Document/Exhibit Description Pages Size
1: 10-K Annual Report 51 227K
2: EX-10.1F Material Contract 4± 20K
3: EX-10.1G Material Contract 4± 20K
4: EX-13 Annual or Quarterly Report to Security Holders 32 138K
5: EX-21 Subsidiaries of the Registrant 1 6K
6: EX-23 Consent of Experts or Counsel 1 6K
7: EX-27 Financial Data Schedule (Pre-XBRL) 1 8K
8: EX-27.1 Financial Data Schedule (Pre-XBRL) 1 9K
9: EX-27.2 Financial Data Schedule (Pre-XBRL) 1 10K
10: EX-27.3 Financial Data Schedule (Pre-XBRL) 1 8K
EX-13 — Annual or Quarterly Report to Security Holders
Exhibit Table of Contents
Selected Consolidated Financial Data
The following selected financial and operating data 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." The Consolidated Statement of
Operations for each of the three years in the period ended August 31, 1999,
and the Consolidated Balance Sheet as of August 31, 1999 and 1998, and the
Report of Independent Accountants thereon are included in this Annual Report.
Diluted net income per share and diluted weighted average shares outstanding
have been retroactively restated for stock splits.
[Enlarge/Download Table]
Year Ended August 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Income Statement Data:
Revenues:
Tuition and other, net $498,846 $384,877 $279,195 $211,247 $161,013
-------- -------- -------- -------- --------
Costs and expenses:
Instructional costs and services 291,062 232,592 167,720 130,039 102,122
Selling and promotional 75,205 49,035 35,187 27,896 21,016
General and administrative 39,826 33,064 25,481 21,266 18,366
-------- -------- -------- -------- --------
406,093 314,691 228,388 179,201 141,504
-------- -------- -------- -------- --------
Income from operations 92,753 70,186 50,807 32,046 19,509
Interest income, net 5,229 6,086 4,174 2,951 2,320
-------- -------- -------- -------- --------
Income before income taxes 97,982 76,272 54,981 34,997 21,829
Provision for income taxes 38,977 29,975 21,602 13,605 9,229
-------- -------- -------- -------- --------
Net income $ 59,005 $ 46,297 $ 33,379 $ 21,392 $ 12,600
======== ======== ======== ======== ========
Diluted net income per share $ .75 $ .59 $ .43 $ .28 $ .18
======== ======== ======== ======== ========
Diluted weighted average shares
outstanding 78,834 79,086 77,726 76,763 68,872
======== ======== ======== ======== ========
1
[Enlarge/Download Table]
August 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance Sheet Data:
Cash, cash equivalents, and
restricted cash $ 77,332 $ 75,039 $ 78,855 $ 63,267 $ 62,601
Marketable securities 39,571 45,467 41,429 13,273
-------- -------- -------- -------- --------
Total cash and marketable securities $116,903 $120,506 $120,284 $ 76,540 $ 62,601
======== ======== ======== ======== ========
Total assets $348,342 $305,160 $194,910 $137,850 $102,132
======== ======== ======== ======== ========
Current liabilities $108,787 $ 95,574 $ 67,394 $ 54,804 $ 45,065
Long-term liabilities 8,435 9,778 3,199 2,432 1,715
Shareholders' equity 231,120 199,808 124,317 80,614 55,352
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $348,342 $305,160 $194,910 $137,850 $102,132
======== ======== ======== ======== ========
Operating Statistics:
Degree enrollments at end of period<F1> 86,800 71,400 56,200 46,900 36,800
======== ======== ======== ======== ========
Average degree enrollments at end of
Period<F1> 79,000 64,100 50,500 41,500 34,000
======== ======== ======== ======== ========
Number of locations:
Campuses 49 42 35 35 28
Learning centers 80 71 60 49 39
-------- -------- -------- -------- --------
Total number of locations<F2> 129 113 95 84 67
======== ======== ======== ======== ========
<FN>
<F1> Degree enrollments are defined as students in attendance in a degree
program at the end of a period. Average degree enrollments represent
the average of the ending degree enrollments for each month in the
period.
<F2> At September 30, 1999, there were 51 campuses and 80 learning centers.
</FN>
The Company did not pay any cash dividends on its Common Stock during
any of the periods set forth in the table above.
2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
relating to future plans, expectations, events, or performances that involve
risks and uncertainties. The Company's actual results of operations could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors. The following discussion should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto.
BACKGROUND AND OVERVIEW
The Company's tuition and other revenues, net of student discounts, have
increased to $498.8 million in 1999 from $161.0 million in 1995. Average
annual degree seeking student enrollments have increased to 79,000 students
in 1999 from approximately 34,000 in 1995. Net income has increased to $59.0
million in 1999 from $12.6 million in 1995. At August 31, 1999, 86,800
degree seeking students were enrolled in UOP, WIU, the College, and IPD
client institutions.
From September 1995 through August 1999, UOP opened 13 campuses, and IPD
established operations at 8 campuses with its client institutions. Start-up
losses for UOP campuses in new markets average $700,000 to $900,000 per site.
These start-up losses are incurred over a 17 to 20 month period, at which
time the enrollments at these new campuses average 200 to 300 students.
Losses for establishing a learning center in a market currently served by UOP
average $200,000. Start-up losses for IPD contract sites average from
$300,000 to $400,000 per site over a 21 to 24 month period.
Approximately 94% of the Company's tuition and other net revenues in
1999 consist of tuition revenues. Tuition revenue is recognized on a weekly
basis, pro rata over the period of instruction. The Company's tuition and
other net revenues also include sales of textbooks and other
education-related products, application fees, other student fees, and other
income. The Company's tuition and other 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). UOP tuition revenues currently represent
approximately 88% of consolidated tuition revenues. IPD tuition revenues
consist of the contractual share of tuition revenues from students enrolled
in programs at IPD client institutions. IPD's contracts with its respective
client institutions generally have terms of five to ten years with provisions
for renewal.
The Company categorizes its expenses as instructional costs and
services, selling and promotional, and general and administrative.
Instructional costs and services at UOP, WIU, and the College 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, financial aid processing costs, the costs of educational materials
sold, facility leases and other occupancy costs, bad debt expense, and
3
depreciation and amortization of property and equipment. UOP and WIU faculty
members are contracted with and paid for one course offering at a time. All
classroom facilities are leased or, in some cases, are provided by the
students' employers at no charge to the Company. Instructional costs and
services at IPD consist primarily of program administration, student
services, and classroom lease expense. Most of the other instructional costs
for IPD-assisted programs, including faculty, financial aid processing, and
other administrative salaries, are the responsibility of the IPD client
institutions.
