
5.	GOODWILL AND INTANGIBLE ASSETS

In connection with the Transaction on June 1, 2006, the Company recorded approximately $2.6 billion of goodwill, which was allocated to its four reporting units: The Art Institutes, Argosy University, Brown Mackie Colleges and South University. The goodwill balance attributed to the Brown Mackie Colleges reporting unit was fully written off in connection with an impairment charge incurred during fiscal 2012. Including the effects of the immaterial errors that were corrected during the following periods, which are described below, a roll forward of the Company's consolidated goodwill balance from June 30, 2011 to June 30, 2014 is as follows (in thousands):



	The Art Institutes			Argosy University			Brown Mackie Colleges			South University			Total
Balance Sheet as of June 30, 2011:
Gross	$	1,984,688		$	219,350		$	254,561		$	123,400		$	2,581,999
Accumulated impairments	—			—			—			—			—
Goodwill	1,984,688			219,350			254,561			123,400			2,581,999

Statement of Operations for the Fiscal Year Ended June 30, 2012:
Impairment charge	(1,063,088		)	(139,361		)	(254,561		)	(76,962		)	(1,533,972		)

Balance Sheet as of June 30, 2012:
Gross	1,984,688			219,350			254,561			123,400			2,581,999
Accumulated impairments	(1,063,088		)	(139,361		)	(254,561		)	(76,962		)	(1,533,972		)
Goodwill	921,600			79,989			—			46,438			1,048,027

Statement of Operations for the Fiscal Year Ended June 30, 2013:
Impairment charge	(270,874		)	—			—			—			(270,874		)

Balance Sheet as of June 30, 2013:
Gross	1,984,688			219,350			254,561			123,400			2,581,999
Accumulated impairments	(1,333,962		)	(139,361		)	(254,561		)	(76,962		)	(1,804,846		)
Goodwill	650,726			79,989			—			46,438			777,153

Statement of Operations for the Fiscal Year Ended June 30, 2014:
Impairment charge	(433,747		)	—			—			—			(433,747		)

Balance Sheet as of June 30, 2014:
Gross	1,984,688			219,350			254,561			123,400			2,581,999
Accumulated impairments	(1,767,709		)	(139,361		)	(254,561		)	(76,962		)	(2,238,593		)
Goodwill	$	216,979		$	79,989		$	—		$	46,438		$	343,406

Correction of Immaterial Errors

During the quarter ended March 31, 2014, the Company identified errors in prior periods in the calculation of deferred taxes that is required in connection with the hypothetical purchase price allocation performed in the step two portion of the goodwill impairment test. The errors in calculating the deferred taxes affected the magnitude of the goodwill impairment charges previously recorded during the fiscal years ended June 30, 2013 and 2012, and as a result, the goodwill impairment charges in the fiscal years ended June 30, 2013 and 2012 were decreased by $23.6 million and $84.5 million, respectively, and decreased previously reported net losses by $23.6 million (net of tax) and $82.2 million (net of tax). In connection with these revisions, the Company's consolidated goodwill balance increased by $108.1 million at June 30, 2013. The impact of these errors was not material to any prior period; however, the aggregate pre-tax amount of the prior period errors of $108.1 million would have been material to the Company's consolidated statements of operations for the fiscal year ended June 30, 2014. Consequently, the Company has corrected the errors by revising the impacted prior period balances on the accompanying consolidated financial statements and related notes. These revisions do not impact EBITDA excluding certain expenses as presented in Note 17, "Segment Reporting" nor do they affect the Company’s past compliance with debt covenants.

The following table summarizes the previously reported and corrected amounts of the impacted balances presented in the accompanying consolidated financial statements (in thousands except per share data).



