10-Q 1 apol-feb28201510q.htm 10-Q APOL - Feb 28 2015 - 10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: February 28, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______
Commission File Number: 0-25232
APOLLO EDUCATION GROUP, INC.
(Exact name of registrant as specified in its charter)

ARIZONA
(State or other jurisdiction of incorporation or organization)
86-0419443
(I.R.S. Employer Identification No.)

4025 S. RIVERPOINT PARKWAY, PHOENIX, ARIZONA 85040
(Address of principal executive offices)
(480) 966-5394
(Registrant’s telephone number, including area code)
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES þ     NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
(Do not check if smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ
As of March 18, 2015, the following shares of stock were outstanding:
Apollo Education Group, Inc. Class A common stock, no par value
107,178,079 Shares
Apollo Education Group, Inc. Class B common stock, no par value
475,149 Shares
 


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2015
INDEX

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Special 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, 2014, under “Accreditation and Jurisdictional Authorizations,” “Financial Aid Programs” and “Regulatory Environment;”
•
Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended August 31, 2014; 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, 2014 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.”


3

Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
As of
($ in thousands)
February 28,
2015
 
August 31,
2014
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
566,078

 
$
1,228,813

Restricted cash and cash equivalents
224,987

 
224,135

Marketable securities
193,745

 
187,472

Accounts receivable, net
235,453

 
225,398

Prepaid taxes
55,113

 
34,006

Deferred tax assets
82,018

 
83,871

Other current assets
55,344

 
58,855

Total current assets
1,412,738

 
2,042,550

Marketable securities
75,096

 
87,811

Property and equipment, net
402,920

 
435,733

Goodwill
248,632

 
259,901

Intangible assets, net
167,768

 
189,365

Deferred tax assets
50,400

 
37,335

Other assets
48,387

 
40,240

Total assets
$
2,405,941

 
$
3,092,935

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

 
 

Short-term borrowings and current portion of long-term debt
$
15,664

 
$
609,506

Accounts payable
72,294

 
63,907

Student deposits
262,387

 
280,562

Deferred revenue
261,428

 
225,818

Accrued and other current liabilities
308,181

 
363,607

Total current liabilities
919,954

 
1,543,400

Long-term debt
45,157

 
47,590

Deferred tax liabilities
25,715

 
22,674

Other long-term liabilities
225,884

 
233,942

Total liabilities
1,216,710

 
1,847,606

Commitments and contingencies


 


Redeemable noncontrolling interests
55,621

 
64,527

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
(3,965,057
)
 
(3,936,607
)
Retained earnings
5,152,466

 
5,143,949

Accumulated other comprehensive loss
(54,574
)
 
(27,320
)
Total Apollo shareholders’ equity
1,132,939

 
1,180,126

Noncontrolling interests
671

 
676

Total equity
1,133,610

 
1,180,802

Total liabilities, redeemable noncontrolling interests and shareholders’ equity
$
2,405,941

 
$
3,092,935

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

4

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

 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
(In thousands, except per share data)
2015
 
2014
 
2015
 
2014
Net revenue
$
578,572

 
$
672,754

 
$
1,297,624

 
$
1,520,902

Costs and expenses:
 
 
 
 
 
 
 
Instructional and student advisory
293,073

 
316,577

 
617,337

 
653,779

Marketing
127,421

 
139,272

 
256,214

 
273,101

Admissions advisory
57,840

 
53,121

 
114,925

 
102,819

General and administrative
70,598

 
67,275

 
142,965

 
142,054

Depreciation and amortization
34,819

 
37,465

 
71,223

 
73,803

Provision for uncollectible accounts receivable
11,969

 
11,534

 
29,367

 
25,512

Restructuring and impairment charges
35,536

 
15,209

 
54,564

 
47,172

Acquisition and other related costs
1,742

 
13,005

 
4,961

 
13,005

Litigation charges
100

 
9,000

 
100

 
9,000

Total costs and expenses
633,098

 
662,458

 
1,291,656

 
1,340,245

Operating (loss) income
(54,526
)
 
10,296

 
5,968

 
180,657

Interest income
740

 
599

 
1,329

 
1,167

Interest expense
(1,739
)
 
(1,983
)
 
(3,401
)
 
(4,069
)
Other (loss) income, net
(1,146
)
 
107

 
(2,431
)
 
914

(Loss) income from continuing operations before income taxes
(56,671
)
 
9,019

 
1,465

 
178,669

Benefit from (provision for) income taxes
20,533

 
5,130

 
(5,134
)
 
(65,088
)
(Loss) income from continuing operations
(36,138
)
 
14,149

 
(3,669
)
 
113,581

Loss from discontinued operations, net of tax
—

 
(1,972
)
 
—

 
(2,363
)
Net (loss) income
(36,138
)
 
12,177

 
(3,669
)
 
111,218

Net loss attributable to noncontrolling interests
2,528

 
2,428

 
3,844

 
2,278

Net (loss) income attributable to Apollo
$
(33,610
)
 
$
14,605

 
$
175

 
$
113,496

Earnings (loss) per share - Basic:
 
 
 
 
 
 
 
Continuing operations attributable to Apollo
$
(0.31
)
 
$
0.15

 
$
—

 
$
1.03

Discontinued operations attributable to Apollo
—

 
(0.02
)
 
—

 
(0.02
)
Basic (loss) income per share attributable to Apollo
$
(0.31
)
 
$
0.13

 
$
—

 
$
1.01

Earnings (loss) per share - Diluted:
 
 
 
 
 
 
 
Continuing operations attributable to Apollo
$
(0.31
)
 
$
0.15

 
$
—

 
$
1.02

Discontinued operations attributable to Apollo
—

 
(0.02
)
 
—

 
(0.02
)
Diluted (loss) income per share attributable to Apollo
$
(0.31
)
 
$
0.13

 
$
—

 
$
1.00

Basic weighted average shares outstanding
108,166

 
112,151

 
108,375

 
112,742

Diluted weighted average shares outstanding
108,166

 
113,380

 
109,337

 
113,676

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


5

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

 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
 
2015
 
2014
Net (loss) income
$
(36,138
)
 
$
12,177

 
$
(3,669
)
 
$
111,218

Other comprehensive (loss) income (net of tax):
 
 
 
 
 
 
 
Currency translation (loss) gain(1)
(20,212
)
 
4,483

 
(37,992
)
 
7,318

Change in fair value of available-for-sale securities(1)
315

 
—

 
241

 
—

Comprehensive (loss) income
(56,035
)
 
16,660

 
(41,420
)
 
118,536

Comprehensive loss attributable to noncontrolling interests
8,469

 
1,748

 
14,341

 
1,499

Comprehensive (loss) income attributable to Apollo
$
(47,566
)
 
$
18,408

 
$
(27,079
)
 
$
120,035

(1) The tax effect on each component of other comprehensive (loss) income during the three and six months ended February 28, 2015 and 2014, respectively, is not significant.
The accompanying notes are an integral part of these condensed consolidated financial statements.


6

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

 
Common Stock
 
Additional
Paid-in
Capital
 
Apollo Class A
Treasury Stock
 
 
 
Accumulated Other
Comprehensive Loss
 
Total Apollo
Shareholders’ Equity
 
Noncontrolling
Interests
 
 
 
 
 
 
Class A Nonvoting
 
Class B Voting
 
 
 
Retained
Earnings
 
 
 
 
Total
Equity
 
 
Redeemable Noncontrolling Interests
(In thousands)
Shares
 
Stated
Value
 
Shares
 
Stated
Value
 
 
Shares
 
Cost
 
 
 
 
 
 
 
Balance as of August 31, 2014
188,007

 
$
103

 
475

 
$
1

 
$
—

 
79,585

 
$
(3,936,607
)
 
$
5,143,949

 
$
(27,320
)
 
$
1,180,126

 
$
676

 
$
1,180,802

 
 
$
64,527

Share repurchases
—

 
—

 
—

 
—

 
—

 
1,527

 
(40,318
)
 
—

 
—

 
(40,318
)
 
—

 
(40,318
)
 
 
—

Share reissuances
—

 
—

 
—

 
—

 
(21,208
)
 
(282
)
 
11,868

 
10,335

 
—

 
995

 
—

 
995

 
 
—

Net tax effect for stock incentive plans
—

 
—

 
—

 
—

 
(2,370
)
 
—

 
—

 
—

 
—

 
(2,370
)
 
—

 
(2,370
)
 
 
—

Share-based compensation
—

 
—

 
—

 
—

 
21,914

 
—

 
—

 
—

 
—

 
21,914

 
—

 
21,914

 
 
—

Currency translation adjustment, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(27,495
)
 
(27,495
)
 
(73
)
 
(27,568
)
 
 
(10,424
)
Available-for-sale securities adjustment, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
241

 
241

 
—

 
241

 
 
—

Acquisition
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
3,437

Redemption value adjustments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,993
)
 
—

 
(1,993
)
 
—

 
(1,993
)
 
 
1,993

Net income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
175

 
—

 
175

 
68

 
243

 
 
(3,912
)
Other
—

 
—

 
—

 
—

 
1,664

 
—

 
—

 
—

 
—

 
1,664

 
—

 
1,664

 
 
—

Balance as of February 28, 2015
188,007

 
$
103

 
475

 
$
1

 
$
—

 
80,830

 
$
(3,965,057
)
 
$
5,152,466

 
$
(54,574
)
 
$
1,132,939

 
$
671

 
$
1,133,610

 
 
$
55,621

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of August 31, 2013
188,007

 
$
103

 
475

 
$
1

 
$
—

 
75,182

 
$
(3,824,758
)
 
$
4,978,815

 
$
(36,563
)
 
$
1,117,598

 
$
411

 
$
1,118,009

 
 
$
—

Share repurchases
—

 
—

 
—

 
—

 
—

 
2,403

 
(72,237
)
 
—

 
—

 
(72,237
)
 
—

 
(72,237
)
 
 
—

Share reissuances
—

 
—

 
—

 
—

 
(15,008
)
 
(391
)
 
16,601

 
200

 
—

 
1,793

 
—

 
1,793

 
 
—

Net tax effect for stock incentive plans
—

 
—

 
—

 
—

 
(7,502
)
 
—

 
—

 
—

 
—

 
(7,502
)
 
—

 
(7,502
)
 
 
—

Share-based compensation
—

 
—

 
—

 
—

 
22,510

 
—

 
—

 
—

 
—

 
22,510

 
—

 
22,510

 
 
—

Currency translation adjustment, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
6,539

 
6,539

 
103

 
6,642

 
 
676

Acquisition
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
51,197

Net income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
113,496

 
—

 
113,496

 
207

 
113,703

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

 
$
103

 
475

 
$
1

 
$
—

 
77,194

 
$
(3,880,394
)
 
$
5,092,511

 
$
(30,024
)
 
$
1,182,197

 
$
721

 
$
1,182,918

 
 
$
49,388

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


7

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
Operating activities:
 

 
 

Net (loss) income
$
(3,669
)
 
$
111,218

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Share-based compensation
21,914

 
22,510

Excess tax benefits from share-based compensation
(236
)
 
—

Depreciation and amortization
71,223

 
73,803

Accelerated depreciation included in restructuring
4,272

 
4,316

Loss (gain) on asset dispositions and impairment charges, net
21,228

 
(1,984
)
Non-cash foreign currency loss, net
1,362

 
596

Provision for uncollectible accounts receivable
29,367

 
25,512

Deferred income taxes
(10,434
)
 
(6,255
)
Changes in assets and liabilities, excluding the impact of acquisitions and disposition:
 
 
 

Restricted cash and cash equivalents
(1,002
)
 
(24,165
)
Accounts receivable
(51,199
)
 
(6,469
)
Prepaid taxes
(21,440
)
 
15,230

Other assets
(3,771
)
 
(11,445
)
Accounts payable
7,870

 
(11,454
)
Student deposits
(15,873
)
 
17,409

Deferred revenue
47,821

 
32,881

Accrued and other liabilities
(42,320
)
 
(48,219
)
Net cash provided by operating activities
55,113

 
193,484

Investing activities:
 

 
 

Purchases of property and equipment
(43,310
)
 
(58,119
)
Purchases of marketable securities
(109,544
)
 
(227,978
)
Maturities and sales of marketable securities
113,651

 
105,237

Acquisitions, net of cash acquired
(21,166
)
 
(94,937
)
Other
467

 
3,446

Net cash used in investing activities
(59,902
)
 
(272,351
)
Financing activities:
 

 
 

Payments on borrowings
(599,925
)
 
(619,268
)
Proceeds from borrowings
4,515

 
—

Share repurchases
(38,718
)
 
(72,237
)
Share reissuances
995

 
1,793

Excess tax benefits from share-based compensation
236

 
—

Payment for contingent consideration
(21,371
)
 
—

Net cash used in financing activities
(654,268
)
 
(689,712
)
Exchange rate effect on cash and cash equivalents
(3,678
)
 
34

Net decrease in cash and cash equivalents
(662,735
)
 
(768,545
)
Cash and cash equivalents, beginning of period
1,228,813

 
1,414,485

Cash and cash equivalents, end of period
$
566,078

 
$
645,940

Supplemental disclosure of cash flow and non-cash information:
 

 
 

Cash paid for income taxes, net of refunds
$
37,346

 
$
70,868

Cash paid for interest
3,514

 
3,911

Restricted stock units vested and released
6,255

 
7,104

Unsettled share repurchases
1,600

 
—

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

8

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations and Significant Accounting Policies
Apollo Education Group, Inc. is one of the world’s largest private education providers, serving students since 1973. Through our subsidiaries, we offer undergraduate, graduate, professional development and other nondegree educational programs and services, online and on-campus principally to working learners. Our educational programs and services are offered throughout the United States and in Europe, Australia, Latin America, Africa and Asia, as well as online throughout the world. Refer to Note 17, Segment Reporting, for further information regarding our education platforms.
Our fiscal year is from September 1 to August 31. Unless otherwise stated, references to particular years or quarters refer to our fiscal years and the associated quarters of those fiscal years.
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 and, in our opinion, contain all adjustments, consisting of normal, recurring adjustments, necessary to fairly present the financial condition, results of operations and cash flows for the periods presented. These unaudited interim condensed consolidated financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements. Therefore, this information should be read in conjunction with the audited consolidated financial statements and related notes included in our 2014 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on October 21, 2014. We consistently applied the accounting policies described in the notes to our consolidated financial statements included in our 2014 Annual Report on Form 10-K in preparing these unaudited interim condensed consolidated financial statements.
Principles of Consolidation
The unaudited interim condensed consolidated 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.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates.
Seasonality
Our operations are generally subject to seasonal trends, which vary depending on subsidiary. We have historically experienced, and expect to continue to experience, fluctuations in our results of operations as a result of seasonal variations in the level of our institutions’ enrollments.
•
University of Phoenix - Although University of Phoenix enrolls students throughout the year, its net revenue is generally lower in our second fiscal quarter (December through February) than the 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 and six months ended February 28, 2015 are not necessarily indicative of the results to be expected for the entire fiscal year.
Reclassifications
We reclassified certain previously reported amounts to conform to our current presentation as follows:
•
We began presenting share reissuances in the aggregate on our Condensed Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interests, which consists of reissuances attributable to our employee stock purchase plan and our equity compensation plans that were previously reported separately;

