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 February 28, 1999
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 APRIL 5, 1999
Class A Common Stock, no par 77,730,027 Shares
Class B Common Stock, no par 511,484 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 . . . . . . . . . . . . . . .10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .17
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 Six Months Ended
February 28, February 28,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Tuition and other, net $109,356 $ 85,078 $225,054 $172,953
Interest income 1,304 1,386 2,616 2,711
-------- -------- -------- --------
Total net revenues 110,660 86,464 227,670 175,664
-------- -------- -------- --------
Costs and expenses:
Instruction costs and services 65,619 54,780 133,287 107,403
Selling and promotional 18,517 10,770 36,449 21,336
General and administrative 9,536 8,116 18,661 16,562
-------- -------- -------- --------
Total costs and expenses 93,672 73,666 188,397 145,301
-------- -------- -------- --------
Income before income taxes 16,988 12,798 39,273 30,363
Less provision for income taxes 6,833 5,068 15,580 12,024
-------- -------- -------- --------
Net income $ 10,155 $ 7,730 $ 23,693 $ 18,339
======== ======== ======== ========
Basic net income per share $ .13 $ .10 $ .30 $ .24
======== ======== ======== ========
Diluted net income per share $ .13 $ .10 $ .30 $ .23
======== ======== ======== ========
Basic weighted average shares
outstanding 78,028 77,171 77,765 76,965
Diluted weighted average shares
outstanding 79,195 79,035 79,177 78,862
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>
February 28, August 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets --
Cash and cash equivalents $ 51,336 $ 52,326
Restricted cash 25,278 22,713
Marketable securities 31,765 27,538
Receivables, net 75,953 61,282
Deferred tax assets, net 6,403 6,203
Other current assets 3,465 3,945
--------- ---------
Total current assets 194,200 174,007
Property and equipment, net 59,858 46,618
Marketable securities 8,550 17,929
Investment in joint venture 10,701 10,807
Cost in excess of fair value of assets purchased, net 40,601 41,398
Other assets 18,305 14,401
--------- ---------
Total assets $332,215 $305,160
========= =========
Liabilities and Shareholders' Equity:
Current liabilities --
Current portion of long-term liabilities $ 333 $ 333
Accounts payable 7,563 9,684
Accrued liabilities 17,630 21,311
Income taxes payable 1,007
Student deposits and current portion of deferred revenue 70,597 63,239
--------- ---------
Total current liabilities 96,123 95,574
--------- ---------
Deferred tuition revenue, less current portion 6,144 4,592
--------- ---------
Long-term liabilities, less current portion 3,738 3,750
--------- ---------
Deferred tax liabilities, net 2,003 1,436
--------- ---------
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;
77,712,000 and 77,112,000 issued and outstanding at February 28, 1999 and
August 31, 1998, respectively 102 101
Class B voting common stock, no par value, 3,000,000 shares authorized;
512,000 issued and outstanding at February 28, 1999 and August 31, 1998 1 1
Additional paid-in capital 95,857 80,677
Treasury stock, at cost, 580,000 shares (14,472)
Retained earnings 142,716 119,023
Cumulative translation adjustment 3 6
--------- ---------
Total shareholders' equity 224,207 199,808
--------- ---------
Total liabilities and shareholders' equity $332,215 $305,160
========= =========
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>
Six Months Ended
February 28,
---------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 23,693 $ 18,339
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,992 6,385
Provision for uncollectible accounts 6,116 4,483
Deferred income taxes 367 (183)
Tax benefits of stock options exercised 9,166 3,523
Increase in assets:
Restricted cash (2,565) (5,997)
Receivables, net (20,787) (15,588)
Other assets (3,316) (1,007)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (6,809) 3,505
Student deposits and deferred revenue 8,910 8,120
Other liabilities 188 89
-------- --------
Net cash provided by operating activities 23,955 21,669
-------- --------
Cash flows from investing activities:
Net additions to property and equipment (20,070) (9,199)
Maturities of marketable securities 9,025 12,730
Purchase of marketable securities (4,070) (15,838)
Purchase of other assets (1,170) (717)
Cash paid for acquisition (19,378)
-------- --------
Net cash used for investing activities (16,285) (32,402)
-------- --------
Cash flows from financing activities:
Purchase of common stock (14,472)
Issuance of common stock 6,015 3,246
Payments on long-term debt (200) (50)
-------- --------
Net cash provided by (used for) financing activities (8,657) 3,196
-------- --------
Effect of currency translation (3) 4
-------- --------
Net decrease in cash and cash equivalents (990) (7,533)
Cash and cash equivalents at beginning of period 52,326 58,928
-------- --------
Cash and cash equivalents at end of period $ 51,336 $ 51,395
======== ========
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 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 1999
and 1998 refer to the periods ended February 28, 1999 and 1998, 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, 1998 included in the Company's Form 10-K as
filed with the Securities and Exchange Commission. The interim financial
information for 1999 and 1998 was reviewed by PricewaterhouseCoopers LLP (see
"Review by Independent Accountants").
