UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended November 30, 2007
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 0-25232
APOLLO GROUP, INC.
(Exact name of registrant as specified in its charter)
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ARIZONA
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86-0419443
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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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.
YES
þ
NO
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Securities Exchange Act.
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Securities Exchange Act).
YES
o
NO
þ
AS OF DECEMBER 21, 2007, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:
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Apollo Group Class A common stock, no par value
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167,252,000 Shares
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Apollo Group Class B common stock, no par value
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475,000 Shares
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APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page 2 of 30
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A), contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical fact may be
forward-looking statements. Such forward-looking statements include, among others, those statements
regarding future events and future results of Apollo Group, Inc. (the Company, Apollo Group,
Apollo, APOL, we, us or our) that are based on current expectations, estimates,
forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date
made and are not guarantees of future performance. In some cases, forward-looking statements can be
identified by terminology such as may, will, should, believes, expects, anticipates,
estimates, plans, predicts, targets, potential, continue, objectives, or the negative
of these terms or other comparable terminology. Such forward-looking statements are necessarily
estimates based upon current information and involve a number of risks and uncertainties. Such
statements should be viewed with caution. Actual events or results may differ materially from the
results anticipated in these forward-looking statements as a result of a variety of factors. While
it is impossible to identify all such factors, factors that could cause actual results to differ
materially from those estimated by us include but are not limited to:
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changes in the regulation of the education industry, including those items set forth in
Item 1 of our Annual Report on Form 10-K for the year ended August 31, 2007, under the
sections titled Regulatory Environment, Accreditation, Federal Financial Aid
Programs, and State Authorization;
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each of the factors discussed in Item 1A of our Annual Report on Form 10-K for the year
ended August 31, 2007,
Risk Factors;
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those factors set forth in Item 7 of our Annual Report on Form 10-K for the year ended
August 31, 2007; and
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changes in the requirements surrounding the reports that we file with the Securities and
Exchange Commission (SEC).
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The cautionary statements referred to in this section also should be considered in connection with
any subsequent written or oral forward-looking statements that may be issued by us or persons
acting on our behalf. 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. Furthermore, we cannot guarantee future results, events, levels of
activity, performance, or achievements.
Page 3 of 30
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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As of
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November 30,
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August 31,
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($ in thousands)
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2007
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2007
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Assets:
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Current assets
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Cash and cash equivalents
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$
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542,128
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$
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339,319
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Restricted cash
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298,754
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296,469
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Marketable securities, current portion
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30,324
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31,278
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Accounts receivable, net
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187,551
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190,912
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Deferred tax assets, current portion
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51,186
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50,885
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Other current assets
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21,124
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16,515
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Total current assets
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1,131,067
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925,378
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Property and equipment, net
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376,102
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364,207
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Marketable securities, less current portion
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18,017
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22,084
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Goodwill
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66,671
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29,633
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Deferred tax assets, less current portion
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89,016
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80,077
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Other assets
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35,861
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28,484
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Total assets
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$
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1,716,734
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$
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1,449,863
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Liabilities and Shareholders Equity:
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Current liabilities
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Accounts payable
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$
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44,624
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$
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80,729
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Accrued liabilities
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105,418
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103,651
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Current portion of long-term liabilities
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21,057
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21,093
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Income taxes payable
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66,416
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43,351
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Student deposits
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329,862
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328,008
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Current portion of deferred revenue
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159,724
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167,003
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Total current liabilities
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727,101
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743,835
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Deferred revenue, less current portion
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237
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295
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Long-term liabilities, less current portion
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123,498
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71,893
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Total liabilities
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850,836
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816,023
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Commitments and contingencies (Note 8)
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Shareholders equity
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Preferred stock, no par value
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Apollo Group Class A nonvoting common stock, no par
value
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103
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103
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Apollo Group Class B voting common stock, no par value
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1
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1
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Additional paid-in capital
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Apollo Group Class A treasury stock, at cost
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(1,370,036
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)
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(1,461,368
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Retained earnings
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2,237,492
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2,096,385
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Accumulated other comprehensive loss
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(1,662
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)
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(1,281
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)
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Total shareholders equity
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865,898
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633,840
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Total liabilities and shareholders equity
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$
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1,716,734
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$
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1,449,863
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4 of 30
APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months
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Ended November 30,
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(in thousands, except per share amounts)
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2007
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2006
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Revenues:
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Tuition and other, net
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$
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780,674
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$
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667,786
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Costs and expenses:
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Instructional costs and services
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333,289
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294,755
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Selling and promotional
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176,909
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155,435
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General and administrative
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51,281
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37,615
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Total costs and expenses
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561,479
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487,805
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Income from operations
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219,195
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179,981
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Interest income and other, net
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9,650
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6,432
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Income before income taxes
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228,845
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186,413
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Provision for income taxes
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88,980
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72,539
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Net Income
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$
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139,865
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$
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113,874
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Earnings per share:
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Basic income per share
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$
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0.84
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$
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0.66
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Diluted income per share
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$
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0.83
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$
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0.65
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Basic weighted average shares outstanding
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167,036
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173,122
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Diluted weighted average shares outstanding
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169,289
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174,521
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5 of 30
APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three Months
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Ended November 30,
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($ in thousands)
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2007
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2006
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Net income
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$
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139,865
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$
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113,874
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Other comprehensive income (net of tax):
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Currency translation gain (loss)
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(381
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)
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173
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Comprehensive income
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$
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139,484
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$
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114,047
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 6 of 30
APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended
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November 30,
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($ in thousands)
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2007
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2006
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Cash flows provided by (used in) operating activities:
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Net income
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$
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139,865
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$
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113,874
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Adjustments to reconcile net income to net cash
provided by operating activities:
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Share-based compensation
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14,924
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10,146
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Excess tax benefits from share-based compensation
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(13,165
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)
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(1,030
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)
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Depreciation and amortization
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18,113
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17,191
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Amortization of marketable securities discount and
premium, net
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21
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56
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Provision for uncollectible accounts receivable
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32,385
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23,114
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Deferred income taxes
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(2,665
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)
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(11,521
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)
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Changes in assets and liabilities excluding the
impact of acquisitions:
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Accounts receivable
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(26,760
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)
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(46,044
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)
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Other assets
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(4,229
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)
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(3,945
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)
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Accounts payable and accrued liabilities
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(29,657
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)
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(11,680
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)
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Income taxes payable
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84,791
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65,175
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Student deposits
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1,854
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2,833
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Deferred revenue
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(7,368
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)
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(4,297
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)
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Other liabilities
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(271
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)
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(980
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)
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Net cash provided by operating activities
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207,838
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152,892
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Cash flows provided by (used in) investing activities:
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Additions to property and equipment
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(18,873
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)
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(13,788
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)
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Additions related to new headquarters
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(5,241
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)
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(11,397
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)
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Acquisitions, net of cash acquired
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(47,033
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)
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(15,079
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)
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Purchase of marketable securities including
auction-rate securities
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(396,660
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)
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(356,275
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)
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Maturities of marketable securities including
auction-rate securities
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401,660
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371,261
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Increase in restricted cash
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(2,285
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)
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(16,065
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)
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Net cash used in investing activities
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(68,432
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)
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(41,343
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)
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Cash flows provided by (used in) financing activities:
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Issuance of Apollo Group Class A common stock
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50,848
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4,349
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Excess tax benefits from share-based compensation
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13,165
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1,030
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|
|
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Net cash provided by financing activities
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64,013
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|
|
5,379
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|
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|
|
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Effect of exchange rate gain (loss) on cash and
cash equivalents
|
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(610
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)
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|
173
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|
|
|
|
|
|
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Net increase in cash and cash equivalents
|
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|
202,809
|
|
|
|
117,101
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Cash and cash equivalents, beginning of period
|
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|
339,319
|
|
|
|
309,058
|
|
|
|
|
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Cash and cash equivalents, end of period
|
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$
|
542,128
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|
|
$
|
426,159
|
|
|
|
|
|
|
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|
|
|
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Supplemental disclosure of non-cash investing and
financing activities
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|
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|
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Credits received for tenant improvements
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$
|
1,634
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|
$
|
458
|
|
Purchases of property and equipment included in
accounts payable
|
|
$
|
6,207
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|
|
$
|
4,608
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Settlement of liability-classified awards through
the issuance of treasury stock
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$
|
16,340
|
|
|
$
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 7 of 30
APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The unaudited interim condensed consolidated financial statements include the accounts of Apollo
Group, Inc. and its wholly-owned subsidiaries and consolidated joint venture, collectively referred
to herein as the Company, Apollo Group, Apollo, APOL, we, us or our. These unaudited
interim condensed consolidated financial statements have been prepared pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission (SEC) and, in the opinion of
management, contain all adjustments, consisting of normal, recurring adjustments, necessary to
fairly present the financial condition, results of operations and cash flows for the periods
presented.
Certain information and note disclosures normally included in these unaudited interim condensed
consolidated financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP) have been condensed or omitted pursuant to SEC
rules. We believe that the disclosures made are adequate to make the information presented not
misleading. We consistently applied the accounting policies described in our 2007 Annual Report on
Form 10-K as filed with the SEC on October 29, 2007, in preparing these unaudited interim condensed
consolidated financial statements. For a discussion of our critical accounting policies, please
refer to our 2007 Annual Report on Form 10-K. These unaudited interim condensed consolidated
financial statements and accompanying notes should be read in conjunction with Managements
Discussion and Analysis of Financial Conditions and Results of Operations included in this filing
and the audited consolidated financial statements and notes thereto contained in our 2007 Annual
Report on Form 10-K.
Our fiscal year is from September 1 to August 31. Unless otherwise noted, references to particular
years or quarters refer to our fiscal years and the associated quarters of those fiscal years.
Because of the seasonal nature of our business, the results of operations for the three months
ended November 30, 2007 are not necessarily indicative of results to be expected for the entire
fiscal year.
The preparation of financial statements in accordance with GAAP requires management to make certain
estimates and assumptions that affect the reported amount of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. The most significant management
estimate is the allowance for doubtful accounts. Actual results could differ from such estimates.