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

•
We began presenting litigation charges as a component of the change in accrued and other liabilities on our Condensed Consolidated Statements of Cash Flows, which did not impact total cash provided by operating activities; and
•
As discussed in Note 3, Discontinued Operations, we began presenting Institute for Professional Development’s operating results as discontinued operations on our Condensed Consolidated Statements of Operations.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. Accordingly, the standard is effective for us on September 1, 2017 using either a full retrospective or a modified retrospective approach. We are currently evaluating which transition approach to use and the impact that the standard will have on our financial statements.
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). The standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2014, and early adoption is permitted. We do not expect to early adopt ASU 2014-08, which will be effective for us on September 1, 2015 and will apply to disposals that have not yet been reported in our financial statements as of the adoption date. Accordingly, the standard will not impact our previously reported disposals, and we will apply the standard to any disposals that occur after adoption.
Note 2. Restructuring and Impairment Charges
Restructuring and impairment charges includes the following for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
 
2015
 
2014
Restructuring charges
$
16,587

 
$
15,209

 
$
35,615

 
$
47,172

Intangibles impairment
12,999

 
—

 
12,999

 
—

Property and equipment impairment
5,950

 
—

 
5,950

 
—

Restructuring and impairment charges
$
35,536

 
$
15,209

 
$
54,564

 
$
47,172

The U.S. higher education industry continues to experience unprecedented, rapidly developing changes that challenge many of the core principles underlying the industry. We began initiating restructuring activities in fiscal year 2011 to reengineer our business processes and educational delivery systems to improve the efficiency and effectiveness of our services to students. We have continued restructuring activities in fiscal year 2015 as we further reduce costs to align with our lower enrollment and revenue.
Our restructuring activities initiated prior to fiscal year 2015 principally include rationalizing our administrative real estate facilities, closing 115 University of Phoenix ground locations, and workforce reductions. During the six months ended February 28, 2015, we incurred $23.3 million of expense associated with restructuring activities initiated prior to fiscal year 2015. The substantial majority of the expense represents an increase in our estimated future cash payments associated with certain lease obligations included in the University of Phoenix ground location rationalization discussed above. We do not expect to incur material charges related to the remaining space expected to be vacated. However, we will incur interest accretion and may record additional adjustments associated with the estimated lease obligations, which involves significant judgment, in future periods.
During the six months ended February 28, 2015, we incurred $12.3 million of restructuring expense associated with new restructuring activities initiated after fiscal year 2014. The expense consisted of $8.5 million of severance and other employee separation costs associated with the elimination of approximately 300 positions. The majority of the remaining restructuring expense represents costs associated with termination of a curriculum-based contract. The expense associated with these activities for the six months ended February 28, 2015 is reflected in our segment reporting as follows: $1.1 million in University of Phoenix and $11.2 million in Other.

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

The following details the changes in our restructuring liabilities during the six months ended February 28, 2015:
 
Lease and Related
Costs, Net
 
Severance and Other Employee
Separation Costs
 
Other Restructuring
Related Costs
 
Total
($ in thousands)
2015 Restructuring
 
Prior Year Restructuring(1)
 
2015 Restructuring
 
Prior Year Restructuring(1)
 
2015 Restructuring
 
Prior Year Restructuring(1)
 
August 31, 2014
$
—

 
$
96,204

 
$
—

 
$
5,687

 
$
—

 
$
1,192

 
$
103,083

Expense
—

 
10,094

 
4,643

 
167

 
3,767

 
357

 
19,028

Other
—

 
(2,605
)
 
(752
)
 
—

 
—

 
—

 
(3,357
)
Payments
—

 
(13,562
)
 
(346
)
 
(5,687
)
 
(617
)
 
(389
)
 
(20,601
)
November 30, 2014
—

 
90,131

 
3,545

 
167

 
3,150

 
1,160

 
98,153

Expense
—

 
12,014

 
3,860

 
426

 
—

 
287

 
16,587

Other
—

 
(2,530
)
 
(635
)
 
—

 
—

 
—

 
(3,165
)
Payments
—

 
(13,290
)
 
(2,801
)
 
(475
)
 
—

 
(704
)
 
(17,270
)
February 28, 2015(2)
$
—

 
$
86,325

 
$
3,969

 
$
118

 
$
3,150

 
$
743

 
$
94,305

(1) We have incurred $367 million of cumulative costs associated with prior year restructuring as of February 28, 2015, which includes lease exit, employee separation, and other related costs of $241 million, $84 million and $42 million, respectively. These cumulative costs have been reflected in our segment reporting as follows: $285 million in University of Phoenix, $18 million in Apollo Global, and $64 million in Other.
(2) The gross, undiscounted obligation associated with our restructuring liabilities as of February 28, 2015 was approximately $167 million, which principally represents non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.
We intend to further reduce costs to align with our lower enrollment and revenue, and expect to incur material charges associated with other future restructuring activities. These efforts include University of Phoenix continuing to actively evaluate the extent, functionality and location of its ground facilities and the potential closure of additional facilities in the future that are determined to be underutilized or unnecessary.
Impairment Charges
In February 2015, University of Phoenix ceased using certain technology that had been incorporated into its academic platform. The University had finite-lived intangibles with a remaining carrying value of $13.0 million associated with this technology. We do not expect any future cash flows associated with this technology over its remaining useful life and, accordingly, we recorded a $13.0 million impairment charge during the second quarter of fiscal year 2015.
Based on developments and trends at University of Phoenix during the second quarter of fiscal year 2015, we evaluated the property and equipment at University of Phoenix’s remaining ground locations for recoverability. Accordingly, we compared the estimated undiscounted cash flows of the locations over the remaining useful lives of their fixed assets to the carrying amount of their fixed assets. Based on our analysis, we recorded $6.0 million of impairment charges during the second quarter of fiscal year 2015. Changes to our business or other circumstances could lead to additional impairments in the future.
Note 3. Discontinued Operations
During fiscal year 2014, we sold the assets of our subsidiary Institute for Professional Development (“IPD”) for $4 million. IPD had insignificant assets and liabilities as of the date of sale and as a result, we realized an immaterial gain on sale. We sold IPD because its business was no longer consistent with our long-term strategic objectives due to recent operating losses and limitations on our ability to further develop and expand the domestic business. We do not have significant continuing involvement with IPD after the sale and, accordingly, IPD’s operating results are presented as discontinued operations on our Condensed Consolidated Statements of Operations. We determined that cash flows from our discontinued operations are not material and are included with cash flows from continuing operations on our Condensed Consolidated Statements of Cash Flows. IPD was previously included in Other in our segment reporting.

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

The following summarizes IPD’s operating results for the three and six months ended February 28, 2014, which are presented in loss from discontinued operations, net of tax on our Condensed Consolidated Statements of Operations:
($ in thousands)
Three Months
Ended
February 28,
2014
 
Six Months
Ended
February 28,
2014
Net revenue
$
6,304

 
$
14,491

Costs and expenses
(9,470
)
 
(18,224
)
Loss from discontinued operations before income taxes
(3,166
)
 
(3,733
)
Benefit from income taxes
1,194

 
1,370

Loss from discontinued operations, net of tax
$
(1,972
)
 
$
(2,363
)
The operating results of our discontinued operations only include revenues and costs directly attributable to the discontinued operations. Accordingly, no interest expense or general corporate overhead have been allocated to IPD. IPD did not meet the held for sale criteria until the period it was sold.
Note 4. Acquisitions
Fiscal Year 2015 Acquisition
On December 4, 2014, Apollo Global acquired a 75% interest in Sociedade Técnica Educacional da Lapa S.A., a provider of postsecondary educational programs in Brazil under the name Faculdade da Educacional da Lapa (“FAEL”). This acquisition provides access to a new market and supports our strategy to diversify and expand our global operations. We made an initial cash payment of R$73.8 million (equivalent to $28.9 million on the acquisition date), and the acquisition includes a potential contingent consideration payment in the future that is principally based on FAEL’s calendar year 2018 net revenue. The contingent payment has a maximum of approximately R$34 million (equivalent to $13.3 million on the acquisition date), and its fair value on the acquisition date was insignificant based on our estimate of FAEL’s future revenue in relation to the contingent payment threshold as defined in the acquisition agreement. We incurred $1.2 million of transaction costs in connection with this acquisition and these costs are included in acquisition and other related costs on our Condensed Consolidated Statements of Operations in the six months ended February 28, 2015.
In connection with the acquisition, we also have the option to buy the remaining noncontrolling interests, and the noncontrolling shareholders have the option to sell their shares to us, beginning in the third quarter of our fiscal year 2019, or earlier in limited circumstances. The prices for these options are based on a formula specified at the acquisition date and are principally based on a multiple of FAEL’s operating results as defined in the acquisition agreement. There is no minimum or maximum price for these options. Since the options are embedded in the shares owned by the noncontrolling shareholders and the shareholders have the option to redeem their shares, we have classified the noncontrolling interests as redeemable equity on our Condensed Consolidated Balance Sheets. Subsequent to recording the noncontrolling interests at fair value on the acquisition date, as discussed further below, we record the redeemable noncontrolling interests at the greater of the carrying value or the redemption value because the interests are probable of becoming redeemable. We determine the redemption value using the formula specified at the acquisition date, and by assuming the end of each period is the redemption date. We record redemption value adjustments through retained earnings.

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

We accounted for the acquisition as a business combination and the following details our preliminary allocation of the purchase price to the assets acquired and liabilities assumed at fair value:
($ in thousands)
 
Cash and cash equivalents
$
7,685

Intangibles:
 
Trademark (indefinite useful life)
9,223

Accreditation (indefinite useful life)
5,940

Course curriculum (4 year useful life)
1,212

Other (4 year useful life)
4,182

Goodwill
14,538

Other assets
2,877

Liabilities
(13,369
)
Total assets acquired and liabilities assumed
32,288

Less: Fair value of redeemable noncontrolling interests
(3,437
)
Total fair value of consideration transferred
28,851

Less: Cash acquired
(7,685
)
Cash paid for acquisition, net of cash acquired
$
21,166

The above purchase price allocation is preliminary and subject to revision as we finalize the valuation of intangible assets, and as additional information about the fair value of other assets and liabilities becomes available.
We determined the fair value of assets acquired, liabilities assumed and the redeemable noncontrolling interests based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the respective items. We used the following assumptions, the majority of which include significant unobservable inputs, and valuation methodologies to determine fair value:
•
Intangibles - We used income approaches to value the substantial majority of the acquired intangibles. The trademark was valued using the relief-from-royalty method, which represents the benefit of owning the intangible asset rather than paying royalties for its use. We used the excess earnings method or the with and with-out method for the remaining intangibles valued using income approaches.
•
Other assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
•
Redeemable noncontrolling interests - We estimated the fair value of the redeemable noncontrolling interests principally as the noncontrolling ownership percentage of the implied fair value of FAEL’s total equity. We reduced the fair value of the noncontrolling interest for certain discounts including lack of control.
We recorded $14.5 million of goodwill as a result of the FAEL acquisition, which may become deductible for tax purposes in the future. The goodwill is principally attributable to the future earnings potential associated with student growth and other intangibles that do not qualify for separate recognition such as the assembled workforce. The goodwill is included in our Apollo Global reportable segment and we have selected a July 1 annual goodwill impairment test date.
We assigned an indefinite useful life to the acquired trademark and accreditation intangibles as we believe they have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic or other factors to limit the intangibles’ useful life and, as applicable, we intend to renew the intangibles and renewal can be accomplished at little cost. We determined all of the other acquired intangibles are finite-lived and we are amortizing them on either a straight-line or an accelerated basis that reflects the pattern in which we expect the economic benefits of the assets to be consumed. The weighted average original useful life of the acquired finite-lived intangibles was 4 years. Refer to Note 7, Goodwill and Intangibles, for the estimated future amortization of our finite-lived intangibles.
FAEL’s operating results are included in our consolidated financial statements from date of acquisition. We have not provided pro forma information or FAEL’s revenue and operating results because the results of operations are not material to our consolidated results of operations.

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

Fiscal Year 2014 Acquisition
On December 20, 2013, Apollo Global acquired 70% of the outstanding shares of Open Colleges, a provider of education and training to adult learners in Australia. We paid A$110.3 million (equivalent to$98.1 million on the transaction date), plus contingent consideration, which we initially measured at $21.4 million based on information available as of the acquisition date. We settled the contingent consideration during fiscal year 2015 as discussed at Note 8, Fair Value Measurements.
We accounted for the Open Colleges acquisition as a business combination and Open Colleges’ operating results are included in our consolidated financial statements from the date of acquisition. We have not provided pro forma information or Open Colleges’ revenue and operating results because the results of operations are not material to our consolidated results of operations.
The acquisition purchase price allocation is summarized below:
($ in thousands)
 
 
Net working capital deficit(1)
 
$
(10,979
)
Property and equipment
 
2,684

Finite-lived intangibles
 
60,575

Goodwill
 
127,656

Deferred taxes, net(1)
 
(9,279
)
Total assets acquired and liabilities assumed
 
170,657

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

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

(1) Net working capital deficit and deferred taxes, net include approximately $33 million of assumed liabilities.

