Company Quick10K Filing
Quick10K
Apollo Education
10-Q 2016-11-30 Quarter: 2016-11-30
10-K 2016-08-31 Annual: 2016-08-31
10-Q 2016-05-31 Quarter: 2016-05-31
10-Q 2016-02-29 Quarter: 2016-02-29
10-Q 2015-11-30 Quarter: 2015-11-30
10-K 2015-08-31 Annual: 2015-08-31
10-Q 2015-05-31 Quarter: 2015-05-31
10-Q 2015-02-28 Quarter: 2015-02-28
10-Q 2014-11-30 Quarter: 2014-11-30
10-K 2014-08-31 Annual: 2014-08-31
10-Q 2014-05-31 Quarter: 2014-05-31
10-Q 2014-02-28 Quarter: 2014-02-28
10-Q 2013-11-30 Quarter: 2013-11-30
HDP Hortonworks 1,636
SHMP NaturalShrimp 45
CNAB United Cannabis 43
BEAG Blue Eagle Lithium 34
DPDW Deep Down 10
CRTG Coretec Group 6
GRCR GRCR Partners 0
MYLI Music of Your Life 0
GIDYL GI Dynamics 0
TOMI Tomi Environmental Solutions 0
APOL 2016-11-30
Part I - Financial Information
Item 1. Financial Statements
Note 1. Nature of Operations and Significant Accounting Policies
Note 2. Restructuring and Impairment Charges
Note 3. Financial Instruments
Note 4. Accounts Receivable, Net
Note 5. Goodwill and Intangibles
Note 6. Fair Value Measurements
Note 7. Accrued and Other Liabilities
Note 8. Debt
Note 9. Income Taxes
Note 10. Shareholders' Equity
Note 11. Earnings per Share
Note 12. Share-Based Compensation
Note 13. Commitments and Contingencies
Note 14. Regulatory Matters
Note 15. Segment Reporting
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 apol-nov302016ex311.htm
EX-31.2 apol-nov302016ex312.htm
EX-32.1 apol-nov302016ex321.htm
EX-32.2 apol-nov302016ex322.htm

Apollo Education Earnings 2016-11-30

APOL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 apol-nov30201610q.htm 10-Q Document

 
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, 2016
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
image1a04.jpg
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 3, 2017, there were 109,386,376 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, 2016
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Apollo Education Group, Inc. | First Quarter 2017 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, 2016, under “Accreditation and Jurisdictional Authorizations,” “Financial Aid Programs” and “Regulatory Environment;”
The impact and effectiveness of the initiatives 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, 2016, 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, 2016 and Part II, Item 1A, Risk Factors, in this Form 10-Q; 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, 2016 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 2017 Form 10-Q | 3


Introductory Note Regarding Pending Merger
On February 7, 2016, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with AP VIII Queso Holdings, L.P. (“Queso”), a subsidiary of funds affiliated with Apollo Management VIII, L.P., which is an affiliate of Apollo Global Management, LLC and Socrates Merger Sub, Inc., a subsidiary of Queso, none of which is, or has ever been, affiliated with us. At the effective time of the merger pursuant to the Merger Agreement (the “Merger”), which, subject to the satisfaction of the closing conditions, is anticipated to be on or before February 1, 2017, the date on which the contract becomes terminable by either party, each share of our issued and outstanding Class A and Class B common stock will be converted pursuant to the terms of the Merger Agreement into the right to receive $10.00 per share in cash. On May 6, 2016, the Merger Agreement was approved by the holders of our outstanding Class A and Class B common stock, each voting separately as a class. Consummation of the Merger is subject to various regulatory and customary approvals, and operating and other conditions. See Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Pending Merger, for additional information on the Merger Agreement and the pending Merger.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 4


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,
2016
 
August 31,
2016
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
517,274

 
$
464,024

Restricted cash and cash equivalents
124,871

 
142,170

Marketable securities
117,392

 
197,886

Accounts receivable, net
246,306

 
224,990

Prepaid taxes
25,058

 
19,287

Other current assets
50,788

 
40,368

Total current assets
1,081,689

 
1,088,725

Marketable securities
6,893

 
18,758

Property and equipment, net
321,345

 
332,702

Goodwill
265,692

 
272,699

Intangible assets, net
179,417

 
191,146

Deferred taxes
68,703

 
78,366

Other assets
31,504

 
30,510

Total assets
$
1,955,243

 
$
2,012,906

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

 
 

Short-term borrowings and current portion of long-term debt
$
23,530

 
$
55,609

Accounts payable
63,360

 
59,640

Student deposits
145,018

 
178,160

Current deferred revenue
234,794

 
188,092

Accrued and other current liabilities
214,404

 
233,976

Total current liabilities
681,106

 
715,477

Long-term debt
33,251

 
35,186

Deferred taxes
15,479

 
16,323

Other long-term liabilities
156,488

 
169,326

Total liabilities
886,324

 
936,312

Commitments and contingencies


 


Redeemable noncontrolling interests
5,767

 
5,860

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
(3,857,845
)
 
(3,868,341
)
Retained earnings
5,018,613

 
5,024,528

Accumulated other comprehensive loss
(97,933
)
 
(85,957
)
Total Apollo shareholders’ equity
1,062,939

 
1,070,334

Noncontrolling interests
213

 
400

Total equity
1,063,152

 
1,070,734

Total liabilities, redeemable noncontrolling interests and shareholders’ equity
$
1,955,243

 
$
2,012,906

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

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 5


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

 
Three Months Ended
November 30,
(In thousands, except per share data)
2016
 
2015
Net revenue
$
484,499

 
$
586,021

Costs and expenses:
 
 
 
Instructional and student advisory
248,753

 
291,327

Marketing
90,967

 
93,802

Admissions advisory
26,588

 
34,188

General and administrative
51,325

 
67,445

Depreciation and amortization
26,854

 
27,394

Provision for uncollectible accounts receivable
13,930

 
15,313

Restructuring and impairment charges
15,365

 
97,823

Merger, acquisition and other related costs, net
2,313

 
3,978

Total costs and expenses
476,095

 
631,270

Operating income (loss)
8,404

 
(45,249
)
Interest income
1,087

 
919

Interest expense
(1,425
)
 
(1,456
)
Other loss, net
(644
)
 
(843
)
Income (loss) from continuing operations before income taxes
7,422

 
(46,629
)
Provision for income taxes
(4,223
)
 
(12,239
)
Income (loss) from continuing operations
3,199

 
(58,868
)
Loss from discontinued operations, net of tax

 
(3,259
)
Net income (loss)
3,199

 
(62,127
)
Net loss attributable to noncontrolling interests
871

 
1,362

Net income (loss) attributable to Apollo
$
4,070

 
$
(60,765
)
Earnings income (loss) per share - Basic:
 
 
 
Continuing operations attributable to Apollo
$
0.04

 
$
(0.53
)
Discontinued operations attributable to Apollo

 
(0.03
)
Basic income (loss) per share attributable to Apollo
$
0.04

 
$
(0.56
)
Earnings income (loss) per share - Diluted:
 
 
 
