense related to the deferred compensation agreement with the Company's President. These expenses as a percentage of net revenues decreased from 14.7% in 1993 to 13.8% in 1994 due to larger net revenues being spread over the fixed costs related to various centralized functions such as information services, corporate accounting and human resources. In 1993, the Company recorded a $638,000 writedown related to land held for sale. As a result of further declines in Northern California real estate values, the Company recorded an additional $135,000 writedown in 1994. Costs related to the start up of new UOP and IPD campuses and learning centers totaled approximately $742,000 and $1.0 million in 1993 and 1994, respectively. Interest expense, which is allocated among all categories of costs and expenses, decreased from $255,000 in 1993 to $153,000 in 1994 primarily as a result of improved cash flow resulting in a reduction of long-term debt and lower seasonal borrowings on the Company's line of credit. The Company's effective tax rate decreased from 43.2% in 1993 to 40.8% in 1994 due primarily to the relative impact of expenses that are nondeductible for tax purposes. Net income increased from $1.1 million in 1993 to $4.9 million in 1994 due to increased enrollments, increased tuition rates (weighted by location), improved utilization of fixed instructional and administrative costs and improved utilization of selling and promotional expenses in existing markets. 15 17 QUARTERLY RESULTS OF OPERATIONS The following table sets forth selected unaudited quarterly financial information for each of the Company's last nine quarters. The Company believes that this information includes all normal recurring adjustments necessary for a fair presentation of such quarterly information when read in conjunction with the consolidated financial statements included herein. The operating results for any quarter are not necessarily indicative of the results for any future period.
QUARTER ENDED ----------------------------------------------------------------------------------------------- FY 1994 FY 1995 FY 1996 ------------------------------------------ ----------------------------------------- ------- NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, 1993 1994 1994 1994 1994 1995 1995 1995 1995 -------- -------- ------- -------- -------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) IN DOLLARS: Net revenues.................... $27,816 $26,953 $34,278 $35,673 $36,465 $36,029 $45,502 $45,433 $49,727 ------- ------- ------- ------- ------- ------- ------- ------- ------- Costs and expenses: Instruction costs and services.................... 18,073 18,502 21,163 23,575 23,418 24,224 26,188 28,292 29,959 Selling and promotional....... 4,112 4,468 4,311 5,027 4,987 5,105 5,518 5,406 6,328 General and administrative.... 3,184 4,910 (1) 4,921 (2) 4,179 3,855 4,954 4,856 4,797 5,595 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses...... 25,369 27,880 30,395 32,781 32,260 34,283 36,562 38,495 41,882 ------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes......................... 2,447 (927 ) 3,883 2,892 4,205 1,746 8,940 6,938 7,845 Provision (credit) for income taxes......................... 1,002 (381 ) 1,572 1,190 1,661 896 3,892 2,780 3,256 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss)............... $ 1,445 $ (546 ) $2,311 $ 1,702 $ 2,544 $ 850 $5,048 $ 4,158 $4,589 ======= ======= ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share..... $ .10 $ (.04 ) $ .15 $ .11 $ .17 $ .04 $ .22 $ .19 $ .20 ======= ======= ======= ======= ======= ======= ======= ======= ======= AS A PERCENTAGE OF NET REVENUES: Net revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ------- ------- ------- ------- ------- ------- ------- ------- ------- Costs and expenses: Instruction costs and services.................... 65.0 68.6 61.7 (3) 66.1 64.2 67.2 57.6 (3) 62.3 60.2 Selling and promotional....... 14.8 16.6 12.6 14.1 13.7 14.1 12.1 12.0 12.7 General and administrative.... 11.4 18.2 (1) 14.4 (2) 11.7 10.6 13.8 10.7 10.4 11.3 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses...... 91.2 103.4 88.7 91.9 88.5 95.1 80.4 84.7 84.2 ------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes......................... 8.8 (3.4 ) 11.3 8.1 11.5 4.9 19.6 15.3 15.8 Provision (credit) for income taxes......................... 3.6 (1.4 ) 4.6 3.3 4.6 2.5 8.6 6.1 6.5 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss)............... 5.2% (2.0 )% 6.7% 4.8% 6.9% 2.4% 11.0% 9.2% 9.3% ======= ======= ======= ======= ======= ======= ======= ======= =======
- --------------- (1) Includes a $750,000 accrual of compensation expense related to the December 1993 deferred compensation agreement with the Company's President. (2) Includes $1.9 million in compensation expense related to the grant of stock options. (3) The favorable margin realized in the third quarters of 1994 and 1995 is due primarily to a significant increase in revenues with no significant increase in the fixed costs related to centralized student services. The favorable margin did not continue to the same extent in the fourth quarters of 1994 and 1995 because of the normal increase in instructional costs and services in preparation for the August peak enrollments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality." 16 18 SEASONALITY The Company experiences seasonality in its results of operations primarily as a result of changes in the level of student enrollments. While the Company enrolls students throughout the year, second quarter (December to February) average enrollments and related revenues generally are lower than other quarters due to the holiday breaks in December and January. Second quarter costs and expenses historically increase as a percentage of net revenues as a result of certain fixed costs not significantly affected by the seasonal second quarter declines in net revenues. The Company experiences a seasonal increase in new enrollments in August of each year when most other colleges and universities begin their fall semesters. As a result, instruction costs and services and selling and promotional expenses historically increase as a percentage of net revenues in the fourth quarter due to increased costs in preparation for the August peak enrollments. The increased costs result in accounts payable levels being higher in August than any other month in the year. The Company anticipates that these seasonal trends in the second and fourth quarters will continue in the future. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased from $39.0 million at August 31, 1995 to $41.4 million at November 30, 1995 due primarily to the $4.8 million in cash generated from operations during the three months ended November 30, 1995, offset in part by capital expenditures and the acquisition of the assets of Western. In conjunction with the acquisition, WIU paid Western $237,000 in cash and assumed $1.8 million in liabilities. The liability consisted of $1.3 million of current liabilities, $393,000 of which was paid on the acquisition date, and $503,000 of long-term debt. At November 30, 1995, the Company had no outstanding borrowings on its $4.0 million line of credit, which bears interest at prime. The line of credit is renewable annually and is payable upon its termination in February 1996. The Company expects to renew this line of credit. Net cash flow received from operating activities increased by $15.8 million from fiscal 1994 to fiscal 1995 due primarily to the $7.7 million increase in net income during the same period, improved collections of accounts receivable and the timing of various tax payments and payments to suppliers. Net cash flow received from operating activities increased by $3.0 million from the three months ended November 30, 1994 to the three months ended November 30, 1995 due primarily to a $2.0 million increase in net income. Capital expenditures, including additions to educational program production costs, increased from $6.1 million for fiscal 1994 to $11.5 million for fiscal 1995 primarily to support the increase in student enrollments and number of locations. Total purchases of property and equipment for the year ended August 31, 1996 are expected to total approximately $12.0 million. Additions to educational program production costs are not expected to exceed $2.0 million for the year ended August 31, 1996. Start up costs are expected to increase from $1.1 million in fiscal 1995 to approximately $3.5 million for fiscal 1996 due to planned expansion into new geographic markets. The lease on the Company's corporate headquarters, which includes the UOP Phoenix Main Campus, was renewed in December 1995 for another five year term. In December 1995, the Company acquired land for a purchase price of $2.9 million which it may use in the future for the possible relocation of its corporate headquarters. The Company does not currently have any material commitments for any capital expenditures in 1996. The Company currently leases all of its educational and administrative facilities. The Company's net receivables as a percent of net revenues decreased from 11.4% in fiscal 1994 to 9.7% in fiscal 1995 and bad debt expense as a percent of net revenues decreased from 1.5% in fiscal 1994 to 1.1% in fiscal 1995. These decreases are due primarily to an increased focus on accounts receivable collections in 1995. The DOE requires that Title IV Program funds collected by an institution for unbilled tuition be kept in a separate cash or cash equivalent account until the students are billed for the portion of their program related to these Title IV Program funds. In addition, all funds transferred to the Company through electronic funds transfer programs are held in a separate cash account until certain conditions are satisfied. As of November 30, 1995, the Company had approximately $10.8 million in these separate accounts, which are reflected as restricted cash, to comply with these requirements. These funds generally remain in these separate accounts for an average of 60-75 days from the date of collection. These restrictions on cash have not significantly affected the Company's ability to fund daily operations. 17 19 The Regulations require all higher education institutions to meet an acid test ratio (defined as the ratio of cash, cash equivalents, restricted cash and current accounts receivable to total current liabilities) of at least 1 to 1, which is calculated at the end of the institution's fiscal year. If an institution, including UOP or WIU, fails to meet the acid test ratio, it may be deemed not financially responsible by the DOE, which could result in a loss of its eligibility to participate in Title IV Programs. UOP's acid test ratio was 1.16 to 1 at August 31, 1994 and 1.31 to 1 at August 31, 1995. WIU's acid test ratio was 2.73 to 1 on September 1, 1995. These requirements apply to the separate financial statements of UOP, WIU and to each of the respective IPD client institutions, but not to the Company's consolidated financial statements. IMPACT OF INFLATION Inflation has not had a significant impact on the Company's historical operations. 18 20 BUSINESS OVERVIEW Apollo Group, Inc. ("Apollo" or the "Company"), through its subsidiaries, the University of Phoenix, Inc. ("UOP"), the Institute for Professional Development ("IPD") and Western International University, Inc. ("WIU"), is a leading provider of higher education programs for working adults based on the number of working adults enrolled in its programs. The consolidated enrollment in the Company's educational programs would make it the largest private institution of higher education in the United States. The Company currently offers its programs and services at 78 campuses and learning centers in 25 states, Puerto Rico and London, England. The Company's enrollment has increased from 17,571 at August 31, 1991 to 36,848 at August 31, 1995. At November 30, 1995, the Company's enrollment was 40,158. Based on its enrollment of over 27,100 adult students at November 30, 1995, UOP is currently the sixth largest regionally accredited private university in the United States and has one of the nation's largest private business schools. UOP has been accredited by the Commission on Institutions of Higher Education of the North Central Association of Colleges and Schools ("NCA") since 1978 and has successfully replicated its teaching/learning model while maintaining educational quality at its 45 campuses and learning centers in Arizona, California, Colorado, Hawaii, Louisiana, Michigan, Nevada, New Mexico, Utah and Puerto Rico. To enhance its ability to expand into new markets, UOP has developed specialized information systems for student tracking, marketing, faculty recruitment and training, financial aid, accounting and academic quality management. Currently, approximately 80% of UOP's students receive some level of tuition reimbursement from their employers, many of which are Fortune 500 companies. In 1989, UOP established Online(TM), a computerized educational delivery system, which currently serves approximately 1,400 degree-seeking students. Online(TM) provides campus-based courses that have been modified for computer delivery. Online(TM) enables the Company to deliver educational programs and services internationally wherever there is access to adequate telephone service, CompuServe(R) or the Internet. The Online(TM) faculty receive specialized training to enable them to teach effectively in the electronic learning environment. The same academic quality management standards applied to campus- based programs, including the assessment of student learning outcomes, are applied to programs delivered through Online(TM). IPD provides program development and management services under long-term contracts (five to ten years) that meet the guidelines of the client institutions' respective regional accrediting associations. IPD provides these services to 15 regionally accredited private colleges and universities at 29 campuses and learning centers in 16 states and shares in the tuition revenues generated from these programs. IPD is able to assist these colleges and universities in expanding and diversifying their programs for working adults. IPD places a priority on institutions that: (1) are interested in developing or expanding off-campus degree programs for working adults; (2) recognize that working adults require a different teaching/learning model than the 18 to 24 year old student; (3) desire to increase enrollments with a limited investment in institutional capital and (4) recognize the unmet educational needs of the working adult students in their market. Approximately 12,000 students are currently enrolled in IPD-assisted programs. WIU acquired the assets of Western in September 1995. WIU is a regionally accredited, private institution of higher education with enrollments of approximately 1,000 at four campuses and learning centers located in Phoenix, Fort Huachuca and Douglas, Arizona and through Thames Lea College in London, England. The Company was incorporated in Arizona in 1981 and maintains its principal executive offices at 4615 East Elwood Street, Phoenix, Arizona 85040. The Company's telephone number is (602) 966-5394. The Company's Internet Web Site address is "http://www.apollogrp.com." 19 21 MARKET The United States education market may be divided into three distinct segments: kindergarten through twelfth grade schools, vocational and technical training schools, and degree-granting colleges and universities ("higher education"). The Company currently operates in the higher education segment. The U.S. Department of Education National Center for Education Statistics ("NCES") estimated that for 1993 (the most recent historical year reported), adults over 24 years of age comprised approximately 6.5 million, or 44%, of the 14.8 million students enrolled in higher education programs. Currently, the U.S. Bureau of Census estimates that 70-75% of students over the age of 24 work while attending school. The demand for higher education from working adults results from the increasing skills required by employers and from a recognition by working adults of the value of an earned degree for career advancement and change. The Company believes that the unique needs of working adults include the following: - Convenient access to a learning environment (including both location and delivery system) - Degree programs offered by regionally accredited institutions that can be completed in a reasonable amount of time - Programs that provide knowledge and skills with immediate practical value in the workplace - Education provided by an academically qualified faculty with current practical experience in fields related to the subjects they instruct - Administrative services designed to accommodate the full-time working adult's schedule - Recognition of adult students as critical consumers of educational programs and services - A learning environment characterized by a low student-to-faculty ratio - Learning resources available electronically to all students regardless of geographical location The Company also believes that the demand from and the unique requirements of the working adult population represent a significant market opportunity to regionally accredited higher education institutions that can offer programs that meet these unique needs. Most regionally accredited colleges and universities are focused on serving the 18 to 24 year old student market. This focus has resulted in a capital-intensive teaching/learning model that may be characterized by: (1) a high percentage of full-time tenured faculty with doctoral degrees; (2) fully-configured library facilities and related full-time staff; (3) dormitories, student unions and other significant plant assets to support the needs of younger students and (4) an emphasis on research and the related staff and facilities. In addition, the majority of accredited colleges and universities continue to provide the bulk of their educational programming from September to mid-December and from mid-January to May. As a result, most full-time faculty members only teach during that limited period of time. While this structure serves the needs of the full-time 18 to 24 year old student, it limits the educational opportunity for working adults who must delay their education for up to five months during these spring, summer and winter breaks. In addition, this structure generally requires working adults to attend one course three times a week, commute to a central site, take work time to complete administrative requirements and, in undergraduate programs, participate passively in an almost exclusively lecture-based learning format primarily focused on a theoretical presentation of the subject matter. For the majority of working adults, earning an undergraduate degree in this manner would take seven to ten years. BUSINESS AND GROWTH STRATEGY The Company's strategic goal is to become the preferred provider of higher education programs for working adult students. The Company is managed as a for-profit corporation in an industry served principally 20 22 by not-for-profit providers. By design, the Company treats both its adult students and their employers as customers. Key elements of the Company's business and growth strategy include the following: ESTABLISH NEW UOP CAMPUSES AND LEARNING CENTERS. UOP plans to add campuses and learning centers throughout the United States. During the past three years, the Company has opened an average of nine campuses and learning centers each year. New locations are selected based on an analysis of various factors, including the general population of working adults in the area, the number of local employers and their educational reimbursement policies and the availability of similar programs offered by other institutions. Campuses consist of classroom and administrative facilities with full student and administrative services. Learning centers differ from campuses in that they consist primarily of classroom facilities with limited on-site administrative staff. ESTABLISH NEW IPD RELATIONSHIPS. IPD plans to enter into additional long-term contracts with private colleges and universities in proximity to metropolitan areas throughout the United States. In general, IPD seeks to establish relationships with colleges and universities located in states where it is difficult for out-of-state accredited institutions to obtain state authorizations. In this way, the Company is able to optimize its campus-based penetration of potential new markets. EXPAND DEGREE PROGRAMS. The Company expects to continue to respond to the changing educational needs of working adults through the introduction of new undergraduate and graduate degree programs. The Company also is investigating the market potential for professional doctoral degree programs and specializations. The Company currently has a full-time staff of over 20 persons involved in its centralized curriculum development process. EXPAND DISTANCE EDUCATION PROGRAMS. The Company plans to expand its distance education programs and services. In 1994, the Company successfully completed its connection to the Internet, thereby making the Company's programs more readily available throughout the United States and worldwide. The Company also plans to enhance its distance education delivery systems as new technologies become cost-effective. ESTABLISH CORPORATE PARTNERSHIPS. The Company seeks to establish educational partnerships with major corporations to provide training and degree programs to their employees both on site and at the Company's campuses and learning centers. To meet the unique learning needs of its different partners, the Company modifies its existing programs or, in some cases, develops customized programs. The Company believes that the establishment of corporate partnerships is an effective way to enhance the products and services offered to its customers. The Company recently entered into educational partnerships with AT&T and Ingram Micro, Inc. INTERNATIONAL EXPANSION. The Company monitors and assesses the feasibility of providing its educational programs internationally and has conducted market research in various foreign countries, including Hungary, Japan, Costa Rica and Mexico. The Company currently offers its programs to international students through Online(TM) and WIU. The timing related to the establishment of new locations and the expansion of programs may vary depending on regulatory requirements and market conditions. HISTORICAL ENROLLMENTS IN THE COMPANY'S FIVE LARGEST MARKETS In addition to opening campuses in new markets, the Company's growth also has resulted from increased enrollments in its existing markets. The table below sets forth a summary of enrollments in the Company's five largest markets over the last five years.
AT AUGUST 31, -------------------------------------- MARKET 1991 1992 1993 1994 1995 - ----------------------------------------------------------- ------ ------ ------ ------ ------ Southern California........................................ 2,284 2,895 3,988 5,218 6,466 Arizona.................................................... 3,207 4,059 4,632 5,023 5,559 Northern California........................................ 709 1,001 1,477 2,429 3,586 Colorado................................................... 1,386 1,608 1,697 2,005 2,661 Distance Education......................................... 1,252 1,655 1,114 1,618 2,366
21 23 TEACHING/LEARNING MODEL The Company's teaching/learning model used by UOP and IPD client institutions was designed for working adults. This model is structured to enable students who are employed full-time to earn their degrees and still meet their personal and professional responsibilities. Students attend weekly classes, averaging 15 students in size, and also meet weekly as part of a three to five person study group. The study group meetings are used for review, work on assigned group projects and preparation for in-class presentations. Courses are designed to facilitate the application of knowledge and skills to the workplace and are taught by faculty members who possess advanced degrees and have an average of 16 years of professional experience in business, industry, government and the professions. In this way, faculty members are able to share their professional knowledge and skills with the students. The Company's teaching/learning model has the following major characteristics: CURRICULUM The curriculum provides for the achievement of specific educational outcomes that are based on the input from faculty, students and student employers. The curriculum is designed to integrate academic theory and professional practice and their application to the workplace. The standardized curriculum for each degree program is also designed to provide students with specified levels of knowledge and skills regardless of delivery method or location. FACULTY Faculty applicants must possess an earned masters or doctoral degree, and have a minimum of five years recent professional experience in a field related to the subject matter in which they seek to instruct. To help promote quality delivery of the curriculum, UOP faculty members are required to: (1) complete an initial assessment conducted by staff and faculty; (2) receive training in grading, facilitation of the teaching/learning model and oversight of study group activities; (3) serve an internship with an experienced faculty mentor and (4) receive ongoing performance evaluations by students, peer faculty and staff. The results of these evaluations are used to establish developmental plans to improve individual faculty performance and to determine continued eligibility of faculty members to provide instruction. INTERACTIVE LEARNING Courses are designed to combine individual and group activity with interaction between and among students and the instructor. The curriculum requires a high level of student participation for purposes of increasing the student's ability to work as part of a team. LEARNING RESOURCES Students and faculty members are provided with electronic and other learning resources for their information needs. During 1995, the Company expanded these services and provided additional access through a connection to the Internet. This minimizes the need for capital-intensive library facilities and holdings. SEQUENTIAL ENROLLMENT Students enroll in and complete courses sequentially, rather than concurrently, thereby allowing full-time working adults to focus their attention and resources on one subject at a time, thus balancing learning with ongoing personal and professional responsibilities. ACADEMIC QUALITY The Company has developed and operationalized an Academic Quality Management System ("AQMS") that is designed to maintain and improve the quality of programs and academic and student services regardless of the delivery method or location. Included in the AQMS is the Adult Learning Outcomes Assessment which seeks to measure student growth in both the cognitive (subject matter) and affective (educational, personal and professional values) domains.
