10-K 1 apol-aug31201510k.htm 10-K 10-K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended: August 31, 2015
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)
Registrant’s telephone number, including area code: (480) 966-5394
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)
 
(Name of each exchange on which registered)
Apollo Education Group, Inc.
Class A common stock, no par value
 
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES þ    NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o    NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES þ     NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o 
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ
No shares of Apollo Education Group, Inc. Class B common stock, its voting stock, are held by non-affiliates. The holders of Apollo Education Group, Inc. Class A common stock are not entitled to any voting rights. The aggregate market value of Apollo Education Group Class A common stock held by non-affiliates as of February 28, 2015 (last business day of the registrant’s most recently completed second fiscal quarter), was approximately $2.6 billion.
As of October 15, 2015, there were 107,929,312 shares of Apollo’s Class A common stock outstanding and 475,149 shares of Apollo’s Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Information Statement for the 2015 Annual Meeting of Class B Shareholders (Part III)
 



APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 31, 2015
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Apollo Education Group, Inc. | 2015 Form 10-K | 2


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


Apollo Education Group, Inc. | 2015 Form 10-K | 3


PART I
Item 1. Business
Overview
Apollo Education Group, Inc. is one of the world’s largest private education providers, serving students since 1973. We seek to improve the lives of adult learners across the globe by making unemployed learners job-ready and employed learners more productive in their careers and communities. We offer undergraduate, graduate, certificate and nondegree educational programs and services, online and on-campus, principally to working learners in the U.S. and abroad through the following:
University of Phoenix
Founded in 1976, The University of Phoenix, Inc. is one of the largest private universities in the U.S. and has graduated more than 900,000 students. The University offers undergraduate and graduate degrees through its nine colleges in a wide range of program areas, including business, education and nursing. A significant majority of the University’s approximately 190,000 students attend classes exclusively online, and the University also offers many of its educational programs and services at ground locations primarily in key selected major metropolitan areas throughout the United States. In addition, the University offers a range of nondegree education programs for lifelong learners and students interested in developing skills and knowledge to improve their prospects of employment in their field of choice or advancement within their existing careers. In fiscal year 2015, University of Phoenix represented 84% of our total consolidated net revenue, and generated more than 100% of our total consolidated operating income.
Apollo Global
Our educational programs based outside the U.S. are primarily offered through our wholly-owned subsidiary, Apollo Global, Inc. We are increasing the extent of our international operations and we believe that our significant experience pioneering and delivering effective, flexible education to working learners can be utilized to successfully offer education in significant and underserved international markets. Apollo Global currently serves over 150,000 learners worldwide, which includes students in short-term, nondegree programs and students that purchased certain self-study and/or asynchronous programs during fiscal year 2015. Global serves its learners through the following:
BPP Holdings Limited (“BPP”) - BPP is headquartered in London, England and offers professional training and exam preparation programs in a variety of areas and qualification training, undergraduate and graduate degrees through BPP University, which principally includes BPP Law School and BPP Business School. The majority of BPP’s professional training and exam preparation revenue is generated from accounting and law program areas. The majority of BPP University’s revenue represents law qualifications and law degree programs. BPP delivers most of its programs through a mix of online and on-ground instruction with locations throughout the United Kingdom and certain European countries.
Open Colleges Australia Pty Ltd (“Open Colleges”) - Open Colleges is headquartered in Sydney, Australia and offers nationally recognized and government approved nondegree certificates, diplomas and other qualifications in a diverse range of disciplines and industries, including health and wellness, business management and services, and community services. The programs are designed for adult learners and provide flexibility through an online, asynchronous delivery model.
Universidad Latinoamericana (“ULA”) - ULA is headquartered in Mexico City, Mexico and offers graduate and undergraduate degrees, high school and executive education in a variety of program areas and disciplines, including medical, dental and communications. ULA delivers instruction through a mix of online and on-ground delivery at its campuses and learning centers, principally in Mexico City.
Milpark Education (Pty) Ltd. (“Milpark Education”) - Milpark Education is headquartered in Cape Town, South Africa and offers postsecondary education designed for adult learners, including undergraduate and graduate degrees primarily in business, and nondegree programs. Milpark Education delivers instruction principally through distance education and, in select instances, on-ground at its campuses in Cape Town and Johannesburg.
Faculdade da Educacional da Lapa (“FAEL”) - FAEL is headquartered in Curitiba, Brazil and offers undergraduate and graduate degrees, primarily in the areas of business, education and technology. FAEL delivers instruction online and at ground locations throughout Brazil.
Apollo Global Chile S.A. (“Apollo Global Chile”) - Apollo Global Chile includes Universidad de Artes, Ciencias y Comunicación (“UNIACC”) and Instituto Superior de las Artes y Comunicaciones (“IACC”). UNIACC offers undergraduate and graduate degree programs in a variety of program areas principally at its campus in Santiago, Chile. IACC primarily offers degree and nondegree programs that are delivered online.
India Education Services Private Ltd (“India Education Services”) - India Education Services, a 50:50 joint venture with HT Media Limited, an Indian media company, operates the Bridge School of Management in India. The school


Apollo Education Group, Inc. | 2015 Form 10-K | 4


offers nondegree management and business programs geared toward adult learners, delivered in a mix of online and on-ground teaching.
On October 20, 2015, we entered into an agreement to acquire all of the outstanding shares of Career Partner GmbH, a provider of education and training programs in Germany, for an initial cash payment of €96 million (equivalent to approximately $109 million as of October 20, 2015), plus a contingent obligation calculated principally based on Career Partner’s operating results for calendar year 2016. The transaction is subject to various closing conditions, the satisfaction of which is uncertain at this time. If the closing conditions are satisfied, the transaction is expected to close during the second quarter of our fiscal year 2016.
Other
TIY Academy, LLC (“The Iron Yard”) - The Iron Yard provides various nondegree bootcamp programs that are typically 12 weeks or less in duration, and provide intensive, immersive skills training designed to provide direct pathways to associated careers in information technology.
The College for Financial Planning Institutes Corporation (“College for Financial Planning”) - College for Financial Planning was founded in 1972 and is the creator of the Certified Financial Planner or CFP designation. College for Financial Planning provides online financial services education programs, including graduate degrees in three majors, certificate programs, Financial Industry Regulatory Authority securities license training, and continuing education courses.
Western International University, Inc. - Western International University offers undergraduate and graduate degrees in a variety of program areas, including business, information technology and behavioral science. Western International University’s programs are designed to provide students with a more self-managed, streamlined and affordable online higher education solution, as they work to achieve their educational goals and advance their careers.
Apollo Professional Development - Apollo Professional Development provides relevant programs for employers to better help them recruit, develop and retain a qualified workforce. Apollo Professional Development develops or acquires specific programs, to ensure a robust business-to-business product portfolio.
Net Revenue
The following presents net revenue for each of our reportable segments for the respective periods:
 
Year Ended August 31,
($ in thousands)
2015
 
2014
 
2013
University of Phoenix
$
2,148,312

 
$
2,632,949

 
$
3,304,464

Apollo Global
391,217

 
338,008

 
275,768

Other
26,748

 
25,908

 
33,619

Net revenue
$
2,566,277

 
$
2,996,865

 
$
3,613,851

The information required by Item 101(b) and 101(d) of Regulation S-K is provided under Note 18, Segment Reporting, in Part II, Item 8, Financial Statements and Supplementary Data, which is incorporated herein by reference.
General
University of Phoenix was founded in 1976 and Apollo was incorporated in Arizona in 1981. Apollo maintains its principal executive offices at 4025 S. Riverpoint Parkway, Phoenix, Arizona 85040 and also maintains senior executive offices at 227 West Monroe Street, Suite 3600, Chicago, Illinois 60606. Our telephone number is (480) 966-5394 and our website address is www.apollo.edu.
Our fiscal year is from September 1 to August 31.


Apollo Education Group, Inc. | 2015 Form 10-K | 5


Strategy
Our strategy includes the following key themes:
Student Success and Career Outcomes - We believe that maximizing the value our students garner from their education is critical to our success. We are focused on continuously improving our educational programs and services and providing the support needed to enable our students to successfully complete their programs and achieve their career goals.
Employer Solutions - We intend to continue working with employers, including Fortune 500 companies, to help solve their human capital needs and delivering education that is relevant and impactful for today’s and tomorrow’s workforce.
Targeted Growth - We intend to focus on areas of high demand for qualified employees and to tailor our programs to meet the needs of students and employers in these areas, including through the increased offering of professional development and other nondegree programs.
Diversify Globally - We intend to continue our expansion in international markets.
Operational Excellence - We intend to continue our efforts to streamline operations, improve efficiency, ensure our cost structure is in line with our enrollment levels and deliver education more effectively and affordably.
In furtherance of the foregoing, University of Phoenix is working to stabilize enrollment and eventually return to growth by transforming itself into a more focused, higher retaining and less complex institution through several initiatives, discussed in more detail at University of Phoenix below.
Industry
Domestic
The domestic postsecondary degree-granting education industry was estimated to be a more than $500 billion industry in 2012, according to a report published in 2015 by the U.S. Department of Education, with approximately 21 million students attending institutions that participate in U.S. federal financial aid programs. The Department projects that enrollment in postsecondary degree-granting institutions will grow 12% over the ten-year period ending in the fall of 2022 to approximately 23.5 million students. The degree-granting sector is highly fragmented with more than 4,700 domestic colleges and universities that participate in U.S. federal financial aid programs with no single institution having a significant market share. Approximately half of these colleges and universities are proprietary institutions.
Domestic higher education also includes a variety of nondegree programs including, but not limited to, education certificate programs, continuing education, professional development, technology bootcamps and test preparation. We believe enrollment in nondegree programs is growing at a faster rate than enrollment in degree programs.
The majority of students today have one or more non-traditional characteristics (e.g., did not enroll immediately after high school graduation, attend part-time, work full-time, are financially independent for purposes of financial aid eligibility, have dependents other than a spouse, are single parents, or have no high school diploma). These non-traditional students (whom we generally refer to as working learners) typically are looking to improve their skills and enhance their earnings potential within the context of their careers or in pursuit of new careers. As the industry has shifted to more students with non-traditional characteristics, an increasing proportion of colleges and universities are addressing the needs of working learners. This includes colleges with well-established brand names that were historically focused on traditional students. See further discussion at Competition below.
The higher education industry continues to experience rapidly developing changes due to a challenging regulatory environment, technological developments, evolving needs and objectives of students and employers, economic constraints affecting educational institutions and students, price competition, increased focus on affordability and value, uneven quality of secondary education in the U.S. and other factors that challenge many of the core principles underlying the industry. As a result of these factors, we see several forces impacting the higher education market in the near future:
Increased pressure for more affordable education programs from reputable brands;
Increased demand for certain education offerings, including nondegree programs, that lead to direct job pathways and require less time to complete;
Increased demand for effective remedial education and other services and programs for students who are underprepared for college;
Increased demand for proof of learning outcomes and education effectiveness; and
Continued contraction of the proprietary sector.


Apollo Education Group, Inc. | 2015 Form 10-K | 6


International
There were approximately 162 million students enrolled in postsecondary education worldwide in 2011, excluding the U.S., according to a report published in 2015 by the U.S. Department of Education. The international higher education market and associated opportunities often vary significantly by country due to a variety of factors including, but not limited to, the political, cultural and regulatory environments, as well as the structure of pre- and postsecondary educational systems. Additionally, higher education is rapidly evolving and private education is playing an important role in advancing the development of education, specifically higher education and lifelong learning, in many countries around the world. Within the last several years, educational groups have been investing in education institutions and consolidating the market in several countries. However, we believe there are significant and underserved key international markets that provide growth opportunities for private education as a result of some or all of the following:
Insufficient public funding to meet demand for education;
Shortcomings in the quality of higher education offerings, resulting in the rise of supplemental training to meet industry demands in the developing world;
Worldwide appreciation of the importance that knowledge plays in economic progress; and
The availability and role of technology in education, broadening the accessibility and reach of education.
University of Phoenix
University of Phoenix was founded in 1976 to provide access to effective higher education for working learners who wanted to advance their knowledge and achieve their professional goals. The University has been an innovator in higher education and has graduated more than 900,000 students. The University offers undergraduate and graduate degrees through its nine colleges in a wide range of program areas as well as various nondegree programs. A significant majority of the University’s students attend classes exclusively online and the proportion of the University’s online students has increased in recent years. Many of the University’s academic programs are also offered at ground locations primarily in key selected major metropolitan areas throughout the United States.
The University’s vision is to be recognized as the most trusted provider of career-relevant higher education for working adults. In furtherance of this, the University offers career focused programs and an instructional model designed specifically to meet the educational needs of working adults, which is further discussed below. The University is working to stabilize enrollment and eventually return to growth by transforming itself into a more focused, higher retaining and less complex institution through several initiatives, including:
Continuing the development of a college-by-college approach that more effectively addresses the specific needs of the students and employers served by each college;
Piloting enhanced admissions criteria to be implemented beginning in fiscal year 2016 to increase the proportion of newly enrolled students who are better prepared for the rigors of college level coursework, and tailoring initial course sequences to match the academic capabilities of students when they first enroll;
Eliminating certain associate degree programs which have lower retention rates and are less career relevant, and adding more career-focused pathways that offer certificates and four-year bachelor’s degrees in key growth areas of the employment market;
Concentrating on ground locations in key selected major metropolitan areas throughout the United States in order to establish a stronger regional presence that meets the needs of both on-ground and online students;
Reducing the number of student cohort start dates from approximately every week to approximately every five weeks for the substantial majority of students in order to reduce complexity and improve the classroom experience;
Modifying marketing activities by discontinuing substantially all use of third-party operated sites in order to better manage the University’s marketing message and to improve its ability to identify students more likely to persist in its educational programs and reduce cost;
Transitioning technology systems from proprietary and legacy systems, including the University’s online classroom, to commercial software and software as a service providers to reduce costs, improve operations and facilitate future systems upgrades; and
Developing increased student self service capabilities, including in admissions, financial aid, academic planning and class scheduling.
We expect that these initiatives will accelerate the current rate of decline in enrollment at University of Phoenix, perhaps significantly, during the near term, but in the longer term will improve retention and graduation rates and position the University to return to growth in the future.


Apollo Education Group, Inc. | 2015 Form 10-K | 7


In addition, the University continues to focus on improving the connection of education to careers by offering career-oriented tools and developing career relationships with employers. These employer relationships provide the University with potential working learners for particular programs, serve to increase the University’s reputation among high-profile employers, and provide the University’s students with access to additional job postings. These relationships are built by working closely with employers to identify their workforce development needs and then leveraging the Apollo network to develop solutions.
Colleges and Programs
University of Phoenix is working to emphasize the distinctiveness of its nine colleges and to more effectively address, on a college-by-college basis, the specific needs of the students and employers served by each college. The University offers undergraduate and graduate degrees in a wide range of program areas through the following colleges:
Colleges
School of Business
School of Nursing(1)
College of Social Sciences
College of Education
College of Humanities and Sciences
College of Security and Criminal Justice
School of Health Services Administration(1)
College of Information Systems and Technology
School of Advanced Studies
(1) Offered through the University’s College of Health Professions.
The School of Business, College of Social Sciences and College of Health Professions represent more than 70% of the University’s Degreed Enrollment. Refer to Students below for a definition of Degreed Enrollment.
Although degree programs represent the substantial majority of the University’s revenue, the University is focused on growing its nondegree continuing education programs, which include:
Individual, credit bearing courses in a variety of program areas, mostly from the University’s degree programs. These courses assist students in fulfilling their educational professional goals, maintaining licensures, and earning general elective credits to transfer into a degree program.
Noncredit bearing professional development programs designed to advance career-specific skills and knowledge for working professionals in a variety of program areas.
Test-preparation and certificate programs designed to help working professionals achieve industry-recognized certifications and/or successfully complete content-specific tests.
Degree seeking students also have the opportunity to benefit from the University’s nondegree programs by earning certificates that can be used in the workplace as they are working toward their ultimate degree goal with no additional tuition or time.
Instructional Model
University of Phoenix’s instructional models are designed specifically to meet the educational needs of working learners, who seek accessibility, curriculum consistency, time and cost-effectiveness, and learning that has immediate application to the workplace. The models are structured to enable students who are employed full-time or have other commitments to earn their degrees and still meet their personal and professional responsibilities. The University’s focus on working, non-traditional, non-residential students minimizes the need for capital-intensive facilities and services like dormitories, student unions, food service, health care, sports and entertainment.
Many of the University’s academic programs are offered at ground locations primarily in key selected major metropolitan areas throughout the United States, but a significant majority of the University’s students attend classes exclusively online. The University’s online classes currently employ a proprietary online learning system used by both faculty and students; however, University of Phoenix entered into an agreement in June 2015 with a leading provider of learning management systems to implement a new learning management system, which the University expects to begin phasing in for new students in calendar year 2016. The University believes this arrangement will reduce cost and complexity, make it easier to incorporate improvements and, over time, improve learning outcomes and enhance the student experience.
Components of University of Phoenix’s instructional model for both online and on-ground classes include:
Curriculum. Faculty content experts design the curriculum for the University’s programs, which enables it to offer current and relevant standardized programs to its students. The curricula are designed to integrate academic theory and professional practice and their application to the workplace.
Faculty. Substantially all University of Phoenix faculty possess either a master’s or doctoral degree. Faculty members typically have many years of experience in the field in which they instruct, and most teach on an adjunct basis. The University has increased its use of full-time faculty in recent years in the initial courses students take at the University to improve the student experience, and more than 1,800 of the University’s faculty as of August 31, 2015 are considered full-time.
Accessibility. Many of the University’s academic programs may be accessed either online or on-ground.


Apollo Education Group, Inc. | 2015 Form 10-K | 8


Active Learning Environment and Class Schedule. University of Phoenix courses involve collaborative learning activities and class schedules often vary in length and structure depending on degree level and delivery mode. The University recently reduced the number of student cohort start dates from approximately every week to approximately every five weeks for the substantial majority of students in order to reduce complexity and improve the classroom experience.
Student Education Services. The University offers students and faculty a variety of education services including learning resources for their information and research needs, tutoring, student workshops and PhoenixConnect, the University’s proprietary academic social media network. PhoenixConnect is used to support students in their academic programs and each college has an online community manager who provides oversight and guidance with respect to college-related conversations in the network.
Phoenix Career Services. Through Phoenix Career Services, the University is working to expand the traditional concept of career services to include career exploration and planning during both the pre-enrollment phase and the student’s academic journey. The University’s Phoenix Career Guidance System allows students to clarify their career aspirations prior to enrollment, and then create personalized career plans upon enrollment that will help them develop the skills and competencies relevant to their desired careers.
Students and alumni can also access the University’s Phoenix Career Services online portal, which includes career preparation tools such as resume and cover letter development services, interview preparation services and a collection of content to help prepare for a career change or advancement opportunity. Once students are ready to search for a career, Phoenix Career Services also provides personal assistance through a nationwide network of career coaches and an online job board from which students can access current career opportunities.
Marketing
University of Phoenix engages in a broad range of advertising and marketing activities to educate students about the options they have in higher learning and convey the University’s value proposition and offerings to connect education to careers. The University is focused on enhancing its brand perception and utilizing different communication channels, which are discussed below, to attract students who are more likely to persist in the University’s programs.
Internet. Many prospective students identify their education opportunities online through search engines, information and social network sites, various education portals on the Internet and school-specific sites such as the University’s phoenix.edu. The University advertises on the Internet using search engine keywords, banners, and custom advertising placements on targeted sites, such as education portals, career sites, and industry-specific websites. As of October 1, 2015, the University discontinued substantially all use of third-party operated sites in order to better manage its marketing message and to improve the University’s ability to identify students more likely to persist in its educational programs and reduce cost.
Brand. Brand advertising is intended to increase potential students’ awareness of the University’s academic quality, commitment to service, academic outcomes, academic community achievements and connection of education to careers. The University’s brand is advertised primarily through national and regional broadcast, radio, online video, social, and print media. Brand advertising also serves to expand the addressable market and establish brand consideration and familiarity with the University’s colleges and programs on both a national and a local basis.
Relationships with Employers and Community Colleges. As discussed further above, we establish relationships with employers in part to provide the University with a source of potential working learners for particular programs. We also establish relationships with community colleges to connect their graduates with the University’s degree programs and other educational programs.
Sponsorships, Corporate Social Responsibility and Other. The University builds its presence in communities through sponsorships, advertising and event marketing to support specific activities, including local and national career events, academic lecture series, workshops and symposiums on various current topics of interest and through its corporate social responsibility outreach program.
Admissions
After attracting prospective students, the University helps students understand the best fit with its programs by providing access to online tools and resources that answer key questions and concerns prior to admission. This includes assessments of a potential student’s learning style, academic abilities and readiness to pursue higher education, a tuition calculator and information on careers.
Admission to University of Phoenix undergraduate degree programs requires a high school diploma or equivalent, and proficiency in English. Admission to master and doctoral degree programs requires an undergraduate degree, and generally for doctoral programs, a master’s degree, from a regionally or nationally accredited college or university, a minimum grade point average and relevant work experience if applicable for the field of study. In addition, the University expects to implement


Apollo Education Group, Inc. | 2015 Form 10-K | 9


enhanced minimum admissions criteria to increase the proportion of newly enrolled students who are better prepared for the rigors of college level coursework.
Students
The following chart shows University of Phoenix student enrollment for the indicated periods:
 
 
Fiscal Year 2013
 
Fiscal Year 2014
 
Fiscal Year 2015
(Rounded to the nearest hundred)
 
Q1
 
Q2
 
Q3
 
Q4
 
Q1
 
Q2
 
Q3
 
Q4
 
Q1
 
Q2
 
Q3
 
Q4
Degreed Enrollment(1)
 
319,700

 
300,800

 
287,500

 
269,000

 
263,000

 
250,300

 
241,900

 
233,500

 
227,400

 
213,800

 
206,900

 
190,700

New Degreed Enrollment(2)
 
54,100

 
38,900

 
38,900

 
41,000

 
41,700

 
32,500

 
33,900

 
38,600

 
39,600

 
28,300

 
29,400

 
26,500

(1) Represents students enrolled in a degree program who attended a credit bearing course during the quarter and had not graduated as of the end of the quarter; students who previously graduated from one degree program and started a new degree program in the quarter (e.g., a graduate of an 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 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.