Continuing operations attributable to Apollo
$
0.04

 
$
(0.53
)
Discontinued operations attributable to Apollo

 
(0.03
)
Diluted income (loss) per share attributable to Apollo
$
0.04

 
$
(0.56
)
Basic weighted average shares outstanding
109,724

 
108,446

Diluted weighted average shares outstanding
110,186

 
108,446

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


Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 6


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

 
Three Months Ended
November 30,
($ in thousands)
2016
 
2015
Net income (loss)
$
3,199

 
$
(62,127
)
Other comprehensive loss (net of tax):
 
 
 
Currency translation adjustment
(12,274
)
 
(3,564
)
Change in fair value of available-for-sale securities(1)
(55
)
 
(99
)
Comprehensive loss
(9,130
)
 
(65,790
)
Comprehensive loss attributable to noncontrolling interests
1,224

 
2,029

Comprehensive loss attributable to Apollo
$
(7,906
)
 
$
(63,761
)
(1) The tax effect during the three months ended November 30, 2016 and 2015, 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 2017 Form 10-Q | 7


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, 2016
188,007

 
$
103

 
475

 
$
1

 
$

 
78,857

 
$
(3,868,341
)
 
$
5,024,528

 
$
(85,957
)
 
$
1,070,334

 
$
400

 
$
1,070,734

 
 
$
5,860

Share repurchases

 

 

 

 

 
115

 
(997
)
 

 

 
(997
)
 

 
(997
)
 
 

Share reissuances

 

 

 

 
(2,452
)
 
(329
)
 
11,493

 
(9,041
)
 

 

 

 

 
 

Net tax effect for stock incentive plans

 

 

 

 
(949
)
 

 

 

 

 
(949
)
 

 
(949
)
 
 

Share-based compensation

 

 

 

 
3,401

 

 

 

 

 
3,401

 

 
3,401

 
 

Currency translation adjustment

 

 

 

 

 

 

 

 
(11,921
)
 
(11,921
)
 
(200
)
 
(12,121
)
 
 
(153
)
Available-for-sale securities adjustment, net of tax

 

 

 

 

 

 

 

 
(55
)
 
(55
)
 

 
(55
)
 
 

Redemption value adjustments

 

 

 

 

 

 

 
(944
)
 

 
(944
)
 

 
(944
)
 
 
944

Net income (loss)

 

 

 

 

 

 

 
4,070

 

 
4,070

 
13

 
4,083

 
 
(884
)
Balance as of November 30, 2016
188,007

 
$
103

 
475

 
$
1

 
$

 
78,643

 
$
(3,857,845
)
 
$
5,018,613

 
$
(97,933
)
 
$
1,062,939

 
$
213

 
$
1,063,152

 
 
$
5,767

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 

 

 

 

 

 

 
(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

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


Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 8


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
November 30,
($ in thousands)
2016
 
2015
Operating activities:
 

 
 

Net income (loss)
$
3,199

 
$
(62,127
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Share-based compensation
3,401

 
9,520

Depreciation and amortization
26,854

 
27,394

Accelerated depreciation included in restructuring
1,728

 
2,953

Impairment charges and losses on asset dispositions
266

 
73,393

Non-cash foreign currency loss, net
483

 
352

Provision for uncollectible accounts receivable
13,930

 
15,313

Deferred income taxes
8,708

 
3

Changes in assets and liabilities:
 
 
 

Restricted cash and cash equivalents
16,673

 
(10,973
)
Accounts receivable
(39,851
)
 
(32,899
)
Prepaid taxes
(3,173
)
 
11,612

Other assets
(10,912
)
 
(9,915
)
Accounts payable
4,176

 
(14,690
)
Student deposits
(31,587
)
 
(4,880
)
Current deferred revenue
50,878

 
2,087

Accrued and other liabilities
(28,319
)
 
(26,010
)
Net cash provided by (used in) operating activities
16,454

 
(18,867
)
Investing activities:
 

 
 

Purchases of property and equipment
(20,872
)
 
(14,456
)
Purchases of marketable securities
(8,993
)
 
(109,715
)
Maturities of marketable securities
96,562

 
57,627

Sales of marketable securities
4,009

 
5,149

Other investing activities
152

 
(196
)
Net cash provided by (used in) investing activities
70,858

 
(61,591
)
Financing activities:
 

 
 

Payments on borrowings
(32,377
)
 
(3,448
)
Proceeds from borrowings

 
926

Share repurchases
(997
)
 
(517
)
Net cash used in financing activities
(33,374
)
 
(3,039
)
Effect of foreign exchange rates on cash and cash equivalents
(688
)
 
(442
)
Net increase (decrease) in cash and cash equivalents
53,250

 
(83,939
)
Cash and cash equivalents, beginning of period
464,024

 
503,705

Cash and cash equivalents, end of period
$
517,274

 
$
419,766

Supplemental disclosure of cash flow and non-cash information:
 

 
 

Cash paid for income taxes, net of refunds
$

 
$

Cash paid for interest
1,455

 
1,392

Restricted stock units vested and released
2,898

 
1,430

Credits received for tenant improvements
402

 

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

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 9


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


Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 10

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

Note 1. Nature of Operations and Significant Accounting Policies
Description of Business
Apollo Education Group, Inc. is a private education provider serving students since 1973. We offer undergraduate, graduate, certificate and nondegree educational programs and services, online and on-campus, principally to working adults in the U.S. and abroad. Refer to Note 15, Segment Reporting, for further information regarding our institutions and operating segments. Our fiscal year is from September 1 to August 31.
Pending Merger
On February 7, 2016, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with AP VIII Queso Holdings, L.P. (“Queso”), a subsidiary of funds affiliated with Apollo Management VIII, L.P., which is an affiliate of Apollo Global Management, LLC and Socrates Merger Sub, Inc., a subsidiary of Queso, none of which is, or has ever been, affiliated with us. At the effective time of the merger pursuant to the Merger Agreement (the “Merger”), which, subject to the satisfaction of the closing conditions, is anticipated to be on or before February 1, 2017, the date on which the contract becomes terminable by either party, each share of our issued and outstanding Class A and Class B common stock will be converted pursuant to the terms of the Merger Agreement into the right to receive $10.00 per share in cash. On May 6, 2016, the Merger Agreement was approved by the holders of our outstanding Class A and Class B common stock, each voting separately as a class.
Consummation of the Merger is subject to customary and other conditions, including:
(i)
the absence of certain conditions or restrictions in the response of the U.S. Department of Education to the pre-acquisition review application filed by University of Phoenix; and
(ii)
the receipt of consents or approvals from other federal, state and foreign educational governing bodies, including the Higher Learning Commission (“HLC”).
On December 7, 2016, the Department of Education provided its response to the preacquisition review application filed by University of Phoenix and Western International University, which specified certain conditions to the continuing participation of these institutions in Title IV programs after the Merger. These conditions were subsequently modified in certain respects in a supplemental response dated December 20, 2016. We have been informed by Queso that it has accepted the mandatory requirements stipulated in the Department’s initial response, as subsequently modified in its supplemental response.
HLC previously informed us that the HLC Board of Trustees had voted to defer action on the change of control applications filed in connection with the proposed Merger until such time as the Department of Education provided us and HLC with a written response to the preacquisition review applications filed by University of Phoenix and Western International University, and a substantive response to any requirements has been filed. We have submitted to HLC all of the requested information, including Queso’s written acceptance of the Department’s response, as supplemented, to the preacquisition review applications, and we anticipate that HLC will take action on our change of control applications in due course. However, we cannot predict or control the timing or outcome of HLC’s review of our applications.
In addition, consummation of the Merger is subject to our satisfying certain minimum operating metrics, measured as of the first or second month end preceding the closing date, depending on the day of the month on which closing occurs, as follows:
(i)
Our aggregate cash, cash equivalents and marketable securities must not be less than the specified amount for the applicable month end;
(ii)
University of Phoenix fiscal year-to-date new degreed enrollments as of the applicable month end must not have declined by more than certain levels (which are derived from the projections we prepared in December 2015 in connection with the Merger, which we refer to as the December 2015 forecast);
(iii)
University of Phoenix trailing twelve month net revenue as of the applicable month end shall not have declined by more than certain levels (which are derived from the December 2015 forecast); and
(iv)
Our consolidated trailing twelve month adjusted earnings before interest, taxes, depreciation and amortization as of the applicable month end shall not have declined by more than certain levels (which are derived from the December 2015 forecast).
The Merger Agreement may be terminated by each of us under certain circumstances, including if the Merger is not consummated by 5:00 pm Eastern time on February 1, 2017. Upon termination of the Merger Agreement under certain specified circumstances, Queso will be required to pay us a reverse termination fee of $25.0 million.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 11

