Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended: November 30, 2016
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______ to ______

Commission File Number: 0-25232

APOLLO EDUCATION GROUP, INC.

(Exact name of registrant as specified in its charter)



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

4025 S. RIVERPOINT PARKWAY, PHOENIX, ARIZONA 85040

(Address of principal executive offices)

(480) 966-5394

(Registrant’s telephone number, including area code)




(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o (Do not check if smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

As of January 3, 2017, there were 109,386,376 shares of Apollo’s Class A common stock outstanding and 475,149 shares of Apollo’s Class B common stock outstanding.

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED NOVEMBER 30, 2016

TABLE OF CONTENTS



		Page
Note Regarding Forward-Looking Statements		3
Introductory Note Regarding Pending Merger		4

	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Comprehensive Loss	7
	Condensed Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interests	8
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49

	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	54

SIGNATURES		55

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Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and future results of Apollo Education Group, Inc. that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance or results. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “predict,” “target,” “potential,” “continue,” “objectives,” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. Such statements should be viewed with caution. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to:

•

Changes in regulation of the U.S. education industry and eligibility of proprietary schools to participate in U.S. federal student financial aid programs, including the factors discussed in Item 1, Business, of our Annual Report on Form 10-K for the year ended August 31, 2016 , under “Accreditation and Jurisdictional Authorizations,” “Financial Aid Programs” and “Regulatory Environment;”


•	The impact and effectiveness of the initiatives to transform University of Phoenix into a more focused, higher retaining and less complex institution, as discussed in Item 1, Business, of our Annual Report on Form 10-K for the year ended August 31, 2016 , under “University of Phoenix;”


•	Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended August 31, 2016 and Part II, Item 1A, Risk Factors, in this Form 10-Q; and


•	Those factors set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended August 31, 2016 and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-Q.

The cautionary statements referred to above also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements for any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

In this report, we refer to Apollo Education Group, Inc. as “the Company,” “Apollo Education Group,” “Apollo,” “APOL,” “we,” “us” or “our.”

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Introductory Note Regarding Pending Merger

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

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Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	As of
($ in thousands)	November 30, 2016			August 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	517,274		$	464,024
Restricted cash and cash equivalents	124,871			142,170
Marketable securities	117,392			197,886
Accounts receivable, net	246,306			224,990
Prepaid taxes	25,058			19,287
Other current assets	50,788			40,368
Total current assets	1,081,689			1,088,725
Marketable securities	6,893			18,758
Property and equipment, net	321,345			332,702
Goodwill	265,692			272,699
Intangible assets, net	179,417			191,146
Deferred taxes	68,703			78,366
Other assets	31,504			30,510
Total assets	$	1,955,243		$	2,012,906
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	23,530		$	55,609
Accounts payable	63,360			59,640
Student deposits	145,018			178,160
Current deferred revenue	234,794			188,092
Accrued and other current liabilities	214,404			233,976
Total current liabilities	681,106			715,477
Long-term debt	33,251			35,186
Deferred taxes	15,479			16,323
Other long-term liabilities	156,488			169,326
Total liabilities	886,324			936,312
Commitments and contingencies
Redeemable noncontrolling interests	5,767			5,860
Shareholders’ equity:
Preferred stock, no par value	—			—
Apollo Class A nonvoting common stock, no par value	103			103
Apollo Class B voting common stock, no par value	1			1
Additional paid-in capital	—			—
Apollo Class A treasury stock, at cost	(3,857,845		)	(3,868,341		)
Retained earnings	5,018,613			5,024,528
Accumulated other comprehensive loss	(97,933		)	(85,957		)
Total Apollo shareholders’ equity	1,062,939			1,070,334
Noncontrolling interests	213			400
Total equity	1,063,152			1,070,734
Total liabilities, redeemable noncontrolling interests and shareholders’ equity	$	1,955,243		$	2,012,906

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

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APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended November 30,
(In thousands, except per share data)	2016			2015
Net revenue	$	484,499		$	586,021
Costs and expenses:
Instructional and student advisory	248,753			291,327
Marketing	90,967			93,802
Admissions advisory	26,588			34,188
General and administrative	51,325			67,445
Depreciation and amortization	26,854			27,394
Provision for uncollectible accounts receivable	13,930			15,313
Restructuring and impairment charges	15,365			97,823
Merger, acquisition and other related costs, net	2,313			3,978
Total costs and expenses	476,095			631,270
Operating income (loss)	8,404			(45,249		)
Interest income	1,087			919
Interest expense	(1,425		)	(1,456		)
Other loss, net	(644		)	(843		)
Income (loss) from continuing operations before income taxes	7,422			(46,629		)
Provision for income taxes	(4,223		)	(12,239		)
Income (loss) from continuing operations	3,199			(58,868		)
Loss from discontinued operations, net of tax	—			(3,259		)
Net income (loss)	3,199			(62,127		)
Net loss attributable to noncontrolling interests	871			1,362
Net income (loss) attributable to Apollo	$	4,070		$	(60,765	)
Earnings income (loss) per share - Basic:
Continuing operations attributable to Apollo	$	0.04		$	(0.53	)
Discontinued operations attributable to Apollo	—			(0.03		)
Basic income (loss) per share attributable to Apollo	$	0.04		$	(0.56	)
Earnings income (loss) per share - Diluted:
Continuing operations attributable to Apollo	$	0.04		$	(0.53	)
Discontinued operations attributable to Apollo	—			(0.03		)
Diluted income (loss) per share attributable to Apollo	$	0.04		$	(0.56	)
Basic weighted average shares outstanding	109,724			108,446
Diluted weighted average shares outstanding	110,186			108,446

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

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APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)



	Three Months Ended November 30,
($ in thousands)	2016			2015
Net income (loss)	$	3,199		$	(62,127	)
Other comprehensive loss (net of tax):
Currency translation adjustment	(12,274		)	(3,564		)
Change in fair value of available-for-sale securities ⁽¹⁾	(55		)	(99		)
Comprehensive loss	(9,130		)	(65,790		)
Comprehensive loss attributable to noncontrolling interests	1,224			2,029
Comprehensive loss attributable to Apollo	$	(7,906	)	$	(63,761	)

⁽¹⁾ The tax effect during the three months ended November 30, 2016 and 2015 , respectively, was not significant.

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

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APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS

(Unaudited)



	Common Stock						Additional Paid-in Capital			Apollo Class A Treasury Stock					Retained Earnings			Accumulated Other Comprehensive Loss			Total Apollo Shareholders’ Equity			Noncontrolling Interests			Total Equity			Redeemable Noncontrolling Interests
	Class A Nonvoting			Class B Voting
	Shares	Stated Value		Shares	Stated Value
(In thousands)	Shares	Stated Value		Shares	Stated Value					Shares		Cost
Balance as of August 31, 2016	188,007	$	103	475	$	1	$	—		78,857		$	(3,868,341	)	$	5,024,528		$	(85,957	)	$	1,070,334		$	400		$	1,070,734		$	5,860
Share repurchases	—	—		—	—		—			115		(997		)	—			—			(997		)	—			(997		)	—
Share reissuances	—	—		—	—		(2,452		)	(329	)	11,493			(9,041		)	—			—			—			—			—
Net tax effect for stock incentive plans	—	—		—	—		(949		)	—		—			—			—			(949		)	—			(949		)	—
Share-based compensation	—	—		—	—		3,401			—		—			—			—			3,401			—			3,401			—
Currency translation adjustment	—	—		—	—		—			—		—			—			(11,921		)	(11,921		)	(200		)	(12,121		)	(153		)
Available-for-sale securities adjustment, net of tax	—	—		—	—		—			—		—			—			(55		)	(55		)	—			(55		)	—
Redemption value adjustments	—	—		—	—		—			—		—			(944		)	—			(944		)	—			(944		)	944
Net income (loss)	—	—		—	—		—			—		—			4,070			—			4,070			13			4,083			(884		)
Balance as of November 30, 2016	188,007	$	103	475	$	1	$	—		78,643		$	(3,857,845	)	$	5,018,613		$	(97,933	)	$	1,062,939		$	213		$	1,063,152		$	5,767

Balance as of August 31, 2015	188,007	$	103	475	$	1	$	—		80,082		$	(3,928,419	)	$	5,153,452		$	(80,579	)	$	1,144,558		$	500		$	1,145,058		$	11,915
Share repurchases	—	—		—	—		—			64		(517		)	—			—			(517		)	—			(517		)	—
Share reissuances	—	—		—	—		(6,050		)	(174	)	5,907			143			—			—			—			—			—
Net tax effect for stock incentive plans	—	—		—	—		(3,470		)	—		—			—			—			(3,470		)	—			(3,470		)	—
Share-based compensation	—	—		—	—		9,520			—		—			—			—			9,520			—			9,520			—
Currency translation adjustment	—	—		—	—		—			—		—			—			(2,897		)	(2,897		)	(25		)	(2,922		)	(642		)
Available-for-sale securities adjustment, net of tax	—	—		—	—		—			—		—			—			(99		)	(99		)	—			(99		)	—
Redemption value adjustments	—	—		—	—		—			—		—			165			—			165			—			165			(165		)
Net (loss) income	—	—		—	—		—			—		—			(60,765		)	—			(60,765		)	44			(60,721		)	(1,406		)
Balance as of November 30, 2015	188,007	$	103	475	$	1	$	—		79,972		$	(3,923,029	)	$	5,092,995		$	(83,575	)	$	1,086,495		$	519		$	1,087,014		$	9,702

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

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APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended November 30,
($ in thousands)	2016			2015
Operating activities:
Net income (loss)	$	3,199		$	(62,127	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Share-based compensation	3,401			9,520
Depreciation and amortization	26,854			27,394
Accelerated depreciation included in restructuring	1,728			2,953
Impairment charges and losses on asset dispositions	266			73,393
Non-cash foreign currency loss, net	483			352
Provision for uncollectible accounts receivable	13,930			15,313
Deferred income taxes	8,708			3
Changes in assets and liabilities:
Restricted cash and cash equivalents	16,673			(10,973		)
Accounts receivable	(39,851		)	(32,899		)
Prepaid taxes	(3,173		)	11,612
Other assets	(10,912		)	(9,915		)
Accounts payable	4,176			(14,690		)
Student deposits	(31,587		)	(4,880		)
Current deferred revenue	50,878			2,087
Accrued and other liabilities	(28,319		)	(26,010		)
Net cash provided by (used in) operating activities	16,454			(18,867		)
Investing activities:
Purchases of property and equipment	(20,872		)	(14,456		)
Purchases of marketable securities	(8,993		)	(109,715		)
Maturities of marketable securities	96,562			57,627
Sales of marketable securities	4,009			5,149
Other investing activities	152			(196		)
Net cash provided by (used in) investing activities	70,858			(61,591		)
Financing activities:
Payments on borrowings	(32,377		)	(3,448		)
Proceeds from borrowings	—			926
Share repurchases	(997		)	(517		)
Net cash used in financing activities	(33,374		)	(3,039		)
Effect of foreign exchange rates on cash and cash equivalents	(688		)	(442		)
Net increase (decrease) in cash and cash equivalents	53,250			(83,939		)
Cash and cash equivalents, beginning of period	464,024			503,705
Cash and cash equivalents, end of period	$	517,274		$	419,766
Supplemental disclosure of cash flow and non-cash information:
Cash paid for income taxes, net of refunds	$	—		$	—
Cash paid for interest	1,455			1,392
Restricted stock units vested and released	2,898			1,430
Credits received for tenant improvements	402			—

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

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APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



		Page
Note 1.	Nature of Operations and Significant Accounting Policies	11
Note 2.	Restructuring and Impairment Charges	14
Note 3.	Financial Instruments	16
Note 4.	Accounts Receivable, Net	17
Note 5.	Goodwill and Intangibles	17
Note 6.	Fair Value Measurements	17
Note 7.	Accrued and Other Liabilities	18
Note 8.	Debt	19
Note 9.	Income Taxes	20
Note 10.	Shareholders’ Equity	20
Note 11.	Earnings Per Share	21
Note 12.	Share-Based Compensation	21
Note 13.	Commitments and Contingencies	22
Note 14.	Regulatory Matters	26
Note 15.	Segment Reporting	31

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APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 . Nature of Operations and Significant Accounting Policies

Description of Business

Apollo Education Group, Inc. is a private education provider serving students since 1973. We offer undergraduate, graduate, certificate and nondegree educational programs and services, online and on-campus, principally to working adults in the U.S. and abroad . Refer to Note 15 , Segment Reporting , for further information regarding our institutions and operating segments. Our fiscal year is from September 1 to August 31.

Pending Merger

Consummation of the Merger is subject to customary and other conditions, including:


(i)	the absence of certain conditions or restrictions in the response of the U.S. Department of Education to the pre-acquisition review application filed by University of Phoenix; and


(ii)	the receipt of consents or approvals from other federal, state and foreign educational governing bodies, including the Higher Learning Commission (“HLC”).

On December 7, 2016, the Department of Education provided its response to the preacquisition review application filed by University of Phoenix and Western International University, which specified certain conditions to the continuing participation of these institutions in Title IV programs after the Merger. These conditions were subsequently modified in certain respects in a supplemental response dated December 20, 2016. We have been informed by Queso that it has accepted the mandatory requirements stipulated in the Department’s initial response, as subsequently modified in its supplemental response.

HLC previously informed us that the HLC Board of Trustees had voted to defer action on the change of control applications filed in connection with the proposed Merger until such time as the Department of Education provided us and HLC with a written response to the preacquisition review applications filed by University of Phoenix and Western International University, and a substantive response to any requirements has been filed. We have submitted to HLC all of the requested information, including Queso’s written acceptance of the Department’s response, as supplemented, to the preacquisition review applications, and we anticipate that HLC will take action on our change of control applications in due course. However, we cannot predict or control the timing or outcome of HLC’s review of our applications.

