APOLLO GROUP INC - 10-Q Quarterly Report

Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-25232

APOLLO GROUP, INC.

(Exact name of registrant as specified in its charter)


ARIZONA (State or other jurisdiction of incorporation or organization)		86-0419443 (I.R.S. Employer Identification No.)

4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)

(480) 966-5394
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

[ü] Yes [ ] No

AT JANUARY 6, 2003, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:


Apollo Education Group Class A common stock, no par value		174,321,000 Shares
Apollo Education Group Class B common stock, no par value		477,000 Shares
University of Phoenix Online common stock, no par value		15,073,000 Shares

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1 – Financial Statements — Apollo Group, Inc.
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.
	Item 3 – Quantitative and Qualitative Disclosures about Market Risk
	Item 4 — Controls and Procedures
PART II – OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-15.1
EX-99.1
EX-99.12
EX-99.3

APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX


PART I – FINANCIAL INFORMATION	PAGE

Item 1. Financial Statements		1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures about Market Risk		18
Item 4. Controls and Procedures		18
PART II – OTHER INFORMATION
Item 1. Legal Proceedings		19
Item 2. Changes in Securities and Use of Proceeds		19
Item 3. Defaults Upon Senior Securities		19
Item 4. Submission of Matters to a Vote of Security Holders		19
Item 5. Other Information		19
Item 6. Exhibits and Reports on Form 8-K		19
SIGNATURES		20
EXHIBIT INDEX		23


EXHIBIT 15.1	–	Letter on Unaudited Interim Financial Information
EXHIBIT 99.1	–	University of Phoenix Online Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXHIBIT 99.2	–	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
EXHIBIT 99.3	–	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

PART I – FINANCIAL INFORMATION

Item 1 — Financial Statements — Apollo Group, Inc.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET


		November 30,			August 31,
		2002			2002

		(Unaudited)
(Dollars in thousands)
Assets:
Current assets
	Cash and cash equivalents	$	343,786		$	295,237
	Restricted cash		105,916			100,252
	Marketable securities		214,502			214,547
	Receivables, net		113,248			99,282
	Deferred tax assets, net		9,773			7,415
	Other current assets		15,024			13,714

Total current assets			802,249			730,447
Property and equipment, net			108,920			104,292
Marketable securities			100,810			78,619
Cost in excess of fair value of assets purchased, net			37,096			37,096
Deferred tax assets, net			4,190			5,062
Other assets			25,125			24,126

Total assets		$	1,078,390		$	979,642

Liabilities and Shareholders’ Equity:
Current liabilities
	Current portion of long-term liabilities	$	7,410		$	7,510
	Accounts payable		21,045			22,478
	Accrued liabilities		39,144			39,855
	Income taxes payable		21,005			7,974
	Student deposits and current portion of deferred revenue		190,779			186,497

Total current liabilities			279,383			264,314
Deferred tuition revenue, less current portion			870			827
Long-term liabilities, less current portion			15,502			15,508

Total liabilities			295,755			280,649

Commitments and contingencies
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued
Apollo Education Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 173,990,000 and 173,221,000 issued and outstanding at November 30, 2002 and August 31, 2002, respectively			103			103
Apollo Education Group Class B voting common stock, no par value, 3,000,000 shares authorized; 484,000 issued and outstanding at November 30, 2002 and August 31, 2002			1			1
University of Phoenix Online nonvoting common stock, no par value, 400,000,000 shares authorized; 14,848,000 and 14,256,000 issued and outstanding at November 30, 2002 and August 31, 2002, respectively
Additional paid-in capital			247,902			227,155
Apollo Education Group Class A treasury stock, at cost, 3,393,000 and 4,162,000 shares at November 30, 2002 and August 31, 2002, respectively			(40,418	)		(46,029	)
University of Phoenix Online treasury stock, at cost, 24,000 shares at August 31, 2002						(526	)
Retained earnings			574,875			518,186
Accumulated other comprehensive income			172			103

Total shareholders’ equity			782,635			698,993

Total liabilities and shareholders’ equity		$	1,078,390		$	979,642

The accompanying notes are an integral part of these consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS


		For the Three Months Ended
		November 30,

		2002		2001

		(Unaudited)
(In thousands, except per share amounts)
Revenues:
	Tuition and other, net	$	308,897	$	228,179

Costs and expenses:
	Instructional costs and services		142,103		116,760
	Selling and promotional		60,326		45,419
	General and administrative		16,147		14,654

			218,576		176,833

Income from operations			90,321		51,346
Interest income, net			3,534		3,043

Income before income taxes			93,855		54,389
Provision for income taxes			37,166		21,430

Net income		$	56,689	$	32,959

Net income attributed to:
	Apollo Education Group common stock	$	53,770	$	31,668

	University of Phoenix Online common stock	$	2,919	$	1,291

Earnings per share attributed to:
Apollo Education Group common stock:
	Basic net income per share	$	0.31	$	0.18

	Diluted net income per share	$	0.30	$	0.18

	Basic weighted average shares outstanding		174,109		172,148

	Diluted weighted average shares outstanding		176,884		174,922

University of Phoenix Online common stock:
	Basic net income per share	$	0.20	$	0.10

	Diluted net income per share	$	0.18	$	0.09

	Basic weighted average shares outstanding		14,483		12,741

	Diluted weighted average shares outstanding		15,985		14,583

The accompanying notes are an integral part of these consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


