UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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.)

4025 S. RIVERPOINT PARKWAY, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)

(480) 966-5394
(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report)

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.

YES þ    NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ    NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).

YES o    NO þ

AS OF March 19, 2010, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:

Apollo Group Class A common stock, no par value		151,121,000 Shares
Apollo Group Class B common stock, no par value		475,000 Shares

 

 

APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX

		PAGE
PART I — FINANCIAL INFORMATION
Special Note Regarding Forward-Looking Statements			3
Item 1. Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			47
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			52
Item 4. [Reserved]			52
Item 5. Other Information			52
Item 6. Exhibits			53
SIGNATURES			54
EX-31.1
EX-31.2
EX-31.3
EX-32.1
EX-32.2
EX-32.3
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and future results of Apollo Group, Inc. (“the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our”) that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance or results. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “predict,” “target,” “potential,” “continue,” “objectives,” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. Such statements should be viewed with caution. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include but are not limited to:

	•		changes in the regulation of the education industry, including the regulatory and other requirements discussed in Item 1, Business, of our Annual Report on Form 10-K for the year ended August 31, 2009, under “Accreditation and Jurisdictional Authorizations,” “Financial Aid Programs,” and “Regulatory Environment;”
	•		each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended August 31, 2009 and Part II, Item 1A, Risk Factors, in this 10-Q; and
	•		those factors set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended August 31, 2009 and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-Q.

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements for any changes, events, or circumstances occurring after the date of this report. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		As of
		February 28,				August 31,
($ in thousands)		2010				2009
ASSETS:
Current assets
Cash and cash equivalents		$	660,844			$	968,246
Restricted cash and cash equivalents			507,151				432,304
Accounts receivable, net			261,205				298,270
Deferred tax assets, current portion			102,078				88,022
Prepaid taxes			47,983				57,658
Other current assets			38,926				35,517
Assets held for sale from discontinued operations (Note 3)			24,750				—
Total current assets			1,642,937				1,880,017
Property and equipment, net			573,740				557,507
Marketable securities			19,579				19,579
Goodwill			488,686				522,358
Intangible assets, net			180,155				203,671
Deferred tax assets, less current portion			81,431				66,254
Other assets			14,043				13,991
Total assets		$	3,000,571			$	3,263,377
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities
Short-term borrowings and current portion of long-term debt		$	54,587			$	461,365
Accounts payable			71,718				66,928
Accrued liabilities			218,521				268,418
Student deposits			522,548				491,639
Deferred revenue			344,555				333,041
Other current liabilities			98,630				133,887
Liabilities held for sale from discontinued operations (Note 3)			5,734				—
Total current liabilities			1,316,293				1,755,278
Long-term debt			121,522				127,701
Deferred tax liabilities			53,659				55,636
Other long-term liabilities			109,518				100,149
Total liabilities			1,600,992				2,038,764
Commitments and contingencies (Note 15)
Shareholders’ equity
Preferred stock, no par value			—				—
Apollo Class A nonvoting common stock, no par value			103				103
Apollo Class B voting common stock, no par value			1				1
Additional paid-in capital			52,673				1,139
Apollo Class A treasury stock, at cost			(2,210,792	)			(2,022,623	)
Retained earnings			3,527,791				3,195,043
Accumulated other comprehensive loss			(30,122	)			(13,740	)
Total Apollo shareholders’ equity			1,339,654				1,159,923
Noncontrolling interests			59,925				64,690
Total equity			1,399,579				1,224,613
Total liabilities and shareholders’ equity		$	3,000,571			$	3,263,377

The accompanying notes are an integral part of these condensed consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three Months Ended February 28,								Six Months Ended February 28,
(in thousands, except per share data)		2010				2009				2010				2009
Net revenue		$	1,070,336			$	869,543			$	2,328,995			$	1,832,825
Costs and expenses:
Instructional costs and services			517,344				364,416				1,036,788				733,392
Selling and promotional			263,549				224,567				537,624				450,930
General and administrative			71,953				69,450				144,034				127,316
Estimated litigation loss (Note 15)			44,500				—				44,500				—
Total costs and expenses			897,346				658,433				1,762,946				1,311,638
Operating income			172,990				211,110				566,049				521,187
Interest income			525				3,430				1,457				8,807
Interest expense			(3,220	)			(621	)			(6,128	)			(2,050	)
Other, net			(79	)			(201	)			(749	)			(2,633	)
Income from continuing operations before income taxes			170,216				213,718				560,629				525,311
Provision for income taxes			(69,064	)			(85,190	)			(219,045	)			(214,535	)
Income from continuing operations			101,152				128,528				341,584				310,776
Loss from discontinued operations, net of tax (Note 3)			(10,638	)			(3,452	)			(10,938	)			(5,392	)
Net income			90,514				125,076				330,646				305,384
Net loss attributable to noncontrolling interests			2,092				270				2,102				322
Net income attributable to Apollo		$	92,606			$	125,346			$	332,748			$	305,706
Earnings (loss) per share — Basic:
Continuing operations attributable to Apollo		$	0.67			$	0.80			$	2.22			$	1.94
Discontinued operations attributable to Apollo			(0.07	)			(0.02	)			(0.07	)			(0.03	)
Basic income per share attributable to Apollo		$	0.60			$	0.78			$	2.15			$	1.91
Earnings (loss) per share — Diluted:
Continuing operations attributable to Apollo		$	0.67			$	0.79			$	2.21			$	1.92
Discontinued operations attributable to Apollo			(0.07	)			(0.02	)			(0.07	)			(0.03	)
Diluted income per share attributable to Apollo		$	0.60			$	0.77			$	2.14			$	1.89
Basic weighted average shares outstanding			154,119				160,153				154,473				159,643
Diluted weighted average shares outstanding			155,168				162,757				155,621				161,806

The accompanying notes are an integral part of these condensed consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

