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 November 30, 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 JANUARY 6, 1999
Class A Common Stock, no par 77,687,670 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 . . . . . . . . . . . . . . . . . . . . . . . . . . .16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .17
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . .17
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . .17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
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
November 30,
------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Revenues:
Tuition and other, net $115,698 $ 87,875
Interest income 1,312 1,325
-------- --------
Total net revenues 117,010 89,200
-------- --------
Costs and expenses:
Instruction costs and services 67,668 52,623
Selling and promotional 17,932 10,566
General and administrative 9,125 8,446
-------- --------
Total costs and expenses 94,725 71,635
-------- --------
Income before income taxes 22,285 17,565
Less provision for income taxes 8,747 6,956
-------- --------
Net income $ 13,538 $ 10,609
======== ========
Basic net income per share $ .17 $ .14
======== ========
Diluted net income per share $ .17 $ .13
======== ========
Basic weighted average shares
outstanding 77,502 76,758
Diluted weighted average shares
outstanding 79,159 78,689
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>
November 30, August 31,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets --
Cash and cash equivalents $ 51,839 $ 52,326
Restricted cash 26,140 22,713
Marketable securities 28,529 27,538
Receivables, net 69,102 61,282
Deferred tax assets, net 6,221 6,203
Other current assets 3,645 3,945
--------- ---------
Total current assets 185,476 174,007
Property and equipment, net 55,800 46,618
Marketable securities 14,592 17,929
Investment in joint venture 10,701 10,807
Cost in excess of fair value of assets purchased, net 40,943 41,398
Other assets 13,534 14,401
--------- ---------
Total assets $321,046 $305,160
========= =========
Liabilities and Shareholders' Equity:
Current liabilities --
Current portion of long-term liabilities $ 333 $ 333
Accounts payable 8,163 9,684
Accrued liabilities 20,121 21,311
Income taxes payable 7,342 1,007
Student deposits and current portion of deferred revenue 66,063 63,239
--------- ---------
Total current liabilities 102,022 95,574
--------- ---------
Deferred tuition revenue, less current portion 5,163 4,592
--------- ---------
Long-term liabilities, less current portion 3,632 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;
76,962,000 and 77,112,000 issued and outstanding at November 30, 1998 and
August 31, 1998, respectively 101 101
Class B voting common stock, no par value, 3,000,000 shares authorized;
512,000 issued and outstanding at November 30, 1998 and August 31, 1998 1 1
Additional paid-in capital 83,974 80,677
Retained earnings 132,561 119,023
Cumulative translation adjustment 7 6
Treasury stock, at cost, 340,000 shares (8,418)
--------- ---------
Total shareholders' equity 208,226 199,808
--------- ---------
Total liabilities and shareholders' equity $321,046 $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>
Three Months Ended
November 30,
---------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,538 $ 10,609
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,398 3,486
Provision for uncollectible accounts 3,044 2,906
Deferred income taxes 549 (182)
Tax benefits of stock options exercised 1,335 2,357
Decrease (increase) in assets:
Restricted cash (3,427) (2,457)
Receivables, net (10,864) (9,166)
Other assets 1,318 325
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 3,624 5,405
Student deposits and deferred revenue 3,395 3,854
Other liabilities 82 (1)
-------- --------
Net cash provided by operating activities 16,992 17,136
-------- --------
Cash flows from investing activities:
Net additions to property and equipment (12,297) (4,864)
Maturities of marketable securities 3,896 2,500
Purchase of marketable securities (1,591) (4,802)
Purchase of other assets (832) (318)
Cash paid for acquisition (19,378)
-------- --------
Net cash used for investing activities (10,824) (26,862)
-------- --------
Cash flows from financing activities:
Purchase of common stock (8,418)
Issuance of common stock 1,962 1,688
Payments on long-term debt (200) (50)
-------- --------
Net cash provided by (used for) financing activities (6,656) 1,638
-------- --------
Effect of currency translation 1 3
-------- --------
Net decrease in cash and cash equivalents (487) (8,085)
Cash and cash equivalents at beginning of period 52,326 58,928
-------- --------
Cash and cash equivalents at end of period $ 51,839 $ 50,843
======== ========
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 1998
and 1997 refer to the periods ended November 30, 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, 1998 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 PricewaterhouseCoopers LLP (see
"Review by Independent Accountants").
