<PAGE> 1
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF APOLLO GROUP, INC.
The following selected financial and operating data of Apollo Group, Inc.
are qualified by reference to and should be read in conjunction with the
financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The statement of
operations data for the years ended August 31, 2000, 1999, and 1998 and the
balance sheet data as of August 31, 2000 and 1999 are derived from the audited
consolidated financial statements of Apollo Group, Inc. Diluted net income per
share and diluted weighted average shares outstanding have been retroactively
restated for stock splits.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Tuition and other, net............ $609,997 $498,846 $384,877 $279,195 $211,247
-------- -------- -------- -------- --------
Costs and expenses:
Instructional costs and
services....................... 352,874 287,582 223,525 161,996 124,664
Selling and promotional........... 96,491 79,143 57,458 42,097 33,969
General and administrative........ 46,555 39,368 33,708 24,295 20,568
-------- -------- -------- -------- --------
495,920 406,093 314,691 228,388 179,201
-------- -------- -------- -------- --------
Income from operations.............. 114,077 92,753 70,186 50,807 32,046
Interest income, net................ 6,228 5,229 6,086 4,174 2,951
-------- -------- -------- -------- --------
Income before income taxes.......... 120,305 97,982 76,272 54,981 34,997
Provision for income taxes.......... 49,114 38,977 29,975 21,602 13,605
-------- -------- -------- -------- --------
Net income.......................... $ 71,191 $ 59,005 $ 46,297 $ 33,379 $ 21,392
======== ======== ======== ======== ========
Diluted net income per share........ $ 0.93 $ 0.75 $ 0.59 $ 0.43 $ 0.28
======== ======== ======== ======== ========
Diluted weighted average shares
outstanding....................... 76,629 78,834 79,086 77,726 76,763
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and
restricted cash................... $ 95,593 $ 77,332 $ 75,039 $ 78,855 $ 63,267
Marketable securities............... 64,246 39,571 45,467 41,429 13,273
-------- -------- -------- -------- --------
Total cash and marketable
securities........................ $159,839 $116,903 $120,506 $120,284 $ 76,540
======== ======== ======== ======== ========
Total assets........................ $404,790 $348,342 $305,160 $194,910 $137,850
======== ======== ======== ======== ========
Current liabilities................. $131,089 $108,787 $ 95,574 $ 67,394 $ 54,804
Long-term liabilities............... 12,493 8,435 9,778 3,199 2,432
Shareholders' equity................ 261,208 231,120 199,808 124,317 80,614
-------- -------- -------- -------- --------
Total liabilities and shareholders'
equity............................ $404,790 $348,342 $305,160 $194,910 $137,850
======== ======== ======== ======== ========
OPERATING STATISTICS:
Degree enrollments at end of year... 100,900 86,800 71,400 56,200 46,900
======== ======== ======== ======== ========
Number of locations:
Campuses.......................... 54 49 42 35 35
Learning centers.................. 96 80 71 60 49
-------- -------- -------- -------- --------
Total number of locations........... 150 129 113 95 84
======== ======== ======== ======== ========
</TABLE>
We did not pay any cash dividends on our common stock during any of the
periods set forth in the table above.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF APOLLO GROUP, INC.
This Annual Report, including the "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Apollo Group, Inc." and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of University of Phoenix Online" contain 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, statements such as: 1) we believe that
our cash from operations along with our existing cash balances and availability
under our line of credit will be adequate to fund our capital and operating
needs for the next 12 to 18 months; 2) although we believe that the OIG audit
will be resolved without any negative impact on Institute for Professional
Development, as with any program review or audit, no assurance can be given as
to the final outcome since the matters are not yet resolved; 3) total purchases
of property and equipment for us for the year ended August 31, 2001, are
expected to range from $38.0 to $42.0 million; 4) 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; 5) total purchases of property and
equipment for University of Phoenix Online for the year ended August 31, 2001,
are expected to range from $4.0 to $6.0 million; 6) we anticipate that seasonal
trends in the second and fourth quarters will continue in the future.
Future events and actual results could differ materially from those set
forth in the forward-looking statements as a results of many factors. Statements
in this Annual 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; and 7) other factors
set forth in this Annual Report. 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
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.
BACKGROUND AND OVERVIEW
Our tuition and other revenues, net of student discounts, have increased to
$610.0 million in 2000 from $211.2 million in 1996. Net income has increased to
$71.2 million in 2000 from $21.4 million in 1996. At August 31, 2000, we had
approximately 100,900 degree seeking students.
From September 1996 through August 2000, University of Phoenix opened 14
campuses. Start-up losses for new campuses in new markets average $700,000 to
$900,000 per site. These start-up losses are incurred over a 17 to 20 month
period, at which time the enrollments at these new campuses average 200 to 300
students. Losses for establishing a learning center in a market currently served
by University of Phoenix average $200,000. Institute for Professional
Development established operations at five campuses with client institutions.
Start-up losses for new contract sites average from $300,000 to $400,000 per
site over a 21 to 24 month period.
Approximately 93% of our tuition and other net revenues in 2000 consist of
tuition revenues. Tuition revenue is recognized on a weekly basis, pro rata over
the period of instruction. Our tuition and other net revenues also include sales
of textbooks and other education-related products, application fees, other
student fees, and other income. Our tuition and other net revenues vary from
period to period based on several factors
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<PAGE> 3
that include (1) the aggregate number of students attending classes, (2) the
number of classes held during the period, and (3) the weighted average tuition
price per credit hour (weighted by program and location). University of Phoenix
tuition revenues currently represent approximately 89% of consolidated tuition
revenues. Institute for Professional Development tuition revenues consist of the
contractual share of tuition revenues from students enrolled in programs at its
client institutions. Institute for Professional Development's contracts with its
respective client institutions generally have terms of five to ten years with
provisions for renewal.
We categorize our expenses as instructional costs and services, selling and
promotional, and general and administrative. Instructional costs and services at
University of Phoenix, Western International University, and the College for
Financial Planning consist primarily of costs related to the delivery and
administration of our educational programs that include faculty compensation,
administrative salaries for departments that provide service directly to the
students, financial aid processing costs, the costs of educational materials
sold, facility leases and other occupancy costs, bad debt expense, and
depreciation and amortization of property and equipment. University of Phoenix
and Western International University faculty members are paid for one course
offering at a time. All classroom facilities are leased or, in some cases, are
provided by the students' employers at no charge to us. Instructional costs and
services at Institute for Professional Development consist primarily of program
administration, student services, and classroom lease expense. Most of the other
instructional costs for Institute for Professional Development-assisted
programs, including faculty, financial aid processing, and other administrative
salaries, are the responsibility of its client institutions.
Selling and promotional costs consist primarily of compensation for
enrollment advisors and corporate marketing, advertising costs, production of
marketing materials, and other costs related to selling and promotional
functions.
General and administrative costs consist primarily of administrative
salaries, occupancy costs, depreciation and amortization, and other related
costs for departments such as executive management, information systems,
corporate accounting, human resources, and other departments that do not provide
direct services to our students. To the extent possible, we centralize these
services to avoid duplication of effort.
RESULTS OF OPERATIONS
The following table sets forth our consolidated statement of operations
data expressed as a percentage of tuition and other net revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
REVENUES:
Tuition and other, net.................................... 100.0% 100.0% 100.0%
----- ----- -----
COSTS AND EXPENSES:
Instructional costs and services.......................... 57.8 57.6 58.1
Selling and promotional................................... 15.8 15.9 14.9
General and administrative................................ 7.7 7.9 8.8
----- ----- -----
81.3 81.4 81.8
----- ----- -----
Income from operations...................................... 18.7 18.6 18.2
Interest income, net........................................ 1.0 1.0 1.6
----- ----- -----
Income before income taxes.................................. 19.7 19.6 19.8
Less provision for income taxes............................. 8.0 7.8 7.8
----- ----- -----
Net income.................................................. 11.7% 11.8% 12.0%
===== ===== =====
</TABLE>
YEAR ENDED AUGUST 31, 2000, COMPARED WITH THE YEAR ENDED AUGUST 31, 1999
Tuition and other net revenues increased by 22.3% to $610.0 million in 2000
from $498.8 million in 1999 primarily due to a 16.1% increase in average
full-time equivalent degree student enrollments and tuition price
3
<PAGE> 4
increases averaging four to five percent (depending on the geographic area and
program) at University of Phoenix. Most of our University of Phoenix campuses,
which include their respective learning centers, had increases in net revenues
and average full-time equivalent degree student enrollments from 1999 to 2000.
Tuition and other net revenues for the year ended August 31, 2000 and 1999,
consist primarily of $540.4 million and $442.0 million, respectively, of net
tuition revenues from students enrolled in degree programs and $29.1 million and
$24.8 million, respectively, of net tuition revenues from students enrolled in
non-degree programs.
Instructional costs and services increased by 22.7% to $352.9 million in
2000 from $287.6 million in 1999 due primarily to the direct costs necessary to
support the increase in degree student enrollments and the $6.0 million charge
related to the U.S. Department of Education agreement. 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 increased to 57.8% in
2000 from 57.6% in 1999 due to the $6.0 million charge related to the U.S.
Department of Education agreement. Excluding the $6.0 million charge,
instructional costs and services as a percentage of tuition and other net
revenues would have decreased to 56.9% in 2000 from 57.6% 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 recurring costs to the
same extent as we face increased costs related to the expansion into additional
markets.
Selling and promotional expenses increased by 21.9% to $96.5 million in
2000 from $79.1 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 15.8% in 2000 from 15.9% in 1999.
General and administrative expenses increased by 18.3% to $46.6 million in
2000 from $39.4 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 7.7% in 2000 from 7.9% in 1999.
Net interest income was $6.2 million and $5.2 million in 2000 and 1999,
respectively. Net interest income increased in 2000 due primarily to higher
average cash balances. Interest expense was $431,000 and $57,000 in 2000 and
1999, respectively.
Our effective tax rate increased to 40.8% in 2000 from 39.8% in 1999. This
increase is due primarily to lower tax-exempt interest income and higher state
taxes in new tax jurisdictions.
Net income increased to $71.2 million in 2000 from $59.0 million in 1999
due primarily to increased enrollments, increased tuition rates, and improved
utilization in selling and promotional and general and administrative costs.
YEAR ENDED AUGUST 31, 1999, COMPARED WITH THE YEAR ENDED AUGUST 31, 1998
Tuition and other net revenues increased by 29.6% to $498.8 million in 1999
from $384.9 million in 1998 due primarily to a 24.0% increase in average
full-time equivalent degree student enrollments, tuition price increases
averaging four to six percent (depending on the geographic area and program),
and a higher concentration of enrollments at locations that charge a higher rate
per credit hour at University of Phoenix. Most of our University of Phoenix
campuses, which include their respective learning centers, had increases in net
revenues and average full-time equivalent degree student enrollments from 1998
to 1999.
Tuition and other net revenues for the year ended August 31, 1999 and 1998,
consist primarily of $442.0 million and $334.2 million, respectively, of net
tuition revenues from students enrolled in degree programs and $24.8 million and
$23.1 million, respectively, of net tuition revenues from students enrolled in
non-degree programs.
Instructional costs and services increased by 28.7% to $287.6 million in
1999 from $223.5 million in 1998 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
4
<PAGE> 5
decreased to 57.6% in 1999 from 58.1% in 1998 due primarily to the exclusion of
certain enrollment staff salaries and greater tuition and other net revenues
being spread over the fixed costs related to centralized student services.
Selling and promotional expenses increased by 37.7% to $79.1 million in
1999 from $57.5 million in 1998 due primarily to the inclusion of certain
enrollment staff salaries, additional advertising and marketing related to six
new University of Phoenix campuses opened during the year, and increased
advertising and marketing for distance education. These expenses as a percentage
of net revenues increased to 15.9% in 1999 from 14.9% in 1998 due to an increase
in the number of campuses opened in new markets in the last two years and the
inclusion of certain enrollment staff salaries.
General and administrative expenses increased by 16.8% to $39.4 million in
1999 from $33.7 million in 1998 due primarily to costs required to support the
increased number of campuses and learning centers, increased information
services expenditures, and overall increases in general and administrative
salaries. General and administrative expenses as a percentage of tuition and
other net revenues decreased to 7.9% in 1999 from 8.8% in 1998 due primarily to
higher tuition and other net revenues being spread over the fixed costs related
to various centralized functions such as information services, corporate
accounting, and human resources.
