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PREM14A
APOLLO EDUCATION GROUP INC filed this Form PREM14A on 03/08/2016
Entire Document
 
PREM14A

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Rule 14a-101)

 

 

Filed by the Registrant  x                             Filed by a Party other than the Registrant   ¨

Check the appropriate box:

 

x   Preliminary Proxy Statement
¨   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
¨   Definitive Proxy Statement
¨   Definitive Additional Materials
¨   Soliciting Material Pursuant to §240.14a-12

APOLLO EDUCATION GROUP, INC.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

¨   No fee required.
x   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)   Title of each class of securities to which transaction applies:
   

Class A common stock, without par value

Class B common stock, without par value

  (2)  

Aggregate number of securities to which transaction applies:

 

   

As of March 2, 2016, (A) 108,167,602 shares of Class A common stock; (B) 475,149 shares of Class B common stock; (C) 0 shares of Class A common stock issuable upon the exercise of stock options with an exercise price less than the per share merger consideration of $9.50; (D) 5,216,922 shares of Class A common stock underlying restricted stock units (including shares of Class A common stock underlying restricted stock units subject to deferral); and (E) 152,656 shares of Class A common stock underlying performance stock units.

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

   

Solely for the purpose of calculating the filing fee, the underlying value of the transaction was calculated as the sum of: (A) 108,167,602 shares of Class A common stock, multiplied by $9.50; (B) 475,149 shares of Class B common stock, multiplied by $9.50; (C) 0 shares of Class A common stock issuable upon the exercise of stock options with an exercise price less than $9.50, multiplied by $9.50; (D) 5,216,922 shares of Class A common stock underlying restricted stock units (including shares of Class A common stock underlying restricted stock units subject to deferral), multiplied by $9.50; and (E) 152,656 shares of Class A common stock underlying performance stock units, multiplied by $9.50.

  (4)  

Proposed maximum aggregate value of transaction:

 

   

$1,083,117,125.50

  (5)  

Total fee paid:

 

   

$109,069.89, determined, in accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, by multiplying 0.00010070 by the proposed maximum aggregate value of the transaction of $1,083,117,125.50.

¨   Fee paid previously with preliminary materials.
¨   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
  (1)  

Amount Previously Paid:

     

  (2)  

Form, Schedule or Registration Statement No.:

     

  (3)  

Filing Party:

 

     

  (4)  

Date Filed:

     

 

 

 


PRELIMINARY PROXY STATEMENT—SUBJECT TO COMPLETION

 

LOGO

Apollo Education Group, Inc.

4025 S. Riverpoint Parkway

Phoenix, Arizona 85040

[●], 2016

Dear Shareholder,

We cordially invite you to attend a special meeting of the holders of our Class A common stock, without par value, which we refer to as Class A common stock, and the holders of our Class B common stock, without par value, which we refer to as Class B common stock, of Apollo Education Group, Inc., an Arizona corporation, which we refer to as the Company, we, us or our, to be held on [●], 2016 at [●], local Phoenix time, at [●].

On February 7, 2016, the Company entered into a merger agreement providing for the acquisition of the Company by AP VIII Queso Holdings, L.P., a Delaware limited partnership, which we refer to as Parent, an entity formed by affiliates of Apollo Management VIII, L.P., and Socrates Merger Sub, Inc., an Arizona corporation and a wholly owned subsidiary of Parent, which we refer to as Merger Sub. Apollo Management VIII, L.P. is not, and has not been, affiliated with Apollo Education Group, Inc. At the special meeting you will be asked, among other things, to consider and vote upon a proposal to adopt the merger agreement.

If the merger is completed, you will be entitled to receive $9.50 in cash, without interest, less any applicable withholding taxes, for each share of our Class A common stock and each share of our Class B common stock owned by you, which represents a premium of approximately 37% to the closing price of our Class A common stock as of February 5, 2016, the last trading day prior to the public announcement of the execution of the merger agreement, and a premium of approximately 44% to the closing price of our Class A common stock on January 8, 2016, immediately prior to the announcement that the Company’s board of directors, which we refer to as the board of directors, was pursuing strategic alternatives.