3. The results of operations for the three-month and six-month periods
ended February 28, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year or any future period.
4. During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" ("SFAS 130"), which is effective in the Company's 1999 fiscal year.
Under SFAS 130, companies are required to report comprehensive income as a
measure of overall performance. Comprehensive income includes all changes in
equity during a reporting period, except those resulting from investments by
owners and distributions to owners. The Company will be required to report
net income and foreign currency translation adjustments as components of
comprehensive income. The components of comprehensive income, other than net
income, were immaterial for the three-month and six-month periods ended
February 28, 1999.
6 <PAGE>
5. A reconciliation of the basic and diluted per share computations for
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended February 28,
(In thousands, except per share amounts)
(Unaudited)
----------------------------------------------------------
1999 1998
--------------------------- ----------------------------
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 $10,155 78,028 $ .13 $ 7,730 77,171 $ .10
===== =====
Effect of dilutive
securities:
Stock options 1,167 1,864
------- ------ ------- ------
Diluted net income
per share $10,155 79,195 $ .13 $ 7,730 79,035 $ .10
======= ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended February 28,
(In thousands, except per share amounts)
(Unaudited)
----------------------------------------------------------
1999 1998
--------------------------- ----------------------------
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 $23,693 77,765 $ .30 $18,339 76,965 $ .24
===== =====
Effect of dilutive
securities:
Stock options 1,412 1,897
------- ------ ------- ------
Diluted net income
per share $23,693 79,177 $ .30 $18,339 78,862 $ .23
======= ====== ===== ======= ====== =====
</TABLE>
6. Certain financial information for the three months and six months ended
February 28, 1998 has been reclassified to conform to the 1999 presentation,
having no effect on net income.
7<PAGE>
Review by Independent Accountants
The financial information as of February 28, 1999, and for the three-
month and six-month periods then ended, included in Part I pursuant to Rule
10-01 of Regulation S-X, has been reviewed by PricewaterhouseCoopers LLP
("PricewaterhouseCoopers"), the Company's 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.
8<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 February 28, 1999, and the related
consolidated statement of operations for the three-month and six-month
periods ended February 28, 1999 and 1998 and the consolidated statement of
cash flows for the six-month periods ended February 28, 1999 and 1998. 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, 1998, 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 19, 1998 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, 1998, 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
March 12, 1999
9<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, 1998 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 six-month periods ended February 28, 1999 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, 1998.
10<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 Six Months
Ended February 28, Ended February 28,
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Tuition and other, net 98.8% 98.4% 98.9% 98.5%
Interest income 1.2 1.6 1.1 1.5
------ ------ ------ ------
Total net revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and expenses:
Instruction costs and services 59.3 63.3 58.6 61.2
Selling and promotional 16.7 12.5 16.0 12.2
General and administrative 8.6 9.4 8.2 9.4
------ ------ ------ ------
Total costs and expenses 84.6 85.2 82.8 82.8
------ ------ ------ ------
Income before income taxes 15.4 14.8 17.2 17.2
Less provision for income taxes 6.2 5.9 6.8 6.8
------ ------ ------ ------
Net income 9.2% 8.9% 10.4% 10.4%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED FEBRUARY 28, 1999 (SECOND QUARTER OF 1999) COMPARED
WITH THREE MONTHS ENDED FEBRUARY 28, 1998 (SECOND QUARTER OF 1998)
Net revenues increased by 28.0% to $110.7 million in 1999 from $86.5
million in 1998 due primarily to a 24.1% increase in average degree student
enrollments and tuition price increases averaging four to six percent
(depending on the geographic area and program). Most of the Company's
campuses, which include their respective learning centers, had increases in
net revenues and average degree student enrollments from 1998 to 1999.