Apollo Education Group, Inc. | 2015 Form 10-K | 10


Apollo Global
Our schools outside of the U.S. offer programs ranging from career oriented, nondegree certificate programs to accredited graduate degrees. BPP, as discussed further below, represents our largest international operation and contributed the majority of Apollo Global’s fiscal year 2015 net revenue. Our international institutions are spread throughout the world with locations in Europe, Australia, North America, Africa, South America and Asia. Apollo Global serves learners through the following:
Business and Headquarters
 
Principal Education Offerings
 
Students and Delivery Method
BPP; London, England
 
Substantially all of BPP’s revenue is generated by undergraduate and graduate degree programs at BPP University, and its nondegree programs. BPP University includes the BPP Law School and BPP Business School, with the law school generating the substantial majority of BPP University’s revenue. The nondegree programs primarily represent professional training and exam preparation.
 
Substantially all BPP students reside in the U.K., and fund their education with personal funds, private loans, government financial aid funding and, in some instances, tuition reimbursement or other forms of assistance from their employers.

Depending on the program, students are offered flexible learning models through on-campus, online, or blended delivery methods.
Open Colleges; Sydney, Australia
 
Open Colleges offers nondegree programs that include certificates, diplomas and other qualifications in a diverse range of disciplines and industries. Open Colleges’ revenue is not concentrated in any particular offering and its largest program areas are health and wellness, business management and services, and community services.
 
Substantially all Open Colleges’ students reside in Australia and fund their education with personal funds.

Open Colleges’ programs are delivered in an online, asynchronous format that provides students with the flexibility to complete programs at their convenience.
ULA; Mexico City, Mexico
 
ULA offers graduate and undergraduate degrees, high school and executive education in medical, dental and communications programs through a mix of online and on-ground delivery at its campuses and learning centers, principally in Mexico City.
 
Substantially all ULA students reside in Mexico and fund their education with personal funds.

Depending on the program, students are offered flexible learning models through on-campus, online or blended delivery methods.
Milpark Education; Cape Town, South Africa
 
Milpark Education offers postsecondary education including undergraduate and graduate degrees, and nondegree programs. The substantial majority of Milpark Education’s programs are in business and finance.
 
Substantially all Milpark Education students reside in South Africa and fund their education with personal funds.

Depending on the program, students are offered flexible learning models through distance education and on-campus learning.
FAEL; Curitiba, Brazil
 
FAEL offers undergraduate and graduate degrees, primarily in the areas of business, education and technology.
 
Substantially all FAEL students reside in Brazil, and fund their education with personal funds and, in some instances, fund a portion of their education with government financial aid programs.

Depending on the program, students are offered flexible learning models through distance education/on-campus/online/blended delivery methods.
Apollo Global Chile; Santiago, Chile
 
Apollo Global Chile includes UNIACC and IACC, which offer degree programs and nondegree programs in a variety of program areas primarily focused on arts and technology.
 
Substantially all UNIACC and IACC students reside in Chile and fund their education with personal funds.

Students are offered flexible learning models through on-campus or online delivery methods.
India Education Services; India
 
India Education Services, a 50:50 joint venture with HT Media Limited, an Indian media company, operates the Bridge School of Management, which offers nondegree management and business programs.
 
The Bridge School of Management is focused on attracting students that reside in India and offers flexible learning models through on-campus or online delivery methods.



Apollo Education Group, Inc. | 2015 Form 10-K | 11


Competition
Domestic
The U.S. higher education industry is highly fragmented with no single private or public institution having a significant market share. We compete primarily with traditional public and private degree-granting regionally accredited colleges and universities, other proprietary degree-granting regionally accredited schools and alternatives to higher education. In addition, we face increasing competition from various emerging non-traditional, credit-bearing and noncredit-bearing education programs, offered by both proprietary and not-for-profit providers. Some of our competitors have greater financial and nonfinancial resources than we have and are able to offer programs similar to ours at a lower tuition level for a variety of reasons, including the availability of direct and indirect government subsidies, government and foundation grants, large endowments, tax-deductible contributions and other financial resources not available to proprietary institutions, or by providing fewer student services or larger class sizes. For example, a typical community college is subsidized by local or state government and, as a result, tuition rates for associate’s degree programs are much lower at community colleges than at University of Phoenix. Legislation has also been introduced in Congress that would pay for two years of community and technical colleges for first-time students who enroll on at least a half-time basis and maintain satisfactory academic progress.
The nondegree sector of higher education is also highly fragmented and has substantially lower barriers to entry compared to degree granting institutions.
The higher education industry continues to experience rapidly developing changes due to a challenging regulatory environment, technological developments, evolving needs and objectives of students and employers, economic constraints affecting educational institutions and students, price competition, increased focus on affordability and value, uneven quality of secondary education in the U.S. and other factors that challenge many of the core principles underlying the industry. Related to this, education providers are testing and adapting new education and operating models focused on reducing costs, time to complete and operational complexity. These recent innovations include competency based and adaptive learning, intensive and immersive skill focused bootcamps and career pathways, tools and services. In addition, one of our primary competitive advantages has been materially diminished as a significant and increasing number of traditional four-year and community colleges offer an increasing array of distance learning and other online education programs, including programs that are geared towards the needs of working learners. This trend has been accelerated by private companies that provide and/or manage online learning platforms for traditional four-year colleges and community colleges. As the proportion of traditional colleges and universities providing alternative learning modalities increases, we will face increased competition from these institutions, including those with highly regarded reputations, the degrees from which are perceived as more valuable in the workplace. Already, this type of competition is significant and has contributed to the substantial decline in University of Phoenix enrollment over the past five years.
Furthermore, as discussed above, University of Phoenix expects to implement enhanced minimum admissions criteria to increase the proportion of newly enrolled students who are better prepared for the rigors of higher education. Many of the students who do not meet these enhanced admissions criteria will not be eligible for admission to traditional four-year colleges and universities. Accordingly, these new admissions standards will increase the proportion of University of Phoenix’s potential students for which the University competes directly with the traditional educational institutions, further intensifying competition.
We believe that the primary factors on which we compete are the following:
Breadth of reliable and high-quality programs tied to careers;
Active and relevant curriculum development that considers the needs of employers;
Career assessment and planning, and connecting career opportunities at leading companies to our students and alumni;
Reputation of the institution and its programs;
Cost and perceived value of our offerings;
Qualified and experienced faculty;
The ability to provide flexible and/or convenient access to our programs and classes;
Differentiated student support services such as academic social networking; and
Size of alumni network.


Apollo Education Group, Inc. | 2015 Form 10-K | 12


International
In general, we operate in international markets that are highly competitive. Our international schools compete with other proprietary companies and, in certain instances, with government supported schools and institutions. Competitive factors for our international schools vary by country and, in some cases, by program offering. For example, BPP’s qualifications and law program offerings compete with other providers primarily based on reputation and student outcomes, including placement rates and exam pass rates. Competitive factors for all of our international offerings generally include the following:
Active and relevant curriculum development that considers the needs of employers; 
Breadth of reliable and high-quality programs and classes;
Qualified and experienced faculty;
Reputation of programs and classes;
The ability to provide flexible and/or convenient access to programs and classes; and
Program affordability.
Employees
As of August 31, 2015, we had approximately 11,000 non-faculty employees, the substantial majority of whom were employed full-time. We also had approximately 23,000 faculty members as of August 31, 2015, of which approximately 21,000 are University of Phoenix faculty. More than 1,800 of the University’s faculty as of August 31, 2015 are considered full-time, and the University’s faculty includes faculty members who have taught in the last twelve months and are eligible to teach future courses. We believe that our employee relations are satisfactory.
Accreditation and Jurisdictional Authorizations
Domestic
University of Phoenix is regionally accredited by The Higher Learning Commission (“HLC”), which provides the following:
Recognition and acceptance by employers, other higher education institutions and governmental entities of the degrees and credits earned by students;
Qualification to participate in student financial aid programs under Title IV of the Higher Education Act (“Title IV”)(in combination with state higher education operating and degree granting authority); and
Qualification for authority to operate in certain states.
Regional accreditation is accepted nationally as the basis for the recognition of earned credit and degrees for academic purposes, employment, professional licensure and, in some states, as a component of authorization to operate as a degree-granting institution.
In July 2013, the accreditation of University of Phoenix was reaffirmed by HLC through the 2022-2023 academic year. At the same time, HLC placed the University 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.
The University submitted a Notice Report to HLC in November 2014 providing evidence that the University has ameliorated those conditions that led to the Notice status and continues to meet relevant accreditation requirements. The HLC Board of Trustees subsequently removed the University from Notice status, effective June 25, 2015.
The University remains assigned by HLC to the Standard Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2016-2017 and will undergo its next reaffirmation process in 2022-2023.
In addition to the above, as a condition of HLC’s approval of the July 2014 changes to the voting stock trust which holds approximately 51% of our outstanding Class B common shares, the only class of Apollo voting stock, University of Phoenix hosted a visit by an HLC peer review team in December 2014 focused on ascertaining the appropriateness of the prior approval. Following the site visits, the Institutional Actions Council of HLC took final action affirming the appropriateness of the change of control approval.


Apollo Education Group, Inc. | 2015 Form 10-K | 13


Accreditation information for University of Phoenix and applicable programs is described below:
Institution/Program
 
Accrediting Body (Year Accredited)(1)
 
Status(1)
University of Phoenix
 
• The Higher Learning Commission (1978, reaffirmed in 1982, 1987, 1992, 1997, 2002 and 2013)
 
• Comprehensive evaluation visit in 2016 or 2017
• Business programs
 
• Accreditation Council for Business Schools and Programs
 
• Reaffirmation visit expected in 2017
• Bachelor of Science in Nursing
 
• Commission on Collegiate Nursing Education (2005)
• Previously accredited by National League for Nursing Accrediting Commission from 1989 to 2005
 
• Reaffirmation visit expected in 2020
• Master of Science in Nursing
 
• Commission on Collegiate Nursing Education (2005)
• Previously accredited by National League for Nursing Accrediting Commission from 1996 to 2005
 
• Reaffirmation visit expected in 2020
• Master of Counseling in Clinical Mental Health (Arizona campuses)
 
• Council for Accreditation of Counseling and Related Educational Programs (2012)
 
• Reaffirmation visit expected in 2017 or 2018
• Master of Counseling in Mental Health Counseling (Utah campus)
 
• Council for Accreditation of Counseling and Related Educational Programs (2001, reaffirmed in 2010, and in 2012)
 
• Reaffirmation visit expected in 2016
• Master of Arts in Education with options in Elementary Teacher Education and Secondary Teacher Education
 
• National Council for Accreditation of Teacher Education (“NCATE”)
 
• The University has, or is pursuing, NCATE programmatic accreditation in those states where it is mandatory for operation
(1) References to years refer to calendar year.
In addition to accreditation by independent accrediting bodies, our schools must be authorized to operate by the appropriate regulatory authorities in many of the jurisdictions in which they operate. Institutions that participate in Title IV programs must be authorized to operate by the appropriate postsecondary regulatory authority in each state where the institution has a physical presence. University of Phoenix is specifically authorized to operate in all of the domestic jurisdictions in which it operates. Some states assert authority to regulate all degree-granting institutions if their educational programs are available to their residents, whether or not the institutions maintain a physical presence within those states. University of Phoenix has obtained licensure in states which require such licensure and where students are enrolled. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - If we fail to maintain any of our state authorizations, we would lose our ability to operate in that state and to participate in Title IV programs there.
Our other domestic institutions maintain accreditations and/or the requisite authorizations in the jurisdictions in which they operate, as applicable. This includes Western International University, which has been accredited by HLC since 1984, and College for Financial Planning, which has been accredited by HLC since 1994.


Apollo Education Group, Inc. | 2015 Form 10-K | 14


International
Our international businesses must be authorized by the relevant regulatory authorities under applicable local law, which in some cases requires accreditation, as described below:
BPP - BPP University Limited has been awarded degree awarding powers by the U.K. Privy Council, and certain of its awards are accredited by professional bodies toward professional qualifications. This designation is expected to require renewal during the 2018-2019 school year. Additionally, BPP Professional Education is an accredited training provider for a number of professional bodies offering training toward those bodies’ professional qualifications. BPP also has additional accreditations by country and/or program as applicable.
Open Colleges - Open Colleges operates three registered training organizations as approved by the Australian Skills Quality Authority. All three registrations were recently renewed for the maximum allowable period of five years with the first expiring and requiring renewal in our fiscal year 2018.
ULA - ULA is recognized as a University of Excellence, which is the highest level of institutional accreditation from the Mexican Federation of Private Institutions of Higher Education (Federación de Instituciones Mexicanas Particulares de Educación Superior). ULA operates under additional regional or programmatic regulators in Mexico, as applicable.
Milpark Education - Milpark Education is registered with the South African Department of Higher Education and Training as a Private Higher Education Institution.
FAEL - FAEL is institutionally accredited by the Brazilian Ministry of Education to provide on-site and distance learning programs and also holds the applicable authorizations for the programs it provides.
Apollo Global Chile - UNIACC and IACC are regulated by the Chilean Ministry of Education (Ministerio de Educación de Chile) and have programmatic accreditations, as applicable.
Bridge School of Management - The Bridge School of Management offers non-accredited programs.
Financial Aid Programs
Domestic
The principal source of federal student financial aid in the U.S. is Title IV of the Higher Education Act and regulations promulgated thereunder. We refer to the financial aid programs under this Act as “Title IV” programs. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. The current reauthorization of the Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in Higher Education Act reauthorization hearings, but the timing and terms of any eventual reauthorization cannot be predicted.
Financial aid under Title IV programs is awarded annually to eligible students. Some Title IV programs award financial aid on the basis of financial need, generally defined as the difference between the cost of attending an educational institution and the amount the student and/or the student’s family, as the case may be, can reasonably be expected to contribute to that cost. The amount of financial aid awarded to a student each academic year is based on many factors, including, but not limited to, program of study, grade level, Title IV annual loan limits, and financial need. We have substantially no control over the amount of Title IV student loans or grants sought by or awarded to our students. All recipients of Title IV program funds must maintain satisfactory academic progress within the guidelines published by the U.S. Department of Education to remain eligible. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - Action by the U.S. Congress to revise the laws governing federal student financial aid programs or reduce funding for these programs, including changes applicable only to proprietary educational institutions, could reduce our enrollment and increase our costs of operation.
In addition to Title IV programs, qualifying U.S. active military and veterans and their family members are eligible for federal student aid from various Departments of Defense and Veterans Affairs programs. We refer to the financial aid programs administered by these Departments as “military benefit” programs. As described below, in October 2015, University of Phoenix was placed on probationary status for purposes of participating in the Department of Defense Tuition Assistance Program for active duty military personnel, and, therefore, newly enrolled active duty military students currently are not eligible to participate in this program.


Apollo Education Group, Inc. | 2015 Form 10-K | 15


During fiscal year 2015, 80% of University of Phoenix’s cash basis revenue for eligible tuition and fees was derived from the receipt of Title IV program funds, as calculated under the 90/10 Rule described in Regulatory Environment below. These Title IV program funds are principally comprised of federal student loans and Pell Grants:
Student loans currently are the most significant component of Title IV program funds and are administered through the Federal Direct Loan Program. Annual and aggregate loan limits apply based on the student’s grade level and other factors. Currently, the maximum annual loan amounts range from $3,500 to $12,500 for undergraduate students and $20,500 for graduate students. There are two types of federal student loans: subsidized loans, which are based on the statutory calculation of student need, and unsubsidized loans, which are not based on student need. Neither type of student loan is based on creditworthiness. Students are not responsible for interest on subsidized loans while enrolled in school. Graduate and professional students are not eligible for subsidized loans. Students are responsible for the interest on unsubsidized loans while enrolled in school, but have the option to defer payment while enrolled. Repayment on federal student loans begins six months after the date the student ceases to be enrolled. The loans are repayable over the course of 10 years and, in some cases, longer. During fiscal year 2015, student loans (both subsidized and unsubsidized) represented approximately 76% of the gross Title IV program funds received by University of Phoenix.
Federal Pell Grants are awarded based on financial need and only to eligible undergraduate students who have not earned a bachelor’s or professional degree. Unlike loans, Pell Grants do not have to be repaid. The maximum annual Pell Grant award is $5,775 for the 2015-2016 award year. During fiscal year 2015, Pell Grants represented approximately 24% of the gross Title IV program funds received by University of Phoenix. Because the federal Pell Grant program is one of the largest non-defense discretionary spending programs in the federal budget, it is a target for reduction as Congress addresses the competing demands for funding and the chronic and significant U.S. budget deficit. Furthermore, a recent study by the U.S. Federal Reserve System demonstrated a direct relationship between student financial aid increases, including Pell Grant increases, and tuition levels, which could impact future Pell Grant amounts. A reduction in the maximum annual Pell Grant amount or changes in eligibility could negatively impact enrollment and could result in increased student borrowing, which would make it more difficult for us to comply with other important regulatory requirements such as maintaining student loan cohort default rates below specified levels.
The remaining funding for tuition and other fees paid by our students primarily consists of military benefit programs, tuition assistance from employers and personal funds.
On October 7, 2015, University of Phoenix was placed on probationary status by the U.S. Department of Defense (“DoD”) in respect of the University’s participation in the DoD Tuition Assistance Program for active duty military personnel, while the DoD is considering whether to terminate the Voluntary Education Partnership Memorandum of Understanding with the University (“DoD MOU”). The DoD MOU is the basis on which the University’s active duty military students participate in the DoD Tuition Assistance Program. While on probationary status, currently eligible enrolled students will remain eligible to participate in the Tuition Assistance Program, but newly enrolled or transfer students of the University will not be eligible. While on probationary status, the University will not be permitted to sponsor activities at military installations, including job training and career events. The DoD cited various bases for its actions, including prior compliance issues relating to the use of “challenge coins” without proper trademark authorization, and sponsorship of military morale, welfare and recreation events without the specific written authorization of the officer designated in the DoD MOU, as well as the pendency of investigations by the Federal Trade Commission and the California Attorney General’s office, which are evidenced by the issuance of formal investigatory demands for information from these authorities. The DoD has informed the University that the specified prior compliance issues have been appropriately addressed. The FTC and California Attorney General investigatory demands for information do not include any allegations of violations and no charges have been made. The University has timely responded to the DoD with relevant information for its consideration. If the DoD MOU is terminated, currently enrolled active military students will no longer be eligible to participate in the DoD’s Tuition Assistance Program. In fiscal year 2015, funding under the DoD Tuition Assistance Program represented less than 1% of University of Phoenix’s net revenue. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate.
International
Although students enrolled at certain of our international institutions receive government financial aid funding, such funding is not a material component of our net revenue from international institutions.


