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| APOL > SEC Filings for APOL > Form 10-Q on 1-Jul-2008 | All Recent SEC Filings |
1-Jul-2008
Quarterly Report
• Executive Summary-a general description of our business and the education industry, as well as key highlights of the current year.
• Critical Accounting Policies and Estimates-a discussion of our accounting policies that require critical judgments and estimates.
• Results of Operations-an analysis of our results of operations in our consolidated financial statements. We operate primarily in one business sector: education. Except to the extent that differences between our reportable segments are material to an understanding of our business as a whole, we present the discussion in our MD&A on a consolidated basis.
• Liquidity, Capital Resources, and Financial Position-an analysis of cash flows, sources and uses of cash, commitments and contingencies, seasonality in the results of our operations, the impact of inflation, and quantitative and qualitative disclosures about market risk.
Forward-Looking Statements
This MD&A contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact may be forward-looking statements. Such
forward-looking statements include, among others, those statements regarding
future events and future results of Apollo that are based on current
expectations, estimates, forecasts, and the beliefs and assumptions of us and
our management, and speak only as of the date made and are not guarantees of
future performance. In some cases, forward-looking statements can be identified
by terminology such as "may," "will," "should," "believe," "expect,"
"anticipate," "estimate," "plan," "predict," "target," "potential," "continue,"
"objectives," or the negative of these terms or other comparable terminology.
Such forward-looking statements are necessarily estimates based upon current
information and involve a number of risks and uncertainties. Such statements
should be viewed with caution. Actual events or results may differ materially
from the results anticipated in these forward-looking statements as a result of
a variety of factors. While it is impossible to identify all such factors,
factors that could cause actual results to differ materially from those
estimated by us include but are not limited to:
• changes in the regulations of the education industry, including those items
set forth in Item 1 of our 2007 Annual Report on Form 10-K, under the
sections titled "Regulatory Environment," "Accreditation," "Federal
Financial Aid Programs," and "State Authorization;"
• each of the factors discussed in Item 1A of our 2007 Annual Report on Form 10-K, Risk Factors;
• those factors set forth in Item 7 of our 2007 Annual Report on Form 10-K for the year ended August 31, 2007; and
• changes in the requirements surrounding the reports that we file with the Securities and Exchange Commission ("SEC").
The cautionary statements referred to in this section also should be considered
in connection with any subsequent written or oral forward-looking statements
that may be issued by us or persons acting on our behalf. We undertake no
obligation to publicly update or revise any forward-looking statements, for any
facts, events, or circumstances after the date hereof that may bear upon
forward-looking statements. Furthermore, we cannot guarantee future results,
events, levels of activity, performance, or achievements.
Executive Summary
Apollo Group, Inc. has been an education provider for more than 30 years,
operating University of Phoenix, Inc. ("UPX"), Institute for Professional
Development, Inc. ("IPD"), The College for Financial Planning Institutes
Corporation ("CFP"), Western International University, Inc. ("WIU") and Insight
Schools, Inc. ("Insight"), all of which are our wholly-owned subsidiaries, and
Apollo Global, Inc. ("Apollo Global"), a consolidated joint venture. We also
recently announced our plans to establish a new Canadian institution, Meritus
University, which we expect to be operational by December 31, 2008. Through
these subsidiaries we are able to offer innovative and distinctive educational
programs and services at high school, undergraduate, and graduate levels in 40
states and the District of
Columbia; Puerto Rico; Alberta and British Columbia, Canada; Mexico; Chile; and
the Netherlands; as well as online throughout the world.
Our combined Degreed Enrollment as of May 31, 2008, was approximately 345,300.
Degreed Enrollment represents individual students enrolled in UPX and Axia
College who attended a course during the quarter and did not graduate as of the
end of the quarter (in March 2006, we began enrolling new students in Axia
College of UPX; from September 2004 through February 2006, we enrolled Axia
students in WIU). Degreed Enrollments include any student who graduated from one
degree program and started a new degree program (for example, a graduate of the
associates degree program returns for a bachelors degree or a bachelors degree
graduate returns for a masters degree, etc.). Degreed Enrollments also include
students participating in certificate programs of at least 18 credit hours in
length with some course applicability into a related degree program. In
addition, students enrolled in WIU, CFP, IPD Client Institutions, UNIACC,
Insight, and additional non-degreed students enrolled in UPX are excluded from
Degreed Enrollment.
The non-traditional education market is a significant and growing component of
the post-secondary education market, which is estimated by the U.S. Department
of Education to be a more than $373.0 billion industry. According to the U.S.
Department of Education, National Center for Education Statistics, based on data
from 2005, over 6.8 million, or 39%, of all students enrolled in higher
education programs are over the age of 24, and this number is expected to
increase by 21% from 2005 through 2016. A large percentage of these students
would not be classified as traditional (i.e., living on campus, supported by
parents and not working). The non-traditional students typically are looking to
improve their skills and enhance their earnings potential within the context of
their careers. From 2005 through 2016, the percentage of 18- to 24-year-old
students in the U.S. is expected to increase 15%. The market for non-traditional
education should continue to increase, reflecting the rapidly expanding
knowledge-based economy.