22 24 STRUCTURAL COMPONENTS OF TEACHING/LEARNING MODEL Although adults over 24 currently comprise approximately 44% of all higher education enrollments in the United States, the mission of many accredited colleges and universities is to serve 18 to 24 year old students and conduct research. UOP and IPD client institutions acknowledge the differences in educational needs between older and younger students and provide programs and services that allow working adult students to earn their degrees while integrating the process with both their personal and professional lives. The Company believes that working adults require a different teaching/learning model than that designed for the 18 to 24 year old student. The Company has found that working adults seek accessibility, curriculum consistency, time and cost effectiveness and learning that has an immediate application to the workplace. The Company's teaching/learning model differs from the models used by most regionally accredited colleges and universities because it is designed to enable adults to complete an undergraduate degree in four years and a graduate degree in two years while working full-time. The structural components of the Company's teaching/learning model include: ACCESSIBILITY Centrally developed standardized curricula that can be accessed through a variety of delivery methods (e.g., campus-based or electronically delivered), that make the educational programs accessible regardless of where the students work and live. INSTRUCTIONAL COSTS While the faculty at most accredited colleges and universities are employed full-time, UOP's and IPD client institutions' part-time faculty are academically qualified, professionally employed and are contracted for instructional services on a course-by-course basis. This policy keeps a portion of the cost of instruction variable. FACILITY COSTS The Company leases its campus and learning center facilities and rents additional classroom space on a short-term basis to accommodate growth in enrollments, thus keeping a portion of its instructional costs variable. EMPLOYED STUDENTS UOP's students are employed full-time and approximately 74% have been employed for nine years or more. This minimizes the need for capital-intensive facilities and services (e.g., dormitories, student unions, food services, personal and employment counseling, health care, sports and entertainment). EMPLOYER SUPPORT Approximately 80% of UOP's students currently receive some level of tuition reimbursement from their employers, many of which are Fortune 500 companies. The Company develops relationships with key employers for purposes of recruiting students and responding to specific employer needs. This allows the Company to remain sensitive to the needs and perceptions of employers, while helping both to generate and sustain diverse sources of revenues.
23 25 PROGRAMS AND SERVICES UOP PROGRAMS. UOP currently offers the following degree programs, areas of specialization and certificate programs at one or more campuses and learning centers or through its distance education delivery systems: DEGREE PROGRAMS WITH RELATED MAJORS - ------------------------------------------------------ ASSOCIATE OF ARTS IN BUSINESS BACHELOR OF ARTS IN MANAGEMENT BACHELOR OF SCIENCE IN BUSINESS Accounting Administration Information Systems Management BACHELOR OF SCIENCE IN NURSING MASTER OF ARTS IN EDUCATION MASTER OF ARTS IN ORGANIZATIONAL MANAGEMENT MASTER OF BUSINESS ADMINISTRATION Technology Management MASTER OF COUNSELING Marriage, Family and Child Therapy Community Counseling Mental Health Counseling MASTER OF NURSING MASTER OF SCIENCE IN COMPUTER INFORMATION SYSTEMS AREAS OF SPECIALIZATION AVAILABLE IN CERTAIN DEGREE PROGRAMS - ------------------------------------------------------ BUSINESS Environmental Management Finance Industrial Relations Marketing Operations Management Technical Management EDUCATION Administration and Supervision Diverse Learner Educational Counseling NURSING Management Education Women's Health Nurse Practitioner CERTIFICATE PROGRAMS, CUSTOM TRAINING AND CONTINUING EDUCATION - ------------------------------------------------------ Alternative Dispute Resolution Art of Negotiation Authorized Certified Novell Administrator (CNA) Authorized Certified Novell Engineer (CNE) Bilingual -- Bicultural Business and the Environment Configuration Management Conflict Resolution Curriculum Elementary Certification English as a Second Language Export Management Foreign Languages Global Management Government Contract Management Human Resource Management Human Resources Professional Development International Management Introduction to the Internet Management and Leadership Marketing Management Materials Management Multidisciplinary Studies OB/GYN Nurse Practitioner OSHA Regulatory Compliance Post Baccalaureate Teacher Education Professional Development for Educators Professional Sales Skills Purchasing Risk Management Sales Management School Guidance Counselor School Nurse Secondary Methodology Special Education TQM for Manufacturing TQM for Service Graduate level courses are also offered for students' continuing professional education requirements, including state teacher certification and state teacher renewal. Undergraduate students may demonstrate and document college level learning gained from experience through the assessment by faculty members (according to the guidelines of the Council for Adult and Experiential Education ("CAEL")) for the potential award of credit. The average number of credits awarded to UOP undergraduate students who utilized the process between 1991 and 1995 was six credits of the 120 required to graduate. Approximately 70% of these credits were attributable to professional and nonregionally accredited course work. CAEL reports that over 1,300 regionally accredited colleges and universities currently provide for the assessment mechanism of college level learning gained through experience for the award of credit. 24 26 IPD SERVICES. IPD offers services to its client institutions including: (1) assisting with curriculum development; (2) conducting market research; (3) developing and executing marketing strategies; (4) training faculty; (5) establishing administrative infrastructures; (6) developing and implementing financial accounting and academic quality management systems; (7) assessing the future needs of adult students and (8) helping develop additional degree programs suitable for the adult higher education market. In consideration for its services, IPD receives a contractual share of tuition revenues from students enrolled in IPD-assisted programs. IPD also assists its client institutions in identifying and developing new degree programs and in seeking the required approvals from their respective regional accrediting associations. In order to facilitate the sharing of information related to the operations of their respective programs, UOP and the IPD client institutions formed the Consortium for the Advancement of Adult Higher Education ("CAAHE"). CAAHE meets semiannually to address issues such as the recruitment and training of part-time, professionally employed faculty, employer input in the curriculum development process, assessment of the learning outcomes of adult students and regulatory issues affecting the operation of programs for working adult students. IPD client institutions offer the following programs with IPD assistance:
NUMBER OF IPD DEGREE PROGRAMS CLIENT INSTITUTIONS -------------------------------------------------------- -------------------- Associate of Arts in General Studies.................... 1 Associate of Arts in Liberal Arts....................... 1 Associate of Science in Business........................ 5 Bachelor of Business Administration..................... 8 Bachelor of Science in Business Administration.......... 4 Bachelor of Science in Nursing.......................... 1 Bachelor of Science in Management....................... 7 Bachelor of Science in Human Resources Management....... 1 Bachelor of Science in Organizational Leadership........ 1 Bachelor of Science in Supervision and Leadership....... 1 Master of Business Administration....................... 7 Master of Science in Management......................... 4 Master of Science in Health............................. 1 Master of Arts in Education............................. 2
The IPD-assisted programs also include a limited number of general education courses, certificate programs and areas of specialization. 25 27 WIU PROGRAMS. WIU currently offers the following degree and certificate programs: DEGREE PROGRAMS WITH RELATED MAJORS - ------------------------------------------------------ ASSOCIATE OF ARTS IN GENERAL STUDIES BACHELOR OF SCIENCE Accounting Aviation Management Finance General Business Information Systems International Business Management Marketing BACHELOR OF ARTS Behavioral Science General Studies International Studies MASTER OF BUSINESS ADMINISTRATION Finance Health Care Management International Business Management Management Information Services Marketing MASTER OF PUBLIC ADMINISTRATION MASTER OF SCIENCE Accounting Health Care Information Resources Management Information Services Information Systems Engineering ADVANCED CERTIFICATE PROGRAMS - ------------------------------------------------------ Corporate Management Finance International Business Management Information Systems Marketing WIU's teaching/learning model has similar characteristics to the teaching/learning model used by UOP and IPD client institutions, including the use of part-time practitioner faculty, standardized curriculum, computerized learning resources and leased facilities. WIU provides educational programs in a semester-based format and does not focus exclusively on working adult students. FACULTY. UOP's faculty is comprised of approximately 3,000 working professionals with earned masters or doctoral degrees and an average of 16 years of experience in business, industry, government or the professions. To help promote quality delivery of the curriculum, UOP faculty members are required to: (1) complete an initial assessment conducted by staff and faculty; (2) receive training in grading, facilitation of the teaching/learning model and oversight of study group activities; (3) serve an internship with an experienced faculty mentor and (4) receive ongoing performance evaluations by students, peer faculty and staff. The results of these evaluations are used to establish developmental plans to improve individual faculty performance and to determine continued eligibility of faculty members to provide instruction. Most faculty members are recruited as the result of referrals from faculty, students and corporate contacts. All faculty are contracted on a course-by-course basis (generally a five to ten week period). The faculty teaching in IPD-assisted programs are comprised of full-time faculty from the client institution as well as qualified part-time faculty who instruct only in these adult programs. The part-time faculty must be approved by each client institution. IPD makes the AQMS available to its client institutions to evaluate faculty and academic and administrative quality. Both UOP and IPD have been successful in recruiting faculty members who meet these academic and professional requirements. WIU's faculty consists of approximately 80 working professionals. WIU's practitioner faculty possess earned masters or doctoral degrees and participate in a selection and training process that is similar to that at UOP. 26 28 ACADEMIC ACCOUNTABILITY. UOP is one of the first regionally accredited universities in the nation to create and utilize an institution-wide system for the assessment of the educational outcomes of its students. The information generated is employed by UOP to improve the quality of the curriculum, instruction and the Company's teaching/learning model. UOP's undergraduate and graduate students complete a comprehensive cognitive (core degree subject matter) and affective (educational, personal and professional values) assessment prior to and upon the completion of their core degree requirements. Students at UOP and IPD client institutions evaluate both academic and administrative quality. This evaluation begins with a registration survey and continues with the evaluation of the curriculum, faculty, delivery method, instruction and administrative services upon the conclusion of each course. The evaluation also includes both a graduation survey and a survey of a random selection of graduates two years after their graduation. The results provide an ongoing basis for improving the teaching/learning model, selection of educational programs and instructional quality. The Company plans to implement similar quality control systems at WIU over the next year. ADMISSIONS STANDARDS. To gain admission to the undergraduate programs of UOP, WIU and the IPD client institutions, students generally must have a high school diploma or General Equivalency Degree ("G.E.D.") and satisfy certain minimum grade point average, employment and age requirements. Additional requirements may apply to individual programs. Students in undergraduate programs may petition to be admitted on provisional status if they do not meet certain admission requirements. To gain admission to the graduate programs of UOP, WIU and the IPD client institutions, students generally must have an undergraduate degree from a regionally accredited college or university and satisfy minimum grade point average, work experience and employment requirements. Additional requirements may apply to individual programs. Students in graduate programs may petition to be admitted on provisional status if they do not meet certain admission requirements. DISTANCE EDUCATION COMPONENTS ONLINE(TM) COMPUTER CONFERENCING. UOP established Online(TM), its computer-based educational delivery system, in 1989 by modifying its classroom courses for delivery at the same level of quality through the use of computers. Online(TM) is currently accessible both nationally and internationally wherever there is adequate phone service or access to CompuServe(R) or the Internet. Online(TM) utilizes a computer conferencing system that enables students and faculty to participate in a learning group of 10 to 12 students. Online(TM) students can complete their course requirements at any time of the day, from locations where they have access to a computer and a modem. Students and faculty interact daily in an electronic classroom without having to be online at the same time. As required in campus-based courses, Online(TM) students also participate in weekly study groups. TWO-WAY VOICE AND DATA. UOP established its audiographic delivery system in 1989 in response to requests from employers with operations in remote areas of the United States. Students completing their degree requirements utilizing this system meet weekly in a remote classroom and interact simultaneously with an instructor in a centralized instructional studio through a two-way voice and data communications system. These students can complete all their coursework in this manner. They are required to achieve the same course outcomes, attend weekly study groups and participate in the AQMS. DIRECTED STUDY. Working adult students may also complete individual courses under the direct weekly instructional supervision of a member of the faculty. At November 30, 1995, there were approximately 2,600 students utilizing the Company's distance education delivery systems, approximately half of whom are enrolled in Online(TM). Distance education is currently subject to certain regulatory constraints. See "Business -- Federal Financial Aid Programs -- Restrictions on Distance Education Programs" and "Business -- State Authorization." 27 29 CUSTOMERS The Company's customers consist of working adult students, colleges and universities, governmental agencies and employers. Based on recent student surveys, the average age of UOP students is in the mid-thirties, approximately 54% are women and 46% are men, and the average annual household income is $53,000. Approximately 74% of UOP students have been employed on a full-time basis for nine years or more. Currently, 67% of UOP students are seeking undergraduate degrees. The Company believes that the demographics of students enrolled in IPD-assisted programs are similar to that of UOP. The approximate age distribution of current UOP students is as follows:
AGE PERCENTAGE OF STUDENTS - ----------- ---------------------- Under 25 12% 26 to 33 35% 34 to 45 42% 46 and over 11% --- 100% ================
IPD client institutions have historically consisted of small private colleges; however, IPD also targets larger institutions of higher education that are in need of marketing and curriculum consulting. The Company believes that to develop and manage educational programs for working adult students effectively, these potential client institutions require both capital and operational expertise. In response to these requirements, IPD provides the startup capital, the curriculum development expertise and the ongoing management in support of the client institutions' provision of quality programs for working adult students. The Company also considers the employers of its students as customers. Many of these employers provide tuition reimbursement programs in order to educate and provide degree opportunities to their employees. Currently, approximately 80% of UOP's students receive some level of tuition reimbursement from their employers, many of which are Fortune 500 companies. Of these students receiving reimbursement, approximately 83% receive at least one-half tuition reimbursement and approximately 42% receive full tuition reimbursement. CORPORATE PARTNERSHIPS The Company seeks to establish strategic relationships with businesses and governmental agencies in offering programs designed to meet their specific needs either by modifying existing programs or, in some cases, by developing customized programs. These programs are often held at the employers' offices or on-site at military bases. In the fourth quarter of 1995, UOP formed an educational partnership with AT&T to provide graduate and undergraduate degree and certificated learning programs to AT&T's 200,000 employees worldwide. A significant aspect of the alliance is an articulation agreement between UOP and the AT&T School of Business that enables UOP to award undergraduate and graduate program credit for certain course work completed through the AT&T School of Business. The partnership will provide AT&T managers with a variety of ways to participate in UOP's programs, depending on their individual schedules and availability, including course work delivered on campus, at AT&T sites or through one or more of UOP's distance education delivery systems. In the fourth quarter of 1995, UOP also formed an educational partnership with Ingram Micro, Inc., a leading distributor of computer and software products, to provide training and certification for Novell and Microsoft software. These programs began in June 1995 at UOP's Northern and Southern California campuses. UOP computer labs, equipped and maintained by Ingram Micro, Inc., will serve as training sites for technical professionals who wish to obtain or enhance skills as network administrators. 28 30 MARKETING To generate interest among potential UOP, WIU and IPD client institution students, UOP, WIU and IPD engage in a broad range of activities to inform potential students about the Company's teaching/learning model and the programs offered. These activities include print and broadcast advertising, advertising on services such as CompuServe(R)*, Prodigy(R) and the Microsoft Network(R), direct mail and information meetings at targeted organizations. The Company also attempts to locate its campuses and learning centers near major highways to provide high visibility and easy access. A substantial portion of new UOP and IPD client institution students are referred by alumni, employers and currently enrolled students. The Company is currently implementing its proprietary marketing systems at WIU to help it identify and manage lead sources and referral data. UOP and WIU advertising is centrally monitored and is directed primarily at local markets in which a campus is located. IPD client institutions approve and monitor all advertising provided by IPD on their behalf. Direct responses to advertising and direct mail are received, tracked and forwarded promptly to the appropriate representatives. In addition, all responses are analyzed to provide data for future marketing efforts. The Company employs over 200 enrollment representatives in its marketing system who make visits and presentations at various organizations and who follow up on leads generated from the Company's advertising efforts and referrals. These individuals also pursue direct responses to interest from potential individual students by arranging for interviews either at a UOP, WIU or IPD location or at a prospective student's place of employment. Interviews are designed to establish a prospective student's qualifications, academic background, course interests and professional goals. Student recruiting policies and standards and procedures for hiring and training university representatives are established centrally, but are implemented at the local level through a director of enrollment or marketing at each location. The Company also has a "Web Site" on the Internet World Wide Web (http://www.apollogrp.com) that allows electronic access to Company and product information and research. The Company's Web Site is accessible from major online networks such as Prodigy(R)*, CompuServe(R) and America OnLine(R). The Company recently completed an agreement to provide direct access to the Company's Web Site from the Microsoft Network(R). ACQUISITION STRATEGY The Company periodically evaluates opportunities to acquire businesses and facilities that complement the Company's business strategy. In evaluating such opportunities, management considers, among other factors, location, demographics, price, the availability of financing on acceptable terms, competitive factors and the opportunity to improve operating performance through the implementation of the Company's operating strategies. The Company has no current commitments with regard to potential acquisitions. COMPETITION The higher education market is highly fragmented and competitive with no private or public institution enjoying a significant market share. The Company competes primarily with four-year and two-year degree-granting public and private regionally accredited colleges and universities. Many of these colleges and universities enroll working adults in addition to the traditional 18 to 24 year old students and some have greater financial and personnel resources than the Company. The Company expects that these colleges and universities will continue to modify their existing programs to serve working adults more effectively. In addition, the Company competes to a lesser extent with other for-profit degree granting institutions on a regional basis. - --------------- *CompuServe(R) is a registered trademark of CompuServe Incorporated, Columbus, Ohio, Prodigy(R) is a registered trademark of Trintex, White Plains, New York, Microsoft Network(R) is a registered servicemark of Microsoft Corporation, Redmond, Washington and America OnLine(R) is a registered trademark of America Online, Inc., Vienna, Virginia. 29 31 The Company competes primarily at a local and regional level with other regionally accredited colleges and universities based on the quality of academic programs, the accessibility of programs and learning resources available to working adults, the cost of the program, the quality of instruction and the time necessary to earn a degree. Although adult students currently comprise approximately 44% of all college and university enrollments, few of these institutions have modified their educational delivery systems to meet the unique needs of working adult students. Institutions providing programs designed for working adults typically target executives or other subsets of the working adult population and tend to provide those programs at only a few sites. IPD faces competition from other entities offering higher education curriculum development and management services for adult education programs. The majority of IPD's current competitors provide pre-packaged curricula or turn-key programs. IPD client institutions, however, face competition from both private and public institutions offering degree and non-degree programs to working adults. LEGAL PROCEEDINGS As of the date of this Prospectus, the Company is not a party to any legal proceedings, the adverse outcome of which, in management's opinion, would have a material adverse effect on the Company's operating results. EMPLOYEES At November 30, 1995, the Company had the following numbers of employees:
FULL-TIME PART-TIME FACULTY TOTAL --------- --------- ------- ------- Apollo...................................... 189 5 -- 194(1) UOP......................................... 977 97 2,967(2) 4,041 IPD......................................... 178 10 --(3) 188 WIU......................................... 24 24 85(2) 133 --------- --------- ------- ------- Total............................. 1,368 136 3,052 4,556 ======= ======= ===== =======