Apollo Education Group, Inc. | 2015 Form 10-K | 16


Regulatory Environment
Domestic
Our domestic postsecondary institutions are subject to extensive federal and state regulations. The Higher Education Act, as reauthorized, and the related U.S. Department of Education regulations govern all higher education institutions participating in Title IV programs, and provide for a regulatory triad by mandating specific regulatory responsibilities for each of the following:
The accrediting agencies recognized by the U.S. Department of Education;
The federal government through the U.S. Department of Education; and
State higher education regulatory bodies.
To be eligible to participate in Title IV programs, a postsecondary institution must be accredited by an accrediting body recognized by the U.S. Department of Education, must comply with the Higher Education Act, as reauthorized, and all applicable regulations thereunder, and must be authorized to operate by the appropriate postsecondary regulatory authority in each state in which the institution operates, as applicable.
In addition to governance by the regulatory triad, there has been substantial and continuing increased focus in recent years by members of the U.S. Congress and federal agencies, including the Department of Education, the Consumer Financial Protection Bureau and the Federal Trade Commission, on the role that proprietary educational institutions play in higher education. 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. In addition, in October 2014, the Department of Education formed an inter-agency task force involving multiple federal agencies and departments including the Federal Trade Commission, the U.S. Departments of Justice, Treasury and Veterans Affairs, the Consumer Financial Protection Bureau, the Securities and Exchange Commission, and numerous state attorneys general, to coordinate activities and share information to protect students from unfair, deceptive and abusive policies and practices. We expect that this challenging regulatory environment will continue for the foreseeable future.
We have summarized below recent material activity in the regulatory environment affecting our business and the most significant regulatory requirements applicable to our domestic postsecondary operations. Changes in or new interpretations of applicable laws, rules, or regulations could have a material adverse effect on our eligibility to participate in Title IV programs, accreditation, authorization to operate in various states, permissible activities, and operating costs. The failure to maintain or renew any required regulatory approvals, accreditation, or state authorizations could have a material adverse effect on us. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate.
Financial Aid Funding
The most recent reauthorization of the federal Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in Higher Education Act reauthorization hearings, but the timing and terms of any eventual reauthorization cannot be predicted.
Title IV program funding is a potential target for reduction as Congress seeks to reduce the U.S. budget deficit. Because the majority of our revenue is derived from Title IV programs, any action by Congress that reduces Title IV program funding, or which alters the eligibility of our institutions or students to participate in Title IV programs could have a material adverse effect on our enrollment and financial condition. 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 Title IV program funding, military benefit programs may be reduced as military branches address decreased funding. Reductions and/or changes in military benefit programs could result in increased student borrowing, decreased enrollment and adverse impacts on our 90/10 Rule percentage, as discussed below.
Gainful Employment
Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide information to prospective students about each eligible program, including the relevant recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers.
In October 2014, the U.S. Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether an academic program prepares students for gainful employment in a recognized occupation. Under the final regulations, which apply on a program-by-program basis, students enrolled in a program will be eligible for Title IV student financial aid only if that program satisfies at least one of two tests relating to student debt service-to-earnings ratios. The two tests specify minimum debt service-to-earnings ratios calculated on the basis of the earnings of program graduates;


Apollo Education Group, Inc. | 2015 Form 10-K | 17


one test measures student loan debt service as a percentage of total earnings, and the other test measures student loan debt service as a percentage of discretionary earnings. If a program fails to meet at least one of the minimum ratios for one year, the institution will be required to provide a warning notice to prospective and enrolled students advising that the program may lose Title IV eligibility based on the final student debt service-to-earnings ratios for the next award year. Programs that fail to meet at least one of the minimum ratios for two years will immediately cease to be Title IV eligible for a period not less than three years.
Under the final regulations, schools are also required to certify to the Department the following for each Title IV eligible program:
The program is included in the schools’ accreditation;
The program is programmatically accredited, if required by a federal government entity, or by a government entity in any state in which the school is located or is required to obtain state approval;
The program satisfies any applicable state licensing and certification requirements for the occupations for which the program prepares students to enter; and
The program is not substantially similar to a program offered by the school that became ineligible due to the student debt service-to-earnings ratios.
The Department has indicated that the official 2014 gainful employment debt service-to-earnings ratios will be issued sometime during calendar year 2016. The expected timing of the issuance of the 2015 ratios has not yet been announced. We believe it is likely that some of University of Phoenix’s programs will be impacted by the regulations. However, the University ceased enrolling new students in most of the programs it believes may be impacted in connection with its initiatives to transform itself into a more focused, higher retaining and less complex institution. Students currently enrolled in these programs represent approximately 10% of the University’s Degreed Enrollment and these programs will continue for such students, who will be taught-out in due course.
Changes in student borrowing needs and practices, student loan interest rates, labor markets and other factors outside of our control could adversely impact compliance with these regulations for some of our programs in the future. The Department has not yet announced the protocol for calculating and disseminating the debt service-to-earnings ratios. Because the ratios will be issued by the Department after the measuring period, we may not know of a program’s failure to meet the tests until after the measuring period, and students enrolled in such a program could lose their access to federal financial aid before completing the program.
Eligibility and Certification Procedures
The Higher Education Act, as reauthorized, specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification.
University of Phoenix’s Title IV Program Participation Agreement expired on December 31, 2012. The University has submitted necessary documentation for recertification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We believe that the University’s application will be renewed in due course. However, we cannot predict whether or to what extent the continued challenging political and regulatory climate and other recent developments relating to our business may have on the timing or outcome of the recertification process. Refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate.


Apollo Education Group, Inc. | 2015 Form 10-K | 18


90/10 Rule
University of Phoenix, and all other proprietary institutions of higher education, are subject to the so-called “90/10 Rule” under the Higher Education Act, as reauthorized. Under this rule, a proprietary institution will be ineligible to participate in Title IV programs for at least two fiscal years if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue, as defined in the rule, from Title IV programs. If an institution is determined to be ineligible, any disbursements of Title IV program funds made after the end of the second fiscal year in the measuring period must be repaid to the U.S. Department of Education. An institution that derives more than 90% of its cash basis revenue from Title IV programs for any single fiscal year will be automatically placed on provisional certification for two fiscal years and will be subject to possible additional sanctions determined to be appropriate under the circumstances by the Department. While the Department has broad discretion to impose additional sanctions on such an institution, there is only limited precedent available to predict what those sanctions might be, particularly in the current regulatory environment. For example, the Department could impose conditions in the provisional certification such as:
Restrictions on the total amount of Title IV program funds that may be disbursed to students;
Restrictions on programmatic and geographic expansion;
Requirements to obtain and post letters of credit;
Additional reporting requirements such as interim financial reporting; or
Any other conditions deemed appropriate by the Department.
The 90/10 Rule percentages for University of Phoenix were as follows for the indicated periods:
 
Year Ended August 31,
 
2015
 
2014
 
2013
University of Phoenix
80%
 
81%
 
83%
The decrease in the University of Phoenix 90/10 Rule percentage is attributable to changes in student mix and the associated available sources of tuition funding. As the University’s enrollment has declined in recent years, the proportion of its student body that uses a lower percentage of Title IV program funds for eligible tuition and fees, such as students that receive tuition assistance from employers or that participate in military benefit programs, has increased. The University has also implemented various other measures in recent years intended to reduce the percentage of its cash basis revenue attributable to Title IV program funds, including encouraging students to carefully evaluate the amount of necessary Title IV program borrowing and increased focus on nondegree continuing education programs. The University has no direct control over the amount of Title IV student loans and grants sought by or awarded to eligible students.
Based on recent trends, we do not expect the 90/10 Rule percentage for University of Phoenix to exceed 90% for fiscal year 2016. However, the 90/10 Rule percentage for the University remains high and could exceed 90% in the future depending on the impact of future changes in the University’s enrollment mix, and regulatory and other factors outside our control, including any reduction in, or change in eligibility to participate in, military benefit programs or changes in the treatment of such funding for purposes of the 90/10 Rule calculation. In October 2015, University of Phoenix was placed on probationary status in respect of its participation in the U.S. Department of Defense Tuition Assistance Program for active duty military personnel. During this probation, newly enrolled active duty military personnel will not be eligible to participate in this program, the funding under which represented less than 1% of the University’s net revenue in fiscal year 2015.
Various legislative proposals have been introduced in Congress that would heighten the requirements of the 90/10 Rule, including proposals that would reduce the 90% maximum under the rule to the pre-1998 level of 85%, cause tuition derived from military benefit programs to be included in the 90% or 85% portion under the rule instead of the 10% portion, as is the case today, and impose Title IV program ineligibility after one year of noncompliance rather than two. If these or similar proposals are adopted, University of Phoenix would be required to increase efforts and resources dedicated to reducing the percentage of cash basis revenue attributable to Title IV program funds.
Any necessary efforts to reduce the 90/10 Rule percentage for University of Phoenix, especially if the percentage exceeds 90% for a fiscal year, may involve taking measures which reduce our revenue, increase our operating expenses, or both, in each case perhaps significantly. In addition, we may be required to make structural changes to our business in the future in order to remain in compliance, which changes may materially alter the manner in which we conduct our business and materially and adversely impact our business and financial condition. Furthermore, these required changes could make it more difficult to comply with other important regulatory requirements, such as the student loan cohort default rate regulations, which are discussed below.


Apollo Education Group, Inc. | 2015 Form 10-K | 19


Standards of Financial Responsibility
Pursuant to the Title IV program regulations, each eligible higher education institution must satisfy a measure of financial responsibility that is based on a weighted average of the following three annual ratios which assess the financial condition of the institution:
Primary Reserve Ratio - measure of an institution’s financial viability and liquidity;
Equity Ratio - measure of an institution’s capital resources and its ability to borrow; and
Net Income Ratio - measure of an institution’s profitability.
These ratios provide three individual scores which are converted into a single composite score. The maximum composite score is 3.0. If the institution achieves a composite score of at least 1.5, it is considered financially responsible. A composite score from 1.0 to 1.4 is also considered financially responsible, and the institution may continue to participate as a financially responsible institution for up to three years, subject to additional monitoring and other consequences. If an institution does not achieve a composite score of at least 1.0, it can be transferred from the “advance” system of payment of Title IV program funds to cash monitoring status or to the “reimbursement” system of payment, under which the institution must disburse its own funds to students and document the students’ eligibility for Title IV program funds before receiving such funds from the U.S. Department of Education. For additional information, refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - A failure to demonstrate “financial responsibility” or “administrative capability” may result in the loss of eligibility to participate in Title IV programs and limit our access to liquidity, which would materially and adversely affect our business, and to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity, Capital Resources, and Financial Position.
The composite scores for Apollo Education Group and University of Phoenix were as follows for the indicated periods:
 
Fiscal Year
 
2015
 
2014
 
2013
Apollo Education Group
2.6
 
2.5
 
2.6
University of Phoenix
2.9
 
2.3
 
2.5
Student Loan Cohort Default Rates
To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain specified levels. Each cohort is the group of students who first enter into student loan repayment during a federal fiscal year (ending September 30) for a three-year measuring period. The cohort default rates are published by the U.S. Department of Education approximately 12 months after the end of the applicable measuring period. Thus, in September 2015, the Department published the cohort default rates for the 2012 cohort.
An educational institution loses eligibility to participate in Title IV programs if its cohort default rate equals or exceeds 40% for any given year or 30% for three consecutive years. If an institution’s cohort default rate equals or exceeds 30% for any given year, it must establish a default prevention task force and develop a default prevention plan with measurable objectives for improving the cohort default rate. We believe that our current repayment management efforts would meet these requirements.
Based on information published by the U.S. Department of Education, the cohort default rates for University of Phoenix and for all proprietary postsecondary institutions for the applicable federal fiscal years were as follows:
 
Cohort Default Rates for
Cohort Years Ended September 30,
 
2012
 
2011
 
2010
University of Phoenix
13.5%
 
19.0%
 
26.0%
All proprietary postsecondary institutions
15.8%
 
19.1%
 
21.8%
We believe that our investment in student protection initiatives and repayment management services have favorably impacted our rates. As part of our repayment management initiatives, we engage third-party service providers to assist our students who are at risk of default. These service providers contact students and offer assistance, which includes providing students with specific loan repayment information such as repayment options and loan servicer contact information, and they attempt to transfer these students to the relevant loan servicer to resolve their delinquency. In addition, we are focused on enrolling students who are a better fit for our programs, in part because the rate of default is higher among students who do not complete their degree program compared to students who graduate. For additional information, refer to Part I, Item 1A, Risk Factors - Risks Related to the Highly Regulated Industry in Which We Operate - An increase in student loan default rates could result in the loss of eligibility to participate in Title IV programs, which would materially and adversely affect our business.


Apollo Education Group, Inc. | 2015 Form 10-K | 20


Administrative Capability
The Higher Education Act, as reauthorized, directs the U.S. Department of Education to assess the administrative capability of each institution to participate in Title IV programs. The failure of an institution to satisfy any of the criteria used to assess administrative capability may cause the Department to determine that the institution lacks administrative capability and, therefore, subject the institution to additional scrutiny or deny eligibility for Title IV programs.
State Authorization
Institutions that participate in Title IV programs must be authorized to operate by the appropriate postsecondary regulatory authority in each state where the institution has a physical presence. University of Phoenix is specifically authorized to operate in all of the domestic jurisdictions in which it operates. Some states assert authority to regulate all degree-granting institutions if their educational programs are available to their residents, whether or not the institutions maintain a physical presence within those states. University of Phoenix has obtained licensure in states which require such licensure and where students are enrolled.
U.S. Department of Education Rulemaking Initiative
In recent years, the U.S. Department of Education has engaged in rulemaking discussions intended to develop new regulations focused on various topics, including cash management and state authorization. The negotiated rulemaking process typically begins with the Department issuing proposed regulations open for public comment after which the Department responds and publishes final regulations. We cannot predict the content of any new regulations that may emerge from the negotiated rulemaking process or the potential impact of such regulations on our domestic institutions.
On September 12, 2015, the Department released its consumer data tool “The New Scorecard”, available at
https://collegescorecard.ed.gov/. This data set was released in lieu of the previously contemplated college ranking system. The impact of this new consumer data tool cannot be predicted. However, if information in the data set is used to compare schools with materially different demographics and missions without appropriate qualifications, it could cast a negative light on University of Phoenix and the proprietary sector generally, and our reputation and enrollment could be adversely affected.
U.S. Department of Education Program Reviews
The U.S. Department of Education periodically reviews institutions participating in Title IV programs for compliance with applicable standards and regulations. In August 2014, the Department commenced an ordinary course program review of University of Phoenix’s administration of Title IV programs covering federal financial aid years 2012-2013 and 2013-2014, as well as compliance with the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act, the Drug-Free Schools and Communities Act and related regulations. The University has received a Final Program Review Determination Letter with regard to this program review. All administrative matters are deemed by the Department to be resolved and/or closed, with the exception of findings regarding compliance with the Clery Act, which have been referred to the Department’s Clery Team and to the Administrative Action and Appeals Division which is standard protocol in such matters.
Office of the Inspector General of the U.S. Department of Education (“OIG”) Subpoena
In March 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 are cooperating with the subpoena but cannot at this time predict the eventual scope, duration or outcome of this matter.
Federal Trade Commission Investigation
In July 2015, we received a Civil Investigative Demand from the U.S. Federal Trade Commission (the “FTC”) relating to an investigation to determine if certain unnamed persons, partnerships, corporations, or others have engaged or are engaging in deceptive or unfair acts or practices in or affecting commerce in the advertising, marketing, or sale of secondary or postsecondary educational products or services or educational accreditation products or services. The Demand requires us to produce documents and information regarding a broad spectrum of the business and practices of University of Phoenix, including in respect of marketing, recruiting, enrollment, financial aid, tuition and fees, academic programs, academic advising, student retention, billing and debt collection, complaints, accreditation, training, military recruitment, and other compliance matters, for the time period of January 1, 2011 to the present.
In addition, in August 2015, we received a notice from the FTC that it had commenced an inquiry into the University of Phoenix’s practices and procedures for safeguarding student and staff personal information, with a request for relevant information from the University.


Apollo Education Group, Inc. | 2015 Form 10-K | 21


We are cooperating with these inquiries, but we cannot at this time predict their eventual scope, duration or outcome.
Attorney General Investigations
In August 2015, we received an Investigative Subpoena from the Office of the Attorney General of the State of California. The Subpoena requires us to produce documents and information regarding the business and practices of University of Phoenix relating to members and former members of the U.S. military and California National Guard, including marketing, recruiting, billing, financial aid, accommodation and other services for military personnel, compliance with federal Executive Order 13607 (Establishing Principles of Excellence for Educational Institutions Serving Service Members, Veterans, Spouses, and Other Family Members), and use of U.S. military logos and emblems in marketing, for the time period of July 1, 2010 to the present. We are cooperating with the Subpoena. We cannot predict the eventual scope, duration or outcome of this matter at this time.
We are also subject to other Attorney General investigations. Refer to Note 16, Commitments and Contingencies, in Part II, Item 8, Financial Statements and Supplementary Data.
Restricted Cash
The U.S. Department of Education places restrictions on Title IV program funds held for students for unbilled educational services. As a trustee of these Title IV program funds, we are required to maintain and restrict these funds pursuant to the terms of our program participation agreement with the Department. These funds are included in restricted cash and cash equivalents in our Consolidated Balance Sheets in Part II, Item 8, Financial Statements and Supplementary Data.
Branching and Classroom Locations
The Title IV regulations contain specific requirements governing the establishment of new locations at which the eligible institution offers, or could offer, 50% or more of an educational program. The U.S. Department of Education requires that the institution notify the Department of each location offering 50% or more of an educational program prior to disbursing Title IV program funds to students at that location. University of Phoenix has procedures in place to ensure timely notification and acquisition of all necessary location approvals prior to disbursing Title IV program funds to students attending any new location. In addition, The Higher Learning Commission and state regulators have requirements for the establishment of new locations.
There are also certain regulatory requirements associated with closing locations, including the requirement to teach-out existing students. During fiscal year 2013, University of Phoenix initiated a plan to reduce the number of its ground locations throughout the U.S., and has continued to reduce its ground locations through fiscal year 2015. Pursuant to these plans, the University has ceased accepting new enrollment at these locations, and has closed or is in the process of closing approximately 150 ground locations. Refer to Note 2, Restructuring and Impairment Charges, in Part II, Item 8, Financial Statements and Supplementary Data.
Change of Ownership or Control
Approximately 51% of our outstanding Class B voting shares, our only class of voting stock, is held by the Apollo Class B Voting Stock Trust No. 1 (the “Class B Trust”), an irrevocable trust of which the current trustees are Peter V. Sperling, Chairman of our Board of Directors, Ms. Terri Bishop, the Vice Chair of our Board of Directors, and Ms. Darby Shupp, a member of our Board of Directors.
Any change of ownership or control of Apollo Education Group, depending on the type of change, may have significant regulatory consequences for University of Phoenix. Such a change of ownership or control could require recertification by the U.S. Department of Education, the reevaluation of accreditation by The Higher Learning Commission and/or reauthorization by state licensing agencies. If we experience a change of ownership or control, then University of Phoenix and certain of our other subsidiaries may cease to be eligible to participate in Title IV programs until recertified by the Department. There is no assurance that such recertification would be obtained on a timely basis. Under some circumstances, the Department may continue an institution’s participation in Title IV programs on a provisional basis pending completion of the change in ownership approval process.
In addition, University of Phoenix is required to report any material change in stock ownership to its principal institutional accrediting body, The Higher Learning Commission, and would be required to obtain approval prior to undergoing any transaction that affects, or may affect, its corporate control or governance. In the event of any such change, The Higher Learning Commission may undertake an evaluation of the effect of the change on the continuing operations of University of Phoenix for purposes of determining if continued accreditation is appropriate, which evaluation may include a comprehensive review.


Apollo Education Group, Inc. | 2015 Form 10-K | 22


In addition, some states in which University of Phoenix is licensed require approval (in some cases, advance approval) of changes in ownership or control in order to remain authorized to operate in those states, and participation in grant programs in some states may be interrupted or otherwise affected by a change in ownership or control.
In July 2014, the Class B Trust was amended to, among other things, make it irrevocable and appoint the three current trustees. These amendments were previously approved by The Higher Learning Commission as an approved change of control, and found by the U.S. Department of Education to be excluded from the Department’s change of control approval requirements. Following the site visits to ascertain the appropriateness of the prior approval, the Institutional Actions Council of HLC took final action affirming the appropriateness of the change of control approval for University of Phoenix.
Refer to Part I, Item 1A, Risk Factors - Risks Related to the Control Over Our Voting Stock - If regulators do not approve or delay their approval of transactions involving a change of control of our company, our 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.
U.S. Department of Education Reporting and Disclosure Requirements
Because of the rising cost of postsecondary education, the U.S. Department of Education annually publishes national lists disclosing the top five percent in each of nine institutional categories with the highest college costs and largest percentage cost increases. Institutions published on such lists may receive negative media attention that may cause some prospective students to choose educational alternatives. University of Phoenix has not been named on these lists.
International
Governmental regulations in foreign countries significantly affect our international operations. New or revised interpretations of regulatory requirements could have a material adverse effect on us. Changes in existing or new interpretations of applicable laws, rules, or regulations in the foreign jurisdictions in which we operate could have a material adverse effect on our accreditation, authorization to operate, permissible activities, and costs of doing business outside of the U.S. The failure to maintain or renew any required regulatory approvals could have a material adverse effect on our international operations.
Available Information
We file annual, quarterly and current reports with the Securities and Exchange Commission. You may read and copy any document we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for information on the Public Reference Room. The Securities and Exchange Commission maintains a website that contains annual, quarterly and current reports that issuers file electronically with the Securities and Exchange Commission. The Securities and Exchange Commission’s website is www.sec.gov.
Our website address is www.apollo.edu. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Information Statements on Schedule 14C, Forms 3, 4, and 5 filed on behalf of directors and executive officers, and all amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission.
Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below and all other information contained in this Annual Report on Form 10-K. In order to help assess the major risks in our business, we have identified many, but not all, of these risks, categorized as Risks Related to the Highly Regulated Industry in Which We Operate, Risks Related to our Business and Risks Related to the Control Over our Voting Stock. Due to the scope of our operations, a wide range of factors could materially affect future developments and performance.
If any of the following risks are realized, our business, financial condition, cash flows or results of operations could be materially and adversely affected, and as a result, the trading price of our Class A common stock could be materially and adversely impacted. These risk factors should be read in conjunction with other information set forth in this Annual Report, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, including the related Notes to Consolidated Financial Statements.


