UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
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(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
May 31,
2010
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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
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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4025 S. RIVERPOINT
PARKWAY, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)
(480) 966-5394
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
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 has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
YES
þ
NO
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer
þ
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting
company
o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
YES
o
NO
þ
AS OF
June 17, 2010, THE FOLLOWING SHARES OF STOCK WERE
OUTSTANDING:
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Apollo Group Class A common stock, no par value
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147,054,000 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
2
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, as amended, 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
or results. In some cases, forward-looking statements can be
identified by terminology such as may,
will, should, could,
believe, expect, anticipate,
estimate, plan, predict,
target, 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 the regulatory and other requirements discussed in
Item 1, Business, of our Annual Report on
Form 10-K
for the year ended August 31, 2009, under
Accreditation and Jurisdictional Authorizations,
Financial Aid Programs, and Regulatory
Environment;
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each of the factors discussed in Item 1A, Risk Factors,
of our Annual Report on Form
10-K
for the
year ended August 31, 2009 and Part II, Item 1A,
Risk Factors, in this
10-Q;
and
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those factors set forth in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, of our Annual Report on
Form 10-K
for the year ended August 31, 2009 and Part I,
Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations, in this
Form 10-Q.
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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 for any
changes, events, or circumstances occurring after the date of
this report. Furthermore, we cannot guarantee future results,
events, levels of activity, performance, or achievements.
3
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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May 31,
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August 31,
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($ in thousands)
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2010
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2009
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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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891,981
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$
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968,246
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Restricted cash and cash equivalents
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482,228
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432,304
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Marketable securities, current portion
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4,405
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Accounts receivable, net
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249,231
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298,270
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Deferred tax assets, current portion
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158,961
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88,022
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Prepaid taxes
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9,563
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57,658
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Other current assets
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38,613
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35,517
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Assets held for sale from discontinued operations (Note 3)
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27,356
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Total current assets
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1,862,338
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1,880,017
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Property and equipment, net
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587,931
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557,507
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Marketable securities, less current portion
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15,174
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19,579
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Goodwill
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456,197
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522,358
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Intangible assets, net
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164,877
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203,671
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Deferred tax assets, less current portion
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72,911
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66,254
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Other assets
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13,556
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13,991
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Total assets
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$
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3,172,984
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$
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3,263,377
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LIABILITIES AND SHAREHOLDERS EQUITY:
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Current liabilities
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Short-term borrowings and current portion of long-term debt
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$
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51,437
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$
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461,365
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Accounts payable
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73,734
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66,928
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Accrued liabilities
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378,982
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268,418
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Student deposits
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490,877
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491,639
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Deferred revenue
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333,972
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333,041
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Other current liabilities
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63,571
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133,887
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Liabilities held for sale from discontinued operations
(Note 3)
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4,691
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Total current liabilities
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1,397,264
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1,755,278
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Long-term debt
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115,153
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127,701
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Deferred tax liabilities
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49,506
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55,636
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Other long-term liabilities
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166,415
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100,149
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Total liabilities
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1,728,338
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2,038,764
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Commitments and contingencies (Note 15)
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Shareholders equity
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Preferred stock, no par value
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Apollo Class A nonvoting common stock, no par value
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103
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103
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Apollo 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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50,723
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1,139
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Apollo Class A treasury stock, at cost
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(2,322,904
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)
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(2,022,623
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)
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Retained earnings
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3,707,074
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3,195,043
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Accumulated other comprehensive loss
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(49,741
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)
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(13,740
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)
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Total Apollo shareholders equity
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1,385,256
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1,159,923
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Noncontrolling interests
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59,390
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64,690
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Total equity
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1,444,646
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1,224,613
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Total liabilities and shareholders equity
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$
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3,172,984
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$
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3,263,377
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
APOLLO
GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended May 31,
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Nine Months Ended May 31,
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(in thousands, except per share data)
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2010
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2009
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2010
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2009
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Net revenue
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$
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1,337,404
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$
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1,047,574
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$
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3,666,399
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$
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2,880,399
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Costs and expenses:
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Instructional costs and services
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540,594
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390,642
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1,577,382
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1,124,034
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Selling and promotional
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273,480
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241,259
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811,104
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692,189
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General and administrative
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79,712
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70,862
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223,746
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198,178
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Estimated litigation loss (Note 15)
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132,600
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177,100
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Goodwill impairment (Note 6)
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8,712
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8,712
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Total costs and expenses
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1,035,098
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702,763
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2,798,044
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2,014,401
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Operating income
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302,306
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344,811
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868,355
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865,998
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Interest income
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827
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2,395
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2,284
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11,202
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Interest expense
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(1,979
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)
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(509
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)
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(8,107
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)
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(2,559
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)
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Other, net
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(1,312
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)
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1,782
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(2,061
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)
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(851
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)
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Income from continuing operations before income taxes
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299,842
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348,479
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860,471
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873,790
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Provision for income taxes
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(122,390
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)
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(142,537
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)
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(341,435
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)
|
|
|
(357,072
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)
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Income from continuing operations
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177,452
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205,942
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519,036
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516,718
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Income (loss) from discontinued operations, net of tax
(Note 3)
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2,084
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(5,330
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)
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(8,854
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)
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(10,722
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)
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Net income
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179,536
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200,612
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510,182
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505,996
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Net (income) loss attributable to noncontrolling interests
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(253
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)
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|
492
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1,849
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|
814
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Net income attributable to Apollo
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$
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179,283
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$
|
201,104
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$
|
512,031
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|
$
|
506,810
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Earnings (loss) per share Basic:
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Continuing operations attributable to Apollo
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$
|
1.17
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$
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1.31
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$
|
3.40
|
|
|
$
|
3.26
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Discontinued operations attributable to Apollo
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|
0.02
|
|
|
|
(0.03
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)
|
|
|
(0.06
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)
|
|
|
(0.07
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)
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|
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|
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Basic income per share attributable to Apollo
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$
|
1.19
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|
|
$
|
1.28
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|
$
|
3.34
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|
|
$
|
3.19
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|
|
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|
|
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|
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|
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Earnings (loss) per share Diluted:
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|
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|
|
|
|
|
|
|
|
|
|
|
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Continuing operations attributable to Apollo
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|
$
|
1.16
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|
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$
|
1.30
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|
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$
|
3.37
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|
|
$
|
3.22
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Discontinued operations attributable to Apollo
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|
0.02
|
|
|
|
(0.04
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)
|
|
|
(0.06
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)
|
|
|
(0.07
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)
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Diluted income per share attributable to Apollo
|
|
$
|
1.18
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|
|
$
|
1.26
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|
$
|
3.31
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|
|
$
|
3.15
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|
|
|
|
|
|
|
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|
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Basic weighted average shares outstanding
|
|
|
151,127
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|
|
|
157,616
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|
|
|
153,345
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|
|
|
158,960
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|
|
|
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|
|
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|
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|
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|
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Diluted weighted average shares outstanding
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|
|
152,291
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|
|
|
159,305
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|
|
|
154,506
|
|
|
|
160,952
|
|
|
|
|
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
APOLLO
GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Nine Months Ended May 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net income
|
|
$
|
179,536
|
|
|
$
|
200,612
|
|
|
$
|
510,182
|
|
|
$
|
505,996
|
|
Other comprehensive income (loss) (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation gain (loss), net
|
|
|
(22,867
|
)
|
|
|
551
|
|
|
|
(41,912
|
)
|
|
|
(9,356
|
)
|
Unrealized loss on auction-rate securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
156,669
|
|
|
|
201,163
|
|
|
|
468,270
|
|
|
|
495,318
|
|
Comprehensive loss attributable to noncontrolling
interests
|
|
|
2,995
|
|
|
|
278
|
|
|
|
7,760
|
|
|
|
2,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Apollo
|
|
$
|
159,664
|
|
|
$
|
201,441
|
|
|
$
|
476,030
|
|
|
$
|
498,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
APOLLO
GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FROM CONTINUING AND DISCONTINUED OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
510,182
|
|
|
$
|
505,996
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
46,236
|
|
|
|
49,385
|
|
Excess tax benefits from share-based compensation
|
|
|
(6,427
|
)
|
|
|
(11,509
|
)
|
Depreciation and amortization
|
|
|
98,091
|
|
|
|
72,857
|
|
Goodwill impairment on discontinued operations (Note 3)
|
|
|
9,400
|
|
|
|
|
|
Goodwill impairment (Note 6)
|
|
|
8,712
|
|
|
|
|
|
Amortization of deferred gain on sale-leasebacks
|
|
|
(1,294
|
)
|
|
|
(1,256
|
)
|
Non-cash foreign currency losses, net
|
|
|
931
|
|
|
|
693
|
|
Provision for uncollectible accounts receivable
|
|
|
208,593
|
|
|
|
106,890
|
|
Estimated litigation loss (Note 15)
|
|
|
177,100
|
|
|
|
|
|
Deferred income taxes
|
|
|
(69,571
|
)
|
|
|
4,017
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(175,845
|
)
|
|
|
(81,663
|
)
|
Other assets
|
|
|
(8,223
|
)
|
|
|
(13,077
|
)
|
Accounts payable and accrued liabilities
|
|
|
(59,413
|
)
|
|
|
19,715
|
|
Income taxes payable
|
|
|
35,203
|
|
|
|
23,774
|
|
Student deposits
|
|
|
897
|
|
|
|
92,408
|
|
Deferred revenue
|
|
|
5,796
|
|
|
|
33,470
|
|
Other liabilities
|
|
|
24,412
|
|
|
|
8,099
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
804,780
|
|
|
|
809,799
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(108,316
|
)
|
|
|
(94,873
|
)
|
Maturities of marketable securities
|
|
|
|
|
|
|
2,660
|
|
Increase in restricted cash and cash equivalents
|
|
|
(49,924
|
)
|
|
|
(105,464
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(158,240
|
)
|
|
|
(197,677
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
Payments on borrowings
|
|
|
(424,775
|
)
|
|
|
(16,211
|
)
|
Proceeds from borrowings
|
|
|
17,824
|
|
|
|
13,620
|
|
Issuance of Apollo Class A common stock
|
|
|
18,209
|
|
|
|
98,963
|
|
Apollo Class A common stock purchased for treasury
|
|
|
(341,161
|
)
|
|
|
(408,768
|
)
|
Noncontrolling interest contributions
|
|
|
2,460
|
|
|
|
2,000
|
|
Excess tax benefits from share-based compensation
|
|
|
6,427
|
|
|
|
11,509
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(721,016
|
)
|
|
|
(298,887
|
)
|
|
|
|
|
|
|
|
|
|
Exchange rate effect on cash and cash equivalents
|
|
|
(1,789
|
)
|
|
|
(731
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(76,265
|
)
|
|
|
312,504
|
|
Cash and cash equivalents, beginning of period
|
|
|
968,246
|
|
|
|
483,195
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
891,981
|
|
|
$
|
795,699
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes, net of refunds
|
|
$
|
356,570
|
|
|
$
|
314,344
|
|
Cash paid during the period for interest
|
|
$
|
5,292
|
|
|
$
|
1,934
|
|
Supplemental disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
Credits received for tenant improvements
|
|
$
|
16,026
|
|
|
$
|
10,861
|
|
Accrued purchases of property and equipment
|
|
$
|
9,190
|
|
|
$
|
6,222
|
|
Restricted stock units vested and released
|
|
$
|
4,938
|
|
|
$
|
9,290
|
|
Unrealized loss on auction-rate securities
|
|
$
|
|
|
|
$
|
2,203
|
|
Unsettled purchase of Apollo Class A common stock for
treasury
|
|
$
|
|
|
|
$
|
38,780
|
|
UNIACC earn-out consideration
|
|
$
|
|
|
|
$
|
7,135
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Nature
of Operations
Apollo Group, Inc., its wholly-owned subsidiaries and
subsidiaries that we control, collectively referred to herein as
the Company, Apollo Group,
Apollo, APOL, we,
us or our, has been an education
provider for more than 35 years. We offer innovative and
distinctive educational programs and services both online and
on-campus at the undergraduate, masters and doctoral
levels through our wholly-owned subsidiaries:
|
|
|
|
|
The University of Phoenix, Inc. (University of
Phoenix);
|
|
|
|
Institute for Professional Development (IPD);
|
|
|
|
The College for Financial Planning Institutes Corporation
(CFFP); and
|
|
|
|
Meritus University, Inc. (Meritus).
|
In addition to these wholly-owned subsidiaries, we have an 85.6%
ownership interest in Apollo Global, Inc. (Apollo
Global), which pursues investments primarily in the
international education services industry, and which we
consolidate in our financial statements. Apollo Global has
completed the following acquisitions:
|
|
|
|
|
BPP Holdings plc (BPP) in the United Kingdom;
|
|
|
|
Universidad de Artes, Ciencias y Comunicación
(UNIACC) in Chile; and
|
|
|
|
Universidad Latinoamericana (ULA) in Mexico.
|
In addition, in April 2010, we contributed all of the common
stock of Western International University, Inc. (Western
International University), which was previously our
wholly-owned subsidiary, to Apollo Global. Refer to Note 4,
Acquisitions, for further discussion.
We also operate online high school programs through our Insight
Schools, Inc. (Insight Schools) wholly-owned
subsidiary. In the second quarter of fiscal year 2010, we
initiated a formal plan to sell Insight Schools, engaged an
investment bank and also began the process of actively marketing
Insight Schools as we determined that the business was no longer
consistent with our long-term strategic objectives. Accordingly,
we have presented Insight Schools as held for sale and as
discontinued operations. Refer to Note 3, Discontinued
Operations, for further discussion.
Note 2. Significant
Accounting Policies
Basis
of Presentation
The unaudited interim condensed consolidated financial
statements include the accounts of Apollo Group, Inc., its
wholly-owned subsidiaries, and subsidiaries that we control.
These unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission
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
Securities and Exchange Commission rules. We believe that the
disclosures made are adequate to make the information presented
not misleading. We consistently applied the accounting policies
described in Item 8,
Financial Statements and
Supplementary Data,
in our 2009 Annual Report on
Form 10-K
as filed with the Securities and Exchange Commission on
October 27, 2009 in preparing these unaudited interim
condensed consolidated financial statements. For a discussion of
our critical accounting policies, please refer to our 2009
Annual Report on
Form 10-K
and Item 2,
Managements Discussion and Analysis of
Financial Condition and Results of Operations
, included in
this filing.
8
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
These unaudited interim condensed consolidated financial
statements and accompanying notes should be read in conjunction
with Item 2,
Managements Discussion and Analysis
of Financial Condition and Results of Operations
, included
in this filing and the audited consolidated financial statements
and notes thereto contained in our 2009 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.
Our operations are generally subject to seasonal trends. We
experience, and expect to continue to experience, fluctuations
in our results of operations as a result of seasonal variations
in the level of student enrollments and timing of certification
exams.
|
|
|
|
|
University of Phoenix
University of Phoenix
enrolls students throughout the year, with its net revenue
generally lower in our second fiscal quarter (December through
February) than the other quarters due to holiday breaks in
December and January.
|
|
|
|
BPP
BPP experiences significant seasonality
associated with the timing of when its courses begin and exam
dates, which generally results in considerably lower net revenue
in our second and, to an even greater degree, in our fourth
fiscal quarters as compared to the other quarters. As a result,
since the cost structure of BPP is relatively fixed, BPPs
profitability is substantially lower in the second and fourth
quarters.
|
|
|
|
Other subsidiaries
Many of our other
subsidiaries experience significant seasonality, as they have
limited enrollment during their respective summer breaks and
winter holidays.
|
Because of the seasonal nature of our business, the results of
operations for the three and nine months ended May 31, 2010
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 assets and liabilities at the date
of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could
differ from these estimates.
Assets and liabilities expected to be sold or disposed of are
presented separately in our Condensed Consolidated Balance
Sheets as assets or liabilities held for sale. If we determine
we will not have continued significant involvement with
components that are classified as held for sale, the results of
operations of these components are presented separately as
income (loss) from discontinued operations, net of tax, in the
current and prior periods. Refer to Note 3, Discontinued
Operations, for further discussion.
Recent
Accounting Pronouncements
Pronouncements
Adopted
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements (SFAS 157) (codified in
ASC 820, Fair Value Measurements and
Disclosures (ASC 820)), which provides
enhanced guidance for using fair value to measure assets and
liabilities. On September 1, 2008, as permitted, we
partially adopted the provisions in SFAS 157 for fair
valuing financial assets and liabilities and non-financial
assets and liabilities that are recognized or disclosed at fair
value on a recurring basis. The partial adoption of
SFAS 157 did not have a material impact on our financial
condition and results of operations. Effective September 1,
2009, we completed our full adoption of the provisions of
SFAS 157 with respect to fair valuing non-financial assets
and liabilities not measured on a recurring basis, and the
adoption did not have a material impact on our financial
condition, results of operations, and disclosures.
9
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)) (codified in ASC 805,
Business Combinations (ASC 805)), which
is a revision of SFAS 141, Business
Combinations. The primary requirements of SFAS 141(R)
are as follows:
|
|
|
|
|
upon initially obtaining control, the acquiring entity in a
business combination recognizes 100% of the fair values of the
acquired assets, including goodwill, and assumed liabilities,
with only limited exceptions even if the acquirer has not
acquired 100% of its target as a consequence, the
step acquisition model has been eliminated;
|
|
|
|
contingent consideration arrangements are fair valued at the
acquisition date and included in the purchase price
consideration the concept of recognizing contingent
consideration at a later date when the amount of that
consideration is determinable beyond a reasonable doubt, is no
longer applicable;
|
|
|
|
for prior business combinations, adjustments for recognized
changes in acquired tax uncertainties are recognized in
accordance with the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109 (codified in
ASC 740, Income Taxes (ASC 740)),
and adjustments for recognized changes in the valuation
allowance for acquired deferred tax assets are recognized in
income tax expense in accordance with the provisions of
ASC 740; and
|
|
|
|
all transaction costs must be expensed as incurred.
|
In April 2009, the FASB issued FSP No. FAS 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in
a Business Combination That Arise from Contingencies
(FSP FAS 141(R)-1) (codified in ASC 805).
FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to
address application issues raised about the initial recognition
and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies
in a business combination. SFAS 141(R) and FSP
FAS 141(R)-1 apply prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. We adopted SFAS 141(R) and FSP
FAS 141(R)-1 on September 1, 2009. The adoption of
SFAS 141(R) and FSP FAS 141(R)-1 did not have a
material impact on our financial condition, results of
operations, and disclosures. Deferred acquisition costs as of
the adoption of SFAS 141(R) were not significant and were
expensed as of August 31, 2009.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51
(SFAS 160) (codified in ASC 810,
Consolidation (ASC 810)).
SFAS 160 establishes new accounting and reporting standards
for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 requires
non-controlling interests to be treated as a separate component
of equity and any changes in the parents ownership
interest (in which control is retained) are accounted for as
equity transactions. However, a change in ownership of a
consolidated subsidiary that results in deconsolidation triggers
gain or loss recognition, with the establishment of a new fair
value basis in any remaining non-controlling ownership
interests. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the non-controlling interests.
SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008 and the provisions are prospective
upon adoption, except for the presentation and disclosure
requirements, which must be applied retrospectively for all
periods presented. Accordingly, we adopted SFAS 160 on
September 1, 2009 and retrospectively adjusted the
following statements:
|
|
|
|
|
Condensed Consolidated Balance Sheets as of August 31, 2009;
|
|
|
|
Condensed Consolidated Statements of Income for the three and
nine months ended May 31, 2009;
|
|
|
|
Condensed Consolidated Statements of Comprehensive Income for
the three and nine months ended May 31, 2009; and
|
|
|
|
Condensed Consolidated Statements of Cash Flows from Continuing
and Discontinued Operations for the nine months ended
May 31, 2009.
|
10
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Refer to Note 12, Shareholders Equity, for additional
disclosure related to our adoption of the provisions of
SFAS 160.
Pronouncements
Not Yet Adopted
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS 167) (codified in ASC 810), which
modifies how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other
things, an entitys purpose and design and a companys
ability to direct the activities of the entity that most
significantly impact the entitys economic performance.
SFAS 167 requires an ongoing reassessment of whether a
company is the primary beneficiary of a variable interest
entity. SFAS 167 also requires additional disclosures about
a companys involvement in variable interest entities and
any significant changes in risk exposure due to that
involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009 and is effective for us
on September 1, 2010. We are currently evaluating the
impact that the adoption of SFAS 167 will have on our
financial condition, results of operations, and disclosures.
In October 2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable
Revenue Arrangementsa consensus of the FASB Emerging
Issues Task Force (ASU
2009-13),
which provides guidance on whether multiple deliverables exist,
how the arrangement should be separated, and the consideration
allocated. ASU
2009-13
requires an entity to allocate revenue in an arrangement using
estimated selling prices of deliverables if a vendor does not
have vendor-specific objective evidence or third-party evidence
of selling price. ASU
2009-13
is
effective for the first annual reporting period beginning on or
after June 15, 2010 and may be applied retrospectively for
all periods presented or prospectively to arrangements entered
into or materially modified after the adoption date. Early
adoption is permitted provided that the revised guidance is
retroactively applied to the beginning of the year of adoption.
ASU
2009-13
is effective for us on September 1, 2010. We are currently
evaluating the impact that the adoption of ASU
2009-13
will
have on our financial condition, results of operations, and
disclosures.
In January 2010, the FASB issued ASU
No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements
(ASU
2010-06).
ASU
2010-06
amends ASC 820 to add new disclosure requirements for
significant transfers in and out of Level 1 and 2
measurements and to provide a gross presentation of the
activities within the Level 3 rollforward. ASU
2010-06
also
clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to
measure fair value. The disclosure requirements in ASU
2010-06
are
effective for interim and annual reporting periods beginning
after December 15, 2009, and are effective for us on
March 1, 2010, except for the requirement to present the
Level 3 rollforward on a gross basis, which is effective
for fiscal years beginning after December 15, 2010, and is
effective for us on September 1, 2011. The partial adoption
of ASU
2010-06
on
March 1, 2010 did not have a material impact on our fair
value measurement disclosures. We are currently evaluating the
impact that the full adoption of ASU
2010-06,
with respect to the Level 3 rollforward, will have on our
fair value measurement disclosures.
Note 3. Discontinued
Operations
In the second quarter of fiscal year 2010, we initiated a formal
plan to sell Insight Schools, engaged an investment bank and
also began the process of actively marketing Insight Schools as
we determined that the business was no longer consistent with
our long-term strategic objectives. We do not expect to have
significant continuing involvement with Insight Schools after it
is sold. Based on these factors, we concluded that we met the
criteria for presenting Insight Schools as held for sale and as
discontinued operations and began presenting Insight
Schools assets and liabilities as held for sale in our
Condensed Consolidated Balance Sheets and Insight Schools
operating results as discontinued operations in our Condensed
Consolidated Statements of Income for all periods presented. We
determined cash flows from discontinued operations are not
material and are included with cash flows from
11
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
continuing operations in our Condensed Consolidated Statements
of Cash Flows from Continuing and Discontinued Operations.
Insight Schools was previously presented as its own reportable
segment.
Since Insight Schools meets the held for sale criteria, we are
required to present its assets and liabilities held for sale at
the lower of the carrying amount or fair value less cost to
sell. Accordingly, in the second quarter of fiscal year 2010, we
evaluated Insight Schools respective assets held for sale,
including goodwill and other long-lived assets for impairment.
Our goodwill impairment analysis as of February 28, 2010
resulted in recognizing a $9.4 million goodwill impairment
charge. This charge was recorded in the second quarter of fiscal
year 2010 and is reflected as a component of income (loss) from
discontinued operations in our Condensed Consolidated Statements
of Income.
At February 28, 2010, our fair value estimate was derived
from obtaining exit price information from advisors and
interested parties specific to the sale of Insight Schools. We
considered this information in revising our estimate of fair
value as a result of our intent to sell Insight Schools.
Historically, our fair value analysis used a combination of the
discounted cash flow and market-based approaches by applying a
75%/25% weighting factor to these respective valuation methods.
The non-binding offers received for Insight Schools were
significantly lower than the estimated fair value derived from
our prior valuation methods. Rather, the non-binding offers
received for Insight Schools were based on Insight Schools
recent operating performance, which has generated and is
expected to continue to generate operating losses in the near
term. Refer to Note 6, Goodwill and Intangible Assets, and
Note 7, Fair Value Measurements, for further discussion.