		For the Three Months Ended
		November 30,

		2002		2001

		(Unaudited)
(In thousands)
Net income		$	56,689	$	32,959
Other comprehensive income, net of income taxes:
	Currency translation gain		69		44

Comprehensive income		$	56,758	$	33,003

The accompanying notes are an integral part of these consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS


					For the Three Months Ended
					November 30,

					2002			2001

					(Unaudited)
(In thousands)
Cash flows provided by (used for) operating activities:
	Net income				$	56,689		$	32,959
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				9,178			8,569
		Amortization of investment premiums				1,313			302
		Provision for uncollectible accounts				6,127			4,995
		Deferred income taxes				(1,486	)		(956	)
		Tax benefits of stock options exercised				17,579			4,511
			Increase in assets:
				Restricted cash		(5,664	)		(16,812	)
				Receivables		(20,093	)		(6,440	)
				Other assets		(1,672	)		(66	)
		Increase in liabilities:
				Accounts payable and accrued liabilities		10,887			8,006
				Student deposits and deferred revenue		4,325			11,344
				Other liabilities		683			563

Net cash provided by operating activities						77,866			46,975

Cash flows provided by (used for) investing activities:
	Net additions to property and equipment					(14,108	)		(6,223	)
	Purchase of marketable securities					(84,761	)		(72,392	)
	Maturities of marketable securities					61,302			53,673
	Purchase of other assets					(1,024	)		(368	)

Net cash used for investing activities						(38,591	)		(25,310	)

Cash flows provided by (used for) financing activities:
	Purchase of Apollo Education Group Class A common stock					(4,068	)		(2,438	)
	Issuance of Apollo Education Group Class A common stock					9,349			4,649
	Purchase of University of Phoenix Online common stock					(2,012	)		(6,833	)
	Issuance of University of Phoenix Online common stock					6,036			3,474
	Payments on long-term debt					(100	)		(100	)

Net cash provided by (used for) financing activities						9,205			(1,248	)

Currency translation gain						69			44

Net increase in cash and cash equivalents						48,549			20,461
Cash and cash equivalents at beginning of period						295,237			145,933

Cash and cash equivalents at end of period					$	343,786		$	166,394

The accompanying notes are an integral part of these consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

1. The interim consolidated financial statements include the accounts of Apollo Group, Inc. (“Apollo” or the “Company”) and its wholly-owned subsidiaries, which include The University of Phoenix, Inc. (“University of Phoenix”), Institute for Professional Development (“IPD”), Western International University, Inc. (“WIU”), and The College for Financial Planning Institutes Corporation (the “College”). This financial information reflects all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Unless otherwise noted, references to 2003 and 2002 refer to the periods ended November 30, 2002 and 2001, respectively.

On March 24, 2000, the Board of Directors of Apollo authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Apollo’s other businesses and its retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining an 89.2% interest in University of Phoenix Online. This percentage has decreased to 86.5% at November 30, 2002 due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan partially offset by the repurchase of shares of University of Phoenix Online common stock.

2. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended August 31, 2002 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the three-month period ended November 30, 2002 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

3. At November 30, 2002, the Company has four stock-based employee compensation plans, which are described more fully in Note 10 in the “Notes to Consolidated Financial Statements” for the year ended August 31, 2002 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for those plans. Stock-based employee compensation expense is not reflected in the Consolidated Statement of Operations as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), to stock-based employee compensation is as follows, in thousands, except per share amounts:


			For the Three Months Ended
			November 30,

			2002			2001

			(Unaudited)
Apollo Education Group
	Net income, as reported		$	53,770		$	31,668
	Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects			(2,768	)		(2,933	)

	Pro forma net income		$	51,002		$	28,735
	Earnings per share:
		Basic — as reported	$	0.31		$	0.18
		Basic — pro forma	$	0.29		$	0.17
		Diluted — as reported	$	0.30		$	0.18
		Diluted — pro forma	$	0.29		$	0.16
University of Phoenix Online
	Net income, as reported		$	2,919		$	1,291
	Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects			(71	)		(152	)

	Pro forma net income		$	2,848		$	1,139
	Earnings per share:
		Basic — as reported	$	0.20		$	0.10
		Basic — pro forma	$	0.20		$	0.09
		Diluted — as reported	$	0.18		$	0.09
		Diluted — pro forma	$	0.17		$	0.08

The effects of applying SFAS No. 123 in the above pro forma disclosures are not necessarily indicative of future amounts. The fair value of each option grant was estimated on the date of grant using the Black-Scholes method with the following weighted-average assumptions for grants for the three months ended November 30, 2002 and 2001, respectively, for Apollo Education Group: 1) dividend yield of 0.0% in both periods; 2) expected volatility of 44.0% and 42.0%; 3) risk-free interest rates of 3.2% and 4.0%; and 4) expected lives of 3.3 and 3.2 years and for grants for the three months ended November 30, 2002 and 2001, respectively, for University of Phoenix Online: 1) dividend yield of 0.0% in both periods; 2) expected volatility of 56.0% and 61.0%; 3) risk-free interest rates of 3.2% and 3.9%; and 4) expected lives of 3.0 and 2.8 years.

4. The Company’s operations are aggregated into a single reportable segment based upon their similar economic and operating characteristics. The Company’s educational operations are conducted in similar markets and produce similar economic results. These operations provide higher education programs for working adults. The Company’s operations are also subject to a similar regulatory environment, which include licensing and accreditation.

