-----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, EnflUT07JHKD8JinoxyqNI9hBdMJy6XQfk3N3PA88uhoz9tMSr+5SsLXtvfJql9O Y/Bzi5bcaACh5IMHXeEzOQ== 0000929887-97-000013.txt : 19971222 0000929887-97-000013.hdr.sgml : 19971222 ACCESSION NUMBER: 0000929887-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19971219 SROS: NASD 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: 97741231 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 November 30, 1997 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 DECEMBER 15, 1997 Class A Common Stock, no par 50,852,732 Shares Class B Common Stock, no par 547,819 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 . . . . . . . . . . . . . . . 9 PART II -- OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .15 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . .15 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . .15 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .15 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .15 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .15 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 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 November 30, ------------------ 1997 1996 -------- -------- (Unaudited) Revenues: Tuition and other, net $87,875 $66,093 Interest income 1,325 890 -------- -------- Total net revenues 89,200 66,983 -------- -------- Costs and expenses: Instruction costs and services 51,863 39,608 Selling and promotional 10,566 8,479 General and administrative 9,206 6,748 -------- -------- Total costs and expenses 71,635 54,835 -------- -------- Income before income taxes 17,565 12,148 Less provision for income taxes 6,956 4,859 -------- -------- Net income $10,609 $ 7,289 ======== ======== Net income per share $ .20 $ .14 ======== ======== Weighted average shares outstanding 52,459 51,607 The accompanying notes are an integral part of these consolidated financial statements.
3 Apollo Group, Inc. and Subsidiaries Consolidated Balance Sheet (Dollars in thousands)
November 30, August 31, 1997 1997 ------------ ------------ (Unaudited) Assets: Current assets -- Cash and cash equivalents $ 50,843 $ 58,928 Restricted cash 22,384 19,927 Investments 31,851 27,182 Receivables, net 42,183 32,040 Inventory 2,713 2,220 Deferred tax assets, net 3,633 2,873 Prepaids and other current assets 1,712 633 --------- --------- Total current assets 155,319 143,803 Property and equipment, net 27,723 25,251 Investments 12,258 14,747 Educational program production costs, net 1,836 1,836 Non-operating property 5,615 5,611 Cost in excess of fair value of assets purchased, net 48,130 2,283 Deposits and other assets 1,928 1,379 --------- --------- Total assets $252,809 $194,910 ========= ========= Liabilities and Shareholders' Equity: Current liabilities -- Current portion of long-term liabilities $ 292 $ 295 Accounts payable 6,162 7,714 Other accrued liabilities 13,848 11,449 Income taxes payable 5,008 253 Student deposits and current portion of deferred revenue 57,923 47,683 --------- --------- Total current liabilities 83,233 67,394 --------- --------- Long-term liabilities, less current portion 2,444 2,494 --------- --------- Deferred tax liabilities, net 1,282 705 --------- --------- Deferred tuition revenue 10,931 -- --------- --------- 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; 50,853,000 and 50,227,000 issued and outstanding at November 30, and August 31, 1997, respectively 67 66 Class B voting common stock, no par value, 3,000,000 shares authorized; 548,000 issued and outstanding at November 30, and August 31, 1997 1 1 Additional paid-in capital 71,509 51,521 Retained earnings 83,342 72,729 --------- --------- Total shareholders' equity 154,919 124,317 --------- --------- Total liabilities and shareholders' equity $252,809 $194,910 ========= ========= 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)
Three Months Ended November 30, --------------------- 1997 1996 --------- --------- (Unaudited) Net cash received from (used for) operating activities: Cash received from customers $87,475 $62,417 Cash paid to employees and suppliers (71,166) (50,981) Interest received 932 730 Interest paid (3) -- Net income taxes paid (2,383) (1,760) -------- -------- Net cash received from operating activities 14,855 10,406 -------- -------- Net cash received from (used for) investing activities: Cash paid at acquisition of the College, net of cash acquired (19,378) -- Purchase of property and equipment (4,947) (2,625) Purchase of investments (4,802) (4,064) Proceeds from investment maturities 2,500 2,798 Additions to educational program production costs (313) (281) Proceeds from sale of assets 2 40 -------- -------- Net cash used for investing activities (26,938) (4,132) -------- -------- Net cash received from (used for) financing activities: Tax benefits related to disqualifying dispositions and exercise of options 2,357 1,574 Issuance of stock 1,688 511 Principal payments on long-term debt (50) (50) -------- -------- Net cash received from financing activities 3,995 2,035 -------- -------- Effect of exchange rate changes on cash 3 -- -------- -------- Net increase (decrease) in cash and cash equivalents (8,085) 8,309 Cash and cash equivalents, beginning of period 58,928 51,982 -------- -------- Cash and cash equivalents, end of period $50,843 $60,291 ======== ======== 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 (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. 2. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended August 31, 1997 included in the Company's Form 10-K as filed with the Securities and Exchange Commission. The interim financial information for the three months ended November 30, 1997 and 1996 was reviewed by Price Waterhouse LLP (see "Review by Independent Accountants"). 3. The results of operations for the three months ended November 30, 1997 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period. 4. In September 1997, the Company acquired the assets and related business operations of the College for Financial Planning and related divisions that include the Institute for Wealth Management, the Institute for Retirement Planning, the American Institute for Retirement Planners, Inc. and the Institute for Tax Studies. The purchase price consisted of $19.1 million in cash, $15.9 million in stock and the assumption of approximately $17.3 million in liabilities, consisting primarily of deferred tuition revenue. The excess of cost over the value of tangible assets of $45.9 million is being amortized over 35 years. Financial results for the College for the period ended November 30, 1997 were not material to the results of the Company as a whole. 5. In November 1997, the Company increased its line of credit to $10.0 million, which bears interest at prime. There are no amounts borrowed under this line of credit at November 30, 1997. Any amounts borrowed under the line of credit are payable upon its termination in January 1999. 6. In November 1997, the Department of Education ("DOE") released amended regulations relating to the DOE's Standards of Financial Responsibility. These regulations are intended to provide a more comprehensive measure of an institution's financial condition. The revised regulations take effect on July 1, 1998 and apply to UOP and WIU. Based on an application of the standards to the August 31, 1997 financial statements of UOP and WIU, the Company believes that UOP and WIU currently meet the requirements under the amended regulations and anticipates meeting the requirements when they become effective on July 1, 1998. 6 Review by Independent Accountants The financial information as of November 30, 1997, and for the three month period then ended, included in Part I pursuant to Rule 10-01 of Regulation S-X, has been reviewed by Price Waterhouse LLP ("Price Waterhouse"), the Company's independent accountants, in accordance with standards established by the American Institute of Certified Public Accountants. Price Waterhouse's report is included in this quarterly report. Price Waterhouse does not carry out any significant or additional audit tests beyond those that would have been necessary if its report had not been included in this quarterly report. Accordingly, such report is not a "report" or "part of a registration statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply. 7 Report of Independent Accountants To the Board of Directors and Shareholders of Apollo Group, Inc.: We have reviewed the accompanying consolidated balance sheet of Apollo Group, Inc. and its subsidiaries as of November 30, 1997, and the related consolidated statements of operations and of cash flows for the three-month periods ended November 30, 1997 and 1996. These financial statements are the responsibility of Apollo Group, Inc.'s management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of August 31, 1997, and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows for the year then ended (not presented herein), and in our report dated October 13, 1997 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of August 31, 1997, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PRICE WATERHOUSE LLP Phoenix, Arizona December 17, 1997 8 PART I -- FINANCIAL INFORMATION Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended August 31, 1997 included in the Company's Form 10-K as filed with the Securities and Exchange Commission, as well as in conjunction with the consolidated financial statements and notes thereto for the three month period ended November 30, 1997 included in Item 1. This quarterly report on Form 10-Q contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words "believe," "plan," "expect," "anticipate," "project" and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of revenues, income or loss, expenses, capital expenditures, plans for future operations, financing needs or plans, the impact of inflation and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this quarterly report, including Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements include, without limitation, new or revised interpretations of regulatory requirements, changes in or new interpretations of other applicable laws, rules and regulations, failure to maintain or renew required regulatory approvals, accreditation or state authorizations by UOP or certain IPD institutions, failure to obtain authorizations from states in which UOP does not currently provide degree programs, failure to obtain the North Central Association of Colleges and Schools'("NCA") approval for UOP to operate in new states, changes in student enrollment, and other factors set forth in "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended August 31, 1997. 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 Ended November 30, ----------------- 1997 1996 ------ ------ (Unaudited) Revenues: Tuition and other, net 98.5% 98.7% Interest income 1.5 1.3 ------ ------ Total net revenues 100.0 100.0 ------ ------ Costs and expenses: Instruction costs and services 58.1 59.1 Selling and promotional 11.9 12.7 General and administrative 10.3 10.1 ------ ------ Total costs and expenses 80.3 81.9 ------ ------ Income before income taxes 19.7 18.1 Less provision for income taxes 7.8 7.2 ------ ------ Net income 11.9% 10.9% ====== ======