In the third quarter of fiscal year 2010, we continued to
progress with sale activities for Insight Schools, including
engaging in non-binding negotiations with an interested party.
We believe the sale continues to be probable within a year from
the date on which we classified Insight Schools as held for
sale. At each period end, we are required to evaluate our fair
value less cost to sell estimate to determine whether a change
in estimate is required. As of May 31, 2010, our fair value
estimate for Insight Schools was derived from recent exit price
information received specific to these non-binding negotiations.
Based on this evaluation, we determined that the fair value less
cost to sell continues to approximate the carrying value of
Insight Schools resulting in no additional impairment.
The major components of assets and liabilities of Insight
Schools presented separately in the Condensed Consolidated
Balance Sheets as held for sale as of May 31, 2010 are
outlined below. For comparability purposes, we have also
presented below Insight Schools assets and liabilities as
of August 31, 2009, which are included in the respective
financial statement line items.
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Accounts receivable, net
|
|
$
|
15,224
|
|
|
$
|
6,564
|
|
Property and equipment, net
|
|
|
6,803
|
|
|
|
5,721
|
|
Goodwill
|
|
|
3,342
|
|
|
|
12,742
|
|
Other
|
|
|
1,987
|
|
|
|
1,563
|
|
|
|
|
|
|
|
|
|
|
Total Insight Schools assets
|
|
$
|
27,356
|
|
|
$
|
26,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insight Schools liabilities
|
|
$
|
4,691
|
|
|
$
|
3,066
|
|
|
|
|
|
|
|
|
|
|
12
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes Insight Schools operating
results for the three and nine months ended May 31, 2010
and 2009, which are presented in income (loss) from discontinued
operations, net of tax in our Condensed Consolidated Statements
of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Nine Months Ended May 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net revenue
|
|
$
|
10,153
|
|
|
$
|
3,769
|
|
|
$
|
30,826
|
|
|
$
|
18,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
impairment
(1)
|
|
|
|
|
|
|
|
|
|
|
(9,400
|
)
|
|
|
|
|
Other costs and expenses
|
|
|
(7,821
|
)
|
|
|
(12,595
|
)
|
|
|
(31,058
|
)
|
|
|
(35,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income
taxes
|
|
|
2,332
|
|
|
|
(8,826
|
)
|
|
|
(9,632
|
)
|
|
|
(17,751
|
)
|
(Provision for) benefit from income
taxes
(1)
|
|
|
(248
|
)
|
|
|
3,496
|
|
|
|
778
|
|
|
|
7,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
2,084
|
|
|
$
|
(5,330
|
)
|
|
$
|
(8,854
|
)
|
|
$
|
(10,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As Insight Schools goodwill is not deductible for tax
purposes, we did not record a tax benefit associated with the
goodwill impairment charge.
|
We include only revenues and costs, including the goodwill
impairment charge discussed above, directly attributable to the
discontinued operations, and not those attributable to the
ongoing entity. Accordingly, no interest expense or general
corporate overhead have been allocated to Insight Schools.
Additionally, we have ceased depreciation and amortization on
property and equipment and finite-lived intangible assets at
Insight Schools.
Note 4. Acquisitions
Western
International University
On April 8, 2010, we contributed all of the common stock of
Western International University, which was previously our
wholly-owned subsidiary, to Apollo Global. We believe Western
International University will better leverage the capabilities
of Apollo Globals international resources to serve both
its U.S. and international students. The transaction was
structured as an asset transfer from Apollo Group to Apollo
Global with Apollo Globals noncontrolling shareholder, The
Carlyle Group (Carlyle), contributing
$2.5 million, plus potential future performance-based
payments, based on the estimated fair market value. The
transaction does not meet the definition of a business
combination under ASC 805 because it is a transfer of
assets between entities under common control. Accordingly,
Western International Universitys net assets were recorded
at carrying value of approximately $8 million as of the
date of the transfer. As a result of the transfer, our ownership
in Apollo Global was reduced from 86.1% to 85.6%.
BPP
On July 30, 2009, Apollo Global, through a wholly-owned
United Kingdom subsidiary, acquired the entire issued and to be
issued ordinary share capital of BPP, a company registered in
England and Wales, for a cash purchase price of 620 pence per
share. BPP is a provider of education and training to
professionals in the legal and finance industries and the BPP
College of Professional Studies is the first proprietary
institution to have been granted degree awarding powers in the
United Kingdom. At exchange rates on the date of the
acquisition, the purchase price for BPP, including assumed debt
and transaction related expenses, was $601.6 million.
We accounted for the BPP acquisition using the purchase method
of accounting prior to our September 1, 2009 adoption of
SFAS 141(R) (codified in ASC 805) noted in
Recent Accounting Pronouncements
in Note 2,
Significant
13
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Accounting Policies. To value the acquired assets and assumed
liabilities, we used the following valuation methodologies:
|
|
|
|
|
Land and buildings included in property and equipment were
valued using the market approach.
|
|
|
|
Trademarks were valued using the relief-from-royalty method,
which represents the benefit of owning an intangible asset
rather than paying royalties for its use.
|
|
|
|
All other intangible assets were valued using one of the
following methods; the income approach, specifically the cost
savings method and excess earnings method, or the replacement
cost approach.
|
|
|
|
Certain other long-term obligations were valued using the
discounted cash flow approach utilizing current discount rates,
cost estimates and assumptions.
|
|
|
|
All other net assets and liabilities carrying value approximated
fair value at the time of the acquisition.
|
A summary of the purchase price allocation is as follows:
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Tangible assets (net of acquired liabilities)
|
|
$
|
(15,346
|
)
|
Finite-lived intangible assets
|
|
|
51,304
|
|
Indefinite-lived intangible assets
|
|
|
139,990
|
|
Goodwill
|
|
|
425,638
|
|
|
|
|
|
|
Total allocated purchase price
|
|
$
|
601,586
|
|
|
|
|
|
|
We assigned indefinite lives to the acquired trademarks and
certain accreditations and designations as we believe that each
of these intangible assets has the continued ability to generate
cash flows indefinitely. In addition, there are no legal,
regulatory, contractual, economic or other factors to limit the
useful life of these intangible assets and we intend to renew
trademarks and accreditations and designations, which can be
accomplished at little cost.
BPPs operating results are included in our condensed
consolidated financial statements from the date of acquisition.
Pro
Forma Financial Results
The following unaudited pro forma financial results of
operations are presented as if the acquisition of BPP had been
completed as of September 1, 2008:
|
|
|
|
|
|
|
Nine Months Ended
|
|
(In thousands, except per share data)
|
|
May 31, 2009
|
|
|
Pro forma net revenue
|
|
$
|
3,114,097
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income attributable to Apollo
|
|
$
|
536,554
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
Basic income per share attributable to Apollo
|
|
$
|
3.38
|
|
|
|
|
|
|
Diluted income per share attributable to Apollo
|
|
$
|
3.33
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
158,960
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
160,952
|
|
|
|
|
|
|
The pro forma financial information is presented for
informational purposes and includes certain adjustments that are
factual and supportable, consisting of increased interest
expense on debt used to fund the acquisition,
14
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
adjustments to depreciation expense related to the fair value
adjustment for property and equipment, and amortization related
to acquired intangible assets, as well as the related tax effect
of these adjustments. The pro forma information is not
indicative of the results of operations that would have been
achieved if the acquisition and related borrowings had taken
place at the beginning of the applicable presented period, or of
future results of the consolidated entities.
|
|
Note 5.
|
Accounts
Receivable, Net
|
Accounts receivable, net consist of the following as of
May 31, 2010 and August 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Student accounts receivable
|
|
$
|
409,136
|
|
|
$
|
380,226
|
|
Less allowance for doubtful accounts
|
|
|
(184,889
|
)
|
|
|
(110,420
|
)
|
|
|
|
|
|
|
|
|
|
Net student accounts receivable
|
|
|
224,247
|
|
|
|
269,806
|
|
Other receivables
|
|
|
24,984
|
|
|
|
28,464
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
249,231
|
|
|
$
|
298,270
|
|
|
|
|
|
|
|
|
|
|
Student accounts receivable is composed primarily of amounts due
related to tuition. In the second quarter of fiscal year 2010,
we began presenting Insight Schools assets and liabilities
as held for sale and its operating results as discontinued
operations. Refer to Note 3, Discontinued Operations, for
further discussion and disclosure of the components of Insight
Schools assets and liabilities.
We reduce accounts receivable by an allowance for amounts that
may become uncollectible in the future. Estimates are used in
determining the allowance for doubtful accounts and are based on
historical collection experience and current trends. In
determining these amounts, we consider and evaluate the
historical write-offs of our receivables. We monitor our
collections and write-off experience to assess whether
adjustments are necessary. We routinely evaluate our estimation
methodology for adequacy and modify it as necessary. In doing
so, our objective is to cause our allowance for doubtful
accounts to reflect the amount of receivables that will become
uncollectible by considering our most recent collections
experience, changes in trends and other relevant facts. Please
refer to our 2009 Annual Report on
Form 10-K
for further discussion of our related critical accounting
policy. The following table summarizes the activity in the
related allowance for doubtful accounts for the three and nine
months ended May 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Nine Months Ended May 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Beginning allowance for doubtful accounts
|
|
$
|
170,138
|
|
|
$
|
95,715
|
|
|
$
|
110,420
|
|
|
$
|
78,362
|
|
Provision for uncollectible accounts receivable
|
|
|
72,011
|
|
|
|
35,977
|
|
|
|
208,593
|
|
|
|
106,890
|
|
Write-offs, net of recoveries
|
|
|
(57,260
|
)
|
|
|
(31,775
|
)
|
|
|
(133,265
|
)
|
|
|
(85,335
|
)
|
Included in assets held for sale
|
|
|
|
|
|
|
|
|
|
|
(859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for doubtful accounts
|
|
$
|
184,889
|
|
|
$
|
99,917
|
|
|
$
|
184,889
|
|
|
$
|
99,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense is included in instructional costs and services
in our Condensed Consolidated Statements of Income. The increase
in bad debt expense is primarily due to decreases in University
of Phoenixs collection rates. Bad debt expense has
increased as a result of the economic downturn and an increase
in the proportion of our receivables that are attributable to
students enrolled in associates degree programs. Our
collection rates for students enrolled in our associates
degree programs are lower than for students enrolled in
bachelors and graduate level programs. Also, students
enrolled in associates degree programs generally persist
at lower rates than those in
15
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
bachelors and graduate level programs, resulting in higher
bad debt rates for students in associates degree programs.
Note 6. Goodwill
and Intangible Assets
Goodwill represents the excess of the purchase price over the
amount assigned to the net assets acquired and liabilities
assumed. Changes in the carrying amount of goodwill by
reportable segment from August 31, 2009 to May 31,
2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of
|
|
|
Apollo Global
|
|
|
Insight
|
|
|
Other
|
|
|
Total
|
|
($ in thousands)
|
|
Phoenix
|
|
|
BPP
|
|
|
Other
(1)
|
|
|
Schools
|
|
|
Schools
|
|
|
Goodwill
|
|
|
Goodwill as of August 31, 2009
|
|
$
|
37,018
|
|
|
$
|
421,836
|
|
|
$
|
35,452
|
|
|
$
|
12,742
|
|
|
$
|
15,310
|
|
|
$
|
522,358
|
|
Impairment on discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,400
|
)
|
|
|
|
|
|
|
(9,400
|
)
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
(8,712
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,712
|
)
|
Included in assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,342
|
)
|
|
|
|
|
|
|
(3,342
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
(46,820
|
)
|
|
|
2,113
|
|
|
|
|
|
|
|
|
|
|
|
(44,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill as of May 31, 2010
|
|
$
|
37,018
|
|
|
$
|
375,016
|
|
|
$
|
28,853
|
|
|
$
|
|
|
|
$
|
15,310
|
|
|
$
|
456,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As a result of contributing all of the common stock of Western
International University to Apollo Global during the third
quarter of fiscal year 2010, we are presenting Western
International University in the Apollo Global Other
reportable segment for all periods presented. Refer to
Note 4, Acquisitions, for further discussion.
|
At May 31, 2010, we completed our annual goodwill and
indefinite lived intangible asset impairment tests, as
applicable, for the following reporting units that have goodwill
impairment testing dates of May 31:
|
|
|
|
|
University of Phoenix
|
|
|
|
UNIACC
|
|
|
|
ULA
|
|
|
|
Western International University
|
|
|
|
Insight Schools
|
At May 31, 2010, the fair value of our University of
Phoenix, UNIACC and Western International University reporting
units exceeded the carrying value of their respective net assets
by at least 40% resulting in no goodwill impairment. In
determining the fair value of these reporting units, we used a
discounted cash flow valuation method for our UNIACC reporting
unit and market multiple information of comparable sized
companies for our University of Phoenix and Western
International University reporting units. Additionally, we have
indefinite-lived intangible assets consisting of trademarks,
foreign regulatory accreditations and designations at our UNIACC
reporting unit totaling $4.7 million. At May 31, 2010,
we performed a fair value analysis of these indefinite-lived
intangible assets and determined there was no impairment.
For our ULA reporting unit, we used a discounted cash flow
valuation method to determine the fair value of the reporting
unit at May 31, 2010. ULA continues to delay the launch of
its online program due to challenges with developing and
designing the technology infrastructure to support the online
platform. We have considered these uncertainties in the future
cash flows used in our annual goodwill impairment test and
determined that the goodwill balance was impaired. At
May 31, 2010, we recorded an $8.7 million impairment
charge for ULAs goodwill. As ULAs goodwill is not
deductible for tax purposes, we did not record a tax benefit
associated with the goodwill impairment charge. Additionally, we
have indefinite-lived intangible assets consisting of
trademarks, foreign
16
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
regulatory accreditations and designations at our ULA reporting
unit totaling $2.5 million. At May 31, 2010, we
performed a fair value analysis of these indefinite-lived
intangible assets and determined there was no impairment.
In the second quarter of fiscal year 2010, we began presenting
Insight Schools assets and liabilities as held for sale
and its operating results as discontinued operations. We
recorded a $9.4 million impairment of Insight Schools
goodwill during the second quarter of fiscal year 2010. As
Insight Schools goodwill is not deductible for tax
purposes, we did not record a tax benefit associated with the
goodwill impairment charge. At May 31, 2010, we revised our
fair value estimate for Insight Schools based on recent exit
price information received from engaging in non-binding
negotiations with an interested party which resulted in no
additional goodwill impairment. Refer to Note 3,
Discontinued Operations, for further discussion.
Intangible assets consist of the following as of May 31,
2010 and August 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010
|
|
|
August 31, 2009
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
|
Acquired
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
Acquired
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Currency
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Currency
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Translation
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Translation
|
|
|
Carrying
|
|
($ in thousands)
|
|
Amount
|
|
|
Amortization
|
|
|
Loss
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Loss
|
|
|
Amount
|
|
|
Finite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student and customer relationships
|
|
$
|
26,515
|
|
|
$
|
(14,994
|
)
|
|
$
|
(2,265
|
)
|
|
$
|
9,256
|
|
|
$
|
26,515
|
|
|
$
|
(4,224
|
)
|
|
$
|
(1,282
|
)
|
|
$
|
21,009
|
|
Copyrights
|
|
|
20,891
|
|
|
|
(4,689
|
)
|
|
|
(2,037
|
)
|
|
|
14,165
|
|
|
|
20,891
|
|
|
|
(488
|
)
|
|
|
(198
|
)
|
|
|
20,205
|
|
Other
|
|
|
20,676
|
|
|
|
(8,203
|
)
|
|
|
(1,777
|
)
|
|
|
10,696
|
|
|
|
23,317
|
|
|
|
(5,233
|
)
|
|
|
(1,117
|
)
|
|
|
16,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
|
68,082
|
|
|
|
(27,886
|
)
|
|
|
(6,079
|
)
|
|
|
34,117
|
|
|
|
70,723
|
|
|
|
(9,945
|
)
|
|
|
(2,597
|
)
|
|
|
58,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
140,797
|
|
|
|
|
|
|
|
(16,587
|
)
|
|
|
124,210
|
|
|
|
140,797
|
|
|
|
|
|
|
|
(2,441
|
)
|
|
|
138,356
|
|
Accreditations and designations
|
|
|
7,456
|
|
|
|
|
|
|
|
(906
|
)
|
|
|
6,550
|
|
|
|
7,456
|
|
|
|
|
|
|
|
(322
|
)
|
|
|
7,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indefinite-lived intangible assets
|
|
|
148,253
|
|
|
|
|
|
|
|
(17,493
|
)
|
|
|
130,760
|
|
|
|
148,253
|
|
|
|
|
|
|
|
(2,763
|
)
|
|
|
145,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
216,335
|
|
|
$
|
(27,886
|
)
|
|
$
|
(23,572
|
)
|
|
$
|
164,877
|
|
|
$
|
218,976
|
|
|
$
|
(9,945
|
)
|
|
$
|
(5,360
|
)
|
|
$
|
203,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets are amortized on either a
straight-line basis or using an accelerated method to reflect
the economic useful life of the asset. The weighted average
useful lives range from 2 to 15 years. Amortization expense
for intangible assets for the three months ended May 31,
2010 and 2009 was $5.6 million and $3.6 million,
respectively, and for the nine months ended May 31, 2010
and 2009 was $19.6 million and $5.5 million,
respectively.
BPP
At May 31, 2010, our BPP reporting unit had goodwill and
intangible assets of $375.0 million and
$151.6 million, respectively. Our first annual goodwill and
indefinite-lived intangible asset impairment testing date for
BPP is July 1. Accordingly, we will perform this analysis
in the fourth quarter of fiscal year 2010. Although we believe
BPP has been temporarily adversely impacted by the economic
downturn since we acquired the business in the fourth quarter of
fiscal year 2009, we do not believe any material event or change
in circumstance has occurred that would require us to perform an
interim goodwill impairment test. Goodwill impairment tests are
subjective and require the use of considerable judgment and
estimates. Depending upon the outcome of our analysis in the
fourth quarter of fiscal year 2010 or in subsequent periods, we
may be required to record an impairment charge for a portion of
BPPs goodwill and intangible assets.
17
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 7. Fair
Value Measurements
Assets and liabilities measured at fair value on a recurring
basis consist of the following as of May 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets/
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
May 31,
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
($ in thousands)
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (including restricted cash equivalents):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,374,209
|
|
|
$
|
1,374,209
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities, current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
|
4,405
|
|
Marketable securities, less current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities
|
|
|
15,174
|
|
|
|
|
|
|
|
|
|
|
|
15,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
$
|
1,389,383
|
|
|
$
|
1,374,209
|
|
|
$
|
|
|
|
$
|
19,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
3,757
|
|
|
$
|
|
|
|
$
|
3,757
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities:
|
|
$
|
3,757
|
|
|
$
|
|
|
|
$
|
3,757
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We measure our money market funds included in cash and
restricted cash equivalents, auction-rate securities included in
marketable securities and interest rate swap included in other
liabilities on a recurring basis at fair value. For our assets
and liabilities measured on a recurring basis, we did not
significantly change our valuation techniques associated with
fair value measurements from prior periods.
|
|
|
|
|
Money market funds
-
Classified within
Level 1 and were valued primarily using real-time quotes
for transactions in active exchange markets involving identical
assets.
|
|
|
|
Auction-rate securities
-
Classified within
Level 3 due to the illiquidity of the market and were
valued using a discounted cash flow model that encompassed
significant unobservable inputs to determine probabilities of
default and timing of auction failure, probabilities of a
successful auction at par
and/or
repurchase at par value for each auction period,
collateralization of the underlying security and credit
worthiness of the issuer. The assumptions used to prepare the
discounted cash flows include estimates for interest rates,
credit spreads, timing and amount of cash flows, liquidity
premiums, expected holding periods and default risk. These
assumptions are subject to change as the underlying data sources
and market conditions evolve. Additionally, as the market for
auction-rate securities continues to be inactive, our discounted
cash flow model also factored the illiquidity of the
auction-rate securities market by adding a spread of 450 to
500 basis points to the applicable discount rate.
|
|
|
|
Interest rate swap
-
We have an interest rate swap
with a notional amount of £30.0 million
($43.6 million) used to minimize the interest rate exposure
on a portion of BPPs variable rate debt. The interest rate
swap is used to fix the variable interest rate on the associated
debt. The swap is classified within Level 2 and is valued
using readily available pricing sources which utilize market
observable inputs including the current variable interest rate
for similar types of instruments.
|
At May 31, 2010, the carrying value of our debt, excluding
capital leases, was $160.8 million. Substantially all of
our debt is variable interest rate debt and the carrying amount
approximates fair value.
18
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the nine months ended May 31, 2010, we did not have
any changes in our Level 3 assets that are measured at fair
value on a recurring basis using significant unobservable inputs.
Assets measured at fair value on a non-recurring basis consist
of the following as of May 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
Significant
|
|
|
Losses for Nine
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Unobservable
|
|
|
Months Ended
|
|
|
|
May 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
May 31,
|
|
($ in thousands)
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2010
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,342
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,342
|
|
|
$
|
(9,400
|
)
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ULA
|
|
|
15,669
|
|
|
|
|
|
|
|
|
|
|
|
15,669
|
|
|
|
(8,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,011
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,011
|
|
|
$
|
(18,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of fiscal year 2010, we began presenting
Insight Schools as held for sale. Accordingly, we measured
Insight Schools goodwill at fair value on a non-recurring
basis as of February 28, 2010 using Level 3 inputs.
The Level 3 inputs were primarily based on exit price
information we received from third parties to purchase Insight
Schools. The Insight Schools goodwill balance was written
down to the implied fair value, resulting in an impairment
charge of $9.4 million included in income (loss) from
discontinued operations, net of tax in the second quarter of
fiscal year 2010. Refer to Note 3, Discontinued Operations,
for further discussion.
At May 31, 2010, ULAs goodwill balance represents the
implied fair value of goodwill and is inclusive of the
$8.7 million goodwill impairment charge recorded in
connection with our annual goodwill impairment test performed at
May 31. ULAs implied fair value of goodwill was
determined using Level 3 inputs included in our discounted
cash flow valuation method. Refer to Note 6, Goodwill and
Intangible Assets, for further discussion.
Note
8. Accrued Liabilities
Accrued liabilities consist of the following as of May 31,
2010 and August 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Estimated litigation loss
|
|
$
|
177,100
|
|
|
$
|
80,500
|
|
Salaries, wages, and benefits
|
|
|
76,492
|
|
|
|
76,583
|
|
Accrued advertising
|
|
|
53,486
|
|
|
|
35,974
|
|
Accrued professional fees
|
|
|
23,156
|
|
|
|
25,287
|
|
Student refunds, grants and scholarships
|
|
|
21,929
|
|
|
|
11,287
|
|
Other accrued liabilities
|
|
|
26,819
|
|
|
|
38,787
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
378,982
|
|
|
$
|
268,418
|
|
|
|
|
|
|
|
|
|
|
Please refer to Note 15, Commitments and Contingencies, for
discussion of estimated litigation losses. Salaries, wages, and
benefits represent amounts due to employees, including faculty,
and third parties for salaries, bonuses, vacation pay, and
health insurance. Accrued advertising represents amounts due for
Internet marketing, direct mail campaigns, and print and
broadcast advertising. Accrued professional fees represent
amounts due to third parties for outsourced student financial
aid processing and other accrued professional and legal
obligations. Student refunds, grants and scholarships represent
amounts due to students for tuition refunds, federal and state
grants payable,
19
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
scholarships, and other related items. Other accrued liabilities
primarily includes sales and business taxes, facilities costs
such as rent and utilities, and certain accrued purchases.
Note 9. Debt
Debt and short-term borrowings consist of the following as of
May 31, 2010 and August 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Bank Facility, see terms below
|
|
$
|
91,457
|
|
|
$
|
495,608
|
|
Capital lease obligations
|
|
|
5,835
|
|
|
|
7,763
|
|
Other, interest rates ranging from 3.3% to 9.4% with various
maturities from 2010 to 2019
|
|
|
69,298
|
|
|
|
85,695
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
166,590
|
|
|
|
589,066
|
|
Less short-term borrowings and current portion of long-term debt
|
|
|
(51,437
|
)
|
|
|
(461,365
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
115,153
|
|
|
$
|
127,701
|
|
|
|
|
|
|
|
|
|
|
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 available 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, expiring 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.
