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, 2000
OR
[ ] 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.
[X] Yes [ ] No
SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK
AS OF JULY 10, 2000
Class A Common Stock, no par 74,685,096 Shares
Class B Common Stock, no par 511,484 Shares
1 <PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
PART I -- FINANCIAL INFORMATION ----
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . .12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .19
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . .19
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . .19
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .19
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
2 <PAGE>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
<TABLE>
Apollo Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
<CAPTION>
May 31, August 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets --
Cash and cash equivalents $ 51,150 $ 51,534
Restricted cash 37,612 25,798
Marketable securities 42,885 31,064
Receivables, net 73,587 75,664
Deferred tax assets, net 10,133 7,346
Other current assets 3,817 6,807
--------- ---------
Total current assets 219,184 198,213
Property and equipment, net 84,224 74,826
Marketable securities 8,576 8,507
Investment in IDL 11,888 10,701
Cost in excess of fair value of assets purchased, net 38,890 39,917
Other assets 13,918 16,178
--------- ---------
Total assets $376,680 $348,342
========= =========
Liabilities and Shareholders' Equity:
Current liabilities --
Current portion of long-term liabilities $ 295 $ 300
Accounts payable 13,494 12,105
Accrued liabilities 24,283 14,340
Income taxes payable 85 535
Student deposits and current portion of deferred revenue 89,464 81,507
--------- ---------
Total current liabilities 127,621 108,787
--------- ---------
Deferred tuition revenue, less current portion 1,063 2,139
--------- ---------
Long-term liabilities, less current portion 9,819 4,222
--------- ---------
Deferred tax liabilities, net 2,661 2,074
--------- ---------
Commitments and contingencies -- --
--------- ---------
Shareholders' equity --
Preferred stock, no par value, 1,000,000 shares authorized, none issued -- --
Class A common stock, no par value, 400,000,000 shares authorized;
74,728,000 and 76,628,000 issued and outstanding at May 31, 2000 and
August 31, 1999, respectively 103 102
Class B common stock, no par value, 3,000,000 shares authorized;
512,000 issued and outstanding at May 31, 2000 and August 31, 1999 1 1
Additional paid-in capital 96,475 99,190
Treasury stock, at cost, 3,814,000 and 1,876,000 shares at May 31, 2000
and August 31, 1999, respectively (88,984) (46,197)
Retained earnings 227,911 178,028
Accumulated other comprehensive income (loss) 10 (4)
--------- ---------
Total shareholders' equity 235,516 231,120
--------- ---------
Total liabilities and shareholders' equity $376,680 $348,342
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3 <PAGE>
<TABLE>
Apollo Group, Inc. and Subsidiaries
Consolidated Statement of Operations
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Tuition and other, net $167,591 $138,107 $444,989 $363,161
-------- -------- -------- --------
Costs and expenses:
Instructional costs and services 97,441 78,873 263,092 212,160
Selling and promotional 23,009 18,783 66,417 55,232
General and administrative 12,572 10,063 35,272 28,695
-------- -------- -------- --------
133,022 107,719 364,781 296,087
-------- -------- -------- --------
Operating income 34,569 30,388 80,208 67,074
Interest income, net 1,590 1,352 4,186 3,939
-------- -------- -------- --------
Income before income taxes 36,159 31,740 84,394 71,013
Provision for income taxes 15,016 12,780 34,511 28,360
-------- -------- -------- --------
Net income $ 21,143 $ 18,960 $ 49,883 $ 42,653
======== ======== ======== ========
Basic net income per share $ .28 $ .24 $ .66 $ .55
======== ======== ======== ========
Diluted net income per share $ .28 $ .24 $ .65 $ .54
======== ======== ======== ========
Basic weighted average shares
outstanding 75,273 77,963 75,938 77,831
Diluted weighted average shares
outstanding 76,126 78,914 76,700 79,089
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4 <PAGE>
<TABLE>
APOLLO GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income
(In thousands)
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income $21,143 $18,960 $49,883 $42,653
Other comprehensive income,
net of income taxes:
Currency translation gain (loss) 53 (15) 14 (18)
Unrealized gain on security 8
Reclassification adjustment for
gains included in net income (8) (8)
------- ------- ------- -------
Comprehensive income $21,188 $18,945 $49,897 $42,635
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5<PAGE>
<TABLE>
Apollo Group, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In thousands)