THREE MONTHS ENDED NOVEMBER 30, 1997 (FIRST QUARTER OF 1998) COMPARED WITH THREE MONTHS ENDED NOVEMBER 30, 1996 (FIRST QUARTER OF 1997) Net revenues increased by 33.2% to $89.2 million in the three months ended November 30, 1997 from $67.0 million in the three months ended November 30, 1996. This is due primarily to an increase in student enrollments from 1996 to 1997, tuition price increases averaging four to five percent and a higher concentration of enrollments at locations that charge a higher rate per credit hour. All UOP campuses, which include their respective learning centers, and most WIU and IPD campuses had increases in net revenues and student enrollments from 1996 to 1997. Tuition and other net revenues for the three months ended November 30, 1997 and 1996 consists primarily of $77.2 and $58.2 million, respectively, of net tuition revenues from students enrolled in degree programs and $4.2 and $2.6 million, respectively, of net tuition revenues from students enrolled in non-degree programs. Average degree-program enrollments increased over 21% to 58,000 in 1997 from 48,000 in 1996. Interest income for the three months ended November 30, 1997 increased to $1.3 million in the three months ended November 30, 1997 from $890,000 in the three months ended November 30, 1996 due primarily to the increase in cash and investments from 1996 to 1997. 10 Instruction costs and services increased by 30.9% to $51.9 million in the three months ended November 30, 1997 from $39.6 million in the three months ended November 30, 1996 due primarily to the direct costs necessary to support the increase in average student enrollments and the added costs related to the acquisition of the College. These costs consist primarily of faculty compensation, classroom lease expenses and related staff salaries. These costs as a percentage of net revenues decreased to 58.1% in the three months ended November 30, 1997 from 59.1% in the three months ended November 30, 1996 due 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 24.6% to $10.6 million in the three months ended November 30, 1997 from $8.5 million in the three months ended November 30, 1996 due primarily to increased marketing and advertising at the Company's campuses and learning centers and at the College, which was acquired in September 1997. These expenses as a percentage of net revenues decreased to 11.9% in the three months ended November 30, 1997 from 12.7% in the three months ended November 30, 1996 due to the Company's ability to increase enrollments in existing markets and to open new learning centers with a proportionately lower increase in selling and promotional expenses. As the Company expands into new markets, it may not be able to leverage its existing selling and promotional expenses to the same extent. General and administrative expenses increased by 36.4% to $9.2 million in the three months ended November 30, 1997 from $6.7 million in the three months ended November 30, 1996 due primarily to increased costs required to support the increased number of UOP and IPD campuses and learning centers, increases in administrative compensation and additional costs related to the administration of the College. These expenses as a percentage of net revenues remained relatively the same at 10.3% in the three months ended November 30, 1997 and 10.1% in the three months ended November 30, 1996. Costs related to the startup of new UOP and IPD campuses and learning centers are expensed as incurred and totaled approximately $1.7 million in the three months ended November 30, 1997 and $1.2 million in the three months ended November 30, 1996. Interest expense, which is allocated among all categories of costs and expenses, was less than $12,000 in the three months ended November 30, 1997 and 1996. The Company's effective tax rate remained relatively the same at 39.6% and 40.0% in the three months ended November 30, 1997 and 1996, respectively. Net income increased to $10.6 million in the three months ended November 30, 1997 from $7.3 million in the three months ended November 30, 1996 due primarily to increased enrollments, increased tuition rates and improved utilization of selling and promotional costs and fixed instruction costs and services. SEASONALITY The Company experiences seasonality in its results of operations primarily as a result of changes in the level of student enrollments. While the Company enrolls students throughout the year, second quarter (December to 11 February) average enrollments for degree-seeking students and the related revenues generally are lower than other quarters due to the holiday breaks in December and January. Second quarter costs and expenses historically increase as a percentage of net revenues as a result of certain fixed costs not significantly affected by the seasonal second quarter declines in net revenues. The Company experiences a seasonal increase in new enrollments in degree programs in August of each year when most other colleges and universities begin their fall semesters. As a result, instruction costs and services and selling and promotional expenses historically increase as a percentage of net revenues in the fourth quarter due to increased costs in preparation for the August peak enrollments. 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. Historically, the third quarter of each fiscal year is the highest in terms of operating profits and net income. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital decreased to $72.1 million at November 30, 1997 from $76.4 million at August 31, 1997 due primarily to $19.4 million in cash used in the acquisition of the College, capital expenditures, and an increase in taxes payable and deferred revenue, offset in part by the $14.9 million in cash generated from operations during the three months ended November 30, 1997. In November 1997, the Company increased its line of credit from $4.0 to $10.0 million. At November 30, 1997, the Company had no outstanding borrowings on the line of credit, which bears interest at prime. The line of credit is renewable annually and any amounts borrowed under the line are payable upon its termination in January 1999. Net cash received from operating activities increased to $14.9 million in the three months ended November 30, 1997 from $10.4 million in the three months ended November 30, 1996 due primarily to a $3.3 million increase in net income from 1996 to 1997 and the timing of receipts from customers and payments to suppliers. Capital expenditures, including additions to educational program production costs, increased to $5.3 million in the three months ended November 30, 1997 from $2.9 million in the three months ended November 30, 1996 due primarily to purchases made to support the increase in student enrollments and number of locations. Total purchases of property, equipment and land for the year ended August 31, 1998 are expected to range from $24.0 to $27.0 million. The increase from 1997 is due to: (1) hardware and software related to the Company's planned conversion to new student records and human resource systems; (2) a greater number of planned new campuses and learning centers compared to 1997; (3) improvements to the Company's computer facilities and telecommunications equipment at the corporate level and (4) increases in normal recurring capital expenditures due to the overall increase in student and employee levels resulting from the growth in the business and the acquisition of the College. Additions to educational program production costs are not expected to exceed $2.5 million for the year ended August 31, 1998. Startup costs are expected to range from $6.0 to $9.0 million in 1998, as compared to $3.6 million for the year ended August 31, 1997, due to recent and planned expansion in to new geographic markets. Net receivables at November 30, 1997 totaled $42.2 million, or 47.3% of first quarter 1998 net revenues. This compares to $32.0 million in net receivables at August 31, 1997, or 41.6% of fourth quarter 1997 net revenues 12 and $27.9 million in net receivables at November 30, 1996, or 41.6% of first quarter 1996 net revenues. The increase in receivables as a percentage of net revenues from November 1996 to November 1997 was due primarily to a backlog in collections and in processing new financial aid loans to students as a result of the significant increase in students and related financial aid applications during the three months ending November 30, 1997. The DOE requires that Title IV Program funds collected by an institution for unbilled tuition be kept in a separate cash or cash equivalent account until the students are billed for the portion of their program related to these Title IV Program funds. In addition, all funds transferred to the Company through electronic funds transfer programs are held in a separate cash account until certain conditions are satisfied. As of November 30, 1997, the Company had approximately $22.4 million in these separate accounts, which are reflected as restricted cash, to comply with these requirements. These funds generally remain in these separate accounts for an average of 60- 75 days from the date of collection. These restrictions on cash have not affected the Company's ability to fund daily operations. In March 1997, the Company began offering an alternative student loan program on a test basis at two of its campuses. The program, offered by a commercial lender, allows students to finance their tuition and related educational costs at a rate of prime plus 1.5%, until the proceeds, if any, from employer reimbursement or financial aid programs are available. Loans for students that don't meet certain credit requirements are guaranteed by the Company, subject to certain limitations. At November 30, 1997 the Company has guaranteed approximately $2.5 million in available credit, approximately $700,000 of which was borrowed by the students at that date. To date, there have been no material defaults by students guaranteed by the Company, although the program has not been in place for a sufficient period of time to assess the overall collection rate. In the first quarter of 1998 this program was expanded to WIU and two more UOP campuses. DEPARTMENT OF EDUCATION REVIEWS Effective September 1, 1995, the Company, through its newly formed WIU subsidiary, completed the acquisition of Western International University ("Western"). As previously disclosed, the Company assumed the Title IV liabilities of Western which were subject to change based on the results of the DOE's audit of Western's Title IV Programs. Although much of the fieldwork was completed in early 1996, the final audit results and the amount that the Company is responsible for has not been determined by the DOE at the current time. The original acquisition price of $2.1 million was adjusted to $3.0 million at August 31, 1996 to reflect an increase in the estimated liability to the DOE related to Western's processing of Title IV financial aid and other related liabilities. Depending on the interpretation of the various regulatory requirements, the final audit results and the Company's liability may differ materially from the estimates currently recorded. Any difference between the final amount and the estimates currently recorded will be recorded as an increase or decrease to expense. UOP's most recent DOE program review began in March 1997 and the fieldwork has not yet been completed. UOP has not yet received any official notification as to the results of the ongoing program review, but expects to receive notification during 1998. Because the DOE may not approve new locations while a program review is in process, the financial aid for new students in new campuses and learning centers may be affected until such time as the program review is completed. The Company believes that the potential 13 delays, if any, will not have a material adverse effect on its results of operations because of the availability of alternative financing and employer tuition reimbursement to many of these students. However, should the DOE not complete its review for an extended period of time, such a delay may have a material adverse effect on the Company's ability to expand UOP's business. IMPACT OF INFLATION Inflation has not had a significant impact on the Company's historical operations. 