Selling and promotional costs consist primarily of compensation for
enrollment advisors and corporate marketing, advertising costs, production of
marketing materials, and other costs related to selling and promotional
functions.
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.
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data of the
Company expressed as a percentage of tuition and other net revenues for the
periods indicated:
[Download Table]
Year Ended August 31,
---------------------------
1999 1998 1997
------- ------- -------
Revenues:
Tuition and other, net 100.0% 100.0% 100.0%
------- ------- -------
Costs and expenses:
Instructional costs and services 58.3 60.5 60.1
Selling and promotional 15.1 12.7 12.6
General and administrative 8.0 8.6 9.1
------- ------- -------
81.4 81.8 81.8
------- ------- -------
Income from operations 18.6 18.2 18.2
Interest income, net 1.0 1.6 1.5
------- ------- -------
Income before income taxes 19.6 19.8 19.7
Less provision for income taxes 7.8 7.8 7.7
------- ------- -------
Net income 11.8% 12.0% 12.0%
======= ======= =======
4
Year Ended August 31, 1999, Compared with the Year Ended August 31, 1998 ----
Tuition and other net revenues increased by 29.6% to $498.8 million in
1999 from $384.9 million in 1998 due primarily to a 23.3% increase in average
degree student enrollments, tuition price increases averaging four to six
percent (depending on the geographic area and program), and a higher
concentration of enrollments at locations that charge a higher rate per
credit hour. Most of the Company's campuses, which include their respective
learning centers, had increases in net revenues and average degree student
enrollments from 1998 to 1999.
Tuition and other net revenues for the year ended August 31, 1999 and
1998, consist primarily of $442.0 million and $334.2 million, respectively,
of net tuition revenues from students enrolled in degree programs and $24.8
million and $23.1 million, respectively, of net tuition revenues from
students enrolled in non-degree programs. Average degree student enrollments
increased to 79,000 in 1999 from approximately 64,100 in 1998.
Instructional costs and services increased by 25.1% to $291.1 million in
1999 from $232.6 million in 1998 due primarily to the direct costs necessary
to support the increase in degree student enrollments. Direct costs consist
primarily of faculty compensation, related staff salaries at each respective
location, classroom lease expenses, and financial aid processing costs.
These costs as a percentage of tuition and other net revenues decreased to
58.3% in 1999 from 60.5% in 1998 due primarily to the exclusion of certain
enrollment staff salaries and greater tuition and other net revenues being
spread over the fixed costs related to centralized student services. As the
Company expands into new markets, it may not be able to leverage its existing
instructional costs and services to the same extent.
Selling and promotional expenses increased by 53.4% to $75.2 million in
1999 from $49.0 million in 1998 due primarily to the inclusion of certain
enrollment staff salaries, additional advertising and marketing related to
six new UOP campuses opened during the year, and increased advertising and
marketing for distance education. These expenses as a percentage of net
revenues increased to 15.1% in 1999 from 12.7% in 1998 due to an increase in
the number of campuses opened in new markets in the last two years and the
inclusion of certain enrollment staff salaries.
General and administrative expenses increased by 20.5% to $39.8 million
in 1999 from $33.1 million in 1998 due primarily to costs required to support
the increased number of campuses and learning centers, increased information
services expenditures, and overall increases in general and administrative
salaries. General and administrative expenses as a percentage of tuition and
other net revenues decreased to 8.0% in 1999 from 8.6% in 1998 due primarily
to higher tuition and other net revenues being spread over the fixed costs
related to various centralized functions such as information services,
corporate accounting, and human resources. The Company may not be able to
leverage its costs to the same extent as it faces increased costs related to
the development and implementation of new information systems and expansion
into additional markets.
Costs related to the start-up of new campuses and learning centers are
expensed as incurred. These start-up costs are primarily included in
instructional costs and services and selling and promotional expenses.
Start-up losses totaled approximately $9.0 million and $7.2 million in 1999
and 1998, respectively.
5
Net interest income was $5.2 million and $6.1 million in 1999 and 1998,
respectively. Net interest income decreased in 1999 due primarily to lower
average cash balances as a result of stock repurchases and lower interest
rates in effect during 1999. Interest expense was $57,000 and $119,000 in
1999 and 1998, respectively.
The Company's effective tax rate increased to 39.8% in 1999 from 39.3%
in 1998. The increase is due primarily to the relative impact of tax-exempt
interest income and of expenses that are non-deductible for tax purposes.
Net income increased to $59.0 million in 1999 from $46.3 million in 1998
due primarily to increased enrollments, increased tuition rates, and improved
utilization in instructional costs and services and general and
administrative costs.
Year Ended August 31, 1998, Compared with the Year Ended August 31, 1997-----
Tuition and other net revenues increased by 37.9% to $384.9 million in
1998 from $279.2 million in 1997 due primarily to a 26.9% increase in average
degree student enrollments, tuition price increases averaging four to five
percent (depending on the geographic area and program), a higher
concentration of enrollments at locations that charge a higher rate per
credit hour, and net revenues from the College. Most of the Company's
campuses, which include their respective learning centers, had increases in
net revenues and average degree student enrollments from 1997 to 1998.
Tuition and other net revenues for the year ended August 31, 1998 and
1997, consists primarily of $334.2 million and $244.7 million, respectively,
of net tuition revenues from students enrolled in degree programs and $23.1
million and $13.2 million, respectively, of net tuition revenues from
students enrolled in non-degree programs. Average degree student enrollments
increased to 64,100 in 1998 from approximately 50,500 in 1997.
Instructional costs and services increased by 38.7% to $232.6 million in
1998 from $167.7 million in 1997 due primarily to the direct costs necessary
to support the increase in average degree student enrollments, consisting
primarily of faculty compensation, classroom lease expenses and related staff
salaries at each respective location, and added expenses related to the
College. These costs as a percentage of tuition and other net revenues
increased to 60.5% in 1998 from 60.1% in 1997 due primarily to the increase
in the number of new locations.
Selling and promotional expenses increased by 39.4% to $49.0 million in
1998 from $35.2 million in 1997 due primarily to an increase in the number of
marketing and enrollment staff, additional advertising and marketing related
to newly opened campuses and learning centers, and expenses related to the
College. These expenses as a percentage of tuition and other net revenues
increased to 12.7% in 1998 from 12.6% in 1997 due to an increase in the
number of campuses opened in new markets in the last two years and an
increase in the number of marketing and enrollment staff, partially offset by
the ability to increase enrollments and open new learning centers in existing
markets with a proportionally lower increase in selling and promotional
expenses.