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

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 2016 Annual Report on Form 10-K as filed with the SEC on October 20, 2016. We consistently applied the accounting policies described in the notes to consolidated financial statements included in our 2016 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 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, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending August 31, 2017.
Reclassifications
We reclassified prior periods for the following to conform to our current presentation:
During the second quarter of fiscal year 2016, we began presenting expenses incurred associated with our pending Merger discussed above in Merger, acquisition and other related costs, net on our Condensed Consolidated Statements of Operations. The associated costs incurred in the first quarter of fiscal year 2016 were included in General and administrative and we have reclassified such costs for the three months ended November 30, 2015 to conform with our current presentation.
We began separately presenting maturities and sales of our marketable securities, which have all been designated as available-for-sale, on our Condensed Consolidated Statements of Cash Flows. This reclassification did not impact total cash flows from investing activities.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 12

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

New Accounting Standards
Future Accounting Standards
Definition of a Business
In January 2017, the Financial Accounting Standards Board (“FASB”) issued a new standard that clarifies the definition of a business. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Accordingly, the standard is effective for us on September 1, 2018. Early adoption is permitted and the standard is to be applied on a prospective basis to purchases or disposals of a business or an asset. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
Statement of Cash Flows
In August 2016, the FASB issued a new standard that clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. Accordingly, the new standard is effective for us on September 1, 2018 using a retrospective approach. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
Further, in November 2016, the FASB issued a new standard that requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement cash flows. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. Accordingly, the new standard is effective for us on September 1, 2018 using a retrospective approach. Based on the substantial restricted cash balances on our consolidated balance sheets, we expect this standard to have a significant impact on the presentation of our consolidated statements of cash flows.
Financial Instruments - Credit Losses
In June 2016, the FASB issued a new standard that changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. Accordingly, the standard is effective for us on September 1, 2020 using a modified retrospective approach. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
Share-Based Payment Accounting
In March 2016, the FASB issued a new standard that is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The new standard is effective for us on September 1, 2017 and we do not plan to early adopt the new standard. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
Leases
In February 2016, the FASB issued a new standard that requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Accordingly, the standard is effective for us on September 1, 2019 using a modified retrospective approach. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
Financial Instruments - Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued a new standard that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new standard 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.
Revenue from Contracts with Customers
In May 2014, the FASB issued a comprehensive new revenue recognition standard 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. The FASB has also issued several amendments which clarify certain

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 13

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

provisions in the standard. The new standard is effective for 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 new revenue recognition standard will have on our consolidated financial statements.
Note 2. Restructuring and Impairment Charges
Restructuring and impairment charges include the following for the respective periods:
 
Three Months Ended
November 30,
($ in thousands)
2016
 
2015
Restructuring charges
$
15,365

 
$
24,430

Goodwill impairments(1)

 
73,393

Restructuring and impairment charges
$
15,365

 
$
97,823

(1) The goodwill impairment charges represent $71.8 million and $1.6 million for our University of Phoenix and Western International University reporting units, respectively.
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 improve efficiency and reduce costs to align with our declining enrollment and revenue. The activities initiated in prior years and those initiated in fiscal year 2017 are described below. Additionally, we intend to further reduce costs in future periods to align with our declining 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)
2016
 
2015
University of Phoenix
$
5,805

 
$
19,090

Apollo Global
1,417

 
404

Other
8,143

 
4,936

Restructuring charges
$
15,365

 
$
24,430

The following details the changes in our restructuring liabilities during the three months ended November 30, 2016:
 
Lease and Related
Costs, Net
 
Severance and Other Employee
Separation Costs
 
Other Restructuring
Related Costs
 
Total
($ in thousands)
2017 Restructuring
 
Prior Year Restructuring(1)
 
2017 Restructuring
 
Prior Year Restructuring(1)
 
2017 Restructuring
 
Prior Year Restructuring(1)
 
August 31, 2016
$

 
$
64,659

 
$

 
$
3,834

 
$

 
$
111

 
$
68,604

Expense

 
9,423

 
3,893

 
431

 

 
1,618

 
15,365

Other

 
1,486

 

 

 

 
(1,338
)
 
148

Payments

 
(10,378
)
 
(2,854
)
 
(2,596
)
 

 
(253
)
 
(16,081
)
November 30, 2016(2)
$

 
$
65,190

 
$
1,039

 
$
1,669

 
$

 
$
138

 
$
68,036

(1) We have incurred $478 million of cumulative costs associated with restructuring activities initiated prior to fiscal year 2017, which include lease exit, employee separation, and other related costs of $306 million, $116 million and $56 million, respectively. These cumulative costs have been reflected in our segment reporting as follows: $347 million in University of Phoenix, $17 million in Apollo Global, and $114 million in Other.
(2) The gross, undiscounted obligation associated with our restructuring liabilities as of November 30, 2016 was approximately $129 million, which principally represents costs for non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 14

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

Activities Initiated in Prior Years
Our restructuring activities initiated prior to fiscal year 2017 principally included closing approximately 150 University of Phoenix ground locations, rationalizing our leased administrative office facilities, and workforce reductions. During the three months ended November 30, 2016, we incurred $11.5 million of expense for these prior year activities. The 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 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%-7% 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, 2016, we had approximately $35 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 2017
During the three months ended November 30, 2016, we incurred $3.9 million of expense for new restructuring activities initiated during fiscal year 2017, which represented severance and other employee separation costs associated with the elimination of approximately 150 positions. The expense associated with these activities for the three months ended November 30, 2016 is reflected in our segment reporting as follows: $2.4 million in University of Phoenix, $1.4 million in Apollo Global and $0.1 million in Other.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 15

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

Note 3. 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 period ends:
 
November 30, 2016
($ in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
Cash
$
470,237

 
$

 
$

 
$
470,237

 
$
470,237

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
137,424

 

 

 
137,424

 
137,424

 

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
38,588

 
15

 
(61
)
 
38,542

 

 
33,382

 
5,160

Tax-exempt municipal bonds
56,955

 
3

 
(63
)
 
56,895

 
7,494

 
47,668

 
1,733

Other
63,330

 
12

 
(10
)
 
63,332

 
26,990

 
36,342

 

