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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, 2004

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 x          NO o

AT JULY 9, 2004, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:

     
Apollo Education Group Class A common stock, no par value   174,926,000 Shares
Apollo Education Group Class B common stock, no par value   477,000 Shares
University of Phoenix Online common stock, no par value   15,664,000 Shares

 

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

         
    PAGE
       
    1  
    20  
    28  
    28  
       
    29  
    30  
    30  
    30  
    30  
    30  
    32  
    33  
EXHIBIT 15.1 – Letter in Lieu of Consent
        
EXHIBIT 15.2 – Letter in Lieu of Consent
        
EXHIBIT 31.1 – Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
        
EXHIBIT 31.2 – Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
        
EXHIBIT 32.1 – Certification of Chief Executive Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
        
EXHIBIT 32.2 – Certification of Chief Financial Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
        
EXHIBIT 99.1 – Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online
        
 EX-15.1
 EX-15.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-99.1

 

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements — Apollo Group, Inc.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

                 
    May 31,   August 31,
    2004
   2003
(Dollars in thousands)   (Unaudited)
Assets:
                
Current assets
                
Cash and cash equivalents
   $ 489,009     $ 416,452  
Restricted cash
     178,533       147,616  
Marketable securities
     323,538       235,962  
Receivables, net
     136,258       123,728  
Deferred tax assets, net
     9,841       9,098  
Income taxes receivable
             842  
Other current assets
     20,812       16,545  
 
    
 		      
 		  
Total current assets
     1,157,991       950,243  
Property and equipment, net
     169,884       119,057  
Marketable securities
     351,871       245,772  
Cost in excess of fair value of assets purchased, net
     37,096       37,096  
Deferred tax assets, net
     5,698       1,155  
Other assets (includes receivable from related party of $13,642 and $13,107 at May 31, 2004 and August 31, 2003, respectively)
     25,821       24,881  
 
    
 		      
 		  
Total assets
   $ 1,748,361     $ 1,378,204  
 
    
 		      
 		  
Liabilities and Shareholders’ Equity:
                
Current liabilities
                
Current portion of long-term liabilities
   $ 3,946     $ 3,231  
Accounts payable
     34,495       29,314  
Accrued liabilities
     68,503       49,525  
Income taxes payable
     26,520          
Student deposits and current portion of deferred revenue
     303,712       253,153  
 
    
 		      
 		  
Total current liabilities
     437,176       335,223  
Deferred tuition revenue, less current portion
     622       942  
Long-term liabilities, less current portion
     15,074       15,114  
 
    
 		      
 		  
Total liabilities
     452,872       351,279  
 
    
 		      
 		  
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; 175,978,000 and 175,286,000 issued and outstanding at May 31, 2004 and August 31, 2003, respectively
     103       103  
Apollo Education Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 issued and outstanding at May 31, 2004 and August 31, 2003
     1       1  
University of Phoenix Online nonvoting common stock, no par value, 400,000,000 shares authorized; 15,867,000 and 15,659,000 issued and outstanding at May 31, 2004 and August 31, 2003, respectively
                
Additional paid-in capital
     342,247       293,650  
Apollo Education Group Class A treasury stock, at cost, 1,411,000 and 2,103,000 shares at May 31, 2004 and August 31, 2003, respectively
     (47,759 )     (27,100 )
University of Phoenix Online treasury stock, at cost, 347,000 and 86,000 shares at May 31, 2004 and August 31, 2003, respectively
     (26,016 )     (4,601 )
Retained earnings
     1,027,306       765,196  
Accumulated other comprehensive loss
     (393 )     (324 )
 
    
 		      
 		  
Total shareholders’ equity
     1,295,489       1,026,925  
 
    
 		      
 		  
Total liabilities and shareholders’ equity
   $ 1,748,361     $ 1,378,204  
 
    
 		      
 		  

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

1

Table of Contents

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS

                                 
    For the Three Months Ended   For the Nine Months Ended
    May 31,
   May 31,
    2004
   2003
   2004
   2003
(In thousands, except per share amounts)           (Unaudited)        
Revenues:
                                
Tuition and other, net
   $ 496,999     $ 364,166     $ 1,305,670     $ 968,244  
 
    
 		      
 		      
 		      
 		  
Costs and expenses:
                                