- ------------------------ (1) Consists primarily of employees in corporate accounting, payroll and human resources, information systems, financial aid and Apollo Press. (2) Consists primarily of part-time professional faculty contracted on a course-by-course basis. (3) Faculty teaching IPD-assisted programs are employed by IPD client institutions. The Company considers its relations with its employees to be good. REGULATORY ENVIRONMENT The Higher Education Act of 1965, as amended (the "HEA") and the regulations promulgated thereunder (the "Regulations") subject all higher education institutions eligible to participate in Federal Financial Aid programs under Title IV of the HEA ("Title IV Programs") to increased regulatory scrutiny. The HEA mandates specific additional regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the accrediting agencies recognized by the United States Department of Education (the "DOE"); (2) the federal government through the DOE and (3) state higher education regulatory bodies, including, if applicable, a State Postsecondary Review Entity ("SPRE"). All higher education institutions participating in Title IV Programs must first be accredited by an association recognized by the DOE. The DOE reviews all such participating institutions for compliance with all applicable HEA standards and regulations. Under the HEA, accrediting associations are required to include the monitoring of certain aspects of Title IV Program compliance as part of their accreditation evaluations. New or revised interpretations of regulatory requirements could have a material adverse effect on the Company. In addition, changes in or new interpretations of other applicable laws, rules or regulations could have a material adverse effect on the accreditation, authorization to operate in various states, permissible 30 32 activities and costs of doing business of UOP, WIU and one or more of the IPD client institutions. The failure to maintain or renew any required regulatory approvals, accreditation or state authorizations by UOP or certain of the IPD client institutions could have a material adverse effect on the Company. ACCREDITATION UOP and the IPD client institutions are accredited by regional accrediting associations recognized by the DOE. Accreditation provides the basis for: (1) the recognition and acceptance by employers, other higher education institutions and governmental entities of the degrees and credits earned by students; (2) the qualification to participate in Title IV Programs and (3) the qualification for authorization in certain states. UOP was granted accreditation by NCA in 1978. UOP's accreditation was reaffirmed in 1982, 1987 and 1992. The next NCA reaffirmation visit is scheduled for 1996-97. IPD-assisted programs offered by the IPD client institutions are evaluated by the client institutions' respective regional accrediting associations either as part of a reaffirmation or focused evaluation visits. Current IPD client institutions are accredited by NCA, New England or Southern regional accrediting associations. UOP is required to receive approval from NCA for the addition of new degree programs and the addition of any campuses or learning centers in new states or countries. Most IPD client institutions are subject to similar policies. In addition, all IPD contracts must meet the guidelines of the client institutions' respective regional accrediting associations. The withdrawal of accreditation from UOP or certain IPD client institutions would have a material adverse effect on the Company. WIU received approval of the transfer of NCA accreditation from Western in October 1995. Western originally received its accreditation from NCA in 1984. See "Business -- Federal Financial Aid Programs -- Western International University, Inc.". All accrediting agencies recognized by the DOE are required to include certain aspects of Title IV Program compliance in their evaluations of accredited institutions. As a result, all regionally accredited institutions, including UOP, WIU and IPD client institutions, will be subject to a Title IV Program compliance review as part of accreditation visits. Regional accreditation is accepted nationally as the basis for the recognition of earned credit and degrees for academic purposes, employment, professional licensure and, in some states, for authorization to operate as a degree-granting institution. Under the terms of a reciprocity agreement among the six regional accrediting associations, representatives of each region in which a regionally accredited institution operates participate in the evaluations for reaffirmation of accreditation. The achievement of UOP's and WIU's missions require them to employ academically qualified practitioner faculty that are able to integrate academic theory with current workplace practice. Because of UOP's and WIU's choice to utilize all practitioner faculty, they have not sought business school program accreditation of the type found at many institutions whose primary missions are to serve the 18 to 24 year old student and to conduct research. UOP's Bachelor of Science in Nursing ("BSN") program received program accreditation from the National League for Nursing ("NLN") in 1989. The accreditation was reaffirmed in October 1995 and the next NLN reaffirmation is scheduled for 2003. If the NLN accreditation is not reaffirmed, UOP's BSN program could be adversely affected. UOP's Master of Counseling ("MC") degree received program accreditation from the Council for Accreditation of Counseling and Related Educational Programs ("CACREP") in May 1995. The next CACREP reaffirmation is scheduled for 1997. FEDERAL FINANCIAL AID PROGRAMS UOP and IPD client institution students participate in Title IV Programs. UOP derives approximately 68% of its net revenues from students who participate in Title IV Programs. The Company believes that IPD derives a similar percentage of its net revenues from students who participate in Title IV Programs administered by the respective IPD client institutions. These students are eligible for Title IV financial aid because: (1) UOP and IPD client institutions are accredited by an accrediting association recognized by the 31 33 DOE; (2) the DOE has certified UOP's and IPD client institutions' Title IV Program eligibility and (3) UOP and IPD client institutions have applicable state authorization to operate and their operating sites have been approved by the DOE. As a result of the Company's acquisition of certain assets of Western, WIU currently is not eligible to participate in Title IV Programs. WIU has applied for DOE approval to resume participation in Title IV Programs. See "Business -- Federal Financial Aid Programs -- Western International University, Inc." The DOE has promulgated regulations, the most recent of which became effective on July 1, 1995, that amend certain provisions of the Title IV Programs and the regulations promulgated thereunder. Some of the more important provisions of these regulations include the following: THE "12-HOUR RULE". Currently, the Regulations place limits on the amount of Title IV Program funds that a student is eligible to receive in any one academic year (as defined by the DOE). The Regulations also specify that, for undergraduate programs, an academic year must consist of at least an equivalent 30 weeks of instruction and a minimum of 24 credit hours. The new Regulations define an equivalent "week of instruction" as 12 hours of regularly scheduled instruction, examinations or preparation for examinations (the "12-Hour Rule"). For programs that consist of eight hours per week of instruction, such as those offered by UOP and IPD client institutions, the academic year must be a minimum of 45 calendar weeks to meet the DOE's equivalent 30 weeks of instruction to qualify for Title IV funding. If UOP were required by the DOE to increase the length of its undergraduate academic year to more than the current 45 calendar weeks, it would reduce the maximum amount of Title IV funding available to UOP's students, which could have a material adverse effect on the Company. RESTRICTED CASH. The DOE places certain restrictions on Title IV Program funds collected for unbilled tuition and funds transferred to the Company through electronic funds transfer. Prior to July 1, 1995, higher education institutions were also required to maintain a minimum cash reserve in an amount equal to at least 25% of the total dollar amount of refunds paid by the institution in its most recent fiscal year. Effective July 1, 1995, an institution is required to submit an irrevocable letter of credit to the DOE, rather than maintain the cash reserve. However, the letter of credit requirement is waived if an institution meets the DOE's standards related to timeliness of refunds, financial responsibility, and other criteria. The Company believes that it meets these applicable DOE standards and will not need to supply the letter of credit. STANDARDS OF FINANCIAL RESPONSIBILITY. Pursuant to the Regulations, all eligible higher education institutions must meet an acid test ratio (defined as the ratio of cash, cash equivalents, restricted cash and current accounts receivable to total current liabilities) of at least 1 to 1 at the end of the institution's fiscal year. At August 31, 1995, UOP's acid test ratio was 1.31 to 1. On September 1, 1995, WIU's acid test ratio was 2.73 to 1. BRANCHING AND CLASSROOM LOCATIONS. The Regulations contain specific requirements governing the establishment of new main campuses, branch campuses and classroom locations at which any student receives more than 50% of his or her instruction. In addition to classrooms at campuses and learning centers, locations affected by these requirements include the business facilities of client companies, military bases and conference facilities used by UOP and WIU. The Company has obtained approval for all UOP locations required to be approved by the Regulations and is seeking reaffirmation of approval for WIU's locations. Should the DOE change its regulations with respect to this approval process or delay approvals of new locations beyond the current approval time rate, the Company's business strategy may be impacted negatively. THE "85/15 RULE." A new requirement of the HEA, commonly referred to as the "85/15 Rule," applies only to for-profit institutions of higher education, which includes UOP and WIU but not IPD client institutions. Under this rule, for-profit institutions will be ineligible to participate in Title IV Programs if the amount of Title IV Program funds used by the students or institution to satisfy tuition, fees and other costs incurred by the students exceed 85% of the institution's cash-basis revenues from eligible programs (UOP's and Western's percentage was 72% and 66% at August 31, 1995, respectively). UOP and WIU are required to calculate this percentage at the end of each fiscal year. 32 34 STUDENT LOAN DEFAULTS. Eligible institutions must maintain a student loan cohort default rate of less than 35% for each of the federal fiscal years 1991 and 1992, 30% for fiscal year 1993 and 25% for fiscal year 1994 and all subsequent fiscal years. In 1992, the most recent DOE cohort default rate reporting period, the national cohort default rate average for all higher education institutions was 15%. UOP and WIU students' cohort default rates as reported by the DOE were 5% and 4.7%, respectively, and IPD client institution students' cohort default rates averaged 5% over that same period. STATE POSTSECONDARY REVIEW ENTITIES ("SPRES"). The Regulations mandate that each state establish a SPRE to review institutions referred by the DOE and eligible institutions the SPRE believes are engaged in Title IV Program fraud and abuse. Each institution will be reviewed against standards developed by the applicable SPRE to determine whether it is eligible to continue to participate in Title IV Programs. The states are required to implement the SPRE portion of the HEA only to the extent to which their costs are covered through Congressional appropriation. On July 27, 1995, President Clinton signed into law a package of spending cuts that rescinded the funding of the SPREs for fiscal year 1995. The HEA specifies that the states are not required to operate the SPREs without Federal funding, and the Company believes that without such funding the SPREs will not operate. COMPENSATION OF REPRESENTATIVES. The Regulations prohibit an institution from providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment, admission or financial aid awarding activity. The Company believes that its current method of compensating representatives complies with the Regulations. ADMINISTRATIVE CAPABILITY. The HEA directs the DOE to assess the administrative capability of each institution to participate in Title IV Programs. The failure of an institution to satisfy any of the criteria used to assess administrative capability may allow the DOE to determine that the institution lacks administrative capability and, therefore, may be subject to additional scrutiny or denied eligibility for Title IV Programs. ELIGIBILITY AND CERTIFICATION PROCEDURES. The HEA specifies the manner in which the DOE reviews institutions for eligibility and certification to participate in Title IV Programs and the Regulations include detailed new standards. Under the HEA and the Regulations, the eligibility to participate in Title IV Programs of each currently participating institution will expire in 1997 or earlier and each institution will be required to reapply for continued eligibility every four years thereafter. The DOE will assess each institution's compliance with the HEA and the Regulations. UOP's eligibility to participate in Title IV Programs expires in 1997. If the DOE does not renew UOP's eligibility, it will have a material adverse effect on the Company. RESTRICTIONS ON DISTANCE EDUCATION PROGRAMS. The Regulations specify that an institution is not eligible to participate in Title IV Programs funding if 50% or more of its courses are correspondence courses, or if 50% or more of its regular students are enrolled in the institution's correspondence courses. Although the Company does not offer correspondence courses, the Regulations currently consider most distance education courses to be correspondence courses if the number of distance education courses exceeds 50% of the sum of courses offered in campus-based delivery systems and courses offered through distance education. The Company does not plan to exceed this 50% level and believes that this restriction will have no impact on its business strategy. DIRECT LENDING PROGRAMS. The DOE has instituted a new direct lending program and various institutions have been invited to participate in the initial phases of the program. The direct lending program, as currently defined by the DOE, would have the effect of eliminating third-party lending institutions and guarantee agencies from the loan disbursement process. The goal of the DOE is to streamline the financial aid lending process, but there is uncertainty as to when this goal will be fully attained. Recently, certain members of Congress have proposed to limit and/or eliminate the direct lending program. The Company has not yet been required to implement the new direct lending process and it is uncertain as to what effect this new process, if implemented, will have on its cash flow. CHANGE OF OWNERSHIP OR CONTROL. A change of ownership or control of the Company, depending on the type of change, may have significant regulatory consequences for UOP and WIU. Such a change of ownership 33 35 or control could trigger recertification by the DOE, reauthorization by certain state licensing agencies or the evaluation of the accreditation by NCA. For institutions owned by publicly-held corporations, the DOE has adopted the change of ownership and control standards used by the federal securities laws. Upon a change of ownership and control sufficient to require the Company to file a Form 8-K with the Securities and Exchange Commission, UOP and WIU would cease to be eligible to participate in Title IV Programs until recertified by the DOE. This recertification would not be required, however, if the transfer of ownership and control was made upon a person's retirement or death and was made either to a member of the person's immediate family or to a person with an ownership interest in the Company who had been involved in its management for at least two years preceding the transfer. In addition, certain states where the Company is presently licensed have requirements governing change of ownership or control. Currently, Arizona and California would require UOP and WIU, as applicable, to be reauthorized upon a 20% and 25% change of ownership or control of the Company, respectively. These states require a new application to be filed for state licensing if such a change of ownership or control occurs. Moreover, the Company is required to report any change in stock ownership of UOP, WIU or Apollo to NCA. At that time, NCA may seek to evaluate the effect of such a change of stock ownership on the continuing operations of UOP and WIU. If UOP is not recertified by the DOE, or does not obtain reauthorization from the necessary state agencies or has its accreditation withdrawn as a consequence of any change in ownership or control, it would have a material adverse effect on the Company. WESTERN INTERNATIONAL UNIVERSITY, INC. Prior to its acquisition by the Company, Western participated in Title IV Programs. However, the acquisition of Western by the Company is considered a change in ownership and control which results in the termination of Western's participation in the Title IV Programs. Under the HEA, and the Regulations, WIU can resume participation in the Title IV Programs if the DOE certifies its eligibility to participate. WIU has received approval to operate under new ownership by the Arizona State Board for Post-Secondary Education and has received approval from NCA for the transfer of accreditation to WIU. WIU has applied with the DOE to resume participation in Title IV programs. Prior to obtaining approval from the DOE, WIU will not be able to disburse funds awarded by Western or process new Title IV financial aid. The Company has arranged for a temporary alternative lender to provide non-recourse financing to credit-qualifying students during this interim period. If the DOE does not certify that WIU is eligible to participate in Title IV Programs, it would have a material adverse effect on WIU. In conjunction with the acquisition, WIU assumed the Title IV liabilities of Western in the estimated amount of $210,000. This amount and the goodwill recorded related to the acquisition is subject to change based on the DOE's audit of Western's Title IV Programs to commence in January 1996. STATE AUTHORIZATION UOP currently is authorized to operate in nine states and Puerto Rico. UOP has held these authorizations for periods ranging from three months to eighteen years. UOP's NCA accreditation is accepted as evidence of compliance with applicable state regulations in Arizona, Colorado, New Mexico, Nevada and Utah. Hawaii does not have authorization provisions for regionally accredited degree-granting institutions. California law, enacted in 1985, requires an on-site visit to all out-of-state accredited institutions of higher education every five years to determine if the institution is in compliance with the State of California regulations. All institutions, including UOP, that operate in California and are accredited by a regional accrediting association other than the Western Association of Schools and Colleges are required to be evaluated separately for authorization to operate. UOP was granted its most recent California authorization in 1989 and expects to renew its license by February 1996. All regionally accredited institutions, including UOP, are required to be evaluated separately for authorization to operate in Puerto Rico. UOP was granted its most recent authorization in Puerto Rico in 1990 and expects to renew its authorization in early 1996. IPD client institutions possess authorization to operate in all states in which they offer educational programs, which are subject to renewal. WIU is currently authorized to operate in Arizona and London, England. 34 36 Certain states assert authority to regulate all degree-granting institutions if their educational programs are available to their residents, whether or not the institutions maintain a physical presence within those states. If a state were to establish grounds for asserting authority over telecommunicated learning, UOP may be required to obtain authorization for, or restrict access to, its programs available through Online(TM) in those states. LOCATIONS UOP currently has campuses and learning centers located throughout nine states and Puerto Rico. The following is a current list of UOP main campuses, divisions and learning centers and the respective opening dates and enrollments as of November 30, 1995:
MAIN CAMPUSES, DIVISIONS AND FISCAL RESPECTIVE LEARNING YEAR ENROLLMENT CENTERS OPENED AT 11/30/95 - -------------------------- ------ ----------- ARIZONA Phoenix Campus............ 1978 4,265 Mesa.................... 1986 Northwest Phoenix....... 1990 Scottsdale.............. 1994 Tucson Campus............. 1983 1,655 East Tucson............. 1993 Fort Huachuca........... 1993 CALIFORNIA Orange County (Fountain Valley) Campus............... 1981 5,638 Diamond Bar............. 1992 Edwards Air Force Base................. 1992 Lawndale................ 1992 Van Nuys................ 1990 Pasadena................ 1995 Ontario................. 1995 Gardena................. 1996 Ventura................. 1996 San Jose Campus........... 1980 2,853 San Ramon............... 1985 San Francisco........... 1994 Pleasanton.............. 1995 Fresno Campus............. 1995 54 San Diego Campus.......... 1989 1,439 Vista................... 1994 Chula Vista............. 1996 Sacramento Campus......... 1993 689 Fairfield............... 1996 COLORADO Denver Campus............. 1982 3,196 Aurora.................. 1988 Colorado Springs........ 1993 Northglenn.............. 1995 HAWAII Honolulu Campus........... 1993 395 LOUISIANA New Orleans Campus........ 1996 13 MICHIGAN Detroit (Southfield) Campus.................. 1996 43 NEVADA Las Vegas Campus.......... 1994 425 Nellis Air Force Base... 1993 NEW MEXICO Albuquerque Campus........ 1985 1,257 Kirkland Air Force Base................. 1993 Santa Fe................ 1994 Santa Teresa -- Las Cruces............... 1995 UTAH Salt Lake City Campus..... 1984 1,627 Ogden................... 1992 Orem.................... 1988 PUERTO RICO Guaynabo Campus........... 1980 1,029 DISTANCE EDUCATION Online(TM), San Francisco, CA(1)................... 1989 1,360 Center for Distance Education, Phoenix, AZ(2)................... 1989 1,201 ------ Total UOP enrollment at November 30, 1995....... 27,139 ======
- --------------- (1) Programs are offered throughout the United States and internationally. (2) Programs are offered in various states throughout the United States. 35 37 IPD currently has contracts with 15 institutions that offer programs at 29 campuses and learning centers in Connecticut, Georgia, Illinois, Indiana, Kansas, Kentucky, Massachusetts, Minnesota, Mississippi, Missouri, North Carolina, Ohio, South Carolina, Texas, Virginia and Wisconsin. WIU currently offers its programs at four campuses and learning centers located in Phoenix, Fort Huachuca and Douglas, Arizona and through Thames Lea College in London, England. PROPERTIES The Company leases all of its administrative and educational facilities. In some cases, classes are held in the facilities of the students' employers at no charge to the Company. Leases generally range from five to seven years; however, the Company attempts to secure longer leases if it is advantageous to do so. The Company also leases space from time-to-time on a short-term basis in order to provide specific courses or programs. The table below sets forth certain information as of November 30, 1995, with respect to properties leased by the Company in excess of 5,000 square feet:
LOCATION SQUARE (CITY/STATE) FEET - ----------------------------------- ------- Phoenix, AZ........................ 124,552 Phoenix, AZ........................ 38,086 San Jose, CA....................... 37,876 Fountain Valley, CA................ 34,545 San Diego, CA...................... 33,097 Englewood, CO...................... 32,000 Tucson, AZ......................... 30,000 Murray, UT......................... 30,000 Albuquerque, NM.................... 23,400 Gardena, CA........................ 23,077 Mesa, AZ........................... 22,450 Marietta, GA....................... 21,634 Overland Park, KS.................. 21,210 San Francisco, CA.................. 20,649 San Francisco, CA.................. 20,324 Colorado Springs, CO............... 20,138 Pleasanton, CA..................... 18,560 Van Nuys, CA ...................... 18,467 Sacramento, CA..................... 18,419 Costa Mesa, CA..................... 18,397 Aurora, CO......................... 16,807 Diamond Bar, CA.................... 15,280 Ontario, CA........................ 14,899 Lawndale, CA....................... 14,041 Quincy, MA......................... 12,863 Northglenn, CO..................... 11,971 Ogden, UT.......................... 11,265 Crestview Hills, KY................ 10,303 Phoenix, AZ........................ 10,066 Charlotte, NC...................... 9,898 Scottsdale, AZ..................... 9,588 Pasadena, CA....................... 9,376 Richmond, VA....................... 9,229 Vista, CA.......................... 9,224 New Haven, CT...................... 9,131 Guaynabo, PR....................... 9,000 Tucson, AZ......................... 7,708 Phoenix, AZ........................ 7,617 Phoenix, AZ........................ 6,120 Fresno, CA......................... 5,944 Las Vegas, NV...................... 5,647 Overland Park, KS.................. 5,625 San Ramon, CA...................... 5,526 Vienna, VA......................... 5,508 Murray, UT......................... 5,340