5. On April 4, 2002, the Board of Directors of Apollo authorized a 3-for-2 stock split of its Apollo Education Group Class A and Class B common stock to be affected in the form of a stock dividend. In connection with this split, holders of Apollo Education Group Class B common stock were issued one share of Apollo Education Group Class A common stock for every two shares of Apollo Education Group Class B common stock. All Apollo Education Group common stock amounts and earnings per share figures for periods prior to the stock split have been restated to reflect the effect of the stock split.

On April 4, 2002, the Board of Directors of Apollo authorized a 4-for-3 stock split of its University of Phoenix Online common stock to be affected in the form of a stock dividend. All University of Phoenix Online common stock amounts and earnings per share figures for periods prior to this stock split have been restated to reflect the effect of the stock split.

6. Earnings attributable to different classes of the Company’s common stock are as follows:


	For the Three Months Ended
	November 30,

	2002		2001

	(Unaudited)
(In thousands)
Apollo Education Group	$	53,770	$	31,668
University of Phoenix Online		2,919		1,291

Net income	$	56,689	$	32,959

The earnings attributable to University of Phoenix Online common stock represent the portion of the earnings of University of Phoenix Online attributed to the shares of University of Phoenix Online common stock outstanding excluding Apollo Education Group’s retained interest in the University of Phoenix Online. At the date of the issuance of the University of Phoenix Online common stock, Apollo Education Group retained an 89.2% interest in University of Phoenix Online. This percentage has decreased to 86.5% at November 30, 2002 due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan partially offset by the repurchase of shares of University of Phoenix Online common stock.

A reconciliation of the basic and diluted earnings per share computations for Apollo Education Group Class A and Class B common stock is as follows, in thousands, except per share amounts:


		For the Three Months Ended November 30,

		2002						2001

				Weighted						Weighted
				Average		Per Share				Average		Per Share
		Income		Shares		Amount		Income		Shares		Amount

		(Unaudited)
Basic net income per share		$	53,770		174,109	$	0.31	$	31,668		172,148	$	0.18
Effect of dilutive securities:
	Stock options				2,775						2,774

Diluted net income per share		$	53,770		176,884	$	0.30	$	31,668		174,922	$	0.18

Basic earnings per share for Apollo Education Group common stock for the three months ended November 30, 2002 and 2001 were computed by dividing Apollo Education Group earnings (including its retained interest in University of Phoenix Online earnings) by the weighted average number of Apollo Education Group common stock shares outstanding during the respective periods. Diluted earnings per share were calculated similarly, except that the dilutive effect of the assumed exercise of options issued under Apollo Group, Inc. incentive plans, exclusive of options granted and shares issued with respect to University of Phoenix Online common stock, is included.

A reconciliation of the basic and diluted earnings per share computations for University of Phoenix Online common stock is as follows, in thousands, except per share amounts:


		For the Three Months Ended November 30,

		2002						2001

				Weighted						Weighted
				Average		Per Share				Average		Per Share
		Income		Shares		Amount		Income		Shares		Amount

		(Unaudited)
Basic net income per share		$	2,919		14,483	$	0.20	$	1,291		12,741	$	0.10
Effect of dilutive securities:
	Stock options				1,502						1,842

Diluted net income per share		$	2,919		15,985	$	0.18	$	1,291		14,583	$	0.09

Basic earnings per share of University of Phoenix Online common stock for the three months ended November 30, 2002 and 2001 were computed by dividing University of Phoenix Online earnings (excluding Apollo Education Group’s retained interest in University of Phoenix Online earnings) by the number of shares of University of Phoenix Online common stock outstanding during the respective periods. Diluted earnings per share were calculated similarly, except that the dilutive effect of the assumed exercise of options issued under Apollo Group, Inc. incentive plans with respect to University of Phoenix Online common stock is included.

7. The following schedules present statement of operations data of Apollo Education Group, University of Phoenix Online, and Apollo Group, Inc. We have presented this information to illustrate the respective operating results of Apollo Education Group and University of Phoenix Online, including the impact of the inter-group license fee and inter-group allocated expenses, and how the operating results of those groups relate to the consolidated operating results of Apollo Group, Inc.

Since its inception, the Company has financed University of Phoenix Online’s operations internally and has not incurred any related third-party debt. All of its cash receipts and disbursements were processed by the Company on University of Phoenix Online’s behalf. All amounts were settled through the funds allocated to/from Apollo Education Group component of University of Phoenix Online’s divisional net worth. Whenever University of Phoenix Online generated cash from operations, that cash was deemed to be transferred to Apollo Education Group and was accounted for as a return of capital. Whenever University of Phoenix Online had a cash need, that cash was deemed to be transferred from Apollo Education Group and was accounted for as a capital contribution. As a result of this policy, no inter-group interest income or expense was reflected in the consolidating statement of operations for the periods prior to the offering.

Upon the completion of the offering, the net proceeds of the offering of $72.8 million were transferred to University of Phoenix Online and accounted for as a capital contribution. Subsequently, the difference between cash receipts and cash outlays attributable to University of Phoenix Online have been accounted for as a revolving credit advance from University of Phoenix Online to Apollo Education Group (to the extent this difference was not transferred to University of Phoenix Online) requiring the reflection of interest expense by Apollo Education Group and interest income by the University of Phoenix Online at the rate of interest determined by the Board of Directors.


			Three Months Ended November 30,
			2002

			Apollo			University of					Apollo
			Education			Phoenix					Group,
			Group			Online		Eliminations			Inc.