14 PART II -- OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . .Not Applicable Item 2. Changes in Securities On September 23, 1997, in connection with the acquisition of the assets and business operations of the College for Financial Planning and related divisions described in Note 4 to the Unaudited Financial Statements included in this Report, the Company issued 444,953 shares of its Class A Common Stock to the National Endowment for Financial Education. Exemption from registration for the issuance of the Class A Common Stock is claimed pursuant to Section 4(2) of the Securities Act of 1933, as amended, regarding transactions by an issuer not involving any public offering. Item 3. Defaults Upon Senior Securities . . . . . . . . . . .Not Applicable Item 4. Submission of Matters to a Vote of Security Holders On September 18, 1997 the holders of the Company's Class B Common Stock unanimously approved certain amendments to the Company's Articles of Incorporation. The Company has filed as Exhibit 3.1 to this Form 10-Q a copy of its restated and amended Articles of Incorporation reflecting the amendments approved at this meeting. Item 5. Other Information . . . . . . . . . . . . . . . . . .Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 2.1 Asset Purchase Agreement by and among National Endowment for Financial Education, Inc. (R), the College for Financial Planning, Inc., as assignee of Apollo Online, Inc., as Buyer, and Apollo Group, Inc. dated August 21, 1997 Exhibit 2.2 Assignment and Amendment of Asset Purchase Agreement by and among National Endowment for Financial Education, Inc. (R), the College for Financial Planning, Inc., Apollo Online, Inc. and Apollo Group, Inc., dated September 23, 1997 Exhibit 3.1 Restated and Amended Articles of Incorporation of the Registrant (As Amended Through September 18, 1997) Exhibit 10.1a Business Loan Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association Exhibit 10.1c Revolving Promissory Note between Apollo Group, Inc. and Wells Fargo Bank, National Association 15 Exhibit 15-1 Letter on Unaudited Interim Financial Information Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K On September 23, 1997 the Company filed a current report on Form 8-K related to the acquisition of certain assets and operations of the College for Financial Planning. 16 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: December 19, 1997 By: /s/ James W. Hoggatt --------------------------------- James W. Hoggatt Vice President of Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 17 APOLLO GROUP, INC. AND SUBSIDIARIES EXHIBIT INDEX PAGE 2.1 Asset Purchase Agreement by and among National Incorporated by Endowment for Financial Education, Inc. (R), the reference to College for Financial Planning, Inc., as assignee Exhibit 10.1 of of Apollo Group, Inc. dated August 21, 1997 the Company's Registration Statement No. 333-35465 on Form S-3 filed September 11, 1997 2.2 Assignment and Amendment of Asset Purchase Incorporated by Agreement by and among National Endowment for reference to Financial Education, Inc. (R), the College for Exhibit 10.2 of Financial Planning, Inc., Apollo Online, Inc., and the Company's Apollo Group, Inc., dated September 23, 1997 Registration Statement No. 333-35465 on Form S-3 filed September 11, 1997 3.1 Restated and Amended Articles of Incorporation of Incorporated by Apollo Group, Inc. (as amended through September reference to 18, 1997) by reference Exhibit 3.1 in the Annual Report on Form 10-K of Apollo Group, Inc. for the year ended August 31, 1997 10.1a Business Loan Agreement between Apollo Group, Inc. and Filed herewith Wells Fargo Bank, National Association 10.1c Revolving Promissory Note between Apollo Group, Inc. Filed herewith and Wells Fargo Bank, National Association 15-1 Letter on Unaudited Interim Financial Information Filed herewith 27 Financial Data Schedule Filed herewith 18 EX-10.1A 2 LOAN AGREEMENT BY THIS LOAN AGREEMENT (the "Agreement"), made and entered into as of this 17th day of November, 1997, WELLS FARGO BANK, NATIONAL ASSOCIATION, whose address is 100 West Washington, Post Office Box 29742, MAC #4101-251, Phoenix, Arizona 85038-9742 (hereinafter, together with any successors and assigns, called "Lender"), and APOLLO GROUP, INC., an Arizona corporation (the "Borrower"), whose address is 4615 East Elwood Street, Suite 400, Phoenix, Arizona 85040, 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: ARTICLE 1 RECITALS Section 1.1 Borrower has requested that Lender establish a revolving line of credit (the "RLC") with Borrower in the amount of $10,000,000.00, under which revolving line of credit advances (each an "RLC Advance") shall be made to Borrower for general corporate purposes. Section 1.2 Lender has agreed to do so upon the terms, conditions and provisions set forth herein. Effective as of the delivery of this Agreement, the Business Loan Agreement dated March 22, 1996 between Borrower, certain of its Subsidiaries and First Interstate Bank of Arizona, N.A., predecessor in interest to Lender (the "1996 Agreement") will be terminated and replaced by this Agreement. ARTICLE 2 DEFINITIONS Section 2.1 DEFINITIONS. Although terms may be defined in other sections of this Agreement, as used herein the following terms shall have the meanings defined below: "Adjusted LIBOR Rate" means, for each LIBOR Advance, the rate per annum determined by Lender to be equal to (i) LIBOR plus (ii) 125 basis points. "Advance" means an RLC Advance and includes a Prime Advance or a LIBOR Advance (each of which shall be a "Type" of Advance). "Agreement" means this Loan Agreement, as amended, modified, supplemented and/or restated from time to time. "Authorized Officer" means the chief executive officer or chief financial officer of Borrower, or such other individual who is from time to time designated to Lender in writing by said officer as authorized to act for Borrower with respect to the Loan. "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Lender as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Lender for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of an Interest Period for delivery of funds on said date for a period of time approximately equal to the number of days in such Interest Period and in an amount approximately equal to the principal amount to which such Interest Period applies. Borrower understands and agrees that Lender may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Lender in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market. "Borrower": See the Preamble. "Business Day" means a day of the year on which commercial banks are not required or authorized to close in Phoenix, Arizona and, if the applicable Business Day relates to any LIBOR Advance, a day on which dealings are carried on in the London Inter-Bank Market. "Convert," "Conversion," and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type pursuant to Section 3.4. "Event of Default": See Section 9.1. "Generally Accepted Accounting Principles" or "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods after the date hereof so as to properly reflect the financial condition, and the results of operations and changes in cash flows, of Borrower and its Subsidiaries, except that any accounting principles or practices required to be changed by the said Accounting Principles Board or Financial Accounting Standards Board (or other appropriate board or committee of the said Boards) in order to continue as a generally accepted accounting principle or practice may so be changed. "Guaranty" of any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person (other than a Subsidiary) or in any manner providing for the payment, purchase, or acquisition of any Indebtedness or other obligation of any other Person (other than a Subsidiary) or otherwise protecting the holder of Indebtedness of any other Person (other than a Subsidiary) against loss (whether by virtue of endorsements, assumptions, partnership arrangements, agreements to keep well, to supply funds, to purchase assets, goods, securities, or services, or to take-or-pay or otherwise), provided that the term "Guaranty" shall not include endorsements for collection or deposits in the ordinary course of business. "Indebtedness" means, with respect to any Person, the following (without duplication): (i) obligations for borrowed money, including the current portion thereof; (ii) monetary obligations representing the deferred purchase price of real and/or personal property, other than trade accounts payable arising in, and on terms customary in, the ordinary course of that Person's business; (iii) monetary obligations under conditional sale agreements; (iv) the present value of all obligations of such Person in respect of any capital lease, discounted in accordance with GAAP; and (v) matured obligations with respect to any Guaranty. "Interest Period" means, with respect to any LIBOR Advance, a period commencing on a Business Day and continuing for one (1), two (2), three (3) or six (6) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of the Note bears interest at the Adjusted LIBOR Rate; provided however, that no Interest Period may be selected for a principal amount less than One Hundred Thousand and No/100 Dollars ($100,000.00); and provided further, that no Interest Period shall extend beyond the Maturity Date. If any Interest Period would end on a day which is not a Business Day, then such Interest Period shall be extended to the next succeeding Business Day. "Interest Rate Option" means either (i) the Adjusted LIBOR Rate for the chosen Interest Period, or (ii) the Prime Rate. "Lender": See the Preamble. "Letter of Credit" means any letter of credit issued at the request of Borrower. "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula: LIBOR = Base LIBOR ------------------------------- 100% - LIBOR Reserve Percentage "LIBOR Advance" means an Advance that bears interest at the Adjusted LIBOR Rate. "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Lender for expected changes in such reserve percentage during the applicable Interest Period. "Lien" means any lien, mortgage, security interest, tax lien, pledge, encumbrance, conditional sale or title retention arrangement, or any other interest in property designed to secure the repayment of Indebtedness or performance under any Guaranty, whether arising by agreement or under any statute or law, or otherwise. "Loan" means the RLC. "Maturity Date" means January 1, 1999. "Maximum Letter of Credit Balance" means $2,500,000.00. "NCA" means the North Central Association of Colleges and Schools. "1934 Act" means the United States Securities Exchange Act of 1934, as amended. "1996 Agreement": See Section 1.2. "Note" means the RLC Note. "Outstanding RLC Balance" means the aggregate amount of RLC Advances and the face amount of Letters of Credit, outstanding from time to time in either case. "Permitted Liens" means: (a) Liens incurred to secure Permitted Non-Bank Indebtedness, the aggregate amount of which shall not exceed $5,000,000.00; (b) Pledges or deposits made to secure payment of workers' compensation (or to participate in any fund in connection with workers' compensation insurance), unemployment