The lease on the Company's corporate headquarters, which includes the UOP Phoenix Main Campus, was renewed in December 1995 for another five year term. In December 1995, the Company acquired land for a purchase price of $2.9 million which it may use in the future for the possible relocation of its corporate headquarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 36 38 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The Company's directors serve one year terms and are elected each year by the holders of the Company's Class B Common Stock. The following sets forth information as of November 30, 1995 concerning the Company's directors and executive officers:
NAME AGE POSITION ---------------------------- --- ---------------------------------------------------------- John G. Sperling, Ph.D...... 74 Chairman of the Board and President William H. Gibbs............ 45 Senior Vice President and Director Jerry F. Noble.............. 53 Senior Vice President and Director John D. Murphy.............. 49 Senior Vice President-Institutional Affairs and Director Peter V. Sperling........... 35 Vice President of Administration, Secretary and Treasurer and Director James W. Hoggatt............ 38 Vice President of Finance and Chief Financial Officer Todd S. Nelson.............. 36 Executive Vice President of UOP Dino D. DeConcini........... 61 Director J. Jorge Klor de Alva, J.D., Ph.D. .................... 47 Director Thomas C. Weir.............. 62 Director
JOHN G. SPERLING, PH.D., is the founder, President and Chairman of the Board of Directors of the Company. Prior to his involvement with the Company, from 1961 to 1973, Dr. Sperling was a professor of Humanities at San Jose State University where he was the Director of the Right to Read Project and the Director of the NSF Cooperative College-School Science Program in Economics. At various times from 1955 to 1961, Dr. Sperling was a member of the faculty at the University of Maryland, Ohio State University and Northern Illinois University. Dr. Sperling received his Ph.D. from Cambridge University, an M.A. from the University of California at Berkeley and a B.A. from Reed College. Dr. Sperling is the father of Peter V. Sperling. WILLIAM H. GIBBS has been with the Company since 1980. Mr. Gibbs has been the President of UOP and a Senior Vice President of the Company since 1987. From 1985 to 1987, Mr. Gibbs was the President of Apollo Education Corporation ("AEC"). From 1980 to 1985, Mr. Gibbs held various positions with the Company, including Chief Financial Officer and faculty member. From 1975 to 1984, Mr. Gibbs was with the accounting firm of Price Waterhouse and, from 1982 to 1984, served as a management advisory manager. Mr. Gibbs currently serves as a director of the Arizona State Board of Private Post-Secondary Education and the Arizona Commission for Post-Secondary Education. Mr. Gibbs received his M.B.A. from the University of Illinois and his B.A. from Arizona State University. Mr. Gibbs is a Certified Public Accountant in the State of Arizona. JERRY F. NOBLE has been with the Company since 1981. Mr. Noble has been a Senior Vice President of the Company since 1987 and the President of IPD since 1984. From 1981 to 1987, Mr. Noble also was the controller of the Company. From 1977 to 1981, Mr. Noble was the corporate accounting manager for Southwest Forest Industries, a forest products company. Mr. Noble received his M.B.A. from UOP and his B.A. from the University of Montana. Mr. Noble is a Certified Public Accountant in the Commonwealth of Virginia. JOHN D. MURPHY has been with the Company since 1976. Mr. Murphy has been the Senior Vice President-Institutional Affairs since 1987. From 1981 to 1987, Mr. Murphy was the Vice President of Public Affairs of the Company. From 1991 to 1994 Mr. Murphy also served as Vice President-Academic Affairs of UOP. From 1972 to 1976, Mr. Murphy was an instructor at San Jose State University. Mr. Murphy is the founder and current Vice President of the Independent Colleges and Universities of Arizona and the founder and current Chairman of the Accredited Out-of-State Colleges and Universities of California. Mr. Murphy is a member of the Council for Private Post-Secondary and Vocational Education in California. Mr. Murphy received an M.A. from the University of San Francisco and a B.A. from San Jose State University. 37 39 PETER V. SPERLING has been with the Company since 1983. Mr. Sperling has been the Vice President of Administration since 1992 and the Secretary and Treasurer of the Company since 1988. From 1987 to 1992, Mr. Sperling was the Director of Operations at AEC. From 1983 to 1987, Mr. Sperling was Director of Management Information Services of the Company. Mr. Sperling received his M.B.A. from UOP and his B.A. from the University of California at Santa Barbara. Mr. Sperling is the son of John G. Sperling. JAMES W. HOGGATT has been with the Company since 1986. Mr. Hoggatt has been the Vice President of Finance and Chief Financial Officer of the Company since 1990. From 1987 to 1990, Mr. Hoggatt was the Vice President-Controller of the Company. From 1986 to 1987, Mr. Hoggatt was the Director of Financial Reporting of the Company. From 1979 to 1986, Mr. Hoggatt was with the accounting firm of Price Waterhouse and, from 1984 to 1986, served as an audit manager. Mr. Hoggatt received a B.S. from Abilene Christian University. Mr. Hoggatt is a Certified Public Accountant in the State of Arizona. TODD S. NELSON has been with the Company since 1987. Mr. Nelson has been a Vice President of the Company since 1994 and the Executive Vice President of UOP since 1989. From 1987 to 1989, Mr. Nelson was the Director of UOP's Utah campus. From 1985 to 1987, Mr. Nelson was the General Manager at Amembal and Isom, a management training company. From 1984 to 1985, Mr. Nelson was a General Manager for Vickers & Company, a diversified holding company. From 1983 to 1984, Mr. Nelson was a Marketing Director at Summa Corporation, a recreational properties company. Mr. Nelson received an M.B.A. from the University of Nevada at Las Vegas and a B.S. from Brigham Young University. Mr. Nelson was a member of the faculty at University of Nevada at Las Vegas from 1983 to 1984. DINO J. DECONCINI has been a director of the Company since 1981. Mr. DeConcini is currently Executive Director, Savings Bonds Marketing Office, U.S. Department of the Treasury. From 1979 to 1995, Mr. DeConcini was a shareholder in DeConcini, McDonald, Brammer, Yetwin and Lacy, P.C., Attorneys at Law. From 1993 to 1995, Mr. DeConcini was a Vice President and Senior Associate of Project International Associates, Inc., an international business consulting firm. From 1991 to 1993 and 1980 to 1990, Mr. DeConcini was a Vice President and partner of Paul R. Gibson & Associates, an international business consulting firm. J. JORGE KLOR DE ALVA, J.D., PH.D., has been a director of the Company since 1991 and is a member of the Audit and Compensation Committees of the Board of Directors of the Company and is a director of UOP. Dr. Klor de Alva has been the Class of 1940 Professor of Comparative Ethnic Studies and Anthropology at the University of California at Berkeley since July 1994. From 1989 to 1994, Dr. Klor de Alva was a Professor of Anthropology at Princeton University. From 1984 to 1989, Dr. Klor de Alva was the Director of the Institute for Mesoamerican Studies at the State University of New York at Albany. From 1982 to 1989, Dr. Klor de Alva was also an Associate Professor of Anthropology and Latin American Studies at the State University of New York at Albany. From 1971 to 1982, Dr. Klor de Alva served at various times as associate professor, assistant professor or lecturer at San Jose State University, the University of California at Santa Cruz, Instituto de Investigaciones Historicas, Universidad Nacional Autonoma de Mexico and the University of California at Berkeley. THOMAS C. WEIR has been a director of the Company since 1983 and is a member of the Audit and Compensation Committees of the Board of Directors of the Company. During 1994, Mr. Weir became the President of Dependable Nurses, Inc., a provider of temporary nursing services, W.D. Enterprises, Inc., a financial services company and Dependable Personnel, Inc., a provider of temporary clerical personnel. In addition, Mr. Weir has been an independent financial consultant since 1990. From 1989 to 1990, Mr. Weir was President of Tucson Electric Power Company. From 1979 to 1987, Mr. Weir was Chairman and Chief Executive Officer of Home Federal Savings & Loan Association, Tucson, Arizona. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has two principal committees: (1) an Audit Committee comprised of J. Jorge Klor de Alva (Chairperson) and Thomas C. Weir and (2) a Compensation Committee comprised of Thomas C. Weir (Chairperson) and J. Jorge Klor de Alva. 38 40 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of December 19, 1995, and as adjusted to reflect the sale of 2,750,000 shares of Class A Common Stock offered hereby, assuming that the Underwriters' over-allotment option is not exercised by: (i) each of the Company's directors; (ii) all directors and officers as a group and (iii) the Selling Shareholders. Except as otherwise indicated, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares, except to the extent that authority is shared by spouses under applicable law or as otherwise noted below.
CLASS B SHARES CLASS A SHARES CLASS A SHARES BENEFICIALLY OWNED CLASS A SHARES BENEFICIALLY TO BE SOLD BENEFICIALLY OWNED BEFORE AND AFTER OWNED PRIOR TO THE OFFERING IN THE OFFERING AFTER THE OFFERING THE OFFERING NAME AND ADDRESS OF ----------------------------- ---------------- ---------------------- --------------------- BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER NUMBER PERCENT NUMBER PERCENT - --------------------- ---------- ---------- ---------------- ---------- ------- ------- ------- John G. Sperling..... 5,993,096(2)(3) 27.7% 1,000,000(3) 4,993,096(3) 23.2% 243,081(12) 42.2% Peter V. Sperling.... 6,447,081(2)(4) 29.8 1,000,000(4) 5,447,081(4) 25.2% 232,068(13) 40.3 William H. Gibbs..... 661,857(5) 3.1 225,000(5) 436,857(5) 2.0% 27,950(14) 4.9 Jerry F. Noble....... 705,189(6) 3.3 225,000(6) 480,189(6) 2.2% 27,950 4.9 John D. Murphy....... 732,147(7) 3.4 225,000(7) 507,147(7) 2.3% 27,950 4.9 Dino J. DeConcini.... 18,700(8) * -- 18,700(8) * -- -- J. Jorge Klor de Alva............... 20,000(9) * -- 20,000(9) * -- -- Thomas C. Weir....... 20,000(9) * -- 20,000(9) * -- -- Todd S. Nelson....... 243,288(10) 1.1 75,000(10) 168,288(10) 0.8% 8,385 1.5 Total for All Directors and Executive Officers as a Group (10 persons)........... 14,159,916(11) 64.0% 2,750,000 11,409,916(11) 51.5% 575,769 100.0%
- --------------- * Less than 1%. (1) The address of each of the listed shareholders, unless noted otherwise, is in care of Apollo Group, Inc., 4615 East Elwood Street, Phoenix, Arizona 85040. (2) Includes 828,438 shares held by the John Sperling 1994 Irrevocable Trust dated April 27, 1994 ("1994 Irrevocable Trust") for which Messrs. John and Peter Sperling are the co-trustees. (3) Includes 121,551 shares that Mr. John Sperling has the right to acquire within 60 days of the date of the table set forth above. If the Underwriters' over-allotment option is exercised, an additional 162,500 shares will be sold by the 1994 Irrevocable Trust for which Messrs. John and Peter Sperling serve as co-trustees and thereafter Mr. John Sperling will beneficially own 4,830,596 shares representing 22.3% of the total shares outstanding after the Offering. (4) Includes 73,664 shares that Mr. Peter Sperling has the right to acquire within 60 days of the date of the table set forth above. If the Underwriters' over-allotment option is exercised, an additional 162,500 shares will be sold by the 1994 Irrevocable Trust for which Messrs. John and Peter Sperling serve as co-trustees, and thereafter Mr. Peter Sperling will beneficially own 5,284,581 shares representing 24.5% of the total shares outstanding after the Offering. (5) Includes 72,484 shares that Mr. Gibbs has the right to acquire within 60 days of the date of the table set forth above. If the Underwriters' over-allotment option is exercised, an additional 75,000 shares will be sold by the Gibbs Family Trust dated July 14, 1994 for which Mr. Gibbs serves as trustee, and thereafter Mr. Gibbs will beneficially own 361,857 shares representing 1.7% of the total shares outstanding after the Offering. (6) Includes 79,192 shares that Mr. Noble has the right to acquire within 60 days of the date of the table set forth above. If the Underwriters' over-allotment option is exercised, an additional 75,000 shares will be sold by Jerry Noble, and thereafter Mr. Noble will beneficially own 405,189 shares representing 1.9% of the total shares outstanding after the Offering. (7) Includes 85,900 shares that Mr. Murphy has the right to acquire within 60 days of the date of the table set forth above. If the Underwriters' over-allotment option is exercised, an additional 75,000 shares will be sold by the Murphy 1993 Revocable Trust dated February 26, 1993 for which Mr. Murphy serves as 39 41 trustee, and thereafter Mr. Murphy will beneficially own 432,147 shares representing 2.0% of the total shares outstanding after the Offering. (8) Includes 18,500 shares that Mr. DeConcini has the right to acquire within 60 days of the date of the table set forth above. (9) Includes 20,000 shares that Mr. Klor de Alva and Mr. Weir have the right to acquire within 60 days of the date of the table set forth above. (10) Includes 73,664 shares that Mr. Nelson has the right to acquire within 60 days of the date of the table set forth above. If the Underwriters' over-allotment option is exercised, an additional 25,000 shares will be sold by Todd Nelson and thereafter Mr. Nelson will beneficially own 143,288 shares representing 0.7% of the total shares outstanding after the Offering. (11) Includes 609,639 shares that the Directors and Executive Officers as a group have the right to acquire within 60 days of the date of the table set forth. If the Underwriters' over-allotment option is exercised, an additional 412,500 shares will be sold by the Directors and Officers as a group, and thereafter the Directors and Executive Officers as a group will beneficially own 10,997,416 shares representing 49.7% of the total shares outstanding after the Offering. (12) Includes 243,080 shares held by the John G. Sperling Revocable Trust dated January 31, 1995. (13) Includes 232,067 shares held by the Peter V. Sperling Revocable Trust dated January 31, 1995. (14) Includes 27,949 shares held by the William H. Gibbs Revocable Trust dated March 8, 1995. 40 42 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 65,000,000 shares of Class A Common Stock, no par value ("Class A Common Stock"); 3,000,000 shares of Class B Common Stock, no par value ("Class B Common Stock"); and 1,000,000 shares of preferred stock, no par value ("Preferred Stock"). CLASS A COMMON STOCK As of the date of this Prospectus there are outstanding 21,527,299 shares of the Class A Common Stock. The holders of Class A Common Stock do not have any voting rights with respect to shares of the Class A Common Stock. The holders of the Class A Common Stock have no preemptive, subscription or additional conversion rights. Upon a liquidation or dissolution of the Company, holders of Class A Common Stock are entitled to share ratably with the holders of Class B Common Stock in any corporate assets remaining after the payment of all debts, subject to any preferential rights of any outstanding Preferred Stock. The Class A Common Stock is not subject to assessment or further calls, has no redemption provisions and is entitled only to such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." CLASS B COMMON STOCK As of the date of this Prospectus, there are outstanding 575,769 shares of the Class B Common Stock. The holders of Class B Common Stock are entitled to one vote for each share held of record on all matters on which shareholders are entitled to vote. The holders of the Class B Common Stock have no preemptive, subscription or additional conversion rights. Upon a liquidation or dissolution of the Company holders of Class B Common Stock are entitled to share ratably with the holders of Class A Common Stock in any corporate assets remaining after the payment of all debts, subject to any preferential rights of any outstanding Preferred Stock. The Class B Common Stock is not subject to assessment or further calls, has no redemption provisions and is entitled only to such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." Each share of Class B Common Stock is freely convertible into one share of Class A Common Stock at the option of the Class B shareholder. All shares of Class B Common Stock will automatically convert to shares of Class A Common Stock (on a share-for-share basis) at such time as the number of shares of Class B Common Stock outstanding is less than 115,154, in which case holders of Class A Common Stock will be entitled to one vote per share (including the Class A Common Stock issued upon the conversion of the Class B Common Stock). No additional shares of Class B Common Stock may be issued by the Company except pursuant to a recapitalization or stock split. All of the Class B Common Stock is currently held by the Company's management and is subject to a Shareholders' Agreement, dated as of September 7, 1994 (the "Shareholders' Agreement"). Subject to the Shareholders' Agreement, shares of the Class B Common Stock must first be offered to the Company and then to the other holders of the Class B Common Stock before such shares may be transferred, except in the case of transfers to existing holders of Class B Common Stock, executive officers of the Company or to a trust created by a shareholder of Class B Common Stock. Upon transfer to any party, other than an existing holder of Class B Common Stock or a an executive officer of the Company, shares of Class B Common Stock must be converted to shares of Class A Common Stock (on a share-for-share basis). Upon the death of any holder of Class B Common Stock, that person's shares must be offered first to the Company and then to the other Class B shareholders at the then fair market value. In addition, parties to the Shareholders' Agreement agreed not to amend such agreement before December 5, 1999 without the prior consent of Smith Barney Inc. PREFERRED STOCK The Board of Directors has the authority, without further action by the shareholders, to issue from time to time up to 1,000,000 shares of Preferred Stock in one or more series and to fix the number of shares, designations, voting powers, preferences, optional and other special rights and the restrictions or qualifications thereof. The rights, preferences, privileges and restrictions or qualifications of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The issuance of Preferred Stock 41 43 could decrease the amount of earnings and assets available for distribution to holders of Class A Common Stock or Class B Common Stock or could adversely affect the rights and powers, including voting rights, if applicable, of holders of Class A Common Stock or Class B Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. As of the date of this Prospectus there are no shares of Preferred Stock outstanding. The Company has no present intention to issue any shares of Preferred Stock. CERTAIN CHARTER PROVISIONS The Company's Articles of Incorporation limit personal liability of directors, to the Corporation or its shareholders, for monetary damages for breach of their fiduciary duty as a director except to the extent such limitation of liability is not permitted under Arizona law. Arizona law provides that the liability of a director may not be eliminated or limited for: (1) transactions in which a director receives a financial benefit to which the director is not entitled; (2) an intentional infliction of harm on the corporation or the shareholders; (3) liability for unlawful distributions in violation of Arizona law or the Articles of Incorporation or (4) an intentional violation of criminal law. In addition, the Company's Bylaws provide that the Company may indemnify any and all of its directors and officers, or former directors and officers, to the fullest extent permitted by law or by the Articles of Incorporation against claims and liabilities to which such persons may become subject. Arizona law generally provides that indemnification is permissible only when the director or officer acted in good faith and in a manner reasonably believed to be in the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. Subject to that standard of care, indemnification is mandatory under Arizona law for "outside directors" as defined under Arizona law. The Company's outside directors are Messrs. DeConcini, Klor de Alva and Weir. Indemnification of directors is precluded in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation or in connection with any other proceeding charging improper personal benefit to the director, whether or not involving action in the director's official capacity, in which the director was adjudged liable on the basis that personal benefit was improperly received by the director. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock is First Interstate Bank of California. 42 44 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 21,527,299 shares of Class A Common Stock outstanding, all of which will be freely tradeable except: (1) 10,387,777 shares which are held by persons who are "affiliates" of the Company for purposes of Rule 144 and (2) all or any portion of the 412,500 shares held by the Selling Shareholders which are not sold to the Underwriters pursuant to their over-allotment option, which will continue to be "restricted securities" for purposes of Rule 144. In general, as Rule 144 currently provides, a person (or persons whose shares are aggregated) who has beneficially owned "restricted" shares for at least two years, including persons who may be deemed "affiliates" of the Company, as that term is defined under Rule 144, would be entitled to sell (in accordance with the provisions specified in the rule) within any three month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Class A Common Stock (approximately 215,270 shares immediately following the Offering) or the average weekly trading volume of each class of such shares in the over-the-counter market during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). An "affiliate" of the Company may sell securities that are not "restricted" without regard to the period of beneficial ownership but subject to the volume limitations described above and other conditions of Rule 144, subject to restrictions on affiliates. A person who is not deemed an "affiliate" of the Company (and has not been for at least 90 days) and who has beneficially owned his or her shares for at least three years, would be entitled to sell such shares under Rule 144 without regard to the volume limitations described above, manner of sale provisions, notice requirements or availability of public information. All of the Company's officers and directors and the Selling Shareholders have agreed that they will not, without the prior written consent of Smith Barney Inc., sell, offer, contract to sell, or otherwise dispose of, any shares of Class A Common Stock or any other securities convertible into or exercisable or exchangeable for Class A Common Stock for a period of 180 days after the date of this Prospectus. See "Underwriting" and "Principal and Selling Shareholders." No prediction can be made of the effect, if any, that sales of share or the availability of such shares for sale will have on the market price prevailing from time to time. Nevertheless, sales by the existing shareholders of substantial amounts of the Class A Common Stock in the public market could adversely affect prevailing market conditions. 43 45 UNDERWRITING Upon the terms and subject to the conditions stated in the Underwriting Agreement dated the date hereof, each Underwriter named below (the "Underwriters") has severally agreed to purchase, and the Selling Shareholders have agreed to sell to such Underwriter, the number of shares of Class A Common Stock set forth opposite the name of such Underwriter.
