UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-25232
APOLLO GROUP, INC.
------------------
(Exact name of registrant as specified in its charter)
ARIZONA 86-0419443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)
(602) 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.
[X] Yes [ ] No
SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK
AS OF JUNE 19, 1998
Class A Common Stock, no par 77,015,536 Shares
Class B Common Stock, no par 547,819 Shares
1 <PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
PART I -- FINANCIAL INFORMATION ----
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . .11
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .18
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . .18
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . .18
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .18
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
2 <PAGE>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
<TABLE>
Apollo Group, Inc. and Subsidiaries
Consolidated Statement of Operations
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Tuition and other, net $105,201 $76,633 $278,154 $203,422
Interest income 1,582 1,209 4,293 3,055
-------- ------- -------- --------
Total net revenues 106,783 77,842 282,447 206,477
-------- ------- -------- --------
Costs and expenses:
Instruction costs and services 61,093 43,572 168,496 121,269
Selling and promotional 11,504 8,492 32,840 25,463
General and administrative 8,479 6,522 25,041 19,856
-------- ------- -------- --------
Total costs and expenses 81,076 58,586 226,377 166,588
-------- ------- -------- --------
Income before income taxes 25,707 19,256 56,070 39,889
Less provision for income taxes 10,185 7,702 22,209 15,954
-------- ------- -------- --------
Net income $ 15,522 $11,554 $ 33,861 $ 23,935
======== ======= ======== ========
Basic net income per share $ .20 $ .15 $ .44 $ .32
======== ======= ======== ========
Diluted net income per share $ .20 $ .15 $ .43 $ .31
======== ======= ======== ========
Basic weighted average shares
outstanding 77,459 75,783 77,130 75,490
Diluted weighted average shares
outstanding 79,250 77,733 78,991 77,618
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
3 <PAGE>
<TABLE>
Apollo Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
<CAPTION>
May 31, August 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets --
Cash and cash equivalents $ 56,193 $ 58,928
Restricted cash 23,838 19,927
Investments 32,273 27,182
Receivables, net 47,917 32,040
Inventory 2,907 2,220
Deferred tax assets, net 4,854 2,873
Prepaids and other current assets 1,843 633
--------- ---------
Total current assets 169,825 143,803
Property and equipment, net 37,217 25,251
Investments 24,262 14,747
Educational program production costs, net 2,034 1,836
Non-operating property 5,638 5,611
Cost in excess of fair value of assets purchased, net 47,629 2,283
Deposits and other assets 4,262 1,379
--------- ---------
Total assets $290,867 $194,910
========= =========
Liabilities and Shareholders' Equity:
Current liabilities --
Current portion of long-term liabilities $ 233 $ 295
Accounts payable 8,583 7,714
Other accrued liabilities 17,697 11,449
Income taxes payable 793 253
Student deposits and current portion of deferred revenue 63,072 47,683
--------- ---------
Total current liabilities 90,378 67,394
--------- ---------
Deferred tuition revenue, less current portion 11,032 --
--------- ---------
Long-term liabilities, less current portion 2,637 2,494
--------- ---------
Deferred tax liabilities, net 775 705
--------- ---------
Commitments and contingencies -- --
--------- ---------
Shareholders' equity --
Preferred stock, no par value, 1,000,000 shares authorized, none issued -- --
Class A nonvoting common stock, no par value, 400,000,000 shares authorized;
77,016,000 and 75,614,000 issued and outstanding at May 31, 1998 and
August 31, 1997, respectively 101 66
Class B voting common stock, no par value, 3,000,000 shares authorized;
548,000 issued and outstanding at May 31, 1998 and August 31, 1997 1 1
Additional paid-in capital 79,348 51,521
Retained earnings 106,595 72,729
--------- ---------
Total shareholders' equity 186,045 124,317
--------- ---------
Total liabilities and shareholders' equity $290,867 $194,910
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4 <PAGE>
<TABLE>
Apollo Group, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In thousands)
<CAPTION>
Nine Months Ended
May 31,