Tuition and other net revenues for the three months ended February 28,
1999 and 1998 consists primarily of $95.5 million and $72.2 million,
respectively, of net tuition revenues from students enrolled in degree
programs and $6.2 million and $5.8 million, respectively, of net tuition
revenues from students enrolled in non-degree programs. Average degree
student enrollments increased to 77,700 in 1999 from approximately 62,600 in
1998.
Interest income was $1.3 million and $1.4 million in 1999 and 1998,
respectively. Interest income decreased in 1999 due primarily to lower
interest rates in effect during 1999.
11<PAGE>
Instruction costs and services increased by 19.8% to $65.6 million in
1999 from $54.8 million in 1998 due primarily to the direct costs necessary
to support the increase in average degree student enrollments and to the
Department of Education program review costs. Direct costs consist primarily
of faculty compensation, classroom lease expenses and related staff salaries
at each respective location. These costs as a percentage of net revenues
decreased to 59.3% in 1999 from 63.3% in 1998 due primarily to greater net
revenues being spread over the fixed costs related to centralized student
services. As the Company expands into new markets, it may not be able to
leverage its existing instruction costs and services to the same extent.
Selling and promotional expenses increased by 71.9% to $18.5 million in
1999 from $10.8 million in 1998 due primarily to an increase in the number of
marketing and enrollment staff, additional advertising and marketing related
to eight new campuses and learning centers opened during the second quarter
of 1999 and increased advertising and marketing for distance education. These
expenses as a percentage of net revenues increased to 16.7% in 1999 from
12.5% in 1998 due to an increase in the number of campuses opened in new
markets during the last two years and an increase in the number of marketing
and enrollment staff.
General and administrative expenses increased by 17.5% to $9.5 million
in 1999 from $8.1 million in 1998 due primarily to costs required to support
the increased number of campuses and learning centers and overall increases
in general and administrative salaries. General and administrative expenses
as a percentage of net revenues decreased to 8.6% in 1999 from 9.4% in 1998
due primarily to higher net revenues being spread over the fixed costs
related to various centralized functions such as information services,
corporate accounting and human resources. The Company may not be able to
leverage its costs to the same extent as it faces increased costs related to
the development and implementation of new information systems and expansion
into additional markets.
Costs related to the start-up of new campuses and learning centers are
expensed as incurred and totaled approximately $2.0 million and $1.8 million
in 1999 and 1998, respectively. These start-up costs are primarily included
in instruction costs and services and selling and promotional expenses.
Interest expense, which is allocated among all categories of costs and
expenses, was less than $30,000 in both 1999 and 1998.
The Company's effective tax rate increased to 40.2% in 1999 from 39.6%
in 1998. The increase is due primarily to the relative impact of tax-exempt
interest income and of expenses that are non-deductible for tax purposes.
Net income increased to $10.2 million in 1999 from $7.7 million in 1998
due primarily to increased enrollments, increased tuition rates and improved
utilization of instruction costs and services and general and administrative
costs.
SIX MONTHS ENDED FEBRUARY 28, 1999 COMPARED WITH SIX MONTHS ENDED FEBRUARY
28, 1998
Net revenues increased by 29.6% to $227.7 million in 1999 from $175.7
million in 1998 due primarily to a 25.4% increase in average degree student
enrollments and tuition price increases averaging four to six percent
(depending on the geographic area and program). Most of the Company's
campuses, which include their respective learning centers, had increases in
net revenues and average degree student enrollments from 1998 to 1999.
