XNAS:APOL Apollo Education Group Inc Class A Quarterly Report 10-Q Filing - 5/31/2012

Effective Date 5/31/2012

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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
 
For the quarterly period ended: May 31, 2012
 
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from [ ] to [ ]

Commission file number: 0-25232
APOLLO GROUP, INC.
(Exact name of registrant as specified in its charter)

ARIZONA
(State or other jurisdiction of incorporation or organization)
86-0419443
(I.R.S. Employer 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.
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 Exchange Act). 
 YES o     NO þ
AS OF June 19, 2012, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:

Apollo Group, Inc. Class A common stock, no par value
112,900,000 Shares
Apollo Group, Inc. Class B common stock, no par value
475,000 Shares
 



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



2


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 U.S. education industry and eligibility of proprietary schools to participate in U.S. federal student financial aid programs, 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, 2011, 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, 2011 and Part II, Item 1A, Risk Factors, in this Form 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, 2011 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 above 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 facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.



3


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
As of
($ in thousands)
May 31, 2012
 
August 31, 2011
ASSETS:
Current assets
 

 
 

Cash and cash equivalents
$
602,144

 
$
1,571,664

Restricted cash and cash equivalents
353,884

 
379,407

Accounts receivable, net
191,665

 
215,567

Prepaid taxes
35,595

 
35,629

Deferred tax assets, current portion
58,084

 
124,137

Other current assets
42,732

 
44,382

Total current assets
1,284,104

 
2,370,786

Property and equipment, net
559,497

 
553,027

Marketable securities
5,946

 
5,946

Goodwill
148,218

 
133,297

Intangible assets, net
160,562

 
121,117

Deferred tax assets, less current portion
86,784

 
70,949

Other assets
24,833

 
14,584

Total assets
$
2,269,944

 
$
3,269,706

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities
 

 
 

Short-term borrowings and current portion of long-term debt
$
35,827

 
$
419,318

Accounts payable
58,710

 
69,551

Student deposits
387,188

 
424,045

Deferred revenue
260,167

 
293,436

Accrued and other current liabilities
311,219

 
448,937

Total current liabilities
1,053,111

 
1,655,287

Long-term debt
90,167

 
179,691

Deferred tax liabilities
21,599

 
26,400

Other long-term liabilities
203,637

 
164,339

Total liabilities
1,368,514

 
2,025,717

Commitments and contingencies


 


Shareholders’ equity
 

 
 

Preferred stock, no par value

 

Apollo Group Class A nonvoting common stock, no par value
103

 
103

Apollo Group Class B voting common stock, no par value
1

 
1

Additional paid-in capital
103,528

 
68,724

Apollo Group Class A treasury stock, at cost
(3,835,973
)
 
(3,125,175
)
Retained earnings
4,667,702

 
4,320,472

Accumulated other comprehensive loss
(31,673
)
 
(23,761
)
Total Apollo shareholders’ equity
903,688

 
1,240,364

Noncontrolling (deficit) interests
(2,258
)
 
3,625

Total equity
901,430

 
1,243,989

Total liabilities and shareholders’ equity
$
2,269,944

 
$
3,269,706

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

4


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

 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(In thousands, except per share data)
2012
 
2011
 
2012
 
2011
Net revenue
$
1,130,808

 
$
1,235,837

 
$
3,279,050

 
$
3,610,901

Costs and expenses:
 

 
 

 
 

 
 
Instructional and student advisory
470,112

 
458,145

 
1,356,409

 
1,335,601

Marketing
158,881

 
161,034

 
483,980

 
484,392

Admissions advisory
95,290

 
99,923

 
298,083

 
315,958

General and administrative
88,084

 
87,857

 
252,028

 
257,075

Depreciation and amortization
45,155

 
41,125

 
133,438

 
117,369

Provision for uncollectible accounts receivable
35,430

 
39,217

 
108,009

 
141,666

Restructuring and other charges
7,577

 

 
29,287

 
3,846

Litigation charge
4,725

 
2,048

 
4,725

 
4,503

Goodwill and other intangibles impairment

 

 
16,788

 
219,927

Total costs and expenses
905,254

 
889,349

 
2,682,747

 
2,880,337

Operating income
225,554

 
346,488

 
596,303

 
730,564

Interest income
219

 
867

 
1,085

 
2,635

Interest expense
(2,830
)
 
(2,383
)
 
(6,618
)
 
(6,207
)
Other, net
(402
)
 
(1,862
)
 
(44
)
 
(1,603
)
Income from continuing operations before income taxes
222,541

 
343,110

 
590,726

 
725,389

Provision for income taxes
(88,159
)
 
(130,385
)
 
(247,889
)
 
(376,016
)
Income from continuing operations
134,382

 
212,725

 
342,837

 
349,373

Income from discontinued operations, net of tax

 
540

 

 
2,487

Net income
134,382

 
213,265

 
342,837

 
351,860

Net (income) loss attributable to noncontrolling interests
(348
)
 
(825
)
 
4,393

 
31,955

Net income attributable to Apollo
$
134,034

 
$
212,440

 
$
347,230

 
$
383,815

Earnings per share — Basic:
 

 
 

 
 
 
 
Continuing operations attributable to Apollo
$
1.13

 
$
1.52

 
$
2.79

 
$
2.67

Discontinued operations attributable to Apollo

 

 

 
0.02

Basic income per share attributable to Apollo
$
1.13

 
$
1.52

 
$
2.79

 
$
2.69

Earnings per share — Diluted:
 

 
 

 
 
 
 
Continuing operations attributable to Apollo
$
1.13

 
$
1.51

 
$
2.77

 
$
2.66

Discontinued operations attributable to Apollo

 

 

 
0.02

Diluted income per share attributable to Apollo
$
1.13

 
$
1.51

 
$
2.77

 
$
2.68

Basic weighted average shares outstanding
118,134

 
139,856

 
124,560

 
142,845

Diluted weighted average shares outstanding
118,793

 
140,343

 
125,335

 
143,222

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


5


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

 
Three Months Ended May 31,
 
Nine Months Ended May 31,
($ in thousands)
2012
 
2011
 
2012
 
2011
Net income
$
134,382

 
$
213,265

 
$
342,837

 
$
351,860

Other comprehensive income (net of tax):
 

 
 

 
 
 
 
Currency translation (loss) gain
(4,774
)
 
2,875

 
(9,402
)
 
7,636

Change in fair value of auction-rate securities

 

 

 
463

Comprehensive income
129,608

 
216,140

 
333,435

 
359,959

Comprehensive loss (income) attributable to noncontrolling interests
319

 
(1,033
)
 
5,883

 
31,092

Comprehensive income attributable to Apollo
$
129,927

 
$
215,107

 
$
339,318

 
$
391,051

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


6


APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FROM CONTINUING AND DISCONTINUED OPERATIONS
(Unaudited)
 
Nine Months Ended May 31,
($ in thousands)
2012
 
2011
Cash flows provided by (used in) operating activities:
 

 
 

Net income
$
342,837

 
$
351,860

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Share-based compensation
59,438

 
50,453

Excess tax benefits from share-based compensation
(1,137
)
 
(1,214
)
Depreciation and amortization
133,438

 
117,369

Amortization of lease incentives
(11,604
)
 
(10,523
)
Amortization of deferred gains on sale-leasebacks
(2,098
)
 
(1,491
)
Goodwill and other intangibles impairment
16,788

 
219,927

Non-cash foreign currency loss, net
173

 
1,767

Provision for uncollectible accounts receivable
108,009

 
141,666

Litigation charge
4,725

 
4,503

Deferred income taxes
31,386

 
(3,327
)
Changes in assets and liabilities, excluding the impact of business acquisition and disposition:
 

 
 

Restricted cash and cash equivalents
25,523

 
67,658

Accounts receivable
(85,788
)
 
(81,215
)
Prepaid taxes
6

 
21,218

Other assets
(6,260
)
 
(13,955
)
Accounts payable
(8,174
)
 
(12,440
)
Student deposits
(35,215
)
 
(89,944
)
Deferred revenue
(32,667
)
 
(60,763
)
Accrued and other liabilities
(123,605
)
 
47,003

Net cash provided by operating activities
415,775

 
748,552

Cash flows provided by (used in) investing activities:
 

 
 

Additions to property and equipment
(85,702
)
 
(119,726
)
Maturities of marketable securities

 
10,000

Acquisition, net of cash acquired
(73,736
)
 

Proceeds from sale-leaseback, net

 
169,018

Proceeds from disposition
3,285

 
9,612

Collateralization of letter of credit

 
126,615

Other investing activities
(1,694
)
 

Net cash (used in) provided by investing activities
(157,847
)
 
195,519

Cash flows provided by (used in) financing activities:
 

 
 

Payments on borrowings
(508,449
)
 
(425,325
)
Proceeds from borrowings
2,437

 
11,682

Apollo Group Class A common stock purchased for treasury
(731,772
)
 
