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, 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)
(480) 966-5394
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK
AS OF JUNE 30, 1999
Class A Common Stock, no par 76,749,755 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 Nine Months Ended
May 31, May 31,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Tuition and other, net $138,107 $105,201 $363,161 $278,154
Interest income 1,366 1,582 3,982 4,293
-------- -------- -------- --------
Total net revenues 139,473 106,783 367,143 282,447
-------- -------- -------- --------
Costs and expenses:
Instruction costs and services 78,873 61,093 212,160 168,496
Selling and promotional 18,783 11,504 55,232 32,840
General and administrative 10,077 8,479 28,738 25,041
-------- -------- -------- --------
Total costs and expenses 107,733 81,076 296,130 226,377
-------- -------- -------- --------
Income before income taxes 31,740 25,707 71,013 56,070
Less provision for income taxes 12,780 10,185 28,360 22,209
-------- -------- -------- --------
Net income $ 18,960 $ 15,522 $ 42,653 $ 33,861
======== ======== ======== ========
Basic net income per share $ .24 $ .20 $ .55 $ .44
======== ======== ======== ========
Diluted net income per share $ .24 $ .20 $ .54 $ .43
======== ======== ======== ========
Basic weighted average shares
outstanding 77,963 77,459 77,831 77,130
Diluted weighted average shares
outstanding 78,914 79,250 79,089 78,991
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,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets --
Cash and cash equivalents $ 44,104 $ 52,326
Restricted cash 28,063 22,713
Marketable securities 29,884 27,538
Receivables, net 73,371 61,282
Deferred tax assets, net 7,216 6,203
Other current assets 6,370 3,945
--------- ---------
Total current assets 189,008 174,007
Property and equipment, net 68,081 46,618
Marketable securities 10,125 17,929
Investment in joint venture 10,701 10,807
Cost in excess of fair value of assets purchased, net 40,259 41,398
Other assets 16,148 14,401
--------- ---------
Total assets $334,322 $305,160
========= =========
Liabilities and Shareholders' Equity:
Current liabilities --
Current portion of long-term liabilities $ 346 $ 333
Accounts payable 12,857 9,684
Accrued liabilities 14,619 21,311
Income taxes payable 1,007
Student deposits and current portion of deferred revenue 78,479 63,239
--------- ---------
Total current liabilities 106,301 95,574
--------- ---------
Deferred tuition revenue, less current portion 2,375 4,592
--------- ---------
Long-term liabilities, less current portion 3,916 3,750
--------- ---------
Deferred tax liabilities, net 1,990 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;
78,427,000 and 77,112,000 issued at May 31, 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 May 31, 1999 and August 31, 1998 1 1
Additional paid-in capital 97,828 80,677
Treasury stock, at cost, 1,621,000 shares (39,855)
Retained earnings 161,676 119,023
Cumulative translation adjustment (12) 6
--------- ---------
Total shareholders' equity 219,740 199,808
--------- ---------
Total liabilities and shareholders' equity $334,322 $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>
Nine Months Ended
May 31,
---------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows provided by (used for) operating
activities:
Net income $ 42,653 $ 33,861
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,473 9,427
Provision for uncollectible accounts 7,368 4,629
Deferred income taxes (459) (1,910)
Tax benefits of stock options exercised 9,398 6,809
Increase in assets:
Restricted cash (5,350) (3,910)
Receivables, net (19,221) (16,651)
Other assets (5,617) (2,601)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (4,526) 7,460
Student deposits and deferred revenue 13,023 9,105
Other liabilities 379 132
-------- --------
Net cash provided by operating activities 52,121 46,351
-------- --------
Cash flows provided by (used for) investing
activities:
Net additions to property and equipment (32,901) (18,641)
Maturities of marketable securities 12,335 17,486
Purchase of marketable securities (7,245) (32,476)
Purchase of other assets (1,835) (1,140)
Proceeds from sale of land 1,622
Cash paid for acquisition (19,378)
-------- --------
Net cash used for investing activities (28,024) (54,149)
-------- --------
Cash flows provided by (used for) financing
activities:
Purchase of common stock (39,855)
Issuance of common stock 7,754 5,109
Payments on long-term debt (200) (50)
-------- --------
Net cash provided by (used for) financing activities (32,301) 5,059
-------- --------
Effect of currency translation (18) 4
-------- --------
Net decrease in cash and cash equivalents (8,222) (2,735)
Cash and cash equivalents at beginning of period 52,326 58,928
-------- --------
Cash and cash equivalents at end of period $ 44,104 $ 56,193
======== ========
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 May 31, 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 nine-month periods
ended May 31, 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 is 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 nine-month periods ended May
31, 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 May 31,
(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 $18,960 77,963 $ .24 $15,522 77,459 $ .20
