10-Q 1 apol-nov30201510q.htm 10-Q 10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: November 30, 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)
(480) 966-5394
(Registrant’s telephone number, including area code)
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES þ     NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
(Do not check if smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ
As of January 4, 2016, there were 108,064,797 shares of Apollo’s Class A common stock outstanding and 475,149 shares of Apollo’s Class B common stock outstanding.
 



APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 2015
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 2


Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Part I, Item 2, 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, of our Annual Report on Form 10-K for the year ended August 31, 2015, 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, of our Annual Report on Form 10-K for the year ended August 31, 2015, under “University of Phoenix;”
Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended August 31, 2015; and
Those factors set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended August 31, 2015 and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-Q.
The cautionary statements referred to above also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements for any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.
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. | First Quarter 2016 Form 10-Q | 3


Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
As of
($ in thousands)
November 30,
2015
 
August 31,
2015
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
419,766

 
$
503,705

Restricted cash and cash equivalents
209,480

 
198,369

Marketable securities
257,012

 
194,676

Accounts receivable, net
214,379

 
198,459

Prepaid taxes
26,795

 
38,371

Other current assets
57,559

 
48,823

Assets of business held for sale

 
40,897

Total current assets
1,184,991

 
1,223,300

Marketable securities
78,874

 
95,815

Property and equipment, net
351,602

 
370,281

Goodwill
173,012

 
247,190

Intangible assets, net
137,452

 
143,244

Deferred taxes
89,190

 
92,105

Other assets
31,457

 
29,129

Total assets
$
2,046,578

 
$
2,201,064

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

 
 

Short-term borrowings and current portion of long-term debt
$
22,485

 
$
14,080

Accounts payable
49,282

 
64,100

Student deposits
239,946

 
245,470

Deferred revenue
187,830

 
186,950

Accrued and other current liabilities
251,948

 
280,847

Liabilities of business held for sale

 
40,897

Total current liabilities
751,491

 
832,344

Long-term debt
20,782

 
31,566

Deferred taxes
7,928

 
7,729

Other long-term liabilities
169,661

 
172,452

Total liabilities
949,862

 
1,044,091

Commitments and contingencies


 


Redeemable noncontrolling interests
9,702

 
11,915

Shareholders’ equity:
 

 
 

Preferred stock, no par value

 

Apollo Class A nonvoting common stock, no par value
103

 
103

Apollo Class B voting common stock, no par value
1

 
1

Additional paid-in capital

 

Apollo Class A treasury stock, at cost
(3,923,029
)
 
(3,928,419
)
Retained earnings
5,092,995

 
5,153,452

Accumulated other comprehensive loss
(83,575
)
 
(80,579
)
Total Apollo shareholders’ equity
1,086,495

 
1,144,558

Noncontrolling interests
519

 
500

Total equity
1,087,014

 
1,145,058

Total liabilities, redeemable noncontrolling interests and shareholders’ equity
$
2,046,578

 
$
2,201,064

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 4


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

 
 
Three Months Ended
November 30,
(In thousands, except per share data)
 
2015
 
2014
Net revenue
 
$
586,021

 
$
714,525

Costs and expenses:
 
 
 
 
Instructional and student advisory
 
291,327

 
321,574

Marketing
 
93,802

 
126,883

Admissions advisory
 
34,188

 
57,085

General and administrative
 
70,326

 
71,823

Depreciation and amortization
 
27,394

 
33,631

Provision for uncollectible accounts receivable
 
15,313

 
17,398

Restructuring and impairment charges
 
97,823

 
18,748

Acquisition and other related costs
 
1,097

 
3,219

Total costs and expenses
 
631,270

 
650,361

Operating (loss) income
 
(45,249
)
 
64,164

Interest income
 
919

 
589

Interest expense
 
(1,456
)
 
(1,662
)
Other loss, net
 
(843
)
 
(1,290
)
(Loss) income from continuing operations before income taxes
 
(46,629
)
 
61,801

Provision for income taxes
 
(12,239
)
 
(27,054
)
(Loss) income from continuing operations
 
(58,868
)
 
34,747

Loss from discontinued operations, net of tax
 
(3,259
)
 
(2,278
)
Net (loss) income
 
(62,127
)
 
32,469

Net loss attributable to noncontrolling interests
 
1,362

 
1,316

Net (loss) income attributable to Apollo
 
$
(60,765
)
 
$
33,785

Earnings (loss) per share - Basic:
 
 
 
 
Continuing operations attributable to Apollo
 
$
(0.53
)
 
$
0.33

Discontinued operations attributable to Apollo
 
(0.03
)
 
(0.02
)
Basic (loss) income per share attributable to Apollo
 
$
(0.56
)
 
$
0.31

Earnings (loss) per share - Diluted:
 
 
 
 
Continuing operations attributable to Apollo
 
$
(0.53
)
 
$
0.33

Discontinued operations attributable to Apollo
 
(0.03
)
 
(0.02
)
Diluted (loss) income per share attributable to Apollo
 
$
(0.56
)
 
$
0.31

Basic weighted average shares outstanding
 
108,446

 
108,581

Diluted weighted average shares outstanding
 
108,446

 
109,378

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement.


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 5


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

 
 
Three Months Ended
November 30,
($ in thousands)
 
2015
 
2014
Net (loss) income
 
$
(62,127
)
 
$
32,469

Other comprehensive (loss) income (net of tax):
 
 
 
 
Currency translation loss(1)
 
(3,564
)
 
(17,780
)
Change in fair value of available-for-sale securities(1)
 
(99
)
 
(74
)
Comprehensive (loss) income
 
(65,790
)
 
14,615

Comprehensive loss attributable to noncontrolling interests
 
2,029

 
5,872

Comprehensive (loss) income attributable to Apollo
 
$
(63,761
)
 
$
20,487

(1) The tax effect on each component of other comprehensive (loss) income during the three months ended November 30, 2015 and 2014, respectively, was not significant.
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement.


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 6


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

 
Common Stock
 
Additional
Paid-in
Capital
 
Apollo Class A
Treasury Stock
 
Retained
Earnings
 
Accumulated Other
Comprehensive Loss
 
Total Apollo
Shareholders’ Equity
 
Noncontrolling
Interests
 
Total
Equity
 
 
Redeemable Noncontrolling Interests
 
Class A Nonvoting
 
Class B Voting
 
 
 
 
 
 
 
 
 
 
Shares
 
Stated
Value
 
Shares
 
Stated
Value
 
 
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
Shares
 
Cost
 
 
 
 
 
 
 
Balance as of August 31, 2015
188,007

 
$
103

 
475

 
$
1

 
$

 
80,082

 
$
(3,928,419
)
 
$
5,153,452

 
$
(80,579
)
 
$
1,144,558

 
$
500

 
$
1,145,058

 
 
$
11,915

Share repurchases

 

 

 

 

 
64

 
(517
)
 

 

 
(517
)
 

 
(517
)
 
 

Share reissuances

 

 

 

 
(6,050
)
 
(174
)
 
5,907

 
143

 

 

 

 

 
 

Net tax effect for stock incentive plans

 

 

 

 
(3,470
)
 

