APOL Apollo Education Grp., Inc.

Apollo Group, Inc. (Nasdaq: APOL) (�Apollo Group,� �Apollo� or �the Company�) today reported unaudited financial results for the three and nine months ended May 31, 2008. Unaudited Third Quarter of Fiscal 2008 Results of Operations Consolidated revenues for the three months ended May 31, 2008, totaled $835.2 million, which represents a 13.9% increase over the third quarter of fiscal 2007. Total Degreed Enrollment grew by 11.0% year-over-year to 345,300. The Company reported net income for the three months ended May 31, 2008, of $139.1 million, or $0.85 per share (163.8 million weighted average diluted shares outstanding), compared to net income of $131.4 million, or $0.75 per share (174.6 million weighted average diluted shares outstanding) for the three months ended May 31, 2007. During the third quarter of fiscal 2008, the Company repurchased approximately 9.8 million shares of its common stock at a weighted average purchase price of approximately $46 for a total expenditure of $454 million. On June 27, 2008, the Board of Directors authorized an increase of the share repurchase program to an aggregate of $500 million. Before giving effect to a special item of $1.6 million due to the securities class action verdict in the third quarter of fiscal 2008, and to special items related to the stock option investigation and restatement costs of $7.6 million in the third quarter of fiscal 2007, net income was $140.1 million, or $0.85 per share in the third quarter of fiscal 2008, as compared to net income of $136.0 million, or $0.78 per share in the third quarter of fiscal 2007. Excluding share-based compensation expense of $14.4 million and the special item related to the securities class action verdict of $1.6 million in the third quarter of fiscal 2008, and share-based compensation expense of $8.9 million and stock option investigation and restatement costs of $7.6 million in the third quarter of fiscal 2007, net income would have been $148.8 million, or $0.91 per share in the third quarter of fiscal 2008, as compared to net income of $141.4 million, or $0.81 per share in the third quarter of fiscal 2007. (See the reconciliation of Generally Accepted Accounting Principles (�GAAP�) financial information to non-GAAP financial information in the tables section of this press release.) �We reported another quarter of solid revenue and enrollment growth, and importantly, we experienced improvement in the growth rate of New Degreed Enrollments as compared to last quarter,� said Joe D�Amico, President, Chief Financial Officer and Treasurer of Apollo Group. �While the overall cost to acquire a student has increased versus a year ago, we still believe that we are on the right track by bringing our marketing intelligence in-house with Aptimus and that the investments we�re making today will lower our student acquisition costs over time and help us to better communicate our brands.� Greg Cappelli, Executive Vice President, Global Strategy and Assistant to the Executive Chairman added, �We continue to invest in new and existing areas including retention, new programs, resource centers and marketing, where we can leverage Apollo�s infrastructure and experience. We are also pleased to announce that Insight Schools will start the 2008 school year with 11 schools in 10 states. The virtual high school market is strong and we are excited about their prospects. We recently announced the formation of Meritus University, a new Canadian degree-granting institution which will begin enrolling students this Fall. Lastly, during the quarter we closed Apollo Global�s first transaction, the acquisition of Chilean-based UNIACC. Apollo Global has many solid opportunities to pursue abroad and their talented team is working diligently on these efforts.