(408,220
)
Issuance of Apollo Group Class A common stock
10,521

 
10,240

Noncontrolling interest contributions

 
6,875

Excess tax benefits from share-based compensation
1,137

 
1,214

Net cash used in financing activities
(1,226,126
)
 
(803,534
)
Exchange rate effect on cash and cash equivalents
(1,322
)
 
1,040

Net (decrease) increase in cash and cash equivalents
(969,520
)
 
141,577

Cash and cash equivalents, beginning of period
1,571,664

 
1,284,769

Cash and cash equivalents, end of period
$
602,144

 
$
1,426,346

Supplemental disclosure of cash flow and non-cash information
 

 
 

Cash paid for income taxes, net of refunds
$
211,500

 
$
326,999

Cash paid for interest
$
7,178

 
$
8,063

Capital lease additions
$
26,906

 
$
14,693

Credits received for tenant improvements
$
24,856

 
$
12,047

Restricted stock units vested and released
$
16,926

 
$
3,614

Acquired technology (Note 5)
$
14,389

 
$

Unsettled share repurchases
$
10,244

 
$
11,802

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

7


APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Nature of Operations
Apollo Group, Inc. and its wholly-owned subsidiaries and majority-owned subsidiaries, 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 principally through the following of our wholly-owned educational subsidiaries:
The University of Phoenix, Inc. (“University of Phoenix”);
Institute for Professional Development (“IPD”); and
The College for Financial Planning Institutes Corporation (“CFFP”).
On September 12, 2011, we acquired all of the outstanding stock of Carnegie Learning, Inc. (“Carnegie Learning”), a publisher of research-based math curricula and adaptive learning software. Refer to Note 5, Acquisitions.
In addition, we have an 85.6% ownership interest in Apollo Global, Inc. (“Apollo Global”) as of May 31, 2012. Apollo Global pursues investments primarily in the international education services industry and is consolidated in our financial statements. We offer educational programs and services through the following wholly-owned subsidiaries of Apollo Global:
BPP Holdings Limited (“BPP”) in the United Kingdom;
Western International University, Inc. (“Western International University”) in the U.S.;
Universidad Latinoamericana (“ULA”) in Mexico; and
Universidad de Artes, Ciencias y Comunicación (“UNIACC”) in Chile.
On December 3, 2011, Apollo Global entered into an agreement with HT Media Limited, an Indian media company, to participate in a start-up, 50:50 joint venture intended to develop and provide educational services and programs in India. HT Media Limited, which is based in New Delhi, India, publishes the Hindustan Times, Hindustan and Mint newspapers, among other business activities.
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, consisting of normal, recurring adjustments, necessary to fairly present the financial condition, results of operations and cash flows for the periods presented.
These unaudited interim condensed consolidated financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements. Therefore, this information should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our 2011 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on October 20, 2011. We consistently applied the accounting policies described in Item 8, Financial Statements and Supplementary Data, in our 2011 Annual Report on Form 10-K in preparing these unaudited interim condensed consolidated financial statements and we believe that the disclosures made are adequate to make the information presented not misleading.
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.
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.
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 our institutions’ enrollments. Although University of Phoenix enrolls students throughout the year, its net revenue is generally lower in our second fiscal quarter (December through February) than the other quarters due to holiday breaks. Because of the seasonal nature of our business and other factors, the

8

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

results of operations for the three and nine months ended May 31, 2012 are not necessarily indicative of results to be expected for the entire fiscal year.
Recent Accounting Pronouncements
Issued Accounting Pronouncement
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”), which simplifies how an entity tests goodwill for impairment. The standard permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Accordingly, an entity will no longer be required to calculate the fair value of a reporting unit in the step one test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We early adopted ASU 2011-08 on September 1, 2011 for our fiscal year 2012 goodwill impairment tests. The adoption of ASU 2011-08 did not have a material impact on our financial condition, results of operations, or disclosures.
Future Accounting Pronouncements
The FASB and the International Accounting Standards Board (“IASB”) are working on joint convergence projects to address accounting differences between GAAP and International Financial Reporting Standards (“IFRS”) in order to support their commitment to achieve a single set of high-quality global accounting standards. Some of the most significant projects on the FASB and IASB’s agenda include accounting for leases, revenue recognition and financial instruments, among other items. Both the FASB and IASB have issued final guidance for certain accounting topics and are currently redeliberating guidance in other areas. The converged guidance that the FASB has already issued addressing fair value measurements, financial instrument disclosures and the statement of other comprehensive income is not expected to have a material impact on our financial condition, results of operations, or disclosures. While we anticipate the lease accounting and revenue recognition proposals will have the greatest impact on us if enacted, the FASB’s standard-setting process is ongoing and until new standards have been finalized and issued, we cannot determine the impact on our financial condition, results of operations, or disclosures that may result from any such future changes.
Concurrent with these convergence projects, the Securities and Exchange Commission is considering incorporating IFRS into the U.S. financial reporting system. At this time, the method and timing of potential conversion to IFRS is uncertain and cannot be determined until final conversion requirements are mandated. The potential preparation of our financial statements in accordance with IFRS could have a material impact on our financial condition, results of operations, and disclosures.
Note 3. Changes in Presentation
Restricted Cash and Cash Equivalents
During fiscal year 2011, we changed our presentation of changes in restricted cash and cash equivalents related to financial aid program funds to cash flows from operating activities on our Condensed Consolidated Statements of Cash Flows from Continuing and Discontinued Operations. We previously presented such changes as cash flows from investing activities. Our restricted cash and cash equivalents primarily represents funds held for students for unbilled educational services that were received from U.S. federal financial aid programs established by Title IV of the Higher Education Act and regulations promulgated thereunder (“Title IV”). When we receive such funds, they are recorded as restricted cash on our Condensed Consolidated Balance Sheets with an offsetting liability recorded as student deposits. These restricted funds are a core activity of our operations and, accordingly, we believe presentation of changes in such funds as an operating activity more appropriately reflects the nature of the restricted cash. Additionally, we believe that including both changes in the restricted cash asset and the student deposit liability within operating activities provides better transparency. We have changed our presentation on our Condensed Consolidated Statements of Cash Flows from Continuing and Discontinued Operations for all periods presented. The changes have no impact on our financial position and results of operations.

9

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

The following table presents our cash flows as previously reported and as changed for the nine months ended May 31, 2011:
($ in thousands)
As Reported
 
As Changed
Cash flows provided by operating activities:
 
 
 
Restricted cash and cash equivalents
$

 
$
67,658

Net cash provided by operating activities
$
680,894

 
$
748,552

Cash flows provided by investing activities:
 
 
 
Collateralization of letter of credit(1)
$
194,273

 
$
126,615

Net cash provided by investing activities
$
263,177

 
$
195,519

(1) Following the change in presentation discussed above, the remaining change in restricted cash and cash equivalents for the nine months ended May 31, 2011 represents funds used to collateralize a letter of credit. We have continued to present this change as an investing activity based on the nature of the restricted cash; however, we have renamed the remaining change, “Collateralization of letter of credit.”
Other
During the third quarter of fiscal year 2012, we combined our presentation of accrued liabilities and other current liabilities on our Condensed Consolidated Balance Sheets and our Condensed Consolidated Statements of Cash Flows from Continuing and Discontinued Operations based on the similar nature of the liabilities. Refer to Note 9, Accrued and Other Liabilities, for a detail of these liabilities. Additionally, we began presenting our restructuring activities as a component of the change in accrued and other liabilities rather than as a separate line item on our Condensed Consolidated Statements of Cash Flows from Continuing and Discontinued Operations. Refer to Note 4, Restructuring and Other Charges, for discussion of our restructuring activities. We have changed our presentation for all periods presented. These changes had no impact on our financial position or results of operations.
Note 4. Restructuring and Other Charges
We have initiated a series of activities to reengineer business processes and refine our educational delivery structure. These activities are designed to increase operating efficiencies and effectiveness, and enhance our students’ educational experience and outcomes. We are focused on aligning our operations with our business strategy, which includes optimizing our cost structure. The following table details the charges incurred for the three and nine months ended May 31, 2012 and 2011, and the cumulative costs associated with these activities, which have all been included in restructuring and other charges on our Condensed Consolidated Statements of Income:
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Cumulative Costs for Restructuring Activities
($ in thousands)
2012
 
2011
 
2012
 
2011
 
Non-cancelable lease obligations and related costs, net(1)
$
535

 
$

 
$
22,245

 
$

 
$
41,312

Employee severance and other benefits
2,681

 

 
2,681

 
3,846

 
6,527

Other restructuring related costs
4,361

 

 
4,361

 

 
4,361

Restructuring and other charges
$
7,577

 
$

 
$
29,287

 
$
3,846

 
$
52,200

(1) Non-cancelable lease obligations and related costs, net includes charges associated with the fair value of our future contractual lease obligations and interest accretion on our lease obligation liabilities, and is partially offset by the release of certain liabilities related to the leases such as deferred rent.