		Three Months Ended February 28,								Six Months Ended February 28,
($ in thousands)		2010				2009				2010				2009
Net income		$	90,514			$	125,076			$	330,646			$	305,384
Other comprehensive income (loss) (net of tax):
Currency translation gain (loss), net			(23,666	)			411				(19,045	)			(9,907	)
Unrealized loss on auction-rate securities			—				—				—				(1,322	)
Comprehensive income			66,848				125,487				311,601				294,155
Comprehensive loss attributable to noncontrolling interests			5,368				205				4,765				2,574
Comprehensive income attributable to Apollo		$	72,216			$	125,692			$	316,366			$	296,729

The accompanying notes are an integral part of these condensed consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FROM CONTINUING AND DISCONTINUED OPERATIONS
(Unaudited)

		Six Months Ended February 28,
($ in thousands)		2010				2009
Cash flows provided by (used in) operating activities:
Net income		$	330,646			$	305,384
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation			29,115				31,358
Excess tax benefits from share-based compensation			(338	)			(11,181	)
Depreciation and amortization			64,661				46,338
Goodwill impairment on discontinued operations (Note 3)			9,400				—
Amortization of deferred gain on sale-leasebacks			(883	)			(818	)
Non-cash foreign currency losses, net			534				2,599
Provision for uncollectible accounts receivable			136,582				70,913
Estimated litigation loss (Note 15)			44,500				—
Deferred income taxes			(19,675	)			(12,583	)
Changes in assets and liabilities:
Accounts receivable			(116,879	)			(48,272	)
Other assets			(5,606	)			(9,112	)
Accounts payable and accrued liabilities			(89,675	)			18,137
Income taxes payable			(2,241	)			(51,953	)
Student deposits			31,378				108,216
Deferred revenue			18,443				20,921
Other liabilities			4,902				5,696
Net cash provided by operating activities			434,864				475,643
Cash flows provided by (used in) investing activities:
Additions to property and equipment			(68,032	)			(64,019	)
Maturities of marketable securities			—				1,660
Increase in restricted cash and cash equivalents			(74,847	)			(114,232	)
Net cash used in investing activities			(142,879	)			(176,591	)
Cash flows provided by (used in) financing activities:
Payments on borrowings			(423,850	)			(15,498	)
Proceeds from borrowings			17,819				13,620
Issuance of Apollo Class A common stock			8,567				96,486
Apollo Class A common stock purchased for treasury			(201,111	)			(2,505	)
Excess tax benefits from share-based compensation			338				11,181
Net cash (used in) provided by financing activities			(598,237	)			103,284
Exchange rate effect on cash and cash equivalents			(1,150	)			(1,107	)
Net (decrease) increase in cash and cash equivalents			(307,402	)			401,229
Cash and cash equivalents, beginning of period			968,246				483,195
Cash and cash equivalents, end of period		$	660,844			$	884,424
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes, net of refunds		$	243,435			$	269,646
Cash paid during the period for interest		$	3,583			$	1,263
Supplemental disclosure of non-cash investing and financing activities
Credits received for tenant improvements		$	8,756			$	7,161
Purchases of property and equipment included in accounts payable		$	6,741			$	5,251
Restricted stock units vested and released		$	2,802			$	7,362
Unrealized loss on auction-rate securities		$	—			$	2,203

The accompanying notes are an integral part of these condensed consolidated financial statements.

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Nature of Operations

Apollo Group, Inc., its wholly-owned subsidiaries and subsidiaries that we control, collectively referred to herein as “the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our,” has been an education provider for more than 35 years. We offer innovative and distinctive educational programs and services both online and on-campus at the undergraduate, master’s and doctoral levels through our wholly-owned subsidiaries:

	•		The University of Phoenix, Inc. (“University of Phoenix”);
	•		Western International University, Inc. (“Western International University”);
	•		Institute for Professional Development (“IPD”);
	•		The College for Financial Planning Institutes Corporation (“CFFP”); and
	•		Meritus University, Inc. (“Meritus”).

In addition to these wholly-owned subsidiaries, we have an 86.1% ownership interest in Apollo Global, Inc. (“Apollo Global”), which pursues investments primarily in the international education services industry, and which we consolidate in our financial statements. Apollo Global has completed the following acquisitions:

	•		BPP Holdings plc (“BPP”) in the United Kingdom;
	•		Universidad de Artes, Ciencias y Comunicación (“UNIACC”) in Chile; and
	•		Universidad Latinoamericana (“ULA”) in Mexico.

We also operate online high school programs through our Insight Schools, Inc. (“Insight Schools”) wholly-owned subsidiary. In the second quarter of fiscal year 2010, we engaged an investment bank and proceeded with a formal plan to sell Insight Schools as we determined that the business is no longer consistent with our long-term strategic objectives. Accordingly, we have presented Insight Schools as held for sale and as discontinued operations. Refer to Note 3, Discontinued Operations, for further discussion.

Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, fluctuations in our results of operations as a result of seasonal variations in the level of student enrollments and timing of certification exams.

	•		University of Phoenix – University of Phoenix enrolls students throughout the year, with its net revenue generally lower in the second quarter (December through February) than the other quarters due to holiday breaks in December and January.
	•		BPP – BPP experiences significant seasonality associated with the timing of when its courses begin and exam dates, which generally results in considerably lower net revenue in the second and to an even greater degree in the fourth quarters as compared to the other quarters. In addition, as the cost structure of BPP is relatively fixed, BPP’s profitability is substantially lower in the second and fourth quarters.
	•		Other subsidiaries – Many of our other subsidiaries experience significant seasonality, as they have limited enrollment during their respective summer breaks and winter holidays.

Note 2. Significant Accounting Policies

Basis of Presentation

The unaudited interim condensed consolidated financial statements include the accounts of Apollo Group, Inc., its wholly-owned subsidiaries, and subsidiaries that we control. These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission and, in the opinion of management, contain all adjustments necessary to fairly present the financial condition, results of operations and cash flows for the periods presented.

