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APOL > SEC Filings for APOL > Form 10-Q on 25-Jun-2012All Recent SEC Filings

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Form 10-Q for APOLLO GROUP INC


25-Jun-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help investors understand our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The MD&A is organized as follows:
• Overview: From management's point of view, we discuss the following:

• An overview of our business and the sectors of the education industry in which we operate;

• Key trends, developments and challenges; and

• Significant events from the current period.

• Critical Accounting Policies and Estimates: A discussion of our accounting policies that require critical judgments and estimates.

• Recent Accounting Pronouncements: A discussion of recently issued accounting pronouncements.

• Results of Operations: An analysis of our results of operations as reflected in our condensed consolidated financial statements.

• Liquidity, Capital Resources, and Financial Position: An analysis of cash flows and contractual obligations and other commercial commitments.

Overview
Apollo is one of the world's largest private education providers and has been a provider of education services for more than 35 years. We offer innovative and distinctive educational programs and services at the undergraduate, master's and doctoral levels at our various campuses and learning centers, and online throughout the world. Our principal wholly-owned subsidiaries and subsidiaries that we control include the following:
• The University of Phoenix, Inc. ("University of Phoenix");

• Apollo Global, Inc. ("Apollo Global"):

• BPP Holdings Limited ("BPP");

• Western International University, Inc. ("Western International University");

• Universidad Latinoamericana ("ULA"); and

• Universidad de Artes, Ciencias y Comunicaciσn ("UNIACC");

• Institute for Professional Development ("IPD"); and

• The College for Financial Planning Institutes Corporation ("CFFP").

On September 12, 2011, we acquired all of the outstanding stock of Carnegie Learning, Inc. ("Carnegie Learning"), a publisher of research-based math curricula and adaptive learning software. Refer to Fiscal Year 2012 Significant Events to Date - Carnegie Learning, Inc. Acquisition in this MD&A for additional information.
Substantially all of our net revenue is composed of tuition and fees for educational services. In fiscal year 2011, University of Phoenix generated 91% of our total consolidated net revenue and more than 100% of our operating income, and 86% of its cash basis revenue for eligible tuition and fees was derived from U.S. federal financial aid programs established by Title IV of the Higher Education Act and regulations promulgated thereunder ("Title IV"), as calculated under the 90/10 Rule.
We believe that a critical element of generating successful long-term growth and attractive returns for our stakeholders is to provide high quality educational products and services for our students in order for them to maximize the benefits of their educational experience. Accordingly, we are intensely focused on student success and more effectively identifying and enrolling students who have a greater likelihood to succeed in our educational programs. We are continuously enhancing and expanding our current service offerings and investing in academic quality. We have developed customized systems for academic quality management, faculty recruitment and training, student tracking, and marketing to help us more effectively manage toward this objective. We believe we utilize one of the most comprehensive postsecondary learning assessment programs in the U.S. We seek to improve student retention by enhancing student services, including academic support, and promoting instructional innovation. All of these efforts are designed to help our students stay in school and succeed.


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Key Trends, Developments and Challenges
The following developments and trends present opportunities, challenges and risks as we work toward our goal of providing attractive returns for all of our stakeholders:
• University of Phoenix Enrollment and Certain Operating Trends. We are focused on enhancing student experiences and outcomes. In furtherance of this, we have implemented a number of important changes and initiatives in recent years to transition our business to more effectively support our students and enhance their educational outcomes. Some of these changes have contributed to the subsequent decline in University of Phoenix enrollment. We believe University of Phoenix New Degreed Enrollment also has been adversely impacted by the following additional factors:

• changes in marketing content and channels to better identify potential students more likely to succeed at University of Phoenix;

• changes in economic conditions; and

• a robust competitive environment. Refer to We face intense competition

          in the postsecondary education market from both public and private
          educational institutions, which could adversely affect our business in
          Part II, Item 1A, Risk Factors.