		(Unaudited)
(In thousands)
Revenues:
Tuition and other, net(1)			$	198,706		$	110,191				$	308,897
Inter-group license fee revenue(2)				4,408					(4,408	)		—

				203,114			110,191		(4,408	)		308,897

Costs and expenses:
Instructional costs and services External expenses(3)				109,348			32,755					142,103
	Inter-group allocated expenses(4)			(5,788	)		5,788					—
	Inter-group license fee expense(2)						4,408		(4,408	)		—
Selling and promotional External expenses(3)				34,326			26,000					60,326
	Inter-group allocated expenses(4)			(225	)		225					—
General and administrative External expenses(3)				16,147								16,147
	Inter-group allocated expenses(4)			(5,507	)		5,507					—

				148,301			74,683		(4,408	)		218,576

Income from operations				54,813			35,508		—			90,321
Interest income, net				2,512			1,022					3,534

Income before income taxes				57,325			36,530		—			93,855
Provision for income taxes(5)				22,627			14,539					37,166

Net income			$	34,698		$	21,991	$	—		$	56,689

[Additional columns below]

[Continued from above table, first column(s) repeated]

Three Months Ended November 30,

2001

Apollo University of Apollo

Education Phoenix Group,

Group Online Eliminations Inc.

(Unaudited)

(In thousands)

Revenues:

Tuition and other, net(1)
$ 163,839 $ 64,340 $ 228,179

Inter-group license fee revenue(2)
2,574 (2,574 ) —

166,413 64,340 (2,574 ) 228,179

Costs and expenses:

Instructional costs and services
External expenses(3)
95,331 21,429 116,760

Inter-group allocated expenses(4)
(3,545 ) 3,545 —

Inter-group license fee expense(2)
2,574 (2,574 ) —

Selling and promotional
External expenses(3)
29,928 15,491 45,419

Inter-group allocated expenses(4)
(149 ) 149 —

General and administrative
External expenses(3)
14,654 14,654

Inter-group allocated expenses(4)
(3,831 ) 3,831 —

132,388 47,019 (2,574 ) 176,833

Income from operations
34,025 17,321 — 51,346

Interest income, net
2,193 850 3,043

Income before income taxes
36,218 18,171 — 54,389

Provision for income taxes(5)
14,207 7,223 21,430

Net income
$ 22,011 $ 10,948 $ — $ 32,959

(1) Tuition and other revenues are shown net of discounts from a variety of promotional programs and represent amounts earned from students of Apollo Education Group and University of Phoenix Online, respectively. There are no tuition or other net revenues that have been allocated between Apollo Education Group and University of Phoenix Online.

(2) Apollo Group, Inc. charges University of Phoenix Online a license fee equal to 4% of University of Phoenix Online’s net revenues for the use of curriculum, trademarks, and copyrights owned by Apollo Group, Inc. and its subsidiaries. The license fee, which is included in University of Phoenix Online’s instructional costs and services, totaled $4.4 million and $2.6 million for the three months ended November 30, 2002 and 2001, respectively. The inter-group license fee revenue of Apollo Education Group eliminates against the inter-group license fee expense of University of Phoenix Online in consolidation at the Apollo Group, Inc. level.

(3) External expenses represent costs incurred directly by Apollo Education Group and University of Phoenix Online and do not include any inter-group allocations.

(4) Certain costs incurred by Apollo and University of Phoenix including legal, accounting, corporate office, and centralized student services costs, have been allocated to University of Phoenix Online on the basis of its revenues in relation to those of Apollo and University of Phoenix. The allocation of such expenses to University of Phoenix Online was as follows:


	Three Months Ended
	November 30,

	2002		2001

	(Unaudited)
(In thousands)
Instructional costs and services	$	5,788	$	3,545
Selling and promotional		225		149
General and administrative		5,507		3,831

	$	11,520	$	7,525

(5) University of Phoenix Online’s results, along with other divisions of University of Phoenix, are included in the Apollo consolidated federal income tax return. State taxes are paid based upon apportioned taxable income or loss of Apollo, with the exception of certain state taxes that are based upon an apportionment of University of Phoenix taxable income or loss. The provision for income taxes included in the accompanying consolidating statement of operations data has been calculated on a separate company basis.

8. The U.S. Department of Education Office of the Inspector General (“OIG”) is currently auditing the administration of the federal student financial assistance programs in connection with educational programs provided pursuant to contractual arrangements between IPD and certain of its client institutions. In audit reports issued to eight client institutions, the OIG asserted that the client institutions violated the statutory prohibition on the use of incentive payments for recruiting by paying IPD a percentage of tuition revenue. The reports further suggest that IPD paid its employees in a manner that included incentive-based compensation even though IPD based its compensation plans for recruiters on factors or qualities that were not solely related to the success in securing enrollments. Additionally, the audit reports question the client institutions’ interpretation of the “12-hour rule.” Although both IPD and the client institutions believe that the matters in question do not relate to student program or institutional eligibility and, therefore, believe a repayment of federal funds is not appropriate, the OIG has recommended to the U.S. Department of Education that the client institutions be required to return to lenders all loan funds disbursed. The institutions, with IPD’s assistance, will work with the U.S. Department of Education to eliminate or settle the issues raised in the audit reports.

During 2001, IPD recorded charges of $5.1 million, to provide for its share of the estimated settlement obligation relating to all of its client institutions under audit. The Company’s calculation of the estimated settlement obligation, which was reflected in instructional costs and services during 2001, was based on available information and previous experience with respect to such settlements.