10

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

The following table summarizes the above restructuring and other charges in our segment reporting format:
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Cumulative Costs for Restructuring Activities
($ in thousands)
2012
 
2011
 
2012
 
2011
 
University of Phoenix
$
535

 
$

 
$
22,245

 
$
3,846

 
$
45,158

Apollo Global — Other
2,681

 

 
2,681

 

 
2,681

Corporate
4,361

 

 
4,361

 

 
4,361

Restructuring and other charges
$
7,577

 
$

 
$
29,287

 
$
3,846

 
$
52,200

The following table details the changes in our restructuring liability by type of cost during the nine months ended May 31, 2012:
($ in thousands)
Non-Cancelable Lease Obligations and Related Costs, Net
 
Employee Severance and Other Benefits
 
Other Restructuring Related Costs
 
Total
Balance at August 31, 2011(1)
$
17,802

 
$

 
$

 
$
17,802

Expense incurred
22,692

 
2,681

 
4,361

 
29,734

Interest accretion
1,368

 

 

 
1,368

Payments
(6,391
)
 
(2,681
)
 
(654
)
 
(9,726
)
Balance at May 31, 2012(1)
$
35,471

 
$

 
$
3,707

 
$
39,178

(1) The current portion of our restructuring liability was $16.2 million and $3.2 million as of May 31, 2012 and August 31, 2011, respectively.
During fiscal year 2011, we initiated a plan to rationalize our real estate portfolio in Phoenix, Arizona through space consolidation and reorganization. The plan consisted of abandoning all, or a portion of, four leased facilities, all of which we are no longer using and have determined we will no longer derive a future economic benefit. The leases on these facilities were classified as operating leases and we recorded $38.7 million of aggregate charges on the respective cease-use dates representing the fair value of our future contractual lease obligations. We measured the lease obligations at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The estimation of future cash flows includes non-cancelable contractual lease costs over the remaining terms of the leases, partially offset by estimated future sublease rental income, which involves significant judgment. Our estimate of the amount and timing of sublease rental income considered subleases that we have executed and subleases we expect to execute, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the facilities. The estimates will be subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements. Excluding adjustments resulting from changes in estimates and interest accretion charges, we do not expect to incur additional charges associated with the abandoned facilities.
During the third quarter of fiscal year 2012, we implemented a reduction in force at UNIACC to better align its operations with its refined business model and outlook following its loss of institutional accreditation. Refer to Note 7, Goodwill and Intangible Assets, for a discussion of this change in accreditation. In connection with this reduction in force, we incurred $2.7 million of employee severance and other benefit costs principally representing non-direct student servicing personnel. We do not expect to incur additional charges associated with this restructuring activity.
We also incurred $4.4 million of costs during the third quarter of fiscal year 2012 principally attributable to services received from third party consulting firms associated with our initiatives to evaluate and identify operating efficiency and effectiveness opportunities. As these services pertain to all areas of our business, we have not allocated these costs to our reportable segments and they are included in our Corporate caption.
Although we expect to implement additional restructuring activities as we reengineer business processes as discussed above, we have not yet finalized our initiatives or committed to any further specific restructuring activities. Accordingly, while future charges and associated savings related to these activities could be substantial, the nature, timing and amount cannot be estimated at this time.

11

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

Note 5. Acquisitions
On September 12, 2011, we acquired all of the outstanding stock of Carnegie Learning, a publisher of research-based math curricula and adaptive learning software for a cash purchase price of $75.0 million. In a separate transaction completed on September 12, 2011, we acquired related technology from Carnegie Mellon University for $21.5 million payable over a 10-year period. We incurred transaction costs of $1.7 million in connection with these acquisitions with the majority included in general and administrative expense in our fiscal year 2011 operating results. The acquisitions allow us to accelerate our efforts to incorporate adaptive learning into our academic platform and to provide tools to help raise student achievement in mathematics, which is expected to support improved retention and graduation rates at University of Phoenix. Given our postsecondary focus, we are currently evaluating strategic alternatives for a potential sale of the K-12 portion of the business in order to support Carnegie Learning’s continued success in this market, but have not yet committed to any specific plan of disposition.
We accounted for the Carnegie Learning acquisition as a business combination. Accordingly, we determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the respective assets and liabilities. We used the following assumptions, the majority of which include significant unobservable inputs, and valuation methodologies to determine fair value of the acquired assets and assumed liabilities:
Software technology and customer relationship intangible assets were valued using the cost savings approach utilizing current discount rates, cost estimates and assumptions;
The Carnegie Learning trademark was valued using the relief-from-royalty method, which represents the benefit of owning this intangible asset rather than paying royalties for its use;
Deferred revenue was valued using the cost plus mark-up approach, which estimates the fair value of our estimated cost to fulfill the obligation; and
The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
We recorded $34.8 million of goodwill as a result of the Carnegie Learning acquisition, which is not deductible for tax purposes. Carnegie Learning is included in our University of Phoenix operating segment and the goodwill is primarily attributable to expected strategic synergies. These synergies include cost savings and benefits attributable to improved student retention and graduation rates at University of Phoenix and the assembled workforce.
The following table presents a summary of the Carnegie Learning acquisition purchase price allocation:
($ in thousands)
 
Net working capital deficit
$
(336
)
Property and equipment
870

Intangible assets
 
    Finite-lived — Software technology
28,000

    Indefinite-lived — Trademark
14,100

    Finite-lived — Customer relationships
9,000

Goodwill
34,794

Deferred taxes, net
(11,428
)
Allocated purchase price
75,000

Less: Cash acquired
(1,264
)
Acquisition, net of cash acquired
$
73,736

We are amortizing the finite-lived software technology on a straight-line basis over a five year useful life, and the customer relationships asset on an accelerated basis over a four year useful life. The amortization of the respective finite-lived intangible assets reflects the pattern in which we expect the economic benefits of the assets to be consumed. We assigned an indefinite life to the acquired trademark as we believe the intangible asset has the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic, or other factors to limit the trademark’s useful life.

12

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

As noted above, we also acquired related technology from Carnegie Mellon University for $21.5 million, payable over a 10-year period. We accounted for this transaction as an asset purchase. Accordingly, we recorded an asset and corresponding liability totaling $14.4 million representing the present value of the future cash payments on the acquisition date using our incremental borrowing rate. The asset is included in intangible assets, net on our Condensed Consolidated Balance Sheets and is being amortized on a straight-line basis over a five year useful life. The liability is included in debt on our Condensed Consolidated Balance Sheets and is being accreted over the 10-year period, with the accretion expense recorded in interest expense on our Condensed Consolidated Statements of Income.
Carnegie Learning’s operating results are included in our condensed consolidated financial statements from the date of acquisition. We have not provided pro forma information because Carnegie Learning’s results of operations are not significant to our consolidated results of operations.
Note 6. Accounts Receivable, Net
Accounts receivable, net consists of the following as of May 31, 2012 and August 31, 2011:
($ in thousands)
May 31, 2012
 
August 31, 2011
Student accounts receivable
$
282,642

 
$
324,324

Less allowance for doubtful accounts
(110,202
)
 
(128,897
)
Net student accounts receivable
172,440

 
195,427

Other receivables
19,225

 
20,140

Total accounts receivable, net
$
191,665

 
$
215,567

Student accounts receivable primarily represents amounts due related to tuition and educational services. The following table summarizes the activity in allowance for doubtful accounts for the three and nine months ended May 31, 2012 and 2011:
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
($ in thousands)
2012
 
2011
 
2012
 
2011
Beginning allowance for doubtful accounts
$
118,946

 
$
159,882

 
$
128,897

 
$
192,857

Provision for uncollectible accounts receivable
35,430

 
39,217

 
108,009

 
141,666

Write-offs, net of recoveries
(44,174
)
 
(53,172
)
 
(126,704
)
 
(188,596
)
Ending allowance for doubtful accounts
$
110,202

 
$
145,927

 
$
110,202

 
$
145,927

Note 7. Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value assigned to the assets acquired and liabilities assumed. Changes in the carrying amount of goodwill from August 31, 2011 to May 31, 2012 are as follows:
 
 
 
Apollo Global
 
 
 
 
($ in thousands)
University of Phoenix
 
BPP
 
Other
 
Other Schools
 
Total Goodwill
Goodwill as of August 31, 2011
$
37,018

 
$
50,694

 
$
30,275

 
$
15,310

 
$
133,297

Goodwill acquired(1)
34,794

 

 

 

 
34,794

Impairment(2)

 

 
(11,912
)
 

 
(11,912
)
Currency translation adjustment

 
(5,085
)
 
(2,876
)
 

 
(7,961
)
Goodwill as of May 31, 2012
$
71,812

 
$
45,609

 
$
15,487

 
$
15,310

 
$
148,218

(1) Goodwill acquired resulted from our acquisition of Carnegie Learning during the first quarter of fiscal year 2012. Refer to Note 5, Acquisitions.
(2) We recorded an impairment charge of $11.9 million of UNIACC’s goodwill during the first quarter of fiscal year 2012. See below for further discussion.