Total
$
766,534

 
$
30

 
$
(134
)
 
$
766,430

 
$
642,145

 
$
117,392

 
$
6,893


 
August 31, 2016
($ in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
Cash
$
527,662

 
$

 
$

 
$
527,662

 
$
527,662

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
66,265

 

 

 
66,265

 
66,265

 

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
91,426

 
33

 
(56
)
 
91,403

 

 
79,055

 
12,348

Tax-exempt municipal bonds
75,696

 
26

 
(13
)
 
75,709

 
100

 
70,697

 
4,912

Other
61,801

 
12

 
(14
)
 
61,799

 
12,167

 
48,134

 
1,498

Total
$
822,850

 
$
71

 
$
(83
)
 
$
822,838

 
$
606,194

 
$
197,886

 
$
18,758

(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 two 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 2017 Form 10-Q | 16

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

Note 4. Accounts Receivable, Net
Accounts receivable, net consist of the following as of the respective period ends:
($ in thousands)
November 30,
2016
 
August 31,
2016
Student accounts receivable
$
278,955

 
$
258,397

Allowance for doubtful accounts
(44,279
)
 
(48,650
)
Net student accounts receivable
234,676

 
209,747

Other receivables
11,630

 
15,243

Total accounts receivable, net
$
246,306

 
$
224,990

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)
2016
 
2015
Beginning allowance for doubtful accounts
$
48,650

 
$
42,259

Provision for uncollectible accounts receivable
13,930

 
15,313

Write-offs, net of recoveries
(17,662
)
 
(9,491
)
Currency translation adjustment
(639
)
 
(43
)
Ending allowance for doubtful accounts
$
44,279

 
$
48,038

Note 5. Goodwill and Intangibles
The following details changes in our goodwill by reportable segment during the three months ended November 30, 2016:
($ in thousands)
University of
Phoenix
 
Apollo
Global
 
Other
 
Total
Goodwill as of August 31, 2016
$

 
$
241,501

 
$
31,198

 
$
272,699

Currency translation adjustment

 
(7,007
)
 

 
(7,007
)
Goodwill as of November 30, 2016
$

 
$
234,494

 
$
31,198

 
$
265,692

As of November 30, 2016, we had $35.9 million and $143.5 million of finite and indefinite-lived intangibles, respectively. The estimated future amortization expense of our finite-lived intangibles as of November 30, 2016 is as follows:
($ in thousands)
Remainder of 2017
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Estimated future amortization expense(1)
$
10,388

 
$
10,243

 
$
4,975

 
$
3,054

 
$
2,176

 
$
1,871

 
$
3,160

 
$
35,867

(1) Estimated future amortization expense may vary as acquisitions and dispositions occur in the future and as a result of foreign currency translation adjustments.
Note 6. Fair Value Measurements
We measure and disclose certain financial instruments at fair value as described in Note 3, Financial Instruments. Liabilities measured at fair value on a recurring basis consist of the following as of the respective period ends:
 
 
 
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, 2016
$
11,574

 
$

 
$

 
$
11,574

Contingent consideration as of August 31, 2016
$
11,851

 
$

 
$

 
$
11,851


Apollo Education Group, Inc. | First Quarter 2017 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)
2016
 
2015
Beginning balance
$
11,851

 
$
7,499

Change in fair value included in net income (loss)
337

 
43

Currency translation adjustment
(614
)
 

Ending balance
$
11,574

 
$
7,542

Our contingent consideration liabilities are valued using discounted cash flow valuation methods encompassing significant unobservable inputs. The inputs include estimated operating results scenarios for the applicable performance periods, probability weightings assigned to operating results scenarios and the discount rates applied.
As of November 30, 2016, we have contingent consideration related to our acquisition of Career Partner during fiscal year 2016 that is principally based on Career Partner’s operating results for calendar year 2016. As of November 30, 2016, the estimated fair value for this contingent consideration was $11.6 million and the associated liability is included in Accrued and other current liabilities on our Condensed Consolidated Balance Sheets. 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, 2016 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, 2016
Restructuring obligations
$
8,028

 
$

 
$

 
$
8,028

 
$
8,028

During the three months ended November 30, 2016, we recorded $8.0 million of aggregate initial lease obligations at fair value associated with our restructuring activities. We recorded obligation liabilities on the dates we ceased using the respective facilities, and we measured the liabilities at fair value using Level 3 inputs included in the valuation method. Refer to Note 2, Restructuring and Impairment Charges.
Note 7. Accrued and Other Liabilities
Accrued and other current liabilities consist of the following as of the respective period ends:
($ in thousands)
November 30,
2016
 
August 31,
2016
Salaries, wages and benefits
$
48,113

 
$
55,309

Restructuring obligations
33,643

 
32,220

Student discounts, grants and scholarships
32,607

 
35,981

Legal and other professional obligations
16,487

 
22,234

Contingent consideration
11,574

 
11,851

Curriculum materials
9,987

 
10,995

Deferred rent and other lease liabilities
9,923

 
9,627

Advertising
9,467

 
12,430

Other
42,603

 
43,329

Total accrued and other current liabilities
$
214,404

 
$
233,976


Apollo Education Group, Inc. | First Quarter 2017 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 period ends:
($ in thousands)
November 30,
2016
 
August 31,
2016
Deferred rent and other lease liabilities
$
41,995

 
$
44,405

Restructuring obligations
34,393

 
36,384

Noncurrent deferred revenue
28,808

 
31,169

Deferred gains on sale-leasebacks
18,320

 
18,663

Other
32,972

 
38,705

Total other long-term liabilities
$
156,488

 
$
169,326

Note 8. Debt
Debt and short-term borrowings consist of the following as of the respective period ends:
($ in thousands)
November 30,
2016
 
August 31,
2016
Revolving Credit Facility
$

 
$
30,000

Capital lease obligations
25,565

 
28,489

Other
31,216

 
32,306

Total debt
56,781

 
90,795

Less short-term borrowings and current portion of long-term debt
(23,530
)
 
(55,609
)
Long-term debt
$
33,251

 
$
35,186

In fiscal year 2012, we entered into a syndicated $625 million unsecured revolving credit facility (the “Revolving Credit Facility”), which expires in April 2017. The Revolving Credit Facility is used for general corporate purposes, which may include acquisitions and share repurchases, and may also be used for borrowings in certain foreign currencies and letters of credit, in each case up to specified sublimits.
As of August 31, 2016, we had $30 million of outstanding borrowings under the Revolving Credit Facility and approximately $29 million of outstanding letters of credit. We repaid the entire amount borrowed under the Revolving Credit Facility as of August 31, 2016 during the first quarter of fiscal year 2017. As of November 30, 2016, we had no outstanding borrowings under the Revolving Credit Facility and approximately $28 million of outstanding letters of credit.
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 weighted average interest rate on our outstanding short-term borrowings under the Revolving Credit Facility at August 31, 2016 was 3.8%.
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, 2016 and August 31, 2016.
Other debt principally includes debt at subsidiaries of Apollo Global and other obligations. The weighted average interest rate on our outstanding other debt at November 30, 2016 and August 31, 2016 was 6.3% and 6.0%, respectively.
The carrying value of our debt, excluding capital leases, approximates fair value based on the nature of our debt, which includes consideration of the portion that is variable-rate.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 19