===== =====
Effect of dilutive
securities:
Stock options 951 1,791
------- ------ ------- ------
Diluted net income
per share $18,960 78,914 $ .24 $15,522 79,250 $ .20
======= ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended May 31,
(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 $42,653 77,831 $ .55 $33,861 77,130 $ .44
===== =====
Effect of dilutive
securities:
Stock options 1,258 1,861
------- ------ ------- ------
Diluted net income
per share $42,653 79,089 $ .54 $33,861 78,991 $ .43
======= ====== ===== ======= ====== =====
</TABLE>
6. Certain financial information for the three months and nine months ended
May 31, 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 May 31, 1999, 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 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 May 31, 1999, and the related consolidated
statement of operations for the three-month and nine-month periods ended May
31, 1999 and 1998 and the consolidated statement of cash flows for the nine-
month periods ended May 31, 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
June 18, 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 nine-month periods ended May 31, 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 Nine Months
Ended May 31, Ended May 31,
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Tuition and other, net 99.0% 98.5% 98.9% 98.5%
Interest income 1.0 1.5 1.1 1.5
------ ------ ------ ------
Total net revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and expenses:
Instruction costs and services 56.5 57.2 57.8 59.6
Selling and promotional 13.5 10.8 15.1 11.6
General and administrative 7.2 7.9 7.8 8.9
------ ------ ------ ------
Total costs and expenses 77.2 75.9 80.7 80.1
------ ------ ------ ------
Income before income taxes 22.8 24.1 19.3 19.9
Less provision for income taxes 9.2 9.6 7.7 7.9
------ ------ ------ ------
Net income 13.6% 14.5% 11.6% 12.0%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MAY 31, 1999 (THIRD QUARTER OF 1999) COMPARED
WITH THREE MONTHS ENDED MAY 31, 1998 (THIRD QUARTER OF 1998)
Net revenues increased by 30.6% to $139.5 million in 1999 from $106.8
million in 1998 due primarily to a 21.4% increase in average degree student
enrollments and tuition price increases averaging four to six percent
(depending on the geographic area and program) and a higher concentration of
enrollments at locations that charge a higher rate per credit hour. 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 May 31, 1999
and 1998 consists primarily of $121.8 million and $91.8 million,
respectively, of net tuition revenues from students enrolled in degree
programs and $6.8 million and $6.5 million, respectively, of net tuition
revenues from students enrolled in non-degree programs. Average degree
student enrollments increased to 80,900 in 1999 from approximately 66,600 in
1998.
Interest income was $1.4 million and $1.6 million in 1999 and 1998,
respectively. Interest income decreased in 1999 due primarily to lower
average cash balances and lower interest rates in effect during 1999.
11<PAGE>
Instruction costs and services increased by 29.1% to $78.9 million in
1999 from $61.1 million in 1998 due primarily to the direct costs necessary
to support the increase in 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 56.5% in 1999 from 57.2% 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 63.3% to $18.8 million in
1999 from $11.5 million in 1998 due primarily to an increase in the number of
marketing and enrollment staff, additional advertising and marketing related
to six new campuses and learning centers opened during the third quarter of
1999 and increased advertising and marketing for distance education. These
expenses as a percentage of net revenues increased to 13.5% in 1999 from
10.8% 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 18.8% to $10.1 million
in 1999 from $8.5 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 7.2% in 1999 from 7.9% 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 $2.5 million and $1.4 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 $25,000 in both 1999 and 1998.
The Company's effective tax rate increased to 40.3% 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 $19.0 million in 1999 from $15.5 million in 1998
due primarily to increased enrollments, increased tuition rates and improved
utilization of instruction costs and services and general and administrative
costs.
NINE MONTHS ENDED MAY 31, 1999 COMPARED WITH NINE MONTHS ENDED MAY 31, 1998
Net revenues increased by 30.0% to $367.1 million in 1999 from $282.4
million in 1998 due primarily to a 24.0% increase in average degree student
enrollments and tuition price increases averaging four to six percent
(depending on the geographic area and program) and a higher concentration of
enrollments at locations that charge a higher rate per credit hour. 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 nine months ended May 31, 1999
and 1998 consists primarily of $320.0 million and $241.2 million,
respectively, of net tuition revenues from students enrolled in degree
programs and $18.8 million and $16.5 million, respectively, of net tuition
revenues from students enrolled in non-degree programs. Average degree
student enrollments increased to 77,800 in 1999 from approximately 62,700 in
1998.