Although the Company believes that the OIG’s audits of certain IPD client institutions will be resolved without any material effect on its financial position, results of operations, or cash flows, and without any material change in IPD’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved.

On approximately December 19, 2001, a class action complaint was filed in the Superior Court of the State of California for the County of Solano, captioned Davis et. al. v. Apollo Group, Inc. et. al., Case No. FCS018663. Plaintiffs, one current and two former enrollment counselors with University of Phoenix, filed this class action on behalf of themselves and current and former enrollment counselors employed by the Company in the State of California and seek certification as a class, monetary damages in unspecified amounts, and injunctive relief. Plaintiffs allege that during their employment, they and other enrollment counselors worked in excess of 8 hours per day or 40 hours per week, and contend that the Company failed to pay overtime. Two status conferences have been held, but no trial date has been set. While the outcome of this legal proceeding is currently not determinable, management does not expect the results of this action to have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

9. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”). Under this standard, asset retirement obligations will be recognized when incurred at their estimated fair value. In addition, the cost of the asset retirement obligations will be capitalized as a part of the asset’s carrying value and depreciated over the asset’s remaining useful life. The adoption of SFAS No. 143 on September 1, 2002 did not have a material impact on its financial condition or results of operations.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). This standard requires that all long-lived assets (including discontinued operations) that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 became effective on September 1, 2002. The implementation of SFAS No. 144 did not have a material effect on its financial condition or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2002 (“SFAS No. 145”). This standard rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes extraordinary item treatment for gains and losses associated with the extinguishment of debt that do not meet Accounting Principles Board Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB No. 30”) criteria. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases as well as other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of SFAS No. 145 on September 1, 2002 did not have a material impact on its financial condition or results of operations.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). This standard addresses financial accounting and reporting for costs associated with exit or disposal activities and replaces Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (“EITF No. 94-3”). SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for exit costs as defined in EITF No. 94-3 is recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002.

Review by Independent Accountants

The financial information as of November 30, 2002, and for the three-month period then ended, included in Part I pursuant to Rule 10-01 of Regulation S-X, has been reviewed by PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”), our independent accountants, in accordance with standards established by the American Institute of Certified Public Accountants. PricewaterhouseCoopers’ report is included in this quarterly report.

PricewaterhouseCoopers does not carry out any significant or additional audit tests beyond those that would have been necessary if its report had not been included in this quarterly report. Accordingly, such report is not a “report” or “part of a registration statement” within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply.

Report of Independent Accountants

The Board of Directors and
Shareholders of Apollo Group, Inc.:

We have reviewed the accompanying consolidated balance sheet of Apollo Group, Inc. and its subsidiaries as of November 30, 2002, and the related consolidated statements of operations and of comprehensive income for each of the three-month periods ended November 30, 2002 and November 30, 2001 and the consolidated statement of cash flows for the three-month periods ended November 30, 2002 and November 30, 2001. These interim financial statements are the responsibility of Apollo Group, Inc.’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of August 31, 2002, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated September 30, 2002 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of August 31, 2002, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
December 17, 2002

PART I – FINANCIAL INFORMATION

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.

The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc. and the consolidated financial statements and related notes of Apollo Group, Inc. for the fiscal year ended August 31, 2002 included in our Form 10-K as filed with the Securities and Exchange Commission, as well as in conjunction with the consolidated financial statements and related notes of Apollo Group, Inc. for the three-month period ended November 30, 2002 included in Item 1.

This Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” contains forward-looking statements. The words “believes,” “expects,” “anticipates,” “estimates,” and other similar statements of expectations identify forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Forward-looking statements in this Form 10-Q and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” include, but are not limited to, statements such as: 1) total purchases of property and equipment for us for the year ended August 31, 2003, are expected to range from $45.0 to $50.0 million; 2) we anticipate the seasonal trends in the second and fourth quarters will continue in the future; 3) although we believe the OIG’s audits of certain Institute for Professional Development’s client institutions will be resolved without any material effect on our financial position, results of operations, or cash flows, and without any material change in Institute for Professional Development’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved; 4) while the outcome of this legal proceeding is currently not determinable, management does not expect the results of this action to have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows; and 5) while the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows. These forward-looking statements are based our estimates, projections, beliefs, and assumptions and speak only as of the date made and are not guarantees of future performance.

Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors. Statements in this Form 10-Q, including “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.,” describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements include, without limitation: 1) new or revised interpretations of regulatory requirements; 2) changes in or new interpretations of applicable laws, rules, and regulations; 3) failure to maintain or renew required regulatory approvals, accreditation, or state authorizations by University of Phoenix or certain Institute for Professional Development client institutions; 4) failure to obtain authorizations from states in which University of Phoenix does not currently provide degree programs; 5) failure to obtain approval from The Higher Learning Commission for University of Phoenix to operate in new states; 6) our ability to continue to attract and retain students; 7) our ability to successfully defend litigation claims; 8) our ability to protect our intellectual property and proprietary rights; 9) our ability to recruit and retain key personnel; 10) our ability to successfully manage economic conditions, including stock market volatility; and 11) other factors set forth in this Form 10-Q. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will prove to be accurate. We undertake no obligation to publicly update or revise any forward-looking statements, or any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission.

SIGNIFICANT ACCOUNTING POLICIES

Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 of the Notes to Consolidated Financial Statements of Apollo Group, Inc. for the fiscal year ended August 31, 2002 included in our Form 10-K as filed with the Securities and Exchange Commission includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following is a brief discussion of the more significant accounting policies and methods used by us.