	As Previously Reported			Adjustments			As Adjusted
Statement of Operations and Comprehensive Loss for the Fiscal Year Ended June 30, 2012
Long-lived asset impairments	$	1,746,765		$	(84,477	)	$	1,662,288
Loss before interest, loss on debt refinancing and income taxes	(1,409,680		)	84,477			(1,325,203		)
Loss before taxes	(1,529,484		)	84,477			(1,445,007		)
Income tax benefit	(13,743		)	2,306			(11,437		)
Net loss	(1,515,741		)	82,171			(1,433,570		)
Basic & diluted loss per share	(11.97		)	0.65			(11.32		)
Comprehensive loss	(1,521,588		)	82,171			(1,439,417		)

Statement of Shareholders' Equity for the Fiscal Year Ended June 30, 2012
Accumulated deficit at June 30, 2012	(935,960		)	82,171			(853,789		)
Total shareholders' equity at June 30, 2012	496,564			82,171			578,735

Balance Sheet as of June 30, 2013
Goodwill	669,090			108,063			777,153
Total assets	2,315,293			108,063			2,423,356
Deferred income taxes liability	70,316			2,306			72,622
Accumulated deficit	(1,203,936		)	105,757			(1,098,179		)
Total shareholders' equity	250,099			105,757			355,856
Total liabilities and shareholders' equity	2,315,293			108,063			2,423,356

Statement of Operations and Comprehensive Loss for the Fiscal Year Ended June 30, 2013
Long-lived asset impairments	323,690			(23,586		)	300,104
Loss before interest, loss on debt refinancing and income taxes	(126,043		)	23,586			(102,457		)
Loss before taxes	(255,938		)	23,586			(232,352		)
Net loss	(267,976		)	23,586			(244,390		)
Basic & diluted loss per share	(2.15		)	0.19			(1.96		)
Comprehensive loss	(263,580		)	23,586			(239,994		)

Statement of Shareholders' Equity for the Fiscal Year Ended June 30, 2013
Accumulated deficit at June 30, 2013	(1,203,936		)	105,757			(1,098,179		)
Total shareholders' equity at June 30, 2013	250,099			105,757			355,856

Goodwill Impairment Charges

As previously disclosed, during the second quarter of fiscal 2014, the Company observed declining application trends for future academic terms, particularly at The Art Institutes reporting unit, and performed a sensitivity analysis of its fair value using the most recently completed long range forecast and available earnings multiples of the Company's peer group. This sensitivity analysis resulted in management concluding that none of its reporting units experienced a triggering event that would have required a step one interim goodwill impairment analysis at December 31, 2013. Additionally, The Art Institutes had positive year-over-year growth in new student enrollment during the second fiscal quarter.

During the quarter ended March 31, 2014, new students decreased approximately 16% at The Art Institutes compared to the prior year quarter. Due primarily to lower than anticipated application production for future periods at The Art Institutes together with a significant deterioration in the Company's market capitalization and credit rating downgrades during the third fiscal quarter resulted in management no longer believing that it was more-likely-than-not that the fair values of each of its reporting units exceeded their carrying values at March 31, 2014. As a result, management revised its long-term projections and performed a step one interim goodwill impairment test for each of its reporting units.

The results indicated that the Argosy University and South University reporting units had fair values in excess of their carrying values. However, the test indicated that the fair value of The Art Institutes fell below its carrying value as of March 31, 2014. Therefore, a step two test was required to be performed for The Art Institutes reporting unit, which yielded a goodwill impairment charge of $433.7 million in the quarter ended March 31, 2014. None of this charge was deductible for income tax purposes.

The step one interim impairment tests performed as of March 31, 2014 used cash flow projections and market data as of that date. The Company does not believe that cash flow projections or the earnings multiples of its publicly-traded peer companies changed materially between March 31, 2014 and the Company's annual assessment date, which is April 1, 2014. In addition, management considered the change in the Company's stock price between these dates and concluded that based on all the available evidence, the impairment test performed as of March 31, 2014 was appropriate to use as the Company's annual April 1, 2014 test.