<CAPTION>
Nine Months Ended
May 31,
---------------------
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows provided by (used for) operating
activities:
Net income $ 49,883 $ 42,653
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,984 14,473
Provision for uncollectible accounts 6,163 7,368
Deferred income taxes (2,200) (459)
Tax benefits of stock options exercised 2,036 9,398
Decrease (increase) in assets:
Restricted cash (11,814) (5,350)
Receivables, net (4,086) (19,221)
Other assets 4,861 (5,617)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 10,882 (4,526)
Student deposits and deferred revenue 6,881 13,023
Other liabilities 5,692 379
-------- --------
Net cash provided by operating activities 88,282 52,121
-------- --------
Cash flows provided by (used for) investing
activities:
Net additions to property and equipment (27,296) (32,901)
Purchase of marketable securities (31,563) (7,351)
Maturities of marketable securities 19,385 12,335
Purchase of other assets (1,030) (1,835)
Proceeds from sale of land 648 1,622
Investment in IDL (1,187) 106
-------- --------
Net cash used for investing activities (41,043) (28,024)
-------- --------
Cash flows provided by (used for) financing
activities:
Purchase of common stock (52,655) (39,855)
Payments on long-term debt (100) (200)
Issuance of common stock 5,118 7,754
-------- --------
Net cash used for financing activities (47,637) (32,301)
-------- --------
Currency translation gain (loss) 14 (18)
-------- --------
Net decrease in cash and cash equivalents (384) (8,222)
Cash and cash equivalents at beginning of period 51,534 52,326
-------- --------
Cash and cash equivalents at end of period $ 51,150 $ 44,104
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
6 <PAGE>
Apollo Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. The interim consolidated financial statements include our accounts and
those of our wholly-owned subsidiaries, which include the University of
Phoenix, Inc., the Institute for Professional Development, Western
International University, Inc., the College for Financial Planning Institutes
Corporation, and Apollo Learning Group, Inc. 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 2000 and 1999 refer to the periods ended May 31, 2000 and 1999,
respectively.
2. 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, 1999 included in our Form 10-K as filed with
the Securities and Exchange Commission.
3. The results of operations for the three-month and nine-month periods
ended May 31, 2000 are not necessarily indicative of the results to be
expected for the entire fiscal year or any future period.
4. Our operations are aggregated into a single reportable segment based
upon their similar economic and operating characteristics. Our educational
operations are conducted in similar markets and produce similar economic
results. These operations provide higher education programs for working
adults. Our operations are also subject to a similar regulatory environment,
which includes licensing and accreditation.
5. During December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 - Revenue Recognition in Financial
Statements ("SAB No. 101"), which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with
the Securities and Exchange Commission. Apollo Group was originally required
to implement SAB No. 101 in the first quarter of its fiscal year ending
August 31, 2001; however, in June 2000, the Securities and Exchange
Commission amended SAB No. 101 to delay the required implementation date. As
a result, we must now implement the related guidelines in the fourth quarter
of our fiscal year ending August 31, 2001. Although the analysis of the
impact of SAB No. 101 has not been completed, it is not expected to have a
material effect on our results of operations.
6. On March 28, 2000, we filed a proxy statement with the Securities and
Exchange Commission relating to a special meeting of our shareholders. At
this special meeting, we will ask our shareholders to: 1) approve an
amendment to our articles of incorporation that would create a new class of
our common stock called University of Phoenix Online common stock; and 2)
adopt and amend our benefit plans. A date for this special meeting has not
yet been set. In addition, on March 28, 2000, we filed a registration
statement with the Securities and Exchange Commission relating to an offering
of our common stock, which is intended to "track" the economic performance of
University of Phoenix Online. This registration statement has not yet become
effective and is subject to the approval of our proposed amended and restated
7 <PAGE>
articles of incorporation at the special meeting by our Class A and Class B
shareholders. The public offering of University of Online common stock is
also subject to prevailing market and other conditions.