---------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Net cash received from (used for) operating activities:
Cash received from customers $273,864 $205,342
Cash paid to employees and suppliers (214,138) (157,535)
Interest received 3,842 2,583
Interest paid (48)
Net income taxes paid (23,811) (16,074)
-------- --------
Net cash received from operating activities 39,709 34,316
-------- --------
Net cash received from (used for) investing activities:
Purchase of investments (32,476) (20,658)
Proceeds from investment maturities 17,486 8,648
Cash paid at acquisition of the College, net of
cash acquired (19,378)
Purchase of property and equipment (18,826) (8,551)
Purchase of non-operating property (28) (1,263)
Additions to educational program production costs (1,112) (1,159)
Proceeds from sale of assets 18 62
-------- --------
Net cash used for investing activities (54,316) (22,921)
-------- --------
Net cash received from (used for) financing activities:
Tax benefits related to disqualifying dispositions and
exercise of options 6,809 5,065
Issuance of stock 5,109 1,994
Principal payments on long-term debt (50) (50)
-------- --------
Net cash received from financing activities 11,868 7,009
-------- --------
Effect of exchange rate changes on cash 4 --
-------- --------
Net increase (decrease) in cash and cash equivalents (2,735) 18,404
Cash and cash equivalents, beginning of period 58,928 51,982
-------- --------
Cash and cash equivalents, end of period $ 56,193 $ 70,386
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
5 <PAGE>
Apollo Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. The interim consolidated financial statements include the accounts of
Apollo Group, Inc. ("Apollo" or the "Company") and its wholly-owned
subsidiaries, which include the University of Phoenix, Inc. ("UOP"), the
Institute for Professional Development ("IPD"), Western International
University, Inc. ("WIU") and the College for Financial Planning (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 1998 and 1997 refer to the
periods ended May 31, 1998 and 1997, respectively.
2. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for
the fiscal year ended August 31, 1997 included in the Company's Form 10-K as
filed with the Securities and Exchange Commission. The interim financial
information for 1998 and 1997 was reviewed by Price Waterhouse LLP (see
"Review by Independent Accountants").
3. The results of operations for the three-month and nine-month periods
ended May 31, 1998 are not necessarily indicative of the results to be
expected for the entire fiscal year or any future period.
4. In September 1997, the Company acquired the assets and related business
operations of the College for Financial Planning and related divisions that
include the Institute for Wealth Management, the Institute for Retirement
Planning, the American Institute for Retirement Planners, Inc. and the
Institute for Tax Studies. The purchase price consisted of $19.1 million in
cash, $15.9 million in stock and the assumption of approximately $17.3
million in liabilities, consisting primarily of deferred tuition revenue.
The excess of cost over the value of tangible assets of $45.9 million is
being amortized over 35 years.
5. In November 1997, the Company increased its line of credit from $4.0 to
$10.0 million. At May 31, 1998, the Company had no outstanding borrowings on
the line of credit, which bears interest at prime. In February 1998, the
Company modified its line of credit agreement to extend the termination date
to February 1, 2000. Any amounts borrowed under the line of credit are
payable upon its termination in February 2000.
6. In November 1997, the Department of Education ("DOE") released amended
regulations relating to the DOE's Standards of Financial Responsibility.
These regulations are intended to provide a more comprehensive measure of an
institution's financial condition. The revised regulations take effect on
July 1, 1998 and apply to UOP and WIU. Based on an application of the
standards to the August 31, 1997 financial statements of UOP and WIU, the
Company believes that UOP and WIU currently meet the requirements under the
amended regulations and anticipates meeting the requirements when they become
effective on July 1, 1998.
6 <PAGE>
7. In February 1998, the Company adopted Statement of Financial Accounting
Standards 128, "Earnings Per Share". As a result, earnings per share
calculations for all prior periods have been restated.