Net interest income was $5.2 million and $6.1 million in 1999 and 1998,
respectively. Net interest income decreased in 1999 due primarily to lower
average cash balances as a result of stock repurchases and lower interest rates
in effect during 1999. Interest expense was $57,000 and $119,000 in 1999 and
1998, respectively.
Our effective tax rate increased to 39.8% in 1999 from 39.3% in 1998. 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 $59.0 million in 1999 from $46.3 million in 1998
due primarily to increased enrollments, increased tuition rates, and improved
utilization in instructional costs and services and general and administrative
costs.
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 full-time
equivalent enrollments and related revenues generally are lower than other
quarters due to the holiday 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 experience a seasonal 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 $118.1 million in
2000 from $75.6 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 $34.8 million in 2000 from $44.7 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
5
<PAGE> 6
contributed to higher capital expenditures in 1999. Total purchases of property
and equipment for the year ended August 31, 2001, are expected to range from
$38.0 to $42.0 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 August 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 election. At August 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 authorized a program allocating up to $150 million
of our funds to repurchase shares of Apollo Education Group Class A common
stock. As of August 31, 2000, we had repurchased approximately 4,379,000 shares
at a total cost of approximately $103.2 million.
We believe that our cash from operations along with our existing cash
balances and availability under our line of credit will be adequate to fund our
capital and operating needs for the next 12 to 18 months.
On March 24, 2000, our Board of Directors 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. Our other businesses and our 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. This
stock represented a 10.8% interest in University of Phoenix Online with Apollo
Education Group retaining the remaining 89.2% interest in University of Phoenix
Online.
The U.S. Department of Education requires that Title IV Program funds
collected in advance of student billings be kept in a separate cash or cash
equivalent account until the students are billed for that portion of their
program. In addition, all Title IV Program funds received by us through
electronic funds transfer are subject to certain holding period restrictions.
These funds generally remain in these separate accounts for an average of 60-75
days from receipt. As of August 31, 2000, we had approximately $35.7 million in
these separate accounts, which are reflected in the Consolidated Balance Sheet
as restricted cash, to comply with these requirements. These restrictions on
cash have not affected our ability to fund daily operations.
The Title IV Regulations, as revised, require all higher education
institutions to meet a minimum composite score to be deemed financially
responsible by the U.S. Department of Education. If the minimum composite score
of 1.0 is not met, an institution would fall under alternative standards and may
lose its eligibility to participate in Title IV Programs. As of August 31, 2000,
University of Phoenix's and Western International University's composite scores
were 2.6 and 3.0, respectively. These requirements apply separately to
University of Phoenix and Western International University and to each of the
respective Institute for Professional Development client institutions, but not
to us on a consolidated basis.
In January 1998, the U.S. 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 University of Phoenix's interpretation of the "12-hour rule," distance
education programs, and institutional refund obligations. University of Phoenix
reached an agreement with the U.S. Department of Education which acknowledges no
admission that there were any issues of non-compliance or errors by University
of Phoenix. To bring this audit to closure and settle all outstanding issues
prior to the final OIG report, which was issued on March 31, 2000, University of
Phoenix agreed to modify its physical campus learning team attendance log to
track the sites of learning team meetings and record the hours attended. This
modification is not expected to have a negative impact on either University of
Phoenix or its students. This modification does not require any change to
University of Phoenix Online's learning team attendance log. Part of the
agreement, dated March 27, 2000, reached with the U.S. Department of Education
requires University of Phoenix to pay the U.S. Department of Education $6.0
million as a negotiated settlement in full satisfaction of all monetary findings
arising under the final OIG audit report. This amount was reflected in
instructional
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<PAGE> 7
costs and services in our third quarter 2000 results. $1.5 million of this
amount was paid in 2000 with the remaining $4.5 million due in 2003.
The OIG is currently auditing the administration of the federal student
financial assistance programs in connection with educational programs provided
pursuant to contractual arrangements between Institute for Professional
Development and certain of its client institutions. To date, OIG has not issued
any draft reports. Although we believe that the OIG audits will be resolved
without any material change in Institute for Professional Development's business
strategy, as with any program review or audit, no assurance can be given as to
the final outcome since the matters are not yet resolved. Liability to us, if
any, from the final audit results will be recorded as an expense.
IMPACT OF INFLATION
Inflation has not had a significant impact on our historical operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our portfolio of marketable securities includes numerous issuers, varying
types of securities, and varying 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.
7
<PAGE> 8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Apollo Group, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of comprehensive income, of changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of Apollo Group, Inc. and its subsidiaries at August 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended August 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of Apollo Group, Inc.'s management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
September 29, 2000
8
<PAGE> 9
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS:
CURRENT ASSETS
Cash and cash equivalents................................. $ 59,912 $ 51,534
Restricted cash........................................... 35,681 25,798
Marketable securities..................................... 58,226 31,064
Receivables, net.......................................... 78,933 75,664
Deferred tax assets, net.................................. 8,267 7,346
Other current assets...................................... 5,888 6,807
-------- --------
TOTAL CURRENT ASSETS........................................ 246,907 198,213
Property and equipment, net................................. 87,833 77,504
Marketable securities....................................... 6,020 8,507
Investment in IDL........................................... 11,888 10,701
Cost in excess of fair value of assets purchased, net....... 38,548 39,917
Other assets................................................ 13,594 13,500
-------- --------
TOTAL ASSETS................................................ $404,790 $348,342
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES
Current portion of long-term liabilities.................. $ 450 $ 300
Accounts payable.......................................... 12,960 12,105
Accrued liabilities....................................... 22,297 14,340
Income taxes payable...................................... 365 535
Student deposits and current portion of deferred
revenue................................................ 95,017 81,507
-------- --------
TOTAL CURRENT LIABILITIES................................... 131,089 108,787
Deferred tuition revenue, less current portion.............. 1,295 2,139
Long-term liabilities, less current portion................. 9,973 4,222
Deferred tax liabilities, net............................... 1,225 2,074
-------- --------
TOTAL LIABILITIES........................................... 143,582 117,222
-------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares
authorized; none issued................................
Class A nonvoting common stock, no par value, 400,000,000
shares authorized; 74,998,000 and 76,628,000 issued and
outstanding at August 31, 2000 and August 31, 1999,
respectively........................................... 103 102
Class B voting common stock, no par value, 3,000,000
shares authorized; 512,000 issued and outstanding at
August 31, 2000 and August 31, 1999.................... 1 1
Additional paid-in capital................................ 95,259 99,190
Treasury stock, at cost, 4,378,000 and 1,876,000 shares at
August 31, 2000 and August 31, 1999, respectively...... (83,353) (46,197)
Retained earnings......................................... 249,219 178,028
Accumulated other comprehensive loss...................... (21) (4)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 261,208 231,120
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $404,790 $348,342
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE> 10
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Tuition and other, net................................... $609,997 $498,846 $384,877
-------- -------- --------
COSTS AND EXPENSES:
Instructional costs and services......................... 352,874 287,582 223,525
Selling and promotional.................................. 96,491 79,143 57,458
General and administrative............................... 46,555 39,368 33,708
-------- -------- --------
495,920 406,093 314,691
-------- -------- --------
Income from operations..................................... 114,077 92,753 70,186
Interest income, net....................................... 6,228 5,229 6,086
-------- -------- --------
Income before income taxes................................. 120,305 97,982 76,272
Provision for income taxes................................. 49,114 38,977 29,975
-------- -------- --------
Net income................................................. $ 71,191 $ 59,005 $ 46,297
======== ======== ========
Basic net income per share................................. $ 0.94 $ 0.76 $ 0.60
======== ======== ========
Diluted net income per share............................... $ 0.93 $ 0.75 $ 0.59
======== ======== ========
Basic weighted average shares outstanding.................. 75,783 77,683 77,245
======== ======== ========
Diluted weighted average shares outstanding................ 76,629 78,834 79,086
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE> 11
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
NET INCOME.................................................. $71,191 $59,005 $46,297
Other comprehensive income, net of income taxes:
Currency translation gain (loss).......................... (17) (10) 3
Unrealized gain on security............................... 8
Reclassification adjustment for gains included in net
income................................................. (8)
------- ------- -------
Comprehensive income........................................ $71,174 $58,995 $46,300
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 12
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------
CLASS A CLASS B
NONVOTING VOTING
--------------- --------------- ADDITIONAL
STATED STATED PAID-IN TREASURY RETAINED
SHARES VALUE SHARES VALUE CAPITAL STOCK EARNINGS
------ ------ ------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31,
1997..................... 50,227 $ 66 548 $1 $51,521 $ -- $ 72,726
Stock issued for College
acquisition.............. 445 15,944
Stock issued under stock
purchase plan............ 75 2,457
Stock issued under stock
option plans............. 475 1 3,542
Exchange Class A shares for
Class B shares........... 36 (36)
Tax benefits of stock
options exercised........ 7,249
3-for-2 stock split........ 25,854 34 (34)
Fractional shares paid
out...................... (2)
Other comprehensive
income...................
Net income................. 46,297
------ ---- --- -- ------- -------- --------
BALANCE AT AUGUST 31,
1998..................... 77,112 101 512 1 80,677 -- 119,023
Stock issued under stock
purchase plan............ 159 3,374
Stock issued under stock
option plans............. 1,233 1 5,456
Tax benefits of stock
options exercised........ 9,683
Treasury stock purchase.... (1,876) (46,197)
Other comprehensive
income...................
Net income................. 59,005
------ ---- --- -- ------- -------- --------
BALANCE AT AUGUST 31,
1999..................... 76,628 102 512 1 99,190 (46,197) 178,028
Stock issued under stock
purchase plan............ 182 (952) 4,325
Stock issued under stock
option plans............. 691 1 (8,594) 15,513
Tax benefits of stock
options exercised........ 5,615
Treasury stock purchase.... (2,503) (56,994)
Other comprehensive
income...................
Net income................. 71,191
------ ---- --- -- ------- -------- --------
BALANCE AT AUGUST 31,
2000..................... 74,998 $103 512 $1 $95,259 $(83,353) $249,219
====== ==== === == ======= ======== ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE SHAREHOLDERS'
INCOME EQUITY
------------- -------------
<S> <C> <C>
BALANCE AT AUGUST 31,
1997..................... $ 3 $124,317
Stock issued for College
acquisition.............. 15,944
Stock issued under stock
purchase plan............ 2,457
Stock issued under stock
option plans............. 3,543
Exchange Class A shares for
Class B shares........... --
Tax benefits of stock
options exercised........ 7,249
3-for-2 stock split........ --
Fractional shares paid
out...................... (2)
Other comprehensive
income................... 3 3
Net income................. 46,297
---- --------
BALANCE AT AUGUST 31,
1998..................... 6 199,808
Stock issued under stock
purchase plan............ 3,374
Stock issued under stock
option plans............. 5,457
Tax benefits of stock
options exercised........ 9,683
Treasury stock purchase.... (46,197)
Other comprehensive
income................... (10) (10)
Net income................. 59,005
---- --------
BALANCE AT AUGUST 31,
1999..................... (4) 231,120
Stock issued under stock
purchase plan............ 3,373
Stock issued under stock
option plans............. 6,920
Tax benefits of stock
options exercised........ 5,615
Treasury stock purchase.... (56,994)
Other comprehensive
income................... (17) (17)
Net income................. 71,191
---- --------
BALANCE AT AUGUST 31,
2000..................... $(21) $261,208
==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 13
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income................................................. $ 71,191 $ 59,005 $ 46,297
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 27,368 20,588 12,786
Provision for uncollectible accounts..................... 7,785 6,906 5,479
Deferred income taxes.................................... (1,770) (505) (2,599)
Tax benefits of stock options exercised.................. 5,615 9,683 7,249
Decrease (increase) in assets:
Restricted cash....................................... (9,883) (3,085) (2,786)
Receivables, net...................................... (11,054) (21,288) (29,733)
Other assets.......................................... 1,540 (5,902) (2,491)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities.............. 8,642 (5,022) 9,542
Student deposits and deferred revenue................. 12,666 15,815 12,955
Other liabilities..................................... 6,001 (633) 192
-------- -------- --------
Net cash provided by operating activities.................. 118,101 75,562 56,891
-------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Net additions to property and equipment.................... (34,830) (44,732) (30,855)
Purchase of marketable securities.......................... (63,285) (24,644) (43,277)
Maturities of marketable securities........................ 38,294 29,922 38,556
Purchase of other assets................................... (2,894) (3,642) (3,685)
Proceeds from sale of land................................. 997 4,212
Investment in IDL.......................................... (1,187) 106 (10,807)
Cash paid for acquisition, net of cash acquired............ (19,378)
-------- -------- --------
Net cash used for investing activities..................... (62,905) (38,778) (69,446)
-------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Purchase of common stock................................... (56,994) (46,197)
Payments on long-term debt................................. (100) (200) (50)
Issuance of common stock................................... 10,293 8,831 6,000
-------- -------- --------
Net cash provided by (used for) financing activities....... (46,801) (37,566) 5,950
-------- -------- --------
Currency translation gain (loss)........................... (17) (10) 3
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 8,378 (792) (6,602)
Cash and cash equivalents at beginning of year............. 51,534 52,326 58,928
-------- -------- --------
Cash and cash equivalents at end of year................... $ 59,912 $ 51,534 $ 52,326
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes............................................. $ 46,635 $ 30,224 $ 24,235
Interest................................................. $ 12 $ 48 $ 9
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 14
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Apollo Group, Inc. ("Apollo" or the "Company"), through its wholly-owned
subsidiaries, the University of Phoenix, Inc. ("UOP"), the 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.