General and administrative expenses increased by 29.8% to $33.1 million
in 1998 from $25.5 million in 1997 due primarily to costs required to support
the increased number of campuses and learning centers, costs associated with
6
the implementation of new information systems, and overall increases in
general and administrative salaries. General and administrative expenses as
a percentage of tuition and other net revenues decreased to 8.6% in 1998 from
9.1% in 1997 due primarily to higher tuition and other 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 campuses and learning centers are
expensed as incurred. These start-up costs are primarily included in
instructional costs and services and selling and promotional expenses.
Start-up losses totaled approximately $7.2 million and $3.6 million in 1998
and 1997, respectively.
Net interest income increased to $6.1 million in 1998 from $4.2 million
in 1997 due to the increase in cash and investments during the year.
Interest expense was $119,000 and $167,000 in 1998 and 1997, respectively.
The Company's effective tax rate was 39.3% in both 1998 and 1997.
Net income increased to $46.3 million in 1998 from $33.4 million in 1997
due primarily to increased enrollments, increased tuition rates, and improved
utilization of general and administrative costs.
SEASONALITY IN RESULTS OF OPERATIONS
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 tuition
and other 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, instructional costs and services and selling and
promotional expenses historically increase as a percentage of tuition and
other net revenues in the fourth quarter due to increased costs in
preparation for the August peak enrollments.
The Company anticipates that these seasonal trends in the second and
fourth quarters will continue in the future.
7
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial
information for each of the Company's last eight quarters. The Company
believes that this information includes all normal recurring adjustments
necessary for a fair presentation of such quarterly information when read in
conjunction with the Consolidated Financial Statements incorporated by
reference in Item 8 of the Form 10-K. The operating results for any quarter
are not necessarily indicative of the results for any future period. Diluted
net income per share and diluted weighted average shares outstanding have
been retroactively restated for stock splits.
[Enlarge/Download Table]
Quarter Ended
----------------------------------------------------------------------------------
FY 1999 FY 1998
-------------------------------------- --------------------------------------
Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 28, Nov. 30,
1999 1999 1999 1998 1998 1998 1998 1997
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share amounts)
Revenues:
Tuition and other, net $135,685 $138,107 $109,356 $115,698 $106,723 $105,201 $ 85,078 $ 87,875
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Instructional costs and services 78,902 78,873 65,619 67,668 64,096 61,093 54,780 52,623
Selling and promotional 19,973 18,783 18,517 17,932 16,195 11,504 10,770 10,566
General and administrative 11,131 10,063 9,507 9,125 8,071 8,457 8,093 8,443
-------- -------- -------- -------- -------- -------- -------- --------
110,006 107,719 93,643 94,725 88,362 81,054 73,643 71,632
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 25,679 30,388 15,713 20,973 18,361 24,147 11,435 16,243
Interest income, net 1,290 1,352 1,275 1,312 1,841 1,560 1,363 1,322
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 26,969 31,740 16,988 22,285 20,202 25,707 12,798 17,565
Provision for income taxes 10,617 12,780 6,833 8,747 7,766 10,185 5,068 6,956
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 16,352 $ 18,960 $ 10,155 $ 13,538 $ 12,436 $ 15,522 $ 7,730 $ 10,609
======== ======== ======== ======== ======== ======== ======== ========
Diluted net income per share $ .21 $ .24 $ .13 $ .17 $ .16 $ .20 $ .10 $ .13
======== ======== ======== ======== ======== ======== ======== ========
Diluted weighted average shares
outstanding 78,068 78,914 79,195 79,159 79,372 79,250 79,035 78,689
======== ======== ======== ======== ======== ======== ======== ========
As a percentage of tuition and
other net revenues:
Revenues:
Tuition and other, net 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Instructional costs and services 58.2 57.1 60.0 58.5 60.0 58.1 64.4 59.9
Selling and promotional 14.7 13.6 16.9 15.5 15.2 10.9 12.7 12.0
General and administrative 8.2 7.3 8.7 7.9 7.5 8.0 9.5 9.6
-------- -------- -------- -------- -------- -------- -------- --------
81.1 78.0 85.6 81.9 82.7 77.0 86.6 81.5
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 18.9 22.0 14.4 18.1 17.3 23.0 13.4 18.5
Interest income, net 1.0 1.0 1.1 1.2 1.7 1.5 1.6 1.5
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 19.9 23.0 15.5 19.3 19.0 24.5 15.0 20.0
Provision for income taxes 7.8 9.3 6.2 7.6 7.3 9.7 5.9 7.9
-------- -------- -------- -------- -------- -------- -------- --------
Net income 12.1% 13.7% 9.3% 11.7% 11.7% 14.8% 9.1% 12.1%
======== ======== ======== ======== ======== ======== ======== ========
8
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to $75.6 million in
1999 from $56.9 million in 1998. The increase resulted primarily from
increased net income and increased non-cash charges for depreciation and
amortization and a smaller increase in accounts receivable offset in part by
a decrease in accounts payable and accrued liabilities.
Capital expenditures increased to $44.7 million in 1999 from $30.9
million in 1998 primarily due to the installation of computer labs related to
the expansion of Information Technology programs, continued development of
the financial aid processing software, the installation of new phone systems
at the corporate offices and several campuses, and leasehold improvements.
Total purchases of property and equipment for the year ended August 31, 2000,
are expected to range from $38.0 to $42.0 million. These expenditures will
primarily be related to new campuses and learning centers, the continued
expansion of computer labs designed to support the Information Technology
programs, hardware and software related to the Company's conversion to a new
human resource system, and increases in normal recurring capital expenditures
due to the overall increase in student and employee levels resulting from the
growth in the business. During 1998, the Company used $19.4 million of cash
for its acquisition of the assets and related business operations of the
College for Financial Planning and $10.8 million for its investment in a
joint venture.
Start-up losses for new campuses and learning centers are expected to
range from $11.0 to $13.0 million in 2000, as compared to $9.0 million in
1999, due to recent and planned expansion into new geographic markets.
At August 31, 1999, the Company had no outstanding borrowings on its
$10.0 million line of credit. Borrowings under the line of credit bear
interest at LIBOR plus .75% or prime at the Company's election. At August
31, 1999, availability under the line of credit was reduced by outstanding
letters of credit of $4.0 million. The line of credit is renewable annually,
and any amounts borrowed under the line are payable upon its termination in
February 2001.
