APOL Apollo Education Grp., Inc.

Apollo Group, Inc. (Nasdaq: APOL) (�Apollo Group� or the �Company�) today reported fiscal 2007 financial results for its second quarter ended February 28, 2007. In addition, the Company announced that it will be filing later today with the Securities and Exchange Commission (�SEC�) its Annual Report on Form 10-K for the year ended August 31, 2006, as well as its Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006, November 30, 2006 and February 28, 2007. With these filings, the Company will be current with the SEC on all required and delinquent periodic filings. These filings contain financial statements that were restated as a result of Apollo Group�s investigation into its past stock option practices, as well as other items. On June 23, 2006, the Company�s Board of Directors authorized a Special Committee to retain independent legal counsel, who in turn retained forensic accountants, to assist them in conducting an independent review of the Company�s historical practices related to stock option grants. On December 16, 2006, the Special Committee�s final factual findings were announced in a press release. In November 2006, with the assistance of outside legal counsel, the Company began its own in-depth internal review to ascertain the most likely measurement date of every stock option grant since its initial public offering (�IPO�). As a result of the restatement, for the fiscal years 1994 through 2005, the Company has recorded pre-tax non-cash compensation expense of $52.9 million. As previously announced, the Company�s continued listing on Nasdaq is subject to review by the Nasdaq Listing and Hearing Review Council. The Company believes, based upon the filings that will be made later today with the SEC and additional information previously submitted to the Listing Council, that it will regain compliance with the requirements for continued listing on Nasdaq. �From a governance standpoint, Apollo is now a much stronger company, and we are confident in our procedures going forward,� said Brian Mueller, president of Apollo Group, Inc. �We have significantly strengthened the governance and internal controls of the Company, including the implementation of a new process for granting stock options, the addition of two new independent members of the Board of Directors, a new Chairperson of the Audit Committee, and a new Compensation Committee. With the investigation and restatement behind us, our energies are solely focused on creating long-term shareholder value.� Based on the independent review conducted by the Special Committee as well as Apollo Group�s internal review, the Company determined that 57 of the 100 total grants made during the period from 1994 through September 2006 used incorrect measurement dates for accounting purposes. The Special Committee also found no direct evidence that the grant date for any of the large management grants was selected with the benefit of hindsight. The Company also identified four material weaknesses in internal controls over financial reporting, which it believes it has made significant progress in remediating as of February 28, 2007. The material weaknesses related to ineffective internal control over financial reporting include: 1. The granting of stock options and the related recording and disclosure of share based compensation expense; 2. The recording of allowance for doubtful accounts; 3. The recording of impairments for goodwill; and 4. The deduction of certain compensation expenses under the Internal Revenue Code. The Company had four primary adjustments to its financial statements: 1. A cumulative pre-tax non-cash compensation expense of $52.9 million covering the period of 1994 through 2005; 2. An accrual of $42.8 million, as of February 2007, for its best estimate with respect to potential tax liabilities, including interest and penalties, under IRS code 162(m); 3. An increase in the allowance for doubtful accounts of $38 million, $24 million of which relates to years prior to fiscal 2006; 4. A goodwill impairment charge of $20.2 million (non-cash) related to the Company�s September 1997 acquisition of the