Certain information and note disclosures normally included in these unaudited interim condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Securities and Exchange Commission rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in Item 8, Financial

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Statements and Supplementary Data, in our 2009 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on October 27, 2009 in preparing these unaudited interim condensed consolidated financial statements. For a discussion of our critical accounting policies, please refer to our 2009 Annual Report on Form 10-K. These unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this filing and the audited consolidated financial statements and notes thereto contained in our 2009 Annual Report on Form 10-K.

Our fiscal year is from September 1 to August 31. Unless otherwise noted, references to particular years or quarters refer to our fiscal years and the associated quarters of those fiscal years.

Because of the seasonal nature of our business, the results of operations for the three and six months ended February 28, 2010 are not necessarily indicative of results to be expected for the entire fiscal year.

The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Assets and liabilities expected to be sold or disposed of are presented separately in our Condensed Consolidated Balance Sheets as assets or liabilities held for sale. If we determine we will not have continued significant involvement with components that are classified as held for sale, the results of operations of these components are presented separately as income (loss) from discontinued operations, net of tax, in the current and prior periods. Refer to Note 3, Discontinued Operations, for further discussion.

Recent Accounting Pronouncements

Pronouncements Adopted

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”) (codified in ASC 820, “Fair Value Measurements and Disclosures”), which provides enhanced guidance for using fair value to measure assets and liabilities. On September 1, 2008, we partially adopted the provisions in SFAS 157 for fair valuing financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis. The partial adoption of SFAS 157 did not have a material impact on our financial condition and results of operations. Effective September 1, 2009, we completed our full adoption of the provisions of SFAS 157 with respect to fair valuing non-financial assets and liabilities not measured on a recurring basis, and the adoption did not have a material impact on our financial condition, results of operations, and disclosures.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) (codified in ASC 805, “Business Combinations”), which is a revision of SFAS 141, “Business Combinations” (“SFAS 141”). The primary requirements of SFAS 141(R) are as follows:

	•		upon initially obtaining control, the acquiring entity in a business combination recognizes 100% of the fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target—as a consequence, the current step acquisition model has been eliminated;
	•		contingent consideration arrangements are fair valued at the acquisition date and included in the purchase price consideration—the concept of recognizing contingent consideration at a later date when the amount of that consideration is determinable beyond a reasonable doubt, is no longer applicable;
	•		for prior business combinations, adjustments for recognized changes in acquired tax uncertainties are recognized in accordance with the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB No. 109” (codified in ASC 740, “Income Taxes”), and adjustments for recognized changes in the valuation allowance for acquired deferred tax assets are recognized in income tax expense in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (codified in ASC 740, “Income Taxes”); and
	•		all transaction costs must be expensed as incurred.

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”) (codified in ASC 805). FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to address application issues raised about the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. SFAS 141(R) and FSP FAS 141(R)-1 apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted SFAS 141(R) and FSP FAS 141(R)-1 on September 1, 2009. The adoption of SFAS 141(R) and FSP FAS 141(R)-1 did not have a material impact on our financial condition, results of operations, and disclosures. Deferred acquisition costs as of the adoption of SFAS 141(R) were not significant and were expensed as of August 31, 2009.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”) (codified in ASC 810, “Consolidation”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires non-controlling interests to be treated as a separate component of equity and any changes in the parent’s ownership interest (in which control is retained) are accounted for as equity transactions. However, a change in ownership of a consolidated subsidiary that results in deconsolidation triggers gain or loss recognition, with the establishment of a new fair value basis in any remaining non-controlling ownership interests. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the non-controlling interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and the provisions are prospective upon adoption, except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented. Accordingly, we adopted SFAS 160 on September 1, 2009 and retrospectively adjusted the following statements:

	•		Condensed Consolidated Balance Sheets as of August 31, 2009;
	•		Condensed Consolidated Statements of Income for the three and six months ended February 28, 2009;
	•		Condensed Consolidated Statements of Comprehensive Income for the three and six months ended February 28, 2009; and
	•		Condensed Consolidated Statements of Cash Flows from Continuing and Discontinued Operations for the six months ended February 28, 2009.

Refer to Note 12, Shareholders’ Equity, for additional disclosure related to our adoption of the provisions of SFAS 160.

Pronouncements Not Yet Adopted

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”) (codified in ASC 810), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009 and is effective for us on September 1, 2010. We are currently evaluating the impact that the adoption of SFAS 167 will have on our financial condition, results of operations, and disclosures.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”), which provides guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. ASU 2009-13 requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price. ASU 2009-13 is effective for the first annual reporting period beginning on or after June 15, 2010 and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption is permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. ASU 2009-13 is effective for us on September 1, 2010. We are currently evaluating the impact that the adoption of ASU 2009-13 will have on our financial condition, results of operations, and disclosures.

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 amends ASC 820 to add new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 rollforward. ASU 2010-06 also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The disclosure requirements in ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, and are effective for us on March 1, 2010, except for the requirement to present the Level 3 rollforward on a gross basis, which is effective for fiscal years beginning after December 15, 2010, and is effective for us on September 1, 2011. We do not believe that the partial adoption of ASU 2010-06 on March 1, 2010 will have a material impact on our fair value measurement disclosures. We are currently evaluating the impact that the full adoption of ASU 2010-06, with respect to the Level 3 rollforward, will have on our fair value measurement disclosures.

Note 3. Discontinued Operations

In the second quarter of fiscal year 2010, we initiated a formal plan to sell Insight Schools and engaged an investment bank as we determined that the business is no longer consistent with our long-term strategic objectives. We also began the process of actively marketing the sale of Insight Schools and based on the estimated timeframe in our current plan of sale, we believe the sale is probable within the next year. We do not expect to have significant continuing involvement with Insight Schools after it is sold. Based on these factors, we concluded that we meet the criteria for presenting Insight Schools as held for sale and as discontinued operations. Accordingly, Insight Schools’ assets and liabilities are classified as held for sale in our Condensed Consolidated Balance Sheets as of February 28, 2010 and Insight Schools’ operating results are presented as discontinued operations in our Condensed Consolidated Statements of Income for all periods presented. Cash flows from discontinued operations were not material and are included with cash flows from continuing operations in our Condensed Consolidated Statements of Cash Flows from Continuing and Discontinued Operations. Insight Schools was previously presented as its own reportable segment.