� Instructional costs and services increased by $26.6 million, or 8.3% to $347.6 million for the three months ended May 31, 2008, from $321.0 million in the three months ended May 31, 2007. As a percentage of net revenue, instructional costs and services declined to 41.6% versus 43.8% in the prior year quarter, primarily as a result of decreases as a percentage of net revenue, in bad debt expense and classroom lease expenses and depreciation. These decreases were partially offset by an increase, as a percentage of net revenue, in employee compensation and related expenses which is due, in part, to investments in Insight Schools and increases to the Company�s compensation rates for academic and financial counselors. As previously reported, during the first quarter of fiscal 2008, the Company reviewed the components of bad debt expense and identified certain items that should have been classified as discounts or refunds (reduction of tuition revenue) rather than bad debt expense. No reclassification was made for prior periods as the amounts were not material to prior period financial statements and had no effect on reported net income. Had the Company reclassified these items in the third quarter of fiscal 2007, the amounts reported for net revenue and bad debt expense would have been $5.0 million lower. On a comparable basis, bad debt expense, as a percentage of net revenue, decreased approximately 160 basis points from 4.0% in the third quarter of fiscal 2007 to 2.4% in the third quarter of fiscal 2008. This decrease is primarily due to the continued focus on front-end collections as well as improvements in student retention rates. Retention and bad debt expense can vary seasonally, and as a result, bad debt expense as a percentage of net revenue may fluctuate from quarter-to-quarter. Selling and promotional expenses increased by $40.7 million, or 25.0%, to $203.6 million for the three months ended May 31, 2008, from $162.9 million in the three months ended May 31, 2007. As a percentage of net revenue, selling and promotional expenses increased to 24.4%, from 22.2% in the prior year�s third quarter. This was a result of an increase, as a percentage of net revenue, in enrollment counselors� compensation and related expenses, advertising and other selling and promotional expenses. Included in other selling and promotional costs are expenses related to Aptimus which the Company acquired in the first quarter of 2008. The increase represents investments made to drive and support future growth of New Degreed Enrollments. Selling and promotional expenses per New Degreed Enrollment increased versus a year ago, and this trend may continue into the near future; however, the Company believes its efforts and investments will help it reduce these costs over the long-term. General and administrative (�G&A�) expenses for the three months ended May 31, 2008, increased by $14.8 million, or 32.1%, to $60.9 million, from $46.1 million in the three months ended May 31, 2007. As reported, G&A, as a percentage of net revenue, increased to 7.3% in the third quarter of 2008, versus 6.3% in the comparable period a year ago. Excluding special items in the third quarter of fiscal 2007, primarily related to the stock option investigation and restatement costs of $7.6 million, G&A expenses were $38.5 million, or 5.2% of net revenue, for the three months ended May 31, 2007. The increase to 7.3%, as a percentage of net revenue, in the third quarter of 2008, is mainly attributable to increases, as a percentage of net revenue, in salary and related payroll costs due to higher employee headcount, increased share-based compensation expense and higher legal fees. Financial and Operating Metrics Below are Apollo Group�s unaudited financial data and operating metrics for fiscal 2008. � Q1 2008 � Q2 2008 � Q3 2008 Revenues (in thousands) Degree Seeking Gross Revenues (1) $ 773,114 $ 692,355 $ 819,445 Less: Discounts and Other � (35,083 ) � (41,463 ) � (39,231 ) Degree Seeking Net Revenues (1) 738,031 650,892 780,214 Non-degree Seeking Revenues (1) 5,038 5,322 10,171 Other (2) � 37,605 � � 37,429 � � 44,832 � $ 780,674 � $ 693,643 � $ 835,217 � � Revenue by Degree Type (in thousands) (1) Associates $ 218,642 $ 204,050 $ 248,171 Bachelors 360,324 315,127 365,960 Masters 179,414 158,649 188,917 Doctoral 14,734 14,529 16,397 Less: Discounts and Other � (35,083 ) � (41,463 ) � (39,231 ) $ 738,031 � $ 650,892 � $ 780,214 � � Degreed Enrollment (1) (3) Associates 114,300 121,200 134,300 Bachelors 137,800 136,400 137,900 Masters 67,300 67,000 67,300 Doctoral � 5,600 � � 5,600 � � 5,800 � � 325,000 � � 330,200 � � 345,300 � � � Degree Seeking Gross Revenues per Degreed Enrollment (1) (3) Associates $ 1,913 $ 1,684 $ 1,848 Bachelors 2,615 2,310 2,654 Masters 2,666 2,368 2,807 Doctoral 2,631 2,594 2,827 All degrees (after discounts) 2,271 1,971 2,260 � � New Degreed Enrollments (1) (4) Associates 33,700 31,100 37,100 Bachelors 21,800 21,500 21,900 Masters 12,400 11,800 11,600 Doctoral � 800 � � 600 � � 800 � � 68,700 � � 65,000 � � 71,400 � � � (1) Represents information for UPX and Axia College only (students enrolled in our Axia programs within UPX and WIU). Degree seeking students (and related revenues) include students participating in certificate programs of at least 18 credit hours in length with some course applicability into a related degree program. Non-degree seeking students include all other certificate programs, single course and continuing education students. � (2) Represents revenues from IPD, CFP, WIU (excluding Axia College which is included in (1)), Insight Schools, Apollo Global and other. � (3) Represents individual students enrolled in degree programs that attended a course during the quarter and did not graduate as of the end of the quarter. Degreed Enrollments include any student who graduated from one degree program and started a new degree program (for example, a graduate of the associates degree program returns for a bachelors degree or a bachelors degree graduate returns for a masters degree, etc.) (rounded to hundreds). � (4) Represents any student who is a new student and starts a program in the quarter, any student who graduated from one degree program and started a new degree program in the quarter (for example, a graduate of the associates degree program returns for a bachelors degree or a bachelors degree graduate returns for a masters degree), as well as any student who started a program in the quarter and had been out of attendance for greater than 12 months (rounded to hundreds). Unaudited First Nine Months of Fiscal 2008 Results of Operations Consolidated revenues for the nine months ended May 31, 2008, were $2.3 billion, a 14.9% increase over the first nine months of fiscal 2007. Average Degreed Enrollment grew by 11.0% for the nine months ended May 31, 2008 as compared to the nine months ended May 31, 2007. The Company reported net income of $246.9 million, or $1.47 per share (167.7 million weighted average diluted shares outstanding), and $305.7 million, or $1.75 per share (174.6 million weighted average diluted shares outstanding), for the nine months ended May 31, 2008, and May 31, 2007, respectively. Before giving effect to the securities class action litigation charge and interest of $170.0 million in the nine months ended May 31, 2008, and to special items related to the stock option investigation and restatement costs of $27.8 million in the nine months ended May 31, 2007, net income was $350.2 million, or $2.09 per share in the first nine months of fiscal 2008, as compared to net income of $322.5 million, or $1.85 per share in the first nine months of fiscal 2007. Excluding total share-based compensation of $49.5 million as well as the securities litigation charges in the first nine months of fiscal 2008, and share-based compensation expense of $40.8 million and stock option investigation and restatement costs of $15.7 million (net of the $12.1 million stock option modification included in share-based compensation) in the first nine months of fiscal 2007, net income would have been $380.3 million, or $2.27 per share in the first nine months of fiscal 2008, as compared to net income of $339.8 million, or $1.95 per share in the first nine months of fiscal 2007. (See the reconciliation of GAAP financial information to non-GAAP financial information in the tables section of this press release.) Unaudited Balance Sheet As of May 31, 2008, the Company�s cash, cash equivalents, and marketable securities, excluding restricted cash, totaled $302.5 million as compared to $392.7 million as of August 31, 2007. Also excluded from this balance at May 31, 2008, is $95.0 million of cash pledged as collateral for a bond posted by the Company in connection with the