College for Financial Planning (�CFP�). The financial impact of the adjustments for fiscal 2006 and the first quarter of 2007 is summarized in the table below. Apollo Group, Inc. Selected Financial Information � As�Previously Announced Final Results Variance % change� ($ in millions except per share data) Fiscal Year 2006: Revenues $2,476.3� $2,477.5� $1.2� 0.0% Income from operations 697.3� 650.0� (47.3) -6.8% Income from operations margin % 28.2% 26.2% (2.0) pts NA Diluted EPS $2.49� $2.35� ($0.14) -5.6% � First Quarter of 2007: Revenues $668.2� $667.8� ($0.4) -0.1% Income from operations 183.7� 180.0� (3.7) -2.0% Income from operations margin % 27.5% 27.0% (0.5) pts NA Diluted EPS $0.66� $0.65� ($0.01) -1.5% Second Quarter Fiscal 2007 Results of Operations Net income was $60.3 million, or $0.35 per diluted share (174.6 million weighted average diluted shares outstanding), compared to $79.1 million, or $0.45 per diluted share (175.4 million weighted average diluted shares outstanding) for the three months ended February 28, 2007 and 2006, respectively. Before giving effect to share based compensation expense and other unusual pre-tax charges of $5.7 million and $26.0 million in the second quarter of fiscal 2007 and fiscal 2006, respectively, earnings per diluted share were $0.44 in the second quarter of 2007, as compared to $0.57 in the second quarter of 2006. (See the reconciliation of Generally Accepted Accounting Principles ("GAAP") financial information to non-GAAP financial information in the tables section of this press release.) Consolidated revenues for the three months ended February 28, 2007, totaled $608.7 million, which represents a 6.7% increase over the second quarter of fiscal 2006. Total degreed enrollments grew by 10.2%. The University of Phoenix, Inc. (�UPX�) accounted for 92.9% of total tuition and other revenues, net. Commenting on the quarter, Mueller said, �We are pleased with the progress we have made in enrollment growth which is driven by productivity improvements in advertising, new enrollment hires, enhanced retention strategies and our branding campaign. New Degreed Enrollments, which we are reporting for the first time, increased 24% year-over-year. The increase in enrollment growth drove revenue growth as well, despite the continued impact of the mix shift to our lower priced Axia program, as well as additional holiday breaks in 2007 versus 2006. In May, we instituted a price increase at Axia which should further benefit revenue growth going forward.� Mueller continued, �We have refined, with the support of our Board of Directors, a long-term strategic plan to best ensure the effective deployment of our resources and capital. Our goal, over time, is to generate mid-to-high single-digit annual domestic revenue growth and low double-digit annual operating income and free cash flow growth.� Instructional costs and services increased by $33.8 million to $296.4 million, a 12.9% increase, in the three months ended February 28, 2007, as compared to the three months ended February 28, 2006, primarily resulting from increases in employee-related expenses due to the higher enrollment numbers, and wage adjustments instituted in December 2005 that increased pay principally to entry-level employees. Selling and promotional expenses increased by $42.7 million to $166.9 million, a 34.4% increase, in the three months ended February 28, 2007, from the three months ended February 28, 2006, primarily resulting from increases in the number of enrollment counselors and an increase in advertising expenditures for both the Company�s internet-based advertising campaign as well as the launch of a national televised branding campaign. General and administrative expenses decreased by $5.4 million to $53.6 million, a 9.2% decline, in the three months ended February 28, 2007, from the three months ended February 28, 2006. Before giving effect to stock option modifications of $12.1 million in the second quarter of fiscal 2007, as well as the unusual charges discussed above of $5.7 million and $26.0 million in the second quarter of fiscal 2007 and fiscal 2006, respectively, general and administrative