UOP is a regionally accredited, private institution of higher education
offering associates, bachelors, masters, and doctoral degree programs in
business, management, computer information systems, education, and health care.
UOP has 29 physical campuses and 67 learning centers located in Arizona,
California, Colorado, Florida, Hawaii, Louisiana, Maryland, Michigan, Nevada,
New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Utah, Washington, Puerto Rico,
and Vancouver, British Columbia. UOP also offers its educational programs
worldwide through University of Phoenix Online, its computerized educational
delivery system. UOP is accredited by the Commission on Institutions of Higher
Education of the North Central Association of Colleges and Schools ("NCA").
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 27 learning centers in 22 states.
The College, located in Denver, Colorado, was acquired in September 1997
and provides financial planning education programs, as well as a regionally
accredited graduate degree program in financial planning.
WIU, which is accredited by NCA, currently offers undergraduate and
graduate degree programs in Phoenix, Chandler, 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 UOP. 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. This stock
represented a 10.8% interest in that business with Apollo Education Group
retaining the remaining 89.2% interest in University of Phoenix Online.
The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 2000, 1999, and 1998 relate to the
fiscal years ended August 31, 2000, 1999, and 1998, respectively.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
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.
RESTRICTED CASH. The U.S. Department of Education requires that Title IV
Program funds collected in advance of student billings be kept in a separate
cash or cash equivalent account until the students are billed for that portion
of their program. In addition, all Title IV Program funds received by the
Company through electronic funds transfer are subject to certain holding period
restrictions. These funds generally remain in these separate accounts for an
average of 60-75 days from date of receipt. Restricted cash is excluded from
cash and cash equivalents in the Consolidated Statement of Cash Flows until the
cash is transferred from these restricted accounts to the Company's operating
accounts. The Company's restricted cash is invested
14
<PAGE> 15
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
primarily in U.S. agency-backed securities and auction market preferred stock
with maturities of ninety days or less.
INVESTMENTS. Investments in marketable securities such as municipal bonds
and U.S. agency obligations are stated at amortized cost, which approximates
fair value. It is the Company's intention to hold its marketable securities
until maturity. Investments in joint ventures and other long-term investments
are carried at cost.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost less
accumulated depreciation. The Company capitalizes the cost of software used for
internal operations once technological feasibility of the software has been
demonstrated. Such costs consist primarily of custom-developed and packaged
software and the direct labor costs of internally developed software.
Depreciation is provided on all furniture, equipment, and related software using
the straight-line method over the estimated useful lives of the related assets
which range from three to seven years, except software which is depreciated over
three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the related assets. Maintenance and repairs are expensed as incurred.
REVENUES, RECEIVABLES, AND RELATED LIABILITIES. The Company's educational
programs range in length from one-day seminars to degree programs lasting up to
four years. Students in the Company's degree programs generally enroll in a
program of study that encompasses a series of five to six week courses that are
taken consecutively over the length of the program. Students are billed on a
course-by-course basis when the student first attends a session, resulting in
the recording of a receivable from the student and deferred tuition revenue in
the amount of the billing. The related revenue for each course, including that
portion of tuition revenues to which the Company is entitled under the terms of
its revenue-sharing contracts with IPD client institutions, is recognized on a
pro rata basis over the period of instruction for each course. Seminars,
continuing education programs, and many of the College's non-degree programs are
usually billed in one installment with the related revenue also recognized on a
pro rata basis over the period of instruction.
Tuition and other revenues are shown net of discounts relating to a variety
of promotional programs. Such discounts totaled $8.7 million, $7.0 million, and
$6.7 million in 2000, 1999, and 1998, respectively.
Many of the Company's students participate in government sponsored
financial aid programs under Title IV of the Higher Education Act of 1965. These
financial aid programs generally consist of guaranteed student loans and direct
grants to students. Guaranteed student loans are issued directly to the student
by external financial institutions, to whom the student is obligated, and are
non-recourse to the Company.
Student deposits consist of payments made in advance of billings. As the
student is billed, the student deposit is applied against the resulting student
receivable.
COST IN EXCESS OF FAIR VALUE OF ASSETS PURCHASED. The Company amortizes
cost in excess of fair value of assets purchased on a straight-line method over
the estimated useful life. At August 31, 2000 and 1999, the Company's cost in
excess of fair value of assets purchased related primarily to the acquisition of
certain assets of the College and WIU, which are being amortized over 35 years
and 15 years, respectively.
Statement of Financial Accounting Standards 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets, including cost in excess of fair value of
assets purchased, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. The carrying value of cost in excess of fair value of assets
purchased is assessed for any permanent impairment by evaluating the operating
performance and future undiscounted cash flows of the underlying businesses.
Adjustments are made if the sum of the expected future net cash flows is less
than book value. As of August 31, 2000, there have been no impairment
adjustments recognized.
15
<PAGE> 16
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amount reported in the
Consolidated Balance Sheet for cash and cash equivalents, restricted cash,
marketable securities, accounts receivable, accounts payable, accrued
liabilities, and student deposits and deferred revenue approximate fair value
because of the short-term nature of these financial instruments.
EARNINGS PER SHARE. Basic net income per share is computed using the
weighted average number of Apollo Education Group Class A and Class B common
shares outstanding during the period. Diluted net income per share is computed
using the weighted average number of Apollo Education Group Class A and Class B
common and common equivalent shares outstanding during the period. Both basic
and diluted weighted average shares have been retroactively restated for stock
splits effected in the form of stock dividends. The amount of any tax benefit to
be credited to capital related to the exercise of options is included when
applying the treasury stock method to stock options in the computation of
earnings per share.
Beginning in the first quarter of fiscal year 2001, the consolidated
financial statements of Apollo Group, Inc. will present basic and diluted
earnings per share for Apollo Education Group common stock and University of
Phoenix Online common stock using the two-class method. The two-class method is
an earnings allocation formula that determines the earnings per share for Apollo
Education Group common stock and University of Phoenix Online common stock
according to participation rights in undistributed earnings.
Basic earnings per share for Apollo Education Group common stock will be
calculated by dividing Apollo Education Group earnings (including its retained
interest in University of Phoenix Online earnings) by the weighted average
number of shares of Apollo Education Group common stock outstanding. Diluted
earnings per share will be calculated similarly, except that it will include the
dilutive effect of the assumed exercise of options, including the effects of
shares issuable under Apollo Group, Inc. incentive plans, exclusive of options
granted with respect to University of Phoenix Online common stock.
Basic earnings per share for University of Phoenix Online common stock will
be calculated by dividing University of Phoenix Online earnings (excluding
Apollo Education Group's retained interest in University of Phoenix Online
earnings) by the weighted average number of shares of University of Phoenix
Online common stock outstanding. Diluted earnings per share will be calculated
similarly, except that it will include the dilutive effect of the assumed
exercise of options with respect to University of Phoenix Online common stock.
DEFERRED RENTAL PAYMENTS AND DEPOSITS. The Company records rent expense
using the straight-line method over the term of the lease agreement.
Accordingly, deferred rental liabilities are provided for lease agreements that
specify scheduled rent increases over the lease term. Rental deposits are
provided for lease agreements that specify payments in advance or scheduled rent
decreases over the lease term.
SELLING AND PROMOTIONAL COSTS. The Company expenses selling and
promotional costs as incurred. Selling and promotional costs include marketing
salaries, direct-response and other advertising, promotional materials, and
related marketing costs.
START-UP COSTS. Costs related to the start-up of new campuses and learning
centers are expensed as incurred.
STOCK-BASED COMPENSATION. The Company has elected to continue to account
for its stock-based awards in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and has
provided the pro forma disclosures as required by Statement of Financial
Accounting Standards 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), for the years ended August 31, 2000, 1999, and 1998.
NEW ACCOUNTING PRONOUNCEMENTS. 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. The Company was originally
required to implement SAB
16
<PAGE> 17
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
RECLASSIFICATIONS. Certain amounts reported for the years ended August 31,
1999 and 1998, have been reclassified to conform to the 2000 presentation,
having no effect on net income.
NOTE 3. ACQUISITIONS
In September 1997, the Company acquired the assets and related business
operations of the College for Financial Planning and related divisions that
include the Institute for Wealth Management, the Institute for Retirement
Planning, the American Institute for Retirement Planners, Inc., and the
Institute for Tax Studies. The adjusted purchase price consisted of $19.4
million in cash, $15.9 million in stock, and the assumption of approximately
$11.4 million in liabilities. The excess of cost over the value of tangible
assets of $40.0 million is being amortized over 35 years.
The acquisition was accounted for under the purchase method and,
accordingly, the results of operations related to this new subsidiary have been
included with those of the Company for periods subsequent to the date of the
acquisition. Results of operations for the College for Financial Planning prior
to the acquisition were not material in relation to the Company's operations as
a whole.
NOTE 4. BALANCE SHEET COMPONENTS
Marketable securities consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31, 2000 AUGUST 31, 1999
------------------------- -------------------------
ESTIMATED AMORTIZED ESTIMATED AMORTIZED
TYPE MARKET VALUE COST MARKET VALUE COST
---- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
CLASSIFIED AS CURRENT:
Municipal bonds............................. $35,870 $35,880 $22,507 $22,497
U.S. treasury obligations................... 299 298
U.S. agency obligations..................... 18,091 18,098 7,863 7,881
Auction rate preferred stock................ 3,950 3,950
Commercial paper............................ 684 686
------- ------- ------- -------
Total current marketable securities......... 58,210 58,226 31,054 31,064
------- ------- ------- -------
Classified as noncurrent:
Municipal bonds due in 1-2 years............ 5,528 5,518 8,232 8,259
U.S. agency obligations..................... 502 502 246 248
------- ------- ------- -------
Total noncurrent marketable securities...... 6,030 6,020 8,478 8,507
------- ------- ------- -------
Total marketable securities....... $64,240 $64,246 $39,532 $39,571
======= ======= ======= =======
</TABLE>
17
<PAGE> 18
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Receivables consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Trade receivables........................................... $84,093 $84,743
Interest receivable......................................... 870 533
Income tax refunds receivable............................... 1,850 32
------- -------
86,813 85,308
Less allowance for doubtful accounts........................ (7,880) (9,644)
------- -------
Total receivables, net............................ $78,933 $75,664
======= =======
</TABLE>
Bad debt expense was $7.8 million, $6.9 million, and $5.5 million for 2000,
1999, and 1998, respectively. Write-offs, net of recoveries, were $9.5 million,
$3.9 million, and $3.4 million for 2000, 1999, and 1998, respectively.
Property and equipment consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Furniture and equipment..................................... $101,752 $ 82,041
Software.................................................... 23,290 19,394
Leasehold improvements...................................... 25,141 16,549
Land and buildings.......................................... 99 350
-------- --------
150,282 118,334
Less accumulated depreciation and amortization.............. (62,449) (40,830)
-------- --------
Property and equipment, net....................... $ 87,833 $ 77,504
======== ========
</TABLE>
Depreciation and amortization expense was $24.2 million, $16.5 million, and
$9.9 million for 2000, 1999, and 1998, respectively.
Cost in excess of fair value of assets purchased consist of the following,
in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Cost in excess of fair value of assets purchased............ $42,831 $42,831
Less accumulated amortization............................... (4,283) (2,914)
------- -------
Total cost in excess, net......................... $38,548 $39,917
======= =======
</TABLE>
Total amortization expense was $1.4 million, $1.5 million, and $1.2 million
in 2000, 1999, and 1998, respectively.
