10-Q 1 apol-feb282014x10q.htm 10-Q APOL - Feb 28 2014 - 10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: February 28, 2014
 
OR
o
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 EDUCATION 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)
(480) 966-5394
(Registrant’s telephone number, including area code)
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES þ     NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
(Do not check if 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
As of March 25, 2014, the following shares of stock were outstanding:
Apollo Education Group, Inc. Class A common stock, no par value
110,819,000 Shares
Apollo Education Group, Inc. Class B common stock, no par value
475,000 Shares
 


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2014
INDEX

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and future results of Apollo Education Group, Inc. (“the Company,” “Apollo Education Group,” “Apollo,” “APOL,” “we,” “us” or “our”) that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance or results. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “predict,” “target,” “potential,” “continue,” “objectives,” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. Such statements should be viewed with caution. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to:
•
Changes in the regulation of the U.S. education industry and eligibility of schools, including in particular proprietary schools, to participate in U.S. federal student financial aid programs, including the regulatory and other requirements discussed in Item 1, Business, of our Annual Report on Form 10-K for the year ended August 31, 2013, under “Accreditation and Jurisdictional Authorizations,” “Financial Aid Programs” and “Regulatory Environment”;
•
Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended August 31, 2013; and
•
Those factors set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended August 31, 2013 and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-Q.
The cautionary statements referred to above also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements for any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.


3

Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
As of
($ in thousands)
February 28,
2014
 
August 31,
2013
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
645,940

 
$
1,414,485

Restricted cash and cash equivalents
283,929

 
259,174

Marketable securities
158,243

 
105,809

Accounts receivable, net
199,102

 
215,401

Prepaid taxes
15,826

 
30,359

Deferred tax assets
64,758

 
60,294

Other current assets
59,283

 
64,134

Total current assets
1,427,081

 
2,149,656

Marketable securities
111,709

 
43,941

Property and equipment, net
457,503

 
472,614

Goodwill
233,037

 
103,620

Intangible assets, net
191,343

 
132,192

Deferred tax assets
60,409

 
63,894

Other assets
50,348

 
32,030

Total assets
$
2,531,430

 
$
2,997,947

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY
Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
30,781

 
$
628,050

Accounts payable
64,290

 
73,123

Student deposits
328,394

 
309,176

Deferred revenue
256,899

 
213,260

Accrued and other current liabilities
328,240

 
346,706

Total current liabilities
1,008,604

 
1,570,315

Long-term debt
43,642

 
64,004

Deferred tax liabilities
24,814

 
12,177

Other long-term liabilities
222,064

 
233,442

Total liabilities
1,299,124

 
1,879,938

Commitments and contingencies


 


Redeemable noncontrolling interests
49,388

 
—

Shareholders’ equity:
 

 
 

Preferred stock, no par value
—

 
—

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

 
103

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

 
1

Additional paid-in capital
—

 
—

Apollo Education Group Class A treasury stock, at cost
(3,880,394
)
 
(3,824,758
)
Retained earnings
5,092,511

 
4,978,815

Accumulated other comprehensive loss
(30,024
)
 
(36,563
)
Total Apollo shareholders’ equity
1,182,197

 
1,117,598

Noncontrolling interests
721

 
411

Total equity
1,182,918

 
1,118,009

Total liabilities, redeemable noncontrolling interests and shareholders’ equity
$
2,531,430

 
$
2,997,947

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

4

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

 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
(In thousands, except per share data)
2014
 
2013
 
2014
 
2013
Net revenue
$
679,058

 
$
834,372

 
$
1,535,393

 
$
1,889,555

Costs and expenses:
 
 
 
 
 
 
 
Instructional and student advisory
319,575

 
383,702

 
659,254

 
815,852

Marketing
143,392

 
173,313

 
281,236

 
336,186

Admissions advisory
55,072

 
68,232

 
106,581

 
139,540

General and administrative
67,676

 
81,218

 
142,906

 
154,757

Depreciation and amortization
37,465

 
41,499

 
73,803

 
85,194

Provision for uncollectible accounts receivable
11,534

 
18,902

 
25,512

 
52,308

Restructuring and other charges
15,209

 
44,076

 
47,172

 
68,192

Acquisition costs and contingent consideration charges
13,005

 
—

 
13,005

 
—

Litigation charge (credit), net
9,000

 
(6,350
)
 
9,000

 
(23,200
)
Total costs and expenses
671,928

 
804,592

 
1,358,469

 
1,628,829

Operating income
7,130

 
29,780

 
176,924

 
260,726

Interest income
599

 
388

 
1,167

 
937

Interest expense
(1,983
)
 
(2,092
)
 
(4,069
)
 
(4,134
)
Other, net
107

 
(126
)
 
914

 
1,673

Income before income taxes
5,853

 
27,950

 
174,936

 
259,202

Benefit from (provision for) income taxes
6,324

 
(14,291
)
 
(63,718
)
 
(111,803
)
Net income
12,177

 
13,659

 
111,218

 
147,399

Net loss (income) attributable to noncontrolling interests
2,428

 
(132
)
 
2,278

 
(377
)
Net income attributable to Apollo
$
14,605

 
$
13,527

 
$
113,496

 
$
147,022

Basic income per share attributable to Apollo
$
0.13

 
$
0.12

 
$
1.01

 
$
1.31

Diluted income per share attributable to Apollo
$
0.13

 
$
0.12

 
$
1.00

 
$
1.30

Basic weighted average shares outstanding
112,151

 
112,573

 
112,742

 
112,496

Diluted weighted average shares outstanding
113,380

 
113,068

 
113,676

 
112,984

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


5

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

 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
 
2014
 
2013
Net income
$
12,177

 
$
13,659

 
$
111,218

 
$
147,399

Other comprehensive income (loss) (net of tax):
 
 
 
 
 
 
 
Currency translation gain (loss)(1)
4,483

 
(3,389
)
 
7,318

 
(2,630
)
Comprehensive income
16,660

 
10,270

 
118,536

 
144,769

Comprehensive loss (income) attributable to noncontrolling interests
1,748

 
199

 
1,499

 
(73
)
Comprehensive income attributable to Apollo
$
18,408

 
$
10,469

 
$
120,035

 
$
144,696

(1) The tax effect on other comprehensive income during the three and six months ended February 28, 2014 and 2013, respectively, is not significant.
The accompanying notes are an integral part of these condensed consolidated financial statements.


6

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS
(Unaudited)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Apollo Education Group
 
Additional
Paid-in
Capital
 
Treasury Stock
 
 
 
Accumulated Other
Comprehensive Loss
 
Total Apollo
Shareholders’ Equity
 
Noncontrolling
Interests
 
 
 
 
 
 
Class A Nonvoting
 
Class B Voting
 
 
Apollo Education Group Class A
 
Retained
Earnings
 
 
 
 
Total Equity
 
 
Redeemable Noncontrolling Interests
($ in thousands)
Shares
 
Stated
Value
 
Shares
 
Stated
Value
 
 
Shares
 
Cost
 
 
 
 
 
 
 
Balance as of August 31, 2013
188,007

 
$
103

 
475

 
$
1

 
$
—

 
75,182

 
$
(3,824,758
)
 
$
4,978,815

 
$
(36,563
)
 
$
1,117,598

 
$
411

 
$
1,118,009

 
 
$
—

Treasury stock purchases
—

 
—

 
—

 
—

 
—

 
2,403

 
(72,237
)
 
—

 
—

 
(72,237
)
 
—

 
(72,237
)
 
 
—

Treasury stock issued under stock purchase plans
—

 
—

 
—

 
—

 
(1,931
)
 
(72
)
 
3,623

 
—

 
—

 
1,692

 
—

 
1,692

 
 
—

Treasury stock issued under stock incentive plans
—

 
—

 
—

 
—

 
(13,077
)
 
(319
)
 
12,978

 
200

 
—

 
101

 
—

 
101

 
 
—

Net tax effect for stock incentive plans
—

 
—

 
—

 
—

 
(7,502
)
 
—

 
—

 
—

 
—

 
(7,502
)
 
—

 
(7,502
)
 
 
—

Share-based compensation
—

 
—

 
—

 
—

 
22,510

 
—

 
—

 
—

 
—

 
22,510

 
—

 
22,510

 
 
—

Currency translation adjustment, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
6,539

 
6,539

 
103

 
6,642

 
 
676

Acquisition
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
51,197

Net income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
113,496

 
—

 
113,496

 
207

 
113,703

 
 
(2,485
)
Balance as of February 28, 2014
188,007

 
$
103

 
475

 
$
1

 
$
—

 
77,194

 
$
(3,880,394
)
 
$
5,092,511

 
$
(30,024
)
 
$
1,182,197

 
$
721

 
$
1,182,918

 
 
$
49,388

Balance as of August 31, 2012
188,007

 
$
103

 
475

 
$
1

 
$
93,770

 
76,239

 
$
(3,878,612
)
 
$
4,743,150

 
$
(30,034
)
 
$
928,378

 
$
(4,055
)
 
$
924,323

 
 
 
Treasury stock purchases
—

 
—

 
—

 
—

 
—

 
159

 
(3,881
)
 
—

 
—

 
(3,881
)
 
—

 
(3,881
)
 
 
 
Treasury stock issued under stock purchase plans
—

 
—

 
—

 
—

 
(2,591
)
 
(93
)
 
4,722

 
—

 
—

 
2,131

 
—

 
2,131

 
 
 
Treasury stock issued under stock incentive plans
—

 
—

 
—

 
—

 
(17,735
)
 
(431
)
 
17,735

 
—

 
—

 
—

 
—

 
—

 
 
 
Net tax effect for stock incentive plans
—

 
—

 
—

 
—

 
(8,816
)
 
—

 
—

 
—

 
—

 
(8,816
)
 
—

 
(8,816
)
 
 
 
Share-based compensation
—

 
—

 
—

 
—

 
27,515

 
—

 
—

 
—

 
—

 
27,515

 
—

 
27,515

 
 
 
Currency translation adjustment, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,326
)
 
(2,326
)
 
(304
)
 
(2,630
)
 
 
 
Purchase of noncontrolling interest
—

 
—

 
—

 
—

 
(48,543
)
 
—

 
—

 
—

 
(4,886
)
 
(53,429
)
 
4,929

 
(48,500
)
 
 
 
Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
147,022

 
—

 
147,022

 
377

 
147,399

 
 
 
Balance as of February 28, 2013
188,007

 
$
103

 
475

 
$
1

 
$
43,600

 
75,874

 
$
(3,860,036
)
 
$
4,890,172

 
$
(37,246
)
 
$
1,036,594

 
$
947

 
$
1,037,541

 
 

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


7

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
Operating activities:
 

 
 

Net income
$
111,218

 
$
147,399

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Share-based compensation
22,510

 
27,515

Depreciation and amortization
73,803

 
85,194

Accelerated depreciation included in restructuring
4,316

 
30,641

Gain on disposition
(1,984
)
 
—

Non-cash foreign currency loss, net
596

 
146

Provision for uncollectible accounts receivable
25,512

 
52,308

Litigation charge (credit), net
9,000

 
(23,200
)
Deferred income taxes
(6,255
)
 
(4,100
)
Changes in assets and liabilities, excluding the impact of acquisition and disposition:
 
 
 

Restricted cash and cash equivalents
(24,165
)
 
(11,438
)
Accounts receivable
(6,469
)
 
(33,919
)
Prepaid taxes
15,230

 
16,143

Other assets
(11,445
)
 
(3,939
)
Accounts payable
(11,454
)
 
1,094

Student deposits
17,409

 
2,551

Deferred revenue
32,881

 
8,632

Accrued and other liabilities
(57,219
)
 
3,923

Net cash provided by operating activities
193,484

 
298,950

Investing activities:
 

 
 

Purchases of property and equipment
(58,119
)
 
(49,024
)
Purchases of marketable securities
(227,978
)
 
(39,444
)
Maturities of marketable securities
105,237

 
7,470

Acquisition, net of cash acquired
(94,937
)
 
—

Other investing activities
3,446

 
(1,500
)
Net cash used in investing activities
(272,351
)
 
(82,498
)
Financing activities:
 

 
 

Payments on borrowings
(619,268
)
 
(629,544
)
Proceeds from borrowings
—

 
2,176

Purchase of noncontrolling interest
—

 
(42,500
)
Purchases of stock for treasury
(72,237
)
 
(3,881
)
Issuances of stock
1,793

 
2,131

Net cash used in financing activities
(689,712
)
 
(671,618
)
Exchange rate effect on cash and cash equivalents
34

 
(46
)
Net decrease in cash and cash equivalents
(768,545
)
 
(455,212
)
Cash and cash equivalents, beginning of period
1,414,485

 
1,276,375

Cash and cash equivalents, end of period
$
645,940

 
$
821,163

Supplemental disclosure of cash flow and non-cash information:
 

 
 

Cash paid for income taxes, net of refunds
$
70,868

 
$
100,713

Cash paid for interest
3,911

 
4,010

Restricted stock units vested and released
7,104

 
10,825

Capital lease additions
—

 
2,755

Credits received for tenant improvements
—

 
1,540

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

8

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations
Apollo Education Group, Inc. and its wholly-owned subsidiaries and majority-owned subsidiaries, collectively referred to herein as “the Company,” “Apollo Education Group,” “Apollo,” “APOL,” “we,” “us,” or “our,” has been an education 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”);
•
Apollo Global, Inc. (“Apollo Global”):
•
BPP Holdings Limited (“BPP”) in the United Kingdom (“U.K.”);
•
Open Colleges Australia Pty Ltd. (“Open Colleges”) in Australia;
•
Universidad Latinoamericana (“ULA”) in Mexico;
•
Universidad de Artes, Ciencias y Comunicación (“UNIACC”) in Chile; and
•
India Education Services Private Ltd. in India;
•
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, LLC (“Apollo Lightspeed”).
During the first quarter of fiscal year 2014, Apollo changed its name from Apollo Group, Inc. to Apollo Education Group, Inc.
On December 20, 2013, Apollo Global acquired 70% of the outstanding shares of Open Colleges, a provider of education and training to adult learners in Australia. Refer to Note 4, Acquisitions.
Note 2. Significant Accounting Policies
Basis of Presentation
The unaudited interim condensed consolidated financial statements include the accounts of Apollo Education Group, Inc., its wholly-owned subsidiaries, and subsidiaries that we control. These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission and, in the opinion of management, contain all adjustments, consisting of normal, recurring adjustments, necessary to fairly present the financial condition, results of operations and cash flows for the periods presented.
These unaudited interim condensed consolidated financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements. Therefore, this information should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our 2013 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on October 22, 2013. We consistently applied the accounting policies described in Item 8, Financial Statements and Supplementary Data, in our 2013 Annual Report on Form 10-K in preparing these unaudited interim condensed consolidated financial statements.
The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Our fiscal year is from September 1 to August 31. Unless otherwise noted, references to particular years or quarters refer to our fiscal years and the associated quarters of those fiscal years.
Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, fluctuations in our results of operations as a result of seasonal variations in the level of our institutions’ enrollments. Although University of Phoenix enrolls students throughout the year, its net revenue is generally lower in our second fiscal quarter (December through February) than the other quarters due to holiday breaks. Because of the seasonal nature of our business and other factors, the results of operations for the three and six months ended February 28, 2014 are not necessarily indicative of results to be expected for the entire fiscal year.