In addition, consummation of the Merger is subject to our satisfying certain minimum operating metrics, measured as of the first or second month end preceding the closing date, depending on the day of the month on which closing occurs, as follows:


(i)	Our aggregate cash, cash equivalents and marketable securities must not be less than the specified amount for the applicable month end;


(ii)	University of Phoenix fiscal year-to-date new degreed enrollments as of the applicable month end must not have declined by more than certain levels (which are derived from the projections we prepared in December 2015 in connection with the Merger, which we refer to as the December 2015 forecast);


(iii)	University of Phoenix trailing twelve month net revenue as of the applicable month end shall not have declined by more than certain levels (which are derived from the December 2015 forecast); and


(iv)	Our consolidated trailing twelve month adjusted earnings before interest, taxes, depreciation and amortization as of the applicable month end shall not have declined by more than certain levels (which are derived from the December 2015 forecast).

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APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Basis of Presentation

These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in our opinion, reflect all adjustments of a normal, recurring nature that are necessary for the fair presentation of our financial condition, results of operations and cash flows for the periods presented. These unaudited interim condensed consolidated financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements. Therefore, this information should be read in conjunction with the audited consolidated financial statements and related notes included in our 2016 Annual Report on Form 10-K as filed with the SEC on October 20, 2016. We consistently applied the accounting policies described in the notes to consolidated financial statements included in our 2016 Annual Report on Form 10-K in preparing these unaudited interim condensed consolidated financial statements.

Use of Estimates

The preparation of these financial statements in accordance with GAAP requires management to make certain estimates, assumptions and judgments that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Although we believe our estimates, assumptions and judgments are reasonable, actual results may differ from our estimates under different assumptions, judgments or conditions.

Principles of Consolidation

These financial statements include the assets, liabilities, revenues and expenses of Apollo Education Group, Inc., our wholly-owned subsidiaries, and other subsidiaries that we control. We eliminate intercompany transactions and balances in consolidation.

Seasonality

Our operations are generally subject to seasonal trends, which vary depending on the subsidiary. We have historically experienced, and expect to continue to experience, fluctuations in our results of operations as a result of seasonal variations in the level of our institutions’ enrollments including, but not limited to, the following:


•	University of Phoenix - University of Phoenix generally has lower net revenue in our second fiscal quarter (December through February) compared to other quarters due to holiday breaks.

•

Apollo Global - Our Apollo Global subsidiaries experience seasonality associated with the timing of when courses begin, exam dates, the timing of their respective holidays and other factors. These factors have historically resulted in lower net revenue in our second and fourth fiscal quarters, particularly for BPP, which also results in substantially lower operating results during these quarters due to BPP’s relatively fixed cost structure.

Because of the seasonal nature of our business and other factors, the results of operations for the three months ended November 30, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending August 31, 2017.

Reclassifications

We reclassified prior periods for the following to conform to our current presentation:

•

During the second quarter of fiscal year 2016, we began presenting expenses incurred associated with our pending Merger discussed above in Merger, acquisition and other related costs, net on our Condensed Consolidated Statements of Operations. The associated costs incurred in the first quarter of fiscal year 2016 were included in General and administrative and we have reclassified such costs for the three months ended November 30, 2015 to conform with our current presentation.


•	We began separately presenting maturities and sales of our marketable securities, which have all been designated as available-for-sale, on our Condensed Consolidated Statements of Cash Flows. This reclassification did not impact total cash flows from investing activities.

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APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

New Accounting Standards

Future Accounting Standards

Definition of a Business

In January 2017, the Financial Accounting Standards Board (“FASB”) issued a new standard that clarifies the definition of a business. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Accordingly, the standard is effective for us on September 1, 2018. Early adoption is permitted and the standard is to be applied on a prospective basis to purchases or disposals of a business or an asset. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

Statement of Cash Flows

In August 2016, the FASB issued a new standard that clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. Accordingly, the new standard is effective for us on September 1, 2018 using a retrospective approach. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

Further, in November 2016, the FASB issued a new standard that requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement cash flows. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. Accordingly, the new standard is effective for us on September 1, 2018 using a retrospective approach. Based on the substantial restricted cash balances on our consolidated balance sheets, we expect this standard to have a significant impact on the presentation of our consolidated statements of cash flows.

Financial Instruments - Credit Losses

In June 2016, the FASB issued a new standard that changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. Accordingly, the standard is effective for us on September 1, 2020 using a modified retrospective approach. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

Share-Based Payment Accounting

In March 2016, the FASB issued a new standard that is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The new standard is effective for us on September 1, 2017 and we do not plan to early adopt the new standard. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

Leases

In February 2016, the FASB issued a new standard that requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Accordingly, the standard is effective for us on September 1, 2019 using a modified retrospective approach. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

Financial Instruments - Recognition, Measurement, Presentation, and Disclosure

In January 2016, the FASB issued a new standard that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard is effective for us on September 1, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

Revenue from Contracts with Customers

In May 2014, the FASB issued a comprehensive new revenue recognition standard that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued several amendments which clarify certain

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provisions in the standard. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. Accordingly, the new revenue recognition standard is effective for us on September 1, 2018 using either a full retrospective or a modified retrospective approach. We are currently evaluating which transition approach to use and the impact that the new revenue recognition standard will have on our consolidated financial statements.

Note 2 . Restructuring and Impairment Charges

Restructuring and impairment charges include the following for the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016		2015
Restructuring charges	$	15,365	$	24,430
Goodwill impairments ⁽¹⁾	—		73,393
Restructuring and impairment charges	$	15,365	$	97,823

⁽¹⁾ The goodwill impairment charges represent $71.8 million and $1.6 million for our University of Phoenix and Western International University reporting units, respectively.

Restructuring Charges

We have implemented various restructuring activities during prior fiscal years and remain focused on reengineering our business processes and educational delivery systems to improve efficiency and reduce costs to align with our declining enrollment and revenue. The activities initiated in prior years and those initiated in fiscal year 2017 are described below. Additionally, we intend to further reduce costs in future periods to align with our declining enrollment and revenue, and expect to incur material charges associated with other future restructuring activities.

The following summarizes the restructuring charges in our segment reporting format for the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016		2015
University of Phoenix	$	5,805	$	19,090
Apollo Global	1,417		404
Other	8,143		4,936
Restructuring charges	$	15,365	$	24,430

The following details the changes in our restructuring liabilities during the three months ended November 30, 2016 :



	Lease and Related Costs, Net					Severance and Other Employee Separation Costs						Other Restructuring Related Costs					Total
($ in thousands)	2017 Restructuring		Prior Year Restructuring ⁽¹⁾			2017 Restructuring			Prior Year Restructuring ⁽¹⁾			2017 Restructuring		Prior Year Restructuring ⁽¹⁾			Total
August 31, 2016	$	—	$	64,659		$	—		$	3,834		$	—	$	111		$	68,604
Expense	—		9,423			3,893			431			—		1,618			15,365
Other	—		1,486			—			—			—		(1,338		)	148
Payments	—		(10,378		)	(2,854		)	(2,596		)	—		(253		)	(16,081		)
November 30, 2016 ⁽²⁾	$	—	$	65,190		$	1,039		$	1,669		$	—	$	138		$	68,036

⁽¹⁾ We have incurred $478 million of cumulative costs associated with restructuring activities initiated prior to fiscal year 2017, which include lease exit, employee separation, and other related costs of $306 million , $116 million and $56 million , respectively. These cumulative costs have been reflected in our segment reporting as follows: $347 million in University of Phoenix, $17 million in Apollo Global, and $114 million in Other.

⁽²⁾ The gross, undiscounted obligation associated with our restructuring liabilities as of November 30, 2016 was approximately $129 million , which principally represents costs for non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.

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Activities Initiated in Prior Years

Our restructuring activities initiated prior to fiscal year 2017 principally included closing approximately 150 University of Phoenix ground locations, rationalizing our leased administrative office facilities, and workforce reductions. During the three months ended November 30, 2016 , we incurred $11.5 million of expense for these prior year activities. The majority of the expense represents initial charges for the estimated fair value of future contractual operating lease obligations which are recorded when we cease using the respective facility, and an increase in our estimated future cash payments associated with exiting additional space at other locations included in the rationalization plan. We measure lease obligations at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The significant unobservable inputs principally include estimated future cash flows and discount rates which have ranged between 3% - 7% for our lease obligations. The estimation of future cash flows includes non-cancelable contractual lease costs over the remaining terms of the leases, partially offset by estimated future sublease rental income, which involves significant judgment. Our estimate of the amount and timing of sublease rental income considers subleases that we have executed or expect to execute, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the facilities. The estimates are subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements.

As of November 30, 2016 , we had approximately $35 million of remaining lease obligations associated with the locations that we expect to close as University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations. We will incur lease obligation charges for these locations when we cease using the respective facilities. We will also continue to incur interest accretion, and may record additional adjustments in future periods for the estimated obligations associated with facilities we have already exited.

Activities Initiated in Fiscal Year 2017

During the three months ended November 30, 2016 , we incurred $3.9 million of expense for new restructuring activities initiated during fiscal year 2017, which represented severance and other employee separation costs associated with the elimination of approximately 150 positions. The expense associated with these activities for the three months ended November 30, 2016 is reflected in our segment reporting as follows: $2.4 million in University of Phoenix, $1.4 million in Apollo Global and $0.1 million in Other.

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Note 3 . Financial Instruments

We invest our excess cash in a variety of marketable securities, which are all classified as available-for-sale. The following summarizes our cash and cash equivalents, restricted cash and cash equivalents and marketable securities by financial instrument category as of the respective period ends:



	November 30, 2016
($ in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents ⁽¹⁾		Current Marketable Securities		Noncurrent Marketable Securities
Cash	$	470,237	$	—	$	—		$	470,237	$	470,237	$	—	$	—
Level 1:
Money market funds	137,424		—		—			137,424		137,424		—		—
Level 2:
Corporate bonds	38,588		15		(61		)	38,542		—		33,382		5,160
Tax-exempt municipal bonds	56,955		3		(63		)	56,895		7,494		47,668		1,733
Other	63,330		12		(10		)	63,332		26,990		36,342		—
Total	$	766,534	$	30	$	(134	)	$	766,430	$	642,145	$	117,392	$	6,893



	August 31, 2016
($ in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents ⁽¹⁾		Current Marketable Securities		Noncurrent Marketable Securities
Cash	$	527,662	$	—	$	—		$	527,662	$	527,662	$	—	$	—
Level 1:
Money market funds	66,265		—		—			66,265		66,265		—		—
Level 2:
Corporate bonds	91,426		33		(56		)	91,403		—		79,055		12,348
Tax-exempt municipal bonds	75,696		26		(13		)	75,709		100		70,697		4,912
Other	61,801		12		(14		)	61,799		12,167		48,134		1,498
Total	$	822,850	$	71	$	(83	)	$	822,838	$	606,194	$	197,886	$	18,758

⁽¹⁾ Cash and cash equivalents includes restricted cash and cash equivalents.

We measure our financial instruments at fair value on a recurring basis as follows:


•	Money market funds - We use Level 1 inputs that primarily consist of real-time quotes for transactions in active exchange markets involving identical assets.


•	Other financial instruments - We use a market approach with Level 2 observable inputs for all other securities. The Level 2 inputs include quoted prices for similar assets in active markets, or quoted prices for identical or similar assets in markets that are not active.

Our marketable securities have maturities that occur within two years . We may sell certain of our marketable securities prior to their stated maturities for strategic reasons including, but not limited to, investment yield and credit risk management. We have not recognized significant gains or losses related to such sales.

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Note 4 . Accounts Receivable, Net

Accounts receivable, net consist of the following as of the respective period ends:



($ in thousands)	November 30, 2016			August 31, 2016
Student accounts receivable	$	278,955		$	258,397
Allowance for doubtful accounts	(44,279		)	(48,650		)
Net student accounts receivable	234,676			209,747
Other receivables	11,630			15,243
Total accounts receivable, net	$	246,306		$	224,990

Student accounts receivable is composed primarily of amounts due related to tuition and educational services. The following summarizes the activity in allowance for doubtful accounts for the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016			2015
Beginning allowance for doubtful accounts	$	48,650		$	42,259
Provision for uncollectible accounts receivable	13,930			15,313
Write-offs, net of recoveries	(17,662		)	(9,491		)
Currency translation adjustment	(639		)	(43		)
Ending allowance for doubtful accounts	$	44,279		$	48,038

Note 5 . Goodwill and Intangibles

The following details changes in our goodwill by reportable segment during the three months ended November 30, 2016 :



($ in thousands)	University of Phoenix		Apollo Global			Other		Total
Goodwill as of August 31, 2016	$	—	$	241,501		$	31,198	$	272,699
Currency translation adjustment	—		(7,007		)	—		(7,007		)
Goodwill as of November 30, 2016	$	—	$	234,494		$	31,198	$	265,692

As of November 30, 2016 , we had $35.9 million and $143.5 million of finite and indefinite-lived intangibles, respectively. The estimated future amortization expense of our finite-lived intangibles as of November 30, 2016 is as follows:



($ in thousands)	Remainder of 2017		2018		2019		2020		2021		2022		Thereafter		Total
Estimated future amortization expense ⁽¹⁾	$	10,388	$	10,243	$	4,975	$	3,054	$	2,176	$	1,871	$	3,160	$	35,867

⁽¹⁾ Estimated future amortization expense may vary as acquisitions and dispositions occur in the future and as a result of foreign currency translation adjustments.

Note 6 . Fair Value Measurements

We measure and disclose certain financial instruments at fair value as described in Note 3 , Financial Instruments . Liabilities measured at fair value on a recurring basis consist of the following as of the respective period ends:



			Fair Value Measurements at Reporting Dates Using
	Fair Value as of Respective Reporting Dates		Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
($ in thousands)	Fair Value as of Respective Reporting Dates				Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Contingent consideration as of November 30, 2016	$	11,574	$	—	$	—	$	11,574
Contingent consideration as of August 31, 2016	$	11,851	$	—	$	—	$	11,851

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The following summarizes the changes in liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016			2015
Beginning balance	$	11,851		$	7,499
Change in fair value included in net income (loss)	337			43
Currency translation adjustment	(614		)	—
Ending balance	$	11,574		$	7,542

Our contingent consideration liabilities are valued using discounted cash flow valuation methods encompassing significant unobservable inputs. The inputs include estimated operating results scenarios for the applicable performance periods, probability weightings assigned to operating results scenarios and the discount rates applied.

