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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-25232
APOLLO GROUP, INC.
ARIZONA | 86-0419443 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No. |
4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)
(480) 966-5394
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
AT JANUARY 8, 2001, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:
Apollo Education Group Class A common stock, no par | 75,690,000 Shares | |
Apollo Education Group Class B common stock, no par | 512,000 Shares | |
University of Phoenix Online Common Stock, no par | 5,794,000 Shares |
APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE | ||||
PART I FINANCIAL INFORMATION | ||||
Item 1. Financial Statements | 1 | |||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations | 11 | |||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 14 | |||
PART II OTHER INFORMATION | ||||
Item 1. Legal Proceedings | 15 | |||
Item 2. Changes in Securities and Use of Proceeds | 15 | |||
Item 3. Defaults Upon Senior Securities | 15 | |||
Item 4. Submission of Matters to a Vote of Security Holders | 15 | |||
Item 5. Other Information | 15 | |||
Item 6. Exhibits and Reports on Form 8-K | 15 | |||
SIGNATURES | 16 | |||
EXHIBIT INDEX | 17 | |||
EXHIBIT 15.1 Letter on Unaudited Interim Financial Information | ||||
EXHIBIT 27 Financial Data Schedule | ||||
EXHIBIT 99 University of Phoenix Online Financial Statements and Managements Discussion and Analysis of Financial Condition And Results of Operations |
PART I FINANCIAL INFORMATION
Item 1 Financial Statements-Apollo Group, Inc.
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30, | August 31, | ||||||||||||||||||||||||
2000 | 2000 | ||||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||
Current assets | |||||||||||||||||||||||||
Cash and cash equivalents | $ | 123,754 | $ | 59,912 | |||||||||||||||||||||
Restricted cash | 44,446 | 35,681 | |||||||||||||||||||||||
Marketable securities | 108,442 | 58,226 | |||||||||||||||||||||||
Receivables, net | 77,765 | 78,933 | |||||||||||||||||||||||
Deferred tax assets, net | 7,681 | 8,267 | |||||||||||||||||||||||
Other current assets | 6,598 | 5,888 | |||||||||||||||||||||||
Total current assets | 368,686 | 246,907 | |||||||||||||||||||||||
Property and equipment, net | 89,892 | 87,833 | |||||||||||||||||||||||
Marketable securities | 11,323 | 6,020 | |||||||||||||||||||||||
Investment in IDL | 11,888 | 11,888 | |||||||||||||||||||||||
Cost in excess of fair value of assets purchased, net | 38,206 | 38,548 | |||||||||||||||||||||||
Other assets | 12,062 | 13,594 | |||||||||||||||||||||||
Total assets | $ | 532,057 | $ | 404,790 | |||||||||||||||||||||
Liabilities and Shareholders Equity: | |||||||||||||||||||||||||
Current liabilities | |||||||||||||||||||||||||
Current portion of long-term liabilities | $ | 322 | $ | 450 | |||||||||||||||||||||
Accounts payable | 10,537 | 12,960 | |||||||||||||||||||||||
Accrued liabilities | 26,905 | 22,297 | |||||||||||||||||||||||
Income taxes payable | 9,849 | 365 | |||||||||||||||||||||||
Student deposits and current portion of deferred revenue | 99,668 | 95,017 | |||||||||||||||||||||||
Total current liabilities | 147,281 | 131,089 | |||||||||||||||||||||||
Deferred tuition revenue, less current portion | 1,280 | 1,295 | |||||||||||||||||||||||
Long-term liabilities, less current portion | 10,542 | 9,973 | |||||||||||||||||||||||
Deferred tax liabilities, net | 252 | 1,225 | |||||||||||||||||||||||
Total liabilities | 159,355 | 143,582 | |||||||||||||||||||||||
Commitments and contingencies | |||||||||||||||||||||||||
Shareholders equity | |||||||||||||||||||||||||
Preferred stock, no par value, 1,000,000 shares
authorized; none issued Apollo Education Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 75,593,000 and 74,998,000 issued and outstanding at November 30, 2000 and August 31, 2000, respectively |
103 | 103 | |||||||||||||||||||||||
Apollo Education Group Class B voting common stock, no par value, 3,000,000 shares authorized; 512,000 issued and outstanding at November 30, 2000 and August 31, 2000 | 1 | 1 | |||||||||||||||||||||||
University of Phoenix Online nonvoting common stock, no par value, 400,000,000 shares authorized; 5,750,000 issued and outstanding at November 30, 2000 | |||||||||||||||||||||||||
Additional paid-in capital | 167,661 | 95,259 | |||||||||||||||||||||||