9
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Reclassifications
During fiscal year 2013, we began presenting amortization of deferred gains on sale-leasebacks and amortization of lease incentives as a component of the change in accrued and other liabilities on our Condensed Consolidated Statements of Cash Flows. We have reclassified the six months ended February 28, 2013 to conform to our current presentation, which did not impact total cash provided by operating activities.
Note 3. Restructuring and Other Charges
The U.S. higher education industry, including the proprietary sector, is experiencing unprecedented, rapidly developing changes that challenge many of the core principles underlying the industry. We are reengineering our business processes and refining our educational delivery systems to improve the effectiveness of our services to students, and reducing the size of our services infrastructure and associated operating expenses to align with our reduced enrollment and revenue. We have incurred restructuring and other charges associated with these activities beginning in fiscal year 2011 as summarized below:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
 
Cumulative
Costs as of
February 28, 2014
($ in thousands)
2014
 
2013
 
2014
 
2013
 
Lease and related costs, net
$
9,505

 
$
34,640

 
$
23,265

 
$
44,752

 
$
195,576

Severance and other employee separation costs
4,863

 
8,217

 
20,117

 
19,160

 
71,143

Other restructuring related costs
841

 
1,219

 
3,790

 
4,280

 
40,686

Restructuring and other charges
$
15,209

 
$
44,076

 
$
47,172

 
$
68,192

 
$
307,405

The following summarizes the restructuring and other charges in our segment reporting format:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
 
Cumulative
Costs as of
February 28, 2014
($ in thousands)
2014
 
2013
 
2014
 
2013
 
University of Phoenix
$
11,229

 
$
38,445

 
$
36,655

 
$
55,341

 
$
238,327

Apollo Global
304

 
3,336

 
1,567

 
3,415

 
13,332

Other
3,676

 
2,295

 
8,950

 
9,436

 
55,746

Restructuring and other charges
$
15,209

 
$
44,076

 
$
47,172

 
$
68,192

 
$
307,405

The following details the changes in our restructuring liabilities by type of cost during the six months ended February 28, 2014:
($ in thousands)
Lease and
Related Costs,
Net
 
Severance and
Other Employee
Separation Costs
 
Other
Restructuring
Related Costs
 
Total
Balance at August 31, 2013(1)
$
104,048

 
$
7,623

 
$
8,130

 
$
119,801

Restructuring and other charges
23,265

 
20,117

 
3,790

 
47,172

Non-cash adjustments(2)
(1,811
)
 
(2,326
)
 
—

 
(4,137
)
Payments
(27,082
)
 
(16,437
)
 
(4,015
)
 
(47,534
)
Balance at February 28, 2014(1)
$
98,420

 
$
8,977

 
$
7,905

 
$
115,302

(1) The current portion of our restructuring liabilities was $56.7 million and $55.2 million as of February 28, 2014 and August 31, 2013, respectively. These balances are included in accrued and other current liabilities on our Condensed Consolidated Balance Sheets and the long-term portion is included in other long-term liabilities. The gross, undiscounted obligation associated with our restructuring liabilities as of February 28, 2014 is approximately $175 million, which principally represents non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.
(2) Non-cash adjustments for lease and related costs, net represents $4.3 million of accelerated depreciation, partially offset by the release of certain associated liabilities such as deferred rent. Non-cash adjustments for severance and other employee separation costs represents share-based compensation.
•
Lease and Related Costs, Net - Beginning in fiscal year 2011, University of Phoenix began rationalizing its administrative real estate facilities. In addition to continuing to rationalize its administrative facilities, University of Phoenix began implementing a plan during fiscal year 2013 to close 115 of its ground locations. As of February 28, 2014, University of Phoenix has closed approximately three-fourths of the locations included in these plans, which

10
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

represents approximately 90% of the total square feet we are exiting. The remaining closures will continue through fiscal year 2014 and beyond as University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations. We have recorded $140.6 million of initial aggregate charges, representing the estimated fair value of future contractual operating lease obligations, which were recorded in the periods we ceased using the respective facilities, $17.0 million of which was recorded in the six months ended February 28, 2014. The other lease and related costs in the six months ended February 28, 2014 consist of accelerated depreciation, as discussed below, and interest accretion on the lease obligations.
We measure lease obligations at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The significant unobservable inputs principally include estimated future cash flows and discount rates, which have ranged between 3%-6% for our lease obligations. The estimation of future cash flows includes non-cancelable contractual lease costs over the remaining terms of the leases, partially offset by estimated future sublease rental income, which involves significant judgment. Our estimate of the amount and timing of sublease rental income considers subleases that we have executed and subleases we expect to execute, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the facilities. The estimates will be subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements. As of February 28, 2014, we have recorded adjustments to our initial lease obligation liabilities for interest accretion and immaterial adjustments for changes in estimated sublease income.
Lease and related costs, net includes $4.3 million of accelerated depreciation in the six months ended February 28, 2014 associated with revising the useful lives of the fixed assets at the facilities we are closing through their expected closure dates. Prior to revising the useful lives, we perform a recoverability analysis for the facilities’ fixed assets by comparing the estimated undiscounted cash flows of the locations through their expected closure dates to the carrying amount of the locations’ fixed assets. Based on such analyses, we recorded immaterial impairment charges during fiscal year 2013 and no impairment charges in the six months ended February 28, 2014.
•
Severance and Other Employee Separation Costs - Beginning in fiscal year 2011 and continuing into fiscal year 2014, we have implemented workforce reductions as we reengineer our business processes and refine our educational delivery systems. We incurred severance and other employee separation costs of $20.1 million in the six months ended February 28, 2014. These costs are included in the reportable segments in which the respective personnel were employed.
Excluding interest accretion associated with our lease obligation liabilities, we expect to incur approximately $10 million of future restructuring charges for the initiatives announced to date. These costs will generally be incurred over the period of time University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations associated with campuses that have not yet been closed.
Note 4. Acquisitions
On December 20, 2013, Apollo Global acquired 70% of the outstanding shares of Open Colleges, a provider of education and training to adult learners in Australia, which supports our strategy to expand our global operations. We paid A$110.3 million (equivalent to $98.1 million on the transaction date), plus contingent consideration of up to A$52.5 million (equivalent to $46.5 million on the transaction date) upon the satisfaction of specified conditions. If the applicable conditions are satisfied, the amount of the contingent consideration will be calculated principally on the basis of Open Colleges’ operating results for its fiscal year ending June 30, 2014 as defined in the acquisition agreement. On the acquisition date, we estimated the fair value of the contingent consideration to be $21.4 million using a discounted cash flow valuation method encompassing significant unobservable inputs. The inputs include estimated operating results for the performance period, probability weightings assigned to the operating results scenarios and the discount rate applied. We incurred $3.6 million of transaction costs in connection with this acquisition, which are included in acquisition costs and contingent consideration charges on our Condensed Consolidated Statements of Income in the three months ended February 28, 2014.
In connection with the acquisition, we also have the option to buy the remaining outstanding shares of Open Colleges, and the noncontrolling shareholders have the option to sell their shares to us, in early 2017, or earlier in limited circumstances. The prices for these options are based on a formula specified at the acquisition date and are principally based on a multiple of Open Colleges’ calendar year 2016 operating results as defined in the acquisition agreement, or an earlier measurement period in the limited circumstances that the options are exercised prior to 2017. There is no minimum or maximum price for these options. Since the options are embedded in the shares owned by the noncontrolling shareholders and the shareholders have the option to

11
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

redeem their shares, we have classified the noncontrolling interests as redeemable equity on our Condensed Consolidated Balance Sheets. Refer to Note 12, Shareholders’ Equity and Redeemable Noncontrolling Interests.
We accounted for the acquisition as a business combination and allocated the purchase price to the assets acquired and liabilities assumed at fair value as summarized below:
($ in thousands)
 
Net working capital deficit
$
(10,979
)
Property and equipment
2,684

Intangibles:
 
Course designations (5 year useful life)
20,652

Trademark (10 year useful life)
17,919

Course curriculum (4 year useful life)
15,790

Customer relationships (1 year useful life)
5,238

Accreditations (4 year useful life)
976

Goodwill
127,656

Deferred taxes, net
(9,279
)
Total assets acquired and liabilities assumed
170,657

Less: Fair value of redeemable noncontrolling interests
(51,197
)
Total fair value of consideration transferred
119,460

Less: Fair value of contingent consideration
(21,371
)
Less: Cash acquired
(3,152
)
Cash paid for acquisition, net of cash acquired
$
94,937

We determined the fair value of assets acquired, liabilities assumed and the redeemable noncontrolling interests based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the respective items. We used the following assumptions, the majority of which include significant unobservable inputs, and valuation methodologies to determine fair value:
•
Intangibles - We used income approaches to value all of the acquired intangibles. The trademark, course designations, and course curriculum were valued using the relief-from-royalty method, which represents the benefit of owning these intangible assets rather than paying royalties for their use. The remaining intangibles were valued using the excess earnings method or cost savings method.
•
Deferred revenue - Deferred revenue is included in net working capital deficit in the above table. We estimated the fair value of deferred revenue using the cost build-up method, which represents the cost to deliver the services, plus a normal profit margin.
•
Other assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
•
Redeemable noncontrolling interests - We estimated the fair value of the redeemable noncontrolling interests as the noncontrolling ownership percentage of the implied fair value of Open Colleges as a whole. Based on the terms of the acquisition, including the redemption options held by the noncontrolling shareholders, we did not apply a discount for lack of control to the value of the noncontrolling interest.
We recorded $127.7 million of goodwill as a result of the Open Colleges acquisition, which is not expected to be deductible for tax purposes. The goodwill is principally attributable to the future earnings potential associated with student growth and other intangibles that do not qualify for separate recognition such as the assembled workforce. The goodwill is included in our Apollo Global reportable segment and we have selected a July 1 annual goodwill impairment test date.
We determined all of the acquired intangibles are finite-lived and we are amortizing them on either a straight-line or an accelerated basis that reflects the pattern in which we expect the economic benefits of the assets to be consumed. The weighted average original useful life of the acquired intangibles was 5.9 years. Refer to Note 7, Goodwill and Intangibles, for the estimated future amortization of our finite-lived intangibles.

12
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Open Colleges’ operating results are included in our consolidated financial statements from date of acquisition. We have not provided pro forma information because Open Colleges’ results of operations are not significant to our consolidated results of operations.
Note 5. Financial Instruments
The following summarizes our cash and cash equivalents, restricted cash and cash equivalents and marketable securities by significant financial instrument category as of the respective periods:
 
February 28, 2014
($ in thousands)
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
 
Total
Carrying
Value
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Cash
$
749,176

 
$
—

 
$
—

 
$
749,176

 
$
—

 
$
—

 
$
749,176

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
152,684

 
—

 
—

 
152,684

 
—

 
—

 
152,684

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt municipal bonds
602

 
61,224

 
48,190

 
110,016

 
201

 
(6
)
 
110,211

Commercial paper
—

 
29,573

 
—

 
29,573

 
3

 
—

 
29,576

Corporate bonds
2,397

 
27,657

 
54,857

 
84,911

 
143

 
(16
)
 
85,038

Time deposits
25,010

 
25,013

 
—

 
50,023

 
—

 
—

 
50,023

Other
—

 
14,776

 
2,716

 
17,492

 
4

 
—

 
17,496

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction-rate securities
—

 
—

 
5,946

 
5,946

 
 
 
 
 


Total
$
929,869

 
$
158,243

 
$
111,709

 
$
1,199,821

 
 
 
 
 
 
 
August 31, 2013
($ in thousands)
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
 
Total
Carrying
Value
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Cash
$
874,074

 
$
—

 
$
—

 
$
874,074

 
$
—

 
$
—

 
$
874,074

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
732,530

 
—

 
—

 
732,530

 
—

 
—

 
732,530

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt municipal bonds
2,055

 
69,621

 
24,070

 
95,746

 
19

 
(54
)
 
95,711

Commercial paper
—

 
9,828

 
—

 
9,828

 
—

 
—

 
9,828

Corporate bonds
—

 
24,503

 
13,925

 
38,428

 
6

 
(40
)
 
38,394

Certificates of deposit
65,000

 
1,200

 
—

 
66,200

 
—

 
—

 
66,200

Other
—

 
657

 
—

 
657

 
—

 
—

 
657

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction-rate securities
—

 
—

 
5,946

 
5,946

 
 
 
 
 
 
Total
$
1,673,659

 
$
105,809

 
$
43,941

 
$
1,823,409

 
 
 
 
 
 
(1) Cash and cash equivalents includes restricted cash and cash equivalents.
We measure our money market funds on a recurring basis at fair value using Level 1 inputs that primarily consist of real-time quotes for transactions in active exchange markets involving identical assets.
Other than our auction-rate securities, which are discussed further below, all of our marketable securities are classified as held-to-maturity as we have the intent and ability to hold them until contractual maturity, which will occur within two years. Our held-to-maturity securities are reported at amortized cost and we have not recorded gains or losses on our held-to-maturity investments. The estimated fair values of our held-to-maturity investments are determined using a market approach with Level