13

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

Intangible assets, net consist of the following as of May 31, 2012 and August 31, 2011:
 
May 31, 2012
 
August 31, 2011
($ in thousands)
Gross
Carrying Amount
 
Accumulated Amortization
 
Effect of Foreign
Currency Translation Loss
 
Net
Carrying Amount
 
Gross
Carrying Amount
 
Accumulated Amortization
 
Effect of Foreign
Currency Translation Loss
 
Net
Carrying Amount
Finite-lived intangible assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Software and technology(1)
$
42,389

 
$
(6,076
)
 
$

 
$
36,313

 
$
3,600

 
$
(3,450
)
 
$

 
$
150

Student and customer relationships(1)
14,109

 
(5,593
)
 
(1,406
)
 
7,110

 
9,477

 
(6,538
)
 
(1,284
)
 
1,655

Copyrights
20,891

 
(15,262
)
 
(786
)
 
4,843

 
20,891

 
(11,521
)
 
(422
)
 
8,948

Other(2)
12,878

 
(10,024
)
 
(1,224
)
 
1,630

 
15,102

 
(9,049
)
 
(1,166
)
 
4,887

Total finite-lived intangible assets
90,267

 
(36,955
)
 
(3,416
)
 
49,896

 
49,070

 
(30,558
)
 
(2,872
)
 
15,640

Indefinite-lived intangible assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Trademarks(1), (2)
108,961

 

 
(5,083
)
 
103,878

 
98,849

 

 
(737
)
 
98,112

Accreditations and designations(2)
7,260

 

 
(472
)
 
6,788

 
7,456

 

 
(91
)
 
7,365

Total indefinite-lived intangible assets
116,221

 

 
(5,555
)
 
110,666

 
106,305

 

 
(828
)
 
105,477

Total intangible assets, net
$
206,488

 
$
(36,955
)
 
$
(8,971
)
 
$
160,562

 
$
155,375

 
$
(30,558
)
 
$
(3,700
)
 
$
121,117

(1) We acquired certain intangible assets during the first quarter of fiscal year 2012 as a result of our acquisition of Carnegie Learning. Refer to Note 5, Acquisitions.
(2) We recorded an impairment charge of $4.9 million of UNIACC’s intangible assets during the first quarter of fiscal year 2012. See below for further discussion.
On September 1, 2011, we early adopted the principles of ASU 2011-08 which simplifies how an entity tests goodwill for impairment by providing an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Our qualitative analysis may consider many factors, including general economic conditions, industry and market conditions, financial performance and key business drivers of the reporting unit, and potential changes to significant assumptions used in the most recent fair value analysis. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount based on our qualitative assessment, or that a qualitative assessment should not be performed for a reporting unit, we proceed with performing the two-step quantitative goodwill impairment test. For further discussion of our two step impairment test process, including valuation methods we employ and critical assumptions and estimates used in determining the fair value of a reporting unit, refer to our 2011 Annual Report on Form 10-K.
At May 31, 2012, we completed our annual goodwill impairment analysis for the following reporting units:
University of Phoenix,
ULA, and
Western International University.
For University of Phoenix and Western International University, we performed qualitative assessments that included consideration of the factors discussed above and the fact that the fair value of these reporting units exceeded their respective carrying values in their most recent annual tests by a substantial margin of at least 50%. Based on our assessments, we concluded that it was more likely than not that the fair value of each reporting unit was greater than its carrying value.
For our ULA reporting unit, we performed the step one quantitative goodwill impairment test and determined the fair value exceeded the carrying value of its net assets and its goodwill was not impaired. The excess as a percentage of fair value was approximately 25%. We determined fair value using the discounted cash flow valuation method which utilized key assumptions that were substantially consistent with our prior annual impairment test.
As of May 31, 2012, we also tested indefinite-lived intangibles consisting primarily of trademarks and accreditations totaling $17.3 million, which includes $14.1 million related to the Carnegie Learning trademark. We performed a fair value analysis of these indefinite-lived intangibles and determined there was no impairment.


14

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

UNIACC Reporting Unit
In November 2011, UNIACC was advised by the National Accreditation Commission of Chile that its institutional accreditation would not be renewed and therefore had lapsed. UNIACC has appealed the decision. The loss of accreditation from the National Accreditation Commission does not impact UNIACC’s ability to operate or confer degrees and does not directly affect UNIACC’s programmatic accreditations. However, this institutional accreditation is necessary for new UNIACC students to participate in government loan programs and for existing students to begin to participate in such programs for the first time. The loss of accreditation has reduced new enrollment in UNIACC’s degree programs due to the unavailability of the government loan programs. Based on these factors and related uncertainty, we revised our cash flow estimates and performed an interim goodwill impairment analysis for UNIACC in the first quarter of fiscal year 2012.
To determine the fair value of the UNIACC reporting unit in our interim step one analysis, we used a discounted cash flow valuation method using assumptions that we believe would be a reasonable market participant’s view of the impact of the loss of accreditation status and the increased uncertainty impacting UNIACC. We used significant unobservable inputs (Level 3) in our discounted cash flow valuation.
Our interim step one goodwill impairment analysis resulted in a lower estimated fair value for the UNIACC reporting unit as compared to its carrying value. Based on the estimated fair value of the UNIACC reporting unit and a hypothetical purchase price allocation, we determined the UNIACC reporting unit would have no implied goodwill. Additionally, our interim impairment tests for the trademark and accreditation intangibles utilized the same significant unobservable inputs (Level 3) and assumptions used in UNIACC’s interim goodwill analysis and resulted in minimal or no fair value. Accordingly, we determined UNIACC’s entire goodwill balance and the trademark and accreditation indefinite-lived intangibles totaling $11.9 million and $3.9 million, respectively, were impaired.
We also evaluated UNIACC’s remaining long-lived assets, including property and equipment and finite-lived intangibles, for recoverability and determined certain finite-lived intangibles were impaired totaling $1.0 million. In the first quarter of fiscal year 2012, UNIACC’s goodwill and other intangibles impairment charges in the aggregate were $16.8 million, with no income tax benefit as UNIACC’s goodwill and other intangibles are not deductible for tax purposes.
Note 8. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis consist of the following as of May 31, 2012:
 
 
 
Fair Value Measurements at Reporting Date Using
($ in thousands)
May 31, 2012
 
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Assets:
 

 
 

 
 

 
 

Cash equivalents (including restricted cash equivalents):
 

 
 

 
 

 
 

Money market funds
$
645,812

 
$
645,812

 
$

 
$

Marketable securities:
 

 
 

 
 

 
 

Auction-rate securities
5,946

 

 

 
5,946

Total assets at fair value on a recurring basis
$
651,758

 
$
645,812

 
$

 
$
5,946

Liabilities:
 

 
 

 
 

 
 

Other liabilities:
 

 
 

 
 

 
 

Interest rate swap
$
1,829

 
$

 
$
1,829

 
$

Total liabilities at fair value on a recurring basis
$
1,829

 
$

 
$
1,829

 
$


15

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

Assets and liabilities measured at fair value on a recurring basis consist of the following as of August 31, 2011:
 
 
 
Fair Value Measurements at Reporting Date Using
($ in thousands)
August 31, 2011
 
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Assets:
 

 
 

 
 

 
 

Cash equivalents (including restricted cash equivalents):
 

 
 

 
 

 
 

Money market funds
$
1,854,927

 
$
1,854,927

 
$

 
$

Marketable securities:
 

 
 

 
 

 
 

Auction-rate securities
5,946

 

 

 
5,946

Total assets at fair value on a recurring basis
$
1,860,873

 
$
1,854,927

 
$

 
$
5,946

Liabilities:
 

 
 

 
 

 
 

Other liabilities:
 

 
 

 
 

 
 

Interest rate swap
$
3,363

 
$

 
$
3,363

 
$

Total liabilities at fair value on a recurring basis
$
3,363

 
$

 
$
3,363

 
$

We measure the above items on a recurring basis at fair value as follows:
Money market funds — Classified within Level 1 and were valued primarily using real-time quotes for transactions in active exchange markets involving identical assets. As of May 31, 2012 and August 31, 2011, our remaining cash and cash equivalents not disclosed in the above tables approximate fair value because of the short-term nature of the financial instruments.
Auction-rate securities — Classified within Level 3 due to the illiquidity of the market and were valued using a discounted cash flow model encompassing significant unobservable inputs such as estimated interest rates, credit spreads, timing and amount of cash flows, credit quality of the underlying securities and illiquidity considerations.
Interest rate swap — We have an interest rate swap with a notional amount of $36.0 million as of May 31, 2012 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 May 31, 2012, the carrying value of our debt, excluding capital leases, was $70.1 million. The majority of our debt is variable interest rate debt and the carrying amount approximates fair value.
We did not change our valuation techniques associated with recurring fair value measurements from prior periods. Additionally, there were no changes in the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)  during the nine months ended May 31, 2012.
Liabilities measured at fair value on a nonrecurring basis during the first nine months of fiscal year 2012 consist of the following:
 