7. A reconciliation of the basic and diluted per share computations is as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended May 31,
(In thousands, except per share amounts)
(Unaudited)
----------------------------------------------------------
2000 1999
--------------------------- ----------------------------
Weighted Weighted
Avg. Per Share Avg. Per Share
Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income
per share $21,143 75,273 $ .28 $18,960 77,963 $ .24
===== =====
Effect of dilutive
securities:
Stock options 853 951
------- ------ ------- ------
Diluted net income
per share $21,143 76,126 $ .28 $18,960 78,914 $ .24
======= ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended May 31,
(In thousands, except per share amounts)
(Unaudited)
----------------------------------------------------------
2000 1999
--------------------------- ----------------------------
Weighted Weighted
Avg. Per Share Avg. Per Share
Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income
per share $49,883 75,938 $ .66 $42,653 77,831 $ .55
===== =====
Effect of dilutive
securities:
Stock options 762 1,258
------- ------ ------- ------
Diluted net income
per share $49,883 76,700 $ .65 $42,653 79,089 $ .54
======= ====== ===== ======= ====== =====
</TABLE>
8 <PAGE>
8. Certain amounts reported for the three months and nine months ended May
31, 1999 have been reclassified to conform to the 2000 presentation, having
no effect on net income.
9. In January 1998, the Department of Education Office of the Inspector
General ("OIG") began performing an audit of University of Phoenix's
administration of the Title IV Programs. The team previously presented
questions regarding our interpretation of the "12-hour rule," distance
education programs, and institutional refund obligations. We have reached an
agreement with the Department of Education. The agreement acknowledges no
admission that there were any issues of non-compliance or errors by us. To
bring this audit to closure and settle all outstanding issues prior to the
final OIG audit report, which was issued on March 31, 2000, we agreed to
modify University of Phoenix's study group attendance log to track the sites
of study group meetings and record the hours attended. We do not expect this
modification to have a negative impact on either University of Phoenix or its
students. Part of the agreement, dated March 27, 2000, reached with the
Department of Education requires that we pay the Department of Education
$6,000,000 as a negotiated settlement in full satisfaction of all monetary
findings arising under the final OIG audit report. This amount was reflected
in instructional costs and services in our third quarter results.
9 <PAGE>
Review by Independent Accountants
The financial information as of May 31, 2000 and for the three-month and
nine-month periods then ended, included in Part I pursuant to Rule 10-01 of
Regulation S-X, has been reviewed by PricewaterhouseCoopers LLP
("PricewaterhouseCoopers"), our independent accountants, in accordance with
standards established by the American Institute of Certified Public
Accountants. PricewaterhouseCoopers' report is included in this quarterly
report.
PricewaterhouseCoopers does not carry out any significant or additional
audit tests beyond those that would have been necessary if its report had not
been included in this quarterly report. Accordingly, such report is not a
"report" or "part of a registration statement" within the meaning of Sections
7 and 11 of the Securities Act of 1933 and the liability provisions of
Section 11 of such Act do not apply.
10 <PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Apollo Group, Inc.:
We have reviewed the accompanying consolidated balance sheet of Apollo Group,
Inc. and its subsidiaries as of May 31, 2000, and the related consolidated
statements of operations and of comprehensive income for the three-month and
nine-month periods ended May 31, 2000 and 1999 and the consolidated statement
of cash flows for the nine-month periods ended May 31, 2000 and 1999. These
financial statements are the responsibility of Apollo Group, Inc.'s
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements
for them to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of August 31, 1999, and the
related consolidated statements of operations, of comprehensive income, of
changes in shareholders' equity and of cash flows for the year then ended
(not presented herein), and in our report dated September 30, 1999 we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet information as of August 31, 1999, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
June 23, 2000
11 <PAGE>
PART I -- FINANCIAL INFORMATION
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes for the fiscal year
ended August 31, 1999 included in our Form 10-K as filed with the Securities
and Exchange Commission, together with the consolidated financial statements
and related notes for the three-month and nine-month periods ended May 31,
2000 included in Item 1.
This quarterly report on Form 10-Q contains forward-looking statements.
Forward-looking statements are inherently uncertain and subject to risks.
Such statements should be viewed with caution. Forward-looking statements in
this report include, but are not limited to: 1) results of operations are not
necessarily indicative of the results to be expected for the entire fiscal
year or any future period; 2) we do not expect SAB No. 101 to have a material
impact on our results of operations; 3)University of Phoenix Online common
stock is intended to "track" the economic performance of the online
operations of the University of Phoenix; 4) we may not be able to leverage
our instructional costs and services expenses to the same extent as we have
in the past; 5) we anticipate that our seasonal trends in the second and
fourth quarters will continue in the future; 6) total expected purchases of
property and equipment for the year ended August 31, 2000, are expected to
range from $35.0 million to $40.0 million; 7) restrictions on cash from Title
IV programs have not affected our ability to fund daily operations; 8) we do
not expect modifications to our study group attendance log to have a negative
impact on either University of Phoenix or its students.