expenses were $35.8 million and $33.0 million in the three months ended February 28, 2007 and 2006, respectively, which represents approximately 5.9% of revenues in both periods. Six Months of Fiscal 2007 Results of Operations Net income attributed to Apollo Group common stock was $174.2 million, or $1.00 per diluted share, (174.5 million weighted average diluted shares outstanding), compared to $207.7 million, or $1.17 per diluted share, (178.1 million weighted average diluted shares outstanding) for the six months ended February 28, 2007 and 2006, respectively. Total consolidated revenues for Apollo Group for the six months ended February 28, 2007 were $1.3 billion, a 6.4% increase over the six months of fiscal 2006. Average quarterly degree enrollments grew by 9.3%. UPX accounted for 91.9% of total tuition and other revenues, net. Expanded Disclosure of Financial and Operating Metrics Apollo Group has expanded the financial data and operating metrics that it will be reporting on a quarterly basis, and has provided this historical information in the table below. The Company has broken out Degree Seeking Revenues, Single Course/Continuing Ed Revenues, and Other Revenues. Furthermore, the Company has provided Revenue by Degree Type, and New Degreed Enrollments. Selected Financial Data and Operating Metrics � Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Revenues (in thousands) Degree Seeking Gross Revenues (1) $ 620,373� $ 559,824� $ 634,288� $ 613,329� $ 655,018� $ 602,256� Less: Discounts (29,409) (25,854) (22,201) (27,917) (25,108) (28,325) Degree Seeking Net Revenues (1) 590,964� 533,970� 612,087� 585,412� 629,910� 573,931� Single Course/Continuing Ed Revenues (1) 3,684� 3,993� 6,826� 7,660� 5,010� 5,352� Other (2) 34,025� 32,587� 34,484� 31,841� 32,866� 29,410� $ 628,673� $ 570,550� $ 653,397� $ 624,913� $ 667,786� $ 608,693� � Revenue by Degree Type (in thousands) (1) Associates $ 73,226� $ 84,498� $ 99,050� $ 108,694� $ 124,527� $ 130,016� Bachelors 366,926� 315,330� 357,111� 336,720� 347,086� 311,301� Masters 171,720� 151,312� 167,675� 156,312� 171,524� 149,139� Doctoral 8,501� 8,684� 10,452� 11,603� 11,881� 11,800� Less: Discounts (29,409) (25,854) (22,201) (27,917) (25,108) (28,325) $ 590,964� $ 533,970� $ 612,087� $ 585,412� $ 629,910� $ 573,931� � Degreed Enrollment (1) (3) Associates 49,000� 54,900� 63,600� 74,000� 83,000� 88,300� Bachelors 149,200� 145,500� 145,200� 140,700� 139,900� 139,300� Masters 68,000� 66,700� 64,500� 63,400� 64,400� 66,100� Doctoral 3,200� 3,700� 3,900� 4,200� 4,500� 4,700� 269,400� 270,800� 277,200� 282,300� 291,800� 298,400� � Degree Seeking Gross Revenues per Degreed Enrollment Associates $ 1,494� $ 1,539� $ 1,557� $ 1,469� $ 1,500� $ 1,472� Bachelors 2,459� 2,167� 2,459� 2,393� 2,481� 2,235� Masters 2,525� 2,269� 2,600� 2,465� 2,663� 2,256� Doctoral 2,657� 2,347� 2,680� 2,763� 2,640� 2,511� All degress (after discounts) 2,194� 1,972� 2,208� 2,074� 2,159� 1,923� � New Degreed Enrollments (1) (4) Associates 18,000� 18,800� 21,500� 26,800� 31,200� 28,400� Bachelors 18,700� 19,500� 20,500� 21,700� 20,700� 20,900� Masters 9,200� 8,700� 9,000� 10,100� 9,400� 9,000� Doctoral 400� 600� 500� 700� 700� 600� 46,300� 47,600� 51,500� 59,300� 62,000� 58,900� � (1)Represents information for UPX and Axia College only. (2)Represents revenues from IPD, CFP, WIU (excluding Axia college which is included in (1) ), Insight Schools and other. (3)Represents individual students enrolled in our degree seeking programs that attended a course during the quarter and did not graduate as of the end of the quarter (includes Axia students enrolled in WIU or UPX) (rounded to hundreds). (4)Represents individual students enrolled in our degree seeking programs that attended a course during the quarter but did not attend a course in the last 12 months (includes Axia students enrolled in WIU or UPX) (rounded to hundreds). Conference Call Information The Company will hold a conference call to discuss these earnings results as well as its long-term strategic plan at 8:30 AM Eastern, 5:30 AM Pacific, tomorrow, Tuesday, May 22, 2007. The call may be accessed by dialing (877) 292-6888 (domestic) or (706) 634-1393 (international). The conference ID number is 9860734. A live webcast of this event may be accessed by visiting the Company�s website at: www.apollogrp.edu. A replay of the call will be available on the website or at (706) 645-9291 (conf. ID # 9860734) until June 5, 2007. Forward-Looking Safe Harbor Statements in this press release regarding Apollo Group�s business outlook, future financial and operating results, and overall future prospects, as well as statements regarding the future effect of Apollo Group�s restatement of historical financial statements, the anticipated amount of additional expenses and related matters, are forward-looking statements, and are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current information and expectations and involve a number of risks and uncertainties. Actual results may differ materially from those projected in such statements due to various factors. For a discussion of the various factors that may cause actual results to differ materially from those projected, please refer to the risk factors and other disclosures contained in Apollo Group�s Form 10-K, Forms 10-Q, and other filings with the Securities and Exchange Commission. About Apollo Group, Inc. Apollo Group, Inc. has been an education provider for more than 30 years, operating the University of Phoenix, the Institute for Professional Development, the College for Financial Planning, Western International University and Insight Schools. The Company offers innovative and distinctive educational programs and services from high school through college level at 263 locations in 39 states, Puerto Rico, Alberta, British Columbia, the Netherlands, and Mexico, as well as online, throughout the world. For more information about Apollo Group, Inc. and its subsidiaries, call (800) 990-APOL or visit Apollo on the company website at: www.apollogrp.edu. APOLLO GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) � For the Three Months Ended February 28, � For the Six Months Ended February 28, 2007� 2006� 2007� 2006� ($ in thousands, except per share amounts) Restated Restated Revenues: Tuition and other, net $ 608,693� $ 570,550� $ 1,276,479� $ 1,199,223� Costs and expenses: Instructional costs and services 296,360� 262,634� 592,334� 527,742� Selling and promotional 166,940� 124,246� 322,375� 252,218� General and administrative 53,593� 58,967� 89,989� 86,296� Total costs and expenses 516,893� 445,847� 1,004,698� 866,256� Income from operations 91,800� 124,703� 271,781� 332,967� Interest income and other, net 6,978� 3,526� 13,410� 7,984� Income before income taxes 98,778� 128,229� 285,191� 340,951� Provision for income taxes 38,440� 49,140� 110,979� 133,282� Net income $ 60,338� $ 79,089� $ 174,212� $ 207,669� � Earnings per share attributed to Apollo Group Class A common stock: � Basic income per share $ 0.35� $ 0.46� $ 1.01� $ 1.18� Diluted income per share $ 0.35� $ 0.45� $ 1.00� $ 1.17� Basic weighted average shares outstanding 173,185� 173,496� 173,153� 175,800� Diluted weighted average shares outstanding 174,624� 175,435� 174,543� 178,094� APOLLO GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) � As of ($ in thousands) February 28, 2007 � August 31, 2006 Assets: Current assets Cash and cash equivalents $ 424,088� $ 309,058� Restricted cash 281,838� 238,267� Marketable securities, current portion 30,138� 45,978� Accounts receivable, net 195,795� 160,583� Deferred tax assets, net, current portion 42,316� 32,622� Other current assets 18,500� � 16,424� Total current assets 992,675� 802,932� Property and equipment, net 343,579� 328,440� Marketable securities , less current portion 45,053� 53,692� Goodwill, net 31,029� 16,891� Deferred tax assets, net, less current portion 66,014� 53,131� Other assets (includes receivable from related party of $16,237 and $15,758 as of 2007 and 2006, respectively) 27,502� � 27,919� Total assets $ 1,505,852� � $ 1,283,005� � Liabilities and Shareholders' Equity: Current liabilities Accounts payable $ 39,147� $ 61,289� Accrued liabilities 105,746� 73,513� Current portion of long-term liabilities 21,290� 23,101� Income taxes payable 33,637� 