The board of directors has determined that the merger agreement, the transactions contemplated by the merger agreement (including the merger) and the voting and support agreements described below are fair to, and in the best interests of, the Company and its shareholders, has approved and declared advisable the merger agreement, the transactions contemplated by the merger agreement (including the merger) and the voting and support agreements, and has submitted the merger agreement to the shareholders for their consideration and recommended that the shareholders approve the merger agreement and the other proposal being submitted for shareholder approval as described below and in the accompanying proxy statement. The board of directors made its determination after consultation with its legal and financial advisors and consideration of a number of factors. Approval of the proposal to adopt the merger agreement requires the affirmative vote of holders of a majority of the outstanding shares of Class A common stock and the affirmative vote of holders of a majority of the outstanding shares of Class B common stock entitled to vote thereon. Although our Class A common stock is non-voting stock generally, the holders of Class A common stock are entitled to a special vote as a class on the merger agreement under applicable Arizona corporate law. Each holder of Class B common stock and certain holders of Class A common stock described under “The Voting and Support Agreements” beginning on page [●] have entered into voting and support agreements with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies. The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to approve, by non-binding, advisory vote,


certain compensation arrangements for the Company’s named executive officers in connection with the merger.

Your vote is very important. The merger cannot be completed unless the merger agreement is adopted by both the affirmative vote of holders of a majority of the outstanding shares of the Company’s Class A common stock and the affirmative vote of holders of a majority of the outstanding shares of the Company’s Class B common stock. Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope, or submit your proxy by telephone or the Internet. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. The failure to return your proxy or vote at the special meeting in person will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

If your shares of our Class A common stock are held in “street name” by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to vote your shares of our Class A common stock without instructions from you. You should instruct your bank, brokerage firm or other nominee to vote your shares of our Class A common stock in accordance with the procedures provided by your bank, brokerage firm or other nominee. The failure to instruct your bank, brokerage firm or other nominee to vote your shares of Class A common stock “FOR” approval of the proposal to adopt the merger agreement will have the same effect as voting “AGAINST” approval of the proposal to adopt the merger agreement.

The accompanying proxy statement provides you with detailed information about the special meeting, the merger agreement, the voting and support agreements and the merger. A copy of the merger agreement is attached as Annex A to the proxy statement, and copies of the voting and support agreements are attached as Annex B to the proxy statement, and are incorporated by reference therein. We encourage you to read the entire proxy statement and its annexes, including the merger agreement and the voting and support agreements, carefully. You may also obtain additional information about the Company from documents we have filed with the Securities and Exchange Commission.

If you have any questions or need assistance voting your shares of our Class A common stock or Class B common stock, please contact Innisfree M&A Incorporated, our proxy solicitor, by calling toll-free at (888) 750-5834. Banks and brokers should call at (212) 750-5833.

The board of directors has approved and declared advisable the merger agreement and recommends that you vote “FOR” the adoption of the merger agreement.

Thank you in advance for your cooperation and continued support.

 

Sincerely,
Gregory W. Cappelli
Chief Executive Officer

The proxy statement is dated [●], 2016, and is first being mailed to our shareholders on or about [●], 2016.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THE ACCOMPANYING PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.


LOGO

Apollo Education Group, Inc.

4025 S. Riverpoint Parkway

Phoenix, Arizona 85040

NOTICE OF SPECIAL MEETING OF CLASS A AND CLASS B SHAREHOLDERS

To Be Held on [], 2016

To the Shareholders of Apollo Education Group, Inc.:

Notice is hereby given that a special meeting of the holders of our Class A common stock, without par value, which we refer to as Class A common stock, and the holders of our Class B common stock, without par value, which we refer to as Class B common stock, of Apollo Education Group, Inc., an Arizona corporation, which we refer to as the Company, will be held at [●], local Phoenix time, on [●], 2016, at [●], for the following purposes:

 

  1. To consider and vote on a proposal to adopt the Agreement and Plan of Merger, dated as of February 7, 2016 as it may be amended from time to time, which we refer to as the merger agreement, by and among the Company, AP VIII Queso Holdings, L.P., a Delaware limited partnership, which we refer to as Parent, and Socrates Merger Sub, Inc., an Arizona corporation and wholly owned subsidiary of Parent, which we refer to as Merger Sub. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement.

 

  2. To consider and vote on a proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

 

  3. In the case of holders of our Class B common stock only, to consider and vote on any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

The merger agreement and the voting and support agreements executed concurrently with the merger agreement, and the merger, along with the other transactions that would be effected in connection with the merger, are described more fully in the attached proxy statement, and we urge you to read it carefully and in its entirety.