Apollo Education Group, Inc. | 2015 Form 10-K | 23


Risks Related to the Highly Regulated Industry in Which We Operate
If we fail to comply with the extensive regulatory requirements for our business, we could face significant monetary liabilities, fines and penalties, including loss of access to U.S. federal student loans and grants for our students.
We are subject to extensive U.S. federal and state regulation as a provider of postsecondary education. The principal federal regulatory regime is established under the Higher Education Act of 1965, as it is amended and reauthorized from time to time, and the regulations promulgated under the Act by the U.S. Department of Education. Among other matters, these regulations govern the participation by University of Phoenix in federal student financial aid programs under Title IV of the Higher Education Act (“Title IV”), which is the principal source of funding for students at the University. A significant majority of our fiscal year 2015 total consolidated net revenue was derived from receipt of Title IV program funds disbursed to our students.
The Higher Education Act, as reauthorized, mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the federal government through the U.S. Department of Education; (2) independent accrediting agencies recognized by the Department of Education; and (3) state higher education regulatory bodies.
The applicable regulatory requirements cover virtually all phases of our U.S. operations, including educational program offerings, branching and classroom locations, instructional and administrative staff, administrative procedures, marketing and recruiting, financial operations, payment of refunds to students who withdraw, maintenance of restricted cash, acquisitions or openings of new schools, commencement of new or cessation of existing educational programs and changes in our corporate structure and ownership.
The applicable regulations, standards and policies of the various regulatory agencies frequently change and often are subject to interpretative uncertainty, particularly where they are crafted for traditional, academic term-based schools rather than our non-term academic delivery model. Changes in, or new interpretations of, applicable laws, regulations, standards or policies could have a material adverse effect on our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs, costs of doing business and our ability to implement beneficial changes in our academic or business model. We cannot predict how the requirements administered by these agencies will be applied or interpreted in the future, or whether our schools will be able to comply with any future changes in these requirements.
If we are found to have violated any applicable regulations, standards or policies, we may be subject to the following sanctions imposed by any one or more of the relevant regulatory agencies:
Monetary fines or penalties;
Limitation or termination of our operations or ability to grant degrees, diplomas and certificates;
Restriction or revocation of our accreditation, licensure or other operating authority;
Limitation, suspension or termination of our eligibility to participate in Title IV programs, military benefit programs or state financial aid programs;
Imposition by the U.S. Department of Education of a delay in the disbursement of Title IV program funds or transfer from the Department’s advance system of receiving Title IV program funds to its reimbursement system, under which a school must disburse its own funds to students and document the students’ eligibility for Title IV program funds before receiving such funds from the Department;
Repayment of funds received under Title IV programs or state financial aid programs;
Requirement to post a letter of credit with the U.S. Department of Education;
Requirement of heightened cash monitoring by the U.S. Department of Education;
Other civil or criminal penalties; and/or
Other forms of censure.
In addition, in some circumstances of noncompliance or alleged noncompliance, we may be subject to qui tam lawsuits under the Federal False Claims Act or various, similar state false claim statutes. In these actions, private plaintiffs seek to enforce remedies under the Act on behalf of the federal government and, if successful, are entitled to recover their costs and to receive a portion of any amounts recovered by the federal government in the lawsuit. These lawsuits can be prosecuted by a private plaintiff, even if the Department does not agree with plaintiff’s theory of liability. In 2009, we settled a qui tam lawsuit relating to alleged payment of incentive compensation to our enrollment counselors for a total payment of $80.5 million, and we currently are subject to a qui tam lawsuit alleging payment of improper incentive compensation in subsequent periods. For more information about the pending qui tam case, refer to Note 16, Commitments and Contingencies, in Part II, Item 8, Financial Statements and Supplementary Data.
The proprietary higher education industry is experiencing broad-based, intensifying scrutiny in the form of coordinated investigations and enforcement actions. In October 2014, the Department of Education formed an inter-agency task force involving multiple federal agencies and departments including the Federal Trade Commission, the U.S. Departments of Justice,


Apollo Education Group, Inc. | 2015 Form 10-K | 24


Treasury and Veterans Affairs, the Consumer Financial Protection Bureau, the Securities and Exchange Commission, and numerous state attorneys general, to coordinate activities and share information to protect students from unfair, deceptive and abusive policies and practices. We believe that the recent investigations of University of Phoenix commenced by the Federal Trade Commission and the California Attorney General are related to this coordinated scrutiny of the industry and that this coordinated scrutiny could lead to the initiation of additional inquiries or claims against us either by participants in the inter-agency task force or other regulatory authorities, any of which could adversely affect our business and reputation. In addition, in October 2015, University of Phoenix was placed on probationary status in respect of its participation in the U.S. Department of Defense Tuition Assistance Program for active duty military personnel, in part due to the pendency of the Federal Trade Commission and California Attorney General investigations. Refer to Part 1, Item 1 - Business - Financial Aid Programs above for more information about this action. We expect that this challenging regulatory environment will continue for the foreseeable future, and may intensify.
Any of the penalties, funding delays, injunctions, restrictions, lawsuits or other forms of censure described above, and the associated reputational impact from ongoing investigations, could have a material adverse effect on our business and financial condition. Recently, the Department of Education imposed a 21-day Title IV funding delay on a major proprietary institution due to a dispute about the pace at which the institution was producing information sought by the Department, which delay contributed to the institution closing and ultimately seeking bankruptcy protection. If we lose our Title IV program eligibility, or our participation is materially conditioned or subject to material delays, we would experience a dramatic decline in revenue and we would be unable to continue our business as it currently is conducted.
If we fail to maintain our institutional accreditation, we could lose our ability to participate in Title IV programs, which would materially and adversely affect our business.
In July 2013, the accreditation of University of Phoenix was reaffirmed by HLC through the 2022-2023 academic year. At the same time, HLC placed the University on Notice status for a two-year period due to concerns regarding governance, student assessment and faculty scholarship/research for doctoral programs. Notice status is a sanction that means that HLC has determined that an institution is on a course of action that, if continued, could lead the institution to be out of compliance with one or more of the HLC Criteria for Accreditation or Core Components.
The University submitted a Notice Report to HLC in November 2014 providing evidence that the University has ameliorated the conditions that led to the Notice status and continues to meet relevant accreditation requirements. The HLC Board of Trustees subsequently removed the University from Notice status, effective June 25, 2015.
We believe that the imposition of the sanction of notice adversely impacted the reputation of University of Phoenix and may have contributed to the University’s continuing decline in enrollment. In addition, the changes made by University of Phoenix to its corporate governance and administrative structure to address the concerns of HLC regarding independence have increased our operating costs and decreased our managerial flexibility to address the rapidly evolving and challenging postsecondary education market.
The University remains assigned by HLC to the Standard Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2016-2017 and will undergo its next reaffirmation process in 2022-2023.
Continued institutional accreditation is critical to University of Phoenix’s business. If the University should lose its institutional accreditation, our business would be substantially impaired and we would not be able to continue our business as it is presently conducted.
The U.S. Department of Education gainful employment regulations may limit the programs we can offer students and increase our cost of operations.
Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide information to prospective students about each eligible program, including the relevant recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers. These reporting requirements increase our costs of operations and could adversely impact student enrollment, persistence and retention if our reported program information compares unfavorably with other reporting educational institutions.
In October 2014, the U.S. Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether an academic program prepares students for gainful employment in a recognized occupation. Under the final regulations, which apply on a program-by-program basis, students enrolled in a program will be eligible for Title IV student financial aid only if that program satisfies at least one of two tests relating to student debt service-to-earnings ratios. The two tests specify minimum debt service-to-earnings ratios calculated on the basis of the earnings of program graduates; one test measures student loan debt service as a percentage of total earnings, and the other test measures student loan debt service as a percentage of discretionary earnings. If a program fails to meet at least one of the minimum ratios for one year, the


Apollo Education Group, Inc. | 2015 Form 10-K | 25


institution will be required to provide a warning notice to prospective and enrolled students advising that the program may lose Title IV eligibility based on the final student debt service-to-earnings ratios for the next award year. Programs that fail to meet at least one of the minimum ratios for two years will immediately cease to be Title IV eligible for a period not less than three years.
Under the final regulations, schools are also required to certify to the Department the following for each Title IV eligible program:
The program is included in the schools’ accreditation;
The program is programmatically accredited, if required by a federal government entity, or by a government entity in any state in which the school is located or is required to obtain state approval;
The program satisfies any applicable state licensing and certification requirements for the occupations for which the program prepares students to enter; and
The program is not substantially similar to a program offered by the school that became ineligible due to the student debt service-to-earnings ratios.
The Department has indicated that the official 2014 gainful employment debt service-to-earnings ratios will be issued sometime during calendar year 2016. The expected timing of the issuance of the 2015 ratios has not yet been announced. We believe it is likely that some of University of Phoenix’s programs will be impacted by the regulations. However, the University ceased enrolling new students in most of the programs it believes may be impacted in connection with its initiatives to transform itself into a more focused, higher retaining and less complex institution. Students currently enrolled in these programs represent approximately 10% of the University’s Degreed Enrollment and these programs will continue for such students, who will be taught-out in due course.
The Department has not yet announced the protocol for calculating and disseminating the debt service-to-earnings ratios. Because the ratios will be issued by the Department after the measuring period, we may not know of a program’s failure to meet the tests until after the measuring period, and students enrolled in such a program could lose their access to federal financial aid before completing the program.
Under the gainful employment regulations, the continuing eligibility of our educational programs for Title IV program funding would be at risk due to factors beyond our control, such as changes in the actual or deemed income level of our graduates, changes in student borrowing levels, increases in interest rates, changes in the federal poverty income level relevant for calculating discretionary income, changes in the percentage of our former students who are current in repayment of their student loans, and other factors. The exposure to these external factors could reduce our ability to confidently offer or continue certain types of programs for which there is market demand, and therefore would impact our ability to maintain or grow our business.
In addition, if we are required to include a warning notice for any of our programs based on the debt service-to-earnings ratios, enrollment in those programs may decline materially, particularly in light of the widely-publicized difficulties experienced by students in recent years who were enrolled in schools that have closed. Accordingly, the inclusion of these required warnings could make continuation of the affected programs impractical, even if students in the programs are still eligible to participate in Title IV aid programs.
University of Phoenix’s certification to participate in Title IV programs expired in December 2012 and continues on a month-to-month basis. If University of Phoenix is not recertified to participate in Title IV programs by the U.S. Department of Education, University of Phoenix would not be eligible to participate in Title IV programs and we could not conduct our business as it is currently conducted.
University of Phoenix is certified by the U.S. Department of Education to participate in Title IV programs. The University was recertified in November 2009 and its current certification expired in December 2012. University of Phoenix has submitted necessary documentation for recertification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We believe that the University’s application will be renewed in due course. However, we cannot predict whether or to what extent the continued challenging political and regulatory climate and other recent developments relating to our business may have on the timing or outcome of the recertification process.
Generally, the recertification process includes a review by the Department of the institution’s educational programs and locations, administrative capability, financial responsibility, and other oversight categories. The Department could limit, suspend or terminate an institution’s participation in Title IV programs, by approving recertification on the basis of a temporary provisional program participation agreement or through other means, for violations of the Higher Education Act, as reauthorized, or Title IV program regulations. If the University’s recertification is approved on a provisional basis, the University could be subject to various operating limitations imposed by the Department and would have limited rights of due process in connection with any future sanctions or termination for noncompliance.


Apollo Education Group, Inc. | 2015 Form 10-K | 26


Continued Title IV program eligibility is critical to the operation of our business. If University of Phoenix becomes ineligible to participate in Title IV programs, or participation is materially limited, we could not conduct our business as it is currently conducted and it would have a material adverse effect on our business and financial condition.
Action by the U.S. Congress to revise the laws governing federal student financial aid programs or reduce funding for these programs, including changes applicable only to proprietary educational institutions, could reduce our enrollment and increase our costs of operation.
The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. The current Higher Education Act reauthorization expired September 30, 2013. Congress continues to engage in Higher Education Act reauthorization hearings and Title IV programs remain authorized and functioning. Changes to the Higher Education Act, including changes in eligibility and funding for Title IV programs, are likely to occur in connection with the next reauthorization, but we cannot predict the scope or substance of any such changes.
The Pell Grant program is one of the largest non-defense discretionary spending programs in the federal budget. Because of this, it is a target for reduction as Congress addresses the competing demands for funding and the chronic and significant U.S. budget deficits. Furthermore, a recent study by the U.S. Federal Reserve System demonstrated a direct relationship between student financial aid increases, including Pell Grant increases, and tuition levels, which could impact future Pell Grant amounts. A reduction in the maximum annual Pell Grant amount or changes in eligibility could result in increased student borrowing, which would make more difficult our ability to comply with other important regulatory requirements, such as the student loan cohort default rate regulations, which are discussed below, and could negatively impact enrollment.
In addition to Congress’s focus on the federal government’s funding challenges, in recent years, there has been substantial and continuing increased focus by members of the U.S. Congress on the role that proprietary educational institutions play in higher education. We expect this focus to continue. Congressional hearings and roundtable discussions have been held regarding various aspects of the education industry, and reports have been issued that are highly critical of proprietary institutions and include a number of recommendations to be considered by Congress in connection with the upcoming reauthorization of the federal Higher Education Act as discussed above. Because a substantial portion of our revenue is derived from Title IV programs, any action by Congress that reduces Title IV program funding, or alters the eligibility of our institutions or students to participate in Title IV programs could have a material adverse effect on our enrollment and financial condition. 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 Title IV program funding, certain military benefit programs may be reduced as military branches address decreased funding. Reductions and/or changes in military benefit programs could result in increased student borrowing, decreased enrollment and adverse impacts on our 90/10 Rule percentage, as discussed below.
If Congress reduced the eligibility or amount of available Title IV program funding, we would attempt to arrange for alternative sources of financial aid for our students, which may include lending funds directly to our students. However, private sources would not be able to provide as much funding to our students or on terms comparable to Title IV programs and such programs are under intense scrutiny from the Consumer Financial Protection Bureau and other regulatory agencies. In addition, private funding sources could require us to guarantee all or part of this assistance and we might incur other additional costs. For these reasons, private, alternative sources of student financial aid would only partly offset, if at all, the impact on our business of reduced Title IV program eligibility or funding, and would not be a practical alternative in the case of a significant reduction in Title IV program eligibility or funding.
Our schools and programs would lose their eligibility to participate in federal student financial aid programs if the percentage of revenue derived from those programs is too high, in which event we could not conduct our business as it is currently conducted.
University of Phoenix, and all other proprietary institutions of higher education, are subject to the so-called “90/10 Rule” under the Higher Education Act, as reauthorized. Under this rule, a proprietary institution will be ineligible to participate in Title IV programs for at least two fiscal years if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue, as defined in the rule, from Title IV programs. If an institution is determined to be ineligible, any disbursements of Title IV program funds made after the end of the second fiscal year in the measuring period must be repaid to the U.S. Department of Education. An institution that derives more than 90% of its cash basis revenue from Title IV programs for any single fiscal year will be automatically placed on provisional certification for two fiscal years and will be subject to possible additional sanctions determined to be appropriate under the circumstances by the Department. While the Department has broad discretion to impose additional sanctions on such an institution, there is only limited precedent available to predict what those sanctions might be, particularly in the current regulatory environment. For example, the Department could impose conditions in the provisional certification such as:
Restrictions on the total amount of Title IV program funds that may be disbursed to students;


Apollo Education Group, Inc. | 2015 Form 10-K | 27


Restrictions on programmatic and geographic expansion;
Requirements to obtain and post letters of credit;
Additional reporting requirements such as interim financial reporting; or
Any other conditions deemed appropriate by the Department.
The 90/10 Rule percentages for University of Phoenix were as follows for the indicated periods:
 
Year Ended August 31,
 
2015
 
2014
 
2013
University of Phoenix
80%
 
81%
 
83%
See the discussion of the 90/10 Rule in Part I, Item 1, Business - Regulatory Environment, above.
Any necessary efforts to reduce the 90/10 Rule percentage for University of Phoenix, especially if the percentage exceeds 90% for a fiscal year, may involve taking measures which reduce our revenue, increase our operating expenses, or both, in each case perhaps significantly. In addition, we may be required to make structural changes to our business in the future in order to remain in compliance, which changes may materially alter the manner in which we conduct our business and materially and adversely impact our business and financial condition. Furthermore, these required changes could make it more difficult to comply with other important regulatory requirements, such as the student loan cohort default rate regulations, which are discussed below.
In recent years, Congress has increased its focus on military benefit programs used for education at proprietary institutions. These military benefit programs are not part of Title IV, and therefore funding under these programs is not included in the 90% portion of the 90/10 Rule. Various bills have been introduced in Congress that would revise the 90/10 Rule to count Department of Defense tuition assistance and Department of Veterans Affairs Post-9/11 GI Bill veterans educational benefits toward the 90% limit, and to reduce the threshold to 85%. We cannot predict the likelihood that Congress will amend the 90/10 Rule in either manner. If all military benefit program funding was included in the 90% portion of the rule calculation, University of Phoenix’s fiscal year 2015 90/10 Rule percentage would have been higher.
In October 2015, University of Phoenix was placed on probationary status in respect of its participation in the U.S. Department of Defense Tuition Assistance Program for active duty military personnel. During this probation, newly enrolled active duty military personnel will not be eligible to participate in this program, the funding under which represented less than 1% of University’s net revenue in fiscal year 2015. For more information, refer to Part I, Item 1 Business - Financial Aid Programs, above.
A failure to demonstrate “financial responsibility” or “administrative capability” may result in the loss of eligibility to participate in Title IV programs and limit our access to liquidity, which would materially and adversely affect our business.
To participate in Title IV programs, the U.S. Department of Education regulations specify that an eligible institution must satisfy specific measures of financial responsibility prescribed by the Department, or post a letter of credit in favor of the Department and possibly accept other conditions on its participation in Title IV programs. Pursuant to the Title IV program regulations, each eligible higher education institution must satisfy a measure of financial responsibility that is based on a weighted average of the following three annual ratios which assess the financial condition of the institution:
Primary Reserve Ratio - measure of an institution’s financial viability and liquidity;
Equity Ratio - measure of an institution’s capital resources and its ability to borrow; and
Net Income Ratio - measure of an institution’s profitability.
These ratios provide three individual scores which are converted into a single composite score. The maximum composite score is 3.0. If the institution achieves a composite score of at least 1.5, it is considered financially responsible. A composite score from 1.0 to 1.4 is also considered financially responsible, and the institution may continue to participate as a financially responsible institution for up to three years, subject to additional monitoring and other consequences. If an institution does not achieve a composite score of at least 1.0, it can be transferred from the “advance” system of payment of Title IV program funds to cash monitoring status or to the “reimbursement” system of payment, under which the institution must disburse its own funds to students and document the students’ eligibility for Title IV program funds before receiving such funds from the U.S. Department of Education. If this were to occur, we would be unable to conduct our business as it is currently conducted.


Apollo Education Group, Inc. | 2015 Form 10-K | 28


The composite scores for Apollo Education Group and University of Phoenix were as follows for the indicated periods:
 
Fiscal Year
 
2015
 
2014
 
2013
Apollo Education Group
2.6
 
2.5
 
2.6
University of Phoenix
2.9
 
2.3
 
2.5
In addition, our principal revolving credit facility requires that we maintain composite scores of at least 1.5. If our composite scores fall below 1.5, it would be an event of default under the facility and the outstanding balance could be declared immediately due and payable. If in connection with composite scores below 1.5 the Department of Education required that we post a letter of credit, our revolving credit facility would not be available for that purpose and there is no assurance that other sources would be available on terms acceptable to us or at all. Furthermore, if our revolving credit facility is no longer available, our composite scores could be reduced even further.
If our composite scores approach 1.5 in the future, which could result from our use of available capital to fund acquisitions, further declines in our cash flows or profitability or other factors, we may be limited in our ability to deploy capital to effect one or more desirable transactions or initiatives due to the impact on our composite scores. We may also be unable to satisfy our working capital and other liquidity requirements associated with our existing operations due in part to the potential impact on our revolving credit facility discussed above. To address a declining composite score, we may be required to seek additional capital through the issuance of equity or equity-linked securities, which would be dilutive to our existing shareholders, but there is no assurance that such equity or equity-linked capital would be available on terms acceptable to us or at all.
Furthermore, the Department regulations specify extensive criteria an institution must satisfy to establish that it has the requisite administrative capability to participate in Title IV programs. The failure of an institution to satisfy any of the criteria used to assess administrative capability may cause the Department to determine that the institution lacks administrative capability and, therefore, subject the institution to additional scrutiny or deny eligibility for Title IV programs. These criteria require, among other things, that the institution:
Comply with all applicable Title IV program regulations;
Have capable and sufficient personnel to administer the Title IV programs;
Have acceptable methods of defining and measuring the satisfactory academic progress of its students;
Not have student loan cohort default rates above specified levels;
Have procedures in place for safeguarding federal funds;
Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
Provide financial aid counseling to its students;
Refer to the Office of Inspector General any credible information indicating that any applicant, student, employee or agent of the institution has been engaged in any fraud or other illegal conduct involving Title IV programs;
Submit in a timely manner all reports and financial statements required by the regulations; and
Not otherwise appear to lack administrative capability.
If we, or our schools eligible to participate in Title IV programs fail to maintain administrative capability or financial responsibility, as defined by the Department, our schools could lose their eligibility to participate in Title IV programs or have that eligibility adversely conditioned, which could significantly reduce the enrollments and revenues of our schools eligible to participate in Title IV programs and materially and adversely affect our business and financial condition.
An increase in student loan default rates could result in the loss of eligibility to participate in Title IV programs, which would materially and adversely affect our business.
To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain specified levels. Each cohort is the group of students who first enter into student loan repayment during a federal fiscal year (ending September 30) for a three-year measuring period.
An educational institution loses eligibility to participate in Title IV programs if its cohort default rate equals or exceeds 40% for any given year or 30% for three consecutive years. If an institution’s cohort default rate equals or exceeds 30% for any given year, it must establish a default prevention task force and develop a default prevention plan with measurable objectives for improving the cohort default rate.