Note 2. Nature of Operations
Apollo Group, Inc. has been an education provider for more than 30 years, operating University of
Phoenix, Inc. (UPX), Institute for Professional Development, Inc. (IPD), The College for
Financial Planning Institutes Corporation (CFP), Western International University, Inc. (WIU)
and Insight Schools, Inc. (Insight), all of which are our wholly-owned subsidiaries. In addition
to these wholly-owned subsidiaries, on October 22, 2007, we formed a joint venture with The Carlyle
Group (Carlyle), called Apollo Global, Inc. (Apollo Global), to pursue investments in the
international education services sector. Through these subsidiaries we are able to offer innovative
and distinctive educational programs and services at high school, college, and graduate levels, at
campuses and learning centers, as well as online throughout the world.
In addition to our education-based offerings, on October 29, 2007, we completed the acquisition of
Aptimus, Inc. (Aptimus), an online advertising network. The acquisition aids in the furtherance
of our broader efforts to position ourselves to more effectively monitor, manage and control our
marketing investments and brands.
Our operations are generally subject to seasonal trends. We experience, and expect to continue to
experience, seasonal fluctuations in the results of operations as a result of changes in the level
of student enrollment. While we enroll students throughout the year, second quarter (December
through February) enrollment and related revenues generally are lower than other quarters due to
holiday breaks in December and January and third quarter (March through May) enrollment and related
revenues are generally the highest of any quarter. We experience a seasonal increase in new
enrollments in August of each year when most other colleges and universities begin their fall
semesters.
Page 8 of 30
Note 3. Accounts Receivable, net
Accounts receivable, net consist of the following as of November 30, 2007 and August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
August 31,
|
|
($ in thousands)
|
|
2007
|
|
|
2007
|
|
Tuition accounts receivable
|
|
$
|
276,091
|
|
|
$
|
281,834
|
|
Less allowance for doubtful accounts
|
|
|
(104,652
|
)
|
|
|
(99,818
|
)
|
|
|
|
|
|
|
|
Net tuition accounts receivable
|
|
$
|
171,439
|
|
|
$
|
182,016
|
|
Other receivables
|
|
|
16,112
|
|
|
|
8,896
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
187,551
|
|
|
$
|
190,912
|
|
|
|
|
|
|
|
|
Tuition accounts receivable is composed primarily of amounts due from students.
Bad debt expense is included in instructional costs and services in our Condensed Consolidated
Statements of Income. The following table summarizes the activity in the related allowance for
doubtful accounts for the three months ended November 30:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
November 30,
|
|
($ in thousands)
|
|
2007
|
|
|
2006
|
|
Beginning allowance for doubtful accounts
|
|
$
|
99,818
|
|
|
$
|
65,184
|
|
Charged to bad debt expense
|
|
|
32,385
|
|
|
|
23,114
|
|
Write-offs, net of recoveries
|
|
|
(27,551
|
)
|
|
|
(18,512
|
)
|
|
|
|
|
|
|
|
Ending allowance for doubtful accounts
|
|
$
|
104,652
|
|
|
$
|
69,786
|
|
|
|
|
|
|
|
|
Note 4. Long-Term Liabilities
Long-term liabilities consist of the following as of November 30, 2007 and August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
August 31,
|
|
($ in thousands)
|
|
2007
|
|
|
2007
|
|
Deferred rent and other lease incentives
|
|
$
|
76,152
|
|
|
$
|
77,755
|
|
Deferred gains on sale-leasebacks
|
|
|
10,899
|
|
|
|
10,602
|
|
Deferred compensation agreement with Dr. John G. Sperling
|
|
|
2,248
|
|
|
|
2,197
|
|
Unrecognized tax benefit (see Note 5)
|
|
|
53,046
|
|
|
|
|
|
Other long-term liabilities
|
|
|
2,210
|
|
|
|
2,432
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
144,555
|
|
|
|
92,986
|
|
Less current portion
|
|
|
(21,057
|
)
|
|
|
(21,093
|
)
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
$
|
123,498
|
|
|
$
|
71,893
|
|
|
|
|
|
|
|
|
Note 5. Income Taxes
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An Interpretation of FASB No. 109, (FIN 48). This
interpretation, among other things, creates a two-step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based
solely on its technical merits, is more-likely-than-not to be sustained upon examination.
Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized
upon settlement. Derecognition of a tax position that was previously recognized would occur when a
company subsequently determines that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a
substitute for derecognition of tax positions, and it has expanded disclosure requirements.
We adopted FIN 48 on September 1, 2007, and did not recognize an adjustment to our liability for
unrecognized income tax benefits as of August 31, 2007. It is our policy to recognize interest and
penalties related to uncertain tax positions in income tax expense. At the date of adoption, we
reclassified $53.0 million of unrecognized tax benefits, including penalties and interest of $16.0
million, from
Page 9 of 30
current income taxes payable to long-term liabilities, as these contingencies are not expected to
be paid within the next year. The total amount of unrecognized tax benefits, including penalties
and interest, would impact our effective tax rate if recognized. We are continually under audit by
various taxing jurisdictions, and as a result, it is possible that the amount of unrecognized tax
benefits could change within the next twelve months. An estimate of the range of the possible
change cannot be made unless or until tax positions are further developed or examinations close. At
the adoption date, our tax filings are generally subject to examination in major tax jurisdictions
for years ending on or after August 31, 2001.
An Internal Revenue Service (IRS) audit relating to our U.S. federal income tax returns for the
fiscal years ended August 31, 2003 through 2005 commenced in September 2006. The audit relates to
income and deductions previously claimed by us, including deductions potentially limited by IRC
Section 162(m). Certain tax deductions in prior years with respect to compensation attributable to
the exercise of certain stock options by executive officers may be in question. Under IRC Section
162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per
year, except to the extent the compensation qualifies as performance-based. Compensation
attributable to options with revised measurement dates may not have qualified as performance-based
compensation. Accordingly, we may have claimed deductions with respect to those exercised options
that were in excess of the limit imposed under IRC Section 162(m). As a result, we accrued an
additional $0.9 million related to interest and penalties in the current quarter, for a total of
$45.5 million with respect to this uncertain tax position, including interest and penalties, for
the taxable years 2003 through 2007 (which are currently our only open years subject to adjustment
for federal tax purposes). For prior periods where a liability existed and where the statute of
limitations has expired, the accrual relating to that period has been reversed in the period in
which the statute expired. In addition, the IRS audit may result in additional tax, penalties and
interest, the amount of which may or may not be material, but this will not be known until the IRS
audit is complete.
Note 6. Earnings Per Share
Apollo Group Class A Common Stock
A reconciliation of the basic and diluted earnings per share computations for our common stock is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
Per Share
|
|
|
|
|
|
Average
|
|
Per Share
|
($ in thousands, except per share amounts)
|
Income
|
|
Shares
|
|
Amount
|
|
Income
|
|
Shares
|
|
Amount
|
Basic income per share
|
|
$
|
139,865
|
|
|
|
167,036
|
|
|
$
|
0.84
|
|
|
$
|
113,874
|
|
|
|
173,122
|
|
|
$
|
0.66
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
2,140
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
1,399
|
|
|
|
(0.01
|
)
|
Restricted stock units
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
139,865
|
|
|
|
169,289
|
|
|
$
|
0.83
|
|
|
$
|
113,874
|
|
|
|
174,521
|
|
|
$
|
0.65
|
|
|
|
|
|
|
Diluted weighted average shares outstanding include the incremental effect of shares that would be
issued upon the assumed exercise of stock options and the vesting of restricted stock unit awards
(RSUs). For the three months ended November 30, 2007 and 2006, approximately 1,317,000 and
5,601,000, respectively, of our stock options and approximately 8,000 RSUs for the three months
ended November 30, 2007, were excluded from the calculation of diluted earnings per share because
the exercise prices of the stock options and the grant price of RSUs were greater than or equal to
the average share price for the quarter; therefore, their inclusion would have been anti-dilutive.
These stock options and RSUs could be dilutive in the future if the average share price increases
and is greater than the exercise price and grant price of these awards.
Note 7. Share-Based Compensation Plans
Stock Option Grant
On March 31, 2007, we entered into an employment contract with Mr. Gregory W. Cappelli, who was
appointed Executive Vice President, Global Strategy and Assistant to the Chairman. Pursuant to his
employment agreement, on September 4, 2007, Mr. Cappelli received a restricted stock unit award of
113,896 shares, representing a value of $5.0 million based on a price of $43.90, the closing price
of our stock on the business day preceding his service inception date, or March 30, 2007. These
RSUs will be subject to a four-year graded vesting schedule with one quarter of the awards vesting
at each anniversary of Mr. Cappellis commencement of employment with Apollo Group on April 2,
2007. Also, on September 4, 2007, Mr. Cappelli received a fiscal year 2008 equalization grant
(Equalization Grant), whereby he was granted an option to purchase 149,711 shares with an
aggregate fair value of
Page 10 of 30
approximately $3.0 million. An option for an additional 1,058 shares was granted to Mr. Cappelli on
October 5, 2007. The aggregate fair value of the options was determined by the Black-Scholes-Merton
option pricing model (BSM) on the grant date using the following assumptions (for a discussion on
our Statement of Financial Accounting Standards (SFAS) No. 123(R) assumption methodology please
refer to our 2007 Annual Report on Form 10-K):
|
|
|
|
|
Expected volatility
|
|
|
35.0
|
%
|
Expected life (years)
|
|
|
4.1
|
|
Risk-free interest rate
|
|
|
4.4
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
The terms of the Equalization Grant are the same as those of the option grant discussed above.
Because the RSU and Equalization Grant contain a performance condition, and the service inception
date of April 2, 2007, precedes the grant date of September 4, 2007, we began recognizing expense
for these awards as of the service inception date.
Stock Option Modifications
On January 12, 2007, our Compensation Committee of the Board of Directors approved a resolution
to modify the terms of the stock option grants for approximately 50 individuals. These
modifications allowed former employees, including officers, terminated on or after November 3,
2006, to exercise options that were in the money as of the end of the 90-day post-termination
period provided under the 2000 Stock Incentive Plan (2SIP) and their option agreements
thereunder, beyond this 90-day period. We extended the exercise periods of these options because we
were unable, during the financial statement restatement process as described in our 2007 Annual
Report on Form 10-K, to sell shares of our Class A common stock to such individuals in compliance
with the applicable registration requirements of the Securities Act of 1933, as amended. Absent the
extension, the options would have expired prior to the former employees having the opportunity to
exercise, since the 90-day post-termination exercise period would have expired prior to us
completing our financial statement restatement process.