As of November 30, 2016 , we have contingent consideration related to our acquisition of Career Partner during fiscal year 2016 that is principally based on Career Partner’s operating results for calendar year 2016. As of November 30, 2016 , the estimated fair value for this contingent consideration was $11.6 million and the associated liability is included in Accrued and other current liabilities on our Condensed Consolidated Balance Sheets. We did not change our valuation techniques associated with recurring fair value measurements from prior periods.

Liabilities measured at fair value on a nonrecurring basis during the three months ended November 30, 2016 are included in other liabilities on our Condensed Consolidated Balance Sheets and consist of the following:



			Fair Value Measurements at Measurement Date Using
($ in thousands)	Fair Value at Measurement Date		Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Losses for Three Months Ended November 30, 2016
Restructuring obligations	$	8,028	$	—	$	—	$	8,028	$	8,028

During the three months ended November 30, 2016 , we recorded $8.0 million of aggregate initial lease obligations at fair value associated with our restructuring activities. We recorded obligation liabilities on the dates we ceased using the respective facilities, and we measured the liabilities at fair value using Level 3 inputs included in the valuation method. Refer to Note 2 , Restructuring and Impairment Charges .

Note 7 . Accrued and Other Liabilities

Accrued and other current liabilities consist of the following as of the respective period ends:



($ in thousands)	November 30, 2016		August 31, 2016
Salaries, wages and benefits	$	48,113	$	55,309
Restructuring obligations	33,643		32,220
Student discounts, grants and scholarships	32,607		35,981
Legal and other professional obligations	16,487		22,234
Contingent consideration	11,574		11,851
Curriculum materials	9,987		10,995
Deferred rent and other lease liabilities	9,923		9,627
Advertising	9,467		12,430
Other	42,603		43,329
Total accrued and other current liabilities	$	214,404	$	233,976

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Other long-term liabilities consist of the following as of the respective period ends:



($ in thousands)	November 30, 2016		August 31, 2016
Deferred rent and other lease liabilities	$	41,995	$	44,405
Restructuring obligations	34,393		36,384
Noncurrent deferred revenue	28,808		31,169
Deferred gains on sale-leasebacks	18,320		18,663
Other	32,972		38,705
Total other long-term liabilities	$	156,488	$	169,326

Note 8 . Debt

Debt and short-term borrowings consist of the following as of the respective period ends:



($ in thousands)	November 30, 2016			August 31, 2016
Revolving Credit Facility	$	—		$	30,000
Capital lease obligations	25,565			28,489
Other	31,216			32,306
Total debt	56,781			90,795
Less short-term borrowings and current portion of long-term debt	(23,530		)	(55,609		)
Long-term debt	$	33,251		$	35,186

In fiscal year 2012, we entered into a syndicated $625 million unsecured revolving credit facility (the “Revolving Credit Facility”), which expires in April 2017. The Revolving Credit Facility is used for general corporate purposes, which may include acquisitions and share repurchases, and may also be used for borrowings in certain foreign currencies and letters of credit, in each case up to specified sublimits.

As of August 31, 2016 , we had $30 million of outstanding borrowings under the Revolving Credit Facility and approximately $29 million of outstanding letters of credit. We repaid the entire amount borrowed under the Revolving Credit Facility as of August 31, 2016 during the first quarter of fiscal year 2017. As of November 30, 2016 , we had no outstanding borrowings under the Revolving Credit Facility and approximately $28 million of outstanding letters of credit.

The Revolving Credit Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Revolving Credit Facility fee ranges from 25 to 40 basis points. Incremental fees for borrowings under the facility generally range from Prime + 25 to 85 basis points. The weighted average interest rate on our outstanding short-term borrowings under the Revolving Credit Facility at August 31, 2016 was 3.8% .

The Revolving Credit Facility contains various customary representations, covenants and other provisions, including a material adverse event clause and the following financial covenants: maximum leverage ratio, minimum interest and rent expense coverage ratio, and U.S. Department of Education financial responsibility composite score requirements. We were in compliance with all applicable covenants related to the Revolving Credit Facility at November 30, 2016 and August 31, 2016 .

Other debt principally includes debt at subsidiaries of Apollo Global and other obligations. The weighted average interest rate on our outstanding other debt at November 30, 2016 and August 31, 2016 was 6.3% and 6.0% , respectively.

The carrying value of our debt, excluding capital leases, approximates fair value based on the nature of our debt, which includes consideration of the portion that is variable-rate.

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Note 9 . Income Taxes

We have historically determined our interim income tax provision by applying our estimated effective income tax rate expected to be applicable for the full fiscal year to our income before income taxes for the period. Our effective income tax rate is dependent upon several factors, such as tax rates in state and foreign jurisdictions and the relative amount of income we earn in such jurisdictions. In determining our full year estimate, we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes. We exercise significant judgment in determining our income tax provision due to transactions, credits and calculations where the ultimate tax determination is uncertain.

Beginning in the first quarter of fiscal year 2016, we used the discrete method to calculate our interim tax provision based primarily on the significant uncertainty associated with our future operating results and the associated impact on our estimated year-to-date income tax expense. Under the discrete method, we determine our tax expense for interim periods based on actual results as if the interim period were an annual period. We have continued using the discrete method for interim periods through the first quarter of fiscal year 2017 as we believe the method provides a more reasonable interim income tax provision as compared to the estimated annual effective tax rate method.

During fiscal year 2015, the Internal Revenue Service (“IRS”) completed its review of our U.S. federal income tax return for fiscal year 2014. Our U.S. federal income tax return for fiscal year 2013 is currently open for review by the IRS and we are also participating in the IRS’s Compliance Assurance Process for fiscal years 2015, 2016 and 2017 which is a voluntary program in which taxpayers seek to resolve all or most issues with the IRS prior to or soon after filing their U.S. federal income tax returns. Additionally, we are subject to numerous ongoing audits by state, local and foreign tax authorities with various tax years as early as 2007 that remain subject to examination.

Although we believe our tax accruals are reasonable, the final determination of tax returns under review or returns that may be reviewed in the future and any related litigation could result in tax liabilities that materially differ from our historical income tax provisions and accruals.

Note 10 . Shareholders’ Equity

Share Repurchases

Our Board of Directors has authorized us to repurchase outstanding shares of our Class A common stock from time to time depending on market conditions and other considerations. During fiscal year 2013, our Board of Directors authorized an increase in the amount available under our share repurchase program up to an aggregate amount of $250 million , of which $52.2 million remained available as of November 30, 2016 . There is no expiration date on the repurchase authorizations and the amount and timing of future share repurchase authorizations and repurchases, if any, will be made as market and business conditions warrant. Repurchases occur at our discretion and may be made on the open market through various methods including but not limited to accelerated share repurchase programs, or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules, and may include repurchases pursuant to Securities and Exchange Commission Rule 10b5-1 nondiscretionary trading programs. We are prohibited from repurchasing shares under the agreements associated with our pending Merger, as described further in Note 1 , Nature of Operations and Significant Accounting Policies . We did not repurchase any shares under the repurchase program during the three months ended November 30, 2016 and 2015 .

We also repurchase shares in connection with tax withholding requirements associated with the release of vested share-based awards, which do not fall under the repurchase program described above. The following summarizes our share repurchase activity for the respective periods:



	Three Months Ended November 30,
(In thousands, except per share data)	2016		2015
Number of shares repurchased	115		64
Cost of share repurchases	$	997	$	517

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Share Reissuances

We reissue our Class A common stock from our treasury stock as a result of the release of shares associated with share-based awards and purchases under our employee stock purchase plan. Share reissuances were as follows for the respective periods:



	Three Months Ended November 30,
(In thousands)	2016	2015
Number of shares reissued	329	174

Note 11 . Earnings Per Share

Our outstanding shares consist of Apollo Class A and Class B common stock. Our Articles of Incorporation treat the declaration of dividends on the Class A and Class B common stock in an identical manner. As such, both the Class A and Class B common stock are included in the calculation of our earnings per share.

Diluted weighted average shares outstanding includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting and release of restricted stock units and performance share awards. The components of basic and diluted earnings per share are as follows:



	Three Months Ended November 30,
(In thousands, except per share data)	2016		2015
Numerator:
Net income (loss) attributable to Apollo (basic and diluted)	$	4,070	$	(60,765	)
Denominator:
Basic weighted average shares outstanding	109,724		108,446
Dilutive effect of restricted stock units and performance share awards ⁽¹⁾	462		—
Dilutive effect of stock options ⁽¹⁾	—		—
Diluted weighted average shares outstanding	110,186		108,446
Basic income (loss) per share attributable to Apollo	$	0.04	$	(0.56	)
Diluted income (loss) per share attributable to Apollo	$	0.04	$	(0.56	)

Anti-dilutive securities excluded from diluted income (loss) per share:
Anti-dilutive restricted stock units and performance share awards ⁽¹⁾	1,962		4,385
Anti-dilutive stock options ⁽¹⁾	3,055		3,716

⁽¹⁾ Due to the loss from continuing operations attributable to Apollo during the three months ended November 30, 2015, no dilutive share-based awards were included in the calculation of diluted loss per share because they would have been anti-dilutive.

Note 12 . Share-Based Compensation

The following details share-based compensation expense for the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016		2015
Instructional and student advisory	$	1,007	$	2,784
Marketing	214		764
Admissions advisory	34		165
General and administrative	2,146		5,754
Restructuring and impairment charges	—		53
Share-based compensation expense	$	3,401	$	9,520

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

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(Unaudited)

performance share awards or stock options during the three months ended November 30, 2016 . As of November 30, 2016 , we had $21.7 million of unrecognized share-based compensation expense, net of estimated forfeitures, related to unvested share-based options and awards. This expense is expected to be recognized over a weighted average period of 2.0 years .

Note 13 . Commitments and Contingencies

Surety Bonds

Our insurers issue surety bonds for us that are required by various states where we operate, or that are required for other purposes. We are obligated to reimburse our insurers for any surety bonds that are paid. As of November 30, 2016 , the face amount of these surety bonds was approximately $21 million .

Letters of Credit

As of November 30, 2016 , we had approximately $28 million of outstanding letters of credit, which support certain of our obligations and guarantees provided by our subsidiaries as part of our normal operations for which fair value is not material.

Litigation and Other Matters

We are subject to various claims and contingencies that arise from time to time in the ordinary course of business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. We do not believe any of these are material for separate disclosure.

The following is a description of pending litigation, settlements, and other proceedings that fall outside the scope of ordinary and routine litigation incidental to our business.

Merger-Related Shareholder Suits

In connection with the pending Merger described in Note 1 , Nature of Operations and Significant Accounting Policies , the class action lawsuits listed below have been filed in the Superior Court of the State of Arizona, Maricopa County against some or all of the following parties: us, our directors, the Apollo Class B Voting Stock Trust No. 1, AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., and Barclays Capital Inc. and Evercore Group L.L.C. (in their capacity as our financial advisors in connection with the Merger):


•	Casey v. Apollo Education Group, Inc., et al. , Case No. CV2016-051605 filed on February 25, 2016;


•	Miglio v. Apollo Education Group, Inc. , et al. , Case No. CV2016-003718 filed on February 26, 2016;


•	Blanchfield v. Apollo Education Group, Inc. , et al ., Case No. CV2016-001738 filed on February 29, 2016;


•	Wagner v. Apollo Education Group, Inc. , et al. , Case No. CV2016-001905 filed on March 9, 2016;


•	Ladouceur v. Apollo Education Group, Inc. , et al. , Case No. CV2016-002148 filed on March 17, 2016; and


•	Simkhovich v. Apollo Education Group, Inc. , et al. , Case No. CV2016-002339 filed on March 23, 2016.

The complaints generally allege that our directors have violated their fiduciary duties by, among other things, failing to properly value us and failing to maximize our value to our shareholders as well as by including purportedly preclusive deal protections in the Merger Agreement, and that we, AP VIII Queso Holdings, L.P. and Socrates Merger Sub, Inc. aided and abetted such alleged breaches of fiduciary duties. The Miglio , Wagner , Ladouceur and Simkhovich complaints further allege that our directors breached their fiduciary duty of candor by filing a materially incomplete and misleading preliminary proxy statement and also allege that the sale process was negatively impacted by certain conflicts with our financial advisors. The plaintiffs seek various remedies, including a declaration that the action is properly maintainable as a class action, an injunction against the consummation of the Merger, an accounting of the damages sustained by the plaintiffs and the class, costs and fees of the action, including attorneys’ fees and expenses, and any other equitable relief the court may deem just and proper.

On March 4, 2016, the action titled Blanchfield v. Apollo Education Group, Inc. , et al . was voluntarily dismissed without prejudice.

On April 12, 2016, the Superior Court of the State of Arizona, Maricopa County consolidated the remaining Casey , Miglio , Wagner , Ladouceur and Simkhovich cases into a single action, In re Apollo Education Group, Inc. Shareholder Litigation , Lead Case No. CV2016-001905 (the “Consolidated Action”). On May 1, 2016, we reached an agreement with the plaintiffs to settle the Consolidated Action in connection with the increase in the Merger consideration to $10.00 per share, which agreement is subject to consummation of the Merger, certain confirmatory discovery and approval by the court. If the Merger is consummated, we anticipate that we will be required to pay the plaintiffs’ expenses and an amount for attorneys’ fees yet to be determined and subject to court approval. We have not accrued any liability associated with this action.

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Securities Class Action (Rameses Te Lomingkit et. al.)

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

Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.