 

 

 

 
(3,470
)
 

 
(3,470
)
 
 

Share-based compensation

 

 

 

 
9,520

 

 

 

 

 
9,520

 

 
9,520

 
 

Currency translation adjustment, net of tax

 

 

 

 

 

 

 

 
(2,897
)
 
(2,897
)
 
(25
)
 
(2,922
)
 
 
(642
)
Available-for-sale securities adjustment, net of tax

 

 

 

 

 

 

 

 
(99
)
 
(99
)
 

 
(99
)
 
 

Redemption value adjustments

 

 

 

 

 

 

 
165

 

 
165

 

 
165

 
 
(165
)
Net (loss) income

 

 

 

 

 

 

 
(60,765
)
 

 
(60,765
)
 
44

 
(60,721
)
 
 
(1,406
)
Balance as of November 30, 2015
188,007

 
$
103

 
475

 
$
1

 
$

 
79,972

 
$
(3,923,029
)
 
$
5,092,995

 
$
(83,575
)
 
$
1,086,495

 
$
519

 
$
1,087,014

 
 
$
9,702

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of August 31, 2014
188,007

 
$
103

 
475

 
$
1

 
$

 
79,585

 
$
(3,936,607
)
 
$
5,143,949

 
$
(27,320
)
 
$
1,180,126

 
$
676

 
$
1,180,802

 
 
$
64,527

Share repurchases

 

 

 

 

 
755

 
(20,064
)
 

 

 
(20,064
)
 

 
(20,064
)
 
 

Share reissuances

 

 

 

 
(10,308
)
 
(227
)
 
9,319

 
1,206

 

 
217

 

 
217

 
 

Net tax effect for stock incentive plans

 

 

 

 
(2,067
)
 

 

 

 

 
(2,067
)
 

 
(2,067
)
 
 

Share-based compensation

 

 

 

 
10,711

 

 

 

 

 
10,711

 

 
10,711

 
 

Currency translation adjustment, net of tax

 

 

 

 

 

 

 

 
(13,224
)
 
(13,224
)
 
(90
)
 
(13,314
)
 
 
(4,466
)
Available-for-sale securities adjustment, net of tax

 

 

 

 

 

 

 

 
(74
)
 
(74
)
 

 
(74
)
 
 

Redemption value adjustments

 

 

 

 

 

 

 
472

 

 
472

 

 
472

 
 
(472
)
Net income (loss)

 

 

 

 

 

 

 
33,785

 

 
33,785

 
44

 
33,829

 
 
(1,360
)
Other

 

 

 

 
1,664

 

 

 

 

 
1,664

 

 
1,664

 
 

Balance as of November 30, 2014
188,007

 
$
103

 
475

 
$
1

 
$

 
80,113

 
$
(3,947,352
)
 
$
5,179,412

 
$
(40,618
)
 
$
1,191,546

 
$
630

 
$
1,192,176

 
 
$
58,229

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement.


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 7


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
November 30,
($ in thousands)
2015
 
2014
Operating activities:
 

 
 

Net (loss) income
$
(62,127
)
 
$
32,469

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
Share-based compensation
9,520

 
10,711

Excess tax benefits from share-based compensation

 
(229
)
Depreciation and amortization
27,394

 
36,404

Accelerated depreciation included in restructuring
2,953

 
3,086

Impairment charges and loss on asset dispositions
73,393

 
972

Non-cash foreign currency loss, net
352

 
535

Provision for uncollectible accounts receivable
15,313

 
17,398

Deferred income taxes
3

 
2,938

Changes in assets and liabilities:
 
 
 

Restricted cash and cash equivalents
(10,973
)
 
(3,298
)
Accounts receivable
(32,899
)
 
(50,331
)
Prepaid taxes
11,612

 
19,989

Other assets
(9,915
)
 
(13,032
)
Accounts payable
(14,690
)
 
5,156

Student deposits
(4,880
)
 
(26,138
)
Deferred revenue
2,087

 
29,822

Accrued and other liabilities
(26,010
)
 
(48,153
)
Net cash (used in) provided by operating activities
(18,867
)
 
18,299

Investing activities:
 

 
 

Purchases of property and equipment
(14,456
)
 
(20,337
)
Purchases of marketable securities
(109,715
)
 
(59,490
)
Maturities and sales of marketable securities
62,776

 
53,974

Other investing activities
(196
)
 
405

Net cash used in investing activities
(61,591
)
 
(25,448
)
Financing activities:
 

 
 

Payments on borrowings
(3,448
)
 
(596,789
)
Proceeds from borrowings
926

 
3,563

Share repurchases
(517
)
 
(20,064
)
Share reissuances

 
217

Excess tax benefits from share-based compensation

 
229

Payment for contingent consideration

 
(21,371
)
Net cash used in financing activities
(3,039
)
 
(634,215
)
Exchange rate effect on cash and cash equivalents
(442
)
 
(2,473
)
Net decrease in cash and cash equivalents
(83,939
)
 
(643,837
)
Cash and cash equivalents, beginning of period
503,705

 
1,228,813

Cash and cash equivalents, end of period
$
419,766

 
$
584,976

Supplemental disclosure of cash flow and non-cash information:
 

 
 

Cash paid for income taxes, net of refunds
$

 
$
3,214

Cash paid for interest
1,392

 
1,701

Restricted stock units vested and released
1,430

 
5,499

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 8


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 9

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

Note 1. Nature of Operations and Significant Accounting Policies
Apollo Education Group, Inc. is one of the world’s largest private education providers, serving students since 1973. 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. Refer to Note 17, Segment Reporting, for further information regarding our institutions and operating segments.
Our fiscal year is from September 1 to August 31.
Basis of Presentation
These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in our opinion, reflect all adjustments of a normal, recurring nature that are necessary for the fair presentation of our financial condition, results of operations and cash flows for the periods presented. These unaudited interim condensed consolidated financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements. Therefore, this information should be read in conjunction with the audited consolidated financial statements and related notes included in our 2015 Annual Report on Form 10-K as filed with the SEC on October 22, 2015. We consistently applied the accounting policies described in the notes to our consolidated financial statements included in our 2015 Annual Report on Form 10-K in preparing these unaudited interim condensed consolidated financial statements.
Use of Estimates
The preparation of these 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.
Principles of Consolidation
These financial statements include the assets, liabilities, revenues and expenses of Apollo Education Group, Inc., our wholly-owned subsidiaries, and other subsidiaries that we control. We eliminate intercompany transactions and balances in consolidation.
Seasonality
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 including, but not limited to, the following:
University of Phoenix - University of Phoenix generally has lower net revenue 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.
Because of the seasonal nature of our business and other factors, the results of operations for the three months ended November 30, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending August 31, 2016.
Reclassifications
We reclassified prior periods for the following to conform to our current presentation:
During the fourth quarter of fiscal year 2015, we began presenting Carnegie Learning, Inc.’s operating results as discontinued operations on our Condensed Consolidated Statements of Operations. Refer to Note 3, Discontinued Operations.
During the first quarter of fiscal year 2016, we began presenting all deferred tax assets and liabilities as noncurrent on our Condensed Consolidated Balance Sheets as discussed further in Recent Accounting Pronouncements below.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 10

