-----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, HIM/yeMi55hhUIxzmcI2g07+SKI1ZdlCcAxTqiQvEcz9wM24Mn+vYBW2mIhEtMm0 uEI6dzKk0V2HC1RZmro34g== 0000929887-98-000001.txt : 19980327 0000929887-98-000001.hdr.sgml : 19980327 ACCESSION NUMBER: 0000929887-98-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980326 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: 98574825 BUSINESS ADDRESS: STREET 1: 4615 EAST ELWOOD ST CITY: PHOENIX STATE: AZ ZIP: 85040 BUSINESS PHONE: 6029665394 MAIL ADDRESS: STREET 1: 4615 E ELWOOD STREET STREET 2: 4615 E ELWOOD STREET CITY: PHOENIX STATE: AZ ZIP: 85040 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-25232 APOLLO GROUP, INC. ------------------ (Exact name of registrant as specified in its charter) ARIZONA 86-0419443 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040 (Address of principal executive offices, including zip code) (602) 966-5394 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF MARCH 20, 1998 Class A Common Stock, no par 50,954,627 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 . . . . . . . . . . . . . . .10 PART II -- OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .17 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . .17 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . .17 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .17 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .17 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .17 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 2 PART I -- FINANCIAL INFORMATION Item 1 -- Financial Statements Apollo Group, Inc. and Subsidiaries Consolidated Statement of Operations (In thousands, except per share amounts)
Three Months Ended Six Months Ended February 28, February 28, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- (Unaudited) (Unaudited) Revenues: Tuition and other, net $85,078 $60,696 $172,953 $126,789 Interest income 1,386 956 2,711 1,846 ------- ------- -------- -------- Total net revenues 86,464 61,652 175,664 128,635 ------- ------- -------- -------- Costs and expenses: Instruction costs and services 53,436 38,089 105,299 77,697 Selling and promotional 10,770 8,492 21,336 16,971 General and administrative 9,460 6,586 18,666 13,334 ------- ------- -------- -------- Total costs and expenses 73,666 53,167 145,301 108,002 ------- ------- -------- -------- Income before income taxes 12,798 8,485 30,363 20,633 Less provision for income taxes 5,068 3,393 12,024 8,252 ------- ------- -------- -------- Net income $ 7,730 $ 5,092 $ 18,339 $ 12,381 ======= ======= ======== ======== Basic net income per share $ .15 $ .10 $ .36 $ .25 ======= ======= ======== ======== Diluted net income per share $ .15 $ .10 $ .35 $ .24 ======= ======= ======== ======== Basic weighted average shares outstanding 51,447 50,363 51,310 50,229 Diluted weighted average shares outstanding 52,690 51,806 52,574 51,706 The accompanying notes are an integral part of these consolidated financial statements.
3 Apollo Group, Inc. and Subsidiaries Consolidated Balance Sheet (Dollars in thousands)
February 28, August 31, 1998 1997 ------------ ------------ (Unaudited) Assets: Current assets -- Cash and cash equivalents $ 51,395 $ 58,928 Restricted cash 25,924 19,927 Investments 30,704 27,182 Receivables, net 46,997 32,040 Inventory 2,997 2,220 Deferred tax assets, net 3,633 2,873 Prepaids and other current assets 1,523 633 -------- -------- Total current assets 163,173 143,803 Property and equipment, net 30,028 25,251 Investments 14,100 14,747 Educational program production costs, net 1,867 1,836 Non-operating property 5,636 5,611 Cost in excess of fair value of assets purchased, net 47,757 2,283 Deposits and other assets 3,157 1,379 -------- -------- Total assets $265,718 $194,910 ======== ======== Liabilities and Shareholders' Equity: Current liabilities -- Current portion of long-term liabilities $ 299 $ 295 Accounts payable 6,667 7,714 Other accrued liabilities 15,797 11,449 Income taxes payable 653 253 Student deposits and current portion of deferred revenue 62,242 47,683 -------- -------- Total current liabilities 85,658 67,394 -------- -------- Long-term liabilities, less current portion 2,528 2,494 -------- -------- Deferred tax liabilities, net 1,282 705 -------- -------- Deferred tuition revenue 10,877 -- -------- -------- 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; 50,955,000 and 50,227,000 issued and outstanding at February 28, 1998 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 February 28, 1998 and August 31, 1997 1 1 Additional paid-in capital 74,233 51,521 Retained earnings 91,072 72,729 -------- -------- Total shareholders' equity 165,373 124,317 -------- -------- Total liabilities and shareholders' equity $265,718 $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)
