-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G5yJv7vaIkd0osV7ExNnVmOmVDUGWu+2OCqDcLWRmCKpNAzCxnWqLqjUGnioRkGU 7A6QcBygVz8PI1dMUfWs7g== 0000929887-99-000002.txt : 19990415 0000929887-99-000002.hdr.sgml : 19990415 ACCESSION NUMBER: 0000929887-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APOLLO GROUP INC CENTRAL INDEX KEY: 0000929887 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 860419443 STATE OF INCORPORATION: AZ FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25232 FILM NUMBER: 99593381 BUSINESS ADDRESS: STREET 1: 4615 EAST ELWOOD ST CITY: PHOENIX STATE: AZ ZIP: 85040 BUSINESS PHONE: 6029665394 MAIL ADDRESS: STREET 1: 4615 E ELWOOD STREET STREET 2: 4615 E ELWOOD STREET CITY: PHOENIX STATE: AZ ZIP: 85040 10-Q 1 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 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 PART I -- FINANCIAL INFORMATION Item 1 -- Financial Statements Apollo Group, Inc. and Subsidiaries Consolidated Statement of Operations (In thousands, except per share amounts)
Three Months Ended Six Months Ended February 28, February 28, ------------------ ------------------ 1999 1998 1999 1998 -------- -------- -------- -------- (Unaudited) (Unaudited) 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.
3 Apollo Group, Inc. and Subsidiaries Consolidated Balance Sheet (Dollars in thousands)
February 28, August 31, 1999 1998 ------------ ------------ (Unaudited) 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.
4 Apollo Group, Inc. and Subsidiaries Consolidated Statement of Cash Flows (In thousands)
Six Months Ended February 28, --------------------- 1999 1998 --------- --------- (Unaudited) 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.
5 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 5. A reconciliation of the basic and diluted per share computations for 1999 and 1998 is as follows:
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 -------- -------- --------- -------- -------- ---------- 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 ======= ====== ===== ======= ====== =====
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 -------- -------- --------- -------- -------- ---------- 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 ======= ====== ===== ======= ====== =====
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 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 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 RESULTS OF OPERATIONS The following table sets forth consolidated statement of operations data of the Company expressed as a percentage of net revenues for the periods indicated:
Three Months Six Months Ended February 28, Ended February 28, ----------------- ----------------- 1999 1998 1999 1998 ------ ------ ------ ------ (Unaudited) (Unaudited) 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% ====== ====== ====== ======
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 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 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 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 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 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 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 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 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 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 EX-15.1 2 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 EX-27 3
5 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. 0000929887 APOLLO GROUP, INC. 1,000 6-MOS AUG-31-1999 FEB-28-1999 76,614 31,765 87,905 11,952 2,536 194,200 91,472 31,614 332,215 96,123 0 0 0 103 224,104 332,215 4,460 227,670 5,545 169,736 0 6,116 29 39,273 15,580 23,693 0 0 0 23,693 .30 .30
EX-10.1E 4 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- -----END PRIVACY-ENHANCED MESSAGE-----