10-K 1 apol-aug312013x10k.htm 10-K APOL - Aug 31 2013 - 10-K

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended: August 31, 2013
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)
Registrant’s telephone number, including area code: (480) 966-5394
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class)
 
(Name of Each Exchange on Which Registered)
Apollo Group, Inc.
Class A common stock, no par value
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES þ    NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o    NO þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o 
(Do not check if a smaller reporting company)
Smaller reporting company o
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
No shares of Apollo Group, Inc. Class B common stock, its voting stock, are held by non-affiliates. The holders of Apollo Group, Inc. Class A common stock are not entitled to any voting rights. The aggregate market value of Apollo Group Class A common stock held by non-affiliates as of February 28, 2013 (last business day of the registrant’s most recently completed second fiscal quarter), was approximately $1.6 billion.
The number of shares outstanding for each of the registrant’s classes of common stock as of October 14, 2013 is as follows:
Apollo Group, Inc. Class A common stock, no par value
112,954,000 Shares
Apollo Group, Inc. Class B common stock, no par value
475,000 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Information Statement for the 2013 Annual Meeting of Class B Shareholders (Part III)
 



APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 31, 2013
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including Item 7, 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 regulation of the U.S. education industry and eligibility of proprietary schools to participate in U.S. federal student financial aid programs, including the factors discussed in Item 1, Business, under “Accreditation and Jurisdictional Authorizations,” “Financial Aid Programs” and “Regulatory Environment”;
Each of the factors discussed in Item 1A, Risk Factors; and
Those factors set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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
Item 1 - Business
Overview
Apollo Group, Inc. and its wholly-owned subsidiaries, collectively referred to herein as “the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our” has been an educational provider since 1973. We offer educational programs and services, online and on-campus, at the undergraduate, master’s and doctoral levels. Our learning platforms include the following:
The University of Phoenix, Inc. (“University of Phoenix”) - University of Phoenix has been accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools since 1978 and holds other programmatic accreditations. In July 2013, University of Phoenix’s accreditation was reaffirmed for a ten-year period by The Higher Learning Commission and the University was placed on Notice status for a two-year period. Refer to Accreditation and Jurisdictional Authorizations below. University of Phoenix offers associate’s, bachelor’s, master’s and doctoral degrees in a variety of program areas. University of Phoenix offers its educational programs worldwide through its online education delivery system and at its campus locations and learning centers throughout the United States, including the Commonwealth of Puerto Rico. University of Phoenix represented 90% of our total consolidated net revenue and generated more than 100% of our operating income in fiscal year 2013.
Apollo Global, Inc. (“Apollo Global”) - Apollo Global was formed in 2007 to make investments primarily in the international education services sector. Apollo Global’s education network principally includes the following:
BPP Holdings Limited (“BPP”) - BPP is headquartered in London, England and offers professional training through schools located in the United Kingdom (“U.K.”), a European network of BPP offices and the sale of books and other publications globally. BPP University, principally composed of BPP Law School and BPP Business School, has been granted degree awarding powers in the U.K. and was awarded the title of “University” by the U.K. in July 2013.
Universidad Latinoamericana (“ULA”) - ULA carries authorization from Mexico’s Ministry of Public Education (Secretaría de Educación Publica), from the National Autonomous University of Mexico (Universidad Nacional Autónoma de México) for its high school and undergraduate psychology and law programs and by the Ministry of Education of the State of Morelos (Secretaría de Educación del Estado de Morelos) for its medicine and nutrition programs. ULA offers degree programs at its campuses throughout Mexico.
Universidad de Artes, Ciencias y Comunicación (“UNIACC”) - UNIACC is an arts and communications university which offers bachelor’s and master’s degree programs at campuses in Chile and online.
Indian Education Services Private Ltd. - Apollo Global is developing a 50:50 joint venture with HT Media Limited, an Indian media company, to provide educational services and programs in India.
Western International University, Inc. (“Western International University,” or “WIU”) - Western International University has been accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools since 1984. In July 2013, Western International University’s accreditation was reaffirmed for a ten-year period by The Higher Learning Commission and WIU was placed on Notice status for a two-year period. Refer to Accreditation and Jurisdictional Authorizations below. WIU offers associate’s, bachelor’s and master’s degrees in a variety of program areas primarily online. During fiscal year 2013, WIU announced a shift in its pricing structure along with a new course delivery method designed to provide students with a more manageable and affordable higher education solution.
Institute for Professional Development (“IPD”) - IPD provides program development, administration and management consulting services to private colleges and universities (“IPD Client Institutions”) to establish or expand their programs for working learners. These services typically include degree program design, curriculum development, market research, student admissions services, accounting and administrative services.
The College for Financial Planning Institutes Corporation (“CFFP”) - CFFP has been accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools since 1994. CFFP provides financial services education programs, including a Master of Science in three majors, and certification programs in retirement, asset management and other financial planning areas. CFFP offers these programs online.
Carnegie Learning, Inc. (“Carnegie Learning”) - Carnegie Learning is a publisher of research-based math curricula and adaptive learning software for middle school, high school and postsecondary students. University of Phoenix has incorporated adaptive learning into its curricula to offer an individualized approach to learning.

4


Apollo Lightspeed - Apollo Lightspeed is focused on developing innovative educational offerings and services, including proprietary learning models and third-party courseware. Apollo Lightspeed’s initial offering, Innovator’s Accelerator, provides insights and tools through a multimedia, collaborative learning platform intended to teach business executives and managers how to cultivate innovation within their organizations.
Net Revenue
The following presents net revenue for each of our reportable segments for the respective periods:
 
Year Ended August 31,
($ in thousands)
2013
 
2012
 
2011
University of Phoenix
$
3,304,464

 
$
3,873,098

 
$
4,322,670

Apollo Global
275,768

 
269,541

 
272,935

Other
101,078

 
110,698

 
115,444

Net revenue
$
3,681,310

 
$
4,253,337

 
$
4,711,049

Refer to Note 19, Segment Reporting, in Item 8, Financial Statements and Supplementary Data, for the segment and related geographic information required by Items 101(b) and 101(d) of Regulation S-K, which information is incorporated by this reference. For a discussion of the risks attendant to our foreign operations, refer to Part I, Item 1A, Risk Factors - Risks Related to our Business - Our expansion into new markets outside the U.S. subjects us to risks inherent in international operations.
University of Phoenix represents the substantial majority of our net revenue and the University’s net revenue is principally a function of student enrollment, which is detailed below for the past three years:
 
Average Degreed Enrollment(1)
 
Aggregate New Degreed Enrollment(1), (5)
 
Year Ended August 31,
 
Year Ended August 31,
(Rounded to the nearest hundred)
2013(2)
 
2012(3)
 
2011(4)
 
2013
 
2012
 
2011
Associate’s
90,500

 
119,900

 
163,500

 
68,900

 
88,100
 
90,500
Bachelor’s
160,100

 
179,200

 
186,000

 
73,400

 
93,700
 
94,900
Master’s
44,100

 
50,600

 
61,700

 
28,300

 
32,000
 
33,600
Doctoral
6,400

 
7,200

 
7,500

 
2,300

 
2,900
 
2,900
Total
301,100

 
356,900

 
418,700

 
172,900

 
216,700
 
221,900
(1) Refer to Students below for a description of the manner in which we calculate Degreed Enrollment and New Degreed Enrollment.
(2) Represents the average of Degreed Enrollment for the quarters ended August 31, 2012, November 30, 2012, February 28, 2013, May 31, 2013 and August 31, 2013. 
(3) Represents the average of Degreed Enrollment for the quarters ended August 31, 2011, November 30, 2011, February 29, 2012, May 31, 2012 and August 31, 2012. 
(4) Represents the average of Degreed Enrollment for the quarters ended August 31, 2010, November 30, 2010, February 28, 2011, May 31, 2011 and August 31, 2011. 
(5) Represents the sum of the four quarters of New Degreed Enrollment in the respective fiscal years.
General
University of Phoenix was founded in 1976 and Apollo Group, Inc. was incorporated in Arizona in 1981. Apollo maintains its principal executive offices at 4025 S. Riverpoint Parkway, Phoenix, Arizona 85040. Our telephone number is (480) 966-5394. Our website addresses are as follows:
•  Apollo Group:
www.apollo.edu
•  Apollo Global:
www.apolloglobal.us
 
•  University of Phoenix:
www.phoenix.edu
•  BPP:
www.bpp.com
 
•  WIU:
www.west.edu
•  ULA:
www.ula.edu.mx
 
•  IPD:
www.ipd.org
•  UNIACC:
www.uniacc.cl
 
•  CFFP:
www.cffp.edu
 
 
 
•  Carnegie Learning:
www.carnegielearning.com
 
 
 
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.

5


Strategy
Our mission is to provide flexible, effective higher education opportunities to students that offer the tools and skills they need to achieve their professional goals. Our goal is to be a recognized leader in connecting students to the careers they want through innovative and effective education programs that produce desired career outcomes.
The key themes of our strategic plan are as follows:
Achieve significant improvements in completion and career outcomes. We are actively focused on increasing student retention across all our institutions and ensuring students achieve their desired career outcomes through education and training.
Increase organic growth through new education offerings. We are exploring new opportunities for growth in higher education and service offerings.
Expand education opportunities and career outcomes for learners worldwide. We believe that learners worldwide can benefit from our career-focused education offerings and we are working to expand our global operations so that they become an increasingly significant portion of our consolidated operating results.
To implement our strategy, we are focused on a number of important initiatives including:
Realigning the organization to directly support efforts to connect education to careers;
Developing new education offerings that are well connected to the careers that our students seek;
Offering scholarships and other targeted tuition discounts to improve affordability of our education programs;
Forming employer relationships to create a pipeline of well-prepared future employees;
Upgrading our education delivery, learning and data platforms to better support student learning;
Redesigning curriculum at the program and course level, including modified entry course sequence and structure;
Implementing improved support methods across our institutions including, but not limited to, increasing our use of full-time faculty in students’ initial courses at University of Phoenix and piloting a new orientation format; and
Streamlining administrative processes to more efficiently deliver critical services and create a more nimble organization.
Industry Background
Domestic Postsecondary
The domestic postsecondary degree-granting education industry was estimated to be a $559 billion industry in 2011, according to the Digest of Education Statistics published in 2013 by the U.S. Department of Education’s National Center for Education Statistics (the “NCES”). We believe that the majority of undergraduates are in some way non-traditional (defined as a student who delays enrollment, attends part-time, works full-time, is financially independent for purposes of financial aid eligibility, has dependents other than a spouse, is a single parent, or does not have a high school diploma). The non-traditional students (whom we generally refer to as working learners) typically are looking to improve their skills and enhance their earnings potential within the context of their careers.
The education formats offered by our institutions enable working learners to attend classes and complete coursework on a more flexible schedule than many traditional universities offer. Although an increasing proportion of colleges and universities are addressing the needs of working learners as discussed in Competition below, some traditional universities and institutions are not able to address the needs of working learners.
International
We believe private education is playing an important role in advancing the development of education, specifically higher education and lifelong learning, in many countries around the world. In addition, we believe the following key trends are driving growth in private education worldwide:
Unmet demand for education in part due to insufficient public funding;
Shortcomings in the quality of higher education offerings, resulting in the rise of supplemental training to meet industry demands in the developing world;
Worldwide appreciation of the importance that knowledge plays in economic progress; and
Increased availability and role of technology in education, broadening the accessibility and reach of education.

6


Our Programs
Our experience as an education provider enables us to deliver quality education and responsive customer service to students at the undergraduate, master’s and doctoral levels. Our institutions have gained expertise in designing curriculum, recruiting and training faculty, monitoring academic quality, and providing a high level of support services to students. Our institutions offer the following:
Accredited Degree Programs. University of Phoenix, Western International University and CFFP are accredited by The Higher Learning Commission (“HLC”) of the North Central Association of Colleges and Schools. In July 2013, University of Phoenix and Western International University’s accreditations were reaffirmed for a ten-year period and both institutions were placed on Notice status for a two-year period by HLC. Refer to Accreditation and Jurisdictional Authorizations below. In addition to the institutional accreditation by HLC, certain of our academic programs are accredited on a programmatic basis by appropriate accrediting entities.
University of Phoenix offers degrees in the following program areas:
 
 
Associate’s
 
Bachelor’s
 
Master’s
 
Doctoral
Arts and Sciences
 
X
 
X
 
 
 
 
Business and Management
 
X
 
X
 
X
 
X
Criminal Justice and Security
 
X
 
X
 
X
 
 
Education
 
X
 
X
 
X
 
X
Human Services
 
X
 
X
 
X
 
 
Nursing and Health Care
 
X
 
X
 
X
 
X
Psychology
 
X
 
X
 
X
 
X
Technology
 
X
 
X
 
X
 
X
Our international operations offer bachelor’s, master’s and doctoral degrees in a variety of degree programs and related areas of specialization. This includes degrees from BPP University, which is principally comprised of BPP Law School and BPP Business School, and has been granted degree-awarding powers by the United Kingdom’s Privy Council. Certain of BPP’s programs also have additional programmatic accreditations.
Professional Examinations Training and Professional Development. BPP provides training and published materials for qualifications in specific markets in accountancy (including tax), financial services, actuarial science, insolvency, human resources, marketing, management and law. University of Phoenix and certain of our other institutions also provide professional development education.
Employers. University of Phoenix and our Workforce Solutions team, which establishes relationships with employers, has formed more than 2,000 relationships. The University works closely with employers to meet their specific educational needs through modification of our existing programs and, in some cases, provides programs specifically selected for their employees.
Teaching/Learning Model
Domestic Postsecondary
The teaching/learning models used by University of Phoenix were designed specifically to meet the educational needs of working learners, who seek accessibility, curriculum consistency, time and cost-effectiveness, and learning that has immediate application to the workplace. The models are structured to enable students who are employed full-time or have other commitments to earn their degrees and still meet their personal and professional responsibilities. Our focus on working, non-traditional, non-residential students minimizes the need for capital-intensive facilities and services like dormitories, student unions, food service, health care, sports and entertainment.
University of Phoenix has campus locations and learning centers throughout the United States, including the Commonwealth of Puerto Rico, and offers students the flexibility to attend both on-campus and online classes. The majority of University of Phoenix students study exclusively online. The University’s online classes employ a proprietary online learning system, are small and have mandatory participation requirements for both the faculty and the students. Each online course is instructionally designed so that students have learning outcomes that are consistent with the outcomes of their on-campus counterparts. All online class materials are delivered electronically.

7


Components of University of Phoenix’s teaching/learning models for both online and on-campus classes include:
Curriculum. Faculty content experts design the curriculum for the University’s programs, which enables it to offer current and relevant standardized programs to its students. The curricula are designed to integrate academic theory and professional practice and their application to the workplace, and to provide for the achievement of specified educational outcomes that are based on input from faculty, students and employers. University of Phoenix has incorporated adaptive learning into its curricula to offer an individualized approach to learning.
Faculty. Substantially all University of Phoenix faculty possess either a master’s or doctoral degree. Faculty members typically have many years of experience in the field in which they instruct, and most teach on an adjunct basis. The University has well-developed methods for hiring and training faculty, which include peer reviews of newly hired instructors by other members of the faculty, training in student instruction and grading, and teaching mentorships with more experienced faculty members. With courses designed to facilitate the application of knowledge and skills to the workplace, faculty members are able to share their professional knowledge and skills with the students.
As part of our strategy to achieve significant improvements in student retention, we have recently increased our use of full-time faculty in the initial courses students take at the University.
Accessibility. Most of University of Phoenix’s academic programs may be accessed through a choice of delivery mode (electronically delivered, campus-based or a blend of both), which make its educational programs accessible, regardless of where the students work and live.
Class Schedule and Active Learning Environment. Courses are designed to encourage and facilitate collaboration among students and interaction with the instructor. The curriculum requires a high level of student participation for purposes of enhancing learning and increasing the student’s ability to work as part of a team. University of Phoenix students are enrolled in five-to-nine week courses year-round and may complete classes sequentially or concurrently depending on their degree level. All courses involve collaborative learning activities.
Student Education Services. The following services are available to students and faculty, as applicable:
Electronic and other learning resources for their information and research needs;
Tutoring;
Centers for Math and Writing Excellence;
Adaptive learning tools;
Student workshops;
Career resources; and
PhoenixConnect, the University’s proprietary academic social media network, which is used to support students in their academic programs. Each college has an online community manager who provides oversight and guidance with respect to college-related conversations in the network.
University of Phoenix is actively working to improve its major learning platform in order to deliver highly personalized learning to students, ease the administrative burden on faculty, improve overall student and faculty experiences, and lead to better educational outcomes. In addition, the University is further developing its services, such as diagnostic tools and individual learning plans, to specifically assist students who have limited or no higher education experience or otherwise may be unprepared to succeed in its academic programs.
Academic Quality. University of Phoenix has an academic quality assessment plan that measures whether the institution provides consistent quality and academic rigor through its delivery of educational programs online and on geographically dispersed campuses. A major component of this plan is the assessment of student learning. To assess student learning, University of Phoenix measures whether graduates meet its programmatic and learning goals. The measurement is composed of the following four ongoing and iterative steps:
Preparing an annual assessment plan for academic programs;
Preparing an annual assessment result report for academic programs, based on student learning outcomes;
Implementing improvements based on assessment results; and
Monitoring effectiveness of implemented improvements.

8


By achieving programmatic competencies, University of Phoenix graduates are expected to become proficient in the following areas:
Critical thinking and problem solving;
Collaboration;
Information utilization;
Communication; and
Professional competence and values.
University of Phoenix has developed an assessment matrix that outlines specific learning outcomes to measure whether students are meeting the University’s learning goals. Multiple methods have been identified to assess each outcome.
International
Our international operations include full-time and part-time courses, delivered on-campus or online, for professional examination preparation, professional development training and various degree/certificate/diploma programs. Our international operations faculty members consist of both full-time and part-time professors and our recruitment standards and processes are appropriate for the respective markets in which we operate.
Our international institutions typically follow a course development process in which faculty members who are subject matter experts work with instructional designers to develop curriculum materials based on learning objectives provided by school academic officers. Curricula are tailored to the relevant standards applicable to the respective markets.
Admissions
To gain admission to our undergraduate programs, students must generally have a high school diploma or equivalent, and for admission to our domestic institutions, must be proficient in English. University of Phoenix currently requires substantially all of its prospective associate’s and bachelor’s students with fewer than 24 incoming credits to participate in University Orientation. This program is a free, three-week orientation designed to help inexperienced prospective students better understand the time commitments and rigors of higher education prior to enrollment. Students practice using the University of Phoenix learning system, learn techniques to be successful in college, and identify useful university services and resources.
The University is currently piloting a new format of the University Orientation program for certain new students, which integrates elements of University Orientation into these students’ first for-credit course.
To gain admission to our master’s and doctoral programs, students must have an undergraduate degree, and generally for doctoral programs, a master’s degree, from a regionally or nationally accredited college or university, satisfy the minimum grade point average requirement, and have relevant work experience, if applicable for their field of study.
Students
University of Phoenix Degreed Enrollment
University of Phoenix Degreed Enrollment for a quarter represents students enrolled in a degree program who attended a credit bearing course during the quarter and had not graduated as of the end of the quarter; students who previously graduated from one degree program and started a new degree program in the quarter (e.g., a graduate of the associate’s degree program returns for a bachelor’s degree); and students participating in certain certificate programs of at least 18 credits with some course applicability into a related degree program.