Subsequent to February 28, 2010, we obtained exit price information from advisors and interested parties specific to the sale of Insight Schools. To determine the fair value of Insight Schools, we considered this information in revising our estimate of fair value as a result of our intent to sell Insight Schools. Historically, our fair value analysis used a combination of the discounted cash flow and market-based approaches by applying a 75%/25% weighting factor to these respective valuation methods. The non-binding offers recently received for Insight Schools are significantly lower than the estimated fair value derived from our prior valuation methods. Rather, the non-binding offers recently received for Insight Schools are based on Insight Schools’ recent operating performance, which has generated and is expected to continue to generate operating losses in the near term. Refer to Note 6, Goodwill and Intangible Assets, and Note 7, Fair Value Measurements, for further discussion.

We are required to present Insight Schools’ assets and liabilities held for sale at the lower of the carrying amount or fair value, less cost to sell. Accordingly, we evaluated Insight Schools’ respective assets held for sale, including goodwill and other long-lived assets for impairment. Our goodwill impairment analysis results indicated that the carrying value of the Insight Schools’ reporting unit of approximately $28.4 million exceeded the estimated fair value less cost to sell of approximately $19.0 million and resulted in recognizing a goodwill impairment charge of $9.4 million. This charge recorded in the second quarter of fiscal year 2010 is reflected as a component of loss from discontinued operations for the three and six months ended February 28, 2010, as presented below.

The major components of assets and liabilities of Insight Schools’ presented separately in the Condensed Consolidated Balance Sheets as held for sale as of February 28, 2010 are outlined below. For comparability purposes, we have also presented below Insight Schools’ assets and liabilities as of August 31, 2009, which are included in the respective financial statement line items.

		February 28,				August 31,
($ in thousands)		2010				2009
Accounts receivable, net		$	11,281			$	6,564
Property and equipment, net			6,881				5,721
Goodwill			3,342				12,742
Other			3,246				1,563
Total Insight Schools assets		$	24,750			$	26,590
Total Insight Schools liabilities		$	5,734			$	3,066

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table summarizes Insight Schools’ operating results for the three and six months ended February 28, 2010 and 2009, which are presented in loss from discontinued operations, net of tax in our Condensed Consolidated Statements of Income:

		Three Months Ended February 28,								Six Months Ended February 28,
($ in thousands)		2010				2009				2010				2009
Net revenue		$	9,031			$	6,586			$	20,673			$	14,271
Goodwill impairment(1)			(9,400	)			—				(9,400	)			—
Other costs and expenses			(11,136	)			(12,299	)			(23,237	)			(23,196	)
Loss from discontinued operations before income taxes			(11,505	)			(5,713	)			(11,964	)			(8,925	)
Benefit from income taxes(1)			867				2,261				1,026				3,533
Loss from discontinued operations		$	(10,638	)		$	(3,452	)		$	(10,938	)		$	(5,392	)

We include only revenues and costs, including the goodwill impairment charge discussed above, directly attributable to the discontinued operations, and not those attributable to the ongoing entity. Accordingly, no interest expense or general corporate overhead have been allocated to Insight Schools. Additionally, we have ceased depreciation and amortization on property and equipment and finite-lived intangible assets at Insight Schools.

Note 4. Acquisitions

BPP

On July 30, 2009, Apollo Global, through a wholly-owned United Kingdom subsidiary, acquired the entire issued and to be issued ordinary share capital of BPP, a company registered in England and Wales, for a cash purchase price of 620 pence per share. BPP is a provider of education and training to professionals in the legal and finance industries and the BPP College of Professional Studies is the first proprietary institution to have been granted degree awarding powers in the United Kingdom. At exchange rates on the date of the acquisition, the purchase price for BPP, including assumed debt and transaction related expenses, was $601.6 million.

We accounted for the BPP acquisition using the purchase method of accounting prior to our September 1, 2009 adoption of SFAS 141(R) (codified in ASC 805, “Business Combinations”) noted in Recent Accounting Pronouncements in Note 2, Significant Accounting Policies. To value the acquired assets and assumed liabilities, we used the following valuation methodologies:

	•		Land and buildings included in property and equipment were valued using the market approach.
	•		Trademarks were valued using the relief-from-royalty method, which represents the benefit of owning an intangible asset rather than paying royalties for its use.
	•		All other intangible assets were valued using one of the following methods; the income approach, specifically the cost savings method and excess earnings method, or the replacement cost approach.
	•		Certain other long-term obligations were valued using the discounted cash flow approach utilizing current discount rates, cost estimates and assumptions.
	•		All other net assets and liabilities carrying value approximated fair value at the time of the acquisition.

A summary of the purchase price allocation is as follows:

($ in thousands)
Tangible assets (net of acquired liabilities)		$	(15,346	)
Finite-lived intangible assets			51,304
Indefinite-lived intangible assets			139,990
Goodwill			425,638
Total allocated purchase price		$	601,586

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

We assigned indefinite lives to the acquired trademarks and certain accreditations and designations as we believe that each of these intangible assets has the continued ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic or other factors to limit the useful life of these intangible assets and we intend to renew trademarks and accreditations and designations, which can be accomplished at little cost.

BPP’s operating results are included in our condensed consolidated financial statements from the date of acquisition.