Treasury stock, at cost, 2,949,000 and 3,545,000 shares at November 30, 2000 and August 31, 2000, respectively | (69,180 | ) | (83,353 | ) | |||||||||||||||||||||
Retained earnings | 274,048 | 249,219 | |||||||||||||||||||||||
Accumulated other comprehensive income (loss) | 69 | (21 | ) | ||||||||||||||||||||||
Total shareholders equity | 372,702 | 261,208 | |||||||||||||||||||||||
Total liabilities and shareholders equity | $ | 532,057 | $ | 404,790 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended | |||||||||
November 30, | |||||||||
2000 | 1999 | ||||||||
(Unaudited) | |||||||||
(In thousands, except per share amounts) | |||||||||
Revenues: | |||||||||
Tuition and other, net | $ | 177,073 | $ | 143,418 | |||||
Costs and expenses: | |||||||||
Instructional costs and services | 95,235 | 82,734 | |||||||
Selling and promotional | 31,008 | 22,559 | |||||||
General and administrative | 11,986 | 11,496 | |||||||
138,229 | 116,789 | ||||||||
Income from operations | 38,844 | 26,629 | |||||||
Interest income, net | 3,168 | 1,317 | |||||||
Income before income taxes | 42,012 | 27,946 | |||||||
Provision for income taxes | 17,183 | 11,119 | |||||||
Net income | $ | 24,829 | $ | 16,827 | |||||
Net income attributed to: | |||||||||
Apollo Education Group common stock | $ | 24,439 | $ | 16,827 | |||||
University of Phoenix Online common stock | $ | 390 | $ | | |||||
Earnings per share attributed to: | |||||||||
Apollo Education Group common stock: | |||||||||
Basic net income per share | $ | 0.32 | $ | 0.22 | |||||
Diluted net income per share | $ | 0.32 | $ | 0.22 | |||||
Basic weighted average shares outstanding | 75,756 | 76,758 | |||||||
Diluted weighted average shares outstanding | 76,806 | 77,495 | |||||||
University of Phoenix Online common stock: | |||||||||
Basic net income per share | $ | 0.07 | |||||||
Diluted net income per share | $ | 0.06 | |||||||
Basic weighted average shares outstanding | 5,750 | ||||||||
Diluted weighted average shares outstanding | 6,480 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Three Months | |||||||||
Ended November 30, | |||||||||
2000 | 1999 | ||||||||
(Unaudited) | |||||||||
(In thousands) | |||||||||
Net income | $ | 24,829 | $ | 16,827 | |||||
Other comprehensive income, net of income taxes: | |||||||||
Currency translation gain (loss) | 90 | (16 | ) | ||||||
Comprehensive income | $ | 24,919 | $ | 16,811 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
3
APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months | ||||||||||
Ended November 30, | ||||||||||
2000 | 1999 | |||||||||
(Unaudited) | ||||||||||
(In thousands) | ||||||||||
Cash flows provided by (used for) operating activities: | ||||||||||
Net income | $ | 24,829 | $ | 16,827 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Depreciation and amortization | 7,476 | 6,330 | ||||||||
Provision for uncollectible accounts | 2,863 | 3,510 | ||||||||
Deferred income taxes | (387 | ) | 561 | |||||||
Tax benefits of stock options exercised | 6,085 | 1,050 | ||||||||
Decrease (increase) in assets: | ||||||||||
Restricted cash | (8,765 | ) | (855 | ) | ||||||
Receivables, net | (1,695 | ) | (5,322 | ) | ||||||
Other assets | (1,205 | ) | 2,728 | |||||||
Increase (decrease) in liabilities: | ||||||||||
Accounts payable and accrued liabilities | 11,669 | 13,380 | ||||||||
Student deposits and deferred revenue | 4,636 | (6,689 | ) | |||||||
Other liabilities | 541 | 457 | ||||||||
Net cash provided by operating activities | 46,047 | 31,977 | ||||||||
Cash flows provided by (used for) investing activities: | ||||||||||
Net additions to property and equipment | (8,917 | ) | (8,468 | ) | ||||||
Purchase of marketable securities | (70,158 | ) | (10,749 | ) | ||||||
Maturities of marketable securities | 14,756 | 3,868 | ||||||||
Purchase of other assets | (246 | ) | (256 | ) | ||||||
Proceeds from sale of land | 593 | | ||||||||
Net cash used for investing activities | (63,972 | ) | (15,605 | ) | ||||||
Cash flows provided by (used for) financing activities: | ||||||||||
Purchase of Apollo Education Group Class A common stock | (23,386 | ) | ||||||||
Issuance of Apollo Education Group Class A common stock | 7,691 | 2,041 | ||||||||
Issuance of University of Phoenix Online common stock | 74,086 | |||||||||
Payments on long-term debt | (100 | ) | (100 | ) | ||||||
Net cash provided by (used for) financing activities | 81,677 | (21,445 | ) | |||||||