NUMBER UNDERWRITER OF SHARES - ---------------------------------- --------- Smith Barney Inc.................. Alex. Brown & Sons Incorporated... NUMBER UNDERWRITER OF SHARES - ---------------------------------- --------- Montgomery Securities............. --------- TOTAL........................... 2,750,000 ========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Class A Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Smith Barney Inc., Alex. Brown & Sons Incorporated and Montgomery Securities are acting as the Representatives, propose to offer part of the shares directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. The Selling Shareholders have granted to the Underwriters an option, exercisable for thirty days from the date of this Prospectus, to purchase up to 412,500 additional shares of Class A Common Stock at the price to public set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the offering of the shares offered hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth opposite each Underwriter's name in the preceding table bears to the total number of shares listed in such table. The Company, its officers and directors and the Selling Shareholders have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of Class A Common Stock of the Company or any securities convertible into, or exercisable or exchangeable for, Class A Common Stock of the Company. The Company, the Selling Shareholders and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The rules of the Securities and Exchange Commission ("Commission") generally prohibit the Underwriters from making a market in the Class A Common Stock during the two business days prior to commencement of sales in this Offering (the "Cooling Off Period"). The Commission has, however, adopted Rule 10b-6A of the Exchange Act ("Rule 10b-6A"), which provides an exemption from such prohibition for certain passive market making transactions. Such passive market making transactions must comply with applicable price and volume limits and must be identified as passive market making transactions. In general, pursuant to Rule 10b-6A, a passive market maker must display its bid for a security at a price not in excess of the highest independent bid for the security. If all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Further, net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market maker's average daily trading volume in a security during a specified prior period and must be discontinued when such limit is reached. Pursuant to the exemption provided by Rule 10b-6A, certain of the Underwriters and selling group members may engage in passive market making in the Class A Common Stock during the Cooling Off Period. Passive market making may stabilize the market price of the Class A Common Stock at a level above that which might otherwise prevail, and if commenced, may be discontinued at any time. 44 46 LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Selling Shareholders by Snell & Wilmer L.L.P. Certain legal matters relating to the Offering will be passed upon for the Underwriters by O'Melveny & Myers. As to matters of Arizona law, O'Melveny & Myers will rely on the opinion of Snell & Wilmer L.L.P. EXPERTS The consolidated financial statements as of August 31, 1995 and 1994 and for each of the three years in the period ended August 31, 1995 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 45 47 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files reports, information statements and other information with the Commission. The reports, information statements and other information filed by the Company with the Commission can be inspected and copied at the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such information can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company's Class A Common Stock is listed on Nasdaq and similar information can be inspected and copied at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. This Prospectus constitutes a part of a registration statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement") filed by the Company with the Commission under the Securities Act. As permitted by the rules and regulations of the Commission, this Prospectus omits certain of the information contained in the Registration Statement and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Company and the securities offered hereby. Statements contained herein concerning the provisions of any documents filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and in each instance reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents have been filed by the Company with the Commission and are hereby incorporated by reference into this Prospectus: (1) Annual Report on Form 10-K for the fiscal year ended August 31, 1995; (2) the Quarterly Report on Form 10-Q for the quarter ended November 30, 1995 and (3) the description of the Class A Common Stock contained in the Company's Registration Statement on Form 8-A/A1 filed with the Commission pursuant to Section 12(g) of the Exchange Act. All other documents and reports filed pursuant to Sections 13, 14 or 15(d) of the Exchange Act (except information included in any such document in response to Items 402(i), 402(k) or 402(l) of Regulation S-K under the Securities Act) from the date of this Prospectus and prior to the termination of this offering of the securities shall be deemed to be incorporated by reference herein and shall be deemed to be a part hereof from the date of the filing of such reports and documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all documents which are incorporated herein by reference (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference in the document which this Prospectus incorporates). Requests should be directed to Mr. James W. Hoggatt, Vice President of Finance and Chief Financial Officer, Apollo Group, Inc., 4615 East Elwood Street, Phoenix, Arizona 85040, telephone number (602) 966-5394. 46 48 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Report of Independent Accountants..................................................... F-2 Consolidated Statement of Operations.................................................. F-3 Consolidated Balance Sheet............................................................ F-4 Consolidated Statement of Changes in Shareholders' Equity............................. F-5 Consolidated Statement of Cash Flows.................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 49 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Apollo Group, Inc.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Apollo Group, Inc. and its subsidiaries at August 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Apollo Group, Inc.'s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Phoenix, Arizona October 12, 1995 F-2 50 APOLLO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts)
THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, --------------------------------- ------------------- 1993 1994 1995 1994 1995 ------- -------- -------- ------- ------- (UNAUDITED) NET REVENUES.......................... $97,545 $124,720 $163,429 $36,465 $49,727 ------- -------- -------- ------- ------- COSTS AND EXPENSES: Instruction costs and services...... 65,319 81,313 102,122 23,418 29,959 Selling and promotional............. 15,812 17,918 21,016 4,987 6,328 General and administrative.......... 14,402 17,194 18,462 3,855 5,595 ------- -------- -------- ------- ------- 95,533 116,425 141,600 32,260 41,882 ------- -------- -------- ------- ------- Income before income taxes............ 2,012 8,295 21,829 4,205 7,845 Less provision for income taxes....... 869 3,383 9,229 1,661 3,256 ------- -------- -------- ------- ------- NET INCOME............................ $ 1,143 $ 4,912 $ 12,600 $ 2,544 $ 4,589 ======= ======== ======== ======= ======= NET INCOME PER SHARE.................. $ .08 $ .32 $ .62 $ .17 $ .20 ======= ======== ======== ======= ======= WEIGHTED AVERAGE SHARES OUTSTANDING... 15,136 15,281 20,485 15,281 22,504
The accompanying notes are an integral part of these consolidated financial statements. F-3 51 APOLLO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in thousands)
AUGUST 31, -------------------- NOVEMBER 30, 1994 1995 1995 ------- -------- ------------ (UNAUDITED) ASSETS: CURRENT ASSETS -- Cash and cash equivalents............................... $ 4,722 $ 50,726 $ 52,609 Restricted cash......................................... 8,094 11,875 10,797 Receivables, net........................................ 14,236 15,883 17,386 Inventory............................................... 2,656 2,723 2,813 Deferred tax asset, net................................. 1,321 2,352 3,088 Prepaids and other current assets....................... 864 485 851 ------- -------- -------- TOTAL CURRENT ASSETS...................................... 31,893 84,044 87,544 Property and equipment, net............................... 6,799 13,390 14,843 Educational program production costs, net................. 1,914 1,963 1,945 Deferred tax asset, net................................... 306 Other assets.............................................. 2,726 2,735 4,144 ------- -------- -------- TOTAL ASSETS.............................................. $43,638 $102,132 $108,476 ======= ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: CURRENT LIABILITIES -- Current portion of long-term liabilities................ $ 183 $ 118 $ 118 Accounts payable........................................ 5,325 6,261 3,569 Other accrued liabilities............................... 6,840 9,962 10,424 Income taxes payable.................................... 310 96 3,617 Student deposits and deferred tuition................... 22,232 28,628 28,409 ------- -------- -------- TOTAL CURRENT LIABILITIES................................. 34,890 45,065 46,137 ------- -------- -------- Long-term liabilities, less current portion............... 1,347 1,201 1,723 ------- -------- -------- Deferred tax liability, net............................... 514 303 ------- -------- -------- Commitments and contingencies............................. -- -- -- ------- -------- -------- SHAREHOLDERS' EQUITY -- Preferred stock, no par value, 1,000,000 shares authorized, none issued.............................. -- -- -- Class A nonvoting common stock, no par value, 65,000,000 shares authorized; 14,394,000 and 21,492,000 issued and outstanding at August 31, 1994 and 1995, respectively, and 21,527,000 issued and outstanding at November 30, 1995................................. 9 18 28 Class B voting common stock, no par value, 3,000,000 shares authorized; 576,000 issued and outstanding.... 1 1 1 Additional paid-in capital.............................. 1,982 37,378 37,740 Retained earnings....................................... 5,409 17,955 22,544 ------- -------- -------- TOTAL SHAREHOLDERS' EQUITY................................ 7,401 55,352 60,313 ------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $43,638 $102,132 $108,476 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 52 APOLLO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands)
COMMON STOCK --------------------------------------------------- CLASS A COMMON NONVOTING CLASS B VOTING --------------- --------------- --------------- ADDITIONAL RETAINED STATED STATED STATED PAID-IN EARNINGS SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) ------ ------ ------ ------ ------ ------ ---------- -------- BALANCE AT AUGUST 31, 1992................. 1,118 $ 10 -- $ -- -- $ -- $ 32 $ (646) New issue.................................. 34 81 Net income................................. 1,143 ------ --- ------ --- --- ---- ------- ------- BALANCE AT AUGUST 31, 1993................. 1,152 10 -- -- -- -- 113 497 Recapitalization: 6,909 shares of Class A Common Stock and 576 shares of Class B Common Stock issued in exchange for 1,152 shares of common stock.......... (1,152) (10) 6,909 9 576 1 Grant of stock options..................... 1,869 Net income................................. 4,912 ------ --- ------ --- --- ---- ------- ------- BALANCE AT AUGUST 31, 1994................. -- -- 6,909 9 576 1 1,982 5,409 Stock issued by public offering............ 3,516 4 34,854 Stock issued under stock purchase plans.... 29 388 Stock issued under stock option plans...... 12 97 Stock canceled under stock option plans.... (3) (22) (54) 4-for-3 stock split........................ 3,673 5 (5) Tax benefit related to stock options exercised................................ 84 Net income................................. 12,600 ------ --- ------ --- --- ---- ------- ------- BALANCE AT AUGUST 31, 1995................. -- -- 14,136 18 576 1 37,378 17,955 3-for-2 stock split........................ 7,356 10 (10) Stock issued under stock purchase plans.... 13 201 Stock issued under stock option plans...... 22 39 Tax benefit related to stock options exercised................................ 132 Net income................................. 4,589 ------ --- ------ --- --- ---- ------- ------- BALANCE AT NOVEMBER 30, 1995 (UNAUDITED)... -- $ -- 21,527 $ 28 576 $ 1 $ 37,740 $ 22,544 ====== === ====== === === ==== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 53 APOLLO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, ------------------------------------ --------------------- 1993 1994 1995 1994 1995 -------- --------- --------- -------- -------- (UNAUDITED) NET CASH RECEIVED FROM (USED FOR) OPERATING ACTIVITIES: Cash received from customers.............. $ 96,787 $ 117,187 $ 159,349 $ 34,578 $ 46,155 Cash paid to employees and suppliers...... (90,460) (105,858) (129,442) (32,239) (41,522) Interest received......................... 95 280 2,207 132 692 Interest paid............................. (279) (153) (96) (16) (20) Net income taxes received (paid).......... 78 (4,962) (9,692) (689) (546) -------- --------- --------- --------- --------- Net cash received from operating activities............................. 6,221 6,494 22,326 1,766 4,759 -------- --------- --------- --------- --------- NET CASH RECEIVED FROM (USED FOR) INVESTING ACTIVITIES: Purchase of property and equipment........ (2,547) (4,724) (9,944) (2,052) (2,357) Additions to educational program production costs....................... (1,527) (1,380) (1,548) (261) (307) Decrease in notes receivable.............. 145 Cash paid at acquisition of Western, net of cash acquired....................... (584) -------- --------- --------- --------- --------- Net cash used for investing activities.... (3,929) (6,104) (11,492) (2,313) (3,248) -------- --------- --------- --------- --------- NET CASH RECEIVED FROM (USED FOR) FINANCING ACTIVITIES: Borrowings on line of credit.............. 12,875 11,190 Repayments of borrowings on line of credit................................. (13,075) (11,190) Proceeds from sale-leaseback of assets.... 2,401 Principal payments on long-term debt...... (632) (912) (181) (10) Issuance of stock......................... 81 35,321 240 Retirement of stock....................... (54) Tax benefits related to exercise of options................................ 84 132 -------- --------- --------- --------- --------- Net cash received from (used for) financing activities................... (751) 1,489 35,170 (10) 372 -------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents............................... 1,541 1,879 46,004 (557) 1,883 Cash and cash equivalents, beginning of period.................................... 1,302 2,843 4,722 4,722 50,726 -------- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD.... $ 2,843 $ 4,722 $ 50,726 $ 4,165 $ 52,609 ======== ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 54 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED NOTE 1. NATURE OF OPERATIONS Apollo Group, Inc. ("Apollo" or the "Company"), through its subsidiaries The University of Phoenix, Inc. ("UOP"), the Institute for Professional Development ("IPD") and Western International University, Inc. ("WIU"), is a leading provider of higher education programs for working adults. The Company's fiscal year is from September 1 to August 31. Unless otherwise stated, references to the years 1993, 1994 and 1995 relate to the fiscal years ended August 31, 1993, 1994 and 1995, respectively. UOP is a regionally accredited, private institution of higher education offering bachelor's and master's degree programs in business, management, computer information systems, education and health care. UOP currently has 45 campuses and learning centers located in Arizona, California, Colorado, Hawaii, Louisiana, Michigan, Nevada, New Mexico, Utah and Puerto Rico. UOP also offers its educational programs nationally and internationally through OnlineTM, its computerized educational delivery system wherever there is adequate phone service or access to CompuServe(R) or the Internet. UOP is accredited by the Commission on Institutions of Higher Education of the North Central Association of Colleges and Schools ("NCA"). IPD provides program development and management services under long-term contracts to 15 regionally accredited private colleges and universities. IPD is currently operating in 16 states. WIU was acquired on September 1, 1995. See Note 3. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Apollo and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. USE OF ESTIMATES. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of cash, cash equivalents and restricted cash approximates fair value due to the short-term maturities of these instruments. RESTRICTED CASH. The U.S. Department of Education (the "DOE") requires that Title IV Program funds collected for unbilled tuition be kept in a separate cash or cash equivalent account until the students are billed for that portion of their program. In addition, all Title IV Program funds transferred to the Company through electronic funds transfer are subject to certain holding period restrictions. These funds generally remain in these separate accounts for an average of 60-75 days from date of collection. Restricted cash is excluded from cash received from operating activities in the Consolidated Statement of Cash Flows until the cash is transferred from these restricted accounts to the Company's operating accounts. The Company's restricted cash is invested in U.S. Treasury backed securities with maturities of ninety days or less. REVENUES, RECEIVABLES AND RELATED LIABILITIES. The Company's educational programs range in length from one-day seminars to degree programs lasting up to 46 months. Long-term programs are billed in blocks of time ranging in length from five weeks to three months. Seminars and other shorter term programs are usually billed in one installment. Billings occur when the student first attends a session resulting in the recording of a receivable and a deferred tuition revenue liability for the amount billed. The deferred tuition revenue liability is recognized into income pro rata over the period of instruction. If a student withdraws from a course or program, the unearned portion of the program that the student has paid for is refunded, generally on a pro rata basis. Because most of the Company's educational programs are billed in short blocks of time ranging from F-7 55 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED five to six weeks, most of the deferred tuition revenue liability at the end of each period will be recognized into income within five to six weeks following the end of that period. Student deposits consist of payments made in advance of billings. As the student is billed, the student deposit is applied against the resulting student receivable. The Company does not record the unbilled portion of educational programs for existing students because the students are not usually financially obligated for the unbilled portion. A majority of these students do, however, remain in their programs until completion. Receivables consist of the following, in thousands:
AUGUST 31, ------------------- NOVEMBER 30, 1994 1995 1995 ------- ------- ------------ Trade receivables.................................. $15,678 $17,991 $ 20,561 Interest receivable................................ 208 261 Income tax receivable.............................. 15 137 ------- ------- ------- 15,693 18,336 20,822 Less allowance for doubtful accounts............... (1,457) (2,453) (3,436) ------- ------- ------- Total receivables, net................... $14,236 $15,883 $ 17,386 ======= ======= =======
Bad debt expense was $1.1 million, $1.8 million and $1.8 million for 1993, 1994 and 1995, respectively. Student deposits and deferred tuition consist of the following, in thousands:
AUGUST 31, ------------------- NOVEMBER 30, 1994 1995 1995 ------- ------- ------------ Student deposits................................... $12,689 $17,756 $ 17,616 Deferred tuition revenue........................... 9,543 10,872 10,793 ------- ------- ------- Total student deposits and deferred tuition................................ $22,232 $28,628 $ 28,409 ======= ======= =======
The carrying value of the student deposit liabilities approximates fair value due to the short-term nature of these instruments. INVENTORY. Inventory consists primarily of curriculum materials. Inventories are stated at the lower of cost, determined using the FIFO (first-in, first-out) method, or market. PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost less accumulated depreciation. The Company capitalizes the cost of software used for internal operations once technological feasibility of the software has been demonstrated. Such costs consist primarily of custom-developed and packaged software and the direct labor costs of internally developed software. Depreciation is provided on all buildings, furniture, equipment and related software using the straight-line method over the estimated useful lives of the related assets which range from three to seven years, except software which is depreciated over three to five years and buildings which are depreciated over 30 years. Leasehold improvements and capital lease assets are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. Depreciation and amortization expense was $1.8 million, $2.0 million and $2.8 million for 1993, 1994 and 1995, respectively. Maintenance and repairs are expensed as incurred. EDUCATIONAL PROGRAM PRODUCTION COSTS. Direct costs incurred in the original production of, and improvements to, educational courses are capitalized, then recognized as expense using the 150% declining balance method over a three-year period beginning in the month the courses are placed in service. Courses are F-8 56 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED generally placed in service within four to six months after the program production commences. These direct costs primarily include contract-based curriculum development, salaries and wages for staff directly engaged in the development process and the costs of royalties and reprint permissions. Any unamortized cost is charged to expense whenever a course or program is discontinued. From 1993 through 1995, less than 4% of these courses were discontinued within three years of being placed in service. Indirect costs related to the curriculum development process, such as space rent and supplies, are expensed as incurred. Amortization expense was $1.1 million, $1.4 million and $1.4 million for 1993, 1994 and 1995, respectively. GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible assets consist primarily of the excess of costs over the fair value of the assets acquired from Western. These assets are being amortized on a straight-line basis over the estimated life of 15 years. DEFERRED RENTAL PAYMENTS AND DEPOSITS. The Company records rent expense using the straight-line method over the term of the lease agreement. Accordingly, deferred rental payment liabilities are provided for lease agreements that specify scheduled rent increases over the lease term and rental deposits are provided for lease agreements that specify payments in advance or scheduled rent decreases over the lease term. DEFERRED COMPENSATION AGREEMENTS. The Company has various deferred compensation agreements with individuals that are accounted for individually on an accrual basis in accordance with the terms of the underlying contract. The expected future benefits are accrued over the period of service required to be rendered in exchange for the benefits. All individuals covered by deferred compensation agreements were fully eligible to receive the benefits at the contract date and as a result, the deferred compensation liability reflects the present value of all future benefits expected to be paid, as determined at the contract date. SELLING AND PROMOTIONAL COSTS. The Company expenses selling and promotional costs as incurred. Selling and promotional costs include marketing salaries, direct-response and other advertising, promotional materials and related marketing costs. Direct-response advertising is not presently capitalized because all the criteria of Statement of Position 93-7, "Reporting on Advertising Costs," were not satisfied. STARTUP COSTS. Costs related to the startup of new campuses and learning centers are expensed as incurred. NON-OPERATING INCOME AND EXPENSE. Interest income is included in net revenues and totaled $84,000, $280,000 and $2.4 million for 1993, 1994 and 1995, respectively. For the three-month period ended November 30, 1994 and 1995, interest income totaled $141,000 and $745,000, respectively. Interest expense, including the imputed interest on deferred compensation agreements, is expensed as incurred. Interest expense totaled $255,000, $153,000 and $96,000 for 1993, 1994 and 1995, respectively. INCOME TAXES. Deferred income taxes have been provided for all significant temporary differences. These temporary differences arise principally from compensation not yet deductible for tax purposes, limitations on bad debt deductions for tax purposes, capitalization of educational program production costs for financial reporting purposes, loss reserves not deductible for tax purposes and the use of accelerated depreciation methods. When options granted under the Company's stock option plans are exercised, the Company receives a tax deduction related to the difference between the market value of its Class A Common Stock at the date of exercise and the sum of the exercise price and any compensation expense recognized for financial reporting purposes. The tax benefit resulting from this tax deduction is reflected as a decrease in the Company's income tax liability and an increase to additional paid-in