 
 
Fair Value Measurements at Measurement Date Using
 
 
($ in thousands)
Fair Value at
Measurement Dates
 
Quoted Prices in
Active Markets for
Identical Liabilities (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Losses for Nine Months Ended May 31, 2012
Liabilities:
 

 
 

 
 

 
 

 
 

Other liabilities:
 

 
 

 
 

 
 

 
 

Restructuring obligations
$
22,692

 
$

 
$

 
$
22,692

 
$
(22,692
)
Total liabilities at fair value on a nonrecurring basis
$
22,692

 
$

 
$

 
$
22,692

 
$
(22,692
)

16

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

During the first nine months of fiscal year 2012, we recorded aggregate initial restructuring obligations at fair value of $22.7 million associated with abandoning certain leased facilities as part of a real estate rationalization plan. We recorded the restructuring obligation liabilities on the dates we ceased use of the respective facilities, and we measured the liabilities at fair value using Level 3 inputs included in the valuation method. Refer to Note 4, Restructuring and Other Charges.
Note 9. Accrued and Other Liabilities
Accrued and other current liabilities consist of the following as of May 31, 2012 and August 31, 2011:
($ in thousands)
May 31, 2012
 
August 31, 2011
Salaries, wages and benefits
$
105,616

 
$
93,763

Accrued legal and other professional obligations(1)
61,544

 
197,957

Accrued advertising
41,534

 
50,172

Deferred rent and other lease liabilities
19,839

 
18,869

Curriculum materials
13,686

 
16,198

Unsettled share repurchases
10,244

 

Student refunds, grants and scholarships
6,530

 
17,360

Other
52,226

 
54,618

Total accrued and other current liabilities
$
311,219

 
$
448,937

(1) Accrued legal and other professional obligations as of August 31, 2011 includes $145.0 million associated with our agreement in principle to settle the Securities Class Action (Policeman’s Annuity and Benefit Fund of Chicago) litigation. Refer to Note 15, Commitments and Contingencies.
Other long-term liabilities consist of the following as of May 31, 2012 and August 31, 2011:
($ in thousands)
May 31, 2012
 
August 31, 2011
Deferred rent and other lease liabilities
$
88,556

 
$
74,136

Uncertain tax positions
29,249

 
22,277

Deferred gains on sale-leasebacks
26,392

 
28,490

Restructuring obligations
22,982

 
14,604

Other
36,458

 
24,832

Total other long-term liabilities
$
203,637

 
$
164,339


17

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

Note 10. Debt
Debt and short-term borrowings consist of the following as of May 31, 2012 and August 31, 2011:
($ in thousands)
May 31, 2012
 
August 31, 2011
Revolving Credit Facility, see terms below
$

 
$
493,322

BPP Credit Facility, see terms below
38,439

 
47,603

Capital lease obligations
55,852

 
36,512

Other, see terms below
31,703

 
21,572

Total debt
125,994

 
599,009

Less short-term borrowings and current portion of long-term debt
(35,827
)
 
(419,318
)
Long-term debt
$
90,167

 
$
179,691

Revolving Credit Facility — During the third quarter of fiscal year 2012, we entered into a syndicated $625 million unsecured revolving credit facility (the “Revolving Credit Facility”), which replaced our previous revolving credit facility. The Revolving Credit Facility is used for general corporate purposes including acquisitions and share repurchases. The term is five years and will expire in April 2017. The Revolving Credit Facility provides a multi-currency sub-limit facility for borrowings in certain specified foreign currencies.
We borrowed substantially all of our credit line under our previous revolving credit facility as of August 31, 2011, which included £63.0 million denominated in British Pounds (equivalent to $103.2 million as of August 31, 2011). The weighted average interest rate on these borrowings at August 31, 2011 was 2.8%, and we repaid the entire amount during the first quarter of fiscal year 2012.
The Revolving Credit Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Revolving Credit Facility fee ranges from 25 to 40 basis points. Incremental fees for borrowings under the facility generally range from LIBOR + 125 to 185 basis points.
The Revolving Credit Facility contains various customary representations, covenants and other provisions, 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. We were in compliance with all applicable covenants related to the Revolving Credit Facility at May 31, 2012.
BPP Credit Facility — In fiscal year 2010, we refinanced BPP’s debt by entering into a £52.0 million (equivalent to $81.5 million as of May 31, 2012) secured credit agreement (the “BPP Credit Facility”). During the second quarter of fiscal year 2012, we amended the BPP Credit Facility reducing the amount available under the facility to £39.0 million (equivalent to $61.1 million as of May 31, 2012). The BPP Credit Facility contains term debt, which was used to refinance BPP’s debt in fiscal year 2010, and revolving credit facilities used for working capital and general corporate purposes. The BPP credit facility will expire on August 31, 2013.
The amended BPP Credit Facility contains financial covenants that include a minimum fixed charge coverage ratio and a maximum leverage ratio, which we were in compliance with as of May 31, 2012. The interest rate on borrowings is LIBOR + 175 basis points. The weighted average interest rate on BPP’s outstanding borrowings at May 31, 2012 and August 31, 2011 was 2.7% and 4.0%, respectively.
Other Debt As of May 31, 2012, other debt includes the present value of our obligation to Carnegie Mellon University, which is discussed further at Note 5, Acquisitions. Other debt also includes $8.1 million of variable rate debt and $9.6 million of fixed rate debt as of May 31, 2012, and $9.1 million of variable rate debt and $12.5 million of fixed rate debt as of August 31, 2011. Excluding our obligation to Carnegie Mellon University, the weighted average interest rate on our other debt at May 31, 2012 and August 31, 2011 was 5.2% and 6.1%. respectively.
Refer to Note 8, Fair Value Measurements, for discussion of the fair value of our debt.

18

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

Note 11. Income Taxes
We determine our interim income tax provision by estimating our effective income tax rate expected to be applicable for the full fiscal year. Our effective income tax rate is dependent upon several factors, such as tax rates in state and foreign jurisdictions and the relative amount of income we earn in such jurisdictions. In determining our full year estimate, we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before 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.
The decrease in the current portion of our net deferred tax assets as of May 31, 2012 compared to August 31, 2011 was principally attributable to the reversal of a deferred tax asset related to our $145.0 million settlement payment associated with the Securities Class Action (Policeman’s Annuity and Benefit Fund of Chicago) matter, which became deductible in the third quarter of fiscal year 2012. Refer to Note 15, Commitments and Contingencies.
We are subject to numerous ongoing audits by federal, 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 nine months ended May 31, 2012 and May 31, 2011:
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Additional Paid-in Capital
 
Treasury Stock Class A
 
 
 
Accumulated Other Comprehensive Loss
 
Total Apollo Shareholders’ Equity
 
Non-controlling (Deficit) Interests
 
 
 
Stated Value
 
Stated Value
 
 
 
Retained Earnings
 
 
 
 
Total Equity
($ in thousands)
 
 
 
Cost
 
 
 
 
 
Balance as of August 31, 2011
$
103

 
$
1

 
$
68,724

 
$
(3,125,175
)
 
$
4,320,472

 
$
(23,761
)
 
$
1,240,364

 
$
3,625

 
$
1,243,989

Treasury stock purchases

 

 

 
(742,016
)
 

 

 
(742,016
)
 

 
(742,016
)
Treasury stock issued under stock purchase plans

 

 
(1,037
)
 
4,926

 

 

 
3,889

 

 
3,889

Treasury stock issued under stock incentive plans

 

 
(19,660
)
 
26,292

 

 

 
6,632

 

 
6,632

Net tax effect for stock incentive plans

 

 
(3,937
)
 

 

 

 
(3,937
)
 

 
(3,937
)
Share-based compensation

 

 
59,438

 

 

 

 
59,438

 

 
59,438

Currency translation adjustment, net of tax

 

 

 

 

 
(7,912
)
 
(7,912
)
 
(1,490
)
 
(9,402
)
Net income (loss)

 

 

 

 
347,230

 

 
347,230

 
(4,393
)
 
342,837

Balance as of May 31, 2012
$
103

 
$
1

 
$
103,528

 
$
(3,835,973
)
 
$
4,667,702

 
$
(31,673
)
 
$
903,688

 
$
(2,258
)
 
$
901,430

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Additional Paid-in Capital
 
Treasury Stock Class A
 
 
 
