-----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, N7ox9YB/eim+DbbyAnzgMGBVLf9SN3EKuPSVAnpP9avq0CYS8SCvao0UMjCPQGrS aZnXn13WReh7mjTD5e9qzg== 0000929887-98-000003.txt : 19980624 0000929887-98-000003.hdr.sgml : 19980624 ACCESSION NUMBER: 0000929887-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980623 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: 98652761 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 May 31, 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 JUNE 19, 1998 Class A Common Stock, no par 77,015,536 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 . . . . . . . . . . . . . . .11 PART II -- OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .18 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . .18 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . .18 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .18 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .18 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .18 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 2 PART I -- FINANCIAL INFORMATION Item 1 -- Financial Statements Apollo Group, Inc. and Subsidiaries Consolidated Statement of Operations (In thousands, except per share amounts)
Three Months Ended Nine Months Ended May 31, May 31, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- (Unaudited) (Unaudited) Revenues: Tuition and other, net $105,201 $76,633 $278,154 $203,422 Interest income 1,582 1,209 4,293 3,055 -------- ------- -------- -------- Total net revenues 106,783 77,842 282,447 206,477 -------- ------- -------- -------- Costs and expenses: Instruction costs and services 61,093 43,572 168,496 121,269 Selling and promotional 11,504 8,492 32,840 25,463 General and administrative 8,479 6,522 25,041 19,856 -------- ------- -------- -------- Total costs and expenses 81,076 58,586 226,377 166,588 -------- ------- -------- -------- Income before income taxes 25,707 19,256 56,070 39,889 Less provision for income taxes 10,185 7,702 22,209 15,954 -------- ------- -------- -------- Net income $ 15,522 $11,554 $ 33,861 $ 23,935 ======== ======= ======== ======== Basic net income per share $ .20 $ .15 $ .44 $ .32 ======== ======= ======== ======== Diluted net income per share $ .20 $ .15 $ .43 $ .31 ======== ======= ======== ======== Basic weighted average shares outstanding 77,459 75,783 77,130 75,490 Diluted weighted average shares outstanding 79,250 77,733 78,991 77,618 The accompanying notes are an integral part of these consolidated financial statements.
3 Apollo Group, Inc. and Subsidiaries Consolidated Balance Sheet (Dollars in thousands)
May 31, August 31, 1998 1997 ------------ ------------ (Unaudited) Assets: Current assets -- Cash and cash equivalents $ 56,193 $ 58,928 Restricted cash 23,838 19,927 Investments 32,273 27,182 Receivables, net 47,917 32,040 Inventory 2,907 2,220 Deferred tax assets, net 4,854 2,873 Prepaids and other current assets 1,843 633 --------- --------- Total current assets 169,825 143,803 Property and equipment, net 37,217 25,251 Investments 24,262 14,747 Educational program production costs, net 2,034 1,836 Non-operating property 5,638 5,611 Cost in excess of fair value of assets purchased, net 47,629 2,283 Deposits and other assets 4,262 1,379 --------- --------- Total assets $290,867 $194,910 ========= ========= Liabilities and Shareholders' Equity: Current liabilities -- Current portion of long-term liabilities $ 233 $ 295 Accounts payable 8,583 7,714 Other accrued liabilities 17,697 11,449 Income taxes payable 793 253 Student deposits and current portion of deferred revenue 63,072 47,683 --------- --------- Total current liabilities 90,378 67,394 --------- --------- Deferred tuition revenue, less current portion 11,032 -- --------- --------- Long-term liabilities, less current portion 2,637 2,494 --------- --------- Deferred tax liabilities, net 775 705 --------- --------- Commitments and contingencies -- -- --------- --------- Shareholders' equity -- Preferred stock, no par value, 1,000,000 shares authorized, none issued -- -- Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 77,016,000 and 75,614,000 issued and outstanding at May 31, 1998 and August 31, 1997, respectively 101 66 Class B voting common stock, no par value, 3,000,000 shares authorized; 548,000 issued and outstanding at May 31, 1998 and August 31, 1997 1 1 Additional paid-in capital 79,348 51,521 Retained earnings 106,595 72,729 --------- --------- Total shareholders' equity 186,045 124,317 --------- --------- Total liabilities and shareholders' equity $290,867 $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)