Accrued liabilities consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Salaries, wages, and benefits............................... $13,415 $ 9,355
Other accrued liabilities................................... 8,882 4,985
------- -------
Total accrued liabilities......................... $22,297 $14,340
======= =======
</TABLE>
18
<PAGE> 19
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Student deposits and current portion of deferred revenue consist of the
following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Student deposits............................................ $52,003 $44,260
Current portion of deferred tuition revenue................. 40,420 35,399
Other deferred revenue...................................... 2,594 1,848
------- -------
Total student deposits and current portion of
deferred revenue................................ $95,017 $81,507
======= =======
</TABLE>
NOTE 5. INVESTMENT IN IDL
In August 1998, the Company together with Hughes Network Systems and Hermes
Onetouch LLC ("Hermes") formed Interactive Distance Learning, Inc. ("IDL"), a
new corporation, to acquire One Touch Systems, a leading provider of interactive
distance learning solutions. The Company contributed $10.8 million and provided
a $1.2 million letter of credit which was paid in October 1999, in exchange for
a 19% interest in the newly formed corporation. This investment is accounted for
under the cost method of accounting. Hermes is wholly-owned by the Company's
Chairman and a Senior Vice President. It was not practical to estimate the fair
value of the Company's investment in IDL as IDL is a private Company.
NOTE 6. SHORT-TERM BORROWINGS
At August 31, 2000, the Company had no outstanding borrowings on its $10.0
million line of credit. Borrowings under the line of credit bear interest at
LIBOR plus .75% or prime at the Company's election. At August 31, 2000,
availability under the line of credit was reduced by outstanding letters of
credit of $5.9 million. Any amounts borrowed under the line are payable upon its
termination in February 2002. The Company's line of credit agreement prohibits
the Company from paying cash dividends or making other cash distributions
without the lender's consent.
NOTE 7. LONG-TERM LIABILITIES
Long-term liabilities consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
2000 1999
------- ------
<S> <C> <C>
Deferred compensation and note agreements discounted at 7.5%
to 12%.................................................... $ 1,116 $1,350
Deferred rent............................................... 3,318 1,900
Department of Education settlement.......................... 4,500
Other long-term liabilities................................. 1,489 1,272
------- ------
Total long-term liabilities............................ 10,423 4,522
Less current portion................................... (450) (300)
------- ------
Total long-term liabilities, net.................. $ 9,973 $4,222
======= ======
</TABLE>
The undiscounted deferred compensation liability was $1.6 million at August
31, 2000 and 1999. The undiscounted note payable related to the WIU acquisition
was $300,000 and $400,000 at August 31, 2000 and 1999, respectively. The
discount rates for these agreements were determined at the date of each
respective agreement based on the estimated long-term rate of return on
high-quality fixed income investments with cash flows similar to the respective
agreements.
The aggregate maturities of the long-term liabilities for each of the five
fiscal years subsequent to August 31, 2000, are as follows: 2001 -- $450;
2002 -- $568; 2003 -- $5,066; 2004 -- $597; 2005 -- $691.
19
<PAGE> 20
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. INCOME TAXES
The related components of the income tax provision are as follows, in
thousands:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $42,312 $32,304 $26,546
State and other..................................... 8,572 7,178 6,028
------- ------- -------
Total current......................................... 50,884 39,482 32,574
------- ------- -------
Deferred:
Federal............................................. (1,537) (361) (2,004)
State and other..................................... (233) (144) (595)
------- ------- -------
Total deferred........................................ (1,770) (505) (2,599)
------- ------- -------
Total provision for income taxes............ $49,114 $38,977 $29,975
======= ======= =======
</TABLE>
The income tax provision differs from the tax that would result from
application of the statutory U.S. federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate...................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................. 5.5 5.2 5.1
Other, net.................................................. 0.3 (0.4) (0.8)
---- ---- ----
Effective income tax rate................................... 40.8% 39.8% 39.3%
==== ==== ====
</TABLE>
Deferred tax assets and liabilities consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
2000 1999
------- ------
<S> <C> <C>
GROSS DEFERRED TAX ASSETS:
Allowance for doubtful accounts............................. $ 4,038 $4,502
Deferred tuition revenue.................................... 2,068 1,299
Department of Education settlement.......................... 1,924
Other....................................................... 3,477 3,124
------- ------
Total gross deferred tax assets................... 11,507 8,925
------- ------
GROSS DEFERRED TAX LIABILITIES:
Depreciation and amortization of property and equipment..... 2,312 2,286
Amortization of cost in excess of fair value of assets
purchased................................................. 1,900 1,289
Other....................................................... 253 78
------- ------
Total gross deferred tax liabilities.............. 4,465 3,653
------- ------
Net deferred tax assets........................... $ 7,042 $5,272
======= ======
</TABLE>
20
<PAGE> 21
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net deferred tax assets are reflected in the accompanying balance sheet as
follows, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Current deferred tax assets, net............................ $ 8,267 $ 7,346
Noncurrent deferred tax liabilities, net.................... (1,225) (2,074)
------- -------
Net deferred tax assets........................... $ 7,042 $ 5,272
======= =======
</TABLE>
In light of the Company's history of profitable operations, management has
concluded that it is more likely than not that the Company will ultimately
realize the full benefit of its deferred tax assets related to future deductible
items. Accordingly, the Company believes that a valuation allowance is not
required for its net deferred tax assets.
NOTE 9. COMMON STOCK
The Company's Board of Directors authorized a program allocating up to $150
million in Company funds to repurchase shares of Apollo Education Group Class A
common stock. As of August 31, 2000, the Company had repurchased approximately
4,379,000 shares at a total cost of approximately $103.2 million.
NOTE 10. EARNINGS PER SHARE
A reconciliation of the basic and diluted per share computations for 2000,
1999, and 1998 are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- ---------------------------
WEIGHTED PER WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- -------- ------ ------- -------- ------ ------- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income per share... $71,191 75,783 $0.94 $59,005 77,683 $0.76 $46,297 77,245 $0.60
EFFECT OF DILUTIVE
SECURITIES:
Stock options.............. 846 1,151 1,841
------- ------ ----- ------- ------ ----- ------- ------ -----
Diluted net income per
share...................... $71,191 76,629 $0.93 $59,005 78,834 $0.75 $46,297 79,086 $0.59
======= ====== ===== ======= ====== ===== ======= ====== =====
</TABLE>
NOTE 11. SEGMENT INFORMATION
The Company's operations are aggregated into a single reportable segment
based upon their similar economic and operating characteristics. The Company's
educational operations are conducted in similar markets and produce similar
economic results. These operations provide higher education programs for working
adults. The Company's operations are also subject to a similar regulatory
environment, which includes licensing and accreditation.
NOTE 12. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company provides various health, welfare, and disability benefits to
its full-time, salaried employees which are funded primarily by Company
contributions. The Company does not provide post-employment or post-retirement
health care and life insurance benefits to its employees.
401(K) PLAN. The Company sponsors a 401(k) plan which is available to all
employees who have completed one year and at least 1,000 hours of continuous
service. The Company matches 100% of the contributions from the first $10,000 of
a participant's annual pre-tax earnings. Contributions from the participant's
earnings in excess of $10,000 are matched by the Company at 18.5%. Participant
contributions
21
<PAGE> 22
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are subject to certain restrictions as set forth in the Internal Revenue Code.
The Company's matching contributions totaled $2.3 million, $2.2 million, and
$1.8 million for 2000, 1999, and 1998, respectively.
STOCK-BASED COMPENSATION PLANS. The Company has four stock-based
compensation plans: the Apollo Group, Inc., Amended and Restated Director Stock
Plan ("Director Stock Plan"), the Apollo Group, Inc., Long-Term Incentive Plan
("LTIP"), the Apollo Group, Inc., 2000 Incentive Plan ("2000 Incentive Plan"),
and the Apollo Group, Inc., Amended and Restated 1994 Employee Stock Purchase
Plan ("Purchase Plan").
The Director Stock Plan currently provides for an annual grant to the
Company's non-employee directors of options to purchase shares of the Company's
Apollo Education Group Class A common stock on September 1 of each year through
2003. Under the LTIP, the Company may grant options, incentive stock options,
stock appreciation rights, and other stock-based awards in the Company's Apollo
Education Group Class A common stock to certain officers, key employees, or
directors of the Company. Many of the options granted under the LTIP vest 25%
per year starting at the end of the year 2002. The vesting may be accelerated
for individual employees if the stock price reaches defined goals for at least
three trading days, and if certain profit goals, defined for groups of
individuals, are also achieved. Under the 2000 Incentive Plan, the Company may
grant options, incentive stock options, stock appreciation rights, and other
stock-based awards in the Company's Apollo Education Group Class A common stock
and shares of the Company's University of Phoenix Online common stock to certain
officers, key employees, or directors of the Company. The Purchase Plan allows
employees of the Company to purchase shares of the Company's Apollo Education
Group Class A common stock and University of Phoenix Online common stock at
quarterly intervals through periodic payroll deductions. The purchase price per
share, in general, is 85% of the lower of 1) the fair market value (as defined
in the Purchase Plan) on the enrollment date into the respective quarterly
offering period or 2) the fair market value on the purchase date.
The Company applies APB 25 and related interpretations in accounting for
its stock-based compensation, and has adopted the disclosure-only provisions of
SFAS 123. Accordingly, no compensation cost has been recognized for these plans.
Had compensation cost for the plans been determined based on the fair value at
the grant date consistent with SFAS 123, the Company's net income, income per
share, and weighted average shares outstanding would have been as follows, in
thousands, except per share amounts:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
PRO FORMA:
Net income.......................................... $66,484 $55,395 $43,986
Diluted income per share............................ $ 0.88 $ 0.71 $ 0.55
Diluted weighted average shares outstanding......... 75,783 77,634 79,889
AS REPORTED:
Net income.......................................... $71,191 $59,005 $46,297
Diluted income per share............................ $ 0.93 $ 0.75 $ 0.59
Diluted weighted average shares outstanding......... 76,629 78,834 79,086
</TABLE>
The effects of applying SFAS 123 in the above pro forma disclosures are not
necessarily indicative of future amounts. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes method with the following
weighted-average assumptions for grants in 2000, 1999, and 1998, respectively:
(1) dividend yield of 0.00% in all years; (2) expected volatility of 74.0%,
73.0%, and 40.0%; (3) risk-free interest rates of 6.5%, 4.5%, and 5.9%, and (4)
expected lives of 5.0, 7.5, and 5.4 years.
22
<PAGE> 23
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity related to stock options to purchase Apollo
Education Group Class A common stock granted under the Director Stock Plan, the
LTIP, and the 2000 Incentive Plan is as follows, in thousands, except per share
amounts:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------ --------------
<S> <C> <C>
OUTSTANDING AT AUGUST 31, 1997.............................. 4,247 $ 6.453
Granted................................................... 370 26.101
Exercised................................................. (694) 5.100
Canceled.................................................. (42) 13.650
------
OUTSTANDING AT AUGUST 31, 1998.............................. 3,881 8.492
Granted................................................... 1,171 25.981
Exercised................................................. (1,233) 4.426
Canceled.................................................. (384) 10.324
------
OUTSTANDING AT AUGUST 31, 1999.............................. 3,435 15.709
Granted................................................... 957 20.865
Exercised................................................. (686) 9.913
Canceled.................................................. (143) 23.858
------
Outstanding at August 31, 2000.............................. 3,563 17.857
======
Exercisable at August 31, 2000.............................. 1,802
======
Available for issuance at August 31, 2000................... 5,677
======
</TABLE>
Stock options to purchase University of Phoenix Online common stock have
not been granted under the Director Stock Plan or the 2000 Incentive Plan as of
August 31, 2000. At August 31, 2000, there were options on 9,100,000 shares of
University of Phoenix Online common stock available for issuance.
The following table summarizes information about the stock options to
purchase Apollo Education Group Class A common stock at August 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------------
CONTRACTUAL WEIGHTED AVG. WEIGHTED AVG.