12<PAGE>
Tuition and other net revenues for the six months ended February 28,
1999 and 1998 consists primarily of $198.2 million and $149.4 million,
respectively, of net tuition revenues from students enrolled in degree
programs and $11.9 million and $10.0 million, respectively, of net tuition
revenues from students enrolled in non-degree programs. Average degree
student enrollments increased to 76,100 in 1999 from approximately 60,700 in
1998.
Interest income was $2.6 million and $2.7 million in 1999 and 1998,
respectively. Interest income decreased in 1999 due primarily to lower
interest rates in effect during 1999.
Instruction costs and services increased by 24.1% to $133.3 million in
1999 from $107.4 million in 1998 due primarily to the direct costs necessary
to support the increase in average degree student enrollments and to the
Department of Education program review costs. Direct costs consist primarily
of faculty compensation, classroom lease expenses and related staff salaries
at each respective location. These costs as a percentage of net revenues
decreased to 58.6% in 1999 from 61.2% in 1998 due primarily to greater net
revenues being spread over the fixed costs related to centralized student
services. As the Company expands into new markets, it may not be able to
leverage its existing instruction costs and services to the same extent.
Selling and promotional expenses increased by 70.8% to $36.4 million in
1999 from $21.3 million in 1998 due primarily to an increase in the number of
marketing and enrollment staff, additional advertising and marketing related
to fifteen new campuses and learning centers opened during the six months
ended February 28, 1999 and increased advertising and marketing for distance
education. These expenses as a percentage of net revenues increased to 16.0%
in 1999 from 12.2% in 1998 due to an increase in the number of campuses
opened in new markets during the last two years and an increase in the number
of marketing and enrollment staff.
General and administrative expenses increased by 12.7% to $18.7 million
in 1999 from $16.6 million in 1998 due primarily to costs required to support
the increased number of campuses and learning centers and overall increases
in general and administrative salaries. General and administrative expenses
as a percentage of net revenues decreased to 8.2% in 1999 from 9.4% in 1998
due primarily to higher net revenues being spread over the fixed costs
related to various centralized functions such as information services,
corporate accounting and human resources. The Company may not be able to
leverage its costs to the same extent as it faces increased costs related to
the development and implementation of new information systems and expansion
into additional markets.
Costs related to the start-up of new campuses and learning centers are
expensed as incurred and totaled approximately $4.1 million and $3.5 million
in 1999 and 1998, respectively. These start-up costs are primarily included
in instruction costs and services and selling and promotional expenses.
Interest expense, which is allocated among all categories of costs and
expenses, was less than $30,000 in both 1999 and 1998.
The Company's effective tax rate increased to 39.7% in 1999 from 39.6%
in 1998. The increase is due primarily to the relative impact of tax-exempt
interest income and of expenses that are non-deductible for tax purposes.
13<PAGE>
Net income increased to $23.7 million in 1999 from $18.3 million in 1998
due primarily to increased enrollments, increased tuition rates and improved
utilization of instruction costs and services and general and administrative
costs.
SEASONALITY IN RESULTS OF OPERATIONS
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 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 net revenues as a
result of certain fixed costs not significantly affected by the seasonal
second quarter declines in net revenues.
The Company experiences an increase in new enrollments 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. These
increased costs result in accounts payable levels being higher in August than
in any other month during the year.
The Company anticipates 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 $24.0 million in
1999 from $21.7 million in 1998. The increase resulted primarily from
increased net income offset in part by an increase in accounts receivable.
The increase in accounts receivable was primarily attributable to the general
growth in operations as well as the implementation in the fourth quarter of
fiscal year 1998 of new financial aid processing software. Although the
Company believes that the new software will ultimately result in processing
efficiencies and faster collections, delays in processing were experienced
during the transition and training period. It has taken longer than the
Company originally expected to get through this transition period which was
complicated by the transition of financial aid processing to Arthur Andersen
Processing Solutions. The Company believes that the backlog in the financial
aid processing is improving, and it expects it accounts receivable balance to
return to more normalized levels by the end of the fiscal year.