Six Months Ended February 28, --------------------- 1998 1997 --------- -------- (Unaudited) Net cash received from (used for) operating activities: Cash received from customers $166,221 $126,728 Cash paid to employees and suppliers (138,689) (99,803) Interest received 2,786 1,793 Interest paid (26) Net income taxes paid (12,052) (7,543) -------- -------- Net cash received from operating activities 18,240 21,175 -------- -------- 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 (9,312) (5,130) Purchase of non-operating property (25) (1,262) Purchase of investments (15,838) (12,376) Proceeds from investment maturities 12,730 5,428 Additions to educational program production costs (691) (652) Proceeds from sale of assets 18 44 -------- -------- Net cash used for investing activities (32,496) (13,948) -------- -------- Net cash received from (used for) financing activities: Tax benefits related to disqualifying dispositions and exercise of options 3,523 3,876 Issuance of stock 3,246 1,399 Principal payments on long-term debt (50) (50) -------- -------- Net cash received from financing activities 6,719 5,225 -------- -------- Effect of exchange rate changes on cash 4 -- -------- -------- Net increase (decrease) in cash and cash equivalents (7,533) 12,452 Cash and cash equivalents, beginning of period 58,928 51,982 -------- -------- Cash and cash equivalents, end of period $ 51,395 $ 64,434 ======== ======== 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. Unless otherwise noted, references to 1998 and 1997 refer to the periods ended February 28, 1998 and 1997, respectively. 2. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended August 31, 1997 included in the Company's Form 10-K as filed with the Securities and Exchange Commission. The interim financial information for 1998 and 1997 was reviewed by Price Waterhouse LLP (see "Review by Independent Accountants"). 3. The results of operations for the three-month and six-month periods ended February 28, 1998 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. 5. In November 1997, the Company increased its line of credit from $4.0 to $10.0 million. At February 28, 1998, the Company had no outstanding borrowings on the line of credit, which bears interest at prime. In February 1998, the Company modified its line of credit agreement to extend the termination date to February 1, 2000. Any amounts borrowed under the line of credit are payable upon its termination in February 2000. 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 7. In February 1998, the Company adopted Statement of Financial Accounting Standards 128, "Earnings Per Share". As a result, earnings per share calculations for all prior periods have been restated. A reconciliation of the basic and diluted per share computations for 1997 and 1998 are as follows:
For the Three Months Ended February 28, (in thousands, except per share amounts) ---------------------------------------------------------- 1998 1997 --------------------------- ---------------------------- Weighted Weighted Avg. Per Share Avg. Per Share Income Shares Amount Income Shares Amount -------- -------- --------- -------- -------- ---------- Basic net income per share $7,730 51,447 $ .15 $5,092 50,363 $ .10 ===== ===== Effect of dilutive securities: Stock options 1,243 1,443 ------ ------ ------ ------ Diluted net income per share $7,730 52,690 $ .15 $5,092 51,806 $ .10 ====== ====== ===== ====== ====== =====
For the Six Months Ended February 28, (in thousands, except per share amounts) ---------------------------------------------------------- 1998 1997 --------------------------- ---------------------------- Weighted Weighted Avg. Per Share Avg. Per Share Income Shares Amount Income Shares Amount -------- -------- --------- -------- -------- ---------- Basic net income per share $18,339 51,310 $ .36 $12,381 50,229 $ .25 ===== ===== Effect of dilutive securities: Stock options 1,264 1,477 ------- ------ ------- ------ Diluted net income per share $18,339 52,574 $ .35 $12,381 51,706 $ .24 ======= ====== ===== ======= ====== =====