Despite the current adverse effects on our enrollment and operating results, we believe that many of these initiatives have improved our student experience and will enhance student outcomes and, therefore, over the long-term, will reduce the risks to our business associated with the regulatory environment and position us for more stable growth.
• Restructuring. We have initiated a series of activities to reengineer business processes and refine our educational delivery structure. These activities are designed to increase operating efficiencies and effectiveness, and enhance our students' educational experience and outcomes. We are focused on aligning our operations with our business strategy, which includes optimizing our cost structure. Although we expect to implement additional restructuring activities as we reengineer business processes, we have not yet finalized our initiatives or committed to any further specific restructuring activities. Accordingly, while future charges and associated savings related to these activities could be substantial, the nature, timing and amount cannot be estimated at this time.

• Regulatory Environment. Our domestic postsecondary institutions are subject to extensive federal and state regulations. In particular, the federal Higher Education Act, as reauthorized, and related U.S. Department of Education regulations, prescribe detailed requirements affecting substantially all activities of University of Phoenix and Western International University as a condition to participating in the various federal student financial aid programs. We have summarized below certain significant regulatory developments and trends applicable to our business. For a more detailed discussion of the regulatory environment and related risks, refer to Item 1, Business, and Item 1A, Risk Factors, in our 2011 Annual Report on Form 10-K.

•         Executive Order on Military and Veterans Benefits Programs. On April
          27, 2012, President Obama issued an executive order regarding the
          establishment of principles for educational institutions receiving
          funding from federal military and veterans educational benefits
          programs, including those provided by the Post-9/11 Veterans
          Educational Assistance Act of 2008, as amended (the "Post-9/11 GI
          Bill") and the Department of Defense Tuition Assistance Program. The
          executive order requires the Departments of Defense, Veterans Affairs
          and Education to establish and implement "Principles of Excellence" to
          apply to educational institutions receiving such funding. The goals of
          the Principles are broadly stated in the order and relate to
          disclosures on costs and amounts of costs covered by federal
          educational benefits, marketing standards, state authorization,
          accreditation approvals, standard institutional refund policies,
          educational plans and academic and financial advising. Various
          implementation mechanisms are included and the Secretaries of Defense
          and Veterans Affairs, in consultation with the Secretary of Education
          and the Director of the Consumer Financial Protection Bureau, are
          required to submit a plan to strengthen enforcement and compliance on
          or before July 27, 2012. These Principles could increase the cost of
          delivering educational services to our military and veteran students.


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•         U.S. Congressional Hearings and Financial Aid Funding. In recent years,
          there has been increased focus by members of the U.S. Congress on the
          role that proprietary educational institutions play in higher
          education. Congressional hearings and roundtable discussions have been
          held, beginning in June 2010, by the U.S. Senate Committee on Health,
          Education, Labor and Pensions ("HELP Committee"), regarding various
          aspects of the education industry that may result in regulatory changes
          that affect our business. We have voluntarily provided substantial
          amounts of information about our business at the request of various
          Congressional committees, and we intend to continue being responsive to
          Congress in this regard. We have been advised by the HELP Committee
          staff that a final report with regard to proprietary institutions is in
          preparation and that it will be released by the Committee in July 2012.
          As Congress addresses the historic U.S. budget deficit, financial aid
          programs are a potential target for reduction. Any action by Congress
          that significantly reduces Title IV program funding, whether through
          across-the-board funding reductions, sequestration or otherwise, or
          materially impacts the eligibility of our institutions or students to
          participate in Title IV programs would have a material adverse effect
          on our enrollment, financial condition, results of operations and cash
          flows.

In addition to possible reductions in federal student financial aid, state-funded student financial aid also may be reduced as many states grapple with their own historic budget shortfalls, including California, as described below.

•         California Grant Program ("Cal Grants"). In California, the state in
          which we conduct the most business by revenue, University of Phoenix
          students are eligible for Cal Grants, the principal state-funded grant
          program. The Governor and the state legislature have proposed several
          changes to the Cal Grant program for the student aid year beginning
          July 1, 2012 which, if adopted, could reduce the award amount or
          eliminate the eligibility of some or all of our new and continuing
          students with regard to these grants. Our students received
          approximately $20 million of grants under the Cal Grant Program in
          fiscal year 2011 and we estimate they would receive approximately $21
          million in fiscal year 2012. These changes could result in increased
          student borrowing, decreased enrollment and adverse impacts on our
          90/10 Rule percentage, as discussed below.