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

Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. We early adopted ASU 2015-17 during our first quarter of fiscal year 2016 on a retrospective basis. Accordingly, we reclassified the current deferred taxes to noncurrent on our August 31, 2015 Condensed Consolidated Balance Sheet, which increased noncurrent deferred tax assets $64.7 million and decreased noncurrent deferred tax liabilities $3.7 million.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). The standard requires that adjustments made to provisional amounts recognized in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. ASU 2015-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption is permitted. We early adopted ASU 2015-16 during our first quarter of fiscal year 2016, which had no impact on our financial statements, and we will apply the new guidance to future adjustments to provisional amounts.
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). The standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. We adopted ASU 2014-08 during our first quarter of fiscal year 2016, which had no impact on our financial statements, and we will apply the new guidance to applicable components that are determined to be held for sale or disposed in future periods.
Future Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. Accordingly, the new revenue recognition standard is effective for us on September 1, 2018 using either a full retrospective or a modified retrospective approach. We are currently evaluating which transition approach to use and the impact that the standard will have on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard is effective for us on September 1, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
Subsequent Events
On December 10, 2015, we acquired all of the outstanding shares of Career Partner GmbH (“Career Partner”) for an initial cash payment of €96 million (equivalent to approximately $105 million on the transaction date), plus a future contingent payment of up to €11 million (equivalent to approximately $12 million on the transaction date) calculated principally based on Career Partner’s operating results for calendar year 2016. Career Partner is a provider of education and training programs in Germany, and this acquisition supports our strategy to diversify and expand our global operations. The transaction will be accounted for as a business combination and Career Partner’s operating results will be included in our consolidated financial statements from the acquisition date. Career Partner’s operating results are not material to our consolidated financial statements, and we have not yet completed the related purchase price allocation principally due to the recent acquisition date.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 11

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

Note 2. Restructuring and Impairment Charges
Restructuring and impairment charges include the following for the respective periods:
 
Three Months Ended
November 30,
($ in thousands)
2015
 
2014
Restructuring charges
$
24,430

 
$
18,748

Goodwill impairments(1)
73,393

 

Restructuring and impairment charges
$
97,823

 
$
18,748

(1) Refer to Note 7, Goodwill and Intangibles, for discussion of the goodwill impairment charges recorded during the first quarter of fiscal year 2016.
Restructuring Charges
We have implemented various restructuring activities during prior fiscal years and remain focused on reengineering our business processes and educational delivery systems to reduce costs to align with our lower enrollment and revenue, and to improve the efficiency and effectiveness of our services to students. The activities initiated in prior years and those initiated in fiscal year 2016 are described below. Additionally, we intend to further reduce costs in future periods to align with our lower enrollment and revenue, and expect to incur material charges associated with other future restructuring activities.
The following summarizes the restructuring charges in our segment reporting format for the respective periods:
 
Three Months Ended
November 30,
($ in thousands)
2015
 
2014
University of Phoenix
$
19,090

 
$
10,223

Apollo Global
404

 
58

Other
4,936

 
8,467

Restructuring charges
$
24,430

 
$
18,748

The following details the changes in our restructuring liabilities during the three months ended November 30, 2015:
 
Lease and Related
Costs, Net
 
Severance and Other Employee
Separation Costs
 
Other Restructuring
Related Costs
 
Total
($ in thousands)
2016 Restructuring
 
Prior Year Restructuring(1)
 
2016 Restructuring
 
Prior Year Restructuring(1)
 
2016 Restructuring
 
Prior Year Restructuring(1)
 
August 31, 2015
$

 
$
74,990

 
$

 
$
8,210

 
$

 
$
90

 
$
83,290

Expense

 
10,479

 
10,380

 
1,058

 
210

 
2,303

 
24,430

Other

 
(387
)
 
(53
)
 

 

 
(1,211
)
 
(1,651
)
Payments

 
(12,662
)
 
(3,158
)
 
(5,257
)
 

 
(813
)
 
(21,890
)
November 30, 2015(2)
$

 
$
72,420

 
$
7,169

 
$
4,011

 
$
210

 
$
369

 
$
84,179

(1) We have incurred $430 million of cumulative costs associated with restructuring activities initiated prior to fiscal year 2016, which include lease exit, employee separation, and other related costs of $267 million, $114 million and $49 million, respectively. These cumulative costs have been reflected in our segment reporting as follows: $319 million in University of Phoenix, $19 million in Apollo Global, and $92 million in Other.
(2) The gross, undiscounted obligation associated with our restructuring liabilities as of November 30, 2015 was approximately $147 million, which principally represents costs for non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.
Activities Initiated in Prior Years
Our restructuring activities initiated prior to fiscal year 2016 principally include rationalizing our leased administrative office facilities, closing approximately 150 University of Phoenix ground locations, and workforce reductions. During the three months ended November 30, 2015, we incurred $13.8 million of expense for these prior year activities. The substantial majority of the expense represents initial charges for the estimated fair value of future contractual operating lease obligations which are recorded when we cease using the respective facility, and an increase in our estimated future cash payments associated with exiting additional space at other locations included in the rationalization plan. We measure lease obligations at fair value using a

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 12

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

discounted cash flow approach encompassing significant unobservable inputs (Level 3). The significant unobservable inputs principally include estimated future cash flows and discount rates which have ranged between 3%-6% for our lease obligations. The estimation of future cash flows includes non-cancelable contractual lease costs over the remaining terms of the leases, partially offset by estimated future sublease rental income, which involves significant judgment. Our estimate of the amount and timing of sublease rental income considers subleases that we have executed 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 additional sublease agreements.
As of November 30, 2015, we had approximately $66 million of remaining lease obligations associated with the locations that we expect to close as University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations. We will incur lease obligation charges for these locations when we cease using the respective facilities. We will also continue to incur interest accretion, and may record additional adjustments in future periods for the estimated obligations associated with facilities we have already exited.
Activities Initiated in Fiscal Year 2016
During the three months ended November 30, 2015, we incurred $10.6 million of expense for new restructuring activities initiated during fiscal year 2016. Substantially all of the expense represents severance and other employee separation costs associated with the elimination of approximately 700 positions. The expense associated with these activities for the three months ended November 30, 2015 is reflected in our segment reporting as follows: $8.2 million in University of Phoenix, $0.2 million in Apollo Global and $2.2 million in Other.
Note 3. Discontinued Operations
During the first quarter of fiscal year 2016, we completed the sale of Carnegie Learning for a nominal amount resulting in a $2.8 million loss on sale. We do not have significant continuing involvement with Carnegie Learning after the sale.
During fiscal year 2015, we began presenting Carnegie Learning’s assets and liabilities as held for sale on our Condensed Consolidated Balance Sheets and its operating results as discontinued operations on our Condensed Consolidated Statements of Operations for all periods presented. As discussed further in Note 17, Segment Reporting, Carnegie Learning’s operating results were previously included in Other in our segment reporting, and certain additional Carnegie Learning expenses associated with University of Phoenix’s use of Carnegie Learning technology were included in our University of Phoenix reportable segment.
The major components of Carnegie Learning’s assets and liabilities presented separately as held for sale on our Condensed Consolidated Balance Sheets as of August 31, 2015 are as follows:
($ in thousands)
As of
August 31, 2015
Cash
$
10,220