7 Review by Independent Accountants The financial information as of February 28, 1998, and for the three- month and six-month periods then ended, included in Part I pursuant to Rule 10-01 of Regulation S-X, has been reviewed by 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. 8 Report of Independent Accountants To the Board of Directors and Shareholders of Apollo Group, Inc.: We have reviewed the accompanying consolidated balance sheet of Apollo Group, Inc. and its subsidiaries as of February 28, 1998, and the related consolidated statement of operations for the three-month and six-month periods ended February 28, 1998 and 1997 and the consolidated statement of cash flows for the six-month periods ended February 28, 1998 and 1997. These financial statements are the responsibility of Apollo Group, Inc.'s management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of August 31, 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 March 20, 1998 9 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 and six-month periods ended February 28, 1998 included in Item 1. This quarterly report on Form 10-Q contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words "believe," "plan," "expect," "anticipate," "project" and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of revenues, income or loss, expenses, capital expenditures, plans for future operations, financing needs or plans, the impact of inflation and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this quarterly report, including "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements include, without limitation, new or revised interpretations of regulatory requirements, changes in or new interpretations of other applicable laws, rules and regulations, failure to maintain or renew required regulatory approvals, accreditation or state authorizations by UOP or certain IPD institutions, failure to obtain authorizations from states in which UOP does not currently provide degree programs, failure to obtain the North Central Association of Colleges and Schools'("NCA") approval for UOP to operate in new states, changes in student enrollment, and other factors set forth in "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended August 31, 1997. MANAGEMENT CHANGES On February 17, 1998, the Company announced the appointment of Todd S. Nelson to President. Mr. Nelson has been a key member of the Apollo Group management team for twelve years. Most recently, he held the post of Vice President of Apollo Group and Executive Vice President of the University of Phoenix. Dr. John G. Sperling will remain Chairman and Chief Executive Officer. 10 In addition, Dr. Jorge Klor de Alva was appointed President of the University of Phoenix, filling the post previously held by Mr. William H. Gibbs. Dr. Jorge Klor de Alva has been affiliated with Apollo Group for seven years as a Board Member, and most recently, as Vice President of Business Development for the Company. The Company also announced that James W. Hoggatt has resigned as Chief Financial Officer of the Company for personal reasons. Mr. Hoggatt will continue to work on special projects for Apollo Group through the end of October 1998. RESULTS OF OPERATIONS The following table sets forth consolidated statement of operations data of the Company expressed as a percentage of net revenues for the periods indicated:
Three Months Six Months Ended February 28, Ended February 28, ----------------- ----------------- 1998 1997 1998 1997 ------ ------ ------ ------ (Unaudited) (Unaudited) Revenues: Tuition and other, net 98.4% 98.4% 98.5% 98.6% Interest income 1.6 1.6 1.5 1.4 ------ ------ ------ ------ Total net revenues 100.0 100.0 100.0 100.0 ------ ------ ------ ------ Costs and expenses: Instruction costs and services 61.8 61.8 60.0 60.4 Selling and promotional 12.5 13.7 12.2 13.2 General and administrative 10.9 10.7 10.6 10.4 ------ ------ ------ ------ Total costs and expenses 85.2 86.2 82.8 84.0 ------ ------ ------ ------ Income before income taxes 14.8 13.8 17.2 16.0 Less provision for income taxes 5.9 5.5 6.8 6.4 ------ ------ ------ ------ Net income 8.9% 8.3% 10.4% 9.6% ====== ====== ====== ======
THREE MONTHS ENDED FEBRUARY 28, 1998 (SECOND QUARTER OF 1998) COMPARED WITH THREE MONTHS ENDED FEBRUARY 28, 1997 (SECOND QUARTER OF 1997) Net revenues increased by 40.2% to $86.5 million in the three months ended February 28, 1998 from $61.7 million in the three months ended February 28, 1997. This is due primarily to an increase in student enrollments from 1997 to 1998, 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 1997 to 1998. 