9


The following details University of Phoenix Degreed Enrollment by degree type for the indicated periods:
(Rounded to the nearest hundred)
Quarter
 
Associate’s
 
 
Bachelor’s
 
 
Master’s
 
 
Doctoral
 
 
Total
Q1 2011
 
177,200
40.4%
 
 
187,300
42.8%
 
 
66,000
15.1%
 
 
7,600
1.7%
 
 
438,100
Q2 2011
 
155,500
38.4%
 
 
181,200
44.7%
 
 
61,200
15.1%
 
 
7,400
1.8%
 
 
405,300
Q3 2011
 
147,900
37.1%
 
 
184,500
46.3%
 
 
58,500
14.7%
 
 
7,500
1.9%
 
 
398,400
Q4 2011
 
136,300
35.8%
 
 
183,100
48.1%
 
 
54,000
14.2%
 
 
7,400
1.9%
 
 
380,800
Q1 2012
 
130,300
34.9%
 
 
182,500
48.9%
 
 
52,900
14.2%
 
 
7,400
2.0%
 
 
373,100
Q2 2012
 
118,100
33.2%
 
 
179,400
50.4%
 
 
51,000
14.3%
 
 
7,300
2.1%
 
 
355,800
Q3 2012
 
112,100
32.4%
 
 
178,300
51.5%
 
 
48,900
14.1%
 
 
7,000
2.0%
 
 
346,300
Q4 2012
 
102,600
31.2%
 
 
172,600
52.6%
 
 
46,400
14.1%
 
 
6,800
2.1%
 
 
328,400
Q1 2013
 
99,100
31.0%
 
 
168,000
52.5%
 
 
46,000
14.4%
 
 
6,600
2.1%
 
 
319,700
Q2 2013
 
89,900
29.9%
 
 
159,600
53.1%
 
 
44,900
14.9%
 
 
6,400
2.1%
 
 
300,800
Q3 2013
 
84,300
29.3%
 
 
154,100
53.6%
 
 
42,900
14.9%
 
 
6,200
2.2%
 
 
287,500
Q4 2013
 
76,400
28.4%
 
 
146,100
54.3%
 
 
40,600
15.1%
 
 
5,900
2.2%
 
 
269,000

10


University of Phoenix New Degreed Enrollment
University of Phoenix New Degreed Enrollment for each quarter represents new students and students who have been out of attendance for more than 12 months who enroll in a degree program and start a credit bearing course in the quarter; students who have previously graduated from a degree program and start a new degree program in the quarter; and students who commence participation in certain certificate programs of at least 18 credits with some course applicability into a related degree program.
The following details University of Phoenix New Degreed Enrollment by degree type for the indicated periods:
(Rounded to the nearest hundred)
Quarter
 
Associate’s
 
 
Bachelor’s
 
 
Master’s
 
 
Doctoral
 
 
Total
Q1 2011
 
24,000
42.5%
 
 
22,800
40.3%
 
 
8,900
15.8%
 
 
800
1.4%
 
 
56,500
Q2 2011
 
18,900
39.2%
 
 
20,900
43.4%
 
 
7,800
16.2%
 
 
600
1.2%
 
 
48,200
Q3 2011
 
23,400
41.8%
 
 
24,000
42.9%
 
 
7,900
14.1%
 
 
700
1.2%
 
 
56,000
Q4 2011
 
24,200
39.5%
 
 
27,200
44.5%
 
 
9,000
14.7%
 
 
800
1.3%
 
 
61,200
Q1 2012
 
27,800
43.6%
 
 
26,100
41.0%
 
 
8,900
14.0%
 
 
900
1.4%
 
 
63,700
Q2 2012
 
18,500
38.0%
 
 
22,000
45.2%
 
 
7,500
15.4%
 
 
700
1.4%
 
 
48,700
Q3 2012
 
21,400
41.5%
 
 
22,100
42.9%
 
 
7,400
14.4%
 
 
600
1.2%
 
 
51,500
Q4 2012
 
20,400
38.7%
 
 
23,500
44.5%
 
 
8,200
15.5%
 
 
700
1.3%
 
 
52,800
Q1 2013
 
22,900
42.3%
 
 
22,500
41.6%
 
 
8,000
14.8%
 
 
700
1.3%
 
 
54,100
Q2 2013
 
14,900
38.3%
 
 
16,700
42.9%
 
 
6,700
17.2%
 
 
600
1.6%
 
 
38,900
Q3 2013
 
15,800
40.6%
 
 
16,400
42.2%
 
 
6,200
15.9%
 
 
500
1.3%
 
 
38,900
Q4 2013
 
15,300
37.3%
 
 
17,800
43.4%
 
 
7,400
18.1%
 
 
500
1.2%
 
 
41,000

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University of Phoenix Student Demographics
We have a diverse student population. The following provides the demographic characteristics of the students attending University of Phoenix courses:
Gender(1)
 
2013
 
2012
 
2011
Female
 
66.4
%
 
67.2
%
 
67.7
%
Male
 
33.6
%
 
32.8
%
 
32.3
%
 
 
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
Race/Ethnicity(2)
 
 
 
 
 
 
African-American
 
29.0
%
 
28.8
%
 
28.0
%
Asian/Pacific Islander
 
3.3
%
 
3.2
%
 
3.2
%
Caucasian
 
47.5
%
 
48.7
%
 
50.7
%
Hispanic
 
14.3
%
 
13.3
%
 
12.4
%
Native American/Alaskan
 
1.0
%
 
1.2
%
 
1.2
%
Other/Unknown
 
4.9
%
 
4.8
%
 
4.5
%
 
 
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
Age(1)
 
 
 
 
 
 
22 and under
 
11.2
%
 
12.3
%
 
12.3
%
23 to 29
 
31.8
%
 
31.9
%
 
32.0
%
30 to 39
 
33.4
%
 
32.9
%
 
32.8
%
40 to 49
 
16.9
%
 
16.5
%
 
16.4
%
50 and over
 
6.7
%
 
6.4
%
 
6.5
%
 
 
100.0
%
 
100.0
%
 
100.0
%
(1) Based on students included in aggregate New Degreed Enrollment, which represents the sum of the four quarters of New Degreed Enrollment in the respective fiscal years.
(2) Based on voluntary reporting by students included in New Degreed Enrollment. For 2013, 2012 and 2011, 67%, 71% and 68%, respectively, of the students attending University of Phoenix courses provided this information.
Marketing
We engage in a broad range of advertising and marketing activities to educate students about the options they have in higher learning and convey our value proposition and offerings to connect education to careers. We are focused on enhancing our brand perception and utilizing our different communication channels, which are discussed below, to attract students who are more likely to persist in our programs.
Brand
Brand advertising is intended to increase potential students’ understanding of our academic quality, commitment to service, academic outcomes, academic community achievements and connection of education to careers. Our brand is advertised primarily through national and regional broadcast, radio and print media. Brand advertising also serves to expand the addressable market and establish brand recognition and familiarity with our schools, colleges and programs on both a national and a local basis.
Internet
Many prospective students identify their education opportunities online through search engines, information and social network sites, various education portals on the Internet and school-specific sites such as our own phoenix.edu. We advertise on the Internet using search engine keywords, banners, and custom advertising placements on targeted sites, such as education portals, career sites, and industry-specific websites. We have reduced our use of third-party operated sites and increased our use of branded media channels because we believe this approach will help us better identify students who are more likely to persist in our educational programs. Our website, phoenix.edu, provides prospective students with relevant information about University of Phoenix and will continue to evolve with in-depth programmatic and education to careers content.

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Sponsorships, Corporate Social Responsibility and Other
We build our presence in communities through sponsorships, advertising and event marketing to support specific activities, including local and national career events, academic lecture series, workshops and symposiums on various current topics of interest and through our corporate social responsibility outreach program.
Relationships with Employers and Community Colleges
We work closely with businesses and governmental agencies to meet their specific educational needs through modification of our existing programs or development of customized programs. These programs can be offered on-site at the employers’ offices or at select military bases.
Our Workforce Solutions team establishes relationships with employers and community colleges that we believe will lead to increased enrollment from those sources. The relationships with community colleges consist of connecting associate’s degree student graduates at community colleges with University of Phoenix bachelor’s degree programs. Where appropriate, we also help community college students gain access to specific courses they need to complete their degrees through a reverse articulation program. We also work with community colleges to, where possible, connect education to careers by providing students with a course of study relevant to local employers.
BPP enrolls the majority of its students through relationships with employers.
Phoenix Prep Center
The Phoenix Prep Center serves prospective students by providing online tools, information, and resources that answer key questions and concerns for prospective students, including assessments of a potential student’s learning style, academic abilities and readiness to pursue higher education, a tuition calculator and information on careers.
Phoenix Career Services
Through Phoenix Career Services, we are working to expand the traditional concept of career services to include the career exploration and planning during the pre-enrollment phase and the student’s academic journeyOur recently launched Phoenix Career Guidance System allows students to clarify their career aspirations in the pre-enrollment process, and then create personalized career plans upon enrollment that will help them develop, through their academic journeys, the skills and competencies aligned to their desired careers.
Students and alumni can also access our Phoenix Career Services online portal where they will find career preparation tools such as resume and cover letter development services, interview preparation services and a collection of content and videos to help prepare for a career change or advancement opportunity. Once students are ready to search for a career, Phoenix Career Services also provides personal assistance through a nationwide network of career coaches and an online job board from which students can access current career opportunities at a selection of companies across the U.S.
Competition
Domestic Postsecondary
The U.S. higher education industry is highly fragmented with no single private or public institution having a significant market share. We compete primarily with traditional public and private two-year and four-year degree-granting regionally accredited colleges and universities, other proprietary degree-granting regionally accredited schools and alternatives to higher education. In addition, we face increasing competition from various emerging non-traditional, credit-bearing and noncredit-bearing education programs, offered by both proprietary and not-for-profit providers. These include massive open online courses (so-called MOOCs) offered worldwide without charge by traditional educational institutions, synchronous massive online courses (SMOCs) offered worldwide for credit by traditional educational institutions, and other direct-to-consumer education services. Some of our competitors have greater financial and nonfinancial resources than we have and are able to offer programs similar to ours at a lower tuition level for a variety of reasons, including the availability of direct and indirect government subsidies, government and foundation grants, large endowments, tax-deductible contributions and other financial resources not available to proprietary institutions, or by providing fewer student services or larger class sizes.
The higher education industry is also experiencing unprecedented, rapidly developing changes due to technological developments, evolving needs and objectives of students and employers, economic constraints affecting educational institutions and students, price competition, increased focus on affordability and other factors that challenge many of the core principles underlying the industry. Related to this, a substantial proportion of traditional colleges and universities and community colleges now offer some form of distance learning or online education programs, including programs geared towards the needs of working learners. As a result, we continue to face increasing competition, including from colleges with well-established brand names. As the online and distance learning segment of the postsecondary education market matures, we believe that the intensity of the competition we face will continue to increase.

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We are working to accelerate the enhancement of our offerings to remain competitive and to more effectively deliver a quality student experience at the right value. In addition, we have increased our use of scholarships and discounts to improve our value proposition to prospective students.
We believe that the primary factors on which we compete are the following:
Breadth of reliable and high-quality products and services;
Active and relevant curriculum development that considers the needs of employers;
Career assessment and planning, and connecting career opportunities at leading companies to our students and alumni;
The ability to provide flexible and convenient access to programs and classes;
Comprehensive and differentiated student support services such as academic social networking;
Reputation of the institution and its programs;
Qualified and experienced faculty;
Size of alumni network;
Relationships with community colleges; and
The variety of geographic locations of campuses.
International
Competitive factors for our international schools vary by country and generally include the following:
Active and relevant curriculum development that considers the needs of employers; 
Breadth of reliable and high-quality programs and classes; and
Reputation of programs and classes.
Employees
As of August 31, 2013, we had approximately 15,000 non-faculty employees, with less than 1,000 of the employees part-time. We also have approximately 29,000 faculty members as of August 31, 2013, which principally represents University of Phoenix faculty who have taught in the last twelve months and are eligible to teach future courses. Most of our faculty are adjunct part-time faculty. We believe that our employee relations are satisfactory.
In recent years, we have implemented workforce reductions as we reengineer our business processes and refine our educational delivery systems. We have continued restructuring our business subsequent to August 31, 2013, which includes workforce reductions of approximately 500 non-faculty personnel.
Accreditation and Jurisdictional Authorizations
Domestic Postsecondary
Accreditation
University of Phoenix is regionally accredited by the Higher Learning Commission (“HLC”) of the North Central Association of Colleges and Schools, which provides the following:
Recognition and acceptance by employers, other higher education institutions and governmental entities of the degrees and credits earned by students;
Qualification to participate in Title IV programs (in combination with state higher education operating and degree granting authority); and
Qualification for authority to operate in certain states.
Regional accreditation is accepted nationally as the basis for the recognition of earned credit and degrees for academic purposes, employment, professional licensure and, in some states, authorization to operate as a degree-granting institution. The six regional accrediting associations, including HLC, have a reciprocity agreement that allows representatives of each region in which a regionally accredited institution operates to participate in the institution’s evaluation for reaffirmation of accreditation.
In July 2013, the accreditation of University of Phoenix was reaffirmed by the HLC through the 2022-2023 academic year. At the same time, HLC placed the University on Notice status for a two-year period due to concerns regarding governance, student assessment and faculty scholarship/research for doctoral programs. Notice status is a sanction that means that HLC has determined that an institution is on a course of action that, if continued, could lead the institution to be out of compliance with one or more of the HLC Criteria for Accreditation or Core Components. The University was assigned by HLC to the Standard

14


Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2016-2017 and will undergo its next reaffirmation visit and process in 2022-2023.
The University is required to submit a Notice Report to the HLC by Fall of 2014 providing evidence that the University meets the Criteria for Accreditation, Core Components and Minimum Expectations (Assumed Practices after January 1, 2013) identified as the basis for the Notice sanction and that it has ameliorated the issues that led to the Notice sanction. In addition, in the Notice Report the University is also required to report on its progress in other areas of concern not included in the Notice sanction, including retention and graduation rates, three-year student loan cohort default rates, and credit hour policies and practices relating to learning teams. The University also will be required to host a focused visit by the HLC no later than January 2015, to validate the contents of the Notice Report. The HLC Board of Trustees will review the University’s Notice Report, together with a report of the focused visit, at a meeting in 2015. During the Notice period, the University is required to disclose its Notice status in connection with any statements regarding its HLC accreditation.
Accreditation information for University of Phoenix and applicable programs is described in the chart below:
Institution/Program
Accrediting Body (Year Accredited)
Status
University of Phoenix
- The Higher Learning Commission of the North Central Association of Colleges and Schools (1978, reaffirmed in 1982, 1987, 1992, 1997, 2002 and 2013)
- Refer above for discussion of Notice status and upcoming reports, evaluations and visits
- Business programs
- Association of Collegiate Business Schools and Programs (2007)
- Reaffirmation visit expected in 2017
- Bachelor of Science in Nursing
- Commission on Collegiate Nursing Education (2005)
- Previously accredited by National League for Nursing Accrediting Commission from 1989 to 2005
- Reaffirmation visit expected in 2020
- Master of Science in Nursing
- Commission on Collegiate Nursing Education (2005)
- Previously accredited by National League for Nursing Accrediting Commission from 1996 to 2005
- Reaffirmation visit expected in 2020
- Master of Counseling in Clinical Mental Health (Phoenix and Tucson, Arizona campuses)
- Council for Accreditation of Counseling and Related Educational Programs (2012)
- Reaffirmation visit expected in 2017 or 2018
- Master of Counseling in Mental Health Counseling (Salt Lake City, Utah campus)
- Council for Accreditation of Counseling and Related Educational Programs (2001, reaffirmed in 2010, and in 2012)
- Reaffirmation visit expected in 2015 or 2016
- Master of Arts in Education with options in Elementary Teacher Education and Secondary Teacher Education

- Candidate for Accreditation in Utah and Hawaii (mandatory for operation)
- Teacher Education Accreditation Council (“TEAC”) (reaffirmed in 2007)

- National Council for Accreditation of Teacher Education (“NCATE”)
- The University’s programmatic accreditation from TEAC will expire at the end of 2013. TEAC and NCATE have merged and become the Council for the Accreditation of Educator Preparation (“CAEP”). CAEP is finalizing its new accreditation processes. The University has elected to allow the programmatic accreditation from TEAC to expire, will pursue NCATE programmatic accreditation in those states where it is mandatory for operation (Utah and Hawaii) in the interim, and will consider the new CAEP options as they emerge.
Western International University has been accredited by HLC since 1984. In July 2013, the accreditation of WIU was reaffirmed by the HLC through the 2022-2023 academic year. At the same time, HLC placed WIU on Notice status for a two-year period due to concerns relating to governance, student assessment and faculty.
Our other domestic institutions maintain the requisite accreditations for their respective operations.

15


Jurisdictional Authorizations
In addition to accreditation by independent accrediting bodies, our schools must be authorized to operate by the appropriate regulatory authorities in many of the jurisdictions in which they operate.
In the U.S., institutions that participate in Title IV programs must be authorized to operate by the appropriate postsecondary regulatory authority in each state where the institution has a physical presence. University of Phoenix is specifically authorized to operate in all but two of the domestic jurisdictions in which it operates. In Hawaii and New Mexico, University of Phoenix has a physical presence and is qualified to operate through July 1, 2014 without specific state regulatory approval due to available state exemptions and annual waivers from the U.S. Department of Education. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - If we fail to maintain any of our state authorizations, we would lose our ability to operate in that state and to participate in Title IV programs there.
All regionally accredited institutions, including University of Phoenix, are required to be evaluated separately for authorization to operate in the Commonwealth of Puerto Rico. University of Phoenix has obtained authorization from the Puerto Rico Commission on Higher Education, and that authorization remains in effect.
Some states assert authority to regulate all degree-granting institutions if their educational programs are available to their residents, whether or not the institutions maintain a physical presence within those states. University of Phoenix and Western International University have obtained licensure in states which require such licensure and where students are enrolled.
Our other domestic institutions maintain the requisite authorizations in the jurisdictions in which they operate.
International
Our international schools must be authorized by the relevant regulatory authorities under applicable local law, which in some cases requires accreditation, as described in the chart below:
School
Accrediting Body
Operational Authority
BPP
- BPP Professional Education and BPP University of Professional Studies operate under a number of professional body accreditations to offer training towards professional body certifications
- BPP has additional accreditations by country and/or program as necessary
- The Privy Council for the United Kingdom has designated BPP University of Professional Studies Limited as an awarding body for qualifications (including degrees) in the United Kingdom.
- BPP University of Professional Studies’ accreditation review during 2018-2019 school year.
ULA
- Federation of Private Mexican Institutions of Higher Education (Federación de Instituciones Mexicanas Particulares de Educación Superior)
- Mexico’s Ministry of Public Education (Secretaria de Educación Pública)
- Ministry of Education of the State of Morelos (Secretaria de Educación del Estado de Morelos)
- National Autonomous University of Mexico (Universidad Nacional Autónoma de México)
UNIACC(1)
- Council for Higher Education (Consejo Superior de Educación)
- Chilean Ministry of Education (Ministerio de Educación de Chile)
(1) Prior to November 2011, UNIACC was accredited by the National Accreditation Commission of Chile. In November 2011, the National Accreditation Commission elected not to renew the accreditation, which therefore lapsed. 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. We expect to consider pursuing re-accreditation with the National Accreditation Commission in fiscal year 2014 when regulations permit.

16


Financial Aid Programs
Domestic Postsecondary
The principal source of federal student financial aid in the U.S. is Title IV of the Higher Education Act, as it is amended and reauthorized from time to time by the U.S. Congress, and the related regulations adopted by the U.S. Department of Education. We refer to the financial aid programs under this Act as “Title IV” programs. In 2008, the Higher Education Act was reauthorized through September 30, 2013 by the Higher Education Opportunity Act. Congress has begun Higher Education Act reauthorization hearings and there is currently an automatic one year extension that continues the current authorization through September 30, 2014.
Financial aid under Title IV is awarded annually to eligible students. Some Title IV programs award financial aid on the basis of financial need, generally defined as the difference between the cost of attending an educational institution and the amount the student and/or the student’s family, as the case may be, can reasonably be expected to contribute to that cost. The amount of financial aid awarded to a student each academic year is based on many factors, including, but not limited to, program of study, grade level, Title IV annual loan limits, and financial need. We have substantially no control over the amount of Title IV student loans or grants sought by or awarded to our students. All recipients of Title IV program funds must maintain satisfactory academic progress within the guidelines published by the U.S. Department of Education to remain eligible. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - Action by the U.S. Congress to revise the laws governing federal student financial aid programs or reduce funding for those programs, including changes applicable only to proprietary educational institutions, could reduce our enrollment and increase our costs of operation.
In addition to Title IV student financial aid, qualifying U.S. active military and veterans and their family members are eligible for federal student aid from various Department of Defense programs, including under the Post-9/11 GI Bill. We refer to the financial aid programs administered by the Department of Defense as “military benefit” programs.
We collected the substantial majority of our fiscal year 2013 total consolidated net revenue from receipt of Title IV financial aid program funds, principally from federal student loans and Pell Grants. University of Phoenix represented 90% of our fiscal year 2013 total consolidated net revenue and University of Phoenix generated 83% of its cash basis revenue for eligible tuition and fees during fiscal year 2013 from the receipt of Title IV financial aid program funds, as calculated under the 90/10 Rule described below.
Student loans currently are the most significant component of Title IV financial aid and are administered through the Federal Direct Loan Program. Annual and aggregate loan limits apply based on the student’s grade level and other factors. Currently, the maximum annual loan amounts range from $3,500 to $12,500 for undergraduate students and $20,500 for graduate students. There are two types of federal student loans: subsidized loans, which are based on the statutory calculation of student need, and unsubsidized loans, which are not based on student need. Neither type of student loan is based on creditworthiness. Students are not responsible for interest on subsidized loans while enrolled in school. Graduate and professional students are not eligible for subsidized loans. Students are responsible for the interest on unsubsidized loans while enrolled in school, but have the option to defer payment while enrolled. Repayment on federal student loans begins six months after the date the student ceases to be enrolled. The loans are repayable over the course of 10 years and, in some cases, longer. During fiscal year 2013, student loans (both subsidized and unsubsidized) represented approximately 77% of the gross Title IV funds received by University of Phoenix.
Federal Pell Grants are awarded based on need and only to undergraduate students who have not earned a bachelor’s or professional degree. Unlike loans, Pell Grants do not have to be repaid. During fiscal year 2013, Pell Grants represented approximately 23% of the gross Title IV funds received by University of Phoenix. The eligibility for and maximum amount of Pell Grants have increased over recent years. Since the 2006-2007 award year, the maximum annual Pell Grant award has increased from $4,050 to $5,645 for the 2013-2014 award year. Because the federal Pell Grant program is one of the largest non-defense discretionary spending programs in the federal budget, it is a target for reduction as Congress addresses the U.S. budget deficits. A reduction in the maximum annual Pell Grant amount or changes in eligibility could negatively impact enrollment and could result in increased student borrowing, which would make it more difficult for us to comply with other important regulatory requirements such as maintaining student loan cohort default rates below specified levels.
The remaining funding for tuition and other fees paid by our students primarily consists of state-funded student financial aid, tuition assistance from employers and personal funds.
International
Although students enrolled at certain of our international institutions receive government financial aid funding, such funding is not a material component of our net revenue from international institutions.