Capital expenditures increased to $20.1 million in 1999 from $9.2
million in 1998 primarily due to the installation of new phone systems at the
corporate offices and several campuses, the installation of computer labs
related to the expansion of Information Technology programs, continued
development of the new financial aid processing software, leasehold
improvements at the corporate offices and to support an increase in the
number of overall locations. Total purchases of property and equipment for
the year ended August 31, 1999 are expected to range from $33.0 to $38.0
million. These expenditures will primarily be related to new campuses and
learning centers, the continued expansion of computer labs designed to
support the Information Technology programs, hardware and software related to
the Company's planned conversion to a new human resource system and increases
in normal recurring capital expenditures due to the overall increase in
student and employee levels resulting from the growth in the business.
14<PAGE>
Start-up costs are expected to range from $8.0 to $10.0 million in 1999,
as compared to $7.2 million in 1998, due to recent and planned expansion into
new geographic markets.
On September 25, 1998, the Company's Board of Directors authorized a
program allocating up to $40 million in Company funds to repurchase shares of
its Class A Common Stock. As of February 28, 1999, the Company had
repurchased approximately 580,000 shares at a total cost of approximately
$14.5 million.
The Department of Education (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 are held
in a separate cash account until certain conditions are satisfied. As of
February 28, 1999, the Company had approximately $25.3 million in these
separate accounts, which are reflected in the Consolidated Balance Sheet as
restricted cash, to comply with these requirements. These funds generally
remain in these separate accounts for an average of 60 to 75 days from the
date of collection. These restrictions on cash have not affected the
Company's ability to fund daily operations.
In December 1998, the Company announced a strategic plan to outsource
the administration and processing of UOP's and WIU's student financial aid
programs to Arthur Andersen Process Solutions. The contract is expected to
be finalized during the third quarter of 1999.
DEPARTMENT OF EDUCATION REVIEWS
UOP's most recent Department of Education program review began in March
1997, and an initial program review report was received in April 1998. This
report contained six findings in the areas of satisfactory academic progress,
refunds and general program administration. UOP submitted its response to
these findings in January 1999. The DOE will issue a final program review
determination after it completes its review of the response. The Company is
uncertain when the final determination will be issued and what the results of
the findings will be.
Additionally, in January 1998, the Department of Education Office of the
Inspector General ("OIG") began performing a routine audit of UOP. The
auditors reviewed UOP's cash management policies. Although no draft report
has been received from the OIG, the audit team indicated at the exit
interview that it had no findings regarding cash management policies. The
team did present questions regarding UOP's interpretation of the "12-hour
rule", UOP's distance education programs and institutional refund
obligations. UOP has supplied the OIG with the information they have
requested and is awaiting an initial draft report. Although the Company
believes that the program review and OIG audit will be resolved without any
material effect, as with any program review or audit, no assurance can be
given as to the final outcome since the matters are not yet resolved.
As previously disclosed, the Company assumed the Title IV liabilities of
Western International University ("Western") which were subject to change
based on the results of the DOE's audit of Western's Title IV Programs. The
final program review results have been received from the DOE and this matter
is now resolved without a material impact to the Company.
15<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 computer issue refers to a condition in computer software
where a two digit field rather than a four digit field is used to distinguish
a calendar year. Unless corrected, some computer programs, hardware ("IT")
and non-information technology systems ("non-IT") could be unable to process
information containing dates subsequent to December 31, 1999. As a result,
such programs and systems could experience miscalculations, malfunctions or
disruptions.
As a result of planned hardware and software upgrades over the last
several years, many of the Company's IT systems are Year 2000 compliant. The
Company has completed the inventory and assessment phases of its Year 2000
readiness program with respect to its major IT systems. The testing and
remediation phases are currently expected to be completed by August 31, 1999.
Although the Company currently expects that all of its IT systems will be
Year 2000 compliant by December 31, 1999, appropriate contingency plans will
be developed for those systems which can not be remediated by that date.
That Company does not have any significant non-IT Year 2000 issues.
The Company has substantially completed the inventory and assessment
phases of it Year 2000 readiness program with respect to significant
suppliers to determine the extent to which the Company may be vulnerable in
the event that such parties are unable to remediate their own Year 2000
issues. Assessment procedures with respect to such parties, who include,
among others, the U. S. Department of Education (DOE), accreditation
agencies, financial institutions and lessors, have consisted primarily of
correspondence with such parties. The Company currently plans to perform
testing of certain suppliers' Year 2000 readiness programs over the next few
months with completion currently expected by September 30, 1999. The Company
will develop appropriate contingency plans, if possible, for those suppliers
who the Company determines will not be Year 2000 compliant by December 31,
1999.