13
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2 observable inputs including quoted prices for similar assets in active markets, or quoted prices for identical or similar assets in markets that are not active.
Our auction-rate securities are classified as available-for-sale and measured at fair value on a recurring basis. Fair value is measured using a discounted cash flow model encompassing Level 3 significant unobservable inputs such as estimated interest rates, credit spreads, timing and amount of cash flows, credit quality of the underlying securities and illiquidity considerations. We have classified our auction-rate securities as noncurrent due to illiquidity considerations.
There were no changes in the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended February 28, 2014.
Note 6. Accounts Receivable, Net
Accounts receivable, net consist of the following as of the respective periods:
($ in thousands)
February 28,
2014
 
August 31,
2013
Student accounts receivable
$
236,571

 
$
243,660

Less allowance for doubtful accounts
(53,038
)
 
(59,744
)
Net student accounts receivable
183,533

 
183,916

Other receivables
15,569

 
31,485

Total accounts receivable, net
$
199,102

 
$
215,401

Student accounts receivable is composed primarily of amounts due related to tuition and educational services. The following summarizes the activity in allowance for doubtful accounts for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
 
2014
 
2013
Beginning allowance for doubtful accounts
$
55,895

 
$
101,793

 
$
59,744

 
$
107,230

Provision for uncollectible accounts receivable
11,534

 
18,902

 
25,512

 
52,308

Write-offs, net of recoveries
(14,391
)
 
(35,922
)
 
(32,218
)
 
(74,765
)
Ending allowance for doubtful accounts
$
53,038

 
$
84,773

 
$
53,038

 
$
84,773

Note 7. Goodwill and Intangibles
The following details changes in the carrying amount of our goodwill by reportable segment during the six months ended February 28, 2014:
($ in thousands)
University of
Phoenix
 
Apollo
Global
 
Other
 
Total
Goodwill as of August 31, 2013
$
71,812

 
$
14,917

 
$
16,891

 
$
103,620

Open Colleges acquisition
—

 
127,656

 
—

 
127,656

Currency translation adjustment
—

 
1,761

 
—

 
1,761

Goodwill as of February 28, 2014
$
71,812

 
$
144,334

 
$
16,891

 
$
233,037


14
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Intangible assets consist of the following as of the respective periods:
 
February 28, 2014
 
August 31, 2013
($ in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Effect of
Foreign
Currency
Translation
Gain (Loss)
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Effect of
Foreign
Currency
Translation
Loss
 
Net
Carrying
Amount
Software and technology
$
42,389

 
$
(20,912
)
 
$
—

 
$
21,477

 
$
42,389

 
$
(16,673
)
 
$
—

 
$
25,716

Accreditations and designations(1)
21,628

 
(733
)
 
288

 
21,183

 
—

 
—

 
—

 
—

Trademarks(1)
17,919

 
(300
)
 
242

 
17,861

 
—

 
—

 
—

 
—

Curriculum(1)
15,790

 
(661
)
 
210

 
15,339

 
—

 
—

 
—

 
—

Student and customer relationships(1)
15,264

 
(7,612
)
 
(1,282
)
 
6,370

 
12,026

 
(7,727
)
 
(1,363
)
 
2,936

Other
20,891

 
(19,408
)
 
(695
)
 
788

 
20,891

 
(18,706
)
 
(777
)
 
1,408

Total finite-lived intangibles
133,881

 
(49,626
)
 
(1,237
)
 
83,018

 
75,306

 
(43,106
)
 
(2,140
)
 
30,060

Trademarks
100,736

 
—

 
526

 
101,262

 
100,736

 
—

 
(5,347
)
 
95,389

Accreditations and designations
7,260

 
—

 
(197
)
 
7,063

 
7,260

 
—

 
(517
)
 
6,743

Total indefinite-lived intangibles
107,996

 
—

 
329

 
108,325

 
107,996

 
—

 
(5,864
)
 
102,132

Total intangible assets, net
$
241,877

 
$
(49,626
)
 
$
(908
)
 
$
191,343

 
$
183,302

 
$
(43,106
)
 
$
(8,004
)
 
$
132,192

(1) We acquired certain intangibles during the second quarter of fiscal year 2014 as a result of our acquisition of Open Colleges. Refer to Note 4, Acquisitions.
As of February 28, 2014, the estimated future amortization expense of our finite-lived intangibles is as follows:
($ in thousands)
 
Remainder of fiscal year 2014
$
12,969

2015
22,054

2016
18,968

2017
10,538

2018
7,411

2019
3,207

Thereafter
7,871

Total estimated future amortization expense(1)
$
83,018

(1) Estimated future amortization expense may vary as acquisitions and dispositions occur in the future and as a result of foreign currency translation adjustments.
Note 8. Fair Value Measurements
We measure and disclose certain financial instruments at fair value as described in Note 5, Financial Instruments. Liabilities measured at fair value on a recurring basis, all of which are included in other liabilities on our Condensed Consolidated Balance Sheets, consist of the following as of February 28, 2014 and August 31, 2013:
 
 
 
Fair Value Measurements at Reporting Date Using
 
Fair Value
as of Respective
Reporting Date
 
Quoted Prices in
Active Markets for
Identical Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
($ in thousands)
 
 
 
Contingent consideration as of February 28, 2014
$
36,023

 
$
—

 
$
—

 
$
36,023

Contingent consideration as of August 31, 2013
$
5,277

 
$
—

 
$
—

 
$
5,277


15
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Our contingent consideration liabilities are classified within Level 3 and valued using discounted cash flow valuation methods encompassing significant unobservable inputs. The inputs include estimated operating results scenarios for the applicable performance periods, probability weightings assigned to operating results scenarios and the discount rates applied. Our contingent consideration liabilities relate to the following:
•
Open Colleges - We acquired Open Colleges during the second quarter of fiscal year 2014 and are obligated to pay contingent consideration of up to A$52.5 million (equivalent to $47.2 million as of February 28, 2014) upon the satisfaction of specified conditions. If the applicable conditions are satisfied, the amount of the contingent consideration will be calculated principally on the basis of Open Colleges’ operating results for its fiscal year ending June 30, 2014 as defined in the acquisition agreement. Based on information available as of the acquisition date, we initially estimated the fair value of the contingent consideration to be $21.4 million. As of February 28, 2014, we increased the estimated fair value to $29.9 million based on information available after the acquisition date, including Open Colleges’ recent operating results. The increase in fair value was included in acquisition costs and contingent consideration charges on our Condensed Consolidated Statements of Income during the second quarter of fiscal year 2014.
•
Noncontrolling Interest in Apollo Global - As a result of our purchase of the noncontrolling interest in Apollo Global during fiscal year 2013, we have contingent consideration that is based on a portion of Apollo Global’s operating results through the fiscal years ending August 31, 2017. As of February 28, 2014, the estimated fair value for this contingent consideration was $6.1 million.
We did not change our valuation techniques associated with recurring fair value measurements from prior periods. The following summarizes the changes in liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the respective periods:
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
Beginning balance
$
5,277

 
$
—

Initial contingent consideration at fair value
21,371

 
6,000

Change in fair value included in net income
8,754

 
(145
)
Currency translation adjustment
621

 
—

Ending balance
$
36,023

 
$
5,855

Liabilities measured at fair value on a nonrecurring basis during the six months ended February 28, 2014, all of which are included in other liabilities on our Condensed Consolidated Balance Sheets, consist of the following:
 
 
 
Fair Value Measurements at Measurement Dates Using
 
 
($ in thousands)
Fair Value at
Measurement
Dates
 
Quoted Prices in
Active Markets for
Identical
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Losses for
Six Months
Ended
February 28,
2014
Initial lease obligations
$
16,972

 
$
—

 
$
—

 
$
16,972

 
$
16,972

During the six months ended February 28, 2014, we recorded $17.0 million of aggregate initial lease obligations at fair value associated with closing certain leased facilities as part of our restructuring activities. We recorded the lease obligation liabilities on the dates we ceased use of the facilities, and we measured the liabilities at fair value using Level 3 inputs included in the valuation method. Refer to Note 3, Restructuring and Other Charges.

16
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9. Accrued and Other Liabilities
Accrued and other current liabilities consist of the following as of the respective periods:
($ in thousands)
February 28,
2014
 
August 31,
2013
Salaries, wages and benefits
$
89,394

 
$
135,553

Restructuring obligations
56,687

 
55,191

Accrued legal and other professional obligations
35,600

 
31,310

Contingent consideration, current portion
29,926

 
—

Accrued advertising
27,275

 
45,850

Student refunds, grants and scholarships
15,780

 
7,180

Deferred rent and other lease liabilities
12,728

 
14,001

Curriculum materials
10,073

 
10,764

Other
50,777

 
46,857

Total accrued and other current liabilities
$
328,240

 
$
346,706

Other long-term liabilities consist of the following as of the respective periods:
($ in thousands)
February 28,
2014
 
August 31,
2013
Deferred rent and other lease liabilities
$
62,903

 
$
67,641

Restructuring obligations
58,615

 
64,610

Deferred gains on sale-leasebacks
22,379

 
22,894

Uncertain tax positions
17,929

 
33,637

Other
60,238

 
44,660

Total other long-term liabilities
$
222,064

 
$
233,442

Note 10. Debt
Debt and short-term borrowings consist of the following as of the respective periods:
($ in thousands)
February 28,
2014
 
August 31,
2013
Revolving Credit Facility, see terms below
$
—

 
$
605,000

Capital lease obligations
38,752

 
49,628

Other, see terms below
35,671

 
37,426

Total debt
74,423

 
692,054

Less short-term borrowings and current portion of long-term debt
(30,781
)
 
(628,050
)
Long-term debt
$
43,642

 
$
64,004

In fiscal year 2012, we entered into a syndicated $625 million unsecured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility is used for general corporate purposes, which may include acquisitions and share repurchases. The term is five years and will expire in April 2017. The Revolving Credit Facility may be used for borrowings in certain foreign currencies and letters of credit, in each case up to specified sublimits.
We borrowed $605.0 million and had approximately $14 million of outstanding letters of credit under the Revolving Credit Facility as of August 31, 2013. We repaid the entire amount borrowed under the Revolving Credit Facility during the first quarter of fiscal year 2014. As of February 28, 2014, we have approximately $24 million of outstanding letters of credit under the Revolving Credit Facility.

17
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Revolving Credit Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Revolving Credit Facility fee ranges from 25 to 40 basis points. Incremental fees for borrowings under the facility generally range from LIBOR + 125 to 185 basis points. The weighted average interest rate on outstanding short-term borrowings under the Revolving Credit Facility at August 31, 2013 was 3.5%.
The Revolving Credit Facility contains various customary representations, covenants and other provisions, including a material adverse event clause and the following financial covenants: maximum leverage ratio, minimum interest and rent expense coverage ratio, and a U.S. Department of Education financial responsibility composite score. We were in compliance with all applicable covenants related to the Revolving Credit Facility at February 28, 2014 and August 31, 2013.
Other debt principally includes debt at subsidiaries of Apollo Global and the present value of an obligation payable over a 10-year period associated with our purchase of technology in fiscal year 2012. The weighted average interest rate on our outstanding other debt at February 28, 2014 and August 31, 2013 was 5.8% and 5.3%, respectively.
The carrying value of our debt, excluding capital leases, approximates fair value based on the nature of our debt, which includes consideration of the portion that is variable-rate.
Note 11. Income Taxes
We determine our interim income tax provision by estimating our effective income tax rate expected to be applicable for the full fiscal year. Our effective income tax rate is dependent upon several factors, such as tax rates in state and foreign jurisdictions and the relative amount of income we earn in such jurisdictions. In determining our full year estimate, we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes. We exercise significant judgment in determining our income tax provision due to transactions, credits and calculations where the ultimate tax determination is uncertain.
Internal Revenue Service Audits
Our U.S. federal income tax return for fiscal year 2012 is currently under review by the Internal Revenue Service (“IRS”). In addition, we are participating in the IRS’s Compliance Assurance Process for fiscal year 2014, which is a voluntary program in which taxpayers seek to resolve all or most issues with the IRS prior to or soon after filing their U.S. federal income tax returns.
In February 2014, we executed a Closing Agreement with the IRS to settle a matter related to the deductibility of certain costs for our foreign subsidiaries in fiscal years 2011 through 2013, which resulted in a $10.2 million tax benefit during the second quarter of fiscal year 2014. In addition, our fiscal year 2011 federal income tax return was closed in connection with this settlement. Based principally on these events, our unrecognized tax benefits decreased $16.5 million during the six months ended February 28, 2014.
Other
In December 2013, Mexico enacted comprehensive tax reform legislation which, among other things, eliminated the flat rate business tax and modified the income tax exemption for educational companies. Based on this legislation, ULA is no longer subject to the flat rate business tax, and is now subject to income tax. Accordingly, we adjusted our deferred taxes associated with this jurisdiction in the second quarter of fiscal year 2014, which resulted in a $2.8 million tax benefit.
In addition to the IRS audits discussed above, 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 returns under review or returns that may be reviewed in the future and any related litigation could result in tax liabilities that materially differ from our historical income tax provisions and accruals.
Note 12. Shareholders’ Equity and Redeemable Noncontrolling Interests
Share Repurchases
Our Board of Directors has authorized us to repurchase outstanding shares of Apollo Education Group Class A common stock from time to time depending on market conditions and other considerations. During 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, of which $180.3 million remained available as of February 28, 2014. There is no expiration date on the repurchase authorizations and the amount and timing of future share repurchase authorizations and repurchases, if any, will be made as market and business conditions warrant. Repurchases occur at our discretion and may be made on the open market through various methods including but not limited to accelerated share repurchase programs, or in privately negotiated transactions,

18
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.
We also repurchase shares in connection with tax withholding requirements associated with the release of vested shares of restricted stock units, which do not fall under the repurchase program described above.
The following summarizes our share repurchase activity for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
(In thousands, except per share data)
2014
 
2013
 
2014
 
2013
Share repurchases under share repurchase program:
 
 
 
 
 
 
 
Number of shares repurchased
1,713

 
—

 
2,290

 
—

Weighted average purchase price per share
$
31.93

 
$
—

 
$
30.44

 
$
—

Cost of share repurchases
$
54,684

 
$
—

 
$
69,684

 
$
—

Share repurchases related to vesting of restricted stock units:
 
 
 
 
 
 
 