During the quarter ended June 30, 2014, management made several decisions that materially affected the short-term projections at The Art Institutes and revised consolidated projections accordingly. In addition, the Company continued to experience significant deterioration in the market capitalization of its stock and declines in the fair values of its publicly-traded debt. These facts and circumstances, among others, resulted in the Company performing a step one interim goodwill impairment test for each of its reporting units at June 30, 2014, the results of which indicated that all reporting units had fair values in excess of their carrying values at June 30, 2014 by more than 25%.

At March 31 and June 30, 2014, the Company estimated the fair value of its reporting units in step one using a combination of the traditional discounted cash flow method (income approach) and the guideline public company method (market approach), which takes into account the relative price and associated earnings multiples of publicly-traded peer companies. Accordingly, these step one interim impairment tests used cash flow projections and market data as of March 31, 2014 and June 30, 2014.

The valuation of the Company's reporting units under the traditional discounted cash flow method requires the use of internal business plans that are based on judgments and estimates, which account for expected future economic conditions, demand and pricing for the Company's educational services, costs, inflation and discount rates, and other factors. The use of judgments and estimates involves inherent uncertainties. The Company's measurement of the fair values of its reporting units is dependent on the accuracy of the assumptions used and how the Company's estimates compare to future operating performance. The key assumptions used are, but not limited to, the following:

•

Future cash flow assumptions — The Company's projections are based on organic growth and are derived from historical experience and assumptions regarding future growth and profitability trends. These projections also take into account the current economic climate and the extent to which the regulatory environment is expected to impact future growth opportunities. The Company's analysis incorporated an assumed period of cash flows of ten years with a terminal value determined using the Gordon Growth Model.

•

Discount rate — The discount rate is based on each reporting unit’s estimated weighted average cost of capital ("WACC"). The three components of WACC are the cost of equity, cost of debt and capital structure, each of which requires judgment by management to estimate. The Company develops its cost of equity estimate using the Capital Asset Pricing Model based on perceived risks and predictability of each reporting unit’s future cash flows. The cost of debt component represents a market participant’s estimated cost of borrowing, which the Company estimates using the average return on corporate bonds as of the valuation date, adjusted for taxes. At March 31, 2014, the WACC used to estimate the fair value of The Art Institutes reporting unit was 15.0%, and the Argosy University and South University reporting units were valued using a WACC of 17.5%. At June 30, 2014, the WACC used to estimate the fair value of The Art Institutes reporting unit was 15.5%, and the Argosy University and South University reporting units were valued using a WACC of 18.0%. The increase in the WACC for all three reporting units from March 31, 2013 to June 30, 2014 was the result of an increase in the industry-specific beta component of the WACC.

Intangible Assets

Intangible assets other than goodwill consisted of the following amounts (in thousands):



	2014					2013
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Tradename-Art Institute	$	73,200	$	—		$	190,000	$	—
Licensing, accreditation and Title IV program participation	87,862		—			95,862		—
Curriculum and programs	21,420		(14,379		)	43,575		(32,596		)
Student contracts, applications and relationships	10,510		(9,492		)	39,511		(37,381		)
Favorable leases and other	6,057		(5,355		)	19,424		(17,960		)
Total intangible assets	$	199,049	$	(29,226	)	$	388,372	$	(87,937	)

During the fiscal year ended June 30, 2014, the Company disposed of approximately $69 million of intangible assets that no longer had a useful life. Because these assets were fully amortized, this write-off had no impact to the consolidated statement of operations.