Currency translation gain (loss) | 90 | (16 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 63,842 | (5,089 | ) | |||||||
Cash and cash equivalents at beginning of period | 59,912 | 51,534 | ||||||||
Cash and cash equivalents at end of period | $ | 123,754 | $ | 46,445 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Apollo Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. The interim consolidated financial statements include the accounts of Apollo Group, Inc. (Apollo or the Company) and its wholly-owned subsidiaries, which include the University of Phoenix, Inc. (UOP), the Institute for Professional Development (IPD), Western International University, Inc. (WIU), and the College for Financial Planning Institutes Corporation (the College). This financial information reflects all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Unless otherwise noted, references to 2001 and 2000 refer to the periods ended November 30, 2000 and 1999, respectively.
On March 24, 2000, the Companys 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 UOP. The Companys 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.
2. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended August 31, 2000 included in the Companys Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the three-month period ended November 30, 2000 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.
3. The Companys operations are aggregated into a single reportable segment based upon their similar economic and operating characteristics. The Companys educational operations are conducted in similar markets and produce similar economic results. These operations provide higher education programs for working adults. The Companys operations are also subject to a similar regulatory environment, which includes licensing and accreditation.
4. Earnings attributable to the different classes of the Companys common stocks is as follows:
For the Three Months | ||||||||
Ended November 30, | ||||||||
2000 | 1999 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Apollo Education Group | $ | 24,439 | $ | 16,827 | ||||
University of Phoenix Online | 390 | | ||||||
Net income | $ | 24,829 | $ | 16,827 | ||||
The earnings attributable to University of Phoenix Online common stock represent 10.8% of the earnings of University of Phoenix Online from October 3, 2000, the date of the offering, through November 30, 2000. The remaining earnings of University of Phoenix Online are included in the earnings attributable to Apollo Education Group common stock.
Basic earnings per share for Apollo Education Group common stock for the three
months ended November 30, 2000 were computed by dividing Apollo Education Group
earnings (including its retained interest in University of Phoenix Online
earnings) by the weighted average number of Apollo Education Group common stock
outstanding during the period. Dilutive earnings per share was calculated
similarly, except that it included 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.
5
A reconciliation of the basic and diluted per share computations for Apollo Education Group Class A and Class B common stock is as follows:
For the Three Months Ended November 30, | |||||||||||||||||||||||||||
2000 | 1999 | ||||||||||||||||||||||||||
Weighted | Per | Weighted | Per | ||||||||||||||||||||||||
Average | Share | Average | Share | ||||||||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | ||||||||||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||||||
Basic net income per share | $ | 24,439 | 75,756 | $ | 0.32 | $ | 16,827 | 76,758 | $ | 0.22 | |||||||||||||||||
Effect of dilutive securities: | |||||||||||||||||||||||||||
Stock options | 1,050 | 737 | |||||||||||||||||||||||||
Diluted net income per share | $ | 24,439 | 76,806 | $ | 0.32 | $ | 16,827 | 77,495 | $ | 0.22 | |||||||||||||||||
Basic earnings per share of University of Phoenix Online common stock for the period from the date of the offering through November 30, 2000, was computed by dividing University of Phoenix Online earnings (excluding Apollo Education Groups retained interest in University of Phoenix Online earnings) by the number of shares of University of Phoenix Online common stock outstanding of 5,750,000. Diluted earnings per share was calculated similarly, except that it included the dilutive effect of the assumed exercise of options with respect to University of Phoenix Online common stock of approximately 730,000 stock options.