As of August 31, 2009, we borrowed our entire credit line
under the Bank Facility, which included £63.0 million
denominated in British Pounds (equivalent to $91.5 million
and $102.6 million U.S. dollars as of May 31,
2010 and August 31, 2009, respectively) related to the BPP
acquisition. We repaid the U.S. dollar denominated debt on
our Bank Facility of $393 million during the first quarter
of fiscal year 2010.
The Bank Facility fees are determined based on a pricing grid
that varies according to our leverage ratio. The Bank Facility
fee ranges from 12.5 to 17.5 basis points and the
incremental fees for borrowings under the facility range from
LIBOR + 50.0 to 82.5 basis points. The weighted average
interest rate on outstanding borrowings under the Bank Facility
at May 31, 2010 was 1.1%.
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
U.S. Department of Education financial responsibility
composite score. In addition, there are covenants restricting
indebtedness, liens, investments, asset transfers and
distributions. We were in compliance with all covenants related
to the Bank Facility at May 31, 2010.
Other debt includes $57.1 million of variable rate debt and
$12.2 million of fixed rate debt at the subsidiaries of
Apollo Global. The weighted average interest rate of these debt
instruments at May 31, 2010 was 4.7%.
Please refer to Note 7, Fair Value Measurements, for
discussion of the fair value of our debt.
20
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 10. Other
Liabilities
Other liabilities consist of the following as of May 31, 2010
and August 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Reserve for uncertain tax positions
|
|
$
|
84,487
|
|
|
$
|
97,619
|
|
Deferred rent and other lease incentives
|
|
|
80,459
|
|
|
|
71,579
|
|
Other
|
|
|
65,040
|
|
|
|
64,838
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
|
229,986
|
|
|
|
234,036
|
|
Less current portion
|
|
|
(63,571
|
)
|
|
|
(133,887
|
)
|
|
|
|
|
|
|
|
|
|
Total other long-term liabilities
|
|
$
|
166,415
|
|
|
$
|
100,149
|
|
|
|
|
|
|
|
|
|
|
Deferred rent and other lease incentives represent amounts
included in lease agreements and are amortized on a
straight-line basis over the term of the leases. The decrease in
the current portion of other liabilities primarily relates to
the classification of our uncertain tax positions. For
discussion of our uncertain tax positions, refer to
Note 11, Income Taxes.
Note 11. Income
Taxes
We exercise significant judgment in determining our income tax
provision due to transactions, credits and calculations where
the ultimate tax determination is uncertain. Please refer to our
significant accounting policies included in our 2009 Annual
Report on
Form 10-K
for further discussion.
During the nine months ended May 31, 2010, our unrecognized
tax benefits decreased by $13.1 million, excluding interest
and penalties, primarily as a result of settling our Internal
Revenue Code Section 162(m) issue related to stock option
compensation as discussed below. This decrease was partially
offset by an increase in our unrecognized tax benefits as a
result of tax positions taken during the nine months ended
May 31, 2010 related to state taxes.
As of May 31, 2010, we had total uncertain tax positions of
$84.5 million, including accrued interest and penalties of
$5.5 million, of which $14.9 million is included in
other current liabilities in our Condensed Consolidated Balance
Sheets. We believe that it is reasonably possible that this
portion of our uncertain tax positions could be resolved or
settled within the next 12 months. The current portion of
our unrecognized tax benefits includes $5.1 million for
which the statute of limitations is set to expire in the fourth
quarter of fiscal year 2010. The entire amount of our
unrecognized tax benefits would favorably affect our effective
rate if ultimately recognized.
Prior to the third quarter of fiscal year 2010, we classified
uncertain tax positions related to the allocation and
apportionment of our income amongst various state and local
jurisdictions in other current liabilities in our Condensed
Consolidated Balance Sheets. We no longer believe these amounts
will be paid in the next year and accordingly have classified
them in other long-term liabilities in our Condensed
Consolidated Balance Sheets.
Internal
Revenue Service Audits
An audit relating to our U.S. federal income tax returns
for fiscal years 2003 through 2005 commenced in September 2006.
In February 2009, the Internal Revenue Service issued an
examination report and proposed to disallow deductions relating
to stock option compensation in excess of the limitations of
Internal Revenue Code Section 162(m). Under
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. The Internal Revenue Service
examination report also proposed the additions of penalties and
interest. On March 6, 2009, we commenced administrative
proceedings with the Office of Appeals of the Internal Revenue
Service
21
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
challenging the proposed adjustments, including penalties and
interest. On November 25, 2009, we executed a Closing
Agreement with the Internal Revenue Service Office of Appeals to
settle this matter. The settlement resolves only the disputed
tax issues between the Internal Revenue Service and us and is
not an admission by us of liability, wrongdoing, legal
compliance or non-compliance for any other purpose.
We accrued an additional $0.5 million of interest during
the first quarter of fiscal year 2010, resulting in a total
accrual, prior to the settlement, of $50.5 million included
in our reserve for uncertain tax positions relating to this
issue. As a result of this settlement, we reclassified
$27.3 million to income taxes payable in our Condensed
Consolidated Balance Sheets as of November 30, 2009. We
paid $22.6 million during the second quarter of fiscal year
2010 and we expect to pay the majority of the remainder by the
end of fiscal year 2010. The remaining accrual of
$23.2 million, relating to the amount in excess of the
settlement, was reversed during the first quarter of fiscal year
2010 through a reduction in the provision for income taxes, a
decrease in deferred tax assets, and an increase in additional
paid-in capital in the amounts of $10.2 million,
$1.5 million and $11.5 million, respectively.
Based on the agreed upon settlement, we believe that we are
entitled to certain deductions related to stock option
compensation that were not claimed on our tax returns for the
years ended in 2006 through 2009. During the first quarter of
fiscal year 2010, we recorded the benefit of these deductions
through provision for income taxes, deferred taxes, and
additional
paid-in-capital
in the amounts of $1.2 million, $0.9 million, and
$16.0 million, respectively. We have submitted claims to
the Internal Revenue Service for the deductions that were not
taken on our tax returns for the years ended in 2006, 2007, and
2008. We claimed the deductions related to stock option
compensation in fiscal year 2009 on our tax return for the year
ended in 2009.
During fiscal year 2009, the Internal Revenue Service commenced
an examination of our tax returns for the years ended in 2006,
2007, and 2008. In addition, we are subject to numerous ongoing
audits by state, local, and foreign tax authorities. Although we
believe our tax accruals to be reasonable, the final
determination of tax audits in the U.S. or abroad and any
related litigation could be materially different from our
historical income tax provisions and accruals.
Note 12. Shareholders
Equity
The following tables detail changes in shareholders equity
during the nine months ended May 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
Class A
|
|
|
|
|
|
Other
|
|
|
Total Apollo
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
Stated
|
|
|
Paid-in
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
Noncontrolling
|
|
|
|
|
($ in thousands)
|
|
Value
|
|
|
Value
|
|
|
Capital
|
|
|
Stated Value
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
Interests
|
|
|
Total Equity
|
|
|
Balance as of August 31, 2009
|
|
$
|
103
|
|
|
$
|
1
|
|
|
$
|
1,139
|
|
|
$
|
(2,022,623
|
)
|
|
$
|
3,195,043
|
|
|
$
|
(13,740
|
)
|
|
$
|
1,159,923
|
|
|
$
|
64,690
|
|
|
$
|
1,224,613
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(341,161
|
)
|
|
|
|
|
|
|
|
|
|
|
(341,161
|
)
|
|
|
|
|
|
|
(341,161
|
)
|
Stock issued under stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
132
|
|
|
|
3,985
|
|
|
|
|
|
|
|
|
|
|
|
4,117
|
|
|
|
|
|
|
|
4,117
|
|
Stock issued under stock option plans
|
|
|
|
|
|
|
|
|
|
|
(22,803
|
)
|
|
|
36,895
|
|
|
|
|
|
|
|
|
|
|
|
14,092
|
|
|
|
|
|
|
|
14,092
|
|
Tax shortfall of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
(1,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,465
|
)
|
|
|
|
|
|
|
(1,465
|
)
|
Tax benefit related to IRS dispute settlement
|
|
|
|
|
|
|
|
|
|
|
27,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,484
|
|
|
|
|
|
|
|
27,484
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
46,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,236
|
|
|
|
|
|
|
|
46,236
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,001
|
)
|
|
|
(36,001
|
)
|
|
|
(5,911
|
)
|
|
|
(41,912
|
)
|
Contributions from noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,460
|
|
|
|
2,460
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
512,031
|
|
|
|
|
|
|
|
512,031
|
|
|
|
(1,849
|
)
|
|
|
510,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2010
|
|
$
|
103
|
|
|
$
|
1
|
|
|
$
|
50,723
|
|
|
$
|
(2,322,904
|
)
|
|
$
|
3,707,074
|
|
|
$
|
(49,741
|
)
|
|
$
|
1,385,256
|
|
|
$
|
59,390
|
|
|
$
|
1,444,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
Class A
|
|
|
|
|
|
Other
|
|
|
Total Apollo
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
Stated
|
|
|
Paid-in
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
Noncontrolling
|
|
|
|
|
($ in thousands)
|
|
Value
|
|
|
Value
|
|
|
Capital
|
|
|
Stated Value
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
Interests
|
|
|
Total Equity
|
|
|
Balance as of August 31, 2008
|
|
$
|
103
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
(1,757,277
|
)
|
|
$
|
2,595,340
|
|
|
$
|
(3,781
|
)
|
|
$
|
834,386
|
|
|
$
|
11,779
|
|
|
$
|
846,165
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(447,548
|
)
|
|
|
|
|
|
|
|
|
|
|
(447,548
|
)
|
|
|
|
|
|
|
(447,548
|
)
|
Stock issued under stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
4,043
|
|
|
|
|
|
|
|
|
|
|
|
4,055
|
|
|
|
|
|
|
|
4,055
|
|
Stock issued under stock option plans
|
|
|
|
|
|
|
|
|
|
|
(20,978
|
)
|
|
|
114,502
|
|
|
|
1,384
|
|
|
|
|
|
|
|
94,908
|
|
|
|
|
|
|
|
94,908
|
|
Tax benefits of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
7,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,086
|
|
|
|
|
|
|
|
7,086
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
49,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,385
|
|
|
|
|
|
|
|
49,385
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,318
|
)
|
|
|
(7,318
|
)
|
|
|
(2,038
|
)
|
|
|
(9,356
|
)
|
Unrealized investment loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,322
|
)
|
|
|
(1,322
|
)
|
|
|
|
|
|
|
(1,322
|
)
|
Contributions from noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
|
|
(86
|
)
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
506,810
|
|
|
|
|
|
|
|
506,810
|
|
|
|
(814
|
)
|
|
|
505,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2009
|
|
$
|
103
|
|
|
$
|
1
|
|
|
$
|
35,505
|
|
|
$
|
(2,086,280
|
)
|
|
$
|
3,103,534
|
|
|
$
|
(12,421
|
)
|
|
$
|
1,040,442
|
|
|
$
|
10,841
|
|
|
$
|
1,051,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
Reissuances
During the three months ended May 31, 2010 and 2009, we
issued approximately 0.5 million shares and
0.1 million shares, respectively, and during the nine
months ended May 31, 2010 and 2009, we issued approximately
0.7 million shares and 2.0 million shares,
respectively, of our Class A common stock from our treasury
stock as a result of stock option exercises, release of shares
covered by vested restricted stock units, and purchases under
our employee stock purchase plan.
Share
Repurchases
Our Board of Directors has authorized us to repurchase
outstanding shares of Apollo Group Class A common stock,
from time to time, depending on market conditions and other
considerations. On February 18, 2010, our Board of
Directors authorized a $500 million increase in the amount
available under our share repurchase program up to an aggregate
amount of $1 billion of Apollo Group Class A common
stock. There is no expiration date on the repurchase
authorizations and repurchases occur at our discretion.
We repurchased approximately 2.5 million shares of our
Class A common stock at a total cost of $139.3 million
and 5.9 million shares of our Class A common stock at
a total cost of $339.3 million during the three and nine
months ended May 31, 2010, respectively. This represented
weighted average purchase prices of $55.50 and $57.85 per share
during the respective periods. During the three and nine months
ended May 31, 2009, we repurchased approximately
7.2 million shares of our Class A common stock at a
total cost of approximately $444.4 million, representing a
weighted average purchase price of $61.62 per share.
As of May 31, 2010, approximately $660.7 million
remained available under our share repurchase authorization. The
amount and timing of future share repurchases, if any, will be
made as market and business conditions warrant. Repurchases may
be made on the open market or in privately negotiated
transactions, pursuant to the applicable Securities and Exchange
Commission rules, and may include repurchases pursuant to
Securities and Exchange Commission
Rule 10b5-1
nondiscretionary trading programs.
23
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In connection with the release of vested shares of restricted
stock, we repurchased approximately 12,000 shares for
$0.7 million and 31,000 shares for $1.8 million
during the three and nine months ended May 31, 2010,
respectively. During the three and nine months ended
May 31, 2009, we repurchased approximately
10,000 shares for $0.7 million and 46,000 shares
for $3.2 million, respectively. These repurchases relate to
tax withholding requirements on the restricted stock units and
do not fall under the repurchase program described above, and
therefore do not reduce the amount that is available for
repurchase under that program.
Subsequent to May 31, 2010, we repurchased an additional
2.0 million shares of our Class A common stock for
$100.0 million representing a weighted average purchase
price of $49.76 per share. Including these purchases, we have
repurchased 7.9 million shares for $439.3 million
during fiscal year 2010 and $560.7 million remains
available under our share repurchase authorization.
Note 13. Earnings
Per Share
Apollo
Group Common Stock
Our outstanding shares consist of Apollo Group Class A and
Class B common stock. Our Articles of Incorporation treat
the declaration of dividends on the Apollo Group Class A
and Class B common stock in an identical manner. As such,
both the Apollo Group Class A and Class B common stock
are included in the calculation of our earnings per share.
Diluted weighted average shares outstanding includes the
incremental effect of shares that would be issued upon the
assumed exercise of stock options and the vesting and release of
restricted stock units. The following provides a reconciliation
of the basic and diluted earnings per share computations for our
common stock for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Net Income
|
|
|
Weighted
|
|
|
|
|
|
Net Income
|
|
|
Weighted
|
|
|
|
|
|
|
Attributable to
|
|
|
Average
|
|
|
Per Share
|
|
|
Attributable to
|
|
|
Average
|
|
|
Per Share
|
|
(In thousands, except per share data)
|
|
Apollo
|
|
|
Shares
|
|
|
Amount
|
|
|
Apollo
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic income per share attributable to Apollo
|
|
$
|
179,283
|
|
|
|
151,127
|
|
|
$
|
1.19
|
|
|
$
|
201,104
|
|
|
|
157,616
|
|
|
$
|
1.28
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
(1)
|
|
|
|
|
|
|
825
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
1,410
|
|
|
|
(0.02
|
)
|
Restricted stock
units
(2)
|
|
|
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share attributable to Apollo
|
|
$
|
179,283
|
|
|
|
152,291
|
|
|
$
|
1.18
|
|
|
$
|
201,104
|
|
|
|
159,305
|
|
|
$
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Net Income
|
|
|
Weighted
|
|
|
|
|
|
Net Income
|
|
|
Weighted
|
|
|
|
|
|
|
Attributable to
|
|
|
Average
|
|
|
Per Share
|
|
|
Attributable to
|
|
|
Average
|
|
|
Per Share
|
|
(In thousands, except per share data)
|
|
Apollo
|
|
|
Shares
|
|
|
Amount
|
|
|
Apollo
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic income per share attributable to Apollo
|
|
$
|
512,031
|
|
|
|
153,345
|
|
|
$
|
3.34
|
|
|
$
|
506,810
|
|
|
|
158,960
|
|
|
$
|
3.19
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
(1)
|
|
|
|
|
|
|
899
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
1,741
|
|
|
|
(0.04
|
)
|
Restricted stock
units
(2)
|
|
|
|
|
|
|
262
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share attributable to Apollo
|
|
$
|
512,031
|
|
|
|
154,506
|
|
|
$
|
3.31
|
|
|
$
|
506,810
|
|
|
|
160,952
|
|
|
$
|
3.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
(1)
|
For the three months ended May 31, 2010 and 2009,
approximately 4,533,000 and 1,543,000, respectively, and for the
nine months ended May 31, 2010 and 2009, approximately
4,826,000 and 1,524,000, respectively, of our stock options
outstanding were excluded from the calculation of diluted
earnings per share because their inclusion would have been
anti-dilutive. These options could be dilutive in the future.
|
|
(2)
|
For the three months ended May 31, 2010 and 2009,
approximately 10,000 and 22,000, respectively, and for both the
nine months ended May 31, 2010 and 2009, approximately
3,000 and 9,000, respectively, of our restricted stock units
were excluded from the calculation of diluted earnings per share
because their inclusion would have been anti-dilutive. These
restricted stock units could be dilutive in the future.
|
Note 14. Share-Based
Compensation
The table below details share-based compensation expense for the
three and nine months ended May 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Nine Months Ended May 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Instructional costs and services
|
|
$
|
7,081
|
|
|
$
|
7,388
|
|
|
$
|
16,714
|
|
|
$
|
16,068
|
|
Selling and promotional
|
|
|
1,897
|
|
|
|
954
|
|
|
|
6,217
|
|
|
|
3,977
|
|
General and administrative
|
|
|
8,143
|
|
|
|
9,685
|
|
|
|
23,305
|
|
|
|
29,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
$
|
17,121
|
|
|
$
|
18,027
|
|
|
$
|
46,236
|
|
|
$
|
49,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with our Apollo Group, Inc. Amended and Restated
2000 Stock Incentive Plan, during the three and nine months
ended May 31, 2010, we granted approximately 1,000 and
45,000 stock options, respectively, that had weighted average
grant date fair value of $25.25 and $23.23 per option,
respectively. The weighted average exercise price of these
options was $63.21 and $57.70, respectively. As of May 31,
2010, there was approximately $52.6 million of total
unrecognized share-based compensation expense, net of
forfeitures, related to unvested stock options.
In accordance with our Apollo Group, Inc. Amended and Restated
2000 Stock Incentive Plan, during the three and nine months
ended May 31, 2010, we granted less than 1,000 and
approximately 114,000 restricted stock units, respectively, that
had weighted average grant date fair value of $63.21 and $60.36
per unit, respectively. As of May 31, 2010, there was
approximately $32.7 million of total unrecognized
share-based compensation expense, net of forfeitures, related to
unvested restricted stock units.
Note 15. Commitments
and Contingencies
Contingencies
Related to Litigation and Other Proceedings
The following is a description of pending litigation,
settlements, and other proceedings that fall outside the scope
of ordinary and routine litigation incidental to our business.
Pending
Litigation and Settlements
Incentive
Compensation False Claims Act Lawsuit
On August 29, 2003, we were notified that a qui tam action
had been filed against us on March 7, 2003, 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. When the federal government declines to
intervene in a qui tam action, as it has done in this case, the
relators may elect to pursue the litigation on behalf of the
federal government and, if they are successful, are entitled to
receive a portion of the federal governments recovery. The
qui tam action alleges, among other things, violations of the
False Claims Act, 31 U.S.C. § 3729(a)(1) and (2),
by University of Phoenix through
25
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
submission of a knowingly false or fraudulent claim for payment
or approval, and submission of knowingly false records or
statements to get a false or fraudulent claim paid or approved
in connection with federal student aid programs. The qui tam
action also asserts that University of Phoenix improperly
compensates its employees. Specifically, the relators allege
that our entry into Program Participation Agreements with the
U.S. Department of Education under Title IV of the
Higher Education Act, as reauthorized, constitutes a false claim
because we did not intend to comply with the applicable employee
compensation requirements and, therefore, we should be required
to pay to the U.S. Department of Education treble the
amount of costs incurred by the U.S. Department of
Education in student loan defaults, student loan subsidies and
student financial aid grants from January 1997 to the present,
plus statutory penalties and forfeiture amounts. We believe that
at all relevant times our compensation programs and practices
were in compliance with the applicable legal requirements. Under
the District Courts current Scheduling Order, trial was
set for March 2010.
In September 2009, the parties to the action, along with the
U.S. Department of Justice, participated in a private
mediation in which the parties reached an agreement in principle
regarding the financial terms of a potential settlement. During
the fourth quarter of fiscal year 2009, based on the settlement
discussions to resolve this matter, we recorded a pre-tax charge
of $80.5 million which represented our best estimate of the
loss related to this matter.
The settlement was finalized by all parties on December 14,
2009. The agreement makes clear that we do not acknowledge,
admit or concede any liability, wrongdoing, noncompliance or
violation as a result of the settlement. Under the terms of the
agreement, we paid $67.5 million to the United States in
December 2009. Under a separate agreement, we paid
$11.0 million in attorneys fees to the plaintiffs, as
required by the False Claims Act, in December 2009. The
remaining portion of the $80.5 million pre-tax charge
recorded in fiscal year 2009 represented our estimate of future
legal costs as of August 31, 2009. On December 17,
2009, the Court entered the order dismissing the lawsuit with
prejudice.
Securities
Class Action
In October 2004, three class action complaints were filed in the
U.S. District Court for the District of Arizona. The
District Court consolidated the three pending class action
complaints under the caption
In re Apollo Group, Inc.
Securities Litigation
, Case
No. CV04-2147-PHX-JAT
and a consolidated class action complaint was filed on
May 16, 2005 by the lead plaintiff. The consolidated
complaint named us, Todd S. Nelson, Kenda B. Gonzales and Daniel
E. Bachus as defendants. On March 1, 2007, by stipulation
and order of the Court, Daniel E. Bachus was dismissed as a
defendant from the case. Lead plaintiff represents a class of
our shareholders who acquired their shares between
February 27, 2004 and September 14, 2004. The
complaint alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and
Rule 10b-5
promulgated under the Act by us for defendants allegedly
material false and misleading statements in connection with our
failure to publicly disclose the contents of a preliminary
U.S. Department of Education program review report. The
case proceeded to trial on November 14, 2007. On
January 16, 2008, the jury returned a verdict in favor of
the plaintiffs awarding damages of up to $5.55 for each share of
common stock in the class suit, plus pre-judgment and
post-judgment interest. The class shares are those purchased
after February 27, 2004 and still owned on
September 14, 2004. The judgment was entered on
January 30, 2008, subject to an automatic stay until
February 13, 2008. On February 13, 2008, the District
Court granted our motion to stay execution of the judgment
pending resolution of our motions for post-trial relief, which
were also filed on February 13, 2008, provided that we post
a bond in the amount of $95.0 million. On February 19,
2008, we posted the $95.0 million bond with the District
Court. Oral arguments on our post-trial motions occurred on
August 4, 2008, during which the District Court vacated the
earlier judgment based on the jury verdict and entered judgment
in favor of Apollo and the other defendants. The
$95.0 million bond posted in February was subsequently
released on August 11, 2008. Plaintiffs lawyers filed
a Notice of Appeal with the Ninth Circuit Court of Appeals on
August 29, 2008. A hearing before a panel of the Court of
Appeals took place on March 3, 2010. On June 23, 2010,
the Court of Appeals reversed the District Courts ruling
in our favor and ordered the District Court to enter judgment
against us in accordance with the jury verdict.
26
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Liability in the case is joint and several, which means that
each defendant, including us, is liable for the entire amount of
the judgment. As a result, we may be responsible for payment of
the full amount of damages as ultimately determined. We do not
expect to receive material amounts of insurance proceeds from
our insurers to satisfy any amounts ultimately payable to the
plaintiff class and we expect our insurers to seek repayment of
amounts advanced to us to date for defense costs. The actual
amount of damages will not be known until all court proceedings
have been completed and eligible members of the class have
presented the necessary information and documents to receive
payment of the award. We have estimated for financial reporting
purposes, using statistically valid models and a 60% confidence
interval, that the damages could range from $127.2 million
to $228.0 million, which includes our estimates of
(a) damages payable to the plaintiff class; (b) the
amount we may be required to reimburse our insurance carriers
for amounts advanced for defense costs; and (c) future
defense costs. Accordingly, in the third quarter of fiscal year
2010, we recorded a charge for estimated damages in the amount
of $132.6 million, which, together with the existing
reserve of $44.5 million recorded in the second quarter of
fiscal year 2010, represents the mid-point of the estimated
range of damages payable to the plaintiffs, plus the other
estimated costs and expenses. We elected to record an amount
based on the mid-point of the range of damages payable to the
plaintiff class because under statistically valid modeling
techniques the mid-point of the range is in fact a more likely
estimate than other points in the range, and the point at which
there is an equal probability that the ultimate loss could be
toward the lower end or the higher end of the range.