The Company believes that the most reasonably likely worst-case scenario
for the Year 2000 issue would be the failure of a significant supplier,
including the DOE, to successfully complete their Year 2000 remediation
efforts. The Company's operations and liquidity largely depend upon student
tuition funding provided by the DOE's Title IV Programs. The Company could
also be significantly impacted by widespread economic or financial market
disruption caused by Year 2000 issues. If such events were to occur, the
Company would encounter disruptions to its business that could have a
material adverse effect on its financial position, results of operations or
cash flows. As previously mentioned, the Company will develop contingency
plans, if possible, for those suppliers it determines will not be Year 2000
compliant by December 31, 1999.
Costs incurred to date in connection with the Company's Year 2000
efforts have not been material. Additionally, the Company does not expect
that remaining costs required to complete such efforts will be material.
Although the Company is unable to predict the impact of any Year 2000-related
disruptions on its business, management does not currently believe that such
disruptions will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
16<PAGE>
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
Item 3 -- Quantitative and Qualitative Disclosures about Market Risk
The Company's portfolio of marketable securities includes numerous
issuers, varying types of securities and maturities. The Company intends to
hold these securities to maturity. The fair value of the Company's 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. The Company does not hold or issue
derivative financial instruments.
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
On December 15, 1998, the holders of the Company's Class B Common Stock
acted by unanimous written consent in lieu of an annual meeting. The
shareholders re-elected the Company's entire Board of Directors and
designated John G. Sperling, Dino J. DeConcini and Thomas C. Weir as Class I
directors, each to hold office until the 1999 Annual Meeting of Shareholders,
John R. Norton III, Hedy F. Govenar and J. Jorge Klor de Alva as Class II
directors, each to hold office until the 2000 Annual Meeting of Shareholders,
and Todd S. Nelson, Peter V. Sperling and Jerry F. Noble as Class III
directors, each to hold office until the 2001 Annual Meeting of Shareholders.
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
Exhibit 10.1e Second Modification Agreement between Apollo Group, Inc.
and Wells Fargo Bank, National Association dated August 13, 1998
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended February
28, 1999.
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: April 14, 1999 By: /s/ Junette C. West
---------------------------------
Junette C. West
Chief Accounting Officer
By: /s/ Kenda B. Gonzales
----------------------------------
Kenda B. Gonzales
Chief Financial Officer
By: /s/ Todd S. Nelson
----------------------------------
Todd S. Nelson
President
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
10.1e Second Modification Agreement between Apollo Group, Filed herewith
Inc. and Wells Fargo, National Association dated
August 13, 1998
20 <PAGE>
Exhibit 15.1
Letter on Unaudited Interim Financial Information
April 13, 1999
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 March 12, 1999 (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/ PricewaterhouseCoopers 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> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 76,614
<SECURITIES> 31,765
<RECEIVABLES> 87,905
<ALLOWANCES> 11,952
<INVENTORY> 2,536
<CURRENT-ASSETS> 194,200
<PP&E> 91,472
<DEPRECIATION> 31,614
<TOTAL-ASSETS> 332,215
<CURRENT-LIABILITIES> 96,123
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 224,104
<TOTAL-LIABILITY-AND-EQUITY> 332,215
<SALES> 4,460
<TOTAL-REVENUES> 227,670
<CGS> 5,545
<TOTAL-COSTS> 169,736
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,116
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> 39,273
<INCOME-TAX> 15,580
<INCOME-CONTINUING> 23,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,693
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
SECOND MODIFICATION AGREEMENT
BY THIS SECOND MODIFICATION AGREEMENT (the "Agreement"),
made and entered into as of the 13th day of August, 1998, WELLS
FARGO BANK, NATIONAL ASSOCIATION, a national banking association,
whose address is 100 West Washington, Post Office Box 29742,
MAC #4101-251, Phoenix, Arizona 85038-9742 (hereinafter called
"Lender"), and APOLLO GROUP, INC., an Arizona corporation, whose
address is 4615 East Elwood Street, Suite 400, Phoenix, Arizona
85040 (hereinafter called "Company"), in consideration of the
mutual covenants herein contained and other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, hereby confirm and agree as follows:
SECTION 1. RECITALS.