5. Certain amounts reported for the three months ended November 30, 1999, have been reclassified to conform to the November 30, 2000 presentation, having no effect on net income.
6. 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.
The information below for Apollo Education Group excludes its retained interest in University of Phoenix Online, which was 100% up until October 3, 2000 and subsequently decreased to 89.2% to reflect the issuance of University of Phoenix Online common stock.
Since its inception, the Company has financed University of Phoenix Onlines operations internally and has not incurred any related third-party debt. All of its cash receipts and disbursements are processed by the Company on University of Phoenix Onlines behalf. Prior to the offering, all amounts were settled through the funds allocated to/from Apollo Education Group component of University of Phoenix Onlines divisional net worth. Whenever University of Phoenix Online generated cash from operations, that cash was deemed to be transferred to Apollo Education Group and was accounted for as a return of capital. Whenever University of Phoenix Online had a cash need, that cash was deemed to be transferred from Apollo Education Group and was accounted for as a capital contribution. As a result of this policy, no inter-group interest income or expense was reflected in the consolidating statement of operations.
Upon the completion of the offering, the net proceeds of the offering of $74.1
million were transferred to University of Phoenix Online and accounted for as a
capital contribution. Subsequently, the difference between cash receipts and
cash outlays attributable to University of Phoenix Online have been accounted
for as a revolving credit advance 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. Accordingly, operating
results for Apollo Education Group and University of Phoenix Online for periods
subsequent to the offering will not be comparable to such operating results
prior to the offering.
6
Three Months Ended November 30, 2000 | ||||||||||||||||
Apollo | University | Apollo | ||||||||||||||
Education | of Phoenix | Group, | ||||||||||||||
Group | Online | Eliminations | Inc. | |||||||||||||
(Unaudited) | ||||||||||||||||
(In thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Tuition and other, net(1) | $ | 142,986 | $ | 34,087 | $ | | $ | 177,073 | ||||||||
Inter-group license fee revenue(2) |
1,363 | (1,363 | ) | | ||||||||||||
144,349 | 34,087 | (1,363 | ) | 177,073 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Instructional costs and services | ||||||||||||||||
External expenses(3) | 83,245 | 11,990 | 95,235 | |||||||||||||
Inter-group allocated expenses(4) |
(2,293 | ) | 2,293 | | ||||||||||||
Inter-group license
fee expense(2) |
1,363 | (1,363 | ) | | ||||||||||||
Selling and promotional | ||||||||||||||||
External expenses(3) | 23,598 | 7,410 | 31,008 | |||||||||||||
Inter-group allocated expenses(4) |
(192 | ) | 192 | | ||||||||||||
General and administrative | ||||||||||||||||
External expenses(3) | 11,986 | 11,986 | ||||||||||||||
Inter-group allocated expenses(4) |
(2,099 | ) | 2,099 | | ||||||||||||
114,245 | 25,347 | (1,363 | ) | 138,229 | ||||||||||||
Income from operations | 30,104 | 8,740 | 38,844 | |||||||||||||
Interest income, net | 2,474 | 694 | 3,168 | |||||||||||||
Income before income taxes | 32,578 | 9,434 | 42,012 | |||||||||||||
Provision for income taxes(5) | 13,325 | 3,858 | 17,183 | |||||||||||||
Net income | $ | 19,253 | $ | 5,576 | $ | | $ | 24,829 | ||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
Three Months Ended November 30, 1999 | ||||||||||||||||
Apollo | University | Apollo | ||||||||||||||
Education | of Phoenix | Group, | ||||||||||||||
Group | Online | Eliminations | Inc. | |||||||||||||
(Unaudited) | ||||||||||||||||
(In thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Tuition and other, net(1) | $ | 122,701 | $ | 20,717 | $ | | $ | 143,418 | ||||||||
Inter-group license fee revenue(2) | 829 | (829 | ) | | ||||||||||||
123,530 | 20,717 | (829 | ) | 143,418 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Instructional costs and services | ||||||||||||||||
External expenses(3) | 74,942 | 7,792 | 82,734 | |||||||||||||
Inter-group allocated expenses(4) | (1,921 | ) | 1,921 | | ||||||||||||
Inter-group license fee expense(2) | 829 | (829 | ) | | ||||||||||||
Selling and promotional | ||||||||||||||||
External expenses(3) | 19,650 | 2,909 | 22,559 | |||||||||||||
Inter-group allocated expenses(4) | (177 | ) | 177 | | ||||||||||||
General and administrative | ||||||||||||||||
External expenses(3) | 11,496 | 11,496 | ||||||||||||||
Inter-group allocated expenses(4) | (1,503 | ) | 1,503 | | ||||||||||||
102,487 | 15,131 | (829 | ) | 116,789 | ||||||||||||
Income from operations | 21,043 | 5,586 | 26,629 | |||||||||||||
Interest income, net | 1,317 | 1,317 | ||||||||||||||
Income before income taxes | 22,360 | 5,586 | 27,946 | |||||||||||||
Provision for income taxes(5) |
8,855 | 2,264 | 11,119 | |||||||||||||
Net income | $ | 13,505 | $ | 3,322 | $ | | $ | 16,827 | ||||||||
(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 Onlines 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 Onlines instructional costs and services, totaled $1.4 million and $829,000 for the three months ended November 30, 2000 and 1999, 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.