insurance, pensions or social security programs; (c) Liens imposed by mandatory provisions of law such as for materialmen's, mechanics', warehousemen's and other like Liens arising in the ordinary course of business, securing Indebtedness or other liabilities whose payment is not yet due; (d) Liens for taxes, assessments and governmental charges or levies imposed upon a Person or upon such Person's income or profits or property, if the obligation secured by such Lien is not in violation of Section 7.7; (e) Liens arising from the good faith deposits in connection with tenders, leases, real estate bids or contracts (other than contracts involving the borrowing of money), pledges or deposits to secure public or statutory obligations, deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to secure the payment of taxes, assessments, custom duties or other similar charges; or (f) Encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, provided that such do not impair the use of such property for the uses intended, and none of which is violated by existing or proposed structures or land use. "Permitted Non-Bank Indebtedness" means Indebtedness, whether direct, indirect or contingent, with respect to any of the following: (a) Purchase money obligations in connection with the acquisition of real and personal property; (b) Seller carryback financing; and (c) Mergers and acquisitions permitted pursuant to Section 8.1. "Person" means any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Prepayment Fee": See Section 3.8. "Prime Advance" means an Advance that bears interest at the Prime Rate. "Prime Rate" means at any time the rate of interest most recently announced within Lender at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Lender's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Lender may designate. "RLC": See Section 1.1. "RLC Advance" means an Advance by Lender to Borrower under the RLC pursuant to Article 3. "RLC Commitment Amount" means Lender's total commitment to make RLC Advances under the RLC not to exceed $10,000,000.00, reduced by the aggregate of (1) all issued and undrawn Letters of Credit issued for the account of Borrower and (2) all drawn Letters of Credit which have not been repaid. "RLC Note" means that Revolving Promissory Note of even date herewith in the face amount equal to the RLC Commitment Amount from Borrower, evidencing the RLC. "SEC" means the United States Securities and Exchange Commission. "Subsidiary" means any business association directly or indirectly controlled by Borrower. "Termination Date" means the earliest to occur of (1) the Maturity Date, or (2) the date Lender exercises any option to declare the Loan fully due and payable after the occurrence of an Event of Default, or (3) such other date as may be agreed upon in writing by Lender and Borrower. "Type": See the definition of Advance. Section 2.2 TERMS GENERALLY. The definitions in Section 2.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Section 2.3 ACCOUNTING TERMS. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP; provided, however, that, for purposes of determining compliance with any covenant set forth herein, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a consolidated basis consistent with the application used in preparing Borrower's consolidated audited financial statements referred to herein. ARTICLE 3 RLC Section 3.1 RLC COMMITMENT AMOUNT. Subject to the conditions set forth herein, Lender, from time to time, shall make such RLC Advances as Borrower may request and shall issue such Letters of Credit as Borrower may request, provided that (a) the Outstanding RLC Balance shall not exceed the RLC Commitment Amount, and (b) the aggregate amount of the face amount of Letters of Credit outstanding at any one time shall not exceed the Maximum Letter of Credit Balance. The RLC shall be a revolving credit, against which RLC Advances may be made to Borrower, repaid by Borrower, and readvances made to Borrower and Letters of Credit issued, terminated or repaid by Borrower and reissued, provided that (i) no Event of Default shall exist, (ii) no RLC Advance shall be made or Letter of Credit issued that would cause the outstanding principal balance of the RLC to exceed the RLC Commitment Amount, (iii) no Letter of Credit shall be issued that would cause the aggregate amount of the face amount of Letters of Credit outstanding at any one time to exceed the Maximum Letter of Credit Balance, and (iv) no RLC Advance shall be made on or after the Maturity Date. Section 3.2 RLC NOTE. The RLC shall be evidenced by the RLC Note in the form approved by Lender, payable to the order of Lender upon the terms and conditions therein contained, and executed and delivered simultaneously with the execution of this Agreement. Section 3.3 RLC ADVANCES. (a) Lender may from time to time make RLC Advances in such sums as Borrower shall request. (b) Borrower shall give Lender written notice, or telephonic notice confirmed immediately in writing, of the request for any RLC Advances under this Agreement. (c) At such time as Borrower requests an RLC Advance or wishes to select a LIBOR option for all or a portion of the outstanding principal balance of the RLC, and at the end of each interest period, Borrower shall give Lender notice specifying (i) the Interest Rate Option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Interest Period. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, (A) Lender receives written confirmation from Borrower not later than three (3) Business Days after such telephone notice is given, and (B) such notice is given to Lender prior to 10:00 a.m., California time, on the first day of the Interest Period. For each LIBOR option requested, Lender will quote the applicable rate to Borrower at approximately 10:00 a.m., California time, on the first day of the Interest Period. If Borrower does not immediately accept the rate quoted by Lender, any subsequent acceptance by Borrower shall be subject to a redetermination by Lender of the applicable rate; provided, however, that if Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Lender shall have no obligation to permit a LIBOR option to be selected on such day. (d) If no specific designation of interest is made at the time any RLC Advance is requested hereunder or at the end of any Interest Period, Borrower shall be deemed to have made a Prime Rate interest selection for such RLC Advance. Section 3.4 CONVERSION AND RENEWAL OF RLC ADVANCES. (a) At any time any portion of the Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Interest Period applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Interest Period designated by Borrower. (b) At any time any portion of the Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for an Interest Period designated by Borrower. Section 3.5 RLC FACILITY FEE. Borrower agrees to pay to Lender in arrears on the first day of each calendar quarter, commencing January 1, 1998, a non-refundable facility fee at a rate per annum equal to 12.5 basis points on the average daily unused amount of the RLC Commitment Amount during the preceding calendar quarter or, if applicable, shorter period. Section 3.6 RLC PAYMENTS. (a) Interest on the RLC shall accrue daily on the full principal balance of the RLC at the Interest Rate Option selected by Borrower, on the basis of the actual number of days elapsed over a year of 360 days. (b) All accrued interest on each RLC Advance shall be due and payable as billed by Lender each month. In addition, the principal amount of each LIBOR Advance, together with all accrued interest, shall be due and payable each month, and the balance, if any, at the end of each respective Interest Period. (c) The entire outstanding principal balance of the RLC Note, all accrued and unpaid interest and all other sums which may have become payable thereunder shall be due and payable in full on the Termination Date. (d) Default interest shall be due and payable as set forth in the RLC Note. (e) When interest is determined in relation to the Prime Rate, each change in the rate of interest shall become effective on the date each Prime Rate change is announced within Lender. With respect to each LIBOR selection, Lender is hereby authorized to note the date, principal amount, interest rate and Interest Period applicable thereto and any payments made thereon on Lender's books and records (either manually or by electronic entry), which notations shall be prima facie evidence of the accuracy of the information noted. Section 3.7 ADDITIONAL PROVISIONS FOR LIBOR ADVANCES. (a) INABILITY TO ASCERTAIN LIBOR. If Lender at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining LIBOR, the Lender shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Lender, then (A) no new LIBOR option may be selected by Borrower, and (B) any portion of the outstanding principal balance of the Loan which bears interest determined in relation to LIBOR, subsequent to the end of the Interest Period applicable thereto, shall bear interest determined in relation to the Prime Rate. (b) ILLEGALITY. If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful to Lender (A) to make LIBOR options available hereunder, or (B) to maintain interest rates based on LIBOR, then in the former event, any obligation of Lender to make available such unlawful LIBOR options shall immediately be cancelled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at Lender's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Interest Period applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Interest Period. Upon the occurrence of any of the foregoing events, Borrower shall pay to Lender immediately upon demand such amounts as may be necessary to compensate Lender for any fines, fees, charges, penalties or other costs incurred or payable by Lender as a result thereof and which are attributable to any LIBOR options made available to Borrower hereunder, and any reasonable allocation made by Lender among its operations shall be conclusive and binding upon Borrower. (c) INCREASED COSTS. If any Change in Law or compliance by Lender with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (A) subject Lender to any tax, duty or other charge with respect to any LIBOR options, or change the basis of taxation of payments to Lender of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Lender); or (B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Lender; or (C) impose on Lender any other condition; and the result of any of the foregoing is to increase the cost to Lender of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by Lender in connection therewith, then in any such case, Borrower shall pay to Lender immediately upon demand such amounts as may be necessary to compensate Lender for any additional costs incurred by Lender and/or reductions in amounts received by Lender which are attributable to such LIBOR options. In determining which costs incurred by Lender and/or reductions in amounts received by Lender are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Lender among its operations shall be conclusive and binding upon Borrower. (d) DISCRETION OF LENDER AS TO MANNER OF FUNDING. Notwithstanding any provision of this Agreement to the contrary, Lender shall be entitled to fund and maintain its funding of all or any part of any Advance in any manner it sees fit. (e) NO PREPAYMENT FEE UNDER SECTION 3.7(b). Borrower shall not be liable for the Prepayment Fee upon repayment under paragraph (b) of this Section 3.7. Section 3.8 PREPAYMENT (a) PRIME RATE. Borrower may prepay principal on any portion of the