On September 25, 1998, the Company's Board of Directors authorized a
program allocating up to $40 million in Company funds to repurchase shares of
its Class A Common Stock. On May 13, 1999, an additional $20 million was
authorized by the Board of Directors to repurchase shares of its Class A
Common Stock. As of August 31, 1999, the Company had repurchased
approximately 1,876,000 shares at a total cost of approximately $46.2
million.
The Department of Education ("ED") 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 are held
in a separate cash account until certain conditions are satisfied. As of
August 31, 1999, the Company had approximately $25.8 million in these
separate accounts, which are reflected in the Consolidated Balance Sheet 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 affected the Company's
ability to fund daily operations.
9
The Title IV Regulations, as revised, require all higher education
institutions to meet a minimum composite score to be deemed financially
responsible by the ED. If the minimum composite score of 1.0 is not met, an
institution would fall under alternative standards and may lose its
eligibility to participate in Title IV Programs. As of August 31, 1999,
UOP's and WIU's composite scores were each 3.0. These requirements apply
separately to UOP and WIU and to each of the respective IPD client
institutions, but not to the Company on a consolidated basis.
UOP's most recent Department of Education program review began in March
1997, and a final program review determination letter was received in July
1999. UOP satisfactorily responded to the findings in ED's program review
report with no additional action required.
In January 1998, the Department of Education Office of the Inspector
General ("OIG") began performing an audit of UOP's administration of the
Title IV Programs. The team previously presented questions regarding UOP's
interpretation of the "12-hour rule," UOP's distance education programs, and
UOP's institutional refund obligations. UOP has received a draft report
addressing these issues and is currently in discussions with the OIG and ED.
Although the Company believes that the OIG audit will be resolved without any
negative impact on UOP's teaching/learning model, as with any program review
or audit, no assurance can be given as to the final outcome since the matters
are not yet resolved. Depending on the interpretation of the various
regulatory requirements, any resulting liability to the Company from the
final audit results will be recorded as an expense.
YEAR 2000 COMPLIANCE
The Year 2000 computer issue refers to a condition in computer software
where a two digit field rather than a four digit field is used to distinguish
a calendar year. Unless corrected, some computer programs, hardware ("IT")
and non-information technology systems ("non-IT") could be unable to process
information containing dates subsequent to December 31, 1999. As a result,
such programs and systems could experience miscalculations, malfunctions, or
disruptions.
The Company has completed the inventory, assessment, and testing phases
of its Year 2000 readiness program with respect to its major IT systems.
Although the Company currently expects that all of its major IT systems are
Year 2000 compliant, appropriate contingency plans are in the process of
being developed for those systems that cannot be remediated by December 31,
1999. The Company does not have any significant non-IT Year 2000 issues.
The Company has substantially completed the inventory, assessment, and
testing phases of its Year 2000 readiness program with respect to significant
suppliers to determine the extent to which the Company may be vulnerable in
the event that such parties are unable to remediate their own Year 2000
issues. Assessment procedures with respect to such parties, who include,
among others, the U.S. Department of Education, accreditation agencies,
financial institutions and lessors, have consisted primarily of
correspondence with such parties. The Company is in the process of
developing appropriate contingency plans, if possible, in the event that
these suppliers are not Year 2000 compliant.
10
The Company believes that the most likely worst-case scenario for the
Year 2000 issue would be the failure of a significant supplier to
successfully complete its Year 2000 remediation efforts. The Company could
be significantly impacted by widespread economic or financial market
disruption caused by Year 2000 issues. If such events were to occur, the
Company would encounter disruptions to its business that could have a
material adverse effect on its financial position, results of operations, or
cash flows. As previously mentioned, the Company will develop contingency
plans, if possible, in the event that these suppliers are not Year 2000
compliant.
Costs incurred to date in connection with the Company's Year 2000
efforts have not been material. Additionally, the Company does not expect
that remaining costs required to complete such efforts will be material.
Although the Company is unable to predict the impact of any Year 2000-related
disruptions on its business, management does not currently believe that such
disruptions will have a material adverse impact on the Company's financial
position, results of operations, or cash flows.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's portfolio of marketable securities includes numerous
issuers, varying types of securities, and varying maturities. The Company
intends to hold these securities to maturity. The fair value of the
Company's portfolio of marketable securities would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates
due primarily to the short-term nature of the portfolio. The Company does
not hold or issue derivative financial instruments.
11
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 comprehensive income, 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
August 31, 1999, 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.
PricewaterhouseCoopers LLP
Phoenix, Arizona
September 30, 1999
12
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(Dollars in thousands)
[Download Table]
August 31,
-----------------------
1999 1998
-------- --------
Assets:
Current assets
Cash and cash equivalents $ 51,534 $ 52,326
Restricted cash 25,798 22,713
Marketable securities 31,064 27,538
Receivables, net 75,664 61,282
Deferred tax assets, net 7,346 6,203
Other current assets 6,807 3,945
-------- --------
Total current assets 198,213 174,007
Property and equipment, net 74,826 46,618
Marketable securities 8,507 17,929
Investment in joint venture 10,701 10,807
Cost in excess of fair value of assets purchased, net 39,917 41,398
Other assets 16,178 14,401
-------- --------
Total assets $348,342 $305,160
======== ========
Liabilities and Shareholders' Equity:
Current liabilities
Current portion of long-term liabilities $ 300 $ 333
Accounts payable 12,105 11,807
Accrued liabilities 14,340 19,188
Income taxes payable 535 1,007
Student deposits and current portion of deferred revenue 81,507 63,239
-------- --------
Total current liabilities 108,787 95,574
-------- --------
Deferred tuition revenue, less current portion 2,139 4,592
-------- --------
Long-term liabilities, less current portion 4,222 3,750
-------- --------
Deferred tax liabilities, net 2,074 1,436
-------- --------
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, 400,000,000
shares authorized; 76,628,000 and 77,112,000 issued and
outstanding at August 31, 1999 and 1998, respectively 102 101
Class B voting common stock, no par value, 3,000,000
shares authorized; 512,000 issued and outstanding at
August 31, 1999 and 1998 1 1
Additional paid-in capital 99,190 80,677
Treasury stock, at cost, 1,876,000 shares (46,197)
Retained earnings 178,028 119,023
Accumulated other comprehensive income (loss) (4) 6
-------- --------
Total shareholders' equity 231,120 199,808
-------- --------
Total liabilities and shareholders' equity $348,342 $305,160
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
13
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(In thousands, except per share amounts)
[Download Table]
Year Ended August 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Revenues:
Tuition and other, net $498,846 $384,877 $279,195
-------- -------- --------
Costs and expenses:
Instructional costs and services 291,062 232,592 167,720
Selling and promotional 75,205 49,035 35,187
General and administrative 39,826 33,064 25,481
-------- -------- --------
406,093 314,691 228,388
-------- -------- --------
Income from operations 92,753 70,186 50,807
Interest income, net 5,229 6,086 4,174
-------- -------- --------
Income before income taxes 97,982 76,272 54,981
Provision for income taxes 38,977 29,975 21,602
-------- -------- --------
Net income $ 59,005 $ 46,297 $ 33,379
======== ======== ========
Basic net income per share $ .76 $ .60 $ .44
======== ======== ========
Diluted net income per share $ .75 $ .59 $ .43
======== ======== ========
Basic weighted average shares outstanding 77,683 77,245 75,625
Diluted weighted average shares outstanding 78,834 79,086 77,726
The accompanying notes are an integral part of these consolidated financial
statements.