NUMBER YEARS EXERCISE PRICE NUMBER EXERCISE PRICE
RANGE OF EXERCISE PRICES OUTSTANDING REMAINING PER SHARE EXERCISABLE PER SHARE
------------------------ -------------- ----------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 1.630 to $ 5.975....... 96 4.50 $ 3.011 96 $ 3.011
$ 7.532 to $ 7.532....... 1,133 5.06 $ 7.532 921 $ 7.532
$17.000 to $23.792....... 974 8.58 $19.268 451 $19.592
$25.625 to $39.734....... 1,360 8.02 $26.488 334 $27.837
----- -----
$ 1.630 to $39.734....... 3,563 7.14 $17.857 1,802 $14.079
===== =====
</TABLE>
23
<PAGE> 24
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company is obligated under facility and equipment leases that are
classified as operating leases. Following is a schedule of future minimum lease
commitments as of August 31, 2000, in thousands:
<TABLE>
<CAPTION>
OPERATING LEASES
-------------------------
EQUIPMENT &
FACILITIES OTHER
---------- -----------
<S> <C> <C>
2001........................................................ $ 53,368 $1,663
2002........................................................ 53,827 488
2003........................................................ 52,064 30
2004........................................................ 42,411
2005........................................................ 36,548
Thereafter.................................................. 64,315
-------- ------
$302,533 $2,181
======== ======
</TABLE>
Facility and equipment rent expense totaled $58.8 million, $44.8 million,
and $32.1 million for 2000, 1999, and 1998, respectively.
In January 1998, the U.S. 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 reached an agreement with the U.S.
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 learning
team attendance log to track the sites of learning team 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 U.S. Department of Education requires that we pay the
U.S. Department of Education $6.0 million 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 2000 results. $1.5 million of this amount was paid in 2000 with the
remaining $4.5 million due in 2003.
The OIG is currently auditing the administration of the federal student
financial assistance programs in connection with educational programs provided
pursuant to contractual arrangements between IPD and certain of its client
institutions. To date, OIG has not issued any draft reports. Although the
Company believes that the OIG audits will be resolved without any material
change in IPD's business strategy, as with any program review or audit, no
assurance can be given as to the final outcome since the matters are not yet
resolved. Liability to the Company, if any, from the final audit results will be
recorded as an expense.
The Company is involved in various legal proceedings occurring in the
normal course of business. The Company believes that the disposition of these
cases will not have a material adverse impact on the financial position or
results of operations of the Company.
NOTE 14. CONSOLIDATING STATEMENT OF OPERATIONS DATA
The following schedules present statement of operations data of Apollo
Education Group, University of Phoenix Online, and Apollo Group, Inc. We have
presented this information to illustrate the respective operating results of
Apollo Education Group and University of Phoenix Online, including the impact of
the inter-group license fee and inter-group allocated expenses, and how the
operating results of those groups relate to the consolidated operating results
of Apollo Group, Inc.
24
<PAGE> 25
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The information presented below for Apollo Education Group excludes its
retained interest in University of Phoenix Online, which was 100% for the
periods presented. This retained interest will decline to reflect issuances of
University of Phoenix Online common stock and may be further adjusted to reflect
other events.
Since its inception, the Company has financed University of Phoenix
Online's operations internally and has not incurred any related third-party
debt. University of Phoenix Online does not maintain a bank account; rather all
of its cash receipts and disbursements are processed by the Company on
University of Phoenix Online's behalf. Currently, all amounts are settled
through the funds allocated to/from Apollo Education Group component of
University of Phoenix Online's divisional net worth. Whenever University of
Phoenix Online generates cash from operations, that cash is deemed to be
transferred to Apollo Education Group and is accounted for as a return of
capital. Whenever University of Phoenix Online has a cash need, that cash is
deemed to be transferred from Apollo Education Group and is accounted for as a
capital contribution. As a result of this policy, the accompanying consolidating
statement of operations data do not reflect any inter-group interest income or
expense.
The difference between the net proceeds of the University of Phoenix Online
common stock offering and outlays attributable to University of Phoenix Online
following the offering has been accounted for as a revolving credit allowance
from University of Phoenix Online to Apollo Education Group requiring the
reflection of interest expense by Apollo Education Group and interest income by
University of Phoenix Online at the rate of interest determined by the Board of
Directors. Any other cash transfers accounted for as revolving credit advances
will not bear interest unless the Board of Directors determines otherwise. As a
result of this change in policy, the consolidating statement of operations data
for periods subsequent to the offering may reflect inter-group interest income
and expense. Accordingly, operating results for Apollo Education Group and
University of Phoenix Online for periods subsequent to this offering may not be
comparable to such operating results prior to this offering.
25
<PAGE> 26
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 2000
------------------------------------------------
APOLLO UNIVERSITY APOLLO
EDUCATION OF PHOENIX GROUP,
GROUP ONLINE ELIMINATIONS INC.
--------- ---------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Tuition and other,
net(1)................... $507,384 $102,613 $ -- $609,997
Inter-group license fee
revenue(2)............... 4,104 (4,104)
-------- -------- ------- --------
511,488 102,613 (4,104) 609,997
======== ======== ======= ========
COSTS AND EXPENSES:
INSTRUCTIONAL COSTS AND
SERVICES
External expenses(3)..... 316,429 36,445 352,874
Inter-group allocated
expenses(4)........... (9,265) 9,265 --
Inter-group license fee
expense(2)............ 4,104 (4,104) --
SELLING AND PROMOTIONAL
External expenses(3)..... 80,995 15,496 96,491
Inter-group allocated
expenses(4)........... (772) 772 --
GENERAL AND ADMINISTRATIVE
External expenses(3)..... 46,555 46,555
Inter-group allocated
expenses(4)........... (7,248) 7,248 --
-------- -------- ------- --------
426,694 73,330 (4,104) 495,920
-------- -------- ------- --------
Income from operations..... 84,794 29,283 114,077
Interest income, net....... 6,228 6,228
-------- -------- ------- --------
Income before income
taxes.................... 91,022 29,283 120,305
Provision for income
taxes(5)................. 37,313 11,801 49,114
-------- -------- ------- --------
Net income................. $ 53,709 $ 17,482 $ -- $ 71,191
======== ======== ======= ========
<CAPTION>
YEAR ENDED AUGUST 31, 1999
------------------------------------------------
APOLLO UNIVERSITY APOLLO
EDUCATION OF PHOENIX GROUP,
GROUP ONLINE ELIMINATIONS INC.
--------- ---------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Tuition and other,
net(1)................... $429,264 $69,582 $ -- $498,846
Inter-group license fee
revenue(2)............... 2,783 (2,783) --
-------- ------- ------- --------
432,047 69,582 (2,783) 498,846
======== ======= ======= ========
COSTS AND EXPENSES:
INSTRUCTIONAL COSTS AND
SERVICES
External expenses(3)..... 255,778 31,804 287,582
Inter-group allocated
expenses(4)........... (4,995) 4,995 --
Inter-group license fee
expense(2)............ 2,783 (2,783) --
SELLING AND PROMOTIONAL
External expenses(3)..... 67,828 11,315 79,143
Inter-group allocated
expenses(4)........... (201) 201 --
GENERAL AND ADMINISTRATIVE
External expenses(3)..... 39,368 39,368
Inter-group allocated
expenses(4)........... (5,352) 5,352 --
-------- ------- ------- --------
352,426 56,450 (2,783) 406,093
-------- ------- ------- --------
Income from operations..... 79,621 13,132 92,753
Interest income, net....... 5,229 5,229
-------- ------- ------- --------
Income before income
taxes.................... 84,850 13,132 97,982
Provision for income
taxes(5)................. 33,654 5,323 38,977
-------- ------- ------- --------
Net income................. $ 51,196 $ 7,809 $ -- $ 59,005
======== ======= ======= ========
<CAPTION>
YEAR ENDED AUGUST 31, 1998
------------------------------------------------
APOLLO UNIVERSITY APOLLO
EDUCATION OF PHOENIX GROUP,
GROUP ONLINE ELIMINATIONS INC.
--------- ---------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Tuition and other,
net(1)................... $339,796 $45,081 $ -- $384,877
Inter-group license fee
revenue(2)............... 1,803 (1,803) --
-------- ------- ------- --------
341,599 45,081 (1,803) 384,877
======== ======= ======= ========
COSTS AND EXPENSES:
INSTRUCTIONAL COSTS AND
SERVICES
External expenses(3)..... 203,108 20,417 223,525
Inter-group allocated
expenses(4)........... (3,223) 3,223 --
Inter-group license fee
expense(2)............ 1,803 (1,803) --
SELLING AND PROMOTIONAL
External expenses(3)..... 49,707 7,751 57,458
Inter-group allocated
expenses(4)........... (166) 166 --
GENERAL AND ADMINISTRATIVE
External expenses(3)..... 33,708 33,708
Inter-group allocated
expenses(4)........... (3,960) 3,960 --
-------- ------- ------- --------
279,174 37,320 (1,803) 314,691
-------- ------- ------- --------
Income from operations..... 62,425 7,761 70,186
Interest income, net....... 6,086 6,086
-------- ------- ------- --------
Income before income
taxes.................... 68,511 7,761 76,272
Provision for income
taxes(5)................. 26,824 3,151 29,975
-------- ------- ------- --------
Net income................. $ 41,687 $ 4,610 $ -- $ 46,297
======== ======= ======= ========
</TABLE>
26
<PAGE> 27
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
---------------
(1) Tuition and other revenues are shown net of discounts from a variety of
promotional programs and represent amounts earned from students of Apollo
Education Group and University of Phoenix Online, respectively. There are no
tuition or other revenues that have been allocated between Apollo Education
Group and University of Phoenix Online.
(2) Apollo Group, Inc. charges University of Phoenix Online a license fee equal
to 4% of University of Phoenix Online's net revenues for the use of
curriculum, trademarks, and copyrights owned by Apollo Group, Inc. and its
subsidiaries. The license fee, which is included in University of Phoenix
Online's instructional costs and services, totaled $4.1 million, $2.8
million, and $1.8 million for the years ended August 31, 2000, 1999, and
1998, respectively. The inter-group license fee revenue of Apollo Education
Group eliminates against the inter-group license fee expense of University
of Phoenix Online in consolidation at the Apollo Group, Inc. level.
The related license policy was not in place prior to March 24, 2000;
however, in order to prepare financial statements that include the charges
and benefits of the types provided for under this policy, the accompanying
consolidating statement of operations data reflect charges and benefits that
would have applied if this policy had been in effect during the periods
presented. Although it has no present intention to do so, Apollo Group,
Inc.'s Board of Directors may at any time in its sole discretion modify,
rescind, or supplement this policy.
(3) External expenses represent costs incurred directly by Apollo Education
Group and University of Phoenix Online and do not include any inter-group
allocations.
(4) Certain costs incurred by Apollo Group, Inc. and the University of Phoenix,
Inc. including legal, accounting, corporate office and centralized student
services costs, have been allocated to University of Phoenix Online on the
basis of its revenues in relation to those of Apollo Group, Inc. and the
University of Phoenix, Inc. The allocation of such expenses to University of
Phoenix Online was as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Instructional costs and services............... $ 9,265 $ 4,995 $3,223
Selling and promotional........................ 772 201 166
General and administrative..................... 7,248 5,352 3,960
------- ------- ------
$17,285 $10,548 $7,349
======= ======= ======
</TABLE>
The related corporate expense allocation policy was not in place prior to
March 24, 2000; however, in order to prepare financial statements that
include the charges and benefits of the types provided for under this
policy, the accompanying consolidating statement of operations data reflect
charges and benefits that would have applied if this policy had been in
effect during the periods presented. Although it has no present intention to
do so, Apollo Group, Inc.'s Board of Directors may at any time in its sole
discretion modify, rescind, or supplement this policy.
(5) University of Phoenix Online's results, along with other divisions of the
University of Phoenix, Inc., are included in the Apollo Group, Inc.
consolidated federal income tax return. State taxes are paid based upon
apportioned taxable income or loss of Apollo Group, Inc., with the exception
of certain state taxes that are based upon an apportionment of University of
Phoenix taxable income or loss. The provision for income taxes included in
the accompanying consolidating statement of operations data has been
calculated on a separate company basis.
27
<PAGE> 28
APOLLO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected unaudited quarterly financial
information for each of the Company's last eight quarters.