RLC which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. (b) LIBOR. Borrower may prepay principal on any portion of the Loan which bears interest determined in relation to LIBOR at any time and in the minimum amount of One Hundred Thousand and no/100 Dollars ($100,000.00); provided, however, that if the outstanding principal balance of such portion of the RLC is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Lender providing this prepayment option to Borrower, or if any such portion of the RLC shall become due and payable at any time prior to the last day of the Interest Period applicable thereto by acceleration or otherwise, except pursuant to Section 3.7(b), Borrower shall pay to Lender immediately upon demand a fee (the "Prepayment Fee") which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Interest Period matures, calculated as follows for each such month: (i) DETERMINE the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Interest Period applicable thereto. (ii) SUBTRACT from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Interest Period at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. Borrower acknowledges that prepayment of such amount may result in Lender incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described Prepayment Fee, except due to a prepayment pursuant to Section 3.7(b), and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Lender. If Borrower fails to pay any Prepayment Fee when due, the amount of such Prepayment Fee shall thereafter bear interest until paid at a rate per annum four percent (4.0%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). Each change in the rate of interest on any such past due Prepayment Fee shall become effective on the date each Prime Rate change is announced within Lender. Section 3.9 REQUIREMENT THAT CONDITIONS BE SATISFIED. Lender shall have no obligation to make any RLC Advances unless and until all of the conditions and requirements of this Agreement are fully satisfied. However, Lender, at its sole and absolute discretion, may elect to make one or more RLC Advances prior to full satisfaction of one or more such conditions and/or requirements. Notwithstanding that such an RLC Advance or RLC Advances are made, such unsatisfied conditions and/or requirements shall not be waived or released thereby. Borrower shall be and continue to be obligated to fully satisfy such conditions and requirements. ARTICLE 4. LETTERS OF CREDIT Section 4.1 ISSUANCE. (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 one percent (1%) 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. (b) In the event that a Letter of Credit is issued at the written request of Borrower on behalf of any Subsidiary, Lender may include therein the following statement: "This Letter of Credit is being issued at the request of Apollo Group, Inc., an Arizona corporation, on behalf of ________________________, a subsidiary of Apollo Group, Inc." Section 4.2 CONDITIONS PRECEDENT. The obligation of Lender to issue and/or renew any Letters of Credit on behalf of Borrower or, at the written request of Borrower, on behalf of any Subsidiary shall be subject to the following conditions precedent on the date of issuance or renewal of each such Letter of Credit: (a) Borrower shall execute and deliver to Lender an application for letter of credit, specifying the amount of the requested letter of credit, the requested term thereof, which term may not exceed the Maturity Date, the beneficiary thereof and, if applicable, the Subsidiary on whose behalf the Letter of Credit is to be issued; and (b) No Event of Default shall exist and no event or condition shall exist that after notice or lapse of time, or both would constitute an Event of Default. Section 4.3 DRAWING. (a) Should any Letter of Credit be drawn upon by the beneficiary thereof, such draw shall be deemed to be a Prime Advance. (b) With respect to any Letter of Credit issued at the written request of Borrower on behalf of a Subsidiary, Borrower agrees that should such Letter of Credit be drawn upon by the beneficiary thereof, Borrower agrees such draw shall be deemed to be a Prime Advance and an obligation of Borrower hereunder. Borrower waives and agrees not to assert (i) any right to require Lender to proceed against such Subsidiary, and (ii) the benefits of any statutory provisions limiting the liability of a surety including without limitation the provisions of Sections 12-1641, et seq. of the Arizona Revised Statutes. ARTICLE 5 CONDITIONS PRECEDENT Section 5.1 Conditions Precedent. The obligation of Lender to make the initial Advance hereunder is subject to the fulfillment of the following conditions: (a) Borrower shall have executed (or obtained the execution or issuing of) and delivered to Lender the following documents or information, all in form satisfactory to Lender: (i) The Note; (ii) A corporate resolution of Borrower authorizing (i) the Loan, and (ii) the execution and delivery by Borrower of all documents to be executed by Borrower, and the performance by Borrower of all acts and things to be performed by Borrower, pursuant to this Agreement; and (iii) A copy of its current Articles of Incorporation and Bylaws, so certified by the Secretary of the corporation, together with a copy of a current Certificate of Good Standing in the state of incorpora- tion for Borrower and evidence of qualification to do business and good business in all states in which Borrower conducts business; and such other documents as Lender may require relating to the existence and good standing of Borrower and the authority of any person acting or executing documents on behalf of Borrower. (b) All representations and warranties by Borrower contained in this Agreement shall remain true and correct and Borrower has performed or complied with all agreements of Borrower made in this Agreement that Borrower is to have performed or complied with by the date of the first Advance. (c) No Event of Default shall exist and no event or condition shall exist that after notice or lapse of time, or both would constitute an Event of Default. (d) Lender shall have received evidence to its satisfaction that there are no Liens, other than those permitted pursuant to Section 8.4, on the property or assets of Borrower. Section 5.2 Conditions Precedent to All Future Advances. The obligation of Lender to make any Advances to Borrower following the initial Advance under Section 5.1 hereof shall be subject to the condition precedent that on the date of each such Advance no Event of Default shall exist and no event or condition shall exist that, after notice or lapse of time or both, would constitute an Event of Default. ARTICLE 6 GENERAL REPRESENTATIONS AND WARRANTIES Borrower hereby represents and warrants to Lender as follows: Section 6.1 RECITALS. The recitals and statements of intent appearing in this Agreement are true and correct. Section 6.2 ORGANIZATION. Borrower is duly organized, validly existing and in good standing under the laws of the state of its organization. Borrower is qualified to do business and is in good standing in the State of Arizona and in each state in which it is required by law to do so. Section 6.3 POWER. Borrower has full power and authority to own its properties and assets and to carry on its business as presently being conducted. Section 6.4 ENFORCEABLE. Borrower is fully authorized and permitted to enter into this Agreement, to execute any and all documentation required herein, to borrow the amounts contemplated herein upon the terms set forth herein and to perform the terms of this Agreement, none of which conflicts with any provision of law or regulation applicable to Borrower. This Agreement and the Note are valid and binding legal obligations of Borrower, and each is enforceable in accordance with its terms. Section 6.5 NO CONFLICT. The execution, delivery and performance by Borrower of this Agreement, the Note and all other documents and instruments relating to the Loan are not in material conflict with any provision of law applicable to Borrower or with the Articles of Incorporation and Bylaws of Borrower and will not result in any breach of the terms or conditions or constitute a default under any agreement or instrument under which Borrower is a party or is obligated. Borrower is not in default in the performance or observance of any obligations, covenants or conditions of any such agreement or instrument. Section 6.6 NO ACTIONS. There are no actions, suits or proceedings pending or threatened against Borrower or any Subsidiary which materially and adversely affect the repayment of the Loan, the performance by Borrower under this Agreement or the financial condition, business or operations of Borrower. Section 6.7 FINANCIAL STATEMENTS. All financial statements and profit and loss statements, all statements as to ownership and all other statements or reports previously or hereafter given to Lender by Borrower are and shall be true and correct as of the date thereof. There has been no material adverse change in the business, properties or condition (financial or otherwise) of Borrower since the date of the latest financial statements given to Lender. Section 6.8 TAX PAYMENTS. Borrower and each Subsidiary have filed all federal, state and local tax returns by the due date as extended and have paid all federal, state and local taxes shown due thereon by such extended due date and all other payments required under federal, state or local law. Section 6.9 MARGIN STOCK. No part of the proceeds of any financial accommodation made by Lender in connection with this Agreement will be used to purchase or carry "margin stock," as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System, or to extend credit to others for the purpose of purchasing or carrying such margin stock. Section 6.10 AFFIRMATION. Each request by Borrower for an Advance hereunder shall constitute an affirmation on the part of Borrower that the representations and warranties of Section 6.7 are true and correct with respect to any financial statements submitted by Borrower to Lender between the date of this Agreement and the date of such request, that the representations and warranties of all other sections of this Article 6 hereof are true and correct as of the time of such request and that the condition precedents set forth in Article 5 hereof are fully satisfied. All representations and warranties made herein shall survive the execution of this Agreement, any and all Advances or proceeds of the Loan and the execution and delivery of all other documents and instruments in connection with the Loan, so long as Lender has any commitment to lend to Borrower hereunder and until the Loan and all indebtedness hereunder have been paid in full and all of Borrower's obligations hereunder have been fully discharged. Section 6.11 OBLIGATIONS OF AFFILIATION. Neither Borrower nor any Subsidiary is currently under any probationary action instituted by the NCA, and to the best of its knowledge, Borrower and each Subsidiary, to the extent applicable, have fully and completely complied with all "Obligations of Affiliation" as prescribed by the NCA. Section 6.12 SUBSIDIARIES. All Subsidiaries of Borrower are correctly identified on Schedule 6.12. ARTICLE 7 AFFIRMATIVE COVENANTS Borrower hereby covenants and agrees that so long as Lender has any commitment to lend to Borrower hereunder and until the Loan and all other indebtedness hereunder have been paid in full and all of Borrower's obligations hereunder have been fully discharged: Section 7.1 EXISTENCE. Except as otherwise permitted by Section 8.1, Borrower