Number of shares repurchased
25

 
20

 
113

 
159

Cost of share repurchases
$
682

 
$
409

 
$
2,553

 
$
3,881

Share Reissuances
We reissue our Apollo Education Group Class A common stock from our treasury stock as a result of the release of shares covered by vested restricted stock units, stock option exercises and purchases under our employee stock purchase plan. Share reissuances were as follows for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
(In thousands)
2014
 
2013
 
2014
 
2013
Share reissuances
110

 
118

 
391

 
524

Purchase of Noncontrolling Interest in Apollo Global
The following details net income attributable to Apollo and transfers to noncontrolling interest during the respective periods:
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
Net income attributable to Apollo
$
113,496

 
$
147,022

Transfer to noncontrolling interest:
 
 
 
Decrease in equity for purchase of noncontrolling interest in Apollo Global(1)
—

 
(48,543
)
Change from net income attributable to Apollo and transfer to noncontrolling interest
$
113,496

 
$
98,479

(1) Represents the difference between the fair value of the consideration paid to purchase the noncontrolling ownership interest in Apollo Global and the carrying amount of the noncontrolling interest acquired, and an adjustment to accumulated other comprehensive loss to reflect the change in Apollo’s proportionate interest.
Redeemable Noncontrolling Interests
On December 20, 2013, Apollo Global acquired 70% of the outstanding shares of Open Colleges. In connection with the acquisition, we also have the option to buy the remaining outstanding shares of Open Colleges, and the noncontrolling shareholders have the option to sell their shares to us, in early 2017, or earlier in limited circumstances. The prices for these options are based on a formula specified at the acquisition date and are principally based on a multiple of Open Colleges’ calendar year 2016 operating results as defined in the acquisition agreement, or an earlier measurement period in the limited circumstances that the options are exercised prior to 2017. There is no minimum or maximum price for these options. Since the options are embedded in the shares owned by the noncontrolling shareholders and the shareholders have the option to redeem their shares, we have classified the noncontrolling interests as redeemable equity on our Condensed Consolidated Balance Sheets.
The redeemable noncontrolling interests are probable of becoming redeemable. Accordingly, we record the redeemable noncontrolling interests at the greater of the carrying value or the redemption value at the end of each reporting period. We

19
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

determine the redemption value using the formula specified at the acquisition date, and by assuming the end of each reporting period is the redemption date. We record redemption value adjustments through retained earnings. As of February 28, 2014, the redemption value of the redeemable noncontrolling interest approximated the carrying value.
Note 13. Earnings Per Share
Our outstanding shares consist of Apollo Education Group Class A and Class B common stock. Our Articles of Incorporation treat the declaration of dividends on the Apollo Education Group Class A and Class B common stock in an identical manner. As such, both the Apollo Education Group Class A and Class B common stock are included in the calculation of our earnings per share.
Diluted weighted average shares outstanding includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting and release of restricted stock units and performance share awards. The components of basic and diluted earnings per share are as follows:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
(In thousands, except per share data)
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net income attributable to Apollo (basic and diluted)
$
14,605

 
$
13,527

 
$
113,496

 
$
147,022

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
112,151

 
112,573

 
112,742

 
112,496

Dilutive effect of restricted stock units and performance share awards
1,070

 
495

 
838

 
488

Dilutive effect of stock options
159

 
—

 
96

 
—

Diluted weighted average shares outstanding
113,380

 
113,068

 
113,676

 
112,984

Basic income per share attributable to Apollo
$
0.13

 
$
0.12

 
$
1.01

 
$
1.31

Diluted income per share attributable to Apollo
$
0.13

 
$
0.12

 
$
1.00

 
$
1.30

 
 
 
 
 
 
 
 
Anti-dilutive securities excluded from diluted earnings per share calculation:
 
 
 
 
 
 
Anti-dilutive restricted stock units and performance share awards outstanding
9

 
1,802

 
842

 
1,902

Anti-dilutive stock options outstanding
2,628

 
7,849

 
3,079

 
8,124

Note 14. Share-Based Compensation
The following details share-based compensation expense for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
 
2014
 
2013
Instructional and student advisory
$
3,280

 
$
5,614

 
$
6,813

 
$
13,202

Marketing
937

 
1,054

 
2,045

 
3,097

Admissions advisory
212

 
196

 
314

 
366

General and administrative
5,644

 
3,399

 
11,012

 
9,422

Restructuring and other charges
464

 
363

 
2,326

 
1,428

Share-based compensation expense
$
10,537

 
$
10,626

 
$
22,510

 
$
27,515

In accordance with our Apollo Education Group, Inc. Amended and Restated 2000 Stock Incentive Plan, we granted 104,000 and 169,000 restricted stock units and performance share awards during the three and six months ended February 28, 2014, respectively. The granted awards had a weighted average grant date fair value of $25.79 and $26.12, respectively. As of February 28, 2014, there was $57.8 million and $2.2 million of total unrecognized share-based compensation cost, net of forfeitures, related to unvested restricted stock units and performance share awards, respectively. These costs are expected to be recognized over a weighted average period of 2.4 years.
In accordance with our Apollo Education Group, Inc. Amended and Restated 2000 Stock Incentive Plan, we granted 31,000 stock options during the three months ended February 28, 2014 and no stock options during the three months ended November 30, 2013. The weighted average grant date fair value of the options granted was $9.98 and the weighted average exercise price was $25.79.

20
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

As of February 28, 2014, there was $6.5 million of total unrecognized share-based compensation cost, net of forfeitures, related to unvested stock options. These costs are expected to be recognized over a weighted average period of 1.8 years.
Note 15. Commitments and Contingencies
Surety Bonds
As part of our normal operations, our insurers issue surety bonds for us that are required by various states where we operate. We are obligated to reimburse our insurers for any surety bonds that are paid. As of February 28, 2014, the face amount of these surety bonds was $42.4 million.
Letters of Credit
As of February 28, 2014, we had approximately $24 million of outstanding letters of credit that are required as part of our normal operations.
Litigation and Other Matters
We are subject to various claims and contingencies that arise from time to time in the ordinary course of business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. We do not believe any of these are material for separate disclosure.
The following is a description of pending litigation, settlements, and other proceedings that fall outside the scope of ordinary and routine litigation incidental to our business.
Securities Class Action (Apollo Institutional Investors Group)
On August 13, 2010, a securities class action complaint was filed in the U.S. District Court for the District of Arizona by Douglas N. Gaer naming us, John G. Sperling, Gregory W. Cappelli, Charles B. Edelstein, Joseph L. D’Amico, Brian L. Swartz and Gregory J. Iverson as defendants for allegedly making false and misleading statements regarding our business practices and prospects for growth. That complaint asserted a putative class period stemming from December 7, 2009 to August 3, 2010. A substantially similar complaint was also filed in the same Court by John T. Fitch on September 23, 2010 making similar allegations against the same defendants for the same purported class period. Finally, on October 4, 2010, another purported securities class action complaint was filed in the same Court by Robert Roth against the same defendants as well as Brian Mueller, Terri C. Bishop and Peter V. Sperling based upon the same general set of allegations, but with a defined class period of February 12, 2007 to August 3, 2010. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On October 15, 2010, three additional parties filed motions to consolidate the related actions and be appointed the lead plaintiff.
On November 23, 2010, the Fitch and Roth actions were consolidated with Gaer and the Court appointed the “Apollo Institutional Investors Group” consisting of the Oregon Public Employees Retirement Fund, the Mineworkers’ Pension Scheme, and Amalgamated Bank as lead plaintiffs. The case is now entitled, In re Apollo Group, Inc. Securities Litigation, Lead Case Number CV-10-1735-PHX-JAT. On February 18, 2011, the lead plaintiffs filed a consolidated complaint naming Apollo, John G. Sperling, Peter V. Sperling, Joseph L. D’Amico, Gregory W. Cappelli, Charles B. Edelstein, Brian L. Swartz, Brian E. Mueller, Gregory J. Iverson, and William J. Pepicello as defendants. The consolidated complaint asserts a putative class period of May 21, 2007 to October 13, 2010. On April 19, 2011, we filed a motion to dismiss and oral argument on the motion was held before the Court on October 17, 2011. On October 27, 2011, the Court granted our motion to dismiss and granted plaintiffs leave to amend. On December 6, 2011, the lead plaintiffs filed an Amended Consolidated Class Action Complaint, which alleges similar claims against the same defendants. On January 9, 2012, we filed a motion to dismiss the Amended Consolidated Class Action Complaint. On June 22, 2012, the Court granted our motion to dismiss and entered a judgment in our favor. On July 20, 2012, the plaintiffs filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit, and their appeal remains pending before that Court. If the plaintiffs are successful in their appeal, we anticipate they will seek substantial damages.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.

21
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Securities Class Action (Teamsters Local 617 Pensions and Welfare Funds)
On November 2, 2006, the Teamsters Local 617 Pension and Welfare Funds filed a class action complaint purporting to represent a class of shareholders who purchased our stock between November 28, 2001 and October 18, 2006. The complaint, filed in the U.S. District Court for the District of Arizona, is entitled Teamsters Local 617 Pension & Welfare Funds v. Apollo Group, Inc. et al., Case Number 06-cv-02674-RCB, and alleges that we and certain of our current and former directors and officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by purportedly making misrepresentations concerning our stock option granting policies and practices and related accounting. The defendants are Apollo, J. Jorge Klor de Alva, Daniel E. Bachus, John M. Blair, Dino J. DeConcini, Kenda B. Gonzales, Hedy F. Govenar, Brian E. Mueller, Todd S. Nelson, Laura Palmer Noone, John R. Norton III, John G. Sperling and Peter V. Sperling. On September 11, 2007, the Court appointed The Pension Trust Fund for Operating Engineers as lead plaintiff. Lead plaintiff filed an amended complaint on November 23, 2007, asserting the same legal claims as the original complaint and adding claims for violations of Section 20A of the Securities Exchange Act of 1934 and allegations of breach of fiduciary duties and civil conspiracy. On April 30, 2009, plaintiffs filed their Second Amended Complaint, which alleges similar claims for alleged securities fraud against the same defendants.
On March 31, 2011, the U.S. District Court for the District of Arizona dismissed the case with prejudice and entered judgment in our favor. Plaintiffs filed a motion for reconsideration of this ruling, and the Court denied this motion on April 2, 2012. On April 27, 2012, the plaintiffs filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit, and their appeal remains pending before that Court. If the plaintiffs are successful in their appeal, we anticipate they will seek substantial damages.
As of February 28, 2014, we have accrued an immaterial amount reflecting a rejected settlement offer we made during the second quarter of fiscal year 2014. The outcome of this legal proceeding is uncertain at this point and the actual amount of any loss will not be known until a settlement or other resolution is reached. Additionally, we intend to pursue reimbursement from our insurance carriers for losses, if any, associated with this matter.
Incentive Compensation False Claims Act Lawsuit
On May 25, 2011, we were notified that a qui tam complaint had been filed against us in the U.S. District Court, Eastern District of California, by private relators under the Federal False Claims Act and California False Claims Act, entitled USA and State of California ex rel. Hoggett and Good v. University of Phoenix, et al, Case Number 2:10-CV-02478-MCE-KJN. When the federal government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the federal government and, if successful, they are entitled to receive a portion of the federal government’s recovery.
The complaint alleges, among other things, that University of Phoenix has violated the Federal False Claims Act since December 12, 2009 and the California False Claims Act for the preceding ten years by falsely certifying to the U.S. Department of Education and the State of California that University of Phoenix was in compliance with various regulations that require compliance with federal rules regarding the payment of incentive compensation to admissions personnel, in connection with University of Phoenix’s participation in student financial aid programs. In addition to injunctive relief and fines, the relators seek significant damages on behalf of the Department of Education and the State of California, including all student financial aid disbursed by the Department to our students since December 2009 and by the State of California to our students during the preceding ten years. On July 12, 2011, we filed a motion to dismiss and on August 30, 2011, relators filed a motion for leave to file a Second Amended Complaint, which the Court granted. On November 2, 2011, we filed a motion to dismiss relators’ Second Amended Complaint, which was denied by the Court on July 6, 2012. On August 1, 2012, we filed a motion for certification of an interlocutory appeal, which was denied by the Court on March 7, 2013. Discovery in this matter has commenced, and trial is scheduled for January 2015.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Himmel Derivative Action
On November 12, 2010, we received a shareholder demand to investigate, address and commence proceedings against each of our directors and certain of our officers for violation of any applicable laws, including in connection with the subject matter of the report of the Government Accountability Office prepared for the U.S. Senate in August 2010, our withdrawal of the outlook we previously provided for our fiscal year 2011, the investigation into possible unfair and deceptive trade practices associated with certain alleged practices of University of Phoenix by the State of Florida Office of the Attorney General in Fort Lauderdale, Florida, the participation by the State of Oregon Office of the Attorney General in the Securities Class Action (Apollo Institutional Investors Group), and the informal inquiry by the Enforcement Division of the Securities and Exchange Commission commenced in October 2009.