Adoption of the merger agreement requires both the affirmative vote of holders of a majority of the outstanding shares of Class A common stock in favor of the adoption of the merger agreement and the affirmative vote of holders of a majority of the outstanding shares of Class B common stock in favor of adoption of the merger agreement. The approval of the holders of both our Class A common stock and Class B common stock, which we refer to collectively as common stock, is required for the adoption of the merger agreement. Although our Class A common stock is non-voting stock generally, the holders of Class A common stock are entitled to a special vote as a class on the merger agreement under applicable Arizona corporate law. Each holder of Class B common stock and certain holders of Class A common stock described under “The Voting and Support Agreements” beginning on page [●] have entered into voting and support agreements with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.


The Company’s board of directors, which we refer to as the board of directors, has determined that the merger agreement and the voting and support agreements, and the transactions contemplated by the merger agreement and the voting and support agreements, including the merger, are fair to, and in the best interests of, the Company and its shareholders and approved and declared advisable the merger agreement, the voting and support agreements, and the transactions contemplated by the merger agreement and the voting and support agreements, including the merger. The board of directors made its determination after consultation with its legal and financial advisors and consideration of a number of factors. The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

Your vote is very important, regardless of the number of shares of common stock of the Company you own. The merger cannot be completed unless the merger agreement is adopted by both the affirmative vote of holders of a majority of the outstanding shares of the Company’s Class A common stock and the affirmative vote of holders of a majority of the outstanding shares of the Company’s Class B common stock. The approval of the holders of both our Class A common stock and Class B common stock is required for the adoption of the merger agreement. Although our Class A common stock is non-voting stock generally, the holders of Class A common stock are entitled to a special vote as a class on the merger agreement under applicable Arizona corporate law. Each holder of Class B common stock and certain holders of Class A common stock described under “The Voting and Support Agreements” beginning on page [●] have entered into voting and support agreements with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope or submit your proxy by telephone or the Internet prior to the special meeting to ensure that your shares of Class A common stock and Class B common stock of the Company will be represented at the special meeting if you are unable to attend. If you fail to return your proxy card or fail to submit your proxy by phone or the Internet, it will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement. If you are a shareholder of record, voting in person at the special meeting will revoke any proxy previously submitted. If you hold your shares of our Class A common stock through a bank, brokerage firm or other nominee, you should follow the procedures provided by your banker, brokerage firm or other nominee in order to vote.

The board of directors has fixed the close of business on [●], 2016 as the record date for determination of shareholders entitled to notice of, and to vote at, the special meeting and any adjournments or postponements thereof. Only shareholders of record at the close of business on the record date are entitled to notice of, and to vote at (in person or by proxy), the special meeting and at any adjournment or postponement thereof. You will be entitled to one (1) vote for each share of our Class A common stock and one (1) vote for each share of our Class B common stock that you owned on the record date. A complete list of our shareholders of record entitled to vote at the special meeting will be available for inspection at our principal executive offices beginning two (2) days after notice is given until the date of the special meeting and continuing through the special meeting for any purpose germane to the special meeting. The list will also be available at the special meeting for inspection by any shareholder present at the special meeting.

Only shareholders of record, their duly authorized proxy holders, beneficial shareholders with proof of ownership and our guests may attend the special meeting. If you are a shareholder of record, please bring valid photo identification to the special meeting. If your shares of our Class A common stock are held through a bank, brokerage firm or other nominee, please bring to the special meeting valid photo identification and proof of your beneficial ownership of our Class A common stock. Acceptable proof could include an account statement showing that you owned shares of our Class A common stock on the record date, [●], 2016. If you are the representative of a corporate or institutional shareholder, you must present valid photo identification along with proof that you are the representative of such shareholder. Please note that cameras, recording devices and other electronic devices will not be permitted at the special meeting.


WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. IF YOU WILL ATTEND THE SPECIAL MEETING AND VOTE IN PERSON, YOUR VOTE BY BALLOT WILL REVOKE ANY PROXY PREVIOUSLY SUBMITTED. SIMILARLY, IF YOU HOLD YOUR SHARES OF OUR CLASS A COMMON STOCK THROUGH A BANK, BROKERAGE FIRM OR OTHER NOMINEE, YOU SHOULD FOLLOW THE PROCEDURES PROVIDED BY YOUR BANK, BROKERAGE FIRM OR OTHER NOMINEE IN ORDER TO VOTE.