3. The results of operations for the three-month period ended November 30,
1998 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
those included in net income, were immaterial for the quarter ended November
30, 1998.
6 <PAGE>
5. A reconciliation of the basic and diluted per share computations for
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended November 30,
(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 $13,538 77,502 $ .17 $10,609 76,758 $ .14
===== =====
Effect of dilutive
securities:
Stock options 1,657 1,931
------- ------ ------- ------
Diluted net income
per share $13,538 79,159 $ .17 $10,609 78,689 $ .13
======= ====== ===== ======= ====== =====
</TABLE>
6. Certain financial information for the three months ended November 30,
1997 has been reclassified to conform to the 1998 presentation, having no
effect on net income.
7<PAGE>
Review by Independent Accountants
The financial information as of November 30, 1998, and for the three-
month period then ended, included in Part I pursuant to Rule 10-01 of
Regulation S-X, has been reviewed by PricewaterhouseCoopers LLP
("PricewaterhouseCoopers"), the Company's independent accountants, in
accordance with standards established by the American Institute of Certified
Public Accountants. PricewaterhouseCoopers's 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 November 30, 1998, and the related
consolidated statements of operations and of cash flows for the three-month
periods ended November 30, 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, 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
December 16, 1998
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 period ended November 30, 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, 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
Ended November 30,
-----------------
1998 1997
------ ------
(Unaudited)
<S> <C> <C>
Revenues:
Tuition and other, net 98.9% 98.5%
Interest income 1.1 1.5
------ ------
Total net revenues 100.0 100.0
------ ------
Costs and expenses:
Instruction costs and services 57.8 59.0
Selling and promotional 15.3 11.9
General and administrative 7.8 9.4
------ ------
Total costs and expenses 80.9 80.3
------ ------
Income before income taxes 19.1 19.7
Less provision for income taxes 7.5 7.8
------ ------
Net income 11.6% 11.9%
====== ======
</TABLE>
THREE MONTHS ENDED NOVEMBER 30, 1998 (FIRST QUARTER OF 1999) COMPARED
WITH THREE MONTHS ENDED NOVEMBER 30, 1997 (FIRST QUARTER OF 1998)
Net revenues increased by 31.2% to $117.0 million in 1998 from $89.2
million in 1997 due primarily to a 26.4% 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 1997 to 1998.
Tuition and other net revenues for the three months ended November 30,
1998 and 1997 consists primarily of $102.7 million and $77.2 million,
respectively, of net tuition revenues from students enrolled in degree
programs and $5.7 million and $4.2 million, respectively, of net tuition
revenues from students enrolled in non-degree programs. Average degree
student enrollments increased to 74,400 in 1998 from approximately 58,800 in
1997.
Interest income was $1.3 million in both 1998 and 1997. Interest income
did not increase in 1998 due to lower interest rates in effect during 1998.
11<PAGE>
Instruction costs and services increased by 28.6% to $67.7 million in
1998 from $52.6 million in 1997 due primarily to the direct costs necessary
to support the increase in average degree student enrollments, consisting
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 57.8% in 1998 from 59.0% in 1997 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 69.7% to $17.9 million in
1998 from $10.6 million in 1997 due primarily to an increase in the number of
marketing and enrollment staff, additional advertising and marketing related
to newly opened campuses and learning centers and increased advertising and
marketing for distance education. These expenses as a percentage of net
revenues increased to 15.3% in 1998 from 11.9% in 1997 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 8.0% to $9.1 million in
1998 from $8.4 million in 1997 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 7.8% in 1998 from 9.4% in 1997 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 $2.1 million and $1.7 million
in 1998 and 1997, 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 $5,000 in both 1998 and 1997.
The Company's effective tax rate was 39.3% and 39.6% in 1998 and 1997,
respectively.
Net income increased to $13.5 million in 1998 from $10.6 million in 1997
due primarily to increased enrollments, increased tuition rates and improved
utilization of 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 the holiday breaks in December and January. Second
12<PAGE>
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
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 remained relatively the same
at $17.0 million in 1998 and $17.1 million in 1997. This resulted primarily
from increased net income offset in part by increases in restricted cash and
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. The Company expects its accounts receivable balance to return to
more normalized levels by mid-1999. Bad debt expense was approximately 3% of
tuition revenues in 1998 and 1997.