22
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

On March 24, 2011, a shareholder derivative complaint was filed in the Superior Court for the State of Arizona, Maricopa County by Daniel Himmel, the foregoing shareholder who previously made a demand for investigation. In the complaint, the plaintiff asserts a derivative claim on our behalf against certain of our current and former officers and directors for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint alleges that the individual defendants made improper statements and engaged in improper business practices that caused our stock price to drop, led to securities class actions against us, and enhanced regulation and scrutiny by various government entities and regulators. The case is entitled, Himmel v. Bishop, et al, Case Number CV2011-005604. Pursuant to a stipulation between all parties, on August 31, 2011, the Court ordered this action stayed during the pendency of the underlying Securities Class Action (Apollo Institutional Investors Group) matter.
K.K. Modi Investment and Financial Services Pvt. Ltd.
On November 8, 2010, a suit was filed by K.K. Modi Investment and Financial Services Pvt. Ltd. (“Modi”) in the High Court of Delhi at New Delhi against defendants Apollo, Western International University, Inc., University of Phoenix, Inc., Apollo Global, Inc., Modi Apollo International Group Pvt. Ltd., Apollo International, Inc., John G. Sperling, Peter V. Sperling and Jorge Klor De Alva, seeking to permanently enjoin the defendants from making investments in the education industry in the Indian market in breach of an exclusivity and noncompete provision which plaintiff alleges is applicable to Apollo and its subsidiaries. The case is entitled, K.K. Modi Investment and Financial Services Pvt. Ltd. v. Apollo International, et. al. We believe that the relevant exclusivity and noncompete provision is inapplicable to us and our affiliates, we have sought to dismiss this action on those grounds, and our application for such relief remains pending before the Court. If plaintiff ultimately obtains the requested injunctive relief, our ability to conduct business in India, including through our joint venture with HT Media Limited, may be adversely affected. It is also possible that in the future K.K. Modi may seek to expand existing litigation in India or commence litigation in the U.S. in which it may assert a significant damage claim against us.
Attorney General Investigations
On October 22, 2010, University of Phoenix received notice that the State of Florida Office of the Attorney General in Fort Lauderdale, Florida had commenced an investigation into possible unfair and deceptive trade practices associated with certain alleged practices of the University. The notice included a subpoena to produce documents and detailed information for the time period of January 1, 2006 to the present about a broad spectrum of the University’s business. We are cooperating with the investigation, but also filed a suit to quash or limit the subpoena and to protect information sought that constitutes propriety or trade secret information. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
In May 2011 and January 2013, University of Phoenix received Civil Investigative Demands from the State of Massachusetts Office of the Attorney General. The Demands relate to an investigation of possible unfair or deceptive methods, acts, or practices by for-profit educational institutions in connection with the recruitment of students and the financing of education. The Demands seek documents, information and testimony regarding a broad spectrum of the University’s business for the time period of January 1, 2002 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
UNIACC Investigations
UNIACC was advised by the National Accreditation Commission of Chile in November 2011 that its institutional accreditation would not be renewed and therefore had lapsed. Subsequently, in June 2012, a prosecutor’s office in Santiago, Chile requested that UNIACC provide documents relating to UNIACC’s relationship with a former employee and consultant who served as a member of the National Accreditation Commission until March 2012, and we have since received requests for additional information in connection with this investigation. Furthermore, in August 2012, the prosecutor’s office began requesting that UNIACC provide information about UNIACC’s business structure and operations and its relationship with other Apollo entities, in connection with an additional investigation regarding UNIACC’s compliance with applicable laws concerning the generation of profit by universities such as UNIACC. The prosecutor’s office is also requesting additional information from UNIACC regarding certain government funding received by the institution. UNIACC is cooperating with these investigations. At this time, we cannot predict the eventual scope, duration or outcome of these investigations.
In November 2012, UNIACC learned that the Ministry of Education was commencing a formal investigation into profit related issues and concerning the official recognition of UNIACC as a university under Chilean law. On November 18, 2013, we were notified by the Ministry of Education that it declined to pursue any charges against UNIACC and closed its investigation without imposing any sanction on UNIACC. In closing its investigation, the Ministry forwarded certain of its files for review by the Chilean tax authorities and the criminal prosecutor conducting the profit investigation referenced above.

23
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Office of the Inspector General of the U.S. Department of Education (“OIG”) Subpoena
On March 21, 2014, University of Phoenix received a subpoena from the Mid-Atlantic Region of the OIG. The subpoena seeks the production by the University of documents and detailed information regarding a broad spectrum of the activities conducted in the University’s Centralized Service Center for the Northeast Region located in Columbia, Maryland, for the time period of January 1, 2007 to the present, including information relating to marketing, recruitment, enrollment, financial aid processing, fraud prevention, student retention, personnel training, attendance, academic grading and other matters. We intend to cooperate with these requests but cannot at this time predict the eventual scope, duration or outcome of this matter.
Patent Infringement Litigation
On March 3, 2008, Digital-Vending Services International Inc. filed a complaint against University of Phoenix and Apollo, as well as Capella Education Company, Laureate Education Inc., and Walden University Inc. in the U.S. District Court for the Eastern District of Texas, since transferred on plaintiff’s motion to the Eastern District of Virginia. The case is entitled, Digital Vending Services International, LLC vs. The University of Phoenix, et al, Case Number 2:09cv555 (JBF-TEM). The complaint alleges that we and the other defendants have infringed and are infringing various patents relating to managing courseware in a shared use operating environment and seeks injunctive relief and substantial damages, including royalties as a percentage of our net revenue over a multi-year period. We filed an answer to the complaint on May 27, 2008, in which we denied that Digital-Vending Services International’s patents were duly and lawfully issued, and asserted defenses of non-infringement and patent invalidity, among others. We also asserted a counterclaim seeking a declaratory judgment that the patents are invalid, unenforceable, and not infringed by us.
On January 7, 2011, the Court granted our motion for summary judgment and dismissed the case with prejudice, citing plaintiff’s failure to point to admissible evidence that could support a finding of infringement. Plaintiff appealed the order granting summary judgment to the United States Court of Appeals for the Federal Circuit, which held oral argument on December 5, 2011. On March 7, 2012, a divided three-judge panel of the Federal Circuit issued an opinion affirming in part and reversing in part the order granting summary judgment, and it remanded a portion of the plaintiff’s claims to the district court for further proceedings. We filed a Petition for Rehearing with the Federal Circuit regarding the portion of the decision reversing the grant of summary judgment, which the Federal Circuit denied on May 25, 2012. Accordingly, the case was remanded to the U.S. District Court for the Eastern District of Virginia for further proceedings. In July 2013, we filed another motion for summary judgment based on non-infringement, and on October 4, 2013, the Court granted our motion and dismissed each of plaintiff’s remaining claims with prejudice. On November 1, 2013, plaintiff filed a Notice of Appeal of the District Court’s order. The parties subsequently entered into a settlement agreement for an immaterial amount pursuant to which plaintiff agreed to dismiss its appeal. Plaintiff’s appeal was dismissed on November 21, 2013, which resolved the litigation.
Note 16. Regulatory Matters
Student Financial Aid
In fiscal year 2013, University of Phoenix generated 90% of our total consolidated net revenue and more than 100% of our operating income, and 83% of the University’s cash basis revenue for eligible tuition and fees was derived from Title IV financial aid program funds, as calculated under the 90/10 Rule described below.
All U.S. federal financial aid programs are established by Title IV of the Higher Education Act and regulations promulgated thereunder. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. In August 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 and substance of any such changes.
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-

24
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

to-month basis until the Department completes its review. We cannot predict whether, or to what extent, the imposition of the Notice sanction by The Higher Learning Commission, as described below, 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 September 30, 2014.
Higher Learning Commission (“HLC”)
University of Phoenix and Western International University are accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools (“HLC”). This accreditation 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.
During fiscal year 2013, the accreditations of University of Phoenix and Western International University were reaffirmed by HLC through the 2022-2023 academic year. At the same time, HLC placed both universities on Notice status for a two-year period. 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.
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 percentage for University of Phoenix was 83% for fiscal year 2013. 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 members of Congress have proposed changes to the 90/10 Rule that would, if enacted, reduce the percentage to 85% and adversely change the manner in which military aid is treated for purposes of the rule calculation.
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 rate for University of Phoenix for the 2010 federal fiscal year was 26.0%, and the draft three-year cohort default rate for the 2011 federal fiscal year, which will be finalized in September 2014, was 19.0%. 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.

25
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

OIG Audit of the U.S. Department of Education
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 University of Phoenix that in the course of this review it identified certain conditions that the OIG believed were Title IV compliance exceptions at University of Phoenix. Although University of Phoenix was not the direct subject of the OIG’s audit of the Department, the OIG asked University of Phoenix to respond so that it could 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 which again identified compliance exceptions at University of Phoenix. University of Phoenix responded to the appendix. In February 2014, the OIG released a final audit report on this subject entitled Title IV of Higher Education Act Programs: Additional Safeguards are Needed to Help Mitigate the Risks that Are Unique to the Distance Education Environment. This report included Appendix J related to University of Phoenix, which identified exceptions based on select student records related 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. While the OIG recommended follow-up action with regard to some schools, University of Phoenix was not among them. The Department has indicated that OIG’s recommendations could form the basis for additional Department guidance or rulemaking. We are not the direct subject of the OIG’s audit of the Department, and we have not accrued any liability associated with this matter.
Note 17. Segment Reporting
We operate primarily in the education industry. Our reportable segments have been determined based on the method by which management evaluates performance and allocates resources. Our seven operating segments are presented in the following reportable segments:
•
University of Phoenix;
•
Apollo Global; and
•
Other (includes Western International University, IPD, CFFP, Carnegie Learning, and Apollo Lightspeed).
During the fourth quarter of fiscal year 2013, we revised our internal management reporting structure and determined Carnegie Learning and Western International University are operating segments. Accordingly, Carnegie Learning is no longer included in our University of Phoenix reportable segment, and Western International University is no longer included in our Apollo Global reportable segment. These operating segments are included in Other in our segment reporting and we have changed our presentation for all periods presented to reflect our revised segment reporting.
Apollo Global acquired Open Colleges during the second quarter of fiscal year 2014 and Open Colleges’ operating results are included in our Apollo Global operating segment from date of acquisition. Refer to Note 4, Acquisitions.

26
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of financial information by reportable segment is as follows:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
 
2014
 
2013
Net revenue:
 

 
 

 
 

 
 
University of Phoenix
$
594,081

 
$
753,566

 
$
1,338,944

 
$
1,689,350

Apollo Global
68,634

 
56,965

 
159,793

 
147,479

Other
16,343

 
23,841

 
36,656

 
52,726

Net revenue
$
679,058

 
$
834,372

 
$
1,535,393

 
$
1,889,555

Operating income (loss)(1):
 

 
 

 
 

 
 
University of Phoenix
$
86,682

 
$
74,757

 
$
270,155

 
$
318,617

Apollo Global(2)
(40,004
)
 
(25,921
)
 
(37,787
)
 
(35,287
)
Other(3)
(39,548
)
 
(19,056
)
 
(55,444
)
 
(22,604
)
Operating income
7,130

 
29,780

 
176,924

 
260,726

Reconciling items:
 
 
 

 
 
 
 
Interest income
599

 
388

 
1,167

 
937

Interest expense
(1,983
)
 
(2,092
)
 
(4,069
)
 
(4,134
)
Other, net
107

 
(126
)
 
914

 
1,673

Income before income taxes
$
5,853

 
$
27,950

 
$
174,936

 
$
259,202

(1) University of Phoenix, Apollo Global and Other include charges associated with our restructuring activities. Refer to Note 3, Restructuring and Other Charges.
(2) The operating loss for Apollo Global for the three and six months ended February 28, 2014 includes $13.0 million of acquisition costs and contingent consideration charges.
(3) The operating loss for Other in the three and six months ended February 28, 2014 includes $9.0 million of charges associated with our legal matters. The operating loss for Other in the three and six months ended February 28, 2013 includes credits of $5.0 million and $21.9 million, respectively, associated with a legal matter.
A summary of our consolidated assets by reportable segment is as follows:
($ in thousands)
February 28,
2014
 
August 31,
2013
University of Phoenix
$
874,980

 
$
790,537

Apollo Global
613,187

 
359,903

Other(1)
1,043,263

 
1,847,507

Total assets
$
2,531,430

 
$
2,997,947

(1) The majority of assets included in Other consists of corporate cash and cash equivalents and marketable securities.

27

Item 2. 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 Annual Report on Form 10-K for the year ended August 31, 2013 and our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1, Financial Statements in this Form 10-Q.
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”);
•
Open Colleges Australia Pty Ltd. (“Open Colleges”);
•
Universidad Latinoamericana (“ULA”);
•
Universidad de Artes, Ciencias y Comunicación (“UNIACC”); and
•
India 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, LLC (“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.
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 these changes have contributed to the decline in University of Phoenix enrollment since 2010, and the 16.5% decline in New Degreed Enrollment in the second quarter of fiscal year 2014 compared to the prior year. See further discussion of enrollment in Results of Operations below.
We are adapting our business to meet these rapidly evolving developments and to stabilize University of Phoenix enrollment. In furtherance of this, we are implementing several initiatives including operating University of Phoenix’s distinct eight colleges more individually to address the specific needs of the markets they serve. Additionally, 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. This includes increased use of scholarships and discounts to improve our value proposition to prospective students. These initiatives, along with 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 provide our students 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

28

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.
•
Student Retention. We are focused on improving student retention. In furtherance of this, we are implementing several initiatives, 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 use of 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.
•
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 reducing the size of our services infrastructure and associated operating expenses to align with our reduced enrollment and revenue. 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 February 28, 2014, University of Phoenix has closed approximately three-fourths of the locations included in these plans, which represents approximately 90% of the total square feet we are exiting. The remaining closures will continue through 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 streamlined, automated where appropriate, and enhanced our administrative and student facing services.
As of February 28, 2014, we have incurred $307.4 million of cumulative restructuring and other charges associated with our restructuring activities. Excluding interest accretion associated with our lease obligation liabilities, we expect to incur approximately $10 million of future restructuring charges for the initiatives announced to date. These costs will generally be incurred over the period of time University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations associated with campuses that have not yet been closed.
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 Condensed 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, or 10%, from our fiscal year 2012 cost base during which time our net revenue decreased approximately 13%. In fiscal year 2014, we expect to further reduce our fixed operating costs by a minimum of $325 million, which would result in a total decline of $675 million, or 19%, from our fiscal year 2012 cost base.
•
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, Australia, Mexico and Chile, and we have a joint venture in India providing educational services and programs. 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.
•
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.