A reconciliation of the basic and diluted per share computations for
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended May 31,
(In thousands, except per share amounts)
(Unaudited)
----------------------------------------------------------
1998 1997
--------------------------- ----------------------------
Weighted Weighted
Avg. Per Share Avg. Per Share
Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income
per share $15,522 77,459 $ .20 $11,554 75,783 $ .15
===== =====
Effect of dilutive
securities:
Stock options 1,791 1,950
------- ------ ------- ------
Diluted net income
per share $15,522 79,250 $ .20 $11,554 77,733 $ .15
======= ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended May 31,
(In thousands, except per share amounts)
(Unaudited)
----------------------------------------------------------
1998 1997
--------------------------- ----------------------------
Weighted Weighted
Avg. Per Share Avg. Per Share
Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income
per share $33,861 77,130 $ .44 $23,935 75,490 $ .32
===== =====
Effect of dilutive
securities:
Stock options 1,861 2,128
------- ------ ------- ------
Diluted net income
per share $33,861 78,991 $ .43 $23,935 77,618 $ .31
======= ====== ===== ======= ====== =====
</TABLE>
7 <PAGE>
8. On April 9, 1998, the Company authorized a 3-for-2 stock split of its
Common Stock effected in the form of a stock dividend that was distributed on
April 27, 1998 to shareholders of record at the close of business on April
13, 1998. The shareholders of the Company's Common Stock received a stock
dividend at the rate of one-half share of Class A Common Stock for each share
of Class A or Class B Common Stock owned. All Common Stock, Common Stock
prices and earnings per share figures for periods prior to the stock split
have been restated to reflect this and previous stock splits effected in the
form of stock dividends.
9. Certain costs and expenses for the nine months ended May 31, 1998 have
been reclassified, having no effect on net income.
8 <PAGE>
Review by Independent Accountants
The financial information as of May 31, 1998, and for the three-month
and nine-month periods then ended, included in Part I pursuant to Rule 10-01
of Regulation S-X, has been reviewed by Price Waterhouse LLP ("Price
Waterhouse"), the Company's independent accountants, in accordance with
standards established by the American Institute of Certified Public
Accountants. Price Waterhouse's report is included in this quarterly report.
Price Waterhouse does not carry out any significant or additional audit
tests beyond those that would have been necessary if its report had not been
included in this quarterly report. Accordingly, such report is not a
"report" or "part of a registration statement" within the meaning of Sections
7 and 11 of the Securities Act of 1933 and the liability provisions of
Section 11 of such Act do not apply.
9 <PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Apollo Group, Inc.:
We have reviewed the accompanying consolidated balance sheet of Apollo Group,
Inc. and its subsidiaries as of May 31, 1998, and the related consolidated
statement of operations for the three-month and nine-month periods ended May
31, 1998 and 1997 and the consolidated statement of cash flows for the nine-
month periods ended May 31, 1998 and 1997. These financial statements are
the responsibility of Apollo Group, Inc.'s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of August 31, 1997, and the
related consolidated statements of operations, of changes in shareholders'
equity and of cash flows for the year then ended (not presented herein), and
in our report dated October 13, 1997 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, 1997, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ PRICE WATERHOUSE LLP
Phoenix, Arizona
June 18, 1998
10 <PAGE
PART I -- FINANCIAL INFORMATION
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto for
the fiscal year ended August 31, 1997 included in the Company's Form 10-K as
filed with the Securities and Exchange Commission, as well as in conjunction
with the consolidated financial statements and notes thereto for the three-
month and nine-month periods ended May 31, 1998 included in Item 1.
This quarterly report on Form 10-Q contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the
Company from time to time in filings with the Securities and Exchange
Commission or otherwise. The words "believe," "plan," "expect,"
"anticipate," "project" and similar expressions identify forward-looking
statements, which speak only as of the date the statement was made. Such
forward-looking statements are within the meaning of that term in Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements may include, but are not
limited to, projections of revenues, income or loss, expenses, capital
expenditures, plans for future operations, financing needs or plans, the
impact of inflation and plans relating to products or services of the
Company, as well as assumptions relating to the foregoing. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Statements in
this quarterly report, including "Notes to Consolidated Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations," describe factors, among others, that could contribute to or
cause such differences. Additional factors that could cause actual results
to differ materially from those expressed in such forward-looking statements
include, without limitation, new or revised interpretations of regulatory
requirements, changes in or new interpretations of other applicable laws,
rules and regulations, failure to maintain or renew required regulatory
approvals, accreditation or state authorizations by UOP or certain IPD
institutions, failure to obtain authorizations from states in which UOP does
not currently provide degree programs, failure to obtain the North Central
Association of Colleges and Schools'("NCA") approval for UOP to operate in
new states, changes in student enrollment, and other factors set forth in
"Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's Annual Report on Form 10-K for
the year ended August 31, 1997.