17


Regulatory Environment
Domestic Postsecondary
Our domestic postsecondary institutions are subject to extensive federal and state regulations. The Higher Education Act, as reauthorized, and the related U.S. Department of Education regulations govern all higher education institutions participating in Title IV financial aid programs, and provide for a regulatory triad by mandating specific regulatory responsibilities for each of the following:
The accrediting agencies recognized by the U.S. Department of Education;
The federal government through the U.S. Department of Education; and
State higher education regulatory bodies.
To be eligible to participate in Title IV programs, a postsecondary institution must be accredited by an accrediting body recognized by the U.S. Department of Education, must comply with the Higher Education Act, as reauthorized, and all applicable regulations thereunder, and must be authorized to operate by the appropriate regulatory authority in each state where the institution maintains a physical presence. We have summarized below recent material activity in the regulatory environment affecting our business and the most significant regulatory requirements applicable to our domestic postsecondary operations.
Changes in or new interpretations of applicable laws, rules, or regulations could have a material adverse effect on our eligibility to participate in Title IV programs, accreditation, authorization to operate in various states, permissible activities, and operating costs. The failure to maintain or renew any required regulatory approvals, accreditation, or state authorizations could have a material adverse effect on us. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate.
Eligibility and Certification Procedures. The Higher Education Act, as reauthorized, 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 expired on December 31, 2012. University of Phoenix has submitted necessary documentation for re-certification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We have no reason to believe that the University’s application will not be renewed in due course, and it is not unusual to be continued on a month-to-month basis until the Department completes its review. However, we cannot predict whether, or to what extent, the imposition of the Notice sanction by The Higher Learning Commission might have on this process.
Western International University was recertified in May 2010 and entered into a new Title IV Program Participation Agreement which expires on September 30, 2014.
U.S. Department of Education Rulemaking Initiative. Negotiated rulemaking public hearings were held by the U.S. Department of Education in May and June 2013. Topics included cash management of Title IV program funds, state authorization for programs offered through distance education or correspondence education, and gainful employment, among others. The negotiated rulemaking process is expected to produce new regulations which will be published this fall and may be effective as soon as July 1, 2014. More information can be found at
http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/index.html.
A negotiated rulemaking committee was convened by the Department in September 2013 specifically on the topic of gainful employment. Prior to the September 2013 committee meeting, the Department released draft regulations on gainful employment. The draft regulations provide for two metrics: an annual debt-to-earnings ratio, and a debt service-to-discretionary income ratio. As proposed, a program would become ineligible for Title IV funding if it fails both metrics in two out of any three consecutive years, or is in a specified “warning zone” for either metric in any four consecutive years. The timing and substance of final regulations dealing with gainful employment cannot be predicted at this time. More information can be found at http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/gainfulemployment.html.
Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - Rulemaking by the U.S. Department of Education could materially and adversely affect our business.
90/10 Rule. University of Phoenix and Western International University, and all other proprietary institutions of higher education, are subject to the so-called “90/10 Rule” under the Higher Education Act, as reauthorized. Under this rule, a proprietary institution will be ineligible to participate in Title IV programs for at least two fiscal years if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue, as defined in the rule, from Title IV programs. If an institution is determined to be ineligible, any disbursements of Title IV program funds made while ineligible must be repaid to the Department. An institution that derives more than 90% of its cash basis revenue from Title IV programs for any single fiscal year will be automatically placed on provisional certification for two fiscal years and will be subject to possible additional sanctions determined to be appropriate under the circumstances by the U.S. Department of Education. While the Department

18


has broad discretion to impose additional sanctions on such an institution, there is only limited precedent available to predict what those sanctions might be, particularly in the current regulatory environment. For example, the Department could impose conditions in the provisional certification such as:
Restrictions on the total amount of Title IV program funds that may be disbursed to students;
Restrictions on programmatic and geographic expansion;
Requirements to obtain and post letters of credit;
Additional reporting requirements such as interim financial reporting; or
Any other conditions deemed appropriate by the Department.
In addition, if an institution is subject to a provisional certification at the time that its current program participation agreement expired, the effect on recertification of the institution or continued eligibility in Title IV programs pending recertification is uncertain.
The 90/10 Rule percentages for University of Phoenix and Western International University were the following for the respective periods:
 
Year Ended August 31,
 
2013
 
2012
 
2011(1)
University of Phoenix
83%
 
84%
 
86%
Western International University
66%
 
68%
 
66%
(1) Calculated excluding the temporary relief from the impact of loan limit increases, which was allowable for amounts received and applied to eligible charges between July 1, 2008 and June 30, 2011 that were attributable to the increased annual loan limits.
The decrease in the University of Phoenix 90/10 Rule percentage is attributable to changes in student mix and their associated available sources of tuition funding. As the University’s enrollment has declined in recent years, the proportion of its student body that uses a lower percentage of Title IV funds for eligible tuition and fees, such as students that receive tuition assistance from employers or that participate in military benefit programs, has increased. The University has also implemented various other measures in recent years intended to reduce the percentage of its cash basis revenue attributable to Title IV funds, including encouraging students to carefully evaluate the amount of necessary Title IV borrowing and continued focus on professional development and continuing education programs. The University has substantially no control over the amount of Title IV student loans and grants sought by or awarded to its students.
Based on recent trends, we do not expect the 90/10 Rule percentage for University of Phoenix to exceed 90% for fiscal year 2014. However, the 90/10 Rule percentage for University of Phoenix remains high and could exceed 90% in the future depending on the degree to which its various initiatives are effective, the impact of future changes in its enrollment mix, and regulatory and other factors outside our control, including any reduction in military benefit programs or changes in the treatment of such funding for purposes of the 90/10 Rule calculation.
Various legislative proposals have been introduced in Congress that would heighten the requirements of the 90/10 Rule, including proposals that would reduce the 90% maximum under the rule to the pre-1998 level of 85%, cause tuition derived from military benefit programs to be included in the 85% portion under the rule instead of the 10% portion as is the case today, and impose Title IV ineligibility after one year of noncompliance rather than two. If these or similar proposals are adopted, University of Phoenix may be required to increase efforts and resources dedicated to reducing the percentage of cash basis revenue attributable to Title IV funds.
Any necessary further efforts to reduce the 90/10 Rule percentage for University of Phoenix, especially if the percentage exceeds 90% for a fiscal year, may involve taking measures which reduce our revenue, increase our operating expenses, or both, in each case perhaps significantly. In addition, we may be required to make structural changes to our business in the future in order to remain in compliance, which changes may materially alter the manner in which we conduct our business and materially and adversely impact our business, financial condition, results of operations and cash flows. Furthermore, these required changes could make it more difficult to comply with other important regulatory requirements, such as the student loan cohort default rate regulations, which are discussed below.
Student Loan Cohort Default Rates. To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain specified levels. Each cohort is the group of students who first enter into student loan repayment during a federal fiscal year (ending September 30). The cohort default rates are published by the U.S. Department of Education approximately 12 months after the end of the applicable measuring period. Thus, in September 2013, the Department published the two-year cohort default rates for the 2011 cohort and the three-year cohort default rates for the 2010 cohort. As discussed below, the measurement period for the student loan cohort default rates has been increased from two

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to three years starting with the 2009 cohort; however both three-year and two-year cohort default rates are currently published until the transition to the three-year rate is completed.
For the two-year requirements that are effective through the 2011 cohort published in September 2013, educational institutions lose eligibility to participate in Title IV programs if their two-year cohort default rate equals or exceeds 25% for three consecutive cohort years or 40% for any given year. The Department began publishing the official three-year cohort default rates with the publication of the 2009 cohort default rate in September 2012. If an institution’s three-year cohort default rate equals or exceeds 30% for any given year, it must establish a default prevention task force and develop a default prevention plan with measurable objectives for improving the cohort default rate. We believe that our current repayment management efforts meet these requirements. Beginning with the three-year cohort default rate for the 2011 cohort published in September 2014, only the three-year rates will be applied for purposes of measuring compliance. Educational institutions will lose eligibility to participate in Title IV programs if their three-year cohort default rate equals or exceeds 40% for any given year or 30% for three consecutive years.
The cohort default rates for University of Phoenix, Western International University and for all proprietary postsecondary institutions for the applicable federal fiscal years were as follows:
 
Two-Year Cohort Default Rates for
Cohort Years Ended September 30,
 
Three-Year Cohort Default Rates for
Cohort Years Ended September 30,
 
2011
 
2010
 
2009
 
2010
 
2009
 
2008
University of Phoenix(1)
14.3%
 
17.9%
 
18.8%
 
26.0%
 
26.4%
 
21.1%
Western International University(1)
7.5%
 
7.7%
 
9.3%
 
10.8%
 
13.7%
 
16.3%
All proprietary postsecondary institutions(1)
13.6%
 
12.9%
 
15.0%
 
21.8%
 
22.7%
 
22.4%
(1) Based on information published by the U.S. Department of Education. The 2008 three-year cohort default rates are trial rates published by the Department for informational purposes only.
We believe that our efforts to shift our student mix to a higher proportion of bachelor’s and graduate level students and our investment in student protection initiatives and repayment management services will continue to stabilize and over time favorably impact our rates. As part of our repayment management initiatives, effective with the 2009 cohort, we engaged third-party service providers to assist our students who are at risk of default. These service providers contact students and offer assistance, which includes providing students with specific loan repayment information such as repayment options and loan servicer contact information, and they attempt to transfer these students to the relevant loan servicer to resolve their delinquency. In addition, we are intensely focused on student retention and enrolling students who have a reasonable chance to succeed in our programs, in part because the rate of default is higher among students who do not complete their degree program compared to students who graduate.
Based on our most recent trends, we expect that our 2011 three-year cohort default rates will be lower than our 2010 three-year cohort default rates. However, if our student loan default rates approach the applicable limits, we may be required to increase efforts and resources dedicated to improving these default rates. This is challenging because most borrowers who are in default or at risk of default are no longer students, and we may have only limited contact with them. Furthermore, recently there has been increased attention by members of Congress and others on default aversion activities of proprietary education institutions. If such attention leads to congressional or regulatory action restricting the types of default aversion assistance that educational institutions are permitted to provide, the default rates of our former students may be negatively impacted. Accordingly, there is no assurance that we would be able to effectively improve our default rates or improve them in a timely manner to meet the requirements for continued participation in Title IV funding if we experience a substantial increase in our student loan default rates.
State Authorization. Institutions that participate in Title IV programs must be authorized to operate by the appropriate postsecondary regulatory authority in each state where the institution has a physical presence. Prior to July 1, 2011, such authorization was not specifically required for the institution’s students to become eligible for Title IV programs. Under the program integrity rules adopted by the Department effective July 1, 2011, institutions are required to obtain specific regulatory approval to operate in such states. University of Phoenix is specifically authorized to operate in all but two of the domestic jurisdictions in which it operates. In Hawaii and New Mexico, University of Phoenix has a physical presence and is qualified to operate through July 1, 2014 without specific state regulatory approval due to available state exemptions and annual waivers from the U.S. Department of Education. Each of these states must implement additional statutes or regulations in order for the University and other institutions to remain eligible for Title IV funds in respect of operations within the states.
Gainful Employment. Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide prospective students with each eligible program’s recognized occupations, cost, completion rate, job placement rate, and median loan debt of program

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completers. These reporting requirements could adversely impact student enrollment, persistence and retention if our reported program information compares unfavorably with other reporting educational institutions. A negotiated rulemaking committee was convened by the U.S. Department of Education in September 2013 specifically on the topic of gainful employment. Refer to U.S. Department of Education Rulemaking Initiative above.
Incentive Compensation. The incentive compensation regulations prohibit the payment of any incentive compensation to persons involved in enrollment and financial aid functions. These regulations also prohibit any revenue sharing arrangements between education services providers, such as our IPD business, and institutions that participate in Title IV programs. The Department clarified the scope of these regulations in a Dear Colleague letter in March 2011, in which among other things the Department indicated that these revenue sharing arrangements would be permissible, but only if the services provider is not an affiliate of an institution that participates in Title IV programs. As a result, we have restructured IPD’s commercial arrangements with its client educational institutions, which has adversely impacted IPD’s business. Unless the Department favorably clarifies its interpretive position on this issue, the interpretation is reversed through judicial action or Congress addresses the problem through legislation, we believe these regulations present a significant competitive disadvantage for our IPD business.
U.S. Department of Education Program Reviews. The U.S. Department of Education periodically reviews institutions participating in Title IV programs for compliance with applicable standards and regulations. University of Phoenix’s most recent program review by the Department was completed in fiscal year 2012. The review covered federal financial aid years 2010-2011 and 2011-2012 and there were no findings in the program review.
Office of the Inspector General of the U.S. Department of Education (“OIG”). In October 2011, the OIG notified us that it was conducting a nationwide audit of the Department’s program requirements, guidance, and monitoring of institutions of higher education offering distance education. In connection with the OIG’s audit of the Department, the OIG examined a sample of University of Phoenix students who enrolled during the period from July 1, 2010 to June 30, 2011. The OIG subsequently notified the University that in the course of this review it identified certain conditions that the OIG believes are Title IV compliance exceptions at University of Phoenix. Although the University is not the direct subject of the OIG’s audit of the Department, the OIG has asked the University to respond so that it may consider the University’s views in formulating its audit report of the Department. In September 2013, the OIG provided to University of Phoenix, among other institutions, a draft appendix to its audit report. The draft appendix again identifies compliance exceptions at University of Phoenix. University of Phoenix has responded to the appendix. These exceptions relate principally to the calculation of the amount of Title IV funds returned after student withdrawals and the process for confirming student eligibility prior to disbursement of Title IV funds.
Administrative Capability. The Higher Education Act, as reauthorized, directs the U.S. Department of Education to assess the administrative capability of each institution to participate in Title IV programs. The failure of an institution to satisfy any of the criteria used to assess administrative capability may cause the Department to determine that the institution lacks administrative capability and, therefore, subject the institution to additional scrutiny or deny eligibility for Title IV programs. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - A failure to demonstrate “administrative capability” or “financial responsibility” may result in the loss of eligibility to participate in Title IV programs, which would materially and adversely affect our business.

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Standards of Financial Responsibility. Pursuant to the Title IV regulations, each eligible higher education institution must satisfy a measure of financial responsibility that is based on a weighted average of three annual tests which assess the financial condition of the institution. The three tests measure primary reserve, equity, and net income ratios. The Primary Reserve Ratio is a measure of an institution’s financial viability and liquidity. The Equity Ratio is a measure of an institution’s capital resources and its ability to borrow. The Net Income Ratio is a measure of an institution’s profitability. These tests provide three individual scores which are converted into a single composite score. The maximum composite score is 3.0. If the institution achieves a composite score of at least 1.5, it is considered financially responsible. A composite score from 1.0 to 1.4 is also considered financially responsible, and the institution may continue to participate as a financially responsible institution for up to three years, subject to additional monitoring and other consequences. If an institution does not achieve a composite score of at least 1.0, it can be transferred from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment, under which the institution must disburse its own funds to students and document the students’ eligibility for Title IV program funds before receiving such funds from the U.S. Department of Education. The fiscal year 2013 composite scores for Apollo Group, University of Phoenix and Western International University were as follows:
 
Fiscal Year 2013
Composite Score
Apollo Group
2.6
University of Phoenix
2.5
Western International University
1.7
Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - A failure to demonstrate “administrative capability” or “financial responsibility” may result in the loss of eligibility to participate in Title IV programs, which would materially and adversely affect our business.
Limits on Title IV Program Funds. The Title IV regulations place restrictions on the types of programs offered and the amount of Title IV program funds that a student is eligible to receive in any one academic year. Only certain types of educational programs offered by an institution qualify for Title IV program funds. For students enrolled in qualified programs, the Title IV regulations place limits on the amount of Title IV program funds that a student is eligible to receive in any one academic year, as defined by the U.S. Department of Education. An academic year must consist of at least 30 weeks of instructional time and a minimum of 24 credits. University of Phoenix and Western International University’s degree programs meet the academic year minimum definition of 30 weeks of instructional time and 24 credits and qualify for Title IV program funds. Our institutions also have corporate training programs and certain certificate and continuing professional education programs that do not qualify for Title IV program funds.
Restricted Cash. The U.S. Department of Education places restrictions on Title IV financial aid program funds held for students for unbilled educational services. As a trustee of these Title IV financial aid funds, we are required to maintain and restrict these funds pursuant to the terms of our program participation agreement with the U.S. Department of Education. These funds are included in restricted cash and cash equivalents in our Consolidated Balance Sheets in Item 8, Financial Statements and Supplementary Data.
Branching and Classroom Locations. The Title IV regulations contain specific requirements governing the establishment of new main campuses, branch campuses and classroom locations at which the eligible institution offers, or could offer, 50% or more of an educational program. In addition to classrooms at campuses and learning centers, locations affected by these requirements include the business facilities of client companies, military bases and conference facilities used by University of Phoenix. The U.S. Department of Education requires that the institution notify the U.S. Department of Education of each location offering 50% or more of an educational program prior to disbursing Title IV program funds to students at that location. University of Phoenix has procedures in place to ensure timely notification and acquisition of all necessary location approvals prior to disbursing Title IV funds to students attending any new location. In addition, The Higher Learning Commission requires that each new campus or learning center of University of Phoenix be approved before offering instruction. States in which the University operates have varying requirements for approval of branch and classroom locations.
There are also certain regulatory requirements associated with closing locations. During fiscal year 2013, University of Phoenix initiated a plan to realign its ground locations throughout the U.S., which includes closing 115 locations. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Change of Ownership or Control. A change of ownership or control of Apollo Group, depending on the type of change, may have significant regulatory consequences for University of Phoenix, Western International University and CFFP. Such a change of ownership or control could require recertification by the U.S. Department of Education, the reevaluation of accreditation by The Higher Learning Commission and/or reauthorization by state licensing agencies. If we experience a change of ownership and control sufficient to require us to file a Form 8-K with the Securities and Exchange Commission, or there is a change in the identity of a controlling shareholder of Apollo Group, then University of Phoenix and Western International University may

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cease to be eligible to participate in Title IV programs until recertified by the Department of Education. There is no assurance that such recertification would be obtained on a timely basis. Under some circumstances, the Department may continue an institution’s participation in Title IV programs on a provisional basis pending completion of the change in ownership approval process.
In addition, University of Phoenix, Western International University and CFFP would be required to report any material change in stock ownership to their principal institutional accrediting body, The Higher Learning Commission, and would be required to obtain approval prior to undergoing any transaction that affects, or may affect, their corporate control or governance. In the event of a material change in ownership of Apollo Group Class B common stock, The Higher Learning Commission may undertake an evaluation of the effect of the change on the continuing operations of University of Phoenix, Western International University and CFFP for purposes of determining if continued accreditation is appropriate, which evaluation may include a comprehensive review.
Also, some states in which University of Phoenix, Western International University or CFFP are licensed require approval (in some cases, advance approval) of changes in ownership or control in order to remain authorized to operate in those states, and participation in grant programs in some states may be interrupted or otherwise affected by a change in ownership or control.
Refer to Part I, Item 1A, Risk Factors - Risks Related to the Control Over Our Voting Stock - If regulators do not approve or delay their approval of transactions involving a change of control of our company, our state licenses, accreditation, and ability to participate in Title IV programs and state grant programs may be impaired, which could materially and adversely affect our business.
Executive Order on Military and Veterans Benefits Programs. In April 2012, President Obama issued an executive order regarding the establishment of principles for educational institutions receiving funding from federal military and veterans educational benefits programs, including those provided by the Post-9/11 Veterans Educational Assistance Act of 2008, as amended (the “Post-9/11 GI Bill”) and the Department of Defense Tuition Assistance Program. The executive order requires the Departments of Defense, Veterans Affairs and Education to establish and implement “Principles of Excellence” to apply to educational institutions receiving such funding. The goals of the Principles are broadly stated in the order and relate to disclosures of costs and amounts of costs covered by federal educational benefits, marketing standards, state authorization, accreditation approvals, standard institutional refund policies, educational plans and academic and financial advising. Various implementation mechanisms are included and the Secretaries of Defense and Veterans Affairs, in consultation with the Secretary of Education and the Director of the Consumer Financial Protection Bureau, submitted a plan to strengthen enforcement and compliance in July 2012. These Principles could increase the cost of delivering educational services to our military and veteran students.
U.S. Department of Education Reporting and Disclosure Requirements. Based on the rising cost of postsecondary education and an effort for more transparency, the U.S. Department of Education publishes national lists annually disclosing the top five percent in each of nine institutional categories with the highest college costs and largest percentage cost increases. Institutions published on such lists may receive negative media attention that may cause some prospective students to choose educational alternatives. University of Phoenix and Western International University have not been on these lists.
International
Governmental regulations in foreign countries significantly affect our international operations. New or revised interpretations of regulatory requirements could have a material adverse effect on us. Changes in existing or new interpretations of applicable laws, rules, or regulations in the foreign jurisdictions in which we operate could have a material adverse effect on our accreditation, authorization to operate, permissible activities, and costs of doing business outside of the U.S. The failure to maintain or renew any required regulatory approvals, accreditation or state authorizations could have a material adverse effect on our international operations.
Available Information
We file annual, quarterly and current reports with the Securities and Exchange Commission. You may read and copy any document we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for information on the Public Reference Room. The Securities and Exchange Commission maintains a website that contains annual, quarterly and current reports that issuers file electronically with the Securities and Exchange Commission. The Securities and Exchange Commission’s website is www.sec.gov.
Our website address is www.apollo.edu. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Information Statements on Schedule 14C, Forms 3, 4, and 5 filed on behalf of directors and executive officers, and all amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission.