<TABLE>
<CAPTION>
2000 1999
----------------------------------------- -----------------------------------------
AUG. 31, MAY 31, FEB. 29, NOV. 30, AUG. 31, MAY 31, FEB. 28, NOV. 30,
2000 2000 2000 1999 1999 1999 1999 1998
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Tuition and other,
net................... $165,008 $167,591 $133,980 $143,418 $135,685 $138,107 $109,356 $115,698
-------- -------- -------- -------- -------- -------- -------- --------
COSTS AND EXPENSES:
Instructional costs and
services(1)........... 90,792 97,499 81,849 82,734 78,271 77,332 65,298 66,681
Selling and
promotional........... 27,944 23,695 22,293 22,559 20,585 20,465 19,253 18,840
General and
administrative........ 12,403 11,828 10,828 11,496 11,150 9,922 9,092 9,204
-------- -------- -------- -------- -------- -------- -------- --------
131,139 133,022 114,970 116,789 110,006 107,719 93,643 94,725
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations.... 33,869 34,569 19,010 26,629 25,679 30,388 15,713 20,973
Interest income, net...... 2,042 1,590 1,279 1,317 1,290 1,352 1,275 1,312
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes................... 35,911 36,159 20,289 27,946 26,969 31,740 16,988 22,285
Provision for income
taxes................... 14,603 15,016 8,376 11,119 10,617 12,780 6,833 8,747
-------- -------- -------- -------- -------- -------- -------- --------
Net income................ $ 21,308 $ 21,143 $ 11,913 $ 16,827 $ 16,352 $ 18,960 $ 10,155 $ 13,538
======== ======== ======== ======== ======== ======== ======== ========
Diluted net income per
share................... $ 0.28 $ 0.28 $ 0.16 $ 0.22 $ 0.21 $ 0.24 $ 0.13 $ 0.17
======== ======== ======== ======== ======== ======== ======== ========
Diluted weighted average
shares outstanding...... 76,418 76,126 76,478 77,495 78,068 78,914 79,195 79,159
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
---------------
(1) Includes the $6.0 million charge (3.6% of tuition and other net revenues)
related to the U.S. Department of Education agreement in the May 31, 2000
quarter.
28
<PAGE> 29
SELECTED FINANCIAL INFORMATION OF UNIVERSITY OF PHOENIX ONLINE
The following selected financial and operating data are qualified by
reference to and should be read in conjunction with the financial statements of
University of Phoenix Online and the related notes, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of University of
Phoenix Online." The statement of operations data for the years ended August 31,
2000, 1999, and 1998 and the balance sheet data as of August 31, 2000 and 1999
are derived from University of Phoenix Online's audited financial statements.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------
2000 1999 1998 1997
-------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Tuition and other, net........................... $102,613 $69,582 $45,081 $28,550
-------- ------- ------- -------
COSTS AND EXPENSES:
Instructional costs and services................. 49,814 39,582 25,443 17,679
Selling and promotional.......................... 16,268 11,516 7,917 6,102
General and administrative....................... 7,248 5,352 3,960 2,149
-------- ------- ------- -------
73,330 56,450 37,320 25,930
-------- ------- ------- -------
Income from operations............................. 29,283 13,132 7,761 2,620
Provision for income taxes......................... 11,801 5,323 3,151 1,078
-------- ------- ------- -------
Net income......................................... $ 17,482 $ 7,809 $ 4,610 $ 1,542
======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................................ $21,962 $14,871 $ 8,516
======= ======= =======
Current liabilities......................................... $15,991 $11,789 $ 9,613
Long-term liabilities....................................... 123 -- 42
Divisional net worth........................................ 5,848 3,082 (1,139)
------- ------- -------
Total liabilities and divisional net worth.................. $21,962 $14,871 $ 8,516
======= ======= =======
</TABLE>
29
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF UNIVERSITY OF PHOENIX ONLINE
As mentioned under "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Apollo Group Inc.," the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations of University of Phoenix Online contains forward-looking statements
relating to future plans, expectations, events, or performance that involve
risks and uncertainties. Actual results of operations could differ materially
from those anticipated in these forward-looking statements as a result of
various factors.
BACKGROUND AND OVERVIEW
University of Phoenix Online is a provider of accessible, accredited
educational programs for working adults. It began operations in 1989 by
modifying courses developed by University of Phoenix's physical campuses for
delivery via modem to students worldwide. Today, students can log on to their
online classes via the Internet 24 hours a day, 7 days a week wherever there is
Internet accessibility using basic technology such as a Pentium-class personal
computer, a 28.8K modem, and an Internet service provider, thereby enhancing the
accessibility of and the potential market for its programs. University of
Phoenix Online currently offers 10 accredited degree programs in business,
education, information technology, and nursing. As of August 31, 2000,
University of Phoenix Online had approximately 16,000 degree students and
approximately 1,300 faculty members.
In order to track the economic performance of University of Phoenix Online,
we have separated University of Phoenix Online, our online division, from Apollo
Education Group, which includes the rest of our businesses. University of
Phoenix Online common stock is intended to track the economic performance of
University of Phoenix Online.
University of Phoenix Online has relied upon us to finance its operations
since inception. Therefore, University of Phoenix Online's financial position,
results of operations, and cash flows to date are not necessarily indicative of
the financial position, results of operations, and cash flows that would have
resulted had University of Phoenix Online been operating as an independent
company.
The provision of services and other matters between University of Phoenix
Online and Apollo Education Group, including the right to use our curriculum,
trademarks, and copyrights, will be governed by corporate expense, license, and
income tax allocation policies, which are described below. These arrangements
were not in place prior to March 24, 2000. However, in order to prepare
financial statements that include charges and benefits of the types provided for
under these arrangements, the financial statements for University of Phoenix
Online reflect charges and benefits that would have applied if these inter-group
arrangements had been in effect during the periods presented.
Although we have no present intention to do so, our Board of Directors may
rescind, modify, or add to any of these policies. While management believes that
these allocation methods are reasonable, the allocated expenses are not
necessarily indicative of, and it is not practicable for us to estimate, the
levels of expenses that would have been incurred if University of Phoenix Online
had been operating as an independent company.
CORPORATE EXPENSES. In order to prepare the financial statements for
University of Phoenix Online, certain costs incurred by us and University of
Phoenix, including legal, accounting, corporate office and centralized student
services costs, were allocated to University of Phoenix Online on the basis of
its revenues in relation to those of us and University of Phoenix. Management
believes the allocation methodology is fair to each group because allocations
based on revenue will not inflate or dilute the operating margin of one group in
30
<PAGE> 31
favor of the other. The allocation of such expenses to University of Phoenix
Online was as follows, in thousands:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Instructional costs and services....................... $ 9,265 $ 4,995 $3,223
Selling and promotional................................ 772 201 166
General and administrative............................. 7,248 5,352 3,960
------- ------- ------
$17,285 $10,548 $7,349
======= ======= ======
</TABLE>
LICENSE FEE. We charge University of Phoenix Online a license fee equal to
4% of University of Phoenix Online's net revenues for the use of our curriculum,
trademarks, and copyrights. The license fee, which is included in instructional
costs and services in University of Phoenix Online's statement of operations,
was $4.1 million, $2.8 million, and $1.8 million for the years ended August 31,
2000, 1999, and 1998, respectively.
INCOME TAXES. University of Phoenix Online's results, along with those of
University of Phoenix's other divisions, are included in our consolidated
federal income tax return. State taxes are paid based upon our apportioned
taxable income or loss, with the exception of certain state taxes that are based
upon an apportionment of University of Phoenix taxable income or loss.
The provision for income taxes included in University of Phoenix Online's
statement of operations has been calculated on a separate company basis. The
related current and deferred tax assets and liabilities are settled with
University of Phoenix at the end of each period through the divisional net worth
account.
University of Phoenix Online's effective income tax rate differs from the
federal statutory tax rate primarily as a result of state income taxes.
We intend, for so long as University of Phoenix Online common stock remains
outstanding, to include in our filings under the Securities Exchange Act of
1934, financial statements of University of Phoenix Online, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
University of Phoenix Online," as of the same dates and for the same periods as
our consolidated financial statements. These financial statements will be
prepared in accordance with accounting principles generally accepted in the
United States of America, and in the case of annual financial statements, will
be audited. These financial statements are not legally required under current
law or Securities and Exchange Commission regulations.
Tuition and other revenues are shown net of discounts. University of
Phoenix Online's educational degree programs last up to four years. Students in
degree programs enroll in a program of study that encompasses a series of five
to six week courses that are taken consecutively over the length of the program.
Students are billed on a course-by-course basis when the student first attends a
session, resulting in the recording of a receivable from the student and
deferred tuition revenue in the amount of the billing. The revenue for each
course is recognized on a pro rata basis over the period of instruction.
Instructional costs and services consist primarily of costs related to the
delivery and administration of educational programs and includes a license fee
equal to 4% of University of Phoenix Online's net revenues for the use of our
curriculum, trademarks, and copyrights. Instructional costs and services include
expenses directly attributable to University of Phoenix Online's operations,
such as faculty compensation, administrative salaries, facility leases and other
occupancy costs, bad debt expense, and depreciation and amortization of property
and equipment, and an allocation of expenses relating to centralized departments
that provide services directly to University of Phoenix Online's students. We
expect University of Phoenix Online's instructional costs and services to
increase as a result of increased student enrollments.
Selling and promotional costs consist primarily of compensation for
enrollment advisors, advertising costs, production of marketing materials, and
other costs related to selling and promotional functions, and an allocation of
expenses relating to Apollo Education Group's centralized marketing functions.
University of Phoenix Online expects selling and promotional costs, both in
absolute dollars and as a percentage of tuition
31
<PAGE> 32
and other net revenues, to increase significantly as it expands its marketing
efforts to increase enrollments and brand awareness.
General and administrative costs consist of the allocation of
administrative salaries, occupancy costs, depreciation and amortization, and
other related costs for departments such as executive management, information
systems, corporate accounting, human resources, and other departments that do
not provide direct services to University of Phoenix Online students.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data of
University of Phoenix Online, expressed as a percentage of tuition and other net
revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
REVENUES:
Tuition and other, net.................................... 100.0% 100.0% 100.0%
----- ----- -----
COSTS AND EXPENSES:
Instructional costs and services.......................... 48.5 56.9 56.4
Selling and promotional................................... 15.9 16.5 17.6
General and administrative................................ 7.1 7.7 8.8
----- ----- -----
71.5 81.1 82.8
----- ----- -----
Income from operations...................................... 28.5 18.9 17.2
Less provision for income taxes............................. 11.5 7.7 7.0
----- ----- -----
Net income.................................................. 17.0% 11.2% 10.2%
===== ===== =====
</TABLE>
YEAR ENDED AUGUST 31, 2000, COMPARED WITH THE YEAR ENDED AUGUST 31, 1999
Tuition and other net revenues increased by 47.5% to $102.6 million in 2000
from $69.6 million in 1999 due primarily to an increase in average full-time
equivalent degree student enrollments. Average full-time equivalent degree
student enrollments increased to approximately 9,500 in 2000 from approximately
7,000 in 1999.
Instructional costs and services increased by 25.9% to $49.8 million in
2000 from $39.6 million in 1999 due primarily to the direct costs necessary to
support the increase in degree student enrollments and University of Phoenix
Online's allocation of $1.1 million of the $6.0 million charge related to the
U.S. Department of Education agreement. Direct costs consist primarily of
faculty compensation and related staff salaries. These costs as a percentage of
tuition and other net revenues decreased to 48.5% in 2000 from 56.9% in 1999 due
primarily to greater net revenues being spread over the fixed costs related to
centralized student services offset in part by the University of Phoenix
Online's allocation of $1.1 million of the $6.0 million charge related to the
U.S. Department of Education agreement. As University of Phoenix Online expands,
it may not be able to leverage its existing instructional costs and services to
the same extent.
Selling and promotional expenses increased by 41.3% to $16.3 million in
2000 from $11.5 million in 1999 due primarily to an increase in enrollment
advisors and additional advertising and marketing. These expenses as a
percentage of tuition and other net revenues decreased to 15.9% in 2000 from
16.5% in 1999 due primarily to greater net revenues being spread over a
proportionately lower increase in selling and promotional expenses.
General and administrative expenses increased by 35.4% to $7.2 million in
2000 from $5.4 million in 1999 due primarily to a higher revenue growth rate at
University of Phoenix Online in that period compared to Apollo Education Group
which resulted in a higher allocation of general and administrative expenses to
University of Phoenix Online. General and administrative expenses as a
percentage of tuition and other net revenues decreased to 7.1% in 2000 from 7.7%
in 1999 due primarily to greater net revenues being spread over a
proportionately lower increase in general and administrative expenses.
32
<PAGE> 33
The effective tax rate decreased to 40.3% in 2000 from 40.5% in 1999.
Net income increased to $17.5 million in 2000 from $7.8 million in 1999,
due primarily to increased enrollments and improved utilization of instructional
costs and services, selling and promotional, and general and administrative
expenses.