Accounts receivable, net
10,327

Property and equipment, net
15,912

Intangible assets, net
14,100

Other
3,972

Allowance for reduction of assets of business held for sale
(13,634
)
Total assets
$
40,897

 
 
Deferred revenue
$
35,602

Other
5,295

Total liabilities
$
40,897


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 13

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

The following summarizes Carnegie Learning’s operating results for the respective periods, which are presented in loss from discontinued operations, net of tax on our Condensed Consolidated Statements of Operations:
 
Three Months Ended
November 30,
($ in thousands)
2015
 
2014
Net revenue
$
2,993

 
$
4,527

Costs and expenses:
 
 
 
Loss on sale
2,773

 

Other
4,519

 
8,192

Loss from discontinued operations before income taxes
(4,299
)
 
(3,665
)
Benefit from income taxes
1,040

 
1,387

Loss from discontinued operations, net of tax
$
(3,259
)
 
$
(2,278
)
The operating results of our discontinued operations only includes revenues and costs directly attributable to the discontinued operations. Accordingly, no interest expense or general corporate overhead has been allocated to Carnegie Learning. Additionally, we ceased depreciation on Carnegie Learning’s property and equipment when we determined it was held for sale.
Note 4. Acquisitions
During fiscal year 2015, we completed the following acquisitions to support our strategy to diversify and expand our professional development offerings and global operations:
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, for $15.9 million.
FAEL - On December 4, 2014, we acquired a 75% interest in Sociedade Técnica Educacional da Lapa S.A., a provider of postsecondary educational programs in Brazil under the name Faculdade da Educacional da Lapa (“FAEL”). We made an initial cash payment of R$73.8 million (equivalent to $28.9 million on the acquisition date), and the acquisition includes a potential contingent consideration payment in the future that is principally based on FAEL’s calendar year 2018 net revenue. The contingent payment has a maximum of approximately R$34 million (equivalent to $9.1 million as of November 30, 2015), and its fair value on the acquisition date was insignificant based on our estimate of FAEL’s future revenue in relation to the contingent payment threshold as defined in the acquisition agreement.
We accounted for these acquisitions as business combinations, and the operating results of The Iron Yard and FAEL are included in our consolidated financial statements from respective acquisition dates. We have not provided pro forma information or the revenue and operating results of the acquired entities because their results of operations are not material, either individually or in the aggregate, to our consolidated results of operations in the respective periods of acquisition. The purchase price allocations are summarized below:

($ in thousands)
The Iron Yard
 
FAEL
Tangible assets (net of acquired liabilities)
$
5,262

 
$
(2,807
)
Indefinite-lived intangibles

 
15,163

Finite-lived intangibles
4,690

 
5,394

Goodwill
15,888

 
14,538

Total assets acquired and liabilities assumed, net
25,840

 
32,288

Less: Fair value of redeemable noncontrolling interests
(9,900
)
 
(3,437
)
Total fair value of consideration transferred
15,940

 
28,851

Less: Cash acquired
(5,401
)
 
(7,685
)
Cash paid for acquisition, net of cash acquired
$
10,539

 
$
21,166


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 14

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

Note 5. Financial Instruments
We invest our excess cash in a variety of marketable securities, which are all classified as available-for-sale. The following summarizes our cash and cash equivalents, restricted cash and cash equivalents and marketable securities by financial instrument category as of the respective periods:
 
November 30, 2015
($ in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
Cash
$
496,494

 
$

 
$

 
$
496,494

 
$
496,494

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
105,325

 

 

 
105,325

 
105,325

 

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
175,257

 
40

 
(437
)
 
174,860

 
954

 
128,158

 
45,748

Tax-exempt municipal bonds
99,267

 
61

 
(62
)
 
99,266

 
1,344

 
73,120

 
24,802

Time deposits
50,315

 

 

 
50,315

 
25,129

 
25,186

 

Other
38,917

 
4

 
(49
)
 
38,872

 

 
30,548

 
8,324

Total
$
965,575

 
$
105

 
$
(548
)
 
$
965,132

 
$
629,246

 
$
257,012

 
$
78,874


 
August 31, 2015
($ in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
Cash
$
564,225

 
$

 
$

 
$
564,225

 
$
564,225

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
107,408

 

 

 
107,408

 
107,408

 

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
137,283

 
16

 
(271
)
 
137,028

 
1,823

 
82,047

 
53,158

Tax-exempt municipal bonds
97,022

 
68

 
(60
)
 
97,030

 
2,408

 
61,530

 
33,092

Time deposits
50,267

 

 

 
50,267

 
25,110

 
25,157

 

Other
36,634

 
10

 
(37
)
 
36,607

 
1,100

 
25,942

 
9,565

Total
$
992,839

 
$
94

 
$
(368
)
 
$
992,565

 
$
702,074

 
$
194,676

 
$
95,815

(1) Cash and cash equivalents includes restricted cash and cash equivalents.
We measure our financial instruments at fair value on a recurring basis as follows:
Money market funds - We use Level 1 inputs that primarily consist of real-time quotes for transactions in active exchange markets involving identical assets.
Other financial instruments - We use a market approach with Level 2 observable inputs for all other securities. The Level 2 inputs include quoted prices for similar assets in active markets, or quoted prices for identical or similar assets in markets that are not active.
Our marketable securities have maturities that occur within three years. We may sell certain of our marketable securities prior to their stated maturities for strategic reasons including, but not limited to, investment yield and credit risk management. We have not recognized significant gains or losses related to such sales.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 15

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

Note 6. Accounts Receivable, Net
Accounts receivable, net consist of the following as of the respective periods:
($ in thousands)
November 30,
2015
 
August 31,
2015
Student accounts receivable
$
254,244

 
$
234,204

Less allowance for doubtful accounts
(48,038
)
 
(42,259
)
Net student accounts receivable
206,206

 
191,945

Other receivables
8,173

 
6,514

Total accounts receivable, net
$
214,379

 
$
198,459

Student accounts receivable is composed primarily of amounts due related to tuition and educational services. The following summarizes the activity in allowance for doubtful accounts for the respective periods:
 
Three Months Ended
November 30,
($ in thousands)
2015
 
2014
Beginning allowance for doubtful accounts
$
42,259

 
$
50,145

Provision for uncollectible accounts receivable
15,313

 
17,398

Write-offs, net of recoveries
(9,491
)
 
(14,406
)
Currency translation adjustment
(43
)
 
(455
)
Ending allowance for doubtful accounts
$
48,038

 
$
52,682

Note 7. Goodwill and Intangibles
The following details changes in our goodwill by reportable segment during the three months ended November 30, 2015:
($ in thousands)
University of
Phoenix
 
Apollo
Global
 
Other
 
Total
Goodwill as of August 31, 2015
$
71,812

 
$
142,599

 
$
32,779

 
$
247,190

Impairment(1)
(71,812
)
 