Accumulated Other Comprehensive Loss
 
Total Apollo Shareholders’ Equity
 
Non-controlling (Deficit) Interests
 
 
 
Stated Value
 
Stated Value
 
 
 
Retained Earnings
 
 
 
 
Total Equity
($ in thousands)
 
 
 
Cost
 
 
 
 
 
Balance as of August 31, 2010
$
103

 
$
1

 
$
46,865

 
$
(2,407,788
)
 
$
3,748,045

 
$
(31,176
)
 
$
1,356,050

 
$
32,690

 
$
1,388,740

Treasury stock purchases

 

 

 
(420,022
)
 

 

 
(420,022
)
 

 
(420,022
)
Treasury stock issued under stock purchase plans

 

 
(1,748
)
 
6,172

 

 

 
4,424

 

 
4,424

Treasury stock issued under stock incentive plans

 

 
(10,110
)
 
15,927

 

 

 
5,817

 

 
5,817

Net tax effect for stock incentive plans

 

 
(2,888
)
 

 

 

 
(2,888
)
 

 
(2,888
)
Share-based compensation

 

 
50,453

 

 

 

 
50,453

 

 
50,453

Currency translation adjustment, net of tax

 

 

 

 

 
6,773

 
6,773

 
863

 
7,636

Change in fair value of auction-rate securities, net of tax

 

 

 

 

 
463

 
463

 

 
463

Noncontrolling interest contributions(1)

 

 

 

 

 

 

 
6,875

 
6,875

Net income (loss)

 

 

 

 
383,815

 

 
383,815

 
(31,955
)
 
351,860

Balance as of May 31, 2011
$
103

 
$
1

 
$
82,572

 
$
(2,805,711
)
 
$
4,131,860

 
$
(23,940
)
 
$
1,384,885

 
$
8,473

 
$
1,393,358

(1) There was no change in our 85.6% ownership interest in Apollo Global during the nine months ended May 31, 2011.
Share Reissuances
During the three months ended May 31, 2012 and 2011, we issued approximately 0.1 million and 0.2 million shares, respectively, and during the nine months ended May 31, 2012 and 2011, we issued approximately 0.6 million and 0.4 million shares, respectively, of our Apollo Group Class A common stock from our treasury stock. These reissuances are a result of stock option exercises, release of shares covered by vested restricted stock units, and purchases under our employee stock purchase plan.

19

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(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. During the third quarter of fiscal year 2012, our Board of Directors authorized an increase in the amount available under our share repurchase program up to an aggregate amount of $300 million. There is no expiration date on the repurchase authorizations and repurchases occur at our discretion.
We repurchased approximately 9.0 million and 4.1 million shares of our Apollo Group Class A common stock at a total cost of $329.0 million and $167.3 million during the three months ended May 31, 2012 and 2011, respectively. This represented weighted average purchase prices of $36.41 and $40.26 per share during the respective periods. During the nine months ended May 31, 2012 and 2011, we repurchased approximately 17.1 million and 10.6 million shares of our Apollo Group Class A common stock at a total cost of approximately $736.0 million and $418.7 million, respectively. This represented weighted average purchase prices of $43.02 and $39.48 per share during the respective periods. At May 31, 2012, $10.2 million was recorded in accrued and other current liabilities on our Condensed Consolidated Balance Sheets for repurchased shares that settled subsequent to May 31, 2012.
As of May 31, 2012, approximately $63.5 million remained available under our share repurchase authorization. The amount and timing of future share repurchase authorizations and repurchases, if any, will be made as market and business conditions warrant. Repurchases may be made on the open market through various methods including but not limited to accelerated share repurchase programs, 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 21,000 and 18,000 shares of Class A common stock for $0.8 million and $0.8 million during the three months ended May 31, 2012 and 2011, respectively. During the nine months ended May 31, 2012 and 2011, we repurchased approximately 126,000 and 32,000 shares of Class A common stock for $6.0 million and $1.3 million, respectively. These repurchases relate to tax withholding requirements on the restricted stock units and do not fall under the repurchase program described above.
Note 13. Earnings Per Share
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 and performance share awards. The components of basic and diluted earnings per share are as follows:
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(In thousands, except per share data)
2012
 
2011
 
2012
 
2011
Net income attributable to Apollo (basic and diluted)
$
134,034

 
$
212,440

 
$
347,230

 
$
383,815

Basic weighted average shares outstanding
118,134

 
139,856

 
124,560

 
142,845

Dilutive effect of stock options
1

 
70

 
25

 
91

Dilutive effect of restricted stock units and performance share awards
658

 
417

 
750

 
286

Diluted weighted average shares outstanding
118,793

 
140,343

 
125,335

 
143,222

Earnings per share:
 

 
 

 
 
 
 
Basic income per share attributable to Apollo
$
1.13

 
$
1.52

 
$
2.79

 
$
2.69

Diluted income per share attributable to Apollo
$
1.13

 
$
1.51

 
$
2.77

 
$
2.68

During the three months ended May 31, 2012 and 2011, approximately 8.6 million and 9.5 million, respectively, of our stock options outstanding and approximately 317,000 and 27,000, respectively, of our restricted stock units and performance share awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. These options, restricted stock units and performance share awards could be dilutive in the future.

20

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

During the nine months ended May 31, 2012 and 2011, approximately 8.7 million and 9.5 million, respectively, of our stock options outstanding and approximately 10,000 and 279,000, respectively, of our restricted stock units and performance share awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. These options, restricted stock units and performance share awards could be dilutive in the future.
Note 14. Share-Based Compensation
The table below details share-based compensation expense for the three and nine months ended May 31, 2012 and 2011:
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
($ in thousands)
2012
 
2011
 
2012
 
2011
Instructional and student advisory
$
6,518

 
$
7,598

 
$
20,641

 
$
19,319

Marketing
1,533

 
1,347

 
5,473

 
4,056

Admissions advisory
405

 
585

 
1,277

 
1,742

General and administrative
10,490

 
10,433

 
32,047

 
25,336

Share-based compensation expense
$
18,946

 
$
19,963

 
$
59,438

 
$
50,453

In accordance with our Apollo Group, Inc. Amended and Restated 2000 Stock Incentive Plan, we granted approximately 3,000 and 12,000 stock options during the three and nine months ended May 31, 2012, respectively. The weighted average grant date fair value was $14.20 and $16.64 for the three and nine months ended May 31, 2012, respectively, and the weighted average exercise price of these options was $42.41 and $45.74 for the three and nine months ended May 31, 2012, respectively. As of May 31, 2012, there was approximately $17.9 million of total unrecognized share-based compensation cost, net of forfeitures, related to unvested stock options and stock appreciation rights. These costs are expected to be recognized over a weighted average period of 1.45 years.
In accordance with our Apollo Group, Inc. Amended and Restated 2000 Stock Incentive Plan, we granted approximately 161,000 and 247,000 restricted stock units and performance share awards during the three and nine months ended May 31, 2012, respectively, that had a weighted average grant date fair value of $38.71 and $40.86, respectively. As of May 31, 2012, there was approximately $80.0 million of total unrecognized share-based compensation expense, net of forfeitures, related to unvested restricted stock units and performance share awards. These costs are expected to be recognized over a weighted average period of 1.87 years.
During the third quarter of fiscal year 2012, we increased the number of Class A shares reserved for issuance under our Amended and Restated 2000 Stock Incentive Plan by 3.5 million shares.
Note 15. Commitments and Contingencies
Contingencies Related to Litigation and Other Proceedings
The following is a description of pending litigation, settlements, and other proceedings that fall outside the scope of ordinary and routine litigation incidental to our business.
Securities Class Action (Policeman’s Annuity and Benefit Fund of Chicago)
In January 2008, a jury returned an adverse verdict against us and two remaining individual co-defendants in a securities class action lawsuit entitled, In re Apollo Group, Inc. Securities Litigation, Case No. CV04-2147-PHX-JAT, filed in the U.S. District Court for the District of Arizona, relating to alleged false and misleading statements in connection with our failure to publicly disclose the contents of a preliminary U.S. Department of Education program review report. After various post-trial challenges, the case was returned to the trial court in March 2011 to administer the shareholder claims process. In September 2011, we entered into an agreement in principle with the plaintiffs to settle the litigation for $145.0 million, which was preliminarily approved by the Court on November 28, 2011. On April 20, 2012, the Court approved the settlement agreement and entered an order of final judgment and dismissal. In connection with approval of the settlement agreement and the dismissal of the lawsuit, the Court also vacated the related judgment against us and the individual defendants.
Under the settlement agreement and during the third quarter of fiscal year 2012, the $145.0 million we had previously deposited into a common fund account in December 2011 was paid to the plaintiffs. As of February 29, 2012, the settlement amount was included in accrued and other current liabilities and the corresponding deposit was presented as restricted funds held for legal