As a result of these modifications, we recorded a non-cash charge to share-based compensation of
$12.1 million during the second quarter of fiscal 2007. In addition, the modified awards held by
former employees who terminated prior to the January 12, 2007 modification are subject to the
provisions of EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock (EITF 00-19). Of the $12.1 million in expense
recognized upon modification of the awards, $11.8 million related to awards subject to the
provisions of EITF 00-19, under which these awards are classified as liabilities and reported in
accrued liabilities in our Condensed Consolidated Balance Sheets. EITF 00-19 also requires that we
report the awards classified as liabilities at their fair value as of each balance sheet date. Any
increase or decrease in this fair value is recorded in general and administrative expense in our
Condensed Consolidated Statements of Income. During the three months ended November 30, 2007, we
recorded fair value adjustments of $0.1 million, which were recorded as reductions in expense. All
awards that were subject to the above modification have been exercised as of November 30, 2007;
accordingly, we have reclassified $16.3 million into additional paid-in-capital, including the
$11.8 million recorded at the time of modification plus $4.5 million in cumulative fair value
adjustments.
Share-Based Compensation Expense
The table below outlines the effects of share-based compensation included in the following costs
and expenses in the Condensed Consolidated Statements of Income for the three months ended November
30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
November 30,
|
|
($ in thousands, except per share amounts)
|
|
2007
|
|
|
2006
|
|
Instructional costs and services
|
|
$
|
5,105
|
|
|
$
|
3,890
|
|
Selling and promotional
|
|
|
733
|
|
|
|
1,085
|
|
General and administrative
|
|
|
9,086
|
|
|
|
5,171
|
|
|
|
|
|
|
|
|
Share-based compensation expense included in
operating expenses
|
|
|
14,924
|
|
|
|
10,146
|
|
Tax effect on share-based compensation
|
|
|
(5,807
|
)
|
|
|
(4,019
|
)
|
|
|
|
|
|
|
|
Share-based compensation expense, net of tax
|
|
$
|
9,117
|
|
|
$
|
6,127
|
|
|
|
|
|
|
|
|
Page 11 of 30
Note 8. Commitments and Contingencies
We are subject to various claims and contingencies in the ordinary course of business, including
those related to regulation, litigation, business transactions, employee-related matters, and
taxes, among others. In accordance with SFAS No. 5, Accounting for Contingencies (SFAS 5), when
we become aware of a claim or potential claim, the likelihood of any loss or exposure is assessed.
If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we
record a liability for the loss. The liability recorded includes probable and estimable legal costs
associated with the claim or potential claim. If the loss is not probable or the amount of the loss
cannot be reasonably estimated, we disclose the claim if the likelihood of a potential loss is
reasonably possible and the amount of the potential loss is material. For matters where no loss
contingency is recorded, our policy is to expense legal fees as incurred.
Internal Revenue Service Audit
In September 2006, the IRS commenced an audit of our U.S. federal income tax returns for the fiscal
years ended August 31, 2003 through 2005. The audit relates to income and deductions previously
claimed by us, including deductions potentially limited by IRC Section 162(m). Certain tax
deductions in prior years with respect to compensation attributable to the exercise of certain
stock options by executive officers may be in question. Under IRC Section 162(m), the amount of
such deduction per covered executive officer is limited to $1.0 million per year, except to the
extent the compensation qualifies as performance-based. Compensation attributable to options with
revised measurement dates may not have qualified as performance-based compensation. Accordingly, we
may have claimed deductions with respect to those exercised options that were in excess of the
limit imposed under IRC Section 162(m). As a result, we accrued an additional $0.9 million related
to interest and penalties in the current quarter, for a total of $45.5 million with respect to this
uncertain tax position, including interest and penalties, for the taxable years 2003 through 2007
(which are currently our only open years subject to adjustment for federal tax purposes). For prior
periods where a liability existed and where the statute of limitations has expired, the accrual
relating to that period has been reversed in the period in which the statute expired. In addition,
the IRS audit may result in additional tax, penalties and interest, the amount of which may or may
not be material, but this will not be known until the IRS audit is complete.
Sale-Leaseback Option
On June 20, 2006, we entered into an option agreement (which was amended in November 2006) with
Macquarie Riverpoint AZ, LLC (Macquarie). The option agreement allows us to execute a sale and
simultaneous leaseback of the new corporate headquarters land and buildings. We began to occupy
these buildings during November 2007, and anticipate finishing construction by the end of the
second quarter of fiscal 2008. In the third quarter of fiscal 2008, we anticipate executing the
sale-leaseback option. When the sale-leaseback option is exercised, we anticipate receiving
approximately $170 million in cash for the buildings and land, and expect to generate a gain on the
sale of approximately $20-30 million. The gain will be deferred over the 12-year term of the lease
agreement.
Contingencies Related to Litigation and Other Proceedings
The following is a description of pending litigation and other proceedings that fall outside the
scope of ordinary and routine litigation incidental to our business.
Pending Litigation
Incentive Compensation False Claims Act Lawsuit
In 2003, a False Claims Act lawsuit was filed against the Company in the U.S. District Court for
the Eastern District of California by two then-current employees on behalf of themselves and the
federal government. The U.S. Department of Justice declined to intervene in the lawsuit. The
lawsuit alleges, among other things, violations of the False Claims Act, 31 U.S.C. § 3729(a)(1) and
(2), by UPX for submission of a knowingly false or fraudulent claim for payment or approval, and
knowingly using false records or statements to get a false or fraudulent claim paid or approved in
connection with federal student aid programs, and asserts that UPX improperly compensated its
employees involved with student recruiting. On March 22, 2004, the District Court dismissed the
complaint with prejudice. On September 5, 2006, the Ninth Circuit reversed the ruling of the
district court and held that the relators had adequately alleged the elements of a False Claims Act
cause of action. The U.S. Supreme Court denied UPXs Petition for Writ of Certiorari. On March 23,
2007, UPX filed a motion in the District Court to dismiss the complaint on the grounds that the
September 7, 2004, settlement agreement between UPX and the U.S. Department of Education
constituted an alternate remedy under the False Claims Act. That motion was denied on August 20,
2007. UPX has filed a motion seeking certification of the Courts order for purposes of bringing an
interlocutory appeal. That motion is pending before the District Court. The District Court has
issued a Scheduling Order pursuant to which trial is set for September 2009. Rule 26 disclosures
have been made and discovery is proceeding. While the outcome of this legal proceeding is
uncertain, management does not expect a material adverse effect on the Companys business,
financial position, results of
Page 12 of 30
operations, or cash flows to result from this action. In addition,
the Company cannot reasonably estimate a range of loss for this action and accordingly has not
accrued any liability associated with this action.
Axia False Claims Act Lawsuit
On August 15, 2005, a relator filed a False Claims Act complaint under seal in the U.S. District
Court for the District of Columbia. On April 12, 2006, the Department of Justice filed the
Governments Notice of Election to Decline Intervention in this
qui tam
lawsuit and on June 15,
2006, the court entered an order unsealing the complaint. An amended complaint was served on or
about November 1, 2006. On November 15, 2006, the relator filed a Voluntary Notice of Dismissal. On
December 1, 2006, the United States consented to the dismissal of the action with prejudice as to
the relator, so long as the dismissal is without prejudice as to the United States. On February 2,
2007, the court ordered the United States to articulate its reasons for consenting to the dismissal
of the action. On February 21, 2007, the United States filed a Statement of Reasons for Consenting
to Dismissal. While the outcome of this legal proceeding is uncertain, management does not expect a
material adverse effect on the Companys business, financial position, results of operations, or
cash flows to result from this action. In addition, the Company cannot reasonably estimate a range
of loss for this action and accordingly has not accrued any liability associated with this action.
Alaska Electrical Pension Fund Derivative Action
On September 5, 2006, the Alaska Electrical Pension Fund filed a shareholder derivative suit in the
U.S. District Court for the District of Arizona, alleging on behalf of the Company that certain of
the Companys current and former officers and directors engaged in misconduct regarding stock
option grants. Similar derivative complaints were filed in the same Court on or about September 19,
2006 and November 11, 2006 by other purported shareholders of the Company, and the three cases were
consolidated by the Court under the caption Alaska Electrical Pension Fund v. Sperling, Case No.
CV06-02124-PHX-ROS, on January 9, 2007. The defendants in the consolidated case are the Company, J.
Jorge Klor de Alva, Daniel E. Bachus, John M. Blair, Dino J. DeConcini, Anthony F. Digiovanni,
Kenda B. Gonzales, Hedy F. Govenar, Brian E. Mueller, Todd S. Nelson, Jerry F. Noble, Laura Palmer
Noone, John R. Norton III, John G. Sperling, and Peter V. Sperling. An independent committee of the
Board of Directors of the Company (Special Committee) was appointed and authorized to determine
whether it is in the Companys best interest to itself pursue the allegations made on behalf of the
Company. Effective December 8, 2006, in response to an order by the Court on December 4, 2006, K.
Sue Redman, who is not a party to the case, replaced Hedy F. Govenar on the Special Committee. As
of March 13, 2007, James R. Reis joined the Special Committee in place of Daniel D. Diethelm. On
July 2, 2007, all defendants and the Company filed Motions to Dismiss the case, and the Special
Committee filed notice of its intent to terminate the action. On August 1, 2007, the court
appointed as lead plaintiff Louisiana Municipal Police Employees Retirement System, and lead
plaintiff filed a Second Amended Complaint on August 15, 2007. On August 17, 2007, the Special
Committee filed a Motion to Terminate the action, based in part upon its conclusion that pursuit of
the claims is not in the Companys best interest. The court subsequently stayed briefing and
discovery in connection with the Motion to Terminate, pending mediation, and the case has been
stayed until January 8, 2008. While the outcome of this legal proceeding is uncertain, management
does not expect a material adverse effect on the Companys business, financial position, results of
operations, or cash flows to result from this action. In connection with our proposed settlement of
this matter and the outcome of the aforementioned mediation, we have accrued our best estimate of
settlement as of November 30, 2007, which is not material for separate disclosure.