7
(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:
Three Months Ended | ||||||||
November 30, | ||||||||
2000 | 1999 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Instructional costs and services | $ | 2,293 | $ | 1,921 | ||||
Selling and promotional | 192 | 177 | ||||||
General and administrative | 2,099 | 1,503 | ||||||
$ | 4,584 | $ | 3,601 | |||||
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 Onlines 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.
7. The U.S. Department of Education Office of the Inspector General (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. In a draft audit report recently issued to one such client institution, the OIG raised issues with, among other things, certain aspects of the contractual arrangement between the client institution and IPD. The client institution is currently preparing its response to the OIGs draft audit report.
As the contractual arrangements between IPD and its client institutions are potentially at issue, IPD may contribute to the ultimate settlement, if any, of the client institutions OIG audits. During the first quarter of 2001, IPD recorded a charge of $1.4 million to provide for its share of the estimated settlement obligation relating to all of its client institutions. Our calculation of the estimated settlement obligation, which is reflected in instructional costs and services in the accompanying consolidated statement of operations, was based on our previous experience with respect to such settlements.
Although we believe that the OIGs audits of IPDs client institutions will be resolved without any material effect on our financial position, results of operations or cash flows, and without any material change in IPDs business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved.
8. 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 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.
9. Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133) establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 requires that an enterprise recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for changes in the fair
value of a derivative instrument depends on the intended use of the derivative
and resulting designation. The Company adopted SFAS No. 133 effective September
1, 2000, with no impact to the Companys results of operations as the Company
has no derivative financial instruments.
8
Review by Independent Accountants
The financial information as of November 30, 2000, and for the three-month period then ended, included in Part I pursuant to Rule 10-01 of Regulation S-X, has been reviewed by PricewaterhouseCoopers LLP (PricewaterhouseCoopers), our independent accountants, in accordance with standards established by the American Institute of Certified Public Accountants. PricewaterhouseCoopers report is included in this quarterly report.
PricewaterhouseCoopers does not carry out any significant or additional
audit tests beyond those that would have been necessary if its report had not
been included in this quarterly report. Accordingly, such report is not a
report or part of a registration statement within the meaning of Sections 7
and 11 of the Securities Act of 1933 and the liability provisions of Section 11
of such Act do not apply.
9
Report of Independent Accountants
To the Board of Directors and
Shareholders of Apollo Group, Inc.:
We have reviewed the accompanying consolidated balance sheet of Apollo Group, Inc. and its subsidiaries as of November 30, 2000, and the related consolidated statements of operations, of comprehensive income and of cash flows for each of the three-month periods ended November 30, 2000 and 1999. These financial statements are the responsibility of Apollo Group, Inc.s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of August 31, 2000, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders equity and of cash flows for the year then ended (not presented herein), and in our report dated September 29, 2000 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of August 31, 2000, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
December 19, 2000
10
PART I FINANCIAL INFORMATION
Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations of Apollo Group, Inc.
The following information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc. and the consolidated financial statements and related notes of Apollo Group, Inc. for the fiscal year ended August 31, 2000 included in our Form 10-K as filed with the Securities and Exchange Commission, as well as in conjunction with the consolidated financial statements and related notes of Apollo Group, Inc. for the three-month period ended November 30, 2000 included in Item 1.