shall maintain its existence with no amendments or changes in its Articles of Incorporation without the prior written consent of Lender, which consent shall not be unreasonably withheld. Section 7.2 MAINTAIN PROPERTY. Borrower and each Subsidiary shall maintain in full force and effect all agreements, rights, trademarks, patents and licenses necessary to carry out their respective businesses, shall keep all of their respective properties in good condition and repair, and shall make all needed and proper repairs and improvements to their respective properties in order to properly conduct their respective businesses. Section 7.3 INSURANCE. To the extent Borrower and its Subsidiaries are not self-insured, Borrower shall at all times maintain and/or cause its Subsidiaries to maintain insurance coverages in scope and amount not less than, and not less extensive than, the scope and amount of insurance coverages customary for companies of comparable size and financial strength in the trades or businesses in which Borrower and its Subsidiaries are from time to time engaged. Upon Lender's request, Borrower shall provide evidence satisfactory to Lender that required coverage in required amounts is in effect. Section 7.4 PAYMENTS. Borrower shall make all payments of interest and principal on the Loan as and when the same become due and payable and shall keep and comply with all covenants, terms and provisions of the Note. Section 7.5 FINANCIAL REPORTS. Borrower shall maintain a standard system of accounting in accordance with good business practices, that reflects the application of GAAP and Borrower shall furnish to Lender the following: (a) CPA FULLY AUDITED FINANCIAL STATEMENTS. Annual consolidated financial statements, combined and combining, including balance sheet, income statement and statement of cash flows, within one hundred twenty (120) days of Borrower's fiscal year end together with a copy of the Form 10-K as filed with the SEC and an opinion on said combined financial statements (which shall not be limited by reason of any limitation imposed by Borrower) of independent certified public accountants acceptable to Lender, to the effect that such financial statements have been prepared in accordance with generally accepted accounting principles consistently maintained and applied (except for changes in which such accountants concur) and that their examination of such accounts in connection with such financial statements has been made in accordance with generally accepted auditing standards). (b) QUARTERLY FINANCIAL STATEMENTS. Fully consolidated Borrower prepared balance sheets and profit and loss statements as of the end of each of its first three fiscal quarters, within forty-five (45) days after the end of each fiscal quarter, together with a copy of the Form 10- Q as filed with the SEC. (c) COMPLIANCE CERTIFICATE. With each statement submitted by Borrower under subparagraphs (a) and (b) above, a certificate signed by an Authorized Officer of Borrower stating that such statements are accurate and that no Event of Default exists and no event has occurred and no condition exists that, after notice or passage of time, or both, would constitute an Event of Default. (d) OTHER INFORMATION. Such other information as Lender shall reasonably request. Section 7.6 RECORDS. Borrower shall maintain, and cause each Subsidiary to maintain, in a safe place, proper and accurate books, ledgers, correspondence and other records relating to its operations and business affairs. Lender shall have the right from time to time to examine and audit and to make abstracts from and photocopies of Borrower's books, ledgers, correspondence and other records and those of its Subsidiaries. Section 7.7 CURRENT OBLIGATIONS. Except for tax protests made in good faith and, the posting, if required, of any and all bonds therewith, Borrower and each Subsidiary shall pay all of its current obligations before they become delinquent, including all federal, state and local taxes, assessments, levies and governmental charges and all other payments required under any federal, state or local law. Section 7.8 DELIVERY OF CORRESPONDENCE BY AND BETWEEN BORROWER, ANY APPLICABLE SUBSIDIARY AND THE NCA. Borrower shall comply, if applicable, and cause each Subsidiary accredited by the NCA, at all times with all "Obligations of Affiliation" as prescribed by the NCA and promptly deliver to Lender a certified copy of all correspondence regarding: (i) potential or actual probationary actions taken by the NCA, or any other accreditation commission; and (ii) written notification from the NCA that Borrower and/or such Subsidiary has not fulfilled one more of its "Obligations of Affiliation" as prescribed by the NCA. Borrower shall also promptly deliver any other accreditation-related information as reasonably requested by Lender from time to time, including but not limited to the NCA's final team report prepared after any evaluation visit. Section 7.9 [Intentionally left blank.] Section 7.10 OTHER DOCUMENTS. Borrower shall execute and deliver to Lender such other instruments and documents and do such other acts as Lender may reasonably require in connection with the Loan. Section 7.11 LITIGATION. Borrower shall promptly give notice in writing to Lender of any litigation pending or threatened against Borrower or any Subsidiary having a material effect on the financial condition of Borrower. Section 7.12 FINANCIAL CONDITION. Borrower shall maintain its consolidated financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein). (a)Total Liabilities divided by Tangible Net Worth not at any time greater than 1.25 to 1.0, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (b) Quick Ratio not at any time less than 1.2 to 1.0, with "Quick Ratio" defined as the aggregate of cash, restricted cash, short-term investments and receivables convertible into cash divided by total current liabilities. (c) Net income after taxes not less than $1.00 on an annual basis, determined as of each fiscal year and pre-tax profit not less than $1.00 on a quarterly basis, determined as of each fiscal quarter end. ARTICLE 8 NEGATIVE COVENANTS Borrower hereby covenants and agrees that so long as Lender has any commitment to lend to Borrower hereunder and until the Loan and all other indebtedness hereunder have been paid in full and all of Borrower's obligations hereunder have been fully discharged, it shall not without receiving the prior written consent of Lender: 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 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 $10,000,000.00 per fiscal year and (b) Borrower or any of its Subsidiaries is the surviving entity of any such merger or acquisition. Section 8.2 FISCAL YEAR. Change the times of commencement or termination of its fiscal year or other accounting periods; or change its method of accounting other than to conform to GAAP. Section 8.3 MARGIN STOCK. Use any proceeds of the Loan, or any proceeds of any other or future financial accommodation from Lender to Borrower, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System, and will not use such proceeds in a manner that would involve Borrower in a violation of Regulation T, U or X of such Board, nor use such proceeds for any purpose not permitted by Section 7 of the 1934 Act or any of the rules or regulations respecting the extensions of credit promulgated thereunder. Section 8.4 LIENS; NEGATIVE PLEDGE. Create or suffer to exist Liens upon its property or assets, or the property or assets of any of its Subsidiaries, real or personal, now owned or hereafter acquired, EXCEPT (i) Liens in favor of Lender, (ii) purchase money security interests in, or purchase money mortgages on, real or personal property to secure purchase money Indebtedness incurred by Borrower, (iii) Liens incurred in connection with permitted seller carryback financing of property, plant and equipment acquired by Borrower or any Subsidiary, and Liens then existing and relating to indebtedness assumed by Borrower or any of its Subsidiaries in connection with any such acquisition, PROVIDED that: (a) any property subject to any of the foregoing is acquired by Borrower or any Subsidiary in the ordinary course of its respective business and the Lien on any such property attaches to such assets concurrently or within thirty (30) days after the acquisition thereof; and (b) each such Lien shall attach only to the property so acquired and fixed improvements thereon; (iv) Permitted Liens; and (v) Liens otherwise permitted hereunder which were granted by any Person which has been merged into, consolidated with or acquired by Borrower in a transaction permitted by the terms of this Agreement. 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 $5,000,000.00 in the aggregate in any fiscal year. 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 to pay (i) intercompany dividends, PROVIDED said dividend(s) has (have) no effect whatsoever on Borrower's consolidated stockholder's equity, and (ii) non-cash dividends including but not limited to intercompany non-cash dividends and non-cash dividends to facilitate stock splits. Section 8.7 [Intentionally left blank Section 8.8 LOSS OF ACCREDITATION. Permit any action that would cause accreditation to be denied by the NCA with respect to any Subsidiary that is accredited by the NCA. Section 8.9 GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower or any Subsidiary as security for, any liabilities or obligations of any other Person or entity, nor permit any Subsidiary to do any of the foregoing, except (a) any of the foregoing in favor of Lender and (b) guaranty associated with Union Bank Campus Card Program. ARTICLE 9 DEFAULT AND REMEDIES Section 9.1 EVENT OF DEFAULT. The occurrence of any of the following events or conditions shall constitute an "Event of Default" under this Agreement: (a) Failure to pay any installment of principal or interest under the Note as and when the same become due and payable, or the failure to pay any other sum due under the Note or this Agreement when the same shall become due and payable; (b) Any failure or neglect to perform or observe any of the terms, provisions, or covenants of this Agreement (other than a failure or neglect described in one or more of the other provisions of this Section 9.1); (c) Any warranty, representation or statement contained in this Agreement, or made or furnished to the Lender by or on behalf of Borrower, that shall be or shall prove to have been materially false when made or furnished; (d) The filing by Borrower and any Subsidiary (or against Borrower or any Subsidiary in which Borrower or said Subsidiary acquiesces or which is not dismissed within ninety (90) days of the filing thereof) of any proceeding under the federal bankruptcy laws now or hereafter existing or any other similar statute now or hereafter in effect; the entry of an order for relief under such laws with respect to Borrower and any Subsidiary; or the appointment of a receiver, trustee, custodian or conservator of all or any part of the assets of Borrower or any Subsidiary; (e) The insolvency of Borrower or any Subsidiary; or the execution by Borrower or any Subsidiary of an assignment for the benefit of creditors; or the convening by Borrower or any Subsidiary of a meeting of its creditors, or any class thereof, for purposes of effecting a moratorium upon or extension or composition of its debts; or the failure of Borrower or any Subsidiary to pay its debts as they mature; or if Borrower or any Subsidiary is generally not paying its debts as they mature; (f) The admission in