Securities Class Action
In October 2004, the Company and three of its executive officers were named as defendants in three
securities class action lawsuits, filed in the U.S. District Court for the District of Arizona,
which have been consolidated as
In re Apollo Group, Inc. Securities Litigation.
On May 16, 2005, a
Consolidated Complaint was filed naming as defendants the Company, Todd S. Nelson, Kenda B.
Gonzales and Daniel E. Bachus. On March 1, 2007, by stipulation and order of the court, Daniel E.
Bachus was dismissed as a defendant from the case. The Consolidated Complaint alleges, among other
things, that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder, by allegedly making materially false and misleading
statements in connection with their failure to publicly disclose the contents of the U.S.
Department of Educations program review report. On June 15, 2005, defendants filed a motion to
dismiss the Consolidated Complaint. The court denied defendants motion to dismiss on October 18,
2005 and discovery commenced. The parties conducted discovery from October 2005 until discovery
closed on February 16, 2007. On March 9, 2007, both parties filed motions for summary judgment. The
summary judgment motions were heard on September 4, 2007, and on September 11, 2007 the court
entered an order denying both parties motions. The trial in the case commenced on November 14,
2007, and is ongoing. While the outcome of this legal proceeding is uncertain, management does not
expect a material adverse effect on the Companys business, financial position, results of
operations, or cash flows to result from this action. In addition, the Company cannot reasonably
estimate a range of loss for this action and accordingly has not accrued any liability associated
with this action.
Page 13 of 30
EEOC v. UPX
On September 25, 2006, the Equal Employment Opportunity Commission (EEOC) filed a Title VII
action against UPX captioned
Equal Employment Opportunity Commission v. UPX
, No.
CV-06-2303-PHX-MHM, in the U.S. District Court for the District of Arizona on behalf of four
identified individuals and an asserted class of unidentified individuals who were allegedly
discriminated
against because they were not members of the Church of Jesus Christ of Latter-day Saints. The
Complaint also alleges that the identified individuals were retaliated against after complaining
about the alleged discrimination. The EEOC did not serve its Complaint on UPX until November 21,
2006. UPX answered the Complaint on December 8, 2006, denying the material allegations asserted. An
initial Scheduling Conference was held on February 15, 2007. The parties are currently engaged in
discovery. While the outcome of this legal proceeding is uncertain, management does not expect a
material adverse effect on the Companys business, financial position, results of operations, or
cash flows to result from this action. In addition, the Company cannot reasonably estimate a range
of loss for this action and accordingly has not accrued any liability associated with this action.
Barnett Derivative Action
On April 24, 2006, Larry Barnett filed a complaint derivatively on behalf of the Company. The
lawsuit was filed in the Superior Court for the State of Arizona, Maricopa County and is entitled
Barnett v. John Blair et al
, Case Number CV2006-051558. On October 10, 2006, plaintiff filed a
First Amended Complaint adding allegations of stock option backdating. The complaint names as
defendants the Company, John M. Blair, Dino J. DeConcini, Hedy F. Govenar, Kenda Gonzales, Todd
Nelson, Laura Palmer Noone, John Norton, John G. Sperling and Peter V. Sperling. The First Amended
Complaint alleges, among other things, that the individual defendants breached their fiduciary
duties to the Company and that certain of the individual defendants were unjustly enriched by their
receipt of backdated stock option grants. The plaintiff seeks, among other things, an award of
unspecified damages and reasonable costs and expenses, including attorneys fees. On August 21,
2006, the Company filed a Motion to Stay the case arguing that it is not in the best interests of
the Company to prosecute plaintiffs purported derivative claims prior to resolution of the
parallel federal securities class action pending against the Company in federal district court as
described under Securities Class Action. The individual defendants joined in the Motion to Stay.
On November 10, 2006, after plaintiff filed the First Amended Complaint and added allegations of
stock option backdating, the Company filed an Amended Motion to Stay arguing that the action should
be stayed pending resolution of the federal securities class action and pending the Special
Committees investigation into the allegations of stock option backdating. Also on November 10,
2006, the Company filed a motion to sever the claims relating to stock option backdating from the
claims made in the original complaint. On January 29, 2007, the Court granted the Amended Motion to
Stay for a period of six months. On June 12, 2007 the Court extended the Stay to November 5, 2007
and set a case management conference for November 13, 2007. The plaintiff filed a motion to lift
the stay on August 31, 2007 in order to conduct discovery related to the Special Committees report
regarding alleged stock option backdating. On October 4, 2007, the Court denied the motion to lift
the stay without prejudice. On October 12, 2007, the Company filed a motion to extend the stay
through February 2008 pending the resolution of the trial in the Securities Class Action. At the
case management conference on November 13, 2007, the Court heard argument on the motion and, at the
conference, granted the motion to extend the stay. The Court scheduled another case management
conference for March 10, 2008, and ordered that the case remain stayed until the date of that
conference. While the outcome of this legal proceeding is uncertain, management does not expect a
material adverse effect on the Companys business, financial position, results of operations, or
cash flows to result from this action. In addition, the Company cannot reasonably estimate a range
of loss for this action and accordingly has not accrued any liability associated with this action.
Bamboo Partners Derivative Action
On August 15, 2006, Bamboo Partners filed a complaint derivatively on behalf of the Company and
UPX. The lawsuit was filed in the U.S. District Court, District of Arizona and is entitled Bamboo
Partners v. Nelson et al., Case Number 2:06-at-10858. The complaint names as defendants Apollo
Group, Inc., UPX, Todd Nelson, Kenda Gonzales, Daniel Bachus, John G. Sperling, Peter V. Sperling,
Laura Palmer Noone, John M. Blair, Dino J. DeConcini, Hedy F. Govenar and John Norton III. The
complaint alleges, among other things, that the defendants violated Sections 10(b) of the Exchange
Act and committed numerous breaches of fiduciary duties. The complaint seeks damages sustained by
Apollo and UPX as a result of breaches of fiduciary duty, abuse of control and waste of corporate
assets. The complaint seeks damages against Laura Palmer Noone for unjust enrichment. The complaint
also seeks attorneys fees, reasonable costs and disbursements. On November 13, 2006, the Company
filed a Motion to Stay the case arguing that it is not in the best interests of the Company to
prosecute plaintiffs purported derivative claims prior to resolution of the parallel federal
securities class action pending against the Company in federal district court, as described above
under Securities Class Action. The individual defendants joined in the Motion to Stay. The court
granted the Companys motion to stay on May 18, 2007. The case remains stayed pending the
resolution of the Securities Class Action. While the outcome of this legal proceeding is uncertain,
management does not expect a material adverse effect on the Companys business, financial position,
results of operations, or cash flows to result from this action. In addition, the Company cannot
reasonably estimate a range of loss for this action and accordingly has not accrued any liability
associated with this action.
Page 14 of 30
Teamsters Local Union Putative Class Action
On November 2, 2006, the Teamsters Local 617 Pension and Welfare Funds filed a class action
complaint in the U.S. District Court for the District of Arizona purporting to represent a class of
shareholders who purchased the Companys stock between November 28, 2001 and October 18, 2006,
alleging that the Company and certain of its current and former directors and officers violated the
federal securities laws through purported misrepresentations concerning the Companys historical stock
option grants. On January 3, 2007, other shareholders, through their separate attorneys, filed
motions seeking appointment as lead plaintiff and approval of their designated counsel as lead
counsel to pursue this action. On September 11, 2007, the court appointed The Pension Trust Fund
for Operating Engineers as lead plaintiff and approved lead plaintiffs selection of lead counsel
and liaison counsel. On November 23, 2007, lead plaintiff filed an amended complaint alleging that
the defendants made misrepresentations concerning the Companys stock option granting policies and
practices, traded while in possession of material non-public information, violated duties of care,
candor and loyalty, and engaged in self-dealing. Lead plaintiff alleges violations of Sections
10(b), 20(a) and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder,
breach of fiduciary duty, and civil conspiracy to commit fraud, and seeks unstated compensatory and
punitive damages and other relief on behalf of the purported class. The defendants are the Company,
John G. Sperling, Todd S. Nelson, Kenda B. Gonzales, Daniel E. Bachus, John M. Blair, Hedy F.
Govenar, Brian E. Mueller, Dino J. DeConcini, Peter V. Sperling, and Laura Palmer Noone. The
Company has not yet responded to the amended complaint in this action but intends to vigorously
oppose plaintiffs allegations. While the outcome of this legal proceeding is uncertain, management
does not expect a material adverse effect on the Companys business, financial position, results of
operations, or cash flows to result from this action. In addition, the Company cannot reasonably
estimate a range of loss for this action and accordingly has not accrued any liability associated
with this action.
Regulatory and Other Legal Matters
Student Financial Aid
All federal financial aid programs are established by the Higher Education Act and regulations
promulgated thereunder. The Higher Education Act has an expiration date; in the past, if Congress
did not reauthorize the Higher Education Act before its expiration date, Congress extended the
authorization of the Higher Education Act. The Higher Education Act is set to expire on March 31,
2008.
The Higher Education Act specifies the manner in which the U.S. Department of Education reviews
institutions for eligibility and certification to participate in Title IV programs. Every
educational institution involved in Title IV programs must be certified to participate and is
required to periodically renew this certification. UPX was recertified in June 2003 and its current
certification for the Title IV programs expired in June 2007. However, in March 2007, UPX submitted
its Title IV program participation recertification application to the U.S. Department of Education.
We have been collaborating with the U.S. Department of Education regarding the UPX recertification
application. Although we have submitted our application for renewal, we are continuing to supply
additional follow-up information based on requests from the U.S. Department of Education. Our
eligibility continues on a month-to-month basis until the U.S. Department of Education issues its
decision on the application. A month-to-month status is not unusual considering the process
is multi-faceted and iterative. We have no reason to believe that the application will not be
renewed and expect that the renewal process will be completed satisfactorily. WIU was recertified
in October 2003 and its current certification for the Title IV programs expires in June 2009.