11 Tuition and other net revenues for the three months ended February 28, 1998 and 1997 consists primarily of $72.2 and $53.3 million, respectively, of net tuition revenues from students enrolled in degree programs and $5.8 and $2.6 million, respectively, of net tuition revenues from students enrolled in non-degree programs. Average degree-program enrollments increased over 26% to 63,000 in 1998 from 50,000 in 1997. Interest income for the three months ended February 28, 1998 increased to $1.4 million in the three months ended February 28, 1998 from $956,000 in the three months ended February 28, 1997 due primarily to the increase in cash and investments from 1997 to 1998. Instruction costs and services increased by 40.3% to $53.4 million in the three months ended February 28, 1998 from $38.1 million in the three months ended February 28, 1997 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 in September 1997. These costs consist primarily of faculty compensation, classroom lease expenses and related staff salaries. These costs as a percentage of net revenues remained the same at 61.8% in the three months ended February 28, 1998 and 1997. Selling and promotional expenses increased by 26.8% to $10.8 million in the three months ended February 28, 1998 from $8.5 million in the three months ended February 28, 1997 due primarily to increased marketing and advertising at the Company's campuses and learning centers and at the College. These expenses as a percentage of net revenues decreased to 12.5% in the three months ended February 28, 1998 from 13.7% in the three months ended February 28, 1997 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 43.6% to $9.5 million in the three months ended February 28, 1998 from $6.6 million in the three months ended February 28, 1997 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 10.9% in the three months ended February 28, 1998 and 10.7% in the three months ended February 28, 1997. Costs related to the startup of new UOP and IPD campuses and learning centers are expensed as incurred and totaled approximately $1.8 million in the three months ended February 28, 1998 and $1.1 million in the three months ended February 28, 1997. Interest expense, which is allocated among all categories of costs and expenses, was less than $25,000 in the three months ended February 28, 1998 and 1997. The Company's effective tax rate remained relatively the same at 39.6% and 40.0% in the three months ended February 28, 1998 and 1997, respectively. Net income increased to $7.7 million in the three months ended February 28, 1998 from $5.1 million in the three months ended February 28, 1997 due primarily to increased enrollments, increased tuition rates and improved utilization of selling and promotional costs and fixed instruction costs and services. 12 SIX MONTHS ENDED FEBRUARY 28, 1998 COMPARED WITH SIX MONTHS ENDED FEBRUARY 28, 1997 Net revenues increased by 36.6% to $175.7 million in the six months ended February 28, 1998 from $128.6 million in the six months ended February 28, 1997. This is due primarily to an increase in student enrollments from 1997 to 1998, 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 1997 to 1998. Tuition and other net revenues for the six months ended February 28, 1998 and 1997 consists primarily of $149.4 and $111.5 million, respectively, of net tuition revenues from students enrolled in degree programs and $10.0 and $5.2 million, respectively, of net tuition revenues from students enrolled in non-degree programs. Average degree-program enrollments increased over 25% to 61,000 in 1998 from 48,500 in 1997. Interest income for the six months ended February 28, 1998 increased to $2.7 million in the six months ended February 28, 1998 from $1.8 million in the six months ended February 28, 1997 due primarily to the increase in cash and investments from 1997 to 1998. Instruction costs and services increased by 35.5% to $105.3 million in the six months ended February 28, 1998 from $77.7 million in the six months ended February 28, 1997 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 in September 1997. These costs consist primarily of faculty compensation, classroom lease expenses and related staff salaries. These costs as a percentage of net revenues decreased to 60.0% in the six months ended February 28, 1998 from 60.4% in the six months ended February 28, 1997 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 25.7% to $21.3 million in the six months ended February 28, 1998 from $17.0 million in the six months ended February 28, 1997 due primarily to increased marketing and advertising at the Company's campuses and learning centers and at the College. These expenses as a percentage of net revenues decreased to 12.2% in the six months ended February 28, 1998 from 13.2% in the six months ended February 28, 1997 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 40.0% to $18.7 million in the six months ended February 28, 1998 from $13.3 million in the six months ended February 28, 1997 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 10.6% in the six months ended February 28, 1998 and 10.4% in the six months ended February 28, 1997. 