29

•
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, in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 22, 2013.
•
Financial Aid Funding. In recent years, there has been increased focus by members of the U.S. Congress and federal agencies such as the Consumer Financial Protection Bureau and the Federal Trade Commission on the role that proprietary educational institutions play in higher education. We expect this focus to increase, particularly during the time leading up to the 2014 mid-term elections. 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 upcoming 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 seeks to reduce the U.S. budget deficit. Any action by Congress that reduces Title IV program funding, whether through across-the-board funding reductions, sequestration or otherwise, or alters the eligibility of our institutions or students to participate in Title IV programs could have a material adverse effect on our enrollment, financial condition, results of operations and cash flows. Action by Congress or federal agencies could also require us to modify our practices in ways that increase our administrative costs and reduce our operating income.
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, as discussed below.
•
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 U.S. Department of Education 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. We cannot predict whether, or to what extent, the recent imposition of the Notice sanction by The Higher Learning Commission, discussed below, might have on this process.
•
U.S. Department of Education Rulemaking Initiative. A negotiated rulemaking committee was convened by the Department in September 2013 on the topic of gainful employment. The committee held negotiated rulemaking sessions in September, November, and December 2013; however, the committee failed to reach consensus. In March 2014, the Department issued a Notice of Proposed Rulemaking to establish measures for determining whether certain postsecondary educational programs prepare students for gainful employment in a recognized occupation, and the conditions under which these educational programs remain eligible to participate in Title IV programs. The effective date of any such regulations cannot be determined at this time, but it is likely that the rules, if adopted, would be effective on or after July 1, 2015. Additional details are available at http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/gainfulemployment.html.
Additionally, the Department announced the creation of another rulemaking committee to focus on other topics, including cash management and state authorization. This committee held its first negotiated rulemaking session in February 2014 and additional negotiated rulemaking sessions are scheduled. These negotiated rulemaking initiatives are expected to produce new regulations in a variety of areas. In March 2014, prior to the second negotiated rulemaking session, the Department issued its proposal for certain new regulations, including those for state authorization. The proposed regulations, if promulgated as drafted, would impose significant new regulatory burdens on postsecondary institutions which provide distance education, regardless of educational sector, including University of Phoenix. The effective date of any such regulations cannot be determined at this time, but it is likely that the rules, if adopted, would be effective on or after July 1, 2015. Additional details are available at http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html.
The Department has also conducted listening tours to solicit public feedback building on President Obama’s call for a national college rating system. The Secretary of the Department has publicly stated that a draft ratings system is expected to be issued in calendar 2014, and the Department has been charged with issuing the ratings for use by students and others for the 2015-2016 school year.

30

•
The Higher Learning Commission Accreditation Reaffirmation. During fiscal year 2013, the accreditations of University of Phoenix and Western International University were reaffirmed by The Higher Learning Commission, their institutional accreditor (“HLC”), through the 2022-2023 academic year. At the same time, HLC placed both universities on Notice status for a two-year period. 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.
•
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 percentage for University of Phoenix was 83% for fiscal year 2013. 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 members of Congress have proposed changes to the 90/10 Rule that would, if enacted, reduce the percentage to 85% and adversely change the manner in which military aid is treated for purposes of the rule calculation.
•
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 rate for University of Phoenix for the 2010 federal fiscal year was 26.0%, and the draft three-year cohort default rate for the 2011 federal fiscal year, which will be finalized in September 2014, was 19.0%. 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.
•
Office of the Inspector General of the U.S. Department of Education (“OIG”) Subpoena. On March 21, 2014, University of Phoenix received a subpoena from the Mid-Atlantic Region of the OIG. The subpoena seeks the production by the University of documents and detailed information regarding a broad spectrum of the activities conducted in the University’s Centralized Service Center for the Northeast Region located in Columbia, Maryland, for the time period of January 1, 2007 to the present, including information relating to marketing, recruitment, enrollment, financial aid processing, fraud prevention, student retention, personnel training, attendance, academic grading and other matters. We intend to cooperate with these requests but cannot at this time predict the eventual scope, duration or outcome of this matter.
•
Open Colleges Registration. Open Colleges primarily provides educational services through the Open Colleges Pty Ltd registered training organization as approved by the Australian Skills Quality Authority. This registration is scheduled to expire in June 2014, and Open Colleges has already begun pursuing re-registration.
For a more detailed discussion of trends, risks and uncertainties, refer to our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 22, 2013.

31

Fiscal Year 2014 Significant Events
In addition to the items mentioned above, we experienced the following significant events during fiscal year 2014 to date:
1.
Corporate Name Change. During the first quarter of fiscal year 2014, we changed our corporate name from Apollo Group, Inc. to Apollo Education Group, Inc. to better and more clearly reflect our mission and our purpose.
2.
Executive Management and Board of Directors Changes. We experienced the following executive management and Board of Directors changes:
•
In September 2013, William J. Pepicello announced his retirement from his position as President of University of Phoenix, effective upon the naming of a successor;
•
J. Mitchell Bowling was appointed as our Chief Operating Officer effective December 2, 2013. Curtis M. Uehlein, who served as our Acting Chief Operating Officer since April 2013, continues to serve in his role as President of Apollo Global;
•
Dana H. Born, Ph.D. was appointed to our Board of Directors on March 20, 2014 and serves on the Audit and Compensation Committees of the Board of Directors; and
•
On April 1, 2014, University of Phoenix announced that the University’s Board of Trustees named Timothy P. Slottow as the new President of the University, effective June 20, 2014.
3.
Empowering America: Reinventing Pathways to College and the Workforce Report. In November 2013, we released this report focusing on the current college and career readiness challenges facing the U.S., innovative ways to address students and their needs, and the economic impact of increasing student preparedness. A copy of this report can be found on our website.
4.
Accreditation Updates.
•
CFFP - During the first quarter of fiscal year 2014, CFFP was informed in writing by The Higher Learning Commission, their institutional accreditor (“HLC”), that CFFP had addressed HLC’s findings from its most recent accreditation reaffirmation review. The next comprehensive visit from HLC is scheduled during the 2017-2018 school year.
•
ULA - During the first quarter of fiscal year 2014, ULA received the highest level of institutional accreditation from the Mexican Federation of Private Institutions of Higher Education, which is the principal accreditor of private universities in Mexico.
5.
Open Colleges Acquisition. On December 20, 2013, Apollo Global acquired 70% of the outstanding shares of Open Colleges, which is a provider of education and training to adult learners in Australia. Refer to Note 4. Acquisitions, in Item 1, Financial Statements.
6.
Balloon. During the third quarter of fiscal year 2014, Apollo Lightspeed launched Balloon™, an online career skills and learning marketplace designed to connect individuals to online learning offerings where they can acquire skills valued by technology companies.
7.
Update on Proposed Change in Apollo Group, Inc. Class B Voting Stock Trust. Approximately 51% of our Class B voting common stock is held by the John Sperling Voting Stock Trust, of which our founder, Dr. John G. Sperling, is the grantor and sole trustee (the “Voting Stock Trust”). Dr. Sperling has proposed to convert the Voting Stock Trust into an irrevocable trust and to appoint Mr. Peter V. Sperling, Ms. Terri Bishop and Ms. Darby Shupp, all of whom are members of our Board of Directors, as trustees, with the sole power to appoint successor and additional trustees. Peter Sperling is the Chair of our Board of Directors and the beneficial owner of the remaining 49% of our outstanding Class B voting common stock and approximately 3.8% of our outstanding Class A nonvoting common stock. Ms. Bishop is the Vice Chair of our Board of Directors. After the proposed amendment, Dr. Sperling would continue to have a limited power to direct the disposition of the shares held by the Voting Stock Trust during his lifetime or upon his death, subject to the transfer restrictions in the Shareholder Agreement among us and the holders of our Class B common stock, dated September 7, 1994, as amended, relating to the ownership and transfer of our Class B common stock.
As previously announced, these proposed changes were approved in November 2013 by the Higher Learning Commission (“HLC”), the principal accreditor of University of Phoenix and Western International University (the “Apollo Institutions”). In March 2014, the U.S. Department of Education notified us that it concurred with our view that the proposed changes to the Voting Stock Trust would constitute an excluded change of control transaction under 34 CFR §600.31(e)(2). Accordingly, the proposed changes will not require the Apollo Institutions to reestablish their eligibility to participate in student financial aid programs under Title IV of the Higher Education Act.

32

HLC’s approval of the proposed changes in the Voting Stock Trust is subject to the condition that each Apollo Institution hosts a visit by HLC within six months after the effectiveness of the change focused on ascertaining the appropriateness of the approval, implications for succession planning, and the effect, if any, of the change in trust arrangements on Apollo and the Apollo Institutions and their ability to continue to meet HLC’s Criteria for Accreditation and Assumed Practices. HLC’s approval also was subject to the requirement that the change be made within 30 days after the approval was granted. Accordingly, the Apollo Institutions must obtain an updated approval from HLC before these changes can be effected.
In addition to the updated HLC approval, the proposed changes may require certain approvals and consents of state education regulatory bodies, which we expect to obtain in due course. We anticipate that the proposed changes to the Voting Stock Trust will be effected before the end of fiscal year 2014, upon the receipt of all necessary approvals.
These proposed changes to the Voting Stock Trust are intended to reduce the regulatory uncertainty associated with the future death or incompetency of Dr. Sperling. For a discussion of the risks associated with these possible change of control matters, see 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, under Risk Factors in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 22, 2013.
Critical Accounting Policies and Estimates
Refer to our 2013 Annual Report on Form 10-K for our critical accounting policies and estimates.
Recent Accounting Pronouncements
Refer to our 2013 Annual Report on Form 10-K for recent accounting pronouncements.
Results of Operations
We have included below a discussion of our operating results and significant items explaining the material changes in our operating results during the three and six months ended February 28, 2014 compared to the three and six months ended February 28, 2013.
As discussed in the Overview of this MD&A, the U.S. higher education industry, including the proprietary sector, is experiencing unprecedented, rapidly developing changes. We believe University of Phoenix enrollment has been adversely impacted by these changes, and 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. Certain of our initiatives under consideration could adversely impact our operating results, especially in the short-term.
Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, fluctuations in our results of operations as a result of seasonal variations in the level of our institutions’ enrollments. Although University of Phoenix enrolls students throughout the year, its net revenue is generally lower in our second fiscal quarter (December through February) than the other quarters due to holiday breaks.

33

Analysis of Condensed Consolidated Statements of Income
The following details our consolidated results of operations. For a more detailed discussion of our operating results by reportable segment, refer to Analysis of Operating Results by Reportable Segment below.
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
 
2014
 
2013
 
% of Net Revenue
 
2014
 
2013
 
% of Net Revenue
($ in thousands)
 
 
2014
 
2013
 
 
 
2014
 
2013
Net revenue
$
679,058

 
$
834,372

 
100.0
 %
 
100.0
 %
 
$
1,535,393

 
$
1,889,555

 
100.0
 %
 
100.0
 %
Costs and expenses:
 
 
 
 
 

 
 

 
 
 
 
 
 

 
 

Instructional and student advisory
319,575

 
383,702

 
47.1
 %
 
46.0
 %
 
659,254

 
815,852

 
42.9
 %
 
43.2
 %
Marketing
143,392

 
173,313

 
21.1
 %
 
20.8
 %
 
281,236

 
336,186

 
18.3
 %
 
17.8
 %
Admissions advisory
55,072

 
68,232

 
8.1
 %
 
8.2
 %
 
106,581

 
139,540

 
6.9
 %
 
7.4
 %
General and administrative
67,676

 
81,218

 
10.0
 %
 
9.7
 %
 
142,906

 
154,757

 
9.3
 %
 
8.2
 %
Depreciation and amortization
37,465

 
41,499

 
5.5
 %
 
5.0
 %
 
73,803

 
85,194

 
4.8
 %
 
4.5
 %
Provision for uncollectible accounts receivable
11,534

 
18,902

 
1.7
 %
 
2.2
 %
 
25,512

 
52,308

 
1.7
 %
 
2.7
 %
Restructuring and other charges
15,209

 
44,076

 
2.3
 %
 
5.3
 %
 
47,172

 
68,192

 
3.1
 %
 
3.6
 %
Acquisition costs and contingent consideration charges
13,005

 
—

 
1.9
 %
 
—
 %
 
13,005

 
—

 
0.9
 %
 
—
 %
Litigation charge (credit), net
9,000

 
(6,350
)
 
1.3
 %
 
(0.8
)%
 
9,000

 
(23,200
)
 
0.6
 %
 
(1.2
)%
Total costs and expenses
671,928

 
804,592

 
99.0
 %
 
96.4
 %
 
1,358,469

 
1,628,829

 
88.5
 %
 
86.2
 %
Operating income
7,130

 
29,780

 
1.0
 %
 
3.6
 %
 
176,924

 
260,726

 
11.5
 %
 
13.8
 %
Interest income
599

 
388

 
0.1
 %
 
—
 %
 
1,167

 
937

 
0.1
 %
 
—
 %
Interest expense
(1,983
)
 
(2,092
)
 
(0.3
)%
 
(0.3
)%
 
(4,069
)
 
(4,134
)
 
(0.3
)%
 
(0.2
)%
Other, net
107

 
(126
)
 
0.1
 %
 
—
 %
 
914

 
1,673

 
0.1
 %
 
0.1
 %
Income before income taxes
5,853

 
27,950

 
0.9
 %
 
3.3
 %
 
174,936

 
259,202

 
11.4
 %
 
13.7
 %
Benefit from (provision for) income taxes
6,324

 
(14,291
)
 
0.9
 %
 
(1.7
)%
 
(63,718
)
 
(111,803
)
 
(4.2
)%
 
(5.9
)%
Net income
12,177

 
13,659

 
1.8
 %
 
1.6
 %
 
111,218

 
147,399

 
7.2
 %
 
7.8
 %
Net loss (income) attributable to noncontrolling interests
2,428

 
(132
)
 
0.4
 %
 
—
 %
 
2,278

 
(377
)
 
0.2
 %
 
—
 %
Net income attributable to Apollo
$
14,605

 
$
13,527

 
2.2
 %
 
1.6
 %
 
$
113,496

 
$
147,022

 
7.4
 %
 
7.8
 %
Net Revenue
Our net revenue decreased $155.3 million and $354.2 million, or 18.6% and 18.7%, in the three and six months ended February 28, 2014, respectively, compared to the prior year periods. The decreases were primarily attributable to net revenue declines at University of Phoenix of 21.2% and 20.7% during the respective periods, principally due to lower enrollment. Refer to further discussion of net revenue by reportable segment below at Analysis of Operating Results by Reportable Segment.
Instructional and Student Advisory
Instructional and student advisory decreased $64.1 million and $156.6 million, or 16.7% and 19.2%, in the three and six months ended February 28, 2014, respectively, compared to the prior year periods. This represented an increase as a percentage of net revenue of 110 basis points, and a decrease as a percentage of net revenue of 30 basis points for the three and six months ended February 28, 2014, respectively. The decreases in expense were primarily due to lower costs including rent and compensation attributable to our restructuring activities (refer to Restructuring and Other Charges below), and lower costs from the enrollment decline. For the six months ended February 28, 2014, the decrease was also due to the assessment of approximately $11 million of foreign indirect taxes in the first quarter of fiscal year 2013 associated with certain instructional materials.