Nine Months Ended May 31, --------------------- 1998 1997 --------- --------- (Unaudited) Net cash received from (used for) operating activities: Cash received from customers $273,864 $205,342 Cash paid to employees and suppliers (214,138) (157,535) Interest received 3,842 2,583 Interest paid (48) Net income taxes paid (23,811) (16,074) -------- -------- Net cash received from operating activities 39,709 34,316 -------- -------- Net cash received from (used for) investing activities: Purchase of investments (32,476) (20,658) Proceeds from investment maturities 17,486 8,648 Cash paid at acquisition of the College, net of cash acquired (19,378) Purchase of property and equipment (18,826) (8,551) Purchase of non-operating property (28) (1,263) Additions to educational program production costs (1,112) (1,159) Proceeds from sale of assets 18 62 -------- -------- Net cash used for investing activities (54,316) (22,921) -------- -------- Net cash received from (used for) financing activities: Tax benefits related to disqualifying dispositions and exercise of options 6,809 5,065 Issuance of stock 5,109 1,994 Principal payments on long-term debt (50) (50) -------- -------- Net cash received from financing activities 11,868 7,009 -------- -------- Effect of exchange rate changes on cash 4 -- -------- -------- Net increase (decrease) in cash and cash equivalents (2,735) 18,404 Cash and cash equivalents, beginning of period 58,928 51,982 -------- -------- Cash and cash equivalents, end of period $ 56,193 $ 70,386 ======== ======== 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 May 31, 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 nine-month periods ended May 31, 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 May 31, 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 May 31, (In thousands, except per share amounts) (Unaudited) ---------------------------------------------------------- 1998 1997 --------------------------- ---------------------------- Weighted Weighted Avg. Per Share Avg. Per Share Income Shares Amount Income Shares Amount -------- -------- --------- -------- -------- ---------- Basic net income per share $15,522 77,459 $ .20 $11,554 75,783 $ .15 ===== ===== Effect of dilutive securities: Stock options 1,791 1,950 ------- ------ ------- ------ Diluted net income per share $15,522 79,250 $ .20 $11,554 77,733 $ .15 ======= ====== ===== ======= ====== =====
For the Nine Months Ended May 31, (In thousands, except per share amounts) (Unaudited) ---------------------------------------------------------- 1998 1997 --------------------------- ---------------------------- Weighted Weighted Avg. Per Share Avg. Per Share Income Shares Amount Income Shares Amount -------- -------- --------- -------- -------- ---------- Basic net income per share $33,861 77,130 $ .44 $23,935 75,490 $ .32 ===== ===== Effect of dilutive securities: Stock options 1,861 2,128 ------- ------ ------- ------ Diluted net income per share $33,861 78,991 $ .43 $23,935 77,618 $ .31 ======= ====== ===== ======= ====== =====
7 8. On April 9, 1998, the Company authorized a 3-for-2 stock split of its Common Stock effected in the form of a stock dividend that was distributed on April 27, 1998 to shareholders of record at the close of business on April 13, 1998. The shareholders of the Company's Common Stock received a stock dividend at the rate of one-half share of Class A Common Stock for each share of Class A or Class B Common Stock owned. All Common Stock, Common Stock prices and earnings per share figures for periods prior to the stock split have been restated to reflect this and previous stock splits effected in the form of stock dividends. 9. Certain costs and expenses for the nine months ended May 31, 1998 have been reclassified, having no effect on net income. 8 Review by Independent Accountants The financial information as of May 31, 1998, and for the three-month and nine-month periods then ended, included in Part I pursuant to Rule 10-01 of Regulation S-X, has been reviewed by 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. 9 Report of Independent Accountants To the Board of Directors and Shareholders of Apollo Group, Inc.: We have reviewed the accompanying consolidated balance sheet of Apollo Group, Inc. and its subsidiaries as of May 31, 1998, and the related consolidated statement of operations for the three-month and nine-month periods ended May 31, 1998 and 1997 and the consolidated statement of cash flows for the nine- month periods ended May 31, 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 June 18, 1998 10 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 Nine Months Ended May 31, Ended May 31, ----------------- ----------------- 1998 1997 1998 1997 ------ ------ ------ ------ (Unaudited) (Unaudited) Revenues: Tuition and other, net 98.5% 98.4% 98.5% 98.5% Interest income 1.5 1.6 1.5 1.5 ------ ------ ------ ------ Total net revenues 100.0 100.0 100.0 100.0 ------ ------ ------ ------ Costs and expenses: Instruction costs and services 57.2 56.0 59.6 58.8 Selling and promotional 10.8 10.9 11.6 12.3 General and administrative 7.9 8.4 8.9 9.6 ------ ------ ------ ------ Total costs and expenses 75.9 75.3 80.1 80.7 ------ ------ ------ ------ Income before income taxes 24.1 24.7 19.9 19.3 Less provision for income taxes 9.6 9.9 7.9 7.7 ------ ------ ------ ------ Net income 14.5% 14.8% 12.0% 11.6% ====== ====== ====== ======