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

Note 9. 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.
Beginning in the first quarter of fiscal year 2016, we used the discrete method to calculate our interim tax provision based primarily on the significant uncertainty associated with our future operating results and the associated impact on our estimated year-to-date income tax expense. Under the discrete method, we determine our tax expense for interim periods based on actual results as if the interim period were an annual period. We have continued using the discrete method for interim periods through the first quarter of fiscal year 2017 as we believe the method provides a more reasonable interim income tax provision as compared to the estimated annual effective tax rate method.
During fiscal year 2015, the Internal Revenue Service (“IRS”) completed its review of our U.S. federal income tax return for fiscal year 2014. Our U.S. 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, 2016 and 2017 which is a voluntary program in which taxpayers seek to resolve all or most issues with the IRS prior to or soon after filing their U.S. federal income tax returns. 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 10. Shareholders’ Equity
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, 2016. 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 are prohibited from repurchasing shares under the agreements associated with our pending Merger, as described further in Note 1, Nature of Operations and Significant Accounting Policies. We did not repurchase any shares under the repurchase program during the three months ended November 30, 2016 and 2015.
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)
2016
 
2015
Number of shares repurchased
115

 
64

Cost of share repurchases
$
997

 
$
517


Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 20

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

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)
2016
 
2015
Number of shares reissued
329

 
174

Note 11. 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)
2016
 
2015
Numerator:
 
 
 
Net income (loss) attributable to Apollo (basic and diluted)
$
4,070

 
$
(60,765
)
Denominator:
 
 
 
Basic weighted average shares outstanding
109,724

 
108,446

Dilutive effect of restricted stock units and performance share awards(1)
462

 

Dilutive effect of stock options(1)

 

Diluted weighted average shares outstanding
110,186

 
108,446

Basic income (loss) per share attributable to Apollo
$
0.04

 
$
(0.56
)
Diluted income (loss) per share attributable to Apollo
$
0.04

 
$
(0.56
)
 
 
 
 
Anti-dilutive securities excluded from diluted income (loss) per share:
 
 
 
Anti-dilutive restricted stock units and performance share awards(1)
1,962

 
4,385

Anti-dilutive stock options(1)
3,055

 
3,716

 (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 12. Share-Based Compensation
The following details share-based compensation expense for the respective periods:
 
Three Months Ended
November 30,
($ in thousands)
2016
 
2015
Instructional and student advisory
$
1,007

 
$
2,784

Marketing
214

 
764

Admissions advisory
34

 
165

General and administrative
2,146

 
5,754

Restructuring and impairment charges

 
53

Share-based compensation expense
$
3,401

 
$
9,520

We are prohibited from granting share based awards under the agreements associated with our pending Merger, as described further in Note 1, Nature of Operations and Significant Accounting Policies. Accordingly, we granted no restricted stock units,

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 21

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

performance share awards or stock options during the three months ended November 30, 2016. As of November 30, 2016, we had $21.7 million of unrecognized share-based compensation expense, net of estimated forfeitures, related to unvested share-based options and awards. This expense is expected to be recognized over a weighted average period of 2.0 years.
Note 13. Commitments and Contingencies
Surety Bonds
Our insurers issue surety bonds for us that are required by various states where we operate, or that are required for other purposes. We are obligated to reimburse our insurers for any surety bonds that are paid. As of November 30, 2016, the face amount of these surety bonds was approximately $21 million.
Letters of Credit
As of November 30, 2016, we had approximately $28 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.
Merger-Related Shareholder Suits
In connection with the pending Merger described in Note 1, Nature of Operations and Significant Accounting Policies, the class action lawsuits listed below have been filed in the Superior Court of the State of Arizona, Maricopa County against some or all of the following parties: us, our directors, the Apollo Class B Voting Stock Trust No. 1, AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., and Barclays Capital Inc. and Evercore Group L.L.C. (in their capacity as our financial advisors in connection with the Merger):
Casey v. Apollo Education Group, Inc., et al., Case No. CV2016-051605 filed on February 25, 2016;
Miglio v. Apollo Education Group, Inc., et al., Case No. CV2016-003718 filed on February 26, 2016;
Blanchfield v. Apollo Education Group, Inc., et al., Case No. CV2016-001738 filed on February 29, 2016;
Wagner v. Apollo Education Group, Inc., et al., Case No. CV2016-001905 filed on March 9, 2016;
Ladouceur v. Apollo Education Group, Inc., et al., Case No. CV2016-002148 filed on March 17, 2016; and
Simkhovich v. Apollo Education Group, Inc., et al., Case No. CV2016-002339 filed on March 23, 2016.
The complaints generally allege that our directors have violated their fiduciary duties by, among other things, failing to properly value us and failing to maximize our value to our shareholders as well as by including purportedly preclusive deal protections in the Merger Agreement, and that we, AP VIII Queso Holdings, L.P. and Socrates Merger Sub, Inc. aided and abetted such alleged breaches of fiduciary duties. The Miglio, Wagner, Ladouceur and Simkhovich complaints further allege that our directors breached their fiduciary duty of candor by filing a materially incomplete and misleading preliminary proxy statement and also allege that the sale process was negatively impacted by certain conflicts with our financial advisors. The plaintiffs seek various remedies, including a declaration that the action is properly maintainable as a class action, an injunction against the consummation of the Merger, an accounting of the damages sustained by the plaintiffs and the class, costs and fees of the action, including attorneys’ fees and expenses, and any other equitable relief the court may deem just and proper.
On March 4, 2016, the action titled Blanchfield v. Apollo Education Group, Inc., et al. was voluntarily dismissed without prejudice.
On April 12, 2016, the Superior Court of the State of Arizona, Maricopa County consolidated the remaining Casey, Miglio, Wagner, Ladouceur and Simkhovich cases into a single action, In re Apollo Education Group, Inc. Shareholder Litigation, Lead Case No. CV2016-001905 (the “Consolidated Action”). On May 1, 2016, we reached an agreement with the plaintiffs to settle the Consolidated Action in connection with the increase in the Merger consideration to $10.00 per share, which agreement is subject to consummation of the Merger, certain confirmatory discovery and approval by the court. If the Merger is consummated, we anticipate that we will be required to pay the plaintiffs’ expenses and an amount for attorneys’ fees yet to be determined and subject to court approval. We have not accrued any liability associated with this action.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 22

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

Securities Class Action (Rameses Te Lomingkit et. al.)
On March 14, 2016, a class action complaint was filed in the United States District Court for the District of Arizona, captioned Rameses Te Lomingkit et. al. v. Apollo Education Group, Inc. et. al., Case Number 2:16-CV-00689-JZB. The plaintiff, who allegedly purchased our shares during the specified class period, filed this putative class action on behalf of the plaintiff and all of our shareholders who acquired Class A shares between June 26, 2013 and October 21, 2015 and seeks certification as a class action and unspecified compensatory damages and costs. The plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated under the Exchange Act, by us and certain of our officers for making allegedly false and misleading statements and failing to disclose material facts relating to the nature of our military recruitment activities and the status of our online classroom platform. The Court appointed the Government of Guam Retirement Fund as lead plaintiff on June 16, 2016. On August 15, 2016, the lead plaintiff filed an amended complaint which also focuses on statements and omissions relating to military recruiting and the online classroom platform. We intend to vigorously defend against the plaintiff’s allegations.
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.
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. On March 4, 2016, the Court granted our motion to dismiss and compel arbitration. On March 9, 2016, plaintiffs filed a notice of their intent to appeal with the U.S. Court of Appeals for the Sixth Circuit. The Court of Appeals affirmed the District Court’s decision in October 2016.
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.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 23