capital. RECAPITALIZATION AND STOCK SPLITS. In June 1994, the Company issued six shares of Class A Common Stock and .5 shares of Class B Common Stock in exchange for each share of common stock outstanding at F-9 57 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED that date. In September 1994, the Company's Class A and Class B Common Stock underwent a 1.118 to 1 stock split. On March 24, 1995, the Board of Directors authorized a 4-for-3 stock split, effected in the form of a stock dividend of 1/3 additional shares of Class A Common Stock for each share of Class A or Class B Common Stock owned by shareholders of record on April 7, 1995, to be distributed on April 28, 1995. On August 25, 1995, the Board of Directors authorized a 3-for-2 stock split, effected in the form of a stock dividend of 1/2 additional shares of Class A Common Stock for each share of Class A or Class B Common Stock owned by shareholders of record on September 8, 1995, to be distributed on September 22, 1995. The June 1994 recapitalization and the three subsequent stock splits have been given retroactive recognition in each period presented in the accompanying consolidated financial statements. EARNINGS PER SHARE. Net income per share is computed using the weighted average number of Class A and Class B common and common equivalent shares outstanding during the period after giving retroactive effect to the recapitalization and stock splits described above. Shares subject to stock options issued during the 12-month period prior to the initial public offering are considered common equivalent shares for all periods prior to the initial public offering, pursuant to the requirements of the Securities and Exchange Commission (the "SEC"). The amount of any tax benefit to be credited to capital related to the exercise of options is included when applying the treasury stock method to stock options in the computation of earnings per share. The exercise of outstanding stock options would not result in a material dilution of earnings per share. RECLASSIFICATIONS. Certain amounts reported for the year ended August 31, 1994 and 1995 have been reclassified to conform to the current presentation, having no effect on net income. NOTE 3. ACQUISITION OF CERTAIN ASSETS OF WESTERN INTERNATIONAL UNIVERSITY Effective September 1, 1995, the Company completed the acquisition of certain assets of Western International University ("Western"). Western was a private non-profit educational institution incorporated in 1978 that was accredited by NCA. The Company formed a new wholly-owned subsidiary called Western International University, Inc. ("WIU") as the holding company for the net assets acquired from Western. WIU acquired accounts receivable, notes receivable, furniture, fixtures, equipment, certain contracts and student agreements, copyrights, trademarks, securities, cash, goodwill and certain other assets of Western. In exchange, WIU paid Western $237,000 in cash, including amounts advanced to Western prior to the closing, and assumed an additional $1.8 million in liabilities. The liabilities consisted of $1.3 million of current liabilities, $393,000 of which was paid on the acquisition date, and $503,000 of long-term debt. WIU assumed the Title IV liabilities of Western in the estimated amount of $210,000. This amount and the goodwill recorded related to the acquisition is subject to change based on the DOE's audit of Western's Title IV Programs to commence in January 1996. The excess of costs over the fair value of the assets acquired was $1.6 million and will be amortized on a straight-line basis over fifteen years. WIU has received approval to operate under new ownership by the Arizona State Board for Post-Secondary Education and has received approval from NCA for the transfer of accreditation to WIU. WIU has applied with the DOE to resume participation in Title IV programs. Prior to obtaining approval from the DOE, WIU will not be able to disburse funds awarded by Western or process new Title IV financial aid. The acquisition was accounted for under the purchase method and, accordingly, the results of operations related to this new subsidiary are included with those of the Company for periods subsequent to the date of acquisition. Results of operations for periods prior to the acquisition were immaterial. Western had consolidated net revenues of $4.3 million and pretax income of $216,000 for the year ended August 31, 1995. F-10 58 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED NOTE 4. DISCONTINUED TECHNICAL TRAINING SCHOOLS In March 1992, the Company adopted a plan to discontinue the operations of its technical training schools. The operations of these schools were phased out over the period from March 1992 through October 1992. Pretax losses related to the operations of the technical training schools were $265,000 in 1993. NOTE 5. FINANCIAL AID PROGRAMS Approximately 50%-60% of the Company's net revenues was received from students who participated in government-sponsored financial aid programs under Title IV of the Higher Education Act of 1965, as amended. These financial aid programs consist generally of: (1) guaranteed student loans that are issued directly to the students and are non-recourse to the Company and (2) direct grants to students. Annually, the DOE publishes the default rates of students participating in the FFEL programs. The latest student default rates as reported by the DOE for these guaranteed student loans are as follows:
FOR LOANS ENTERING REPAYMENT DURING THE DOE FISCAL YEAR ENDED SEPTEMBER 30, ---------------------- 1990 1991 1992 ---- ---- ---- Students attending: UOP campuses................................................. 2.6% 3.5% 5.0% IPD client institutions...................................... 4.1% 5.6% 5.3% Western campuses............................................. 7.0% 7.4% 4.7% National average............................................... 22.4% 17.8% 15.0%
NOTE 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following, in thousands:
AUGUST 31, ------------------- NOVEMBER 30, 1994 1995 1995 ------- ------- ------------ Land............................................... $ 125 $ 125 $ 125 Buildings.......................................... 225 225 225 Furniture and equipment............................ 9,088 16,494 18,369 Software........................................... 3,084 3,196 3,392 Capitalized equipment leases....................... 377 Leasehold improvements............................. 1,188 1,032 1,132 ------- ------- ------- 14,087 21,072 23,243 Less accumulated depreciation...................... (7,059) (7,682) (8,400) Less accumulated amortization of capitalized equipment leases................................. (229) ------- ------- ------- Property and equipment, net.............. $ 6,799 $13,390 $ 14,843 ======= ======= =======
During 1994, the Company sold furniture and equipment under a sale-leaseback arrangement. The assets were sold for $2.4 million in cash, resulting in a $351,000 gain that is being recognized pro rata over the term of the related operating lease. In 1994 and 1995, the Company recognized a gain of $88,000 and $117,000, respectively. In addition, the Company sold a house located on leased land to the Company's Secretary and Treasurer for $140,000 in 1994. The book value of the building and related improvements, net of accumulated F-11 59 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED depreciation, was $148,000. The Company believes that the terms of this sale were as favorable as could have been obtained from an unaffiliated party. NOTE 7. EDUCATIONAL PROGRAM PRODUCTION COSTS Educational program production costs consist of the following, in thousands:
AUGUST 31, ------------------- NOVEMBER 30, 1994 1995 1995 ------- ------- ------------ Educational program production costs............... $ 6,823 $ 7,722 $ 8,004 Less accumulated amortization...................... (4,909) (5,759) (6,059) ------- ------- ------- Educational program production costs, net.................................... $ 1,914 $ 1,963 $ 1,945 ======= ======= =======
The net effect on pre-tax income of the capitalization and amortization of educational program production costs amounts to an increase of $429,000 in 1993, a decrease of $36,000 in 1994 and an increase of $49,000 in 1995. NOTE 8. DEPOSITS AND OTHER ASSETS Deposits and other assets consist of the following, in thousands:
AUGUST 31, ----------------- NOVEMBER 30, 1994 1995 1995 ------ ------ ------------ Goodwill and other intangible assets, net............ $ 257 $ 494 $2,062 Land held for sale................................... 1,414 1,310 1,183 Rental deposits...................................... 540 493 693 Other deposits....................................... 515 438 206 ------- ------- ------- Total other assets......................... $2,726 $2,735 $4,144 ======= ======= =======
Goodwill and other intangible assets consist primarily of the excess of costs over the fair value of the assets acquired from Western. Land held for sale consists of approximately 105 acres of undeveloped land located in Santa Cruz County, California, a substantial portion of which was acquired from a related party in 1991. As a result of poor market conditions in Northern California, the Company recorded a $638,000 writedown in 1993 ($359,000 after related tax benefit), a $135,000 writedown in 1994 ($80,000 after related tax benefit) and a $104,000 writedown in 1995 ($60,000 after related tax benefit), based on independent appraisals dated June 1993, August 1994 and May 1995, respectively. NOTE 9. SHORT-TERM BORROWINGS At August 31, 1995, the Company had no amounts borrowed against its $4.0 million line of credit. The line of credit is secured by receivables, inventory, land held for sale and property and equipment and bears interest at prime (7.87% at August 31, 1995). The line of credit is renewable annually and is payable upon its termination in February 1996. The Company expects to renew this credit line. The Company is in compliance with the restrictive covenants contained in its line of credit agreement. The Company's line of credit agreement prohibits the Company from paying cash dividends or making other cash distributions without the lender's consent. F-12 60 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED NOTE 10. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following, in thousands:
AUGUST 31, NOVEMBER 30, ----------------- ------------ 1994 1995 1995 ------ ------ ------------ Salaries and wages................................... $3,186 $4,252 $ 4,251 Employee benefits and payroll withholdings........... 1,166 1,856 1,537 Other accruals....................................... 2,488 3,854 4,636 ------ ------ ------- Total other accrued liabilities............ $6,840 $9,962 $ 10,424 ====== ====== =======
NOTE 11. EMPLOYEE AND DIRECTOR BENEFIT PLANS The Company provides various health, welfare and disability benefits to its full-time salaried employees which are funded primarily by contributions. The Company does not provide postemployment or postretirement health care and life insurance benefits to its employees. The Company sponsors a 401(k) plan which is available to all employees of the Company who have completed one year and at least 1,000 hours of continuous service. The Company matches 100% of the contributions from the first $10,000 of a participant's annual pre-tax earnings. Contributions from the participant's earnings in excess of $10,000 are matched by the Company at 18.5%. Participant contributions are subject to certain restrictions as set forth in the Internal Revenue Code. The Company's matching contributions totaled $668,000, $745,000 and $848,000 for 1993, 1994 and 1995, respectively. In addition, the Company has three stock-based compensation plans that were adopted in 1994: the Apollo Group, Inc. Director Stock Plan ("Director Stock Plan"), the Apollo Group, Inc. Long-Term Incentive Plan ("LTIP") and the Apollo Group, Inc. 1994 Employee Stock Purchase Plan ("Purchase Plan"). The Director Stock Plan provides for an annual grant of options to the Company's nonemployee directors to purchase 6,000 shares, adjusted for stock splits, of the Company's Class A Common Stock on September 1 of each year. Under the LTIP, the Company may grant options, incentive stock options, stock appreciation rights and other stock based awards to certain officers or key employees of the Company. At November 30, 1995, there were 122,000 and 581,000 shares available for issuance under the Director Stock Plan and LTIP, respectively, and, to date, only non-qualified stock options have been granted. A F-13 61 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED summary of the activity related to the stock options granted under the Director Stock Plan and LTIP follows, in thousands: OPTIONS OUTSTANDING -- Balance at August 31, 1993................................................. -- June 2, 1994 grant at $.935 per share................................... 369 ----- Balance at August 31, 1994................................................. 369 December 6, 1994 grant at $5.50 per share............................... 402 Exercised at $5.50 per share............................................ (18) Canceled at $5.50 per share............................................. (4) ----- Balance at August 31, 1995................................................. 749 September 1995 grants at $20.17 to 25.42 per share...................... 942 Exercised at $.935 to $5.50 per share................................... (22) Canceled at $25.42 per share............................................ (12) ----- Balance at November 30, 1995............................................... 1,657 ===== OPTIONS EXERCISABLE -- Balance at August 31, 1993 and 1994........................................ -- ===== Balance at August 31, 1995................................................. 749 ===== Balance at November 30, 1995............................................... 727 ===== OPTIONS AVAILABLE FOR ISSUANCE -- Balance at August 31, 1994................................................. 1,400 Less options granted.................................................... (771) Plus options canceled................................................... 4 ----- Balance at August 31, 1995................................................. 633 Increase in available shares............................................ 1,000 Less options granted.................................................... (942) Plus options canceled................................................... 12 ----- Balance at November 30, 1995............................................... 703 =====
The June 2, 1994 grant to certain key employees was based on the fair value of such options at the date of grant as determined by an independent valuation. Pursuant to SEC requirements, the Company recorded $1.9 million in compensation expense and additional paid-in capital in 1994 related to these options, representing the difference between the exercise price per share and the assumed initial public offering price multiplied by the total number of shares granted. In September 1995, the Company increased the number of shares of Class A Common Stock available for issuance under the LTIP from 493,000 to 1.5 million. At the same time, the Company granted an additional 924,000 options to purchase shares of Class A Common Stock, at $25.42 per share, to officers and certain key employees under the LTIP. The options vest 25% at the end of seven years and ratably thereafter over the eighth to approximate tenth year. This vesting period may be accelerated for individual employees if the stock price reaches defined goals for at least three trading days and if certain profit goals, defined for groups of individuals, are also achieved. F-14 62 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED The Purchase Plan allows employees of the Company to purchase up to 1.0 million shares of the Company's Class A Common Stock at quarterly intervals through periodic payroll deductions. The purchase price per share, in general, is 85% of the lower of: (1) the fair market value (as defined in the Purchase Plan) of a share of Class A Common Stock on the participant's enrollment date into the respective quarterly offering period or (2) the fair market value of a share of Class A Common Stock on the purchase date. During the year ended August 31, 1995, 53,000 shares were purchased by eligible employees at prices ranging from $5.58 to $11.32 per share. At August 31, 1995, there are 947,000 shares available for purchase under the Purchase Plan. NOTE 12. LONG-TERM LIABILITIES Long-term liabilities consist of the following, in thousands:
AUGUST 31, ----------------- NOVEMBER 30, 1994 1995 1995 ------ ------ ------------ Deferred compensation agreements, discounted at 7.5% to 12%........................................................ $ 998 $1,004 $1,007 Deferred rental payments..................................... 351 315 331 Note payable related to acquisition of WIU, discounted at 9%......................................................... 503 Mortgage notes and capital lease obligations paid in full in 1995....................................................... 181 ------ ------ ------ Total long-term liabilities........................ 1,530 1,319 1,841 Less current portion......................................... (183) (118) (118) ------ ------ ------ Total long-term liabilities, net................... $1,347 $1,201 $1,723 ====== ====== ======
The aggregate maturities of all long-term liabilities for each of the five fiscal years subsequent to August 31, 1995 are: 1996 -- $118,000; 1997 -- $126,000; 1998 -- $95,000; 1999 -- $49,000; 2000 -- $50,000. The undiscounted deferred compensation liability was $1.8 million at both August 31, 1994 and 1995. The discount rate for deferred compensation agreements was determined at the date of each respective agreement based on the estimated long-term rate of return on high-quality fixed income investments with cash flows similar to the respective agreements. NOTE 13. LEASES The Company is obligated under facility and equipment leases that are classified as operating leases. Following is a schedule of future minimum lease commitments as of August 31, 1995, in thousands:
OPERATING LEASES ----------------------- EQUIPMENT BUILDINGS AND OTHER --------- --------- 1996............................................................ $ 11,704 $ 1,611 1997............................................................ 9,770 670 1998............................................................ 8,667 119 1999............................................................ 7,260 4 2000............................................................ 6,115 1 Thereafter...................................................... 7,906 ------- ------ $ 51,422 $ 2,405 ======= ======
F-15 63 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED Facility and equipment rent expense totaled $11.5 million, $13.8 million and $16.5 million for 1993, 1994 and 1995, respectively. NOTE 14. INCOME TAXES Pre-tax earnings (loss) and the related components of the income tax provision are as follows, in thousands:
THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, ------------------------------- ------------------- 1993 1994 1995 1994 1995 ------- ------- ------- ------- ------- PRE-TAX EARNINGS (LOSS): United States.................... $ 2,091 $ 8,104 $21,401 $ 4,127 $ 7,563 Puerto Rico...................... (79) 191 428 78 282 ------ ------ ------- ------ ------ Total pre-tax earnings............. $ 2,012 $ 8,295 $21,829 $ 4,205 $ 7,845 ====== ====== ======= ====== ====== INCOME TAX PROVISION (CREDIT): Current -- state................. $ 244 $ 1,072 $ 2,550 $ 336 $ 1,057 Current -- federal............... 559 3,399 7,103 1,635 2,787 Deferred......................... 66 (1,088) (424) (310) (588) ------ ------ ------- ------ ------ Total provision for income taxes......... $ 869 $ 3,383 $ 9,229 $ 1,661 $ 3,256 ====== ====== ======= ====== ======
The income tax provision differs from the tax that would result from application of the statutory federal corporate tax rate. The reasons for the differences are as follows, in thousands:
THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, ------------------------------- ------------------- 1993 1994 1995 1994 1995 ------- ------- ------- ------- ------- Income tax provision at expected rate of 34% for 1993 and 1994 and 35% for 1995............... $ 684 $ 2,820 $ 7,640 $ 1,472 $ 2,746 Nondeductible business meals..... 37 46 172 45 38 Non-taxable interest income...... (193) (71) State taxes, net of federal benefit........................ 141 536 1,518 133 531 Other, net....................... 7 (19) 92 11 12 ---- ------ ------ ------ ------ Total provision for income taxes......... $ 869 $ 3,383 $ 9,229 $ 1,661 $ 3,256 ==== ====== ====== ====== ======
F-16 64 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED The current and non-current deferred tax assets and liabilities consist of the following, in thousands:
AUGUST 31, NOVEMBER 30, ----------------- ------------ 1994 1995 1995 ------ ------ ------------ GROSS DEFERRED TAX ASSETS: Compensation not yet deductible for tax purposes... $1,353 $1,455 $1,568 Difference in bad debt deductions for financial reporting purposes.............................. 583 981 1,426 Loss reserves not deductible for tax purposes...... 567 554 311 Difference in lease expense deductions............. 318 272 630 Other.............................................. 66 262 ------ ------ ------ Total gross deferred tax assets.................... 2,821 3,328 4,197 ------ ------ ------ GROSS DEFERRED TAX LIABILITIES: Deduction of educational program production costs for tax purposes................................ 786 785 546 Depreciation and amortization of property and equipment....................................... 349 547 633 State taxes........................................ 158 233 Other.............................................. 59 ------ ------ ------ Total gross deferred tax liabilities............... 1,194 1,490 1,412 ------ ------ ------ NET DEFERRED TAX ASSET............................... $1,627 $1,838 $2,785 ====== ====== ====== The net tax asset is reflected in the accompanying balance sheet as follows: Current deferred tax asset, net...................... $1,321 $2,352 $3,088 Noncurrent deferred tax asset (liability), net....... 306 (514) (303) ------ ------ ------ NET DEFERRED TAX ASSET............................... $1,627 $1,838 $2,785 ====== ====== ======
In light of the Company's history of profitable operations, management has concluded that it is more likely than not that the Company will ultimately realize the full benefit of its deferred tax assets related to future deductible items. Accordingly, the Company believes that no valuation allowance is required for deferred tax assets in excess of deferred tax liabilities. F-17 65 APOLLO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF AND FOR THE PERIODS ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED NOTE 15. CASH RECEIVED FROM OPERATING ACTIVITIES Following is a reconciliation of net income to net cash received from operating activities, as shown on the consolidated statement of cash flows, in thousands:
AUGUST 31, NOVEMBER 30, ------------------------------- ------------------- 1993 1994 1995 1994 1995 ------- ------- ------- ------- ------- Net income............................... $ 1,143 $ 4,912 $12,600 $ 2,544 $ 4,589 Asset write down......................... 638 135 104 133 Depreciation and amortization of: Property and equipment................. 1,819 1,997 2,751 569 1,058 Educational program production costs... 1,098 1,365 1,375 337 322 Goodwill and other intangible assets... 35 Writeoff of unamortized cost of discontinued educational courses....... 51 124 3 Bad debt expense......................... 1,116 1,822 1,849 1,004 761 Compensation expense related to grant of options................................ 1,869 Net loss (gain) on disposal of assets.... (30) (141) 602 6 52 Change in assets and liabilities, net of effect from purchase of Western: Decrease (increase) in restricted cash................................ (1,907) (6,098) (3,781) (1,727) 1,078 Increase in receivables, net of write-offs.......................... (4,128) (5,894) (3,496) (1,019) (2,079) Decrease (increase) in deferred tax asset............................... 157 (757) (725) (702) (736) Decrease (increase) in other current assets.............................. 26 (940) 312 (21) (433) Decrease (increase) in other assets.... 186 (687) (113) (314) 26 Increase (decrease) in deferred rent... (269) 10 (36) (32) 17 Increase (decrease) in deferred compensation contracts.............. (46) 753 6 5 3 Increase (decrease) in accounts payable and accrued liabilities............. 468 2,727 4,058 (2,107) (2,507) Increase (decrease) in student deposits and deferred tuition................ 5,329 6,192 6,396 1,554 (872) Increase (decrease) in deferred taxes............................... (170) (331) 514 336 (211) Increase (decrease) in taxes payable... 791 (491) (214) 1,333 3,520 ------- ------- ------- ------- ------- Net cash received from operating activities......... $ 6,221 $ 6,494 $22,326 $ 1,766 $ 4,759 ======= ======= ======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: The Company purchased certain assets of Western for a total purchase price of $2.1 million. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired............................................... $2,065 Less cash paid to Western and on behalf of Western for the assets acquired.................................................................. (630) ------ Net liabilities assumed........................................... $1,435 ======
F-18 66 [DESCRIPTION OF INSIDE BACK COVER GRAPHICS] Top left photo: A picture showing campus activity with caption reading: "In 2000, 6.8 million of the nation's 15.5 million college students are projected to be adults over the age of 24." Top right photo: A picture of the University of Phoenix building located in Phoenix, Arizona with caption reading: "The University of Phoenix is the 6th largest regionally accredited private university in the United States." Bottom left photo: A picture showing classroom activity with caption reading: "The professionally-employed faculty help integrate academic theory and current practice." Bottom right photo: A picture showing graduation activity with caption reading: "A college degree is necessary for career advancement and change."