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Item 1A - Risk Factors
You should carefully consider the risks and uncertainties described below and all other information contained in this Annual Report on Form 10-K. In order to help assess the major risks in our business, we have identified many, but not all, of these risks. Due to the scope of our operations, a wide range of factors could materially affect future developments and performance.
If any of the following risks are realized, our business, financial condition, cash flows or results of operations could be materially and adversely affected, and as a result, the trading price of our Class A common stock could be materially and adversely impacted. These risk factors should be read in conjunction with other information set forth in this Annual Report, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, including the related Notes to Consolidated Financial Statements.
Risks Related to the Control Over Our Voting Stock
Our Class A common stock has no voting rights. Our Chairman of the Board and our Chairman Emeritus control 100% of our voting stock and control substantially all actions requiring the vote or consent of our shareholders, which may have an adverse effect on the trading price of our Class A common stock and may discourage a takeover.
All of the Apollo Group Class B common stock, our only class of voting stock, is controlled by Dr. John G. Sperling, our founder and Chairman Emeritus, and his son, Mr. Peter V. Sperling, the Chairman of our Board of Directors. Specifically, approximately 51% of our Class B common stock is owned by a revocable grantor trust, of which Dr. Sperling is the sole trustee (the “JGS Trust”). During his lifetime, Dr. Sperling has the power to remove or replace all trustees of the JGS Trust and to direct the disposition of the Class B common stock held by the trust, including upon his death, subject to certain limitations, including the limitations on transfers set forth in the Shareholders Agreement, as amended, among the Class B shareholders and us. The remainder of our Class B common stock is owned by Mr. Sperling, also through a revocable grantor trust.
Accordingly, Dr. Sperling and Mr. Sperling together control the election of all members of our board of directors and substantially all other actions requiring a vote of our shareholders, except in certain limited circumstances. Holders of our outstanding Class A common stock do not have the right to vote for the election of directors or for substantially any other action requiring a vote of shareholders.
Upon Dr. Sperling’s death or incompetency, the JGS Trust will become irrevocable and Mr. Sperling, Ms. Terri Bishop and Ms. Darby Shupp, all of whom are members of our board of directors, will automatically be appointed as successor trustees. Following Dr. Sperling’s death, the trustees of the JGS Trust shall have the sole power to appoint successor and additional trustees.
The control of a majority of our voting stock by Dr. Sperling makes it impossible for a third-party to acquire voting control of us without Dr. Sperling’s consent. After Dr. Sperling’s death or incompetency, it will be impossible for a third-party to acquire voting control of us without the approval of a majority of the trustees of the JGS Trust. There is no assurance that the Apollo Group Class B shareholders, or the trustees of the JGS Trust, will exercise their control of Apollo Group in the same manner that a majority of the outstanding Class A shareholders would if they were entitled to vote on actions currently reserved exclusively for our Class B shareholders.
We are a Controlled Company under the NASDAQ Listing Rules and therefore are exempt from certain corporate governance requirements, which could reduce the influence of independent directors on our management and strategic direction.
We are a “Controlled Company” as defined in Rule 5615(c)(1) of the NASDAQ Listing Rules, because more than 50% of the voting power of our outstanding stock is controlled by Dr. John G. Sperling. As a consequence, we are exempt from certain requirements of NASDAQ Listing Rule 5605, including that:
Our Board be composed of a majority of Independent Directors (as defined in NASDAQ Listing Rule 5605(a)(2));
The compensation of our officers be determined by a majority of the independent directors or a compensation committee composed solely of independent directors; and
Nominations to the Board of Directors be made by a majority of the independent directors or a nominations committee composed solely of independent directors.
However, NASDAQ Listing Rule 5605(b)(2) does require that our independent directors have regularly scheduled meetings at which only independent directors are present (“executive sessions”). In addition, Internal Revenue Code Section 162(m) requires that a compensation committee of outside directors (within the meaning of Section 162(m)) approve stock option grants to executive officers in order for us to be able to claim deductions for the compensation expense attributable to such stock options. Notwithstanding the foregoing exemptions, we do have a majority of independent directors on our Board of

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Directors and we do have an Audit Committee, a Compensation Committee and a Nominating and Governance Committee composed entirely of independent directors.
The charters for the Compensation Committee, Audit Committee and Nominating and Governance Committee have been adopted by the Board of Directors and are available on our website, www.apollo.edu. These charters provide, among other items, that each member must be independent as such term is defined by the rules of the NASDAQ Stock Market LLC and the Securities and Exchange Commission.
If in the future our Board of Directors elects to rely on the exemptions permitted by the NASDAQ Listing Rules and reduce the number or proportion of independent directors on our Board and its key committees, the influence of independent directors on our management and strategy would be reduced and the influence of the holders of our Class B voting common stock on our management and strategy would increase.
If regulators do not approve or delay their approval of transactions involving a change of control of our company, our eligibility to participate in Title IV programs, our accreditation and our state licenses may be impaired in a manner that materially and adversely affects our business.
A change of ownership or control of Apollo Group, depending on the type of change, may have significant regulatory consequences for University of Phoenix. Such a change of ownership or control could require recertification by the U.S. Department of Education, the reevaluation of accreditation by The Higher Learning Commission and reauthorization by state licensing agencies. If we experience a change of ownership and control sufficient to require us to file a Form 8-K with the Securities and Exchange Commission, or there is a change in the identity of a controlling shareholder of Apollo Group, then University of Phoenix may cease to be eligible to participate in Title IV programs until recertified by the Department of Education. There is no assurance that such recertification would be obtained on a timely basis. Under some circumstances, the Department may continue an institution’s participation in Title IV programs on a provisional basis pending completion of the change in ownership approval process. The continuing participation of University of Phoenix in Title IV programs is critical to its business. Any disruption in its eligibility to participate in Title IV programs would materially and adversely impact our business, financial condition, results of operations and cash flows.
In addition, University of Phoenix would be required to report any material change in stock ownership to its principal institutional accrediting body, The Higher Learning Commission, and would be required to obtain approval prior to undergoing any transaction that affects, or may affect, its corporate control or governance. In the event of a material change in the ownership of Apollo Group Class B common stock, The Higher Learning Commission may undertake an evaluation of the effect of the change on the continuing operations of University of Phoenix for purposes of determining if continued accreditation is appropriate, which evaluation may include a comprehensive review. If the Commission determines that the change is such that prior approval by the Commission was required, but was not obtained, the Commission’s policies require it to consider withdrawal of accreditation. Because a majority of our Class B voting shares is held by the John G. Sperling voting stock trust, of which Dr. Sperling is the sole trustee, we believe that The Higher Learning Commission will consider the death or incompetency of Dr. Sperling to be a change of control, because such event would result in the appointment of three new trustees of the voting stock trust, as discussed in the preceding risk factor. If accreditation by The Higher Learning Commission is suspended or withdrawn, University of Phoenix would not be eligible to participate in Title IV programs until the accreditation is reinstated by the Commission or is obtained from another appropriate accrediting body. There is no assurance that reinstatement of accreditation could be obtained on a timely basis, if at all, and accreditation from a different qualified accrediting authority, if available, would require a significant amount of time. Any material disruption in accreditation would materially and adversely impact our business, financial condition, results of operations and cash flows.
Also, some states in which University of Phoenix is licensed require approval (in some cases, advance approval) of changes in ownership or control in order to remain authorized to operate in those states, and participation in grant programs in some states may be interrupted or otherwise affected by a change in ownership or control.
All of the Apollo Group Class B common stock, our only class of voting stock, is controlled by Dr. John G. Sperling, our founder and Chairman Emeritus, and his son, Mr. Peter V. Sperling, the Chairman of our Board of Directors. Specifically, approximately 51% of our Class B common stock is owned by a revocable grantor trust (the “JGS Trust”), of which Dr. Sperling is the sole trustee. We cannot prevent a change of ownership or control that would arise from a transfer of voting stock by Dr. Sperling, Mr. Sperling or the JGS Trust, including a transfer that may occur or be deemed to occur upon the death or incompetency of one or both of Dr. Sperling or Mr. Sperling or a transfer effected through an amendment of the JGS Trust.

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Risks Related to the Highly Regulated Industry in Which We Operate
If we fail to comply with the extensive regulatory requirements for our business, we could face significant monetary liabilities, fines and penalties, including loss of access to U.S. federal student loans and grants for our students. 
We are subject to extensive U.S. federal and state regulation as a provider of postsecondary education. The principal federal regulatory regime is established under the Higher Education Act of 1965, as it is amended and reauthorized from time to time, and the regulations promulgated under the Act by the U.S. Department of Education. Among other matters, these regulations govern the participation by University of Phoenix and Western International University in federal student financial aid programs under Title IV of the Higher Education Act (“Title IV”), which is the principal source of funding for students at these universities. We collected the substantial majority of our fiscal year 2013 total consolidated net revenue from receipt of Title IV financial aid program funds.
The Higher Education Act, as reauthorized, mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the federal government through the U.S. Department of Education; (2) independent accrediting agencies recognized by the Department of Education; and (3) state higher education regulatory bodies.
The applicable regulatory requirements cover virtually all phases of our U.S. operations, including educational program offerings, branching and classroom locations, instructional and administrative staff, administrative procedures, marketing and recruiting, financial operations, payment of refunds to students who withdraw, maintenance of restricted cash, acquisitions or openings of new schools, commencement of new or cessation of existing educational programs and changes in our corporate structure and ownership.
The applicable regulations, standards and policies of the various regulatory agencies frequently change and often are subject to interpretative challenges, particularly where they are crafted for traditional, academic term-based schools rather than our non-term academic delivery model. Changes in, or new interpretations of, applicable laws, regulations, standards or policies could have a material adverse effect on our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs, costs of doing business and our ability to implement beneficial changes in our academic or business model. We cannot predict how the requirements administered by these agencies will be applied or interpreted in the future, or whether our schools will be able to comply with any future changes in these requirements.
If we are found to have violated any applicable regulations, standards or policies, we may be subject to the following sanctions imposed by any one or more of the relevant regulatory agencies:
Monetary fines or penalties;
Limitation or termination of our operations or ability to grant degrees, diplomas and certificates;
Restriction or revocation of our accreditation, licensure or other operating authority;
Limitation, suspension or termination of our eligibility to participate in Title IV programs or state financial aid programs;
Repayment of funds received under Title IV programs or state financial aid programs;
Requirement to post a letter of credit with the U.S. Department of Education;
Requirement of heightened cash monitoring by the U.S. Department of Education;
Transfer from the U.S. Department of Education’s advance system of receiving Title IV program funds to its reimbursement system, under which a school must disburse its own funds to students and document the students’ eligibility for Title IV program funds before receiving such funds from the Department;
Other civil or criminal penalties; and/or
Other forms of censure.
In addition, in some circumstances of noncompliance or alleged noncompliance, we may be subject to qui tam lawsuits under the Federal False Claims Act or various, similar state false claim statutes. In these actions, private plaintiffs seek to enforce remedies under the Act on behalf of the U.S. federal government and, if successful, are entitled to recover their costs and to receive a portion of any amounts recovered by the U.S. federal government in the lawsuit. These lawsuits can be prosecuted by a private plaintiff, even if the Department does not agree with plaintiff’s theory of liability. In 2009, we settled a qui tam lawsuit relating to alleged payment of incentive compensation to our enrollment counselors for a total payment of $80.5 million, and we currently are subject to a another qui tam lawsuit alleging payment of improper incentive compensation in subsequent periods. For more information about the pending qui tam case, refer to Note 17, Commitments and Contingencies, in Part II, Item 8, Financial Statements and Supplementary Data.
In October 2011, the Office of the Inspector General of the U.S. Department of Education (“OIG”) notified us that it was conducting a nationwide audit of the Department’s program requirements, guidance, and monitoring of institutions of higher education offering distance education. In connection with the OIG’s audit of the Department, the OIG examined a sample of

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University of Phoenix students who enrolled during the period from July 1, 2010 to June 30, 2011. The OIG subsequently notified University of Phoenix that in the course of this review it identified certain conditions that the OIG believes are Title IV compliance exceptions at University of Phoenix. Although University of Phoenix is not the direct subject of the OIG’s audit of the Department, the OIG has asked University of Phoenix to respond so that it may consider University of Phoenix’s views in formulating its audit report of the Department. In September 2013, the OIG provided to University of Phoenix, among other institutions, a draft appendix to its audit report. The draft appendix again identifies compliance exceptions at University of Phoenix. University of Phoenix has responded to the appendix. These exceptions relate principally to the calculation of the amount of Title IV funds returned after student withdrawals and the process for confirming student eligibility prior to disbursement of Title IV funds.
Any of the penalties, injunctions, restrictions, lawsuits or other forms of censure listed above could have a material adverse effect on our business, financial condition, results of operations and cash flows. If we lose our Title IV eligibility, we would experience a dramatic decline in revenue and we would be unable to continue our business as it currently is conducted.
University of Phoenix’s certification to participate in Title IV programs expired in December 2012 and continues on a month-to-month basis. If University of Phoenix is not recertified to participate in Title IV programs by the U.S. Department of Education, University of Phoenix would not be eligible to participate in Title IV programs and we could not conduct our business as it is currently conducted.
University of Phoenix and Western International University are certified by the U.S. Department of Education to participate in Title IV programs. University of Phoenix was recertified in November 2009 and its current certification expired in December 2012. University of Phoenix has submitted necessary documentation for re-certification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We have no reason to believe that the University’s application will not be renewed in due course, and it is not unusual to be continued on a month-to-month basis until the Department completes its review. However, we cannot predict whether, or to what extent, the imposition of Notice status on University of Phoenix by The Higher Learning Commission might have on this process. Western International University was recertified in May 2010 and its current certification expires in September 2014.
Generally, the recertification process includes a review by the Department of the institution’s educational programs and locations, administrative capability, financial responsibility, and other oversight categories. The Department could limit, suspend or terminate an institution’s participation in Title IV programs for violations of the Higher Education Act, as reauthorized, or Title IV regulations.
Continued Title IV eligibility is critical to the operation of our business. If University of Phoenix becomes ineligible to participate in Title IV federal student financial aid programs, we could not conduct our business as it is currently conducted and it would have a material adverse effect on our business, financial condition, results of operations and cash flows.
Action by the U.S. Congress to revise the laws governing federal student financial aid programs or reduce funding for these programs, including changes applicable only to proprietary educational institutions, could reduce our enrollment and increase our costs of operation.
The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. In 2008, the Higher Education Act was reauthorized through September 30, 2013 by the Higher Education Opportunity Act. Congress has begun Higher Education Act reauthorization hearings and there is currently an automatic one year extension that continues the current authorization through September 30, 2014. Changes to the Higher Education Act, including changes in eligibility and funding for Title IV programs, are likely to occur in connection with this reauthorization, but we cannot predict the scope or substance of any such changes.
In April 2011, Congress permanently eliminated year-round Pell Grant awards beginning with the 2011-2012 award year as part of the fiscal year 2011 Continuing Resolution spending bill. This change, which did not reduce the maximum annual grant level, did not have a material impact on our business. However, because the Pell Grant program is one of the largest non-defense discretionary spending programs in the federal budget, it is a target for reduction as Congress addresses the unprecedented U.S. budget deficit. A reduction in the maximum annual Pell Grant amount or changes in eligibility could result in increased student borrowing, which would make more difficult our ability to comply with other important regulatory requirements, such as the student loan cohort default rate regulations, which are discussed below, and could negatively impact enrollment.
In addition to Congress’s focus on the federal government’s funding challenges, in recent years, there has been increased focus by Congress on the role that proprietary educational institutions play in higher education. Beginning in 2010, various Congressional hearings have been held, including a series of hearings by the U.S. Senate Committee on Health, Education, Labor and Pensions (“HELP Committee”). In July 2012, the staff of Senator Tom Harkin, the Chairman of the HELP Committee, released a report entitled, “For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success.” The report, which was highly critical of the for-profit education sector, was not adopted by the full

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committee and the minority committee staff criticized it for relying on discredited sources and refusing to examine similar concerns in the non-profit education sector. Nonetheless, the report may be influential as Congress begins the process of reauthorizing the Higher Education Act as discussed above. The report advocates significant changes in the requirements governing participation by for-profit educational institutions in Title IV student financial aid programs, including the following:
Condition access to federal student financial aid on meeting minimum student outcomes;
Prohibit institutions from funding marketing, advertising and recruiting activities with federal financial aid dollars;
Increase student loan cohort default rate tracking periods beyond the current three years;
Require that proprietary colleges receive at least 15 percent of revenues from sources other than federal funds, including non-Title IV funding such as military benefit programs; and
Impose criteria beyond accreditation and state authorization for access to federal student financial aid.
These changes, if adopted, could have a significant negative impact on our business and the proprietary education sector generally. In addition, other Congressional hearings and roundtable discussions may be held regarding various aspects of the education industry that may affect our business. We cannot predict what legislation, if any, may emanate from these Congressional committee hearings or what impact any such legislation might have on the proprietary education sector and our business in particular.
The confluence of the increasing scrutiny in Congress of the proprietary education sector and the unprecedented federal budget deficits increases the likelihood of legislation that will adversely impact our business. Any action by Congress that significantly reduces Title IV program funding, whether through across-the-board funding reductions, sequestration or otherwise, or materially impacts the eligibility of our institutions or students to participate in Title IV programs would have a material adverse effect on our enrollment, financial condition, results of operations and cash flows. Congressional action also could require us to modify our practices in ways that increase our administrative costs and reduce our operating income.
If Congress reduced the amount of available Title IV program funding, we would attempt to arrange for alternative sources of financial aid for our students, which may include lending funds directly to our students, but private sources would not be able to provide as much funding to our students or on terms comparable to Title IV. In addition, private funding sources could require us to guarantee all or part of this assistance and we might incur other additional costs. For these reasons, private, alternative sources of student financial aid would only partly offset, if at all, the impact on our business of reduced Title IV program funding, and would not be a practical alternative in the case of a significant reduction in Title IV financial aid.
If our institutional accrediting body loses recognition by the U.S. Department of Education, we could lose our ability to participate in Title IV programs, which would materially and adversely affect our business.
University of Phoenix and Western International University are institutionally accredited by The Higher Learning Commission (“HLC”) of the North Central Association of Colleges and Schools, one of the six regional accrediting agencies recognized by the U.S. Department of Education. Refer below for discussion of Notice status. Accreditation by an accrediting agency recognized by the Department is required in order for an institution to become and remain eligible to participate in Title IV programs.
If the Department ceased to recognize HLC for any reason, University of Phoenix and Western International University would not be eligible to participate in Title IV programs beginning 18 months after the date such recognition ceased unless HLC was again recognized or our institutions were accredited by another accrediting body recognized by the Department. In June 2013, the National Advisory Committee on Institutional Quality and Integrity, a Committee that advises the Secretary of Education on matters related to postsecondary accreditation and eligibility, recommended to the Secretary that HLC have continuing recognition as an eligible accreditor with certain conditions and required reports.
In the event of a loss of recognition of HLC by the Department, it would, among other things, render our schools and programs ineligible to participate in Title IV programs, affect our authorization to operate and to grant degrees in certain states and decrease student demand. If University of Phoenix became ineligible to participate in Title IV programs, we could not conduct our business as it is currently conducted and it would have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we fail to maintain our institutional accreditation, we could lose our ability to participate in Title IV programs, which would materially and adversely affect our business.
In July 2013, the accreditation of University of Phoenix was reaffirmed by the HLC through the 2022-2023 academic year. At the same time, HLC placed the University on Notice status for a two-year period due to concerns regarding governance, student assessment and faculty scholarship/research for doctoral programs. Notice status is a sanction that means that HLC has determined that an institution is on a course of action that, if continued, could lead the institution to be out of compliance with one or more of the HLC Criteria for Accreditation or Core Components. The University was assigned by HLC to the Standard