13 Costs related to the startup of new UOP and IPD campuses and learning centers are expensed as incurred and totaled approximately $3.5 million in the six months ended February 28, 1998 and $2.3 million in the six months ended February 28, 1997. Interest expense, which is allocated among all categories of costs and expenses, was less than $30,000 in the six months ended February 28, 1998 and 1997. The Company's effective tax rate remained relatively the same at 39.6% and 40.0% in the six months ended February 28, 1998 and 1997, respectively. Net income increased to $18.3 million in the six months ended February 28, 1998 from $12.4 million in the six months ended February 28, 1997 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 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 increased to $77.5 million at February 28, 1998 from $76.4 million at August 31, 1997 due primarily to $18.2 million in cash generated from operations during the six months ended February 28, 1998 and a $9.5 million increase in restricted cash and investments, offset by the $19.4 million in cash used in the acquisition of the College, capital expenditures, and an increase in deferred revenue. In November 1997, the Company increased its line of credit from $4.0 to $10.0 million. At February 28, 1998, 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 February 2000. Net cash received from operating activities decreased to $18.2 million in the six months ended February 28, 1998 from $21.2 million in the six months ended February 28, 1997 due primarily to the timing of receipts from 14 customers and payments to suppliers offset in part by a $6.0 million increase in net income from 1997 to 1998. Capital expenditures, including additions to educational program production costs, increased to $10.0 million in the six months ended February 28, 1998 from $7.0 million in the six months ended February 28, 1997 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 relating to new campuses and learning centers 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 into new geographic markets. Net receivables at February 28, 1998 totaled $47.0 million, or 54.4% of second 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 and $28.0 million in net receivables at February 28, 1997, or 45.3% of second quarter 1997 net revenues. The increase in receivables as a percentage of net revenues from February 1997 to February 1998 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 six months ending February 28, 1998. 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 February 28, 1998, the Company had approximately $25.9 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 do not meet certain credit requirements are guaranteed by the Company, subject to certain limitations. At February 28, 1998, the Company has guaranteed approximately $4.1 million in available credit, approximately $2.5 million of which was borrowed by the students at that date. To date, there have been no material defaults by students whose loans are guaranteed by the Company, although the program has not been in place for a sufficient period of time to assess the overall collection rate. During 1998, this program was expanded to WIU and three additional UOP campuses. 15 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 reviews and audits began in March 1997 and the fieldwork was recently completed. Routine exit interviews with the DOE teams indicated certain issues to be further evaluated, but the Company is unable to quantify these matters until it receives additional information from DOE. UOP expects to receive notification as to their results of the program reviews and audits during 1998. YEAR 2000 COMPLIANCE The Company has and will continue to make certain investments in its software systems and applications to ensure the Company is year 2000 compliant. The financial impact to the Company to ensure year 2000 compliance has not been and is not anticipated to be material to its financial position or results of operations. IMPACT OF INFLATION Inflation has not had a significant impact on the Company's historical operations. 16 PART II -- OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . .Not Applicable Item 2. Changes in Securities . . . . . . . . . . . . . . . .Not Applicable Item 3. Defaults Upon Senior Securities . . . . . . . . . . .Not Applicable Item 4. Submission of Matters to a Vote of Security Holders .Not Applicable Item 5. Other Information . . . . . . . . . . . . . . . . . .Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 10.1d Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association Exhibit 15.1 Letter on Unaudited Interim Financial Information Exhibit 27 Financial Data Schedule Exhibit 27.1 Restated Financial Data Schedule for the period ending November 30, 1997 Exhibit 27.2 Restated Financial Data Schedule for the period ending August 31, 1997 Exhibit 27.3 Restated Financial Data Schedule for the period ending May 31, 1997 Exhibit 27.4 Restated Financial Data Schedule for the period ending February 28, 1997 Exhibit 27.5 Restated Financial Data Schedule for the period ending November 30, 1996 Exhibit 27.6 Restated Financial Data Schedule for the period ending August 31, 1996 Exhibit 27.7 Restated Financial Data Schedule for the period ending May 31, 1996 Exhibit 27.8 Restated Financial Data Schedule for the period ending February 29, 1996 Exhibit 27.9 Restated Financial Data Schedule for the period ending November 30, 1995 17 Exhibit 27.10 Restated Financial Data Schedule for the period ending August 31, 1995 (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended February 28, 1998. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APOLLO GROUP, INC. (Registrant) Date: March 26, 1998 By: /s/ Junette C. West --------------------------------- Junette C. West Vice President-Controller (Chief Accounting Officer) By: /s/ Todd S. Nelson ---------------------------------- Todd S. Nelson President (Duly Authorized Officer) 19 APOLLO GROUP, INC. AND SUBSIDIARIES EXHIBIT INDEX PAGE 10.1d Modification Agreement between Apollo Group, Inc. and Filed herewith Wells Fargo Bank, National Association 15.1 Letter on Unaudited Interim Financial Information Filed herewith 27 Financial Data Schedule Filed herewith 27.1 Restated Financial Data Schedule for the period ending Filed herewith November 30, 1997 27.2 Restated Financial Data Schedule for the period ending Filed herewith August 31, 1997 27.3 Restated Financial Data Schedule for the period ending Filed herewith May 31, 1997 27.4 Restated Financial Data Schedule for the period ending Filed herewith February 28, 1997 27.5 Restated Financial Data Schedule for the period ending Filed herewith November 30, 1996 27.6 Restated Financial Data Schedule for the period ending Filed herewith August 31, 1996 27.7 Restated Financial Data Schedule for the period ending Filed herewith May 31, 1996 27.8 Restated Financial Data Schedule for the period ending Filed herewith February 29, 1996 27.9 Restated Financial Data Schedule for the period ending Filed herewith November 30, 1995 27.10 Restated Financial Data Schedule for the period ending Filed herewith August 31, 1995 20 EX-10.1D 2 MODIFICATION AGREEMENT BY THIS MODIFICATION AGREEMENT (the "Agreement"), made and entered into as of the 5th day of February, 1998, WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, whose address is 100 West Washington, Post Office Box 29742, MAC #4101- 251, Phoenix, Arizona 85038-9742 (hereinafter called "Lender"), and APOLLO GROUP, INC., an Arizona corporation, whose address is 4615 East Elwood Street, Suite 400, Phoenix, Arizona 85040 (hereinafter called "Company"), in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, hereby confirm and agree as follows: SECTION 1. RECITALS. 1.1 Company and Lender entered into a Loan Agreement dated November 17, 1997 (the "Loan Agreement"), which provided for, among other things, a revolving line of credit (the "RLC") in the amount of $10,000,000.00, evidenced by a Revolving Promissory Note dated November 17, 1997, executed by the Company (the "RLC Note"), all upon the terms and conditions contained therein. All undefined capitalized terms used herein shall have the meaning given them in the Loan Agreement. 1.2 As of the date hereof, prior to the effect of the modifications contained herein, the outstanding principal balance of the RLC is $0.00. Lender has issued for the account of the Company two (2) standby letters of credit in the amount of $6,459.06 and $1,250,500.00, dated November 13, 1997. 1.3 Company and Lender desire to modify the Loan Documents as set forth herein. SECTION 2. LOAN AGREEMENT. 2.1 The following definition in Section 2.1 of the Loan Agreement is hereby amended to read as follows: "Maturity Date" means February 1, 2000. SECTION 3. OTHER MODIFICATIONS, RATIFICATIONS AND AGREEMENTS. 3.1 All references to the Loan Agreement in the Loan Documents are hereby amended to refer to the Loan Agreement as hereby amended. 3.2 Company acknowledges that the indebtedness evidenced by the RLC Note is just and owing, that the balance thereof is correctly shown in the records of Lender as of the date hereof, and Company agrees to pay the indebtedness evidenced by the RLC Note according to the terms thereof, as herein modified. 