U.S. Department of Education Audits
From time to time as part of the normal course of business, UPX and WIU are subject to periodic
program reviews and audits by regulating bodies. On December 22, 2005, the U.S. Department of
Education, Office of Inspector General (OIG), issued an audit report on their review of UPXs
policies and procedures for the calculation and return of Title IV funds. The OIG concluded that
UPX had policies and procedures that provide reasonable assurances that it properly identified
withdrawn students, appropriately determined whether a return of Title IV funds was required,
returned Title IV funds for withdrawn students in a timely manner and used appropriate
methodologies for most aspects of calculating the return of Title IV funds. The OIG also concluded,
however, that UPX did not use appropriate methodologies for calculating the percentage of Title IV
financial aid earned from March 1, 2004 through December 7, 2004. Since December 8, 2004, UPX has
adopted the methodologies deemed appropriate by the U.S. Department of Education. On November 3,
2006, the U.S. Department of Education issued a preliminary audit determination letter (PADL)
concerning UPXs administration of the Title IV federal student aid programs regarding this matter.
On June 7, 2007, UPX responded to the PADL request. The U.S. Department of Education will
ultimately issue a final audit determination letter regarding the return of Title IV funds. UPX has
accrued $3.7 million, which is its best estimate of the refund liability. While the outcome of the
OIG audit proceedings are on-going, management does not expect a material adverse effect on our
business, financial position, results of operations, or cash flows to result from these actions.
Page 15 of 30
SEC Informal Inquiry and Department of Justice Investigation
In June 2006, we were notified by letter from the SEC of an informal inquiry and the Commissions
request for the production of documents relating to our stock option grants. In July 2007, the SEC
notified us that it had closed its inquiry into our stock option grants, without recommending any
enforcement action. Also in June 2006, we received a grand jury subpoena from the U.S. Attorneys
Office for the Southern District of New York requesting that we provide documents relating to our
stock option grants. We have cooperated fully with this request.
Note 9. Segment Reporting
We operate primarily in the educational industry. Our six operating segments are aggregated into
three reportable segments for financial reporting purposes: UPX, Other Schools, and Corporate. The
Other Schools segment includes IPD, WIU, CFP and Insight. Costs incurred related to our global
expansion are currently included in the Corporate segment. Apollo Global has not yet received any
capital contribution and had no operating activity as of November 30, 2007.
Consistent with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), our reportable segments have been determined based on the method by which management
evaluates performance and allocates resources. Management evaluates performance based on reportable
segment profit. This measure of profit includes allocating corporate support costs to each segment
as part of a general allocation, but excludes interest income and certain revenue and unallocated
corporate charges. At the discretion of management, certain corporate costs are not allocated to
the subsidiaries due to their designation as special charges because of their infrequency of
occurrence, the non-cash nature of the expense, and/or the determination that the allocation of
these costs to the subsidiaries will not result in an appropriate measure of the subsidiaries
results. These costs include such items as unscheduled or significant management bonuses, unusual
severance pay, stock-based compensation expense attributed to corporate management and
administrative employees, etc. The revenue and corporate charges which are not allocated to UPX or
Other Schools segments are included in the Corporate segment.
The accounting policies of each segment are consistent with those described in the summary of
significant accounting policies in Note 2 of our audited consolidated financial statements included
in our 2007 Annual Report on Form 10-K. Transactions between segments, which are not significant,
are consummated on a basis intended to reflect the market value of the underlying services and are
eliminated in consolidation.
Our principal operations are located in the United States, and the results of operations and
long-lived assets in geographic regions outside of the United States are not significant. During
the three months ended November 30, 2007 and 2006, no individual customer accounted for more than
10% of our consolidated revenues.
Summary financial information by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
November 30,
|
|
($ in thousands)
|
|
2007
|
|
|
2006
|
|
Tuition and other revenue, net:
|
|
|
|
|
|
|
|
|
UPX
|
|
$
|
743,390
|
|
|
$
|
607,017
|
|
Other Schools
|
|
|
36,665
|
|
|
|
60,794
|
|
Corporate
|
|
|
619
|
|
|
|
(25
|
)
|
|
|
|
|
|
$
|
780,674
|
|
|
$
|
667,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
UPX
|
|
$
|
229,402
|
|
|
$
|
172,561
|
|
Other Schools
|
|
|
5,346
|
|
|
|
13,426
|
|
Corporate
|
|
|
(15,553
|
)
|
|
|
(6,006
|
)
|
|
|
|
|
|
$
|
219,195
|
|
|
$
|
179,981
|
|
|
|
|
Page 16 of 30
Note 10. Acquisitions
Aptimus
On October 29, 2007, we completed the acquisition of all outstanding common stock of online
advertising network Aptimus, Inc. for approximately $48.1 million after preliminary adjustments.
The acquisition has been accounted for pursuant to SFAS No. 141, Business Combinations (SFAS
141), under which the initial purchase price allocation is subject to revision for a period of up
to one year from the date of acquisition. The operating results are included in the unaudited
interim condensed consolidated financial statements from the date of acquisition. In connection
with the acquisition, we have initially recorded $37.0 million of goodwill. The results of
operations of Aptimus are not significant to our consolidated results of operations.
A summary of the preliminary purchase price composition is as follows:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Cash paid for the outstanding common stock of Aptimus
|
|
$
|
41,486
|
|
Cash paid for certain common stock equivalents of Aptimus
|
|
|
4,672
|
|
Transaction-related costs
|
|
|
1,897
|
|
|
|
|
|
Total purchase price
|
|
$
|
48,055
|
|
|
|
|
|
A summary of the preliminary purchase price allocation is as follows:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Net working capital
|
|
$
|
(1,920
|
)
|
Property and equipment
|
|
|
573
|
|
Intangibles
|
|
|
7,800
|
|
Deferred tax assets
|
|
|
6,346
|
|
Goodwill
|
|
|
37,038
|
|
Employee stock options assumed
|
|
|
(1,782
|
)
|
|
|
|
|
Total allocated purchase price
|
|
|
48,055
|
|
Less: Cash acquired
|
|
|
(1,022
|
)
|
|
|
|
|
Acquisition, net of cash acquired
|
|
$
|
47,033
|
|
|
|
|
|
Apollo Global
On October 22, 2007, we formed a joint venture with The Carlyle Group (Carlyle), called Apollo
Global, Inc. (Apollo Global), to pursue investments in the international education services
sector. Carlyle, based in Washington D.C., is one of the worlds largest private equity firms,
managing over $76 billion in assets for over 1,000 institutional investors, including several of
the largest pension funds in the U.S. Through Apollo Global, we intend to capitalize on the
significant global demand for education services. Apollo Global will provide education services
through two primary strategies. First, Apollo Global will facilitate delivery of a wide range of
U.S. accredited degrees to foreign students outside the U.S. Within approximately 18 months, we
expect to transfer to Apollo Global assets that are dedicated to recruiting and servicing
international students. Following such transfer, Apollo Global will, under a service agreement with
us, perform enrollment activities directed toward students who live outside the U.S. and who are
not citizens of the U.S. or members of the U.S. military. Second, Apollo Global will acquire or
invest in companies that provide local education services, including post-secondary degrees, in the
countries it seeks to enter. These investments will be achieved through both a disciplined
acquisition process and organic growth.
We have agreed to commit up to $801 million in cash or contributed assets and own 80.1% of Apollo
Global. Carlyle has agreed to commit up to $199 million in cash or contributed assets and own the
remaining 19.9%. Additionally, appropriate amounts of debt will be employed. The Board of Apollo
Global consists of seven directors, four of whom were designated by us and two of whom were
designated by Carlyle. The seventh director is the Interim President of Apollo Global.
Additionally, 10 to 15% of the value of the equity will be available to provide incentives for
management of Apollo Global. Apollo Global is consolidated in our financial statements. No cash
contributions of Apollo Global have been made as of November 30, 2007.
Page 17 of 30
Note 11. Subsequent Events
Financing
On January 4, 2008, we entered into a syndicated $500 million Credit Agreement (the Bank
Facility). The Bank Facility is an unsecured revolving credit facility that will be used for
general corporate purposes including acquisitions and stock buybacks. The Bank Facility has an
expansion feature for an aggregate principal amount of up to $250 million. The term is five years
and will expire on January 4, 2013. The Bank Facility provides a multi-currency sub-limit facility
for borrowings in certain specified foreign currencies up to $300 million.
The Bank Facility fees are determined based on a pricing grid that varies according to our leverage
ratio. The facility fee ranges from 12.5 bps to 17.5 bps and the incremental fees for borrowings
under the facility range from LIBOR + 50.0 bps to 82.5 bps.
The Bank Facility contains affirmative and negative covenants, including the following financial
covenants: maximum leverage ratio, minimum coverage interest and rent expense ratio, and a
Department of Education financial responsibility composite score. In addition,
there are covenants restricting indebtedness, liens, investments, asset transfers and
distributions. Our obligations under the Bank Facility are guaranteed by our material domestic
subsidiaries.