11 <PAGE>
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth consolidated statement of operations data
of the Company expressed as a percentage of net revenues for the periods
indicated:
<CAPTION>
Three Months Nine Months
Ended May 31, Ended May 31,
----------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Tuition and other, net 98.5% 98.4% 98.5% 98.5%
Interest income 1.5 1.6 1.5 1.5
------ ------ ------ ------
Total net revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and expenses:
Instruction costs and services 57.2 56.0 59.6 58.8
Selling and promotional 10.8 10.9 11.6 12.3
General and administrative 7.9 8.4 8.9 9.6
------ ------ ------ ------
Total costs and expenses 75.9 75.3 80.1 80.7
------ ------ ------ ------
Income before income taxes 24.1 24.7 19.9 19.3
Less provision for income taxes 9.6 9.9 7.9 7.7
------ ------ ------ ------
Net income 14.5% 14.8% 12.0% 11.6%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MAY 31, 1998 (THIRD QUARTER OF 1998) COMPARED
WITH THREE MONTHS ENDED MAY 31, 1997 (THIRD QUARTER OF 1997)
Net revenues increased by 37.2% to $106.8 million in the three months
ended May 31, 1998 from $77.8 million in the three months ended May 31, 1997.
This is due primarily to an increase in student enrollments from 1997 to
1998, tuition price increases averaging four to five percent, a higher
concentration of enrollments at locations that charge a higher rate per
credit hour and net revenues from the College. All UOP campuses, which
include their respective learning centers, WIU and most IPD campuses had
increases in net revenues and student enrollments from 1997 to 1998.
Tuition and other net revenues for the three months ended May 31, 1998
and 1997 consists primarily of $91.8 million and $66.9 million, respectively,
of net tuition revenues from students enrolled in degree programs and $6.5
million and $4.2 million, respectively, of net tuition revenues from students
enrolled in non-degree programs. Average degree-program enrollments
increased over 28% to 66,600 in 1998 from 52,000 in 1997.
Interest income for the three months ended May 31, 1998 increased to
$1.6 million from $1.2 million in the three months ended May 31, 1997 due
primarily to the increase in cash and investments from 1997 to 1998 and to a
higher average yield on the related investments.
12 <PAGE>
Instruction costs and services increased by 40.2% to $61.1 million in
the three months ended May 31, 1998 from $43.6 million in the three months
ended May 31, 1997 due primarily to the direct costs necessary to support the
increase in average student enrollments and the added costs related to the
acquisition of the College in September 1997. These costs consist primarily
of faculty compensation, classroom lease expenses and related staff salaries.
These expenses as a percentage of net revenues increased to 57.2% in the
three months ended May 31, 1998 from 56.0% in the three months ended May 31,
1997 due primarily to increased costs related to processing student financial
aid programs, the opening of new campuses and learning centers, and added
costs related to the College.
Selling and promotional expenses increased by 35.5% to $11.5 million in
the three months ended May 31, 1998 from $8.5 million in the three months
ended May 31, 1997 due primarily to additional marketing and advertising
costs incurred for newly opened campuses and learning centers, costs related
to the College, and additional costs incurred to support continued growth for
existing campuses and learning centers. These expenses as a percentage of
net revenues remained relatively the same at 10.8% for the three months ended
May 31, 1998 and 10.9% for the three months ended May 31, 1997.
General and administrative expenses increased by 30.0% to $8.5 million
in the three months ended May 31, 1998 from $6.5 million in the three months
ended May 31, 1997 due primarily to increased costs required to support the
increased number of campuses and learning centers and for expenses related to
computer system conversions and upgrades. These expenses as a percentage of
net revenues decreased to 7.9% in the three months ended May 31, 1998 from
8.4% in the three months ended May 31, 1997 due primarily to higher net
revenues being spread over fixed costs related to various centralized
functions.
Costs related to the startup of new campuses and learning centers are
expensed as incurred and totaled approximately $1.4 million in the three
months ended May 31, 1998 and $653,000 in the three months ended May 31,
1997. Interest expense, which is allocated among all categories of costs and
expenses, was less than $25,000 in the three months ended May 31, 1998 and
1997.
The Company's effective tax rate remained relatively the same at 39.6%
and 40.0% in the three months ended May 31, 1998 and 1997, respectively.