14
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income
(In thousands)
[Download Table]
Year Ended August 31,
---------------------------
1999 1998 1997
------- ------- -------
Net income $59,005 $46,297 $33,379
Other comprehensive income:
Currency translation gain (loss) (10) 3 3
------- ------- -------
Comprehensive income $58,995 $46,300 $33,382
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
15
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(In thousands)
[Enlarge/Download Table]
Common Stock
--------------------------------
Class A Class B
Nonvoting Voting Accum.
--------------- --------------- Addi- Other Total
tional Compre- Share-
Stated Stated Paid-In Treasury Retained hensive holders'
Shares Value Shares Value Capital Stock Earnings Income Equity
------ ------- ------ ------ ------- -------- -------- ------ --------
Balance at August 31, 1996 49,476 $ 65 576 $ 1 $41,201 $ -- $ 39,347 $ -- $ 80,614
Stock issued under stock
purchase plan 80 1,834 1,834
Stock issued under stock
option plans 643 1 978 979
Exchange Class A shares for
Class B shares 28 (28) --
Tax benefits of stock options
exercised 7,508 7,508
Currency translation gain 3 3
Net income 33,379 33,379
------ ------- ------ ------ ------- -------- -------- ------ --------
Balance at August 31, 1997 50,227 66 548 1 51,521 -- 72,726 3 124,317
Stock issued for College
acquisition 445 15,944 15,944
Stock issued under stock
purchase plan 75 2,457 2,457
Stock issued under stock
option plans 475 1 3,542 3,543
Exchange Class A shares for
Class B shares 36 (36) --
Tax benefits of stock options
exercised 7,249 7,249
3-for-2 stock split 25,854 34 (34) --
Fractional shares paid out (2) (2)
Currency translation gain 3 3
Net income 46,297 46,297
------ ------- ------ ------ ------- -------- -------- ------ --------
Balance at August 31, 1998 77,112 101 512 1 80,677 -- 119,023 6 199,808
Stock issued under stock
purchase plan 159 3,374 3,374
Stock issued under stock
option plans 1,233 1 5,456 5,457
Tax benefits of stock options
exercised 9,683 9,683
Treasury stock purchase (1,876) (46,197) (46,197)
Currency translation loss (10) (10)
Net income 59,005 59,005
------ ------- ------ ------ ------- -------- -------- ------ --------
Balance at August 31, 1999 76,628 $ 102 512 $ 1 $99,190 $(46,197) $178,028 $ (4) $231,120
====== ======= ====== ====== ======= ======== ======== ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
16
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands)
[Download Table]
Year Ended August 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows provided by (used for) operating
activities:
Net income $ 59,005 $ 46,297 $ 33,379
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,588 12,786 8,291
Provision for uncollectible accounts 6,906 5,479 2,523
Deferred income taxes (505) (2,599) 145
Tax benefits of stock options exercised 9,683 7,249 7,508
Decrease (increase) in assets:
Restricted cash (3,085) (2,786) (8,642)
Receivables, net (21,288) (29,733) (8,578)
Other assets (5,902) (2,491) 970
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (5,022) 9,542 488
Student deposits and deferred revenue 15,815 12,955 11,947
Other liabilities (633) 192 927
-------- -------- --------
Net cash provided by operating activities 75,562 56,891 48,958
-------- -------- --------
Cash flows provided by (used for) investing
activities:
Net additions to property and equipment (44,732) (30,855) (12,699)
Purchase of marketable securities (24,644) (43,277) (51,634)
Maturities of marketable securities 29,922 38,556 22,983
Purchase of other assets (3,642) (3,685) (3,427)
Proceeds from sale of land 4,212
Investment in joint venture 106 (10,807)
Cash paid for acquisition, net of cash
acquired (19,378)
-------- -------- --------
Net cash used for investing activities (38,778) (69,446) (44,777)
-------- -------- --------
Cash flows provided by (used for) financing
activities:
Purchase of common stock (46,197)
Payments on long-term debt (200) (50) (50)
Issuance of common stock 8,831 6,000 2,812
-------- -------- --------
Net cash provided by (used for) financing
activities (37,566) 5,950 2,762
-------- -------- --------
Currency translation gain (loss) (10) 3 3
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (792) (6,602) 6,946
Cash and cash equivalents at beginning
of year 52,326 58,928 51,982
-------- -------- --------
Cash and cash equivalents at end of year $ 51,534 $ 52,326 $ 58,928
======== ======== ========
Supplemental disclosure of cash flow
information
Cash paid during the year for:
Income taxes $ 30,224 $ 24,235 $ 13,953
Interest $ 48 $ 9 $ 11
The accompanying notes are an integral part of these consolidated financial
statements.
17
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Apollo Group, Inc. ("Apollo" or the "Company"), through its wholly-owned
subsidiaries, The University of Phoenix, Inc. ("UOP"), the Institute for
Professional Development ("IPD"), the College for Financial Planning
Institutes Corporation (the "College"), and Western International University,
Inc. ("WIU"), is a leading provider of higher education programs for working
adults.
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
28 campuses and 53 learning centers located in Arizona, California, Colorado,
Florida, Hawaii, Louisiana, Maryland, Michigan, Nevada, New Mexico, Oklahoma,
Oregon, Pennsylvania, Utah, Washington, Puerto Rico, and Vancouver, British
Columbia. UOP also offers its educational programs worldwide through Online,
its computerized educational delivery system. 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 21 regionally accredited private colleges and universities. IPD
currently operates at 21 campuses and 25 learning centers in 22 states. IPD
has contracted to develop online degree programs for the United States Marine
Corps.
The College, located in Denver, Colorado, was acquired in September 1997
and provides financial planning education programs, as well as a regionally
accredited graduate degree program in financial planning.