Apollo Education Group, Inc. | 2015 Form 10-K | 29


Based on information published by the U.S. Department of Education, the cohort default rates for University of Phoenix and for all proprietary postsecondary institutions for the applicable federal fiscal years were as follows:
 
Cohort Default Rates for
Cohort Years Ended September 30,
 
2012
 
2011
 
2010
University of Phoenix
13.5%
 
19.0%
 
26.0%
All proprietary postsecondary institutions
15.8%
 
19.1%
 
21.8%
See the discussion of cohort default rates in Part I, Item 1, Business - Regulatory Environment, above.
If our student loan default rates approach the applicable limits in the future, we may be required to increase efforts and resources dedicated to improving these default rates. This is challenging because most borrowers who are in default or at risk of default are no longer students, and we may have only limited contact with them. Furthermore, continued increased attention has been given by members of Congress and others on default aversion activities of proprietary education institutions. If such attention leads to congressional or regulatory action restricting the types of default aversion assistance that educational institutions are permitted to provide, the default rates of our former students may be negatively impacted. Such attention could also lead to Congressional proposals to increase the measuring period, which could negatively impact our default rates. Accordingly, there is no assurance that we would be able to effectively improve our default rates or improve them in a timely manner to meet the requirements for continued participation in Title IV programs if we experience a substantial increase in our student loan default rates.
If we fail to maintain any of our state authorizations, we would lose our ability to operate in that state and to participate in Title IV programs there.
Institutions that participate in Title IV programs must be authorized to operate by the appropriate postsecondary regulatory authority in each state where the institution has a physical presence. Prior to July 1, 2011, such authorization was not specifically required for the institution’s students to become eligible for Title IV programs. Under the program integrity rules adopted by the Department effective July 1, 2011, institutions are required to obtain specific regulatory approval to operate in such states. University of Phoenix is specifically authorized to operate in all of the domestic jurisdictions in which it operates. Some states assert authority to regulate all degree-granting institutions if their educational programs are available to their residents, whether or not the institutions maintain a physical presence within those states. University of Phoenix has obtained licensure in states which require such licensure and where students are enrolled.
The U.S. Department of Education may adopt debt forgiveness regulations that could lead to liability for amounts based on borrower defenses or affect the Department’s assessment of our institutional capability.
On August 20, 2015, the U.S. Department of Education announced its intention to establish a negotiated rulemaking committee to develop proposed regulations (collectively, the “Debt Forgiveness Regulations”) for determining the criteria the Department will use to identify acts or omissions of an institution that constitute defenses to repayment of Federal Direct Loans, and standards and procedures to determine liability of an institution for amounts based on borrower defenses. The committee will also propose rules to determine the effect that borrower defenses to loan repayment may have on the Department’s assessment of institutional capability. We cannot predict the timing or outcome of this rulemaking process or how any such resulting rules would be enforced. Should the Department adopt rules proposed by the negotiated rulemaking committee, or rules in furtherance of the objectives of the rulemaking committee, they may include rules that serve as a basis for recovery of losses arising from loan forgiveness from Title IV participating institutions. Depending on the processes and standards that may be adopted by the Department in the Debt Forgiveness Regulations, which we cannot predict at this time, the outcome of any legal proceeding instituted by a private party or governmental authority or the facts asserted therein could collaterally serve as the basis for liability for amounts based on borrower defenses or the termination of eligibility to participate in the Title IV program based on the Department’s institutional capability assessment. Such liability or termination of eligibility could have a material adverse effect on our business and financial condition and result in the imposition of significant restrictions on us and our ability to operate.


Apollo Education Group, Inc. | 2015 Form 10-K | 30


Non-U.S. Operations
Our non-U.S. operations are subject to risks not inherent in our U.S. operations, which could adversely affect our business.
We operate physical and online educational institutions in the United Kingdom, Australia, Mexico, South Africa, Brazil, Chile and elsewhere, and we are actively seeking further expansion in other countries, including India, where we offer educational programs through a joint venture. Our operations in each of the relevant foreign jurisdictions are subject to regulatory requirements relating to education providers, as well as foreign businesses. Many foreign countries have not fully embraced the proprietary education model, and in other countries, proprietary education remains controversial. As a result, our foreign operations are subject to the political risk that existing regulations will be interpreted unfavorably or new regulations will be adopted that render our business model impractical. In addition, our non-U.S. operations are subject to the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act which require extensive compliance vigilance on our part and, in some cases, puts our foreign operations at a competitive disadvantage with local companies. If one or more of our foreign operations ceases to be economically practical, we may be forced to discontinue such operations or seek a buyer, either of which might result in a substantial loss of value to Apollo Education Group.
Risks Related to Our Business
We face intense and increasing competition in the postsecondary education market from both public and private educational institutions, which has adversely affected our business.
Postsecondary education in our existing and new market areas is highly competitive and is becoming increasingly so as the industry is undergoing profound change at an unprecedented rate. We compete primarily with traditional public and private degree-granting regionally accredited colleges and universities, other proprietary degree-granting regionally accredited schools and alternatives to higher education. In addition, we face increasing competition from various emerging non-traditional, credit-bearing and noncredit-bearing education programs, offered by both proprietary and not-for-profit providers. Some of our competitors have greater financial and nonfinancial resources than we have and are able to offer programs similar to ours at a lower tuition level for a variety of reasons, including the availability of direct and indirect government subsidies, government and foundation grants, large endowments, tax-deductible contributions and other financial resources not available to proprietary institutions, or by providing fewer student services or larger class sizes. For example, a typical community college is subsidized by local or state government and, as a result, tuition rates for associate’s degree programs are much lower at community colleges than at University of Phoenix. Legislation has also been introduced in Congress that would pay for two years of community and technical colleges for first-time students who enroll on at least a half-time basis and maintain satisfactory academic progress. Also, like University of Phoenix, other proprietary educational institutions have begun to deploy pricing incentives to impact demand. We believe that price competition through targeted programs involving student scholarships and otherwise will increase throughout the industry in the future. We have implemented scholarships and discounts which reduce the amount of tuition we receive, and further downward pressure on our tuition rates may cause us to implement further pricing incentives, which will adversely affect our revenue.
In addition, one of our primary competitive advantages has been materially diminished as a significant and increasing number of traditional four-year and community colleges offer an increasing array of distance learning and other online education programs, including programs that are geared towards the needs of working learners. This trend has been accelerated by private companies that provide and/or manage online learning platforms for traditional four-year colleges and community colleges. As the proportion of traditional colleges and universities providing alternative learning modalities increases, we will face increased competition from these institutions, including those with highly regarded reputations, the degrees from which are perceived as more valuable in the workplace. Already, this type of competition is significant and has contributed to the substantial decline in University of Phoenix enrollment over the past five years.
Furthermore, as discussed below, University of Phoenix expects to implement enhanced minimum admissions criteria to better ensure that newly enrolled students are adequately prepared for the rigors of higher education. Many of the students who do not meet these enhanced admissions criteria will not be eligible for admission to traditional four-year colleges and universities. Accordingly, these new admissions standards will increase the proportion of University of Phoenix’s potential students for which the University competes directly with the traditional educational institutions, further intensifying competition.
Additionally, the total postsecondary student population has recently declined, with the proprietary share disproportionately affected. Enrollment in Title IV program eligible postsecondary degree-granting institutions in spring 2015 decreased 2%, compared to spring 2014, with the largest decrease of 5% taking place among four-year proprietary institutions. Although the U.S. Department of Education projects that enrollment in degree-granting, postsecondary institutions will grow 12% over the ten-year period ending in the fall of 2022 to approximately 23.5 million students, this projected growth compares with a 24.3% increase reported in the prior ten-year period ended in 2012, when enrollment increased from 16.6 million students in 2002 to approximately 20.6 million students in 2012.


Apollo Education Group, Inc. | 2015 Form 10-K | 31


The combination of flat or declining postsecondary student population and increased capacity in the postsecondary education sector will further intensify competition.
This intense competition makes it more challenging for us to enroll students who are likely to succeed in our educational programs, and has contributed to the more than 50% decline in degreed enrollment at University of Phoenix since 2010 and put downward pressure on our tuition rates. We must adapt our business to meet these competitive challenges. The recently launched transformation of University of Phoenix to a more focused institution, as discussed below, is intended to address these competitive challenges.
We have launched a set of initiatives to transform University of Phoenix into a more focused institution; these initiatives will further reduce the University’s enrollment in the short-term and may not be successful in improving enrollment and retention in the longer term.
We are working to transform University of Phoenix into a more focused, higher retaining and less complex institution in order to improve student outcomes and stabilize enrollment. In furtherance of this, the University is implementing several important initiatives, as described in Part I, Item 1, Business - University of Phoenix. These initiatives require significant time, energy and resources, and involve many significant interrelated and simultaneous changes in the University’s processes and programs. We believe these initiatives, taken as a whole, will negatively and significantly impact new enrollment in the short-term, and there is no assurance that we will succeed in achieving our objectives of improving enrollment, student retention, graduation rates and cost to enroll in the longer-term. If our efforts are not successful, University of Phoenix enrollment may continue to decline further and our business and financial condition will be materially and adversely affected.
Our financial performance depends on our ability to continue to develop favorable awareness among, and enroll and retain students; adverse publicity has negatively impacted demand for our programs.
Building favorable awareness of our schools and the programs we offer is critical to our ability to attract prospective students. We expend significant resources on marketing. To the extent that our schools are unable to successfully market and advertise their educational programs, our schools’ ability to attract and enroll prospective students in such programs will be adversely affected. It is also critical to our success that we convert these prospective students to enrolled students in a cost-effective manner and that these enrolled students remain active in our programs.
In recent years, University of Phoenix has reduced its use of third-party operated sites and increased its use of branded media channels in order to better manage its marketing message, improve the University’s ability to identify students more likely to persist in its educational programs and reduce cost. Effective October 1, 2015, the University discontinued substantially all use of such third-party operated sites, which accounted for approximately 9% of University of Phoenix New Degreed Enrollment in fiscal year 2015 and represented the marketing channel with the highest cost per New Degreed Enrollment. We expect that this change will negatively impact New Degreed Enrollment in at least the short-term.
In addition, the proprietary postsecondary education sector is under regulatory and other scrutiny which has led to media attention that has portrayed the sector in an unflattering light. This negative media attention has caused and may continue to cause some prospective students to choose educational alternatives outside of the proprietary sector or proprietary alternatives other than University of Phoenix, either of which could continue to negatively impact our new enrollments.


Apollo Education Group, Inc. | 2015 Form 10-K | 32


Some of the additional factors that could prevent us from successfully enrolling and retaining students in our programs include:
Increased competition from schools offering distance learning and other online educational programs;
A decrease in the perceived or actual economic benefits that students derive from our programs or education in general;
A decrease in or perceived low student pass rates for professional licenses and other examinations necessary for students to work in their chosen field;
Regulatory investigations that may damage our reputation;
Increased regulation of online education, including in states in which we do not have a physical presence;
Litigation that may damage our reputation;
Inability to continue to recruit, train and retain quality faculty;
Student or employer dissatisfaction with the quality of our services and programs;
Tuition rate reductions by competitors that we are unwilling or unable to match;
A decline in the acceptance of online education;
Unavailability of ground locations where students want to attend; and
Disruptions to our information technology systems.
If one or more of these factors reduces demand for our programs, our enrollment could be further negatively affected or our costs associated with each new enrollment could increase, or both, either of which could have a material adverse impact on our business and financial condition.
Our financial performance depends, in part, on our ability to keep pace with changing education market needs; if we fail to keep pace or fail in implementing or adapting to new educational offerings and technologies, our business may be adversely affected.
The nature of the skills required by employers can evolve rapidly in today’s changing economic and technological environment. Accordingly, it is important for our schools’ educational programs to evolve in response to economic and technological changes. The expansion of existing programs and the development of new programs, including the changes discussed above to transform University of Phoenix, may not be accepted by current or prospective students or the employers of our graduates. Even if our schools are able to develop acceptable new programs, our schools may not be able to begin offering those new programs as quickly as required by prospective employers or as quickly as our competitors offer similar programs. In addition, we may be unable to obtain specialized accreditations or licensures that may make certain programs desirable to students. To offer a new academic program, we may be required to obtain federal, state and accrediting agency approvals, which may be conditioned or delayed in a manner that could significantly affect our growth plans. In addition, to be eligible for Title IV programs, a new academic program may need to be certified by the U.S. Department of Education. If we are unable to adequately respond to changes in market requirements due to regulatory or financial constraints, unusually rapid technological changes, or other factors, our ability to attract and retain students could be impaired, the rates at which our graduates obtain jobs involving their fields of study could suffer, and our business and financial condition could be adversely affected.
Establishing new academic programs or modifying existing programs requires us to make investments, incur marketing expenses and reallocate other resources. We may have limited experience with the courses in new areas and may need to modify our systems and strategy or enter into arrangements with other educational institutions to provide new programs effectively and profitably. If we are unable to increase the number of students or offer new programs in a cost-effective manner, or are otherwise unable to manage effectively the operations of newly established academic programs, our business, financial condition and results of operations could be adversely affected.
If we do not maintain existing, and develop additional, relationships with employers, our business may be impaired.
We currently have relationships with large employers to provide their employees with the opportunity to obtain degrees and professional development certificates through us while continuing their employment. These relationships are an important part of our strategy as they provide us with potential working learners for particular programs and also serve to increase our reputation among high-profile employers. In addition, degree-granting programs in which employers directly pay tuition have a beneficial impact on our 90/10 Rule percentage calculation by reducing the proportion of our cash basis revenues attributable to Title IV program funds. If we are unable to develop new relationships or further develop our existing relationships, if our existing relationships deteriorate or end, or if we are unable to offer programs that teach skills demanded by employers, our efforts to seek these sources of potential working learners may be impaired, and this could materially and adversely affect our business and financial condition and our compliance with applicable regulations.


Apollo Education Group, Inc. | 2015 Form 10-K | 33


Our acquisitions may not be successful and may result in additional debt or dilution to our shareholders, which could adversely affect our business.
As part of our growth strategy, we are actively considering acquisition opportunities worldwide. We have acquired and expect to acquire additional proprietary educational institutions that complement our strategic direction, some of which could be material. Any acquisition involves significant risks and uncertainties, including:
Inability to successfully integrate the acquired operations, including the information technology systems, into our institutions and maintain uniform standards, controls, policies and procedures;
Inability to successfully operate and grow the acquired businesses;
Distraction of management’s attention from normal business operations;
Challenges retaining the key employees of the acquired operation;
Operating, market or other challenges causing operating results to be less than projected;
Expenses associated with the acquisition;
Noncontrolling shareholder options that could require us to purchase shares in certain of our businesses that we do not wholly-own;
Challenges relating to conforming non-compliant financial reporting procedures to those required of a subsidiary of a U.S. reporting company, including procedures required by the Sarbanes-Oxley Act; and
Unidentified issues not discovered in our due diligence process, including commitments and/or contingencies.
Acquisitions are inherently risky. We have experienced many challenges in connection with our previous acquisitions and cannot be certain that any future acquisitions will be successful and will not materially adversely affect our business and financial condition. We may not be able to identify suitable acquisition opportunities, acquire institutions on favorable terms, or successfully integrate or profitably operate acquired institutions. Future transactions may involve use of our cash resources, issuance of equity or debt securities, incurrence of other forms of debt or a significant increase in our financial leverage, which could adversely affect our business and financial condition, especially if the cash flows associated with any acquisition are not sufficient to cover the additional debt service and could negatively impact our compliance with the U.S. Department of Education composite score measure of financial responsibility. If we issue equity securities as consideration in an acquisition, current shareholders’ percentage ownership and earnings per share may be diluted. In addition, our acquisition of an educational institution could be considered a change in ownership and control of the acquired institution under applicable regulatory standards. For such an acquisition in the U.S., we may need approval from the U.S. Department of Education and applicable state agencies and accrediting agencies and possibly other regulatory bodies. Our inability to obtain such approvals with respect to a completed acquisition could have a material adverse effect on our business and financial condition.


Apollo Education Group, Inc. | 2015 Form 10-K | 34


Our expansion into new markets outside the U.S. subjects us to risks inherent in international operations.
As part of our growth strategy, we have acquired schools and universities outside the U.S. and we intend to actively pursue further acquisitions. To the extent that we make such acquisitions, we will face risks that are inherent in international operations, including:
Complexity of operations across borders;
Compliance with foreign regulatory environments, including laws and regulations hindering proprietary education enterprises;
Changes in existing laws to prohibit or restrict proprietary education, whether arising from public discontent or otherwise;
Currency exchange rate fluctuations and/or price controls or restrictions on exchange of foreign currencies;
Monetary policy risks, such as inflation, hyperinflation and deflation;
Potential political and economic instability in the countries in which we operate;
Expropriation of assets by local governments;
Multiple and possibly overlapping and conflicting tax laws;
Compliance with anti-corruption regulations such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010;
Potential unionization of employees under local labor laws and local labor laws that make it more expensive and complex to negotiate with, retain or terminate employees;
Greater difficulty in utilizing and enforcing any acquired intellectual property and contract rights;
Investment and execution missteps due to a failure to understand the local culture and market;
Limitations on the repatriation of funds; and
Increased risk of acts of terrorism and war, epidemics and natural disasters.
Any one or more of these risks could negatively impact our non-U.S. operations and materially and adversely impact our business and financial condition.
System disruptions to our computer networks or phone systems could have a material adverse effect on our business.
The performance and reliability of our computer network and phone systems infrastructure at our schools, including our online programs, is critical to our operations, reputation and ability to attract and retain students. From time to time we experience intermittent outages of the information technology systems used by our students and by our employees, including system-wide outages. Any computer system error or failure, regardless of cause, could result in a substantial outage that materially disrupts our online and ground operations. Not all of our critical systems are protected by a validated formal disaster recovery plan and redundant disaster recovery infrastructure at a geographically remote data center. We are continuing execution of our plan to implement disaster recovery infrastructure for our remaining critical systems to allow timely recovery from catastrophic failure. For those systems not yet protected, a catastrophic failure or unavailability for any reason of our principal data center may require us to replicate the function of this data center at our existing remote data facility or elsewhere, and could result in the loss of data. An event such as this may require service restoration activities that could take up to several weeks to complete.
We have upgraded or are in the process of upgrading a substantial portion of our key IT systems, including our online student classroom, student relationship and communications management platform, and corporate applications, and retiring the related legacy systems. Although these new systems are expected to improve the productivity, scalability, reliability and sustainability of our IT infrastructure, the transition from the legacy systems entails risk of unanticipated disruption or failure to fully replicate all necessary data processing and reporting functions, including in our core business functions.
Any disruption in our IT systems, including any disruptions and system malfunctions that may arise from our substantial IT systems upgrade initiative currently underway or outsourcing initiatives, could significantly impact our operations, reduce student and prospective student confidence in our educational institutions, adversely affect our compliance with applicable regulations and accrediting body standards and have a material adverse effect on our business and financial condition. Although we maintain insurance in respect of some types of these disruptions, there is no assurance that available insurance proceeds would be adequate to compensate us for damages sustained due to these disruptions.


Apollo Education Group, Inc. | 2015 Form 10-K | 35


Security threats to our computer systems, including breach of the personal information that we collect, could have a material adverse effect on our business.
We face an ever increasing number of threats to our computer systems, including unauthorized activity and access, malicious penetration, system viruses, malicious code and organized cyber-attacks, which could breach our security and disrupt our systems. These risks increase when we are making changes to our IT systems, such as our substantial IT systems upgrade initiative currently underway and our frequent updates to enable instructional innovation and address new student populations. Our size makes us a prominent target for hacking and other cyber-attacks within the education industry. From time to time we experience security events and incidents, and these reflect an increasing level of malicious sophistication, organization and innovation. We have devoted and will continue to devote significant resources to the security of our computer systems, but they may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations, perhaps over an extended period of time prior to detection. As a result, we may be required to expend significant additional resources to protect against the threat of or alleviate problems caused by these system disruptions and security breaches. Any of these events could have a material adverse effect on our business and financial condition. Although we maintain insurance in respect of these types of events, there is no assurance that available insurance proceeds would be adequate to compensate us for damages sustained due to these events.
In addition, possession and use of personal information in our operations subjects us to risks and costs that could harm our business. Our educational institutions collect, use and retain large amounts of personal information regarding our students and their families, including social security numbers, tax return information and personal and family financial data. We also collect and maintain personal information of our employees in the ordinary course of our business. Some of this personal information is held and managed by certain of our vendors. Although we use security and business controls to limit access and use of personal information, a third-party may be able to circumvent those security and business controls, which could result in a breach of student or employee privacy. In addition, errors in the storage, use or transmission of personal information could result in a breach of student or employee privacy, and the increased availability and use of mobile data devices by our employees and students increases the risk of unintentional disclosure of personal information. Possession and use of personal information in our operations also subjects us to legislative and regulatory burdens that could require notification of data breaches and restrict our use of personal information. We cannot ensure that a breach, loss or theft of personal information will not occur. A breach, theft or loss of personal information regarding our students and their families or our employees that is held by us or our vendors could have a material adverse effect on our reputation and results of operations and result in liability under state and federal privacy statutes and legal actions by state attorneys, general and private litigants, and any of which could have a material adverse effect on our business and financial condition. In August 2015, we received a notice from the Federal Trade Commission that it had commenced an inquiry into the University of Phoenix’s practices and procedures for safeguarding student and staff personal information, with a request for relevant information from the University. We cannot predict the ultimate outcome of this matter and we may incur substantial costs and other expenses in connection with our response.
If we cannot attract qualified new personnel or retain our existing senior management team, our business could be adversely affected.
Our future performance depends on the continued services and continuing contributions of our senior management to execute on our business plan and to identify and pursue new opportunities. Our future success also depends in large part on our continued ability to attract and retain qualified personnel. The loss of the services of our senior management for any reason could adversely affect our business and results of operations.
We have experienced a number of changes in senior management in recent years. Our Chief Financial Officer resigned in May 2015, and Gregory J. Iverson, our current Chief Accounting Officer and Treasurer, was appointed Chief Financial Officer effective October 26, 2015. A lack of management continuity could result in operational and administrative inefficiencies, make achievement of our strategic and management objectives more challenging and may make recruiting for future management positions more difficult. If we are unable to effectively manage our business through these management transitions, our business and results of operation could be adversely affected.
To effectively educate our students, we must continue to attract and retain qualified faculty members.
Our educational institutions employ approximately 23,000 faculty members, a substantial majority of whom are adjunct, part-time faculty. In order to effectively educate our students, we must recruit and train a large number of faculty on an ongoing basis and keep our faculty engaged and focused on the mission of delivering quality education. If we cannot attract and retain sufficient qualified faculty members, or we fail to adequately train new faculty members, or our relations with faculty members deteriorate and lead to work stoppages or other disruptions, our ability to serve our students would be impaired and we may be required to reduce the scope or number of the classes available to our students, any of which could have a material adverse impact our business.