Net income increased by 34.3% to $15.5 million in the three months ended
May 31, 1998 from $11.6 million in the three months ended May 31, 1997 due
primarily to increased enrollments, increased tuition rates and improved
utilization of general and administrative expenses.
13 <PAGE>
NINE MONTHS ENDED MAY 31, 1998 COMPARED WITH NINE MONTHS ENDED MAY 31, 1997
Net revenues increased by 36.8% to $282.4 million in the nine months
ended May 31, 1998 from $206.5 million in the nine months ended May 31, 1997.
This is due primarily to an increase in student enrollments from 1997 to
1998, tuition price increases averaging four to five percent, a higher
concentration of enrollments at locations that charge a higher rate per
credit hour and to net revenues from the College. All UOP campuses, which
include their respective learning centers, WIU and most IPD campuses had
increases in net revenues and student enrollments from 1997 to 1998.
Tuition and other net revenues for the nine months ended May 31, 1998
and 1997 consists primarily of $241.2 million and $178.4 million,
respectively, of net tuition revenues from students enrolled in degree
programs and $16.5 million and $9.4 million, respectively, of net tuition
revenues from students enrolled in non-degree programs. Average degree-
program enrollments increased over 26.0% to 62,700 in 1998 from 49,700 in
1997.
Interest income increased to $4.3 million in the nine months ended May
31, 1998 from $3.1 million in the nine months ended May 31, 1997 due
primarily to the increase in cash and investments from 1997 to 1998 and to a
higher average yield on the related investments.
Instruction costs and services increased by 38.9% to $168.5 million in
the nine months ended May 31, 1998 from $121.3 million in the nine months
ended May 31, 1997 due primarily to the direct costs necessary to support the
increase in average student enrollments and the added costs related to the
College. These costs as a percentage of net revenues increased to 59.6% in
the nine months ended May 31, 1998 from 58.8% in the nine months ended May
31, 1997 due to increased costs related to processing student financial aid
programs, the opening of new campuses and learning centers, and added costs
related to the College.
Selling and promotional expenses increased by 29.0% to $32.8 million in
the nine months ended May 31, 1998 from $25.5 million in the nine months
ended May 31, 1997 due primarily to increased marketing and advertising at
the Company's campuses and learning centers and additional costs related to
the College. These expenses as a percentage of net revenues decreased to
11.6% in the nine months ended May 31, 1998 from 12.3% in the nine months
ended May 31, 1997 due to the Company's ability to increase enrollments in
existing markets and to open new learning centers with a proportionately
lower increase in selling and promotional expenses.
General and administrative expenses increased by 26.1% to $25.0 million
in the nine months ended May 31, 1998 from $19.9 million in the nine months
ended May 31, 1997 due primarily to increased costs required to support the
increased number of campuses and learning centers and for expenses related to
computer system conversions and upgrades. These expenses as a percentage of
net revenues decreased to 8.9% in the nine months ended May 31, 1998 from
9.6% in the nine months ended May 31, 1997 due primarily to higher net
revenues being spread over fixed costs related to centralized functions.
14 <PAGE>
Costs related to the startup of new campuses and learning centers are
expensed as incurred and totaled approximately $4.9 million in the nine
months ended May 31, 1998 and $2.9 million in the nine months ended May 31,
1997. Interest expense, which is allocated among all categories of costs and
expenses, was less than $50,000 in the nine months ended May 31, 1998 and
1997.
The Company's effective tax rate remained relatively the same at 39.6%
and 40.0% in the nine months ended May 31, 1998 and 1997, respectively.
Net income increased by 41.5% to $33.9 million in the nine months ended
May 31, 1998 from $23.9 million in the nine months ended May 31, 1997 due
primarily to increased enrollments, increased tuition rates and improved
utilization of selling and promotional costs and general and administrative
expenses.
SEASONALITY
The Company experiences seasonality in its results of operations
primarily as a result of changes in the level of student enrollments. While
the Company enrolls students throughout the year, second quarter (December to
February) average enrollments for degree-seeking students and the related
revenues generally are lower than other quarters due to the holiday breaks in
December and January. Second quarter costs and expenses historically
increase as a percentage of net revenues as a result of certain fixed costs
not significantly affected by the seasonal second quarter declines in net
revenues.