67 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 5 Use of Proceeds....................... 7 Dividend Policy....................... 7 Capitalization........................ 8 Price Range of Common Stock........... 9 Selected Consolidated Financial Data................................ 10 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 12 Business.............................. 19 Management............................ 37 Principal and Selling Shareholders.... 39 Description of Capital Stock.......... 41 Shares Eligible for Future Sale....... 43 Underwriting.......................... 44 Legal Matters......................... 45 Experts............................... 45 Available Information................. 46 Incorporation of Certain Documents by Reference........................... 46 Index to Consolidated Financial Statements.......................... F-1 Report of Independent Accountants..... F-2 Consolidated Financial Statements..... F-3 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2,750,000 Shares APOLLO GROUP, INC. CLASS A COMMON STOCK ------------ PROSPECTUS JANUARY , 1996 ------------ SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED MONTGOMERY SECURITIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 68 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the issuance and distribution of the securities being registered are as follows: SEC Registration Fee...................................................... $ 36,000 NASD Fee.................................................................. 11,000 Legal Fees................................................................ 100,000 Accounting Fees........................................................... 100,000 Blue Sky Fees and Disbursements........................................... 10,000 Miscellaneous (includes printing)......................................... 100,000 ------- Total........................................................... $357,000 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Articles of Incorporation limit personal liability of directors, to the Corporation or its shareholders, for monetary damages for breach of their fiduciary duty as a director except to the extent such limitation of liability is not permitted under Arizona law. Arizona law provides that the liability of a director may not be eliminated or limited for: (1) transactions in which a director receives a financial benefit to which the director is not entitled; (2) an intentional infliction of harm on the corporation or the shareholders; (3) liability for unlawful distributions in violation of Arizona law or the Articles of Incorporation or (4) an intentional violation of criminal law. In addition, the Company's Bylaws provide that the Company may indemnify any and all of its directors and officers, or former directors and officers, to the fullest extent permitted by law or by the Articles of Incorporation against claims and liabilities to which such persons may become subject. Arizona law generally provides that indemnification is permissible only when the director or officer acted in good faith and in a manner reasonably believed to be in the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. Subject to that standard of care indemnification is mandatory under Arizona law for "outside directors" as defined under Arizona law. The Company's outside directors are Messrs. DeConcini, Klor de Alva, and Weir. Indemnification of directors is precluded in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation or in connection with any other proceeding charging improper personal benefit to the director, whether or not involving action in the director's official capacity, in which the director was adjudged liable on the basis that personal benefit was improperly received by the director. The Registrant, the Selling Shareholders and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Reference is made to the Underwriting Agreement filed as part of Exhibit 1 hereto. For information regarding the Registrant's undertaking to submit to adjudication the issue of indemnification for violation of the securities laws, see Item 17 hereof. In addition the Company is paying a Directors' and Officers' liability insurance for claims up to $5,000,000. II-1 69 ITEM 16. EXHIBITS.
EXHIBIT PAGE OR NUMBER DESCRIPTION METHOD OF FILING - ------ ------------------------------- ------------------------------- 1 Form of Underwriting Agreement Page 4 Articles of Incorporation of Incorporated by reference to the Company Exhibit 3.1 of the Company's Form S-1 Registration Statement No. 33-83804 ("Form S-1 #33-83804") 5 Opinion of Snell & Wilmer Page L.L.P. 23.1 Consent of Independent Page Accountants 24 Power of Attorney See Signature Page 27 Financial Data Schedule Page
ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or 14c-3 under the Securities Exchange Act of 1934; and where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person II-2 70 in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 71 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Apollo Group, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Phoenix and State of Arizona on December 21, 1995. APOLLO GROUP, INC. an Arizona corporation By /s/ JOHN G. SPERLING ------------------------------------ John G. Sperling President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter V. Sperling and James W. Hoggatt, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form S-3 Registration Statement and to sign any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) of the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE - ---------------------------------------- --------------------------------- ------------------ /s/ JOHN G. SPERLING Chairman of the Board, December 21, 1995 - ---------------------------------------- President and John G. Sperling Chief Executive Officer (Principal Executive Officer) /s/ WILLIAM H. GIBBS Senior Vice President December 21, 1995 - ---------------------------------------- and Director William H. Gibbs /s/ JERRY F. NOBLE Senior Vice President December 21, 1995 - ---------------------------------------- and Director Jerry F. Noble /s/ JOHN D. MURPHY Senior Vice President December 21, 1995 - ---------------------------------------- of International Affairs John D. Murphy and Director /s/ PETER V. SPERLING Vice President of December 21, 1995 - ---------------------------------------- Administration, Secretary Peter V. Sperling and Director /s/ JAMES W. HOGGATT Vice President of Finance and December 21, 1995 - ---------------------------------------- Chief Financial Officer James W. Hoggatt (Principal Financial and Accounting Officer)
II-4 72
SIGNATURE TITLE DATE - ---------------------------------------- --------------------------------- ------------------ /s/ J. JORGE KLOR DE ALVA Director December 21, 1995 - ---------------------------------------- J. Jorge Klor de Alva /s/ THOMAS C. WEIR Director December 21, 1995 - ---------------------------------------- Thomas C. Weir
II-5 73 EXHIBIT INDEX
EXHIBIT PAGE OR NUMBER DESCRIPTION METHOD OF FILING - ------ ------------------------------- ------------------------------- 1 Form of Underwriting Agreement Page 4 Articles of Incorporation of Incorporated by reference to the Company Exhibit 3.1 of the Company's Form S-1 Registration Statement No. 33-83804 ("Form S-1 #33-83804") 5 Opinion of Snell & Wilmer Page L.L.P. 23.1 Consent of Independent Page Accountants 24 Power of Attorney See Signature Page 27 Financial Data Schedule Page
EX-1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1 2,750,000 Shares Apollo Group, Inc. Class A Common Stock UNDERWRITING AGREEMENT January ___, 1996 SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED MONTGOMERY SECURITIES As Representatives of the Several Underwriters c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Dear Sirs: The shareholders of Apollo Group, Inc., an Arizona corporation (the "Company"), listed on Part A of Schedule I hereto (the "Selling Shareholders") propose to sell an aggregate of 2,750,000 shares of the Company's Class A Common Stock, no par value, to the several Underwriters named in Schedule II hereto (the "Underwriters"). The Company's Class A Common Stock, no par value, is hereinafter referred to as the "Class A Common Stock" and the 2,750,000 shares of Class A Common Stock to be sold to the Underwriters by the Selling Shareholders are hereinafter referred to as the "Firm Shares". The Selling Shareholders listed on Part B of Schedule I also propose to sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional 412,500 shares (the "Additional Shares") of Class A Common Stock. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares". The Company and the Selling Shareholders desire to confirm as follows their respective agreements with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the several purchases of the Shares by the Underwriters. 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-3 under the Act (the "registration statement"), including a prospectus subject to completion relating to the Shares. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the 2 time it becomes effective, or, if the registration statement became effective prior to the execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. Any reference in this Agreement to the registration statement, the Registration Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the registration statement, the Registration Statement, such Prepricing Prospectus or the Prospectus, as the case may be, and any reference to any amendment or supplement to the registration statement, the Registration Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after such date under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which upon filing, are incorporated by reference therein, as required by paragraph (b) of Item 12 of Form S-3. As used herein, the term "Incorporated Documents" means the documents which at the time are incorporated by reference in the registration statement, the Registration Statement, any Prepricing Prospectus, the Prospectus, or any amendment or supplement thereto. 2. Agreements to Sell and Purchase. Subject to such adjustments as you may determine in order to avoid fractional shares, each Selling Shareholder hereby agrees, subject to all the terms and conditions set forth herein, to sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Selling Shareholders herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from each Selling Shareholder, at a purchase price of $_______ per Share (the "purchase price per share"), that number of Firm Shares which bears the same proportion to the number of Firm Shares set forth opposite the name of such Selling Shareholder in Schedule I hereto as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto (or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Selling Shareholders. 2 3 The Selling Shareholders listed on Part B of Schedule I hereto also agree, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company and the Selling Shareholders herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Selling Shareholders listed on Part B of Schedule I hereto, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time and from time to time prior to 9:00 P.M., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to an aggregate of 412,500 Additional Shares from the Selling Shareholders listed on Part B of Schedule I hereto (the maximum number of Additional Shares which each of them agrees to sell upon the exercise by the Underwriters of the over-allotment option is set forth opposite their respective names in Part B of Schedule I). Additional Shares may be purchased only for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The number of Additional Shares which the Underwriters elect to purchase upon any exercise of the over-allotment option shall be provided by each Selling Shareholder who has agreed to sell Additional Shares in proportion to the respective maximum numbers of Additional Shares which each such Selling Shareholder has agreed to sell. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments as you may determine in order to avoid fractional shares) which bears the same proportion to the number of Additional Shares to be sold by each Selling Shareholder who has agreed to sell Additional Shares as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto (or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Selling Shareholders. Certificates in transferable form for the Shares (including any Additional Shares) which each of the Selling Shareholders agrees to sell pursuant to this Agreement have been placed in custody with First Interstate Bank of Arizona (the "Custodian") for delivery under this Agreement pursuant to a Custody Agreement and Power of Attorney (the "Custody Agreement") executed by each of the Selling Shareholders appointing William H. Gibbs and Peter V. Sperling, and each of them, as agents and attorneys-in-fact (the "Attorneys-in-Fact"). Each Selling Shareholder agrees that (i) the Shares represented by the certificates held in custody pursuant to the Custody Agreement are subject to the interests of the Underwriters, the Company and each other Selling Shareholder, (ii) the arrangements made by the Selling Shareholders for such custody are, except as specifically provided in the Custody Agreement, irrevocable, and (iii) the obligations of the Selling Shareholders hereunder and under the Custody Agreement shall not be terminated by any act of such Selling Shareholder or by operation of law, whether by the death or incapacity of any Selling Shareholder or the occurrence of any other event. If any Selling Shareholder shall die or be incapacitated or if any other event shall occur before the delivery of the Shares hereunder, certificates for the Shares of such Selling Shareholder shall be delivered to the Underwriters by the Attorneys-in-Fact in accordance with the terms and conditions of this 3 4 Agreement and the Custody Agreement as if such death or incapacity or other event had not occurred, regardless of whether or not the Attorneys-in-Fact or any Underwriter shall have received notice of such death, incapacity or other event. Each Attorney-in-Fact is authorized, on behalf of each of the Selling Shareholders, to execute this Agreement and any other documents necessary or desirable in connection with the sale of the Shares to be sold hereunder by such Selling Shareholder, to make delivery of the certificates for such Shares, to receive the proceeds of the sale of such Shares, to give receipts for such proceeds, to pay therefrom any expenses to be borne by such Selling Shareholder in connection with the sale and public offering of such Shares, to distribute the balance thereof to such Selling Shareholder, and to take such other action as may be necessary or desirable in connection with the transactions contemplated by this Agreement. Each Attorney-in-Fact agrees to perform his duties under the Custody Agreement. 3. Terms of Public Offering. Each of the Selling Shareholders has been advised by you that the Underwriters propose to make a public offering of their Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery of the Shares and Payment Therefor. Delivery to the Underwriters of and payment for the Firm Shares shall be made at the office of O'Melveny & Myers, 610 Newport Center Drive, Suite 1700, Newport Beach, CA 92660, at 7:00 A.M., local time, on January ___, 1996 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement among you, and the Company and the Attorneys-in-Fact. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of O'Melveny & Myers at such time on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than three nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Attorneys-in- Fact (with a copy to the Company) of the Underwriters' determination to purchase a number, specified in such notice, of Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Shares may be varied by agreement among you, the Company and the Attorneys-in-Fact. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 1:00 P.M., New York City time, on the third business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price 4 5 therefor by certified or official bank check or checks payable in Los Angeles Clearing House (next day) funds to the order of the Attorneys-in-Fact. 5. Agreements of the Company. The Company agrees with the several Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration Statement or such post-effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post-effective amendment has become effective. (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any change in the Company's or any Subsidiary's (as hereinafter defined) condition (financial or other), business, prospects, properties, net worth or results of operations, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge, (i) four signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits to the registration statement, (ii) such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may request, (iii) such number of copies of the Incorporated Documents, without exhibits, as you may request, and (iv) four copies of the exhibits to the Incorporated Documents. (d) The Company will not file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus or, prior to the end of the period of time referred to in the first sentence in subsection (f) below, file any 5 6 document which, upon filing becomes an Incorporated Document, of which you shall not previously have been advised or to which, after you shall have received a copy of the document proposed to be filed, you shall reasonably object. (e) Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have requested, copies of each form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus (or to file under the Exchange Act any document which, upon filing, becomes and Incorporated Document) in order to comply with the Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto (or to such document), and will expeditiously furnish to the Underwriters and dealers a reasonable number of copies thereof. In the event that the Company and you, as Representatives of the several Underwriters, agree that the Prospectus should be amended or supplemented, the Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which 6 7 would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act. (i) During the period of five years hereafter, the Company will furnish to you and your counsel, O'Melveny & Myers (i) as soon as available, a copy of each report of the Company mailed to holders of the Company's Class A Common Stock or filed with the Commission, and (ii) from time to time such other information concerning the Company as you may reasonably request. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 12 hereof or by notice given by you terminating this Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company or the Selling Shareholders to comply with the terms or fulfill any of the conditions of this Agreement, the Company and the Selling Shareholders agree to reimburse the Representatives for all out-of-pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. (k) [Reserved]. (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) Except as provided in this Agreement and except pursuant to the Company's Long-Term Incentive Plan, Employee Stock Purchase Plan and Director Stock Plan, the Company will not sell, contract to sell or otherwise dispose of any Class A Common Stock or any securities convertible into or exercisable or exchangeable for Class A Common Stock, or grant any options or warrants to purchase Class A Common Stock, for a period of 180 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc. (n) The Company has furnished or will furnish to you "lock-up" letters, in form and substance satisfactory to you, signed by each of its current officers and directors. (o) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or 7 8 manipulation of the price of the Class A Common Stock to facilitate the sale or resale of the Shares. 6. Agreements of the Selling Shareholders. Each of the Selling Shareholders agrees with the several Underwriters as follows: (a) Such Selling Shareholder will cooperate to the extent necessary to cause the registration statement or any post-effective amendment thereto to become effective at the earliest possible time. (b) Such Selling Shareholder will pay all federal and other taxes, if any, on the transfer or sale of the Shares being sold by the Selling Shareholder to the Underwriters. (c) Such Selling Shareholder will do or perform all things required to be done or performed by the Selling Shareholder prior to the Closing Date or any Option Closing Date, as the case may be, to satisfy all conditions precedent to the delivery of the Shares pursuant to this Agreement. (d) Such Selling Shareholder will not sell, contract to sell or otherwise dispose of any Common Stock, except for the sale of Shares to the Underwriters pursuant to this Agreement, prior to the expiration of 180 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc. (e) Except as stated in this Agreement and in the Prepricing Prospectus and the Prospectus, such Selling Shareholder will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (f) Such Selling Shareholder will advise you promptly, and if requested by you, will confirm such advice in writing, within the period of time referred to in Section 5(f) hereof, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations or of any change in information relating to such Selling Shareholder or the Company or any new information relating to the Company or relating to any matter stated in the Prospectus or any amendment or supplement thereto which comes to the attention of such Selling Shareholder that suggests that any statement made in the Registration Statement or the Prospectus (as then amended or supplemented, if amended or supplemented) is or may be untrue in any material respect or that the Registration Statement or Prospectus (as then amended or supplemented, if amended or supplemented) omits or may omit to state a material fact or a fact necessary to 8 9 be stated therein in order to make the statements therein not misleading in any material respect, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented, if amended or supplemented) in order to comply with the Act or any other law. 7. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The Company and the transactions contemplated by this Agreement meet the requirements for using Form S-3 under the Act. The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Act, or any registration statement filed with the Commission under Rule 462 (b) under the Act, complied or will comply in all material respects with the provisions of the Act and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. (c) The Incorporated Documents heretofore filed, when they were filed (or, if any amendment with respect to any such document was filed, when such amendment was filed), conformed in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, and any further Incorporated Documents so filed will, when they are filed, conform in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder; no such document when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and no such further document, when it is filed, will contain an untrue statement of a material fact or will omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. (d) All the outstanding shares of Class A Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and are free 9 10 of any preemptive or similar rights, and the capital stock of the Company conforms to the description thereof in the registration statement and the prospectus. (e) The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Arizona with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of the Company and the Subsidiaries (as hereinafter defined) taken as a whole. (f) All the Company's significant subsidiaries (collectively, the "Subsidiaries") are listed on Exhibit A attached hereto. Each Subsidiary is a corporation duly organized, validly existing and in good standing in the jurisdiction of its incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of such Subsidiary; all the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any lien, adverse claim, security interest, equity or other encumbrance. (g) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or to which any of their respective properties is subject, that are required to be described in the Registration Statement or the Prospectus but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or any Incorporated Document that are not described or filed as required by the Act or the Exchange Act. (h) Neither the Company nor any of the Subsidiaries is in material violation of its certificate or articles of incorporation or by-laws, or other organizational documents, or of any law, ordinance, administrative decree of any court or governmental rule or regulation applicable to the Company or any of the Subsidiaries, or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries, or in default in any material respect in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any material agreement, indenture, lease or other instrument 10 11 to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound. (i) Neither the sale of the Shares, the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby (i) requires any consent, approval, authorization or other order of or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency, or official (except such as may be required for the registration of the Shares under the Act and the Exchange Act and compliance with the securities or Blue Sky laws of various jurisdictions, all of which have been or will be effected in accordance with this Agreement and except for those consents, approvals and authorizations that have been obtained by the Company), or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws, or other organizational documents, of the Company or any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes or will constitute a material breach of, or a material default under, any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound (except for those agreements, leases or other instruments for which the Company has obtained consents), or materially violates or will materially violate any statute, law, regulation, filing or judgment, injunction, order or decree applicable to the Company or any of the Subsidiaries or any of their respective properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of any agreement or instrument to which any of them is a party or by which any of them may be bound or to which any of the property or assets of any of them is subject. (j) The accountants, Price Waterhouse LLP, who have certified or shall certify the financial statements included or incorporated by reference in the Registration Statement and the Prospectus (or any amendment or supplement thereto) are independent public accountants with respect to the Company within the meaning of the Act and the applicable published rules and regulations thereunder. (k) The financial statements, together with related schedules and notes, included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company and the Subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company and the Subsidiaries. 