Interest income was $4.0 million and $4.3 million in 1999 and 1998,
respectively. Interest income decreased in 1999 due primarily to lower
average cash balances and lower interest rates in effect during 1999.
Instruction costs and services increased by 25.9% to $212.2 million in
1999 from $168.5 million in 1998 due primarily to the direct costs necessary
to support the increase in 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 57.8% in 1999 from 59.6% 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 68.2% to $55.2 million in
1999 from $32.8 million in 1998 due primarily to an increase in the number of
marketing and enrollment staff, additional advertising and marketing related
to 21 new campuses and learning centers opened during the nine months ended
May 31, 1999 and increased advertising and marketing for distance education.
These expenses as a percentage of net revenues increased to 15.1% in 1999
from 11.6% 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 14.8% to $28.7 million
in 1999 from $25.0 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 7.8% in 1999 from 8.9% 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 $6.6 million and $4.9 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 $50,000 in both 1999 and 1998.
The Company's effective tax rate increased to 39.9% 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 $42.7 million in 1999 from $33.9 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 typically 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 $52.1 million in
1999 from $46.4 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 its accounts receivable balance
to return to more normalized levels by the end of the fiscal year.
Capital expenditures increased to $32.9 million in 1999 from $18.6
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 financial aid processing software and leasehold
improvements. Total purchases of property and equipment for the year ended
August 31, 1999 are expected to range from $38.0 to $42.0 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
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
fiscal year 1999, as compared to $7.2 million in fiscal year 1998, due to
recent and planned expansion into new geographic markets.
At May 31, 1999, the Company had no outstanding borrowings on its $10.0
million line of credit, which bears interest at prime. At May 31, 1999,
availability under the line of credit was reduced by outstanding letters of
credit of $4.0 million. The line of credit is renewable annually and any
amounts borrowed under the line are payable upon its termination in February
2001.
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. On May 13, 1999, an additional $20 million was
authorized by the Company's Board of Directors to repurchase shares of its
Class A Common Stock. As of May 31, 1999, the Company had repurchased
approximately 1,621,000 shares at a total cost of approximately $39.9
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 May
31, 1999, the Company had approximately $28.1 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.
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 conducted a follow up visit in May
1999 and the Company expects to receive a final program review determination
within 60 days.
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.
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 substantially complete and are expected to be
finalized 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 are in the process of being developed for those
systems which can not be remediated by that date. The 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 is currently performing
testing of certain suppliers' Year 2000 readiness 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 .Not Applicable
Item 5. Other Information . . . . . . . . . . . . . . . . . .Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1f Third Modification Agreement between Apollo Group, Inc.
and Wells Fargo Bank, National Association dated April 30, 1999
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, 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: July 13, 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
10.1f Third Modification Agreement between Apollo Group, Filed herewith
Inc. and Wells Fargo, National Association dated
April 30, 1999
15.1 Letter on Unaudited Interim Financial Information Filed herewith
27 Financial Data Schedule Filed herewith
20 <PAGE>
THIRD MODIFICATION AGREEMENT
BY THIS THIRD MODIFICATION AGREEMENT (the "Agreement"), made
and entered into as of the 30th day of April, 1999, 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 previously modified by that
Modification Agreement dated as of February 5, 1998 and that
Second Modification Agreement dated as of August 13, 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 (a) two (2) standby letters of credit in the amount of
$17,860.00 and $2,742,476.00, originally issued on November 13,
1997 and subsequently amended from time to time and (b) a standby
letter of credit in the amount of $1,243,632.94 originally issued
on September 14, 1998.
1.3 Company and Lender desire to modify the Loan Agreement
as set forth herein.
SECTION 2. LOAN AGREEMENT.
The modifications provided in this Section 2 shall be
effective as of February 28, 1999 as though entered into as of
such date.
2.1 The following definitions in Section 2.1 of the Loan
Agreement are hereby amended to read as follows:
"Adjusted LIBOR Rate" means, for each LIBOR
Advance, the rate per annum determined by Lender to be
equal to (i) LIBOR plus (ii) 75 basis points.
"Maturity Date" means February 1, 2001.
"Maximum Letter of Credit Balance" means
$6,000,000.00.