 
(1,581
)
 
(73,393
)
Currency translation adjustment

 
(785
)
 

 
(785
)
Goodwill as of November 30, 2015
$

 
$
141,814

 
$
31,198

 
$
173,012

(1) During the first quarter of fiscal year 2016, we recorded impairment charges of $71.8 million and $1.6 million for our University of Phoenix and Western International University reporting units, respectively.
Intangibles consist of the following as of the respective periods:
 
November 30, 2015
 
August 31, 2015
($ in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Effect of
Foreign
Currency
Translation
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Effect of
Foreign
Currency
Translation
 
Net
Carrying
Amount
Accreditations and designations
$
21,628

 
$
(7,850
)
 
$
(3,050
)
 
$
10,728

 
$
21,628

 
$
(6,972
)
 
$
(3,153
)
 
$
11,503

Trademarks
21,019

 
(3,380
)
 
(2,921
)
 
14,718

 
21,019

 
(2,942
)
 
(3,034
)
 
15,043

Curriculum
19,715

 
(8,424
)
 
(2,462
)
 
8,829

 
19,715

 
(7,361
)
 
(2,470
)
 
9,884

Student and customer relationships
5,437

 
(2,805
)
 
(2,026
)
 
606

 
5,517

 
(2,632
)
 
(1,975
)
 
910

Other
3,770

 
(768
)
 
(740
)
 
2,262

 
3,746

 
(597
)
 
(633
)
 
2,516

Total finite-lived intangibles
71,569

 
(23,227
)
 
(11,199
)
 
37,143

 
71,625

 
(20,504
)
 
(11,265
)
 
39,856

Trademarks
101,637

 

 
(12,559
)
 
89,078

 
101,637

 

 
(9,906
)
 
91,731

Accreditations and designations
14,470

 

 
(3,239
)
 
11,231

 
14,470

 

 
(2,813
)
 
11,657

Total indefinite-lived intangibles
116,107

 

 
(15,798
)
 
100,309

 
116,107

 

 
(12,719
)
 
103,388

Total intangible assets, net
$
187,676

 
$
(23,227
)
 
$
(26,997
)
 
$
137,452

 
$
187,732

 
$
(20,504
)
 
$
(23,984
)
 
$
143,244


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 16

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

The estimated future amortization expense of our finite-lived intangibles as of November 30, 2015 is as follows:
($ in thousands)
Remainder of 2016
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Estimated future amortization expense(1)
$
7,968

 
$
9,917

 
$
7,375

 
$
3,359

 
$
1,975

 
$
1,794

 
$
4,755

 
$
37,143

(1) Estimated future amortization expense may vary as acquisitions and dispositions occur in the future and as a result of foreign currency translation adjustments.
Goodwill Impairment
Our market capitalization declined significantly during the first quarter of fiscal year 2016 after we reported our fourth quarter fiscal year 2015 results and our business outlook for fiscal year 2016. We believe the decline in the first quarter of fiscal year 2016 was attributable to University of Phoenix’s lower enrollment, increasing risk associated with the proprietary education sector, and uncertainty associated with its strategy to transform into a more focused, higher retaining and less complex institution. Although we believe the University’s new strategy in the longer term will improve retention and graduation rates and help stabilize enrollment, the associated initiatives have accelerated the enrollment decline at the University and we expect they will negatively impact its cash flows in the short-term. Based on the decline in market capitalization, we performed an interim goodwill impairment analysis for University of Phoenix in the first quarter of fiscal year 2016.
University of Phoenix represents the substantial majority of our consolidated operating results and, as discussed above, we believe our market capitalization decline in the first quarter of fiscal year 2016 was attributable to the University. Accordingly, we estimated the fair value of our University of Phoenix reporting unit using a market-based valuation approach, which incorporated assumptions that we believe would be a reasonable market participant’s view of the increased risk and uncertainty associated with the University and its expected future cash flows. The market-based approach included multiples derived from comparable companies with consideration of the University’s current operating trends and transformational strategy in relation to the other companies. Our interim step one goodwill impairment analysis resulted in a lower estimated fair value for University of Phoenix compared to its carrying value. Based on the University’s estimated fair value and a hypothetical purchase price allocation, we determined the University would have no implied goodwill. Accordingly, we recorded a $71.8 million impairment charge in the first quarter of fiscal year 2016 representing the University’s entire goodwill balance. We did not record an income tax benefit associated with this charge as the University’s goodwill is not deductible for tax purposes.
During the first quarter of fiscal year 2016, we also recorded a $1.6 million goodwill impairment charge representing the entire goodwill balance for our Western International University reporting unit. Western International University operates in the same sector of the U.S. proprietary education industry as University of Phoenix.
We did not record any impairment charges associated with our other reporting units as we do not believe there have been any events or changes in circumstances since their respective most recent annual impairment tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount. As part of this consideration, we compared the sum of the estimated fair values of our reporting units to our market capitalization in the first quarter of fiscal year 2016, 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. However, we may be required to record additional goodwill impairment charges in the future if our critical assumptions deteriorate or our market capitalization declines further.
Note 8. Fair Value Measurements
We measure and disclose certain financial instruments at fair value as described in Note 5, Financial Instruments. Liabilities measured at fair value on a recurring basis, all of which are included in other liabilities on our Condensed Consolidated Balance Sheets, consist of the following as of November 30, 2015 and August 31, 2015:
 
 
 
Fair Value Measurements at Reporting Dates Using
 
Fair Value
as of Respective
Reporting Dates
 
Quoted Prices in
Active Markets for
Identical Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
($ in thousands)
 
 
 
Contingent consideration as of November 30, 2015
$
7,542

 
$

 
$

 
$
7,542

Contingent consideration as of August 31, 2015
$
7,499

 
$

 
$

 
$
7,499


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 17

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

The following summarizes the changes in liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the respective periods:
 
Three Months Ended
November 30,
($ in thousands)
2015
 
2014
Beginning balance
$
7,499

 
$
41,893

Change in fair value included in net income
43

 
(1,121
)
Payment for contingent consideration(1)

 
(34,480
)
Ending balance
$
7,542

 
$
6,292

(1) During fiscal year 2015, we paid $34.5 million to settle the contingent consideration for our Open Colleges acquisition, which was initially measured at $21.4 million based on information available as of the acquisition date.
As of November 30, 2015, we have a $7.5 million contingent consideration liability, which resulted from our purchase of the noncontrolling interest in Apollo Global during fiscal year 2013 and is based on a portion of Apollo Global’s operating results through the fiscal years ending August 31, 2017. The liability is measured at fair value using Level 3 inputs included in the valuation method. The inputs include estimated operating results scenarios for the applicable performance period, probability weightings assigned to operating results scenarios and the discount rates applied. We did not change our valuation techniques associated with recurring fair value measurements from prior periods.
Liabilities measured at fair value on a nonrecurring basis during the three months ended November 30, 2015 are included in other liabilities on our Condensed Consolidated Balance Sheets and consist of the following:
 
 
 
Fair Value Measurements at Measurement Date Using
 
 
($ in thousands)
Fair Value at
Measurement
Date
 
Quoted Prices in
Active Markets for
Identical Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Losses for
Three Months Ended
November 30, 2015
Restructuring obligations
$
7,671