THREE MONTHS ENDED MAY 31, 1998 (THIRD QUARTER OF 1998) COMPARED WITH THREE MONTHS ENDED MAY 31, 1997 (THIRD QUARTER OF 1997) Net revenues increased by 37.2% to $106.8 million in the three months ended May 31, 1998 from $77.8 million in the three months ended May 31, 1997. This is due primarily to an increase in student enrollments from 1997 to 1998, tuition price increases averaging four to five percent, a higher concentration of enrollments at locations that charge a higher rate per credit hour and net revenues from the College. All UOP campuses, which include their respective learning centers, WIU and most IPD campuses had increases in net revenues and student enrollments from 1997 to 1998. Tuition and other net revenues for the three months ended May 31, 1998 and 1997 consists primarily of $91.8 million and $66.9 million, respectively, of net tuition revenues from students enrolled in degree programs and $6.5 million and $4.2 million, respectively, of net tuition revenues from students enrolled in non-degree programs. Average degree-program enrollments increased over 28% to 66,600 in 1998 from 52,000 in 1997. Interest income for the three months ended May 31, 1998 increased to $1.6 million from $1.2 million in the three months ended May 31, 1997 due primarily to the increase in cash and investments from 1997 to 1998 and to a higher average yield on the related investments. 12 Instruction costs and services increased by 40.2% to $61.1 million in the three months ended May 31, 1998 from $43.6 million in the three months ended May 31, 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 expenses as a percentage of net revenues increased to 57.2% in the three months ended May 31, 1998 from 56.0% in the three months ended May 31, 1997 due primarily to increased costs related to processing student financial aid programs, the opening of new campuses and learning centers, and added costs related to the College. Selling and promotional expenses increased by 35.5% to $11.5 million in the three months ended May 31, 1998 from $8.5 million in the three months ended May 31, 1997 due primarily to additional marketing and advertising costs incurred for newly opened campuses and learning centers, costs related to the College, and additional costs incurred to support continued growth for existing campuses and learning centers. These expenses as a percentage of net revenues remained relatively the same at 10.8% for the three months ended May 31, 1998 and 10.9% for the three months ended May 31, 1997. General and administrative expenses increased by 30.0% to $8.5 million in the three months ended May 31, 1998 from $6.5 million in the three months ended May 31, 1997 due primarily to increased costs required to support the increased number of campuses and learning centers and for expenses related to computer system conversions and upgrades. These expenses as a percentage of net revenues decreased to 7.9% in the three months ended May 31, 1998 from 8.4% in the three months ended May 31, 1997 due primarily to higher net revenues being spread over fixed costs related to various centralized functions. Costs related to the startup of new campuses and learning centers are expensed as incurred and totaled approximately $1.4 million in the three months ended May 31, 1998 and $653,000 in the three months ended May 31, 1997. Interest expense, which is allocated among all categories of costs and expenses, was less than $25,000 in the three months ended May 31, 1998 and 1997. The Company's effective tax rate remained relatively the same at 39.6% and 40.0% in the three months ended May 31, 1998 and 1997, respectively. Net income increased by 34.3% to $15.5 million in the three months ended May 31, 1998 from $11.6 million in the three months ended May 31, 1997 due primarily to increased enrollments, increased tuition rates and improved utilization of general and administrative expenses. 