47,812� Student deposits 278,959� 254,130� Current portion of deferred revenue 146,201� � 135,911� Total current liabilities 624,980� 595,756� Deferred revenue, less current portion 588� 384� Long-term liabilities, less current portion 76,630� � 82,492� Total liabilities 702,198� � 678,632� � Commitments and contingencies � Shareholders' equity Preferred stock, no par value, 1,000,000 shares authorized; none issued -� -� Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,004,000 issued at February 28, 2007 and August 31, 2006, and 172,707,000 and 172,555,000 outstanding at February 28, 2007 and August 31, 2006, respectively 103� 103� Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 475,000 issued and outstanding at February 28, 2007 and August 31, 2006 1� 1� Additional paid-in capital -� -� Apollo Group Class A treasury stock, at cost, 15,297,000 and 15,449,000 shares at February 28, 2007 and August 31, 2006, respectively (1,043,682) (1,054,046) Retained earnings 1,848,008� 1,659,349� Accumulated other comprehensive loss (776) � (1,034) Total shareholders' equity 803,654� � 604,373� Total liabilities and shareholders' equity $ 1,505,852� � $ 1,283,005� APOLLO GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) � For the Six Months Ended Feb 28, 2007� 2006� ($ in thousands) Restated Cash flows provided by operating activities: Net income $ 174,212� $ 207,669� Adjustments to reconcile net income to net cash provided by operating activities: Share based compensation 31,879� 11,267� Excess tax benefits from share based compensation (1,064) (12,853) Depreciation and amortization 34,789� 32,506� Amortization of marketable securities discounts and premium, net 109� 673� Provision for uncollectible accounts receivable 52,635� 47,751� Deferred income taxes (22,577) (6,614) Changes in assets and liabilities: Accounts receivable, net (87,847) (38,517) Other assets (2,275) 3,406� Accounts payable and accrued liabilities (5,312) (11,847) Income taxes payable (13,898) 13,848� Student deposits 24,829� 9,067� Deferred revenue 10,494� (8,685) Other liabilities (2,227) � 4,748� Net cash provided by operating activities 193,747� � 252,419� Cash flows (used in) provided by investing activities: Additions to property and equipment (26,828) (15,308) Purchase of land and buildings related to new headquarters building (23,385) (14,761) Purchase of Insight Schools, net of cash (15,079) -� Purchase of marketable securities including auction rate securities (545,475) (647,820) Maturities of marketable securities including auction rate securities 571,816� 782,084� (Decrease) increase in restricted cash (45,542) 4,957� Purchase of other assets -� � (721) Net cash (used in) provided by investing activities (84,493) � 108,431� Cash flows provided by (used in) financing activities: Repurchase of Apollo Group Class A common stock -� (510,882) Issuance of Apollo Group Class A common stock 4,454� 19,119� Cash paid for cancellation of vested options -� (6,330) Excess tax benefits from share based compensation 1,064� � 12,853� Net cash provided by (used in) used in financing activities 5,518� � (485,240) Currency translation gain (loss) 258� � (296) Net increase (decrease) in cash and cash equivalents 115,030� (124,686) Cash and cash equivalents, beginning of period 309,058� � 137,184� Cash and cash equivalents, end of period $ 424,088� � $ 12,498� � Supplemental disclosure of non-cash investing activities Credits received for tenant improvements $ 2,368� $ 10,777� Purchases of property and equipment included in accounts payable $ 3,168� $ 15,510� APOLLO GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED SUPPLEMENTAL OPERATING EXPENSE DETAIL (unaudited) � Instructional Costs and Services Detail % of Revenues For the Three Months Ended Feb. 28, � For the Three Months Ended Feb. 28, � % Change� 2007� 2006� 2007� 2006� 2007 vs. 2006 ($ in millions) Restated Restated Employee compensation and related expenses $108.4� $91.4� 17.8% 16.0% 18.6% Faculty compensation 53.5� 49.1� 8.8% 8.6% 9.0% Classroom lease expenses and depreciation 49.6� 46.7� 8.1% 8.2% 6.2% Other instructional costs and services 40.3� 37.2� 6.6% 6.5% 8.3% Bad