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

Note 5. Financial Instruments
We invest our excess cash in a variety of marketable securities, which are all classified as available-for-sale. The following summarizes our cash and cash equivalents, restricted cash and cash equivalents and marketable securities by significant financial instrument category as of the respective periods:
 
February 28, 2015
($ in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
Cash
$
657,122

 
$
—

 
$
—

 
$
657,122

 
$
657,122

 
$
—

 
$
—

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
108,666

 
—

 
—

 
108,666

 
108,666

 
—

 
—

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
128,979

 
62

 
(180
)
 
128,861

 
—

 
80,069

 
48,792

Tax-exempt municipal bonds
76,244

 
79

 
(199
)
 
76,124

 
202

 
63,479

 
12,443

Time deposits
50,180

 
—

 
—

 
50,180

 
25,075

 
25,105

 
—

Other
39,001

 
8

 
(56
)
 
38,953

 
—

 
25,092

 
13,861

Total
$
1,060,192

 
$
149

 
$
(435
)
 
$
1,059,906

 
$
791,065

 
$
193,745

 
$
75,096


 
August 31, 2014
($ in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
Cash
$
1,295,395

 
$
—

 
$
—

 
$
1,295,395

 
$
1,295,395

 
$
—

 
$
—

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
132,508

 
—

 
—

 
132,508

 
132,508

 
—

 
—

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt municipal bonds
106,543

 
155

 
(11
)
 
106,687

 
—

 
78,443

 
28,244

Corporate bonds
106,575

 
123

 
(52
)
 
106,646

 
—

 
56,837

 
49,809

Time deposits
50,100

 
—

 
—

 
50,100

 
25,041

 
25,059

 
—

Commercial paper
11,793

 
1

 
—

 
11,794

 
—

 
11,794

 
—

Other
19,155

 
1

 
(1
)
 
19,155

 
4

 
15,339

 
3,812

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction-rate securities(2)
6,850

 
—

 
(904
)
 
5,946

 
—

 
—

 
5,946

Total
$
1,728,919

 
$
280

 
$
(968
)
 
$
1,728,231

 
$
1,452,948

 
$
187,472

 
$
87,811

(1) Cash and cash equivalents includes restricted cash and cash equivalents.
(2) Auction-rate securities were redeemed at par value during the second quarter of fiscal year 2015.
We measure our financial instruments at fair value on a recurring basis as follows:
•
Money market funds - We use Level 1 inputs that primarily consist of real-time quotes for transactions in active exchange markets involving identical assets.
•
Other financial instruments - We use a market approach with Level 2 observable inputs for all other securities. The Level 2 inputs include quoted prices for similar assets in active markets, or quoted prices for identical or similar assets in markets that are not active.
Our marketable securities have maturities that occur within three years. We may sell certain of our available-for-sale 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.

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

Note 6. Accounts Receivable, Net
Accounts receivable, net consist of the following as of the respective periods:
($ in thousands)
February 28,
2015
 
August 31,
2014
Student accounts receivable
$
274,295

 
$
255,134

Less allowance for doubtful accounts
(49,891
)
 
(50,145
)
Net student accounts receivable
224,404

 
204,989

Other receivables
11,049

 
20,409

Total accounts receivable, net
$
235,453

 
$
225,398

Student accounts receivable is composed primarily of amounts due related to tuition and educational services. The following summarizes the activity in allowance for doubtful accounts for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
 
2015
 
2014
Beginning allowance for doubtful accounts
$
52,682

 
$
55,895

 
$
50,145

 
$
59,744

Provision for uncollectible accounts receivable
11,969

 
11,534

 
29,367

 
25,512

Write-offs, net of recoveries
(14,760
)
 
(14,391
)
 
(29,621
)
 
(32,218
)
Ending allowance for doubtful accounts
$
49,891

 
$
53,038

 
$
49,891

 
$
53,038

Note 7. Goodwill and Intangibles
The following details changes in our goodwill by reportable segment during the six months ended February 28, 2015:
($ in thousands)
University of
Phoenix
 
Apollo
Global
 
Other
 
Total
Goodwill as of August 31, 2014
$
71,812

 
$
171,198

 
$
16,891

 
$
259,901

FAEL acquisition
—

 
14,538

 
—

 
14,538

Currency translation adjustment
—

 
(25,807
)
 
—

 
(25,807
)
Goodwill as of February 28, 2015
$
71,812

 
$
159,929

 
$
16,891

 
$
248,632


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

Intangibles consist of the following as of the respective periods:
 
February 28, 2015
 
August 31, 2014
($ in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Effect of
Foreign
Currency
Translation
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Effect of
Foreign
Currency
Translation
 
Net
Carrying
Amount
Accreditations and designations
$
21,628

 
$
(5,094
)
 
$
(1,910
)
 
$
14,624

 
$
21,628

 
$
(3,015
)
 
$
1,000

 
$
19,613

Trademarks
17,919

 
(2,093
)
 
(1,771
)
 
14,055

 
17,919

 
(1,238
)
 
907

 
17,588

Curriculum(1)
18,205

 
(5,172
)
 
(1,398
)
 
11,635

 
16,993

 
(2,933
)
 
826

 
14,886

Student and customer relationships(2)
14,437

 
(10,365
)
 
(1,578
)
 
2,494

 
15,934

 
(9,780
)
 
(1,161
)
 
4,993

Software and technology(3) 
—

 
—

 
—

 
—

 
42,389

 
(25,151
)
 
—

 
17,238

Other(1), (2)
11,303

 
(5,919
)
 
(1,978
)
 
3,406

 
20,891

 
(19,909
)
 
(611
)
 
371

Total finite-lived intangibles
83,492

 
(28,643
)
 
(8,635
)
 
46,214

 
135,754

 
(62,026
)
 
961

 
74,689

Trademarks(1)
115,737

 
—

 
(7,189
)
 
108,548

 
106,514

 
—

 
(68
)
 
106,446

Accreditations and designations(1)
14,470

 
—

 
(1,464
)
 
13,006

 
8,530

 
—

 
(300
)
 
8,230

Total indefinite-lived intangibles
130,207

 
—

 
(8,653
)
 
121,554

 
115,044

 
—

 
(368
)
 
114,676

Total intangible assets, net
$
213,699

 
$
(28,643
)
 
$
(17,288
)
 
$
167,768

 
$
250,798

 
$
(62,026
)
 
$
593

 
$
189,365

(1) We acquired intangibles during the second quarter of fiscal year 2015 as a result of our acquisition of FAEL. Refer to Note 4, Acquisitions.
(2) The decrease in the gross carrying amount as of February 28, 2015 compared to August 31, 2014 was due to the removal of intangibles that were fully amortized during fiscal year 2015.
(3) We recorded a $13.0 million impairment charge of technology intangibles during the second quarter of fiscal year 2015. Refer to Note 2, Restructuring and Impairment Charges.
The following is the estimated future amortization expense of our finite-lived intangibles as of February 28, 2015:
($ in thousands)
Remainder of 2015
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
Estimated future amortization expense(1)
$
7,006

 
$
11,255

 
$
10,214

 
$
7,543

 
$
3,135

 
$
1,609

 
$
5,452

 
$
46,214

(1) The estimated future amortization expense may vary as acquisitions and dispositions occur in the future and as a result of foreign currency translation adjustments.
Note 8. Fair Value Measurements
We measure and disclose certain financial instruments at fair value as described in Note 5, Financial Instruments. Liabilities measured at fair value on a recurring basis, all of which are included in other liabilities on our Condensed Consolidated Balance Sheets, consist of the following as of February 28, 2015 and August 31, 2014:
 
 
 
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 February 28, 2015
$
6,416

 
$
—

 
$
—

 
$
6,416

Contingent consideration as of August 31, 2014
$
41,893

 
$
—

 
$
—

 
$
41,893


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

The following summarizes changes in liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
 
2015
 
2014
Beginning balance
$
6,292

 
$
5,743

 
$
41,893

 
$
5,277

Initial contingent consideration at fair value
—

 
21,371

 
—

 
21,371

Change in fair value included in net income
124

 
8,288

 
(997
)
 
8,754

Payment for contingent consideration
—

 
—

 
(34,480
)
 
—

Currency translation adjustment
—

 
621

 
—

 
621

Ending balance
$
6,416

 
$
36,023

 
$
6,416

 
$
36,023

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. Our contingent consideration liabilities relate to the following:
•
Open Colleges - As a result of our acquisition of Open Colleges during fiscal year 2014, we had contingent consideration that was based on Open Colleges’ operating results through June 2014 as defined in the acquisition agreement. We initially measured the contingent consideration at $21.4 million based on information available as of the acquisition date. We settled the contingent consideration during fiscal year 2015 and paid $34.5 million, which includes $21.4 million in financing activities and the remaining portion is included in operating activities on our Condensed Consolidated Statements of Cash Flows.
•
Apollo Global - As a result of our purchase of the noncontrolling interest in Apollo Global during fiscal year 2013, we have contingent consideration that is based on a portion of Apollo Global’s operating results through the fiscal years ending August 31, 2017. As of February 28, 2015, the estimated fair value for this contingent consideration was $6.4 million.
We did not change our valuation techniques associated with recurring fair value measurements from prior periods.
Note 9. Accrued and Other Liabilities
Accrued and other current liabilities consist of the following as of the respective periods:
($ in thousands)
February 28,
2015
 
August 31,
2014
Salaries, wages and benefits
$
81,995

 
$
125,165

Student refunds, grants and scholarships
43,400

 
20,072

Restructuring obligations
43,146

 
43,339

Accrued legal and other professional obligations
35,604

 
33,651

Accrued advertising
29,558

 
33,853

Deferred rent and other lease liabilities
12,982

 
12,384

Curriculum materials
10,904

 
12,069

Contingent consideration
—

 
35,239

Other
50,592

 
47,835

Total accrued and other current liabilities
$
308,181

 
$
363,607


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

Other long-term liabilities consist of the following as of the respective periods:
($ in thousands)
February 28,
2015
 
August 31,
2014
Deferred revenue
$
58,737

 
$
51,831

Deferred rent and other lease liabilities
53,516

 
57,788

Restructuring obligations
51,159

 
59,744

Deferred gains on sale-leasebacks
20,905

 
21,641

Uncertain tax positions
7,187

 
9,770

Other
34,380

 
33,168

Total other long-term liabilities
$
225,884

 
$
233,942

Note 10. Debt
Debt and short-term borrowings consist of the following as of the respective periods:
($ in thousands)
February 28,
2015
 
August 31,
2014
Revolving Credit Facility
$
—

 
$
585,000

Capital lease obligations
22,707

 
32,806

Other
38,114

 
39,290

Total debt
60,821

 
657,096

Less short-term borrowings and current portion of long-term debt
(15,664
)
 
(609,506
)
Long-term debt
$
45,157

 
$
47,590

In fiscal year 2012, we entered into a syndicated $625 million unsecured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility is used for general corporate purposes, which may include acquisitions and share repurchases. The term is five years and will expire in April 2017. The Revolving Credit Facility may be used for borrowings in certain foreign currencies and letters of credit, in each case up to specified sublimits.
We borrowed $585.0 million and had approximately $24 million of outstanding letters of credit under the Revolving Credit Facility as of August 31, 2014. We repaid the entire amount borrowed under the Revolving Credit Facility during the first quarter of fiscal year 2015. As of February 28, 2015, we have approximately $44 million of outstanding letters of credit under the Revolving Credit Facility.
The Revolving Credit Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Revolving Credit Facility fee ranges from 25 to 40 basis points. Incremental fees for borrowings under the facility generally range from LIBOR + 125 to 185 basis points. The weighted average interest rate on outstanding short-term borrowings under the Revolving Credit Facility at August 31, 2014 was 3.5%.
The Revolving Credit Facility contains various customary representations, covenants and other provisions, including a material adverse event clause and the following financial covenants: maximum leverage ratio, minimum interest and rent expense coverage ratio, and 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 February 28, 2015 and August 31, 2014.
Other debt principally includes debt at subsidiaries of Apollo Global and the present value of an obligation payable over a 10-year period associated with our purchase of technology in fiscal year 2012. The weighted average interest rate on our outstanding other debt at February 28, 2015 and August 31, 2014 was 5.6% and 5.8%, 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.

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

Note 11. Income Taxes
We determine 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.
Our U.S. federal income tax return for fiscal year 2013 is currently open for review by the Internal Revenue Service (“IRS”) and we are participating in the IRS’s Compliance Assurance Process for fiscal years 2014 and 2015, 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. We are also subject to numerous ongoing audits by state, local and foreign tax authorities with various tax years as early as 2007 that remain subject to examination. Although we believe our tax accruals are reasonable, the final determination of tax returns under review or returns that may be reviewed in the future and any related litigation could result in tax liabilities that materially differ from our historical income tax provisions and accruals.
Note 12. Shareholders’ Equity and Redeemable Noncontrolling Interests
Share Repurchases
Our Board of Directors has authorized us to repurchase outstanding shares of our Class A common stock from time to time depending on market conditions and other considerations. During fiscal year 2013, our Board of Directors authorized an increase in the amount available under our share repurchase program up to an aggregate amount of $250 million, of which $52.2 million remained available as of February 28, 2015. There is no expiration date on the repurchase authorizations and the amount and timing of future share repurchase authorizations and repurchases, if any, will be made as market and business conditions warrant. Repurchases occur at our discretion and may be made on the open market through various methods including but not limited to accelerated share repurchase programs, or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules, and may include repurchases pursuant to Securities and Exchange Commission Rule 10b5-1 nondiscretionary trading programs.
We also repurchase shares in connection with tax withholding requirements associated with the release of vested shares of 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
February 28,
 
Six Months Ended
February 28,
(In thousands, except per share data)
2015
 
2014
 
2015
 
2014
Share repurchases under share repurchase program:
 
 
 
 
 
 
 
Number of shares repurchased
763

 
1,713

 
1,440

 
2,290

Weighted average purchase price per share
$
26.22

 
$
31.93

 
$
26.45

 
$
30.44

Cost of share repurchases(1)
$
20,000

 
$
54,684

 
$
38,092

 
$
69,684

Share repurchases related to vesting of share-based awards:
 
 
 
 
 
 
 
Number of shares repurchased
9

 
25

 
87

 
113

Cost of share repurchases
$
254

 
$
682

 
$
2,226

 
$
2,553

(1) At February 28, 2015, $1.6 million was recorded in accrued and other current liabilities on our Condensed Consolidated Balance Sheets for repurchased shares that settled subsequent to February 28, 2015.