2.2 Section 4.1(a) of the Loan Agreement is hereby amended
to read as follows:
(a) Provided that Borrower has satisfied the
conditions precedent contained in Section 4.2 hereof,
Lender agrees, from time to time, to issue and/or renew
Letters of Credit on behalf of Borrower or, at the
written request of Borrower, on behalf of any
Subsidiary so long as upon such issuance or renewal (i)
upon the issuance of each Letter of Credit, a fee is
paid by Borrower to Lender in an amount equal to the
greater of $500.00 or three-quarters of one percent
(0.75%) per annum of the face amount of such Letter of
Credit, based on a 360-day year, actual days elapsed,
(ii) fees upon the payment or negotiation by Lender of
each draft under any Letter of Credit and upon the
occurrence of any other activity with respect to any
Letter of Credit (including without limitation, the
transfer, amendment or cancellation of any Letter of
Credit) determined in accordance with Lender's standard
fees and charges then in effect for such activity,
(iii) in accordance with the terms and conditions of
Section 3.1 hereof, the Outstanding RLC Balance would
not exceed the RLC Commitment Amount, and (iv) the
aggregate amount of the face amount of Letters of
Credit outstanding at such time would not exceed the
Maximum Letter of Credit Balance.
2.3 Section 8.1 of the Loan Agreement is hereby amended to
read as follows:
Section 8.1 No Mergers, Acquisitions and
Consolidations. Dissolve or liquidate, or become a
party to any merger or consolidation, or sell,
transfer, lease or otherwise dispose of all or
substantially all of its property or assets, or
purchase or acquire the assets or capital stock of an
-2-
unrelated Person, or allow any Subsidiary to do so,
except that (i) any Subsidiary of Borrower may merge
into or transfer assets to Borrower or any other
Subsidiary, and (ii) Borrower and any of its
Subsidiaries may undertake mergers and acquisitions so
long as (a) the aggregate consideration paid by
Borrower and all its Subsidiaries with respect to all
merger and acquisitions is not more than $25,000,000.00
per fiscal year and (b) Borrower or any of its
Subsidiaries is the surviving entity of any such merger
or acquisition.
2.4 Section 8.5 of the Loan Agreement is hereby amended to
read as follows:
Section 8.5 Indebtedness. Incur or permit any
Subsidiary to incur, Indebtedness from any Person,
except (i) trade payables incurred in the ordinary
course of business; (ii) Indebtedness with the Lender;
(iii) Indebtedness resulting from its guaranty
associated with the Union Bank Campus Card Program; and
(iv) Permitted Non-Bank Indebtedness not to exceed
$10,000,000.00 in the aggregate in any fiscal year.
2.5 Section 8.6 of the Loan Agreement is hereby amended to
read as follows:
Section 8.6 Payment of Dividends. Declare or
pay any cash dividends or distribution either in cash,
stock or any other property on Borrower's stock now or
hereafter outstanding; nor redeem, retire, repurchase
or otherwise acquire any shares of any class of
Borrower's stock now or hereafter outstanding.
Notwithstanding the foregoing, Borrower shall be
permitted (i) to pay intercompany dividends, provided
said dividend(s) has (have) no effect whatsoever on
Borrower's consolidated stockholder's equity, (ii) to
pay non-cash dividends including but not limited to
intercompany non-cash dividends and non-cash dividends
to facilitate stock splits, and (iii) to repurchase
shares of its Class A common stock up to an aggregate
amount of $40,000,000.00, which amount shall include
the approximately $14,500,000.00 repurchased through
February 28, 1999.
-3-
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.
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.
-4-
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.
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 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.
-5-
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.
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/ Kenda Gonzales
------------------------------
Name: Kenda Gonzales
------------------------------
Its: Chief Financial Officer
------------------------------
COMPANY
-6-
Exhibit 15.1
Letter on Unaudited Interim Financial Information
July 12, 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 June 18, 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> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 72,167
<SECURITIES> 29,884
<RECEIVABLES> 84,894
<ALLOWANCES> 11,523
<INVENTORY> 3,130
<CURRENT-ASSETS> 189,008
<PP&E> 104,016
<DEPRECIATION> 35,935
<TOTAL-ASSETS> 334,322
<CURRENT-LIABILITIES> 106,301
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 219,637
<TOTAL-LIABILITY-AND-EQUITY> 334,322
<SALES> 7,522
<TOTAL-REVENUES> 367,143
<CGS> 8,714
<TOTAL-COSTS> 267,392
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,368
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 71,013
<INCOME-TAX> 28,360
<INCOME-CONTINUING> 42,653
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<NET-INCOME> 42,653
<EPS-BASIC> .55
<EPS-DILUTED> .54
</TABLE>