Class Action Alleging Violations of Kentucky Wage and Hour Laws

On June 9, 2015, two former University of Phoenix employees filed an action in the Circuit Court of Jefferson County Kentucky alleging that they were wrongfully terminated from their positions with the University in violation of Kentucky and federal law. In this action, which is captioned Aldrich et al. v. The University of Phoenix, 15-C-2839 (Jefferson Cty. Circuit Court), plaintiffs also allege that the University violated Kentucky wage and hour law by failing to pay plaintiffs overtime and other required wages, and in connection with these wage and hour claims, they seek to represent a class of plaintiffs consisting of all individuals employed by the University within the past five years who performed a substantial part of their job duties in Kentucky. Plaintiffs seek to recover damages on their own behalf in connection with their alleged wrongful termination and past due wages, overtime compensation and other relief on behalf of the class in connection with the wage and hour claims. On March 4, 2016, the Court granted our motion to dismiss and compel arbitration. On March 9, 2016, plaintiffs filed a notice of their intent to appeal with the U.S. Court of Appeals for the Sixth Circuit. The Court of Appeals affirmed the District Court’s decision in October 2016.

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.

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Federal False Claims Act Lawsuit

On March 3, 2016, a qui tam complaint against us filed by a private relator under the Federal False Claims Act was unsealed. The lawsuit, captioned United States of America ex rel. Arthur Green v. University of Phoenix, et al , Case Number 1:14 CV 1654, was previously filed under seal in the U.S. District Court for the Northern District of Ohio. It was unsealed by order of the District Court after the federal government notified the District Court of its decision not to intervene in the case. The relator filed an amended complaint on October 18, 2016.

The amended complaint alleges, among other things, that since at least August 2007, University of Phoenix has violated the Federal False Claims Act by falsely certifying to the U.S. Department of Education that the University was in compliance with various regulations under the U.S. Higher Education Act relating to preparation of student financial aid forms and other matters, including in connection with employee participation in student financial aid programs. Plaintiff alleges that certain identified student loans should be reimbursed to the government, in addition to statutory fines and penalties, in an amount to be determined at trial.

K.K. Modi Investment and Financial Services Pvt. Ltd.

On November 8, 2010, a suit was filed by K.K. Modi Investment and Financial Services Pvt. Ltd. (“Modi”) in the High Court of Delhi at New Delhi against defendants Apollo, Western International University, Inc., University of Phoenix, Inc., Apollo Global, Inc., Modi Apollo International Group Pvt. Ltd., Apollo International, Inc., John G. Sperling, Peter V. Sperling and Jorge Klor De Alva, seeking to permanently enjoin the defendants from making investments in the education industry in the Indian market in breach of an exclusivity and noncompete provision which plaintiff alleges is applicable to Apollo and its subsidiaries. The case is entitled, K.K. Modi Investment and Financial Services Pvt. Ltd. v. Apollo International, et. al . We believe that the relevant exclusivity and noncompete provision is inapplicable to us and our affiliates. On October 31, 2014, the Court denied the Apollo defendants’ initial applications to have the case dismissed, concluding that plaintiffs’ complaint raised factual issues that needed to be resolved through the submission of evidence. Defendants appealed that ruling to the Division Bench of the High Court, and that appeal was denied by the Division Bench on August 17, 2015. We then filed a Special Leave Petition before the India Supreme Court on November 21, 2015 seeking leave to appeal the decision of the Division Bench, which was denied on January 15, 2016. On February 15, 2016, we filed a petition for review of the denial of the Special Leave Petition, which was rejected by the India Supreme Court on March 31, 2016. The case will be returned to the Delhi High Court for the taking of evidence. If plaintiff ultimately obtains the requested injunctive relief, our ability to conduct business in India, including through our joint venture with HT Media Limited, may be adversely affected. It is also possible that in the future K.K. Modi may seek to expand existing litigation in India or commence litigation in the U.S. in which it may assert a significant damage claim against us.

Attorney General Investigations

In August 2015, we received an Investigative Subpoena from the Office of the Attorney General of the State of California. The Subpoena requires us to produce documents and information regarding the business and practices of University of Phoenix relating to members and former members of the U.S. military and California National Guard, including marketing, recruiting, billing, financial aid, accommodation and other services for military personnel, compliance with federal Executive Order 13607 (Establishing Principles of Excellence for Educational Institutions Serving Service Members, Veterans, Spouses, and Other Family Members), and use of U.S. military logos and emblems in marketing, for the time period of July 1, 2010 to the present.

In February 2016, we received a Second Investigative Subpoena from the Office of the Attorney General of the State of California in the Matter of the Investigation of For-Profit Educational Institutions, following the Investigative Subpoena we received in August 2015. The Second Investigative Subpoena, which is not limited to matters involving military students, seeks the production of documents and information regarding a broad spectrum of the business and practices of Apollo and its subsidiaries, including University of Phoenix, relating to marketing, recruiting, compensation of enrollment advisors, complaints, financial aid, compliance, accreditation, other governmental investigations, private litigation and other matters, as well as additional information relating to marketing and services to members and former members of the U.S. military and California National Guard, for the time period of July 1, 2010 to the present.

We are cooperating with the California Attorney General in these investigative proceedings. We cannot predict the eventual scope, duration or outcome of the investigations at this time.

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In May 2011 and January 2013, University of Phoenix received Civil Investigative Demands from the State of Massachusetts Office of the Attorney General. The Demands relate to an investigation of possible unfair or deceptive methods, acts, or practices by proprietary educational institutions in connection with the recruitment of students and the financing of education. The Demands seek documents, information and testimony regarding a broad spectrum of the University’s business for the time period of January 1, 2002 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.

In October 2010, University of Phoenix received notice that the State of Florida Office of the Attorney General in Fort Lauderdale, Florida had commenced an investigation into possible unfair and deceptive trade practices associated with certain alleged practices of the University. The notice included a subpoena to produce documents and detailed information for the time period of January 1, 2006 to the present about a broad spectrum of the University’s business. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.

Because of the many questions of fact and law that may arise, the outcome of these state Attorneys General investigative proceedings is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for these matters and, accordingly, we have not accrued any liability associated with these matters.

In addition, from time to time, we receive requests for information from state Attorneys General, accrediting bodies, state higher education regulatory bodies and other federal and state government agencies relating to investigations or inquiries being conducted by other state or federal agencies, pending litigation or specific complaints received from students or former students. These requests can be broad and time consuming to respond to, and there is a risk that they could expand and/or lead to a formal inquiry or investigation into our practices.

Federal Trade Commission Investigation

In July 2015, we received a Civil Investigative Demand from the U.S. Federal Trade Commission (the “FTC”) relating to an investigation to determine if certain unnamed persons, partnerships, corporations, or others have engaged or are engaging in deceptive or unfair acts or practices in or affecting commerce in the advertising, marketing, or sale of secondary or postsecondary educational products or services or educational accreditation products or services. The Demand requires us to produce documents and information regarding a broad spectrum of the business and practices of University of Phoenix, including in respect of marketing, recruiting, enrollment, financial aid, tuition and fees, academic programs, academic advising, student retention, billing and debt collection, complaints, accreditation, training, military recruitment, and other compliance matters, for the time period of January 1, 2011 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.

Because of the many questions of fact and law that may arise, the outcome of the FTC investigation is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this matter and, accordingly, we have not accrued any liability associated with this matter.

Open Colleges Investigations

In September 2015, Open Colleges received a Notice from the Australian Competition and Consumer Commission (“ACCC”) requiring the production of information about student refunds upon withdrawal and related matters for the period of time since July 2014. In addition, Open Colleges receives inquiries and is subject to audits from time to time from governmental regulatory authorities, including an inquiry in October 2015 from the Australian Skills Quality Authority (“ASQA”), the national regulator of vocational education programs, regarding student complaints about marketing practices, refund policies and other matters (which has since been concluded without material findings).

Following a recent compliance audit, the two key institutions comprising our Open Colleges operations each received a notice of noncompliance and intention to make a decision to impose sanctions from ASQA due to various alleged compliance deficiencies. One of the alleged deficiencies arose from a change in the interpretation of applicable course requirements, which will require changes in our procedures for student workplace skills assessments used in connection with courses that represent a substantial portion of the Open Colleges institutions’ enrollment. These changes, which we are implementing, could increase the operating costs for these institutions, perhaps substantially, and could have competitive implications.

We submitted a response to the ASQA notice and on January 4, 2017, ASQA notified the two institutions of its decision to not impose sanctions.

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Office of the Inspector General of the U.S. Department of Education (“OIG”) Subpoena

On March 21, 2014, University of Phoenix received a subpoena from the Mid-Atlantic Region of the OIG. The subpoena seeks the production by the University of documents and detailed information regarding a broad spectrum of the activities conducted in the University’s Centralized Service Center for the Northeast Region located in Columbia, Maryland, for the time period of January 1, 2007 to the present, including information relating to marketing, recruitment, enrollment, financial aid processing, fraud prevention, student retention, personnel training, attendance, academic grading and other matters. We are cooperating with these requests. We cannot predict the eventual scope, duration or outcome of this matter at this time.

Because of the many questions of fact and law that may arise, the outcome of this matter is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss and, accordingly, we have not accrued any liability associated with this matter.

UNIACC Investigations

UNIACC was advised by the National Accreditation Commission of Chile in November 2011 that its institutional accreditation would not be renewed and therefore had lapsed. Subsequently, in June 2012, a prosecutor’s office in Santiago, Chile requested that UNIACC provide documents relating to UNIACC’s relationship with a former employee and consultant who served as a member of the National Accreditation Commission (“CNA”) until March 2012, and we received requests for additional information in connection with this investigation. Furthermore, in August 2012, the prosecutor’s office began requesting that UNIACC provide information about UNIACC’s business structure and operations and its relationship with other Apollo entities, in connection with an additional investigation regarding UNIACC’s compliance with applicable laws concerning the generation of profit by universities such as UNIACC. The prosecutor’s office also requested additional information from UNIACC regarding certain government funding received by the institution. On April 7, 2016, the prosecutor closed the investigation related to the CNA matter.

Shareholder Derivative Lawsuit

On June 10, 2016, we received a shareholder demand to commence a civil action against each of our directors and certain of our current and former officers on grounds of breach of fiduciary duty and other claims, and to make available for examination certain records. The demand is a condition precedent under applicable Arizona law to the filing of a derivative lawsuit on behalf of the Company seeking damages from directors and officers for breach of fiduciary duty. On July 11, 2016, we learned that, prior to the expiration of the required 90-day waiting period, the shareholders filed a derivative complaint in the Superior Court of Arizona, captioned Kevin J. Guinan et. al. v. Apollo Education Group, Inc. et. al. , Case Number CV2016-005901, seeking relief from the waiting period requirement and damages from directors and officers for alleged breach of fiduciary duties, unjust enrichment, abuse of control and corporate waste relating to recruitment practices, false claims, our new student classroom, share repurchases and other matters. On July 26, 2016, the plaintiffs filed a motion for a preliminary injunction, seeking, among other things, to terminate or postpone our pending Merger described in Note 1 , Nature of Operations and Significant Accounting Policies . The parties have reached an agreement to resolve the lawsuit, subject to negotiation of a stipulation of settlement and court approval. We anticipate that we will be required to pay the plaintiffs’ expenses and an amount for attorneys’ fees yet to be determined and subject to court approval. The settlement and associated expenses and fees are not expected to be material.

Note 14 . Regulatory Matters

All U.S. federal student financial a id programs are established by Title IV of the Higher Education Act and regulations promulgated thereunder. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. The most recent reauthorization of the Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in discussion and activity regarding Higher Education Act reauthorization, but the timing and terms of any eventual reauthorization cannot be predicted.

The Higher Education Act, as reauthorized, specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification, which is granted in a Program Participation Agreement with the institution.

University of Phoenix’s Title IV Program Participation Agreement expired on December 31, 2012. The University has submitted necessary documentation for recertification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We believe that the University’s application will be renewed in due course. However, we cannot predict whether or to what extent the Department may seek to impose conditions on our operations in connection with any recertification, including some or all conditions to continued participation in Title IV programs following

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the consummation of our pending Merger transaction that the Department has identified in its response to our application for preacquisition review of that transaction.

In February 2016, the Department notified the University that for the duration of the month-to-month continuation of the University’s Program Participation Agreement, University of Phoenix must obtain from the Department prior approval of substantial changes, including (i) the establishment of additional locations, (ii) any increase in the level of academic offering beyond those listed in the Institution’s Eligibility and Certification Approval Report and (iii) the addition of any educational program (including degree, nondegree, or short-term training programs). Some of these substantial changes include changes that previously could be implemented by the University upon notice to the Department and without prior approval.

Additionally, in August 2014, the Department commenced an ordinary course program review of University of Phoenix’s administration of Title IV programs covering federal financial aid years 2012-2013 and 2013-2014, as well as compliance with the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act, the Drug-Free Schools and Communities Act and related regulations. During fiscal year 2015, the University received a Final Program Review Determination Letter with regard to this program review. All administrative matters are deemed by the Department to be resolved and/or closed, with the exception of findings regarding compliance with the Clery Act, which have been referred to the Department’s Clery Team and to the Administrative Action and Appeals Division which is standard protocol in such matters. The outcome of this matter is uncertain at this point and, based on the information available to us at present, we have not accrued any liability associated with this matter.

Gainful Employment Regulations

Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide information to prospective students about each eligible program, including the relevant recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers. These reporting requirements increase our costs of operations and could adversely impact student enrollment, persistence and retention if our reported program information compares unfavorably with other reporting educational institutions.

In October 2014, the U.S. Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether an academic program prepares students for gainful employment in a recognized occupation. Under the regulations, which apply on a program-by-program basis, the Title IV eligibility of students enrolled in a program will depend on the outcome of two tests relating to average student loan debt service-to-earnings ratios of program graduates for each cohort year. One test measures student loan debt service as a percentage of total earnings; the other test measures student loan debt service as a percentage of deemed discretionary earnings. For each test, the regulations specify the ratios that constitute “pass”, “fail”, and neither pass nor fail, which is referred to as “zone”. If a program fails both of the tests for one measuring year, the institution will be required to provide a warning notice to prospective and enrolled students advising that the program may lose Title IV eligibility based on the outcome of the tests for the next measuring year. Programs that fail both tests in two out of three consecutive years or are in the zone for four consecutive years will be ineligible to participate in Title IV student financial aid for a period of at least three years.

In late October 2016, the Department provided draft gainful employment debt service-to-earnings ratios for the initial measuring year, which the Department refers to as Debt Measure Year 2015 (“DMYR15”). The Department expects to issue the final DMYR15 debt service-to-earnings ratios in January 2017.