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 covered by vested restricted stock units, performance share awards, stock option exercises and purchases under our employee stock purchase plan. Share reissuances were as follows for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
(In thousands)
2015
 
2014
 
2015
 
2014
Number of shares reissued
55

 
110

 
282

 
391

Note 13. Earnings Per Share
Our outstanding shares consist of Apollo Class A and Class B common stock. Our Articles of Incorporation treat the declaration of dividends on the Class A and Class B common stock in an identical manner. As such, both the Class A and Class B common stock are included in the calculation of our earnings per share.
Diluted weighted average shares outstanding includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting and release of restricted stock units and performance share awards. The components of basic and diluted earnings per share are as follows:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
(In thousands, except per share data)
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net (loss) income attributable to Apollo (basic and diluted)
$
(33,610
)
 
$
14,605

 
$
175

 
$
113,496

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
108,166

 
112,151

 
108,375

 
112,742

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

 
1,070

 
759

 
838

Dilutive effect of stock options(1)
—

 
159

 
203

 
96

Diluted weighted average shares outstanding
108,166

 
113,380

 
109,337

 
113,676

Basic (loss) income per share attributable to Apollo
$
(0.31
)
 
$
0.13

 
$
—

 
$
1.01

Diluted (loss) income per share attributable to Apollo
$
(0.31
)
 
$
0.13

 
$
—

 
$
1.00

 
 
 
 
 
 
 
 
Anti-dilutive securities excluded from diluted (loss) income per share:
 
 
 
 
 
 
 
Anti-dilutive restricted stock units and performance share awards outstanding(1)
929

 
9

 
11

 
842

Anti-dilutive stock options outstanding(1)
2,572

 
2,628

 
2,411

 
3,079

(1) Due to the loss from continuing operations attributable to Apollo during the three months ended February 28, 2015, no dilutive share-based awards were included in the calculation of diluted loss per share for the respective period because they would have been anti-dilutive.
Note 14. Share-Based Compensation
The following details share-based compensation expense for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
 
2015
 
2014
Instructional and student advisory
$
2,905

 
$
3,280

 
$
5,887

 
$
6,813

Marketing
783

 
937

 
1,619

 
2,045

Admissions advisory
256

 
212

 
517

 
314

General and administrative
6,624

 
5,644

 
12,504

 
11,012

Restructuring and impairment charges
635

 
464

 
1,387

 
2,326

Share-based compensation expense
$
11,203

 
$
10,537

 
$
21,914

 
$
22,510


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

In accordance with our Amended and Restated 2000 Stock Incentive Plan, we granted 14,000 and 68,000 restricted stock units and performance share awards during the three and six months ended February 28, 2015, respectively. The granted awards had a weighted average grant date fair value per share of $32.00 and $30.06, respectively. As of February 28, 2015, we had $59.2 million and $3.2 million of unrecognized share-based compensation cost, net of forfeitures, related to unvested restricted stock units and performance share awards, respectively. These costs are expected to be recognized over a weighted average period of 2.4 years.
We did not grant any stock options during the six months ended February 28, 2015. As of February 28, 2015, we had $6.9 million of unrecognized share-based compensation cost, net of forfeitures, related to unvested stock options. These costs are expected to be recognized over a weighted average period of 2.7 years.
Note 15. Commitments and Contingencies
Surety Bonds
As part of our normal operations, our insurers issue surety bonds for us that are required by various states where we operate. We are obligated to reimburse our insurers for any surety bonds that are paid. As of February 28, 2015, the face amount of these surety bonds was approximately $34 million.
Letters of Credit
As of February 28, 2015, we had approximately $44 million of outstanding letters of credit, which principally support certain guarantees provided by our subsidiaries as part of our normal operations for which fair value is not material.
Litigation and Other Matters
We are subject to various claims and contingencies that arise from time to time in the ordinary course of business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. We do not believe any of these are material for separate disclosure.
The following is a description of pending litigation, settlements, and other proceedings that fall outside the scope of ordinary and routine litigation incidental to our business.
Class Action Alleging Unfair and Deceptive Practices
On November 13, 2014, Ashley Paredes filed a class action complaint against University of Phoenix and Apollo Education Group, Inc. alleging unfair and deceptive business practices in violation of California law. Captioned Paredes v. The University of Phoenix, Inc., the action was initially filed in California Superior Court in San Bernadino County, but was subsequently removed to Federal District Court in the Central District of California. The complaint purports to assert claims on behalf of the class of individuals who enrolled in the University’s educational programs for Psychology, Education, Nursing, Health Administration and Criminal Justice, and Technology from November 10, 2011 through November 10, 2014. The complaint alleges that the University misled class members regarding transferability of credits earned at the University and by promising or guaranteeing employment upon completion of studies. The complaint seeks to recover damages on behalf of plaintiff and other members of the class.
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 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 under the Telephone Consumer Protection Act
On February 28, 2015, Thomas Barton and Leon Abdullah filed a class action complaint against University of Phoenix in the United States District Court for the Northern District of California. The complaint alleges that University of Phoenix violated the Telephone Consumer Protection Act by contacting plaintiffs on their cellular telephones using automated dialing technology without their express written consent. The complaint seeks to recover damages on behalf of plaintiffs and other members of the class.
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 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.

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

Incentive Compensation False Claims Act Lawsuit
On May 25, 2011, we were notified that a qui tam complaint had been filed against us in the U.S. District Court, Eastern District of California, by private relators under the Federal False Claims Act and California False Claims Act, entitled USA and State of California ex rel. Hoggett and Good v. University of Phoenix, et al, Case Number 2:10-CV-02478-MCE-KJN. When the federal government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the federal government and, if successful, they are entitled to receive a portion of the federal government’s recovery.
The complaint alleges, among other things, that University of Phoenix has violated the Federal False Claims Act since December 12, 2009 and the California False Claims Act for the preceding ten years by falsely certifying to the U.S. Department of Education and the State of California that University of Phoenix was in compliance with various regulations that require compliance with federal rules regarding the payment of incentive compensation to admissions personnel, in connection with University of Phoenix’s participation in student financial aid programs. In addition to injunctive relief and fines, the relators seek significant damages on behalf of the Department of Education and the State of California, including all student financial aid disbursed by the Department to our students since December 2009 and by the State of California to our students during the preceding ten years. On July 24, 2014, the Court granted our motion to dismiss for lack of jurisdiction and dismissed relators’ complaint with prejudice. On December 14, 2014, relators filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit, and their appeal remains pending before that court.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
K.K. Modi Investment and Financial Services Pvt. Ltd.
On November 8, 2010, a suit was filed by K.K. Modi Investment and Financial Services Pvt. Ltd. (“Modi”) in the High Court of Delhi at New Delhi against defendants Apollo, Western International University, Inc., University of Phoenix, Inc., Apollo Global, 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 have appealed that ruling to the Division Bench of the High Court, and that appeal remains pending. 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
On October 22, 2010, University of Phoenix received notice that the State of Florida Office of the Attorney General in Fort Lauderdale, Florida had commenced an investigation into possible unfair and deceptive trade practices associated with certain alleged practices of the University. The notice included a subpoena to produce documents and detailed information for the time period of January 1, 2006 to the present about a broad spectrum of the University’s business. We are cooperating with the investigation, but also filed a suit to quash or limit the subpoena and to protect information sought that constitutes proprietary or trade secret information. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
In May 2011 and January 2013, University of Phoenix received Civil Investigative Demands from the State of Massachusetts Office of the Attorney General. The Demands relate to an investigation of possible unfair or deceptive methods, acts, or practices by 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.

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

Because of the many questions of fact and law that may arise, the outcome of these investigative proceedings is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for these matters and, accordingly, we have not accrued any liability associated with these matters.
In addition, from time to time, we receive informal requests from state Attorneys General and other government agencies relating to specific complaints they have received from students or former students and seeking information about the student, our programs, and other matters relating to our activities in the relevant state. 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 in a particular state.
UNIACC Investigations
UNIACC was advised by the National Accreditation Commission of Chile in November 2011 that its institutional accreditation would not be renewed and therefore had lapsed. Subsequently, in June 2012, a prosecutor’s office in Santiago, Chile requested that UNIACC provide documents relating to UNIACC’s relationship with a former employee and consultant who served as a member of the National Accreditation Commission until March 2012, and we received requests for additional information in connection with this investigation. Furthermore, in August 2012, the prosecutor’s office began requesting that UNIACC provide information about UNIACC’s business structure and operations and its relationship with other Apollo entities, in connection with an additional investigation regarding UNIACC’s compliance with applicable laws concerning the generation of profit by universities such as UNIACC. The prosecutor’s office has also requested additional information from UNIACC regarding certain government funding received by the institution. UNIACC is cooperating with these investigations. At this time, we cannot predict the eventual scope, duration or outcome of these investigations.
In November 2012, UNIACC learned that the Ministry of Education was commencing a formal investigation into profit related issues and concerning the official recognition of UNIACC as a university under Chilean law. On November 18, 2013, we were notified by the Ministry of Education that it declined to pursue any charges against UNIACC and closed its investigation without imposing any sanction on UNIACC. In closing its investigation, the Ministry forwarded certain of its files for review by the Chilean tax authorities and the criminal prosecutor conducting the profit investigation referenced above.
Because of the many questions of fact and law that may arise, the outcome of these investigative proceedings is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for these matters and, accordingly, we have not accrued any liability associated with these matters.
Office of the Inspector General of the U.S. Department of Education (“OIG”) Subpoena
On March 21, 2014, University of Phoenix received a subpoena from the Mid-Atlantic Region of the OIG. The subpoena seeks the production by the University of documents and detailed information regarding a broad spectrum of the activities conducted in the University’s Centralized Service Center for the Northeast Region located in Columbia, Maryland, for the time period of January 1, 2007 to the present, including information relating to marketing, recruitment, enrollment, financial aid processing, fraud prevention, student retention, personnel training, attendance, academic grading and other matters. We are cooperating with these requests but cannot at this time predict the eventual scope, duration or outcome of this matter.
Because of the many questions of fact and law that may arise, the outcome of this matter is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss and, accordingly, we have not accrued any liability associated with this matter.

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

Securities Class Action (Apollo Institutional Investors Group)
On August 13, 2010, a securities class action complaint was filed in the U.S. District Court for the District of Arizona by Douglas N. Gaer naming us, John G. Sperling, Gregory W. Cappelli, Charles B. Edelstein, Joseph L. D’Amico, Brian L. Swartz and Gregory J. Iverson as defendants for allegedly making false and misleading statements regarding our business practices and prospects for growth. That complaint asserted a putative class period stemming from December 7, 2009 to August 3, 2010. A substantially similar complaint was also filed in the same Court by John T. Fitch on September 23, 2010 making similar allegations against the same defendants for the same purported class period. Finally, on October 4, 2010, another purported securities class action complaint was filed in the same Court by Robert Roth against the same defendants as well as Brian Mueller, Terri C. Bishop and Peter V. Sperling based upon the same general set of allegations, but with a defined class period of February 12, 2007 to August 3, 2010. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On October 15, 2010, three additional parties filed motions to consolidate the related actions and be appointed the lead plaintiff.
On November 23, 2010, the Fitch and Roth actions were consolidated with Gaer and the Court appointed the “Apollo Institutional Investors Group” consisting of the Oregon Public Employees Retirement Fund, the Mineworkers’ Pension Scheme, and Amalgamated Bank as lead plaintiffs. The case is now entitled, In re Apollo Group, Inc. Securities Litigation, Lead Case Number CV-10-1735-PHX-JAT. On February 18, 2011, the lead plaintiffs filed a consolidated complaint naming Apollo, John G. Sperling, Peter V. Sperling, Joseph L. D’Amico, Gregory W. Cappelli, Charles B. Edelstein, Brian L. Swartz, Brian E. Mueller, Gregory J. Iverson, and William J. Pepicello as defendants. The consolidated complaint asserts a putative class period of May 21, 2007 to October 13, 2010. On April 19, 2011, we filed a motion to dismiss, which was granted on October 27, 2011. On December 6, 2011, the lead plaintiffs filed an Amended Consolidated Class Action Complaint, which alleges similar claims against the same defendants. On January 9, 2012, we filed a motion to dismiss the Amended Consolidated Class Action Complaint. On June 22, 2012, the Court granted our motion to dismiss and entered a judgment in our favor.
On July 20, 2012, the plaintiffs filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit. On December 16, 2014, the U.S. Court of Appeals for the Ninth Circuit issued an opinion affirming the District Court’s dismissal of plaintiffs’ complaint.
Securities Class Action (Teamsters Local 617 Pensions and Welfare Funds)
On November 2, 2006, the Teamsters Local 617 Pension and Welfare Funds filed a class action complaint purporting to represent a class of shareholders who purchased our stock between November 28, 2001 and October 18, 2006. The complaint, filed in the U.S. District Court for the District of Arizona, is entitled Teamsters Local 617 Pension & Welfare Funds v. Apollo Group, Inc. et al., Case Number 06-cv-02674-RCB, and alleges that we and certain of our current and former directors and officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by purportedly making misrepresentations concerning our stock option granting policies and practices and related accounting. The defendants are Apollo, J. Jorge Klor de Alva, Daniel E. Bachus, John M. Blair, Dino J. DeConcini, Kenda B. Gonzales, Hedy F. Govenar, Brian E. Mueller, Todd S. Nelson, Laura Palmer Noone, John R. Norton III, John G. Sperling and Peter V. Sperling. On September 11, 2007, the Court appointed The Pension Trust Fund for Operating Engineers as lead plaintiff. Lead plaintiff filed an amended complaint on November 23, 2007, asserting the same legal claims as the original complaint and adding claims for violations of Section 20A of the Securities Exchange Act of 1934 and allegations of breach of fiduciary duties and civil conspiracy. On April 30, 2009, plaintiffs filed their Second Amended Complaint, which alleges similar claims for alleged securities fraud against the same defendants.
On March 31, 2011, the U.S. District Court for the District of Arizona dismissed the case with prejudice and entered judgment in our favor. Plaintiffs filed a motion for reconsideration of this ruling, and the Court denied this motion on April 2, 2012. On April 27, 2012, the plaintiffs filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit. During the pendency of this appeal, the parties reached an agreement in principle to settle this matter and, at the request of the parties, the Ninth Circuit issued an order staying the appeal on April 30, 2014. On February 19, 2015, plaintiffs filed a motion seeking the preliminary approval of the settlement.
As of February 28, 2015, we had accrued an immaterial amount reflecting the agreed upon settlement, which we subsequently paid in March 2015. We intend to pursue reimbursement of the settlement amount from our insurance carriers, although the outcome of any such recovery efforts is uncertain at this point.
Class Action Alleging Violations of the California Labor Code
On December 24, 2014, Carmin Tandy, who was previously employed as a faculty member at University of Phoenix, filed a class action complaint against Apollo Education Group, Inc. and University of Phoenix alleging violations of the California Labor Code pertaining to the manner in which University of Phoenix faculty in California were compensated. Captioned Tandy v. Apollo