YEAR ENDED AUGUST 31, 1999, COMPARED WITH THE YEAR ENDED AUGUST 31, 1998
Tuition and other net revenues increased by 54.3% to $69.6 million in 1999
from $45.1 million in 1998 due primarily to an increase in average full-time
equivalent degree student enrollments. Average full-time equivalent degree
student enrollments increased to approximately 7,000 in 1999 from approximately
4,800 in 1998.
Instructional costs and services increased by 55.6% to $39.6 million in
1999 from $25.4 million in 1998 due primarily to the direct costs necessary to
support the increase in degree student enrollments. These costs as a percentage
of tuition and other net revenues increased to 56.9% in 1999 from 56.4% in 1998
due primarily to increased costs in anticipation of increases in degree student
enrollment.
Selling and promotional expenses increased by 45.5% to $11.5 million in
1999 from $7.9 million in 1998 due primarily to an increase in enrollment
advisors and additional advertising and marketing. These expenses as a
percentage of tuition and other net revenues decreased to 16.5% in 1999 from
17.6% in 1998 due primarily to greater net revenues being spread over a
proportionately lower increase in selling and promotional expenses.
General and administrative expenses increased by 35.2% to $5.4 million in
1999 from $4.0 million in 1998 due primarily to a higher revenue growth rate at
University of Phoenix Online in that period compared to Apollo Education Group
which resulted in a higher allocation of general and administrative expenses to
University of Phoenix Online. General and administrative expenses as a
percentage of tuition and other net revenues decreased to 7.7% in 1999 from 8.8%
in 1998 due primarily to greater net revenues being spread over a
proportionately lower increase in general and administrative expenses.
The effective tax rate decreased to 40.5% in 1999 from 40.6% in 1998.
Net income increased to $7.8 million in 1999 from $4.6 million in 1998.
QUARTERLY FLUCTUATIONS IN RESULTS OF OPERATIONS
University of Phoenix Online may experience seasonality in its results of
operations primarily as a result of changes in the level of student enrollments.
While students are enrolled throughout the year, average enrollments and related
revenues may be lower in some quarters than others. Most expenses do not vary
directly with revenues and are difficult to adjust in the short term. As a
result, if revenues for a particular quarter are lower than another, operating
expenses may not be able to be proportionately reduced for that quarter.
LIQUIDITY AND CAPITAL RESOURCES
University of Phoenix Online currently is able to provide for its own
capital expenditures and cash required for operations. University of Phoenix
Online does not maintain a bank account; rather, all of its cash receipts and
cash disbursements are processed by us on its behalf. Cash generated by Apollo
Education Group and University of Phoenix Online has been and will continue to
be managed centrally by us. University of Phoenix Online's liquidity could be
adversely affected by the investment decisions we make.
Net cash provided by operating activities increased to $18.5 million in
2000 from $6.1 million in 1999. The increase resulted primarily from increased
net income, a smaller increase in accounts receivable, and an increase in
student deposits and deferred revenue. These increases were partially offset by
increased other assets. The smaller increase in accounts receivable was
primarily attributable to increased efficiency of financial aid processing in
2000.
33
<PAGE> 34
Capital expenditures increased to $3.7 million in 2000 from $2.6 million in
1999 due primarily to continued growth in operations. Total purchases of
property and equipment for the year ended August 31, 2001, are expected to range
from $4.0 to $6.0 million. These expenditures will primarily be related to
increases in normal recurring capital expenditures due to the overall increase
in students and employees resulting from the growth in the business.
On March 24, 2000, the Board of Directors of Apollo Group, Inc. ("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 the University of Phoenix, Inc., a
wholly-owned subsidiary of Apollo. 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. This
stock represented a 10.8% interest in University of Phoenix Online with Apollo
Education Group retaining the remaining 89.2% interest in University of Phoenix
Online.
We have allocated all of the net proceeds from the University of Phoenix
Online common stock offering to University of Phoenix Online. In addition,
although we have no obligation to provide funds to University of Phoenix Online
and the decision to do so is within the discretion of our Board of Directors, it
is our present intention to fund, if needed, the operations and cash flow needs
of University of Phoenix Online through fiscal 2001.
In January 1998, the U.S. 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 University of Phoenix's interpretation of the "12-hour rule," distance
education programs, and institutional refund obligations. University of Phoenix
reached an agreement with the U.S. Department of Education which acknowledges no
admission that there were any issues of non-compliance or errors by University
of Phoenix. To bring this audit to closure and settle all outstanding issues
prior to the final OIG report, which was issued on March 31, 2000, University of
Phoenix agreed to modify its physical campus learning team attendance log to
track the sites of learning team meetings and record the hours attended. This
modification is not expected to have a negative impact on either University of
Phoenix or its students. This modification does not require any change to
University of Phoenix Online's learning team attendance log. Part of the
agreement, dated March 27, 2000, reached with the U.S. Department of Education
requires University of Phoenix to pay the U.S. Department of Education $6.0
million as a negotiated settlement in full satisfaction of all monetary findings
arising under the final OIG audit report. Approximately $1.1 million of this
amount was allocated to University of Phoenix Online during the third quarter of
the fiscal year ending August 31, 2000 in accordance with the corporate expense
allocation policy. This amount is reflected in University of Phoenix Online's
instructional costs and services.
34
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Apollo Group, Inc.:
In our opinion, the accompanying balance sheet and the related statements
of operations and of cash flows present fairly, in all material respects, the
financial position of University of Phoenix Online at August 31, 2000 and 1999,
and the results of its operations and its cash flows for each of the three years
in the period ended August 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Apollo Group, Inc.'s management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, University of Phoenix Online is a division of the
University of Phoenix, Inc., a wholly-owned subsidiary of Apollo Group, Inc.
Accordingly, the financial statements of University of Phoenix Online should be
read in conjunction with the audited financial statements of Apollo Group, Inc.
PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
September 29, 2000
35
<PAGE> 36
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
2000 1999
-------- -------
<S> <C> <C>
ASSETS:
Current assets
Receivables, net.......................................... $ 13,991 $11,133
Other current assets...................................... 482 147
-------- -------
Total current assets........................................ 14,473 11,280
Property and equipment, net................................. 5,940 3,575
Other assets................................................ 1,549 16
-------- -------
Total assets................................................ $ 21,962 $14,871
======== =======
LIABILITIES AND DIVISIONAL NET WORTH:
Current liabilities
Accounts payable.......................................... $ 245 $ 140
Accrued liabilities....................................... 1,220 1,626
Student deposits and deferred tuition revenue............. 14,526 10,023
-------- -------
Total current liabilities................................... 15,991 11,789
Long-term liabilities....................................... 123 --
-------- -------
Total liabilities........................................... 16,114 11,789
-------- -------
Commitments and contingencies
DIVISIONAL NET WORTH:
Funds allocated to/from Apollo Education Group.............. (23,747) (9,031)
Accumulated earnings...................................... 29,595 12,113
-------- -------
Total divisional net worth................................ 5,848 3,082
-------- -------
Total liabilities and divisional net worth.................. $ 21,962 $14,871
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
REVENUES:
Tuition and other, net.................................... $102,613 $69,582 $45,081
-------- ------- -------
COSTS AND EXPENSES:
Instructional costs and services.......................... 49,814 39,582 25,443
Selling and promotional................................... 16,268 11,516 7,917
General and administrative................................ 7,248 5,352 3,960
-------- ------- -------
73,330 56,450 37,320
-------- ------- -------
INCOME FROM OPERATIONS...................................... 29,283 13,132 7,761
Provision for income taxes.................................. 11,801 5,323 3,151
-------- ------- -------
NET INCOME.................................................. $ 17,482 $ 7,809 $ 4,610
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 38
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income.................................................. $ 17,482 $ 7,809 $ 4,610
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 1,383 922 571
Provision for uncollectible accounts........................ 2,129 2,411 784
Decrease (increase) in assets:
Receivables, net.......................................... (4,987) (7,001) (3,681)
Other assets.............................................. (1,884) (131) 33
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities.................. (301) (66) 1,041
Student deposits and deferred revenue..................... 4,503 2,260 2,130
Other liabilities......................................... 123 (60) (17)
-------- ------- -------
Net cash provided by operating activities................... 18,448 6,144 5,471
-------- ------- -------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Net additions to property and equipment..................... (3,732) (2,556) (814)
-------- ------- -------
Net cash used for investing activities...................... (3,732) (2,556) (814)
-------- ------- -------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Funds allocated to/from Apollo Education Group.............. (14,716) (3,588) (4,657)
-------- ------- -------
Net cash used for financing activities...................... (14,716) (3,588) (4,657)
-------- ------- -------
Net change in cash.......................................... -- -- --
Cash at beginning of year................................... -- -- --
-------- ------- -------
Cash at end of year......................................... $ -- $ -- $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 39
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
On March 24, 2000, the Board of Directors of Apollo Group, Inc. ("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 the University of Phoenix, Inc., a
wholly-owned subsidiary of Apollo. 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. This
stock represented a 10.8% interest in University of Phoenix Online with Apollo
Education Group retaining the remaining 89.2% interest in University of Phoenix
Online.
University of Phoenix Online is the online division of University of
Phoenix which is a regionally accredited, private institution of higher
education offering associates, bachelors, masters, and doctoral degree programs
in business, management, computer information systems, education, and health
care. University of Phoenix Online offers its educational programs worldwide
through its computerized educational delivery system. University of Phoenix is
accredited by the Commission on Institutions of Higher Education of the North
Central Association of Colleges and Schools.
The accompanying financial statements provide financial information
regarding the underlying business of University of Phoenix Online. Even though
Apollo Group, Inc. has separated its assets, liabilities, revenues, and expenses
between Apollo Education Group and University of Phoenix Online for purposes of
tracking the economic performance of each of University of Phoenix Online and
Apollo Education Group, that separation will not change the legal title to any
assets or the responsibility for any liabilities and will not affect the rights
of creditors. Holders of University of Phoenix Online common stock are common
stockholders of Apollo Group, Inc. and are subject to all the risks associated
with an investment in Apollo Group, Inc.'s assets and liabilities. Material
financial events which may occur at Apollo Education Group may affect University
of Phoenix Online's results of operations or financial position. Accordingly,
University of Phoenix Online's financial statements should be read in
conjunction with Apollo Group, Inc.'s consolidated financial statements.
The provision of services and other matters between University of Phoenix
Online and Apollo Education Group, including the right to use the curriculum,
trademarks, and copyrights of Apollo Group, Inc. and its subsidiaries, are
governed by corporate expense, income tax, and license allocation policies,
which are described in Note 3. Related Party Transactions. These policies were
not in place prior to March 24, 2000. However, in order to prepare financial
statements that include charges and benefits of the types provided for under
these polices, the accompanying financial statements reflect charges and
benefits that would have applied if these policies had been in effect during the
periods presented.
University of Phoenix Online's fiscal year is from September 1 to August
31. Unless otherwise stated, references to the years 2000, 1999, and 1998 relate
to the fiscal years ended August 31, 2000, 1999, and 1998, respectively.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost less
accumulated depreciation. University of Phoenix Online capitalizes the cost of
software used for internal operations once technological feasibility of the
software has been demonstrated. Such costs consist primarily of custom-developed
and packaged software and the direct labor costs of internally-developed
software. Depreciation is provided on all furniture, equipment, and software
using the straight-line method over the estimated useful lives of the related
assets which range from three to seven years, except software which is
depreciated over three to five years.
39
<PAGE> 40
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful lives of the related assets.
Maintenance and repairs are expensed as incurred.
REVENUES, RECEIVABLES, AND RELATED LIABILITIES. Tuition and other revenues
are shown net of discounts relating to a variety of promotional programs.
University of Phoenix Online's educational degree programs last up to four
years. Students in degree programs enroll in a program of study that encompasses
a series of five to six week courses that are taken consecutively over the
length of the program. Students are billed on a course-by-course basis, when the
student first attends a session, resulting in the recording of a receivable from
the student and deferred tuition revenue in the amount of the billing. The
revenue for each course is recognized on a pro rata basis over the period of
instruction.
Many of University of Phoenix Online's students participate in government
sponsored financial aid programs under Title IV of the Higher Education Act of
1965. These financial aid programs generally consist of guaranteed student loans
and direct grants to students. Guaranteed student loans are issued directly to
the student by external financial institutions, to whom the student is
obligated, and are non-recourse to University of Phoenix.