Based on the draft rates, University of Phoenix programs representing approximately 15% of the University’s total degreed enrollment as of November 30, 2016 failed both of the debt service-to-earnings tests, and a small number of programs were in the zone.

In connection with the University’s initiative to transform itself into a more focused, higher retaining and less complex institution, beginning in September 2015 and continuing through early fiscal year 2017, the University ceased enrolling new students in programs it believed may be impacted by the gainful employment regulations. As a result of these actions, the University has ceased enrolling new students in all of the programs that failed both of the minimum debt service-to-earnings tests for DMYR15. These programs, and the other programs that were retired in connection with the broader initiative to transform the University, represented approximately 19% of the University’s total degreed enrollment as of November 30, 2016. Students who are currently enrolled in such programs are being taught-out.

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scholarships to students enrolled in these programs to help the affected students complete their programs of study. The ultimate cost of this assistance cannot be predicted currently, but could be substantial, depending on the number of students who qualify and choose to participate.

Changes in student borrowing needs and practices, student loan interest rates, labor markets and other factors outside of our control could adversely impact compliance with these regulations for some of our continuing programs in the future.

Defense to Repayment Regulations

On October 28, 2016, the U.S. Department of Education published final regulations establishing new processes and standards for the discharge of student loans. The regulations provide for discharge of student loans first disbursed on or after July 1, 2017, and recovery by the borrower of any amounts paid on such loans where:


•	a school breaches contractual promises to a student;


•	certain judgments based on any state or federal law are entered against a school related to the loan or the educational services after a contested proceeding; or


•	a school makes substantial misrepresentations about the nature of its educational programs, financial charges or employability of graduates.

In general, the extent to which a loan obligation is discharged or previously paid amounts are recovered is limited to the amount of pecuniary damages suffered by the borrower associated with the relevant basis for the discharge, as determined by a Department hearing officer in the exercise of broad discretion. The decision of the hearing officer is final, subject to limited rights to appeal a decision to the Secretary of Education. In most cases, the Department is entitled to seek reimbursement from the disbursing school of any loan amounts discharged or recovered by students.

In addition, the Department has the discretion to initiate proceedings for discharge on behalf of groups of students if, among other reasons, the Department determines that there are common facts and claims or that such action would promote compliance by the school. Such group proceedings can be initiated whether a school has closed or is currently operating, and can include students who have not requested relief. In any such proceeding, a Department official will represent the relevant group in the fact-finding process, which will be presided over by a Department hearing officer.

There is no time limit on claims to discharge outstanding amounts owed by a borrower, regardless of the basis for the discharge, and no time limit on claims for recovery of amounts previously paid which are based on the entry of a judgment. Claims for recovery of amounts previously paid which are based on breach of contract or misrepresentation generally must be made within six years of the breach or discovery of the misrepresentation.

The new procedures and standards increase the likelihood that individual and group borrower defense to repayment claims will be made and confer on the Department substantially complete and unreviewable discretion to adjudicate any such claims, including claims initiated by the Department itself. Because the specified standards are imprecise in many respects and the Department is the final arbiter of the standards and the findings of fact, we may not be able successfully to predict how the standards will be applied to our students until claims have been made and adjudicated. Application of the specified standards relating to breach of contract and misrepresentation, and the determination of the appropriate amount of damages each are likely to involve complicated and nuanced questions of fact and may involve large groups of students deemed by the Department to be similarly situated. Accordingly, we may be exposed in a proceeding to potentially significant liability based on intensely factual analyses and judgments, under circumstances where we have available only limited due process rights. If a large group of students, in either a private proceeding or a proceeding initiated and prosecuted by the Department, succeeds in a defense to repayment claim for any reason, our business and financial condition could be materially and adversely harmed.

Financial Responsibility Standards

Also on October 28, 2016, the Department published final regulations modifying the Department’s financial responsibility standards to provide that a proprietary institution is deemed not to be financially responsible if it is subject to one or more specified triggering events on or after July 1, 2017, including:


•	A failure to satisfy the 90/10 test for the prior fiscal year;


•	For publicly traded institutions, a failure to timely file annual or quarterly reports with the Securities and Exchange Commission, the receipt of certain warnings from the SEC or the relevant stock exchange, or the delisting of the institution’s stock; and


•	Cohort default rates above 30% for the two most recent measuring periods.

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In addition, an institution will be deemed not to be financially responsible if the institution is subject to one or more other specified triggering events, if the Department determines that after taking into account the possible future financial consequences a recalculated composite score for the institution’s most recently completed fiscal year would be less than 1.0 . Such triggering events include the following:


•	The institution incurs a liability in connection with a judicial or administrative proceeding, including as a result of settlement;


•	The institution is sued after July 1, 2017 by a federal or state authority regarding certain matters involving student loans or the provision of educational services and such suit is still pending after 120 days;


•	The institution is otherwise sued after July 1, 2017 and such lawsuit has survived a motion for summary judgment or the time to assert such a motion has expired;


•	The institution is required by its accrediting agency to submit a teach-out plan in connection with closure of the institution or certain of its locations;


•	The institution has programs that could become ineligible to participate in Title IV programs based on the gainful employment debt service-to-earnings rates for the next measuring year; or


•	The institution has a composite score of less than 1.5 and experiences a withdrawal of owner’s equity by any means, including by declaring a dividend.

Furthermore, an institution will be deemed to not be financially responsible if the Department determines that there is an event or condition that is reasonably likely to have a material adverse effect on the financial condition, business, or results of operations of the institution, including as a result of one or more of the following events:


•	significant fluctuation in the amount of Title IV funds received by the institution;


•	citation of noncompliance by a state licensing or authorizing agency;


•	failure of a financial stress test to be developed by the Department;


•	high annual dropout rates, as calculated by the Department;


•	action by an accrediting agency to place the institution on probation or issue a show-cause order for failure to meet one or more accrediting standards;


•	violation of a provision in a loan agreement; or


•	pending borrower defense to repayment claims or an expectation that a significant number of borrower defense to repayment claims will be filed related to the institution, as determined by the Department.

If an institution is deemed to be not financially responsible because of the occurrence of one or more of the foregoing triggering events, the institution must either post a letter of credit in the amount of at least 50% of prior year Title IV receipts or, with the Department’s approval, continue participation in Title IV programs under a provisional certification for a limited period of time, post a letter of credit in an amount of at least 10% of prior year Title IV receipts and comply with certain other conditions.

These new financial responsibility standards significantly expand the circumstances under which a proprietary institution will be deemed to not be financially responsible, including circumstances and events that may not actually pose financial risks to the institution, circumstances that are based on subjective judgments of the Department about future events, and allegations and claims for relief in private or administrative litigation or enforcement proceedings that may ultimately be found to lack merit. The posting by University of Phoenix of a letter of credit in the amount of 50% or more of its Title IV program receipts for its preceding fiscal year likely would be an insurmountable burden. Accordingly, if the University is found to not be financially responsible under these new standards, it would be able to continue participation in Title IV programs only if terms of a provisional certification, including the amount of any associated letter of credit, can be agreed with the Department, the terms of which may materially and adversely impact our business and operations. In order to reduce the risk and uncertainty associated with these regulations, we may need to modify our administrative and other student-facing practices and procedures in a manner that increases our costs and reduces our administrative effectiveness. Furthermore, because of the potentially significant consequences of a determination that we are not financially responsible, our flexibility in responding to private or administrative litigation or enforcement actions may be severely constrained in a manner that materially and adversely impacts our business and financial condition.

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State Authorization Regulations

On December 19, 2016, the U.S. Department of Education published final regulations, effective July 1, 2018, which establish new requirements for distance education programs to maintain the state authorizations necessary to be eligible to participate in Title IV programs. Among other things, the regulations:


•	Require an institution offering distance education to have requisite state authority to offer such programs to state residents if required by the state;


•	Define and recognize acceptable state authorization reciprocity agreements;


•	Require institutions to document individualized state processes for resolving student complaints; and


•	Require an institution to provide extensive public and individualized disclosures to enrolled and prospective students regarding its programs offered solely through distance education, including information concerning adverse actions filed against the school by state entities or accrediting bodies.

Under the regulations, individual states may impose new and diverse requirements on institutions offering distance education and thereby reduce the regulatory and operational efficiency that our schools have relied on under the State Authorization Reciprocity Agreement (“SARA”). In those states that have adopted SARA, now comprise a majority of domestic jurisdictions, our Title IV eligible programs are authorized to operate on the basis of Arizona state regulatory approval.

The regulations also require extensive new public disclosures based upon certain actions by accreditors and state entities, including state Attorneys General, and require disclosure to current and prospective students upon the mere filing of an adverse action and long after the initial action was resolved, even if resolved in favor of the institution.

The regulations raise potential risks for our business, since the precise regulatory scope of individualized state requirements and disclosures are unclear and subject to interpretation in a manner that may be adverse to us and not fully known or predictable in advance, and certain of the potential adverse consequences could arise from the mere commencement of adverse actions by government entities or accrediting bodies, even if these actions and claims ultimately are found to lack merit. Furthermore, the significant discretion vested in the Department to interpret and administer the regulations may result in unexpected outcomes that adversely affect our business. In order to reduce the risk associated with these regulations, we may need to modify our administrative and other student-facing practices and procedures in a manner that increases our costs and reduces our administrative effectiveness.

Higher Learning Commission Accreditation

University of Phoenix is regionally accredited by the Higher Learning Commission (“HLC”), which provides the following:


•	Recognition and acceptance by employers, other higher education institutions and governmental entities of the degrees and credits earned by students;


•	Qualification to participate in Title IV programs (in combination with state higher education operating and degree granting authority); and


•	Qualification for authority to operate in certain states.

In July 2013, the accreditation of University of Phoenix was reaffirmed by HLC, the University’s principal accreditor, through the 2022-2023 academic year. The University is subject to the Standard Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2017 and will undergo its next reaffirmation process in 2022-2023.

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APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 15 . Segment Reporting

We operate in the education industry and our operating segments have been determined based on the method by which our chief operating decision maker evaluates performance and allocates resources. We have not aggregated any of our operating segments, which are presented in our segment reporting as follows:


•	University of Phoenix , which offers undergraduate and graduate degrees through its colleges and schools in a wide range of program areas as well as various nondegree programs. A significant majority of the University’s students attend classes exclusively online, and the University also offers its educational programs and services at ground locations throughout the U.S.


•	Apollo Global , which includes our institutions based outside the U.S., and its corporate operations. Apollo Global acquired Career Partner during the second quarter of fiscal year 2016, and the operating results are included in our Apollo Global operating segment from the date of acquisition.


•	Other , which includes College for Financial Planning, Western International University, The Iron Yard, Apollo Professional Development, and Apollo corporate activities.

A summary of financial information by reportable segment is as follows:



	Three Months Ended November 30,
($ in thousands)	2016			2015
Net revenue:
University of Phoenix	$	354,294		$	462,617
Apollo Global	121,246			115,332
Other	8,959			8,072
Net revenue	$	484,499		$	586,021
Operating income (loss) ⁽¹⁾ :
University of Phoenix	$	32,550		$	(17,504	)
Apollo Global	(3,643		)	(2,335		)
Other	(20,503		)	(25,410		)
Operating income (loss)	8,404			(45,249		)
Reconciling items:
Interest income	1,087			919
Interest expense	(1,425		)	(1,456		)
Other loss, net	(644		)	(843		)
Income (loss) from continuing operations before income taxes	$	7,422		$	(46,629	)

⁽¹⁾ University of Phoenix, Apollo Global and Other include restructuring and impairment charges during the periods, which includes a $71.8 million goodwill impairment charge during the first quarter of fiscal year 2016 for our University of Phoenix reporting unit. Refer to Note 2 , Restructuring and Impairment Charges . Additionally, Apollo Global and Other include expense represented in Merger, acquisition and other related costs, net, during the three months ended November 30, 2016 and 2015.

Our consolidated assets by reportable segment consist of the following as of the respective period ends:



($ in thousands)	November 30, 2016		August 31, 2016
University of Phoenix	$	609,546	$	599,790
Apollo Global	690,169		704,207
Other ⁽¹⁾	655,528		708,909
Total assets	$	1,955,243	$	2,012,906

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended August 31, 2016 and our financial statements included in Part I, Item 1, of this Form 10-Q.

Overview

Apollo Education Group, Inc. is a private education provider serving students since 1973. We believe that our success depends on providing high quality education and career-focused pathways, tools and services to students to maximize the benefits of their educational experience. We offer undergraduate, graduate, certificate and nondegree educational programs and services, online and on-campus, principally to working adults in the U.S. and abroad.

Substantially all of our net revenue is composed of tuition and fees for educational services. In fiscal year 2016 , University of Phoenix generated 78% of our consolidated net revenue.

Pending Merger

On February 7, 2016, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with AP VIII Queso Holdings, L.P., a Delaware limited partnership (“Queso”) and Socrates Merger Sub, Inc., an Arizona corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Queso. Queso is a subsidiary of funds affiliated with Apollo Management VIII, L.P., which is an affiliate of Apollo Global Management, LLC, none of which is, or has ever been, affiliated with us. The Vistria Group, LP is a co-investor in Queso. Najafi Companies, LLC is a potential co-investor in Queso. At the effective time of the Merger, which, subject to the satisfaction of the closing conditions, is anticipated to be on or before February 1, 2017, the date on which the contract becomes terminable by either party, each share of our issued and outstanding Class A and Class B common stock (other than shares owned by Queso and its subsidiaries and shares owned by us and our subsidiaries) will be converted pursuant to the terms of the Merger Agreement into the right to receive $10.00 per share in cash. On May 6, 2016, the Merger Agreement was approved by the holders of our outstanding Class A and Class B common stock, each voting separately as a class.

Consummation of the Merger is subject to customary and other conditions, including:


(i)	the absence of certain conditions or restrictions in the response of the U.S. Department of Education to the pre-acquisition review application filed by University of Phoenix; and


(ii)	the receipt of consents or approvals from other federal, state and foreign educational governing bodies, including the Higher Learning Commission (“HLC”).