Capital expenditures increased to $12.3 million in 1998 from $4.9
million in 1997 primarily due to the installation of a new phone system 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 $28.0 to $30.0
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.
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.
13<PAGE>
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 November 30, 1998, the Company had
repurchased approximately 340,000 shares at a total cost of approximately
$8.4 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
November 30, 1998, the Company had approximately $26.1 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 second 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 has been received. 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.
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. 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
14<PAGE>
recorded. Any difference between the final amount and the estimates
currently recorded will be recorded as an increase or decrease, as
applicable, to expense.
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.
The Company is currently in the assessment phase of evaluating its core
business information systems for Year 2000 readiness and has extended that
review to include a wide variety of other IT and non-IT systems. As a result
of hardware and software upgrades and computer system purchases over the past
few years, many of the Company's computer systems should not have a Year 2000
problem or have been warranted to be Year 2000 compliant by third-party
vendors. The Company is continuing the process of updating much of its
existing software for Year 2000 compliance by acquiring new and upgraded
third party software packages to replace existing software and modifying
existing internally developed software. In no case is a system being
replaced solely because of Year 2000 issues, although in some cases, the
timing of system replacements is being accelerated. Sufficient testing of
the Company's IT systems has not been completed to fully validate readiness.
Additional testing is planned during 1999 to reasonably ensure Year 2000
compliance. Additionally, while the Company may have incurred an opportunity
cost for addressing the Year 2000 issue, it does not believe that any
specific IT projects have been deferred as a result of its Year 2000 efforts.
The Company's non-IT compliance is focused primarily in the area of
facilities leased by the Company. The Company is working with its lessors to
ensure compliance on these non-IT systems.
The Company has begun to assess the readiness of its significant
suppliers, business partners, banking agencies and governmental agencies to
determine the extent to which the Company may be vulnerable in the event that
those parties fail to properly remediate their own Year 2000 issues. The
Company's operations and liquidity largely depend upon the student funding
provided by Title IV Programs for its students. Processing of applications
for this funding is handled by the U.S. Department of Education's computers
systems. The U.S. Department of Education has stated that its systems will
be Year 2000 compliant in early calendar year 1999 and that various schools
will be able to run tests of the remediated systems during the first half of
calendar year 1999; however, the Company is unable to independently assess
the U.S. Department of Education's progress to date and no test dates have
been announced yet. Similarly, UOP, IPD, WIU, the College and IPD client
institutions are licensed by one or more agencies in the states in which they
are based and are accredited by accrediting bodies that are recognized by the
U.S. Department of Education. Any prolonged interruption would have a
15<PAGE>
material adverse impact upon the education industry and, accordingly, upon
the Company's business, results of operations, liquidity and financial
condition. The Company is in the process of developing an appropriate
contingency plan in the event that a significant exposure is identified
relative to the dependencies on third-party systems.
The Company believes that the most reasonably likely worst-case scenario
for the Year 2000 issue would be that the Company or the third parties with
whom it has relationships would cease or not successfully complete their Year
2000 remediation efforts. If this were to occur, the Company would encounter
disruptions to its business that could have a material adverse effect on its
results of operations. The Company could be materially impacted by
widespread economic or financial market disruption or by year 2000 computer
system failures at the U.S. Department of Education. The Company has not at
this time established a formal Year 2000 contingency plan but will consider
and, if necessary, address doing so as part of its Year 2000 activities.
Although the Company is unable at this time to assess the possible
impact on its results of operations, liquidity or financial condition of any
Year 2000 related disruptions to its business caused by the malfunctioning of
any IT or non-IT systems and products that it uses or that third parties with
which it has material relationships use, management does not believe at the
current time that the cost of remediating the Company's internal Year 2000
problems will have a material adverse impact upon its business, results of
operations, liquidity or financial condition.
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.
16<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 November
30, 1998.
17 <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: January 11, 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
18 <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
19 <PAGE>
Exhibit 15.1
Letter on Unaudited Interim Financial Information
January 11, 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 December 16, 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/ PricewaterhouseCoopers LLP
<TABLE> <S> <C>
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<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>
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<NAME> APOLLO GROUP, INC.
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> NOV-30-1998
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