securities class action verdict announced during the fiscal second quarter. Restricted cash and student deposits increased approximately $64.5 million and $58.7 million since August 31, 2008, respectively. These increases were primarily due to increased student enrollment. At May 31, 2008, accounts receivable declined to $184.2 million from $190.9 million at August 31, 2007, resulting in days sales outstanding (�DSO�) declining to 26 days for the third quarter as compared to 36 days in the third quarter of 2007, and from 38 days at August 31, 2007. The decrease in DSO is primarily due to improvements in processing time for the receipt of student financial aid, the write-off of approximately $28.4 million in previously reserved uncollectible accounts receivable during the quarter and seasonality. As a result of seasonality, DSO may fluctuate from quarter-to-quarter. Goodwill increased by $36.4 million to $66.0 million at May 31, 2008, from $29.6 million at August 31, 2007, primarily due to the acquisition of Aptimus, Inc. in the first quarter of 2008. Intangible assets, net, increased by $19.5 million to $21.7 million at May 31, 2008, from $2.2 million at August 31, 2007, primarily due to the acquisition of Aptimus, Inc. in the first quarter of fiscal 2008 and Apollo Global�s acquisition of UNIACC in the third quarter of fiscal 2008. Deferred tax assets increased by $77.4 million to $208.4 million at May 31, 2008, from $131.0 million at August 31, 2007, mainly due to the accounting for the tax effects of the securities litigation charge. Long-term liabilities (including current portion) increased by $240.8 million to $333.8 million at May 31, 2008, from $93.0 million at August 31, 2007, primarily due to the securities litigation charge and the reclassification from income taxes payable of approximately $53.0 million related to the adoption of FIN 48, Accounting for Uncertain Tax Positions. Deferred revenue at May 31, 2008, increased to $206.0 million from $167.3 million at August 31, 2007, and increased from $150.0 million at May 31, 2007. The increase from the prior year quarter is principally due to increased student enrollment. Conference Call Information The Company will hold a conference call to discuss these earnings results at 5:00 PM Eastern, 2:00 PM Phoenix time, today, Tuesday, July 1, 2008. The call may be accessed by dialing (877) 292-6888 (domestic) or (706) 634-1393 (international). The conference ID number is 46892453. A live webcast of this event may be accessed by visiting the Company�s website at www.apollogrp.edu. A replay of the call will be available on the website or at (706) 645-9291 (conf. ID # 46892453) until July 11, 2008. About Apollo Group, Inc. Apollo Group, Inc. has been an education provider for more than 30 years, providing academic access and opportunity to students through its subsidiaries, University of Phoenix, Institute for Professional Development, College for Financial Planning, Western International University, Meritus University, Insight Schools and Apollo Global. It also owns Aptimus, a provider of innovative digital media solutions. The Company's distinctive educational programs and services are provided at the high school, college and graduate levels in 40 states (as of May 31, 2008) and the District of Columbia; Puerto Rico; Alberta and British Columbia, Canada; Mexico; Chile; and the Netherlands, as well as online, throughout the world. For more information about Apollo Group, Inc. and its subsidiaries, call (800) 990-APOL or visit the Company�s website at www.apollogrp.edu. Forward-Looking Safe Harbor Statements in this press release regarding Apollo Group�s business outlook, future financial and operating results, Degreed Enrollment and New Degreed Enrollments, and overall future prospects, are forward-looking statements, and are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current information and expectations and involve a number of risks and uncertainties. Actual results may differ materially from those projected in such statements due to various factors. For a discussion of the various factors that may cause actual results to differ materially from those projected, please refer to