We are evaluating our available options to challenge the jury
verdict or this ruling by the Court of Appeals. If we elect to
seek a rehearing
en banc
, or to petition for a writ of
certiorari for review by the U.S. Supreme Court, or to
pursue other relief, we will seek a stay of execution of the
judgment pending the resolution of any such action, and we
expect that we will be required to post a bond as a condition of
any such stay.
We believe we have adequate liquidity to fund the amount of any
likely required bond or, if necessary, the satisfaction of the
judgment.
Barnett
Derivative Action
On April 24, 2006, Larry Barnett, one of our shareholders,
filed a shareholder derivative complaint on behalf of Apollo.
The allegations in the complaint pertain to the matters that
were the subject of the investigation performed by the
U.S. Department of Education that led to the issuance of
the U.S. Department of Educations February 5,
2004 Program Review Report. The complaint 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. In the complaint, plaintiff asserts a derivative
claim, on our behalf, for breaches of fiduciary duty against the
following nine of our current or former officers and directors:
John M. Blair, Dino J. DeConcini, Hedy F. Govenar, Kenda B.
Gonzales, Todd S. Nelson, Laura Palmer Noone, John R. Norton
III, John G. Sperling and Peter V. Sperling. Plaintiff contends
that we are entitled to recover from these individuals the
amount of the settlement that we paid to the
U.S. Department of Education and our losses (both
litigation expenses and any damages awarded) stemming from the
federal securities class actions pending against us in Federal
District Court as described above under Securities
Class Action.
On April 10, 2008, the plaintiff filed a Second Amended
Complaint. In addition to the damages previously sought,
plaintiff added a request that we recover from defendants the
expenses associated with the
qui tam
action in the
U.S. District Court for the Eastern District of California.
On May 9, 2008, we moved for a continued stay of Counts 1-2
and dismissal of Counts 3-5 added in the Second Amended
Complaint. On July 30, 2008, the Superior Court dismissed
Counts 3-5, and stayed Counts 1-2, until the next pre-trial
conference. At the continued pre-trial conference on
October 27, 2008, the Superior Court lifted the discovery
stay and set certain long-range deadlines for completion of
discovery, dispositive motions, and disclosure of experts.
On April 3, 2009, we filed a motion seeking the appointment
of an independent panel consisting of Dr. Roy A.
Herberger, Jr. and Stephen J. Giusto. The Court granted our
motion on July 31, 2009.
27
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On March 22, 2010, the parties filed a stipulation of
settlement with the Court wherein they agreed to resolve this
action. The proposed stipulation of settlement requires Apollo
to implement a series of corporate governance reforms and pay an
immaterial amount to the plaintiffs counsel for their fees
and expenses. On May 12, 2010, the Court entered an order
preliminarily approving the stipulation of settlement and set a
settlement hearing for July 12, 2010. Based on information
available to us at present, our management does not expect a
material adverse effect on our business to result from this
action.
Teamsters
Local Union Putative Class Action
On November 2, 2006, the Teamsters Local 617 Pension and
Welfare Funds filed a class action complaint purporting to
represent a class of shareholders who purchased our stock
between November 28, 2001 and October 18, 2006. The
complaint, filed in the U.S. District Court for the
District of Arizona, is entitled
Teamsters Local 617
Pension & Welfare Funds v. Apollo Group, Inc. et
al.
, Case Number 06-cv-02674-RCB, and alleges that we and
certain of our current and former directors and officers
violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and
Rule 10b-5
promulgated thereunder by purportedly making misrepresentations
concerning our stock option granting policies and practices and
related accounting. The defendants are Apollo Group, Inc., J.
Jorge Klor de Alva, Daniel E. Bachus, John M. Blair, Dino J.
DeConcini, Kenda B. Gonzales, Hedy F. Govenar, Brian E. Mueller,
Todd S. Nelson, Laura Palmer Noone, John R. Norton III, John G.
Sperling and Peter V. Sperling. Plaintiff seeks unstated
compensatory damages and other relief. 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. Lead plaintiff filed an amended complaint on
November 23, 2007, asserting the same legal claims as the
original complaint and adding claims for violations of
Section 20A of the Securities Exchange Act of 1934 and
allegations of breach of fiduciary duties and civil conspiracy.
On January 22, 2008, all defendants filed motions to
dismiss. On March 31, 2009, the Court dismissed the case
with prejudice as to Daniel Bachus, Hedy Govenar, Brian E.
Mueller, Dino J. DeConcini, and Laura Palmer Noone. The Court
also dismissed the case as to John Sperling and Peter Sperling,
but granted plaintiffs leave to file an amended complaint
against them. Finally, the Court dismissed all of
plaintiffs claims concerning misconduct before November
2001 and all of the state law claims for conspiracy and breach
of fiduciary duty. On April 30, 2009, plaintiffs filed
their Second Amended Complaint, which alleges similar claims for
alleged securities fraud against the same defendants. On
June 15, 2009, all defendants filed another motion to
dismiss the Second Amended Complaint. On February 22, 2010,
the Court partially granted the plaintiffs motion for
reconsideration, but withheld a final determination on the
individual defendants pending the Courts ruling on the
motion to dismiss the Second Amended Complaint.
Discovery in this case has not yet begun. Because of the many
questions of fact and law that may arise, the outcome of this
legal proceeding is uncertain at this point. Based on
information available to us at present, we cannot reasonably
estimate a range of loss for this action and accordingly have
not accrued any liability associated with this action.
Patent
Infringement Litigation
On March 3, 2008, Digital-Vending Services International
Inc. filed a complaint against University of Phoenix and Apollo
Group Inc., as well as Capella Education Company, Laureate
Education Inc., and Walden University Inc. in the
U.S. District Court for the Eastern District of Texas. The
complaint alleges that we and the other defendants have
infringed and are infringing various patents relating to
managing courseware in a shared use operating environment. We
filed an answer to the complaint on May 27, 2008, in which
we denied that Digital-Vending Services Internationals
patents were duly and lawfully issued, and asserted defenses of
non-infringement and patent invalidity, among others. We also
asserted a counterclaim seeking a declaratory judgment that the
patents are
28
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
invalid, unenforceable, and not infringed by us. Together with
the other defendants, we filed a motion to transfer venue from
the Eastern District of Texas to Washington, D.C. on
February 27, 2009. On September 30, 2009, the Court
granted plaintiffs motion to transfer the case to the
Eastern District of Virginia and denied the defendants
motion to transfer the case to the District of Columbia.
On March 18, 2010, we filed our opening claim construction
brief and a motion for summary judgment based on the
indefiniteness of the Digital-Vending Services International
patent claims. On March 26, 2010, we voluntarily withdrew
our motion for summary judgment based on indefiniteness in order
to file a single motion for summary judgment after claim
construction, which will also include defenses based on
invalidity and non-infringement. On June 10, 2010, the
Court issued its claim construction ruling. Discovery in the
case is ongoing and a scheduling order has been issued with a
trial date set for November 1, 2010.
Because of the many questions of fact and law that may arise,
the outcome of this legal proceeding is uncertain at this point.
Based on information available to us at present, we cannot
reasonably estimate a range of loss for this action. However, we
accrued an immaterial amount pursuant to settlement discussions
during the third quarter of fiscal year 2010 associated with
this action.
Student
Loan Class Action
On December 9, 2008, three former University of Phoenix
students filed a complaint against Apollo Group, Inc. and
University of Phoenix in the U.S. District Court for the
Eastern District of Arkansas. The complaint alleges that with
regard to students who dropped from their courses shortly after
enrolling, University of Phoenix improperly returned the entire
amount of the students undisbursed federal loan funds to
the lender. The students purport to be bringing the complaint on
behalf of themselves and a proposed class of similarly-situated
student loan borrowers. On January 21, 2009, the plaintiffs
voluntarily filed a dismissal without prejudice to
re-filing. The plaintiffs then filed a similar complaint
in the U.S. District Court for the Central District of
California (Western Division Los Angeles) on
February 5, 2009. We filed an answer denying all of the
asserted claims on March 30, 2009. Under the District
Courts current Scheduling Order, trial is set for October
2010. The matter is currently in discovery. The plaintiffs filed
their motion for class certification and an amended complaint on
July 14, 2009. On March 22, 2010, the Court denied
plaintiffs Motion for Class Certification. The
Courts action encompasses a denial to certify the class
action for all purported nationwide classes and California
sub-classes.
As a result, the case will now proceed on an individual
plaintiff basis and, absent a reversal of this denial of class
certification, we do not expect any material adverse impact from
the lawsuit.
Brodale
Employment and False Claims Lawsuit
On August 1, 2008, former employee, Stephen Lee Brodale,
filed a lawsuit in Federal District Court in San Diego
against Apollo, University of Phoenix, and several individual
employees. The complaint alleges various employment claims and
also includes claims under the Federal and California false
claims acts. The U.S. Department of Justice declined to
participate in the lawsuit and it was served on Apollo on
August 10, 2009. On September 16, 2009, the Court
dismissed the employment claims without prejudice, upon joint
motion by the parties, so that they could proceed to binding
arbitration. On September 14, 2009, we filed a motion to
dismiss the remaining false claims act allegations. The Court
granted our motion and dismissed the remaining claims on
November 6, 2009. On January 5, 2010, plaintiff filed
a Notice of Appeal with the Ninth Circuit. Plaintiff
subsequently agreed to voluntarily dismiss the appeal and the
Court ordered the appeal dismissed on February 10, 2010.
29
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Wage and
Hour Class Actions
During fiscal year 2009 and 2010, five lawsuits, each styled as
a class action, were commenced by various former and current
employees against Apollo
and/or
University of Phoenix alleging wage and hour claims for failure
to pay minimum wages and overtime and certain other violations.
These lawsuits are as follows:
|
|
|
|
|
Sabol.
Action filed July 31, 2009, by several former
employees in Federal District Court in Philadelphia. We filed an
answer denying the asserted claim on September 29, 2009.
During the course of the action, all but one of the former
employees voluntarily opted out of the lawsuit. On
January 24, 2010, we filed a motion for partial summary
judgment with respect to plaintiffs claim that the
Academic Counselor position is incorrectly
classified as exempt. On February 9, 2010, plaintiff filed
a Rule 56(f) motion seeking leave to conduct additional
discovery before response to our motion for partial summary
judgment. On March 3, 2010, the Court granted plaintiff
leave to conduct additional discovery on issues related to the
motion for partial summary judgment until April 5, 2010.
The Court also ordered plaintiff to file his response to the
motion for summary judgment on or before April 20, 2010. On
February 15, 2010, plaintiff filed a Motion for Class
Certification and we filed our opposition on March 5, 2010.
|
On April 19, 2010, the parties agreed to dismiss with
prejudice their claims regarding employment as an Academic
Counselor and to withdraw their pending motion for conditional
certification to the extent it seeks to certify a class of
Academic Counselors. On May 12, 2010, the Court granted
plaintiffs motion to conditionally certify a collective
action to include current and former Enrollment Counselors at
all of University of Phoenixs nationwide locations.
Although the potential class is significant, the extent to which
prospective class members will choose to opt in to
participate in the lawsuit is unknown. We believe that the
claims do not support conditional certification as a collective
action and will move the Court to de-certify the class following
additional discovery. Because of the many questions of fact and
law that may arise, the outcome of this legal proceeding is
uncertain at this point. Based on information available to us at
present, we cannot reasonably estimate a range of loss for this
action and accordingly have not accrued any liability associated
with this action.
|
|
|
|
|
Adoma.
Action filed January 8, 2010 by Diane Adoma
in United States District Court, Eastern District of California.
On March 5, 2010, we filed a motion to dismiss, or in the
alternative to stay or transfer, the case based on the
previously filed Sabol and Juric actions. On May 3, 2010,
the Court denied the motion to dismiss
and/or
transfer. On April 12, 2010, plaintiff filed her motion for
conditional collective action certification. The deadline for
Apollo to file its opposition is July 12, 2010 and a
hearing date is set for August 9, 2010. Because of the many
questions of fact and law that may arise, the outcome of this
legal proceeding is uncertain at this point. Based on
information available to us at present, we cannot reasonably
estimate a range of loss for this action and, accordingly, we
have not accrued any liability associated with this action.
|
|
|
|
Juric.
Action filed April 3, 2009, by former
employee Dejan Juric in California State Court in Los Angeles.
We filed an answer denying all of the asserted claims on
May 4, 2009 and then removed the case to the Federal
District Court in Los Angeles. On December 30, 2009,
plaintiff filed an amended complaint dismissing the California
class allegations and inserting nation-wide class allegations
under the Fair Labor Standards Act. On February 16, 2010,
we filed a motion to dismiss, or in the alternative to stay or
transfer, the case based on the previously filed Sabol action.
On June 6, 2010, the parties agreed to settle the case for
an immaterial amount. On June 21, 2010, the Court entered
the order dismissing the lawsuit with prejudice.
|
|
|
|
Tranchita.
Action filed August 10, 2009, by several
former employees in Federal District Court in Chicago. On
September 2, 2009, we filed a motion to dismiss, or in the
alternative to stay or transfer, the case based on the
previously filed Sabol action. The plaintiffs subsequently
agreed to dismiss their class allegations and settle the case
for an immaterial amount. On May 13, 2010, the Court
entered the order dismissing the lawsuit with prejudice.
|
30
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
Davis.
Action filed September 28, 2009, by former
employee Adonijah Davis in Federal District Court in Tampa,
Florida. On November 2, 2009, we filed a motion to dismiss,
or in the alternative to stay or transfer, the case based on the
previously filed Sabol action. On November 17, 2009,
plaintiff filed an amended complaint removing the class action
allegations and electing to proceed on a single plaintiff basis.
As a result, the Court denied our motion to dismiss as moot on
November 18, 2009. On January 28, 2010, the parties
agreed to settle the case for an immaterial amount. On
June 17, 2010, the Court entered the order dismissing the
lawsuit with prejudice.
|
Other
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. We do not believe any of these
are material for separate disclosure.
Regulatory
and Other Legal Matters
Student
Financial Aid
All U.S. federal financial aid programs are established by
Title IV of the Higher Education Act and regulations
promulgated thereunder. In August 2008, the Higher Education Act
was reauthorized through September 30, 2013 by the Higher
Education Opportunity Act.
The Higher Education Opportunity 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.
University of Phoenix was recertified in November 2009 and
entered into a new Title IV Program Participation Agreement
which expires on December 31, 2012.
Western International University was recertified in May 2010 and
entered into a new Title IV Program Participation Agreement
which expires on September 30, 2014.
U.S.
Department of Education Program Review
The U.S. Department of Education periodically reviews
institutions participating in Title IV programs for
compliance with applicable standards and regulations. In
February 2009, the Department performed a program review of
University of Phoenixs policies and procedures involving
Title IV programs. On December 31, 2009, University of
Phoenix received the Departments Program Review Report,
which was a preliminary report of the Departments
findings. We responded to the preliminary report in the third
quarter of fiscal year 2010. The Department issued its Final
Program Review Determination letter on June 16, 2010, which
confirmed we had completed the corrective actions and satisfied
the obligations arising from the review as described below.
Subsequent to May 31, 2010, we posted a letter of credit in
the amount of approximately $126 million as required to
comply with the Departments standards of financial
responsibility. The Departments regulations require
institutions to post a letter of credit where a program review
report cites untimely return of unearned Title IV funds for
more than 10% of the sampled students in a period covered by the
review. The letter of credit is fully cash collateralized and
must be maintained until at least June 30, 2012.
Of the six findings contained in the Final Program Review
Determination Letter, three related to University of
Phoenixs procedures for determining student withdrawal
dates and associated timing of the return of unearned
Title IV funds, which averaged no more than six days
outside the required timeframe in the affected sample files.
There were no findings that indicated incorrect amounts of
Title IV funds had been returned. In the second quarter of
31
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
fiscal year 2010, we made payments totaling $0.7 million to
reimburse the Department for the cost of Title IV funds
associated with these findings.
The remaining findings involved isolated clerical errors
verifying student-supplied information and, as self-reported by
University of Phoenix in 2008, the calculation of student
financial need where students were eligible for tuition and fee
waivers and discounts, and the use of Title IV funds for
non-program purposes such as transcripts, applications and late
fees.
State
Regulatory Matters
From time to time as part of the normal course of business, our
domestic post-secondary education institutions are subject to
audits and reviews by various state higher education regulatory
bodies. During the third quarter of fiscal year 2010, we
recorded a $5.0 million charge included in instructional
costs and services in our Condensed Consolidated Statements of
Income, which represents our best estimate of an expected loss
related to a state audit.
Securities
and Exchange Commission Informal Inquiry
During October 2009, we received notification from the
Enforcement Division of the Securities and Exchange Commission
indicating that they had commenced an informal inquiry into our
revenue recognition practices. Based on the information and
documents that the Securities and Exchange Commission has
requested from us
and/or
our
auditors, which relate to our revenue recognition practices and
other matters, including our policies and practices relating to
student refunds, the return of Title IV funds to lenders
and bad debt reserves, the eventual scope, duration and outcome
of the inquiry cannot be predicted at this time. We are
cooperating fully with the Securities and Exchange Commission in
connection with the inquiry.
Internal
Revenue Service Audits
Please refer to Note 11, Income Taxes, for discussion of
Internal Revenue Service audits.
Note 16. Segment
Reporting
We operate primarily in the education industry. We have
organized our segments using a combination of factors primarily
focusing on the type of educational services provided and
products delivered. Our six operating segments are managed in
the following four reportable segments:
|
|
|
|
|
University of Phoenix;
|
|
|
|
Apollo Global BPP;
|
|
|
|
Apollo Global Other; and
|
|
|
|
Other Schools.
|
During the third quarter of fiscal year 2010, we contributed all
of the common stock of Western International University, which
was previously our wholly-owned subsidiary, to Apollo Global.
Please refer to Note 4, Acquisitions, for further
discussion. Western International University was previously
presented in the Other Schools reportable segment. As a result
of this transaction, we are presenting Western International
University in the Apollo Global Other reportable
segment. We have revised our financial information by reportable
segment for all periods presented to conform to our current
presentation.
In the second quarter of fiscal year 2010, we began presenting
Insight Schools assets and liabilities as held for sale
and discontinued operations. Insight Schools was previously
reported as its own reportable segment. As Insight Schools is
presented as discontinued operations in our Condensed
Consolidated Statements of Income for all
32
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
periods presented, we have revised our financial information by
reportable segment to conform to our current presentation.
The Apollo Global Other reportable segment includes
Western International University, UNIACC, ULA and Apollo Global
corporate operations. The Other Schools reportable segment
includes IPD, CFFP and Meritus. The Corporate caption in our
segment reporting includes adjustments to reconcile segment
results to consolidated results, which primarily consist of net
revenue and corporate charges that are not allocated to our
reportable segments. Please refer to our 2009 Annual Report on
Form 10-K
for further discussion of our segments.
A summary of financial information by reportable segment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Nine Months Ended May 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
1,214,194
|
|
|
$
|
1,005,199
|
|
|
$
|
3,314,040
|
|
|
$
|
2,747,683
|
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
75,815
|
|
|
|
|
|
|
|
218,135
|
|
|
|
|
|
Other
|
|
|
18,966
|
|
|
|
16,627
|
|
|
|
59,799
|
|
|
|
58,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
94,781
|
|
|
|
16,627
|
|
|
|
277,934
|
|
|
|
58,372
|
|
Other Schools
|
|
|
27,027
|
|
|
|
24,650
|
|
|
|
73,051
|
|
|
|
71,576
|
|
Corporate
|
|
|
1,402
|
|
|
|
1,098
|
|
|
|
1,374
|
|
|
|
2,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,337,404
|
|
|
$
|
1,047,574
|
|
|
$
|
3,666,399
|
|
|
$
|
2,880,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
440,800
|
|
|
$
|
360,156
|
|
|
$
|
1,078,233
|
|
|
$
|
900,431
|
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
13,395
|
|
|
|
|
|
|
|
18,204
|
|
|
|
|
|
Other
(1)
|
|
|
(12,119
|
)
|
|
|
(3,047
|
)
|
|
|
(21,078
|
)
|
|
|
(4,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
1,276
|
|
|
|
(3,047
|
)
|
|
|
(2,874
|
)
|
|
|
(4,149
|
)
|
Other Schools
|
|
|
5,771
|
|
|
|
2,747
|
|
|
|
7,620
|
|
|
|
5,779
|
|
Corporate
(2)
|
|
|
(145,541
|
)
|
|
|
(15,045
|
)
|
|
|
(214,624
|
)
|
|
|
(36,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
302,306
|
|
|
|
344,811
|
|
|
|
868,355
|
|
|
|
865,998
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
827
|
|
|
|
2,395
|
|
|
|
2,284
|
|
|
|
11,202
|
|
Interest expense
|
|
|
(1,979
|
)
|
|
|
(509
|
)
|
|
|
(8,107
|
)
|
|
|
(2,559
|
)
|
Other, net
|
|
|
(1,312
|
)
|
|
|
1,782
|
|
|
|
(2,061
|
)
|
|
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
299,842
|
|
|
$
|
348,479
|
|
|
$
|
860,471
|
|
|
$
|
873,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The operating loss for Apollo Global Other for the
three and nine months ended May 31, 2010 includes the
$8.7 million goodwill impairment charge for ULA. Refer to
Note 6, Goodwill and Intangible Assets, for further
discussion.
|
|
(2)
|
The operating loss for Corporate includes $132.6 million
and $177.1 million during the three and nine months ended
May 31, 2010, respectively, of charges associated with the
Securities Class Action matter. Refer to Note 15,
Commitments and Contingencies, for further discussion.
|
33
APOLLO
GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of our consolidated assets by reportable segment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
1,064,387
|
|
|
$
|
1,112,002
|
|
Apollo Global:
|
|
|
|
|
|
|
|
|
BPP
|
|
|
650,032
|
|
|
|
778,416
|
|
Other
|
|
|
129,877
|
|
|
|
148,125
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
779,909
|
|
|
|
926,541
|
|
Other Schools
|
|
|
35,857
|
|
|
|
37,590
|
|
Insight
Schools
(1)
|
|
|
|
|
|
|
26,590
|
|
Corporate
(1)
|
|
|
1,292,831
|
|
|
|
1,160,654
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,172,984
|
|
|
$
|
3,263,377
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Insight Schools assets are held for sale and included in
our Corporate caption as of May 31, 2010. Please refer to
Note 3, Discontinued Operations, for further discussion.
|
34
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) is
intended to help investors understand our results of operations,
financial condition and present business environment. The
MD&A is provided as a supplement to, and should be read in
conjunction with, our unaudited condensed consolidated financial
statements and related notes included elsewhere in this report.