11 12 (l) The execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws. (m) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto) or in the Incorporated Documents, subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto) or in the Incorporated Documents, neither the Company nor any of the Subsidiaries has incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Company and the Subsidiaries taken as a whole, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, of the Company or any of the Subsidiaries, or any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, net worth, or results of operations of the Company and the Subsidiaries taken as a whole. (n) Each of the Company and the Subsidiaries has good and marketable title to all property (real and personal) described in the Prospectus as being owned by it, free and clear of all material liens, claims, security interests or other encumbrances except such as are described in the Registration Statement and the Prospectus or in a document filed as an exhibit to the Registration Statement or in the Incorporated Documents and all the property described in the Prospectus as being held under lease by each of the Company and the Subsidiaries is held by it under valid, subsisting and enforceable leases. (o) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (p) The Company and each of the Subsidiaries have all necessary accreditation approvals, governmental authorizations, orders, licenses, certificates, franchises and permits of and from all accreditation agencies and governmental or regulatory authorities, including without limitation, all authorizations required for participation in federal financial aid programs under Title IV ("Title IV Programs") of the Higher Education Act of 1965, as amended (collectively, "permits"), as are necessary to own its respective properties and to conduct its business in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; the Company and each of the Subsidiaries has fulfilled and performed all its material obligations with respect to such permits and no event has occurred or condition exists which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material 12 13 impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus; and, except as described in the Prospectus, none of such permits contains any restriction that is materially burdensome to the Company or any of the Subsidiaries. (q) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (r) To the Company's knowledge, neither the Company nor any of its Subsidiaries nor any employee or agent of the Company or any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (s) The Company and each of the Subsidiaries have filed all tax returns required to be filed, which returns are complete and correct, and neither the Company nor any Subsidiary is in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto. (t) No holder of any security of the Company has any right to require registration of shares of Class A Common Stock or any other security of the Company because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement. (u) The Company and the Subsidiaries own or possess all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing. (v) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (w) The Company has complied with all provisions of Florida Statutes, SS 517.075, relating to doing business with Cuba. 8. Representations and Warranties of the Selling Shareholders. Each Selling Shareholder represents and warrants to each Underwriter that: 13 14 (a) Such Selling Shareholder now has, and on the Closing Date and any Option Closing Date will have, valid and marketable title to the Shares to be sold by such Selling Shareholder, free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer. (b) Such Selling Shareholder now has, and on the Closing Date and any Option Closing Date will have, full legal right, power and authorization, and any approval required by law, to sell, assign transfer and deliver such Shares in the manner provided in this Agreement, and upon delivery of and payment for such Shares hereunder, the several Underwriters will acquire valid and marketable title to such Shares, free and clear of any lien, claim, security interest, or other encumbrance. (c) This Agreement and the Custody Agreement have been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and are the valid and binding agreements of such Selling Shareholder enforceable against such Selling Shareholder in accordance with their respective terms. (d) Neither the execution and delivery of this Agreement or the Custody Agreement by or on behalf of such Selling Shareholder nor the consummation of the transactions herein or therein contemplated by or on behalf of such Selling Shareholder requires any consent, approval, authorization or order of, or filing or registration with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required under the Act or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) or conflicts or will conflict with or constitutes or will constitute a breach of, or default under, or violates or will violate, any agreement, indenture or other instrument to which such Selling Shareholder is a party or by which such Selling Shareholder is or may be bound or to which any of such Selling Shareholder's property or assets is subject, or any statute, law, rule, regulation, ruling, judgment, injunction, order or decree applicable to such Selling Shareholder or to any property or assets of such Selling Shareholder. (e) The Registration Statement and the Prospectus, insofar as they relate to such Selling Shareholder, do not and will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (f) Such Selling Shareholder does not have any knowledge or any reason to believe that the Registration Statement or the Prospectus (or any amendment or supplement thereto) contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (g) The representations and warranties of such Selling Shareholder in the Custody Agreement are, and on the Closing Date and any Option Closing Date will be, true 14 15 and correct and the Underwriters are entitled to rely on such representations and warranties as if they were made directly to them. (h) Such Selling Shareholder has not taken, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Class A Common Stock to facilitate the sale or resale of the Shares, except for the lock-up arrangements described in the Prospectus. 9. Indemnification and Contribution. (a) The Company and each Selling Shareholder, jointly and severally, agrees to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Company has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Company or any Selling Shareholder may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company or any Selling Shareholder, such Underwriter or such controlling person shall promptly notify the parties against whom indemnification is being sought (the "indemnifying parties"), and such indemnifying parties shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees 15 16 and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the indemnifying parties have agreed in writing to pay such fees and expenses, (ii) the indemnifying parties have failed to assume the defense and employ counsel, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the indemnifying parties and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and any indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the indemnifying party shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the indemnifying parties shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The indemnifying parties shall not be liable for any settlement of any such action, suit or proceeding effected without their written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the indemnifying parties agree to indemnify and hold harmless any Underwriter, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, each Selling Shareholder, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company and the Selling Shareholders to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer, any Selling Shareholder, or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by paragraph (b) above (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Company, its directors, any such officer, Selling Shareholder, and any such controlling person shall have 16 17 the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which any Underwriter may otherwise have. (d) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under paragraph (a) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided that, in the event that the Underwriters shall have purchased any Additional Shares hereunder, any determination of the relative benefits received by the Company, the Selling Shareholders or the Underwriters from the offering of the Shares shall include the net proceeds (before deducting expenses) received by the Company and the Selling Shareholders, and the underwriting discounts and commissions received by the Underwriters, from the sale of such Additional Shares, in each case computed on the basis of the respective amounts set forth in the notes to the table on the cover page of the Prospectus. The relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (c) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (c) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in 17 18 connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule II hereto (or such numbers of Firm Shares increased as set forth in Section 12 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 9 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 9 and the representations and warranties of the Company and the Selling Shareholders set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or the Selling Shareholders or any person controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 9. 10. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the registration statement or such post-- effective amendment shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the registration statement shall have been issued and no proceeding for that purpose shall have been instituted or, to 18 19 the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the registration statement or the prospectus or otherwise) shall have been complied with to your satisfaction. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting the condition (financial or other), business, properties, net worth, or results of operations of the Company or the Subsidiaries not contemplated by the Prospectus, which in your opinion, as Representatives of the several Underwriters, would materially, adversely affect the market for the Shares, or (ii) any event or development relating to or involving the Company or any officer or director of the Company or any Selling Shareholder which makes any statement made in the Prospectus untrue or which, in the opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your opinion, as Representatives of the several Underwriters, materially adversely affect the market for the Shares. (c) You shall have received on the Closing Date, an opinion of Snell & Wilmer L.L.P., counsel for the Company and the Selling Shareholders, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Arizona and has full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of the Company and the Subsidiaries taken as a whole; (ii) Each of the Subsidiaries is a corporation duly organized and validly existing in good standing under the laws of the jurisdiction of its organization, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto); and all the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned of record by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any perfected security interest, or, to the best knowledge of such counsel after reasonable inquiry, any other security interest, lien, adverse claim, equity or other encumbrance; 19 20 (iii) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Company conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock; " (iv) All the shares of capital stock of the Company outstanding as of the date hereof have been duly authorized and validly issued, are fully paid and nonassessable, and have not been issued in violation of any preemptive, or to the best knowledge of such counsel after reasonable inquiry, similar rights that entitle persons to acquire any such shares; (v) The form of certificates for the Shares conforms to the requirements of the Arizona General Corporation Law; (vi) The Registration Statement and all post-effective amendments, if any, have become effective under the Act and, to the best knowledge of such counsel after reasonable inquiry, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule 424(b); (vii) The Company has corporate power and authority to enter into this Agreement, and this Agreement has been duly authorized, executed and delivered by the Company and, if governed by Arizona law, the Agreement would be a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement of rights to indemnity and contribution hereunder may be limited by Federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Company's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles; (viii) Neither the Company nor any of the Subsidiaries is in violation of its respective certificate or articles of incorporation or bylaws, or other organizational documents, or to the best knowledge of such counsel after reasonable inquiry, is in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness described in the Registration Statement or the Prospectus (or any amendment, supplement or exhibit thereto), except as may be disclosed in the Registration Statement or Prospectus (or any amendment, supplement or exhibit thereto); (ix) Neither the execution, delivery or performance of this Agreement, compliance by the Company with the provisions hereof, nor consummation by the Company of the transactions contemplated hereby conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws, or other organizational documents, of the Company or any of the 20 21 Subsidiaries or any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective Properties is bound that is an exhibit to the Registration Statement or to any Incorporated Document, or is known to such counsel after reasonable inquiry, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries, nor will any such action result in any violation of any existing law, regulation, ruling, judgment, injunction, order or decree known to such counsel after reasonable inquiry, applicable to the Company, the Subsidiaries or any of their respective properties; (x) No consent, approval, authorization or other order of, or registration of filing with, any court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Company or the Selling Shareholders (except as have been obtained under the Act, the Exchange Act or otherwise obtained by the Company or the Selling Shareholders or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) for the valid sale of the Shares to the Underwriters by the Selling Shareholders as contemplated by this Agreement; (xi) The Registration Statement and the Prospectus and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the Act; and each of the Incorporated Documents (except for the financial statements and the notes thereto and the schedules and other financial and statistical data contained therein, as to which counsel need not express any opinion) complies as to form in all material respects with the Exchange Act and the rules and regulations of the Commission thereunder; (xii) To the best knowledge of such counsel after reasonable inquiry, (A) other than as described or contemplated in the Prospectus (or any supplement thereto), there are no legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or any of their property, is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto) and (B) there are no agreements, contracts, indentures, leases or other instruments, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement or any Incorporated Document that are not described or filed as required, as the case may be; (xiii) In the actual knowledge of the Snell & Wilmer L.L.P. lawyers actively involved in the preparation of the Registration Statement, neither the Company nor any of the Subsidiaries is in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of 21 22 the Subsidiaries that would have a material adverse effect on the Company and the Subsidiaries taken as a whole; (xiv) The statements in the Registration Statement and Prospectus, insofar as they are descriptions of contracts, agreements or other legal documents, or refer to statements of law or legal conclusions, are accurate and present fairly the information required to be shown; (xv) This Agreement and the Custody Agreement have each been duly executed and delivered by or on behalf of each of the Selling Shareholders and, if governed by Arizona law, would each be a valid, legal and binding agreement of each such Selling Shareholder, enforceable against such Selling Shareholder in accordance with its terms, except as may limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles; (xvi) To the knowledge of such counsel, each Selling Shareholder has full legal right, power and authorization, and any approval required by law, to sell, assign, transfer and deliver good and marketable title to the Shares which such Selling Shareholder has agreed to sell pursuant to this Agreement; (xvii) The execution and delivery of this Agreement and the Custody Agreement by the Selling Shareholders and the consummation of the transactions contemplated hereby and thereby will not conflict with, violate, result in a breach of or constitute a default under the terms or provisions of any agreement, indenture, mortgage or other instrument known to such counsel to which any Selling Shareholder is a party or by which any of them or any of their assets or property is bound, or any court order or decree or any law, rule, or regulation applicable to any Selling Shareholder or to any of the property or assets of any Selling Shareholder; (xviii) Upon delivery of the Shares pursuant to this Agreement and payment therefor as contemplated herein the Underwriters will acquire good and marketable title to the Shares free and clear of any lien, claim, security interest, or other encumbrance, restriction on transfer or other defect in title; (xix) The Company and each of the Subsidiaries have all necessary governmental and accreditation agency authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all accreditation agencies and governmental or regulatory authorities, including without limitation, all authorizations required for participation in Title IV Programs (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial condition of the Company and the Subsidiaries taken as a whole), to own their respective properties and to conduct their respective businesses as now being conducted, subject to such qualifications as may be set forth in the Prospectus; 22 23 (xx) The Company and the Subsidiaries own all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of them or necessary, for the conduct of their respective businesses, and counsel is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the subsidiaries with respect to the foregoing; (xxi) Except as described in the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and counsel does not know of any commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable or exercisable for capital stock of the Company; (xxii) Except as described in the Prospectus, there is no holder of any security of the Company or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, the Shares or the right to have any Class A Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the registration statement, to require registration under the Act of any shares of Class A Common Stock or other securities of the Company; and (xxiii) Although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof (including review and discussion of contents of all Incorporated Documents), and nothing has come to the attention of such counsel that has caused it to believe that the Registration Statement (including the Incorporated Documents) at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date or the Option Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus or any Incorporated Document). (d) You shall have received on the Closing Date an opinion of O'Melveny & Myers, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to the matters referred to in clauses (vi), (vii), (xi) and (xxiii) of the foregoing paragraph (c) and such other related 23 24 matters as you may request. In rendering such opinion, such counsel may rely, as to matters involving the application of Arizona law, to the extent such counsel deems proper, on the opinion of Snell & Wilmer L.L.P., counsel for the Company. (e) You shall have received letters addressed to you, as Representatives of the several Underwriters, and dated the date hereof and the Closing Date from Price Waterhouse LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (f) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission at or prior to the Closing Date; (ii) there shall not have been any material change in the capital stock of the Company nor any material increase in the short-term or long-term debt of the Company (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or Supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company and the Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company and the Subsidiaries, taken as a whole, other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you), to the effect set forth in this Section 10(f) and in Section 10(g) hereof. (g) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (h) All the representations and warranties of the Selling Shareholders contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by or on behalf of the Selling Shareholders to the effect set forth in this Section 10(h) and in Section 10(i) hereof. (i) The Selling Shareholders shall not have failed at or prior to the Closing Date to have performed or complied with any of their agreements herein contained 24 25 and required to be performed or complied with by them hereunder at or prior to the Closing Date. (j) Prior to the Closing Date, the Shares shall have been listed or approved for listing on the Nasdaq National Market. (k) The Selling Shareholders shall have furnished or caused to be furnished to you such further certificates and documents as you shall have requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel. Any certificate or document signed by any officer of the Company or any Attorney-in-Fact or any Selling Shareholder and delivered to you, as Representatives of the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Company the Selling Shareholders or the particular Selling Shareholder, as the case may be, to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 10, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (i) shall be dated the Option Closing Date in question and the opinions or letters called for by paragraphs (c), (d) and (e) shall be revised to reflect the sale of Additional Shares. 11. Expenses. The Selling Shareholders (in proportion to the number of Shares being offered by each of them, including any Additional Shares which the Underwriters shall have elected to purchase) agree to pay the following costs and expenses and all other costs and expenses incident to the performance by them of their obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, the Incorporated Documents, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the original issuance and sale of the Shares; (iv) the printing (or reproduction) and delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Shares; (v) the listing of the Shares on the Nasdaq National Market; (vi) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements 25 26 of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vii) the filing fees and the fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (viii) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Shares; and (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company and the Selling Shareholders. 12. Effective Date of Agreement. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company and the Selling Shareholders. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule II hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Company for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement 26 27 includes, for all purposes of this Agreement, any party not listed in Schedule II hereto who, with your approval and the approval of the Company, purchases Shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase. Any notice under this Section 12 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 13. Termination of Agreement. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company or any Selling Shareholder, by notice to the Company, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in securities generally on the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market System shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York or Arizona shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Company by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 14. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside cover page, and the statements in the first and third paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 7(b) and 9 hereof. 15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and 13 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company, at the office of the Company at Apollo Group, Inc., 4615 E. Elwood Street, P.O. Box 52069, Phoenix, Arizona 85072-2069, Attention: James W. Hoggatt, Vice President-Finance and Chief Financial Officer, or (ii) if to the Selling Shareholders, at ___________________________, Attention: _________________, or (iii) if to you, as Representatives of the several Underwriters, in care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company, its directors and officers, and the other controlling persons referred to in Section 9 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of 27 28 this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 16. Applicable Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. 28 29 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Shareholders and the several Underwriters. Very truly yours, APOLLO GROUP, INC. By -------------------------------------- John G. Sperling President and Chairman of the Board Each of the Selling Shareholders named in Schedule I hereto By -------------------------------------- William H. Gibbs Attorney-in-Fact By -------------------------------------- Peter V. Sperling Attorney-in-Fact Confirmed as of the date first above mentioned on behalf of themselves and the other several Underwriters named in Schedule II hereto. SMITH BARNEY INC. ALEX, BROWN & SONS INCORPORATED MONTGOMERY SECURITIES As Representatives of the Several Underwriters By SMITH BARNEY INC. By ------------------------------------------- Basil E. Horner Director 29 30 SCHEDULE I APOLLO GROUP, INC. Part A - Firm Shares Selling Shareholders Number of Firm Shares Total Part B - Additional Shares Selling Shareholders Number of Firm Shares Total Schedule I-1 31 SCHEDULE II APOLLO GROUP, INC. Underwriter Number of Firm Shares - -------------------------- --------------------- Total ================ Schedule II-1 32 EXHIBIT A APOLLO GROUP, INC. SIGNIFICANT SUBSIDIARIES 1. The University of Phoenix 2. Institute for Professional Development 3. Apollo Press, Inc. 4. Western International University, Inc. Exhibit A-1 EX-5 3 OPINION OF SNELL & WILMER 1 EXHIBIT 5 December 21, 1995 Apollo Group, Inc. 4615 East Elwood Street Phoenix, Arizona 85040 RE: REGISTRATION STATEMENT ON FORM S-3 Ladies and Gentlemen: In connection with the Registration Statement on Form S-3, including amendments and exhibits thereto (the "Registration Statement"), for the proposed offer and sale of up to 3,162,500 shares of Class A Common Stock of Apollo Group, Inc. (the "Company"), which includes 412,500 of such shares which may be sold pursuant to an underwriters' over-allotment option (the "Shares"), by certain of the Company's shareholders, we are of the opinion that the Shares are legally issued, fully paid, and nonassessable. In rendering this opinion, we have reviewed and relied upon such documents and records of the Company as we have deemed necessary and have assumed the following: (i) the genuineness of all signatures and the authenticity of documents submitted to us as originals, and the conformity to originals of all documents submitted to us as copies; (ii) the accuracy, completeness, and genuineness of all representations and certifications, with respect to factual matters, made to us by officers of the Company and public officials; and (iii) the accuracy and completeness of Company records. The opinions expressed herein are limited solely to the laws of the State of Arizona. We express no opinion on the laws of any other jurisdiction or principles of conflicts of law and can assume no responsibility for the applicability or effect of any such laws or principles. 2 Apollo Group, Inc. December 21, 1995 Page 2 The opinions expressed herein are based upon the law and other matters in effect on the date hereof, and we assume no obligation to revise or supplement this opinion should such law be changed by legislative action, judicial decision, or otherwise, or should any facts or other matters upon which we have relied be changed. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the Registration Statement. Very truly yours, SNELL & WILMER L.L.P. EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-3 of our report dated October 12, 1995 relating to the financial statements of Apollo Group, Inc., which appears in such Prospectus. We also consent to the references to us under the headings "Experts" and "Selected Consolidated Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Consolidated Financial Data." PRICE WATERHOUSE LLP Phoenix, Arizona December 20, 1995 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Statement of Operations and the Consolidated Balance Sheet and is qualified in its entirety by reference to such financial statements. 0000929887 APOLLO GROUP, INC. 1,000 3-MOS AUG-31-1996 NOV-30-1995 63406 0 20822 3436 2813 87544 23243 8400 108476 46137 0 29 0 0 60284 108476 0 49727 1997 29959 0 761 20 7845 3256 4589 0 0 0 4589 .20 .20
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