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Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2016-2017 and will undergo its next reaffirmation visit and process in 2022-2023.
The University is required to submit a Notice Report to the HLC by Fall of 2014 providing evidence that the University meets the Criteria for Accreditation, Core Components and Minimum Expectations (Assumed Practices after January 1, 2013) identified as the basis for the Notice sanction and that it has ameliorated the issues that led to the Notice sanction. In addition, in the Notice Report the University is also required to report on its progress in other areas of concern not included in the Notice sanction, including retention and graduation rates, three-year student loan cohort default rates, and credit hour policies and practices relating to learning teams. The University also will be required to host a focused visit by HLC no later than January 2015, to validate the contents of the Notice Report. The HLC Board of Trustees will review the University’s Notice Report, together with a report of the focused visit, at a meeting in 2015.
We believe that the imposition of the sanction of notice could adversely impact the reputation of University of Phoenix and its ability to attract and retain students, faculty and employees, and therefore could materially and adversely impact our business, financial condition, results of operations and cash flows. If, after the Notice period, HLC determines that University of Phoenix is not in compliance with one or more of HLC’s Criteria for Accreditation, HLC may elect to impose probation, which would have further, more prominent consequences for the University and our business. In addition, the changes made by University of Phoenix to its corporate governance and administrative structure could increase our operating costs and/or decrease our managerial flexibility to address the rapidly evolving and challenging postsecondary education market.
Continued institutional accreditation is critical to University of Phoenix’s business. If the University should lose its institutional accreditation, our business would be substantially impaired and we would not be able to continue our business as it is presently conducted.
Rulemaking by the U.S. Department of Education could materially and adversely affect our business.
The U.S. Department of Education has promulgated a substantial number of new regulations in the past three years that impact our business, including the following:
Effective during 2011:
Regulations removing certain “safe harbors” that previously defined the limits of the prohibition on the payment of incentive compensation to persons involved in enrollment and financial aid functions, and regulations prohibiting revenue sharing arrangements between education services providers that are affiliates of institutions that participate in Title IV programs and other institutions that participate in Title IV programs;
Regulations requiring institutions that participate in Title IV programs to be authorized to operate by the appropriate postsecondary regulatory authority in each state where the institution has a physical presence;
Regulations defining for the first time the standards to measure “preparation for gainful employment,” instituting consequences of failing the standards, and requiring reporting of certain data to the Department of Education (such regulations were vacated by the U.S. District Court for the District of Columbia in 2012); and
Regulations expanding the definition of misrepresentation and the sanctions that the Department may impose for engaging in a substantial misrepresentation (such regulations were partially remanded and vacated in 2012).
Effective during 2012:
Regulations requiring certain disclosures to students related to gainful employment.
These regulations have increased our operating cost and in some cases required us to change the manner in which we operate our business. New or amended regulations in the future, particularly regulations focused on the proprietary sector, could further negatively impact our business.
Our schools and programs would lose their eligibility to participate in federal student financial aid programs if the percentage of revenues derived from those programs is too high, in which event we could not conduct our business as it is currently conducted.
University of Phoenix and Western International University, and all other proprietary institutions of higher education, are subject to the so-called “90/10 Rule” under the Higher Education Act, as reauthorized. Under this rule, a proprietary institution will be ineligible to participate in Title IV programs for at least two fiscal years if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue, as defined in the rule, from Title IV programs. If an institution is determined to be ineligible, any disbursements of Title IV program funds made while ineligible must be repaid to the Department. An institution that derives more than 90% of its cash basis revenue from Title IV programs for any single fiscal year will be automatically placed on provisional certification for two fiscal years and will be subject to possible additional sanctions determined to be

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appropriate under the circumstances by the U.S. Department of Education. While the Department has broad discretion to impose additional sanctions on such an institution, there is only limited precedent available to predict what those sanctions might be, particularly in the current regulatory environment. For example, the Department could impose conditions in the provisional certification such as:
Restrictions on the total amount of Title IV program funds that may be disbursed to students;
Restrictions on programmatic and geographic expansion;
Requirements to obtain and post letters of credit;
Additional reporting requirements such as interim financial reporting; or
Any other conditions deemed appropriate by the Department.
In addition, if an institution is subject to a provisional certification at the time that its current program participation agreement expired, the effect on recertification of the institution or continued eligibility in Title IV programs pending recertification is uncertain.
The 90/10 Rule percentages for University of Phoenix and Western International University were the following for the respective periods:
 
Year Ended August 31,
 
2013
 
2012
 
2011(1)
University of Phoenix
83%
 
84%
 
86%
Western International University
66%
 
68%
 
66%
(1) Calculated excluding the temporary relief from the impact of loan limit increases, which was allowable for amounts received and applied to eligible charges between July 1, 2008 and June 30, 2011 that were attributable to the increased annual loan limits.
Although the University of Phoenix 90/10 Rule percentage has decreased in recent years, University of Phoenix’s percentage increased materially over the years prior to fiscal year 2010. This prior increase was primarily attributable to the increase in student loan limits effected by the Ensuring Continued Access to Student Loans Act of 2008 and expanded eligibility for and increases in the maximum amount of Pell Grants.
The decrease in the University of Phoenix 90/10 Rule percentage is attributable to changes in student mix and their associated available sources of tuition funding. As the University’s enrollment has declined in recent years, the proportion of its student body that uses a lower percentage of Title IV funds for eligible tuition and fees, such as students that receive tuition assistance from employers or that participate in military benefit programs, has increased. The University has also implemented various other measures in recent years intended to reduce the percentage of its cash basis revenue attributable to Title IV funds, including encouraging students to carefully evaluate the amount of necessary Title IV borrowing and continued focus on professional development and continuing education programs. The University has substantially no control over the amount of Title IV student loans and grants sought by or awarded to its students.
Based on recent trends, we do not expect the 90/10 Rule percentage for University of Phoenix to exceed 90% for fiscal year 2014. However, the 90/10 Rule percentage for University of Phoenix remains high and could exceed 90% in the future depending on the degree to which its various initiatives are effective, the impact of future changes in its enrollment mix, and regulatory and other factors outside our control, including any reduction in military benefit programs or changes in the treatment of such funding for purposes of the 90/10 Rule calculation.
Various legislative proposals have been introduced in Congress that would heighten the requirements of the 90/10 Rule. For example, in January 2012, the Protecting Our Students and Taxpayers Act was introduced in the U.S. Senate and, if adopted, would reduce the 90% maximum under the rule to the pre-1998 level of 85%, cause tuition derived from military benefit programs to be included in the 85% portion under the rule instead of the 10% portion as is the case today, and impose Title IV ineligibility after one year of noncompliance rather than two. If these or similar proposals are adopted, University of Phoenix may be required to increase efforts and resources dedicated to reducing the percentage of cash basis revenue attributable to Title IV funds.
Any necessary further efforts to reduce the 90/10 Rule percentage for University of Phoenix, especially if the percentage exceeds 90% for a fiscal year, may involve taking measures which reduce our revenue, increase our operating expenses, or both, in each case perhaps significantly. In addition, we may be required to make structural changes to our business in the future in order to remain in compliance, which changes may materially alter the manner in which we conduct our business and materially and adversely impact our business, financial condition, results of operations and cash flows. Furthermore, these required changes could make it more difficult to comply with other important regulatory requirements, such as the student loan cohort default rate regulations, which are discussed below.

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An increase in student loan default rates could result in the loss of eligibility to participate in Title IV programs, which would materially and adversely affect our business.
To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain specified levels. Each cohort is the group of students who first enter into student loan repayment during a federal fiscal year (ending September 30). The cohort default rates are published by the U.S. Department of Education approximately 12 months after the end of the applicable measuring period. Thus, in September 2013, the Department published the two-year cohort default rates for the 2011 cohort and the three-year cohort default rates for the 2010 cohort. As discussed below, the measurement period for the student loan cohort default rates has been increased from two to three years starting with the 2009 cohort; however both three-year and two-year cohort default rates are currently published until the transition to the three-year rate is completed.
For the two-year requirements that are effective through the 2011 cohort published in September 2013, educational institutions lose eligibility to participate in Title IV programs if their two-year cohort default rate equals or exceeds 25% for three consecutive cohort years or 40% for any given year. The Department began publishing the official three-year cohort default rates with the publication of the 2009 cohort default rate in September 2012. If an institution’s three-year cohort default rate equals or exceeds 30% for any given year, it must establish a default prevention task force and develop a default prevention plan with measurable objectives for improving the cohort default rate. We believe that our current repayment management efforts meet these requirements. Beginning with the three-year cohort default rate for the 2011 cohort published in September 2014, only the three-year rates will be applied for purposes of measuring compliance. Educational institutions will lose eligibility to participate in Title IV programs if their three-year cohort default rate equals or exceeds 40% for any given year or 30% for three consecutive years.
The cohort default rates for University of Phoenix, Western International University and for all proprietary postsecondary institutions for the applicable federal fiscal years were as follows:
 
Two-Year Cohort Default Rates for
Cohort Years Ended September 30,
 
Three-Year Cohort Default Rates for
Cohort Years Ended September 30,
 
2011
 
2010
 
2009
 
2010
 
2009
 
2008
University of Phoenix(1)
14.3%
 
17.9%
 
18.8%
 
26.0%
 
26.4%
 
21.1%
Western International University(1)
7.5%
 
7.7%
 
9.3%
 
10.8%
 
13.7%
 
16.3%
All proprietary postsecondary institutions(1)
13.6%
 
12.9%
 
15.0%
 
21.8%
 
22.7%
 
22.4%
(1) Based on information published by the U.S. Department of Education. The 2008 three-year cohort default rates are trial rates published by the Department for informational purposes only.
We believe that our efforts to shift our student mix to a higher proportion of bachelor’s and graduate level students and our investment in student protection initiatives and repayment management services will continue to stabilize and over time favorably impact our rates. As part of our repayment management initiatives, effective with the 2009 cohort, we engaged third-party service providers to assist our students who are at risk of default. These service providers contact students and offer assistance, which includes providing students with specific loan repayment information such as repayment options and loan servicer contact information, and they attempt to transfer these students to the relevant loan servicer to resolve their delinquency. In addition, we are intensely focused on student retention and enrolling students who have a reasonable chance to succeed in our programs, in part because the rate of default is higher among students who do not complete their degree program compared to students who graduate.
Based on our most recent trends, we expect that our 2011 three-year cohort default rates will be lower than the 2010 three-year cohort default rates. However, if our student loan default rates approach the applicable limits, we may be required to increase efforts and resources dedicated to improving these default rates. This is challenging because most borrowers who are in default or at risk of default are no longer students, and we may have only limited contact with them. Furthermore, recently there has been increased attention by members of Congress and others on default aversion activities of proprietary education institutions. If such attention leads to congressional or regulatory action restricting the types of default aversion assistance that educational institutions are permitted to provide, the default rates of our former students may be negatively impacted. Accordingly, there is no assurance that we would be able to effectively improve our default rates or improve them in a timely manner to meet the requirements for continued participation in Title IV funding if we experience a substantial increase in our student loan default rates.
If we fail to maintain any of our state authorizations, we would lose our ability to operate in that state and to participate in Title IV programs there.
Institutions that participate in Title IV programs must be authorized to operate by the appropriate postsecondary regulatory authority in each state where the institution has a physical presence. Prior to July 1, 2011, such authorization was not

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specifically required for the institution’s students to become eligible for Title IV programs. Under the program integrity rules adopted by the Department effective July 1, 2011, institutions are required to obtain specific regulatory approval to operate in such states. University of Phoenix is specifically authorized to operate in all but two of the domestic jurisdictions in which it operates. In Hawaii and New Mexico, University of Phoenix has a physical presence and is qualified to operate through July 1, 2014 without specific state regulatory approval due to available state exemptions and annual waivers from the U.S. Department of Education. Each of these states must implement additional statutes or regulations in order for the University and other institutions to remain eligible for Title IV funds in respect of operations within the states.
If such implementation is not completed by the respective states, University of Phoenix could continue to operate in these states without specific state approval through July 1, 2014 or beyond if the U.S. Department of Education provides for additional waivers to take effect on and after July 1, 2014 and University of Phoenix obtains such further annual waivers. However, if we cannot obtain either specific authorization or an additional annual waiver for the period after July 1, 2014, our business could be adversely impacted.
The U.S. Department of Education gainful employment regulations may limit the programs we can offer students and increase our cost of operations.
Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” Historically, this concept has not been defined in detailed regulations. On October 29, 2010 and June 13, 2011, the Department published final regulations on gainful employment.
The final gainful employment rules defined - for the first time - the standards to measure “preparation for gainful employment in a recognized occupation.” The rules established three annual standards related to student loan borrowing by which gainful employment was to be measured for each academic program of study: (i) percentage of the program’s former students who entered repayment during the cohort period and are current in their student loan repayment, (ii) ratio of discretionary income to total student loan debt for the program’s completers and (iii) ratio of actual earnings to total student loan debt for the program’s completers. As adopted, the rules provided that an academic program that passed any one standard for a given year would be considered to be providing training leading to gainful employment. If an academic program failed all three metrics for a given year, the institution would be required to disclose the failure to existing and prospective students including the amount by which the program did not meet the minimum standards and describe the program’s plan for improvement. After two failures within three years, the institution would be required to inform students in the failing program that their debts may be unaffordable, that the program may lose eligibility, and what transfer options exist. After three failures within four years, the academic program would lose eligibility to participate in Title IV programs for at least three years.
In addition, the rules as adopted required institutions to notify the Department at least 90 days before the commencement of new educational programs leading to gainful employment in recognized occupations, and in some cases, would require that the Department approve the program.
These rules were vacated by the U.S. District Court for the District of Columbia on June 30, 2012. The court also vacated the rules requiring reporting to the Department of information about students who complete a program leading to gainful employment in a recognized occupation, including the amount of debt incurred under private loans or institutional finance plans, matriculation information, and end of year enrollment information. On July 30, 2012, the Department filed a motion asking the court to reinstate the requirement that institutions report information about student loan-repayment rates and debt-to-income ratios. The motion was denied on March 19, 2013.
The Court did not vacate the portion of the rules requiring proprietary postsecondary institutions to provide prospective students with each eligible program’s recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers beginning July 1, 2011. The disclosure requirements and the requirements for reporting information relating to our programs to the Department and to our students have increased our administrative burdens. These reporting requirements could adversely impact student enrollment, persistence and retention if our reported program information compares unfavorably with other reporting educational institutions.
A negotiated rulemaking committee was convened by the U.S. Department of Education in September 2013 specifically on the topic of gainful employment. Prior to the September 2013 committee meeting, the Department released draft regulations on gainful employment. The draft regulations provide for two metrics: an annual debt-to-earnings ratio, and a debt service-to-discretionary income ratio. As proposed, a program would become ineligible for Title IV funding if it fails both metrics in two out of any three consecutive years, or is in a specified “warning zone” for either metric in any four consecutive years. The timing and substance of final regulations dealing with gainful employment cannot be predicted at this time. If the final rules regarding gainful employment metrics are reinstated on appeal or the new draft rules are promulgated by the Department in a manner that withstands challenge, the continuing eligibility of our educational programs for Title IV funding would be at risk due to factors beyond our control, such as changes in the actual or deemed income level of our graduates, changes in student

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borrowing levels, increases in interest rates, changes in the federal poverty income level relevant for calculating discretionary income, changes in the percentage of our former students who are current in repayment of their student loans, and other factors. The exposure to these external factors could reduce our ability to confidently offer or continue certain types of programs for which there is market demand, and therefore would impact our ability to maintain or grow our business.
A failure to demonstrate “administrative capability” or “financial responsibility” may result in the loss of eligibility to participate in Title IV programs, which would materially and adversely affect our business.
The U.S. Department of Education regulations specify extensive criteria an institution must satisfy to establish that it has the requisite administrative capability to participate in Title IV programs. The failure of an institution to satisfy any of the criteria used to assess administrative capability may cause the Department to determine that the institution lacks administrative capability and, therefore, subject the institution to additional scrutiny or deny eligibility for Title IV programs. These criteria require, among other things, that the institution:
Comply with all applicable Title IV program regulations;
Have capable and sufficient personnel to administer the federal student financial aid programs;
Have acceptable methods of defining and measuring the satisfactory academic progress of its students;
Not have student loan cohort default rates above specified levels;
Have procedures in place for safeguarding federal funds;
Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
Provide financial aid counseling to its students;
Refer to the Office of Inspector General any credible information indicating that any applicant, student, employee or agent of the institution has been engaged in any fraud or other illegal conduct involving Title IV programs;
Submit in a timely manner all reports and financial statements required by the regulations; and
Not otherwise appear to lack administrative capability.
Furthermore, to participate in Title IV programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the Department, or post a letter of credit in favor of the Department and possibly accept other conditions on its participation in Title IV programs. Pursuant to the Title IV regulations, each eligible higher education institution must satisfy a measure of financial responsibility that is based on a weighted average of three annual tests which assess the financial condition of the institution. The three tests measure primary reserve, equity, and net income ratios. The Primary Reserve Ratio is a measure of an institution’s financial viability and liquidity. The Equity Ratio is a measure of an institution’s capital resources and its ability to borrow. The Net Income Ratio is a measure of an institution’s profitability. These tests provide three individual scores which are converted into a single composite score. The maximum composite score is 3.0. If the institution achieves a composite score of at least 1.5, it is considered financially responsible. A composite score from 1.0 to 1.4 is also considered financially responsible, and the institution may continue to participate as a financially responsible institution for up to three years, subject to additional monitoring and other consequences. If an institution does not achieve a composite score of at least 1.0, it can be transferred from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment, under which the institution must disburse its own funds to students and document the students’ eligibility for Title IV program funds before receiving such funds from the U.S. Department of Education. The fiscal year 2013 composite scores for Apollo Group, University of Phoenix and Western International University were as follows:
 
Fiscal Year 2013
Composite Score
Apollo Group
2.6
University of Phoenix
2.5
Western International University
1.7
Under some circumstances, particularly if our composite scores approach 1.5 in the future, which could result from acquisitions, declines in our institutions’ profitability or other factors, we may be limited in our ability to deploy capital to effect one or more desirable transactions or initiatives due to the impact on our composite scores.
If we, or our schools eligible to participate in Title IV programs fail to maintain administrative capability or financial responsibility, as defined by the Department, our schools could lose their eligibility to participate in Title IV programs or have that eligibility adversely conditioned, which would have a material adverse effect on our business. Limitations on, or termination of, participation in Title IV programs as a result of the failure to demonstrate administrative capability or financial responsibility would limit students’ access to Title IV program funds, which could significantly reduce the enrollments and revenues of our schools eligible to participate in Title IV programs and materially and adversely affect our business, financial condition, results of operations and cash flows.