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

Federal False Claims Act Lawsuit
On March 3, 2016, a qui tam complaint against us filed by a private relator under the Federal False Claims Act was unsealed. The lawsuit, captioned United States of America ex rel. Arthur Green v. University of Phoenix, et al, Case Number 1:14 CV 1654, was previously filed under seal in the U.S. District Court for the Northern District of Ohio. It was unsealed by order of the District Court after the federal government notified the District Court of its decision not to intervene in the case. The relator filed an amended complaint on October 18, 2016.
The amended complaint alleges, among other things, that since at least August 2007, University of Phoenix has violated the Federal False Claims Act by falsely certifying to the U.S. Department of Education that the University was in compliance with various regulations under the U.S. Higher Education Act relating to preparation of student financial aid forms and other matters, including in connection with employee participation in student financial aid programs. Plaintiff alleges that certain identified student loans should be reimbursed to the government, in addition to statutory fines and penalties, in an amount to be determined at trial.
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, 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, which was denied on January 15, 2016. On February 15, 2016, we filed a petition for review of the denial of the Special Leave Petition, which was rejected by the India Supreme Court on March 31, 2016. The case will be returned to the Delhi High Court for the taking of evidence. 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.
In February 2016, we received a Second Investigative Subpoena from the Office of the Attorney General of the State of California in the Matter of the Investigation of For-Profit Educational Institutions, following the Investigative Subpoena we received in August 2015. The Second Investigative Subpoena, which is not limited to matters involving military students, seeks the production of documents and information regarding a broad spectrum of the business and practices of Apollo and its subsidiaries, including University of Phoenix, relating to marketing, recruiting, compensation of enrollment advisors, complaints, financial aid, compliance, accreditation, other governmental investigations, private litigation and other matters, as well as additional information relating to marketing and services to members and former members of the U.S. military and California National Guard, for the time period of July 1, 2010 to the present.
We are cooperating with the California Attorney General in these investigative proceedings. We cannot predict the eventual scope, duration or outcome of the investigations at this time.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 24

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

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.
In October 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.
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.
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 the production of information about student refunds upon withdrawal and related matters for the period of time since July 2014. In addition, Open Colleges receives inquiries and is subject to audits from time to time from governmental regulatory authorities, including an inquiry in October 2015 from the Australian Skills Quality Authority (“ASQA”), the national regulator of vocational education programs, regarding student complaints about marketing practices, refund policies and other matters (which has since been concluded without material findings).
Following a recent compliance audit, the two key institutions comprising our Open Colleges operations each received a notice of noncompliance and intention to make a decision to impose sanctions from ASQA due to various alleged compliance deficiencies. One of the alleged deficiencies arose from a change in the interpretation of applicable course requirements, which will require changes in our procedures for student workplace skills assessments used in connection with courses that represent a substantial portion of the Open Colleges institutions’ enrollment. These changes, which we are implementing, could increase the operating costs for these institutions, perhaps substantially, and could have competitive implications.
We submitted a response to the ASQA notice and on January 4, 2017, ASQA notified the two institutions of its decision to not impose sanctions.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 25

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

Office of the Inspector General of the U.S. Department of Education (“OIG”) Subpoena
On March 21, 2014, University of Phoenix received a subpoena from the Mid-Atlantic Region of the OIG. The subpoena seeks the production by the University of documents and detailed information regarding a broad spectrum of the activities conducted in the University’s Centralized Service Center for the Northeast Region located in Columbia, Maryland, for the time period of January 1, 2007 to the present, including information relating to marketing, recruitment, enrollment, financial aid processing, fraud prevention, student retention, personnel training, attendance, academic grading and other matters. We are cooperating with these requests. We cannot predict the eventual scope, duration or outcome of this matter at this time.
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.
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 (“CNA”) 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 also requested additional information from UNIACC regarding certain government funding received by the institution. On April 7, 2016, the prosecutor closed the investigation related to the CNA matter.
Shareholder Derivative Lawsuit
On June 10, 2016, we received a shareholder demand to commence a civil action against each of our directors and certain of our current and former officers on grounds of breach of fiduciary duty and other claims, and to make available for examination certain records. The demand is a condition precedent under applicable Arizona law to the filing of a derivative lawsuit on behalf of the Company seeking damages from directors and officers for breach of fiduciary duty. On July 11, 2016, we learned that, prior to the expiration of the required 90-day waiting period, the shareholders filed a derivative complaint in the Superior Court of Arizona, captioned Kevin J. Guinan et. al. v. Apollo Education Group, Inc. et. al., Case Number CV2016-005901, seeking relief from the waiting period requirement and damages from directors and officers for alleged breach of fiduciary duties, unjust enrichment, abuse of control and corporate waste relating to recruitment practices, false claims, our new student classroom, share repurchases and other matters. On July 26, 2016, the plaintiffs filed a motion for a preliminary injunction, seeking, among other things, to terminate or postpone our pending Merger described in Note 1, Nature of Operations and Significant Accounting Policies. The parties have reached an agreement to resolve the lawsuit, subject to negotiation of a stipulation of settlement and court approval. We anticipate that we will be required to pay the plaintiffs’ expenses and an amount for attorneys’ fees yet to be determined and subject to court approval. The settlement and associated expenses and fees are not expected to be material.
Note 14. 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 discussion and activity regarding Higher Education Act reauthorization, 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 Department may seek to impose conditions on our operations in connection with any recertification, including some or all conditions to continued participation in Title IV programs following

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 26

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

the consummation of our pending Merger transaction that the Department has identified in its response to our application for preacquisition review of that transaction.
In February 2016, the Department notified the University that for the duration of the month-to-month continuation of the University’s Program Participation Agreement, University of Phoenix must obtain from the Department prior approval of substantial changes, including (i) the establishment of additional locations, (ii) any increase in the level of academic offering beyond those listed in the Institution’s Eligibility and Certification Approval Report and (iii) the addition of any educational program (including degree, nondegree, or short-term training programs). Some of these substantial changes include changes that previously could be implemented by the University upon notice to the Department and without prior approval.
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 Regulations
Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide information to prospective students about each eligible program, including the relevant recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers. These reporting requirements increase our costs of operations and could adversely impact student enrollment, persistence and retention if our reported program information compares unfavorably with other reporting educational institutions.
In October 2014, the U.S. Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether an academic program prepares students for gainful employment in a recognized occupation. Under the regulations, which apply on a program-by-program basis, the Title IV eligibility of students enrolled in a program will depend on the outcome of two tests relating to average student loan debt service-to-earnings ratios of program graduates for each cohort year. One test measures student loan debt service as a percentage of total earnings; the other test measures student loan debt service as a percentage of deemed discretionary earnings. For each test, the regulations specify the ratios that constitute “pass”, “fail”, and neither pass nor fail, which is referred to as “zone”. If a program fails both of the tests for one measuring 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 outcome of the tests for the next measuring year. Programs that fail both tests in two out of three consecutive years or are in the zone for four consecutive years will be ineligible to participate in Title IV student financial aid for a period of at least three years.
In late October 2016, the Department provided draft gainful employment debt service-to-earnings ratios for the initial measuring year, which the Department refers to as Debt Measure Year 2015 (“DMYR15”). The Department expects to issue the final DMYR15 debt service-to-earnings ratios in January 2017.
Based on the draft rates, University of Phoenix programs representing approximately 15% of the University’s total degreed enrollment as of November 30, 2016 failed both of the debt service-to-earnings tests, and a small number of programs were in the zone.
In connection with the University’s initiative to transform itself into a more focused, higher retaining and less complex institution, beginning in September 2015 and continuing through early fiscal year 2017, the University ceased enrolling new students in programs it believed may be impacted by the gainful employment regulations. As a result of these actions, the University has ceased enrolling new students in all of the programs that failed both of the minimum debt service-to-earnings tests for DMYR15. These programs, and the other programs that were retired in connection with the broader initiative to transform the University, represented approximately 19% of the University’s total degreed enrollment as of November 30, 2016. Students who are currently enrolled in such programs are being taught-out.
Because the measuring period for the next cohort (DMYR16) has already ended, we do not have the opportunity to make changes to any of the programs that failed both tests for DMYR15, and if these programs also fail both tests for DMYR16, they immediately will cease to be eligible to participate in Title IV programs. In such case, the University intends to provide