3.3 Company hereby reaffirms to Lender each of the representations, warranties, covenants and agreements of Company set forth in the RLC Note and the Loan Agreement, with the same force and effect as if each were separately stated herein and made as of the date hereof. 3.4 Company hereby ratifies, reaffirms, acknowledges, and agrees that the RLC Note and the Loan Agreement, represent valid, enforceable and collectible obligations of Company, and that there are no existing claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to any of these documents or instruments. In addition, Company hereby expressly waives, releases and absolutely and forever discharges Lender and its present and former shareholders, directors, officers, employees and agents, and their separate and respective heirs, personal representatives, successors and assigns, from any and all liabilities, claims, demands, damages, action and causes of action, whether known or unknown and whether contingent or matured, that Company may now have, or has had prior to the date hereof, or that may hereafter arise with respect to acts, omissions or events occurring prior to the date hereof. To the best of Company's knowledge, Company further acknowledges and represents that no event has occurred and no condition exists that, after notice or lapse of time, or both, would constitute a default under this Agreement, the RLC Note or the Loan Agreement. 3.5 All terms, conditions and provisions of the RLC Note and the Loan Agreement are continued in full force and effect and shall remain unaffected and unchanged except as specifically amended hereby. The RLC Note and the Loan Agreement, as amended hereby, are hereby ratified and reaffirmed by Company, and Company specifically acknowledges the validity and enforceability thereof. SECTION 4. GENERAL. 4.1 This Agreement in no way acts as a release or relinquishment of those rights securing payment of the RLC. Such rights are hereby ratified, confirmed, renewed and extended by Company in all respects. 4.2 The modifications contained herein shall not be binding upon Lender until Lender shall have received all of the following: (a) An original of this Agreement fully executed by the Company. (b) Such resolutions or authorizations and such other documents as Lender may reasonably require relating to the existence and good standing of the Company and the authority of any person executing this Agreement or other documents on behalf of the Company. 4.3 Company shall execute and deliver such additional documents and do such other acts as Lender may reasonably require to fully implement the intent of this Agreement. 4.4 Company shall pay all costs and expenses, including, but not limited to, reasonable attorneys' fees incurred by Lender in connection herewith, whether or not all of the conditions described in Paragraph 4.2 above are satisfied. Lender, at its option, but without any obligation to do so, may advance funds to pay any such costs and expenses that are the obligation of the Company, and all such funds advanced shall bear interest at the highest rate provided in the RLC Note and shall be due and payable upon demand. 4.5 Notwithstanding anything to the contrary contained herein or in any other instrument executed by Company or Lender, or in any other action or conduct undertaken by Company or Lender on or before the date hereof, the agreements, covenants and provisions contained herein shall constitute the only evidence of Lender's consent to modify the terms and provisions of the Loan Agreement. Accordingly, no express or implied consent to any further modifications involving any of the matters set forth in this Agreement or otherwise shall be inferred or implied by Lender's execution of this Agreement. Further, Lender's execution of this Agreement shall not constitute a waiver (either express or implied) of the requirement that any further modification of the RLC or of the RLC Note or the Loan Agreement, shall require the express written approval of Lender; no such approval (either express or implied) has been given as of the date hereof. 4.6 Time is hereby declared to be of the essence hereof of the RLC, of the RLC Note and of the Loan Agreement, and Lender requires, and Company agrees to, strict performance of each and every covenant, condition, provision and agreement hereof, of the RLC Note and the Loan Agreement. 4.7 This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their heirs, personal representatives, successors and assigns. 