WIU, which is accredited by NCA, currently offers undergraduate and
graduate degree programs in Phoenix, Chandler, and Fort Huachuca, Arizona.
The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 1999, 1998, and 1997 relate to the
fiscal years ended August 31, 1999, 1998, and 1997, respectively.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -------------------------------------------------
The consolidated financial statements include the accounts of Apollo and
its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
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.
Restricted cash -------------------------------------------------------------
The U.S. Department of Education requires that Title IV Program funds
collected for unbilled tuition be kept in a separate cash or cash equivalent
18
account until the students are billed for that portion of their program. In
addition, all Title IV Program funds received by 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 receipt. Restricted cash is excluded from cash and cash
equivalents 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 primarily in U.S.
Agency-backed securities and auction market preferred stock with maturities
of ninety days or less.
Investments -----------------------------------------------------------------
Investments in marketable securities such as municipal bonds and U.S.
agency obligations are stated at amortized cost, which approximates fair
value. It is the Company's intention to hold its marketable securities until
maturity. Investments in joint ventures and other long-term investments are
carried at cost.
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 are amortized using the
straight-line method over the shorter of the lease term or the estimated
useful lives of the related assets. Maintenance and repairs are expensed as
incurred.
Revenues, receivables, and related liabilities ------------------------------
The Company's educational programs range in length from one-day seminars
to degree programs lasting up to four years. Long-term degree programs are
billed in blocks of time ranging in length from five weeks to three months.
Seminars, other shorter term programs, and many of the College's non-degree
programs are usually billed in one installment. Billings occur when the
student first attends a session resulting in the recording of a receivable
and deferred tuition revenue for the amount billed. The deferred tuition
revenue 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 in accordance with the
Company's refund policy.
Because most of the Company's educational programs at UOP, IPD, and WIU
are billed in short blocks of time ranging from five to six weeks, most
deferred tuition revenue at the end of each period will be recognized into
income within five to six weeks following the end of that period. Many of
the College's non-degree programs are billed in one installment and will be
recognized into income over 4 to 24 months. Any deferred tuition revenue
that will not be recognized into income within 12 months is classified as
long-term deferred tuition revenue. The Company does not record the
19
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.
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.
Cost in excess of fair value of assets purchased ----------------------------
The Company amortizes cost in excess of fair value of assets purchased
on a straight-line method over the estimated useful life. At August 31,
1999, the Company's cost in excess of fair value of assets purchased related
primarily to the acquisition of certain assets of the College for Financial
Planning and Western International University, which are being amortized over
35 years and 15 years, respectively.
Statement of Financial Accounting Standards 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets, including cost in excess of fair value of
assets purchased, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. The carrying value of cost in excess of fair value of assets
purchased is assessed for any permanent impairment by evaluating the
operating performance and future undiscounted cash flows of the underlying
businesses. Adjustments are made if the sum of the expected future net cash
flows is less than book value. As of August 31, 1999, there have been no
impairment adjustments recognized.
Fair value of financial instruments -----------------------------------------
The carrying amount reported in the Consolidated Balance Sheet for cash
and cash equivalents, restricted cash, marketable securities, accounts
receivable, accounts payable, accrued liabilities, and student deposits and
deferred revenue approximate fair value because of the short-term nature of
these financial instruments.
Earnings per share ----------------------------------------------------------
Basic net income per share is computed using the weighted average number
of Class A and Class B common shares outstanding during the period. Diluted
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. Both basic and diluted weighted average shares have been
retroactively restated for stock splits effected in the form of stock
dividends. 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.
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 liabilities are
provided for lease agreements that specify scheduled rent increases over the
lease term. Rental deposits are provided for lease agreements that specify
payments in advance or scheduled rent decreases over the lease term.
20
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.
Start-up costs --------------------------------------------------------------
Costs related to the start-up of new campuses and learning centers are
expensed as incurred.
Stock-based compensation ----------------------------------------------------
The Company has elected to continue to account for its stock-based
awards in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and has provided the
pro forma disclosures as required by Statement of Financial Accounting
Standards 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), for
the years ended August 31, 1999, 1998, and 1997.
New accounting pronouncements -----------------------------------------------
During 1999, the Company adopted the American Institute of Certified
Public Accountants Statement of Position No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
The adoption of SOP 98-1 did not have a material impact on its financial
statements.
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.
Comprehensive income --------------------------------------------------------
The Company adopted Statement of Financial Accounting Standards 130,
"Reporting Comprehensive Income" ("SFAS 130"), which requires additional
reporting with respect to certain changes in assets and liabilities that
previously were reported in shareholders' equity. Accordingly, the Company
has included a Consolidated Statement of Comprehensive Income for the years
ended August 31, 1999, 1998, and 1997.
Reclassifications -----------------------------------------------------------
Certain amounts reported for the years ended August 31, 1998 and 1997,
have been reclassified to conform to the 1999 presentation, having no effect
on net income.
21
NOTE 3. ACQUISITIONS
In September 1997, the Company acquired the assets and related business
operations of the College for Financial Planning and related divisions that
include the Institute for Wealth Management, the Institute for Retirement
Planning, the American Institute for Retirement Planners, Inc., and the
Institute for Tax Studies. The adjusted purchase price consisted of $19.4
million in cash, $15.9 million in stock, and the assumption of approximately
$11.4 million in liabilities. The excess of cost over the value of tangible
assets of $40.0 million is being amortized over 35 years.
The acquisition was accounted for under the purchase method and,
accordingly, the results of operations related to this new subsidiary has
been included with those of the Company for periods subsequent to the date of
the acquisition. Results of operations for the College for Financial
Planning prior to the acquisition were not material in relation to the
Company's operations as a whole.
NOTE 4. BALANCE SHEET COMPONENTS
Marketable securities consist of the following, in thousands:
[Enlarge/Download Table]
August 31, 1999 August 31, 1998
------------------------ -----------------------
Estimated Amortized Estimated Amortized
Type Market Value Cost Market Value Cost
---------- ------------ -------- ------------ -------
Classified as current:
Municipal bonds $22,507 $22,497 $26,969 $26,898
U.S. agency obligations 7,863 7,881 640 640
Commercial paper 684 686
------- ------- ------- -------
Total current marketable securities 31,054 31,064 27,609 27,538
------- ------- ------- -------
Classified as noncurrent:
Municipal bonds due in 1-2 years 8,232 8,259 17,975 17,929
U.S. agency obligations 246 248
------- ------- ------- -------
Total noncurrent marketable securities 8,478 8,507 17,975 17,929
------- ------- ------- -------
Total marketable securities $39,532 $39,571 $45,584 $45,467
======= ======= ======= =======
22
Receivables consist of the following, in thousands:
[Download Table]
August 31,
-------------------
1999 1998
------- -------
Trade receivables $84,743 $67,160
Interest receivable 533 671
Income tax refunds receivable 32 79
------- -------
85,308 67,910
Less allowance for doubtful accounts (9,644) (6,628)
------- -------
Total receivables, net $75,664 $61,282
======= =======
Bad debt expense was $6.9 million, $5.5 million, and $2.5 million for
1999, 1998, and 1997, respectively.