The MD&A is organized as follows:
|
|
|
|
|
Overview:
From managements point of view, we
discuss the following:
|
|
|
|
|
|
An overview of our business and the sectors of the education
industry in which we operate;
|
|
|
|
Key trends, developments and challenges; and
|
|
|
|
Significant events from the current period.
|
|
|
|
|
|
Critical Accounting Policies and Estimates:
A discussion
of our accounting policies that require critical judgments and
estimates.
|
|
|
|
Recent Accounting Pronouncements:
A discussion of
recently issued accounting pronouncements.
|
|
|
|
Results of Operations:
An analysis of our results of
operations as reflected in our condensed consolidated financial
statements.
|
|
|
|
Liquidity, Capital Resources, and Financial Position:
An
analysis of cash flows and contractual obligations and other
commercial commitments.
|
OVERVIEW
Apollo is one of the worlds largest private education
providers and has been a provider of education services for more
than 35 years. We offer innovative and distinctive
educational programs and services at the undergraduate,
masters and doctoral levels at our various campuses and
learning centers, and online throughout the world. Our principal
wholly-owned subsidiaries and subsidiaries that we control
include the following:
|
|
|
|
|
University of Phoenix;
|
|
|
|
Apollo Global:
|
|
|
|
|
|
BPP Holdings, plc (BPP);
|
|
|
|
Western International University;
|
|
|
|
Universidad de Artes, Ciencias y Comunicación
(UNIACC); and
|
|
|
|
Universidad Latinoamericana (ULA);
|
|
|
|
|
|
Institute for Professional Development (IPD);
|
|
|
|
College for Financial Planning Institutes
(CFFP); and
|
|
|
|
Meritus University, Inc. (Meritus).
|
Substantially all of our net revenue is composed of tuition and
fees for educational services. In fiscal year 2009, University
of Phoenix accounted for approximately 95% of our total
consolidated net revenue. University of Phoenix generated 83% of
its cash basis revenue for eligible tuition and fees during
fiscal year 2009 from receipt of Title IV financial aid
program funds, as calculated under the 90/10 Rule, including the
benefit from the permitted temporary exclusion of revenue
associated with the recently increased annual student loan
limits. Following rulemaking and other guidance from the
U.S. Department of Education, we finalized the favorable
effect of this temporary relief for fiscal year 2009 in the
second quarter of fiscal year 2010. This temporary relief
expires in July 2011, and excluding this benefit the percentage
for University of Phoenix was 86%.
We believe that a critical element of generating successful
long-term growth and attractive returns for our stakeholders is
to provide high quality educational products and services for
our students in order for them to
35
maximize the benefits of their educational experience.
Accordingly, we are intensely focused on student success and
better identifying and enrolling students who have a reasonable
chance to succeed in our rigorous programs. We are continuously
enhancing and expanding our current service offerings and
investing in academic quality. We have developed customized
computer programs for academic quality management, faculty
recruitment and training, student tracking, and marketing to
help us more effectively manage toward this objective. We
believe we utilize one of the most comprehensive postsecondary
learning assessment programs in the U.S. We seek to improve
student retention by enhancing student services, promoting
instructional innovation and improving academic support. All of
these efforts are designed to help our students stay in school
and succeed. In December 2009, University of Phoenix published
its second Academic Annual Report which contains a variety of
comparative performance measures related to student outcomes and
University of Phoenix initiatives related to quality and
accountability.
Key
Trends, Developments and Challenges
The following circumstances and trends present opportunities,
challenges and risks as we work toward our goal of providing
attractive returns for all of our stakeholders:
|
|
|
|
|
Evolving Domestic Postsecondary Education Market.
We
believe domestic postsecondary education continues to experience
a profound shift from traditional undergraduate students (those
students living on campus and attending classes full-time) to
non-traditional students who work, are raising a family, or are
doing both while trying to earn a college degree. This trend
continues to provide an opportunity for education providers such
as University of Phoenix to provide quality academic programs
and services that appeal to non-traditional students.
|
|
|
|
Economic Downturn.
The U.S. and much of the world
economy have been in the midst of an economic downturn. These
conditions have contributed to a portion of our recent
enrollment growth as an increased number of working learners
seek to advance their education to improve their job security or
reemployment prospects. One of our challenges is to adequately
and effectively service our increased student population without
over-building our infrastructure and delivery platform in a
manner that might result in excess capacity when the portion of
our growth related to the economic downturn subsides. In
addition to this impact on our enrollment, the economic downturn
has negatively affected our bad debt expense and allowance for
doubtful accounts and reduced the availability of state-funded
student financial aid as many states face revenue shortfalls. We
believe that the availability of state-funded student financial
aid will continue to decline, which may negatively impact our
enrollment and, to the extent that Title IV funds replace
these state funding sources for our students, may negatively
impact our 90/10 Rule calculation.
|
|
|
|
Regulatory Environment
|
|
|
|
|
|
Compliance.
Our domestic business is highly regulated by
the U.S. Department of Education, the applicable academic
accreditation agencies and state education regulatory
authorities. Compliance with these regulatory requirements is a
significant part of our administrative effort. In August 2008,
the U.S. Congress reauthorized the Higher Education Act
through 2013 by enacting the Higher Education Opportunity Act,
which resulted in a large number of new and modified
requirements that ultimately will be implemented through the
U.S. Department of Education rulemaking. Final regulations
for implementing the Higher Education Opportunity Act provisions
were published in October 2009 with an effective date of
July 1, 2010. We have developed and implemented the
necessary procedural and substantive changes to enable us to
comply with the provisions by the effective date.
|
|
|
|
New Rulemaking Initiative
. In November 2009, the
U.S. Department of Education convened two new negotiated
rulemaking teams related to Title IV program integrity
issues and foreign school issues. The team addressing program
integrity issues, which included representatives of the various
higher education constituencies, was unable to reach consensus
on all of the rules addressed by that team. Accordingly, under
the negotiated rulemaking protocol, the Department is free to
propose rules without regard to the tentative agreement reached
regarding certain of
|
36
|
|
|
|
|
the rules. The proposed program integrity rulemaking addresses
numerous topics. The most significant proposals for our business
are the following:
|
|
|
|
|
|
Modification of the standards relating to the payment of
incentive compensation to employees involved in student
recruitment and enrollment; and
|
|
|
|
Adoption of a definition of gainful employment for
purposes of the requirement for Title IV student financial
aid that a program of study prepare students for gainful
employment in a recognized occupation.
|
On June 18, 2010, the Department issued a Notice of
Proposed Rulemaking (NPRM) in respect of the program
integrity issues, other than the metrics for determining
compliance with the gainful employment requirement, with a
45 day public comment period. A separate NPRM in respect of
the gainful employment metrics is expected later this summer.
The Department has stated that its goal is to publish final
rules by November 1, 2010, to be effective July 1,
2011.
We cannot predict the form of the rules that ultimately may be
adopted by the U.S. Department of Education following
public comment. If the rules regarding incentive compensation
are adopted by the Department in the form proposed, they could
have a material impact on the manner in which we conduct our
business. If the rules regarding gainful employment metrics are
adopted in the form last presented by the Department in the
negotiated rulemaking process, they could have a material impact
on the manner in which we conduct our business. Compliance with
these rules, which if adopted could be effective as early as
July 1, 2011, could reduce our enrollment, increase our
cost of doing business, and have a material adverse effect on
our business, financial condition, results of operations and
cash flows. Refer to Item 1A,
Risk Factors
, for further
discussion of the U.S. Department of Educations
proposals.
|
|
|
|
|
90/10 Rule
. One requirement of the Higher Education Act,
commonly referred to as the 90/10 Rule, applies to
proprietary institutions such as the University of Phoenix and
Western International University. Under this rule, a proprietary
institution will be ineligible to participate in Title IV
programs if for any two consecutive fiscal years it derives more
than 90% of its cash basis revenue, as defined in the rule, from
Title IV programs. An institution that exceeds this limit
for any single fiscal year will be placed on provisional
certification for two fiscal years and will be subject to
additional sanctions. In recent years, the 90/10 Rule
percentages for the University of Phoenix have trended closer to
90%. For fiscal year 2009, the percentage for University of
Phoenix was 83%, including the benefit from the permitted
temporary exclusion of revenue associated with the recently
increased annual student loan limits. This temporary relief
expires in July 2011, and excluding this relief the percentage
for University of Phoenix was 86%.
|
We expect the upward pressure on the 90/10 Rule percentage to
continue in fiscal year 2010. University of Phoenix is
continuing to implement various measures to reduce the
percentage of its cash basis revenue attributable to
Title IV funds, including emphasizing employer-paid and
other direct-pay education programs, encouraging students to
carefully evaluate the amount of necessary Title IV
borrowing, and increasing the emphasis on professional
development and continuing education. Although we expect that
these measures will continue to favorably impact the 90/10 Rule
calculation in the future, there is no assurance that these
initiatives will be effective or will be adequate to prevent the
90/10 Rule calculation from exceeding 90%. If this calculation
exceeds 90% in future fiscal years, we will need to increase our
efforts to reduce the percentage of our cash-basis revenue that
is composed of Title IV funding. These efforts, and our
other long-term initiatives to impact this calculation, may
involve taking measures which increase our operating expenses
and/or
reduce our revenue. Title IV eligibility is critical to the
continued operation of our business.
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Student Loan Cohort Default Rates
. To remain eligible to
participate in Title IV programs, an educational
institutions student loan cohort default rates must remain
below certain specified
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37
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levels. An educational institution will lose its eligibility to
participate in some or all Title IV programs if its student
loan cohort default rate equals or exceeds 25% for three
consecutive years or 40% for any given year. If our student loan
default rates approach these limits, we may be required to
increase efforts and resources dedicated to improving these
default rates.
|
The cohort default rates for the University of Phoenix have been
increasing over the past three years and we anticipate that the
2008 cohort default rate, which will be published by the
U.S. Department of Education in September 2010, will be
above 10%. In addition, we expect this upward trend to intensify
due to the current challenging economic climate and the growth
in our associates degree student population in recent
years. Consistent with this, the available preliminary data for
the University of Phoenix 2009 cohort reflect a substantially
higher default rate than for the comparable period in the 2008
cohort. Refer to Item 1A,
Risk Factors
, for further
discussion.
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Initiative to Enhance Student Outcomes.
We are intensely
focused on improving student outcomes. This focus includes
several elements, including the following:
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Upgrading our learning and data platforms with the goal of
enhancing the student experience;
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Adopting new financial aid tools to minimize student debt
levels, such as our Responsible Borrowing Calculator which is
designed to help students calculate the amount of student
borrowing necessary to achieve their educational objectives and
to motivate them to not incur unnecessary student debt;
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Transitioning our marketing approaches to more effectively
identify students who have the ability to succeed in our
rigorous educational programs; and
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Developing an orientation program which we call University
Orientation. This program is a free three-week program designed
to help our prospective students understand the rigors of higher
education prior to enrollment. After piloting the program for
several months, our intention is to require all prospective
University of Phoenix students with less than 24 credit hours to
participate in the program beginning during the latter half of
the first quarter of fiscal year 2011.
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We expect that our shift in marketing focus and wide-scale
implementation of University Orientation will adversely impact
fiscal year 2011 University of Phoenix New Degreed Enrollment
and Degreed Enrollment, net revenue, operating profit, and cash
flow. However, we believe that these efforts are the right thing
to do for our students and, over the long-term, will improve
student persistence and completion rates and therefore reduce
bad debt expense and position us for more stable long-term cash
flow growth.
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Federal Direct Loan Program.
During the third quarter of
fiscal year 2010, the Health Care and Education Reconciliation
Act was enacted and signed into law. This legislation, among
other things, eliminates the Federal Family Education Loan
Program (FFELP) and instead requires all Title IV student
loans to be administered through the Federal Direct Loan Program
(FDLP) commencing July 1, 2010. We completed our transition
from the FFELP program to the FDLP during the third quarter of
fiscal year 2010. If we experience a disruption in our ability
to process student loans through the FDLP, either because of
administrative challenges on our part or the inability of the
U.S. Department of Education to process the increased
volume of direct loans on a timely basis, our results of
operations and cash flows could be materially and adversely
affected.
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Opportunities to Expand into New Markets.
We believe that
there is a growing demand for high quality education outside the
U.S. and that we have capabilities and expertise that can
be useful in providing these services beyond our current reach.
We believe we can deploy our key capabilities in student
services, technology and marketing to expand into new markets to
further our mission of providing high quality, accessible
education. We intend to actively pursue quality opportunities to
partner with
and/or
acquire existing institutions of higher learning where we
believe we can achieve long-term attractive growth and value
creation.
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38
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Integration.
We continue our efforts to integrate our
acquired educational institutions and seek to use our experience
to enhance the quality, delivery and student outcomes of their
respective education programs. As with all acquisitions, there
are significant risks, uncertainties and challenges inherent
with integration.
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We acquired Insight Schools in fiscal year 2007. In the second
quarter of fiscal year 2010, we initiated a formal plan to sell
Insight Schools as we determined that the business was no longer
consistent with our long-term strategic objectives. We recorded
a $9.4 million impairment charge for Insight Schools
goodwill in the second quarter of fiscal year 2010.
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We acquired ULA in fiscal year 2008 and recorded an
$8.7 million impairment charge for ULAs goodwill in
the third quarter of fiscal year 2010.
|
For further discussion of the above items, refer to
Critical
Accounting Policies and Estimates
in this MD&A. If we
are unable to adequately integrate and successfully operate our
acquired businesses, we may be required to record additional
non-cash impairment charges for certain acquired assets.
For a more detailed discussion of trends, risks and
uncertainties, and our strategic plan, please refer to our 2009
Annual Report on
Form 10-K,
and Item 1A,
Risk Factors
, included in this report.
Third
Quarter of Fiscal Year 2010 Significant Events
We experienced the following significant events since the second
quarter of fiscal year 2010:
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1.
|
Degreed Enrollment and New Degreed Enrollment Growth
. We
achieved 13.3% growth in University of Phoenix Degreed
Enrollment in the third quarter of fiscal year 2010 as compared
to the third quarter of fiscal year 2009. University of Phoenix
New Degreed Enrollment during the third quarter of fiscal year
2010 increased 7.5% as compared to the third quarter of fiscal
year 2009. Refer to
Results of Operations
in MD&A
for further discussion.
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|
2.
|
Net Revenue Growth
. Our net revenue increased 27.7% in
the third quarter of fiscal year 2010 as compared to the third
quarter of fiscal year 2009 with University of Phoenixs
net revenue increasing 20.8% mainly from its Degreed Enrollment
growth and selective tuition price increases. Apollo
Globals acquisition of BPP in the fourth quarter of fiscal
year 2009 also contributed 7.2 percentage points of the
overall increase in consolidated net revenue in the third
quarter of fiscal year 2010 compared to the third quarter of
fiscal year 2009.
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3.
|
Securities Class Action
. In October 2004, three
class action complaints were filed in the U.S. District
Court for the District of Arizona. The District Court
consolidated the three pending class action complaints under the
caption
In re Apollo Group, Inc. Securities Litigation
,
Case
No. CV04-2147-PHX-JAT
and a consolidated class action complaint was filed on
May 16, 2005 by the lead plaintiff. The consolidated
complaint named us, Todd S. Nelson, Kenda B. Gonzales and Daniel
E. Bachus as defendants. On March 1, 2007, by stipulation
and order of the Court, Daniel E. Bachus was dismissed as a
defendant from the case. Lead plaintiff represents a class of
our shareholders who acquired their shares between
February 27, 2004 and September 14, 2004. The
complaint alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and
Rule 10b-5
promulgated under the Act by us for defendants allegedly
material false and misleading statements in connection with our
failure to publicly disclose the contents of a preliminary
U.S. Department of Education program review report. The
case proceeded to trial on November 14, 2007. On
January 16, 2008, the jury returned a verdict in favor of
the plaintiffs awarding damages of up to $5.55 for each share of
common stock in the class suit, plus pre-judgment and
post-judgment interest. The class shares are those purchased
after February 27, 2004 and still owned on
September 14, 2004. The judgment was entered on
January 30, 2008, subject to an automatic stay until
February 13, 2008. On February 13, 2008, the District
Court granted our motion to stay execution of the judgment
pending resolution of our motions for post-trial relief, which
were also filed on February 13, 2008, provided that we post
a bond in the amount of $95.0 million. On February 19,
2008, we posted the $95.0 million bond with the District
Court. Oral arguments on our post-trial motions occurred on
August 4, 2008, during which the District Court vacated the
earlier judgment based on the jury verdict and entered
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39
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judgment in favor of Apollo and the other defendants. The
$95.0 million bond posted in February was subsequently
released on August 11, 2008. Plaintiffs lawyers filed
a Notice of Appeal with the Ninth Circuit Court of Appeals on
August 29, 2008. A hearing before a panel of the Court of
Appeals took place on March 3, 2010. On June 23, 2010,
the Court of Appeals reversed the District Courts ruling
in our favor and ordered the District Court to enter judgment
against us in accordance with the jury verdict.
|
Liability in the case is joint and several, which means that
each defendant, including us, is liable for the entire amount of
the judgment. As a result, we may be responsible for payment of
the full amount of damages as ultimately determined. We do not
expect to receive material amounts of insurance proceeds from
our insurers to satisfy any amounts ultimately payable to the
plaintiff class and we expect our insurers to seek repayment of
amounts advanced to us to date for defense costs. The actual
amount of damages will not be known until all court proceedings
have been completed and eligible members of the class have
presented the necessary information and documents to receive
payment of the award. We have estimated for financial reporting
purposes, using statistically valid models and a 60% confidence
interval, that the damages could range from $127.2 million
to $228.0 million, which includes our estimates of
(a) damages payable to the plaintiff class; (b) the
amount we may be required to reimburse our insurance carriers
for amounts advanced for defense costs; and (c) future
defense costs. Accordingly, in the third quarter of fiscal year
2010, we recorded a charge for estimated damages in the amount
of $132.6 million, which, together with the existing
reserve of $44.5 million recorded in the second quarter of
fiscal year 2010, represents the mid-point of the estimated
range of damages payable to the plaintiffs, plus the other
estimated costs and expenses. We elected to record an amount
based on the mid-point of the range of damages payable to the
plaintiff class because under statistically valid modeling
techniques the mid-point of the range is in fact a more likely
estimate than other points in the range, and the point at which
there is an equal probability that the ultimate loss could be
toward the lower end or the higher end of the range.
We are evaluating our available options to challenge the jury
verdict or this ruling by the Court of Appeals. If we elect to
seek a rehearing
en banc
, or to petition for a writ of
certiorari for review by the U.S. Supreme Court, or to
pursue other relief, we will seek a stay of execution of the
judgment pending the resolution of any such action, and we
expect that we will be required to post a bond as a condition of
any such stay.
We believe we have adequate liquidity to fund the amount of any
likely required bond or, if necessary, the satisfaction of the
judgment.
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4.
|
University of Phoenix Program Review
. On
December 31, 2009, University of Phoenix received the
U.S. Department of Educations Program Review Report,
which was a preliminary report of the Departments
findings. We responded to the preliminary report in the third
quarter of fiscal year 2010. The Department issued its Final
Program Review Determination letter on June 16, 2010, which
confirmed we had completed the corrective actions and satisfied
the obligations arising from the review. Refer to Note 15,
Commitments and Contingencies, in Item 1,
Financial
Statements
, for additional information.
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5.
|
Western International University.
Western International
University was recertified by the U.S. Department of
Education in May 2010 and entered into a new Title IV
Program Participation Agreement which expires on
September 30, 2014. In addition, in April 2010, we
contributed all of the common stock of Western International
University, which was previously our wholly-owned subsidiary, to
Apollo Global. Refer to Note 4, Acquisitions, in
Item 1,
Financial Statements
, for further discussion.
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40
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
For a detailed discussion of our critical accounting policies
and estimates, please refer to our 2009 Annual Report on
Form 10-K.
Included below is an update for certain of our Critical
Accounting Policies and Estimates as of May 31, 2010.
Goodwill
and Intangible Assets
Goodwill represents the excess of the purchase price of an
acquired business over the amount assigned to the net assets
acquired and the assumed liabilities. Our goodwill by reportable
segment is summarized in the table below:
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Annual
|
|
Goodwill as of
|
|
|
Impairment Test
|
|
May 31,
|
|
August 31,
|
Reportable Segment Goodwill Balance Is Recorded In
|
|
Date
|
|
2010
|
|
2009
|
($ in thousands)
|
|
|
|
|
|
|
|
University of Phoenix
|
|
|
May 31
|
|
|
$
|
37,018
|
|
|
$
|
37,018
|
|
Apollo Global BPP
|
|
|
July 1
|
|
|
|
375,016
|
|
|
|
421,836
|
|
Apollo Global Other
|
|
|
|
|
|
|
|
|
|
|
|
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UNIACC
|
|
|
May 31
|
|
|
|
11,603
|
|
|
|
11,197
|
|
ULA
|
|
|
May 31
|
|
|
|
15,669
|
|
|
|
22,674
|
|
Western International
University
(1)
|
|
|
May 31
|
|
|
|
1,581
|
|
|
|
1,581
|
|
Other Schools
|
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|
|
|
|
|
|
|
|
|
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CFFP
|
|
|
August 31
|
|
|
|
15,310
|
|
|
|
15,310
|
|
Insight
Schools
(2)
|
|
|
May 31
|
|
|
|
3,342
|
|
|
|
12,742
|
|
|
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(1)
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As a result of contributing all of the common stock of Western
International University to Apollo Global during the third
quarter of fiscal year 2010, we are presenting Western
International University in the Apollo Global Other
reportable segment for all periods presented. Refer to
Note 4, Acquisitions, in Item 1,
Financial
Statements,
for further discussion.
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(2)
|
As of May 31, 2010, Insight Schools goodwill balance
is included in assets held for sale in our Condensed
Consolidated Balance Sheets. See further discussion below.
|
At May 31, 2010, we completed our annual goodwill and
indefinite-lived intangible asset impairment tests, as
applicable, for the following reporting units that have goodwill
impairment testing dates of May 31:
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University of Phoenix
|
|
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UNIACC
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ULA
|
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|
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Western International University
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Insight Schools
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At May 31, 2010, the fair value of our University of
Phoenix, UNIACC and Western International University reporting
units exceeded the carrying value of their respective net assets
by at least 40% resulting in no goodwill impairment. In
determining the fair value of these reporting units, we used a
discounted cash flow valuation method for our UNIACC reporting
unit and market multiple information of comparable sized
companies for our University of Phoenix and Western
International University reporting units. Additionally, we have
indefinite-lived intangible assets consisting of trademarks,
foreign regulatory accreditations and designations at our UNIACC
reporting unit totaling $4.7 million. At May 31, 2010,
we performed a fair value analysis of these indefinite-lived
intangible assets and determined there was no impairment.
For our ULA reporting unit, we used a discounted cash flow
valuation method to determine the fair value of the reporting
unit at May 31, 2010. ULA continues to delay the launch of
its online program due to challenges with developing and
designing the technology infrastructure to support the online
platform. We have considered these uncertainties in the future
cash flows used in our annual goodwill impairment test and
determined that the goodwill
41
balance was impaired. At May 31, 2010, we recorded an
$8.7 million impairment charge for ULAs goodwill. As
ULAs goodwill is not deductible for tax purposes, we did
not record a tax benefit associated with the goodwill impairment
charge. Additionally, we have indefinite-lived intangible assets
consisting of trademarks, foreign regulatory accreditations and
designations at our ULA reporting unit totaling
$2.5 million. At May 31, 2010, we performed a fair
value analysis of these indefinite-lived intangible assets and
determined there was no impairment.
We believe the assumptions used in the May 31 goodwill and
indefinite-lived intangible asset impairment tests for our
reporting units are consistent with those that would be used by
a market participant and employ the concept of highest and best
use of the asset. For our UNIACC and ULA reporting units, we
determined fair value using a discounted cash flow method and
account for the inherent risk in the respective reporting unit
by calculating scenarios, applying a reasonable weighting to
these scenarios and discounting the cash flows by a
risk-adjusted rate of return. Goodwill impairment tests are
subjective and require management to use considerable judgment
and estimates relating to future cash flows based on its
knowledge of the business and current operating plans, growth
rates, economic and market conditions, and the applicable
discount rate. Generally, the most critical assumptions and
estimates in determining the estimated fair value of our
reporting units relate to the amounts and timing of expected
future cash flows for each reporting unit, the probability
weightings and discount rate applied to those cash flows and
long-term growth rates. The expected future cash flows are based
on managements projection of revenues, gross margin,
operating costs considering planned business and operating
strategies over a long-term planning horizon. The discount rate
used by each reporting unit is based on our assumption of a
prudent investors required rate of return of assuming the
risk of investing in a particular company in a specific country.
Our goodwill impairment tests for UNIACC and ULA used discount
rates ranging from 15% to 15.5%. A 100 basis point change
in the discount rate would increase (decrease) the fair value by
approximately $9 million for UNIACC and $5 million for
ULA. The perpetual long-term growth rate reflects the
sustainable operating profit a reporting unit could generate in
a perpetual state as a function of revenue growth, inflation and
future margin expectations. Our goodwill impairment tests used
long-term growth rates of 5%. A 100 basis point change in
the long-term growth rate would increase (decrease) the fair
value by approximately $4 million for UNIACC and
$3 million for ULA. Please refer to our significant
accounting policies included in our 2009 Annual Report on
Form 10-K
for further discussion of the valuation techniques used to
estimate the fair value of our reporting units and
indefinite-lived intangible assets.