21

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

matter on our Condensed Consolidated Balance Sheets.
As of May 31, 2012, we have accrued an estimate of a portion of the $23.2 million of defense costs that were advanced to us and other defendants in this shareholder litigation, and estimated future legal costs that may be incurred in resolving the dispute with our insurers regarding whether we are required to reimburse these funds. Because of the many questions of fact and law that may arise, the outcome of the dispute with our insurance carriers is uncertain at this point. However, we do not believe the potential exposure in excess of our accrual is material.
Securities Class Action (Apollo Institutional Investors Group)
On August 13, 2010, a securities class action complaint was filed in the U.S. District Court for the District of Arizona by Douglas N. Gaer naming us, John G. Sperling, Gregory W. Cappelli, Charles B. Edelstein, Joseph L. D’Amico, Brian L. Swartz and Gregory J. Iverson as defendants for allegedly making false and misleading statements regarding our business practices and prospects for growth. That complaint asserted a putative class period stemming from December 7, 2009 to August 3, 2010. A substantially similar complaint was also filed in the same Court by John T. Fitch on September 23, 2010 making similar allegations against the same defendants for the same purported class period. Finally, on October 4, 2010, another purported securities class action complaint was filed in the same Court by Robert Roth against the same defendants as well as Brian Mueller, Terri C. Bishop and Peter V. Sperling based upon the same general set of allegations, but with a defined class period of February 12, 2007 to August 3, 2010. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On October 15, 2010, three additional parties filed motions to consolidate the related actions and be appointed the lead plaintiff.
On November 23, 2010, the Fitch and Roth actions were consolidated with Gaer and the Court appointed the “Apollo Institutional Investors Group” consisting of the Oregon Public Employees Retirement Fund, the Mineworkers’ Pension Scheme, and Amalgamated Bank as lead plaintiffs. The case is now entitled, In re Apollo Group, Inc. Securities Litigation, Lead Case Number CV-10-1735-PHX-JAT. On February 18, 2011, the lead plaintiffs filed a consolidated complaint naming Apollo, John G. Sperling, Peter V. Sperling, Joseph L. D’Amico, Gregory W. Cappelli, Charles B. Edelstein, Brian L. Swartz, Brian E. Mueller, Gregory J. Iverson, and William J. Pepicello as defendants. The consolidated complaint asserts a putative class period of May 21, 2007 to October 13, 2010. On April 19, 2011, we filed a motion to dismiss and oral argument on the motion was held before the Court on October 17, 2011. On October 27, 2011, the Court granted our motion to dismiss and granted plaintiffs leave to amend. On December 6, 2011, the lead plaintiffs filed an Amended Consolidated Class Action Complaint, which alleges similar claims against the same defendants. On January 9, 2012, we filed a motion to dismiss the Amended Consolidated Class Action Complaint. On June 22, 2012, the Court granted our motion to dismiss and entered a judgment in our favor.
We cannot at this time predict whether or not the plaintiffs will appeal this dismissal. Based on information available to us at present, we cannot reasonably estimate a range of loss, if any, for this action and, accordingly, we have not accrued any liability associated with this action.
Securities Class Action (Teamsters Local 617 Pensions and Welfare Funds)
On November 2, 2006, the Teamsters Local 617 Pension and Welfare Funds filed a class action complaint purporting to represent a class of shareholders who purchased our stock between November 28, 2001 and October 18, 2006. The complaint, filed in the U.S. District Court for the District of Arizona, is entitled Teamsters Local 617 Pension & Welfare Funds v. Apollo Group, Inc. et al., Case Number 06-cv-02674-RCB, and alleges that we and certain of our current and former directors and officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by purportedly making misrepresentations concerning our stock option granting policies and practices and related accounting. The defendants are Apollo Group, Inc., J. Jorge Klor de Alva, Daniel E. Bachus, John M. Blair, Dino J. DeConcini, Kenda B. Gonzales, Hedy F. Govenar, Brian E. Mueller, Todd S. Nelson, Laura Palmer Noone, John R. Norton III, John G. Sperling and Peter V. Sperling. On September 11, 2007, the Court appointed The Pension Trust Fund for Operating Engineers as lead plaintiff. Lead plaintiff filed an amended complaint on November 23, 2007, asserting the same legal claims as the original complaint and adding claims for violations of Section 20A of the Securities Exchange Act of 1934 and allegations of breach of fiduciary duties and civil conspiracy. On April 30, 2009, plaintiffs filed their Second Amended Complaint, which alleges similar claims for alleged securities fraud against the same defendants.
On March 31, 2011, the U.S. District Court for the District of Arizona dismissed the case with prejudice and entered judgment in our favor. Plaintiffs filed a motion for reconsideration of this ruling, and the Court denied this motion on April 2, 2012. On April 27, 2012, the plaintiffs filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit, and their appeal remains pending before that Court. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, we cannot reasonably estimate a range of loss for this action

22

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

and, accordingly, we have not accrued any liability associated with this action.
Incentive Compensation False Claims Act Lawsuit
On May 25, 2011, we were notified that a qui tam complaint had been filed against us in the U.S. District Court, Eastern District of California, by private relators under the Federal False Claims Act and California False Claims Act, entitled USA and State of California ex rel. Hoggett and Good v. University of Phoenix, et al, Case Number 2:10-CV-02478-MCE-KJN. When the federal government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the federal government and, if successful, they are entitled to receive a portion of the federal government’s recovery.
The complaint alleges, among other things, that University of Phoenix has violated the Federal False Claims Act since December 12, 2009 and the California False Claims Act for the preceding ten years by falsely certifying to the U.S. Department of Education and the State of California that University of Phoenix was in compliance with various regulations that require compliance with federal rules regarding the payment of incentive compensation to admissions personnel, in connection with University of Phoenix’s participation in student financial aid programs. In addition to injunctive relief and fines, the relators seek significant damages on behalf of the Department of Education and the State of California, including all student financial aid disbursed by the Department to our students since December 2009 and by the State of California to our students during the preceding ten years. On July 12, 2011, we filed a motion to dismiss and on August 30, 2011, relators filed a motion for leave to file a Second Amended Complaint, which the Court granted. On November 2, 2011, we filed a motion to dismiss relators’ Second Amended Complaint, and that motion is currently pending before the Court.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Patent Infringement Litigation
On March 3, 2008, Digital-Vending Services International Inc. filed a complaint against University of Phoenix and Apollo Group Inc., as well as Capella Education Company, Laureate Education Inc., and Walden University Inc. in the U.S. District Court for the Eastern District of Texas, since transferred on plaintiff’s motion to the Eastern District of Virginia. The case is entitled, Digital Vending Services International, LLC vs. The University of Phoenix, et al, Case Number 2:09cv555 (JBF-TEM). The complaint alleges that we and the other defendants have infringed and are infringing various patents relating to managing courseware in a shared use operating environment and seeks injunctive relief and substantial damages, including royalties as a percentage of our net revenue over a multi-year period. We filed an answer to the complaint on May 27, 2008, in which we denied that Digital-Vending Services International’s patents were duly and lawfully issued, and asserted defenses of non-infringement and patent invalidity, among others. We also asserted a counterclaim seeking a declaratory judgment that the patents are invalid, unenforceable, and not infringed by us.
On March 18, 2010, we filed our opening claim construction brief and on June 10, 2010, the Court issued its claim construction ruling. Discovery is now concluded and we filed a motion for summary judgment on August 13, 2010. A hearing on our motion for summary judgment was held on November 12, 2010, and on January 7, 2011, the Court granted our motion for summary judgment and dismissed the case with prejudice, citing plaintiff’s failure to point to admissible evidence that could support a finding of infringement.
Plaintiff appealed the order granting our summary judgment motion to the United States Court of Appeals for the Federal Circuit, which held oral argument on December 5, 2011. On March 7, 2012, a divided three-judge panel of the Federal Circuit issued an opinion affirming in part and reversing in part the order granting summary judgment, and it remanded a portion of the plaintiff’s claims to the district court for further proceedings. We filed a Petition for Rehearing with the Federal Circuit regarding the portion of the decision reversing the grant of summary judgment, which the Federal Circuit denied on May 25, 2012. Accordingly, the case has been remanded to the U.S. District Court for the Eastern District of Virginia for further proceedings, the outcome of which remains uncertain at this point.
As of May 31, 2012, we have accrued an immaterial amount principally reflecting a rejected settlement offer we made during the third quarter of fiscal year 2012, as well as additional legal costs that we may incur in this matter.
Adoma Wage and Hour Class Action
On January 8, 2010, Diane Adoma filed an action in United States District Court, Eastern District of California alleging wage and hour claims under the Fair Labor Standards Act and California law for failure to pay overtime and other violations, entitled Adoma et al. v. University of Phoenix, et al, Case Number 2:10-cv-04134-JCJ. On March 5, 2010, we filed a motion to dismiss, or