Pro Forma Financial Results

The following unaudited pro forma financial results of operations are presented as if the acquisition of BPP had been completed as of September 1, 2008:

		Six Months Ended
(in thousands, except per share data)		February 28, 2009
Pro forma net revenue		$	1,986,698
Pro forma net income attributable to Apollo		$	321,808
Pro forma earnings per share:
Basic income per share attributable to Apollo		$	2.02
Diluted income per share attributable to Apollo		$	1.99
Basic weighted average shares outstanding			159,643
Diluted weighted average shares outstanding			161,806

The pro forma financial information is presented for informational purposes and includes certain adjustments that are factual and supportable, consisting of increased interest expense on debt used to fund the acquisition, adjustments to depreciation expense related to the fair value adjustment for property and equipment, and amortization related to acquired intangible assets, as well as the related tax effect of these adjustments. The pro forma information is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place at the beginning of the applicable presented period, or of future results of the consolidated entities.

Note 5. Accounts Receivable, Net

Accounts receivable, net consist of the following as of February 28, 2010 and August 31, 2009:

		February 28,				August 31,
($ in thousands)		2010				2009
Student accounts receivable		$	404,904			$	380,226
Less allowance for doubtful accounts			(170,138	)			(110,420	)
Net student accounts receivable			234,766				269,806
Other receivables			26,439				28,464
Total accounts receivable, net		$	261,205			$	298,270

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Student accounts receivable is composed primarily of amounts due related to tuition. In the second quarter of fiscal year 2010, we began presenting Insight Schools’ assets and liabilities as held for sale and its operating results as discontinued operations. Refer to Note 3, Discontinued Operations, for further discussion and disclosure of the components of Insight Schools’ assets and liabilities.

Bad debt expense is included in instructional costs and services in our Condensed Consolidated Statements of Income. Please refer to our 2009 Annual Report on Form 10-K for further discussion of our related critical accounting policy. The following table summarizes the activity in the related allowance for doubtful accounts for the three and six months ended February 28, 2010 and 2009:

		Three Months Ended February 28,								Six Months Ended February 28,
($ in thousands)		2010				2009				2010				2009
Beginning allowance for doubtful accounts		$	138,405			$	88,274			$	110,420			$	78,362
Provision for uncollectible accounts receivable			73,883				36,056				136,582				70,913
Write-offs, net of recoveries			(41,291	)			(28,615	)			(76,005	)			(53,560	)
Included in assets held for sale			(859	)			—				(859	)			—
Ending allowance for doubtful accounts		$	170,138			$	95,715			$	170,138			$	95,715

The increase in bad debt expense is primarily due to University of Phoenix’s lower collection rates. Collection rates have declined as a result of the economic downturn, the effects of certain operational changes and increases in receivables from students enrolled in associate’s degree programs. Students enrolled in associate’s degree programs generally persist at lower rates than those in bachelor’s and graduate level programs, resulting in higher bad debts when these students withdraw from the University of Phoenix.

Note 6. Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the amount assigned to the net assets acquired and liabilities assumed. Changes in the carrying amount of goodwill by reportable segment from August 31, 2009 to February 28, 2010 are as follows:

		University of				Apollo Global								Insight				Other				Total
($ in thousands)		Phoenix				BPP				Other				Schools				Schools				Goodwill
Goodwill as of August 31, 2009		$	37,018			$	421,836			$	33,871			$	12,742			$	16,891			$	522,358
Goodwill impairment			—				—				—				(9,400	)			—				(9,400	)
Included in assets held for sale			—				—				—				(3,342	)			—				(3,342	)
Currency translation adjustment			—				(22,204	)			1,274				—				—				(20,930	)
Goodwill as of February 28, 2010		$	37,018			$	399,632			$	35,145			$	—			$	16,891			$	488,686

In the second quarter of fiscal year 2010, we began presenting Insight Schools’ assets and liabilities as held for sale and its operating results as discontinued operations. Additionally, we recorded a $9.4 million impairment of Insight Schools’ goodwill during the second quarter of fiscal year 2010. Refer to Note 3, Discontinued Operations, for further discussion.

Intangible assets consist of the following as of February 28, 2010 and August 31, 2009:

		February 28, 2010																August 31, 2009
										Effect of																Effect of
		Acquired								Foreign								Acquired								Foreign
		Gross								Currency				Net				Gross								Currency				Net
		Carrying				Accumulated				Translation				Carrying				Carrying				Accumulated				Translation				Carrying
($ in thousands)		Amount				Amortization				Loss				Amount				Amount				Amortization				Loss				Amount
Finite-lived intangible assets
Student and customer relationships		$	26,515			$	(12,173	)		$	(1,694	)		$	12,648			$	26,515			$	(4,224	)		$	(1,282	)		$	21,009
Copyrights			20,891				(3,368	)			(1,103	)			16,420				20,891				(488	)			(198	)			20,205
Other			20,676				(6,793	)			(1,336	)			12,547				23,317				(5,233	)			(1,117	)			16,967
Total finite-lived intangible assets			68,082				(22,334	)			(4,133	)			41,615				70,723				(9,945	)			(2,597	)			58,181
Indefinite-lived intangible assets
Trademarks			140,797				—				(9,150	)			131,647				140,797				—				(2,441	)			138,356
Accreditations and designations			7,456				—				(563	)			6,893				7,456				—				(322	)			7,134
Total indefinite-lived intangible assets			148,253				—				(9,713	)			138,540				148,253				—				(2,763	)			145,490
Total intangible assets, net		$	216,335			$	(22,334	)		$	(13,846	)		$	180,155			$	218,976			$	(9,945	)		$	(5,360	)		$	203,671

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Finite-lived intangible assets are amortized on either a straight-line basis or using an accelerated method to reflect the economic useful life of the asset. The weighted average useful lives range from 2 to 15 years. Amortization expense for intangible assets for the three months ended February 28, 2010 and 2009 was $6.5 million and $1.0 million, respectively, and for the six months ended February 28, 2010 and 2009 was $14.0 million and $1.9 million, respectively.