Revenues, receivables, and related liabilities

95% of our tuition and other net revenues during the first three months of 2003 consist of tuition revenues. Tuition revenue is recognized on a weekly basis, pro rata over the period of instruction. Our tuition and other net revenues also include commissions from the sale of textbooks and other education-related products, application fees, other student fees, and other income. Our tuition and other net revenues vary from period to period based on several factors that include: 1) the aggregate number of students attending classes; 2) the number of classes held during the period; and 3) the weighted average tuition price per credit hour (weighted by program and location). University of Phoenix tuition revenues currently represent 93% of consolidated tuition revenues. Institute for Professional Development tuition revenues consist of the contractual share of tuition revenues from students enrolled in related

programs at its client institutions. Institute for Professional Development’s contracts with its respective client institutions generally have terms of five to ten years with provisions for renewal.

Our educational programs range in length from one-day seminars to degree programs lasting up to four years. Students in our degree programs generally enroll in a program of study that encompasses a series of five to six week courses that are taken consecutively over the length of the program. Students are billed on a course-by-course basis when the student first attends a session, resulting in the recording of a receivable from the student and deferred tuition revenue in the amount of the billing. The related revenue for each course, including that portion of tuition revenues to which we are entitled under the terms of our revenue-sharing contracts with Institute for Professional Development client institutions, is recognized on a pro rata basis over the period of instruction for each course. Application fee revenue and related costs are deferred and recognized on a pro rata basis over the period of the program. Seminars, continuing education programs, and many of the College for Financial Planning’s non-degree programs are usually billed in one installment with the related revenue also recognized on a pro rata basis over the period of instruction.

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Estimates are used in determining our allowance for bad debts and are based on our historical collection experience, current trends, and a percentage of our accounts receivable by aging category. In determining these percentages, we look at historical write-offs of our receivables. A significant change in the aging of our accounts receivable balances would have an effect on the allowance for doubtful accounts balance. Our accounts receivable are written-off once the account is deemed to be uncollectible. This typically occurs once we have exhausted all efforts to collect the account which includes collection attempts by company employees and outside collection agencies.

Tuition and other revenues are shown net of discounts relating to a variety of promotional programs. Such discounts totaled $5.1 million and $3.5 million in 2003 and 2002, respectively.

Many of our students participate in government sponsored financial aid programs under Title IV of the Higher Education Act of 1965. These financial aid programs generally consist of guaranteed student loans and direct grants to students. Guaranteed student loans are issued directly to the student by external financial institutions, to whom the student is obligated, and are non-recourse to us.

Student deposits consist of payments made in advance of billings. As the student is billed, the student deposit is applied against the resulting student receivable.

Expenses

We categorize our expenses as instructional costs and services, selling and promotional, and general and administrative. Instructional costs and services at University of Phoenix, Western International University, and College for Financial Planning consist primarily of costs related to the delivery and administration of our educational programs that include faculty compensation, administrative salaries for departments that provide service directly to the students, financial aid processing costs, the costs of educational materials sold, facility leases and other occupancy costs, bad debt expense, and depreciation and amortization of property and equipment. University of Phoenix and Western International University faculty members are contracted for one course offering at a time. All classroom facilities are leased or, in some cases, are provided by the students’ employers at no charge to us. Instructional costs and services at Institute for Professional Development consist primarily of program administration, student services, and classroom lease expense. Most of the other instructional costs for Institute for Professional Development-assisted programs, including faculty, financial aid processing, and other administrative salaries, are the responsibility of its client institutions. Costs related to the start-up of new campuses and learning centers are expensed as incurred.

Selling and promotional costs consist primarily of compensation for enrollment counselors and corporate marketing, advertising costs, production of marketing materials, and other costs related to selling and promotional functions. We expense selling and promotional costs as incurred.

General and administrative costs consist primarily of administrative salaries, occupancy costs, depreciation and amortization, and other related costs for departments such as executive management, information systems, corporate accounting, human resources, and other departments that do not provide direct services to our students. To the extent possible, we centralize these services to avoid duplication of effort.

Impairment of intangible assets

Our intangible assets primarily consist of approximately $37.1 million in unamortized cost in excess of fair value of assets purchased (i.e. goodwill) resulting from our acquisitions of Western International University and the College for Financial Planning. Intangible assets, including cost in excess of fair value of assets purchased, are reviewed for impairment on an annual basis or whenever events or circumstances indicate that the estimated fair value is less than the related carrying value. The carrying value of cost in excess of fair value of assets purchased is assessed for any permanent impairment by evaluating the operating performance and using valuation techniques such as future discounted cash flows of the underlying businesses. In assessing the recoverability of our

goodwill and other intangibles we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record non-cash impairment charges for these assets not previously recorded.