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 27

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

scholarships to students enrolled in these programs to help the affected students complete their programs of study. The ultimate cost of this assistance cannot be predicted currently, but could be substantial, depending on the number of students who qualify and choose to participate.
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 continuing programs in the future.
Defense to Repayment Regulations
On October 28, 2016, the U.S. Department of Education published final regulations establishing new processes and standards for the discharge of student loans. The regulations provide for discharge of student loans first disbursed on or after July 1, 2017, and recovery by the borrower of any amounts paid on such loans where:
a school breaches contractual promises to a student;
certain judgments based on any state or federal law are entered against a school related to the loan or the educational services after a contested proceeding; or
a school makes substantial misrepresentations about the nature of its educational programs, financial charges or employability of graduates.
In general, the extent to which a loan obligation is discharged or previously paid amounts are recovered is limited to the amount of pecuniary damages suffered by the borrower associated with the relevant basis for the discharge, as determined by a Department hearing officer in the exercise of broad discretion. The decision of the hearing officer is final, subject to limited rights to appeal a decision to the Secretary of Education. In most cases, the Department is entitled to seek reimbursement from the disbursing school of any loan amounts discharged or recovered by students.
In addition, the Department has the discretion to initiate proceedings for discharge on behalf of groups of students if, among other reasons, the Department determines that there are common facts and claims or that such action would promote compliance by the school. Such group proceedings can be initiated whether a school has closed or is currently operating, and can include students who have not requested relief. In any such proceeding, a Department official will represent the relevant group in the fact-finding process, which will be presided over by a Department hearing officer.
There is no time limit on claims to discharge outstanding amounts owed by a borrower, regardless of the basis for the discharge, and no time limit on claims for recovery of amounts previously paid which are based on the entry of a judgment. Claims for recovery of amounts previously paid which are based on breach of contract or misrepresentation generally must be made within six years of the breach or discovery of the misrepresentation.
The new procedures and standards increase the likelihood that individual and group borrower defense to repayment claims will be made and confer on the Department substantially complete and unreviewable discretion to adjudicate any such claims, including claims initiated by the Department itself. Because the specified standards are imprecise in many respects and the Department is the final arbiter of the standards and the findings of fact, we may not be able successfully to predict how the standards will be applied to our students until claims have been made and adjudicated. Application of the specified standards relating to breach of contract and misrepresentation, and the determination of the appropriate amount of damages each are likely to involve complicated and nuanced questions of fact and may involve large groups of students deemed by the Department to be similarly situated. Accordingly, we may be exposed in a proceeding to potentially significant liability based on intensely factual analyses and judgments, under circumstances where we have available only limited due process rights. If a large group of students, in either a private proceeding or a proceeding initiated and prosecuted by the Department, succeeds in a defense to repayment claim for any reason, our business and financial condition could be materially and adversely harmed.
Financial Responsibility Standards
Also on October 28, 2016, the Department published final regulations modifying the Department’s financial responsibility standards to provide that a proprietary institution is deemed not to be financially responsible if it is subject to one or more specified triggering events on or after July 1, 2017, including:
A failure to satisfy the 90/10 test for the prior fiscal year;
For publicly traded institutions, a failure to timely file annual or quarterly reports with the Securities and Exchange Commission, the receipt of certain warnings from the SEC or the relevant stock exchange, or the delisting of the institution’s stock; and
Cohort default rates above 30% for the two most recent measuring periods.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 28

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

In addition, an institution will be deemed not to be financially responsible if the institution is subject to one or more other specified triggering events, if the Department determines that after taking into account the possible future financial consequences a recalculated composite score for the institution’s most recently completed fiscal year would be less than 1.0. Such triggering events include the following:
The institution incurs a liability in connection with a judicial or administrative proceeding, including as a result of settlement;
The institution is sued after July 1, 2017 by a federal or state authority regarding certain matters involving student loans or the provision of educational services and such suit is still pending after 120 days;
The institution is otherwise sued after July 1, 2017 and such lawsuit has survived a motion for summary judgment or the time to assert such a motion has expired;
The institution is required by its accrediting agency to submit a teach-out plan in connection with closure of the institution or certain of its locations;
The institution has programs that could become ineligible to participate in Title IV programs based on the gainful employment debt service-to-earnings rates for the next measuring year; or
The institution has a composite score of less than 1.5 and experiences a withdrawal of owner’s equity by any means, including by declaring a dividend.
Furthermore, an institution will be deemed to not be financially responsible if the Department determines that there is an event or condition that is reasonably likely to have a material adverse effect on the financial condition, business, or results of operations of the institution, including as a result of one or more of the following events:
significant fluctuation in the amount of Title IV funds received by the institution;
citation of noncompliance by a state licensing or authorizing agency;
failure of a financial stress test to be developed by the Department;
high annual dropout rates, as calculated by the Department;
action by an accrediting agency to place the institution on probation or issue a show-cause order for failure to meet one or more accrediting standards;
violation of a provision in a loan agreement; or
pending borrower defense to repayment claims or an expectation that a significant number of borrower defense to repayment claims will be filed related to the institution, as determined by the Department.
If an institution is deemed to be not financially responsible because of the occurrence of one or more of the foregoing triggering events, the institution must either post a letter of credit in the amount of at least 50% of prior year Title IV receipts or, with the Department’s approval, continue participation in Title IV programs under a provisional certification for a limited period of time, post a letter of credit in an amount of at least 10% of prior year Title IV receipts and comply with certain other conditions.
These new financial responsibility standards significantly expand the circumstances under which a proprietary institution will be deemed to not be financially responsible, including circumstances and events that may not actually pose financial risks to the institution, circumstances that are based on subjective judgments of the Department about future events, and allegations and claims for relief in private or administrative litigation or enforcement proceedings that may ultimately be found to lack merit. The posting by University of Phoenix of a letter of credit in the amount of 50% or more of its Title IV program receipts for its preceding fiscal year likely would be an insurmountable burden. Accordingly, if the University is found to not be financially responsible under these new standards, it would be able to continue participation in Title IV programs only if terms of a provisional certification, including the amount of any associated letter of credit, can be agreed with the Department, the terms of which may materially and adversely impact our business and operations. In order to reduce the risk and uncertainty associated with these regulations, we may need to modify our administrative and other student-facing practices and procedures in a manner that increases our costs and reduces our administrative effectiveness. Furthermore, because of the potentially significant consequences of a determination that we are not financially responsible, our flexibility in responding to private or administrative litigation or enforcement actions may be severely constrained in a manner that materially and adversely impacts our business and financial condition.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 29