the risk factors and other disclosures contained in Apollo Group�s previously filed Form 10-K, Forms 10-Q, and other filings with the Securities and Exchange Commission. Apollo Group, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) � As of May 31, � August 31, ($ in thousands) 2008 2007 Assets: Current assets Cash and cash equivalents $ 237,072 $ 339,319 Restricted cash and cash equivalents 360,929 296,469 Marketable securities, current portion 28,366 31,278 Accounts receivable, net 184,183 190,912 Deferred tax assets, current portion 46,814 50,885 Other current assets � 24,683 � � 16,515 � Total current assets 882,047 925,378 Property and equipment, net 421,588 364,207 Restricted cash for bond collateralization 95,000 - Marketable securities, less current portion 37,035 22,084 Goodwill 66,017 29,633 Intangible assets, net 21,656 2,214 Deferred tax assets, less current portion 161,583 80,077 Other assets � 27,295 � � 26,270 � Total assets $ 1,712,221 � $ 1,449,863 � � Liabilities and Shareholders' Equity: Current liabilities Accounts payable $ 42,234 $ 80,729 Accrued liabilities 116,637 103,651 Current portion of long-term liabilities 80,808 21,093 Income taxes payable 30,753 43,351 Student deposits 386,755 328,008 Current portion of deferred revenue � 205,795 � � 167,003 � Total current liabilities 862,982 743,835 Deferred revenue, less current portion 210 295 Long-term liabilities, less current portion � 253,037 � � 71,893 � Total liabilities � 1,116,229 � � 816,023 � � Commitments and contingencies � Minority interest � 6,599 � � - � � 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 7,923 - Apollo Group Class A treasury stock, at cost (1,783,570 ) (1,461,368 ) Retained earnings 2,367,131 2,096,385 Accumulated other comprehensive loss � (2,195 ) � (1,281 ) Total shareholders' equity � 589,393 � � 633,840 � Total liabilities and shareholders' equity $ 1,712,221 � $ 1,449,863 � Apollo Group, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) � Three Months Ended � Nine Months Ended May 31, May 31, (in thousands, except per share data) 2008 � 2007 2008 � 2007 Revenues: � Tuition and other, net $ 835,217 � $ 733,392 $ 2,309,534 � $ 2,009,871 Costs and expenses: Instructional costs and services 347,598 321,050 1,008,609 910,244 Selling and promotional 203,644 162,901 582,257 485,276 General and administrative 60,910 46,069 167,203 139,198 Estimated securities litigation loss � 1,566 � � - � 169,966 � � - Total costs and expenses � 613,718 � � 530,020 � 1,928,035 � � 1,534,718 Income from operations 221,499 203,372 381,499 475,153 Interest income and other, net � 3,329 � � 8,530 � 21,037 � � 21,940 Income before income taxes and minority interest 224,828 211,902 402,536 497,093 Provision for income taxes 85,951 80,464 155,833 191,443 Minority interest, net of tax � (229 ) � - � (229 ) � - Net income $ 139,106 � $ 131,438 $ 246,932 � $ 305,650 � Earnings per share: � Basic income per share $ 0.85 � $ 0.76 $ 1.49 � $ 1.77 � Diluted income per share $ 0.85 � $ 0.75 $ 1.47 � $ 1.75 Basic weighted average shares outstanding � 162,751 � � 173,188 � 165,919 � � 173,165 Diluted weighted average shares outstanding � 163,841 � � 174,620 � 167,737 � � 174,588 Apollo Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) � � Nine Months Ended May 31, 2008 2007 ($ in thousands) Cash flows provided by (used in) operating activities: Net income $ 246,932 $ 305,650 Adjustments to reconcile net income to net cash provided by operating activities: Share-based compensation 49,451 40,766 Excess tax benefits from share-based compensation (17,947 ) (2,290 ) Depreciation and amortization 59,073 55,317 Amortization of deferred gain on sale-leaseback (1,339 ) (1,317 ) Amortization of marketable securities discount and premium, net 60 152 Provision for uncollectible accounts receivable 79,255 83,303 Minority interest (229 ) - Estimated securities litigation loss 165,748 - Deferred income taxes (69,401 ) (34,843 ) Changes in assets and liabilities excluding the impact of acquisitions: Accounts receivable (39,515 ) (102,271 ) Other assets (9,314 ) (5,276 ) Accounts payable and accrued liabilities (21,907 ) (15,640 ) Income taxes payable 57,294 29,045 