writing by Borrower or any Subsidiary that it is unable to pay its debts as they mature or that it is generally not paying its debts as they mature; (g) The liquidation, termination or dissolution of Borrower or any Subsidiary except as otherwise permitted in this Agreement; or (h) The occurrence of any default under the Note or any document or instrument given by Borrower or any Subsidiary in connection with any other indebtedness of Borrower or any Subsidiary to Lender and the expiration of any grace period provided therein. Section 9.2 REMEDIES. Upon the occurrence of any Event of Default and at any time thereafter while such Event of Default is continuing, subject to the provisions of subparagraphs (b) and (c) hereof, Lender may do one or more of the following: (a) Cease making Advances or extensions of financial accommodations in any form to or for the benefit of Borrower and declare the entire Loan immediately due and payable, without notice or demand; (b) Proceed to protect and enforce its rights and remedies under this Agreement and the Note; and (c) Avail itself of any other relief to which Lender may be legally or equitably entitled. Section 9.3 NOTICE AND CURE PROVISION. Prior to exercising any right of acceleration of the Indebtedness or other right or remedy by Lender, unless a different grace period is provided in this Agreement, Lender shall give written notice of any default upon which such right or remedy is dependent and, if such default is of a nature that can be corrected by Borrower, allow the following time period for such correction: (a) If the default relates to the nonpayment of money: ten (10) days; (b) If the default relates to the non-performance of any covenant herein made by Borrower, or to the existence of any condition or state of affairs that may be corrected by Borrower other than the nonpayment of money: sixty (60) days. No notice need be given or period for correction allowed by Lender in the event of insolvency, or in the event of administration of property in any legal or equitable proceeding of any kind, including, without limitation, any proceeding under federal bankruptcy law or any other similar statute now or hereafter in effect, or in the event of any other default that Lender reasonably determines to be of a nature beyond Borrower's reasonable power to correct. ARTICLE 10 ACTION UPON AGREEMENT Section 10.1 THIRD PARTY. This Agreement is made for the sole protection and benefit of the parties hereto, their successors and assigns, and no other person or organization shall have any right of action hereon. No representation of any kind is made to third parties by the execution hereof, by the existence or form of the indebtedness treated herein, or by any performance, or failure or waiver thereof, by any party of the terms hereof. Specifically, without limitation of the foregoing, the Lender makes no representation to any third party as to the solvency of Borrower or of the commercial practicability of any business enterprise to which or for which the Loan is made. Section 10.2 ENTIRE AGREEMENT. This Agreement embodies the entire Agreement of the parties with regard to the subject matter hereof. There are no representations, promises, warranties, understandings or agreements express or implied, oral or otherwise, in relation thereto, except those expressly referred to or set forth herein. Borrower acknowledges that the execution and the delivery of this Agreement is its free and voluntary act and deed, and that said execution and delivery have not been induced by, nor done in reliance upon, any representations, promises, warranties, understandings or agreements made by Lender, its agents, officers, employees or representatives. Section 10.3 WRITING REQUIRED. No promise, representation, warranty or agreement made subsequent to the execution and delivery hereof by either party hereto, and no revocation, partial or otherwise, or change, amendment, addition, alteration or modification of this Agreement shall be valid unless the same shall be in writing signed by all parties hereto. Section 10.4 NO PARTNERSHIP. Lender and Borrower each have separate and independent rights and obligations under this Agreement. Nothing contained herein shall be construed as creating, forming or constituting any partnership, joint venture, merger or consolidation of Borrower and Lender for any purpose or in any respect. ARTICLE 11 GENERAL Section 11.1. SURVIVAL. This Agreement shall survive the making of the Loan and shall continue so long as any part of the Loan, or any extension or renewal thereof, or any Letter of Credit remains outstanding. Section 11.2 CONTEXT. This Agreement shall apply to the parties hereto according to the context hereof, and without regard to the number or gender of words or expressions used herein. Section 11.3 TIME. Time is expressly made of the essence of this Agreement. Section 11.4 NOTICES. All notices required or permitted to be given hereunder shall be in writing, and shall become effective immediately if personally delivered or effective twenty-four (24) hours after such are deposited in the United States mail, certified or registered, postage prepaid, addressed as shown above, or to such other address as such party may from time to time designate in writing. Any notice sent to Borrower shall be sent to the attention of its chief financial officer. Section 11.5 COSTS. Borrower shall pay all reasonable costs and expenses arising from the preparation of this Agreement, the Note, the closing of the Loan, the making of Advances thereunder, and the enforcement of Lender's rights hereunder, including but not limited to, accounting fees, appraisal fees, attorneys' fees and any charges that may be imposed on Lender as a result of this transaction. At the option of Lender and upon written notice to Borrower, RLC Advances may be made and disbursed from time to time by Lender directly in payment of such costs and expenses. Section 11.6 COLLECTION OF PAYMENTS. Borrower authorizes Lender to collect principal, interest and fees due under this Agreement by charging Borrower's demand deposit account number 4159502319 with Lender, or any other demand deposit account maintained by Borrower with Lender, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. Section 11.7 SUCCESSORS. This Agreement shall, except as herein otherwise provided, be binding upon and inure to the benefit of the successors and assigns of the parties, hereto. Section 11.8 HEADINGS. The headings or captions of sections in this Agreement are for convenience and reference only, and in no way define, limit or describe the scope or intent of this Agreement or the provisions of such sections. Section 11.9 ARBITRATION. (a) ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self- help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) GOVERNING RULES. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in Arizona selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. (c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration hereunder. (d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be active members of the Arizona State Bar or retired judges of the state or federal judiciary of Arizona with expertise in the substantive law applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of Arizona, (ii) may grant any remedy or relief that a court of the state of Arizona could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Arizona Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of Arizona, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of Arizona. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of Arizona. (f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. Section 11.10 LAW. This Agreement shall be construed according to the laws of the State of Arizona. IN WITNESS WHEREOF, these presents have been executed as of the day and year first set forth above and each party hereby acknowledges that it has read the Arbitration provisions contained in Section 11.9 of this Agreement. WELLS FARGO BANK, National Association By: /s/ Karen Maher Name: Karen Maher Title: Vice President LENDER APOLLO GROUP, INC., an Arizona corporation By: /s/ John G. Sperling Name: John G. Sperling Title: President and CEO BORROWER SCHEDULE 6.12 Subsidiaries Apollo Press, Inc. Apollo Online, Inc. Apollo Education Corporation Institute for Professional Development, Inc. Computer Aided Learning Corporation, Inc. The University of Phoenix, Inc. Western International University, Inc. UOP-Michigan College For Financial Planing, Inc. Apollo Training Corporation Apollo Development Corporation LOAN AGREEMENT by and between WELLS FARGO BANK, NATIONAL ASSOCIATION as Lender and APOLLO GROUP, INC. as Borrower Dated as of November 17, 1997 TABLE OF CONTENTS PAGE ARTICLE 1 RECITALS. . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . 1 Section 2.1 Definitions. . . . . . . . . . . . . . . . . 1 Section 2.2 Terms Generally. . . . . . . . . . . . . . . 6 Section 2.3 Accounting Terms . . . . . . . . . . . . . . 6 ARTICLE 3 RLC . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.1 RLC Commitment Amount. . . . . . . . . . . . 6 Section 3.2 RLC Note . . . . . . . . . . . . . . . . . . 6 Section 3.3 RLC Advances . . . . . . . . . . . . . . . . 7 Section 3.4 Conversion and Renewal of RLC Advances . . . 7 Section 3.5 RLC Facility Fees. . . . . . . . . . . . . . 8 Section 3.6 RLC Payments . . . . . . . . . . . . . . . . 8 Section 3.7 Additional Provisions for LIBOR Advances . . 8 Section 3.8 Prepayment . . . . . . . . . . . . . . . . .10 Section 3.9 Requirement that Conditions be Satisfied . .11 ARTICLE 4 LETTER OF CREDIT Section 4.1 Issuance . . . . . . . . . . . . . . . . . .11 Section 4.2 Conditions Precedent . . . . . . . . . . . .12 Section 4.3 Drawing. . . . . . . . . . . . . . . . . . .12 ARTICLE 5 CONDITIONS PRECEDENT. . . . . . . . . . . . . . . .12 Section 5.1 Conditions Precedent . . . . . . . . . . . .12 Section 5.2 Conditions Precedent to All Future Advances. . . . . . . . . . . . . . 13 ARTICLE 6 GENERAL REPRESENTATIONS AND WARRANTIES . . . . . . 13 Section 6.1 Recitals . . . . . . . . . . . . . . . . . .13 Section 6.2 Organization . . . . . . . . . . . . . . . .13 Section 6.3 Power. . . . . . . . . . . . . . . . . . . .14 Section 6.4 Enforceable. . . . . . . . . . . . . . . . .14 Section 6.5 No Conflict. . . . . . . . . . . . . . . . .14 Section 6.6 No Actions . . . . . . . . . . . . . . . . .14 Section 6.7 Financial Statements . . . . . . . . . . . .14 Section 6.8 Tax Payment. . . . . . . . . . . . . . . . .14 Section 6.9 Margin Stock . . . . . . . . . . . . . . . .14 Section 6.10 Affirmation. . . . . . . . . . . . . . . . .14 Section 6.11 Obligations of Affiliation . . . . . . . . 15 Section 6.12 Subsidiaries . . . . . . . . . . . . . . . 15 ARTICLE 7 AFFIRMATION COVENANTS. . . . . . . . . . . . . . . 15 Section 7.1 Existence . . . . . . . . . . . . . . . . . 15 Section 7.2 Maintain Property . . . . . . . . . . . . . 15 Section 7.3 Insurance . . . . . . . . . . . . . . . . . 15 Section 7.4 Payment . . . . . . . . . . . . . . . . . . 16 Section 7.5 Financial Reports . . . . . . . . . . . . . 16 Section 7.6 Records . . . . . . . . . . . . . . . . . . 16 Section 7.7 Current Obligation. . . . . . . . . . . . . 16 Section 7.8 Delivery of Correspondence By and Between Borrower, any Applicable Subsidiary and the NCA. . . . . . . . . . . 17 Section 7.9 [Intentionally left blank]. . . . . . . . . 17 Section 7.10 Other Documents . . . . . . . . . . . . . . 17 Section 7.11 Litigation. . . . . . . . . . . . . . . . . 17 Section 7.12 Financial Condition. . . . . . . . . . . . 