1.1 Company and Lender entered into a Loan Agreement dated
November 17, 1997 (as amended, the "Loan Agreement"), which
provided for, among other things, a revolving line of credit (the
"RLC") in the amount of $10,000,000.00, evidenced by a Revolving
Promissory Note dated November 17, 1997, executed by the Company
(the "RLC Note"), all upon the terms and conditions contained
therein. The Loan Agreement was modified by that Modification
Agreement dated as of February 5, 1998. All undefined
capitalized terms used herein shall have the meaning given them
in the Loan Agreement.
1.2 As of the date hereof, prior to the effect of the
modifications contained herein, the outstanding principal balance
of the RLC is $0. Lender has issued for the account of the
Company two (2) standby letters of credit in the amount of
$44,007.00 and $1,630,715.00, originally issued on November 13,
1997 and subsequently amended from time to time.
1.3 Company and Lender desire to modify the Loan Agreement
as set forth herein.
SECTION 2. LOAN AGREEMENT.
2.1 The following definition in Section 2.1 of the Loan
Agreement is hereby amended to read as follows:
"Maximum Letter of Credit Balance" means $3,500,000.00.
2.2 Article 7 of the Loan Agreement is hereby amended by
the addition of the following as Section 7.13:
"Section 7.13 Year 2000 Covenant. Borrower shall
ensure that the following are Year 2000 Compliant in a
timely manner, but in no event later than December 31, 1999:
(a) Borrower itself; and (b) any other major commercial
properties and entities in which Borrower holds a
controlling interest. Borrower shall further make
reasonable inquiries of and request reasonable validation
that each of the following are similarly Year 2000
Compliant: (x) all major tenants or other entities from
which Borrower receives payments; and (y) all major
contractors, suppliers, service providers and vendors of
Borrower. As used in this paragraph, "major" shall mean
properties or entities the failure of which to be Year 2000
Compliant would have a material adverse economic impact upon
Borrower. The term "Year 2000 Compliant" shall mean, in
regard to any property or entity, that all software,
hardware, equipment, goods or systems utilized by or
material to the physical operations, business operations, or
financial reporting of such property or entity
(collectively, the "systems") will properly perform date
sensitive functions before, during and after the year 2000.
In furtherance of this covenant, Borrower shall, in addition
to any other necessary actions, perform a comprehensive
review and assessment of all systems of Borrower, and shall
adopt a detailed plan, with itemized budget, for the
testing, remediation, and monitoring of such systems.
Borrower shall, within thirty business days of Lender's
written request, provide to Lender such certifications or
other evidence of Borrower's compliance with the terms of
this paragraph as Lender may from time to time reasonably
require.
SECTION 3. OTHER MODIFICATIONS, RATIFICATIONS AND AGREEMENTS.
3.1 All references to the Loan Agreement in the Loan
Agreement, the RLC Note and the other documents delivered with
respect to the RLC (the "Loan Documents") are hereby amended to
refer to the Loan Agreement as hereby amended.
3.2 Company acknowledges that the indebtedness evidenced by
the RLC Note is just and owing, that the balance thereof is
correctly shown in the records of Lender as of the date hereof,
and Company agrees to pay the indebtedness evidenced by the RLC
Note according to the terms thereof, as herein modified.
3.3 Company hereby reaffirms to Lender each of the
representations, warranties, covenants and agreements of Company
set forth in the RLC Note and the Loan Agreement, with the same
force and effect as if each were separately stated herein and
made as of the date hereof.