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

Education Group, Inc., et al., the action was initially filed in California Superior Court in San Diego County, but was subsequently removed to Federal District Court in the Southern District of California. On February 25, 2015, plaintiff voluntarily dismissed her complaint.
Class Action under the Telephone Consumer Protection Act
On September 25, 2014, Mundy Gonzalez filed a class action complaint against University of Phoenix alleging violations of the Telephone Consumer Protection Act (“TCPA”). Captioned Gonzalez v. The University of Phoenix, 3:14-cv-02279, the action was filed in U.S. District Court for the Southern District of California. On February 13, 2015, plaintiff voluntarily dismissed her complaint.
Himmel Derivative Action
On March 24, 2011, Daniel Himmel filed a shareholder derivative complaint in the Superior Court for the State of Arizona, Maricopa County, entitled Himmel v. Bishop, et al, Case Number CV2011-005604. On February 2, 2015, plaintiff filed a stipulation seeking the voluntary dismissal of his complaint, and the Court entered a dismissal order on February 5, 2015, thus terminating this action.
Securities Class Action (Nader Saleh)
On April 24, 2014, a securities class action complaint was filed in the U.S. District Court for the District of Arizona by Nader Saleh naming Apollo Education Group, Inc., Gregory W. Cappelli, and Brian L. Swartz as defendants and asserting a putative class period stemming from October 19, 2011 to April 1, 2014. The complaint is entitled Saleh v. Apollo Education Group, Inc., 2:14-cv-00877-SRB and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, among other complaints. On November 12, 2014, plaintiff voluntarily dismissed the complaint, and the district court subsequently terminated the case on November 13, 2014.
Note 16. Regulatory Matters
All U.S. federal financial aid programs are established by Title IV of the Higher Education Act and regulations promulgated thereunder. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. The current reauthorization of the federal Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in Higher Education Act reauthorization hearings, but the timing and terms of any eventual reauthorization cannot be predicted.
The Higher Education Act, as reauthorized, specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification.
University of Phoenix was recertified in November 2009 and entered into a new Title IV Program Participation Agreement which expired on December 31, 2012. University of Phoenix has submitted necessary documentation for re-certification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We have no reason to believe that the University’s application will not be renewed in due course, and it is not unusual to be continued on a month-to-month basis while the Department completes its review. 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. The University has received and responded to a draft program review report which included findings regarding compliance with the Clery Act and various Title IV administrative matters. We believe that all findings regarding Title IV administrative matters have been resolved and that a Final Program Review Determination Letter will be issued in due course. Findings regarding compliance with the Clery Act have been referred to the Department’s Clery Team and to the Administrative Action and Appeals Division which is standard protocol in such matters.
Western International University was recertified by the Department of Education in November 2014 and subsequently entered into a new Title IV Program Participation Agreement which expires in June 2018.
Gainful Employment
Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide information to prospective students about each

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

eligible program, including the relevant recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers.
In October 2014, the U.S. Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether an academic program prepares students for gainful employment in a recognized occupation. Under the final regulations, which apply on a program-by-program basis, students enrolled in a program will be eligible for Title IV student financial aid only if that program satisfies at least one of two tests relating to student debt-to-earnings ratios. The two tests specify minimum debt-to-earnings ratios calculated on the basis of the earnings of program graduates; one test measures student loan debt as a percentage of total earnings, and the other test measures student loan debt as a percentage of discretionary earnings. Programs that fail to meet at least one of the minimum ratios for two years will lose eligibility for federal financial aid for a period not less than three years.
The Department has indicated that the official 2014 gainful employment debt-to-earnings ratios will be issued sometime during calendar year 2016. The expected timing of the issuance of the 2015 ratios is unknown at this time. We believe it is likely that some of our programs will be impacted by the regulations, which may require modification of the affected programs or, in some cases, discontinuation.
Higher Learning Commission Accreditation
University of Phoenix is accredited by The Higher Learning Commission (“HLC”), which provides the following:
•
Recognition and acceptance by employers, other higher education institutions and governmental entities of the degrees and credits earned by students;
•
Qualification to participate in Title IV programs (in combination with state higher education operating and degree granting authority); and
•
Qualification for authority to operate in certain states.
In July 2013, the accreditation of University of Phoenix was reaffirmed by HLC through the 2022-2023 academic year. At the same time, HLC placed the University on Notice status for a two-year period. Notice status is a sanction that means that HLC has determined that an institution is on a course of action that, if continued, could lead the institution to be out of compliance with one or more of the HLC Criteria for Accreditation or Core Components. University of Phoenix was assigned by HLC to the Standard Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2016-2017 and will undergo its next reaffirmation visit and process in 2022-2023.
The University submitted a Notice Report to HLC in November 2014 providing evidence that the University has ameloriated those conditions that led to the Notice status and continues to meet the Criteria for Accreditation, Core Components and Assumed Practices associated with those conditions. In addition, in the Notice Report the University reported on its progress in other areas of concern not included as a basis for the Notice sanction, including retention and graduation rates, three-year student loan cohort default rates, and credit hour policies and practices relating to learning teams. The University hosted a focused visit in January 2015 to validate the contents of the Notice Report filed in November 2014. Based on the process to date, we believe that the University has adequately addressed the concerns expressed by the HLC in connection with its Notice determination. We expect that the HLC Board of Trustees will consider the matter and take final action at its meeting in late June 2015. If the HLC Board were to determine that the requirements for lifting the Notice sanction have not been met or that the University otherwise is not in compliance with the applicable accreditation criteria, the Board could impose additional sanctions on the University, including probation, or take other action that could adversely impact our business.
In addition to the above, as a condition of HLC’s approval of the July 2014 changes to the voting stock trust which holds approximately 51% of our outstanding Class B common shares, the only class of Apollo voting stock, University of Phoenix hosted a visit by an HLC peer review team in December 2014 focused on ascertaining the appropriateness of the prior approval, implications for succession planning, and the effect, if any, of the change in trust arrangements on Apollo and its relevant subsidiaries, and their ability to continue to meet HLC’s Criteria for Accreditation and Assumed Practices. Based upon the process to date, we believe that we have adequately addressed the Commission’s relevant criteria in this matter. Final action is pending with HLC.
OIG Audit of the U.S. Department of Education
In October 2011, the Office of the Inspector General of the U.S. Department of Education (“OIG”) notified us that it was conducting a nationwide audit of the Department’s program requirements, guidance, and monitoring of institutions of higher education offering distance education. In connection with the OIG’s audit of the Department, the OIG examined a sample of University of Phoenix students who enrolled during the period from July 1, 2010 to June 30, 2011. The OIG subsequently notified University of Phoenix that in the course of this review it identified certain conditions that the OIG believed were Title

27
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

IV program compliance exceptions at University of Phoenix. In February 2014, the OIG released a final audit report on this subject, which identified exceptions based on select student records related principally to the calculation of the amount of Title IV program funds returned after student withdrawals and the process for confirming student eligibility prior to disbursement of Title IV program funds. While the OIG recommended follow-up action with regard to some schools, University of Phoenix was not among them. We were not the direct subject of the OIG’s audit of the Department, and we have not accrued any liability associated with this matter.
Note 17. Segment Reporting
We operate 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;
•
Apollo Global; and
•
Other.
University of Phoenix offers undergraduate and graduate degrees in a wide range of program areas as well as various nondegree programs. The University’s students attend classes online and at ground campus locations throughout the U.S. and Puerto Rico. The majority of students attend classes exclusively online.
Apollo Global includes:
•
BPP Holdings Limited (“BPP”);
•
Open Colleges Australia Pty Ltd (“Open Colleges”);
•
Universidad Latinoamericana (“ULA”);
•
Milpark Education (Pty) Ltd. (“Milpark Education”);
•
Faculdade da Educacional da Lapa (“FAEL”);
•
Apollo Global Chile S.A. (“Apollo Global Chile”);
•
India Education Services Private Ltd (“India Education Services”); and
•
Apollo Global corporate operations.
Apollo Global acquired FAEL during the second quarter of fiscal year 2015. Refer to Note 4, Acquisitions. Apollo Global also acquired Open Colleges and Milpark Education during fiscal year 2014. The operating results for each of these entities are included in our Apollo Global operating segment from the date of each respective acquisition.
Other includes:
•
The College for Financial Planning Institutes Corporation (“College for Financial Planning”);
•
Carnegie Learning, Inc.;
•
Western International University, Inc.; and
•
Apollo Corporate activities.
During fiscal year 2014, we sold the assets of IPD and began presenting it as discontinued operations. IPD was previously included in Other in our segment reporting. As IPD’s operating results are presented as discontinued operations on our Condensed Consolidated Statements of Operations for all periods presented, we have revised our financial information by segment to exclude IPD’s operating results.

28
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of financial information by reportable segment is as follows:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
 
2015
 
2014
Net revenue:
 

 
 

 
 

 
 
University of Phoenix
$
487,769

 
$
594,081

 
$
1,080,622

 
$
1,338,944

Apollo Global
81,100

 
68,634

 
196,240

 
159,793

Other
9,703

 
10,039

 
20,762

 
22,165

Net revenue
$
578,572

 
$
672,754

 
$
1,297,624

 
$
1,520,902

Operating (loss) income(1):
 

 
 

 
 

 
 
University of Phoenix
$
1,350

 
$
86,682

 
$
94,861

 
$
270,155

Apollo Global(2)
(27,541
)
 
(40,004
)
 
(32,383
)
 
(37,787
)
Other(3)
(28,335
)
 
(36,382
)
 
(56,510
)
 
(51,711
)
Operating (loss) income
(54,526
)
 
10,296

 
5,968

 
180,657

Reconciling items:
 
 
 

 
 
 
 
Interest income
740

 
599

 
1,329

 
1,167

Interest expense
(1,739
)
 
(1,983
)
 
(3,401
)
 
(4,069
)
Other (loss) income, net
(1,146
)
 
107

 
(2,431
)
 
914

(Loss) income from continuing operations before income taxes
$
(56,671
)
 
$
9,019

 
$
1,465

 
$
178,669

(1) University of Phoenix, Apollo Global and Other include restructuring and impairment charges during the periods. Refer to Note 2, Restructuring and Impairment Charges.
(2) During the three and six months ended February 28, 2015, Apollo Global incurred $1.0 million and $2.7 million of acquisition and other related costs, respectively. The operating loss for Apollo Global in the three and six months ended February 28, 2014 includes $13.0 million of acquisition and other related costs.
(3) The operating loss for Other in the three and six months ended February 28, 2015 includes $0.7 million and $2.3 million of acquisition and other related costs, respectively. The operating loss for Other in the three and six months ended February 28, 2014 includes $9.0 million of charges associated with our legal matters.
A summary of our consolidated assets by reportable segment is as follows:
($ in thousands)
February 28,
2015
 
August 31,
2014
University of Phoenix
$
769,666

 
$
824,895

Apollo Global
671,914

 
680,363

Other(1)
964,361

 
1,587,677

Total assets
$
2,405,941

 
$
3,092,935

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

29

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, 2014 and our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1, Financial Statements, in this Form 10-Q.
Overview
Apollo Education Group, Inc. is one of the world’s largest private education providers, serving students since 1973. We believe that our success depends on providing high quality education and career pathways, tools and services to students to maximize the benefits of their educational experience. Through our subsidiaries, we offer undergraduate, graduate, professional development and other nondegree educational programs and services, online and on-campus principally to working learners. Our educational programs and services are offered throughout the United States and in Europe, Australia, Latin America, Africa and Asia, as well as online throughout the world.
Substantially all of our net revenue is composed of tuition and fees for educational services. In fiscal year 2014, University of Phoenix represented 87% of our total consolidated net revenue and generated more than 100% of our total consolidated operating income. Further information regarding our education platforms is included in Note 17, Segment Reporting, in Part I, Item 1, Financial Statements.
Key Trends, Developments and Challenges
The following developments and trends present opportunities, challenges and risks relating to our business:
•
Rapidly Evolving and Highly Competitive Education Industry. The U.S. higher education industry continues to experience unprecedented, rapidly developing changes due to technological developments, evolving needs and objectives of students and employers, economic constraints affecting educational institutions and students, price competition, increased focus on affordability and other factors that challenge many of the core principles underlying the industry. In addition, the proprietary sector in which we operate has experienced significant and increasing competition from traditional public and private colleges and universities as these institutions have increased their distance learning and other online education programs, including programs that are geared towards the needs of working learners. We believe these developments have contributed to the decline in University of Phoenix enrollment that began in late 2010. See further discussion of enrollment in Results of Operations below.
We are focused on adapting our business to meet these rapidly evolving developments and to stabilize University of Phoenix enrollment. In furtherance of this, we are implementing several initiatives including those discussed below relating to careers and reengineering our business processes. Additionally, we are restructuring the administration of University of Phoenix’s colleges to emphasize their distinctiveness and to allow each of them to more effectively address the needs of their students and the employers they serve. We are also increasing the use of targeted scholarships and discounts designed to attract students and reward persistence, and are implementing other initiatives focused on supporting student retention.
•
Education to Careers Value Proposition. We believe it is critical that we maximize the value our students garner from their education. Our goal is to deliver, and to continually improve, educational programs that give our students the skills they need to increase their employment opportunities within their field of study or to advance within their existing careers. This is our key value proposition to prospective students. We have launched the Phoenix Career Guidance System, which includes various career-oriented tools, and we are focused on better connecting our students to the careers they want and connecting employers with the talent they need. We intend to focus on areas of high demand for qualified employees. In furtherance of this, we are focused on introducing new programs, including professional development and other nondegree programs, and revamping and refreshing existing programs to better meet the needs of students and employers in these areas.
•
Business Process Reengineering. We remain focused on reengineering our business processes and educational delivery systems to improve the efficiency and effectiveness of our services to students, and further reducing costs to align with our lower enrollment and revenue. These activities include streamlining and, where appropriate, automating, our administrative and student facing services and closing underutilized or unnecessary University of Phoenix campus locations. University of Phoenix continues to actively evaluate the extent, functionality and location of its ground facilities and expects to close additional facilities in the future that are determined to be underutilized or unnecessary. See further discussion of University of Phoenix ground facilities in Results of Operations below.
•
Online Student Classroom. University of Phoenix’s new online student classroom, which was fully implemented in late June 2014, has experienced technical challenges that adversely impacted the user experience for our students. 