Future events and actual results could differ materially from those set
forth in the forward-looking statements as a result of many factors.
Statements in the quarterly report, including "Notes to Consolidated
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," describe, factors among others, that
could contribute to or cause such differences. Additional factors that could
cause actual results to differ materially from those expressed in such
forward-looking statements include, without limitation: 1) new or revised
interpretations of regulatory requirements; 2) changes in or new
interpretations of other applicable laws, rules and regulations; 3) failure
to maintain or renew required regulatory approvals, accreditation or state
authorizations by University of Phoenix or certain Institute for Professional
Development client institutions; 4) failure to obtain authorizations from
states in which University of Phoenix does not currently provide degree
programs; 5) failure to obtain the North Central Association of Colleges and
Schools' approval for University of Phoenix to operate in new states; 6)
changes in student enrollment; 7) and other factors set forth in "Business"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in our annual report on Form 10-K for the year ended August
31, 1999. These forward-looking statements are based on estimates,
projections, beliefs, and assumptions of us and our management and speak only
as of the date made and are not guarantees of future performance. We
undertake no obligation to publicly update or revise any forward-looking
statements, or any facts, events or circumstances after the date hereof that
12 <PAGE>
may bear upon forward-looking statements. You are advised, however, to
consult any further disclosures we make in our reports filed with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth consolidated statement of operations data
of the Company expressed as a percentage of net revenues for the periods
indicated:
<CAPTION>
Three Months Nine Months
Ended May 31, Ended May 31,
----------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Tuition and other, net 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Costs and expenses:
Instructional costs and services 58.2 57.1 59.1 58.4
Selling and promotional 13.7 13.6 14.9 15.2
General and administrative 7.5 7.3 8.0 7.9
------ ------ ------ ------
79.4 78.0 82.0 81.5
------ ------ ------ ------
Operating income 20.6 22.0 18.0 18.5
Interest income, net 1.0 1.0 1.0 1.0
------ ------ ------ ------
Income before income taxes 21.6 23.0 19.0 19.5
Provision for income taxes 9.0 9.3 7.8 7.8
------ ------ ------ ------
Net income 12.6% 13.7% 11.2% 11.7%
====== ====== ====== ======
</TABLE>
13 <PAGE>
<TABLE>
The following table sets forth our consolidated statement of operations
data, expressed as a percentage of net revenues for the periods indicated.
These percentages exclude the $6.0 million charge to instructional costs and
services related to the Department of Education agreement:
<CAPTION>
Three Months Nine Months
Ended May 31, Ended May 31,
----------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Tuition and other, net 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Costs and expenses:
Instructional costs and services 54.6 57.1 57.8 58.4
Selling and promotional 13.7 13.6 14.9 15.2
General and administrative 7.5 7.3 8.0 7.9
------ ------ ------ ------
75.8 78.0 80.7 81.5
------ ------ ------ ------
Operating income 24.2 22.0 19.3 18.5
Interest income, net 1.0 1.0 1.0 1.0
------ ------ ------ ------
Income before income taxes 25.2 23.0 20.3 19.5
Provision for income taxes 10.5 9.3 8.3 7.8
------ ------ ------ ------
Net income 14.7% 13.7% 12.0% 11.7%
====== ====== ====== ======
</TABLE>
14 <PAGE>
THREE MONTHS ENDED MAY 31, 2000 (THIRD QUARTER OF 2000) COMPARED WITH THREE
MONTHS ENDED MAY 31, 1999 (THIRD QUARTER OF 1999)
Tuition and other net revenues increased by 21.3% to $167.6 million in
2000 from $138.1 million in 1999 due primarily to a 18.7% increase in average
degree student enrollments, and tuition price increases averaging four to
five percent (depending on the geographic area and program). Most of our
campuses, which include their respective learning centers, had increases in
tuition and other net revenues and average degree student enrollments from
1999 to 2000.
Tuition and other net revenues for the three months ended May 31, 2000
and 1999 consists primarily of $150.5 million and $121.8 million,
respectively, of net tuition revenues from students enrolled in degree
programs and $6.8 million and $6.8 million, respectively, of net tuition
revenues from students enrolled in non-degree programs. Average degree
student enrollments increased to 94,134 in 2000 from 79,284 in 1999.