 

By Order of the Board of Directors,
Sean B.W. Martin
Senior Vice President, General Counsel and Secretary

Phoenix, Arizona

Dated: [●], 2016


TABLE OF CONTENTS

 

SUMMARY

     1   

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

     14   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     22   

PARTIES TO THE MERGER

     24   

Apollo Education Group, Inc.

     24   

AP VIII Queso Holdings, L.P.

     24   

Socrates Merger Sub, Inc.

     24   

The Vistria Group

     24   

Najafi Companies

     24   

THE SPECIAL MEETING

     25   

Date, Time and Place of the Special Meeting

     25   

Purpose of the Special Meeting

     25   

Record Date and Quorum

     25   

Attendance

     26   

Vote Required

     26   

Proxies and Revocation

     29   

Adjournments

     29   

Anticipated Date of Completion of the Merger

     29   

Rights of Shareholders Who Seek Appraisal

     29   

Solicitation of Proxies; Payment of Solicitation Expenses

     30   

Questions and Additional Information

     30   

THE MERGER

     31   

Merger Consideration

     31   

Background of the Merger

     31   

Reasons for the Merger; Recommendation of the Company’s Board of Directors

     50   

Opinions of the Company’s Financial Advisors.

     57   

Certain Company Forecasts

     70   

Financing of the Merger

     75   

Closing and Effective Time of Merger

     76   

Payment of Merger Consideration and Surrender of Stock Certificates

     77   

Interests of Certain Persons in the Merger

     77   

Material U.S. Federal Income Tax Consequences of the Merger

     82   

Regulatory Approvals

     84   

Litigation Relating to the Merger

     85   

Amendment to the Shareholder Agreement and Termination

     85   

THE MERGER AGREEMENT

     87   

Explanatory Note Regarding the Merger Agreement

     87   

Effects of the Merger; Directors and Officers; Articles of Incorporation; By-laws

     87   

Closing and Effective Time of the Merger

     88   

Treatment of Common Stock and Stock-Based Awards

     88   

Exchange and Payment Procedures

     89   

Representations and Warranties

     91   

Conduct of Our Businesses Pending the Merger

     94   

Solicitation of Acquisition Proposals; Board Recommendation Changes

     96   

Shareholders Meeting

     99   

Filings; Other Actions; Notification

     99   

Company Cooperation with Refinancing

     102   

Employee Benefits Matters

     102   

Conditions to the Merger

     103   

 

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Termination

     106   

Termination Fees

     108   

Fees and Expenses

     109   

Remedies

     109   

Indemnification; Directors’ and Officers’ Insurance

     110   

Amendment or Supplement

     110   

Governing Law

     110   

Jurisdiction

     111   

THE VOTING AND SUPPORT AGREEMENTS

     112   

Explanatory Note Regarding the Voting and Support Agreements

     112   

Summary

     112   

THE REGULATORY SIDE LETTER AGREEMENTS

     114   

Explanatory Note Regarding the Regulatory Side Letter Agreements

     114   

Summary

     114   

ADVISORY VOTE ON MERGER-RELATED COMPENSATION FOR THE COMPANY’S NAMED EXECUTIVE OFFICERS

     116   

Golden Parachute Compensation

     116   

Merger-Related Compensation Proposal

     118   

Vote Required and the Company Board Recommendation

     118   

MARKET PRICE OF CLASS A COMMON STOCK

     119   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     120   

NO DISSENTERS’ RIGHTS

     123   

HOUSEHOLDING OF PROXY MATERIALS

     124   

DELISTING AND DEREGISTRATION OF CLASS A COMMON STOCK

     125   

SUBMISSION OF SHAREHOLDER PROPOSALS

     125   

WHERE YOU CAN FIND MORE INFORMATION

     125   

 

Annex A    Agreement and Plan of Merger
Annex B   

Voting and Support Agreements

 

B-1: Voting and Support Agreement, dated as of February 7, 2016, by and among AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., Apollo Education Group, Inc. and the John Sperling Revocable Trust.

B-2: Voting and Support Agreement, dated as of February 7, 2016, by and among AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., Apollo Education Group, Inc. and Peter V. Sperling.