30

We completed a substantial portion of the corrective measures during the second quarter of fiscal year 2015, and remediation work will continue throughout the remainder of fiscal year 2015. We believe that the disruptions experienced by our students using the online classroom contributed to the decline in student retention we experienced during the six months ended February 28, 2015.
•
Expansion into New Markets. We have operations on six continents and are working to expand our global operations, including exploring new opportunities for growth outside the U.S. in areas of non-traditional higher education, such as certificate programs and vocational education. The integration and operation of acquired businesses in foreign jurisdictions entails substantial regulatory, market and execution risks and, consistent with our experience to date, such acquisitions may not be accretive for an extended period of time.
•
Regulatory Environment. The following summarizes significant regulatory matters applicable to our business. For a more detailed discussion of the regulatory environment and related risks, refer to Part I, Item 1, Business, and Item 1A, Risk Factors, in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 21, 2014.
•
Financial Aid Funding. In recent years, there has been increased focus by members of the U.S. Congress and federal agencies, including the Department of Education, the Consumer Financial Protection Bureau and the Federal Trade Commission, on the role that proprietary educational institutions play in higher education. Congressional hearings and roundtable discussions have been held regarding various aspects of the education industry, and reports have been issued that are highly critical of proprietary institutions and include a number of recommendations to be considered by Congress in connection with the upcoming reauthorization of the federal Higher Education Act. The current reauthorization of the federal Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in Higher Education Act reauthorization hearings, but the timing and terms of any eventual reauthorization cannot be predicted.
Title IV program funding is a potential target for reduction as Congress seeks to reduce the U.S. budget deficit. Because a significant portion of our revenue is derived from Title IV programs, any action by Congress that reduces Title IV program funding, either as part of the Higher Education Act reauthorization or through across-the-board funding reductions, sequestration or otherwise, or which alters the eligibility of our institutions or students to participate in Title IV programs could have a material adverse effect on our enrollment and financial condition. Action by Congress or federal agencies could also require us to modify our practices in ways that increase our administrative costs and reduce our operating income.
In addition to possible reductions in Title IV program funding, military financial aid programs may be reduced as military branches address decreased funding. Reductions and/or changes in military financial aid could result in increased student borrowing, decreased enrollment and adverse impacts on our 90/10 Rule percentage.
•
Gainful Employment. Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide information to prospective students about each eligible program, including the relevant recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers.
In October 2014, the U.S. Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether an academic program prepares students for gainful employment in a recognized occupation. Under the final regulations, which apply on a program-by-program basis, students enrolled in a program will be eligible for Title IV student financial aid only if that program satisfies at least one of two tests relating to student debt-to-earnings ratios. The two tests specify minimum debt-to-earnings ratios calculated on the basis of the earnings of program graduates; one test measures student loan debt as a percentage of total earnings, and the other test measures student loan debt as a percentage of discretionary earnings. Programs that fail to meet at least one of the minimum ratios for two years will lose eligibility for federal financial aid for a period not less than three years.
The Department has indicated that the official 2014 gainful employment debt-to-earnings ratios will be issued sometime during calendar year 2016. The expected timing of the issuance of the 2015 ratios is unknown at this time. We believe it is likely that some of our programs will be impacted by the regulations, which may require modification of the affected programs or, in some cases, discontinuation.

31

•
U.S. Department of Education Program Participation Agreement and Program Review. University of Phoenix’s Title IV Program Participation Agreement expired December 31, 2012. The University has submitted necessary documentation for re-certification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We have no reason to believe that the University’s application will not be renewed in due course, and it is not unusual to be continued on a month-to-month basis while the Department completes its review. 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. The University has received and responded to a draft program review report which included findings regarding compliance with the Clery Act and various Title IV administrative matters. We believe that all findings regarding Title IV administrative matters have been resolved and that a Final Program Review Determination Letter will be issued in due course. Findings regarding compliance with the Clery Act have been referred to the Department’s Clery Team and to the Administrative Action and Appeals Division which is standard protocol in such matters.
Western International University was recertified by the Department of Education in November 2014 and subsequently entered into a new Title IV Program Participation Agreement which expires in June 2018.
•
National College Rating System. In response to President Obama’s call for a national college rating system, the U.S. Department of Education released a draft ratings framework in December 2014 which is intended to provide increased transparency regarding access, affordability, and student outcomes at U.S. colleges. The public comment period on the draft ratings framework ended on February 17, 2015, and the Department intends to release the final ratings system for use by students and others in advance of the 2015-2016 school year. Additional details are available at
http://www.ed.gov/news/press-releases/public-feedback-college-ratings-framework.
The impact of the ratings system cannot be predicted, but if the system as adopted compares schools with dramatically different demographics and missions without appropriate qualifications or otherwise casts a negative light on the proprietary sector, our reputation and business could be adversely affected.
•
The Higher Learning Commission Accreditation. In July 2013, the accreditation of University of Phoenix was reaffirmed by The Higher Learning Commission, its institutional accreditor (“HLC”), through the 2022-2023 academic year. At the same time, HLC placed the University on Notice status for a two-year period. Notice status is a sanction that means that HLC has determined that an institution is on a course of action that, if continued, could lead the institution to be out of compliance with one or more of the HLC Criteria for Accreditation or Core Components. We submitted the required report to HLC in connection with this matter and hosted a focused visit in January 2015 to validate the contents of the report. Refer to Note 16, Regulatory Matters, in Item 1, Financial Statements. Based on the process to date, we believe that the University has adequately addressed the concerns expressed by the HLC in connection with its Notice determination. We expect that the HLC Board of Trustees will consider the matter and take final action at its meeting in late June 2015. If the HLC Board were to determine that the requirements for lifting the Notice sanction have not been met or that the University otherwise is not in compliance with the applicable accreditation criteria, the Board could impose additional sanctions on the University, including probation, or take other action that could adversely impact our business.
In addition to the above, as a condition of HLC’s approval of the July 2014 changes to the voting stock trust which holds approximately 51% of our outstanding Class B common shares, the only class of Apollo voting stock, University of Phoenix hosted a visit by an HLC peer review team in December 2014 focused on ascertaining the appropriateness of the prior approval, implications for succession planning, and the effect, if any, of the change in trust arrangements on Apollo and its relevant subsidiaries, and their ability to continue to meet HLC’s Criteria for Accreditation and Assumed Practices. Based upon the process to date, we believe that we have adequately addressed the Commission’s relevant criteria in this matter. Final action is pending with HLC.
For a more detailed discussion of our business, industry and risks, refer to our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 21, 2014.

32

Other Fiscal Year 2015 Events
In addition to the items mentioned above, we experienced the following other events during the second quarter of fiscal year 2015:
1.
Acquisition of FAEL. On December 4, 2014, Apollo Global acquired a 75% interest in Sociedade Técnica Educacional da Lapa S.A., which provides postsecondary educational programs in Brazil under the name Faculdade da Educacional da Lapa (“FAEL”). Refer to Note 4, Acquisitions, in Item 1, Financial Statements.
2.
Student Loan Cohort Default Rates. During the second quarter of fiscal year 2015, the U.S. Department of Education released the draft three-year cohort default rates for the 2012 federal fiscal year. The 2012 draft three-year cohort default rate for University of Phoenix, which will be finalized in September 2015, was 13.6%, which is a decrease from the University’s 2011 three-year cohort default rate of 19.0%.
Critical Accounting Policies and Estimates
Refer to our 2014 Annual Report on Form 10-K for our critical accounting policies and estimates and refer to Note 2, Restructuring and Impairment Charges, in Item 1, Financial Statements, for discussion of long-lived asset impairments recorded during the second quarter of fiscal year 2015.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 1, Nature of Operations and Significant Accounting Policies, in Item 1, Financial Statements.
Results of Operations
We have included below a discussion of our operating results and significant items explaining the material changes in our operating results during the three and six months ended February 28, 2015 compared to the three and six months ended February 28, 2014.
As discussed in the Overview of this MD&A, the U.S. higher education industry continues to experience unprecedented, rapidly developing changes. We believe University of Phoenix enrollment has been adversely impacted by these changes, and we are focused on adapting our business to meet these rapidly evolving developments and to stabilize University of Phoenix enrollment.
Our operations are generally subject to seasonal trends, which vary depending on the subsidiary. We have historically experienced, and expect to continue to experience, fluctuations in our results of operations as a result of seasonal variations in the level of our institutions’ enrollments.
•
University of Phoenix - Although University of Phoenix enrolls students throughout the year, its net revenue is generally lower in our second fiscal quarter (December through February) than the 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.

33

Analysis of Condensed Consolidated Statements of Operations
The following details our consolidated results of operations. For a more detailed discussion of our operating results by reportable segment, refer to Analysis of Operating Results by Reportable Segment below.
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
 
2015
 
2014
 
% of Net Revenue
 
2015
 
2014
 
% of Net Revenue
($ in thousands)
 
 
2015
 
2014
 
 
 
2015
 
2014
Net revenue
$
578,572

 
$
672,754

 
100.0
 %
 
100.0
 %
 
$
1,297,624

 
$
1,520,902

 
100.0
 %
 
100.0
 %
Costs and expenses:
 
 
 
 
 

 
 

 
 
 
 
 
 

 
 

Instructional and student advisory
293,073

 
316,577

 
50.7
 %
 
47.1
 %
 
617,337

 
653,779

 
47.6
 %
 
43.0
 %
Marketing
127,421

 
139,272

 
22.0
 %
 
20.7
 %
 
256,214

 
273,101

 
19.7
 %
 
18.0
 %
Admissions advisory
57,840

 
53,121

 
10.0
 %
 
7.9
 %
 
114,925

 
102,819

 
8.8
 %
 
6.8
 %
General and administrative
70,598

 
67,275

 
12.2
 %
 
10.0
 %
 
142,965

 
142,054

 
11.0
 %
 
9.3
 %
Depreciation and amortization
34,819

 
37,465

 
6.0
 %
 
5.6
 %
 
71,223

 
73,803

 
5.5
 %
 
4.8
 %
Provision for uncollectible accounts receivable
11,969

 
11,534

 
2.1
 %
 
1.7
 %
 
29,367

 
25,512

 
2.3
 %
 
1.7
 %
Restructuring and impairment charges
35,536

 
15,209

 
6.1
 %
 
2.3
 %
 
54,564

 
47,172

 
4.2
 %
 
3.0
 %
Acquisition and other related costs
1,742

 
13,005

 
0.3
 %
 
1.9
 %
 
4,961

 
13,005

 
0.4
 %
 
0.9
 %
Litigation charges
100

 
9,000

 
—
 %
 
1.3
 %
 
100

 
9,000

 
—
 %
 
0.6
 %
Total costs and expenses
633,098

 
662,458

 
109.4
 %
 
98.5
 %
 
1,291,656

 
1,340,245

 
99.5
 %
 
88.1
 %
Operating (loss) income
(54,526
)
 
10,296

 
(9.4
)%
 
1.5
 %
 
5,968

 
180,657

 
0.5
 %
 
11.9
 %
Interest income
740

 
599

 
0.1
 %
 
0.1
 %
 
1,329

 
1,167

 
0.1
 %
 
0.1
 %
Interest expense
(1,739
)
 
(1,983
)
 
(0.3
)%
 
(0.3
)%
 
(3,401
)
 
(4,069
)
 
(0.3
)%
 
(0.3
)%
Other (loss) income, net
(1,146
)
 
107

 
(0.2
)%
 
—
 %
 
(2,431
)
 
914

 
(0.2
)%
 
—
 %
(Loss) income from continuing operations before income taxes
(56,671
)
 
9,019

 
(9.8
)%
 
1.3
 %
 
1,465

 
178,669

 
0.1
 %
 
11.7
 %
Benefit from (provision for) income taxes
20,533

 
5,130

 
3.6
 %
 
0.8
 %
 
(5,134
)
 
(65,088
)
 
(0.4
)%
 
(4.2
)%
(Loss) income from continuing operations
(36,138
)
 
14,149

 
(6.2
)%
 
2.1
 %
 
(3,669
)
 
113,581

 
(0.3
)%
 
7.5
 %
Loss from discontinued operations, net of tax
—

 
(1,972
)
 
—
 %
 
(0.3
)%
 
—

 
(2,363
)
 
—
 %
 
(0.2
)%
Net (loss) income
(36,138
)
 
12,177

 
(6.2
)%
 
1.8
 %
 
(3,669
)
 
111,218

 
(0.3
)%
 
7.3
 %
Net loss attributable to noncontrolling interests
2,528

 
2,428

 
0.4
 %
 
0.4
 %
 
3,844

 
2,278

 
0.3
 %
 
0.2
 %
Net (loss) income attributable to Apollo
$
(33,610
)
 
$
14,605

 
(5.8
)%
 
2.2
 %
 
$
175

 
$
113,496

 
—
 %
 
7.5
 %
Net Revenue
Our net revenue decreased $94.2 million and $223.3 million, or 14.0% and 14.7%, in the three and six months ended February 28, 2015, respectively, compared to the prior year periods. The decreases were primarily attributable to net revenue declines at University of Phoenix of 17.9% and 19.3% during the respective periods, principally due to lower enrollment. See discussion of the enrollment decline in University of Phoenix below. This was partially offset by increases in Apollo Global net revenue.
Instructional and Student Advisory
Instructional and student advisory decreased $23.5 million and $36.4 million, or 7.4% and 5.6%, in the three and six months ended February 28, 2015, respectively, compared to the prior year periods. This represented increases as a percentage of net revenue of 360 and 460 basis points, respectively. The decreases in expense were primarily due to lower costs from the University of Phoenix enrollment decline and lower costs including rent and compensation attributable to our restructuring activities. This was partially offset by costs attributable to Apollo Global’s recent acquisitions.
Marketing
Marketing decreased $11.9 million and $16.9 million, or 8.5% and 6.2%, in the three and six months ended February 28, 2015, respectively, compared to the prior year periods. This represented increases as a percentage of net revenue of 130 and 170 basis points, respectively. The decreases in expense were principally attributable to lower headcount due in part to our restructuring activities, and lower advertising costs. This was partially offset by advertising costs attributable to Apollo Global’s recent acquisitions.