•         Higher Learning Commission. In August 2010, University of Phoenix
          received a letter from its principal accreditor, the Higher Learning
          Commission ("HLC"), requiring University of Phoenix to provide certain
          information and evidence of compliance with HLC accreditation
          standards. The letter related to the August 2010 report published by
          the Government Accountability Office of its undercover investigation
          into the enrollment and recruiting practices of a number of proprietary
          institutions of higher education, including University of Phoenix. In
          July 2011, HLC informed University of Phoenix that the Special
          Committee formed to review this matter had completed its work,
          concluding that based on its limited review, it found no apparent
          evidence of systematic misrepresentations to students or that
          University of Phoenix's procedures in the areas of recruiting,
          financial aid and admissions are significantly inadequate or
          inappropriate. HLC also stated that there remain significant questions
          and areas that University of Phoenix should work on improving. HLC is
          reviewing these areas of concern as part of its previously scheduled
          comprehensive evaluation visit, which began in March 2012.


•         Rulemaking Initiatives. In October 2010 and June 2011, the U.S.
          Department of Education promulgated new rules related to Title IV
          program integrity issues and foreign school issues. The most
          significant of these rules for our business are the following:


•                Modification of the standards relating to the payment of
                 incentive compensation to employees involved in student
                 recruitment and enrollment;


•                Implementation of standards for state authorization of
                 institutions of higher education;


•                Adoption of a definition of "gainful employment" for purposes of
                 the requirement of Title IV student financial aid that a program
                 of study offered by a proprietary institution prepare students
                 for gainful employment in a recognized occupation; and


•                Expansion of the definition of misrepresentation, relating to
                 the Department's authority to suspend or terminate an
                 institution's participation in Title IV programs if the
                 institution engages in substantial misrepresentation about the
                 nature of its educational program, its financial charges, or the
                 employability of its graduates, and expansion of the sanctions
                 that the Department may impose for engaging in a substantial
                 misrepresentation.

Most of the rules were effective in July 2011. The rules regarding the metrics for determining whether an academic program prepares students for gainful employment are effective on July 1, 2012. On June 21, 2012, the Department released data to educational institutions showing the calculation of the gainful employment metrics for the federal fiscal year 2011 for each of the institution's covered programs. These data are for informational


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purposes only, as the gainful employment regulations are not effective until July 1, 2012. We have evaluated this recently released data, and we continue to believe that substantially all of our academic programs currently prepare students for gainful employment measured in the manner set forth in the final gainful employment regulations for purposes of continued eligibility to participate in federal student financial aid programs.
In May 2011, the Department announced its intention to establish additional negotiated rulemaking committees to prepare proposed regulations under the Higher Education Act. In January 2012, two negotiation teams began their work on regulations relating to teacher preparation and student loan issues. These negotiations concluded in April 2012, and under the rulemaking protocol, the Department will issue a Notice of Proposed Rulemaking for public comment before promulgating final regulations on these issues. We expect the Department will issue notices of proposed rulemaking which, among other things, address modifications to student loan repayment plans and procedures, as well as new regulations defining high quality teacher preparation programs for determining the academic program's eligibility to participate in Title IV programs. More information can be found at
http://www2.ed.gov/policy/highered/reg/hearulemaking/2011/index.html. In May 2012, the Department announced its intention to establish a negotiated rulemaking committee to prepare proposed regulations under the Higher Education Act designed to prevent fraud and otherwise ensure proper use of Title IV program funds, especially within the context of current technologies. In particular, the regulations intend to address the use of debit cards and other banking mechanisms for disbursing federal student aid, to improve and streamline the campus-based aid programs, and regulatory changes to further help institutions prevent fraudulent student activity. Public hearings were held in May 2012 and the Department anticipates committee negotiations will begin in September 2012. More information can be found at http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/index.html.
• 90/10 Rule. One requirement of the Higher Education Act, as reauthorized, commonly referred to as the "90/10 Rule," provides that a proprietary institution will be ineligible to participate in Title IV programs if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue, as defined in the rule, from Title IV programs. The University of Phoenix 90/10 Rule percentage for fiscal year 2011 was 86%. Based on our most recent trends, we do not expect the 90/10 Rule percentage for University of Phoenix to exceed 90% for fiscal year 2012. However, the 90/10 Rule percentage for University of Phoenix remains near 90% and could exceed 90% in the future.