Instructional costs and services
     196,026       159,345       552,017       444,697  
Selling and promotional
     103,287       70,990       272,316       195,801  
General and administrative
     22,849       17,015       63,544       49,864  
 
    
 		      
 		      
 		      
 		  
 
     322,162       247,350       887,877       690,362  
 
    
 		      
 		      
 		      
 		  
Income from operations
     174,837       116,816       417,793       277,882  
Interest income, net
     4,886       3,853       13,617       10,896  
 
    
 		      
 		      
 		      
 		  
Income before income taxes
     179,723       120,669       431,410       288,778  
Provision for income taxes
     70,387       46,412       169,300       112,146  
 
    
 		      
 		      
 		      
 		  
Net income
   $ 109,336     $ 74,257     $ 262,110     $ 176,632  
 
    
 		      
 		      
 		      
 		  
Net income attributed to:
                                
Apollo Education Group common stock
   $ 101,103     $ 69,816     $ 242,502     $ 166,193  
 
    
 		      
 		      
 		      
 		  
University of Phoenix Online common stock
   $ 8,233     $ 4,441     $ 19,608     $ 10,439  
 
    
 		      
 		      
 		      
 		  
Earnings per share attributed to:
                                
Apollo Education Group common stock:
                                
Basic net income per share
   $ 0.57     $ 0.40     $ 1.38     $ 0.95  
 
    
 		      
 		      
 		      
 		  
Diluted net income per share
   $ 0.56     $ 0.39     $ 1.35     $ 0.94  
 
    
 		      
 		      
 		      
 		  
Basic weighted average shares outstanding
     176,554       175,311       176,310       174,750  
 
    
 		      
 		      
 		      
 		  
Diluted weighted average shares outstanding
     179,360       177,931       179,004       177,375  
 
    
 		      
 		      
 		      
 		  
University of Phoenix Online common stock:
                                
Basic net income per share
   $ 0.51     $ 0.29     $ 1.23     $ 0.70  
 
    
 		      
 		      
 		      
 		  
Diluted net income per share
   $ 0.48     $ 0.27     $ 1.14     $ 0.64  
 
    
 		      
 		      
 		      
 		  
Basic weighted average shares outstanding
     15,987       15,446       15,917       14,998  
 
    
 		      
 		      
 		      
 		  
Diluted weighted average shares outstanding
     17,226       16,742       17,187       16,374  
 
    
 		      
 		      
 		      
 		  

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

2

Table of Contents

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

                                 
    For the Three Months Ended   For the Nine Months Ended
    May 31,
   May 31,
    2004
   2003
   2004
   2003
(In thousands)   (Unaudited)
Net income
   $ 109,336     $ 74,257     $ 262,110     $ 176,632  
Other comprehensive income:
                                
Currency translation gain (loss)
     82       (340 )     (69 )     (475 )
 
    
 		      
 		      
 		      
 		  
Comprehensive income
   $ 109,418     $ 73,917     $ 262,041     $ 176,157  
 
    
 		      
 		      
 		      
 		  

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

3

Table of Contents

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

                                                 
    Common Stock
                                    University of Phoenix
    Apollo Education Group
   Online
    Class A Nonvoting
   Class B Voting
   Nonvoting
            Stated           Stated           Stated
    Shares
   Value
   Shares
   Value
   Shares
   Value
(In thousands)                                                
Nine Months Ended May 31, 2003 (Unaudited)
                                                
Balance at August 31, 2002
     173,221       $103       484       $1       14,256       $—  
Stock issued under stock purchase plans
     73                               94          
Stock issued under stock option plans
     1,859                               1,307          
Tax benefits of stock options exercised
                                               
Treasury stock purchases
     (106 )                             (65 )        
Conversion of Apollo Education Group Class B common stock to Apollo Education Group Class A common stock
     6               (7 )                        
Currency translation adjustment
                                               
Net income
                                                
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Balance at May 31, 2003
     175,053     $ 103       477     $ 1       15,592     $ —  
 
    
 		      
 		      
 		      
 		      
 		      
 		  

     

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                                 
            Apollo   University                
            Education   of                
            Group   Phoenix           Accumulated    
    Additional   Class A   Online           Other   Total
    Paid-in   Treasury   Treasury   Retained   Comprehensive   Shareholders’
    Capital
   Stock
   Stock
   Earnings
   Income
   Equity
(In thousands)                                                
Nine Months Ended May 31, 2003
                                                