(i)	Our aggregate cash, cash equivalents and marketable securities must not be less than the specified amount for the applicable month end;


(ii)	University of Phoenix fiscal year-to-date new degreed enrollments as of the applicable month end must not have declined by more than 15% from forecasted levels (which are derived from the projections we prepared in December 2015 in connection with the Merger, which we refer to as the December 2015 forecast);


(iii)	University of Phoenix trailing twelve month net revenue as of the applicable month end shall not have declined by more than 10% from forecasted levels (which are derived from the December 2015 forecast); and


(iv)	Our consolidated trailing twelve month adjusted earnings before interest, taxes, depreciation and amortization as of the applicable month end shall not have declined by more than $75 million from forecasted levels (which are derived from the December 2015 forecast).

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We believe we have satisfied each of these minimum operating metrics as of December 31, 2016, which is the relevant measurement date for a closing on or prior to February 1, 2017.

There is no assurance that the conditions to the consummation of the Merger will be satisfied in a timely manner or at all.

The Merger Agreement may be terminated by each of us under certain circumstances, including if the Merger is not consummated by 5:00 pm Eastern time on February 1, 2017. Upon termination of the Merger Agreement under certain specified circumstances, Queso will be required to pay us a reverse termination fee of $25.0 million. For additional information about some of the consequences that could arise from the failure to consummate the Merger, see Part I, Item 1A, Risk Factors - Risks Related to our Pending Merger - Our pending merger may not be consummated, which may adversely affect our business, and our business may suffer during the pendency of the merger as a result of uncertainty regarding consummation in our Form 10-K annual report filed with the SEC on October 20, 2016.

Assuming timely receipt of required regulatory approvals and the satisfaction or waiver of all other closing conditions, we anticipate that the Merger will be completed on or before February 1, 2017, the date on which the contract becomes terminable by either party.

For additional information related to the Merger and the Merger Agreement, please refer to the following filings we have made with the Securities and Exchange Commission:


•	Current Report on Form 8-K filed February 8, 2016;


•	Definitive Proxy Statement filed March 23, 2016;


•	Supplement to the Definitive Proxy Statement filed May 2, 2016;


•	Amendments to the Merger Agreement attached to our Current Report on Form 8-K filed on May 2, 2016 and our Quarterly Report on Form 10-Q filed July 8, 2016;


•	Current Report on Form 8-K filed July 7, 2016;


•	Annual Report on Form 10-K filed October 20, 2016;


•	Current Report on Form 8-K filed December 8, 2016; and


•	Current Report on Form 8-K filed December 21, 2016.

Key Trends, Developments and Challenges

The following developments and trends present opportunities, challenges and risks relating to our business. For a more detailed discussion of our business, industry and risks, refer to our 2016 Annual Report on Form 10-K.

Rapidly Evolving and Highly Competitive Education Industry

The higher education industry is changing at an increasing pace due to a challenging political and regulatory environment (discussed further below), technological developments, evolving needs and objectives of students and employers, economic constraints affecting educational institutions and students, price competition, increased focus on affordability and value, inconsistent quality of secondary education in the U.S. and other factors that challenge many of the core principles underlying the industry. In addition, one of our primary competitive advantages in the U.S. has been materially diminished as a significant and increasing number of traditional four-year and community colleges, which are subject to fewer regulatory constraints, offer an increasing array of distance learning and other online education programs, including programs that are offered wholly online and geared towards the needs of working adults. In recent years, we have not competed successfully with these traditional schools and this has contributed to the substantial decline in University of Phoenix enrollment that began in late 2010. See further discussion of enrollment in Results of Operations below.

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University of Phoenix Transformation

The University’s vision is to be recognized as the most truste d provider of career-relevant higher education for working adults. In furtherance of this, the University offers career focused programs and an instructional model designed specifically to meet the educational needs of working adults.

Due in part to the rapidly changing higher education environment, particularly for proprietary institutions, and the competitive factors described above, the University’s enrollment has substantially declined since late 2010. The University is working to stabilize enrollment in the longer term by transforming itself into a more focused, higher retaining and less complex institution, including through:

•

Student outcomes initiatives designed to better prepare incoming students and to help existing students progress in their programs to completion. This includes tailoring initial course sequences to match the academic capabilities of students when they first enroll, assessing our programs and retiring or improving those which have lower retention rates or are less career relevant, adding more career-focused pathways that offer certificates and four-year bachelor’s degrees in key growth areas of the employment market, and piloting diagnostic tools for development of enhanced admissions guidelines and pathways expected to be implemented in fiscal year 2017.


•	Student experience initiatives such as concentrating on fewer ground locations in selected major metropolitan areas throughout the U.S. while maintaining a regional presence for both on-ground and online students, and continuing to improve the classroom experience by offering student cohort start dates approximately every five weeks for most programs to optimize class size and classroom dynamics.


•	Brand health and outreach initiatives designed to better manage the University’s marketing message, improve its ability to identify those students more likely to persist in its educational programs, and build on the University’s move away from third-party operated websites for marketing purposes.

•

Operational excellence initiatives designed to reduce costs, improve operations and facilitate future systems upgrades such as continuing the transition of technology systems from proprietary and legacy systems to commercial software and software as a service. This includes the University’s online classroom and developing increased student self-service capabilities in admissions, financial aid, academic planning and class scheduling.

We have experienced significant challenges in accurately predicting the effects on enrollment and retention of the various initiatives that we have developed and deployed in recent years. Accordingly, there is no assurance that our current transformation plan will stabilize enrollment, improve retention or achieve the other intended results, and the broad scope and number of simultaneous changes increases the risk of unexpected challenges and unintended consequences. Some of these initiatives have accelerated the enrollment decline at University of Phoenix in recent years, as discussed further below in Results of Operations . Further, we expect that the University’s enrollment will continue declining as we implement our currently planned initiatives, although we expect the rate of decline to moderate compared to the rate during fiscal year 2016. We do not expect the University’s enrollment to increase prior to fiscal year 2019.

Cost Reductions

We are intensely focused on reengineering our business processes and educational delivery systems to improve efficiencies and reduce costs to align with our declining enrollment and revenue in a manner that does not adversely impact the quality of our services to students. As discussed above, some of the initiatives to transform University of Phoenix have accelerated the near term rate of decline in the University’s enrollment and revenue, which has increased the amount of necessary cost reductions. In furtherance of this, we are closing underutilized or unnecessary University of Phoenix campus locations, reducing our workforce as necessary, streamlining and, where appropriate, automating our administrative and student facing services, outsourcing administrative and other services, evaluating the scope of our academic programs and delaying the implementation of certain of University of Phoenix’s transformation initiatives. Also, we have engaged outside advisors to assist us in identifying and effectuating these cost reduction initiatives. We have significantly reduced our operating costs over recent periods and further significant reductions are increasingly challenging. There is no assurance that we will be able to reduce costs to align with University of Phoenix’s reduced enrollment and revenue, especially if the University’s near term enrollment declines more than anticipated. Although we seek to effect these cost reductions in a manner that does not adversely impact the quality of our services to students, given the magnitude of these changes, they could result in near term disruption to our business which may further decrease our enrollment and revenues. Additionally, our fiscal year 2017 Department of Education financial responsibility composite score will be adversely impacted if we are not successful in reducing costs sufficiently during fiscal year 2017, whether due to our inability to effectuate planned cost reductions, greater than anticipated declines in our enrollment and revenue or other factors. See further discussion under Political and Regulatory Environment - Financial Responsibility Composite Score and Results of Operations below.

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Political and Regulatory Environment

In recent years, there has been substantial and continuing increased focus by various 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 Higher Education Act. A group of influential U.S. senators has strongly and repeatedly encouraged the Departments of Education, Defense and Veterans Affairs to take action to limit or terminate the participation of proprietary educational institutions, including University of Phoenix, in existing tuition assistance programs.

In late 2014, the Department of Education formed an inter-agency task force focused on the proprietary sector involving multiple federal agencies and departments including the Federal Trade Commission, the U.S. Departments of Justice, Treasury and Veterans Affairs, the Consumer Financial Protection Bureau, the Securities and Exchange Commission, and numerous state Attorneys General, to coordinate activities and share information to protect students from unfair, deceptive and abusive policies and practices by proprietary higher education institutions.

In recent years, two major proprietary education institutions, together serving over 110,000 students, have ceased operations and filed for bankruptcy protection due to delays in or denial by the Department of Education of Title IV funding for students and requirements to post letters of credit, based in part on the existence of multiple investigations by various regulatory authorities. In neither case were the principal investigations completed nor were substantial enforcement actions commenced and prosecuted to conclusion. Accordingly, proprietary institutions are at risk of harmful delays or denial of Title IV funding for students due to investigations and other preliminary allegations, even if such investigations or allegations may ultimately be found to lack merit.

We cannot predict what impact, if any, the commencement of the Trump Administration may have on the current political and regulatory environment for proprietary educational institutions.

The following summarizes additional significant political or regulatory matters applicable to our business.


•	Gainful Employment Regulations

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these actions, the University has ceased enrolling new students in all of the programs that failed both of the minimum debt service-to-earnings tests for DMYR15. These programs, and the other programs that were retired in connection with the broader initiative to transform the University, represented approximately 19% of the University’s total degreed enrollment as of November 30, 2016. Students who are currently enrolled in such programs are being taught-out.

Because the measuring period for the next cohort (DMYR16) has already ended, we do not have the opportunity to make changes to any of the programs that failed both tests for DMYR15, and if these programs also fail both tests for DMYR16, they immediately will cease to be eligible to participate in Title IV programs. In such case, the University intends to provide scholarships to students enrolled in these programs to help the affected students complete their programs of study. The ultimate cost of this assistance cannot be predicted currently, but could be substantial, depending on the number of students who qualify and choose to participate.


•	Defense to Repayment Regulations


•	a school breaches contractual promises to a student;


•	certain judgments based on any state or federal law are entered against a school related to the loan or the educational services after a contested proceeding; or


•	a school makes substantial misrepresentations about the nature of its educational programs, financial charges or employability of graduates.

For additional information see Part II, Item 1A, Risk Factors - New Department of Education regulations regarding discharge of Title IV student loan obligations and standards for institutional financial responsibility subject our business to substantial risks, including reimbursement of the Department for any debt relief granted by the Department to potentially large groups of students and automatic requirements to post a substantial letter of credit upon the occurrence of certain events in this form 10-Q.

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•	Financial Responsibility Standards


•	A failure to satisfy the 90/10 test for the prior fiscal year;


•	For publicly traded institutions, a failure to timely file annual or quarterly reports with the Securities and Exchange Commission, the receipt of certain warnings from the SEC or the relevant stock exchange, or the delisting of the institution’s stock; and


•	Cohort default rates above 30% for the two most recent measuring periods.


•	The institution incurs a liability in connection with a judicial or administrative proceeding, including as a result of settlement;


•	The institution is sued after July 1, 2017 by a federal or state authority regarding certain matters involving student loans or the provision of educational services and such suit is still pending after 120 days;


•	The institution is otherwise sued after July 1, 2017 and such lawsuit has survived a motion for summary judgment or the time to assert such a motion has expired;


•	The institution is required by its accrediting agency to submit a teach-out plan in connection with closure of the institution or certain of its locations;


•	The institution has programs that could become ineligible to participate in Title IV programs based on the gainful employment debt service-to-earnings rates for the next measuring year; or


•	The institution has a composite score of less than 1.5 and experiences a withdrawal of owner’s equity by any means, including by declaring a dividend.


•	significant fluctuation in the amount of Title IV funds received by the institution;


•	citation of noncompliance by a state licensing or authorizing agency;


•	failure of a financial stress test to be developed by the Department;


•	high annual dropout rates, as calculated by the Department;


•	action by an accrediting agency to place the institution on probation or issue a show-cause order for failure to meet one or more accrediting standards;


•	violation of a provision in a loan agreement; or


•	pending borrower defense to repayment claims or an expectation that a significant number of borrower defense to repayment claims will be filed related to the institution, as determined by the Department.

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to modify our administrative and other student-facing practices and procedures in a manner that increases our costs and reduces our administrative effectiveness. Furthermore, because of the potentially significant consequences of a determination that we are not financially responsible, our flexibility in responding to private or administrative litigation or enforcement actions may be severely constrained in a manner that materially and adversely impacts our business and financial condition.


•	State Authorization Regulations


•	Require an institution offering distance education to have requisite state authority to offer such programs to state residents if required by the state;


•	Define and recognize acceptable state authorization reciprocity agreements;


•	Require institutions to document individualized state processes for resolving student complaints; and


•	Require an institution to provide extensive public and individualized disclosures to enrolled and prospective students regarding its programs offered solely through distance education, including information concerning adverse actions filed against the school by state entities or accrediting bodies.

Under the regulations, individual states may impose new and diverse requirements on institutions offering distance education and thereby reduce the regulatory and operational efficiency that our schools have relied on under the State Authorization Reciprocity Agreement (“SARA”). In those states that have adopted SARA, which now comprise a majority of domestic jurisdictions, our Title IV eligible programs are authorized to operate on the basis of Arizona state regulatory approval.

The regulations also require extensive new public disclosures based upon certain actions by accreditors and state entities, including state Attorneys General and require disclosure to current and prospective students upon the mere filing of an adverse action and for long after the initial action was resolved, even if resolved in favor of the institution.


•	Financial Responsibility Composite Score

To participate in Title IV programs, the U.S. Department of Education regulations specify that an eligible institution of higher education must satisfy specific measures of financial responsibility prescribed by the Department, or post a letter of credit in favor of the Department and accept other conditions on its participation in Title IV programs. Pursuant to the Title IV program regulations, each eligible institution must satisfy a measure of financial responsibility that is based on a weighted average of the following three annual ratios which assess the financial condition of the institution:


•	Primary Reserve Ratio - measure of an institution’s financial viability and liquidity;


•	Equity Ratio - measure of an institution’s capital resources and its ability to borrow; and


•	Net Income Ratio - measure of an institution’s profitability.