Student deposits 58,747 43,212 Deferred revenue 7,701 13,727 Other liabilities � 3,833 � � (3,073 ) Net cash provided by operating activities � 568,442 � � 406,462 � Cash flows provided by (used in) investing activities: Additions to property and equipment (67,834 ) (38,338 ) Additions to land and buildings related to new headquarters (12,408 ) (32,072 ) Acquisitions, net of cash acquired (70,302 ) (15,079 ) Purchase of marketable securities including auction-rate securities (875,098 ) (969,460 ) Maturities of marketable securities including auction-rate securities 864,551 1,008,861 Collateralization of bond posted for securities litigation matter (95,000 ) - Increase in restricted cash and cash equivalents � (64,460 ) � (48,697 ) Net cash used in investing activities � (320,551 ) � (94,785 ) Cash flows provided by (used in) financing activities: Payments on long-term debt (709 ) - Borrowings under line of credit 250,000 - Repayments of line of credit (250,000 ) - Purchase of Apollo Group Class A common stock (454,362 ) - Issuance of Apollo Group Class A common stock 80,721 5,278 Minority interest contributions 6,975 - Excess tax benefits from share-based compensation � 17,947 � � 2,290 � Net cash provided by (used in) financing activities � (349,428 ) � 7,568 � Effect of foreign currency transaction loss, net � (710 ) � (329 ) Net increase (decrease) in cash and cash equivalents � (102,247 ) � 318,916 � Cash and cash equivalents, beginning of period � 339,319 � � 309,058 � Cash and cash equivalents, end of period $ 237,072 � $ 627,974 � � Supplemental disclosure of cash flow information Cash paid during the year for income taxes $ 168,092 $ 197,237 Supplemental disclosure of non-cash investing and financing activities Credits received for tenant improvements $ 7,843 $ 3,406 Purchases of property and equipment included in accounts payable $ 4,630 $ 5,772 Settlement of liability-classified awards through the issuance of treasury stock $ 16,340 $ - Unrealized loss on auction-rate securities $ 803 $ - Apollo Group, Inc. and Subsidiaries Detailed Expense Tables � � � � � � Instructional costs and services Three Months Ended May 31, % of Revenues % Change 2008 2007 2008 2007 2008 vs. 2007 ($ in millions) Employee compensation and related expenses $ 126.5 $ 106.1 15.1% 14.5% 19.2% Faculty compensation 71.6 62.7 8.6% 8.5% 14.2% Classroom lease expenses and depreciation 52.9 50.9 6.3% 6.9% 3.9% Other instructional costs and services 52.5 45.2 6.3% 6.2% 16.2% Bad debt expense 20.3 34.3 2.4% 4.7% -40.8% Financial aid processing costs 18.9 16.7 2.3% 2.3% 13.2% Share-based compensation � 4.9 � 5.1 0.6% 0.7% -3.9% Instructional costs and services $ 347.6 $ 321.0 41.6% 43.8% 8.3% � � � � Selling and promotional Three Months Ended May 31, % of Revenues % Change 2008 2007 2008 2007 2008 vs. 2007 ($ in millions) Enrollment counselors' compensation and related expenses $ 98.5 $ 80.2 11.8% 10.9% 22.8% Advertising 78.2 66.7 9.4% 9.1% 17.2% Other selling and promotional expenses 26.1 15.1 3.1% 2.1% 72.8% Share-based compensation � 0.8 � 0.9 0.1% 0.1% -11.1% Selling and promotional $ 203.6 $ 162.9 24.4% 22.2% 25.0% � � � � General and administrative Three Months Ended May 31, % of Revenues % Change 2008 2007 2008 2007 2008 vs. 2007 ($ in millions) Employee compensation and related expenses $ 26.0 $ 18.6 3.1% 2.5% 39.8% Share-based compensation 8.7 2.9 1.0% 0.4% 200.0% Legal, audit, and corporate insurance 8.8 3.1 1.1% 0.4% 183.9% Administrative space and depreciation 6.8 5.2 0.8% 0.7% 30.8% Other general and administrative expenses � 10.6 � 16.3 1.3% 2.3% -35.0% General and administrative $ 60.9 $ 46.1 7.3% 6.3% 32.1% The following special items are included in general and administrative expenses: � � � � � Three Months Ended May 31, ($ in millions) 2008 2007 Line item included in above Fair value adjustment for former employee stock options $ � � � - $ (0.1) Other general and administrative expenses Stock option investigation / financial statement restatement � � � � - � 7.7 Other general and administrative expenses Subtotal $ � � � - $ 7.6 Apollo Group, Inc. and Subsidiaries Detailed Expense Tables � � � � � � � Instructional costs and services Nine