 
$

 
$

 
$
7,671

 
$
7,671

During the three months ended November 30, 2015, we recorded $7.7 million of aggregate initial lease obligations at fair value associated with our restructuring activities. We recorded obligation liabilities on the dates we ceased using the respective facilities, and we measured the liabilities at fair value using Level 3 inputs included in the valuation method. Refer to Note 2, Restructuring and Impairment Charges.
Note 9. Accrued and Other Liabilities
Accrued and other current liabilities consist of the following as of the respective periods:
($ in thousands)
November 30,
2015
 
August 31,
2015
Salaries, wages and benefits
$
55,036

 
$
74,454

Student discounts, grants and scholarships
49,009

 
44,682

Restructuring obligations
41,892

 
38,921

Legal and other professional obligations
27,190

 
23,961

Deferred rent and other lease liabilities
10,627

 
12,181

Curriculum materials
9,528

 
11,690

Advertising
8,850

 
21,931

Other
49,816

 
53,027

Total accrued and other current liabilities
$
251,948

 
$
280,847


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 18

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

Other long-term liabilities consist of the following as of the respective periods:
($ in thousands)
November 30,
2015
 
August 31,
2015
Deferred rent and other lease liabilities
$
47,980

 
$
49,745

Restructuring obligations
42,287

 
44,369

Deferred gains on sale-leasebacks
19,799

 
20,168

Deferred revenue
17,581

 
16,687

Other
42,014

 
41,483

Total other long-term liabilities
$
169,661

 
$
172,452

Note 10. Debt
Debt and short-term borrowings consist of the following as of the respective periods:
($ in thousands)
November 30,
2015
 
August 31,
2015
Revolving Credit Facility
$

 
$

Capital lease obligations
13,856

 
16,863

Other
29,411

 
28,783

Total debt
43,267

 
45,646

Less short-term borrowings and current portion of long-term debt
(22,485
)
 
(14,080
)
Long-term debt
$
20,782

 
$
31,566

In fiscal year 2012, we entered into a syndicated $625 million unsecured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility is used for general corporate purposes, which may include acquisitions and share repurchases. The term is five years and will expire in April 2017. The Revolving Credit Facility may be used for borrowings in certain foreign currencies and letters of credit, in each case up to specified sublimits.
We had no outstanding borrowings under the Revolving Credit Facility as of November 30, 2015 and August 31, 2015, but we had approximately $59 million and $41 million of outstanding letters of credit as of the respective periods. Subsequent to November 30, 2015, we borrowed $50 million under the Revolving Credit Facility to use in our acquisition of Career Partner. Refer to Note 1, Nature of Operations and Significant Accounting Policies.
The Revolving Credit Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Revolving Credit Facility fee ranges from 25 to 40 basis points. Incremental fees for borrowings under the facility generally range from Prime + 25 to 85 basis points.
The Revolving Credit Facility contains various customary representations, covenants and other provisions, including a material adverse event clause and the following financial covenants: maximum leverage ratio, minimum interest and rent expense coverage ratio, and U.S. Department of Education financial responsibility composite score requirements. We were in compliance with all applicable covenants related to the Revolving Credit Facility at November 30, 2015 and August 31, 2015.
Other debt principally includes debt at subsidiaries of Apollo Global and other obligations. The weighted average interest rate on our outstanding other debt at both November 30, 2015 and August 31, 2015 was 5.6%.
The carrying value of our debt, excluding capital leases, approximates fair value based on the nature of our debt, which includes consideration of the portion that is variable-rate.
Note 11. Income Taxes
We have historically determined our interim income tax provision by applying our estimated effective income tax rate expected to be applicable for the full fiscal year to our income before income taxes for the period. Our effective income tax rate is dependent upon several factors, such as tax rates in state and foreign jurisdictions and the relative amount of income we earn in such jurisdictions. In determining our full year estimate, we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes. We exercise significant judgment in determining our income tax provision due to transactions, credits and calculations where the ultimate tax determination is uncertain.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 19

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

As further discussed in Note 7, Goodwill and Intangibles, there is significant uncertainty associated with University of Phoenix’s future operating results due to competitive factors and its initiatives to transform itself into a more focused, higher retaining and less complex institution. Based primarily on this uncertainty, we used the discrete method to calculate our interim tax provision for the first quarter of fiscal year 2016. Under the discrete method, we determined our tax expense for the interim period based on actual results as if the interim period were an annual period, which we believe provides a more reasonable interim income tax provision than the continued use of the estimated annual effective tax rate method. Our first quarter fiscal year 2016 effective income tax rate for continuing operations was also significantly impacted by the goodwill impairment charge for our University of Phoenix reporting unit, which was not deductible for tax purposes. Refer to Note 7, Goodwill and Intangibles.
During fiscal year 2015, the Internal Revenue Service (“IRS”) completed its review of our United States federal income tax return for fiscal year 2014. Our United States 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.
Note 12. Shareholders’ Equity and Redeemable Noncontrolling Interests
Share Repurchases
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 November 30, 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.
We also repurchase shares in connection with tax withholding requirements associated with the release of vested share-based awards, which do not fall under the repurchase program described above.
The following summarizes our share repurchase activity for the respective periods:
 
Three Months Ended
November 30,
(In thousands, except per share data)
2015
 
2014
Share repurchases under share repurchase program:
 
 
 
Number of shares repurchased

 
677

Weighted average purchase price per share
$

 
$
26.72

Cost of share repurchases
$

 
$
18,092

Share repurchases related to vesting of share-based awards:
 
 
 
Number of shares repurchased
64

 
78

Cost of share repurchases
$
517

 
$
1,972

Share Reissuances
We reissue our Class A common stock from our treasury stock as a result of the release of shares associated with share-based awards and purchases under our employee stock purchase plan. Share reissuances were as follows for the respective periods:
 
Three Months Ended
November 30,
(In thousands)
2015
 
2014
Number of shares reissued
174

 
227


Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 20

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

Note 13. Earnings Per Share
Our outstanding shares consist of Apollo Class A and Class B common stock. Our Articles of Incorporation treat the declaration of dividends on the Class A and Class B common stock in an identical manner. As such, both the Class A and Class B common stock are included in the calculation of our earnings per share.
Diluted weighted average shares outstanding includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting and release of restricted stock units and performance share awards. The components of basic and diluted earnings per share are as follows:
 
Three Months Ended
November 30,
(In thousands, except per share data)
2015
 
2014
Numerator:
 
 
 
Net (loss) income attributable to Apollo (basic and diluted)
$
(60,765
)
 
$
33,785

Denominator:
 
 
 
Basic weighted average shares outstanding
108,446

 
108,581

Dilutive effect of restricted stock units and performance share awards(1)

 
618

Dilutive effect of stock options(1)

 
179

Diluted weighted average shares outstanding
108,446

 
109,378

Basic (loss) income per share attributable to Apollo
$
(0.56
)
 
$
0.31

Diluted (loss) income per share attributable to Apollo
$
(0.56
)
 
$
0.31

 
 
 
 