34

Marketing
Marketing decreased $29.9 million and $55.0 million, or 17.3% and 16.3%, in the three and six months ended February 28, 2014, respectively, compared to the prior year periods. This represented increases as a percentage of net revenue of 30 and 50 basis points, respectively. The decreases in expense were principally attributable to lower advertising costs, and lower headcount due in part to our restructuring activities.
Admissions Advisory
Admissions advisory decreased $13.2 million and $33.0 million, or 19.3% and 23.6%, in the three and six months ended February 28, 2014, respectively, compared to the prior year periods. This represented decreases as a percentage of net revenue of 10 and 50 basis points, respectively. The decreases in expense were principally attributable to lower headcount due in part to our restructuring activities.
General and Administrative
General and administrative decreased $13.5 million and $11.9 million, or 16.7% and 7.7%, in the three and six months ended February 28, 2014, respectively, compared to the prior year periods. This represented increases as a percentage of net revenue of 30 and 110 basis points, respectively. The decreases in expense were primarily due to lower costs including rent and compensation attributable to our restructuring activities, and a $5.0 million retirement bonus in the second quarter of fiscal year 2013.
Depreciation and Amortization
Depreciation and amortization decreased $4.0 million and $11.4 million, or 9.7% and 13.4%, in the three and six months ended February 28, 2014, respectively, compared to the prior year periods. This represented increases as a percentage of net revenue of 50 and 30 basis points, respectively. The decreases in expense were principally attributable to lower depreciation due in part to the decline in depreciable assets resulting from our restructuring activities. This was partially offset by $2.5 million of intangible asset amortization in the three and six months ended February 28, 2014 as a result of the Open Colleges acquisition.
Provision for Uncollectible Accounts Receivable
Provision for uncollectible accounts receivable decreased $7.4 million and $26.8 million, or 39.0% and 51.2%, in the three and six months ended February 28, 2014, respectively, compared to the prior year periods. This represented decreases as a percentage of net revenue of 50 and 100 basis points, respectively. The decreases were primarily due to reductions in our gross student receivables from lower enrollment, and process improvements that significantly contributed to lowering our gross student receivables associated with students no longer enrolled in our programs. The decline was less significant in the three months ended compared to six months ended because certain process improvements were initiated in the second quarter of fiscal year 2013. Our collection rates have also increased due in part to changes in the relative composition of our student receivables including a higher proportion attributable to students in higher degree level programs.
Restructuring and Other Charges
The U.S. higher education industry, including the proprietary sector, is experiencing unprecedented, rapidly developing changes that challenge many of the core principles underlying the industry. We are reengineering our business processes and refining our educational delivery systems to improve the effectiveness of our services to students, and reducing the size of our services infrastructure and associated operating expenses to align with our reduced enrollment and revenue. We have incurred restructuring and other charges associated with these activities beginning in fiscal year 2011 as summarized below:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
 
Cumulative
Costs as of
February 28, 2014
($ in thousands)
2014
 
2013
 
2014
 
2013
 
Lease and related costs, net
$
9,505

 
$
34,640

 
$
23,265

 
$
44,752

 
$
195,576

Severance and other employee separation costs
4,863

 
8,217

 
20,117

 
19,160

 
71,143

Other restructuring related costs
841

 
1,219

 
3,790

 
4,280

 
40,686

Restructuring and other charges
$
15,209

 
$
44,076

 
$
47,172

 
$
68,192

 
$
307,405


35

The following summarizes the restructuring and other charges in our segment reporting format:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
 
Cumulative
Costs as of
February 28, 2014
($ in thousands)
2014
 
2013
 
2014
 
2013
 
University of Phoenix
$
11,229

 
$
38,445

 
$
36,655

 
$
55,341

 
$
238,327

Apollo Global
304

 
3,336

 
1,567

 
3,415

 
13,332

Other
3,676

 
2,295

 
8,950

 
9,436

 
55,746

Restructuring and other charges
$
15,209

 
$
44,076

 
$
47,172

 
$
68,192

 
$
307,405

•
Lease and Related Costs, Net - Beginning in fiscal year 2011, University of Phoenix began rationalizing its administrative real estate facilities. In addition to continuing to rationalize its administrative facilities, University of Phoenix began implementing a plan during fiscal year 2013 to close 115 of its ground locations. As of February 28, 2014, University of Phoenix has closed approximately three-fourths of the locations included in these plans, which represents approximately 90% of the total square feet we are exiting. The remaining closures will continue through fiscal year 2014 and beyond as University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations. We have recorded $140.6 million of initial aggregate charges, representing the estimated fair value of future contractual operating lease obligations, which were recorded in the periods we ceased using the respective facilities, $17.0 million of which was recorded in the six months ended February 28, 2014. The other lease and related costs in the six months ended February 28, 2014 consist of accelerated depreciation, as discussed below, and interest accretion on the lease obligations.
We measure lease obligations at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The significant unobservable inputs principally include estimated future cash flows and discount rates, which have ranged between 3%-6% for our lease obligations. The estimation of future cash flows includes non-cancelable contractual lease costs over the remaining terms of the leases, partially offset by estimated future sublease rental income, which involves significant judgment. Our estimate of the amount and timing of sublease rental income considers subleases that we have executed and subleases we expect to execute, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the facilities. The estimates will be subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements. As of February 28, 2014, we have recorded adjustments to our initial lease obligation liabilities for interest accretion and immaterial adjustments for changes in estimated sublease income.
Lease and related costs, net includes $4.3 million of accelerated depreciation in the six months ended February 28, 2014 associated with revising the useful lives of the fixed assets at the facilities we are closing through their expected closure dates. Prior to revising the useful lives, we perform a recoverability analysis for the facilities’ fixed assets by comparing the estimated undiscounted cash flows of the locations through their expected closure dates to the carrying amount of the locations’ fixed assets. Based on such analyses, we recorded immaterial impairment charges during fiscal year 2013 and no impairment charges in the six months ended February 28, 2014.
•
Severance and Other Employee Separation Costs - Beginning in fiscal year 2011 and continuing into fiscal year 2014, we have implemented workforce reductions as we reengineer our business processes and refine our educational delivery systems. We incurred severance and other employee separation costs of $20.1 million in the six months ended February 28, 2014. These costs are included in the reportable segments in which the respective personnel were employed.
Excluding interest accretion associated with our lease obligation liabilities, we expect to incur approximately $10 million of future restructuring charges for the initiatives announced to date. These costs will generally be incurred over the period of time University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations associated with campuses that have not yet been closed.
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 Condensed 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, or 10%, from our fiscal year 2012 cost base during which time our net revenue decreased approximately 13%. In fiscal year 2014, we expect to further reduce our fixed operating costs by a minimum of $325 million, which would result in a total decline of $675 million, or 19%, from our fiscal year 2012 cost base.

36

Acquisition Costs and Contingent Consideration Charges
During the three and six months ended February 28, 2014, we recorded $13.0 million of acquisition costs and charges associated with changes in the fair value of contingent consideration associated with our acquisitions. The substantial majority of this expense is attributable to our acquisition of Open Colleges.
Litigation Charge (Credit), Net
We recorded a $9.0 million charge in the second quarter of fiscal year 2014 associated with our legal matters. Refer to Note 15, Commitments and Contingencies in Item 1, Financial Statements. We recorded credits of $6.4 million and $23.2 million in the three and six months ended February 28, 2013, respectively, resulting from resolution of certain of our legal matters.
Benefit from (Provision for) Income Taxes
We had pre-tax income of $5.9 million during the three months ended February 28, 2014 and recorded an aggregate $6.3 million benefit from income taxes. The aggregate benefit was principally attributable to a $10.2 million benefit in the second quarter of fiscal year 2014 from resolution with the Internal Revenue Service related to the deductibility of certain costs for our foreign subsidiaries, and a $2.8 million tax benefit resulting from tax reform in Mexico. Refer to Note 11, Income Taxes, in Item 1, Financial Statements. These benefits were partially offset by an increase in nondeductible foreign losses primarily due to the Acquisition costs and contingent consideration charges discussed above.
Our effective income tax rate was 36.4% and 43.1% for the six months ended February 28, 2014 and 2013, respectively. The decrease was principally attributable to the tax benefits recorded in the second quarter of fiscal year 2014 discussed above.
Net Loss (Income) Attributable to Noncontrolling Interests
The change in net loss (income) attributable to noncontrolling interests during the three and six months ended February 28, 2014 compared to the prior periods was principally attributable to Open College’s noncontrolling shareholders’ portion of Open Colleges operating results.
Analysis of Operating Results by Reportable Segment
The following details our operating results by reportable segment for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
 
$
Change
 
%
Change
 
2014
 
2013
 
$
Change
 
%
Change
Net revenue
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

University of Phoenix
$
594,081

 
$
753,566

 
$
(159,485
)
 
(21.2
)%
 
$
1,338,944

 
$
1,689,350

 
$
(350,406
)
 
(20.7
)%
Apollo Global
68,634

 
56,965

 
11,669

 
20.5
 %
 
159,793

 
147,479

 
12,314

 
8.3
 %
Other
16,343

 
23,841

 
(7,498
)
 
(31.5
)%
 
36,656

 
52,726

 
(16,070
)
 
(30.5
)%
Net revenue
$
679,058

 
$
834,372

 
$
(155,314
)
 
(18.6
)%
 
$
1,535,393

 
$
1,889,555

 
$
(354,162
)
 
(18.7
)%
Operating income (loss)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

University of Phoenix
$
86,682

 
$
74,757

 
$
11,925

 
16.0
 %
 
$
270,155

 
$
318,617

 
$
(48,462
)
 
(15.2
)%
Apollo Global
(40,004
)
 
(25,921
)
 
(14,083
)
 
(54.3
)%
 
(37,787
)
 
(35,287
)
 
(2,500
)
 
(7.1
)%
Other
(39,548
)
 
(19,056
)
 
(20,492
)
 
(107.5
)%
 
(55,444
)
 
(22,604
)
 
(32,840
)
 
(145.3
)%
Operating income
$
7,130

 
$
29,780

 
$
(22,650
)
 
(76.1
)%
 
$
176,924

 
$
260,726

 
$
(83,802
)
 
(32.1
)%
University of Phoenix
University of Phoenix’s net revenue decreased $159.5 million and $350.4 million, or 21.2% and 20.7%, during the three and six months ended February 28, 2014, respectively, compared to the prior year periods. The decreases were principally attributable to lower enrollment. During fiscal year 2014, we increased our use of discounts, grants and scholarships to improve University of Phoenix’s value proposition to prospective students. These discounts, grants and scholarships also reduced net revenue compared to the prior year. Future net revenue will be impacted by tuition price and other fee changes, changes in enrollment and student mix within programs and degree levels, and discounts, grants and scholarships.

37

The following details University of Phoenix student enrollment for the respective periods:
 
Three Months Ended
February 28
 
 
 
Six Months Ended
February 28
 
2014
 
2013
 
% Change
 
 
 
2014
 
2013
 
% Change
Degreed Enrollment(1)
250,300

 
300,800

 
(16.8
)%
 
 
Average Degreed Enrollment(3)
260,800

 
316,300

 
(17.5
)%
New Degreed Enrollment(2)
32,500

 
38,900

 
(16.5
)%
 
 
Aggregate New Degreed Enrollment
74,200

 
93,000

 
(20.2
)%
(1) Represents students enrolled in a University of Phoenix 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.
(2) Represents new students and students who have been out of attendance for more than 12 months who enroll in a University of Phoenix 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.
(3) Represents the average of quarterly Degreed Enrollment from the beginning to the end of the respective periods.
University of Phoenix Average Degreed Enrollment decreased 17.5% in the six months ended February 28, 2014 compared to the prior year period. We believe University of Phoenix enrollment has been adversely impacted by unprecedented, rapidly developing changes and increasing competition in the U.S. higher education industry as further discussed in the Overview of this MD&A. 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. Certain of our initiatives under consideration could adversely impact our operating results, especially in the short-term.
University of Phoenix’s operating income decreased $48.5 million, or 15.2%, during the six months ended February 28, 2014 compared to the prior period. This year-to-date decrease consisted of a $60.4 million decrease in the first quarter and a $11.9 million increase in the second quarter. Although net revenue declined in both quarters as described above, University of Phoenix increased operating income in the second quarter due to more significant decreases in expenses principally attributable to less restructuring charges and lower advertising. For a more detailed discussion of operating expenses, refer to Analysis of Condensed Consolidated Statements of Income.
Apollo Global
Apollo Global net revenue increased $11.7 million and $12.3 million, or 20.5% and 8.3%, during the three and six months ended February 28, 2014, respectively, compared to the prior year periods. The increases were principally attributable to revenue from Open Colleges from the date of acquisition, and higher enrollment at other international institutions.
Operating losses increased $14.1 million and $2.5 million in the three and six months ended February 28, 2014, respectively, compared to the prior year periods. The increases were principally attributable to the $13.0 million of acquisition costs and contingent consideration charges discussed above associated primarily with our acquisition of Open Colleges, and $2.5 million of intangible asset amortization associated with the acquisition. For the six months ended February 28, 2014, the increase was partially offset by the assessment of approximately $11 million of foreign indirect taxes in the first quarter of fiscal year 2013 associated with certain instructional materials.
Other
Other net revenue decreased $7.5 million and $16.1 million during the three and six months ended February 28, 2014, respectively, compared to the prior year periods. The decreases were principally attributable to declines at IPD and WIU. The IPD decline principally resulted from a decrease in the number of its Client Institutions and the WIU decline was due to lower enrollment and the launch of its new strategy at the end of fiscal year 2013. We expect WIU’s new strategy to continue to reduce its revenue in the near-term due to the new pricing structure that allows prospective WIU students to test the academic experience for a significantly reduced price in their initial courses.
Operating losses increased $20.5 million and $32.8 million during the three and six months ended February 28, 2014, respectively, compared to the prior year periods. The increases were principally attributable to the decline in net revenue, the $9.0 million litigation charge in the second quarter of fiscal year 2014, and $5.0 million and $21.9 million of litigation credits recorded in the three and six months ended February 28, 2013, respectively.