17 ARTICLE 8 NEGATIVE COVENANTS . . . . . . . . . . . . . . . . 18 Section 8.1 No Mergers, Acquisitions and Consolidations. 18 Section 8.2 Fiscal Year. . . . . . . . . . . . . . . . . 18 Section 8.3 Margin Stock. . . . . . . . . . . . . . . . 18 Section 8.4 Liens; Negative Pledge. . . . . . . . . . . 18 Section 8.5 Indebtedness. . . . . . . . . . . . . . . . 19 Section 8.6 Payment of Dividends. . . . . . . . . . . . 19 Section 8.7 [Intentionally left blank.] . . . . . . . . 19 Section 8.8 Loss of Accreditation . . . . . . . . . . . 19 Section 8.9 Guaranties . . . . . . . . . . . . . . . . 19 ARTICLE 9 DEFAULT AND REMEDIES . . . . . . . . . . . . . . . 19 Section 9.1 Event of Default. . . . . . . . . . . . . . 19 Section 9.2 Remedies. . . . . . . . . . . . . . . . . . 20 Section 9.3 Notice and Cure Provision . . . . . . . . . 21 ARTICLE 10 ACTION UPON AGREEMENT. . . . . . . . . . . . . . .21 Section 10.1 Entire Party. . . . . . . . . . . . . . . .21 Section 10.2 Entire Agreement. . . . . . . . . . . . . .21 Section 10.3 Writing Required. . . . . . . . . . . . . .22 Section 10.4 No Partnership. . . . . . . . . . . . . . .22 ARTICLE 11 GENERAL. . . . . . . . . . . . . . . . . . . . . .22 Section 11.1 Survival. . . . . . . . . . . . . . . . . .22 Section 11.2 Context . . . . . . . . . . . . . . . . . .22 Section 11.3 Time. . . . . . . . . . . . . . . . . . . .22 Section 11.4 Notices . . . . . . . . . . . . . . . . . .22 Section 11.5 Costs . . . . . . . . . . . . . . . . . . .22 Section 11.6 Collection of Payments. . . . . . . . . . .22 Section 11.7 Successors. . . . . . . . . . . . . . . . .23 Section 11.8 Headings. . . . . . . . . . . . . . . . . .23 Section 11.9 Arbitration . . . . . . . . . . . . . . . .23 Section 11.10 Law . . . . . . . . . . . . . . . . . . . .23 SCHEDULES 6.12 Subsidiaries EX-10.1C 3 REVOLVING PROMISSORY NOTE $10,000,000.00 Phoenix, Arizona November 17, 1997 FOR VALUE RECEIVED, the undersigned ("Maker"), promises to pay to the order of WELLS FARGO BANK, National Association (the "Payee"; Payee and each subsequent successor, transferee and/or owner of this Note, whether taking by endorsement or otherwise, are herein successively called "Holder"), at 100 West Washington, Post Office Box 29742, MAC #4101-251, Phoenix, Arizona 85038- 9742, or at such other place as Holder may from time to time designate in writing, the principal sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00) or so much thereof as Holder may advance to or for the benefit of Maker plus interest calculated on a daily basis (based on a 360-day year) from the date hereof on the principal balance from time to time outstanding as hereinafter provided, principal, interest and all other sums payable hereunder to be paid in lawful money of the United States of America as follows: (a) INTEREST. Interest shall accrue on the unpaid principal of each RLC Advance: (i) At the Prime Rate if it is a Prime Advance. (ii) At the Adjusted LIBOR Rate if it is a LIBOR Advance. (b) PAYMENTS. All accrued interest on each RLC Advance shall be due and payable as billed by Holder each month. In addition, the principal amount of each LIBOR Advance together with all accrued interest, shall be due and payable each month, and the balance, if any, at the end of each respective Interest Period. (c) FINAL PAYMENT. The entire outstanding principal balance outstanding hereunder, all accrued and unpaid interest and all other sums which may have become payable hereunder shall be due and payable in full on the Termination Date. (d) DEFINITIONS. The capitalized terms used and not otherwise defined herein shall have the same meanings as defined in the Loan Agreement (defined below). The principal balance of this Note represents a revolving credit all or any part of which may be advanced to Maker, repaid by Maker, and readvanced to Maker from time to time, subject to the other terms hereof and the conditions, if any, contained in the Loan Agreement and provided that the principal balance outstanding at any one time shall not exceed the face amount hereof. Maker's indebtedness under this Note shall be further evidenced by the balance of Maker's loan account with Holder to which charges and credits shall be entered in accordance with Holder's standard accounting practices in effect from time to time. Holder, at its discretion, from time to time, may render statements of account to Maker setting forth the outstanding principal amount of the Loan and amounts of interest, costs and fees due and payable with respect thereto. Each such statement, if and as so rendered, shall be deemed correct and accepted by Maker, and shall be conclusively binding upon Maker, unless Maker notifies Holder of any discrepancy within thirty (30) days after the date of the statement. If such statements are rendered periodically by Holder and provide that accrued interest and other amounts shown thereon are due and payable on receipt, all such interest and amounts shall be so due and payable. Maker agrees to an effective rate of interest that is the rate stated above plus any additional rate of interest resulting from any other charges in the nature of interest paid or to be paid by or on behalf of Maker, or any benefit received or to be received by Holder, in connection with this Note. All payments on this Note shall be applied to the payment of any costs, fees or other charges incurred in connection with the indebtedness evidenced hereby, the payment of accrued interest and the reduction of the principal balance, in the order and manner Holder, in its sole and absolute discretion, shall determine from time to time. This Note is issued pursuant to that Loan Agreement dated of even date herewith between Maker and Payee (the "Loan Agreement"). Time is of the essence of this Note. At the option of Holder, the entire unpaid principal balance, all accrued and unpaid interest and all other amounts payable hereunder shall become immediately due and payable without notice upon the failure to pay any sum due and owing hereunder as provided herein or upon the occurrence of any event of default under the Loan Agreement. After maturity, including maturity upon acceleration, the unpaid principal balance, all accrued and unpaid interest and all other amounts payable hereunder shall bear interest at that rate that is four percent (4%) above the rate that would otherwise be payable under the terms hereof. Maker shall pay all costs and expenses, including reasonable attorneys' fees and court costs, incurred in the collection or enforcement of all or any part of this Note. Such court costs and attorneys' fees shall be set by the court and not by jury, shall be included in any judgment obtained by Holder. Maker shall have the option to prepay this Note, in full or in part, at any time. Maker shall pay to Holder such amount or amounts as shall be sufficient to compensate for any Prepayment Fee which Holder may reasonably incur as a result of payment or Conversion of any LIBOR Advance other than on the last Business Day of the Interest Period for such LIBOR Advance. Failure of Holder to exercise any option hereunder shall not constitute a waiver of the right to exercise the same in the event of any subsequent default or in the event of continuance of any existing default after demand for strict performance hereof. Maker (a) waives any and all formalities in connection with this Note to the maximum extent allowed by law, including (but not limited to) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment of this Note; and (b) consents that Holder may extend the time of payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced by this Note, at the request of any other person liable hereon, and such consent shall not alter nor diminish the liability of any person hereon. In addition, Maker waives and agrees not to assert: (a) any right to require Holder to proceed against Maker to proceed against or exhaust any security for the Note, to pursue any other remedy available to Holder, or to pursue any remedy in any particular order or manner; (b) the benefit of any statute of limitations affecting its liability hereunder or the enforcement hereof; (c) the benefits of any legal or equitable doctrine or principle of marshalling; (d) notice of the existence, creation or incurring of new or additional indebtedness of Maker to Holder; (e) the benefits of any statutory provision limiting the liability of a surety, including without limitation the provisions of Sections 12-1641, et seq., of the Arizona Revised Statutes; and (f) any defense arising by reason of any disability or other defense of Maker or by reason of the cessation from any cause whatsoever (other than payment in full) of the liability of Maker for payment of the Note. Maker agrees that to the extent Maker makes any payment to Holder in connection with the indebtedness evidenced by this Note, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Holder or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then the indebtedness of Maker under this Note shall continue or shall be reinstated, as the case may be, and, to the extent of such payment or repayment by Holder, the indebtedness evidenced by this Note or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. Without limiting the right of Holder to bring any action or proceeding against Maker or against any property of Maker (an "Action") arising out of or relating to this Note or any indebtedness evidenced hereby in the courts of other jurisdictions, Maker hereby irrevocably submits to the jurisdiction, process and venue of any Arizona State or Federal court sitting in Phoenix, Arizona, and hereby irrevocably agrees that any Action may be heard and determined in such Arizona State court or in such Federal court. Maker hereby irrevocably waives, to the fullest extent it may effectively do so, the defenses of lack of jurisdiction over any person, inconvenient forum or improper venue, to the maintenance of any Action in any jurisdiction. This Note shall be binding upon Maker and its successors and assigns and shall inure to the benefit of Payee, and any subsequent holders of this Note, and their successors and assigns. All notices required or permitted in connection with this Note shall be given at the place and in the manner provided in the Loan Agreement for the giving of notices. This Note shall be construed according to the laws of the State of Arizona. IN WITNESS WHEREOF, this Revolving Promissory Note has been executed as of the date first written above. APOLLO GROUP, INC., an Arizona corporation By /s/ John G. Sperling -------------------------------------- John G. Sperling Its President and Chief Executive Officer -------------------------------------- MAKER EX-15.1 4 Exhibit 15-1 Letter on Unaudited Interim Financial Information December 19, 1997 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: We are aware that Apollo Group, Inc. has incorporated by reference our report dated December 17, 1997 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in its Registration Statement on Form S-3 (No. 333-35465) and its Registration Statements on Form S-8 (Nos. 33-87844, 33-88982, 33-88984 and 33-63429). We are also aware of our responsibilities under the Securities Act of 1933. Yours very truly, /s/ PRICE WATERHOUSE LLP EX-27 5
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 3-MOS AUG-31-1998 NOV-30-1997 73,227 31,851 49,204 7,021 2,713 155,319 46,064 18,341 252,809 83,233 0 0 0 68 154,851 252,809 2,820 89,200 2,916 62,429 0 2,906 3 17,565 6,956 10,609 0 0 0 10,609 .20 .20
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