B-3: Voting and Support Agreement, dated as of February 7, 2016, by and among AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., Apollo Education Group, Inc. and Gregory W. Cappelli.

B-4: Voting and Support Agreement, dated as of February 7, 2016, by and among AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., Apollo Education Group, Inc. and the John Sperling 1994 Irrevocable Trust.

B-5: Voting and Support Agreement, dated as of February 7, 2016, by and among AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., Apollo Education Group, Inc. and Aurora Foundation.

B-6: Voting and Support Agreement, dated as of February 7, 2016, by and among AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., Apollo Education Group, Inc. and San Roque School Charitable Trust.

 

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B-7: Voting and Support Agreement, dated as of February 7, 2016, by and among AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., Apollo Education Group, Inc. and the Peter Sperling Voting Stock Trust.

B-8: Voting and Support Agreement, dated as of February 7, 2016, by and among AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., Apollo Education Group, Inc. and Apollo Class B Voting Stock Trust No. 1.

Annex C    Amendment to Shareholder Agreement
Annex D    Opinion of Barclays Capital Inc.
Annex E    Opinion of Evercore Group L.L.C.

 

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This proxy statement and a proxy card are first being mailed on or about [●], 2016 to shareholders who owned shares of the Company’s common stock as of the close of business on [●], 2016.

SUMMARY

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic.

Parties to the Merger (Page [])

Apollo Education Group, Inc., or “the Company”, “we”, “us” or “our”, is one of the world’s largest private education providers, serving students since 1973. Through its subsidiaries, the Company offers undergraduate, graduate, professional development and other non-degree educational programs and services, online and on-campus, principally to working learners. Its educational programs and services are offered throughout the United States and in Europe, Australia, Latin America, Africa and Asia, as well as online throughout the world. For more information about the Company and its subsidiaries, call (800) 990-APOL or visit the Company’s website at www.apollo.edu. Our website address is provided as an inactive textual reference only. The information contained on our website is not incorporated into, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the Securities and Exchange Commission. See also “Where You Can Find More Information” beginning on page [●]. The Company’s Class A common stock is listed on the NASDAQ under the symbol “APOL”.

AP VIII Queso Holdings, L.P. is a Delaware limited partnership that is a subsidiary of funds affiliated with Apollo Management VIII, L.P. and Apollo Global Management, LLC. In addition to certain funds affiliated with Apollo Management VIII, L.P., which we refer to collectively as the AGM investors, Vistria Fund, LP, an affiliate of The Vistria Group, LP, has committed to purchase, or to cause one or more of its affiliates to purchase, a percentage of the equity interests of Parent prior to the effective time of the merger. AP VIII Queso Holdings, L.P. may assign all or part of its rights and obligations under the merger agreement to one or more affiliates, subject to the terms and conditions therein. We refer to AP VIII Queso Holdings, L.P. or its permitted assignee as “Parent” in this proxy statement. Prior to the closing of the merger, Najafi Companies, LLC and certain other financial investors with relationships with Apollo Management VIII, L.P. or The Vistria Group, LP may also commit to purchasing a certain percentage of the equity interests of Parent.

Socrates Merger Sub, Inc., or “Merger Sub”, is an Arizona corporation. Merger Sub is a wholly owned subsidiary of Parent and was formed solely for the purpose of engaging in the merger and other related transactions. Merger Sub has not engaged in any business other than in connection with the merger and other related transactions. Upon the completion of the merger, Merger Sub will cease to exist and the Company will continue as the surviving corporation.

The Vistria Group is a Chicago, Illinois-based private investment firm focused on investing in middle market companies in the healthcare, education, and financial services sectors. Vistria’s team is comprised of experienced operating partners and private equity executives, committed to building innovative market leading companies.

Najafi Companies is an international private investment firm based in Phoenix, Arizona, targeting education, media, consumer products, internet services, and direct marketing sectors. The firm makes highly

 

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selective investments in companies with strong management teams across a variety of industries, often in areas undergoing rapid transformation.

The Special Meeting (Page [])

Date, Time and Place of the Special Meeting (Page [])

The special meeting will be held on [●], 2016, at [●], local Phoenix time, at [●].