Page 18 of 30
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A)
This Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
is intended to help investors understand Apollo Group, Inc. (the Company, Apollo Group,
Apollo, APOL, we, us, or our), our operations, and our present business environment. The
MD&A is provided as a supplement to, and should be read in conjunction with, the audited
consolidated financial statements and notes thereto contained in our 2007 Annual Report on Form
10-K as filed with the SEC on October 29, 2007. The following overview provides a summary of the
sections included in our MD&A:
|
|
|
Forward-Looking Statements
cautionary information about forward-looking statements
and a description of certain risks and uncertainties that could cause our actual results
to differ materially from our historical results or our current expectations or
projections.
|
|
|
|
|
Executive Summary
a general description of our business and the education industry,
as well as key highlights of the current year.
|
|
|
|
|
Critical Accounting Policies and Estimates
a discussion of our accounting policies
that require critical judgments and estimates.
|
|
|
|
|
Results of Operations
an analysis of our results of operations in our consolidated
financial statements. We operate primarily in one business sector: education. Except to
the extent that differences between our reportable segments are material to an
understanding of our business as a whole, we present the discussion in our MD&A on a
consolidated basis.
|
|
|
|
|
Liquidity, Capital Resources, and Financial Position
an analysis of cash flows,
sources and uses of cash, commitments and contingencies, seasonality in the results of
our operations, the impact of inflation, and quantitative and qualitative disclosures
about market risk.
|
Forward-Looking Statements
This MD&A contains certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical fact may be forward-looking statements. Such
forward-looking statements include, among others, those statements regarding future events and
future results of Apollo Group, Inc. (the Company, Apollo Group, Apollo, APOL, we, us
or our) that are based on current expectations, estimates, forecasts, and the beliefs and
assumptions of us and our management, and speak only as of the date made and are not guarantees of
future performance. In some cases, forward-looking statements can be identified by terminology such
as may, will, should, believes, expects, anticipates, estimates, plans, predicts,
targets, potential, continue, objectives, or the negative of these terms or other
comparable terminology. Such forward-looking statements are necessarily estimates based upon
current information and involve a number of risks and uncertainties. Such statements should be
viewed with caution. Actual events or results may differ materially from the results anticipated in
these forward-looking statements as a result of a variety of factors. While it is impossible to
identify all such factors, factors that could cause actual results to differ materially from those
estimated by us include but are not limited to:
|
|
|
changes in the regulations of the education industry, including those items set forth in
Item 1 of the 2007 Annual Report on Form 10-K, under the sections titled Regulatory
Environment, Accreditation, Federal Financial Aid Programs, and State Authorization;
|
|
|
|
|
each of the factors discussed in Item 1A of the 2007 Annual Report on Form 10-K,
Risk
Factors;
|
|
|
|
|
those factors set forth in Item 7 of the 2007 Annual Report on Form 10-K; and
|
|
|
|
|
changes in the requirements surrounding the reports that we file with the Securities and
Exchange Commission (SEC).
|
The cautionary statements referred to in this section also should be considered in connection with
any subsequent written or oral forward-looking statements that may be issued by us or persons
acting on our behalf. 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. Furthermore, we cannot guarantee future results, events, levels of
activity, performance, or achievements.
Executive Summary
Apollo Group, Inc. has been an education provider for more than 30 years, operating University of
Phoenix, Inc. (UPX), Institute for Professional Development, Inc. (IPD), The College for
Financial Planning Institutes Corporation (CFP), Western International University, Inc. (WIU)
and Insight Schools, Inc. (Insight), all of which are our wholly-owned subsidiaries, and Apollo
Global, Inc. (Apollo Global), a consolidated joint venture. We offer innovative and distinctive
educational programs and services at high school,
Page 19 of 30
college and graduate levels at 102 campuses and 154 learning centers in 40 states and the District
of Columbia; Puerto Rico; Alberta and British Columbia, Canada; Mexico; and the Netherlands; as
well as online throughout the world. Our combined Degreed Enrollment for UPX, including Axia
College (Axia College has been a part of UPX since March 2006, but was a part of WIU from September
2004 through February 2006), as of November 30, 2007, was approximately 325,000. In addition,
students are enrolled in WIU, CFP, IPD Client Institutions, and Insight, and additional non-degreed
students are enrolled in UPX. Degreed Enrollment represents individual students enrolled in our
degree programs who attended a course during the quarter and did not graduate as of the end of the
quarter (including Axia students enrolled in UPX and WIU). Degreed
Enrollment includes any student
who graduated from one degree program and started a new degree program (for example, a graduate of
the associates degree program returns for a bachelors degree or a graduate of a bachelors degree
program returns for a masters degree), as well as students who have been out of attendance for
greater than 12 months and return to a program.
The non-traditional education market is a
significant and growing component of the post-secondary
education market, which is estimated by the U.S. Department of Education to be a more than $373.0
billion industry. According to the U.S. Department of Education, National Center for Education
Statistics, over 6.8 million, or 39%, based on its most recent
data from 2005, of all students enrolled in higher education programs are
over the age of 24, and this number is expected to increase by 21%
from 2005 through 2016. A large percentage of these students would not be classified as traditional
(i.e., living on campus, supported by parents and not working). The non-traditional students
typically are looking to improve their skills and enhance their earnings potential within the
context of their careers. From 2005 through 2016, the percentage of 18- to 24-year-old students in
the U.S. is expected to increase 15%. The market for non-traditional education should continue to
increase, reflecting the rapidly expanding knowledge-based economy.
Our operations are generally subject to seasonal trends. We experience, and expect to continue to
experience, seasonal fluctuations in the results of operations as a result of changes in the level
of student enrollment. While we enroll students throughout the year, second quarter (December
through February) enrollment and related revenues generally are lower than other quarters due to
holiday breaks in December and January. We experience a seasonal increase in new enrollments in
August of each year when most other colleges and universities begin their fall semesters.
During the first quarter of fiscal 2008, we experienced the following significant events:
|
1.
|
|
Enrollment and Revenue Growth While Investing in our Business for the Future -
We
achieved 11.4% growth in Degreed Enrollment for the three months ended November 30, 2007 as
compared to the three months ended November 30, 2006, which,
coupled with previously implemented selective tuition
price increases depending on geographic area and program, resulted in a 16.9% increase in
revenue over the same period. These increases helped fund a significant portion of our
investment in product development and marketing and lead generation during the quarter to
ensure our continued growth and viability in the future.
|
|
|
2.
|
|
Apollo Global -
On October 22, 2007, we formed a joint venture with The Carlyle
Group (Carlyle), Apollo Global, to pursue investments in the international education
services sector. Carlyle, based in Washington D.C., is one of the worlds largest private
equity firms, managing over $76 billion in assets for over 1,000 institutional investors,
including several of the largest pension funds in the U.S. Through Apollo Global, we intend
to capitalize on the significant global demand for education services. Apollo Global will
provide education services through two primary strategies. First, Apollo Global will
facilitate delivery of a wide range of our U.S. accredited degrees to foreign students
outside the U.S. Within approximately 18 months, we expect to transfer to Apollo Global
assets that are dedicated to recruiting and servicing international students. Following such
transfer, Apollo Global will, under a service agreement with us, perform enrollment
activities directed toward students who live outside the U.S. and who are not citizens of
the U.S. or members of the U.S. military. Second, Apollo Global will acquire or invest in
companies that provide local education services, including post-secondary degrees, in the
countries it seeks to enter. These investments will be achieved through both a disciplined
acquisition process and organic growth.
|
|
|
|
|
We have agreed to commit up to $801 million in cash or contributed assets and own 80.1% of
Apollo Global. Carlyle has agreed to commit up to $199 million in cash or contributed assets
and own the remaining 19.9%. Additionally, appropriate amounts of debt will be employed. The
Board of Apollo Global consists of seven directors, four of whom were designated by us and two
of whom were designated by Carlyle. The seventh director is the Interim President of Apollo
Global. Additionally, 10 to 15% of the value of the equity will be available to provide
incentives for management of Apollo Global. Apollo Global is consolidated in our financial
statements. No cash contributions of Apollo Global have been made as of November 30, 2007.
|
|
|
3.
|
|
Bank Facility -
On January 4, 2008, we entered into a syndicated $500 million
Credit Agreement (the Bank Facility). The Bank Facility is an unsecured revolving credit
facility that will be used for general corporate purposes including acquisitions and stock
buybacks. The Bank Facility has an expansion feature for an aggregate principal amount of up
to $250 million. The term is five years and will expire on January 4, 2013. The Bank
Facility provides a multi-currency sub-limit facility for borrowings in certain specified
foreign currencies up to $300 million.
|
Page 20 of 30
|
|
|
The Bank Facility fees are determined based on a pricing grid that varies according to our
leverage ratio. The facility fee ranges from 12.5 bps to 17.5 bps and the incremental fees for
borrowings under the facility range from LIBOR + 50.0 bps to 82.5 bps.
|
|
|
|
|
The Bank Facility contains affirmative and negative covenants, including the following
financial covenants: maximum leverage ratio, minimum coverage interest and rent expense ratio,
and a Department of Education financial responsibility composite score. In addition, there are
covenants restricting indebtedness, liens, investments, asset transfers and distributions. Our
obligations under the Bank Facility are guaranteed by our material domestic subsidiaries.
|
|
|
4.
|
|
Aptimus, Inc. (Aptimus)
- On October 29, 2007, we completed the acquisition of
Aptimus (Nasdaq:APTM), an online advertising network. The acquisition aids in the
furtherance of our broader efforts to position ourselves to more effectively monitor, manage
and control our marketing investments and brands, with the goal of increasing awareness of
and access to quality and affordable education.
|
Critical Accounting Policies and Estimates
Please refer to our Annual Report filed on Form 10-K for the fiscal year ended August 31, 2007
filed on October 29, 2007.
Results of Operations
We have included below a discussion of our operating results and significant items which explain
the material changes in our operating results during the last three months.
We categorize our expenses as instructional costs and services, selling and promotional, and
general and administrative.
Instructional costs and services at UPX, WIU, CFP and Insight consist primarily of costs related to
the delivery and administration of our educational programs and include faculty compensation,
administrative compensation 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, technology spending in support of student systems and
depreciation and amortization of property and equipment. UPX and WIU faculty members are primarily
contracted 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 IPD consist primarily of program administration, student services, and classroom lease expense.
Most of the other instructional costs for IPD-assisted programs, including faculty, financial aid
processing, and other administrative salaries, are the responsibility of IPDs Client Institutions.
Selling and promotional costs consist primarily of compensation for enrollment counselors,
management and support staff, corporate marketing, advertising, production of marketing materials,
and other costs related to selling and promotional functions. All operating expenses related to
Aptimus are classified as selling and promotional costs. We expense selling and promotional costs
as incurred.
General and administrative costs consist primarily of administrative compensation, occupancy costs,
depreciation and amortization, and other related costs for departments such as executive
management, information technology, 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.
Certain Reclassifications
We revised the presentation of certain information technology-related expense items between
instructional costs and services and general and administrative expenses. The net effect of the
reclassification was an increase in general and administrative expenses in the amount of $1.2
million for the three months ended November 30, 2006, and an offsetting decrease in instructional
costs and services.