Our operations are generally subject to seasonal trends. We experience, and
expect to continue to experience, seasonal fluctuations in the results of
operations as a result of changes in the level of student enrollment. While we
enroll students throughout the year, second quarter (December through February)
enrollment and related revenues generally are lower than other quarters due to
holiday breaks in December and January.
During the first nine months of fiscal 2008, we experienced the following
significant events:
1. Enrollment and Revenue Growth While Investing in our Business for the Future
- We achieved 11.0% growth in average Degreed Enrollment for the nine months
ended May 31, 2008 as compared to the nine months ended May 31, 2007, which,
coupled with previously implemented selective tuition price increases,
depending on geographic area and program, resulted in a 14.9% increase in
revenue over the same period. These increases helped fund a significant
portion of our investment in product development and marketing and lead
generation during the first nine months of fiscal 2008 to ensure our
continued growth in the future.
2. Apollo Global - On October 22, 2007, we formed a joint venture with The Carlyle Group ("Carlyle"), called Apollo Global, to pursue investments in the international education services sector. Carlyle, based in Washington D.C., is one of the world's largest private equity firms. Through Apollo Global, we intend to capitalize on the significant global demand for education services. Apollo Global will provide education services through two primary strategies. First, Apollo Global will facilitate delivery of a wide range of our U.S. accredited degrees to foreign students outside the U.S. Within approximately 18 months from formation, we expect to transfer assets that are dedicated to recruiting and servicing international students at fair value to Apollo Global. Following such transfer, Apollo Global, under a service agreement with us, will perform enrollment activities directed toward students who live outside the U.S. and who are not citizens of the U.S. or members of the U.S. military. Second, Apollo Global will acquire or invest in companies that provide local education services, including post-secondary degrees, in the countries it seeks to enter. These investments will be achieved through both a disciplined acquisition process and organic growth.
We have agreed to commit up to $801 million in cash or contributed assets and own 80.1% of Apollo Global. Carlyle has agreed to commit up to $199 million in cash or contributed assets and own the remaining 19.9%. Apollo Global is consolidated in our financial statements. As of May 31, 2008, total cash contributions made to Apollo Global approximated $35.0 million, of which $28.0 million was funded by Apollo.
3. Bank Facility - On January 4, 2008, we entered into a syndicated $500 million Credit Agreement (the "Bank Facility"). The Bank Facility is an unsecured revolving credit facility that will be used for general corporate purposes including acquisitions and stock buybacks. The Bank Facility has an expansion feature for an aggregate principal amount of up to $250 million. The term is five years and will expire on January 4, 2013. The Bank Facility provides a multi-currency sub-limit facility for borrowings in certain specified foreign currencies up to $300 million. The Bank Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The facility fee ranges from 12.5 to 17.5 basis points and the incremental fees for borrowings under the facility range from LIBOR + 50.0 to 82.5 basis points. There were no outstanding borrowings under the Bank Facility as of May 31, 2008.
4. Aptimus, Inc. ("Aptimus") - On October 29, 2007, we completed the acquisition of all outstanding common stock of online advertising network Aptimus for approximately $48.1 million. Prior to the acquisition, Aptimus operated as a results-based advertising network that distributed advertisements for direct marketing advertisers across a network of third-party web sites. The acquisition enables us to more effectively monitor, manage and control our marketing investments and brands, with the goal of increasing awareness of and access to quality and affordable education. Our current operating strategy is to integrate Aptimus as an integral part of our corporate marketing function.
5. Universidad de Artes, Ciencias y Comunicación ("UNIACC") - On March 28, 2008, Apollo Global completed its first transaction with the acquisition of UNIACC, an accredited, private arts and communications university in Chile, as well as its related entities. UNIACC offers bachelors and masters degree programs and is accredited by the Chilean Council of Higher Education. In 2004, UNIACC became the first university in Chile to teach a fully online undergraduate program. Apollo Global purchased 100% of UNIAAC for $44.5 million composed of cash and assumed debt, excluding an earn-out payment denominated in U.S. Dollars based on a multiple of earnings to be paid four years from the closing date. If the earn-out were based on current earnings, it would approximate $9.0 million. The UNIACC acquisition enables Apollo Global to provide local education services, including post-secondary degrees, while establishing a presence in the Chilean market. This is our first investment in South America and expands our delivery of local education services to that region.