The Company experiences a seasonal increase in new enrollments in degree
programs in August of each year when most other colleges and universities
begin their fall semesters. As a result, instruction costs and services and
selling and promotional expenses historically increase as a percentage of net
revenues in the fourth quarter due to increased costs in preparation for the
August peak enrollments. The Company anticipates that these seasonal trends
in the second and fourth quarters will continue in the future. Historically,
the third quarter of each fiscal year is the highest in terms of operating
profits and net income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $79.4 million at May 31, 1998
from $76.4 million at August 31, 1997 due primarily to $39.7 million in cash
generated from operations during the nine months ended May 31, 1998, a $9.0
million increase in restricted cash and short-term investments and a $15.9
million increase in net accounts receivable, offset by the $19.4 million in
cash used in the acquisition of the College, $18.8 million in capital
expenditures, and a $15.4 million increase in student deposits and current
portion of deferred revenue.
In November 1997, the Company increased its line of credit from $4.0 to
$10.0 million. At May 31, 1998, the Company had no outstanding borrowings on
the line of credit, which bears interest at prime. The line of credit is
renewable annually and any amounts borrowed under the line are payable upon
its termination in February 2000.
Net cash received from operating activities increased to $39.7 million
in the nine months ended May 31, 1998 from $34.3 million in the nine months
ended May 31, 1997 due primarily to the timing of receipts from
15 <PAGE>
customers and payments to suppliers and a $9.9 million increase in net income
from 1997 to 1998 offset by a $7.7 million increase in income taxes paid.
Capital expenditures and additions to educational program production costs
increased to $20.0 million in the nine months ended May 31, 1998 from $11.0
million in the nine months ended May 31, 1997 due primarily to purchases made
to support the increase in student enrollments and the number of locations
and for costs related to the first phase of the conversion of the Company's
student records system. Total purchases of property, equipment and land for
the year ended August 31, 1998 are expected to range from $26.0 million to
$30.0 million compared to $14.1 million for the year ended August 31, 1997.
The increase from 1997 is due to: (1) hardware and software related to the
Company's planned conversion to new student records and human resource
systems; (2) a greater number of planned new campuses and learning centers
compared to 1997; (3) improvements to the Company's computer facilities and
telecommunications equipment at the corporate level and (4) increases in
normal recurring capital expenditures due to the overall increase in student
and employee levels resulting from the growth in the business and the
acquisition of the College. Additions to educational program production
costs are not expected to exceed $2.0 million for the year ended August 31,
1998. Startup costs relating to new campuses and learning centers are
expected to range from $6.0 million to $9.0 million in 1998, as compared to
$3.6 million for the year ended August 31, 1997, due to recent and planned
expansion into new geographic markets.
Net receivables at May 31, 1998 totaled $47.9 million, or 44.9% of third
quarter 1998 total net revenues. This compares to $28.9 million in net
receivables at May 31, 1997, or 37.1% of third quarter 1997 net revenues.
The increase in receivables as a percentage of net revenues from May 1997 to
May 1998 was due primarily to a backlog in collections and billings and a
backlog in processing new financial aid loans to students as a result of the
significant increase in students and related financial aid applications
during the nine months ending May 31, 1998.
The DOE requires that Title IV Program funds collected by an institution
for unbilled tuition be kept in a separate cash or cash equivalent account
until the students are billed for the portion of their program related to
these Title IV Program funds. In addition, all funds transferred to the
Company through electronic funds transfer programs are held in a separate
cash account until certain conditions are satisfied. As of May 31,
1998, the Company had approximately $23.8 million in these separate accounts,
which are reflected as restricted cash, to comply with these requirements.
These funds generally remain in these separate accounts for an average of 60-
75 days from the date of collection. These restrictions on cash have not
affected the Company's ability to fund daily operations.
As previously disclosed, the Company began offering an alternative
student loan program on a test basis at several of its campuses in March
1997. In May 1998, this pilot program was discontinued. The loans currently
outstanding will continue to be serviced by the commercial lender that
offered the program under the original terms and conditions. Loans for
students that did not meet certain credit requirements were guaranteed by the
Company, subject to certain limitations. At May 31, 1998, the Company had
guaranteed approximately $8.8 million in available credit, approximately $2.3
million of which was borrowed by the students at that date. To date, there
have been no material defaults by students whose loans are guaranteed by the
Company.