Page 21 of 30
Three Months Ended November 30, 2007 Compared to the Three Months Ended November 30, 2006
All references to the first quarter of fiscal 2008 and the first quarter of fiscal 2007 in this
section refer to the three months ended November 30, 2007, and 2006, respectively. The following
table sets forth an analysis of our Consolidated Statements of Income for the periods indicated:
Analysis of Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
Ended November 30,
|
|
|
Ended November 30,
|
|
|
% Change
|
|
($ in millions, except percentages)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007 vs 2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition and other, net
|
|
$
|
780.7
|
|
|
$
|
667.8
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
16.9
|
%
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
333.3
|
|
|
|
294.8
|
|
|
|
42.7
|
%
|
|
|
44.1
|
%
|
|
|
13.1
|
%
|
Selling and promotional
|
|
|
176.9
|
|
|
|
155.4
|
|
|
|
22.6
|
%
|
|
|
23.3
|
%
|
|
|
13.8
|
%
|
General and administrative
|
|
|
51.3
|
|
|
|
37.6
|
|
|
|
6.6
|
%
|
|
|
5.6
|
%
|
|
|
36.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
561.5
|
|
|
|
487.8
|
|
|
|
71.9
|
%
|
|
|
73.0
|
%
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
219.2
|
|
|
|
180.0
|
|
|
|
28.1
|
%
|
|
|
27.0
|
%
|
|
|
21.8
|
%
|
Interest income and other, net
|
|
|
9.7
|
|
|
|
6.4
|
|
|
|
1.2
|
%
|
|
|
1.0
|
%
|
|
|
51.6
|
%
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
228.9
|
|
|
|
186.4
|
|
|
|
29.3
|
%
|
|
|
28.0
|
%
|
|
|
22.8
|
%
|
Provision for income taxes
|
|
|
89.0
|
|
|
|
72.5
|
|
|
|
11.4
|
%
|
|
|
10.9
|
%
|
|
|
22.8
|
%
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
139.9
|
|
|
$
|
113.9
|
|
|
|
17.9
|
%
|
|
|
17.1
|
%
|
|
|
22.8
|
%
|
|
|
|
|
|
|
|
|
|
Refer to the above Analysis of Consolidated Statements of Income when reading the results of
operations discussion below.
Tuition and Other Revenue, Net
Information about our tuition and other revenue, net by reportable segment on a percentage basis is
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
UPX
|
|
|
95.2
|
%
|
|
|
90.9
|
%
|
Other Schools
|
|
|
4.7
|
%
|
|
|
9.1
|
%
|
Corporate
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
|
Tuition and other revenue, net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
Our tuition and other revenue, net increased by 16.9% in the first quarter of fiscal 2008 versus
the first quarter of fiscal 2007 primarily due to (a) an 11.4% increase in Degreed Enrollment in
the first quarter of fiscal 2008 versus the first quarter of fiscal
2007, and (b) previously implemented selective tuition
price increases depending on geographic area and program. The primary price increase by program
type was in our associates degree program. In May 2007, we increased our associates degree
tuition price by approximately 9%. We expect this tuition increase to positively impact our
associates degree tuition rate per Degreed Enrollment prospectively. Additionally, during the
quarter, we experienced increased persistence among our UPX student body. This positively impacts
our revenue growth as well. Even after the rate increase noted above, our associates degree
program has a lower tuition rate than our other programs. Accordingly, we continued to experience
negative mix shift during the quarter as our associates Degreed Enrollment increased 37.7% from
the first quarter of fiscal 2007 and represented 35.2% of our Degreed Enrollment at November 30,
2007, compared to 28.4% at November 30, 2006.
Tuition and other revenue, net at Other Schools decreased both in dollars and as a percentage of
consolidated tuition and other revenue, net in the first quarter of fiscal 2008 versus the first
quarter of fiscal 2007, as WIU Axia College students graduate or drop from the program. Axia
College began offering their associates degree programs in September 2004 at WIU; however, in
March 2006 (our third quarter of fiscal 2006), we began offering all Axia College programs at UPX
instead of WIU. Therefore, we expect the percentage of revenue within Other Schools to continue to
decrease prospectively.
Page 22 of 30
Instructional Costs and Services
Instructional costs and services increased by 13.1% in the first quarter of fiscal 2008 versus the
first quarter of fiscal 2007. The following table sets forth the changes in the significant
components of instructional costs and services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
Ended November 30,
|
|
|
Ended November 30,
|
|
|
% Change
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007 vs. 2006
|
|
Employee compensation and related expenses
|
|
$
|
113.8
|
|
|
$
|
104.0
|
|
|
|
14.6
|
%
|
|
|
15.6
|
%
|
|
|
9.4
|
%
|
Faculty compensation
|
|
|
65.7
|
|
|
|
57.5
|
|
|
|
8.4
|
%
|
|
|
8.6
|
%
|
|
|
14.3
|
%
|
Classroom lease expenses and depreciation
|
|
|
52.0
|
|
|
|
51.0
|
|
|
|
6.7
|
%
|
|
|
7.6
|
%
|
|
|
2.0
|
%
|
Other instructional costs and services
|
|
|
44.7
|
|
|
|
40.6
|
|
|
|
5.6
|
%
|
|
|
6.0
|
%
|
|
|
10.1
|
%
|
Bad debt expense
|
|
|
32.4
|
|
|
|
23.1
|
|
|
|
4.2
|
%
|
|
|
3.5
|
%
|
|
|
40.3
|
%
|
Financial aid processing costs
|
|
|
19.6
|
|
|
|
14.7
|
|
|
|
2.5
|
%
|
|
|
2.2
|
%
|
|
|
33.3
|
%
|
Share-based compensation
|
|
|
5.1
|
|
|
|
3.9
|
|
|
|
0.7
|
%
|
|
|
0.6
|
%
|
|
|
30.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
$
|
333.3
|
|
|
$
|
294.8
|
|
|
|
42.7
|
%
|
|
|
44.1
|
%
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services as a percentage of tuition and other revenue, net decreased in the
first quarter of fiscal 2008 versus the first quarter of fiscal 2007 primarily due to decreases as
a percentage of tuition and other revenue, net in employee compensation and related expenses and
classroom lease expenses and depreciation, which were partially offset by increases as a percentage
of tuition and other revenue, net in bad debt expense and financial aid processing costs.
Employee compensation as a percentage of tuition and other revenue, net decreased in the first
quarter of fiscal 2008 versus the first quarter of fiscal 2007 primarily due to the improved
efficiency with which we provided our student support services (finance and academic counseling,
etc.) in the current year as compared with prior years. We continue to make changes in our
operating structure and believe that this improved trend will continue. Classroom lease expense and
depreciation decreased 90 basis points as a percentage of revenue primarily in the first quarter of
fiscal 2008 versus the first quarter of fiscal 2007 due to our ability to increase revenues and
enrollments without increasing our classroom facilities. This is primarily driven by leveraging our
online modality.
Bad debt expense as a percentage of tuition and other
revenue, net increased in the first quarter
of fiscal 2008 versus the first quarter of fiscal 2007 primarily due
to the continuing trend of changes in our enrollment mix to a higher
percentage of students enrolled in our associates degree
programs. When we are required to collect outstanding
balances directly from our students, students enrolled in our associates degree programs generally
have higher write-offs, based on the greater risk of default presented by the associates degree
programs demographics, versus students enrolled in other degree programs. Additionally, during the
first quarter of fiscal 2008, we performed a review of the components of bad debt expense and
identified certain items that should have been classified as
discounts or refunds (reduction of tuition and other revenue, net) as opposed to bad
debt expense. No reclassification was made for prior periods as the amounts were not material to prior period
financial statements and had no effect on reported net income. Had we
not changed the classification for these items
in the first quarter of fiscal 2008, the amounts reported for tuition and other revenue, net and
bad debt expense would have been $5.1 million higher, and bad debt expense as a percentage of
tuition and other revenue, net would have been 4.78% versus 4.15%. For the first, second, third and
fourth quarters of fiscal 2007, our reported bad debt expense as a percentage of tuition and other revenue,
net would have been lower by 59, 82, 65 and 87 basis points, respectively, as a result of this
reclassification.
Financial aid processing costs as a percentage of tuition and other revenue, net increased in the
first quarter of fiscal 2008 versus the first quarter of fiscal 2007 primarily due to third party
costs associated with the online documentation collection process we implemented in the second
quarter of fiscal 2007. Additionally, the demographics of our student population have changed
slightly, with a higher percentage of students applying for financial aid.
Page 23 of 30
Selling and Promotional Expenses
Selling and promotional expenses increased by 13.8% in the first quarter of fiscal 2008 versus the
first quarter of fiscal 2007. The following table sets forth the changes in the significant
components of selling and promotional expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
Ended November 30,
|
|
|
Ended November 30,
|
|
|
% Change
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007 vs. 2006
|
|
Enrollment counselors compensation
and related expenses
|
|
$
|
89.0
|
|
|
$
|
75.7
|
|
|
|
11.4
|
%
|
|
|
11.3
|
%
|
|
|
17.6
|
%
|
Advertising
|
|
|
71.1
|
|
|
|
65.3
|
|
|
|
9.1
|
%
|
|
|
9.8
|
%
|
|
|
8.9
|
%
|
Other selling and promotional expenses
|
|
|
16.1
|
|
|
|
13.3
|
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
21.1
|
%
|
Share-based compensation
|
|
|
0.7
|
|
|
|
1.1
|
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
(36.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and promotional expenses
|
|
$
|
176.9
|
|
|
$
|
155.4
|
|
|
|
22.6
|
%
|
|
|
23.3
|
%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and promotional expenses as a percentage of tuition and other revenue, net decreased in the
first quarter of fiscal 2008 versus the first quarter of fiscal 2007 primarily due to a decrease as
a percentage of tuition and other revenue, net in Internet-based advertising costs, which were
partially offset by an increase as a percentage of tuition and other revenue, net in costs to
support our national branding campaign (included in advertising). Our reduced advertising costs as
a percentage of tuition and other revenue, net are being primarily driven by more efficient and
productive spending to acquire higher quality Internet-based leads. As previously disclosed, we
launched our national branding campaign in January 2007 and continue to invest to support our
image.
On October 29, 2007, we completed the acquisition of online advertising network Aptimus. We believe
this acquisition will help us, over time, increase the effectiveness and efficiency of our online
advertising directed at increasing awareness of and access to quality education services.