This Form 10-Q, including the Managements Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc. contains forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Forward-looking statements in this Form 10-Q and Managements Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc. include, but are not limited to, statements such as 1) 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; 2) 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; 3) we anticipate the seasonal trends in the second and fourth quarters will continue in the future; and 4) although we believe that the OIGs audits of IPDs client institutions will be resolved without any material effect on our financial position, results of operations or cash flows, and without any material change in IPDs business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved.
Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors. Statements in this Form 10-Q, including Notes to Consolidated Financial Statements and Managements 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 UOP or certain IPD client institutions; 4) failure to obtain authorizations from states in which UOP does not currently provide degree programs; 5) failure to obtain the North Central Association of Colleges and Schools approval for UOP to operate in new states; 6) changes in student enrollment; and 7) other factors set forth in this Form 10-Q. 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.
RESULTS OF OPERATIONS
The following table sets forth our consolidated statement of operations data expressed as a percentage of net revenues for the periods indicated:
Three Months Ended | |||||||||
November 30, | |||||||||
2000 | 1999 | ||||||||
(Unaudited) | |||||||||
Revenues: | |||||||||
Tuition and other, net | 100.0 | % | 100.0 | % | |||||
Costs and expenses: | |||||||||
Instructional costs and services | 53.8 | 57.7 | |||||||
Selling and promotional | 17.5 | 15.7 | |||||||
General and administrative | 6.8 | 8.0 | |||||||
78.1 | 81.4 | ||||||||
Income from operations | 21.9 | 18.6 | |||||||
Interest income, net | 1.8 | 0.9 | |||||||
Income before income taxes | 23.7 | 19.5 | |||||||
Less provision for income taxes | 9.7 | 7.8 | |||||||
Net income | 14.0 | % | 11.7 | % | |||||
11
THREE MONTHS ENDED NOVEMBER 30, 2000 (FIRST QUARTER OF 2001) COMPARED WITH THREE MONTHS ENDED NOVEMBER 30, 1999 (FIRST QUARTER OF 2000)
Tuition and other net revenues increased by 23.5% to $177.1 million in the three months ended November 30, 2000 from $143.4 million in the three months ended November 30, 1999 due primarily to a 15.2% increase in average full-time equivalent degree student enrollments and tuition price increases averaging four to six percent (depending on the geographic area and program) at UOP. Most of our UOP campuses, which include their respective learning centers, had increases in net revenues and average full-time equivalent degree student enrollments from the three months ended November 30, 1999 to the three months ended November 30, 2000.
Tuition and other net revenues for the three months ended November 30, 2000 and 1999 consists primarily of $160.8 million and $126.2 million, respectively, of net tuition revenues from students enrolled in degree programs and $4.2 million and $7.2 million, respectively, of net tuition revenues from students enrolled in non-degree programs.
Instructional costs and services increased by 15.1% to $95.2 million in the three months ended November 30, 2000 from $82.7 million in the three months ended November 30, 1999 due primarily to the direct costs necessary to support the increase in degree student enrollments. Direct costs consist primarily of faculty compensation, related staff salaries at each respective location, classroom lease expenses, and financial aid processing costs. These costs as a percentage of tuition and other net revenues decreased to 53.8% in the three months ended November 30, 2000 from 57.7% in the three months ended November 30, 1999 due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student 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 37.5% to $31.0 million in the three months ended November 30, 2000 from $22.6 million in the three months ended November 30, 1999 due primarily to additional advertising and marketing. These expenses as a percentage of tuition and other net revenues increased to 17.5% in the three months ended November 30, 2000 from 15.7% in the three months ended November 30, 1999 due to increased advertising primarily related to University of Phoenix Online.
General and administrative expenses increased by 4.3% to $12.0 million in the three months ended November 30, 2000 from $11.5 million in the three months ended November 30, 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 decreased to 6.8% in the three months ended November 30, 2000 from 8.0% in the three months ended November 30, 1999 due primarily to greater 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 $3.2 million and $1.3 million in the three months ended November 30, 2000 and 1999, respectively. This increase was attributable to the increase in cash equivalents and marketable securities between periods primarily as a result of the University of Phoenix Online offering. Interest expense was $111,000 and $48,000 for the three months ended November 30, 2000 and 1999, respectively.
Our effective tax rate increased to 40.9% in the three months ended November 30, 2000 from 39.8% in the three months ended November 30, 1999. The increase is due primarily to the relative impact of tax-exempt interest income and of expenses that are non-deductible for tax purposes.