Apollo Education Group, Inc. | 2015 Form 10-K | 36


If we are unable to successfully conclude pending litigation and governmental inquiries, our business and financial condition could be adversely affected.
We, certain of our subsidiaries, and certain of our current and former directors and executive officers have been named as defendants in various lawsuits and we have received various governmental inquiries. Refer to Note 16, Commitments and Contingencies and Note 17, Regulatory Matters, in Part II, Item 8, Financial Statements and Supplementary Data, for further discussion of pending litigation and other proceedings. In addition, changes in our business and pending actions by regulators and accreditors may increase the risk of claims.
We cannot predict the ultimate outcome of these matters and expect to incur significant defense costs and other expenses in connection with them. Such costs and expenses could have a material adverse effect on our financial condition and the market price of our common stock. We may be required to pay substantial damages or settlement costs in excess of our insurance coverage related to these matters, or may be required to pay substantial fines or penalties, any of which could have a further material adverse effect on our financial condition. An adverse outcome in any of these matters could also materially and adversely affect our licenses, accreditations and eligibility to participate in Title IV programs.
We rely on proprietary rights and intellectual property that may not be adequately protected under current laws, and we encounter disputes from time to time relating to our use of intellectual property.
Our success depends in part on our ability to protect our proprietary rights and intellectual property. We rely on a combination of copyrights, trademarks, trade secrets, patents, domain names and contractual agreements to protect our proprietary rights. For example, we rely on trademark protection in the U.S. and various foreign jurisdictions to protect our rights to various marks as well as distinctive logos and other marks associated with our services. We also rely on agreements under which we obtain intellectual property to own or license rights to use intellectual property developed by faculty members, content experts and other third-parties. We cannot assure that these measures are adequate, that we have secured, or will be able to secure, appropriate permissions or protections for all of the intellectual property rights we use or claim rights to in the U.S. or various foreign jurisdictions, or that third parties will not terminate our license rights or infringe upon or otherwise violate our intellectual property rights or the intellectual property rights of others. Despite our efforts to protect these rights, unauthorized third parties may attempt to use, duplicate or copy the proprietary aspects of our student recruitment and educational delivery methods and systems, curricula, online resource material or other content. Our management’s attention may be diverted by these attempts and we may need to use funds in litigation to protect our proprietary rights against any infringement or violation, which could have a material adverse affect on our business and financial condition.
We may become party to disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in these disputes. For example, third parties may allege that we have infringed upon or not obtained sufficient rights in the technologies used in our educational delivery systems, the content of our courses or other training materials or in our ownership or uses of other intellectual property claimed by that third-party. Some third-party intellectual property rights may prove to be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid violating those intellectual property rights. Any such intellectual property claim could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether such claim has merit. Our various liability insurance coverages, if any, may not cover potential claims of this type adequately or at all, and we may be required to alter the design and operation of our systems or the content of our courses or pay monetary damages or license fees to third parties, which could have a material adverse affect on our business and financial condition.
We may incur liability for the unauthorized duplication, distribution or other use of materials posted online.
In some instances, our employees, including faculty members, or our students may post various articles or other third-party content online in class discussion boards or in other venues including Facebook, PhoenixConnect, University of Phoenix’s proprietary social media network, and other social networks. The laws governing the fair use of these third-party materials are imprecise and adjudicated on a case-by-case basis, which makes it challenging to adopt and implement appropriately balanced institutional policies governing these practices. As a result, we could incur liability to third parties for the unauthorized duplication, distribution or other use of this material. Any such claims could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether the claims have merit. Our various liability insurance coverages, if any, may not cover potential claims of this type adequately or at all, and we may be required to alter or cease our uses of such material, which may include changing or removing content from our courses, or pay monetary damages, which could have a material adverse affect on our business and financial condition.


Apollo Education Group, Inc. | 2015 Form 10-K | 37


We may have unanticipated tax liabilities that could adversely impact our results of operations and financial condition.
We are subject to multiple types of taxes in the U.S., United Kingdom and various other foreign jurisdictions. The determination of our worldwide provision for income taxes and other tax accruals involves various judgments, and therefore the ultimate tax determination is subject to uncertainty. In addition, changes in tax laws, regulations, or rules may adversely affect our future reported financial results, may impact the way in which we conduct our business, or may increase the risk of audit by the Internal Revenue Service (“IRS”) or other tax authorities.
During fiscal year 2015, the IRS completed its review of our United States federal income tax return for fiscal year 2014. Our federal income tax return for fiscal year 2013 is currently open for review by the IRS and we are also participating in the IRS’s Compliance Assurance Process for fiscal years 2015 and 2016, 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 United States federal income tax returns. Additionally, we are subject to numerous ongoing audits by state, local and foreign tax authorities with various tax years as early as 2007 that remain subject to examination. 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.
In addition, an increasing number of states and localities are adopting new laws or changing their interpretation of existing laws regarding the apportionment of service revenues for corporate income tax purposes in a manner that could result in a larger proportion of our income being taxed by the states into which we sell services. These legislative and administrative changes could have a material adverse effect on our business and financial condition.
Risks Related to the Control Over Our Voting Stock
Our Class A common stock has no voting rights. The Apollo Class B Voting Stock Trust No. 1 holds approximately 51% of our voting stock and controls substantially all actions requiring the vote or consent of our shareholders, which may discourage or make impractical a takeover and may have an adverse effect on the trading price of our Class A common stock.
Approximately 51% of our outstanding Class B voting shares, our only class of voting stock, is held by the Apollo Class B Voting Stock Trust No. 1 (the “Class B Trust”), an irrevocable trust of which the current trustees are Peter V. Sperling, Chairman of our Board of Directors, Ms. Terri Bishop, the Vice Chair of our Board of Directors, and Ms. Darby Shupp, a member of our Board of Directors. Mr. Peter Sperling owns the remaining 49% of our outstanding Class B voting stock through a revocable grantor trust. Accordingly, the Class B Trust and Mr. Peter Sperling together control the election of all members of our Board of Directors and substantially all other actions requiring a vote of our shareholders, except in certain limited circumstances. Holders of our outstanding Class A common stock do not have the right to vote for the election of directors or for substantially any other action requiring a vote of shareholders. The trustees of the Class B Trust have the sole power to appoint successor and additional trustees.
The control of a majority of our voting stock by the Class B Trust makes it impossible for a third-party to acquire voting control of us without the approval of a majority of the trustees of the Class B Trust. There is no assurance that the Apollo Education Group Class B shareholders, or the trustees of the Class B Trust, will exercise their control of Apollo Education Group in the same manner that a majority of the outstanding Class A shareholders would if they were entitled to vote on actions currently reserved exclusively for our Class B shareholders.
We are a Controlled Company under the Nasdaq Listing Rules and therefore are exempt from certain corporate governance requirements, which could reduce the influence of independent directors on our management and strategic direction.
We are a “Controlled Company” as defined in Rule 5615(c)(1) of the Nasdaq Listing Rules, because more than 50% of the voting power of our outstanding stock is controlled by the Class B Trust. As a consequence, we are exempt from certain requirements of Nasdaq Listing Rule 5605, including that:
Our Board be composed of a majority of Independent Directors (as defined in Nasdaq Listing Rule 5605(a)(2));
The compensation of our officers be determined by a majority of the independent directors or a compensation committee composed solely of independent directors; and
Nominations to the Board of Directors be made by a majority of the independent directors or a nominations committee composed solely of independent directors.
However, Nasdaq Listing Rule 5605(b)(2) does require that our independent directors have regularly scheduled meetings at which only independent directors are present (“executive sessions”). In addition, Internal Revenue Code Section 162(m) requires that a compensation committee of outside directors (within the meaning of Section 162(m)) approve stock option grants to executive officers in order for us to be able to claim deductions for the compensation expense attributable to such stock options. Notwithstanding the foregoing exemptions, we do have a majority of independent directors on our Board of


Apollo Education Group, Inc. | 2015 Form 10-K | 38


Directors and we do have an Audit Committee, a Compensation Committee and a Nominating and Governance Committee composed entirely of independent directors.
The charters for the Compensation Committee, Audit Committee and Nominating and Governance Committee have been adopted by the Board of Directors and are available on our website, www.apollo.edu. These charters provide, among other items, that each member must be independent as such term is defined by the rules of the Nasdaq Stock Market LLC and the Securities and Exchange Commission.
If in the future our Board of Directors elects to rely on the exemptions permitted by the Nasdaq Listing Rules and reduce the number or proportion of independent directors on our Board and its key committees, the influence of independent directors on our management and strategy would be reduced and the influence of the holders of our Class B voting common stock on our management and strategy would increase.
If regulators do not approve or delay their approval of transactions involving a change of control of our company, our eligibility to participate in Title IV programs, our accreditation and our state licenses may be impaired in a manner that materially and adversely affects our business.
A change of ownership or control of Apollo Education Group, depending on the type of change, may have significant regulatory consequences for University of Phoenix. Such a change of ownership or control could require recertification by the U.S. Department of Education, the reevaluation of accreditation by The Higher Learning Commission and/or reauthorization by state licensing agencies. If we experience a change of ownership or control, then University of Phoenix and certain of our other subsidiaries may cease to be eligible to participate in Title IV programs until recertified by the Department. The continuing participation of University of Phoenix in Title IV programs is critical to our business. Any disruption in its eligibility to participate in Title IV programs would materially and adversely impact our business and financial condition.
In addition, University of Phoenix is required to report any material change in stock ownership to its principal institutional accrediting body, The Higher Learning Commission, and would be required to obtain approval prior to undergoing any transaction that affects, or may affect, its corporate control or governance. In the event of any such change, The Higher Learning Commission may undertake an evaluation of the effect of the change on the continuing operations of University of Phoenix for purposes of determining if continued accreditation is appropriate, which evaluation may include a comprehensive review. If the Commission determines that the change is such that prior approval by the Commission was required, but was not obtained, the Commission’s policies require it to consider withdrawal of accreditation. If accreditation by The Higher Learning Commission is suspended or withdrawn, University of Phoenix would not be eligible to participate in Title IV programs until the accreditation is reinstated by the Commission or is obtained from another appropriate accrediting body. There is no assurance that reinstatement of accreditation could be obtained on a timely basis, if at all, and accreditation from a different qualified accrediting authority, if available, would require a significant amount of time. Any material disruption in accreditation would materially and adversely impact our business and financial condition.
In addition, some states in which University of Phoenix is licensed require approval (in some cases, advance approval) of changes in ownership or control in order to remain authorized to operate in those states, and participation in grant programs in some states may be interrupted or otherwise affected by a change in ownership or control.
As discussed above, approximately 51% of our outstanding Class B voting stock, our only class of voting stock, is held by the Class B Trust, and Mr. Peter Sperling beneficially owns the remaining 49% of such shares. A future change in trustees of the Class B Trust, whether resulting from resignation, death, disability or otherwise, may be considered to be a change of control by the Department of Education, The Higher Learning Commission or other regulatory authorities, depending on the circumstances.
We cannot prevent a change of ownership or control that would arise from a transfer of voting stock by the Class B Trust or Mr. Peter Sperling, including a transfer that may occur or be deemed to occur upon the resignation, death or incompetency of one or more of the trustees of the Class B Trust.
Item 1B. Unresolved Staff Comments
None.


Apollo Education Group, Inc. | 2015 Form 10-K | 39


Item 2. Properties
We lease and own real estate primarily in connection with providing educational programs and services. Our principal executive offices are located in Phoenix, Arizona, and we also maintain senior executive offices in Chicago, Illinois. Our properties consist of the following as of August 31, 2015:
 
 
Leased(4)
 
Owned
 
 
Square Feet
 
# of Properties
 
Square Feet
 
# of Properties
University of Phoenix(1)
 
4,839,000

 
162

 

 

Apollo Global(2)
 
646,000

 
59

 
576,000

 
15

Other(3)
 
1,243,000

 
25

 
3,000

 
1

 
 
6,728,000

 
246

 
579,000

 
16

(1) University of Phoenix has closed or is in the process of closing approximately 150 ground locations, as further discussed in Note 2, Restructuring and Impairment Charges, in Part II, Item 8, Financial Statements and Supplementary Data. The University continues to offer many of its academic programs at ground locations primarily in key selected major metropolitan areas throughout the United States.
(2) Apollo Global’s properties are principally located in the United Kingdom, Mexico, Chile, South Africa, Australia and Brazil.
(3) The substantial majority of Other represents office space located in the U.S.
(4) We are rationalizing certain of our real estate facilities and ground locations in connection with our restructuring activities. The properties in the above table include 2.9 million of square feet we are exiting as part of our restructuring activities for which we still have a remaining lease obligation as of August 31, 2015.
Our properties consist of both office and dual purpose space, which includes classroom and office facilities. Leases generally range from five to ten years with one to two renewal options for extended terms. We also lease space from time to time on a short-term basis in order to provide specific courses or programs. We periodically evaluate the current utilization of our educational facilities, projected enrollment and other relevant data to determine facility needs.
Item 3. Legal Proceedings
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. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
A description of pending litigation, settlements, and other proceedings that fall outside the scope of ordinary and routine litigation incidental to our business is provided under Note 16, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.


Apollo Education Group, Inc. | 2015 Form 10-K | 40


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market and Shareholders
Our Class A common stock is traded on the Nasdaq Global Select Market under the symbol “APOL.” As of August 31, 2015, there were 213 registered holders of record of our Class A common stock, none of which are entitled to any voting rights. Because many of our shares of Class A common stock are held by banks, brokers and other financial institutions on behalf of shareholders, there are a substantially greater number of shareholders represented by these registered holders.
The following sets forth the high and low sales prices per share for our Class A common stock as reported by the Nasdaq Global Select Market during each quarter of the two most recent fiscal years:
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
High
 
Low
 
High
 
Low
 
High
 
Low
 
High
 
Low
Fiscal Year 2015
$
17.36

 
$
10.20

 
$
28.53

 
$
16.05

 
$
34.55

 
$
24.82

 
$
31.44

 
$
23.30

Fiscal Year 2014
32.10

 
26.29

 
35.23

 
26.05

 
35.92

 
24.18

 
29.07

 
18.50

There is no established public trading market for our Class B common stock and all shares of our Class B common stock are beneficially owned by three registered affiliate holders.
Dividends
Although we are permitted to pay dividends on our Class A and Class B common stock, we have never paid cash dividends on our common stock. Dividends are payable at the discretion of the Board of Directors, and the Articles of Incorporation treat the declaration of dividends on the Class A and Class B common stock in an identical manner as follows: holders of our Class A and Class B common stock are entitled to receive cash dividends, if and to the extent declared by the Board of Directors, payable to the holders of either class or both classes of common stock in equal or unequal per share amounts, at the discretion of the Board of Directors. We do not expect to pay dividends in the foreseeable future. The decision of our Board of Directors to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition and other factors the Board of Directors may consider relevant.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, which is incorporated herein by reference.
Issuer Purchases of Equity Securities
Our Board of Directors has authorized us to repurchase outstanding shares of our 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 $52.2 million remained available as of August 31, 2015. 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, 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.


Apollo Education Group, Inc. | 2015 Form 10-K | 41


The following details changes in our treasury stock during the three months ended August 31, 2015:
(In thousands, except per share data)
Total Number of Shares Repurchased
 
Average Price Paid per Share
 
Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs
 
Maximum Value of Shares Available for Repurchase Under the Plans or Programs
Treasury stock as of May 31, 2015
80,782

 
$
49.06

 
80,782

 
$
52,224

New authorizations

 

 

 

Share repurchases

 

 

 

Share reissuances
(14
)
 
49.06

 
(14
)
 

Treasury stock as of June 30, 2015
80,768

 
$
49.06

 
80,768

 
$
52,224

New authorizations

 

 

 

Share repurchases

 

 

 

Share reissuances
(238
)
 
49.06

 
(238
)
 

Treasury stock as of July 31, 2015
80,530

 
$
49.06

 
80,530

 
$
52,224

New authorizations

 

 

 

Share repurchases

 

 

 

Share reissuances
(448
)
 
49.06

 
(448
)
 

Treasury stock as of August 31, 2015
80,082

 
$
49.06

 
80,082

 
$
52,224




Apollo Education Group, Inc. | 2015 Form 10-K | 42


Company Stock Performance
The following graph compares the five-year cumulative total return attained by shareholders on our Class A common stock relative to the cumulative total returns of the S&P 500 index and a customized peer group which includes the following companies:
Peer Group
American Public Education, Inc.
Capella Education Company
DeVry Education Group Inc.
ITT Educational Services, Inc.
Bridgepoint Education, Inc.
Career Education Corporation
Grand Canyon Education, Inc.
Strayer Education, Inc.
An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our Class A common stock, in the S&P 500 Index, and in the peer group on August 31, 2010, and its relative performance is tracked through August 31, 2015. The stock price performance included in this graph is based on historical results and is not necessarily indicative of future stock price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among Apollo, the S&P 500 Index and a Peer Group
* $100 invested on August 31, 2010 in stock, index and peer group, including reinvestment of dividends.
Source: Standard & Poor’s.
 
Fiscal Year Ending August 31,
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
Apollo
$
100

 
$
110

 
$
63

 
$
44

 
$
65

 
$
26

S&P 500 Index
100

 
118

 
140

 
166

 
208

 
209

Peer Group
100

 
107

 
59

 
78

 
89

 
64

The information contained in the performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission nor shall such information be deemed incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.


Apollo Education Group, Inc. | 2015 Form 10-K | 43


Item 6. Selected Financial Data
The following selected financial data is derived from our consolidated financial statements and is qualified by reference to and should be read in conjunction with Item 8, Financial Statements and Supplementary Data, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, to fully understand factors that may affect the comparability of the information. The historical results are not necessarily indicative of the results to be expected in any future period.
We have made certain reclassifications to the selected financial data associated with our presentation of Carnegie Learning as discontinued operations. Refer to Note 3, Discontinued Operations, in Item 8, Financial Statements and Supplementary Data.
 
As of August 31,
($ in thousands)
2015
 
2014
 
2013
 
2012
 
2011
Cash and cash equivalents
$
503,705

 
$
1,228,813

 
$
1,414,485

 
$
1,276,375

 
$
1,571,664

Restricted cash and cash equivalents
198,369

 
224,135

 
259,174

 
318,334

 
379,407

Current marketable securities
194,676

 
187,472

 
105,809

 

 

Noncurrent marketable securities
95,815

 
87,811

 
43,941

 
5,946

 
5,946

Total assets
2,204,795

 
3,092,935

 
2,997,947

 
2,868,322

 
3,269,706

Total debt
45,646

 
657,096

 
692,054

 
719,911

 
599,009

Total liabilities
1,047,822

 
1,847,606

 
1,879,938

 
1,943,999

 
2,025,717

Redeemable noncontrolling interests
11,915

 
64,527

 

 

 

Total equity
1,145,058

 
1,180,802

 
1,118,009

 
924,323

 
1,243,989

 
Year Ended August 31,
(In thousands, except per share data)
2015
 
2014
 
2013
 
2012
 
2011
Net revenue
$
2,566,277

 
$
2,996,865

 
$
3,613,851

 
$
4,183,307

 
$
4,635,031

Operating income(1)
114,944

 
354,964

 
455,979

 
700,928

 
936,405

Income from continuing operations
47,480

 
221,430

 
267,477

 
397,553

 
517,666

Net income
24,295

 
204,798

 
248,965

 
417,006

 
535,796

Net income attributable to Apollo
29,755

 
209,304

 
248,526

 
422,678

 
572,427

Earnings (loss) per share - Basic:
 

 
 

 
 

 
 
 
 
Continuing operations attributable to Apollo
$
0.49

 
$
2.03

 
$
2.37

 
$
3.36

 
$
3.93

Discontinued operations attributable to Apollo
(0.21
)
 
(0.15
)
 
(0.17
)
 
0.12

 
0.12

Basic income per share attributable to Apollo
$
0.28

 
$
1.88

 
$
2.20

 
$
3.48

 
$
4.05

Earnings (loss) per share - Diluted:
 

 
 

 
 

 
 

 
 

Continuing operations attributable to Apollo
$
0.49

 
$
2.01

 
$
2.36

 
$
3.34

 
$
3.91

Discontinued operations attributable to Apollo
(0.22
)
 
(0.15
)
 
(0.17
)
 
0.11

 
0.13

Diluted income per share attributable to Apollo
$
0.27

 
$
1.86

 
$
2.19

 
$
3.45

 
$
4.04

Basic weighted average shares outstanding
108,092

 
111,354

 
112,712

 
121,607

 
141,269

Diluted weighted average shares outstanding
109,038

 
112,610

 
113,285

 
122,357

 
141,750

(1) Operating income includes:
Restructuring and impairment charges of $81.8 million, $85.3 million, $197.0 million, $38.7 million and $22.9 million in fiscal years 2015, 2014, 2013, 2012 and 2011, respectively;
Acquisition and other related costs of $6.2 million and $19.8 million in fiscal years 2015 and 2014, respectively;
Litigation charges (credits) of $0.1 million, $13.9 million, $(24.6) million, $4.7 million, and $(12.0) million in fiscal years 2015, 2014, 2013, 2012 and 2011, respectively; and
Goodwill and other intangibles impairment of $16.8 million and $219.9 million in fiscal years 2012 and 2011, respectively.