Trade names are often considered to have useful lives similar to that of the overall business, which generally means such assets are assigned an indefinite life for accounting purposes. State licenses and accreditations of the Company’s schools as well as their eligibility for Title IV program participation are periodically renewed in cycles ranging from every year to up to every ten years depending upon government and accreditation regulations. Because the Company considers these renewal processes to be a routine aspect of the overall business, these assets are assigned indefinite lives. A roll forward of the Company's consolidated indefinite-lived intangible assets balances from June 30, 2011 to June 30, 2014 is as follows (in thousands):



	Tradename-Art Institute			Licensing, accreditation and Title IV program participation
Balance Sheet at June 30, 2011:
Gross	$	330,000		$	112,179
Accumulated impairments	—			—
Net balance	330,000			112,179

Statement of Operations for the Fiscal Year Ended June 30, 2012:
Impairment charge	(112,000		)	(16,317		)

Balance Sheet at June 30, 2012:
Gross	330,000			112,179
Accumulated impairments	(112,000		)	(16,317		)
Net balance	218,000			95,862

Statement of Operations for the Fiscal Year Ended June 30, 2013:
Impairment charge	(28,000		)	—

Balance Sheet at June 30, 2013:
Gross	330,000			112,179
Accumulated impairments	(140,000		)	(16,317		)
Net balance	190,000			95,862

Statement of Operations for the Fiscal Year Ended June 30, 2014:
Impairment charge	(116,800		)	(8,000		)

Balance Sheet at June 30, 2014:
Gross	330,000			112,179
Accumulated impairments	(256,800		)	(24,317		)
Net balance	$	73,200		$	87,862

Intangible Asset Impairments

In connection with the goodwill analyses performed as of March 31, 2014 and June 30, 2014 described above, the Company also performed impairment analyses with respect to indefinite-lived intangible assets at these dates. The fair value of The Art Institutes trade name was determined under the relief from royalty method (income approach), which is the same method the Company used to value this asset at the Transaction date. The relief from royalty method focuses on the level of royalty payments that the user of an intangible asset would have to pay a third party for the use of the asset if it were not owned by the user.

The Company recorded two impairments of The Art Institutes trade name totaling $116.8 million during the fiscal year ended June 30, 2014, utilizing the following key assumptions:


•	a 15.5% discount rate and 1.5% royalty rate at March 31, 2014; and


•	a 16.0% discount rate and a 1.0% royalty rate at June 30, 2014.

In the fiscal 2013 analysis, the Company used a royalty rate of 2.0%. The royalty rate decreased throughout the year due primarily to reductions in long term revenue forecasts at The Art Institutes compared to the prior year long range projections. The increase in the discount rate was consistent with the increase in the WACC used in the goodwill impairment analysis for The Art Institutes.

The Company also revalued the licensing, accreditation and Title IV program participation assets for all reporting units at March 31, 2014 and June 30, 2014 using the same approaches used to value these assets as of the date of the Transaction, which resulted in an $8.0 million impairment at The Art Institutes. A $16.3 million impairment of these assets was recorded during fiscal 2012, which consisted of $15.0 million at The Art Institutes and $1.3 million at Argosy University. These assets were valued by a combination of the cost and income approaches. The cost approach is used for the licensing and accreditation portions of this asset. Numerous factors are considered in order to estimate the Title IV portion of the asset, including the estimated amount of time it would take for an institution to qualify for Title IV funds as a new operation, the number of students currently receiving federal financial aid, the amount schools would have to lend students during the estimated time it would take to qualify for Title IV funds and the present value of projected cash flows.

During the fiscal year ended June 30, 2014, the Company recorded a $3.6 million charge in long-lived asset impairments in the consolidated statement of operations relating to definite-lived curriculum intangible assets at Argosy University as the estimated future cash flows could not support the carrying value of the asset. The charge was calculated using an income valuation approach.

Amortization of Intangible Assets

Amortization of intangible assets was $6.3 million, $6.8 million and $7.6 million during the fiscal years ended June 30, 2014, 2013 and 2012, respectively. Total estimated amortization of the Company’s intangible assets for each of the years ending June 30, 2015 through 2019 was as follows at June 30, 2014 (in thousands):



Fiscal years	Amortization Expense
2015	$	5,434
2016	2,936
2017	340
2018	51