Balance at August 31, 2002
     $227,155       $(46,029 )     $(526 )     $518,186       $103       $698,993  
Stock issued under stock purchase plans
     4,433       828                               5,261  
Stock issued under stock option plans
     11,799       20,945       2,538                       35,282  
Tax benefits of stock options exercised
     39,730                                       39,730  
Treasury stock purchases
             (4,068 )     (2,012 )                     (6,080 )
Conversion of Apollo Education Group Class B common stock to Apollo Education Group Class A common stock
                                             —  
Currency translation adjustment
                                     (475 )     (475 )
Net income
                             176,632               176,632  
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Balance at May 31, 2003
   $ 283,117     $ (28,324 )   $ —     $ 694,818     $ (372 )   $ 949,343  
 
    
 		      
 		      
 		      
 		      
 		      
 		  
                                                 
    Common Stock
                                    University of Phoenix
    Apollo Education Group
   Online
    Class A Nonvoting
   Class B Voting
   Nonvoting
            Stated           Stated           Stated
    Shares
   Value
   Shares
   Value
   Shares
   Value
(In thousands)                                                
Nine Months Ended May 31, 2004 (Unaudited)
                                                
Balance at August 31, 2003
     175,286     $ 103       477     $ 1       15,659     $ —  
Stock issued under stock purchase plans
     57                               60          
Stock issued under stock option plans
     1,199                               593          
Tax benefits of stock options exercised
                                               
Treasury stock purchases
     (564 )                             (445 )        
Currency translation adjustment
                                               
Net income
                                                
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Balance at May 31, 2004
     175,978     $ 103       477     $ 1       15,867     $ —  
 
    
 		      
 		      
 		      
 		      
 		      
 		  

     

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                                 
            Apollo   University                
            Education   of                
            Group   Phoenix           Accumulated    
    Additional   Class A   Online           Other   Total
    Paid-in   Treasury   Treasury   Retained   Comprehensive   Shareholders’
    Capital
   Stock
   Stock
   Earnings
   Income
   Equity
(In thousands)                                                
Nine Months Ended May 31, 2004
                                                
Balance at August 31, 2003
   $ 293,650     $ (27,100 )   $ (4,601 )   $ 765,196     $ (324 )   $ 1,026,925  
Stock issued under stock purchase plans
     4,003       1,090       1,369                       6,462  
Stock issued under stock option plans
     8,257       21,287       9,898                       39,442  
Tax benefits of stock options exercised
     36,337                                       36,337  
Treasury stock purchases
             (43,036 )     (32,682 )                     (75,718 )
Currency translation adjustment
                                     (69 )     (69 )
Net income
                             262,110               262,110  
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Balance at May 31, 2004
   $ 342,247     $ (47,759 )   $ (26,016 )   $ 1,027,306     $ (393 )   $ 1,295,489  
 
    
 		      
 		      
 		      
 		      
 		      
 		  

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

4

Table of Contents

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

                 
    For the Nine Months Ended
    May 31,
    2004
   2003
(In thousands)   (Unaudited)
Cash flows provided by (used for) operating activities:
                
Net income
   $ 262,110     $ 176,632  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
     32,511       29,585  
Amortization of investment premiums
     4,640       3,858  
Provision for uncollectible accounts
     19,490       15,079  
Deferred income taxes
     (5,286 )     (1,322 )
Tax benefits of stock options exercised
     36,337       39,730  
Increase in assets:
                
Restricted cash
     (30,917 )     (35,225 )
Receivables
     (32,020 )     (30,841 )
Other assets
     (4,190 )     (1,507 )
Increase in liabilities:
                
Accounts payable and accrued liabilities
     50,679       5,021  
Student deposits and deferred revenue
     50,239       45,344  
Other liabilities
     2,744       2,282  
 
    
 		      
 		  
Net cash provided by operating activities
     386,337       248,636  
 
    
 		      
 		  
Cash flows provided by (used for) investing activities:
                
Net additions to property and equipment
     (51,655 )     (41,151 )
Purchase of land and buildings related to future Online expansion
     (32,080 )        
Purchase of marketable securities
     (422,364 )     (324,959 )
Maturities of marketable securities
     224,049       213,498  
Purchase of other assets
     (1,847 )     (1,757 )
 
    
 		      
 		  
Net cash used for investing activities
     (283,897 )     (154,369 )