Property and equipment consist of the following, in thousands:
[Download Table]
August 31,
-------------------
1999 1998
------- -------
Furniture and equipment $79,363 $52,698
Software 19,394 11,061
Leasehold improvements 16,549 7,432
Land and buildings 350 350
------- -------
115,656 71,541
Less accumulated depreciation and amortization (40,830) (24,923)
------- -------
Property and equipment, net $74,826 $46,618
======= =======
Depreciation and amortization expense was $16.5 million, $9.9 million,
and $6.4 million for 1999, 1998, and 1997, respectively.
23
Cost in excess of fair value of assets purchased consist of the
following, in thousands:
[Download Table]
August 31,
-------------------
1999 1998
------- -------
Cost in excess of fair value of assets purchased $42,831 $42,831
Less accumulated amortization (2,914) (1,433)
------- -------
Total cost in excess, net $39,917 $41,398
======= =======
Total amortization expense was $1.5 million, $1.2 million, and $176,000
in 1999, 1998, and 1997, respectively.
Accrued liabilities consist of the following, in thousands:
[Download Table]
August 31,
-------------------
1999 1998
------- -------
Salaries, wages, and benefits $ 9,355 $ 9,816
Other accrued liabilities 4,985 9,372
------- -------
Total accrued liabilities $14,340 $19,188
======= =======
Student deposits and current portion of deferred revenue consist of the
following, in thousands:
[Download Table]
August 31,
-------------------
1999 1998
------- -------
Student deposits $44,260 $35,794
Current portion of deferred tuition revenue 35,399 26,067
Other deferred revenue 1,848 1,378
------- -------
Total student deposits and current portion of
deferred revenue $81,507 $63,239
======= =======
24
NOTE 5. INVESTMENT IN JOINT VENTURE
In August 1998, the Company together with Hughes Network Systems and
Hermes Onetouch LLC ("Hermes") formed a new corporation to acquire One Touch
Systems, a leading provider of interactive distance learning solutions. The
Company contributed $10.8 million and provided a $1.2 million letter of
credit which will be paid in October 1999, in exchange for a 19% interest in
the newly formed corporation. This investment is accounted for under the
cost method of accounting. Hermes is wholly-owned by the Company's Chairman
and a Senior Vice President.
NOTE 6. SHORT-TERM BORROWINGS
At August 31, 1999, the Company had no outstanding borrowings on its
$10.0 million line of credit. Borrowings under the line of credit bear
interest at LIBOR plus .75% or prime at the Company's election. At August
31, 1999, availability under the line of credit was reduced by outstanding
letters of credit of $4.0 million. Any amounts borrowed under the line are
payable upon its termination in February 2001. The Company's line of credit
agreement prohibits the Company from paying cash dividends or making other
cash distributions without the lender's consent.
NOTE 7. LONG-TERM LIABILITIES
Long-term liabilities consist of the following, in thousands:
[Download Table]
August 31,
------------------
1999 1998
------ ------
Deferred compensation and note agreements
discounted at 7.5% to 12% $1,350 $1,495
Deferred rent 1,900 1,436
Other long-term liabilities 1,272 1,152
------ ------
Total long-term liabilities 4,522 4,083
Less current portion (300) (333)
------ ------
Total long-term liabilities, net $4,222 $3,750
====== ======
The undiscounted deferred compensation liability was $1.6 million at
August 31, 1999 and 1998. The undiscounted note payable related to the WIU
acquisition was $400,000 and $600,000 at August 31, 1999 and 1998,
respectively. The discount rates for these agreements were 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.
The aggregate maturities of the deferred compensation and note
agreements for each of the five fiscal years subsequent to August 31, 1999,
are as follows: 2000--$300,000; 2001--$298,000; 2002--$384,000; 2003--
$317,000; 2004--$292,000.
25
NOTE 8. INCOME TAXES
The related components of the income tax provision are as follows, in
thousands:
[Download Table]
Year Ended August 31,
---------------------------
1999 1998 1997
------- ------- -------
Current:
Federal $32,304 $26,546 $17,877
State and other 7,178 6,028 3,870
------- ------- -------
Total current 39,482 32,574 21,747
------- ------- -------
Deferred:
Federal (361) (2,004) (123)
State and other (144) (595) (22)
------- ------- -------
Total deferred (505) (2,599) (145)
------- ------- -------
Total provision for income taxes $38,977 $29,975 $21,602
======= ======= =======
The income tax provision differs from the tax that would result from
application of the statutory federal and state corporate tax rates. The
rates for the tax provision are as follows:
[Download Table]
Year Ended August 31,
------------------------
1999 1998 1997
------ ------ ------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 5.2 5.1 5.0
Other, net (.4) (.8) (.7)
------ ------ ------
Effective income tax rate 39.8% 39.3% 39.3%
====== ====== ======
26
Deferred tax assets and liabilities consist of the following, in
thousands:
[Download Table]
August 31,
-------------------
1999 1998
------ ------
Gross deferred tax assets:
Allowance for doubtful accounts $4,502 $2,869
Deferred tuition revenue 1,299 2,264
Other 3,124 2,096
------ ------
Total gross deferred tax assets 8,925 7,229
------ ------
Gross deferred tax liabilities:
Depreciation and amortization of property
and equipment 2,286 1,542
Amortization of goodwill 1,289 674
Other 78 246
------ ------
Total gross deferred tax liabilities 3,653 2,462
------ ------
Net deferred tax assets $5,272 $4,767
====== ======
Net deferred tax assets are reflected in the accompanying balance sheet
as follows, in thousands:
[Download Table]
August 31,
-----------------
1999 1998
------ ------
Current deferred tax assets, net $7,346 $6,203
Noncurrent deferred tax liabilities, net (2,074) (1,436)
------ ------
Net deferred tax assets $5,272 $4,767
====== ======
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 a valuation
allowance is not required for its net deferred tax assets.