Note 7. Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis consist of the following as of February 28, 2010:

						Fair Value Measurements at Reporting Date Using
						Quoted Prices
						in Active
						Markets for				Significant
						Identical				Other				Significant
						Assets/				Observable				Unobservable
		February 28,				Liabilities				Inputs				Inputs
($ in thousands)		2010				(Level 1)				(Level 2)				(Level 3)
Assets:
Cash equivalents (including restricted cash equivalents):
Money market funds		$	1,161,995			$	1,161,995			$	—			$	—
Marketable securities:
Auction-rate securities			19,579				—				—				19,579
Total assets:		$	1,181,574			$	1,161,995			$	—			$	19,579
Liabilities:
Other liabilities:
Interest rate swap		$	3,938			$	—			$	3,938			$	—
Total liabilities:		$	3,938			$	—			$	3,938			$	—

We measure our money market funds included in cash and restricted cash equivalents, auction-rate securities included in marketable securities and interest rate swap included in other liabilities on a recurring basis at fair value. For our assets and liabilities measured on a recurring basis, we did not significantly change our valuation techniques associated with fair value measurements from prior periods. As of February 28, 2010, cash equivalents disclosed in the table above excludes $6.0 million of cash held in bank overnight deposit accounts that approximate fair value.

	•		Money market funds - Classified within Level 1 and were valued primarily using real-time quotes for transactions in active exchange markets involving identical assets.
	•		Auction-rate securities - Classified within Level 3 due to the illiquidity of the market and were valued using a discounted cash flow model that encompassed significant unobservable inputs to determine probabilities of default and timing of auction failure, probabilities of a successful auction at par and/or repurchase at par value for each auction period, collateralization of the underlying security and credit worthiness of the issuer. The assumptions used to prepare the discounted cash flows

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

			include estimates for interest rates, credit spreads, timing and amount of cash flows, liquidity premiums, expected holding periods and default risk. These assumptions are subject to change as the underlying data sources and market conditions evolve. Additionally, as the market for auction-rate securities continues to be inactive, our discounted cash flow model also factored the illiquidity of the auction-rate securities market by adding a spread of 450 to 500 basis points to the applicable discount rate.
	•		Interest rate swap – We have an interest rate swap with a notional amount of £30.0 million ($46.3 million) used to minimize the interest rate exposure on a portion of BPP’s variable rate debt. The interest rate swap is used to fix the variable interest rate on the associated debt. The swap is classified within Level 2 and is valued using readily available pricing sources which utilize market observable inputs including the current variable interest rate for similar types of instruments.

At February 28, 2010, the carrying value of our debt, excluding capital leases, was $169.7 million. Substantially all of our debt is variable interest rate debt and the carrying amount approximates fair value.

During the six months ended February 28, 2010, we did not have any changes in our Level 3 assets that are measured at fair value on a recurring basis using significant unobservable inputs.

Assets measured at fair value on a non-recurring basis consist of the following as of February 28, 2010:

						Fair Value Measurements at Reporting Date Using
						Quoted Prices
						in Active				Significant				Significant
						Markets for				Other				Unobservable
		February 28,				Identical Assets				Observable Inputs				Inputs
($ in thousands)		2010				(Level 1)				(Level 2)				(Level 3)				Total Losses
Assets:
Assets held for sale
Goodwill		$	3,342			$	—			$	—			$	3,342			$	(9,400	)
Total		$	3,342			$	—			$	—			$	3,342			$	(9,400	)

In connection with presenting Insight Schools as held for sale in the second quarter of fiscal year 2010, we measured Insight Schools’ goodwill at fair value on a non-recurring basis using Level 3 inputs. The Level 3 inputs were primarily based on exit price information from advisors which includes consideration of non-binding offers we recently received from third parties to purchase Insight Schools. The Insight Schools’ goodwill balance was written down to the implied fair value, resulting in an impairment charge of $9.4 million that is included in loss from discontinued operations for the three and six months ended February 28, 2010. Refer to Note 3, Discontinued Operations for further discussion.

Note 8. Accrued Liabilities

Accrued liabilities consist of the following as of February 28, 2010 and August 31, 2009:

		February 28,				August 31,
($ in thousands)		2010				2009
Estimated litigation loss		$	44,500			$	80,500
Salaries, wages, and benefits			72,882				76,583
Accrued advertising			34,537				35,974
Accrued professional fees			25,208				25,287
Student refunds, grants and scholarships			11,759				11,287
Other accrued liabilities			29,635				38,787
Total accrued liabilities		$	218,521			$	268,418

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Please refer to Note 15, Commitments and Contingencies, for discussion of estimated litigation losses. Salaries, wages, and benefits represent amounts due to employees, faculty and third parties for salaries, bonuses, vacation pay, and health insurance. Accrued advertising represents amounts due for Internet marketing, direct mail campaigns, and print and broadcast advertising. Accrued professional fees represent amounts due to third parties for outsourced student financial aid processing and other accrued professional and legal obligations. Student refunds, grants and scholarships represent amounts due to students for tuition refunds, federal and state grants payable, scholarships, and other related items. Other accrued liabilities primarily includes sales and business taxes, facilities costs such as rent and utilities, and certain accrued purchases.

Note 9. Debt

Debt and short-term borrowings consist of the following as of February 28, 2010 and August 31, 2009:

		February 28,				August 31,
($ in thousands)		2010				2009
Bank Facility, see terms below		$	97,222			$	495,608
Capital lease obligations			6,383				7,763
Other, interest rates ranging from 1.1% to 9.4% with various maturities from 2010 to 2019			72,504				85,695
Total debt			176,109				589,066
Less short-term borrowings and current portion of long-term debt			(54,587	)			(461,365	)
Long-term debt		$	121,522			$	127,701

On January 4, 2008, we entered into a syndicated $500 million credit agreement (the “Bank Facility”). The Bank Facility is an unsecured revolving credit facility available for general corporate purposes including acquisitions and stock buybacks. The Bank Facility has an expansion feature for an aggregate principal amount of up to $250 million. The term is five years, expiring on January 4, 2013. The Bank Facility provides a multi-currency sub-limit facility for borrowings in certain specified foreign currencies up to $300 million.