In the second quarter of fiscal year 2010, we began presenting
Insight Schools assets and liabilities as held for sale
and its operating results as discontinued operations. We
recorded a $9.4 million impairment of Insight Schools
goodwill during the second quarter of fiscal year 2010. As
Insight Schools goodwill is not deductible for tax
purposes, we did not record a tax benefit associated with the
goodwill impairment charge. At May 31, 2010, we revised our
fair value estimate for Insight Schools based on recent exit
price information received from engaging in non-binding
negotiations with an interested party which resulted in no
additional goodwill impairment. Refer to Note 3,
Discontinued Operations, in Item 1,
Financial
Statements
, for further discussion.
BPP
At May 31, 2010, our BPP reporting unit had goodwill and
intangible assets of $375.0 million and
$151.6 million, respectively. Our first annual goodwill and
indefinite-lived intangible asset impairment testing date for
BPP is July 1. Accordingly, we will perform this analysis
in the fourth quarter of fiscal year 2010. Although we believe
BPP has been temporarily adversely impacted by the economic
downturn since we acquired the business in the fourth quarter of
fiscal year 2009, we do not believe any material event or change
in circumstance has occurred that would require us to perform an
interim goodwill impairment test. Goodwill impairment tests are
subjective and require the use of considerable judgment and
estimates. Depending upon the outcome of our analysis in the
fourth quarter of fiscal year 2010 or in subsequent periods, we
may be required to record an impairment charge for a portion of
BPPs goodwill and intangible assets.
RECENT
ACCOUNTING PRONOUNCEMENTS
Please refer to Note 2, Significant Accounting Policies, in
Item 1,
Financial Statements
, for recent accounting
pronouncements.
42
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 three and nine months ended
May 31, 2010, compared to the prior periods in fiscal year
2009. Our operations are generally subject to seasonal trends.
We experience, and expect to continue to experience,
fluctuations in our results of operations as a result of
seasonal variations in the level of student enrollments and
timing of certification exams.
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University of Phoenix
University of
Phoenix enrolls students throughout the year, with its net
revenue generally lower in our second fiscal quarter (December
through February) than the other quarters due to holiday breaks
in December and January.
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BPP
BPP experiences significant
seasonality associated with the timing of when its courses begin
and exam dates, which generally results in considerably lower
net revenue in our second and, to an even greater degree, in our
fourth fiscal quarters as compared to the other quarters. As a
result, since the cost structure of BPP is relatively fixed,
BPPs profitability is substantially lower in the second
and fourth quarters.
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Other subsidiaries
Many of our other
subsidiaries experience significant seasonality, as they have
limited enrollment during their respective summer breaks and
winter holidays.
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We categorize our operating expenses as instructional costs and
services, selling and promotional, and general and
administrative.
|
|
|
|
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Instructional costs and services
consist
primarily of costs related to the delivery and administration of
our educational programs and include costs related to faculty
and administrative compensation, classroom and faculty
administration lease expenses and depreciation, bad debt
expense, financial aid processing costs and other related costs.
Tuition costs for all employees and their eligible family
members are recorded as an expense within instructional costs
and services.
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Selling and promotional costs
consist
primarily of compensation for enrollment counselors, management
and support staff and corporate marketing, advertising expenses,
production of marketing materials, and other costs directly
related to selling and promotional functions. Selling and
promotional costs are expensed when incurred.
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|
|
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General and administrative costs
consist
primarily of corporate compensation, occupancy costs,
depreciation and amortization of property and equipment, legal
and professional fees, and other related costs.
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43
For
the three months ended May 31, 2010 compared to the three
months ended May 31, 2009
Analysis
of Condensed Consolidated Statements of Income
The table below details our consolidated results of operations.
For a more detailed discussion by reportable segment, refer to
our
Analysis of Operating Results by Reportable Segment
.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
%
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Net revenue
|
|
$
|
1,337.4
|
|
|
$
|
1,047.6
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
27.7
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
540.6
|
|
|
|
390.6
|
|
|
|
40.4
|
%
|
|
|
37.3
|
%
|
|
|
38.4
|
%
|
Selling and promotional
|
|
|
273.5
|
|
|
|
241.3
|
|
|
|
20.4
|
%
|
|
|
23.0
|
%
|
|
|
13.3
|
%
|
General and administrative
|
|
|
79.7
|
|
|
|
70.9
|
|
|
|
6.0
|
%
|
|
|
6.8
|
%
|
|
|
12.4
|
%
|
Estimated litigation loss
|
|
|
132.6
|
|
|
|
|
|
|
|
9.9
|
%
|
|
|
0.0
|
%
|
|
|
*
|
|
Goodwill impairment
|
|
|
8.7
|
|
|
|
|
|
|
|
0.7
|
%
|
|
|
0.0
|
%
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,035.1
|
|
|
|
702.8
|
|
|
|
77.4
|
%
|
|
|
67.1
|
%
|
|
|
47.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
302.3
|
|
|
|
344.8
|
|
|
|
22.6
|
%
|
|
|
32.9
|
%
|
|
|
(12.3
|
%)
|
Interest income
|
|
|
0.8
|
|
|
|
2.4
|
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
(66.7
|
%)
|
Interest expense
|
|
|
(2.0
|
)
|
|
|
(0.5
|
)
|
|
|
(0.2
|
%)
|
|
|
0.0
|
%
|
|
|
*
|
|
Other, net
|
|
|
(1.3
|
)
|
|
|
1.8
|
|
|
|
(0.1
|
%)
|
|
|
0.2
|
%
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
299.8
|
|
|
|
348.5
|
|
|
|
22.4
|
%
|
|
|
33.3
|
%
|
|
|
(14.0
|
%)
|
Provision for income taxes
|
|
|
(122.4
|
)
|
|
|
(142.6
|
)
|
|
|
(9.1
|
%)
|
|
|
(13.6
|
%)
|
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
177.4
|
|
|
|
205.9
|
|
|
|
13.3
|
%
|
|
|
19.7
|
%
|
|
|
(13.8
|
%)
|
Income (loss) from discontinued operations, net of tax
|
|
|
2.1
|
|
|
|
(5.3
|
)
|
|
|
0.1
|
%
|
|
|
(0.6
|
%)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
179.5
|
|
|
|
200.6
|
|
|
|
13.4
|
%
|
|
|
19.1
|
%
|
|
|
(10.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to noncontrolling interests
|
|
|
(0.2
|
)
|
|
|
0.5
|
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Apollo
|
|
$
|
179.3
|
|
|
$
|
201.1
|
|
|
|
13.4
|
%
|
|
|
19.2
|
%
|
|
|
(10.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
Our net revenue increased $289.8 million, or 27.7%, in the
third quarter of fiscal year 2010 compared to the third quarter
of fiscal year 2009. University of Phoenixs 20.8% net
revenue growth was the primary contributor to the increase,
mainly due to its growth in Degreed Enrollment and selective
tuition price increases. Apollo Globals acquisition of BPP
also contributed $75.8 million, or 7.2 percentage
points, of the overall increase in net revenue in the third
quarter of fiscal year 2010 compared to the third quarter of
fiscal year 2009. For a more detailed discussion, refer to our
Analysis of Operating Results by Reportable Segment
.
Instructional
Costs and Services
Instructional costs and services increased $150.0 million,
or 38.4%, in the third quarter of fiscal year 2010 compared to
the third quarter of fiscal year 2009, which represents a
310 basis point increase as a percentage of net revenue.
The increase as a percentage of net revenue is primarily due to
BPPs cost structure, along with
start-up,
development and other infrastructure and support costs incurred
by Apollo Global, which have increased in scale with the
acquisition of BPP in the fourth quarter of fiscal year 2009.
The increase is also due to an increase in bad debt expense as a
percentage of net revenue due to decreases in University of
Phoenixs collection rates. Bad debt expense has increased
as a result of the economic downturn and an increase in the
proportion of our receivables that
44
are attributable to students enrolled in associates degree
programs. Our collection rates for students enrolled in our
associates degree programs are lower than for students
enrolled in bachelors and graduate level programs. Also,
students enrolled in associates degree programs generally
persist at lower rates than those in bachelors and
graduate level programs, resulting in higher bad debt rates for
students in associates degree programs. Our bad debt
expense was 5.4% of net revenue in the third quarter of fiscal
year 2010 compared to 3.4% of net revenue in the third quarter
of fiscal year 2009.
During the third quarter of fiscal year 2010, instructional
costs and services included a $5.0 million charge
associated with a state audit. Please refer to Note 15,
Commitments and Contingencies, in Item 1,
Financial
Statements
, for further discussion.
Selling
and Promotional
Selling and promotional increased $32.2 million, or 13.3%,
in the third quarter of fiscal year 2010 compared to the third
quarter of fiscal year 2009, but represents a 260 basis
point decrease as a percentage of net revenue. The increase in
expense mainly resulted from University of Phoenixs
investments in non-internet long-term branding and program
driven marketing initiatives. The decrease as a percentage of
net revenue is due in part to lower spending on internet
marketing for associates new enrollments, and BPPs
cost structure as BPP incurs lower selling and promotional costs
as a percentage of net revenue compared to our other businesses.
Improved enrollment counselor effectiveness at University of
Phoenix also contributed to the decrease as a percentage of net
revenue.
General
and Administrative
General and administrative increased $8.8 million, or
12.4%, in the third quarter of fiscal year 2010 compared to the
third quarter of fiscal year 2009, but represents an
80 basis point decrease as a percentage of net revenue. The
decrease as a percentage of net revenue is primarily due to a
reduction in legal costs in connection with defending ourselves
in legal matters as described in Note 15, Commitments and
Contingencies, in Item 1,
Financial Statements
. The
decrease is also due to a reduction in share-based compensation
as a percentage of net revenue.
Estimated
Litigation Loss
In connection with the Securities Class Action matter, we
recorded a charge of $132.6 million in the third quarter of
fiscal year 2010. See Note 15, Commitments and
Contingencies, in Item 1,
Financial Statements
, for
further discussion of this matter.
Goodwill
Impairment
We recorded an $8.7 million impairment of ULAs
goodwill during the third quarter of fiscal year 2010. Refer to
Critical Accounting Policies and Estimates
in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations for further discussion.
Interest
Income
Interest income decreased $1.6 million in the third quarter
of fiscal year 2010 compared to the third quarter of fiscal year
2009 primarily due to lower interest rate yields during the
respective periods.
Interest
Expense
Interest expense increased $1.5 million in the third
quarter of fiscal year 2010 compared to the third quarter of
fiscal year 2009 due to an increase in average borrowings
principally at subsidiaries of Apollo Global, and borrowings on
our syndicated $500 million credit agreement (the
Bank Facility) that were outstanding during the
third quarter of fiscal year 2010.
Other,
Net
Other, net in the third quarters of fiscal years 2010 and 2009
primarily consists of net foreign currency gains and losses
related to our international operations.
45
Provision
for Income Taxes
Our effective income tax rate for continuing operations for the
third quarter of fiscal year 2010 was 40.8% compared to 40.9%
for the third quarter of fiscal year 2009.
Recently, there have been a number of state law changes or
interpretations that have resulted in a larger portion of our
income generated from online operations being subject to state
income tax
and/or
increases in the statutory rate at which certain states impose
tax on our income. Given that a large majority of the states
currently face significant budget deficits, we anticipate that
additional states in which we are subject to income tax may
enact similar tax law changes in the relatively near future. We
are currently pursuing state tax initiatives that, if
successful, could result in a future reduction in our state
taxes.
Income
(Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations, net of tax, relates
to our Insight Schools business, which we classified as held for
sale and as discontinued operations in the second quarter of
fiscal year 2010. The income generated by Insight Schools during
the third quarter of fiscal year 2010 compared to the loss
during the third quarter of fiscal year 2009 was primarily due
to growth in net revenue resulting from increased enrollment in
the schools operated by Insight Schools. Please refer to
Note 3, Discontinued Operations, in Item 1,
Financial Statements
, for further discussion.
Analysis
of Operating Results by Reportable Segment
The table below details our operating results by reportable
segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
$
|
|
|
%
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
1,214.2
|
|
|
$
|
1,005.2
|
|
|
$
|
209.0
|
|
|
|
20.8
|
%
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
75.8
|
|
|
|
|
|
|
|
75.8
|
|
|
|
*
|
|
Other
(1)
|
|
|
19.0
|
|
|
|
16.6
|
|
|
|
2.4
|
|
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
94.8
|
|
|
|
16.6
|
|
|
|
78.2
|
|
|
|
*
|
|
Other Schools
|
|
|
27.0
|
|
|
|
24.7
|
|
|
|
2.3
|
|
|
|
9.3
|
%
|
Corporate
(2)
|
|
|
1.4
|
|
|
|
1.1
|
|
|
|
0.3
|
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,337.4
|
|
|
$
|
1,047.6
|
|
|
$
|
289.8
|
|
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
440.8
|
|
|
$
|
360.2
|
|
|
$
|
80.6
|
|
|
|
22.4
|
%
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
13.4
|
|
|
|
|
|
|
|
13.4
|
|
|
|
*
|
|
Other
(1)
|
|
|
(12.1
|
)
|
|
|
(3.0
|
)
|
|
|
(9.1
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
1.3
|
|
|
|
(3.0
|
)
|
|
|
4.3
|
|
|
|
*
|
|
Other Schools
|
|
|
5.8
|
|
|
|
2.7
|
|
|
|
3.1
|
|
|
|
114.8
|
%
|
Corporate
(2)
|
|
|
(145.6
|
)
|
|
|
(15.1
|
)
|
|
|
(130.5
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
302.3
|
|
|
$
|
344.8
|
|
|
$
|
(42.5
|
)
|
|
|
(12.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As a result of contributing all of the common stock of Western
International University to Apollo Global during the third
quarter of fiscal year 2010, we are presenting Western
International University in the Apollo Global Other
reportable segment for all periods presented. Refer to
Note 4, Acquisitions, in Item 1,
Financial
Statements
, for further discussion.
|
46
|
|
(2)
|
The Corporate caption in our segment reporting includes
adjustments to reconcile segment results to consolidated
results, which primarily consist of net revenue and corporate
charges that are not allocated to our segments. The operating
loss for Corporate in the three months ended May 31, 2010
includes the $132.6 million charge associated with the
Securities Class Action matter. See Note 15,
Commitments and Contingencies, in Item 1,
Financial
Statements
, for further discussion of this matter.
|
University
of Phoenix
The $209.0 million, or 20.8%, increase in net revenue in
our University of Phoenix segment was primarily due to growth in
its Degreed Enrollment as detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Degreed
Enrollment
(1)
|
|
|
|
New Degreed
Enrollment
(2)
|
|
|
|
Quarter Ended May 31,
|
|
|
%
|
|
|
|
Quarter Ended May 31,
|
|
|
%
|
|
(rounded to the nearest hundred)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
Associates
|
|
|
212,100
|
|
|
|
186,600
|
|
|
|
13.7
|
%
|
|
|
|
50,200
|
|
|
|
48,800
|
|
|
|
2.9
|
%
|
Bachelors
|
|
|
186,400
|
|
|
|
156,100
|
|
|
|
19.4
|
%
|
|
|
|
31,700
|
|
|
|
26,000
|
|
|
|
21.9
|
%
|
Masters
|
|
|
70,400
|
|
|
|
71,200
|
|
|
|
(1.1
|
%)
|
|
|
|
11,300
|
|
|
|
11,900
|
|
|
|
(5.0
|
%)
|
Doctoral
|
|
|
7,600
|
|
|
|
6,800
|
|
|
|
11.8
|
%
|
|
|
|
900
|
|
|
|
800
|
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
476,500
|
|
|
|
420,700
|
|
|
|
13.3
|
%
|
|
|
|
94,100
|
|
|
|
87,500
|
|
|
|
7.5
|
%
|
|
|
(1)
|
Degreed Enrollment for a quarter represents individual students
enrolled in a University of Phoenix degree program who attended
a course during the quarter and did not graduate as of the end
of the quarter. Degreed Enrollment for a quarter also includes
any student who previously graduated from one degree program and
started a new degree program in the quarter (for example, a
graduate of the associates degree program returns for a
bachelors degree or a bachelors degree graduate
returns for a masters degree). In addition, Degreed
Enrollment includes students participating in University of
Phoenix certificate programs of at least 18 credit hours with
some course applicability into a related degree program.
|
|
(2)
|
New Degreed Enrollment for a quarter represents any individual
student enrolled in a University of Phoenix degree program who
is a new student and started a course in the quarter, any
individual student who previously graduated from one degree
program and started a new degree program in the quarter (for
example, a graduate of an associates degree program
returns for a bachelors degree program, or a graduate of a
bachelors degree program returns for a masters
degree), as well as any individual student who started a degree
program in the quarter and had been out of attendance for
greater than 12 months. In addition, New Degreed Enrollment
includes students who in the quarter started participating in
University of Phoenix certificate programs of at least 18 credit
hours in length with some course applicability into a related
degree program.
|
We believe the enrollment growth is primarily attributable to
the following:
|
|
|
|
|
Enhancements in our marketing capabilities, along with continued
investments in enhancing and expanding University of Phoenix
service offerings and academic quality.
|
|
|
|
Economic uncertainties, as working learners seek to advance
their education to improve their job security or reemployment
prospects. This element of our growth may diminish as the
economy and the employment outlook improve in the U.S.
|
|
|
|
One additional online course start date for associates
degree courses compared to the third quarter of fiscal year 2009.
|
Offsetting some of this growth are our efforts to better
identify and enroll students who are willing to put in the
effort to succeed in our rigorous programs. Contributing to this
effort are refinements in our marketing strategy, including
leveraging our marketing analytics to identify and enroll those
prospective students and our University Orientation pilot
program. Decreased enrollment in masters degree programs
also offsets this growth. For further discussion of University
Orientation, refer to
Overview
in this Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
47
In addition to the growth in Degreed Enrollment, net revenue
increased due to selective tuition price and other fee changes
implemented in July 2009, which varied by geographic area,
program, and degree level. In the aggregate, these selective
price and other fee changes, including increases in discounts
for military and veteran students, averaged approximately 4%.
We also have announced selective tuition price and other fee
changes at University of Phoenix depending on geographic area,
program, and degree level that will be effective July 1,
2010. In aggregate, these tuition price and other fee changes,
including increased discounts to military and other veteran
students in selective programs, will generally be in the range
of 4-6%. The impact on future net revenue and operating income
will continue to be impacted by these price and other fee
changes, along with changes in enrollment, student mix within
programs and degree levels, and discounts.
Operating income in our University of Phoenix segment increased
$80.6 million, or 22.4%, during the third quarter of fiscal
year 2010 compared to the third quarter of fiscal year 2009.
This increase was primarily attributable to the following:
|
|
|
|
|
The 20.8% increase in University of Phoenix net revenue;
|
|
|
|
Variable employee headcount has grown at a lower rate than the
increase in net revenue; and
|
|
|
|
An increase in enrollment counselor effectiveness as a result of
internal initiatives.
|
The above factors were partially offset by increased bad debt
expense as a percentage of net revenue due to decreases in
University of Phoenixs collection rates. Bad debt expense
has increased as a result of the economic downturn and an
increase in the proportion of our receivables that are
attributable to students enrolled in associates degree
programs. Our collection rates for students enrolled in our
associates degree programs are lower than for students
enrolled in bachelors and graduate level programs. Also,
students enrolled in associates degree programs generally
persist at lower rates than those in bachelors and
graduate level programs, resulting in higher bad debt rates for
students in associates degree programs.
Apollo
Global
Net revenue in our Apollo Global segment increased
$78.2 million during the third quarter of fiscal year 2010
compared to the third quarter of fiscal year 2009. The increase
was due to Apollo Globals acquisition of BPP during the
fourth quarter of fiscal year 2009, which contributed
$75.8 million in net revenue in the third quarter of fiscal
year 2010.
Our Apollo Global segment generated $1.3 million of
operating income during the third quarter of fiscal year 2010
compared to a $3.0 million operating loss during the third
quarter of fiscal year 2009 primarily due to BPPs
$13.4 million of operating income during the third quarter
of fiscal year 2010 and no contribution in the third quarter of
fiscal year 2009 since the acquisition of BPP did not occur
until the fourth quarter of fiscal year 2009. BPP experiences
significant seasonality associated with the timing of when its
courses begin and exam dates, which generally results in
considerably lower net revenue in our second and, to an even
greater degree, in our fourth fiscal quarters as compared to the
other quarters. As a result, since the cost structure of BPP,
including amortization of intangibles, is relatively fixed,
BPPs profitability is substantially lower in the second
and fourth quarters.
The increase in operating income for the Apollo Global segment
was partially offset by the following:
|
|
|
|
|
The $8.7 million ULA goodwill impairment. Please refer to
Note 6, Goodwill and Intangible Assets, in Item 1,
Financial Statements
, for further discussion.
|
|
|
|
Certain investments in BPP associated with the integration
process and an adverse impact on BPPs operations from the
global economic downturn.
|
|
|
|
Investment in Western International University, UNIACC and ULA
including, but not limited to, initiatives to enhance academic
quality and grow the respective brands.
|
48
Other
Schools
The increase in net revenue and operating income in our Other
Schools segment during the third quarter of fiscal year 2010
compared to the third quarter of fiscal year 2009 was primarily
due to a contract termination fee earned by IPD during the third
quarter of fiscal year 2010.
For
the nine months ended May 31, 2010 compared to the nine
months ended May 31, 2009
Analysis
of Condensed Consolidated Statements of Operations
The table below details our consolidated results of operations.
For a more detailed discussion by reportable segment, refer to
our
Analysis of Operating Results by Reportable Segment
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
|
|
|
|
|
|
|
% of Net Revenue
|
|
|
%
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Net revenue
|
|
$
|
3,666.4
|
|
|
$
|
2,880.4
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
27.3
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
1,577.4
|
|
|
|
1,124.0
|
|
|
|
43.0
|
%
|
|
|
39.0
|
%
|
|
|
40.3
|
%
|
Selling and promotional
|
|
|
811.1
|
|
|
|
692.2
|
|
|
|
22.2
|
%
|
|
|
24.0
|
%
|
|
|
17.2
|
%
|
General and administrative
|
|
|
223.7
|
|
|
|
198.2
|
|
|
|
6.1
|
%
|
|
|
6.9
|
%
|
|
|
12.9
|
%
|
Estimated litigation loss
|
|
|
177.1
|
|
|
|
|
|
|
|
4.8
|
%
|
|
|
0.0
|
%
|
|
|
*
|
|
Goodwill impairment
|
|
|
8.7
|
|
|
|
|
|
|
|
0.2
|
%
|
|
|
0.0
|
%
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,798.0
|
|
|
|
2,014.4
|
|
|
|
76.3
|
%
|
|
|
69.9
|
%
|
|
|
38.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
868.4
|
|
|
|
866.0
|
|
|
|
23.7
|
%
|
|
|
30.1
|
%
|
|
|
0.3
|
%
|
Interest income
|
|
|
2.3
|
|
|
|
11.2
|
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
|
|
(79.5
|
%)
|
Interest expense
|
|
|
(8.1
|
)
|
|
|
(2.6
|
)
|
|
|
(0.2
|
%)
|
|
|
(0.1
|
%)
|
|
|
*
|
|
Other, net
|
|
|
(2.1
|
)
|
|
|
(0.8
|
)
|
|
|
(0.1
|
%)
|
|
|
0.0
|
%
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
860.5
|
|
|
|
873.8
|
|
|
|
23.5
|
%
|
|
|
30.3
|
%
|
|
|
(1.5
|
%)
|
Provision for income taxes
|
|
|
(341.4
|
)
|
|
|
(357.1
|
)
|
|
|
(9.3
|
%)
|
|
|
(12.4
|
%)
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
519.1
|
|
|
|
516.7
|
|
|
|
14.2
|
%
|
|
|
17.9
|
%
|
|
|
0.5
|
%
|
Loss from discontinued operations, net of tax
|
|
|
(8.9
|
)
|
|
|
(10.7
|
)
|
|
|
(0.3
|
%)
|
|
|
(0.3
|
%)
|
|
|
16.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
510.2
|
|
|
|
506.0
|
|
|
|
13.9
|
%
|
|
|
17.6
|
%
|
|
|
0.8
|
%
|
Net loss attributable to noncontrolling interests
|
|
|
1.8
|
|
|
|
0.8
|
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Apollo
|
|
$
|
512.0
|
|
|
$
|
506.8
|
|
|
|
14.0
|
%
|
|
|
17.6
|
%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
Our net revenue increased $786.0 million, or 27.3% in the
first nine months of fiscal year 2010 compared to the first nine
months of fiscal year 2009. University of Phoenixs 20.6%
net revenue growth was the primary contributor to the increase,
mainly due to its growth in Degreed Enrollment and selective
tuition price increases. Apollo Globals acquisition of BPP
also contributed $218.1 million, or 7.6 percentage
points, of the overall increase in net revenue in the first nine
months of fiscal year 2010 compared to the first nine months of
fiscal year 2009. For a more detailed discussion, refer to our
Analysis of Operating Results by Reportable Segment
.