6. Securities Class Action - In October 2004, three class action complaints were filed in the U.S. District Court for the District of Arizona. The Court consolidated the three pending class action complaints under the caption In re Apollo Group, Inc. Securities Litigation, Case No. CV04-2147-PHX-JAT and a consolidated class action complaint was filed on May 16, 2005 by the lead plaintiff. The consolidated complaint named us, Todd S. Nelson, Kenda B. Gonzales and Daniel E. Bachus as defendants. On March 1, 2007, by stipulation and order of the Court, Daniel E. Bachus was dismissed as a defendant from the case. Lead plaintiff represents a class of our shareholders who acquired their shares between February 27, 2004 and September 14, 2004. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under the Act by us for defendants' allegedly material false and misleading statements in connection with our failure to publicly disclose the contents of a preliminary DOE program review report. The case proceeded to trial on November 14, 2007. On January 16, 2008, the jury returned a verdict in favor of the plaintiffs awarding damages of up to $5.55 for each share of common stock in the class suit, plus pre-judgment and post-judgment interest. The class shares are those purchased after February 27, 2004 and still owned on September 14, 2004. The judgment was entered on January 30, 2008, subject to an automatic stay until February 13, 2008. On February 13, 2008, the Court granted our motion to stay execution of the judgment pending resolution of our motions for post-trial relief, which were also filed on February 13, 2008, provided that we post a bond in the amount of $95.0 million. On February 19, 2008, we posted the $95.0 million bond with the Court. Oral arguments have been scheduled for August 4, 2008 on our post-trial motions. If our motions are denied, in whole or in part, we intend to pursue any and all remedies that may be available, including, if necessary, appealing the judgment. If an appeal is necessary, the Court may require that we post a bond in order to stay enforcement of the judgment during the appeal, and the bond could be in a different amount from the present bond. We believe we have adequate liquidity to fund any likely bond amount.
Liability in the case is joint and several, which means that each defendant, including us, is liable for the entire amount of the judgment. As a result, we will be responsible for payment of the full amount of damages as ultimately determined. We do not expect to receive material amounts of insurance proceeds from our insurers to satisfy any amounts ultimately payable to the plaintiff class.
The actual amount of damages will not be known until all Court proceedings,
including post trial motions and any appeal, have been completed. We have
estimated for financial reporting purposes, using statistically valid models
and a 60% confidence interval, that the damages could range from
$120.5 million to $216.4 million, which includes (a) our estimate of damages
based on the verdict; (b) our estimate of potential amounts we expect to
reimburse our insurance carriers; (c) estimated future defense costs; and
(d) legal and other professional fees incurred during the second quarter of
fiscal 2008. In the second quarter of fiscal 2008, we recorded a charge for
estimated damages at the mid-point of this range, or $168.4 million. We
elected to record the mid-point of this range because under statistically
valid modeling techniques the mid-point of the range is in fact a more
likely estimate than other points in the range, and the point at which there
is an equal probability that the ultimate loss could be toward the lower end
or the higher end of the range. In the third quarter of fiscal 2008, we
recorded an additional charge of $1.6 million for interest on the estimated
damages.
7. Meritus University - On May 13, 2008, we announced our plans to establish a new Canadian institution, Meritus University. Meritus University has received approval to offer three programs from the New Brunswick Department of Post-Secondary Education, Training and Labour (the "Department"), thereby establishing degree-granting status. The three programs approved by the Department are Master of Business Administration, Bachelor of Business Administration and Bachelor of Information Technology Management. Meritus University will not seek U.S. accreditation and will be based in Fredericton, New Brunswick, offering complete degree programs online to working professionals throughout Canada and abroad. Meritus University is expected to be operational by December 31, 2008.
8. UPX Operating Realignment - During the third quarter of fiscal 2008, we announced a management and reporting realignment within UPX. Historically, UPX on-campus operations have been managed by region and then by campus within each region. The global online operation was managed centrally. This realignment takes our online operation and shifts reporting responsibility to our regional management. UPX will retain an independently operating online campus under this new reporting structure. We believe this realignment will allow us to promote the sharing of common goals and best practices while maximizing efficiencies, and most importantly help us remain student focused.
9. Changes in Management - On June 24, 2008, Brian E. Mueller resigned from his position as President and Director. Also on June 24, 2008, our Board of Directors appointed Joseph L. D'Amico interim President, in addition to serving as our Chief Financial Officer and Treasurer.
Critical Accounting Policies and Estimates
Please refer to our Annual Report filed on Form 10-K for the fiscal year ended
August 31, 2007 filed on October 29, 2007.
Results of Operations
We have included below a discussion of our operating results and significant
items which explain the material changes in our operating results during the
last three and nine months ended May 31, 2008.
We categorize our expenses as instructional costs and services, selling and
promotional, and general and administrative.
Instructional costs and services at UPX, WIU, CFP, UNIACC and Insight consist
primarily of costs related to the delivery and administration of our educational
programs and include faculty compensation, administrative compensation for
departments that provide service directly to students, financial aid processing
costs, the costs of educational materials sold, facility leases and other
occupancy costs, bad debt expense, technology spending in support of student
systems and depreciation and amortization of property and equipment. UPX and WIU
faculty members are primarily contracted 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 us. 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 IPD's Client Institutions.
Selling and promotional costs consist primarily of compensation for enrollment
counselors, management and support staff, corporate marketing, advertising,
production of marketing materials, and other costs related to selling and
promotional functions. All operating expenses related to Aptimus are classified
as selling and promotional costs. We expense selling and promotional costs as
incurred.
General and administrative costs consist primarily of administrative
compensation, occupancy costs, depreciation and amortization, and other related
costs for departments such as executive management, information technology,
corporate accounting, human resources, and other departments that do not provide
direct services to our students. To the extent possible, we centralize these
services to avoid duplication of effort.
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