34

Admissions Advisory
Admissions advisory increased $4.7 million and $12.1 million, or 8.9% and 11.8%, in the three and six months ended February 28, 2015, respectively, compared to the prior year periods. This represented increases as a percentage of net revenue of 210 and 200 basis points, respectively. The increases in expense were principally attributable to higher average employee compensation at University of Phoenix resulting from its effort to retain qualified personnel following the reorganization its admissions advisory function. The increase was also due to costs attributable to Open Colleges as a result of the timing of the acquisition during the second quarter of fiscal year 2014.
General and Administrative
General and administrative increased $3.3 million and $0.9 million, or 4.9% and 0.6%, in the three and six months ended February 28, 2015, respectively, compared to the prior year periods. This represented increases as a percentage of net revenue of 220 and 170 basis points, respectively. The increases were primarily due to costs attributable to Apollo Global’s recent acquisitions.
Depreciation and Amortization
Depreciation and amortization decreased $2.6 million in both the three and six months ended February 28, 2015 compared to the prior year periods. This represented decreases of 7.1% and 3.5% during the three and six month periods, respectively, and increases as a percentage of net revenue of 40 and 70 basis points, respectively. The decrease in expense was principally attributable to lower depreciation due in part to the decline in depreciable assets resulting from our restructuring activities. This was partially offset by intangibles amortization attributable to Apollo Global’s recent acquisitions.
Provision for Uncollectible Accounts Receivable
Provision for uncollectible accounts receivable increased $0.4 million and $3.9 million, or 3.8% and 15.1%, in the three and six months ended February 28, 2015, respectively, compared to the prior year periods. This represented increases as a percentage of net revenue of 40 and 60 basis points, respectively. The increases principally occurred at Open Colleges as a result of the timing of the acquisition during the second quarter of fiscal year 2014 and its increased enrollment since the acquisition.
Restructuring and Impairment Charges
Restructuring and impairment charges includes the following for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
 
2015
 
2014
Restructuring charges
$
16,587

 
$
15,209

 
$
35,615

 
$
47,172

Intangibles impairment(1)
12,999

 
—

 
12,999

 
—

Property and equipment impairment(1)
5,950

 
—

 
5,950

 
—

Restructuring and impairment charges
$
35,536

 
$
15,209

 
$
54,564

 
$
47,172

(1) Refer to Note 2, Restructuring and Impairment Charges, in Item 1, Financial Statements, for discussion of these impairment charges.
The U.S. higher education industry continues to experience unprecedented, rapidly developing changes that challenge many of the core principles underlying the industry. We began initiating restructuring activities in fiscal year 2011 to reengineer our business processes and educational delivery systems to improve the efficiency and effectiveness of our services to students. We have continued restructuring activities in fiscal year 2015 as we further reduce costs to align with our lower enrollment and revenue.
Our restructuring activities initiated prior to fiscal year 2015 principally include rationalizing our administrative real estate facilities, closing 115 University of Phoenix ground locations, and workforce reductions. During the six months ended February 28, 2015, we incurred $23.3 million of expense associated with restructuring activities initiated prior to fiscal year 2015. The substantial majority of the expense represents an increase in our estimated future cash payments associated with certain lease obligations included in the University of Phoenix ground location rationalization discussed above. We do not expect to incur material charges related to the remaining space expected to be vacated. However, we will incur interest accretion and may record additional adjustments associated with the estimated lease obligations, which involves significant judgment, in future periods.
During the six months ended February 28, 2015, we incurred $12.3 million of restructuring expense associated with new restructuring activities initiated after fiscal year 2014. The expense consisted of $8.5 million of severance and other employee separation costs associated with the elimination of approximately 300 positions. The majority of the remaining restructuring expense represents costs associated with termination of a curriculum-based contract. The expense associated with these

35

activities for the six months ended February 28, 2015 is reflected in our segment reporting as follows: $1.1 million in University of Phoenix and $11.2 million in Other.
We intend to further reduce costs to align with our lower enrollment and revenue, and expect to incur material charges associated with other future restructuring activities. These efforts include University of Phoenix continuing to actively evaluate the extent, functionality and location of its ground facilities and the potential closure of additional facilities in the future that are determined to be underutilized or unnecessary.
Refer to Note 2, Restructuring and Impairment Charges, in Item 1, Financial Statements, which is incorporated herein by reference, for further information on our restructuring activities.
Acquisition and Other Related Costs
We recorded $1.7 million and $5.0 million of acquisition and other related costs during the three and six months ended February 28, 2015, respectively. This principally represents costs associated with our acquisition of FAEL completed in December 2014, and diligence costs related to other potential acquisitions that were not completed.
During the three and six months ended February 28, 2014, we recorded $13.0 million associated with changes in the fair value of contingent consideration associated with our acquisitions. The substantial majority of this expense was attributable to our acquisition of Open Colleges.
Litigation Charges
We recorded charges of $0.1 million and $9.0 million during the second quarters of fiscal year 2015 and 2014, respectively, associated with our legal matters. Refer to Note 15, Commitments and Contingencies in Item 1, Financial Statements.
Benefit from (Provision for) Income Taxes
We recorded a benefit from income taxes during the second quarter of fiscal year 2015, which represented a 36.2% effective income tax rate. The effective rate was adversely impacted by foreign losses for which we cannot take a tax benefit.
During the six months ended February 28, 2015, we had pre-tax income of $1.5 million and recorded $5.1 million of income tax expense. The low pre-tax income caused our foreign losses for which we cannot take a tax benefit to have a more significant impact on our effective tax rate for the period.
We had pre-tax income of $9.0 million during the three months ended February 28, 2014 and recorded an aggregate $5.1 million benefit from income taxes. The aggregate benefit was principally attributable to a $10.2 million benefit from resolution with the Internal Revenue Service related to the deductibility of certain costs for our foreign subsidiaries, and a $2.8 million tax benefit resulting from tax reform in Mexico. These benefits were partially offset by an increase in nondeductible foreign losses primarily due to the acquisition and other related costs discussed above.
During the six months ended February 28, 2014, our effective income tax rate was 36.4%, which was favorably impacted by the tax benefits recorded in the second quarter of fiscal year 2014 discussed above.
Analysis of Operating Results by Reportable Segment
The following details our operating results by reportable segment for the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
 
$
Change
 
%
Change
 
2015
 
2014
 
$
Change
 
%
Change
Net revenue
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

University of Phoenix
$
487,769

 
$
594,081

 
$
(106,312
)
 
(17.9
)%
 
$
1,080,622

 
$
1,338,944

 
$
(258,322
)
 
(19.3
)%
Apollo Global
81,100

 
68,634

 
12,466

 
18.2
 %
 
196,240

 
159,793

 
36,447

 
22.8
 %
Other
9,703

 
10,039

 
(336
)
 
(3.3
)%
 
20,762

 
22,165

 
(1,403
)
 
(6.3
)%
Net revenue
$
578,572

 
$
672,754

 
$
(94,182
)
 
(14.0
)%
 
$
1,297,624

 
$
1,520,902

 
$
(223,278
)
 
(14.7
)%
Operating (loss) income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

University of Phoenix
$
1,350

 
$
86,682

 
$
(85,332
)
 
(98.4
)%
 
$
94,861

 
$
270,155

 
$
(175,294
)
 
(64.9
)%
Apollo Global
(27,541
)
 
(40,004
)
 
12,463

 
31.2
 %
 
(32,383
)
 
(37,787
)
 
5,404

 
14.3
 %
Other
(28,335
)
 
(36,382
)
 
8,047

 
22.1
 %
 
(56,510
)
 
(51,711
)
 
(4,799
)
 
(9.3
)%
Operating (loss) income
$
(54,526
)
 
$
10,296

 
$
(64,822
)
 
*

 
$
5,968

 
$
180,657

 
$
(174,689
)
 
(96.7
)%
* Not meaningful

36

University of Phoenix
University of Phoenix’s net revenue decreased $106.3 million and $258.3 million, or 17.9% and 19.3%, during the three and six months ended February 28, 2015, respectively, compared to the prior year periods. The decreases were principally attributable to lower enrollment from the continued decline in New Degreed Enrollment, as detailed and defined in the table below, and a decline in student retention. The University’s net revenue also decreased as a result of the increased use of discounts, grants and scholarships.
In connection with the new emphasis by University of Phoenix on the distinctiveness of its colleges, the University evaluated pricing on a programmatic basis and determined changes were appropriate for a number of its programs. Accordingly, the University implemented selective price changes, including decreases, on a program by program basis, effective near the end of the first quarter of fiscal year 2015. Future net revenue will be impacted by these and other pricing changes, changes in enrollment and student mix within programs, and discounts, grants and scholarships.
The following details University of Phoenix student enrollment for the respective periods:
 
Three Months Ended
February 28,
 
 
 
Six Months Ended
February 28,
(Rounded to the nearest hundred)
2015
 
2014
 
% Change
 
 
 
2015
 
2014
 
% Change
Degreed Enrollment(1)
213,800

 
250,300

 
(14.6
)%
 
 
Average Degreed Enrollment(3)
224,900

 
260,800

 
(13.8
)%
New Degreed Enrollment(2)
28,300

 
32,500

 
(12.9
)%
 
 
Aggregate New Degreed Enrollment
67,900

 
74,200

 
(8.5
)%
(1) Represents students enrolled in a degree program who attended a credit bearing course during the quarter and had not graduated as of the end of the quarter; students who previously graduated from one degree program and started a new degree program in the quarter (e.g., a graduate of the associate’s degree program returns for a bachelor’s degree); and students participating in certain certificate programs of at least 18 credits with some course applicability into a related degree program.
(2) Represents new students and students who have been out of attendance for more than 12 months who enroll in a degree program and start a credit bearing course in the quarter; students who have previously graduated from a degree program and start a new degree program in the quarter; and students who commence participation in certain certificate programs of at least 18 credits with some course applicability into a related degree program.
(3) Represents the average of quarterly Degreed Enrollment from the beginning to the end of the respective periods.
University of Phoenix Average Degreed Enrollment decreased 13.8% in the six months ended February 28, 2015 compared to the prior year period due to the continued decline in New Degreed Enrollment and lower student retention. We believe the following factors, some of which are discussed in more detail in the Overview of this MD&A, contributed to the decrease:
1.
University of Phoenix enrollment continues to be adversely impacted by the rapidly evolving and highly competitive education industry.
2.
The University’s reduced advertising in the second quarter of fiscal year 2015 contributed to the 12.9% decline in New Degreed Enrollment for the quarter.
3.
The disruptions experienced by our students using the University’s new online classroom contributed to the decline in student retention we experienced during the six months ended February 28, 2015.
University of Phoenix’s operating income decreased $85.3 million and $175.3 million, or 98.4% and 64.9%, in the three and six months ended February 28, 2015, respectively, compared to the prior year periods. The University’s operating margins were 0.3% and 8.8% in the three and six months ended February 28, 2015, respectively, and its operating results were impacted by restructuring and impairment charges of $31.0 million and $41.2 million in the respective periods. The decreases in operating income were principally attributable to lower net revenue, which was partially offset by decreases in faculty and curriculum costs associated with lower enrollment, lower costs including rent and compensation attributable to our restructuring activities, and lower advertising costs.
Apollo Global
Apollo Global net revenue increased $12.5 million and $36.4 million, or 18.2% and 22.8%, during the three and six months ended February 28, 2015, respectively, compared to the prior year periods. The increases were primarily due to revenue from recent acquisitions and an increase in enrollment at other institutions. This was partially offset by a decrease associated with changes in foreign exchange rates.

37

Apollo Global’s operating losses decreased $12.5 million and $5.4 million, or 31.2% and 14.3% during the three and six months ended February 28, 2015, respectively, compared to the prior year periods. Apollo Global’s operating results include the following during the respective periods:
 
Three Months Ended
February 28,
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
 
2015
 
2014
Depreciation and amortization
$
9,678

 
$
9,007

 
$
20,149

 
$
15,366

Acquisition and other related costs
1,012

 
12,997

 
2,698

 
12,997

Restructuring and impairment charges
43

 
304

 
101

 
1,567

The decreased operating loss in the three and six months ended February 28, 2015 compared to the prior year periods was principally due to a reduction in acquisition and other related costs.
In addition to acquisition and other related costs, Apollo’s Global’s recent acquisitions have a negative near term impact due to intangibles amortization and integration related costs. Additionally, Open Colleges’ educational offerings generally extend beyond one year and the associated revenue is recognized over the contractual period that students are provided access to complete their program, or the time period it takes students to complete their program, as applicable. However, Open Colleges’ operating costs are period costs that are expensed as incurred and a substantial portion are incurred before, or soon after, the students begin their programs. Accordingly, as a result of Open Colleges’ enrollment growth, service model, and cost structure, Apollo Global’s operating results are negatively impacted in the near term. However, these factors do not have the same adverse impact on cash flows generated from Open Colleges. Additionally, Apollo Global’s deferred revenue has increased substantially following the Open Colleges’ acquisition, and we expect its deferred revenue to continue to increase. Apollo Global’s deferred revenue was approximately $177 million and $115 million as of February 28, 2015 and 2014, respectively.
Other
Other net revenue decreased $0.3 million and $1.4 million during the three and six months ended February 28, 2015, respectively, compared to the prior year periods. The decreases were principally attributable to lower enrollment at Western International University.
Operating losses during the three months ended February 28, 2015 decreased $8.0 million compared to the prior year. The decrease was principally attributable to the $9.0 million litigation charge in the second quarter of fiscal year 2014 discussed above.
Operating losses during the six months ended February 28, 2015 increased $4.8 million compared to the prior year. This was principally attributable to increased losses at Western International University and an increase in restructuring charges, which was partially offset by the litigation charge in the second quarter of fiscal year 2014 discussed above.
Liquidity, Capital Resources and Financial Position
We believe that our cash and cash equivalents and available liquidity will be adequate to satisfy our working capital and other liquidity requirements associated with our existing operations through at least the next 12 months. We believe that the most strategic uses of our cash resources include investments in initiatives to improve student outcomes, investments in opportunities for targeted growth through new education offerings or programs, expansion of our global operations through acquisitions or other initiatives, and share repurchases.
Although we currently have substantial available liquidity, our ability to access the credit markets and other sources of liquidity, including utilization of our Revolving Credit Facility described below, may be adversely affected if we experience regulatory compliance challenges, including, but not limited to, maintaining a U.S. Department of Education financial responsibility composite score of at least 1.5, reduced availability of Title IV program funding, or other adverse effects on our business from regulatory or legislative changes. Additionally, we believe that due to recent developments in the proprietary education sector, capital has become less accessible to, and more expensive for, proprietary education providers like us. For a detailed discussion of the regulatory environment and related risks, refer to Part I, Item 1A, Risk Factors, in our 2014 Annual Report on Form 10-K.