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

State Authorization Regulations
On December 19, 2016, the U.S. Department of Education published final regulations, effective July 1, 2018, which establish new requirements for distance education programs to maintain the state authorizations necessary to be eligible to participate in Title IV programs. Among other things, the regulations:
Require an institution offering distance education to have requisite state authority to offer such programs to state residents if required by the state;
Define and recognize acceptable state authorization reciprocity agreements;
Require institutions to document individualized state processes for resolving student complaints; and
Require an institution to provide extensive public and individualized disclosures to enrolled and prospective students regarding its programs offered solely through distance education, including information concerning adverse actions filed against the school by state entities or accrediting bodies.
Under the regulations, individual states may impose new and diverse requirements on institutions offering distance education and thereby reduce the regulatory and operational efficiency that our schools have relied on under the State Authorization Reciprocity Agreement (“SARA”). In those states that have adopted SARA, now comprise a majority of domestic jurisdictions, our Title IV eligible programs are authorized to operate on the basis of Arizona state regulatory approval.
The regulations also require extensive new public disclosures based upon certain actions by accreditors and state entities, including state Attorneys General, and require disclosure to current and prospective students upon the mere filing of an adverse action and long after the initial action was resolved, even if resolved in favor of the institution.
The regulations raise potential risks for our business, since the precise regulatory scope of individualized state requirements and disclosures are unclear and subject to interpretation in a manner that may be adverse to us and not fully known or predictable in advance, and certain of the potential adverse consequences could arise from the mere commencement of adverse actions by government entities or accrediting bodies, even if these actions and claims ultimately are found to lack merit. Furthermore, the significant discretion vested in the Department to interpret and administer the regulations may result in unexpected outcomes that adversely affect our business. In order to reduce the risk associated with these regulations, we may need to modify our administrative and other student-facing practices and procedures in a manner that increases our costs and reduces our administrative effectiveness.
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, the University’s principal accreditor, 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 2017 and will undergo its next reaffirmation process in 2022-2023.

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 30

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

Note 15. 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 colleges and schools 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 U.S.
Apollo Global, which includes our institutions based outside the U.S., and its corporate operations. Apollo Global acquired Career Partner during the second quarter of fiscal year 2016, and the operating results are included in our Apollo Global operating segment from the date of acquisition.
Other, which includes College for Financial Planning, Western International University, The Iron Yard, Apollo Professional Development, and Apollo corporate activities.
A summary of financial information by reportable segment is as follows:
 
Three Months Ended
November 30,
($ in thousands)
2016
 
2015
Net revenue:
 

 
 
University of Phoenix
$
354,294

 
$
462,617

Apollo Global
121,246

 
115,332

Other
8,959

 
8,072

Net revenue
$
484,499

 
$
586,021

Operating income (loss)(1):
 

 
 
University of Phoenix
$
32,550

 
$
(17,504
)
Apollo Global
(3,643
)
 
(2,335
)
Other
(20,503
)
 
(25,410
)
Operating income (loss)
8,404

 
(45,249
)
Reconciling items:
 
 
 
Interest income
1,087

 
919

Interest expense
(1,425
)
 
(1,456
)
Other loss, net
(644
)
 
(843
)
Income (loss) from continuing operations before income taxes
$
7,422

 
$
(46,629
)
(1) University of Phoenix, Apollo Global and Other include restructuring and impairment charges during the periods, which includes a $71.8 million goodwill impairment charge during the first quarter of fiscal year 2016 for our University of Phoenix reporting unit. Refer to Note 2, Restructuring and Impairment Charges. Additionally, Apollo Global and Other include expense represented in Merger, acquisition and other related costs, net, during the three months ended November 30, 2016 and 2015.
Our consolidated assets by reportable segment consist of the following as of the respective period ends:
($ in thousands)
November 30,
2016
 
August 31,
2016
University of Phoenix
$
609,546

 
$
599,790

Apollo Global
690,169

 
704,207

Other(1)
655,528

 
708,909

Total assets
$
1,955,243

 
$
2,012,906

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

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 31


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended August 31, 2016 and our financial statements included in Part I, Item 1, of this Form 10-Q.
Overview
Apollo Education Group, Inc. is a private education provider serving students since 1973. We believe that our success depends on providing high quality education and career-focused pathways, tools and services to students to maximize the benefits of their educational experience. We offer undergraduate, graduate, certificate and nondegree educational programs and services, online and on-campus, principally to working adults in the U.S. and abroad.
Substantially all of our net revenue is composed of tuition and fees for educational services. In fiscal year 2016, University of Phoenix generated 78% of our consolidated net revenue.
Pending Merger
On February 7, 2016, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with AP VIII Queso Holdings, L.P., a Delaware limited partnership (“Queso”) and Socrates Merger Sub, Inc., an Arizona corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Queso. Queso is a subsidiary of funds affiliated with Apollo Management VIII, L.P., which is an affiliate of Apollo Global Management, LLC, none of which is, or has ever been, affiliated with us. The Vistria Group, LP is a co-investor in Queso. Najafi Companies, LLC is a potential co-investor in Queso. At the effective time of the Merger, which, subject to the satisfaction of the closing conditions, is anticipated to be on or before February 1, 2017, the date on which the contract becomes terminable by either party, each share of our issued and outstanding Class A and Class B common stock (other than shares owned by Queso and its subsidiaries and shares owned by us and our subsidiaries) will be converted pursuant to the terms of the Merger Agreement into the right to receive $10.00 per share in cash. On May 6, 2016, the Merger Agreement was approved by the holders of our outstanding Class A and Class B common stock, each voting separately as a class.
Consummation of the Merger is subject to customary and other conditions, including:
(i)
the absence of certain conditions or restrictions in the response of the U.S. Department of Education to the pre-acquisition review application filed by University of Phoenix; and
(ii)
the receipt of consents or approvals from other federal, state and foreign educational governing bodies, including the Higher Learning Commission (“HLC”).
On December 7, 2016, the Department of Education provided its response to the preacquisition review application filed by University of Phoenix and Western International University, which specified certain conditions to the continuing participation of these institutions in Title IV programs after the Merger. These conditions were subsequently modified in certain respects in a supplemental response dated December 20, 2016. We have been informed by Queso that it has accepted the mandatory requirements stipulated in the Department’s initial response, as subsequently modified in its supplemental response.
HLC previously informed us that the HLC Board of Trustees had voted to defer action on the change of control applications filed in connection with the proposed Merger until such time as the Department of Education provided us and HLC with a written response to the preacquisition review applications filed by University of Phoenix and Western International University, and a substantive response to any requirements has been filed. We have submitted to HLC all of the requested information, including Queso’s written acceptance of the Department’s response, as supplemented, to the preacquisition review applications, and we anticipate that HLC will take action on our change of control applications in due course. However, we cannot predict or control the timing or outcome of HLC’s review of our applications.