These ratios provide three individual scores which are converted into a single composite score. The maximum composite score is 3.0. If an institution’s composite score is at least 1.5, it is considered financially responsible. If an institution’s composite score is less than 1.5 but is 1.0 or higher, it is still considered financially responsible, and the institution may continue to participate as a financially responsible institution for up to three years under the Department’s “zone” alternative. Under the zone alternative, the Department may subject the institution to various

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operating or other requirements, which may include being transferred from the “advance” method of payment of Title IV program funds to the heightened cash monitoring payment method under which the institution is required to make Title IV disbursements to eligible students and parents before it requests or receives funds from the Department for the amount of those disbursements, or being transferred to the more onerous reimbursement payment method under which an institution must submit to the Department documentation demonstrating the eligibility for each Title IV disbursement and wait for the Department’s approval before drawing down Title IV funds.

If an institution does not achieve a composite score of at least 1.0, it is subject to additional requirements in order to continue its participation in the Title IV programs, including submitting to the Department a letter of credit in an amount equal to at least 10%, and at the Department’s discretion up to 50%, of the Title IV funds received by the institution during its most recently completed fiscal year, and being placed on provisional certification status, under which the institution must receive Department approval before implementing new locations or educational programs and comply with other restrictions, including reduced due process rights in subsequent proceedings before the Department.

In addition, under new regulations that took effect on July 1, 2016, institutions placed on either the heightened cash monitoring payment method or the reimbursement payment method must pay Title IV credit balances to students and parents before requesting Title IV funds from the Department and may not hold Title IV credit balances on behalf of students or parents, even if such balances are expected to be applied to future tuition payments.

The composite scores for Apollo Education Group and University of Phoenix, which are calculated as of the end of our fiscal year, were as follows for the indicated periods:



	Fiscal Year
	2016	2015	2014
Apollo Education Group	1.8	2.6	2.5
University of Phoenix	2.9	2.9	2.3

The decline in the Apollo Education Group fiscal year 2016 composite score was principally attributable to our decline in profitability, which included $73.4 million of goodwill impairment charges during fiscal year 2016. Refer to Results of Operations below.

We believe that we may be able to take certain corrective measures to maintain composite scores of 1.5 or greater, if we determine that there is increased risk that our composite scores will fall below that level, depending on the circumstances causing the expected decline. However, such measures, if available, may require material modifications to our business and strategy that would adversely impact our future revenue and profitability and/or may involve the issuance of equity or equity-linked securities under challenging circumstances that could result in material dilution to our existing shareholders.


•	U.S. Department of Education Program Participation Agreement

University of Phoenix’s Title IV Program Participation Agreement expired on December 31, 2012. The University has submitted necessary documentation for recertification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We believe that the University’s application will be renewed in due course. However, we cannot predict whether or to what extent the Department may seek to impose conditions on our operations in connection with any recertification, including some or all of the conditions to continued participation in the Title IV programs following the consummation of our pending Merger transaction that the Department has identified in its response to our application for preacquisition review of that transaction.

Continued Title IV program eligibility is critical to the operation of our business. If University of Phoenix becomes ineligible to participate in Title IV programs, or participation is materially limited, our business would be unsustainable.

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•	Federal Trade Commission Investigation


•	California Attorney General Investigations

We are cooperating with the California Attorney General in these investigative proceedings. We cannot predict the eventual scope, duration or outcome of the investigations at this time.


•	Financial Aid Funding Levels

The most recent reauthorization of the Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in discussion and activity regarding Higher Education Act reauthorization, but the timing and terms of any eventual reauthorization cannot be predicted.

Title IV program funding is a potential target for reduction by Congress. Because the majority of our revenue is derived from Title IV programs, any action by Congress that reduces Title IV program funding, or which alters the eligibility of our institutions or students to participate in Title IV programs could have a material adverse effect on our enrollment and financial condition. Action by Congress or federal agencies could also require us to modify our practices in ways that increase our operating costs.

In addition to possible reductions in Title IV program funding, military benefit programs may be reduced as military branches address competing budget priorities. Reductions and/or changes in military benefit programs, or changes in our eligibility to participate in such programs, could result in increased student borrowing, decreased enrollment and adverse impacts on our 90/10 Rule percentage.

Expansion of Global Operations

We have operations on six co ntinents and recently expanded our global operations through the acquisition of Career Partner in fiscal year 2016. 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. Furthermore, there has been increased focus in recent years on educational institutions in certain of the countries in which we operate.

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Critical Accounting Policies and Estimates

Refer to our 2016 Annual Report on Form 10-K for our critical accounting policies and estimates and refer to Note 9 , Income Taxes , in Item 1, Financial Statements, for a discussion of the calculation of our interim income tax provision for the first quarter of fiscal years 2016 and 2017.

New Accounting Standards

For discussion of new accounting standards, 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 months ended November 30, 2016 compared to the three months ended November 30, 2015 .

As discussed in the Overview of this MD&A, the U.S. higher education industry continues to experience rapidly developing changes, including significant and increasing competition for the proprietary sector from public and private colleges and universities as these institutions continue to expand their online education programs. These developments have contributed to the substantial decline in University of Phoenix enrollment that began in late 2010.


•	University of Phoenix - University of Phoenix generally has lower net revenue in our second fiscal quarter (December through February) compared to other quarters due to holiday breaks.

•

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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 November 30,
	2016			2015			% of Net Revenue
($ in thousands)	2016			2015			2016		2015
Net revenue	$	484,499		$	586,021		100.0	%	100.0	%
Costs and expenses:
Instructional and student advisory	248,753			291,327			51.3	%	49.7	%
Marketing	90,967			93,802			18.8	%	16.0	%
Admissions advisory	26,588			34,188			5.5	%	5.8	%
General and administrative	51,325			67,445			10.6	%	11.5	%
Depreciation and amortization	26,854			27,394			5.5	%	4.7	%
Provision for uncollectible accounts receivable	13,930			15,313			2.9	%	2.6	%
Restructuring and impairment charges	15,365			97,823			3.2	%	16.7	%
Merger, acquisition and other related costs, net	2,313			3,978			0.5	%	0.7	%
Total costs and expenses	476,095			631,270			98.3	%	107.7	%
Operating income (loss)	8,404			(45,249		)	1.7	%	(7.7	)%
Interest income	1,087			919			0.2	%	0.2	%
Interest expense	(1,425		)	(1,456		)	(0.3	)%	(0.3	)%
Other loss, net	(644		)	(843		)	(0.1	)%	(0.2	)%
Income (loss) from continuing operations before income taxes	7,422			(46,629		)	1.5	%	(8.0	)%
Provision for income taxes	(4,223		)	(12,239		)	(0.8	)%	(2.0	)%
Income (loss) from continuing operations	3,199			(58,868		)	0.7	%	(10.0	)%
Loss from discontinued operations, net of tax	—			(3,259		)	—	%	(0.6	)%
Net income (loss)	3,199			(62,127		)	0.7	%	(10.6	)%
Net loss attributable to noncontrolling interests	871			1,362			0.1	%	0.2	%
Net income (loss) attributable to Apollo	$	4,070		$	(60,765	)	0.8	%	(10.4	)%

Net Revenue

Our net revenue decreased $101.5 million , or 17.3% , in the three months ended November 30, 2016 compared to the prior year. The decrease was attributable to a 23.4% net revenue decline at University of Phoenix principally due to lower enrollment. See discussion of the enrollment decline in Analysis of Operating Results by Reportable Segment - University of Phoenix below. This was partially offset by an increase in Apollo Global net revenue.

Instructional and Student Advisory

Instructional and student advisory decreased $42.6 million , or 14.6% , in the three months ended November 30, 2016 compared to the prior year, which represented an increase as a percentage of net revenue of 160 basis points. The decrease in expense was primarily due to lower costs that are more variable in nature such as faculty associated with University of Phoenix’s enrollment decline, and lower costs including compensation and rent attributable to our restructuring activities. This was partially offset by costs attributable to our acquisition of Career Partner, which occurred during the second quarter of fiscal year 2016.

Marketing

Marketing decreased $2.8 million , or 3.0% , in the three months ended November 30, 2016 compared to the prior year, which represented an increase as a percentage of net revenue of 280 basis points. The decrease in expense was principally attributable to lower headcount as a result of our restructuring activities, which was partially offset by an increase in advertising at University of Phoenix associated with its brand initiatives.

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Admissions Advisory

Admissions advisory decreased $7.6 million , or 22.2% , in the three months ended November 30, 2016 compared to the prior year, which represented a decrease as a percentage of net revenue of 30 basis points. The decrease was principally attributable to lower University of Phoenix headcount as a result of our restructuring activities.

General and Administrative

General and administrative decreased $16.1 million , or 23.9% , in the three months ended November 30, 2016 compared to the prior year, which represented a decrease as a percentage of net revenue of 90 basis points. The decrease was primarily due to lower headcount as a result of our restructuring activities, and other reductions in compensation expense, including share-based compensation.

Depreciation and Amortization

Depreciation and amortization decreased $0.5 million , or 2.0% , in the three months ended November 30, 2016 compared to the prior year, which represented an increase as a percentage of net revenue of 80 basis points. The decrease in expense was principally attributable to lower depreciation expense resulting from a decline in depreciable assets due in part to our restructuring activities. This was partially offset by Career Partner’s intangible asset amortization, which was acquired in the second quarter of fiscal year 2016.

Provision for Uncollectible Accounts Receivable

Provision for uncollectible accounts receivable decreased $1.4 million , or 9.0% , in the three months ended November 30, 2016 compared to the prior year, which represented an increase as a percentage of net revenue of 30 basis points. The decrease in expense was primarily due to lower University of Phoenix enrollment.

Restructuring and Impairment Charges

Restructuring and impairment charges include the following for the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016		2015
Restructuring charges	$	15,365	$	24,430
Goodwill impairments ⁽¹⁾	—		73,393
Restructuring and impairment charges	$	15,365	$	97,823

⁽¹⁾ The goodwill impairment charges represent $71.8 million and $1.6 million for our University of Phoenix and Western International University reporting units, respectively.

The following summarizes the restructuring charges in our segment reporting format for the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016		2015
University of Phoenix	$	5,805	$	19,090
Apollo Global	1,417		404
Other	8,143		4,936
Restructuring charges	$	15,365	$	24,430

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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.

Merger, Acquisition and Other Related Costs, Net

We recorded $2.3 million and $4.0 million of net expense during the three months ended November 30, 2016 and November 30, 2015 , respectively, which principally represents professional fees associated with our pending Merger discussed further in the Overview of this MD&A.

Provision for Income Taxes

During the three months ended November 30, 2016 , we had pre-tax income of $7.4 million and recorded $4.2 million of income tax expense. Based on the amount of our pre-tax income, our effective income tax rate for the three months ended November 30, 2016 was significantly impacted by the composition of our pre-tax income from domestic and foreign operations, including foreign losses for which we cannot take a tax benefit.

During the three months ended November 30, 2015 , our effective income tax rate for continuing operations was significantly impacted by the $71.8 million goodwill impairment charge for our University of Phoenix reporting unit, which was not deductible for tax purposes.

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Analysis of Operating Results by Reportable Segment

The following details our operating results by reportable segment for the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016			2015			$ Change			% Change
Net revenue:
University of Phoenix	$	354,294		$	462,617		$	(108,323	)	(23.4	)%
Apollo Global	121,246			115,332			5,914			5.1	%
Other	8,959			8,072			887			11.0	%
Net revenue	$	484,499		$	586,021		$	(101,522	)	(17.3	)%
Operating income (loss):
University of Phoenix	$	32,550		$	(17,504	)	$	50,054		*
Apollo Global	(3,643		)	(2,335		)	(1,308		)	(56.0	)%
Other	(20,503		)	(25,410		)	4,907			19.3	%
Operating income (loss)	$	8,404		$	(45,249	)	$	53,653		*

* Not meaningful

University of Phoenix

University of Phoenix’s net revenue decreased $108.3 million , or 23.4% , during the three months ended November 30, 2016 compared to the prior year. The decrease was principally attributable to lower Average Degreed Enrollment as discussed below. The University’s future net revenue will be impacted by 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 November 30,
(Rounded to the nearest hundred)	2016	2015	% Change
Degreed Enrollment ^{(1), (2)}	135,900	176,900	(23.2	)%
New Degreed Enrollment ⁽³⁾	20,200	24,500	(17.6	)%
Average Degreed Enrollment ⁽⁴⁾	139,200	183,800	(24.3	)%

⁽¹⁾ Represents students enrolled in a degree program who attended a credit bearing course during the quarter and had not graduated as of the end of the quarter; students who previously graduated from one degree program and started a new degree program in the quarter (e.g., a graduate of an associate’s degree program returns for a bachelor’s degree); and students participating in certain certificate programs of at least 18 credits with some course applicability into a related degree program.

⁽²⁾ As described in Footnote 1, Degreed Enrollment includes students who attended a credit bearing course during the quarter and had not graduated as of the end of the quarter. The proportion of students included in Degreed Enrollment who have completed their academic work but not yet formally graduated (“academically complete students”) increased beginning in the third quarter of fiscal year 2016 compared to the prior year periods due to changes in the manner in which graduation applications are processed. We estimate that the number of academically complete students reflected in this increase was approximately 2,000 - 3,000 for both the third and fourth quarters of fiscal year 2016, and 500 - 1,500 for the first quarter of fiscal year 2017.

⁽³⁾ 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.

⁽⁴⁾ Represents the average of quarterly Degreed Enrollment from the beginning to the end of the respective periods.

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University of Phoenix Average Degreed Enrollment decreased 24.3% in the three months ended November 30, 2016 compared to the prior year primarily due to the continued decline in New Degreed Enrollment. We believe the following factors, some of which are discussed in more detail in the Overview of this MD&A, contributed to the decrease:


•	University of Phoenix enrollment continues to be adversely impacted by the rapidly evolving and highly competitive education industry, which includes adverse publicity associated with the challenging political and regulatory environment, particularly for the proprietary education sector; and


•	Recently launched initiatives as part of the University’s transformation strategy including the retiring of a number of lower retaining associate’s degree programs. Some of these initiatives have accelerated the enrollment decline at University of Phoenix in recent years, and we expect that the University’s enrollment will continue declining in the near term.