Student deposits consist of payments made in advance of billings. As the
student is billed, the student deposit is applied against the resulting student
receivable.
EARNINGS PER SHARE. Earnings per share for University of Phoenix Online
has been omitted from the accompanying statement of operations since University
of Phoenix Online common stock is a class of stock of Apollo Group, Inc. and is
not part of the capital structure of University of Phoenix Online.
Beginning in the first quarter of fiscal year 2001, the consolidated
financial statements of Apollo Group, Inc. will present basic and diluted
earnings per share for Apollo Education Group common stock and University of
Phoenix Online common stock using the two-class method. The two-class method is
an earnings allocation formula that determines the earnings per share for Apollo
Education Group common stock and University of Phoenix Online common stock
according to participation rights in undistributed earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amount reported in the
balance sheet for accounts receivable, accounts payable, accrued liabilities,
and student deposits and deferred tuition revenue approximates fair value
because of the short-term nature of these financial instruments.
SELLING AND PROMOTIONAL COSTS. University of Phoenix Online expenses
selling and promotional costs as incurred. Selling and promotional costs include
marketing salaries, direct-response and other advertising, promotional
materials, and related marketing costs.
NEW ACCOUNTING PRONOUNCEMENTS. 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. University of Phoenix Online
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, University of Phoenix Online must now implement the related
guideline in the fourth quarter of its 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 University of Phoenix Online's results
of operations.
USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
40
<PAGE> 41
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMPREHENSIVE INCOME. Comprehensive income includes all changes in
divisional net worth during a period from non-owner sources. University of
Phoenix Online has not had any transactions, other than net income, that are
required to be reported in comprehensive income.
NOTE 3. RELATED PARTY TRANSACTIONS
University of Phoenix Online's financial statements reflect the application
of certain expense allocation and treasury activity policies summarized below.
Although it has no present intention to do so, the Board of Directors of Apollo
Group, Inc. may rescind, modify, or add to any of these policies. While
management believes that these allocation methods are reasonable, the allocated
expenses are not necessarily indicative of, and it is not practicable for us to
estimate, the levels of expenses that would have been incurred if University of
Phoenix Online had been operating as an independent company.
CORPORATE EXPENSES. In order to prepare the accompanying financial
statements, certain costs incurred by Apollo Group, Inc. and University of
Phoenix were allocated to University of Phoenix Online on the basis of its
revenues in relation to those of Apollo Group, Inc. and University of Phoenix.
The allocation of such expenses to University of Phoenix Online was as follows,
in thousands:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Instructional costs and services....................... $ 9,265 $ 4,995 $3,223
Selling and promotional................................ 772 201 166
General and administrative............................. 7,248 5,352 3,960
------- ------- ------
$17,285 $10,548 $7,349
======= ======= ======
</TABLE>
LICENSE FEE. Apollo Group, Inc. charges University of Phoenix Online a
license fee equal to 4% of University of Phoenix Online's net revenues for the
use of curriculum, trademarks, and copyrights owned by Apollo Group, Inc. and
its subsidiaries. The license fee, which is included in instructional costs and
services in the accompanying statement of operations, was $4.1 million, $2.8
million, and $1.8 million for the years ended August 31, 2000, 1999, and 1998,
respectively.
INCOME TAXES. University of Phoenix Online's results, along with those of
University of Phoenix's other divisions, are included in Apollo Group, Inc.'s
consolidated federal income tax return. State taxes are paid based upon
apportioned taxable income or loss of Apollo Group, Inc., with the exception of
certain state taxes that are based upon an apportionment of University of
Phoenix taxable income or loss.
The provision for income taxes included in the accompanying statement of
operations has been calculated on a separate company basis. The related current
and deferred tax assets and liabilities are settled with University of Phoenix
at the end of each period through the funds allocated to/from Apollo Education
Group component of divisional net worth.
University of Phoenix Online's effective income tax rate differs from the
federal statutory tax rate primarily as a result of state income taxes.
TREASURY ACTIVITIES. Since its inception, Apollo Group, Inc. has financed
University of Phoenix Online's operations internally and has not incurred any
related third party debt. University of Phoenix Online does not maintain a bank
account; rather all of its cash receipts and disbursements are processed by
Apollo Group, Inc. on University of Phoenix Online's behalf. Currently all
amounts are settled through the funds allocated to/from Apollo Education Group
component of University of Phoenix Online's divisional net worth. Whenever
University of Phoenix Online generates cash from operations, that cash is deemed
to be transferred
41
<PAGE> 42
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to Apollo Education Group and is accounted for as a return of capital. Whenever
University of Phoenix Online has a cash need, that cash need is deemed to be
transferred from Apollo Education Group and is accounted for as a capital
contribution. As a result of this policy, the accompanying statement of
operations does not reflect any inter-group interest income or expense.
The difference between the net proceeds of the University of Phoenix Online
common stock offering and outlays attributable to University of Phoenix Online
following the offering has been accounted for as a revolving credit allowance
from University of Phoenix Online to Apollo Education Group requiring the
reflection of interest expense by Apollo Education Group and interest income by
University of Phoenix Online at the rate of interest determined by the Board of
Directors. Any other cash transfers accounted for as revolving credit advances
will not bear interest unless the Board of Directors determines otherwise. As a
result of this change in policy, the consolidating statement of operations data
for periods subsequent to the offering may reflect inter-group interest income
and expense. Accordingly, operating results for University of Phoenix Online for
periods subsequent to this offering may not be comparable to such operating
results prior to this offering.
NOTE 4. BALANCE SHEET COMPONENTS
Receivables consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Trade receivables........................................... $15,717 $12,657
Less allowance for doubtful accounts........................ (1,726) (1,524)
------- -------
Total receivables, net............................ $13,991 $11,133
======= =======
</TABLE>
Bad debt expense was $2.1 million, $2.4 million, and $784,000 for 2000,
1999, and 1998, respectively.
Property and equipment consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Furniture and equipment..................................... $ 6,277 $ 5,190
Software.................................................... 540 507
Leasehold improvements...................................... 1,632 257
------- -------
8,449 5,954
Less accumulated depreciation and amortization.............. (2,509) (2,379)
------- -------
Property and equipment, net....................... $ 5,940 $ 3,575
======= =======
</TABLE>
42
<PAGE> 43
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense was $1,367,000, $922,000, and
$571,000 for 2000, 1999, and 1998, respectively.
Accrued liabilities consist of the following, in thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Salaries, wages, and benefits............................... $ 1,046 $ 981
Other accrued liabilities................................... 174 645
------- -------
Total accrued liabilities......................... $ 1,220 $ 1,626
======= =======
</TABLE>
Student deposits and deferred tuition revenue consist of the following, in
thousands:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Student deposits............................................ $ 6,123 $ 6,363
Deferred tuition revenue.................................... 8,403 3,660
------- -------
Total student deposits and deferred tuition
revenue......................................... $14,526 $10,023
======= =======
</TABLE>
Divisional net worth activity for the years ended August 31, is as follows,
in thousands:
<TABLE>
<CAPTION>
FUNDS ALLOCATED ACCUMULATED
TO/FROM APOLLO EARNINGS
EDUCATION GROUP (LOSSES) TOTAL
--------------- ----------- --------
<S> <C> <C> <C>
BALANCE AT AUGUST 31, 1998...................... $ (5,443) $ 4,304 $ (1,139)
Net income.................................... 7,809 7,809
Funds allocated to/from Apollo Education
Group...................................... (3,588) (3,588)
-------- ------- --------
BALANCE AT AUGUST 31, 1999...................... (9,031) 12,113 3,082
Net income.................................... 17,482 17,482
Funds allocated to/from Apollo Education
Group...................................... (14,716) (14,716)
-------- ------- --------
BALANCE AT AUGUST 31, 2000...................... $(23,747) $29,595 $ 5,848
======== ======= ========
</TABLE>
University of Phoenix Online and Apollo Education Group had no intercompany
purchases or cash transfers for the fiscal years ended August 31, 2000 and 1999.
NOTE 5. BENEFIT PLANS
Employees of University of Phoenix Online are eligible to participate in
Apollo Group, Inc.'s various health, welfare, and disability benefit programs
offered to its full-time, salaried employees which are funded primarily by
Apollo Education Group contributions. Additionally, eligible employees also
participate in Apollo Group, Inc.'s 401(k) plan as well as its employee stock
option and stock purchase plans. Apollo Group, Inc. does not provide
post-employment or post-retirement health care and life insurance benefits to
University of Phoenix Online's employees.
43
<PAGE> 44
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. COMMITMENTS AND CONTINGENCIES
University of Phoenix Online is obligated under facility and equipment
leases that are classified as operating leases. Following is a schedule of
future minimum lease commitments as of August 31, 2000, in thousands:
<TABLE>
<CAPTION>
OPERATING LEASES
-------------------------
EQUIPMENT &
FACILITIES OTHER
---------- -----------
<S> <C> <C>
2001........................................................ $ 903 $10
2002........................................................ 967 3
2003........................................................ 975
2004........................................................ 984
2005........................................................ 992
Thereafter.................................................. 4,016
------ ---
$8,837 $13
====== ===
</TABLE>
Facility and equipment rent expense totaled $1.2 million, $1.4 million, and
$1.1 million for 2000, 1999, and 1998, respectively.
There are no legal proceedings to which Apollo Group, Inc. is a party
pertaining to the business and operations of University of Phoenix Online, other
than those occurring in the normal course of business. Management believes that
the disposition of these cases will not have a material adverse impact on the
financial position or results of operations of Apollo Education Group or
University of Phoenix Online.
In January 1998, the U.S. 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 University of Phoenix's interpretation of the "12-hour rule," distance
education programs, and institutional refund obligations. University of Phoenix
reached an agreement with the U.S. Department of Education which acknowledges no
admission that there were any issues of non-compliance or errors by University
of Phoenix. To bring this audit to closure and settle all outstanding issues
prior to the final OIG report, which was issued on March 31, 2000, University of
Phoenix agreed to modify its physical campus learning team attendance log to
track the sites of learning team meetings and record the hours attended. This
modification is not expected to have a negative impact on either University of
Phoenix or its students. This modification does not require any change to
University of Phoenix Online's learning team attendance log. Part of the
agreement, dated March 27, 2000, reached with the U.S. Department of Education
requires University of Phoenix to pay the U.S. Department of Education $6.0
million as a negotiated settlement in full satisfaction of all monetary findings
arising under the final OIG audit report. Approximately $1.1 million of this
amount was allocated to University of Phoenix Online during 2000 in accordance
with the corporate expense allocation policy and has been reflected in
University of Phoenix Online's instructional costs and services.
44
<PAGE> 45
UNIVERSITY OF PHOENIX ONLINE
(A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected unaudited quarterly financial
information of University of Phoenix Online for each of the last eight quarters.
<TABLE>
<CAPTION>
2000 1999
---------------------------------------- ----------------------------------------
AUG. 31, MAY 31, FEB. 29, NOV. 30, AUG. 31, MAY 31, FEB. 28, NOV. 30,
2000 2000 2000 1999 1999 1999 1999 1998
-------- ------- -------- -------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Tuition and other, net.......... $31,661 $28,367 $21,868 $20,717 $19,332 $19,304 $16,051 $14,895
------- ------- ------- ------- ------- ------- ------- -------
COSTS AND EXPENSES:
Instructional costs and
services(1)................... 13,525 14,478 11,269 10,542 11,655 10,808 8,614 8,505
Selling and promotional......... 5,754 4,208 3,220 3,086 3,493 2,530 2,946 2,547
General and administrative...... 2,287 1,873 1,585 1,503 1,674 1,192 1,430 1,056
------- ------- ------- ------- ------- ------- ------- -------
21,566 20,559 16,074 15,131 16,822 14,530 12,990 12,108
------- ------- ------- ------- ------- ------- ------- -------
Income from operations............ 10,095 7,808 5,794 5,586 2,510 4,774 3,061 2,787
Provision for income taxes........ 4,059 3,132 2,346 2,264 1,017 1,935 1,242 1,129
------- ------- ------- ------- ------- ------- ------- -------
Net income........................ $ 6,036 $ 4,676 $ 3,448 $ 3,322 $ 1,493 $ 2,839 $ 1,819 $ 1,658
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
---------------
(1) Includes University of Phoenix Online's allocation of $1.1 million (3.9% of
tuition and other net revenues) of the $6.0 million charge related to the
U.S. Department of Education agreement in the May 31, 2000 quarter.
45