Anti-dilutive securities excluded from diluted (loss) income per share:
 
 
 
Anti-dilutive restricted stock units and performance share awards outstanding(1)
4,385

 
316

Anti-dilutive stock options outstanding(1)
3,716

 
2,476

 (1) Due to the loss from continuing operations attributable to Apollo during the three months ended November 30, 2015, no dilutive share-based awards were included in the calculation of diluted loss per share because they would have been anti-dilutive.
Note 14. Share-Based Compensation
The following details share-based compensation expense for the respective periods:
 
Three Months Ended
November 30,
($ in thousands)
2015
 
2014
Instructional and student advisory
$
2,784

 
$
2,982

Marketing
764

 
836

Admissions advisory
165

 
261

General and administrative
5,754

 
5,880

Restructuring and impairment charges
53

 
752

Share-based compensation expense
$
9,520

 
$
10,711

In accordance with our Amended and Restated 2000 Stock Incentive Plan, we granted 568,000 restricted stock units and performance share awards during the three months ended November 30, 2015. The granted awards had a weighted average grant date fair value per share of $7.50. As of November 30, 2015, we had $61.6 million and $3.0 million of unrecognized share-based compensation expense, net of estimated forfeitures, related to unvested restricted stock units and performance share awards, respectively. This expense is expected to be recognized over a weighted average period of 2.7 years.
In accordance with our Amended and Restated 2000 Stock Incentive Plan, we granted 4,000 stock options during the three months ended November 30, 2015. The weighted average grant date fair value and the weighted average exercise price of the options granted were $4.12 and $10.35, respectively. As of November 30, 2015, we had $8.9 million of unrecognized share-based compensation expense, net of estimated forfeitures, related to unvested stock options. This expense is expected to be recognized over a weighted average period of 2.8 years.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 21

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

Note 15. Commitments and Contingencies
Surety Bonds
As part of our normal operations, our insurers issue surety bonds for us that are required by various states where we operate. We are obligated to reimburse our insurers for any surety bonds that are paid. As of November 30, 2015, the face amount of these surety bonds was approximately $11 million.
Letters of Credit
As of November 30, 2015, we had approximately $59 million of outstanding letters of credit, which support certain of our obligations and guarantees provided by our subsidiaries as part of our normal operations for which fair value is not material.
Litigation and Other Matters
We are subject to various claims and contingencies that arise from time to time in the ordinary course of business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. We do not believe any of these are material for separate disclosure.
The following is a description of pending litigation, settlements, and other proceedings that fall outside the scope of ordinary and routine litigation incidental to our business.
Class Action Alleging Violations of Kentucky Wage and Hour Laws
On June 9, 2015, two former University of Phoenix employees filed an action in the Circuit Court of Jefferson County Kentucky alleging that they were wrongfully terminated from their positions with the University in violation of Kentucky and federal law. In this action, which is captioned Aldrich et al. v. The University of Phoenix, 15-C-2839 (Jefferson Cty. Circuit Court), plaintiffs also allege that the University violated Kentucky wage and hour law by failing to pay plaintiffs overtime and other required wages, and in connection with these wage and hour claims, they seek to represent a class of plaintiffs consisting of all individuals employed by the University within the past five years who performed a substantial part of their job duties in Kentucky. Plaintiffs seek to recover damages on their own behalf in connection with their alleged wrongful termination and past due wages, overtime compensation and other relief on behalf of the class in connection with the wage and hour claims.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Incentive Compensation False Claims Act Lawsuit
On May 25, 2011, we were notified that a qui tam complaint had been filed against us in the U.S. District Court, Eastern District of California, by private relators under the Federal False Claims Act and California False Claims Act, entitled USA and State of California ex rel. Hoggett and Good v. University of Phoenix, et al, Case Number 2:10-CV-02478-MCE-KJN. When the federal government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the federal government and, if successful, they are entitled to receive a portion of the federal government’s recovery.
The complaint alleges, among other things, that University of Phoenix has violated the Federal False Claims Act since December 12, 2009 and the California False Claims Act for the preceding ten years by falsely certifying to the U.S. Department of Education and the State of California that University of Phoenix was in compliance with various regulations that require compliance with federal rules regarding the payment of incentive compensation to admissions personnel, in connection with University of Phoenix’s participation in student financial aid programs. In addition to injunctive relief and fines, the relators seek significant damages on behalf of the Department of Education and the State of California, including all student financial aid disbursed by the Department to our students since December 2009 and by the State of California to our students during the preceding ten years. On July 24, 2014, the Court granted our motion to dismiss for lack of jurisdiction and dismissed relators’ complaint with prejudice. On December 14, 2014, relators filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit, and their appeal remains pending before that court.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
K.K. Modi Investment and Financial Services Pvt. Ltd.
On November 8, 2010, a suit was filed by K.K. Modi Investment and Financial Services Pvt. Ltd. (“Modi”) in the High Court of Delhi at New Delhi against defendants Apollo, Western International University, Inc., University of Phoenix, Inc., Apollo Global,

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 22

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

Inc., Modi Apollo International Group Pvt. Ltd., Apollo International, Inc., John G. Sperling, Peter V. Sperling and Jorge Klor De Alva, seeking to permanently enjoin the defendants from making investments in the education industry in the Indian market in breach of an exclusivity and noncompete provision which plaintiff alleges is applicable to Apollo and its subsidiaries. The case is entitled, K.K. Modi Investment and Financial Services Pvt. Ltd. v. Apollo International, et. al. We believe that the relevant exclusivity and noncompete provision is inapplicable to us and our affiliates. On October 31, 2014, the Court denied the Apollo defendants’ initial applications to have the case dismissed, concluding that plaintiffs’ complaint raised factual issues that needed to be resolved through the submission of evidence. Defendants appealed that ruling to the Division Bench of the High Court, and that appeal was denied by the Division Bench on August 17, 2015. We then filed a Special Leave Petition before the India Supreme Court on November 21, 2015, seeking leave to appeal the decision of the Division Bench. If plaintiff ultimately obtains the requested injunctive relief, our ability to conduct business in India, including through our joint venture with HT Media Limited, may be adversely affected. It is also possible that in the future K.K. Modi may seek to expand existing litigation in India or commence litigation in the U.S. in which it may assert a significant damage claim against us.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
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 Attorney General in this matter. We cannot predict the eventual scope, duration or outcome of this matter at this time, but we expect to provide to the Attorney General’s office information relating to aspects of our operations that is not limited to military students.
In May 2011 and January 2013, University of Phoenix received Civil Investigative Demands from the State of Massachusetts Office of the Attorney General. The Demands relate to an investigation of possible unfair or deceptive methods, acts, or practices by proprietary educational institutions in connection with the recruitment of students and the financing of education. The Demands seek documents, information and testimony regarding a broad spectrum of the University’s business for the time period of January 1, 2002 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
On October 22, 2010, University of Phoenix received notice that the State of Florida Office of the Attorney General in Fort Lauderdale, Florida had commenced an investigation into possible unfair and deceptive trade practices associated with certain alleged practices of the University. The notice included a subpoena to produce documents and detailed information for the time period of January 1, 2006 to the present about a broad spectrum of the University’s business. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
Because of the many questions of fact and law that may arise, the outcome of these state Attorneys General investigative proceedings is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for these matters and, accordingly, we have not accrued any liability associated with these matters.
In addition, from time to time, we receive requests for information from state Attorneys General, accrediting bodies, state higher education regulatory bodies and other federal and state government agencies relating to investigations or inquiries being conducted by other state or federal agencies, pending litigation or specific complaints received from students or former students. These requests can be broad and time consuming to respond to, and there is a risk that they could expand and/or lead to a formal inquiry or investigation into our practices. We have received such a request from the Wisconsin Department of Justice for information relating to programs offered by University of Phoenix to Wisconsin residents.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 23