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If IPD’s client institutions are sanctioned due to non-compliance with Title IV requirements, our business could be responsible for any resulting fines and penalties.
Our subsidiary, Institute for Professional Development, Inc. (“IPD”) provides to its client institutions numerous consulting and administrative services, including services that involve the handling and receipt of Title IV funds. As a result of this, IPD may be jointly and severally liable for any fines, penalties or other sanctions imposed by the U.S. Department of Education on the client institution for violation of applicable Title IV regulations, regardless of the degree of fault, if any, on IPD’s part. The imposition of such fines, penalties or other sanctions could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Non-U.S. Operations
Our non-U.S. operations are subject to risks not inherent in our U.S. operations, which could adversely affect our business.
We operate physical and online educational institutions in the United Kingdom, Europe, Mexico, Chile and elsewhere, and we are actively seeking further expansion in other countries, including India, where we are developing a joint venture. Our operations in each of the relevant foreign jurisdictions are subject to regulatory requirements relating to education providers, as well as foreign businesses. Many foreign countries have not fully embraced the proprietary education model, and in other countries, proprietary education remains controversial. As a result, our foreign operations are subject to the political risk that existing regulations will be interpreted unfavorably or new regulations will be adopted that render our business model impractical. In addition, our non-U.S. operations are subject to the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act which require extensive compliance vigilance on our part and, in some cases, puts our foreign operations at a competitive disadvantage with local companies. If one or more of our foreign operations ceases to be economically practical, we may be forced to discontinue such operations or seek a buyer, either of which might result in a substantial loss of value to Apollo Group.
Risks Related to Our Business
We face intense and increasing competition in the postsecondary education market from both public and private educational institutions, which could adversely affect our business.
Postsecondary education in our existing and new market areas is highly competitive and is becoming increasingly so. We compete with traditional public and private two-year and four-year degree-granting regionally accredited colleges and universities, other proprietary degree-granting regionally accredited schools and alternatives to higher education. In addition, we face increasing competition from various emerging non-traditional, credit-bearing and noncredit-bearing education programs, provided by both proprietary and not-for-profit providers, including massive open online courses (so-called MOOCs) offered worldwide without charge by traditional educational institutions, synchronous massive online courses (SMOCs) offered worldwide for credit by traditional educational institutions, and other direct-to-consumer education services. Some of our competitors have greater financial and nonfinancial resources than we have and are able to offer programs similar to ours at a lower tuition level for a variety of reasons, including the availability of direct and indirect government subsidies, government and foundation grants, large endowments, tax-deductible contributions and other financial resources not available to proprietary institutions, or by providing fewer student services or larger class sizes. For example, a typical community college is subsidized by local or state government and, as a result, tuition rates for associate’s degree programs are much lower at community colleges than at University of Phoenix. Also, like University of Phoenix, other proprietary educational institutions have begun to deploy pricing incentives to impact demand. We believe that price competition through targeted programs involving student scholarships and otherwise will increase throughout the industry in the future. We have implemented scholarships and discounts which reduce the amount of tuition we receive, and further downward pressure on our tuition rates may cause us to implement further pricing incentives, which will adversely affect our revenue.
In addition, an increasing number of traditional colleges and community colleges are offering distance learning and other online education programs, including programs that are geared towards the needs of working learners. This trend has been accelerated by private companies that provide and/or manage online learning platforms for traditional colleges and community colleges. As the proportion of traditional colleges providing alternative learning modalities increases, we continue to face increasing competition from traditional colleges, including colleges with well-established reputations. Already, this type of competition is significant. As the online and distance learning segment of the postsecondary education market matures, we believe that the intensity of the competition we face will continue to increase.
Furthermore, the total postsecondary student population has recently declined, with the for-profit share disproportionately affected. Enrollment in Title IV postsecondary degree-granting institutions in spring 2013 decreased 2.3%, compared to spring 2012, with the largest decrease of 8.7% taking place among four-year for-profit institutions. Although the U.S. Department of Education projects that enrollment in degree-granting, postsecondary institutions will grow 13% over the ten-year period ending in the fall of 2021 to approximately 24.1 million students, this projected growth compares with a 33.7% increase

34


reported in the prior ten-year period ended in 2011, when enrollment increased from 15.9 million students in 2001 to approximately 21.3 million students in 2011.
The combination of flat or declining postsecondary student population and increased capacity in the postsecondary education sector will further intensify competition.
This intense competition makes it more challenging for us to enroll students who are likely to succeed in our educational programs, which has contributed to the decline in recent years in our enrollment levels and put further downward pressure on our tuition rates. If we are not successful in adapting our business to meet these competitive challenges, our enrollment may continue to decline, which could materially and adversely affect our business, financial condition, results of operations and cash flows.
Changes we are making to our business to improve the student experience and more cost-effectively deliver services to our students may adversely affect our enrollment and operating results.
We are evaluating and making changes across a broad spectrum of our business and systems to improve the student experience and more cost-effectively deliver services to our students. In furtherance of this, we are implementing several important initiatives, including the following:
Incorporating career resources such as career planning tools and faculty support directly into the student learning experience to enhance the connection between education and careers;
Upgrading our learning and data platforms;
Piloting a new format of University of Phoenix’s University Orientation program;
Increasing use of full-time faculty in initial University of Phoenix courses; and
Streamlining and automating administrative processes, including student-facing processes.
These initiatives require significant time, energy and resources, and involve many significant interrelated and simultaneous changes in our processes and programs. We may not succeed in achieving our objectives of improving our services to students and reducing the cost of delivering services, due to organizational, operational, regulatory or other constraints. If our reengineering efforts are not successful, we may experience reduced enrollment, increased expense or other impacts on our business that materially and adversely impact our operating results and cash flows.
The reduction in the number of our on-ground locations could negatively impact our enrollment and operating results.
We are evaluating substantially all of our business processes, and reengineering them as necessary, to more efficiently support our business needs and objectives. In connection with this, University of Phoenix initiated a plan during fiscal year 2013 to close 115 locations. In part due to this reduction in locations, our non-faculty employee headcount decreased approximately 3,000 during fiscal year 2013 compared to the prior year. The closures will continue into fiscal year 2014 and beyond as University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations. Because of the rapidly evolving and transformational changes in higher education, the University continues to evaluate the extent, functionality and location of its ground facilities, and may close additional facilities in the future.
We have continued restructuring our business subsequent to August 31, 2013, which includes workforce reductions of approximately 500 non-faculty personnel.
We have recorded charges associated with this business optimization and will record further charges as we complete our plan to close on-ground locations. However, the actual costs that we will incur could be higher than expected and the benefits could be less than anticipated due to a number of factors, including:
Unanticipated requirements or expense of teach-out obligations for the ground facilities not yet closed;
Higher than expected lease exit costs, which are principally dependent on the amount and timing of sublease income associated with the facilities;
Employment claims associated with the reduction in workforce;
Higher costs than anticipated to deliver our core and other services after the closures; and
Unexpected costs or delays associated with regulatory compliance.
These restructuring activities may adversely impact our ability to grow our business, deliver services, enroll new students, retain key employees or comply with applicable laws and regulations, and may negatively impact employee morale or have other adverse consequences for our business which cannot now be predicted, any of which could materially and adversely impact our business, financial condition, results of operations and cash flows.

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Our financial performance depends on our ability to continue to develop awareness among, and enroll and retain students; adverse publicity may negatively impact demand for our programs.
Building awareness of our schools and the programs we offer is critical to our ability to attract prospective students. Over the last several fiscal years, we have expended significant resources on marketing and we expect to do so in the future. If our schools are unable to successfully market and advertise their educational programs, our schools’ ability to attract and enroll prospective students in such programs could be adversely affected. It is also critical to our success that we convert these prospective students to enrolled students in a cost-effective manner and that these enrolled students remain active in our programs.
The proprietary postsecondary education sector is under regulatory and other scrutiny which has led to media attention that has portrayed the sector in an unflattering light. This negative media attention may cause some prospective students to choose educational alternatives outside of the proprietary sector or may cause them to choose proprietary alternatives other than University of Phoenix, either of which could negatively impact our new enrollments.
Some of the additional factors that could prevent us from successfully enrolling and retaining students in our programs include:
Increased competition from schools offering distance learning and other online educational programs;
A decrease in the perceived or actual economic benefits that students derive from our programs or education in general;
Regulatory investigations that may damage our reputation;
Increased regulation of online education, including in states in which we do not have a physical presence;
Litigation that may damage our reputation;
Inability to continue to recruit, train and retain quality faculty;
Student or employer dissatisfaction with the quality of our services and programs;
Student financial, personal or family constraints;
Tuition rate reductions by competitors that we are unwilling or unable to match;
A decline in the acceptance of online education;
Unavailability of ground locations where students want to attend or concern about recent closures of ground campuses; and
Disruptions to our information technology systems.
If one or more of these factors reduces demand for our programs, our enrollment could be negatively affected or our costs associated with each new enrollment could increase, or both, either of which could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Our financial performance depends, in part, on our ability to keep pace with changing education market needs and technology; if we fail to keep pace or fail in implementing or adapting to new educational offerings and technologies, our business may be adversely affected.
Increasingly, employers demand that their new employees possess appropriate technological skills and also appropriate “soft” skills, such as communication, critical thinking and teamwork. The nature of the skills required can evolve rapidly in today’s changing economic and technological environment. Accordingly, it is important for our schools’ educational programs to evolve in response to economic and technological changes. The expansion of existing programs and the development of new programs may not be accepted by current or prospective students or the employers of our graduates. Even if our schools are able to develop acceptable new programs, our schools may not be able to begin offering those new programs as quickly as required by prospective employers or as quickly as our competitors offer similar programs. In addition, we may be unable to obtain specialized accreditations or licensures that may make certain programs desirable to students. To offer a new academic program, we may be required to obtain federal, state and accrediting agency approvals, which may be conditioned or delayed in a manner that could significantly affect our growth plans. In addition, to be eligible for Title IV programs, a new academic program may need to be certified by the U.S. Department of Education. If we are unable to adequately respond to changes in market requirements due to regulatory or financial constraints, unusually rapid technological changes, or other factors, our ability to attract and retain students could be impaired, the rates at which our graduates obtain jobs involving their fields of study could suffer, and our business, financial condition, results of operations and cash flows could be adversely affected.
Establishing new academic programs or modifying existing programs requires us to make investments, incur marketing expenses and reallocate other resources. We may have limited experience with the courses in new areas and may need to modify our systems and strategy or enter into arrangements with other educational institutions to provide new programs effectively and profitably. If we are unable to increase the number of students or offer new programs in a cost-effective manner,

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or are otherwise unable to manage effectively the operations of newly established academic programs, our business, financial condition, results of operations and cash flows could be adversely affected.
If the proportion of our students who enroll with, and accumulate, fewer than 24 credits increases, we may experience increased cost and reduced profitability.
Prior to fiscal year 2010, a substantial proportion of our overall growth arose from an increase in associate’s degree students enrolled in University of Phoenix. As a result of this, the proportion of our Degreed Enrollment composed of students who enroll with fewer than 24 credits increased. We experienced certain adverse effects from this shift, such as increases in student loan default rates. Although the proportion of our Degreed Enrollment composed of associate’s degree students decreased in recent fiscal years, the proportion of our bachelor’s degree students who enroll with fewer than 24 incoming credits has increased. If the proportion of our students with fewer than 24 incoming credits continues to increase, we may experience adverse consequences, such as higher cost per New Degreed Enrollment, lower retention rates and/or higher student services costs, an increase in the percentage of our revenue derived from Title IV funding under the 90/10 Rule, an increase in our student loan default rates, an increase in our bad debt expense, more limited ability to implement tuition price increases and other effects that may adversely affect our business, financial condition, results of operations and cash flows.
System disruptions and security threats to our computer networks or phone systems could have a material adverse effect on our business.
The performance and reliability of our computer network and phone systems infrastructure at our schools, including our online programs, is critical to our operations, reputation and ability to attract and retain students. From time to time we experience intermittent outages of the information technology systems used by our students and by our employees, including system-wide outages. Any computer system error or failure, regardless of cause, could result in a substantial outage that materially disrupts our online and ground operations. Not all of our critical systems are protected by a validated formal disaster recovery plan and redundant disaster recovery infrastructure at a geographically remote data center. We are continuing execution of our plan to implement disaster recovery infrastructure for our remaining critical systems to allow timely recovery from catastrophic failure. For those systems not yet protected, a catastrophic failure or unavailability for any reason of our principal data center may require us to replicate the function of this data center at our existing remote data facility or elsewhere, and could result in the loss of data. An event such as this may require service restoration activities that could take up to several weeks to complete.
We have upgraded or are in the process of upgrading a substantial portion of our key IT systems, including our student learning system, student services platform and corporate applications, and retiring the related legacy systems. Although these new systems are expected to improve the productivity, scalability, reliability and sustainability of our IT infrastructure, the transition from the legacy systems entails risk of unanticipated disruption or failure to fully replicate all necessary data processing and reporting functions, including in our core business functions.
Any disruption in our IT systems, including any disruptions and system malfunctions that may arise from our upgrade initiative, could significantly impact our operations, reduce student and prospective student confidence in our educational institutions, adversely affect our compliance with applicable regulations and accrediting body standards and have a material adverse effect on our business, financial condition, results of operations and cash flows. We do not maintain material amounts of insurance in respect of some types of these disruptions, and there is no assurance that insurance proceeds, if available, would be adequate to compensate us for damages sustained due to these disruptions.
In addition, we face an ever increasing number of threats to our computer systems, including unauthorized activity and access, malicious penetration, system viruses, malicious code and organized cyber-attacks, which could breach our security and disrupt our systems. These risks increase when we are making changes to our IT system, such as our substantial IT upgrade initiative currently underway and our frequent updates to enable instructional innovation and address new student populations. From time to time we experience security events and incidents, and these reflect an increasing level of sophistication, organization and innovation. We have devoted and will continue to devote significant resources to the security of our computer systems, but they may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary and personally identifiable information or cause interruptions or malfunctions in operations, perhaps over an extended period of time prior to detection. As a result, we may be required to expend significant additional resources to protect against the threat of or alleviate problems caused by these system disruptions and security breaches. Any of these events could have a material adverse effect on our business, financial condition, results of operations and cash flows. Although we maintain insurance in respect of these types of events, there is no assurance that available insurance proceeds would be adequate to compensate us for damages sustained due to these events.

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If we do not maintain existing, and develop additional, relationships with employers, our future growth may be impaired.
We currently have relationships with large employers to provide their employees with the opportunity to obtain degrees through us while continuing their employment. These relationships are an important part of our strategy as they provide us with a steady source of potential working learners for particular programs and also serve to increase our reputation among high-profile employers. In addition, programs in which employers directly pay tuition have a beneficial impact on our 90/10 Rule percentage calculation by reducing the proportion of our cash basis revenues attributable to Title IV funds. If we are unable to develop new relationships or further develop our existing relationships, if our existing relationships deteriorate or end, or if we are unable to offer programs that teach skills demanded by employers, our efforts to seek these sources of potential working learners may be impaired, and this could materially and adversely affect our business, financial condition, results of operations and cash flows.
If we cannot attract qualified new personnel or retain our existing senior management team, our business could be adversely affected.
Our future performance depends on the continued services and continuing contributions of our senior management to execute on our business plan and to identify and pursue new opportunities. Our future success also depends in large part on our continued ability to attract and retain qualified personnel. The loss of the services of our senior management for any reason could adversely affect our business and results of operations.
The President of University of Phoenix announced his retirement in September 2013, which will be effective upon the naming of his successor. In addition, since the March 2013 retirement of Apollo’s President and Chief Operating Officer, that role has been filled in an acting capacity, and since early in fiscal year 2013, the Provost of University of Phoenix has been filled in an acting capacity. We and University of Phoenix are in the process of conducting comprehensive searches to fill these positions. Competition for such personnel can be intense, and our ability to attract, select and hire new candidates may prove difficult, take more time than anticipated, and be costly. A lack of management continuity could also result in operational and administrative inefficiencies, make achievement of our strategic and management objectives more challenging and may make recruiting for future management positions more difficult. If we are unable to effectively manage our business through these management transitions our business and results of operation could be adversely affected.
If we are unable to successfully conclude pending litigation and governmental inquiries, our business, financial condition, results of operations and cash flows could be adversely affected.
We, certain of our subsidiaries, and certain of our current and former directors and executive officers have been named as defendants in various lawsuits.
In November 2010, the District Court for the District of Arizona consolidated three securities class action complaints into a single action entitled, In re Apollo Group, Inc. Securities Litigation and 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 consolidated complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and asserts a putative class period of May 21, 2007 to October 13, 2010.
On May 25, 2011, we were notified that a qui tam complaint had been filed against us by private relators under the Federal False Claims Act and California False Claims Act. 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.
During fiscal year 2011, we received notices from the Attorney General’s Office of each of Florida, Massachusetts and Delaware regarding their investigations under applicable consumer protection laws of the business practices at University of Phoenix. We received an additional notice from Massachusetts in fiscal year 2013. We believe that there may be an informal coalition of states considering investigations into recruiting practices and the financing of education at proprietary educational institutions, which may or may not include these three states. The consumer protection laws of states are broad and subject to substantial interpretation. If our past or current business practices at University of Phoenix are found to violate applicable consumer protection laws, we could be subject to monetary fines or penalties and possible limitations on the manner in which we conduct our business, which could materially and adversely affect our business, financial condition, results of operations and cash flows. To the extent that more states commence such investigations or multiple states act in a concerted manner, the cost of responding to these inquiries and investigations could increase significantly and the potential impact on our business would be substantially greater.