-2-
3.4 Company hereby ratifies, reaffirms, acknowledges, and
agrees that the RLC Note and the Loan Agreement, represent valid,
enforceable and collectible obligations of Company, and that
there are no existing claims, defenses, personal or otherwise, or
rights of setoff whatsoever with respect to any of these
documents or instruments. In addition, Company hereby expressly
waives, releases and absolutely and forever discharges Lender and
its present and former shareholders, directors, officers,
employees and agents, and their separate and respective heirs,
personal representatives, successors and assigns, from any and
all liabilities, claims, demands, damages, action and causes of
action, whether known or unknown and whether contingent or
matured, that Company may now have, or has had prior to the date
hereof, or that may hereafter arise with respect to acts,
omissions or events occurring prior to the date hereof. To the
best of Company's knowledge, Company further acknowledges and
represents that no event has occurred and no condition exists
that, after notice or lapse of time, or both, would constitute a
default under this Agreement, the RLC Note or the Loan Agreement.
3.5 All terms, conditions and provisions of the RLC Note
and the Loan Agreement are continued in full force and effect and
shall remain unaffected and unchanged except as specifically
amended hereby. The RLC Note and the Loan Agreement, as amended
hereby, are hereby ratified and reaffirmed by Company, and
Company specifically acknowledges the validity and enforceability
thereof.
SECTION 4. GENERAL.
4.1 This Agreement in no way acts as a release or
relinquishment of those rights securing payment of the RLC. Such
rights are hereby ratified, confirmed, renewed and extended by
Company in all respects.
4.2 The modifications contained herein shall not be binding
upon Lender until Lender shall have received all of the
following:
(a) An original of this Agreement fully executed
by the Company.
(b) Such resolutions or authorizations and such
other documents as Lender may reasonably require
relating to the existence and good standing of the
Company and the authority of any person executing this
Agreement or other documents on behalf of the Company.
-3-
4.3 Company shall execute and deliver such additional
documents and do such other acts as Lender may reasonably require
to fully implement the intent of this Agreement.
4.4 Company shall pay all costs and expenses, including,
but not limited to, reasonable attorneys' fees incurred by Lender
in connection herewith, whether or not all of the conditions
described in Paragraph 4.2 above are satisfied. Lender, at its
option, but without any obligation to do so, may advance funds to
pay any such costs and expenses that are the obligation of the
Company, and all such funds advanced shall bear interest at the
highest rate provided in the RLC Note and shall be due and
payable upon demand.
4.5 Notwithstanding anything to the contrary contained
herein or in any other instrument executed by Company or Lender,
or in any other action or conduct undertaken by Company or Lender
on or before the date hereof, the agreements, covenants and
provisions contained herein shall constitute the only evidence of
Lender's consent to modify the terms and provisions of the Loan
Agreement. Accordingly, no express or implied consent to any
further modifications involving any of the matters set forth in
this Agreement or otherwise shall be inferred or implied by
Lender's execution of this Agreement. Further, Lender's
execution of this Agreement shall not constitute a waiver (either
express or implied) of the requirement that any further
modification of the RLC or of the RLC Note or the Loan Agreement,
shall require the express written approval of Lender; no such
approval (either express or implied) has been given as of the
date hereof.
4.6 Time is hereby declared to be of the essence hereof of
the RLC, of the RLC Note and of the Loan Agreement, and Lender
requires, and Company agrees to, strict performance of each and
every covenant, condition, provision and agreement hereof, of the
RLC Note and the Loan Agreement.
4.7 This Agreement shall be binding upon, and shall inure
to the benefit of, the parties hereto and their heirs, personal
representatives, successors and assigns.
4.8 This Agreement is made for the sole protection and
benefit of the parties hereto, and no other person or entity
shall have any right of action hereon.
4.9 This Agreement shall be governed by and construed
according to the laws of the State of Arizona.
-4-
IN WITNESS WHEREOF, these presents are executed as of the
date indicated above.
WELLS FARGO BANK, NATIONAL
ASSOCIATION, a national banking
association
By: /s/Karen Maher
--------------------------------
Name: Karen Maher
------------------------------
Its: Vice President
-------------------------------
LENDER
APOLLO GROUP, INC., an Arizona
corporation
By: /s/John G. Sperling
--------------------------------
Name: John G. Sperling
------------------------------
Its: Chief Executive Officer
-------------------------------
COMPANY
-5-