Instructional
Costs and Services
Instructional costs and services increased $453.4 million,
or 40.3%, in the first nine months of fiscal year 2010 compared
to the first nine months of fiscal year 2009, which represents a
400 basis point increase as a percentage of
49
net revenue. The increase as a percentage of net revenue is
primarily due to BPPs cost structure, along with
start-up,
development and other infrastructure and support costs incurred
by Apollo Global, which have increased in scale with the
acquisition of BPP in the fourth quarter of fiscal year 2009.
The increase is also due to an increase in bad debt expense as a
percentage of net revenue due to decreases in University of
Phoenixs collection rates. Bad debt expense has increased
as a result of the economic downturn and an increase in the
proportion of our receivables that are attributable to students
enrolled in associates degree programs. Our collection
rates for students enrolled in our associates degree
programs are lower than for students enrolled in bachelors
and graduate level programs. Also, students enrolled in
associates degree programs generally persist at lower
rates than those in bachelors and graduate level programs,
resulting in higher bad debt rates for students in
associates degree programs. Our bad debt expense was 5.7%
of net revenue in the first nine months of fiscal year 2010
compared to 3.7% of net revenue in the first nine months of
fiscal year 2009.
During the third quarter of fiscal year 2010, instructional
costs and services included a $5.0 million charge
associated with a state audit. Please refer to Note 15,
Commitments and Contingencies, in Item 1,
Financial
Statements
, for further discussion.
Selling
and Promotional
Selling and promotional increased $118.9 million, or 17.2%,
in the first nine months of fiscal year 2010 compared to the
first nine months of fiscal year 2009, but represents a
180 basis point decrease as a percentage of net revenue.
The increase in expense mainly resulted from University of
Phoenixs investments in non-internet long-term branding
and program driven marketing initiatives. The decrease as a
percentage of net revenue is due in part to lower spending on
internet marketing for associates new enrollments, and
BPPs cost structure as BPP incurs lower selling and
promotional costs as a percentage of net revenue compared to our
other businesses. Improved enrollment counselor effectiveness at
University of Phoenix also contributed to the decrease as a
percentage of net revenue.
General
and Administrative
General and administrative increased $25.5 million, or
12.9%, in the first nine months of fiscal year 2010 compared to
the first nine months of fiscal year 2009, but represents an
80 basis point decrease as a percentage of net revenue. The
decrease as a percentage of net revenue is primarily due to the
following:
|
|
|
|
|
a reduction in legal costs in connection with defending
ourselves in legal matters as described in Note 15,
Commitments and Contingencies, in Item 1,
Financial
Statements
;
|
|
|
|
expense in the first nine months of fiscal year 2009 resulting
from our internal review of certain Satisfactory Academic
Progress calculations; and
|
|
|
|
a reduction in share-based compensation as a percentage of net
revenue.
|
Estimated
Litigation Loss
In connection with the Securities Class Action matter, we
recorded charges of $44.5 million and $132.6 million
in the second and third quarters of fiscal year 2010,
respectively. See Note 15, Commitments and Contingencies,
in Item 1,
Financial Statements
, for further
discussion of this matter.
Goodwill
Impairment
We recorded an $8.7 million impairment of ULAs
goodwill during the third quarter of fiscal year 2010. Refer to
Critical Accounting Policies and Estimates
in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations for further discussion.
Interest
Income
Interest income decreased $8.9 million in the first nine
months of fiscal year 2010 compared to the first nine months of
fiscal year 2009 primarily due to lower interest rate yields
during the respective periods.
50
Interest
Expense
Interest expense increased $5.5 million in the first nine
months of fiscal year 2010 compared to the first nine months of
fiscal year 2009 due to an increase in average borrowings
principally at subsidiaries of Apollo Global, and borrowings on
our Bank Facility that were outstanding during the first nine
months of fiscal year 2010.
Other,
Net
Other, net in the first nine months of fiscal years 2010 and
2009 primarily consists of net foreign currency gains and losses
related to our international operations.
Provision
for Income Taxes
Our effective income tax rate for continuing operations for the
first nine months of fiscal year 2010 was 39.7% compared to
40.9% for the first nine months of fiscal year 2009. The
decrease was primarily attributable to the tax benefit of
$11.4 million recorded in the first quarter of fiscal year
2010 associated with our settlement of a dispute with the
Internal Revenue Service relating to the deduction of certain
stock option compensation on our U.S. federal income tax
returns beginning in fiscal year 2003. Refer to Note 11,
Income Taxes, in Item 1,
Financial Statements
, for
additional information. This was partially offset by an increase
in state taxes.
Recently, there have been a number of state law changes or
interpretations that have resulted in a larger portion of our
income generated from online operations being subject to state
income tax
and/or
increases in the statutory rate at which certain states impose
tax on our income. Given that a large majority of the states
currently face significant budget deficits, we anticipate that
additional states in which we are subject to income tax may
enact similar tax law changes in the relatively near future. We
are currently pursuing state tax initiatives that, if
successful, could result in a future reduction in our state
taxes.
Loss from
Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax, relates to our
Insight Schools business, which we classified as held for sale
and as discontinued operations in the second quarter of fiscal
year 2010. The decrease in the loss from discontinued
operations, net of tax, during the first nine months of fiscal
year 2010 compared to the first nine months of fiscal year 2009
was primarily due to growth in net revenue resulting from
increased enrollment in the schools operated by Insight Schools.
This was partially offset by an impairment of Insight
Schools goodwill of $9.4 million recorded in the
second quarter of fiscal year 2010. Please refer to Note 3,
Discontinued Operations, in Item 1,
Financial
Statements
, for further discussion.
51
Analysis
of Operating Results by Reportable Segment
The table below details our operating results by reportable
segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
3,314.0
|
|
|
$
|
2,747.7
|
|
|
$
|
566.3
|
|
|
|
20.6
|
%
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
218.1
|
|
|
|
|
|
|
|
218.1
|
|
|
|
*
|
|
Other
(1)
|
|
|
59.8
|
|
|
|
58.4
|
|
|
|
1.4
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
277.9
|
|
|
|
58.4
|
|
|
|
219.5
|
|
|
|
*
|
|
Other Schools
|
|
|
73.1
|
|
|
|
71.6
|
|
|
|
1.5
|
|
|
|
2.1
|
%
|
Corporate
(2)
|
|
|
1.4
|
|
|
|
2.7
|
|
|
|
(1.3
|
)
|
|
|
(48.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
3,666.4
|
|
|
$
|
2,880.4
|
|
|
$
|
786.0
|
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
|
$
|
1,078.2
|
|
|
$
|
900.4
|
|
|
$
|
177.8
|
|
|
|
19.7
|
%
|
Apollo Global:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPP
|
|
|
18.2
|
|
|
|
|
|
|
|
18.2
|
|
|
|
*
|
|
Other
(1)
|
|
|
(21.1
|
)
|
|
|
(4.1
|
)
|
|
|
(17.0
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apollo Global
|
|
|
(2.9
|
)
|
|
|
(4.1
|
)
|
|
|
1.2
|
|
|
|
*
|
|
Other Schools
|
|
|
7.6
|
|
|
|
5.8
|
|
|
|
1.8
|
|
|
|
31.0
|
%
|
Corporate
(2)
|
|
|
(214.5
|
)
|
|
|
(36.1
|
)
|
|
|
(178.4
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
868.4
|
|
|
$
|
866.0
|
|
|
$
|
2.4
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As a result of contributing all of the common stock of Western
International University to Apollo Global during the third
quarter of fiscal year 2010, we are presenting Western
International University in the Apollo Global Other
reportable segment for all periods presented. Refer to
Note 4, Acquisitions, in Item 1,
Financial
Statements
, for further discussion.
|
|
(2)
|
The Corporate caption in our segment reporting includes
adjustments to reconcile segment results to consolidated
results, which primarily consist of net revenue and corporate
charges that are not allocated to our segments. The operating
loss for Corporate in the first nine months of fiscal year 2010
includes the $177.1 million charge associated with the
Securities Class Action matter. See Note 15,
Commitments and Contingencies, in Item 1,
Financial
Statements
, for further discussion of this matter.
|
University
of Phoenix
The $566.3 million, or 20.6%, increase in net revenue in
our University of Phoenix segment was primarily due to growth in
Degreed Enrollment and selective tuition price increases
implemented in July 2009, which varied by geographic area,
program, and degree level. In the aggregate, these selective
price and other fee changes, including increases in discounts
for military and veteran students, averaged approximately 4%.
The impact on future net revenue and operating income will
continue to be impacted by these price and other fee changes,
along with changes in enrollment, student mix within programs
and degree levels, and discounts. The increase in net revenue
was partially offset by a continued shift in student body mix to
a higher percentage of students enrolled in associates
degree programs, which have tuition prices generally lower than
other degree programs.
We have announced selective tuition price and other fee changes
at University of Phoenix depending on geographic area, program,
and degree level that will be effective July 1, 2010. In
aggregate, these tuition price and other fee
52
changes, including increased discounts to military and other
veteran students in selective programs, will generally be in the
range of 4-6%. The impact on future net revenue and operating
income will continue to be impacted by these price and other fee
changes, along with changes in enrollment, student mix within
programs and degree levels, and discounts.
Operating income in our University of Phoenix segment increased
$177.8 million, or 19.7%, during the first nine months of
fiscal year 2010 compared to the first nine months of fiscal
year 2009. This increase was primarily attributable to the
following:
|
|
|
|
|
The 20.6% increase in University of Phoenix net revenue;
|
|
|
|
Variable employee headcount has grown at a lower rate than the
increase in net revenue; and
|
|
|
|
An increase in enrollment counselor effectiveness as a result of
internal initiatives.
|
The above factors were partially offset by increased bad debt
expense as a percentage of net revenue due to decreases in
University of Phoenixs collection rates. Bad debt expense
has increased as a result of the economic downturn and an
increase in the proportion of our receivables that are
attributable to students enrolled in associates degree
programs. Our collection rates for students enrolled in our
associates degree programs are lower than for students
enrolled in bachelors and graduate level programs. Also,
students enrolled in associates degree programs generally
persist at lower rates than those in bachelors and
graduate level programs, resulting in higher bad debt rates for
students in associates degree programs.
Apollo
Global
Net revenue in our Apollo Global segment increased
$219.5 million during the first nine months of fiscal year
2010 compared to the first nine months of fiscal year 2009. The
increase was due to Apollo Globals acquisition of BPP
during the fourth quarter of fiscal year 2009, which contributed
$218.1 million in net revenue in the first nine months of
fiscal year 2010.
Operating loss in our Apollo Global segment decreased
$1.2 million during the first nine months of fiscal year
2010 compared to the first nine months of fiscal year 2009
primarily due to BPPs $18.2 million of operating
income during the first nine months of fiscal year 2010 and no
contribution in the first nine months of fiscal year 2009 since
the acquisition of BPP did not occur until the fourth quarter of
fiscal year 2009. BPP experiences significant seasonality
associated with the timing of when its courses begin and exam
dates, which generally results in considerably lower net revenue
in our second and, to an even greater degree, in our fourth
fiscal quarters as compared to the other quarters. As a result,
since the cost structure of BPP, including amortization of
intangibles, is relatively fixed, BPPs profitability is
substantially lower in the second and fourth quarters.
The decrease in operating loss was partially offset by the
following:
|
|
|
|
|
The $8.7 million ULA goodwill impairment. Please refer to
Note 6, Goodwill and Intangible Assets, in Item 1,
Financial Statements
, for further discussion.
|
|
|
|
Certain investments in BPP associated with the integration
process and an adverse impact on BPPs operations from the
global economic downturn.
|
|
|
|
Investment in Western International University, UNIACC and ULA
including, but not limited to, initiatives to enhance academic
quality and grow the respective brands.
|
Other
Schools
The increase in net revenue and operating income in our Other
Schools segment the first nine months of fiscal year 2010
compared to the first nine months of fiscal year 2009 was
primarily due to a contract termination fee earned by IPD during
the third quarter of fiscal year 2010.
53
LIQUIDITY,
CAPITAL RESOURCES, AND FINANCIAL POSITION
We believe that our cash and cash equivalents and available
liquidity will be adequate to satisfy our working capital and
other liquidity requirements associated with our existing
operations through at least the next 12 months. We believe
that the most strategic uses of our cash resources include
investments in the continued enhancement and expansion of our
student offerings, share repurchases, acquisition opportunities
including our commitment to Apollo Global, and investments in
marketing and information technology initiatives. Additionally,
we may be required to post a bond to stay enforcement of the
judgment in our Securities Class Action matter or pay
damages awarded in that action.
Cash and
Cash Equivalents and Restricted Cash and Cash
Equivalents
The following table provides a summary of our cash and cash
equivalents and restricted cash and cash equivalents at
May 31, 2010 and August 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Assets
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
|
May 31,
|
|
|
August 31,
|
|
|
%
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Cash and cash equivalents
|
|
$
|
892.0
|
|
|
$
|
968.2
|
|
|
|
28.1
|
%
|
|
|
29.7
|
%
|
|
|
(7.9
|
%)
|
Restricted cash and cash equivalents
|
|
|
482.2
|
|
|
|
432.3
|
|
|
|
15.2
|
%
|
|
|
13.2
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,374.2
|
|
|
$
|
1,400.5
|
|
|
|
43.3
|
%
|
|
|
42.9
|
%
|
|
|
(1.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (excluding restricted cash) decreased
$76.2 million primarily due to $407.0 million used for
net payments on borrowings, $341.2 million used for the
repurchase of shares of our Class A common stock,
$108.3 million used for capital expenditures, and a
$49.9 million increase in restricted cash, which was
partially offset by $804.8 million of cash generated from
operations. Cash generated from operations was negatively
impacted by our $80.5 million settlement payment, including
legal fees, for the
Incentive Compensation False Claims Act
Lawsuit
.
Subsequent to May 31, 2010, the Ninth Circuit Court of
Appeals reversed a prior ruling of the District Court for the
District of Arizona in which the District Court vacated a jury
verdict in favor of the plaintiff in the Securities Class Action
matter described in Note 15, Commitments and Contingencies,
in Item 1,
Financial Statements
. The Court of
Appeals ordered the District Court to enter judgment for the
plaintiff in accordance with the prior jury verdict. We are
evaluating our available options to challenge the verdict or the
ruling by the Court of Appeals. If we elect to seek a review of
the appellate courts decision or other relief, we will
seek a stay of execution of the judgment pending the resolution
of any such action, and we expect that we will be required to
post a bond as a condition of any such stay. We have estimated
for financial reporting purposes, using statistically valid
models and a 60% confidence interval, that the damages could
range from $127.2 million to $228.0 million, which
includes our estimates of (a) damages payable to the
plaintiff class; (b) the amount we may be required to
reimburse our insurance carriers for amounts advanced for
defense costs (approximately $23.2 million); and
(c) future defense costs.
Subsequent to May 31, 2010, we posted a letter of credit in
the amount of approximately $126 million as required in
connection with a program review of University of Phoenix by the
U.S. Department of Education. The letter of credit is fully
cash collateralized and must be maintained until at least
June 30, 2012. Refer to Note 15, Commitments and
Contingencies, in Item 1,
Financial Statements
, for
additional information.
We measure our money market funds included in cash and
restricted cash equivalents at fair value. Our money market
funds totaling $1,374.2 million were valued primarily using
real-time quotes for transactions in active exchange markets
involving identical assets. As of May 31, 2010, we did not
record any material adjustments to reflect these instruments at
fair value.
For further discussion of our fair value measurements recorded
at fair value on a recurring and non-recurring basis, Refer to
Note 7, Fair Value Measurements, in Item 1,
Financial Statements
.
54
Debt
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 available 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, expiring 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.
As of August 31, 2009, we borrowed our entire credit line
under the Bank Facility, which included £63.0 million
denominated in British Pounds (equivalent to $91.5 million
and $102.6 million U.S. dollars as of May 31,
2010 and August 31, 2009, respectively) related to the BPP
acquisition. We repaid the U.S. dollar denominated debt on
our Bank Facility of $393 million during the first quarter
of fiscal year 2010.
The Bank Facility fees are determined based on a pricing grid
that varies according to our leverage ratio. The Bank Facility
fee ranges from 12.5 to 17.5 basis points and the
incremental fees for borrowings under the facility range from
LIBOR + 50.0 to 82.5 basis points. The weighted average
interest rate on outstanding borrowings under the Bank Facility
at May 31, 2010 was 1.1%.
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
U.S. Department of Education financial responsibility
composite score. In addition, there are covenants restricting
indebtedness, liens, investments, asset transfers and
distributions. We were in compliance with all covenants related
to the Bank Facility at May 31, 2010.
Other debt includes $57.1 million of variable rate debt and
$12.2 million of fixed rate debt at the subsidiaries of
Apollo Global. The weighted average interest rate of these debt
instruments at May 31, 2010 was 4.7%.
Cash
Flows
Operating
Activities
The following table provides a summary of our operating cash
flows during the respective periods:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
Net income
|
|
$
|
510.2
|
|
|
$
|
506.0
|
|
Non-cash items
|
|
|
471.8
|
|
|
|
221.1
|
|
Changes in certain operating assets and liabilities
|
|
|
(177.2
|
)
|
|
|
82.7
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
804.8
|
|
|
$
|
809.8
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2010
Our
non-cash items primarily consisted of a $208.6 million
provision for uncollectible accounts receivable, a
$177.1 million charge associated with the Securities
Class Action matter, $98.1 million of depreciation and
amortization, $46.2 million of share-based compensation and
goodwill impairments totaling $18.1 million. These items
were partially offset by $69.6 million of deferred taxes.
The changes in certain operating assets and liabilities
primarily consisted of a $175.8 million increase in gross
accounts receivable primarily due to increased enrollment and
lower collection rates on aged receivables, and a
$59.4 million decrease in accounts payable and accrued
liabilities due to our $80.5 million settlement payment,
including legal fees, for the
Incentive Compensation False
Claims Act Lawsuit
. These items were partially offset by
increases in income taxes payable and other liabilities of
$35.2 million and $24.4 million, respectively.
Nine Months Ended May 31, 2009
Our
non-cash items primarily consisted of a $106.9 million
provision for uncollectible accounts receivable,
$72.9 million for depreciation and amortization, and
$49.4 million for share-based compensation, which was
partially offset by $11.5 million of excess tax benefits
from share-based compensation. The changes in certain operating
assets and liabilities primarily consisted of increases in
student deposits and deferred revenue of $92.4 million and
$33.5 million, respectively, primarily due to increased
enrollment and a higher percentage of students receiving
financial aid, a $23.8 million increase in income taxes
55
payable, and a $19.7 million increase in accounts payable
and accrued liabilities. This was partially offset by a
$81.7 million increase in accounts receivable.
We monitor our accounts receivable through a variety of metrics,
including days sales outstanding. We calculate our days sales
outstanding by determining average daily student revenue based
on a rolling 12 month analysis and divide it into the gross
student accounts receivable balance as of the end of the period.
As of May 31, 2010, excluding accounts receivable and the
related net revenue for Apollo Global, our days sales
outstanding was 30 days, as compared to 32 days as of
August 31, 2009, and 24 days as of May 31, 2009.
The increase in days sales outstanding as compared to
May 31, 2009 is primarily due to increases in gross
accounts receivable due to decreases in University of
Phoenixs collection rates and the effects of certain
operational changes. Collection rates have declined as a result
of the economic downturn and an increase in the proportion of
our receivables that are attributable to students enrolled in
associates degree programs.
Investing
Activities
The following table provides a summary of our investing cash
flows during the respective periods:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
Capital expenditures
|
|
$
|
(108.3
|
)
|
|
$
|
(94.9
|
)
|
Increase in restricted cash and cash equivalents
|
|
|
(49.9
|
)
|
|
|
(105.5
|
)
|
Other
|
|
|
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(158.2
|
)
|
|
$
|
(197.7
|
)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2010
Cash used
for investing activities primarily consisted of
$108.3 million used for capital expenditures that primarily
relates to investments in our computer equipment and software,
and a $49.9 million increase in restricted cash and cash
equivalents principally due to increased student deposits
associated with students receiving financial aid.
Nine Months Ended May 31, 2009
Cash used
for investing activities primarily consisted of a
$105.5 million increase in restricted cash and cash
equivalents as a result of increased student deposits and
$94.9 million for capital expenditures that primarily
relate to investments in our computer equipment and software.
Financing
Activities
The following table provides a summary of our financing cash
flows during the respective periods:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
Payments on borrowings, net
|
|
$
|
(407.0
|
)
|
|
$
|
(2.6
|
)
|
Apollo Class A common stock purchased for treasury
|
|
|
(341.2
|
)
|
|
|
(408.8
|
)
|
Issuance of Apollo Class A common stock
|
|
|
18.2
|
|
|
|
99.0
|
|
Other
|
|
|
9.0
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
$
|
(721.0
|
)
|
|
$
|
(298.9
|
)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2010
Cash used
in financing activities primarily consisted of
$407.0 million used for net payments on borrowings and
$341.2 million used for the repurchase of our Class A
common stock, which was partially offset by $18.2 million
provided by stock option exercises and shares issued under our
employee stock purchase plan.
Nine Months Ended May 31, 2009
Cash used
in financing activities primarily consisted of
$408.8 million used for the repurchase of our Class A
common stock, which was partially offset by $99.0 million
provided by stock option exercises and shares issued under our
employee stock purchase plan.
56
Subsequent to May 31, 2010, we repurchased an additional
2.0 million shares of our Class A common stock for
$100.0 million representing a weighted average purchase
price of $49.76 per share. Including these purchases, we have
repurchased 7.9 million shares for $439.3 million
during fiscal year 2010 and $560.7 million remains
available under our share repurchase authorization.
Contractual
Obligations and Other Commercial Commitments
During the first nine months of fiscal year 2010, we had the
following material changes in our contractual obligations and
other commercial commitments:
|
|
|
|
|
We repaid the U.S. dollar denominated debt on our Bank
Facility of $393 million; and
|
|
|
|
Our total liability for uncertain tax benefits, including
interest and penalties, decreased $13.1 million primarily
due to our settlement of an Internal Revenue Service audit.
Refer to Note 11, Income Taxes, in Item 1,
Financial Statements
, for additional information.
|
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 2009
through May 31, 2010. Information regarding our contractual
obligations and commercial commitments is provided in our 2009
Annual Report on
Form 10-K.
57
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
Impact of
Inflation
Inflation has not had a significant impact on our historical
operations.
Foreign
Currency Exchange Risk
We use the U.S. dollar as our reporting currency. The
functional currencies of our foreign subsidiaries are generally
the local currencies. Accordingly, our foreign currency exchange
risk is related to the following exposure areas:
|
|
|
|
|
Adjustments resulting from the translation of assets and
liabilities of the foreign subsidiaries into U.S. dollars
using exchange rates in effect at the balance sheet dates. These
translation adjustments are recorded in accumulated other
comprehensive income (loss);
|
|
|
|
Earnings volatility from the translation of income and expense
items of the foreign subsidiaries using an average monthly
exchange rate for the respective periods; and
|
|
|
|
Gains and losses resulting from foreign currency exchange rate
changes related to intercompany receivables and payables that
are not of a long-term investment nature, as well as gains and
losses from foreign currency transactions. These items are
recorded in Other, net in our Condensed Consolidated Statements
of Income.
|
During the first nine months of fiscal year 2010, we recorded
$41.9 million in net foreign currency translation losses,
net of tax, that are included in other comprehensive income.