13 NINE MONTHS ENDED MAY 31, 1998 COMPARED WITH NINE MONTHS ENDED MAY 31, 1997 Net revenues increased by 36.8% to $282.4 million in the nine months ended May 31, 1998 from $206.5 million in the nine months ended May 31, 1997. This is due primarily to an increase in student enrollments from 1997 to 1998, tuition price increases averaging four to five percent, a higher concentration of enrollments at locations that charge a higher rate per credit hour and to net revenues from the College. All UOP campuses, which include their respective learning centers, WIU and most IPD campuses had increases in net revenues and student enrollments from 1997 to 1998. Tuition and other net revenues for the nine months ended May 31, 1998 and 1997 consists primarily of $241.2 million and $178.4 million, respectively, of net tuition revenues from students enrolled in degree programs and $16.5 million and $9.4 million, respectively, of net tuition revenues from students enrolled in non-degree programs. Average degree- program enrollments increased over 26.0% to 62,700 in 1998 from 49,700 in 1997. Interest income increased to $4.3 million in the nine months ended May 31, 1998 from $3.1 million in the nine months ended May 31, 1997 due primarily to the increase in cash and investments from 1997 to 1998 and to a higher average yield on the related investments. Instruction costs and services increased by 38.9% to $168.5 million in the nine months ended May 31, 1998 from $121.3 million in the nine months ended May 31, 1997 due primarily to the direct costs necessary to support the increase in average student enrollments and the added costs related to the College. These costs as a percentage of net revenues increased to 59.6% in the nine months ended May 31, 1998 from 58.8% in the nine months ended May 31, 1997 due to increased costs related to processing student financial aid programs, the opening of new campuses and learning centers, and added costs related to the College. Selling and promotional expenses increased by 29.0% to $32.8 million in the nine months ended May 31, 1998 from $25.5 million in the nine months ended May 31, 1997 due primarily to increased marketing and advertising at the Company's campuses and learning centers and additional costs related to the College. These expenses as a percentage of net revenues decreased to 11.6% in the nine months ended May 31, 1998 from 12.3% in the nine months ended May 31, 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. General and administrative expenses increased by 26.1% to $25.0 million in the nine months ended May 31, 1998 from $19.9 million in the nine months ended May 31, 1997 due primarily to increased costs required to support the increased number of campuses and learning centers and for expenses related to computer system conversions and upgrades. These expenses as a percentage of net revenues decreased to 8.9% in the nine months ended May 31, 1998 from 9.6% in the nine months ended May 31, 1997 due primarily to higher net revenues being spread over fixed costs related to centralized functions. 14 Costs related to the startup of new campuses and learning centers are expensed as incurred and totaled approximately $4.9 million in the nine months ended May 31, 1998 and $2.9 million in the nine months ended May 31, 1997. Interest expense, which is allocated among all categories of costs and expenses, was less than $50,000 in the nine months ended May 31, 1998 and 1997. The Company's effective tax rate remained relatively the same at 39.6% and 40.0% in the nine months ended May 31, 1998 and 1997, respectively. Net income increased by 41.5% to $33.9 million in the nine months ended May 31, 1998 from $23.9 million in the nine months ended May 31, 1997 due primarily to increased enrollments, increased tuition rates and improved utilization of selling and promotional costs and general and administrative expenses. 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. 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 $79.4 million at May 31, 1998 from $76.4 million at August 31, 1997 due primarily to $39.7 million in cash generated from operations during the nine months ended May 31, 1998, a $9.0 million increase in restricted cash and short-term investments and a $15.9 million increase in net accounts receivable, offset by the $19.4 million in cash used in the acquisition of the College, $18.8 million in capital expenditures, and a $15.4 million increase in student deposits and current portion of deferred revenue. In November 1997, the Company increased its line of credit from $4.0 to $10.0 million. At May 31, 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 increased to $39.7 million in the nine months ended May 31, 1998 from $34.3 million in the nine months ended May 31, 1997 due primarily to the timing of receipts from 15 customers and payments to suppliers and a $9.9 million increase in net income from 1997 to 1998 offset by a $7.7 million increase in income taxes paid. Capital expenditures and additions to educational program production costs increased to $20.0 million in the nine months ended May 31, 1998 from $11.0 million in the nine months ended May 31, 1997 due primarily to purchases made to support the increase in student enrollments and the number of locations and for costs related to the first phase of the conversion of the Company's student records system. Total purchases of property, equipment and land for the year ended August 31, 1998 are expected to range from $26.0 million to $30.0 million compared to $14.1 million for the year ended August 31, 1997. 