16 <PAGE>
DEPARTMENT OF EDUCATION REVIEWS
Effective September 1, 1995, the Company, through its newly formed WIU
subsidiary, completed the acquisition of Western International University
("Western"). As previously disclosed, the Company assumed the Title IV
liabilities of Western which were subject to change based on the results of
the DOE's audit of Western's Title IV Programs. Although much of the
fieldwork was completed in early 1996, the final audit results and the amount
that the Company is responsible for has not been determined by the DOE at the
current time. The original acquisition price of $2.1 million was adjusted to
$3.0 million at August 31, 1996 to reflect an increase in the estimated
liability to the DOE related to Western's processing of Title IV financial
aid and other related liabilities. Depending on the interpretation of the
various regulatory requirements, the final audit results and the Company's
liability may differ materially from the estimates currently recorded. Any
difference between the final amount and the estimates currently recorded will
be recorded as an increase or decrease to expense.
UOP's most recent DOE program reviews and audits began in March 1997,
and an initial draft of the program review has been received. There were
several findings that will require additional review and follow up with the
DOE in order to bring the program review to closure. Additionally, the
routine exit interview on the DOE audit indicated certain issues to be
further evaluated, but the Company is unable to quantify these matters until
it receives additional information from the DOE. UOP expects to receive
notification as to their results of the program reviews and audits during the
calendar year 1998.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its
software systems and applications to ensure the Company is year 2000
compliant. The financial impact to the Company to ensure year 2000
compliance has not been and is not anticipated to be material to its
financial position or results of operations.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
17 <PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . .Not Applicable
Item 2. Changes in Securities . . . . . . . . . . . . . . . .Not Applicable
Item 3. Defaults Upon Senior Securities . . . . . . . . . . .Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders .Not Applicable
Item 5. Other Information . . . . . . . . . . . . . . . . . .Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 15.1 Letter on Unaudited Interim Financial Information
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended May
31, 1998.
18 <PAGE>
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 23, 1998 By: /s/ Junette C. West
---------------------------------
Junette C. West
Vice President-Controller
(Chief Accounting Officer)
By: /s/ Todd S. Nelson
----------------------------------
Todd S. Nelson
President
(Duly Authorized Officer)
19 <PAGE>
APOLLO GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
PAGE
15.1 Letter on Unaudited Interim Financial Information Filed herewith
27 Financial Data Schedule Filed herewith
20 <PAGE>
Exhibit 15.1
Letter on Unaudited Interim Financial Information
June 23, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Apollo Group, Inc. has incorporated by
reference our report dated June 18, 1998 (issued pursuant to
the provisions of Statement on Auditing Standards No. 71) in
its Registration Statements on Form S-8 (Nos. 33-87844, 33-
88982, 33-88984 and 33-63429). We are also aware of our
responsibilities under the Securities Act of 1933.
Yours very truly,
/s/ Price Waterhouse LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Operations and the Consolidated Balance Sheet and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000929887
<NAME> APOLLO GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 80,031
<SECURITIES> 32,273
<RECEIVABLES> 55,548
<ALLOWANCES> 7,631
<INVENTORY> 2,907
<CURRENT-ASSETS> 169,825
<PP&E> 59,536
<DEPRECIATION> 22,319
<TOTAL-ASSETS> 290,867
<CURRENT-LIABILITIES> 90,378
<BONDS> 0
0
0
<COMMON> 102
<OTHER-SE> 185,943
<TOTAL-LIABILITY-AND-EQUITY> 290,867
<SALES> 8,502
<TOTAL-REVENUES> 282,447
<CGS> 9,293
<TOTAL-COSTS> 201,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,823
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 56,070
<INCOME-TAX> 22,209
<INCOME-CONTINUING> 33,861
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,861
<EPS-PRIMARY> .44<F1>
<EPS-DILUTED> .43<F1>
<FN>
<F1>On April 9, 1998, the Company authorized a 3-for-2 stock split of its Common
Stock effected in the form of a stock dividend that was distributed on April
27, 1998 to shareholders of record at the close of business on April 13, 1998.
Financial Data Schedules reported prior to the stock split have not been
restated to reflect this and previous stock splits effected in the form of
stock dividends.
</FN>
</TABLE>