38

Cash and Cash Equivalents, Restricted Cash and Cash Equivalents and Marketable Securities
The substantial majority of our cash and cash equivalents, including restricted cash and cash equivalents, are held by our domestic operations and placed with high-credit-quality financial institutions. The following provides a summary of these financial instruments as of the respective periods:
 
 
 
 
 
 
 
% of Total Assets at
($ in thousands)
February 28,
2015
 
August 31,
2014
 
% Change
 
February 28,
2015
 
August 31,
2014
Cash and cash equivalents
$
566,078

 
$
1,228,813

 
(53.9
)%
 
23.5
%
 
39.7
%
Restricted cash and cash equivalents
224,987

 
224,135

 
0.4
 %
 
9.4
%
 
7.2
%
Marketable securities(1)
193,745

 
187,472

 
3.3
 %
 
8.1
%
 
6.1
%
Total
$
984,810

 
$
1,640,420

 
(40.0
)%
 
41.0
%
 
53.0
%
(1) Represents current marketable securities. We also have $75.1 million and $87.8 million of long-term marketable securities as of February 28, 2015 and August 31, 2014, respectively, which includes securities maturing in less than three years.
Cash and cash equivalents (excluding restricted cash) decreased $662.7 million primarily due to:
•
$595.4 million of payments on borrowings (net of proceeds from borrowings);
•
$43.3 million for capital expenditures;
•
$38.7 million for share repurchases;
•
$34.5 million paid for contingent consideration associated with our Open Colleges acquisition, which includes $21.4 million and $13.1 million in financing and operating activities, respectively; and
•
$21.2 million paid to acquire FAEL.
The above items were partially offset by $55.1 million of cash provided by operations, which was adversely impacted by a portion of the contingent consideration payment as discussed above.
We consider the unremitted earnings attributable to certain of our foreign subsidiaries to be permanently reinvested. As of February 28, 2015, the earnings from these operations were not significant.
As of February 28, 2015, we had $108.7 million of money market funds included in cash and restricted cash equivalents that we measure at fair value. Our remaining cash and cash equivalents included in the above table approximate fair value because of the short-term nature of the financial instruments.
Our current marketable securities, which principally include corporate bonds, tax-exempt municipal bonds, and time deposits, have original maturities to us greater than three months, and contractual maturities that will occur within one year. Our current marketable securities are classified as available-for-sale and are measured at fair value. We determine the fair value of these investments using a market approach with Level 2 observable inputs including quoted prices for similar assets in active markets, or quoted prices for identical or similar assets in markets that are not active. Refer to Note 5, Financial Instruments, in Item 1, Financial Statements.
Debt
In fiscal year 2012, we entered into a syndicated $625 million unsecured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility is used for general corporate purposes, which may include acquisitions and share repurchases. The term is five years and will expire in April 2017. The Revolving Credit Facility may be used for borrowings in certain foreign currencies and letters of credit, in each case up to specified sublimits.
We borrowed $585.0 million and had approximately $24 million of outstanding letters of credit under the Revolving Credit Facility as of August 31, 2014. We repaid the entire amount borrowed under the Revolving Credit Facility during the first quarter of fiscal year 2015. As of February 28, 2015, we have approximately $44 million of outstanding letters of credit under the Revolving Credit Facility.
The Revolving Credit Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Revolving Credit Facility fee ranges from 25 to 40 basis points. Incremental fees for borrowings under the facility generally range from LIBOR + 125 to 185 basis points. The weighted average interest rate on outstanding short-term borrowings under the Revolving Credit Facility at August 31, 2014 was 3.5%.
The Revolving Credit Facility contains various customary representations, covenants and other provisions, including a material adverse event clause and the following financial covenants: maximum leverage ratio, minimum interest and rent expense coverage ratio, and 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 February 28, 2015 and August 31, 2014.

39

Other debt principally includes debt at subsidiaries of Apollo Global and the present value of an obligation payable over a 10-year period associated with our purchase of technology in fiscal year 2012. The weighted average interest rate on our outstanding other debt at February 28, 2015 and August 31, 2014 was 5.6% and 5.8%, respectively.
The carrying value of our debt, excluding capital leases, approximates fair value based on the nature of our debt, which includes consideration of the portion that is variable-rate.
Cash Flows
Operating Activities
The following provides a summary of our operating cash flows during the respective periods:
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
Net (loss) income
$
(3,669
)
 
$
111,218

Non-cash items
138,696

 
118,498

Changes in assets and liabilities, excluding the impact of acquisitions and disposition
(79,914
)
 
(36,232
)
Net cash provided by operating activities
$
55,113

 
$
193,484

Six Months Ended February 28, 2015 - Our non-cash items primarily consisted of $71.2 million of depreciation and amortization, a $29.4 million provision for uncollectible accounts receivable, $21.9 million of share-based compensation, and $21.2 million for losses on asset dispositions and impairment charges. The changes in assets and liabilities primarily consisted of the following:
•
a $51.2 million use of cash related to the change in accounts receivable, excluding the provision for uncollectible accounts receivable;
•
a $42.3 million decrease in accrued and other liabilities principally attributable to the payment of accrued bonuses and the payment of the Open Colleges contingent consideration discussed above;
•
a $21.4 million increase in prepaid taxes primarily due to the timing and method of calculating our quarterly estimated income tax payments; and
•
a $15.9 million decrease in student deposits principally attributable to the timing of course starts at BPP.
The above changes were partially offset by a $47.8 million increase in deferred revenue principally attributable to the timing of course starts at BPP and increased enrollment at Open Colleges.
We monitor our accounts receivable through a variety of metrics, including days sales outstanding. We calculate our days sales outstanding by determining average daily student revenue based on a rolling twelve month analysis and divide it into the gross student accounts receivable balance as of the end of the period. As of February 28, 2015, excluding accounts receivable and the related net revenue for Apollo Global, our days sales outstanding was 22 days compared to 21 days as of August 31, 2014 and 19 days as of February 28, 2014.
Six Months Ended February 28, 2014 - Our non-cash items primarily consisted of $73.8 million of depreciation and amortization, a $25.5 million provision for uncollectible accounts receivable, and $22.5 million of share-based compensation. The changes in assets and liabilities primarily consisted of a $48.2 million decrease in accrued and other liabilities principally attributable to the timing of our payroll cycle and accrued bonus payments, and a $24.2 million increase in restricted cash and cash equivalents. This was partially offset by a $32.9 million increase in deferred revenue principally attributable to the timing of course starts at BPP, a $17.4 million increase in student deposits, and a $15.2 million decrease in prepaid income taxes.
Investing Activities
The following provides a summary of our investing cash flows during the respective periods:
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
Capital expenditures
$
(43,310
)
 
$
(58,119
)
Acquisitions, net of cash acquired
(21,166
)
 
(94,937
)
Maturities and sales (purchases) of marketable securities, net
4,107

 
(122,741
)
Other
467

 
3,446

Net cash used in investing activities
$
(59,902
)
 
$
(272,351
)

40

Cash paid for acquisitions during the first six months of fiscal year 2015 represents Apollo Global’s acquisition of FAEL, and the amount in the prior year represents Apollo Global’s acquisition of Open Colleges.
Financing Activities
The following provides a summary of our financing cash flows during the respective periods:
 
Six Months Ended
February 28,
($ in thousands)
2015
 
2014
Payments on borrowings, net
$
(595,410
)
 
$
(619,268
)
Share repurchases
(38,718
)
 
(72,237
)
Payment for contingent consideration
(21,371
)
 
—

Other
1,231

 
1,793

Net cash used in financing activities
$
(654,268
)
 
$
(689,712
)
Six Months Ended February 28, 2015 - Cash used in financing activities primarily consisted of the following:
•
$595.4 million used for payments on borrowings (net of proceeds from borrowings);
•
$38.7 million used for share repurchases, which excludes $1.6 million of shares repurchased during the second quarter of fiscal year 2015 that settled subsequent to February 28, 2015. Total share repurchases during the first six months of fiscal year 2015 consisted of $38.1 million used to repurchase 1.4 million shares at a weighted average purchase price of $26.45 per share, and additional repurchases related to tax withholding requirements on restricted stock units; and
•
$21.4 million representing the financing portion of our Open Colleges contingent consideration payment discussed above.
As of February 28, 2015, we had $52.2 million available under our share repurchase authorization. There is no expiration date on the repurchase authorization and the amount and timing of future share repurchase authorizations and repurchases, if any, will be made as market and business conditions warrant. Repurchases occur at our discretion and may be made on the open market through various methods including but not limited to accelerated share repurchase programs, or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules, and may include repurchases pursuant to Securities and Exchange Commission Rule 10b5-1 nondiscretionary trading programs.
Six Months Ended February 28, 2014 - Cash used in financing activities primarily consisted of $619.3 million used for payments on borrowings, and $72.2 million used for share repurchases. Share repurchases consisted of $69.7 million used to repurchase 2.3 million shares at a weighted average purchase price of $30.44 per share, and additional repurchases related to tax withholding requirements on the restricted stock units.
Contractual Obligations and Other Commercial Commitments
We had the following material changes in our contractual obligations and other commercial commitments during the six months ended February 28, 2015:
•
We repaid the entire amount borrowed on our Revolving Credit Facility of $585.0 million;
•
We paid $34.5 million of contingent consideration associated with our Open Colleges acquisition; and
•
In connection with our acquisition of FAEL in December 2014, we also have the option to buy the remaining noncontrolling interests, and the noncontrolling shareholders have the option to sell their shares to us, beginning in the third quarter of our fiscal year 2019, or earlier in limited circumstances. The prices for these options are based on a formula specified at the acquisition date and are principally based on a multiple of FAEL’s operating results as defined in the acquisition agreement. There is no minimum or maximum price for these options. Refer Note 4, Acquisitions, in Item 1, Financial Statements.
There have been no other material changes in our contractual obligations and other commercial commitments other than in the ordinary course of business since the end of fiscal year 2014 through February 28, 2015. Information regarding our contractual obligations and other commercial commitments is provided in our 2014 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes to our market risk since August 31, 2014. For a discussion of our exposure to market risk, refer to our 2014 Annual Report on Form 10-K.

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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We intend to maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our Chief Executive Officer (“Principal Executive Officer”) and our Senior Vice President and Chief Financial Officer (“Principal Financial Officer”), as appropriate, to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. Our Disclosure Committee meets on a quarterly basis and more often if necessary.
Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act), as of the end of the period covered by this report. Based on that evaluation, management concluded that, as of that date, our disclosure controls and procedures were effective at the reasonable assurance level.
Attached as exhibits to this Quarterly Report on Form 10-Q are certifications of our Principal Executive Officer and Principal Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act. This Disclosure Controls and Procedures section includes information concerning management’s evaluation of disclosure controls and procedures referred to in those certifications and, as such, should be read in conjunction with the certifications of our Principal Executive Officer and Principal Financial Officer.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the quarter ended February 28, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 15, Commitments and Contingencies, in Part I, Item 1, Financial Statements, for legal proceedings, which is incorporated into this Item 1 of Part II by this reference.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our 2014 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchase of Equity Securities
Our Board of Directors has authorized us to repurchase outstanding shares of our Class A common stock from time to time depending on market conditions and other considerations. During the fiscal year 2013, our Board of Directors authorized an increase in the amount available under our share repurchase program up to an aggregate amount of $250 million, of which $52.2 million remained available as of February 28, 2015. There is no expiration date on the repurchase authorizations and repurchases occur at our discretion.
During the three months ended February 28, 2015, we repurchased 0.8 million shares of our Class A common stock at a total cost of $20 million, representing a weighted average purchase price of $26.22 per share. The following details changes in our treasury stock during the three months ended February 28, 2015:
(In thousands, except per share data)
Total Number of
Shares
Repurchased
 
Average Price
Paid per Share
 
Total Number of
Shares Repurchased
as Part of Publicly
Announced Plans or
Programs
 
Maximum Value of Shares Available for Repurchase Under the Plans or Programs
Treasury stock as of November 30, 2014
80,113

 
$
49.27

 
80,113

 
$
72,224

New authorizations
—

 
—

 
—

 
—

Share repurchases
—

 
—

 
—

 
—

Share reissuances
(5
)
 
49.27

 
(5
)
 
—

Treasury stock as of December 31, 2014
80,108

 
$
49.27

 
80,108

 
$
72,224

New authorizations
—

 
—

 
—

 
—

Share repurchases
362

 
25.96

 
362

 
(9,389
)
Share reissuances
(40
)
 
49.17

 
(40
)
 
—

Treasury stock as of January 31, 2015
80,430

 
$
49.17

 
80,430

 
$
62,835

New authorizations
—

 
—

 
—

 
—

Share repurchases
401

 
26.46

 
401

 
(10,611
)
Share reissuances
(1
)
 
49.06

 
(1
)
 
—

Treasury stock as of February 28, 2015
80,830

 
$
49.06

 
80,830

 
$
52,224

Resales by Directors and Officers
From time to time, our directors and officers enter into written trading plans under Securities and Exchange Commission Rule 10b5-1(c) for the resale of shares of our common stock, including shares to be acquired upon the vesting of restricted stock units and performance share awards, and shares to be acquired pursuant to the exercise of stock options. These plans, which must be entered into during an open trading window and at a time when the director or officer is not in possession of material nonpublic information, provide for sales in accordance with a formula, algorithm or other instructions such that the seller cannot exercise any influence over how, when or whether to effect sales. After adopted, sales may occur in accordance with the plans regardless of whether or not the seller subsequently possesses material nonpublic information or otherwise would then be permitted to trade in our securities. Our insider trading policy permits the adoption of these types of trading plans, and we encourage our directors and officers to utilize such plans, where practical. We do not announce, via Form 8-K or otherwise, the adoption or any termination of such trading plans, if any. Sales under these plans generally must be reported within two business days on Form 4 filed with the SEC, pursuant to Section 16 of the Securities Exchange Act of 1934, as amended.
Sales of Unregistered Securities
We did not have any sales of unregistered equity securities during the three months ended February 28, 2015.

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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
 
Exhibit
Number
Exhibit Description
 
 
10.1
Apollo Education Group, Inc. Deferred Compensation Plan (effective February 1, 2012) (as amended and restated effective November 1, 2014)
 
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
101.INS
XBRL Instance Document
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


44

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


 
APOLLO EDUCATION GROUP, INC.
An Arizona Corporation
Date: March 25, 2015

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

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

45