debt expense 26.2� 23.7� 4.3% 4.2% 10.5% Financial aid processing costs 14.4� 12.6� 2.4% 2.2% 14.3% Share based compensation 4.0� 1.9� 0.7% 0.3% 110.5% Instructional costs and services $296.4� $262.6� 48.7% 46.0% 12.9% Selling and Promotional Expense Detail % of Revenues For the Three Months Ended Feb. 28, � For the Three Months Ended Feb. 28, � % Change� 2007� 2006� 2007� 2006� 2007 vs.2006 ($ in millions) Restated Restated Enrollment advisors' compensation and related expenses $79.2� $62.7� 13.0% 11.0% 26.3% Advertising 72.2� 49.4� 11.9% 8.7% 46.2% Other selling and promotional expenses 14.5� 11.9� 2.4% 2.1% 21.8% Share based compensation 1.0� 0.2� 0.1% 0.0% 400.0% Selling and promotional expenses $166.9� $124.2� 27.4% 21.8% 34.4% General and Administrative Expense Detail % of Revenues For the Three Months Ended Feb. 28, � For the Three Months Ended Feb. 28, % Change� 2007� 2006� 2007� 2006� 2007 vs.2006 ($ in millions) Restated Restated Employee compensation and related expenses $13.3� $38.8� 2.2% 6.8% -65.7% Share based compensation 16.8� 5.0� 2.8% 0.9% 236.0% Legal, audit, and corporate insurance 4.6� 3.2� 0.7% 0.5% 43.8% Administrative space and depreciation 6.6� 5.3� 1.1% 0.9% 24.5% Other general and administrative expenses 12.3� 6.7� 2.0% 1.2% 83.6% General and administrative expenses $53.6� $59.0� 8.8% 10.3% -9.2% Instructional Costs and Services Detail % of Revenues For the Six Months Ended Feb. 28, � For the Six Months Ended Feb. 28, � % Change� 2007� 2006� 2007� 2006� 2007 vs.2006 ($ in millions) Restated Restated Employee compensation and related expenses $214.9� $180.9� 16.8% 15.1% 18.8% Faculty compensation 111.0� 102.4� 8.7% 8.5% 8.4% Classroom lease expenses and depreciation 99.3� 93.5� 7.8% 7.8% 6.2% Other instructional costs and services 80.7� 73.7� 6.3% 6.1% 9.5% Bad debt expense 49.3� 47.8� 3.9% 4.0% 3.1% Financial aid processing costs 29.2� 25.5� 2.3% 2.1% 14.5% Share based compensation 7.9� 3.9� 0.6% 0.3% 102.6% Instructional costs and services $592.3� $527.7� 46.4% 44.0% 12.2% Selling and Promotional Expense Detail % of Revenues For the Six Months Ended Feb. 28, � For the Six Months Ended Feb. 28, � % Change� 2007� 2006� 2007� 2006� 2007 vs. 2006 ($ in millions) Restated Restated Enrollment advisors' compensation and related expenses $154.9� $119.5� 12.1% 10.0% 29.6% Advertising 137.5� 105.9� 10.8% 8.8% 29.8% Other selling and promotional expenses 27.9� 26.2� 2.2% 2.2% 6.5% Share based compensation 2.1� 0.6� 0.1% 0.0% 250.0% Selling and promotional expenses $322.4� $252.2� 25.2% 21.0% 27.8% General and Administrative Expense Detail % of Revenues For the Six Months Ended Feb. 28, � For the Six Months Ended Feb. 28, � % Change� 2007� 2006� 2007� 2006� 2007 vs.2006 ($ in millions) Restated Restated Employee compensation and related expenses $26.0� $49.8� 2.0% 4.1% -47.8% Share based compensation 22.0� 6.7� 1.7% 0.6% 228.4% Legal, audit, and corporate insurance 9.0� 5.6� 0.7% 0.5% 60.7% Administrative space and depreciation 13.0� 10.9� 1.0% 0.9% 19.3% Other general and administrative expenses 20.0� 13.3� 1.6% 1.1% 50.4% General and administrative expenses $90.0� $86.3� 7.1% 7.2% 4.3% Reconciliation of GAAP financial information to non-GAAP financial information � For the Three Months Ended February 28, 2007� � 2006� (in millions, except per share amounts) Restated Net income as reported $ 60.3� � $ 79.1� � Reconciling items: Share based compensation expense 21.7� 7.1� Unusual charges (1) 5.7� � 26.0� 27.4� 33.1� Less tax effects (10.7) � (12.7) 16.7� � 20.4� Net income adjusted to exclude share basedcompensation expense and unusual charges $ 77.0� � $ 99.5� � Diluted weighted average shares outstanding 174.6� � 175.4� � Diluted income per share adjusted to exclude share based compensation expense and unusual charges $ 0.44� � $ 0.57� � � (1) The $5.7 million charge in fiscal 2007 represents professional fees related to the stock option investigation and restatement, as well as a non-cash fair value adjustment for stock options modified for former employees. The $26.0 million in 2006 represents severance charged in connection with the resignation of the Company�s former CEO.