University of Phoenix had operating income of $32.6 million and an operating loss of $17.5 million during the three months ended November 30, 2016 and November 30, 2015 , respectively. The University’s operating results were impacted by $5.8 million and $90.9 million of restructuring and impairment charges for the respective periods. In addition, the University’s operating results declined in the first quarter of fiscal year 2016 compared to the prior year due to lower net revenue, which was partially offset by lower costs attributable to our restructuring activities and decreases in costs that are more variable in nature.

Apollo Global

Apollo Global’s net revenue increased $5.9 million during the three months ended November 30, 2016 compared to the prior year. The increase was primarily due to revenue from Career Partner, which was acquired in the second quarter of fiscal year 2016. The increase in revenue was partially offset by the impact of foreign exchange rates (approximately $11 million).

Apollo Global had operating losses of $3.6 million and $2.3 million during the three months ended November 30, 2016 and 2015, respectively. Apollo Global’s operating results include the following during the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016			2015
Depreciation and amortization	$	11,292		$	8,701
Merger, acquisition and other related (credit) costs, net	(311		)	591
Restructuring and impairment charges	1,417			404

Other

Other net revenue increased $0.9 million during the three months ended November 30, 2016 compared to the prior year due to an increase in net revenue at The Iron Yard.

Other operating losses decreased $4.9 million during the three months ended November 30, 2016 compared to the prior year due to reduced operating costs resulting from our restructuring activities.

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. Our ability to deploy currently available liquidity is constrained by our need to maintain U.S. Department of Education financial responsibility composite scores of at least 1.5, and, if the scores fall below 1.5, would adversely impact our ability to finance the operation of our business. Additionally, our existing $625 million Revolving Credit Facility described below expires in April 2017. Furthermore, access to 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, reduced availability of Title IV program funding, or other adverse effects on our business from regulatory or legislative changes. For a detailed discussion of the regulatory environment and related risks, refer to Part I, Item 1A, Risk Factors , in our 2016 Annual Report on Form 10-K.

Our existing syndicated $625 million credit facility expires in April 2017. Due to the current challenging business and regulatory climate for the proprietary education sector and the continued decline in our operating performance, we expect that any subsequent credit facility, if one can be arranged, will be substantially smaller and more expensive than our current facility. We believe that a number of lenders, including members of our Revolving Credit Facility syndicate, have made a decision to exit the proprietary education sector. Accordingly, there is no assurance that we will be able to timely arrange a replacement credit facility on terms acceptable to us or at all, and much will depend on near-term developments in our business and the proprietary education sector generally.

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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 period ends:



							% of Total Assets at
($ in thousands)	November 30, 2016		August 31, 2016		% Change		November 30, 2016		August 31, 2016
Cash and cash equivalents	$	517,274	$	464,024	11.5	%	26.5	%	23.1	%
Restricted cash and cash equivalents	124,871		142,170		(12.2	)%	6.4	%	7.1	%
Current marketable securities	117,392		197,886		(40.7	)%	6.0	%	9.8	%
Noncurrent marketable securities	6,893		18,758		(63.3	)%	0.3	%	0.9	%
Total	$	766,430	$	822,838	(6.9	)%	39.2	%	40.9	%

Cash and cash equivalents (excluding restricted cash) increased $53.3 million primarily due $91.6 million of marketable securities maturities and sales (net of purchases), and $16.5 million of cash provided by operations. This was partially offset by $32.4 million of payments on borrowings and $20.9 million of capital expenditures.

We consider the unremitted earnings attributable to certain of our foreign subsidiaries to be permanently reinvested. As of November 30, 2016 , the unremitted earnings from these operations were not significant.

As of November 30, 2016 , our cash and restricted cash equivalents included $137.4 million of money market funds that we measure at fair value. We determine fair value of these funds using a market approach with Level 1 inputs that primarily consist of real-time quotes for transactions in active exchange markets involving identical assets. Our remaining cash and cash equivalents approximate fair value because of the short-term nature of the financial instruments.

Our marketable securities, which principally include corporate bonds and tax-exempt municipal bonds, have original maturities to us greater than three months, and contractual maturities that will occur within two years. Our 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 3 , Financial Instruments , in Item 1, Financial Statements .

Debt

As of August 31, 2016 , we had $30 million of outstanding borrowings under the Revolving Credit Facility and approximately $29 million of outstanding letters of credit. We repaid the entire amount borrowed under the Revolving Credit Facility as of August 31, 2016 during the first quarter of fiscal year 2017. As of November 30, 2016 we had no outstanding borrowings under the Revolving Credit Facility and approximately $28 million of outstanding letters of credit.

The 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.

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Cash Flows

Operating Activities

The following provides a summary of our operating cash flows during the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016			2015
Net income (loss)	$	3,199		$	(62,127	)
Non-cash items	55,370			128,928
Changes in assets and liabilities	(42,115		)	(85,668		)
Net cash provided by (used in) operating activities	$	16,454		$	(18,867	)

Three Months Ended November 30, 2016 - Our non-cash items primarily consisted of $26.9 million of depreciation and amortization, a $13.9 million provision for uncollectible accounts receivable, and $8.7 million of deferred income taxes. The changes in assets and liabilities, primarily consisted of the following:


•	A $39.9 million use of cash related to the change in accounts receivable, excluding the provision for uncollectible accounts receivable;


•	A $31.6 million decrease in student deposits principally attributable to the enrollment decline at University of Phoenix and the timing of course starts at BPP; and


•	A $28.3 million decrease in accrued and other liabilities principally attributable to the payment of accrued bonuses.

The above changes were partially offset by a $50.9 million increase in deferred revenue principally attributable to the timing of course starts at BPP and University of Phoenix, and a decrease in restricted cash at University of Phoenix.

We monitor University of Phoenix accounts receivable through a variety of metrics, including days sales outstanding. We calculate the University’s days sales outstanding by determining average daily student revenue based on a rolling twelve month analysis and divide it into its gross student accounts receivable balance as of the end of the period. As of November 30, 2016 , University of Phoenix’s days sales outstanding was 35 days compared to 30 days and 21 days as of August 31, 2016 and November 30, 2015 , respectively. The increase in days sales outstanding was principally attributable to higher University of Phoenix gross student receivables as of November 30, 2016 primarily due to the timing of student cohort start dates and financial aid funds received by the University at the end of the respective periods.

Three Months Ended November 30, 2015 - Our non-cash items primarily consisted of $73.4 million of goodwill impairments, $27.4 million of depreciation and amortization, a $15.3 million provision for uncollectible accounts receivable, and $9.5 million of share-based compensation. The changes in assets and liabilities primarily consisted of the following:


•	A $32.9 million use of cash related to the change in accounts receivable, excluding the provision for uncollectible accounts receivable;


•	A $26.0 million decrease in accrued and other liabilities principally attributable to the timing of our payroll cycle and the payment of accrued bonuses; and


•	A $14.7 million decrease in accounts payable.

Investing Activities

The following provides a summary of our investing cash flows during the respective periods:



	Three Months Ended November 30,
($ in thousands)	2016			2015
Maturities and sales (purchases) of marketable securities, net	91,578			(46,939		)
Capital expenditures	(20,872		)	(14,456		)
Other	152			(196		)
Net cash provided by (used in) investing activities	$	70,858		$	(61,591	)

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Financing Activities

The following provides a summary of our financing cash flows during the respective periods:



	Three Months Ended November 31,
($ in thousands)	2016			2015
Payments on borrowings, net	$	(32,377	)	$	(2,522	)
Share repurchases	(997		)	(517		)
Net cash used in financing activities	$	(33,374	)	$	(3,039	)

Three Months Ended November 30, 2016 - Cash used in financing activities primarily consisted of $32.4 million used for payments on borrowings. The share repurchases during the first quarter of fiscal year 2017 related to tax withholding requirements on share-based awards. We did not repurchase shares under our share repurchase program during the three months ended November 30, 2016 .

As of November 30, 2016 , 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. We are prohibited from repurchasing shares under the agreements associated with our pending Merger, as described in the Overview of this MD&A.

Three Months Ended November 30, 2015 - The share repurchases during the first quarter of fiscal year 2016 related to tax withholding requirements on share-based awards. We did not repurchase shares under our share repurchase program during the three months ended November 30, 2015 .

Contractual Obligations and Other Commercial Commitments

There have been no material changes in our contractual obligations and other commercial commitments other than in the ordinary course of business since the end of fiscal year 2016 through November 30, 2016 .

Information regarding our contractual obligations and other commercial commitments is provided in our 2016 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, 2016 . For a discussion of our exposure to market risk, refer to our 2016 Annual Report on Form 10-K.

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 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.

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Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting during the quarter ended November 30, 2016 , 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 13 , 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

In addition to the risk factors set forth below, see the risk factors included in our Annual Report on Form 10-K for the year ended August 31, 2016 and the discussion in Key Trends, Developments and Challenges in Management’s Discussion and Analysis of Financial Condition and Results of Operations above.

New Department of Education regulations regarding discharge of Title IV student loan obligations and standards for institutional financial responsibility subject our business to substantial risks, including reimbursement of the Department for any debt relief granted by the Department to potentially large groups of students and automatic requirements to post a substantial letter of credit upon the occurrence of certain events.

Defense to Repayment Regulations


•	a school breaches contractual promises to a student;


•	certain judgments based on any state or federal law are entered against a school related to the loan or the educational services after a contested proceeding; or


•	a school makes substantial misrepresentations about the nature of its educational programs, financial charges or employability of graduates.

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Financial Responsibility Standards

The final regulations also modify the Department’s financial responsibility standards to provide that an institution (other than a public institution) is deemed not to be financially responsible if it is subject to one or more specified triggering events on or after July 1, 2017. Under the final regulations, an institution is automatically deemed not financially responsible upon the occurrence of any of the following events:


•	For proprietary institutions, a failure to satisfy the 90/10 test for the prior fiscal year;


•	For publicly traded institutions:


◦	A warning from the Securities and Exchange Commission that it may suspend trading in the institution’s stock;


◦	The institution fails to timely file annual or quarterly periodic reports with the SEC;


◦	A notice from the relevant stock exchange that the institution is not in compliance with exchange requirements, or the delisting of its stock;


•	The institution’s two most recent cohort default rates are greater than 30%.

In addition, an institution will be deemed not to be financially responsible if the institution is subject to one or more other specified triggering events, and after taking into account the actual or potential debts, liabilities, or losses that have stemmed or may stem from such actions or events, the institution’s recalculated composite score is less than 1.0, as determined by the Department. Such triggering events include the following:


•	The institution incurs a liability in connection with a judicial or administrative proceeding, including as a result of settlement;


•	The institution is sued after July 1, 2017 by a federal or state authority regarding certain matters involving student loans or the provision of educational services and such suit is still pending after 120 days;


•	The institution is otherwise sued after July 1, 2017 and such lawsuit has survived a motion for summary judgment or the time to assert such a motion has expired;


•	The institution is required by its accrediting agency to submit a teach-out plan in connection with closure of the institution or certain of its locations;


•	The institution has programs that could become ineligible to participate in Title IV programs based on the gainful employment debt service-to-earnings rates for the next measuring year; or


•	The institution has a composite score of less than 1.5 and experiences a withdrawal of owner’s equity by any means, including by declaring a dividend.


•	significant fluctuation in the amount of Title IV funds received by the institution;


•	citation of noncompliance by a state licensing or authorizing agency;


•	failure of a financial stress test to be developed by the Department;


•	high annual dropout rates, as calculated by the Department;


•	action by an accrediting agency to place the institution on probation or issue a show-cause order for failure to meet one or more accrediting standards;


•	violation of a provision in a loan agreement; or


•	pending borrower defense to repayment claims or an expectation that a significant number of borrower defense to repayment claims will be filed related to the institution, as determined by the Department.

If an institution is deemed not to be not financially responsible because of the occurrence of one or more of the foregoing triggering events, the institution will be required to post an irrevocable letter of credit in an amount determined by the Department that is not less than 50% of the amount of Title IV program funds received by the institution in its last fiscal year. In the alternative, subject to Department approval, such an institution may continue to participate in Title IV programs under a provisional certification for a limited period of time provided that, among other things the institution posts an irrevocable letter of credit in an amount determined by the Department that is at least 10% of the amount of Title IV program funds received by the institution in its last fiscal year.

An institution that is required to provide a letter of credit may also be required to disclose to students information about the letter of credit, if the Department determines through consumer testing that such disclosures are meaningful to students.

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Recently, two major proprietary higher education institutions were forced to cease operations and seek bankruptcy protection due to delays in Title IV disbursements and requirements to post letters of credit imposed by the Department based in part on the existence of pending state and federal investigations and the Department’s judgment regarding various subjective matters such as the institution’s culture. These new regulations increase the power of the Department to take summary action that could harm University of Phoenix and Apollo Education Group, perhaps materially, before we could effectively exercise our due process rights, even if the action is based on pending investigations or legal proceedings that ultimately are determined to lack merit.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchase of Equity Securities

We did not repurchase shares of our Class A common stock during the three months ended November 30, 2016 , and the following details changes in our treasury stock during the three months ended November 30, 2016 :



(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 August 31, 2016	78,857		$	49.06	78,857		$	52,224
New authorizations	—		—		—		—
Share repurchases	—		—		—		—
Share reissuances	—		—		—		—
Treasury stock as of September 30, 2016	78,857		$	49.06	78,857		$	52,224
New authorizations	—		—		—		—
Share repurchases	—		—		—		—
Share reissuances	(168	)	49.06		(168	)	—
Treasury stock as of October 31, 2016	78,689		$	49.06	78,689		$	52,224
New authorizations	—		—		—		—
Share repurchases	—		—		—		—
Share reissuances	(46	)	49.06		(46	)	—
Treasury stock as of November 30, 2016	78,643		$	49.06	78,643		$	52,224

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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 November 30, 2016 .

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
	Exhibit Number	Exhibit Description
	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

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 54

Table of Contents

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: January 9, 2017




	By:	/s/ Gregory J. Iverson
		Gregory J. Iverson Senior Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer (Principal Financial and Accounting Officer)

Apollo Education Group, Inc. | First Quarter 2017 Form 10-Q | 55

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