At the special meeting, holders of our Class A common stock, without par value, which we refer to as Class A common stock, and holders of our Class B common stock, without par value, which we refer to as Class B common stock, will be asked to approve the proposal to adopt the merger agreement and to approve the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger. If there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement, the special meeting may be adjourned for the purpose of soliciting additional proxies if the votes cast by the holders of the shares of our Class B common stock in person or by proxy at the special meeting in favor of a proposal to adjourn exceed the votes cast by such holders opposing such proposal. Each holder of Class B common stock has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Record Date and Quorum (Page [])

You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of our Class A common stock or Class B common stock, which we refer to collectively as our common stock or our shares, at the close of business on [●], 2016, which the Company has set as the record date for the special meeting and which we refer to as the record date. You will be entitled to one (1) vote for each share of our Class A common stock and one (1) vote for each share of our Class B common stock that you owned on the record date. As of the close of business on the record date, there were [●] shares of our Class A common stock outstanding and entitled to vote at the special meeting, held by [●] holders of record, as well as 475,149 shares of our Class B common stock outstanding and entitled to vote at the special meeting, held by three holders of record.

For purposes of the proposal to adopt the merger agreement, a majority of the votes entitled to be cast by the holders of our Class A common stock outstanding at the close of business on the record date, present in person or represented by proxy, at the special meeting constitutes a quorum of the Class A shareholders, and a majority of the shares of our Class B common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum of the Class B shareholders. For purposes of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger, a majority of the votes entitled to be cast by the holders of our Class A common stock and Class B common stock, collectively, outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum. For purposes of any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies, a majority of the votes entitled to be cast by the holders of our Class B common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum. Abstentions and broker non-votes (as described below) are counted as present for the purpose of determining whether a quorum is present.

Vote Required (Page [])

Approval of the proposal to adopt the merger agreement requires the affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding shares of our Class A common stock and the

 

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affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding shares of our Class B common stock entitled to vote thereon. Although our Class A common stock is non-voting stock generally, the holders of Class A common stock are entitled to a special vote as a class on the merger agreement under applicable Arizona corporate law. Abstentions and broker non-votes will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

The proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger, as described in the section titled “Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers” beginning on page [●], will be approved if the votes cast by the holders of our Class A common stock and Class B common stock, collectively, in person or by proxy, at the special meeting in favor of such proposal exceed the votes cast by such holders opposing such proposal. Although our Class A common stock is non-voting stock generally, the Company is providing shareholders with the opportunity to approve, on a non-binding, advisory basis, such merger-related compensation in accordance with Section 14A of the Securities Exchange Act of 1934 (as amended), which we refer to as the Exchange Act. Abstentions and broker non-votes and shares not in attendance at the special meeting will have no effect on the outcome of the proposal to approve the merger-related compensation.

Any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies will be approved if the votes cast by the holders of our Class B common stock in person or by proxy at the special meeting in favor of such proposal exceed the votes cast by such holders opposing such proposal. Each holder of Class B common stock has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

As of [●], 2016, the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate: (i) [●] shares of our Class A common stock (not including any shares of our common stock deliverable upon exercise or conversion of any options, stock appreciation rights, restricted shares or phantom awards), representing approximately [●] percent of the outstanding shares of our Class A common stock and (ii) [●] shares of our Class B common stock (not including any shares of our common stock deliverable upon exercise or conversion of any options, stock appreciation rights, restricted shares or phantom awards), representing approximately [●] percent of the outstanding shares of our Class B common stock. Certain directors and officers, as described under “The Voting and Support Agreements” beginning on page [●], have entered into voting and support agreements with the Company, Parent and Merger Sub, requiring such director or officer to vote all of his shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

As of March 2, 2016 the Apollo Class B Voting Stock Trust No. 1, Peter V. Sperling, the Peter Sperling Voting Stock Trust, the Aurora Foundation, the San Roque School Charitable Trust, the John Sperling Revocable Trust, the John Sperling 1994 Irrevocable Trust and Gregory W. Cappelli collectively beneficially owned and were entitled to vote 8,338,144 shares of our Class A common stock, representing approximately 7.7% of the outstanding shares of our Class A common stock, and 475,149 shares of our Class B common stock, representing 100% of the outstanding shares of our Class B common stock. Consistent with the terms of the voting and support agreements executed by such shareholders with Parent, Merger Sub and the Company, such shareholders intend to vote all of the shares of common stock held by them “FOR” approval of the proposal to adopt the merger agreement, “FOR” approval of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger and, with respect to such shareholders who hold shares of our Class B common stock, “FOR” approval of any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