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We are also subject to various other lawsuits, investigations and claims, covering a range of matters. Refer to Note 17, Commitments and Contingencies, in Part II, Item 8, Financial Statements and Supplementary Data, which is incorporated herein by reference, for further discussion of pending litigation and other proceedings. In addition, changes in our business and pending actions by regulators and accreditors may increase the risk of claims by our shareholders.
We cannot predict the ultimate outcome of these matters and expect to incur significant defense costs and other expenses in connection with them. Such costs and expenses could have a material adverse effect on our business, financial condition, results of operations and cash flows and the market price of our common stock. We may be required to pay substantial damages or settlement costs in excess of our insurance coverage related to these matters, or may be required to pay substantial fines or penalties, any of which could have a further material adverse effect on our business, financial condition, results of operations and cash flows. An adverse outcome in any of these matters could also materially and adversely affect our licenses, accreditations and eligibility to participate in Title IV programs.
Our acquisitions may not be successful and may result in additional debt or dilution to our shareholders, which could adversely affect our business.
As part of our growth strategy, we are actively considering acquisition opportunities worldwide. We have acquired and expect to acquire additional proprietary educational institutions that complement our strategic direction, some of which could be material. Any acquisition involves significant risks and uncertainties, including:
Inability to successfully integrate the acquired operations, including the information technology systems, into our institutions and maintain uniform standards, controls, policies and procedures;
Inability to successfully operate and grow the acquired businesses, including, with respect to BPP, risks related to:
Damage to BPP’s reputation, including as a result of unfavorable public opinion in the United Kingdom regarding proprietary schools and ownership of BPP by a U.S. company; and
Uncertainty of future enrollment relating to BPP’s recently established Business School, reduced demand for professional degrees, increased competition for professional examinations training, changes in the content of or procedures for professional examinations or other factors.
Distraction of management’s attention from normal business operations;
Challenges retaining the key employees of the acquired operation;
Operating, market or other challenges causing operating results to be less than projected;
Expenses associated with the acquisition;
Challenges relating to conforming non-compliant financial reporting procedures to those required of a subsidiary of a U.S. reporting company, including procedures required by the Sarbanes-Oxley Act; and
Unidentified issues not discovered in our due diligence process, including commitments and/or contingencies.
Acquisitions are inherently risky. We have experienced many challenges in connection with our previous acquisitions and cannot be certain that any future acquisitions will be successful and will not materially adversely affect our business, financial condition, results of operations and cash flows. We may not be able to identify suitable acquisition opportunities, acquire institutions on favorable terms, or successfully integrate or profitably operate acquired institutions. Future transactions may involve use of our cash resources, issuance of equity or debt securities, incurrence of other forms of debt or a significant increase in our financial leverage, which could adversely affect our business, financial condition, results of operations and cash flows, especially if the cash flows associated with any acquisition are not sufficient to cover the additional debt service and could negatively impact our compliance with the U.S. Department of Education composite score measure of financial responsibility. If we issue equity securities as consideration in an acquisition, current shareholders’ percentage ownership and earnings per share may be diluted. In addition, our acquisition of an educational institution could be considered a change in ownership and control of the acquired institution under applicable regulatory standards. For such an acquisition in the U.S., we may need approval from the U.S. Department of Education and applicable state agencies and accrediting agencies and possibly other regulatory bodies. Our inability to obtain such approvals with respect to a completed acquisition could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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Our expansion into new markets outside the U.S. subjects us to risks inherent in international operations.
As part of our growth strategy, we have acquired universities outside the U.S. and we intend to actively pursue further acquisitions. To the extent that we make such acquisitions, we will face risks that are inherent in international operations, including:
Complexity of operations across borders;
Compliance with foreign regulatory environments, including laws and regulations hindering for-profit education enterprises;
Changes in existing laws to prohibit or restrict for-profit education, whether arising from public discontent or otherwise;
Currency exchange rate fluctuations and/or price controls or restrictions on exchange of foreign currencies;
Monetary policy risks, such as inflation, hyperinflation and deflation;
Potential political and economic instability in the countries in which we operate, including potential student uprisings such as the 2011 student protests in London against tuition increases and the recent student protests in Chile against for-profit education;
Expropriation of assets by local governments;
Multiple and possibly overlapping and conflicting tax laws;
Compliance with anti-corruption regulations such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010;
Potential unionization of employees under local labor laws and local labor laws that make it more expensive and complex to negotiate with, retain or terminate employees;
Greater difficulty in utilizing and enforcing our intellectual property and contract rights;
Failure to understand the local culture and market;
Limitations on the repatriation of funds; and
Acts of terrorism and war, epidemics and natural disasters.
Any one or more of these risks could negatively impact our non-U.S. operations and materially and adversely impact our business, financial condition, results of operations and cash flows.
We rely on proprietary rights and intellectual property that may not be adequately protected under current laws, and we encounter disputes from time to time relating to our use of intellectual property.
Our success depends in part on our ability to protect our proprietary rights and intellectual property. We rely on a combination of copyrights, trademarks, trade secrets, patents, domain names and contractual agreements to protect our proprietary rights. For example, we rely on trademark protection in the U.S. and various foreign jurisdictions to protect our rights to various marks as well as distinctive logos and other marks associated with our services. We also rely on agreements under which we obtain intellectual property to own or license rights to use intellectual property developed by faculty members, content experts and other third-parties. We cannot assure that these measures are adequate, that we have secured, or will be able to secure, appropriate permissions or protections for all of the intellectual property rights we use or claim rights to in the U.S. or various foreign jurisdictions, or that third parties will not terminate our license rights or infringe upon or otherwise violate our intellectual property rights or the intellectual property rights of others. Despite our efforts to protect these rights, unauthorized third parties may attempt to use, duplicate or copy the proprietary aspects of our student recruitment and educational delivery methods and systems, curricula, online resource material or other content. Our management’s attention may be diverted by these attempts and we may need to use funds in litigation to protect our proprietary rights against any infringement or violation, which could have a material adverse affect on our business, financial condition, results of operations and cash flows.
We may become party to disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in these disputes. For example, third parties may allege that we have infringed upon or not obtained sufficient rights in the technologies used in our educational delivery systems, the content of our courses or other training materials or in our ownership or uses of other intellectual property claimed by that third-party. Some third-party intellectual property rights may prove to be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid violating those intellectual property rights. Any such intellectual property claim could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether such claim has merit. Our various liability insurance coverages, if any, may not cover potential claims of this type adequately or at all, and we may be required to alter the design and operation of our systems or the content of our courses or pay monetary damages or license fees to third parties, which could have a material adverse affect on our business, financial condition, results of operations and cash flows. Refer to Note 17, Commitments and Contingencies, in Part II, Item 8, Financial Statements and Supplementary Data, for a description of pending patent litigation.

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We may incur liability for the unauthorized duplication, distribution or other use of materials posted online.
In some instances, our employees, including faculty members, or our students may post various articles or other third-party content online in class discussion boards or in other venues including Facebook, PhoenixConnect, University of Phoenix’s proprietary social media network, and other social networks. The laws governing the fair use of these third-party materials are imprecise and adjudicated on a case-by-case basis, which makes it challenging to adopt and implement appropriately balanced institutional policies governing these practices. As a result, we could incur liability to third parties for the unauthorized duplication, distribution or other use of this material. Any such claims could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether the claims have merit. Our various liability insurance coverages, if any, may not cover potential claims of this type adequately or at all, and we may be required to alter or cease our uses of such material, which may include changing or removing content from our courses, or pay monetary damages, which could have a material adverse affect on our business, financial condition, results of operations and cash flows.
The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation and operations.
Possession and use of personal information in our operations subjects us to risks and costs that could harm our business. Our educational institutions collect, use and retain large amounts of personal information regarding our students and their families, including social security numbers, tax return information, personal and family financial data and credit card numbers. We also collect and maintain personal information of our employees in the ordinary course of our business. Some of this personal information is held and managed by certain of our vendors. Although we use security and business controls to limit access and use of personal information, a third-party may be able to circumvent those security and business controls, which could result in a breach of student or employee privacy. In addition, errors in the storage, use or transmission of personal information could result in a breach of student or employee privacy, and the increased availability and use of mobile data devices by our employees and students increases the risk of unintentional disclosure of personal information. Possession and use of personal information in our operations also subjects us to legislative and regulatory burdens that could require notification of data breaches and restrict our use of personal information. We cannot ensure that a breach, loss or theft of personal information will not occur. A breach, theft or loss of personal information regarding our students and their families or our employees that is held by us or our vendors could have a material adverse effect on our reputation and results of operations and result in liability under state and federal privacy statutes and legal actions by state attorneys, general and private litigants, and any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may have unanticipated tax liabilities that could adversely impact our results of operations and financial condition.
We are subject to multiple types of taxes in the U.S., United Kingdom and various other foreign jurisdictions. The determination of our worldwide provision for income taxes and other tax accruals involves various judgments, and therefore the ultimate tax determination is subject to uncertainty. In addition, changes in tax laws, regulations, or rules may adversely affect our future reported financial results, may impact the way in which we conduct our business, or may increase the risk of audit by the Internal Revenue Service or other tax authorities.
Our U.S. federal income tax return for fiscal year 2011 is currently under review by the Internal Revenue Service. In addition, we are subject to numerous ongoing audits by state, local and foreign tax authorities. Although we believe our tax accruals are reasonable, the final determination of tax audits in the U.S. or abroad and any related litigation could result in tax liabilities that materially differ from our historical income tax provisions and accruals.
In addition, an increasing number of states are adopting new laws or changing their interpretation of existing laws regarding the apportionment of service revenues for corporate income tax purposes in a manner that could result in a larger proportion of our income being taxed by the states into which we sell services. These legislative and administrative changes could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Item 1B - Unresolved Staff Comments
None.

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Item 2 - Properties
Our corporate headquarters are principally located in Phoenix, Arizona. As of August 31, 2013, we used 328 facilities representing 8.5 million square feet as follows:
 
 
Leased
 
Owned
 
 
Square Feet
 
# of Properties
 
Square Feet
 
# of Properties
University of Phoenix(1)
 
6,079,775

 
209

 

 

Apollo Global(2)
 
443,499

 
49

 
598,245

 
16

Other(3)
 
1,343,265

 
54

 

 

 
 
7,866,539

 
312

 
598,245

 
16

(1) University of Phoenix has campus locations and learning centers throughout the U.S., including the Commonwealth of Puerto Rico.
(2) Apollo Global’s properties are principally located in the United Kingdom, Mexico and Chile.
(3) The substantial majority of Other properties is office space located in the U.S.
Our properties consist of both office and dual purpose space, which includes classroom and office facilities. Leases generally range from five to ten years with one to two renewal options for extended terms. We also lease space from time to time on a short-term basis in order to provide specific courses or programs. We evaluate current utilization of our educational facilities and projected enrollment to determine facility needs.
During fiscal year 2013, University of Phoenix initiated a plan to realign its ground locations throughout the U.S., which includes closing 115 locations (approximately two million square feet). As of August 31, 2013, the University has closed approximately two-thirds of the locations included in the plan, with the remaining locations expected to be closed as regulatory approvals are obtained and as teach-out obligations are satisfied. The properties in the above table include locations in the University of Phoenix realignment plan for which we still have a remaining lease obligation as of August 31, 2013. These properties represent approximately 1.1 million of the square feet in the above table.
Because of the rapidly evolving and transformational changes in higher education, University of Phoenix continues to evaluate the extent, functionality and location of its ground facilities, and may close additional facilities in the future. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3 - Legal Proceedings
We are subject to various claims and contingencies which are in the scope of ordinary and routine litigation incidental to our business, including those related to regulation, business transactions, employee-related matters and taxes, among others. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
A description of pending litigation, settlements, and other proceedings that are outside the scope of ordinary and routine litigation incidental to our business is provided under Note 17, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, which is incorporated herein by reference.
Item 4 - Mine Safety Disclosures
Not applicable.
PART II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our Apollo Group Class A common stock trades on the NASDAQ Global Select Market under the symbol “APOL.” The holders of our Apollo Group Class A common stock are not entitled to any voting rights.
There is no established public trading market for our Apollo Group Class B common stock and all shares of our Apollo Group Class B common stock are beneficially owned by affiliates.

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The following sets forth the high and low bid share prices for our Apollo Group Class A common stock as reported by the NASDAQ Global Select Market:
 
2013
 
2012
 
High
 
Low
 
High
 
Low
First Quarter
$
30.41

 
$
18.36

 
$
50.02

 
$
37.08

Second Quarter
$
22.48

 
$
16.80

 
$
58.29

 
$
42.29

Third Quarter
$
21.91

 
$
15.98

 
$
43.80

 
$
30.93

Fourth Quarter
$
22.91

 
$
16.89

 
$
38.34

 
$
25.77

Holders
As of August 31, 2013, there were approximately 228 registered holders of record of Apollo Class A common stock and four registered holders of record of Apollo Class B common stock. A substantially greater number of holders of Apollo Group Class A common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
Dividends
Although we are permitted to pay dividends on our Apollo Class A and Apollo Class B common stock, we have never paid cash dividends on our common stock. Dividends are payable at the discretion of the Board of Directors, and the Articles of Incorporation treat the declaration of dividends on the Apollo Class A and Apollo Class B common stock in an identical manner as follows: holders of our Apollo Class A common stock and Apollo Class B common stock are entitled to receive cash dividends, if and to the extent declared by the Board of Directors, payable to the holders of either class or both classes of common stock in equal or unequal per share amounts, at the discretion of the Board of Directors. We have no current plan to pay dividends in the near-term. The decision of our Board of Directors to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition and other factors the Board of Directors may consider relevant.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, which is incorporated herein by reference.
Purchase of Equity Securities
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 2013, our Board of Directors authorized an increase in the amount available under our share repurchase program up to an aggregate amount of $250 million. There is no expiration date on the repurchase authorizations and repurchases occur at our discretion.
As of August 31, 2013, $250 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.


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The following details changes in our treasury stock during the three months ended August 31, 2013:
(In thousands, except per share data)
Total Number of Shares Repurchased
 
Average Price Paid per Share
 
Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs
 
Maximum Value of Shares Available for Repurchase Under the Plans or Programs
Treasury stock as of May 31, 2013
75,653

 
$
50.87

 
75,653

 
$
250,000

New authorizations

 

 

 

Shares repurchased

 

 

 

Shares reissued
(5
)
 
50.87

 
(5
)
 

Treasury stock as of June 30, 2013
75,648

 
$
50.87

 
75,648

 
$
250,000

New authorizations

 

 

 

Shares repurchased

 

 

 

Shares reissued
(424
)
 
50.87

 
(424
)
 

Treasury stock as of July 31, 2013
75,224

 
$
50.87

 
75,224

 
$
250,000

New authorizations

 

 

 

Shares repurchased

 

 

 

Shares reissued
(42
)
 
50.87

 
(42
)
 

Treasury stock as of August 31, 2013
75,182

 
$
50.87

 
75,182

 
$
250,000



44


Company Stock Performance
The following graph compares the five-year cumulative total return attained by shareholders on Apollo Class A common stock relative to the cumulative total returns of the S&P 500 index and a customized peer group of five companies that includes: Career Education Corporation, Corinthian Colleges, Inc., DeVry Inc., ITT Educational Services, Inc., and Strayer Education, Inc. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in the S&P 500 Index, and in the peer group on August 31, 2008, and its relative performance is tracked through August 31, 2013. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among Apollo Group, Inc., the S&P 500 Index and a Peer Group
* $100 invested on August 31, 2008 in stock and index, including reinvestment of dividends. Fiscal year ending August 31.
Source: Standard & Poor’s.
 
8/08
 
8/09
 
8/10
 
8/11
 
8/12
 
8/13
Apollo Group, Inc. 
100
 
102
 
67
 
74
 
42
 
29
S&P 500 Index
100
 
82
 
86
 
102
 
120
 
142
Peer Group
100
 
113
 
69
 
71
 
33
 
36
The information contained in the performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission nor shall such information be deemed incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.


45


Item 6 - Selected Consolidated Financial Data
The following selected consolidated financial data is qualified by reference to and should be read in conjunction with Item 8, Financial Statements and Supplementary Data, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, to fully understand factors that may affect the comparability of the information presented below. The consolidated balance sheets data as of August 31, 2013 and 2012 and the consolidated statements of income data for fiscal years 2013, 2012 and 2011 were derived from the audited consolidated financial statements, included herein. The consolidated balance sheets data as of August 31, 2011, 2010 and 2009 and the consolidated statements of income data for fiscal years 2010 and 2009 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period.
Consolidated Balance Sheets Data:
 
As of August 31,
($ in thousands)
2013
 
2012
 
2011
 
2010
 
2009
Cash and cash equivalents
$
1,414,485

 
$
1,276,375

 
$
1,571,664

 
$
1,284,769

 
$
968,246

Restricted cash and cash equivalents
259,174

 
318,334

 
379,407

 
444,132

 
432,304

Marketable securities
105,809

 

 

 

 

Long-term restricted cash and cash equivalents

 

 

 
126,615

 

Total assets
2,997,947

 
2,868,322

 
3,269,706

 
3,601,451

 
3,263,377

Current liabilities
1,570,315

 
1,655,039

 
1,655,287

 
1,793,511

 
1,755,278

Long-term debt
64,004

 
81,323

 
179,691

 
168,039

 
127,701

Long-term liabilities
245,619

 
207,637

 
190,739

 
251,161

 
155,785

Total equity
1,118,009

 
924,323

 
1,243,989

 
1,388,740

 
1,224,613

Consolidated Statements of Income Data:
 
Year Ended August 31,
(In thousands, except per share data)
2013
 
2012
 
2011
 
2010
 
2009
Net revenue
$
3,681,310

 
$
4,253,337

 
$
4,711,049

 
$
4,906,613

 
$
3,953,566

Operating income(1)
427,414

 
676,337

 
955,858

 
1,008,715

 
1,065,935

Income from continuing operations
248,965

 
383,183

 
529,087

 
535,467

 
610,207

Net income
248,965

 
417,006

 
535,796

 
521,581

 
593,830

Net income attributable to Apollo
248,526

 
422,678

 
572,427

 
553,002

 
598,319

Earnings (loss) per share - Basic:
 

 
 

 
 

 
 
 
 
Continuing operations attributable to Apollo
$
2.20

 
$
3.24

 
$
4.01

 
$
3.73

 
$
3.90

Discontinued operations attributable to Apollo

 
0.24

 
0.04

 
(0.09
)
 
(0.11
)
Basic income per share attributable to Apollo
$
2.20

 
$
3.48

 
$
4.05

 
$
3.64

 
$
3.79

Earnings (loss) per share - Diluted:
 

 
 

 
 

 
 

 
 

Continuing operations attributable to Apollo
$
2.19

 
$
3.22

 
$
4.00

 
$
3.71

 
$
3.85

Discontinued operations attributable to Apollo

 
0.23

 
0.04

 
(0.09
)
 
(0.10
)
Diluted income per share attributable to Apollo
$
2.19

 
$
3.45

 
$
4.04

 
$
3.62

 
$
3.75

Basic weighted average shares outstanding
112,712

 
121,607

 
141,269

 
151,955

 
157,760

Diluted weighted average shares outstanding
113,285

 
122,357

 
141,750

 
152,906

 
159,514

(1) Operating income includes:
Restructuring and other charges of $198.6 million, $38.7 million and $22.9 million in fiscal years 2013, 2012 and 2011, respectively;
Litigation (credit) charge, net of $(24.6) million, $4.7 million, $(12.0) million, $178.0 million and $80.5 million in fiscal years 2013, 2012, 2011, 2010 and 2009, respectively; and
Goodwill and other intangibles impairment of $16.8 million, $219.9 million and $184.6 million in fiscal years 2012, 2011 and 2010, respectively.


46


Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help investors understand our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and related notes included in Item 8, Financial Statements and Supplementary Data.
Overview
Apollo is one of the world’s largest private education providers and has been a provider of education services since 1973. We believe that our success depends on providing high quality educational products and services to students at the right value to maximize the benefits of their educational experience. We offer educational programs and services, online and on-campus, at the undergraduate, master’s and doctoral levels. Our principal learning platforms include the following:
The University of Phoenix, Inc. (“University of Phoenix”);
Apollo Global, Inc. (“Apollo Global”):
BPP Holdings Limited (“BPP”);
Universidad Latinoamericana (“ULA”);
Universidad de Artes, Ciencias y Comunicación (“UNIACC”); and
Indian Education Services Private Ltd.
Western International University, Inc. (“Western International University,” or “WIU”);
Institute for Professional Development (“IPD”);
The College for Financial Planning Institutes Corporation (“CFFP”);
Carnegie Learning, Inc. (“Carnegie Learning”); and
Apollo Lightspeed.
Substantially all of our net revenue is composed of tuition and fees for educational services. In fiscal year 2013, University of Phoenix represented 90% of our total consolidated net revenue and generated more than 100% of our operating income, and 83% of the University’s cash basis revenue for eligible tuition and fees was derived from U.S. federal financial aid programs established by Title IV of the Higher Education Act and regulations promulgated thereunder (“Title IV”), as calculated under the 90/10 Rule.
Key Trends, Developments and Challenges
The following developments and trends present opportunities, challenges and risks as we work toward our goal of providing attractive returns for all of our stakeholders:
Rapidly Evolving and Highly Competitive Education Industry. The U.S. higher education industry, including the proprietary sector, is experiencing unprecedented, rapidly developing changes due to technological developments, evolving needs and objectives of students and employers, economic constraints affecting educational institutions and students, rising costs of education and increased focus on affordability, price competition and other factors that challenge many of the core principles underlying the industry. We believe University of Phoenix enrollment has been adversely impacted by these changes as discussed below in Results of Operations of this MD&A.
We are adapting our business to meet these rapidly evolving developments. We are working to accelerate the enhancement of our offerings to remain competitive and to more effectively deliver a quality student experience at the right value. In addition, we have increased our use of scholarships and discounts to improve our value proposition to prospective students. Certain of our initiatives under consideration, including some of those described below, could adversely impact our operating results, especially in the short-term.
Education to Careers Value Proposition. We believe it is critical that we demonstrate a compelling and cost-effective relationship between our educational offerings and improvement in our graduates’ prospects for employment in their field of choice or advancement within their existing careers. This is our key value proposition to prospective students. Our goal is to provide programs that offer specialized skills in high-growth industries and careers. We have launched career-oriented tools and continue to increase career connections and relationships to meet student and employer needs. To ensure we offer relevant workforce skills, we are working with industry experts and employers to develop and incorporate curriculum changes. We are also redesigning our programs to allow students to earn credentials and/or certificates they can use in the workplace as they are earning their ultimate degree goal.