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 $2.0 million for the year ended August 31, 1998. Startup costs relating to new campuses and learning centers are expected to range from $6.0 million 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 May 31, 1998 totaled $47.9 million, or 44.9% of third quarter 1998 total net revenues. This compares to $28.9 million in net receivables at May 31, 1997, or 37.1% of third quarter 1997 net revenues. The increase in receivables as a percentage of net revenues from May 1997 to May 1998 was due primarily to a backlog in collections and billings and a backlog in processing new financial aid loans to students as a result of the significant increase in students and related financial aid applications during the nine months ending May 31, 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 May 31, 1998, the Company had approximately $23.8 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. As previously disclosed, the Company began offering an alternative student loan program on a test basis at several of its campuses in March 1997. In May 1998, this pilot program was discontinued. The loans currently outstanding will continue to be serviced by the commercial lender that offered the program under the original terms and conditions. Loans for students that did not meet certain credit requirements were guaranteed by the Company, subject to certain limitations. At May 31, 1998, the Company had guaranteed approximately $8.8 million in available credit, approximately $2.3 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. 16 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 an initial draft of the program review has been received. There were several findings that will require additional review and follow up with the DOE in order to bring the program review to closure. Additionally, the routine exit interview on the DOE audit indicated certain issues to be further evaluated, but the Company is unable to quantify these matters until it receives additional information from the DOE. UOP expects to receive notification as to their results of the program reviews and audits during the calendar year 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. 17 PART II -- OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . .Not Applicable Item 2. Changes in Securities . . . . . . . . . . . . . . . .Not Applicable Item 3. Defaults Upon Senior Securities . . . . . . . . . . .Not Applicable Item 4. Submission of Matters to a Vote of Security Holders .Not Applicable Item 5. Other Information . . . . . . . . . . . . . . . . . .Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 15.1 Letter on Unaudited Interim Financial Information Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended May 31, 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: June 23, 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 15.1 Letter on Unaudited Interim Financial Information Filed herewith 27 Financial Data Schedule Filed herewith 20 EX-15.1 2 Exhibit 15.1 Letter on Unaudited Interim Financial Information June 23, 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 June 18, 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 3
5 This schedule contains summary financial information extracted from the Consolidated Statement of Operations and the Consolidated Balance Sheet and is qualified in its entirety by reference to such financial statements. 0000929887 APOLLO GROUP, INC. 1,000 9-MOS AUG-31-1998 MAY-31-1998 80,031 32,273 55,548 7,631 2,907 169,825 59,536 22,319 290,867 90,378 0 0 0 102 185,943 290,867 8,502 282,447 9,293 201,336 0 4,823 48 56,070 22,209 33,861 0 0 0 33,861 .44 .43 On April 9, 1998, the Company authorized a 3-for-2 stock split of its Common Stock effected in the form of a stock dividend that was distributed on April 27, 1998 to shareholders of record at the close of business on April 13, 1998. Financial Data Schedules reported prior to the stock split have not been restated to reflect this and previous stock splits effected in the form of stock dividends.
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