Various legislative proposals have been introduced in Congress that would heighten the requirements of the 90/10 Rule. For example, in January 2012, the Protecting Our Students and Taxpayers Act was introduced in the U.S. Senate and, if adopted, would reduce the 90% maximum under the rule to the pre-1998 level of 85%, cause tuition derived from Title IV programs for military personnel to be included in the 85% portion under the rule instead of the 10% portion as is the case today, and impose Title IV ineligibility after one year of noncompliance rather than two. If this or other proposals are adopted as proposed, University of Phoenix would have to make material changes to its business to remain eligible to participate in Title IV programs, which could materially and adversely affect our business. In addition, reductions in the Cal Grant program in California as discussed above, and other state-funded student financial aid programs also could adversely impact our compliance with the 90/10 rule, because tuition revenue derived from such programs is included in the 10% portion of the rule calculation.

•         Student Loan Cohort Default Rates. To remain eligible to participate in
          Title IV programs, an educational institution's student loan cohort
          default rates must remain below certain specified levels. Under current
          regulations, an educational institution will lose its eligibility to
          participate in Title IV programs if its two-year measuring period
          student loan cohort default rate equals or exceeds 25% for three
          consecutive cohort years, or 40% for any given year. For University of
          Phoenix and Western International University, the 2009 cohort default
          rates were 18.8% and 9.3%, respectively, and the draft 2010 cohort
          default rates, which will be finalized in September 2012, were 18.0%
          and 8.0%, respectively.

The cohort default rate requirements were modified by the Higher Education Opportunity Act enacted in August 2008 to increase by one year the measuring period for each cohort. Starting in September 2012, the U.S. Department of Education will publish the official three-year cohort default rates in addition to the two-year rates, beginning with the 2009 cohort. If an institution's three-year cohort default rate equals or exceeds 30% for any given year (compared to 25% under the current two-year standard), it must establish a default prevention task force and develop a default prevention plan with measurable objectives for improving the cohort default rate. We believe that our current repayment management efforts meet these requirements. If an institution's three-year cohort default rates for the 2009 and 2010 cohorts equals or exceeds 30%, the institution may be subject to provisional certification imposing various additional requirements for participation in Title IV programs. Beginning with the three-year cohort default rate for the 2011 cohort published in September 2014, the three-


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year rates will be applied for purposes of measuring compliance with the requirements. If the three-year cohort default rate for the 2011 cohort equals or exceeds 40%, the institution will cease to be eligible to participate in Title IV programs, and if the institution's three-year cohort default rate equals or exceeds 30% for three consecutive years, beginning with the 2009 cohort, the institution will cease to be eligible to participate in Title IV programs. The Department has published, for informational purposes, "trial rates" to assist institutions in understanding the impact of the new three-year cohort default rate calculation. For University of Phoenix and Western International University, the trial three-year cohort default rates for the 2008 cohort were 21.1% and 16.3%, respectively. The University of Phoenix and Western International University draft three-year cohort default rates for the 2009 cohort, which will be finalized in September 2012, were 26.7% and 14.7%, respectively.
• Information Technology. We are upgrading a substantial portion of our key IT systems, including our student learning system, student services platform and corporate applications, and retiring the related legacy systems. We believe that these new systems will improve the productivity, scalability, reliability and sustainability of our IT infrastructure. However, the transition from our legacy systems entails risk of unanticipated disruption, including disruptions in our core business functions, that could adversely impact our business. Refer to System disruptions and security threats to our computer networks or phone systems could have a material adverse effect on our business in Part II, Item 1A, Risk Factors.