47


Student Retention. We are focused on improving student retention by tailoring our programs to more effectively attract those students who can succeed in our educational programs. In addition, we are implementing several initiatives to improve retention, including:
Increasing use of full-time faculty in initial University of Phoenix courses;
Piloting a new format of University of Phoenix’s University Orientation program;
Modified entry course structure and sequencing;
Enhancement of our adaptive learning math tools for students;
Targeted scholarships; and
Redesigning our programs to allow students to earn credentials and/or certificates they can use in the workplace as they are earning their ultimate degree goal.
A number of these initiatives depend on successful implementation of multiple significant information technology system upgrades and changes, which may require more time or resources than we currently anticipate for full deployment. Any such delays or increased funding requirements could impact our ability to improve our student retention rates in the near-term.
Business Process Reengineering. We remain focused on continuing the reengineering of our business processes and refining our educational delivery systems to improve the effectiveness of our services to students, and to reduce the size of our services infrastructure and associated operating expenses to align with our reduced enrollment. These activities include the following:
University of Phoenix Campus Closures. Beginning in fiscal year 2013, University of Phoenix began implementing a plan to close 115 of its ground locations, after which the University will operate ground campus facilities in 111 locations in 36 states, the District of Columbia and the Commonwealth of Puerto Rico. As of August 31, 2013, University of Phoenix has closed nearly two-thirds of the locations included in these plans and the remaining closures will continue into fiscal year 2014 and beyond as University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations. Because of the rapidly evolving and transformational changes in higher education, the University continues to evaluate the extent, functionality and location of its ground facilities, and may close additional facilities in the future.
Services. In addition to the ground facility closures, we have begun multiple initiatives to streamline, automate where appropriate, and enhance our administrative and student-facing student services.
As of August 31, 2013, we have incurred $260.2 million of cumulative restructuring and other charges associated with our restructuring activities. We have continued restructuring our business subsequent to August 31, 2013, which includes workforce reductions of approximately 500 non-faculty personnel. We expect to incur approximately $50 million of future restructuring charges for the initiatives announced to date. The majority of these charges represent lease related costs associated with closing University of Phoenix campuses, and will be incurred as the University obtains the necessary regulatory approvals and completes its teach-out obligations. We expect to incur the majority of the $50 million in fiscal year 2014 and the remainder in future years.
Our costs that are more variable in nature represent approximately 14% of our net revenue and are included in Instructional and student advisory on our Consolidated Statements of Income. Due principally to our cost optimization and restructuring activities in recent years, our fiscal year 2013 operating costs that have historically been more fixed in nature decreased approximately $350 million compared to fiscal year 2012. In fiscal year 2014, we expect to further reduce our fixed operating costs by a minimum of $300 million, which would result in a total decline of $650 million, or 18%, from the our fiscal year 2012 cost base.
Refer to Results of Operations in this MD&A and Part I, Item 1A, Risk Factors - Risks Related to Our Business - The reduction in the number of our on-ground locations could negatively impact our enrollment and operating results, for further discussion.
Expansion into New Markets. We believe that learners worldwide can benefit from our career-focused education offerings. We are working to expand our global operations so that they become an increasingly significant portion of our consolidated operating results, and are exploring new opportunities for growth in other non-traditional higher education and service offerings. To date, we have acquired educational institutions in the United Kingdom, Mexico and Chile, and are developing a joint venture intended to provide educational services and programs in India. The integration and operation of acquired businesses in foreign jurisdictions entails substantial regulatory, market and execution risks and such acquisitions may not be accretive for an extended period of time, if at all, depending on the circumstances.

48


Information Technology. We are upgrading a substantial portion of our key IT systems, including our student learning system, student services platform and corporate applications, and retiring the related legacy systems. We believe that these new systems will improve the productivity, scalability, reliability and sustainability of our IT infrastructure and improve the student experience. However, the transition from our legacy systems entails risk of unanticipated disruption, including disruptions in our core business functions that could adversely impact our business. Refer to Part I, Item 1A, Risk Factors - Risks Related to Our Business - System disruptions and security threats to our computer networks or phone systems could have a material adverse effect on our business.
Regulatory Environment. The following summarizes significant regulatory matters applicable to our business. For a more detailed discussion of the regulatory environment and related risks, refer to Part I, Item 1, Business, and Item 1A, Risk Factors.
The Higher Learning Commission Accreditation Reaffirmation. In July 2013, the accreditation of University of Phoenix was reaffirmed by The Higher Learning Commission, its institutional accreditor (“HLC”), through the 2022-2023 academic year. At the same time, HLC placed the University on Notice status for a two-year period, due to concerns regarding governance, student assessment and faculty scholarship/research for doctoral programs. Notice status is a sanction that means that HLC has determined that an institution is on a course of action that, if continued, could lead the institution to be out of compliance with one or more of the HLC Criteria for Accreditation or Core Components. We believe the imposition of the sanction of Notice on University of Phoenix could adversely impact our business. See discussion of these risks in Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - If we fail to maintain our institutional accreditation, we could lose our ability to participate in Title IV programs, which would materially and adversely affect our business.
In July 2013, the accreditation of Western International University also was reaffirmed by HLC through the 2022-2023 academic year, and Western International University was placed on Notice status for a two-year period due to concerns relating to governance, student assessment and faculty.
U.S. Congressional Hearings and Financial Aid Funding. In recent years, there has been increased focus by members of the U.S. Congress on the role that proprietary educational institutions play in higher education and we expect this focus to continue. Congressional hearings and roundtable discussions have been held regarding various aspects of the education industry, and reports have been issued that are highly critical of proprietary institutions and include a number of recommendations to be considered by Congress in connection with the next required reauthorization of the federal Higher Education Act. The current reauthorization expired September 30, 2013, but was extended automatically to September 30, 2014. In addition, financial aid programs are a potential target for reduction as Congress addresses the historic U.S. budget deficit. Any action by Congress that significantly reduces Title IV program funding, whether through across-the-board funding reductions, sequestration or otherwise, or materially impacts the eligibility of our institutions or students to participate in Title IV programs would have a material adverse effect on our enrollment, financial condition, results of operations and cash flows. Congressional action could also require us to modify our practices in ways that could increase our administrative costs and reduce our operating income. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - Action by the U.S. Congress to revise the laws governing federal student financial aid programs or reduce funding for those programs, including changes applicable only to proprietary educational institutions, could reduce our enrollment and increase our costs of operation.
In addition to possible reductions in federal student financial aid, certain military financial aid may be reduced as military branches address decreased funding. Reductions and/or changes in military financial aid could result in increased student borrowing, decreased enrollment and adverse impacts on our 90/10 Rule percentage.
Program Participation Agreement. University of Phoenix’s Title IV Program Participation Agreement expired December 31, 2012. The University has submitted necessary documentation for re-certification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We have no reason to believe that the University’s application will not be renewed in due course, and it is not unusual to be continued on a month-to-month basis until the Department completes its review. However, we cannot predict whether, or to what extent, the imposition of the Notice sanction by The Higher Learning Commission might have on this process.
U.S. Department of Education Rulemaking Initiative. Negotiated rulemaking public hearings were held by the U.S. Department of Education in May and June 2013. Topics included cash management of Title IV program funds, state authorization for programs offered through distance education or correspondence education, and

49


gainful employment, among others. The negotiated rulemaking process is expected to produce new regulations which could be effective as soon as July 1, 2014. More information can be found at
http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/index.html.
A negotiated rulemaking committee was convened by the Department in September 2013 specifically on the topic of gainful employment. Prior to the September 2013 committee meeting, the Department released new draft regulations on gainful employment. Under the draft regulations, programs would have to pass one of two metrics: the annual debt-to-earnings ratio, or the debt-to-discretionary income ratio. If either of the metrics is within a specified zone, students would receive debt warnings. As proposed, a program would become ineligible for Title IV funding if it fails two out of three years or does not pass in any one of four years. More information can be found at
http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/gainfulemployment.html
90/10 Rule. To remain eligible to participate in Title IV programs, proprietary institutions of higher education must comply with the so-called “90/10 Rule” under the Higher Education Act, as reauthorized, and must derive 90% or less of their cash basis revenue, as defined in the rule, from Title IV programs. The 90/10 Rule percentages for University of Phoenix were the following for the respective periods:
 
Year Ended August 31,
 
2013
 
2012
 
2011(1)
University of Phoenix
83%
 
84%
 
86%
(1) Calculated excluding the temporary relief from the impact of loan limit increases, which was allowable for amounts received and applied to eligible charges between July 1, 2008 and June 30, 2011 that were attributable to the increased annual loan limits.
Based on recent trends, we do not expect the 90/10 Rule percentage for University of Phoenix to exceed 90% for fiscal year 2014. However, the 90/10 Rule percentage for University of Phoenix remains high and could exceed 90% in the future depending on the degree to which its various initiatives are effective, the impact of future changes in its enrollment mix, and regulatory and other factors outside our control, including any reduction in military benefit programs or changes in the treatment of such funding for purposes of the 90/10 Rule calculation. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - Our schools and programs would lose their eligibility to participate in federal student financial aid programs if the percentage of revenues derived from those programs is too high, in which event we could not conduct our business as it is currently conducted.
Student Loan Cohort Default Rates. To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain specified levels. Educational institutions will lose eligibility to participate in Title IV programs if their three-year cohort default rate equals or exceeds 40% for any given year or 30% for three consecutive years. The three-year cohort default rates for University of Phoenix for the applicable federal fiscal years were as follows:
 
Three-Year Cohort Default Rates for
Cohort Years Ended September 30,
 
2010
 
2009
 
2008
University of Phoenix(1)
26.0%
 
26.4%
 
21.1%
(1) Based on information published by the U.S. Department of Education. The 2008 three-year cohort default rate is a trial rate published by the Department for informational purposes only.
Based on our most recent trends, we expect that our 2011 three-year cohort default rate will be lower than the 2010 three-year cohort default rate. However, if our student loan default rates approach the applicable limits, we may be required to increase efforts and resources dedicated to improving these default rates. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - An increase in student loan default rates could result in the loss of eligibility to participate in Title IV programs, which would materially and adversely affect our business.
For a more detailed discussion of our business, industry and risks, refer to Item 1, Business, and Item 1A, Risk Factors.

50


Fiscal Year 2013 Significant Events
In addition to the items mentioned above, we experienced the following significant events during fiscal year 2013 and to date:
1.
Purchase of Noncontrolling Interest. During the first quarter of fiscal year 2013, we purchased the 14.4% noncontrolling ownership interest in Apollo Global from The Carlyle Group. We paid $42.5 million cash, plus a contingent payment based on a portion of Apollo Global’s operating results through the fiscal years ending August 31, 2017. As a result of the transaction, Apollo Group owns 100% of Apollo Global. Refer to Note 14, Shareholders’ Equity in Item 8, Financial Statements and Supplementary Data.
2.
Executive Management Changes. We experienced the following executive management changes:
Joseph L. D’Amico resigned as President in March 2013 and retired from his position of Executive Vice President and Advisor to the Chief Executive Officer in September 2013; and
Curtis M. Uehlein was appointed as our Acting Chief Operating Officer in April 2013, and also serves as President of Apollo Global.
William J. Pepicello announced his retirement from his position as President of the University of Phoenix, effective upon the naming of a successor.
3.
Board of Directors Changes. We experienced the following changes on our Board of Directors during fiscal year 2013:
Dr. John Sperling, our founder and Executive Chairman, announced his retirement as Executive Chairman and a director effective December 31, 2012;
Our Board of Directors elected Peter Sperling, formerly Vice Chairman of the Board of Directors, to succeed Dr. John Sperling as Chairman of our Board of Directors, effective December 31, 2012;
Our Board of Directors elected Terri Bishop, a member of the Board of Directors and formerly Executive Vice President, Integrated Academic Strategies and Senior Advisor to the Chief Executive Officer, to succeed Peter Sperling as Vice Chair of the Board of Directors, effective December 31, 2012;
Matthew Carter, Jr. was appointed to our Board of Directors on December 13, 2012 and sits on the audit and finance committees of the Board of Directors;
K. Sue Redman, a member of our Board of Directors and Audit Committee Chair, chose not to stand for reelection at the annual meeting of our Class B shareholders and therefore her term of service ended on January 8, 2013;
George A. Zimmer, a member of our Board of Directors, resigned on March 21, 2013; and
Margaret Spellings, a member of our Board of Directors, resigned effective August 31, 2013.
4.
BPP Accreditation and University Status. In March 2013, the Quality Assurance Agency for Higher Education in the U.K. approved BPP University of Professional Studies’ accreditation for the next six years, which is the maximum allowable period. The next accreditation review is scheduled during the 2018-2019 school year. Additionally, BPP University was awarded the title of “University” by the U.K. in July 2013.
5.
Western International University. In June 2013, WIU announced a shift in its pricing structure along with a new online course delivery method designed to provide students with a more manageable and affordable higher education solution. The new pricing structure allows WIU students to complete programs at half the cost previously incurred by WIU students, and allows prospective students to test the academic experience before they formally enroll. The education delivery method incorporates multimedia content delivery, knowledge checks and enhanced engagement with instructors and other students to put the learning in practical context. We believe this shift will improve the student experience and further differentiate WIU.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make certain estimates, assumptions and judgments 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. Our critical accounting policies involve a higher degree of judgments, estimates and complexity, and are detailed below.

51


Revenue Recognition
Our educational programs, primarily composed of University of Phoenix programs, are designed to range in length from one-day seminars to degree programs lasting up to four years. Students in University of Phoenix degree programs generally enroll in a program of study encompassing a series of five- to nine-week courses taken consecutively over the length of the program. Generally, students are billed on a course-by-course basis when the student first attends a session, resulting in the recording of a receivable from the student and deferred revenue in the amount of the billing. University of Phoenix students generally fund their education through loans and/or grants from U.S. federal financial aid programs established by Title IV of the Higher Education Act and regulations promulgated thereunder (“Title IV”), military benefit programs, tuition assistance from their employers, or personal funds.
Net revenue consists principally of tuition and fees associated with different educational programs and related educational materials, and is presented net of discounts. Tuition benefits for our employees and their eligible dependents are included in net revenue and instructional and student advisory expenses, and were $53.4 million, $71.1 million and $97.0 million during fiscal years 2013, 2012 and 2011, respectively. The following presents the components of our net revenue, and each component as a percentage of total net revenue, for the respective periods:
 
Year Ended August 31,
($ in thousands)
2013
 
2012
 
2011
Tuition and educational services revenue
$
3,622,767

 
99
 %
 
$
4,124,629

 
97
 %
 
$
4,549,010

 
96
 %
Educational materials revenue
252,441

 
7
 %
 
294,499

 
7
 %
 
320,780

 
7
 %
Services revenue
45,602

 
1
 %
 
56,981

 
1
 %
 
76,500

 
2
 %
Other revenue
42,816

 
1
 %
 
33,192

 
1
 %
 
23,139

 
 %
Gross revenue
3,963,626

 
108
 %
 
4,509,301

 
106
 %
 
4,969,429

 
105
 %
Discounts
(282,316
)
 
(8
)%
 
(255,964
)
 
(6
)%
 
(258,380
)
 
(5
)%
Net revenue
$
3,681,310

 
100
 %
 
$
4,253,337

 
100
 %
 
$
4,711,049

 
100
 %
We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered or delivery has occurred, our fees or price to the customer is fixed and determinable, and collectibility is reasonably assured.
Tuition and educational services revenue encompasses both online and on-campus delivery modes. We recognize tuition and educational services revenue over the period of instruction as services are delivered to students, which varies depending on the program structure.
Educational materials revenue encompasses online course materials delivered to students over the period of instruction and the sale of various books, study texts, course notes, and CDs. We recognize revenue associated with online materials over the period of the related course to correspond with delivery of the materials to students. We recognize revenue for the sale of other educational materials when they have been delivered to and accepted by students or other customers.
Services revenue represents net revenue generated by IPD, which provides program development, administration and management consulting services to private colleges and universities (“IPD Client Institutions”) to establish or expand their programs for working learners. These services typically include degree program design, curriculum development, market research, certain student admissions services, accounting, and administrative services. Prior to July 1, 2011, IPD was typically paid a portion of the tuition revenue generated from these programs, and the portion of service revenue to which IPD was entitled under the terms of the contract was recognized as the services were provided. As a result of U.S. Department of Education regulations that became effective on July 1, 2011, IPD’s revenue is generated based on fixed fee contracts with IPD Client Institutions and is recognized in accordance with the terms of the respective agreements as services are provided. The term for IPD’s contracts range up to ten years with provisions for renewal thereafter.
Other revenue includes net revenue generated by Carnegie Learning since its acquisition in fiscal year 2012, fees students pay when submitting an enrollment application and non-tuition generating revenues such as renting classroom space. Enrollment application fees are deferred and recognized over the average length of time a student remains enrolled in a program of study along with the related application costs associated with processing the applications.
Discounts reflect reductions in charges for tuition or other fees from our standard rates and include military, corporate, and other employer discounts, along with institutional scholarships, grants and promotions. Discounts are generally recognized over the period of instruction in the same manner as the related revenue to which the discount relates.

52


University of Phoenix’s refund policy permits students who attend 60% or less of a course to be eligible for a refund for the portion of the course they did not attend. Refunds result in a reduction in deferred revenue during the period that a student drops or withdraws from a class because associated tuition revenue is recognized over the period of instruction as the services are delivered. This refund policy applies to students in most, but not all states, as some states require different policies.
Net revenue generally varies from period to period based on several factors, including the aggregate number of students attending classes, the number of classes held during the period, and the tuition price per credit.
Sales tax collected from students is excluded from net revenue. Collected but unremitted sales tax is included as a liability on our Consolidated Balance Sheets and is not material to our consolidated financial statements.
Allowance for Doubtful Accounts
Our accounts receivable is reduced by an allowance for amounts that we expect to become uncollectible in the future. We use estimates that are subjective and require judgment in determining the allowance for doubtful accounts, which are principally based on historical collection experience, historical write-offs of our receivables and current trends. Our accounts receivable are written off once the account is deemed to be uncollectible, which typically occurs after outside collection agencies have pursued collection for approximately six months.
When a student with Title IV loans withdraws, Title IV rules determine if we are required to return a portion of Title IV funds to the lender. We are then entitled to collect these funds from the students, but collection rates for these types of receivables is significantly lower than our collection rates for receivables for students who remain in our educational programs.
Our estimation methodology uses a statistical model that considers a number of factors that we believe impact whether receivables will become uncollectible based on our collections experience. These factors include, but are not limited to, the student’s academic performance and previous college experience as well as other student characteristics such as degree level and method of payment. We also monitor and consider external factors such as changes in the economic and regulatory environment. We routinely evaluate our estimation methodology for adequacy and modify it as necessary. In doing so, we believe our allowance for doubtful accounts reflects the amount of receivables that will become uncollectible by considering our most recent collections experience, changes in trends and other relevant facts.
We recorded bad debt expense of $83.8 million, $146.7 million and $181.3 million during fiscal years 2013, 2012 and 2011, respectively. Our allowance for doubtful accounts was $59.7 million and $107.2 million as of August 31, 2013 and 2012, respectively, which approximated 25% and 37% of gross student receivables as of the respective dates. For the purpose of sensitivity:
a one percent change in our allowance for doubtful accounts as a percentage of gross student receivables as of August 31, 2013 would have resulted in a pre-tax change in income of $2.4 million; and
if our bad debt expense were to change by one percent of net revenue for the fiscal year ended August 31, 2013, we would have recorded a pre-tax change in income of approximately $36.8 million.
For a discussion of the decrease in bad debt expense in recent years, refer to Results of Operations below.
Goodwill and Intangibles
Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed. At the time of an acquisition, we allocate the goodwill and related assets and liabilities to our respective reporting units. We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components.
Our intangibles are recorded at fair market value on their acquisition date and principally include trademarks, technology, customer relationships and foreign regulatory accreditations and designations. We assign indefinite lives to intangibles that we believe have the continued ability to generate cash flows indefinitely; have no legal, regulatory, contractual, economic or other factors limiting the useful life of the respective intangible; and we intend to renew the respective intangible and renewal can be accomplished at little cost. Finite-lived intangibles are amortized on either a straight-line basis or using an accelerated method to reflect the pattern in which the economic benefits of the asset are consumed. The weighted average original useful life of our $30.1 million of finite-lived intangibles as of August 31, 2013 was 4.9 years.
We assess goodwill and indefinite-lived intangibles at least annually for impairment or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit or indefinite-lived intangible below its carrying amount. We perform our annual indefinite-lived intangibles impairment tests on the same dates that we perform our annual goodwill impairment tests for the respective reporting units. In performing our impairment tests, we first consider the option to assess qualitative factors to determine whether it is more likely than not that

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the fair value of a reporting unit or intangible, as applicable, is less than its carrying amount. If we conclude that it is more likely than not that the fair value is less than the carrying amount based on our qualitative assessment, or that a qualitative assessment should not be performed, we proceed with the following quantitative impairment tests:
Goodwill - We compare the estimated fair value of the reporting unit to the carrying value of its net assets. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, we perform a hypothetical purchase price allocation to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. An impairment loss is recognized to the extent the implied fair value of the goodwill is less than the carrying amount of the goodwill.
Indefinite-lived intangibles - We compare the estimated fair value of the intangible with its carrying value. If the carrying value of the intangible exceeds its fair value, an impairment loss is recognized in the amount of that excess.
Our goodwill and indefinite-lived intangibles by reporting unit are summarized below:
($ in thousands)
Annual
Impairment
Test Date
 
Goodwill as of August 31,
 
Indefinite-lived Intangibles
as of August 31,
2013
 
2012
2013
 
2012
University of Phoenix(1)
May 31
 
$
71,812

 
$
71,812

 
$

 
$
14,100

Apollo Global
 
 
 

 
 

 
 

 
 

BPP
July 1
 

 

 
84,739

 
86,410

ULA
May 31