Net income increased to $24.8 million in the three months ended November 30, 2000 from $16.8 million in the three months ended November 30, 1999 due primarily to increased enrollments, increased tuition rates, and improved utilization of 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 enrollments and related revenues generally are lower than other quarters due to seasonal breaks in December and January. Second quarter costs and expenses historically increase as a percentage of tuition and other net revenues as a result of certain fixed costs not significantly affected by the seasonal second quarter declines in net revenues.
We 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.
12
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to $46.0 million in the three months ended November 30, 2000 from $32.0 million in the three months ended November 30, 1999. The increase resulted primarily from increased net income, increased tax benefits of stock options exercised and a larger increase in student deposits and deferred revenue partially offset by a larger increase in restricted cash.
Capital expenditures remained relatively flat at $8.9 million during the three months ended November 30, 2000 compared to $8.5 million in the three months ended November 30, 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 November 30, 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 November 30, 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 November 30, 2000, we had repurchased approximately 4,379,000 shares at a total cost of approximately $103.2 million.
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 UOP. 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 that business 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 to 75 days from receipt. As of November 30, 2000, we had approximately $44.4 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.
In January 1998, the U.S. Department of Education Office of the Inspector General (OIG) began performing an audit of UOPs administration of the Title IV Programs. The team previously presented questions regarding UOPs interpretation of the 12-hour rule, distance education programs, and institutional refund obligations. UOP 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 UOP. To bring this audit to closure and settle all outstanding issues prior to the final OIG report, which was issued on March 31, 2000, UOP 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 UOP or its students. This modification does not require any change to University of Phoenix Onlines learning team attendance log. Part of the agreement, dated March 27, 2000, reached with the U.S. Department of Education requires UOP 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 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. In a draft audit report recently issued to one such client institution, the OIG raised issues with, among other things, certain aspects of the contractual arrangement between the client institution and IPD. The client institution is currently preparing its response to the OIGs draft audit report.
As the contractual arrangements between IPD and its client institutions are potentially at issue, IPD may contribute to the ultimate settlement, if any, of the client institutions OIG audits. During the first quarter of 2001, IPD recorded a charge of $1.4 million to provide for its share of the estimated settlement obligation relating to all of its client institutions. Our calculation of the estimated settlement obligation, which is reflected in instructional costs and services in the accompanying consolidated statement of operations, was based on our previous experience with respect to such settlements.
Although we believe that the OIGs audits of IPDs client institutions
will be resolved without any material effect on our financial position, results
of operations or cash flows, and without any material change in IPDs business
strategy, as with any program review or audit, no assurance can be given as to
the final outcome as the matters are not yet resolved.
13
IMPACT OF INFLATION
Inflation has not had a significant impact on our historical operations.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Our portfolio of marketable securities includes numerous issuers, varying types
of securities and maturities. We intend to hold these securities to maturity.
The fair value of our portfolio of marketable securities would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due primarily to the short-term nature of the portfolio. We do
not hold or issue derivative financial instruments.
14
PART II OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | Not Applicable | ||
Item 2. | Changes in Securities and Use of Proceeds | Not Applicable | ||
Item 3. | Defaults Upon Senior Securities | Not Applicable | ||
Item 4. | Submission of Matters to a Vote of Security Holders | Not Applicable | ||
Item 5. | Other Information | Not Applicable | ||
Item 6. | Exhibits and Reports on Form 8-K |
(a) Exhibits:
Exhibit 15.1 Letter on Unaudited Interim Financial Information |
Exhibit 27 Financial Data Schedule |
Exhibit 99 University of Phoenix Online Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations |
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended November 30, 2000. |
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
APOLLO GROUP, INC. (Registrant) |
||
Date: January 12, 2001 | By: /s/ Kenda B. Gonzales | |
Kenda B. Gonzales Chief Financial Officer |
||
By: /s/ Daniel E. Bachus | ||
Daniel E. Bachus Chief Accounting Officer and Controller |
||
By: /s/ Todd S. Nelson | ||
Todd S. Nelson President |
16
APOLLO GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
PAGE |
||
15.1 Letter on Unaudited Interim Financial Information |
Filed herewith |
|
27 Financial Data Schedule |
Filed herewith |
|
99 University of Phoenix Online Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations | Filed herewith |
17
|