Apollo Education Group, Inc. | 2015 Form 10-K | 44


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and related notes included in Item 8, Financial Statements and Supplementary Data.
Overview
Apollo Education Group, Inc. is one of the world’s largest private education providers, serving students since 1973. We believe that our success depends on providing high quality education and career pathways, tools and services to students to maximize the benefits of their educational experience. We offer undergraduate, graduate, certificate and nondegree educational programs and services, online and on-campus, principally to working learners in the U.S. and abroad.
Substantially all of our net revenue is composed of tuition and fees for educational services. In fiscal year 2015, University of Phoenix represented 84% of our total consolidated net revenue, and generated more than 100% of our total consolidated operating income.
Key Trends, Developments and Challenges
The following developments and trends present opportunities, challenges and risks relating to our business:
Rapidly Evolving and Highly Competitive Education Industry
The higher education industry continues to experience rapidly developing changes due to a challenging regulatory environment, technological developments, evolving needs and objectives of students and employers, economic constraints affecting educational institutions and students, price competition, increased focus on affordability and value, uneven quality of secondary education in the U.S. and other factors that challenge many of the core principles underlying the industry. In addition, one of our primary competitive advantages has been materially diminished as a significant and increasing number of traditional four-year and community colleges offer an increasing array of distance learning and other online education programs, including programs that are geared towards the needs of working learners. Already, this type of competition is significant and has contributed to the substantial decline in University of Phoenix enrollment over the past five years. See further discussion of enrollment in Results of Operations below.
Furthermore, as discussed below, University of Phoenix expects to implement enhanced minimum admissions criteria to better ensure that newly enrolled students are adequately prepared for the rigors of higher education. Many of the students who do not meet these enhanced admissions criteria will not be eligible for admission to traditional four-year colleges and universities. Accordingly, these new admissions standards will increase the proportion of University of Phoenix’s potential students for which the University competes directly with the traditional educational institutions, further intensifying competition.
University of Phoenix Transformation
The University’s vision is to be recognized as the most trusted provider of career-relevant higher education for working adults. In furtherance of this, the University offers career focused programs and an instructional model designed specifically to meet the educational needs of working adults, which is further discussed in Part I, Item 1, Business - University of Phoenix. Due in part to the competitive factors described above, University of Phoenix Degreed Enrollment decreased by 18% over the past fiscal year and 60% over the past five fiscal years. The University is working to stabilize enrollment and eventually return to growth by transforming itself into a more focused, higher retaining and less complex institution through several initiatives, including:
Continuing the development of a college-by-college approach that more effectively addresses the specific needs of the students and employers served by each college;
Piloting enhanced admissions criteria to be implemented beginning in fiscal year 2016 to increase the proportion of newly enrolled students who are better prepared for the rigors of college level coursework, and tailoring initial course sequences to match the academic capabilities of students when they first enroll;
Eliminating certain associate degree programs which have lower retention rates and are less career relevant, and adding more career-focused pathways that offer certificates and four-year bachelor’s degrees in key growth areas of the employment market;
Concentrating on ground locations in key selected major metropolitan areas throughout the United States in order to establish a stronger regional presence that meets the needs of both on-ground and online students;
Reducing the number of student cohort start dates from approximately every week to approximately every five weeks for the substantial majority of students in order to reduce complexity and improve the classroom experience;


Apollo Education Group, Inc. | 2015 Form 10-K | 45


Modifying marketing activities by discontinuing substantially all use of third-party operated sites in order to better manage the University’s marketing message and to improve its ability to identify students more likely to persist in its educational programs and reduce cost;
Transitioning technology systems from proprietary and legacy systems, including the University’s online classroom, to commercial software and software as a service providers to reduce costs, improve operations and facilitate future systems upgrades; and
Developing increased student self service capabilities, including in admissions, financial aid, academic planning and class scheduling.
We expect that these initiatives will accelerate the current rate of decline in enrollment at University of Phoenix, perhaps significantly, during the near term, but in the longer term will improve retention and graduation rates and position the University to return to growth in the future.
Professional Development
Although degree programs represent the substantial majority of our revenue, we are increasing our professional development and other nondegree programs, both domestically and internationally, to address the growing needs of employees and employers for specialized, nondegree education and training.
Business Reengineering
We continue to reengineer our business processes and educational delivery systems to improve the efficiency and effectiveness of our services to students, and reduce costs to align with our lower enrollment and revenue. These activities include streamlining and, where appropriate, automating our administrative and student facing services and closing underutilized or unnecessary University of Phoenix campus locations. In furtherance of this, the University approved the closure of 24 additional ground locations during the fourth quarter of fiscal year 2015, and continues to actively evaluate the extent, functionality and location of its ground facilities. See further discussion of University of Phoenix ground locations in Results of Operations below.
Online Student Classroom
University of Phoenix implemented a new proprietary online student classroom in late June 2014, which experienced technical challenges that adversely impacted the user experience of its students. We completed a substantial portion of the corrective measures during the second quarter of fiscal year 2015, and continued to provide enhancements to the learning management system throughout the remainder of fiscal year 2015. In June 2015, we entered into an agreement with a leading provider of learning management systems to implement a new learning management system for University of Phoenix, which the University expects to begin phasing in for new students in calendar year 2016. The University believes this arrangement eventually will reduce cost and complexity, make it easier to incorporate improvements.
Expansion of Global Operations
We have operations on six continents and are working to expand our global operations, including exploring new opportunities for growth outside the U.S. in areas of non-traditional higher education, such as certificate programs and vocational education. The integration and operation of acquired businesses in foreign jurisdictions entails substantial regulatory, market and execution risks and, consistent with our experience to date, such acquisitions may not be accretive for an extended period of time.
Regulatory Environment
In recent years, there has been substantial and continued increased focus by members of the U.S. Congress and federal agencies, including the Department of Education, the Consumer Financial Protection Bureau and the Federal Trade Commission, on the role that proprietary educational institutions play in higher education. 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. In addition, the Department of Education has formed an inter-agency task force involving multiple federal agencies and departments including the Federal Trade Commission, the U.S. Departments of Justice, Treasury and Veterans Affairs, the Consumer Financial Protection Bureau, the Securities and Exchange Commission, and numerous state attorneys general, to coordinate activities and share information to protect students from unfair, deceptive and abusive policies and practices. We expect that this challenging regulatory environment will continue for the foreseeable future.


Apollo Education Group, Inc. | 2015 Form 10-K | 46


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 Part I, Item 1A, Risk Factors.
Financial Aid Funding
The most recent reauthorization of the federal Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in Higher Education Act reauthorization hearings, but the timing and terms of any eventual reauthorization cannot be predicted.
Title IV program funding is a potential target for reduction as Congress seeks to reduce the U.S. budget deficit. Because the majority of our revenue is derived from Title IV programs, any action by Congress that reduces Title IV program funding, or which alters the eligibility of our institutions or students to participate in Title IV programs could have a material adverse effect on our enrollment and financial condition. 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 Title IV program funding, military benefit programs may be reduced as military branches address decreased funding. Reductions and/or changes in military benefit programs, or changes in our eligibility to participate in such programs could result in increased student borrowing, decreased enrollment and adverse impacts on our 90/10 Rule percentage. In October 2015, University of Phoenix was placed on probationary status in respect of its participation in the U.S. Department of Defense Tuition Assistance Program for active duty military personnel. During this probation, newly enrolled active duty military personnel will not be eligible to participate in this program, the funding under which represented less than 1% of the University’s net revenue in fiscal year 2015. If the University’s eligibility is terminated, currently enrolled students will no longer be able to participate in the Tuition Assistance Program.
Gainful Employment
Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide information to prospective students about each eligible program, including the relevant recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers.
In October 2014, the U.S. Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether an academic program prepares students for gainful employment in a recognized occupation, as discussed in Part I, Item 1, Business - Regulatory Environment. The Department has indicated that the official 2014 gainful employment debt service-to-earnings ratios will be issued sometime during calendar year 2016. The expected timing of the issuance of the 2015 ratios has not yet been announced. We believe it is likely that some of University of Phoenix’s programs will be impacted by the regulations. However, the University ceased enrolling new students in most of the programs it believes may be impacted in connection with its initiatives to transform itself into a more focused, higher retaining and less complex institution. Students currently enrolled in these programs represent approximately 10% of the University’s Degreed Enrollment and these programs will continue for such students, who will be taught-out in due course.
Changes in student borrowing needs and practices, student loan interest rates, labor markets and other factors outside of our control could adversely impact compliance with these regulations for some of our programs in the future. The Department has not yet announced the protocol for calculating and disseminating the debt service-to-earnings ratios. Because the ratios will be issued by the Department after the measuring period, we may not know of a program’s failure to meet the tests until after the measuring period, and students enrolled in such a program could lose their access to federal financial aid before completing the program.
U.S. Department of Education Program Participation Agreement
University of Phoenix’s Title IV Program Participation Agreement expired December 31, 2012. The University has submitted necessary documentation for recertification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We believe that the University’s application will be renewed in due course. However, we cannot predict whether or to what extent the continued challenging political and regulatory climate and other recent developments relating to our business may have on the timing or outcome of the recertification process.
Continued Title IV program eligibility is critical to the operation of our business. If University of Phoenix becomes ineligible to participate in Title IV programs, or participation is materially limited, we could not conduct our business as it is currently conducted and it would have a material adverse affect on our business and financial condition.


Apollo Education Group, Inc. | 2015 Form 10-K | 47


The Higher Learning Commission Accreditation
In July 2013, the accreditation of University of Phoenix was reaffirmed by The Higher Learning Commission, its institutional accreditor (“HLC”), through the 2022-2023 academic year. At the same time, HLC placed the University on Notice status for a two-year period. Notice status is a sanction that means that HLC has determined that an institution is on a course of action that, if continued, could lead the institution to be out of compliance with one or more of the HLC Criteria for Accreditation or Core Components.
The University submitted a Notice Report to HLC in November 2014 providing evidence that the University has ameliorated those conditions that led to the Notice status and continues to meet the relevant accreditation requirements. The HLC Board of Trustees subsequently removed the University from Notice status, effective June 25, 2015.
The University remains assigned by HLC to the Standard Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2016-2017 and will undergo its next reaffirmation process in 2022-2023.
In addition to the above, as a condition of HLC’s approval of the July 2014 changes to the voting stock trust which holds approximately 51% of our outstanding Class B common shares, the only class of Apollo voting stock, University of Phoenix hosted a visit by an HLC peer review team in December 2014 focused on ascertaining the appropriateness of the prior approval. Following the site visits, the Institutional Actions Council of HLC took final action affirming the appropriateness of the change of control approval.
Federal Trade Commission Investigation
In July 2015, we received a Civil Investigative Demand from the U.S. Federal Trade Commission (the “FTC”) relating to an investigation to determine if certain unnamed persons, partnerships, corporations, or others have engaged or are engaging in deceptive or unfair acts or practices in or affecting commerce in the advertising, marketing, or sale of secondary or postsecondary educational products or services or educational accreditation products or services. The Demand requires us to produce documents and information regarding a broad spectrum of the business and practices of University of Phoenix, including in respect of marketing, recruiting, enrollment, financial aid, tuition and fees, academic programs, academic advising, student retention, billing and debt collection, complaints, accreditation, training, military recruitment, and other compliance matters, for the time period of January 1, 2011 to the present.
In addition, in August 2015, we received a notice from the FTC that it had commenced an inquiry into the University of Phoenix’s practices and procedures for safeguarding student and staff personal information, with a request for relevant information from the University.
We are cooperating with these inquiries, but we cannot at this time predict their eventual scope, duration or outcome.
For a more detailed discussion of our business, industry and risks, refer to Item 1, Business, and Item 1A, Risk Factors.


Apollo Education Group, Inc. | 2015 Form 10-K | 48


Other Events
In addition to the above items, we experienced the following other events during fiscal year 2015 and to date:
1.
Acquisition of FAEL. On December 4, 2014, we acquired a 75% interest in Sociedade Técnica Educacional da Lapa S.A., which provides postsecondary educational programs in Brazil under the name Faculdade da Educacional da Lapa (“FAEL”). Refer to Note 4, Acquisitions, in Item 8, Financial Statements and Supplementary Data.
2.
Executive Management Changes. We experienced the following executive management changes:
Brian L. Swartz resigned from his position as Senior Vice President and Chief Financial Officer during May 2015; and
Gregory J. Iverson was appointed as our Chief Financial Officer, effective October 26, 2015. Joseph L. D’Amico, who has been serving as our Interim Chief Financial Officer since May 2015, will transition to the role of Senior Advisor to the Chief Executive Officer.
3.
Purchase of Open Colleges Noncontrolling Interests. On June 5, 2015, we purchased the remaining 30% noncontrolling ownership interests in Open Colleges. Refer to Note 13, Shareholders’ Equity and Redeemable Noncontrolling Interests, in Item 8, Financial Statements and Supplementary Data.
4.
Acquisition of The Iron Yard. On June 11, 2015, we acquired a 62% interest in TIY Academy, LLC (“The Iron Yard”), a provider of nondegree information technology bootcamp programs in the United States. Refer to Note 4, Acquisitions, in Item 8, Financial Statements and Supplementary Data.
5.
Career Partner GmbH. On October 20, 2015, we entered into an agreement to acquire all of the outstanding shares of Career Partner GmbH, a provider of education and training programs in Germany, for an initial cash payment of €96 million (equivalent to approximately $109 million as of October 20, 2015), plus a contingent obligation calculated principally based on Career Partner’s operating results for calendar year 2016. The transaction is subject to various closing conditions, the satisfaction of which is uncertain at this time. If the closing conditions are satisfied, the transaction is expected to close during the second quarter of our fiscal year 2016.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements in accordance with GAAP requires management to make certain estimates, assumptions and judgments that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Although we believe our estimates, assumptions and judgments are reasonable, actual results may differ materially from our estimates under different assumptions, judgments or conditions.
Our significant accounting policies, which are detailed in Note 1, Nature of Operations and Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, describe the significant accounting policies and methods used in the preparation of our consolidated financial statements. Of our significant accounting policies, we consider the following policies to be critical as they involve a higher degree of subjective or complex judgments and assumptions, often as a result of the need to make estimates about the effect of inherently uncertain matters: (i) Revenue Recognition, (ii) Allowance for Doubtful Accounts, (iii) Goodwill and Intangibles, (iv) Other Long-Lived Asset Impairments, (v) Restructuring and Impairment Charges, (vi) Loss Contingencies, and (vii) Income Taxes.
Revenue Recognition
Substantially all of our net revenue is composed of tuition and fees from educational programs that range in length from one-day seminars to degree and nondegree programs lasting multiple years. University of Phoenix represents the substantial majority of our total consolidated net revenue, and substantially all of the University’s net revenue is generated from degree programs. University of Phoenix students fund their education through loans and/or grants from U.S. federal financial aid programs established by Title IV of the Higher Education Act and regulations promulgated thereunder (“Title IV”), military benefit programs, tuition assistance from their employers, or personal funds.


Apollo Education Group, Inc. | 2015 Form 10-K | 49


Our net revenue generally varies from period to period based on several factors, including the aggregate number of students attending educational programs, the number of programs or classes held during the period, and the tuition price per program. The following summarizes our net revenue for the respective periods:
 
Year Ended August 31,
($ in thousands)
2015
 
2014
 
2013
Tuition and educational services(1)
$
2,646,447

 
103
 %
 
$
3,030,064

 
101
 %
 
$
3,622,767

 
100
 %
Educational materials
224,434

 
9
 %
 
219,085

 
7
 %
 
252,441

 
7
 %
Other
21,045

 
1
 %
 
22,715

 
1
 %
 
20,743

 
1
 %
Gross revenue
2,891,926

 
113
 %
 
3,271,864

 
109
 %
 
3,895,951

 
108
 %
Discounts(2)
(325,649
)
 
(13
)%
 
(274,999
)
 
(9
)%
 
(282,100
)
 
(8
)%
Net revenue
$
2,566,277

 
100
 %
 
$
2,996,865

 
100
 %
 
$
3,613,851

 
100
 %
(1) Tuition and educational services revenue includes $24.2 million, $32.3 million and $53.4 million of tuition benefits for our employees and their eligible dependents during fiscal years 2015, 2014 and 2013, respectively. Such benefits are also included in instructional and student advisory expenses.
(2) University of Phoenix has increased its use of discounts, grants and scholarships in recent years. See further discussion below and in Results of Operations in this MD&A.
We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered or delivery has occurred, our fee or price to the customer is fixed or determinable, and collectibility is reasonably assured.
Tuition and educational services encompasses all educational delivery modes (i.e., online, on-ground, etc.), and we recognize revenue over the period of instruction as services are delivered to students, which may vary depending on the program structure.
Under University of Phoenix’s non-term academic delivery model, students generally enroll in a program of study encompassing a series of five- to nine-week courses taken consecutively over the length of the program. Students are billed separately for each course when the student first attends a course, resulting in the recording of a receivable from the student and deferred revenue in the amount of the billing. The University generally recognizes revenue evenly over the period of instruction (e.g., five weeks for a five-week course) as services are delivered to the student. For students who participate in the University’s risk-free, three-week program during their first credit-bearing course, the University does not recognize revenue for the risk-free period until students decide to continue beyond the risk-free period, which is when the tuition and fees become fixed and determinable.
University of Phoenix’s refund policy permits students who attend 60% or less of a course to be eligible for a refund for the portion of the course they did not attend. Accordingly, the University ceases revenue recognition for the remainder of a course if a student withdraws prior to the tuition refund period elapsing, and refunds result in a reduction of deferred revenue in the period that a student withdraws. This refund policy applies to students in most, but not all states, as some states require different policies. Additionally, the University reassesses collectibility throughout the period revenue is recognized when there are changes in facts or circumstances that indicate collectibility is no longer reasonably assured, including when the University determines that a student has withdrawn.
Tuition revenue for our Apollo Global operations is generally recognized over the length of the course and/or program. However, we recognize revenue associated with Open Colleges’ educational offerings over the shorter of the contractual period that students are provided access to complete their online, asynchronous program or the period of time it takes students to complete their program. As a result, revenue recognition for Open Colleges’ educational offerings generally extends beyond one year.
Educational materials encompasses online course materials delivered to students over the period of instruction, and various textbooks and other learning materials. We recognize revenue associated with online materials over the period of the related course to correspond with delivery of the materials to students. We recognize revenue for other educational materials when they have been delivered to and accepted by students or other customers.
Other includes fees students pay when submitting an enrollment application and non-tuition revenues such as renting classroom space.
Discounts represent institutional scholarships, grants and promotions. This includes reductions in charges for tuition or other fees from our standard rates typically provided to military, corporate and other employer students. Discounts are generally recognized over the period of instruction in the same manner as the related revenue to which the discount relates.