These losses are primarily the result of the strengthening of
the U.S. dollar relative to the British Pound during the
first nine months of fiscal year 2010.
As we expand our international operations, we will conduct more
transactions in currencies other than the U.S. Dollar.
Additionally, we expect the volume of transactions in the
various foreign currencies will continue to increase, thus
increasing our exposure to foreign currency exchange rate
fluctuations.
Interest
Rate Risk
Interest
Income
As of May 31, 2010, we held $1,393.8 million in cash
and cash equivalents, restricted cash and cash equivalents, and
marketable securities. During the nine months ended May 31,
2010, we earned interest income of $2.3 million. When the
Federal Reserve Bank lowers the Federal Funds Rate, it generally
results in a reduction in our interest rates. The reduction of
the Federal Funds Rate in December 2008 to the range of
0.0% 0.25% has lowered our interest rate yield
during the first nine months of fiscal year 2010 below 1%. Based
on the current Federal Funds Rate, we do not believe any further
reduction would have a material impact on us.
Interest
Expense
We have exposure to changing interest rates primarily associated
with our variable rate debt. At May 31, 2010, we had a
total outstanding debt balance of $166.6 million, which
consisted of $148.5 million of variable rate debt and
$18.1 million of fixed rate debt including capital lease
obligations.
We have not historically entered into financial arrangements to
hedge our interest rate exposure. However, in connection with
the BPP acquisition, we acquired an interest rate swap with a
notional amount of £30.0 million ($43.6 million)
used to minimize the interest rate exposure on a portion of
BPPs variable rate debt. The interest rate swap is used to
fix the variable interest rate on the associated debt. As of
May 31, 2010, the fair value of the swap is a liability of
$3.8 million and is included in other current liabilities
in the Condensed Consolidated Balance Sheets.
For the purpose of sensitivity, based on our outstanding
variable rate debt exposed to changes in interest rates as of
May 31, 2010, an increase of 100 basis points in our
weighted average interest rate would increase interest expense
by approximately $1.0 million on an annual basis.
58
Auction-Rate
Securities Risk
At May 31, 2010, our auction-rate securities totaled
$19.6 million. Our auction-rate securities are
insignificant to our total assets that require fair value
measurements and thus, the use and possible changes in the use
of unobservable inputs used to determine the fair value of our
auction-rate securities would not have a material impact on our
liquidity and capital resources.
We will continue to monitor our investment portfolio. We will
also continue to evaluate any changes in the market value of the
failed auction-rate securities that have not been liquidated and
depending upon existing market conditions, we may be required to
record
other-than-temporary
impairment charges in the future.
For all of our financial instruments recorded at fair value,
please refer to Note 7, Fair Value Measurements, in
Item 1,
Financial Statements
, for additional
information about our valuation methods.
59
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, as amended, is recorded, processed,
summarized and reported within the specified time periods and
accumulated and communicated to our management, including our
Co-Chief Executive Officers (Principal Executive
Officers) and our Senior Vice President and Chief
Financial Officer (Principal Financial Officer), as
appropriate, to allow timely decisions regarding required
disclosure. We have established a Disclosure Committee,
consisting of certain members of management, to assist in this
evaluation. Our Disclosure Committee meets on a quarterly basis
and more often if necessary.
Our management, under the supervision and with the participation
of our Principal Executive Officers and Principal Financial
Officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in
Rules 13a-15(e)
or
15d-15(e)
promulgated under the Securities Exchange 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.
Attached as exhibits to this Quarterly Report on
Form 10-Q
are certifications of our Principal Executive Officers and
Principal Financial Officer, which are required in accordance
with
Rule 13a-14
of the Securities Exchange Act. This Disclosure Controls and
Procedures section includes information concerning
managements evaluation of disclosure controls and
procedures referred to in those certifications and, as such,
should be read in conjunction with the certifications of our
Principal Executive Officers and Principal Financial Officer.
Changes
in Internal Control over Financial Reporting
We acquired BPP Holdings plc (BPP) in the fourth
quarter of fiscal year 2009. We are not yet required to
evaluate, and have not fully evaluated BPPs internal
control over financial reporting and, therefore, any material
changes in internal control over financial reporting that may
result from this acquisition were not disclosed in our 2009
Annual Report on
Form 10-K,
or this Quarterly Report on
Form 10-Q.
We intend to disclose all material changes in internal control
over financial reporting resulting from this acquisition prior
to or in our Annual Report on
Form 10-K
for the fiscal year ending August 31, 2010, in which report
we will be required for the first time to include BPP in our
annual assessment of internal control over financial reporting.
Subject to BPPs internal control over financial reporting
as discussed above, there have not been any changes in our
internal control over financial reporting during the quarter
ended May 31, 2010, that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
60
PART II
OTHER INFORMATION
Item 1. Legal
Proceedings
Please refer to Note 15, Commitments and Contingencies, in
Part I, Item 1,
Financial Statements
, for legal
proceedings, which is incorporated into Item 1 of
Part II by this reference.
Item 1A. Risk
Factors
In addition to the updated risk factors set forth below, please
see the risk factors included in our 2009 Annual Report on
Form 10-K.
Accreditation
Requirements
If we
fail to maintain our institutional accreditation or if our
institutional accrediting body loses recognition by the U.S.
Department of Education, we could lose our ability to
participate in Title IV programs, which would materially
and adversely affect our business.
University of Phoenix and Western International University are
institutionally accredited by The Higher Learning Commission
(HLC), one of the six regional accrediting agencies
recognized by the U.S. Department of Education.
Accreditation by an accrediting agency recognized by the
U.S. Department of Education is required in order for an
institution to become and remain eligible to participate in
Title IV programs.
If the U.S. Department of Education ceased to recognize HLC
for any reason, University of Phoenix and Western International
University would not be eligible to participate in Title IV
programs beginning 18 months after the date such
recognition ceased unless HLC was again recognized or our
institutions were accredited by another accrediting body
recognized by the U.S. Department of Education. In December
2009, the Office of Inspector General of the
U.S. Department of Education (OIG) requested
that the U.S. Department of Education review the
appropriateness of the U.S. Department of Educations
recognition of HLC as an accrediting body, following the
OIGs unfavorable review of HLCs initial
accreditation of a non-traditional, for-profit postsecondary
educational institution. We cannot predict the outcome of the
U.S. Department of Educations review of HLCs
recognition. HLC accredits over 1,000 colleges and universities,
including some of the most highly regarded universities in the
U.S.
Regardless of the outcome of the U.S. Department of
Educations review of HLC, the focus by the OIG and the
U.S. Department of Education on the process pursuant to
which HLC accredited a non-traditional, for-profit postsecondary
educational institution may make the accreditation review
process more challenging for University of Phoenix and Western
International University when they undergo their normal HLC
accreditation review process in the future. In addition,
programmatic or location expansion by University of Phoenix
and/or
Western International University may result in increased
scrutiny or additional requirements. If this occurred, we may
have to incur additional costs
and/or
curtail or modify certain program offerings or new locations at
which we offer our programs in order to maintain our
accreditation, which could increase our costs, reduce our
enrollment and materially and adversely affect our business.
The loss of accreditation for any reason would, among other
things, render our schools and programs ineligible to
participate in Title IV programs, affect our authorization
to operate and to grant degrees in certain states and decrease
student demand. If University of Phoenix became ineligible to
participate in Title IV programs, we could not conduct our
business as it is currently conducted and it would have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
61
Regulatory
Pending
rulemaking by the U.S. Department of Education could result in
regulatory changes that materially and adversely affect our
business.
In November 2009, the U.S. Department of Education convened
two new negotiated rulemaking teams related to Title IV
program integrity issues and foreign school issues. The team
addressing program integrity issues, which included
representatives of the various higher education constituencies,
was unable to reach consensus on the form of all of the rules
addressed by that team. Accordingly, under the negotiated
rulemaking protocol, the U.S. Department of Education is
free to propose rules without regard to the tentative agreement
reached regarding certain of the rules.
The proposed program integrity rulemaking addresses numerous
topics. The most significant proposals for our business are the
following:
|
|
|
|
|
Modification of the standards relating to the payment of
incentive compensation to employees involved in student
recruitment and enrollment; and
|
|
|
|
Adoption of a definition of gainful employment for
purposes of the requirement for Title IV student financial
aid that a program of study prepare students for gainful
employment in a recognized occupation.
|
On June 18, 2010, the Department issued a Notice of
Proposed Rulemaking (NPRM) in respect of the program
integrity issues, other than the metrics for determining
compliance with the gainful employment requirement, with a
45 day public comment period. The Department has stated
that it expects to issue a separate NPRM in respect of the
gainful employment metrics later this summer and its goal is to
publish final rules by November 1, 2010, to be effective
July 1, 2011.
Incentive
Compensation
A school participating in Title IV programs may not pay any
commission, bonus or other incentive payments to any person
involved in student recruitment or admissions or awarding of
Title IV program funds, if such payments are based directly
or indirectly on success in enrolling students or obtaining
student financial aid. The law and regulations governing this
requirement do not establish clear criteria for compliance in
all circumstances, but there currently are twelve safe harbors
that define specific types of compensation that are deemed not
to constitute impermissible incentive compensation. Currently,
we rely on several of these safe harbors to ensure that our
compensation and recruitment practices comply with the
applicable requirements.
In the rules proposed by the Department, these twelve safe
harbors would be eliminated and, in lieu of the safe harbors,
some of the relevant concepts relating to the incentive
compensation limitations would be defined. These changes would
increase the uncertainty about what constitutes incentive
compensation and which employees are covered by the regulation.
We may have to change some of our compensation practices for
enrollment counselors and other employees. This could adversely
affect our ability to compensate our enrollment counselors and
other employees in a manner that appropriately reflects their
relative merit, which in turn could reduce their effectiveness
and make it more difficult to attract and retain staff with the
desired talent and motivation to succeed at Apollo. In addition,
a lack of certainty could increase the risk of future Federal
False Claims Act
qui tam
lawsuits in which private
plaintiffs assert that our compensation practices violate the
incentive compensation rules and, therefore, that our receipt of
Title IV funds constitutes a false claim. We recently
settled, without admitting any violation or misconduct, such a
qui tam
lawsuit relating to our enrollment counselor
compensation practices. See the discussion of this lawsuit under
Incentive Compensation False Claims Act Lawsuit in
Note 15, Commitments and Contingencies, in Part 1,
Item 1,
Financial Statements
. We are evaluating
possible changes to our compensation models that are intended to
be responsive to the proposed changes in the incentive
compensation rules and, among other things, aligned with our
focus on the student experience.
62
The elimination of the existing twelve safe harbors also could
affect the manner in which we conduct our business in the
following additional ways:
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Our IPD business currently utilizes a revenue sharing model with
its client institutions, which is expressly permitted under one
of the twelve incentive compensation safe harbors. If this type
of revenue sharing becomes impermissible, we would need to
modify IPDs business model so as to comply with the new
requirements, which could materially and adversely affect this
business. IPD represents less than 2% of our net revenue and
operating income, respectively.
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We pay various third parties for Internet-based services related
to lead generation and marketing. As proposed, payments to a
third party for providing student contact information for
prospective students would still be permissible, provided that
such payments are not based on the number of students who apply
or enroll. If this regulation is adopted in the form proposed by
the Department in the negotiated rulemaking, it could reduce our
ability to manage the quality of our leads and decrease our
marketing efficiency, which could materially increase our
marketing costs and adversely affect our business.
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Gainful
Employment
Under the Higher Education Act of 1965, proprietary schools are
eligible to participate in Title IV programs in respect of
educational programs that lead to gainful employment in a
recognized occupation. Historically, this concept has not
been defined in detail. The Department has proposed adopting a
definition of gainful employment that is based on a ratio of
student debt to income. Specifically, in the negotiated
rulemaking process, the U.S. Department of Education
proposed rules pursuant to which a particular educational
program would be eligible for Title IV funding only if
student loan debt service for graduates of such a program does
not exceed 8% of their annual income. As proposed, the student
loan debt service would be calculated on the basis of the median
level of debt for students who complete the particular program
of study, assuming a ten-year amortization and the current
unsubsidized Stafford loan program interest rate, and annual
income for program graduates would be calculated on the basis of
the U.S. Bureau of Labor Statistics data, at the
25th percentile, for persons employed in the relevant
federal Standard Occupational Classification(s) for the specific
program.
As initially proposed by the Department in the negotiated
rulemaking process, educational programs that do not meet the
debt-to-income
test would still be eligible if the student loan repayment rate
among program graduates is at least 90%, measured over a three
year period. As such, educational program eligibility sanctions
could take effect in 2014 for programs that do not meet either
of the two tests.
If this regulation is adopted in a form similar to the
Departments proposal in the negotiated rulemaking process,
it could render many of our programs, and many programs offered
by other proprietary educational institutions, ineligible for
Title IV funding because they do not meet either of the two
tests. In addition, the continuing eligibility of our
educational programs for Title IV funding would be at risk
due to factors beyond our control, such as changes in the income
level of persons employed in specific occupations or sectors,
increases in interest rates, changes in student mix to persons
requiring higher amounts of student loans to complete their
programs, changes in student loan delinquency rates and other
factors. If a particular program ceased to be eligible for
Title IV funding, in most cases it would not be practical
to continue offering that course under our current business
model. Regulations in the form proposed in the negotiated
rulemaking process could result in a significant realignment of
the types of educational programs that are offered by us and by
proprietary institutions in general, in order to comply with the
rules or to avoid the uncertainty associated with compliance
over time. This realignment could reduce our enrollment, perhaps
materially.
In addition, for those programs that remain eligible only under
the alternative basis of student loan repayment rates, we may
have to substantially increase our efforts to promote student
loan repayment in order to ensure continued Title IV
eligibility. This could materially increase our cost of doing
business
and/or
cause
us to further limit enrollment.
63
Impact of
Rulemaking
We cannot predict the form of any final rules regarding the
program integrity issues that may be adopted by the Department.
Compliance with these rules, as presented by the Department in
the negotiated rulemaking, which if adopted could be effective
as early as July 1, 2011, could reduce our enrollment,
increase our cost of doing business, and have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
An
increase in our student loan default rates could result in the
loss of eligibility to participate in Title IV programs,
which would materially and adversely affect our
business.
To remain eligible to participate in Title IV programs, an
educational institutions student loan cohort default rates
must remain below certain specified levels. The cohort is the
group of students who first enter into a student loan repayment
during a federal fiscal year (ending September 30). Under the
Higher Education Act, as reauthorized, the currently applicable
cohort default rate for each cohort is the percentage of the
students in the cohort who default on their student loans prior
to the end of the following federal fiscal year, which
represents a two-year measuring period. An educational
institution will lose its eligibility to participate in some or
all Title IV programs if its student loan cohort default
rate equals or exceeds 25% for three consecutive years or 40%
for any given year. If our student loan default rates approach
these limits, we may be required to increase efforts and
resources dedicated to improving these default rates. In
addition, because there is a lag between the funding of a
student loan and a default thereunder, many of the borrowers who
are in default or at risk of default are former students with
whom we may have only limited contact. Accordingly, there can be
no assurance that we would be able to effectively improve our
default rates or improve them in a timely manner to meet the
requirements for continued participation in Title IV
funding if we experience a substantial increase in our student
loan default rates.
The cohort default rates for the University of Phoenix have been
increasing over the past three years and we anticipate that the
2008 cohort default rate, which will be published by the
U.S. Department of Education in September 2010, will be
above 10%. In addition, we expect this upward trend to intensify
due to the current challenging economic climate and the growth
in our associates degree student population in recent
years. Consistent with this, the available preliminary data for
the University of Phoenix 2009 cohort reflect a substantially
higher default rate than for the comparable period in the 2008
cohort.
The cohort default rate requirements were modified by the Higher
Education Opportunity Act enacted in August 2008 to increase by
one year the measuring period for each cohort. Starting with the
2009 cohort, the U.S. Department of Education will
calculate both the current two-year and the new three-year
cohort default rates. Beginning with the 2011 three-year cohort
default rate published in September 2014, the three-year rates
will be applied for purposes of measuring compliance with the
requirements, as follows:
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Annual test.
If the 2011 three-year cohort
default rate exceeds 40%, the institution will cease to be
eligible to participate in Title IV programs; and
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Three consecutive years test.
If the
institutions three-year cohort default rate exceeds 30%
(an increase from the current 25% threshold applicable to the
two-year cohort default rates) for three consecutive years,
beginning with the 2009 cohort, the institution will cease to be
eligible to participate in Title IV programs.
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If we lose our eligibility to participate in Title IV
programs because of high student loan default rates, we could
not conduct our business as it is currently being conducted and
it would have a material adverse effect on our business,
financial condition, results of operations and cash flows. See
the discussion of student loan cohort default rates, including
the changes enacted by the Higher Education Opportunity Act, in
Item 1, Business
Regulatory Environment
Domestic Postsecondary
Student Loan Defaults
, in our Annual
Report on
Form 10-K
for the fiscal year ended August 31, 2009.
64
The
U.S. Congress has recently commenced an examination of the
for-profit education sector that could result in legislation or
further Department of Education rulemaking restricting
Title IV program participation by proprietary schools in a
manner that materially and adversely affects our
business.
In recent months, there has been increased focus by the
U.S. Congress on the role that for-profit educational
institutions play in higher education. On June 17, 2010,
the Education and Labor Committee of the U.S. House of
Representatives held a hearing to examine the manner in which
accrediting agencies review higher education institutions
policies on credit hours and program length. On June 24,
2010, the Health, Education, Labor and Pensions Committee of the
U.S. Senate released a report, entitled, Emerging
Risk?: An Overview of Growth, Spending, Student Debt and
Unanswered Questions in For-Profit Higher Education and
held the first in a series of hearings to examine the
proprietary education sector. Earlier, on June 21, the
Chairmen of each of these education committees, together with
other members of Congress, requested the Government
Accountability Office (GAO) to conduct a review and
prepare a report with recommendations regarding various aspects
of the proprietary sector, including recruitment practices,
educational quality, student outcomes, the sufficiency of
integrity safeguards against waste, fraud and abuse in federal
student aid programs and the degree to which proprietary
institutions revenue is composed of Title IV and
other federal funding sources.
These hearings and the requested GAO review are not formally
related to the U.S. Department of Educations
negotiated rulemaking process currently underway in respect of
program integrity issues. However, the outcome of the hearings
and the requested GAO review could impact the substance of the
Departments program integrity rulemaking.
We cannot predict the extent to which, or whether, these
hearings and review will result in legislation or further
rulemaking affecting our participation in Title IV
programs. To the extent that any laws or regulations are adopted
that limit our participation in Title IV programs or the
amount of student financial aid for which our students are
eligible, our business would be adversely affected, perhaps
materially.
65
Economic
Downturn
Budget
constraints in states that provide state financial aid to our
students could reduce the amount of such financial aid that is
available to our students, which could reduce our enrollment and
adversely affect our 90/10 Rule calculation.
Many states are experiencing severe budget deficits and
constraints. Some of these states have reduced or eliminated
various student financial assistance programs, and additional
states may do so in the future. If our students who receive this
type of assistance cannot secure alternate sources of funding,
they may be forced to withdraw or reduce the rate at which they
seek to complete their education. Other students who would
otherwise have been eligible for state financial assistance may
not be able to enroll without such aid. This reduced funding
could decrease our enrollment and adversely affect our business,
financial condition, results of operations and cash flows.
In addition, the reduction or elimination of these
non-Title IV sources of student funding may adversely
affect our 90/10 Rule calculation by increasing the proportion
of the affected students funding needs satisfied by
Title IV programs. This could negatively impact or increase
the cost of our compliance with the 90/10 Rule, as discussed
under the Risk Factor,
Our schools and programs would
lose their eligibility to participate in federal student
financial aid programs if the percentage of our revenues derived
from those programs is too high
in our 2009 Annual
Report on
Form 10-K.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
Our Board of Directors has authorized us to repurchase
outstanding shares of Apollo Group Class A common stock,
from time to time, depending on market conditions and other
considerations. On February 18, 2010, our Board of
Directors authorized a $500 million increase in the amount
available under our share repurchase program up to an aggregate
amount of $1 billion of Apollo Group Class A common
stock. There is no expiration date on the repurchase
authorizations and repurchases occur at our discretion.
During the three months ended May 31, 2010, we repurchased
approximately 2.5 million shares of our Class A common
stock at a total cost of approximately $139.3 million,
representing a weighted average purchase price of $55.50 per
share. The table below details our share repurchases during the
three months ended May 31, 2010:
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Total Number
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of Shares
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Repurchased as
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Part of Publicly
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Maximum Value
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Total # of
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Average
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Announced
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of Shares
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Shares
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Price Paid
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Plans or
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Available for
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(Numbers in thousands, except per share amounts)
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Repurchased
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per Share
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Programs
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Repurchase
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Treasury stock as of February 28, 2010
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36,904
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$
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59.91
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36,904
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$
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800,000
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New authorizations
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Shares repurchased
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Shares reissued
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(23
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)
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59.91
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(23
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)
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Treasury stock as of March 31, 2010
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36,881
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|
|
59.91
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|
|
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36,881
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800,000
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New authorizations
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|
|
|
|
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Shares repurchased
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677
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58.10
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677
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(39,319
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)
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Shares reissued
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(429
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)
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59.87
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(429
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)
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Treasury stock as of April 30, 2010
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37,129
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|
59.87
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|
|
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37,129
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|
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760,681
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New authorizations
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|
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|
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Shares repurchased
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1,834
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54.54
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1,834
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(100,000
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)
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Shares reissued
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(3
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)
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59.62
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(3
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)
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Treasury stock as of May 31, 2010
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38,960
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$
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59.62
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38,960
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$
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660,681
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We did not have any sales of unregistered equity securities
during the three months ended May 31, 2010.
66
Subsequent to May 31, 2010, we repurchased an additional
2.0 million shares of our Class A common stock for
$100.0 million representing a weighted average purchase
price of $49.76 per share. Including these purchases, we have
repurchased 7.9 million shares for $439.3 million
during fiscal year 2010 and $560.7 million remains
available under our share repurchase authorization.
Item 3. Defaults
Upon Senior Securities
Not Applicable.
Item 4. (Removed
and Reserved)
Item 5. Other
Information
None.
67
Item 6. Exhibits
APOLLO
GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
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Exhibit
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Number
|
|
Exhibit Description
|
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10.1
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Transition Agreement between Apollo Group, Inc. and P. Robert
Moya, dated May 17, 2010, incorporated by reference to
Exhibit 10.1 of Apollo Group, Inc.s
Form 8-K
filed with the Securities and Exchange Commission on
May 20, 2010
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10.2
|
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Amended and Restated Employment Agreement between Apollo Group,
Inc. and Joseph L. DAmico, dated May 18, 2010,
incorporated by reference to Exhibit 10.2 of Apollo Group,
Inc.s
Form 8-K
filed with the Securities and Exchange Commission on
May 20, 2010
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10.3
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Irrevocable Letter of Credit, dated June 9, 2010
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31.1
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Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
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31.3
|
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Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
|
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Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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32.2
|
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Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
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32.3
|
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Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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101
|
|
The following financial information from our Quarterly Report on
Form 10-Q
for the third quarter of fiscal 2010, filed with the SEC on
June 30, 2010, formatted in Extensible Business Reporting
Language (XBRL): (i) the Condensed Consolidated Balance
Sheets as of May 31, 2010 and August 31, 2009,
(ii) the Condensed Consolidated Statements of Income for
the three and nine months ended May 31, 2010, and
May 31, 2009, (iii) the Condensed Consolidated
Statements of Comprehensive Income for the three and nine months
ended May 31, 2010, and May 31, 2009, (iv) the
Condensed Consolidated Statements of Cash Flows from Continuing
and Discontinued Operations for the nine months ended
May 31, 2010, and May 31, 2009, and (v) Notes to
Condensed Consolidated Financial Statements (tagged as blocks of
text).
(1)
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(1)
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The XBRL related information in Exhibit 101 to this
Quarterly Report on
Form 10-Q
shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to liability of that section and
shall not be incorporated by reference into any filing or other
document pursuant to the Securities Act of 1933, as amended,
except as shall be expressly set forth by specific reference in
such filing or document.
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68
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: June 30, 2010
Brian L. Swartz
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Signatory)
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By:
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/s/ Gregory
J. Iverson
|
Gregory J. Iverson
Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer and
Duly Authorized Signatory)
69
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