As of August 31, 2009, we borrowed our entire credit line under the Bank Facility, which included £63.0 million denominated in British Pounds (equivalent to $102.6 million and $97.2 million U.S. dollars as of August 31, 2009 and February 28, 2010, respectively) related to the BPP acquisition. We repaid the U.S. dollar denominated debt on our Bank Facility of $393 million during the first quarter of fiscal year 2010.

The Bank Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Bank Facility fee ranges from 12.5 to 17.5 basis points and the incremental fees for borrowings under the facility range from LIBOR + 50.0 to 82.5 basis points. The weighted average interest rate on outstanding borrowings under the Bank Facility at February 28, 2010 was 1.0%.

The Bank Facility contains affirmative and negative covenants, including the following financial covenants: maximum leverage ratio, minimum coverage interest and rent expense ratio, and a U.S. Department of Education financial responsibility composite score. In addition, there are covenants restricting indebtedness, liens, investments, asset transfers and distributions. We were in compliance with all covenants related to the Bank Facility at February 28, 2010.

Other debt includes $59.7 million of variable rate debt and $12.8 million of fixed rate debt at the subsidiaries of Apollo Global. The weighted average interest rate of these debt instruments at February 28, 2010 was 2.9%.

Please refer to Note 7, Fair Value Measurements, for discussion of the fair value of our debt.

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 10. Other Liabilities

Other liabilities consist of the following as of February 28, 2010 and August 31, 2009:

		February 28,				August 31,
($ in thousands)		2010				2009
Deferred rent and other lease incentives		$	75,834			$	71,579
Reserve for uncertain tax positions			63,594				97,619
Other			68,720				64,838
Total other liabilities			208,148				234,036
Less current portion			(98,630	)			(133,887	)
Total other long-term liabilities		$	109,518			$	100,149

Deferred rent and other lease incentives represent amounts included in lease agreements and are amortized on a straight-line basis over the term of the leases. Refer to Note 11, Income Taxes, for discussion of our uncertain tax positions.

Note 11. Income Taxes

We exercise significant judgment in determining our income tax provision due to transactions, credits and calculations where the ultimate tax determination is uncertain. Please refer to our significant accounting policies included in our 2009 Annual Report on Form 10-K for further discussion.

During the six months ended February 28, 2010, our unrecognized tax benefits decreased by $24.6 million, excluding interest and penalties, primarily as a result of settling our Internal Revenue Code Section 162(m) issue related to stock option compensation as discussed below. This decrease was partially offset by an increase in our unrecognized tax benefits as a result of tax positions taken during the six months ended February 28, 2010 related to state taxes.

As of February 28, 2010, we had total uncertain tax positions of $63.6 million, including accrued interest and penalties of $3.9 million, of which $50.8 million is included in other current liabilities in our Condensed Consolidated Balance Sheets. We believe that it is reasonably possible that this portion of our uncertain tax positions could be resolved or settled within the next 12 months. The current portion of our uncertain tax positions principally relates to amounts accrued related to allocation and apportionment of our income amongst various state and local jurisdictions. The entire amount of our unrecognized tax benefits would favorably affect our effective rate if ultimately recognized.

Internal Revenue Service Audits

An audit relating to our U.S. federal income tax returns for fiscal years 2003 through 2005 commenced in September 2006. In February 2009, the Internal Revenue Service issued an examination report and proposed to disallow deductions relating to stock option compensation in excess of the limitations of Internal Revenue Code Section 162(m). Under Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year, except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurement dates may not have qualified as performance-based compensation. The Internal Revenue Service examination report also proposed the additions of penalties and interest. On March 6, 2009, we commenced administrative proceedings with the Office of Appeals of the Internal Revenue Service challenging the proposed adjustments, including penalties and interest. On November 25, 2009, we executed a Closing Agreement with the Internal Revenue Service Office of Appeals to settle this matter. The settlement resolves only the disputed tax issues between the Internal Revenue Service and us and is not an admission by us of liability, wrongdoing, legal compliance or non-compliance for any other purpose.

We accrued an additional $0.5 million of interest during the first quarter of fiscal year 2010, resulting in a total accrual, prior to the settlement, of $50.5 million included in our reserve for uncertain tax positions relating to this issue. As a result of this settlement, we reclassified $27.3 million to income taxes payable in our Condensed Consolidated Balance Sheets as of November 30, 2009. We paid $22.6 million during the second quarter of fiscal year 2010 and we expect to pay the remainder by the end of fiscal year 2010. The remaining accrual of $23.2 million, relating to the amount in excess of the settlement, was reversed during the first quarter of fiscal year 2010 through a reduction in the provision for income taxes, a decrease in deferred tax assets, and an increase in additional paid-in capital in the amounts of $10.2 million, $1.5 million and $11.5 million, respectively.

Based on the agreed upon settlement, we believe that we are entitled to certain deductions related to stock option compensation that were not claimed on our tax returns for the years ended in 2006 through 2009. During the first quarter of fiscal year 2010, we recorded

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

the benefit of these deductions through provision for income taxes, deferred taxes, and additional paid-in-capital in the amounts of $1.2 million, $0.9 million, and $16.0 million, respectively. We have submitted claims to the Internal Revenue Service for the deductions that were not taken on our tax returns for the years ended in 2006, 2007, and 2008. We intend to claim the deductions related to stock option compensation in fiscal year 2009 on our tax return for the year ended in 2009.

During fiscal year 2009, the Internal Revenue Service commenced an examination of our tax returns for the years ended in 2006, 2007, and 2008. In addition, we are subject to numerous ongoing audits by state, local, and foreign tax authorities. Although we believe our tax accruals to be reasonable, the final determination of tax audits in the U.S. or abroad and any related litigation could be materially different from our historical income tax provisions and accruals.