38

Liquidity, Capital Resources and Financial Position
We believe that our cash and cash equivalents and available liquidity will be adequate to satisfy our working capital and other liquidity requirements associated with our existing operations through at least the next 12 months. We believe that the most strategic uses of our cash resources include investments in initiatives to achieve significant improvements in student retention and career outcomes, investments in opportunities to increase organic growth through new education offerings, expansion of our global operations through acquisitions or other initiatives, and share repurchases.
Although we currently have substantial available liquidity, our ability to access the credit markets and other sources of liquidity may be adversely affected if we experience regulatory compliance challenges, including, but not limited to, maintaining a U.S. Department of Education financial responsibility composite score of at least 1.5, reduced availability of Title IV funding, or other adverse effects on our business from regulatory or legislative changes. For a detailed discussion of the regulatory environment and related risks, refer to Part I, Item 1A, Risk Factors, in our 2013 Annual Report on Form 10-K.
Cash and Cash Equivalents, Restricted Cash and Cash Equivalents and Marketable Securities
The substantial majority of our cash and cash equivalents, including restricted cash and cash equivalents, are held by our domestic operations and placed with high-credit-quality financial institutions. The following provides a summary of our cash and cash equivalents, restricted cash and cash equivalents and current marketable securities as of the respective periods:
 
 
 
 
 
% of Total Assets at
 
 
($ in thousands)
February 28,
2014
 
August 31,
2013
 
February 28,
2014
 
August 31,
2013
 
%
Change
Cash and cash equivalents
$
645,940

 
$
1,414,485

 
25.5
%
 
47.2
%
 
(54.3
)%
Restricted cash and cash equivalents
283,929

 
259,174

 
11.2
%
 
8.7
%
 
9.6
 %
Marketable securities(1)
158,243

 
105,809

 
6.3
%
 
3.5
%
 
49.6
 %
Total
$
1,088,112

 
$
1,779,468

 
43.0
%
 
59.4
%
 
(38.9
)%
(1) Represents current marketable securities. We also had $111.7 million and $43.9 million of long-term marketable securities as of February 28, 2014 and August 31, 2013, respectively, which principally includes held-to-maturity securities maturing in less than two years.
Cash and cash equivalents (excluding restricted cash) decreased $768.5 million primarily due to $619.3 million of payments on borrowings, $122.7 million of marketable securities purchases (net of maturities), $94.9 million to acquire Open Colleges, $72.2 million for share repurchases, and $58.1 million for capital expenditures. These items were partially offset by $193.5 million of cash provided by operations.
We consider the unremitted earnings attributable to certain of our foreign subsidiaries to be permanently reinvested. As of February 28, 2014, the earnings from these operations were not significant.
As of February 28, 2014, we had $152.7 million of money market funds included in cash and restricted cash equivalents that we measure at fair value. Our remaining cash and cash equivalents included in the above table approximate fair value because of the short-term nature of the financial instruments.
As of February 28, 2014, our current marketable securities principally includes tax-exempt municipal bonds, commercial paper and corporate bonds that have original maturities to us greater than three months, and contractual maturities that will occur within one year. Our current marketable securities are classified as held-to-maturity as we have the intent and ability to hold them until contractual maturity. Accordingly, they are reported at amortized cost and we have not recorded gains or losses on our held-to-maturity investments. We determine the fair value of our held-to-maturity investments using a market approach with Level 2 observable inputs including quoted prices for similar assets in active markets, or quoted prices for identical or similar assets in markets that are not active. Refer to Note 5, Financial Instruments in Item 1, Financial Statements.
Debt
In fiscal year 2012, we entered into a syndicated $625 million unsecured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility is used for general corporate purposes, which may include acquisitions and share repurchases. The term is five years and will expire in April 2017. The Revolving Credit Facility may be used for borrowings in certain foreign currencies and letters of credit, in each case up to specified sublimits.
We borrowed $605.0 million and had approximately $14 million of outstanding letters of credit under the Revolving Credit Facility as of August 31, 2013. We repaid the entire amount borrowed under the Revolving Credit Facility during the first quarter of fiscal year 2014. As of February 28, 2014, we have approximately $24 million of outstanding letters of credit under the Revolving Credit Facility.

39

The Revolving Credit Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Revolving Credit Facility fee ranges from 25 to 40 basis points. Incremental fees for borrowings under the facility generally range from LIBOR + 125 to 185 basis points. The weighted average interest rate on outstanding short-term borrowings under the Revolving Credit Facility at August 31, 2013 was 3.5%.
The Revolving Credit Facility contains various customary representations, covenants and other provisions, including a material adverse event clause and the following financial covenants: maximum leverage ratio, minimum interest and rent expense coverage ratio, and a U.S. Department of Education financial responsibility composite score. We were in compliance with all applicable covenants related to the Revolving Credit Facility at February 28, 2014 and August 31, 2013.
Other debt principally includes debt at subsidiaries of Apollo Global and the present value of an obligation payable over a 10-year period associated with our purchase of technology in fiscal year 2012. The weighted average interest rate on our outstanding other debt at February 28, 2014 and August 31, 2013 was 5.8% and 5.3%, respectively.
The carrying value of our debt, excluding capital leases, approximates fair value based on the nature of our debt, which includes consideration of the portion that is variable-rate.
Cash Flows
Operating Activities
The following provides a summary of our operating cash flows during the respective periods:
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
Net income
$
111,218

 
$
147,399

Non-cash items
127,498

 
168,504

Changes in assets and liabilities, excluding the impact of acquisition and disposition
(45,232
)
 
(16,953
)
Net cash provided by operating activities
$
193,484

 
$
298,950

Six Months Ended February 28, 2014 - Our non-cash items primarily consisted of $73.8 million of depreciation and amortization, a $25.5 million provision for uncollectible accounts receivable, and $22.5 million of share-based compensation. The changes in assets and liabilities primarily consisted of a $57.2 million decrease in accrued and other liabilities principally attributable to the timing of our payroll cycle and accrued bonus payments, and a $24.2 million increase in restricted cash and cash equivalents. This was partially offset by a $32.9 million increase in deferred revenue principally attributable to the timing of course starts at BPP, a $17.4 million increase in student deposits, and a $15.2 million decrease in prepaid income taxes principally attributable to the timing of our quarterly tax payments.
Six Months Ended February 28, 2013 - Our non-cash items primarily consisted of $85.2 million of depreciation and amortization, a $52.3 million provision for uncollectible accounts receivable, $30.6 million of restructuring accelerated depreciation, and $27.5 million of share-based compensation. These items were partially offset by a $23.2 million credit resulting from resolution in certain of our legal matters. The changes in assets and liabilities primarily consisted of a $33.9 million use of cash related to the change in accounts receivable, excluding the provision for uncollectible accounts receivable, partially offset by a $16.1 million decrease in prepaid taxes principally attributable to the timing of our quarterly tax payments.
We monitor our accounts receivable through a variety of metrics, including days sales outstanding. We calculate our days sales outstanding by determining average daily student revenue based on a rolling twelve month analysis and divide it into the gross student accounts receivable balance as of the end of the period. As of February 28, 2014, excluding accounts receivable and the related net revenue for Apollo Global, our days sales outstanding was 19 days, which was consistent with our days sales outstanding as of February 28, 2013, and was a two day decrease compared to August 31, 2013.

40

Investing Activities
The following provides a summary of our investing cash flows during the respective periods:
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
Purchases of marketable securities, net
$
(122,741
)
 
$
(31,974
)
Acquisition of Open Colleges
(94,937
)
 
—

Capital expenditures
(58,119
)
 
(49,024
)
Other
3,446

 
(1,500
)
Net cash used in investing activities
$
(272,351
)
 
$
(82,498
)
Financing Activities
The following provides a summary of our financing cash flows during the respective periods:
 
Six Months Ended
February 28,
($ in thousands)
2014
 
2013
Payments on borrowings, net
$
(619,268
)
 
$
(627,368
)
Purchases of stock for treasury
(72,237
)
 
(3,881
)
Purchase of noncontrolling interest
—

 
(42,500
)
Issuances of stock
1,793

 
2,131

Net cash used in financing activities
$
(689,712
)
 
$
(671,618
)
Six Months Ended February 28, 2014 - Cash used in financing activities primarily consisted of $619.3 million used for payments on borrowings, and $72.2 million used for share repurchases. Share repurchases consisted of $69.7 million used to repurchase 2.3 million shares at a weighted average purchase price of $30.44 per share, and additional repurchases related to tax withholding requirements on the restricted stock units.
As of February 28, 2014, $180.3 million remained available under our share repurchase authorization. There is no expiration date on the repurchase authorization and the amount and timing of future share repurchase authorizations and repurchases, if any, will be made as market and business conditions warrant. Repurchases occur at our discretion and 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.
Six Months Ended February 28, 2013 - Cash used in financing activities primarily consisted of $627.4 million used for payments on borrowings (net of proceeds from borrowings), and $42.5 million used for the purchase of the noncontrolling ownership interest in Apollo Global.
Contractual Obligations and Other Commercial Commitments
We had the following material changes in our contractual obligations and other commercial commitments during the six months ended February 28, 2014:
•
We repaid the entire amount borrowed on our Revolving Credit Facility of $605.0 million.
•
In connection with our acquisition of Open Colleges in the second quarter of fiscal year 2014, we are obligated to pay contingent consideration of up to A$52.5 million (equivalent to $47.2 million as of February 28, 2014) upon the satisfaction of specified conditions. As of February 28, 2014, the estimated fair value for this contingent consideration was $29.9 million, and the balance is included in other current liabilities on our Condensed Consolidated Balance Sheets as we expect this amount to be paid within one year.
We also have the option to buy the 30% noncontrolling interests in Open Colleges, and the noncontrolling shareholders have the option to sell their shares to us, in early 2017, or earlier in limited circumstances. The prices for these options are based on a formula specified at the acquisition date and are principally based on a multiple of Open Colleges’ calendar year 2016 operating results as defined in the acquisition agreements, or an earlier measurement period in the limited circumstances that the options are exercised prior to 2017. There is no minimum or maximum price for these options. Refer to Note 4, Acquisitions in Item 1, Financial Statements.

41

There have been no other material changes in our contractual obligations and other commercial commitments other than in the ordinary course of business since the end of fiscal year 2013 through February 28, 2014. Information regarding our contractual obligations and other commercial commitments is provided in our 2013 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes to our market risk since August 31, 2013. For a discussion of our exposure to market risk, refer to our 2013 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We intend to maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our Chief Executive Officer (“Principal Executive Officer”) and our Senior Vice President and Chief Financial Officer (“Principal Financial Officer”), as appropriate, to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. Our Disclosure Committee meets on a quarterly basis and more often if necessary.
Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act), as of the end of the period covered by this report. Based on that evaluation, management concluded that, as of that date, our disclosure controls and procedures were effective at the reasonable assurance level.
Attached as exhibits to this Quarterly Report on Form 10-Q are certifications of our Principal Executive Officer and Principal Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act. This Disclosure Controls and Procedures section includes information concerning management’s evaluation of disclosure controls and procedures referred to in those certifications and, as such, should be read in conjunction with the certifications of our Principal Executive Officer and Principal Financial Officer.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the quarter ended February 28, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

42

PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 15, Commitments and Contingencies, in Part I, Item 1, Financial Statements, for legal proceedings, which is incorporated into this Item 1 of Part II by this reference.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our 2013 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchase of Equity Securities
Our Board of Directors has authorized us to repurchase outstanding shares of Apollo Education Group Class A common stock, from time to time, depending on market conditions and other considerations. During the 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.
During the three months ended February 28, 2014, we repurchased 1.7 million shares of our Class A common stock at a total cost of $54.7 million, representing a weighted average purchase price of $31.93 per share. The following details changes in our treasury stock during the three months ended February 28, 2014:
(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
Treasury stock as of November 30, 2013
75,566

 
$
50.69

 
75,566

 
$
235,000

New authorizations
—

 
—

 
—

 
—

Shares repurchased
271

 
26.03

 
271

 
(7,061
)
Shares reissued
(40
)
 
50.60

 
(40
)
 
—

Treasury stock as of December 31, 2013
75,797

 
$
50.60

 
75,797

 
$
227,939

New authorizations
—

 
—

 
—

 
—

Shares repurchased
1,442

 
33.04

 
1,442

 
(47,623
)
Shares reissued
(35
)
 
50.27

 
(35
)
 
—

Treasury stock as of January 31, 2014
77,204

 
$
50.27

 
77,204

 
$
180,316

New authorizations
—

 
—

 
—

 
—

Shares repurchased
—

 
—

 
—

 
 
Shares reissued
(10
)
 
50.27

 
(10
)
 
—

Treasury stock as of February 28, 2014
77,194

 
$
50.27

 
77,194

 
$
180,316

Resales by Directors and Officers
From time to time, our directors and officers enter into written trading plans under Securities and Exchange Commission Rule 10b5-1(c) for the resale of shares of our common stock, including shares to be acquired upon the vesting of restricted stock units and performance share awards, and shares to be acquired pursuant to the exercise of stock options. These plans, which must be entered into during an open trading window and at a time when the director or officer is not in possession of material nonpublic information, provide for sales in accordance with a formula, algorithm or other instructions such that the seller cannot exercise any influence over how, when or whether to effect sales. After adopted, sales may occur in accordance with the plans regardless of whether or not the seller subsequently possesses material nonpublic information or otherwise would then be permitted to trade in our securities. Our insider trading policy permits the adoption of these types of trading plans, and we encourage our directors and officers to utilize such plans, where practical. We do not announce, via Form 8-K or otherwise, the adoption or any termination of such trading plans, if any. Sales under these plans generally must be reported within two business days on Form 4 filed with the SEC, pursuant to Section 16 of the Securities Exchange Act of 1934, as amended.
Sales of Unregistered Securities
We did not have any sales of unregistered equity securities during the three months ended February 28, 2014.

43

Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
 
Exhibit
Number
Exhibit Description
 
 
2.1
Share Sale Agreement by and among the Sellers and Restrained Persons party thereto, ACN 149 902 330 Pty Limited, Apollo Global Asia-Pacific Pty Ltd and Apollo Education Group, Inc., dated December 16, 2013(1)
 
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
101.INS
XBRL Instance Document
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
(1) Portions of this exhibit have been omitted pursuant to a request for confidential treatment from the Securities and Exchange Commission.

44

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
APOLLO EDUCATION GROUP, INC.
An Arizona Corporation
Date: April 1, 2014

 
 
 
 
By: 
/s/  Brian L. Swartz
 
 
Brian L. Swartz
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

 
 
 
 
By: 
/s/  Gregory J. Iverson
 
 
Gregory J. Iverson
Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)

45