27
NOTE 9. COMMON STOCK
On September 25, 1998, the Company's Board of Directors authorized a
program allocating up to $40 million in Company funds to repurchase shares of
its Class A Common Stock. On May 13, 1999, an additional $20 million was
authorized by the Board of Directors to repurchase shares of its Class A
Common Stock. As of August 31, 1999, the Company had repurchased
approximately 1,876,000 shares at a total cost of approximately $46.2
million.
NOTE 10. EARNINGS PER SHARE
A reconciliation of the basic and diluted per share computations for
1999, 1998, and 1997 are as follows:
[Enlarge/Download Table]
For the Year Ended August 31,
(In thousands, except per share amounts)
---------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Per Share Average Per Share Average Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- ---------- -------- -------- ----------
Basic net income
per share $59,005 77,683 $ .76 $46,297 77,245 $ .60 $33,379 75,625 $ .44
===== ===== =====
Effect of dilutive
securities:
Stock options 1,151 1,841 2,101
------- ------ ------- ------ ------- ------
Diluted net income
per share $59,005 78,834 $ .75 $46,297 79,086 $ .59 $33,379 77,726 $ .43
======= ====== ===== ======= ====== ===== ======= ====== =====
NOTE 11. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for the way that public business
enterprises report certain information about operating segments in the
financial reports. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
The Company's operations are aggregated into a single reportable segment
based upon their similar economic and operating characteristics. The
Company's educational operations are conducted in similar markets and produce
similar economic results. These operations provide higher education programs
for working adults. The Company's operations are also subject to a similar
regulatory environment, which includes licensing and accreditation.
28
NOTE 12. 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 Company
contributions. The Company does not provide post-employment or post-
retirement health care and life insurance benefits to its employees.
401(k) Plan -----------------------------------------------------------------
The Company sponsors a 401(k) plan which is available to all employees
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 $2.2
million, $1.8 million, and $1.3 million for 1999, 1998, and 1997,
respectively.
Stock-Based Compensation Plans ----------------------------------------------
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 currently provides for an annual grant to the
Company's non-employee directors of options to purchase shares 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. Many of the options granted under the LTIP vest 25% per year
starting at the end of the year 2002. The vesting 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. The Purchase Plan allows employees of the
Company to purchase 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) on the enrollment date into the respective quarterly
offering period or 2) the fair market value on the purchase date.
The Company applies APB 25 and related interpretations in accounting for
its stock-based compensation, and has adopted the disclosure-only provisions
of SFAS 123. Accordingly, no compensation cost has been recognized for these
plans. Had compensation cost for the plans been determined based on the fair
29
value at the grant date consistent with SFAS 123, the Company's net income,
income per share, and weighted average shares outstanding would have been as
follows, in thousands except per share amounts:
[Download Table]
Year Ended August 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Pro forma:
Net income $55,395 $43,986 $31,551
Diluted income per share $ .71 $ .55 $ .40
Diluted weighted average shares outstanding 77,634 79,889 78,365
As reported:
Net income $59,005 $46,297 $33,379
Diluted income per share $ .75 $ .59 $ .43
Diluted weighted average shares outstanding 78,834 79,086 77,726
The effects of applying SFAS 123 in the above pro forma disclosure are
not necessarily indicative of future amounts. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes method with
the following weighted-average assumptions for grants in 1999, 1998, and
1997, respectively: (1) dividend yield of 0.00% in all years; (2) expected
volatility of 73.0%, 40.0%, and 37.0%; (3) risk-free interest rates of 4.5%,
5.9%, and 6.0%, and (4) expected lives of 7.5, 5.4, and 6.9 years.
30
A summary of the activity related to the stock options granted under the
Director Stock Plan and the LTIP is as follows, in thousands except per share
amounts:
[Download Table]
Weighted
Average
Exercise Price
Shares per Share
------ --------------
Outstanding at August 31, 1996 5,162 $ 4.913
Granted 314 17.336
Exercised (965) 1.014
Canceled (264) 9.158
------
Outstanding at August 31, 1997 4,247 6.453
Granted 370 26.101
Exercised (694) 5.100
Canceled (42) 13.650
------
Outstanding at August 31, 1998 3,881 8.492
Granted 1,171 25.981
Exercised (1,233) 4.426
Canceled (384) 10.324
------
Outstanding at August 31, 1999 3,435 15.709
======
Exercisable at August 31, 1999 1,611
======
Available for issuance at August 31, 1999 1,243
======
The following table summarizes information about the Company's stock
options at August 31, 1999:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -------------------------
Weighted Avg. Weighted Avg.
Number Contractual Exercise Number Exercise
Range of Outstanding Years Price Exercisable Price
Exercise Prices (In thousands) Remaining per Share (In thousands) per Share
------------------- ------------ ----------- --------- ----------- ------------
$ 1.630 to $ 5.975 124 5.45 $ 2.691 124 $ 2.691
$ 7.532 to $ 7.532 1,684 6.06 $ 7.532 1,027 $ 7.532
$17.000 to $23.792 237 6.97 $19.407 167 $19.739
$25.625 to $33.313 1,390 9.05 $26.152 293 $27.584
--------- -----------
$ 1.630 to $33.313 3,435 7.31 $15.709 1,611 $12.068
========= ===========
31
NOTE 13. COMMITMENTS AND CONTINGENCIES
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, 1999, in thousands:
[Download Table]
Operating Leases
---------------------------
Equipment
Facilities & Other
---------- ---------
2000 $ 42,173 $ 973
2001 41,060 676
2002 40,396 188
2003 37,826
2004 28,167
Thereafter 55,893
---------- ---------
$ 245,515 $ 1,837
========== =========
Facility and equipment rent expense totaled $44.8 million, $32.1
million, and $23.4 million for 1999, 1998, and 1997, respectively.
In January 1998, the Department of Education Office of the Inspector
General ("OIG") began performing an audit of UOP's administration of the
Title IV Programs. The team previously presented questions regarding UOP's
interpretation of the "12-hour rule," UOP's distance education programs, and
UOP's institutional refund obligations. UOP has received a draft report
addressing these issues and is currently in discussions with the OIG and ED.
Although the Company believes that the OIG audit will be resolved without any
negative impact on UOP's teaching/learning model, as with any program review
or audit, no assurance can be given as to the final outcome since the matters
are not yet resolved. Depending on the interpretation of the various
regulatory requirements, any resulting liability to the Company from the
final audit results will be recorded as an expense.
The Company is involved in various legal proceedings occurring in the
normal course of business. The Company believes that the disposition of
these cases will not have a material adverse impact on the financial position
or results of operations of the Company.
32
Dates Referenced Herein and Documents Incorporated by Reference
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