APOLLO GROUP INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2003

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-25232

APOLLO GROUP, INC.

(Exact name of registrant as specified in its charter)


ARIZONA		86-0419443
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)

(480) 966-5394
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.


YES x		NO o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).


YES o		NO x

AT JULY 9, 2003, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:


Apollo Education Group Class A common stock, no par value		175,274,000 Shares
Apollo Education Group Class B common stock, no par value		477,000 Shares
University of Phoenix Online common stock, no par value		15,639,000 Shares

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
	Item 1 – Financial Statements Apollo Group, Inc.
	Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.
	Item 3 – Quantitative and Qualitative Disclosures about Market Risk
	Item 4 — Controls and Procedures
PART II – OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-15.1
EX-99.1
EX-99.2
EX-99.3

APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX


	PAGE
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements		1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.		20
Item 3. Quantitative and Qualitative Disclosures about Market Risk		26
Item 4. Controls and Procedures		27
PART II – OTHER INFORMATION
Item 1. Legal Proceedings		28
Item 2. Changes in Securities and Use of Proceeds		28
Item 3. Defaults Upon Senior Securities		28
Item 4. Submission of Matters to a Vote of Security Holders		28
Item 5. Other Information		28
Item 6. Exhibits and Reports on Form 8-K		28
SIGNATURES		29
EXHIBIT INDEX		32
EXHIBIT 15.1 – Letter on Unaudited Interim Financial Information
EXHIBIT 99.1 – Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online
EXHIBIT 99.2 – Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.3 – Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements - Apollo Group, Inc.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET


		May 31,			August 31,
		2003			2002

(Dollars in thousands)		(Unaudited)
Assets:
Current assets
	Cash and cash equivalents	$	418,892		$	295,237
	Restricted cash		135,477			100,252
	Marketable securities		243,055			214,547
	Receivables, net		115,044			99,282
	Deferred tax assets, net		9,270			7,415
	Other current assets		14,691			13,714

Total current assets			936,429			730,447
Property and equipment, net			115,247			104,292
Marketable securities			157,714			78,619
Cost in excess of fair value of assets purchased, net			37,096			37,096
Deferred tax assets, net			4,529			5,062
Other assets			24,955			24,126

Total assets		$	1,275,970		$	979,642

Liabilities and Shareholders’ Equity:
Current liabilities
	Current portion of long-term liabilities	$	3,255		$	7,510
	Accounts payable		23,288			22,478
	Accrued liabilities		42,286			39,855
	Income taxes payable		9,754			7,974
	Student deposits and current portion of deferred tuition revenue		231,928			186,497

Total current liabilities			310,511			264,314
Deferred tuition revenue, less current portion			740			827
Long-term liabilities, less current portion			15,376			15,508

Total liabilities			326,627			280,649

Commitments and contingencies
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued
Apollo Education Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 175,053,000 and 173,221,000 issued and outstanding at May 31, 2003 and August 31, 2002, respectively			103			103
Apollo Education Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 and 484,000 issued and outstanding at May 31, 2003 and August 31, 2002, respectively			1			1
University of Phoenix Online nonvoting common stock, no par value, 400,000,000 shares authorized; 15,592,000 and 14,256,000 issued and outstanding at May 31, 2003 and August 31, 2002, respectively
Additional paid-in capital			283,117			227,155
Apollo Education Group Class A treasury stock, at cost, 2,336,000 and 4,162,000 shares at May 31, 2003 and August 31, 2002, respectively			(28,324	)		(46,029	)
University of Phoenix Online treasury stock, at cost, 24,000 shares at August 31, 2002						(526	)
Retained earnings			694,818			518,186
Accumulated other comprehensive income (loss)			(372	)		103

Total shareholders’ equity			949,343			698,993

Total liabilities and shareholders’ equity		$	1,275,970		$	979,642

The accompanying notes are an integral part of these consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS


		For the Three Months Ended				For the Nine Months Ended
		May 31,				May 31,
		2003		2002		2003		2002

(In thousands, except per share amounts)		(Unaudited)
Revenues:
	Tuition and other, net	$	364,166	$	276,349	$	968,244	$	727,146

Costs and expenses:
	Instructional costs and services		159,345		129,764		444,697		365,302
	Selling and promotional		70,990		50,546		195,801		142,851
	General and administrative		17,015		15,260		49,864		43,247

			247,350		195,570		690,362		551,400

Income from operations			116,816		80,779		277,882		175,746
Interest income, net			3,853		3,068		10,896		8,847

Income before income taxes			120,669		83,847		288,778		184,593
Provision for income taxes			46,412		33,048		112,146		72,742

Net income		$	74,257	$	50,799	$	176,632	$	111,851

Net income attributed to:
	Apollo Education Group common stock	$	69,816	$	48,369	$	166,193	$	106,599

	University of Phoenix Online common stock	$	4,441	$	2,430	$	10,439	$	5,252

Earnings per share attributed to:
Apollo Education Group common stock:
	Basic net income per share	$	0.40	$	0.28	$	0.95	$	0.62