Apollo Education Group, Inc. | 2015 Form 10-K | 50


University of Phoenix offers scholarship programs designed to improve the value proposition for students by providing the opportunity to earn increased tuition discounts as they progress in their programs. We estimate the amount of these future discounts based on our historical experience with student persistence and recognize the associated amount either over the period the discount is earned by the student or when the student is no longer eligible, as applicable. As of August 31, 2015 and 2014, we had $44.7 million and $14.9 million, respectively, of student discounts, grants and scholarships in accrued and other current liabilities on our Consolidated Balance Sheets, the substantial majority of which represents the estimated amount of future discounts associated with these programs. We routinely evaluate our estimation methodology for these programs and modify them as necessary.
Sales and other indirect tax collected from students is excluded from net revenue. Collected but unremitted sales and other indirect tax is included as a liability on our Consolidated Balance Sheets and is not material to our consolidated financial statements.
Allowance for Doubtful Accounts
We reduce our accounts receivable by an allowance for amounts that we expect to be uncollectible. We use estimates that are subjective and require judgment in determining the allowance for doubtful accounts, and estimates may vary depending on the institution or educational program that generated the accounts receivable. In general, our estimates are based on historical collection experience and write-offs, the aging of our receivables, and current trends. Our accounts receivable are written off once the account is deemed to be uncollectible, which typically occurs after outside collection agencies have pursued collection for approximately six months.
For our Title IV eligible institutions, program participation rules determine if we are required to return a portion of the funds to the U.S. Department of Education when a student with Title IV program loans withdraws. We are then entitled to collect these funds from the students, but collection rates for these types of receivables are significantly lower than our collection rates for receivables from students who remain in our educational programs.
We estimate our allowance for doubtful accounts for University of Phoenix’s receivables by considering a number of factors that we believe impact whether receivables will become uncollectible based on our collections experience. These factors include, but are not limited to, the student’s academic performance and previous college experience, as well as other student characteristics such as credit hours earned and method of payment. We also monitor and consider external factors such as changes in the economic and regulatory environment.
We routinely evaluate our estimation methodologies for all our institutions and educational programs for adequacy and modify them as necessary. In doing so, we believe our allowance for doubtful accounts reflects the amount of receivables that will become uncollectible by considering our most recent collections experience, changes in trends and other relevant facts.
We recorded bad debt expense of $59.2 million, $53.8 million and $83.8 million during fiscal years 2015, 2014 and 2013, respectively. Our allowance for doubtful accounts was $42.3 million and $50.1 million as of August 31, 2015 and 2014, respectively, which approximated 18% and 20% of gross student receivables as of the respective dates. For the purpose of sensitivity:
A one percent change in our allowance for doubtful accounts as a percentage of gross student receivables as of August 31, 2015 would have resulted in a pre-tax change in income of $2.3 million; and
If our bad debt expense were to change by one percent of net revenue for the fiscal year ended August 31, 2015, we would have recorded a pre-tax change in income of approximately $25.7 million.
Refer to Results of Operations below for a discussion of bad debt expense trends in recent years.
Goodwill and Intangibles
Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed. We allocate assets acquired, including goodwill, and liabilities assumed in business combinations to our respective reporting units. We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components.
Our intangibles principally consist of trademarks, regulatory accreditations and designations, and course curriculum. We assign indefinite lives to intangibles that we believe have the continued ability to generate cash flows indefinitely; have no legal, regulatory, contractual, economic or other factors limiting the useful life of the respective intangible; and we intend to renew the respective intangible, as applicable, and renewal can be accomplished at little cost.
Finite-lived intangibles are amortized on either a straight-line basis or using an accelerated method to reflect the pattern in which the economic benefits of the asset are expected to be consumed. The weighted average original useful life of our $39.9 million of finite-lived intangibles as of August 31, 2015 was 6.6 years.


Apollo Education Group, Inc. | 2015 Form 10-K | 51


We assess goodwill and indefinite-lived intangibles for impairment annually, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit or indefinite-lived intangible below its carrying amount. We perform our annual indefinite-lived intangibles impairment tests on the same dates that we perform our annual goodwill impairment tests for the respective reporting units. In performing our impairment tests, we first consider the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or intangible, as applicable, is less than its carrying amount. If we conclude that it is more likely than not that the fair value is less than the carrying amount based on our qualitative assessment, or that a qualitative assessment should not be performed, we proceed with the following quantitative impairment tests:
Goodwill - We compare the estimated fair value of the reporting unit to the carrying value of its net assets. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, we perform a hypothetical purchase price allocation to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. An impairment loss is recognized to the extent the implied fair value of the goodwill is less than the carrying amount of the goodwill.
Indefinite-lived intangibles - We compare the estimated fair value of the intangible with its carrying value. If the carrying value of the intangible exceeds its fair value, an impairment loss is recognized in the amount of that excess.
Our goodwill and indefinite-lived intangibles for our reporting units within our reportable segments are summarized below:
($ in thousands)
Annual
Impairment
Test Date
 
Goodwill
as of August 31,
 
Indefinite-lived Intangibles
as of August 31,
2015
 
2014
2015
 
2014
University of Phoenix
May 31
 
$
71,812

 
$
71,812

 
$

 
$

Apollo Global(1):
 
 
 

 
 

 
 

 
 

Open Colleges
July 1
 
103,002

 
134,561

 

 

BPP
July 1
 

 

 
84,401

 
90,461

Milpark Education
July 1
 
17,760

 
21,828

 
5,638

 
6,930

ULA
May 31
 
11,436

 
14,809

 
1,835

 
2,377

FAEL
July 1
 
10,401

 

 
10,849

 

UNIACC
May 31
 

 

 
665

 
808

Other:
 
 
 

 
 

 
 

 
 

The Iron Yard
July 1
 
15,888

 

 

 

College for Financial Planning
August 31
 
15,310

 
15,310

 

 

Western International University
May 31
 
1,581

 
1,581

 

 

Carnegie Learning(2)
May 31
 

 

 

 
14,100

Total
 
 
$
247,190

 
$
259,901

 
$
103,388

 
$
114,676

(1) The functional currencies of our foreign subsidiaries are generally the local currencies. Accordingly, the goodwill and intangibles of our foreign subsidiaries are adjusted for translation into U.S. dollars using exchange rates in effect at the balance sheet dates. The balances will change in the future as a result of foreign currency translation adjustments.
(2) As of August 31, 2015, Carnegie Learning is included in assets held for sale on our Consolidated Balance Sheets. Refer to Note 3, Discontinued Operations, in Item 8, Financial Statements and Supplementary Data.
The process of evaluating goodwill and indefinite-lived intangibles for impairment is subjective and requires significant judgment at many points during the analysis. If we elect to perform an optional qualitative analysis, we consider many factors including, but not limited to, general economic conditions, industry and market conditions, financial performance and key business drivers, long-term operating plans, and potential changes to significant assumptions used in the most recent fair value analysis for either the reporting unit or respective intangible.
When performing a quantitative goodwill or indefinite-lived intangibles impairment test, we generally determine fair value using an income-based approach, a market-based approach or a combination of both methods. The fair value determination consists primarily of using significant unobservable inputs (Level 3) under the fair value measurement standards. We believe the most critical assumptions and estimates in determining the estimated fair value of our reporting units or indefinite-lived intangibles include, but are not limited to, the amounts and timing of expected future cash flows, the discount rate applied to those cash flows, terminal growth rates, selection of comparable market multiples, assumed control premiums and applying weighting factors when multiple valuation methods are used. The assumptions used in determining our expected future cash flows consider various factors such as historical operating trends and long-term operating strategies and initiatives. The


Apollo Education Group, Inc. | 2015 Form 10-K | 52


discount rate used by each reporting unit is based on our assumption of a prudent investor’s required rate of return of assuming the risk of investing in a particular company in a specific country. The terminal growth rate reflects the sustainable operating income a reporting unit could generate in a perpetual state as a function of revenue growth, inflation and future margin expectations.
Fiscal Year 2015 Impairment Testing
Our market capitalization declined significantly during the fourth quarter of fiscal year 2015 after we reported our third quarter results. We believe the decline in the fourth quarter of fiscal year 2015 was principally attributable to University of Phoenix’s lower enrollment and uncertainty associated with the University’s announced change in strategy to transform into a more focused, higher retaining and less complex institution. Although we believe the University’s new strategy will favorably impact student retention, graduation rates and cost to enroll in the long-term, we announced that the associated initiatives, taken as a whole, will negatively impact its new enrollment and cash flows in the short-term. Based primarily on the decline in market capitalization, we performed an interim goodwill impairment analysis for University of Phoenix in the fourth quarter of fiscal year 2015.
University of Phoenix represents the substantial majority of our consolidated operating results and, as discussed above, we believe our market capitalization decline in the fourth quarter of fiscal year 2015 was principally attributable to the University. Accordingly, we determined the fair value of our University of Phoenix reporting unit using a market-based approach primarily due to uncertainty viewed by market participants associated with the University’s expected future cash flows. The critical assumptions in the market-based approach included comparable market multiples and an assumed control premium for a market participant to acquire a controlling interest in the University. Based on our evaluation, University of Phoenix’s estimated fair value exceeded carrying value by a margin of more than 15% of the University’s estimated fair value. We may be required to record an impairment in the future if our critical assumptions deteriorate or our market capitalization declines further.
We did not record any impairment charges associated with our other reporting units as the estimated fair value of each of the reporting units exceeded the carrying value of their respective net assets as of their annual impairment test dates. We elected to perform qualitative assessments for certain of our reporting units. For reporting units that we tested using a quantitative approach, which includes Open Colleges and Milpark Education, the estimated fair values exceeded the respective carrying values by margins of more than 15% of their respective estimated fair values. We determined the fair values of both Open Colleges and Milpark Education using a combination of the discounted cash flow valuation method and market-based approaches, to which we applied more weighting to the market-based approaches. If the critical assumptions used in our impairment testing for these reporting units deteriorate or are otherwise adversely impacted, a lower fair value estimate may result. In particular, the goodwill acquired in our recent acquisitions was principally attributable to future earnings potential associated with student growth. If these acquired entities do not achieve our forecasts, the goodwill could be impaired in the future.
During the fourth quarter of fiscal year 2015, we compared the sum of the estimated fair values of our reporting units to our market capitalization, plus an assumed control premium to acquire a controlling interest in Apollo. Apollo is a “Controlled Company” under Nasdaq listing rules and our market capitalization is based solely on our nonvoting publicly traded Class A common stock. Based on our evaluation, the fair values of our reporting units were reasonable in relation to our market capitalization.
The BPP trademark represents the substantial majority of our indefinite-lived intangibles. We tested the BPP trademark using a quantitative approach and estimated its fair value using the relief-from-royalty method, which represents the benefit of owning the trademark rather than paying royalties for its use. The estimated fair value of the BPP trademark exceeded its carrying value by a margin representing more than 30% of its fair value.
Other Long-Lived Asset Impairments
We evaluate the carrying amount of our other long-lived assets, including property and equipment and finite-lived intangibles, whenever changes in circumstances or events indicate that the carrying value of such assets may not be recoverable. If such circumstances or events occur, we assess recoverability by comparing the estimated undiscounted future cash flows expected to be generated by the assets with their carrying value. If the carrying value of the assets exceeds the estimated undiscounted future cash flows expected to be generated by the assets, an impairment loss is recognized for the difference between the estimated fair value of the assets and their carrying value.
During fiscal year 2015, we recorded $9.9 million of long-lived asset impairment charges that are included in restructuring and impairment charges on our Consolidated Statements of Income. Additionally, we recorded long-lived asset impairments associated with Carnegie Learning, which is presented as held for sale as of August 31, 2015 and its operating results are included in discontinued operations for all periods presented. Refer to Note 2, Restructuring and Impairment Charges, and Note 3, Discontinued Operations, in Item 8, Financial Statements and Supplementary Data.


Apollo Education Group, Inc. | 2015 Form 10-K | 53


As of August 31, 2015, we believe the carrying amounts of our remaining other long-lived assets are recoverable and no impairment exists. However, we are continuing to reduce costs to align with our lower enrollment and revenue, and changes to our business or other circumstances could lead to potential impairments in the future.
Restructuring and Impairment Charges
Restructuring and impairment charges principally consist of non-cancelable lease obligations, severance and other employee separation costs, other related costs and certain long-lived asset impairments. We recognize restructuring obligations and liabilities for exit and disposal activities at fair value in the period the liability is incurred. Measuring fair value and recognizing the associated liabilities is subjective and requires significant judgment. For our non-cancelable lease obligations, we record the obligation when we terminate the contract in accordance with the contract terms or when we cease using the right conveyed by the contract. Our employee severance costs are expensed on the date we notify the employee, unless the employee must provide future service, in which case the benefits are expensed over the future service period.
We generally estimate the fair value of restructuring obligations using significant unobservable inputs (Level 3) based on the best available information. For non-cancelable lease obligations, the fair value estimate is based on the contractual lease costs over the remaining terms of the leases, partially offset by estimated future sublease rental income. Our estimate of the amount and timing of sublease rental income considers subleases we have executed or expect to execute, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the facilities. The estimates are subject to adjustment as market conditions change or as new information becomes available, including the execution of sublease agreements.
Changes to restructuring obligations in periods subsequent to the initial fair value measurement are not measured at fair value. We record a cumulative adjustment resulting from changes in the estimated timing or amount of cash flows associated with restructuring obligations in the period of change using the same discount rate that was initially used to measure the obligation’s fair value. Changes in restructuring obligations resulting from the passage of time are recorded as accretion expense. Adjustments to restructuring obligations, including accretion expense, are included in restructuring and impairment charges on our Consolidated Statements of Income.
We began initiating restructuring activities in fiscal year 2011 to reengineer our business processes and educational delivery systems to improve the efficiency and effectiveness of our services to students. We have subsequently continued restructuring activities to further reduce costs to align with our lower enrollment and revenue. As detailed further in Results of Operations in this MD&A, we have incurred $37.1 million, $85.3 million and $197.0 million of restructuring expense in fiscal years 2015, 2014 and 2013, respectively, associated with restructuring activities initiated prior to fiscal year 2015. We incurred $34.8 million of additional restructuring expense in fiscal year 2015 for new restructuring activities initiated during the fiscal year. The following details the changes in our restructuring obligations by type of cost during fiscal year 2015:
 
Lease and Related
Costs, Net
 
Severance and Other Employee
Separation Costs
 
Other Restructuring
Related Costs
 
Total
($ in thousands)
2015 Restructuring
 
Prior Year Restructuring(1)
 
2015 Restructuring
 
Prior Year Restructuring(1)
 
2015 Restructuring
 
Prior Year Restructuring(1)
 
August 31, 2014

 
96,204

 

 
5,687

 

 
1,192

 
103,083

Expense(1)
1,022

 
35,018

 
28,628

 
1,355

 
5,135

 
763

 
71,921

Other(2)
(1,022
)
 
(9,155
)
 
(2,046
)
 

 
(984
)
 

 
(13,207
)
Payments

 
(47,077
)
 
(18,372
)
 
(7,042
)
 
(4,061
)
 
(1,955
)
 
(78,507
)
August 31, 2015(3)
$

 
$
74,990

 
$
8,210

 
$

 
$
90

 
$

 
$
83,290

(1) Restructuring and impairment charges on our Consolidated Statements of Income also includes $9.9 million of long-lived asset impairment charges recorded during fiscal year 2015.
(2) Other primarily includes accelerated depreciation, share-based compensation and adjustments to certain lease related liabilities such as deferred rent.
(3) The gross, undiscounted obligation associated with our restructuring liabilities as of August 31, 2015 was approximately $147 million, which principally represents lease costs for non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.


Apollo Education Group, Inc. | 2015 Form 10-K | 54


Loss Contingencies
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. When we become aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount of the loss or range of loss can be reasonably estimated, we record a liability for the loss. The liability recorded includes probable and estimable legal costs incurred to date and future legal costs to the point in the legal matter where we believe a conclusion to the matter will be reached. The liability excludes any anticipated loss recoveries from third parties such as insurers, which we record as a receivable if we determine recovery is probable. If the loss is not probable or the amount of the loss or range of loss cannot be reasonably estimated, we disclose the claim if the likelihood of a potential loss is reasonably possible and the amount of the potential loss could be material. For matters where no loss contingency is recorded, we expense legal fees as incurred. The assessment of the likelihood of a potential loss and the estimation of the amount of a loss or range of loss are subjective and require judgment. Refer to Note 16, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, for additional information regarding contingencies.
Income Taxes
We are subject to the income tax laws of the U.S. and the foreign jurisdictions in which we have significant business operations. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. As a result, significant judgments and interpretations are required in determining our provision for income taxes and evaluating our uncertain tax positions.
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted. We record a valuation allowance to reduce deferred tax assets to the amount that we believe is more likely than not to be realized.
We have not provided deferred taxes on unremitted earnings attributable to international subsidiaries that have been considered permanently reinvested. As of August 31, 2015, the unremitted earnings from these operations were not significant, but they are expected to increase in the future due to our international expansion, which includes recent acquisitions completed by Apollo Global.
We evaluate and account for uncertain tax positions using a two-step approach. Recognition (step one) occurs when we conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (step two) determines the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Derecognition of a tax position that was previously recognized would occur when we subsequently determine that a tax position no longer meets the more likely than not threshold of being sustained. We classify interest and penalties accrued in connection with unrecognized tax benefits as income tax expense on our Consolidated Statements of Income. Our total unrecognized tax benefits, excluding interest and penalties, were $14.8 million and $18.4 million as of August 31, 2015 and 2014, respectively.
Recent Accounting Pronouncements
For discussion of recent accounting pronouncements, refer to Note 1, Nature of Operations and Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data.
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 fiscal years 2015, 2014 and 2013.
As discussed in the Overview of this MD&A, the U.S. higher education industry continues to experience rapidly developing changes, including significant and increasing competition from public and private colleges and universities as these institutions continue to increase their online education programs. These developments have contributed to the substantial decline in University of Phoenix enrollment over the past five years. We are focused on adapting our business to meet these rapidly evolving developments, which includes University of Phoenix working to stabilize enrollment by transforming itself into a more focused, higher retaining and less complex institution.
Our operations are generally subject to seasonal trends, which vary depending on the subsidiary. We have historically experienced, 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.
University of Phoenix - Although University of Phoenix enrolls students throughout the year, its net revenue is


Apollo Education Group, Inc. | 2015 Form 10-K | 55


generally lower in our second fiscal quarter (December through February) compared to other quarters due to holiday breaks.
Apollo Global - Our Apollo Global subsidiaries experience seasonality associated with the timing of when courses begin, exam dates, the timing of their respective holidays and other factors. These factors have historically resulted in lower net revenue in our second and fourth fiscal quarters, particularly for BPP, which also results in substantially lower operating results during these quarters due to BPP’s relatively fixed cost structure.
We categorize our operating expenses principally as follows:
Instructional and student advisory - consist primarily of costs related to the delivery and administration of our educational programs and include costs related to faculty, student advisory and administrative compensation, classroom and administration lease expenses (including facilities that are shared and support both instructional and other functions), financial aid processing costs, costs related to the development and enhancement of our educational programs and other related costs. Tuition costs for all employees and their eligible family members are recorded as an expense within instructional and student advisory.
Marketing - the substantial majority of costs consist of advertising expenses, compensation for marketing personnel, including personnel responsible for establishing relationships with selected employers, and production of marketing materials. The category also includes other costs directly related to marketing functions.
Admissions advisory - the substantial majority of costs consist of compensation for admissions personnel. The category also includes other costs directly related to admissions advisory functions.
General and administrative - consist primarily of corporate compensation, legal and professional fees, rent expense, information technology infrastructure costs and other related costs.
Depreciation and amortization - consist of depreciation expense on our property and equipment and amortization of our finite-lived intangibles.
Provision for uncollectible accounts receivable - consist of expense charged to reduce our accounts receivable to our estimate of the amount we expect to collect.


Apollo Education Group, Inc. | 2015 Form 10-K | 56


Analysis of 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.
 
Year Ended August 31,
 
% Change
2015 versus 2014
 
% Change
2014 versus 2013
 
 
 
 
 
 
 
% of Net Revenue
 
 
($ in thousands)
2015
 
2014
 
2013
 
2015
 
2014
 
2013
 
 
Net revenue
$
2,566,277

 
$
2,996,865

 
$
3,613,851

 
100.0
 %
 
100.0
 %
 
100.0
 %
 
(14.4
)%
 
(17.1
)%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instructional and student advisory
1,207,535

 
1,283,194

 
1,543,482

 
47.0
 %
 
42.8
 %
 
42.7
 %
 
(5.9
)%
 
(16.9
)%
Marketing
487,759

 
545,596

 
629,938

 
19.0
 %
 
18.2
 %
 
17.4
 %
 
(10.6
)%
 
(13.4
)%
Admissions advisory
209,768

 
215,196

 
253,319

 
8.2
 %
 
7.2
 %
 
7.0
 %
 
(2.5
)%
 
(15.0
)%
General and administrative
273,662

 
286,206

 
325,135

 
10.7
 %
 
9.6
 %
 
9.0
 %
 
(4.4
)%
 
(12.0
)%
Depreciation and amortization
125,303

 
138,810

 
149,778

 
4.9
 %
 
4.6
 %
 
4.2
 %
 
(9.7
)%
 
(7.3
)%
Provision for uncollectible accounts receivable
59,205

 
53,819

 
83,798

 
2.3
 %
 
1.8
 %
 
2.3
 %
 
10.0
 %
 
(35.8
)%
Restructuring and impairment charges
81,800

 
85,343

 
197,022

 
3.2
 %
 
2.8
 %
 
5.5
 %
 
*

 
*

Acquisition and other related costs
6,201

 
19,837

 

 
0.2
 %
 
0.7
 %
 
 %
 
*

 
*

Litigation charges (credits)
100

 
13,900

 
(24,600
)
 
 %
 
0.5
 %
 
(0.7
)%
 
*

 
*

Total costs and expenses
2,451,333

 
2,641,901

 
3,157,872

 
95.5
 %
 
88.2
 %
 
87.4
 %
 
(7.2
)%
 
(16.3
)%
Operating income
114,944

 
354,964

 
455,979

 
4.5
 %
 
11.8
 %
 
12.6
 %
 
(67.6
)%
 
(22.2
)%
Interest income
3,050

 
2,230

 
1,913

 
0.1
 %
 
0.1
 %
 
0.1
 %
 
36.8
 %
 
16.6
 %
Interest expense
(6,595
)
 
(7,914
)
 
(8,745
)
 
(0.3
)%
 
(0.3
)%
 
(0.3
)%
 
(16.7
)%
 
(9.5
)%
Other (loss) income, net
(5,756
)
 
(560
)
 
2,405

 
(0.2
)%
 
 %
 
0.1
 %
 
*

 
*

Income from continuing operations before income taxes
105,643

 
348,720

 
451,552

 
4.1
 %
 
11.6
 %
 
12.5
 %
 
(69.7
)%
 
(22.8
)%
Provision for income taxes
(58,163
)
 
(127,290
)
 
(184,075
)
 
(2.2
)%
 
(4.2
)%
 
(5.1
)%
 
(54.3
)%
 
(30.8
)%</