4.8 This Agreement is made for the sole protection and benefit of the parties hereto, and no other person or entity shall have any right of action hereon. 4.9 This Agreement shall be governed by and construed according to the laws of the State of Arizona. IN WITNESS WHEREOF, these presents are executed as of the date indicated above. WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association By: /s/ Karen Maher -------------------------------------- Name: Karen Maher -------------------------------------- Its: Vice President -------------------------------------- LENDER APOLLO GROUP, INC., an Arizona corporation By: /s/ John G. Sperling -------------------------------------- Name: John G. Sperling -------------------------------------- Its: President and CEO -------------------------------------- COMPANY EX-15.1 3 Exhibit 15.1 Letter on Unaudited Interim Financial Information March 26, 1998 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: We are aware that Apollo Group, Inc. has incorporated by reference our report dated March 20, 1998 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in its Registration Statements on Form S-8 (Nos. 33-87844, 33-88982, 33-88984 and 33-63429). We are also aware of our responsibilities under the Securities Act of 1933. Yours very truly, /s/ Price Waterhouse LLP EX-27 4
5 This schedule contains summary financial information extracted from the Consolidated Statement of Operations and the Consolidated Balance Sheet and is qualified in its entirety by reference to such financial statements. 0000929887 APOLLO GROUP, INC. 1,000 6-MOS AUG-31-1998 FEB-28-1998 77,319 30,704 54,986 7,989 2,997 163,173 50,222 20,194 265,718 85,658 0 0 0 68 165,305 265,718 5,803 175,664 5,888 126,635 0 4,633 26 30,363 12,024 18,339 0 0 0 18,339 .36 .35
EX-27.1 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 .21 .20
EX-27.2 6
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 12-MOS AUG-31-1997 AUG-31-1997 78,855 27,182 36,561 4,521 2,220 143,803 40,976 15,725 194,910 67,394 0 0 0 67 124,250 194,910 11,703 283,536 12,019 202,907 0 2,525 167 54,981 21,602 33,379 0 0 0 33,379 .66 .64
EX-27.3 7
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 9-MOS AUG-31-1997 MAY-31-1997 87,726 22,308 33,521 4,609 2,940 145,887 36,823 13,943 182,867 67,930 0 0 0 66 111,564 182,867 9,044 206,477 8,630 146,732 0 1,878 50 39,889 15,954 23,935 0 0 0 23,935 .48 .46
EX-27.4 8
5 This schedule contains summary financial information extracted from the Consolidated Statement of Operations and the Consolidated Balance Sheet and is qualified in its entirety by reference to such financial statements. 0000929887 APOLLO GROUP, INC. 1,000 6-MOS AUG-31-1997 FEB-28-1997 79,821 20,221 33,143 5,191 3,034 134,543 33,465 12,278 166,638 64,802 0 0 0 66 98,292 166,638 5,927 128,635 5,380 94,668 0 2,221 30 20,633 8,252 12,381 0 0 0 12,381 .25 .24
EX-27.5 9
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-31-1997 NOV-30-1996 74,224 14,537 33,454 5,574 2,821 122,812 31,340 11,153 153,328 60,218 0 0 0 66 89,939 153,238 3,171 66,983 3,046 47,908 0 2,092 11 12,148 4,859 4,289 0 0 0 4,289 .15 .14
EX-27.6 10
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 12-MOS AUG-31-1996 AUG-31-1996 63,267 13,273 29,679 3,694 3,112 109,141 28,900 9,975 137,850 54,804 0 0 0 66 80,548 137,850 9,339 214,275 9,600 157,935 0 1,704 77 34,997 13,605 21,392 0 0 0 21,392 .43 .42
EX-27.7 11
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 9-MOS AUG-31-1996 MAY-31-1996 59,836 11,832 23,537 3,665 2,903 98,025 25,350 8,708 123,234 48,882 0 0 0 66 72,221 123,234 6,481 155,076 6,591 113,630 0 1,136 58 25,505 10,330 15,175 0 0 0 15,175 .31 .30
EX-27.8 12
5 This schedule contains summary financial information extracted from the Consolidated Statement of Operations and the Consolidated Balance Sheet and is qualified in its entirety by reference to such financial statements. 0000929887 APOLLO GROUP, INC. 1,000 6-MOS AUG-31-1996 FEB-29-1996 64,572 0 22,342 3,628 2,949 90,065 24,463 8,542 114,718 48,923 0 0 0 44 63,732 114,718 4,086 96,085 4,072 72,221 0 1,018 39 12,564 5,089 7,475 0 0 0 7,475 .15 .15
EX-27.9 13
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-31-1996 NOV-30-1995 63,406 0 20,822 3,436 2,813 87,544 23,243 8,400 108,476 46,137 0 0 0 29 60,284 108,476 0 49,727 1,997 29,959 0 761 20 7,845 3,256 4,589 0 0 0 4,589 .09 .09
EX-27.10 14
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 12-MOS AUG-31-1995 AUG-31-1995 62,601 0 18,336 2,453 2,723 84,044 21,072 7,682 102,132 45,065 0 0 0 19 55,333 102,132 0 163,429 0 123,138 18,462 1,849 96 21,829 9,229 12,600 0 0 0 12,600 .28 .27
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