General and Administrative Expenses
General and administrative expenses increased by 36.4% in the first quarter of fiscal 2008 versus
the first quarter of fiscal 2007. The following table sets forth the changes in the significant
components of general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
Ended November 30,
|
|
|
Ended November 30,
|
|
|
% Change
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007 vs. 2006
|
|
Employee compensation and related expenses
|
|
$
|
19.9
|
|
|
$
|
15.3
|
|
|
|
2.5
|
%
|
|
|
2.3
|
%
|
|
|
30.1
|
%
|
Share-based compensation
|
|
|
9.1
|
|
|
|
5.2
|
|
|
|
1.2
|
%
|
|
|
0.8
|
%
|
|
|
75.0
|
%
|
Legal, audit, and corporate insurance
|
|
|
5.7
|
|
|
|
2.9
|
|
|
|
0.7
|
%
|
|
|
0.4
|
%
|
|
|
96.6
|
%
|
Administrative space and depreciation
|
|
|
5.9
|
|
|
|
5.1
|
|
|
|
0.8
|
%
|
|
|
0.8
|
%
|
|
|
15.7
|
%
|
Other general and administrative expenses
|
|
|
10.7
|
|
|
|
9.1
|
|
|
|
1.4
|
%
|
|
|
1.3
|
%
|
|
|
17.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
51.3
|
|
|
$
|
37.6
|
|
|
|
6.6
|
%
|
|
|
5.6
|
%
|
|
|
36.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other general and administrative expenses for the first quarter of fiscal 2007 is $2.0
million of stock option investigation and financial statement restatement costs. Excluding this
item, general and administrative expenses as a percentage of tuition and other revenue, net
increased from 5.3% in the first quarter of fiscal 2007 to 6.6% in the first quarter of fiscal
2008. This increase as a percentage of tuition and other revenue, net
is primarily due to (a) salary and related payroll costs due to additional employees in our information technology, legal, and finance functions, (b) higher
share-based compensation expense and (c) increased legal costs in connection with
defending ourselves in the legal matters described elsewhere in this report.
Interest Income and Other, Net
Interest income and other, net increased by $3.2 million in the first quarter of fiscal 2008 versus
the first quarter of fiscal 2007. This increase was primarily attributable to higher average
balances in cash and cash equivalents, restricted cash and marketable securities. This increase was
offset by a slight decrease in tax-exempt interest yields from the first quarter of fiscal 2007
versus the first quarter of fiscal 2008.
Page 24 of 30
Liquidity, Capital Resources, and Financial Position
Based on past performance and current expectations, we believe that our cash and cash equivalents,
marketable securities, and cash generated from operations plus available borrowings under our Bank
Facility will satisfy our working capital needs, capital expenditures, stock repurchases,
commitments, acquisitions and other liquidity requirements associated with our existing operations
through at least the next 12 months and the foreseeable future. We believe that the most strategic
uses of our cash resources include potential acquisition opportunities, including over time our
commitment to Apollo Global, possible repurchase of shares, and start-up costs associated with new
campuses.
Cash and Cash Equivalents and Marketable Securities
Cash and cash equivalents and marketable securities increased $197.8 million, or 50.4%, to $590.5
million as of November 30, 2007, from $392.7 million as of August 31, 2007. Cash and cash
equivalents and marketable securities represented 34.4% and 27.1% of our
total assets as of November 30, 2007, and August 31, 2007, respectively. The increase was primarily
due to the $207.8 million of cash generated from operations partially offset by $24.1 million used
for capital expenditures (including $5.2 million for our new corporate headquarters) and $47.0
million used for the purchase of Aptimus.
A component of our investment policy is to invest in auction-rate securities (generally tax-exempt
municipal bonds and preferred stock). Auction-rate securities trade or mature on a shorter term
than the underlying debt or equity based on an auction bid that resets the interest rate of the
security. The auction or reset dates occur at intervals that are generally between 7 and 35 days of
the purchase. To date, we have not experienced a failed auction for any auction-rate securities in
which we have invested. These securities provide a higher interest rate than similar securities and
provide high liquidity to otherwise longer-term investments. Traditionally, we have invested in
auction-rate securities throughout the fiscal year to maximize our yield, but liquidated them prior
to quarterly or annual reporting dates. In the future, we may elect to hold these investments at
quarterly and annual reporting dates in order to maximize our interest rate yield. This would
result in reporting higher amounts of available-for-sale marketable securities and less cash and
cash equivalents.
Cash Flows
Operating Activities
Operating activities provided $207.8 million in cash for the first quarter of fiscal 2008 compared
to providing $152.9 million for the first quarter of fiscal 2007. Included below is a summary of
operating cash flows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30,
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
Net income
|
|
$
|
139.9
|
|
|
$
|
113.9
|
|
Non-cash items
|
|
|
49.6
|
|
|
|
38.0
|
|
Changes in certain operating assets
and liabilities
|
|
|
18.3
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
207.8
|
|
|
$
|
152.9
|
|
|
|
|
|
|
|
|
Our non-cash items consisted primarily of a provision for bad debts, depreciation and amortization,
and share-based compensation, partially offset by excess tax benefits from share-based compensation
and deferred taxes. Changes in certain operating assets and liabilities primarily consist of
accounts receivable, accounts payable, accrued liabilities, income taxes payable, student deposits
and deferred revenue. The $18.3 million in changes in certain operating assets and liabilities
consists principally of an increase in income taxes payable of $84.8 million due to timing of
quarterly estimated payments, partially offset by an increase in accounts receivable and a decrease
in accounts payable due to timing of payments for Internet-based advertising.
Accounts receivable is a significant item in our working capital. We monitor our accounts
receivable through a variety of metrics, including days sales outstanding (DSO). We calculate our
DSO based on determining average daily revenue based on a rolling twelve month analysis and divide
it into the gross student accounts receivable balance as of the end of the period. As of November
30, 2007, our DSO stayed consistent at 35 days as compared to November 30, 2006, but declined from
38 days as of August 31, 2007. The decrease in DSO since August 31, 2007 is primarily due to a
reduction in the percentage of current (less than 90 days old) receivables as a result of
improvements in our front-end collection process.
Page 25 of 30
Investing Activities
Investing activities used $68.4 million in cash during the first quarter of fiscal 2008 compared to
using $41.3 million in the first quarter of fiscal 2007. The fiscal 2008 fluctuation primarily
includes $47.0 million used for the purchase of Aptimus, as well as $24.1 million used for capital
expenditures, of which $5.2 million related to the build out of our new corporate headquarters
building. The fiscal 2007 fluctuation primarily includes $25.2 million for capital expenditures, of
which $11.4 million is related to the build out of our new corporate headquarters building.
Sale-Leaseback Option.
On June 20, 2006, we entered into an option agreement (which was amended in
November 2006) with Macquarie Riverpoint AZ, LLC (Macquarie). The option agreement allows us to
execute a sale and simultaneous leaseback of the new corporate headquarters land and buildings. We
began to occupy portions of these buildings during November 2007, and anticipate finishing
construction by the end of the second quarter of 2008. In the third quarter of 2008, we anticipate
executing the sale-leaseback option. When the sale-leaseback option is exercised, we anticipate
receiving approximately $170 million in cash for the buildings and
land, and expect to generate a gain on the sale of approximately $20-30 million. The gain will be
deferred over the 12-year term of the lease agreement.
Financing Activities
Financing activities provided $64.0 million of cash during the first quarter of fiscal 2008,
compared to providing $5.4 million in the first quarter of fiscal 2007. The fiscal 2008 fluctuation
includes $50.8 million received primarily for stock issued to employees related to the exercise of
stock options.
Contractual Obligations and Other Commercial Commitments
In addition to our previously disclosed contractual obligations and other commercial commitments at
the end of fiscal 2007, FIN 48 unrecognized tax benefits were $53.0 million as of November 30,
2007. Based on the uncertainties associated with the settlement of these types of items, we are
unable to make reasonably reliable estimates of potential cash settlements, if any, with taxing
authorities.
There have been no other material changes in our contractual obligations and other commercial
commitments other than in the ordinary course of business since the end of fiscal year 2007.
Information regarding our contractual obligations and commercial commitments is provided in our
2007 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Please refer to our 2007 Annual Report on Form 10-K.
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An Interpretation of FASB No. 109, (FIN 48). This
interpretation, among other things, creates a two-step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based
solely on its technical merits, is more-likely-than-not to be sustained upon examination.
Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized
upon settlement. Derecognition of a tax position that was previously recognized would occur when a
company subsequently determines that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a
substitute for derecognition of tax positions, and it has expanded disclosure requirements. We
adopted FIN 48 on September 1, 2007, and did not recognize an adjustment to our liability for
unrecognized income tax benefits as of August 31, 2007.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Please refer to our 2007 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We intend to maintain disclosure controls and procedures designed to provide reasonable assurance
that information required to be disclosed in reports filed under the Securities Exchange Act of
1934 (the Act) is recorded, processed, summarized and reported within the specified time periods,
and accumulated and communicated to management, including our President (Principal Executive
Officer) and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Page 26 of 30
Management, under the supervision and with the participation of our President (Principal Executive
Officer) and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) promulgated under the Act), as of the end of the period covered by
this report. Based on that evaluation, management concluded that, as of that date, our disclosure
controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the quarter
ended November 30, 2007, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Page 27 of 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Please refer to Note 8 in Part I, Item 1 for legal proceedings.
Item 1A. Risk Factors
There have been no material changes in the risk factors previously disclosed in our 2007 Annual
Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not purchase any Apollo Group Class A common stock during the three months ended November
30, 2007.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Page 28 of 30
Item 6. Exhibits
APOLLO GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
|
|
|
Exhibit Number
|
|
Description of Exhibit
|
|
|
|
10.1
|
|
Executive Officer Performance Incentive Plan
|
|
|
|
10.2
|
|
Credit Agreement dated January 4, 2008
|
|
|
|
31.1
|
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|
Page 29 of 30
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 8, 2008
|
|
|
By:
|
/s/ Joseph L. DAmico
|
|
|
|
Joseph L. DAmico
|
|
|
|
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Duly Authorized Signatory)
|
|
|
|
|
|
|
By:
|
/s/ Brian L. Swartz
|
|
|
|
Brian L. Swartz
|
|
|
|
Senior Vice President of Finance and Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized Signatory)
|
|
|
Page 30 of 30
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