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

UNIACC Investigations
UNIACC was advised by the National Accreditation Commission of Chile in November 2011 that its institutional accreditation would not be renewed and therefore had lapsed. Subsequently, in June 2012, a prosecutor’s office in Santiago, Chile requested that UNIACC provide documents relating to UNIACC’s relationship with a former employee and consultant who served as a member of the National Accreditation Commission until March 2012, and we received requests for additional information in connection with this investigation. Furthermore, in August 2012, the prosecutor’s office began requesting that UNIACC provide information about UNIACC’s business structure and operations and its relationship with other Apollo entities, in connection with an additional investigation regarding UNIACC’s compliance with applicable laws concerning the generation of profit by universities such as UNIACC. The prosecutor’s office has also requested additional information from UNIACC regarding certain government funding received by the institution. UNIACC is cooperating with these investigations. At this time, we cannot predict the eventual scope, duration or outcome of these investigations.
Because of the many questions of fact and law that may arise, the outcome of these investigative proceedings is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for these matters and, accordingly, we have not accrued any liability associated with these matters.
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. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
In addition, in August 2015, we received a notice from the FTC that it had commenced an inquiry into University of Phoenix’s practices and procedures for safeguarding student and staff personal information, which inquiry has since been closed without any adverse action.
Because of the many questions of fact and law that may arise, the outcome of the FTC investigation is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this matter and, accordingly, we have not accrued any liability associated with this matter.
Open Colleges Investigations
In September 2015, Open Colleges received a Notice from the Australian Competition and Consumer Commission (“ACCC”) requiring Open Colleges to produce information about student refunds upon withdrawal and related matters for the period of time since July 2014. In addition, Open Colleges receives inquiries from time to time from governmental regulatory authorities regarding student complaints, including an inquiry in October 2015 from the Australian Skills Quality Authority regarding student complaints about marketing practices, refund policies and other matters. Open Colleges is cooperating with the relevant authorities in these matters, but we cannot at this time predict their eventual scope, duration or outcome.
Because of the many questions of fact and law that may arise, the outcome of these investigative proceedings is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for these matters and, accordingly, we have not accrued any liability associated with these matters.
Office of the Inspector General of the U.S. Department of Education (“OIG”) Subpoena
On March 21, 2014, University of Phoenix received a subpoena from the Mid-Atlantic Region of the OIG. The subpoena seeks the production by the University of documents and detailed information regarding a broad spectrum of the activities conducted in the University’s Centralized Service Center for the Northeast Region located in Columbia, Maryland, for the time period of January 1, 2007 to the present, including information relating to marketing, recruitment, enrollment, financial aid processing, fraud prevention, student retention, personnel training, attendance, academic grading and other matters. We are cooperating with these requests, but we cannot at this time predict the eventual scope, duration or outcome of this matter.
Because of the many questions of fact and law that may arise, the outcome of this matter is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss and, accordingly, we have not accrued any liability associated with this matter.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 24

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

Securities Class Action (Teamsters Local 617 Pensions and Welfare Funds)
On November 2, 2006, the Teamsters Local 617 Pension and Welfare Funds filed a class action complaint alleging that we and certain of our current and former directors and officers violated the Securities Exchange Act of 1934. The complaint is entitled Teamsters Local 617 Pension & Welfare Funds v. Apollo Group, Inc. et al., Case Number 06-cv-02674-RCB.
The parties reached an agreement in principle to settle this matter for an immaterial amount and, on July 29, 2015, the district court entered an order approving the settlement and dismissing with prejudice the claims against defendants. Subsequent to the approval, an individual non-class member filed an untimely objection to the settlement with the district court. On December 7, 2015, the district court struck the objection.
Note 16. Regulatory Matters
All U.S. federal student financial aid programs are established by Title IV of the Higher Education Act and regulations promulgated thereunder. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. The most recent 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.
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, which is granted in a Program Participation Agreement with the institution.
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 in general relating to the proprietary education sector and our business may have on the timing or outcome of the recertification process.
Additionally, 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. During fiscal year 2015, the University 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. The outcome of this matter is uncertain at this point and, based on the information available to us at present, we have not accrued any liability associated with this matter.
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 average 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 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 of not less than three years.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 25

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

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 many 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. As of August 31, 2015, students enrolled in these programs that ceased enrolling new students represented approximately 10% of the University’s Degreed Enrollment. Students who were already enrolled in such programs, and who do not elect to enroll in a different University of Phoenix program, 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.
Higher Learning Commission Accreditation
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 Title IV programs (in combination with state higher education operating and degree granting authority); and
Qualification for authority to operate in certain states.
In July 2013, the accreditation of University of Phoenix was reaffirmed by HLC through the 2022-2023 academic year. The University is subject 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.
Military Benefit Programs
U.S. Department of Defense Tuition Assistance Program
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 remain eligible to participate in the Tuition Assistance Program, but newly enrolled or transfer students of the University are not eligible. Additionally, the University is not 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, sponsorship of military morale, welfare and recreation events without the specific written authorization of the officer designated in the DoD MOU, and the pending investigations by the Federal Trade Commission and the California Attorney General’s office. 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, and the DoD has subsequently requested additional information, including information unrelated to the subject matter of the original notice of probation. 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.
U.S. Department of Veterans Affairs Educational Benefits
University of Phoenix participates in the Department of Veterans Affairs educational benefits programs (“VA Programs”) for eligible veterans. Under these VA Programs, the educational locations serving veterans are subject to a compliance survey each year. Following the notice of probation from the Department of Defense described above, the Veterans Administration announced the commencement of the annual compliance survey, with an accelerated schedule and increased scope relative to prior years. In fiscal year 2015, funding under VA Programs represented approximately 10% of University of Phoenix’s cash basis revenue, as determined in the same manner prescribed in the 90/10 Rule.

Apollo Education Group, Inc. | First Quarter 2016 Form 10-Q | 26

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

Note 17. Segment Reporting
We operate in the education industry and our operating segments have been determined based on the method by which our chief operating decision maker evaluates performance and allocates resources. We have not aggregated any of our operating segments, which are presented in our segment reporting as follows:
University of Phoenix, which 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 University also offers its educational programs and services at ground locations throughout the United States.
Apollo Global, which includes our institutions based outside the U.S., and its corporate operations. Apollo Global acquired FAEL during the second quarter of fiscal year 2015, and FAEL’s operating results are included in our Apollo Global operating segment from the date of acquisition.