23

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

in the alternative to stay or transfer, the case based on the previously filed Sabol and Juric actions. On May 3, 2010, the Court denied the motion to dismiss and/or transfer. On April 12, 2010, plaintiff filed her motion for conditional collective action certification. The Court denied class certification under the Fair Labor Standards Act and transferred these claims to the District Court in Pennsylvania. On August 31, 2010, the U.S. District Court in California granted plaintiff’s motion for class action certification of the California claims. On September 14, 2010, we filed a petition for permission to appeal the class certification order with the Ninth Circuit, which was denied on November 3, 2010. There are approximately 1,500 current and former employees in the class.
In August 2011, the parties agreed to settle the case for an immaterial amount, which was accrued in our financial statements during fiscal year 2011. The agreement, in which we do not admit any liability, is subject to final approval by the Court. On June 18, 2012, the Court preliminarily approved the settlement and granted the parties’ motion to certify the class of plaintiffs for settlement purposes. We expect a final approval hearing for the settlement will be held later this year.
Shareholder Derivative Actions and Demand Letters
On November 12, 2010 and December 8, 2010, we received separate demands on behalf of two different shareholders to investigate, address and commence proceedings against each of our directors and certain of our officers for violation of any applicable laws, including in connection with the subject matter of the report of the Government Accountability Office prepared for the U.S. Senate in August 2010, our withdrawal of the outlook we previously provided for our fiscal year 2011, the investigation into possible unfair and deceptive trade practices associated with certain alleged practices of University of Phoenix by the State of Florida Office of the Attorney General in Fort Lauderdale, Florida, the participation by the State of Oregon Office of the Attorney General in the Securities Class Action (Apollo Institutional Investors Group), and the informal inquiry by the Enforcement Division of the Securities and Exchange Commission commenced in October 2009. On September 8, 2011, we received an additional shareholder demand letter from Darlene Smith, who is already pursuing one of the two previously filed shareholder derivative actions against Apollo management. In this letter, Ms. Smith requests that the Company pursue a contribution action against Todd Nelson and Kenda Gonzales based on the jury verdict in the Policeman’s Annuity and Benefit Fund of Chicago Securities Class Action described above. The demands are a condition precedent under applicable Arizona law to the filing of a derivative lawsuit on behalf of Apollo Group seeking damages from directors and officers for breach of fiduciary duty. The following two lawsuits have commenced to date in connection with these demands:
Himmel Derivative Action. On March 24, 2011, a shareholder derivative complaint was filed in the Superior Court for the State of Arizona, Maricopa County by Daniel Himmel, one of the foregoing shareholders who previously made a demand for investigation. In the complaint, the plaintiff asserts a derivative claim on our behalf against certain of our current and former officers and directors for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint alleges that the individual defendants made improper statements and engaged in improper business practices that caused our stock price to drop, led to securities class actions against us, and enhanced regulation and scrutiny by various government entities and regulators. The case is entitled, Himmel v. Bishop, et al, Case Number CV2011-005604. Pursuant to a stipulation between all parties, on August 31, 2011, the Court ordered this action stayed during the pendency of the underlying Apollo Group Institutional Investors Securities Class Action.
Smith Derivative Action. On April 12, 2011, a shareholder derivative complaint was filed in the U.S. District Court for the District of Arizona by Darlene Smith, one of the foregoing shareholders who previously made a demand for investigation. In the complaint, the plaintiff asserts a derivative claim on our behalf against certain of our current and former officers and directors for violations of federal securities laws, state law claims for breaches of fiduciary duty, abuse of control, gross mismanagement, unjust enrichment, corporate waste, and insider trading. The case is entitled, Smith v. Sperling, et al, Case Number CV-11-0722-PHX-PGR. On February 3, 2012, the Company and the individual defendants filed motions to dismiss the case, which are currently pending with the Court. Oral argument on the defendants’ motion to dismiss is scheduled for July 9, 2012.
K.K. Modi Investment and Financial Services Pvt. Ltd.
On November 8, 2010, a suit was filed by K.K. Modi Investment and Financial Services Pvt. Ltd. (“Modi”) in the High Court of Delhi at New Delhi against defendants Apollo Group, Inc., Western International University, Inc., University of Phoenix, Inc., Apollo Global, Inc., Modi Apollo International Group Pvt. Ltd., Apollo International, Inc., John G. Sperling, Peter V. Sperling and Jorge Klor De Alva, seeking to permanently enjoin the defendants from making investments in the education industry in the Indian market in breach of an exclusivity and noncompete provision which plaintiff alleges is applicable to Apollo Group and its subsidiaries. The case is entitled, K.K. Modi Investment and Financial Services Pvt. Ltd. v. Apollo International, et. al. We believe that the relevant exclusivity and noncompete provision is inapplicable to us and our affiliates, we have sought to dismiss this action on those grounds, and our application for such relief remains pending before the Court. On December 14, 2010, the Court declined

24

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

to enter an injunction, but the matter is set for a further hearing on September 17, 2012. If plaintiff ultimately obtains the requested injunctive relief, our ability to conduct business in India, including through our joint venture with HT Media Limited, may be adversely affected. It is also possible that in the future K.K. Modi may seek to expand existing litigation in India or commence litigation in the U.S. in which it may assert a significant damage claim against us.
Other
We are subject to various claims and contingencies in the ordinary course of business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. We do not believe any of these are material for separate disclosure.
Other Matters
Attorney General Investigations
During fiscal year 2011, we received notices from the Attorney General Offices in three states that they were investigating business practices at the University of Phoenix, as described below. We believe there may be an informal coalition of states considering investigatory or other inquiries into recruiting practices and the financing of education at proprietary educational institutions, which may or may not include these three states.
State of Florida. On October 22, 2010, University of Phoenix received notice that the State of Florida Office of the Attorney General in Fort Lauderdale, Florida had commenced an investigation into possible unfair and deceptive trade practices associated with certain alleged practices of University of Phoenix. The notice included a subpoena to produce documents and detailed information for the time period of January 1, 2006 to the present about a broad spectrum of University of Phoenix’s business. We are cooperating with the investigation, but also filed a suit to quash or limit the subpoena and to protect information sought that constitutes propriety or trade secret information. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
State of Massachusetts. On May 13, 2011, University of Phoenix received a Civil Investigative Demand from the State of Massachusetts Office of the Attorney General. The Demand relates to an investigation of possible unfair or deceptive methods, acts, or practices by for-profit educational institutions in connection with the recruitment of students and the financing of education. The Demand requires us to produce documents and detailed information and to give testimony regarding a broad spectrum of University of Phoenix’s business for the time period of January 1, 2002 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
State of Delaware. On August 3, 2011, University of Phoenix received a subpoena from the Attorney General of the State of Delaware to produce detailed information regarding University of Phoenix students residing in Delaware. The time period covered by the subpoena is January 1, 2006 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
Securities and Exchange Commission
During October 2009, we received notification from the Enforcement Division of the Securities and Exchange Commission indicating that they had commenced an informal inquiry into our revenue recognition practices. The Securities and Exchange Commission has requested various information and documents from us and/or our auditors, including information regarding our revenue recognition practices, our policies and practices relating to student refunds, the return of Title IV funds to lenders and bad debt reserves, our insider trading policies and procedures, a chronology of the internal processing and availability of information about the U.S. Department of Education program review of University of Phoenix commenced in early 2009, certain information relating to non-Title IV revenue sources and other matters. On March 21, 2012, the staff of the Securities and Exchange Commission notified us that the informal inquiry had been completed and that the staff did not intend to recommend any enforcement action by the Commission.
During April 2012, we received notification from the Enforcement Division of the Securities and Exchange Commission requesting documents and information relating to certain stock sales by company insiders and our February 28, 2012 announcement filed with the Commission on Form 8-K regarding revised enrollment forecasts. We are cooperating fully with the Securities and Exchange Commission in connection with this investigation. We cannot predict the eventual scope or outcome of this investigation.

25

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

Note 16. Regulatory Matters
Student Financial Aid
In fiscal year 2011, University of Phoenix generated 91% of our total consolidated net revenue and more than 100% of our operating income, and 86% of its cash basis revenue for eligible tuition and fees was derived from Title IV financial aid program funds, as calculated under the 90/10 Rule.
All U.S. federal financial aid programs are established by Title IV of the Higher Education Act and regulations promulgated thereunder. In August 2008, the Higher Education Act was reauthorized through September 30, 2013 by the Higher Education Opportunity Act. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. Changes to the Higher Education Act are likely to result from subsequent reauthorizations, and the scope and substance of any such changes cannot be predicted.
The Higher Education Opportunity Act specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification.
University of Phoenix was recertified in November 2009 and entered into a new Title IV Program Participation Agreement which expires December 31, 2012.
Western International University was recertified in May 2010 and entered into a new Title IV Program Participation Agreement which expires September 30, 2014.
Accreditation