Instructional costs and services increased by 15.9% to $91.4 million in
2000, excluding the $6.0 million charge related to the Department of
Education agreement, from $78.9 million in 1999 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 54.6% in 2000, excluding the $6.0 million charge
related to the Department of Education agreement, from 57.1% in 1999 due to
greater net revenues being spread over a proportionally lower increase in
instructional costs and services. We may not be able to leverage our costs
to the same extent as we face increased costs related to the expansion into
additional markets.
Selling and promotional expenses increased by 22.5% to $23.0 million in
2000 from $18.8 million in 1999 due primarily to additional advertising and
marketing. These expenses as a percentage of tuition and other net revenues
remained relatively consistent at 13.7% in 2000 and 13.6% in 1999.
General and administrative expenses increased by 24.9% to $12.6 million
in 2000 from $10.1 million in 1999 due primarily to increased employee
expenses related primarily to information services and depreciation related
to the implementation of information support systems. General and
administrative expenses as a percentage of tuition and other net revenues
remained relatively consistent at 7.5% in 2000 and 7.3% in 1999.
Net interest income was $1.6 million and $1.4 million in 2000 and 1999,
respectively. Interest expense was less than $90,000 for 2000 and 1999.
Our effective tax rate increased to 41.5% in 2000 from 40.3% in 1999.
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 $24.7 million in 2000, excluding the $6.0
million charge related to the Department of Education agreement, net of
taxes, from $19.0 million in 1999 due primarily to increased enrollments,
increased tuition rates, and improved utilization of instructional costs and
services expenses.
15 <PAGE>
NINE MONTHS ENDED MAY 31, 2000 COMPARED WITH NINE MONTHS ENDED MAY 31, 1999
Tuition and other net revenues increased by 22.5% to $445.0 million in
2000 from $363.2 million in 1999 due primarily to a 17.9% increase in average
degree student enrollments and tuition price increases averaging four to five
percent (depending on the geographic area and program). Most of our
campuses, which include their respective learning centers, had increases in
tuition and other net revenues and average degree student enrollments from
1999 to 2000.
Tuition and other net revenues for the nine months ended May 31, 2000
and 1999 consists primarily of $397.1 million and $320.0 million,
respectively, of net tuition revenues from students enrolled in degree
programs and $18.3 million and $18.8 million, respectively, of net tuition
revenues from students enrolled in non-degree programs. Average degree
student enrollments increased to 89,760 in 2000 from 76,148 in 1999.
Instructional costs and services increased by 21.2% to $257.1 million in
2000, excluding the $6.0 million charge related to the Department of
Education agreement, from $212.2 million in 1999 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 57.8% in 2000, excluding the $6.0 million charge
related to the Department of Education agreement, from 58.4% in 1999 due to
greater net revenues being spread over a proportionally lower increase in
instructional costs and services. We may not be able to leverage our costs
to the same extent as we face increased costs related to the expansion into
additional markets.
Selling and promotional expenses increased by 20.3% to $66.4 million in
2000 from $55.2 million in 1999 due primarily to additional advertising and
marketing. These expenses as a percentage of tuition and other net revenues
decreased to 14.9% in 2000 from 15.2% in 1999 due to greater net revenues
being spread over a proportionally lower increase in selling and promotional
expenses.
General and administrative expenses increased by 22.9% to $35.3 million
in 2000 from $28.7 million in 1999 due primarily to increased employee
expenses related primarily to information services and depreciation related
to the implementation of information support systems. General and
administrative expenses as a percentage of tuition and other net revenues
remained relatively consistent at 8.0% in 2000 and 7.9% in 1999.
Net interest income was $4.2 million and $3.9 million in 2000 and 1999,
respectively. Interest expense was less than $160,000 for 2000 and 1999.
Our effective tax rate increased to 40.9% in 2000 from 39.9% in 1999.
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 $53.4 million in 2000, excluding the $6.0
million charge related to the Department of Education agreement, net of
taxes, from $42.7 million in 1999 due primarily to increased enrollments,
increased tuition rates, and improved utilization of instructional costs and
services and selling and promotional expenses.