• Expand into New Markets. We intend to continue to pursue opportunities to utilize our core expertise and organizational capabilities, both domestically and internationally. In particular, Apollo Global is actively evaluating opportunities to partner with or acquire existing institutions of higher learning outside of the U.S. to address the growing international demand for postsecondary education services. To date, Apollo Global has acquired educational institutions in the United Kingdom, Mexico and Chile, and has also established a joint venture to develop and provide educational services and programs in India. The integration and operation of acquired businesses in foreign jurisdictions entails substantial regulatory, market and execution risks and such acquisitions may not be accretive for an extended period of time, if at all, depending on the circumstances.

For a more detailed discussion of trends, risks and uncertainties, and our strategic plan, refer to our 2011 Annual Report on Form 10-K and Part II, Item 1A, Risk Factors, included in this report. Fiscal Year 2012 Significant Events to Date In addition to the items mentioned above, we experienced the following significant events during fiscal year 2012:
1. Carnegie Learning, Inc. Acquisition. During the first quarter of fiscal year 2012, we acquired all of the stock of Carnegie Learning, Inc., a publisher of research-based math curricula and adaptive learning software for $75.0 million. In a separate transaction, we acquired related technology from Carnegie Mellon University for $21.5 million, payable over a 10-year period. The acquisitions allow us to accelerate our efforts to incorporate adaptive learning into our academic platform and to provide tools to help raise student achievement in mathematics, which we believe will support improved retention and graduation rates. Refer to Note 5, Acquisitions, in Item 1, Financial Statements.

2. UNIACC Accreditation. On November 17, 2011, UNIACC was advised by the National Accreditation Commission of Chile that its institutional accreditation would not be renewed and therefore had lapsed. UNIACC has appealed the decision. The loss of accreditation from the National Accreditation Commission does not impact UNIACC's ability to operate or confer degrees and does not directly affect UNIACC's programmatic accreditations. However, this institutional accreditation is necessary for new UNIACC students to participate in government loan programs and for existing students to begin to participate in such programs for the first time. The loss of accreditation has reduced new enrollment in UNIACC's degree programs due to the unavailability of the government loan programs. We cannot predict the magnitude of any further reduction at this time and if the loss of institutional accreditation is not reversed and continues to decrease demand among students who seek government loans or otherwise reduces demand for potential students, the university's viability could be materially and adversely affected. Based principally on these developments, we recorded goodwill and other intangibles impairment charges of $16.8 million during the first quarter of fiscal year 2012. Refer to Critical Accounting Policies and Estimates in this MD&A.

3. Joint Venture to Provide Educational Services in India. On December 3, 2011, Apollo Global entered into an agreement with HT Media Limited, an Indian media company, to participate in a start-up, 50:50 joint venture intended to develop and provide educational services and programs in India. HT Media Limited, which is based in New Delhi, India, publishes the Hindustan Times, Hindustan and Mint newspapers, among other business activities.


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4. Securities Class Action (Policeman's Annuity and Benefit Fund of Chicago). During the first quarter of fiscal year 2012, we entered into an agreement in principle with the plaintiffs to settle a securities class action lawsuit entitled In re Apollo Group, Inc. Securities Litigation, Case No. CV04-2147-PHX-JAT, filed in the U.S. District Court for the District of Arizona, for $145.0 million. On April 20, 2012, the Court approved the settlement agreement and entered an order of final judgment and dismissal. In connection with approval of the settlement agreement and the dismissal of the lawsuit, the Court also vacated the related judgment against us and the individual defendants. Under the settlement agreement and during the third quarter of fiscal year 2012, the $145.0 million we had previously deposited into a common fund account in December 2011 was paid to the plaintiffs. Refer to Note 15, Commitments and Contingencies, in Item 1, Financial Statements.

5. Changes in Directors and Executive Officers. The following changes in directors and executive officers have occurred during fiscal year 2012:

. . .

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