RESULTS OF OPERATIONS

The following table sets forth our consolidated statement of operations data expressed as a percentage of tuition and other net revenues for the periods indicated:


		Three Months Ended
		November 30,

		2002			2001

		(Unaudited)
Revenues:
	Tuition and other, net		100.0	%		100.0	%

Costs and expenses:
	Instructional costs and services		46.0			51.2
	Selling and promotional		19.5			19.9
	General and administrative		5.2			6.4

			70.7			77.5

Income from operations			29.3			22.5
Interest income, net			1.1			1.3

Income before income taxes			30.4			23.8
Provision for income taxes			12.0			9.4

Net income			18.4	%		14.4	%

THREE MONTHS ENDED NOVEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED NOVEMBER 30, 2001

Tuition and other net revenues increased by 35.4% to $308.9 million in the three months ended November 30, 2002 from $228.2 million in the three months ended November 30, 2001 due primarily to a 29.0% increase in average full-time equivalent degree student enrollments and tuition price increases averaging four to six percent (depending on the geographic area and program) at University of Phoenix. Most of our University of Phoenix campuses, which include their respective learning centers, had increases in net revenues and average full-time equivalent degree student enrollments from the three months ended November 30, 2001 to the three months ended November 30, 2002.

Tuition and other net revenues for the three months ended November 30, 2002 and 2001 consist primarily of $291.4 million and $215.6 million, respectively, of net tuition revenues from students enrolled in degree programs and $2.6 million and $2.9 million, respectively, of net tuition revenues from students enrolled in non-degree programs.

Instructional costs and services increased by 21.7% to $142.1 million in the three months ended November 30, 2002 from $116.8 million in the three months ended November 30, 2001 due primarily to the direct costs necessary to support the increase in degree student enrollments. Direct costs consist primarily of faculty compensation, related staff salaries at each respective location, classroom lease expenses, and financial aid processing costs. These costs as a percentage of tuition and other net revenues decreased to 46.0% in the three months ended November 30, 2002 from 51.2% in the three months ended November 30, 2001 due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student services. We may not be able to leverage our recurring costs to the same extent as we face increased costs related to the expansion into new geographic markets.

Selling and promotional expenses increased by 32.8% to $60.3 million in the three months ended November 30, 2002 from $45.4 million in the three months ended November 30, 2001 due primarily to additional advertising and marketing expenditures and additional enrollment counselors. These expenses as a percentage of tuition and other net revenues remained fairly consistent decreasing to 19.5% in the three months ended November 30, 2002 from 19.9% in the three months ended November 30, 2001.

General and administrative expenses increased by 10.2% to $16.1 million in the three months ended November 30, 2002 from $14.7 million in the three months ended November 30, 2001 due primarily to increased employee compensation and related expenses partially offset by a $1.0 million contribution to the Twin Towers Fund made during the first three months of 2002. General and administrative expenses as a percentage of tuition and other net revenues decreased to 5.2% in the three months ended November 30, 2002 from 6.4% in the three months ended November 30, 2001 due primarily to greater tuition and other net revenues being spread over the fixed costs related to various centralized functions such as information services, corporate accounting, and human resources and the $1.0 million contribution to the Twin Towers Fund made during the first three months of 2002.

Net interest income was $3.5 million and $3.0 million in the three months ended November 30, 2002 and 2001, respectively. Interest expense was $105,000 and $89,000 for the three months ended November 30, 2002 and 2001, respectively.

Our effective tax rate remained relatively consistent increasing to 39.6% in the three months ended November 30, 2002 from 39.4% in the three months ended November 30, 2001.

Net income increased to $56.7 million in the three months ended November 30, 2002 from $33.0 million in the three months ended November 30, 2001 due primarily to increased enrollments, increased tuition rates, and improved utilization of instructional costs and services and general and administrative costs, partially offset by increased income tax expense.

SEASONALITY IN RESULTS OF OPERATIONS

We experience seasonality in our results of operations primarily as a result of changes in the level of student enrollments. While we enroll students throughout the year, second quarter (December through February) average full-time equivalent degree student enrollments and related revenues generally are lower than other quarters due to seasonal breaks in December and January. Second quarter costs and expenses historically increase as a percentage of tuition and other net revenues as a result of certain fixed costs not significantly affected by the seasonal second quarter declines in net revenues.

We experience a seasonal increase in new enrollments in August of each year when most other colleges and universities begin their fall semesters. As a result, instructional costs and services and selling and promotional expenses historically increase as a percentage of tuition and other net revenues in the fourth quarter due to increased costs in preparation for the August peak enrollments.

We anticipate that these seasonal trends in the second and fourth quarters will continue in the future.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities increased to $77.9 million in the three months ended November 30, 2002 from $47.0 million in the three months ended November 30, 2001. The increase resulted primarily from increased net income, a smaller increase in restricted cash and an increase in the tax benefit for options exercised partially offset by a larger increase in receivables and a smaller increase in student deposits and deferred revenue.

Capital expenditures increased to $14.1 million during the three months ended November 30, 2002 compared to $6.2 million in the three months ended November 30, 2001 primarily due to increases in the purchase of furniture and equipment to support the increase in student and employee levels. Total purchases of property and equipment for the year ended August 31, 2003 are expected to range from $45.0 to $50.0 million. These expenditures will primarily be related to new campuses and learning centers and increases in normal recurring capital expenditures due to the overall increase in student and employee levels resulting from the growth in the business.

At November 30, 2002, we had no outstanding borrowings on our $10.0 million line of credit. Borrowings under the line of credit bear interest at LIBOR plus .75% or prime at our election. At November 30, 2002, availability under the line of credit was reduced by an outstanding letter of credit of $8.8 million. The line of credit is renewable annually, and any amounts borrowed under the line are payable upon its termination in February 2004.

Our Board of Directors authorized a program allocating up to $150.0 million of our funds to repurchase shares of Apollo Education Group Class A common stock and University of Phoenix Online common stock. As of November 30, 2002, we had repurchased approximately 10,224,000 shares of Apollo Education Group Class A common stock at a total cost of approximately $113.2 million and approximately 455,000 shares of University of Phoenix Online common stock at a total cost of approximately $9.4 million.