16 <PAGE>
SEASONALITY IN RESULTS OF OPERATIONS
We experience seasonality in our results of operations primarily as a
result of changes in the level of student enrollments. While we enroll
students throughout the year, second quarter (December to February) average
enrollments and related revenues generally are lower than other quarters due
to seasonal 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.
We typically experience an 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.
We anticipate that these seasonal trends in the second and fourth
quarters will continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to $88.3 million in
2000 from $52.1 million in 1999. The increase resulted primarily from
increased net income, an increase in depreciation and amortization expense, a
smaller increase in accounts receivable, and an increase in accounts payable
and accrued liabilities. The smaller increase in accounts receivable was
primarily attributable to increased efficiency of financial aid processing in
2000.
Capital expenditures decreased to $27.3 million in 2000 from $32.9
million in 1999 primarily due to higher expenditures in 1999 related to
leasehold improvements, as a result of more new campus openings, and due to
more computer lab installations in 1999 for our expansion of information
technology programs. Software development of our financial aid processing
system and our new human resource system also contributed to higher capital
expenditures in 1999. Total purchases of property and equipment for the year
ended August 31, 2000 are expected to range from $35.0 to $40.0 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, and increases in normal recurring capital
expenditures due to the overall increase in student and employee levels
resulting from the growth in the business.
At May 31, 2000, we had no outstanding borrowings on our $10.0 million
line of credit. Borrowings under the line of credit bear interest at LIBOR
plus .75% or prime at our selection. At May 31, 2000, availability under the
line of credit was reduced by outstanding letters of credit of $5.9 million.
The line of credit is renewable annually, and any amounts borrowed under the
line are payable upon its termination in February 2002.
Our Board of Directors has authorized a program allocating up to $150
million in Company funds to repurchase shares of its Class A Common Stock. As
of May 31, 2000, we had repurchased approximately 4,228,000 shares at a total
cost of approximately $98.9 million and reissued approximately 414,000 shares
under our stock option plans and employee stock purchase plan.
17 <PAGE>
The Department of Education 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 us through electronic funds transfer are held in a
separate cash account until certain conditions are satisfied. As of May 31,
2000, we had approximately $37.6 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 to 75 days from the date of collection. These
restrictions on cash have not affected our ability to fund daily operations.
In January 1998, the Department of Education Office of the Inspector
General ("OIG") began performing an audit of University of Phoenix's
administration of the Title IV Programs. The team previously presented
questions regarding our interpretation of the "12-hour rule," distance
education programs, and institutional refund obligations. We have reached an
agreement with the Department of Education. The agreement acknowledges no
admission that there were any issues of non-compliance or errors by us. To
bring this audit to closure and settle all outstanding issues prior to the
final OIG audit report, which was issued on March 31, 2000, we agreed to
modify University of Phoenix's study group attendance log to track the sites
of study group meetings and record the hours attended. We do not expect this
modification to have a negative impact on either University of Phoenix or its
students. Part of the agreement, dated March 27, 2000, reached with the
Department of Education requires that we pay the Department of Education
$6,000,000 as a negotiated settlement in full satisfaction of all monetary
findings arising under the final OIG audit report. This amount was reflected
in instructional costs and services in our third quarter results.
IMPACT OF INFLATION
Inflation has not had a significant impact on our historical operations.
Item 3 -- Quantitative and Qualitative Disclosures about Market Risk
Our portfolio of marketable securities includes numerous issuers,
varying types of securities and maturities. We intend to hold these
securities to maturity. The fair value of our 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. We do not hold or issue derivative financial instruments.
18 <PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . .Not Applicable
Item 2. Changes in Securities . . . . . . . . . . . . . . . .Not Applicable
Item 3. Defaults Upon Senior Securities . . . . . . . . . . .Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders .Not Applicable
Item 5. Other Information . . . . . . . . . . . . . . . . . .Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 15.1 Letter on Unaudited Interim Financial Information
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended May 31,
2000.
19 <PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APOLLO GROUP, INC.
(Registrant)
Date: July 14, 2000 By: /s/ Kenda B. Gonzales
----------------------------------
Kenda B. Gonzales
Chief Financial Officer
and Chief Accounting Officer
By: /s/ Todd S. Nelson
----------------------------------
Todd S. Nelson
President
20 <PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
PAGE
15.1 Letter on Unaudited Interim Financial Information Filed herewith
27 Financial Data Schedule Filed herewith
21 <PAGE>