Months Ended May 31, % of Revenues % Change 2008 2007 2008 2007 2008 vs. 2007 ($ in millions) Employee compensation and related expenses $ 360.1 $ 315.2 15.6% 15.8% 14.2% Faculty compensation 197.4 173.8 8.5% 8.6% 13.6% Classroom lease expenses and depreciation 157.7 152.8 6.8% 7.6% 3.2% Other instructional costs and services 139.7 126.3 6.2% 6.3% 10.6% Bad debt expense 79.3 83.3 3.4% 4.1% -4.8% Financial aid processing costs 57.7 45.9 2.5% 2.3% 25.7% Share-based compensation � 16.7 � 12.9 0.7% 0.6% 29.5% Instructional costs and services $ 1,008.6 $ 910.2 43.7% 45.3% 10.8% � � � � Selling and promotional Nine Months Ended May 31, % of Revenues % Change 2008 2007 2008 2007 2008 vs. 2007 ($ in millions) Enrollment counselors' compensation and related expenses $ 283.6 $ 235.1 12.3% 11.7% 20.6% Advertising 230.4 204.2 10.0% 10.2% 12.8% Other selling and promotional expenses 65.4 43.0 2.8% 2.1% 52.1% Share-based compensation � 2.8 � 3.0 0.1% 0.1% -6.7% Selling and promotional $ 582.2 $ 485.3 25.2% 24.1% 20.0% � � � � General and administrative Nine Months Ended May 31, % of Revenues % Change 2008 2007 2008 2007 2008 vs. 2007 ($ in millions) Employee compensation and related expenses $ 68.9 $ 50.4 3.0% 2.5% 36.7% Share-based compensation 30.0 24.9 1.3% 1.2% 20.5% Legal, audit, and corporate insurance 19.0 9.1 0.8% 0.5% 108.8% Administrative space and depreciation 18.6 15.6 0.8% 0.8% 19.2% Other general and administrative expenses � 30.7 � 39.2 1.3% 2.0% -21.7% General and administrative $ 167.2 $ 139.2 7.2% 7.0% 20.1% The following special items are included in general and administrative expenses: � � � � � Nine Months Ended May 31, ($ in millions) 2008 2007 Line item included in above Stock option modifications $ � � � - $ 12.1 Share-based compensation Fair value adjustment for former employee stock options - 2.7 Other general and administrative expenses Stock option investigation/ financial statement restatement � � � � - � 13.0 Other general and administrative expenses Subtotal $ � � � - $ 27.8 Reconciliation of GAAP financial information to non-GAAP financial information � � � � � � Three Months Ended May 31, Nine Months Ended May 31, 2008 2007 2008 2007 (in millions, except per share amounts) � Net income as reported $ 139.1 � $ 131.4 � $ 246.9 � $ 305.7 � � Reconciling items: Former employee fair value adjustments for stock options - - - 12.1 (2) Option investigation and restatement costs - 7.7 (3) - 13.0 (3) Fair value adjustment for former employee stock options - (0.1 ) - 2.7 Estimated securities litigation loss � 1.6 � (1) � - � � 170.0 � (1) � - � 1.6 7.6 170.0 27.8 Less: tax effects � (0.6 ) � (3.0 ) � (66.7 ) � (11.0 ) � 1.0 � � 4.6 � � 103.3 � � 16.8 � Net income adjusted to exclude special items $ 140.1 � $ 136.0 � $ 350.2 � $ 322.5 � � Diluted income per share adjusted to exclude special items $ 0.85 � $ 0.78 � $ 2.09 � $ 1.85 � � � Net income as reported $ 139.1 � $ 131.4 � $ 246.9 � $ 305.7 � � Reconciling items: Share-based compensation 14.4 8.9 49.5 40.8 Option investigation and restatement costs - 7.7 (3) - 13.0 (3) Fair value adjustment for former employee stock options - (0.1 ) - 2.7 Estimated securities litigation loss � 1.6 � (1) � - � � 170.0 � (1) � - � 16.0 16.5 219.5 56.5 Less: tax effects � (6.3 ) � (6.5 ) � (86.1 ) � (22.4 ) � 9.7 � � 10.0 � � 133.4 � � 34.1 � Net income adjusted to exclude share-based compensation expense and special items $ 148.8 � $ 141.4 � $ 380.3 � $ 339.8 � � Diluted income per share adjusted to exclude share-based compensation expense and special items $ 0.91 � $ 0.81 � $ 2.27 � $ 1.95 � � Diluted weighted average shares outstanding � 163.8 � � 174.6 � � 167.7 � � 174.6 � � � (1) The $1.6 million and $170.0 million charges for the three and nine months ended May 31, 2008, respectively, represent the estimated securities litigation loss. � (2) The nine months ended May 31, 2007 include $12.1 million in former employee fair value adjustments for stock options, which is included in share-based compensation. � (3) The $7.7 million and $13.0 million charges for the three and nine months ended May 31, 2007, respectively, represent costs related to the stock option investigation and restatement.