On March 24, 2000, our Board of Directors authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Our other businesses and our retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining 89.2% interest in University of Phoenix Online. This percentage has decreased to 86.5% at November 30, 2002 due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan partially offset by the repurchase of shares of University of Phoenix Online common stock.

The U.S. Department of Education requires that Title IV Program funds collected in advance of student billings be kept in a separate cash or cash equivalent account until the students are billed for that portion of their program. In addition, all Title IV Program funds received by us through electronic funds transfer are subject to certain holding period restrictions. These funds generally remain in these separate accounts for an average of 60 to 75 days from receipt. As of November 30, 2002, we had approximately $105.9 million in these separate accounts, which are reflected in the Consolidated Balance Sheet as restricted cash, to comply with these requirements. These restrictions on cash have not affected our ability to fund daily operations.

The U.S. Department of Education Office of the Inspector General (“OIG”) is currently auditing the administration of the federal student financial assistance programs in connection with educational programs provided pursuant to contractual arrangements between Institute for Professional Development and certain of its client institutions. In audit reports issued to eight client institutions, the OIG asserted that the client institutions violated the statutory prohibition on the use of incentive payments for recruiting by paying Institute for Professional Development a percentage of tuition revenue. The reports further suggest that Institute for Professional Development paid its employees in a manner that included incentive-based compensation even though Institute for Professional Development based its compensation plans for recruiters on factors or qualities that were not solely related to the success in securing enrollments. Additionally, the audit reports question the client institutions’ interpretation of the “12-hour rule.” Although both Institute for Professional Development and the client institutions believe that the matters in question do not relate to student program or institutional eligibility and, therefore, believe a repayment of federal funds is not appropriate, the OIG has recommended to the U.S. Department of Education that the client institutions be required to return to lenders all loan funds disbursed. The institutions, with Institute for Professional Development’s assistance, will work with the U.S. Department of Education to eliminate or settle the issues raised in the audit reports.

During 2001, Institute for Professional Development recorded a charge of $5.1 million to provide for its share of the estimated settlement obligation relating to all of its client institutions under audit. Our calculation of the estimated settlement obligation, which was reflected in instructional costs and services in 2001, was based on information available to us and our previous experience with respect to such settlements.

Although we believe that the OIG’s audits of certain Institute for Professional Development’s client institutions will be resolved without any material effect on our financial position, results of operations, or cash flows, and without any material change in Institute for Professional Development’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”). Under this standard, asset retirement obligations will be recognized when incurred at their estimated fair value. In addition, the cost of the asset retirement obligations will be capitalized as a part of the asset’s carrying value and depreciated over the asset’s remaining useful life. The adoption of SFAS No. 143 on September 1, 2002 did not have a material impact on our financial condition or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2002 (“SFAS No. 145”). This standard rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes extraordinary item treatment for gains and losses associated with the extinguishment of debt that do not meet the Accounting Principles Board Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB No. 30”) criteria. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases as well as other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of SFAS No. 145 effective September 1, 2002 did not have a material impact on our financial condition or results of operations.

exit or disposal activities and replaces Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (“EITF No. 94-3”). SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for exit costs as defined in EITF No. 94-3 is recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002.

IMPACT OF INFLATION

Inflation has not had a significant impact on our historical operations.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Our portfolio of marketable securities includes numerous issuers, varying types of securities and varying maturities. We intend to hold these securities to maturity. The fair value of our portfolio of marketable securities would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due primarily to the short-term nature of the portfolio. We do not hold or issue derivative financial instruments.

Item 4 — Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control procedures and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the President and Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. There were no significant changes in our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.


Item 2.	Changes in Securities and Use of Proceeds	Not Applicable
Item 3.	Defaults Upon Senior Securities	Not Applicable
Item 4.	Submission of Matters to a Vote of Security Holders	Not Applicable
Item 5.	Other Information	Not Applicable
Item 6.	Exhibits and Reports on Form 8-K

(a) Exhibits:


Exhibit 15.1		Letter on Unaudited Interim Financial Information
Exhibit 99.1		University of Phoenix Online Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations
Exhibit 99.2		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
Exhibit 99.3		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

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the three months ended November 30, 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		APOLLO GROUP, INC. (Registrant)

Date: January 14, 2003

	By:	/s/ Kenda B. Gonzales Kenda B. Gonzales Chief Financial Officer

	By:	/s/ Daniel E. Bachus Daniel E. Bachus Chief Accounting Officer and Controller

	By:	/s/ Todd S. Nelson Todd S. Nelson President and Chief Executive Officer

CERTIFICATIONS

I, Todd S. Nelson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apollo Group, Inc. (the “registrant”);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: January 14, 2003

		/s/ Todd S. Nelson Todd S. Nelson President and Chief Executive Officer

CERTIFICATIONS—(Continued)

I, Kenda B. Gonzales, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apollo Group, Inc. (the “registrant”);

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date: January 14, 2003

		/s/ Kenda B. Gonzales Kenda B. Gonzales Chief Financial Officer

APOLLO GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX


Exhibit Number		Description of Exhibit

15.1		Letter on Unaudited Interim Financial Information
99.1		University of Phoenix Online Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations
99.2		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
99.3		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

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

(b)		Reports on Form 8-K

		No reports on Form 8-K were filed during the three months ended November 30, 2002.