	Diluted net income per share	$	0.39	$	0.27	$	0.94	$	0.61

	Basic weighted average shares outstanding		175,311		173,112		174,750		172,635

	Diluted weighted average shares outstanding		177,931		176,040		177,375		175,462

University of Phoenix Online common stock:
	Basic net income per share	$	0.29	$	0.18	$	0.70	$	0.40

	Diluted net income per share	$	0.27	$	0.16	$	0.64	$	0.35

	Basic weighted average shares outstanding		15,446		13,283		14,998		12,974

	Diluted weighted average shares outstanding		16,742		15,291		16,374		14,928

The accompanying notes are an integral part of these consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


		For the Three Months Ended						For the Nine Months Ended
		May 31,						May 31,
		2003			2002			2003			2002

(In thousands)		(Unaudited)
Net income		$	74,257		$	50,799		$	176,632		$	111,851
Other comprehensive income, net of income taxes:
	Currency translation loss		(340	)		(152	)		(475	)		(49	)

Comprehensive income		$	73,917		$	50,647		$	176,157		$	111,802

The accompanying notes are an integral part of these consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS


				For the Nine Months Ended
				May 31,
				2003			2002

(In thousands)				(Unaudited)
Cash flows provided by (used for) operating activities:
	Net income			$	176,632		$	111,851
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			29,585			26,341
		Amortization of investment premiums			3,858			2,208
		Provision for uncollectible accounts			15,079			11,495
		Deferred income taxes			(1,322	)		(4,516	)
		Tax benefits of stock options exercised			39,730			20,537
		Increase in assets:
			Restricted cash		(35,225	)		(30,859	)
			Receivables		(30,841	)		(13,859	)
			Other assets		(1,507	)		(204	)
		Increase in liabilities:
			Accounts payable and accrued liabilities		5,021			12,573
			Student deposits and deferred revenue		45,344			37,199
			Other liabilities		2,282			8,576

Net cash provided by operating activities					248,636			181,342

Cash flows provided by (used for) investing activities:
	Net additions to property and equipment				(41,151	)		(27,713	)
	Purchase of marketable securities				(324,959	)		(225,568	)
	Maturities of marketable securities				213,498			150,030
	Purchase of other assets				(1,757	)		(1,129	)

Net cash used for investing activities					(154,369	)		(104,380	)

Cash flows provided by (used for) financing activities:
	Purchase of Apollo Education Group Class A common stock				(4,068	)		(2,438	)
	Issuance of Apollo Education Group Class A common stock				26,353			14,368
	Purchase of University of Phoenix Online common stock				(2,012	)		(6,833	)
	Issuance of University of Phoenix Online common stock				14,190			10,812
	Payments on long-term liabilities				(4,600	)		(100	)

Net cash provided by financing activities					29,863			15,809

Currency translation loss					(475	)		(49	)

Net increase in cash and cash equivalents					123,655			92,722
Cash and cash equivalents at beginning of period					295,237			145,933

Cash and cash equivalents at end of period				$	418,892		$	238,655

The accompanying notes are an integral part of these consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Note 1. Nature of Operations

Apollo Group, Inc. (“Apollo” or the “Company”), through its wholly-owned subsidiaries, The University of Phoenix, Inc. (“University of Phoenix”), Institute for Professional Development (“IPD”), The College for Financial Planning Institutes Corporation (the “College”), and Western International University, Inc. (“WIU”), has been providing higher education to working adults for over 25 years.

University of Phoenix is a regionally accredited, private institution of higher education offering associates, bachelors, masters, and doctoral degree programs in business, criminal justice, education, health care, human services, information technology, management, and nursing. University of Phoenix has 42 physical campuses and 85 learning centers located in Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, Puerto Rico, and Vancouver, British Columbia. University of Phoenix also offers its educational programs worldwide through University of Phoenix Online, its computerized educational delivery system. University of Phoenix is accredited by The Higher Learning Commission (“HLC”) and is a member of the North Central Association of Colleges and Schools.

IPD provides program development and management services under long-term contracts to 22 regionally accredited private colleges and universities. IPD currently operates at 22 campuses and 30 learning centers in 22 states.

The College, located in Denver, Colorado, provides financial planning education programs, as well as a regionally accredited graduate degree program in financial planning.

WIU, which is accredited by HLC, currently offers undergraduate and graduate degree programs in Phoenix, Chandler, Scottsdale, and Fort Huachuca, Arizona.

On March 24, 2000, the Board of Directors of Apollo authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Apollo’s other businesses and its retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining an 89.2% interest in University of Phoenix Online. This percentage has decreased to 85.9% at May 31, 2003 due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan partially offset by the repurchase of shares of University of Phoenix Online common stock.

This financial information reflects all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Unless otherwise noted, references to 2003 and 2002 refer to the periods ended May 31, 2003 and 2002, respectively.

Note 2. Significant Accounting Policies

Basis of Presentation

The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended August 31, 2002 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the three-month and nine-month periods ended May 31, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Principles of consolidation

The consolidated financial statements include the accounts of Apollo and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated 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.

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x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2003


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934