Note 12. Shareholders’ Equity

The following tables detail changes in shareholders’ equity during the six months ended February 28, 2010 and 2009:

														Treasury
		Common Stock												Stock								Accumulated
		Class A				Class B				Additional				Class A								Other				Total Apollo
		Stated				Stated				Paid-in								Retained				Comprehensive				Shareholders’				Noncontrolling
($ in thousands)		Value				Value				Capital				Stated Value				Earnings				Loss				Equity				Interests				Total Equity
Balance as of August 31, 2009		$	103			$	1			$	1,139			$	(2,022,623	)		$	3,195,043			$	(13,740	)		$	1,159,923			$	64,690			$	1,224,613
Treasury stock purchases			—				—				—				(201,111	)			—				—				(201,111	)			—				(201,111	)
Stock issued under stock purchase plans			—				—				133				2,619				—				—				2,752				—				2,752
Stock issued under stock option plans			—				—				(4,508	)			10,323				—				—				5,815				—				5,815
Tax shortfall of stock options exercised			—				—				(690	)			—				—				—				(690	)			—				(690	)
Tax benefit related to IRS dispute settlement			—				—				27,484				—				—				—				27,484				—				27,484
Stock-based compensation			—				—				29,115				—				—				—				29,115				—				29,115
Currency translation adjustment, net of tax			—				—				—				—				—				(16,382	)			(16,382	)			(2,663	)			(19,045	)
Net income (loss)			—				—				—				—				332,748				—				332,748				(2,102	)			330,646
Balance as of February 28, 2010		$	103			$	1			$	52,673			$	(2,210,792	)		$	3,527,791			$	(30,122	)		$	1,339,654			$	59,925			$	1,399,579

														Treasury
		Common Stock												Stock								Accumulated
		Class A				Class B				Additional				Class A								Other				Total Apollo
		Stated				Stated				Paid-in								Retained				Comprehensive				Shareholders’				Noncontrolling
		Value				Value				Capital				Stated Value				Earnings				Loss				Equity				Interests				Total Equity
Balance as of August 31, 2008		$	103			$	1			$	—			$	(1,757,277	)		$	2,595,340			$	(3,781	)		$	834,386			$	11,779			$	846,165
Treasury stock purchases			—				—				—				(2,505	)			—				—				(2,505	)			—				(2,505	)
Stock issued under stock purchase plans			—				—				10				2,710				—				—				2,720				—				2,720
Stock issued under stock option plans			—				—				(18,945	)			111,327				1,384				—				93,766				—				93,766
Tax benefits of stock options exercised			—				—				9,514				—				—				—				9,514				—				9,514
Stock-based compensation			—				—				31,358				—				—				—				31,358				—				31,358
Currency translation adjustment, net of tax			—				—				—				—				—				(7,655	)			(7,655	)			(2,252	)			(9,907	)
Unrealized investment loss, net of tax			—				—				—				—				—				(1,322	)			(1,322	)			—				(1,322	)
Other, net			—				—				—				—				—				—				—				(107	)			(107	)
Net income (loss)			—				—				—				—				305,706				—				305,706				(322	)			305,384
Balance as of February 28, 2009		$	103			$	1			$	21,937			$	(1,645,745	)		$	2,902,430			$	(12,758	)		$	1,265,968			$	9,098			$	1,275,066

Share Reissuances

During the three months ended February 28, 2010 and 2009, we issued approximately 0.1 million shares and 1.3 million shares, respectively, and during the six months ended February 28, 2010 and 2009, we issued approximately 0.2 million shares and 1.9 million shares, respectively, of our Class A common stock from our treasury stock as a result of stock option exercises, release of shares covered by vested restricted stock units, and purchases under our employee stock purchase plan.

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Share Repurchases

Our Board of Directors has authorized us to repurchase outstanding shares of Apollo Group Class A common stock, from time to time, depending on market conditions and other considerations. On February 18, 2010, our Board of Directors authorized a $500 million increase in the amount available under our share repurchase program up to an aggregate amount of $1 billion of Apollo Group Class A common stock. There is no expiration date on the repurchase authorizations and repurchases occur at our discretion.

During the three months ended February 28, 2010, we repurchased approximately 3.4 million shares of our Class A common stock at a total cost of approximately $200 million, representing a weighted average purchase price of $59.61 per share. As of February 28, 2010, approximately $800 million remained available under our share repurchase authorization. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant. Repurchases may be made on the open market or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules, and may include repurchases pursuant to Securities and Exchange Commission Rule 10b5-1 nondiscretionary trading programs.

In connection with the release of vested shares of restricted stock, we repurchased approximately 2,000 shares for $0.1 million and 19,000 shares for $1.1 million during the three and six months ended February 28, 2010, respectively. During the six months ended February 28, 2009, we repurchased approximately 36,000 shares for $2.5 million. These repurchases relate to tax withholding requirements on the restricted stock units and do not fall under the repurchase program described above, and therefore do not reduce the amount that is available for repurchase under that program.

Note 13. Earnings Per Share

Apollo Group Common Stock

Our outstanding shares consist of Apollo Group Class A and Class B common stock. Our Articles of Incorporation treat the declaration of dividends on the Apollo Group Class A and Class B common stock in an identical manner. As such, both the Apollo Group Class A and Class B common stock are included in the calculation of our earnings per share.

Diluted weighted average shares outstanding includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting and release of restricted stock units. The following provides a reconciliation of the basic and diluted earnings per share computations for our common stock for the periods indicated:

		Three Months Ended February 28,
		2010												2009
		Net Income				Weighted								Net Income				Weighted
		Attributable to				Average				Per Share				Attributable to				Average				Per Share
(in thousands, except per share data)		Apollo				Shares				Amount				Apollo				Shares				Amount
Basic income per share attributable to Apollo		$	92,606				154,119			$	0.60			$	125,346				160,153			$	0.78
Effect of dilutive securities:
Stock options(1)			—				808				—				—				2,356				(0.01	)
Restricted stock units(2)			—				241				—				—				248				—
Diluted income per share attributable to Apollo		$	92,606				155,168			$	0.60			$	125,346				162,757			$	0.77