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Proxies and Revocation (Page [])

Any shareholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person by appearing at the special meeting. If your shares of our Class A common stock are held in “street name” through a bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your shares of our common stock using the instructions provided by your bank, brokerage firm or other nominee. If you fail to submit a proxy or to vote in person at the special meeting, or do not provide your bank, brokerage firm or other nominee with instructions, as applicable, your shares of our Class A common stock will not be voted on the proposal to adopt the merger agreement, which will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement, and your shares of our Class A common stock will not be counted in respect of, and will not have an effect on, the proposal to approve the merger-related compensation.

You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by voting again at a later date through any of the methods available to you, by giving written notice of revocation to our Corporate Secretary, which must be filed with the Corporate Secretary by the time the special meeting begins, or by attending the special meeting and voting in person. Written notice of revocation should be mailed to: 4025 South Riverpoint Parkway, Phoenix, Arizona 85040, MS CF-KX01, Attention: Corporate Secretary.

The Merger (Page [])

The merger agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation in the merger, which we refer to as the surviving corporation, and will continue to do business following the consummation of the merger. As a result of the merger, the Company will cease to be a publicly traded company and will become a wholly owned direct or indirect subsidiary of Parent. If the merger is completed, you will not own any shares of the capital stock of the surviving corporation.

Merger Consideration (Page [])

In the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent and shares owned by the Company or any direct or indirect wholly owned subsidiary of the Company, in each case not held on behalf of third parties, which we refer to as an excluded share and collectively, as excluded shares), will automatically be converted into the right to receive an amount in cash equal to $9.50, without interest and less any applicable withholding taxes.

Reasons for the Merger; Recommendation of the Company’s Board of Directors (Page [])

After careful consideration of various factors described in the section entitled “The Merger—Reasons for the Merger; Recommendation of the Board of Directors” beginning on page [●], the Company’s board of directors, which we refer to as the board of directors, determined that the merger agreement and the transactions contemplated by the merger agreement (including the merger) are fair to, and in the best interests of, the Company and its shareholders and approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement (including the merger), and resolved that the merger agreement be submitted for consideration by the shareholders of the Company at a special meeting of shareholders, and recommended that the shareholders of the Company vote to adopt the merger agreement.

In considering the recommendation of the board of directors with respect to the proposal to adopt the merger agreement, you should be aware that our directors and executive officers have interests in the merger that are different from, or in addition to, yours. The board of directors was aware of and considered these interests,

 

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among other matters, in evaluating and negotiating the merger agreement and the transactions contemplated by the merger agreement (including the merger), and in recommending that the merger agreement be adopted by the shareholders of the Company. See the section entitled “The Merger—Interests of Certain Persons in the Merger” beginning on page [●].

The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

Opinion of Barclays Capital Inc. (Page [])

On February 6, 2016, in connection with the merger, Barclays Capital Inc., which we refer to as Barclays, rendered its oral opinion (which was subsequently confirmed in writing) to the board of directors that, as of such date and based upon and subject to the qualifications, limitations and assumptions stated in its opinion, from a financial point of view, the consideration to be offered to the holders of common stock (other than excluded shares) in the merger, taken in the aggregate, is fair to such holders.

The full text of Barclays’ written opinion, dated as of February 7, 2016, is attached as Annex D to this Proxy Statement. Barclays’ written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Barclays in rendering its opinion. Barclays’ opinion addresses only the fairness, from a financial point of view, as of the date of such opinion, to the holders of common stock (other than excluded shares) of the consideration to be offered to such holders in the merger, taken in the aggregate. Barclays did not express any view on, and Barclays’ opinion does not address, the allocation of the aggregate consideration payable pursuant to the merger agreement among the holders of Class A common stock and the holders of Class B common stock. You are encouraged to read the opinion carefully in its entirety. The summary of Barclays’ written opinion set forth in this proxy statement under “The Merger—Opinions of the Company’s Financial Advisors—Opinion of Barclays Capital Inc.” beginning on page [] is qualified in its entirety by reference to the full text of Barclays’ opinion. Barclays’ opinion was provided to the board of directors in connection with its evaluation of the consideration provided for in the merger from a financial point of view. Barclays’ opinion does not address any other aspects or implications of the merger and does not constitute a recommendation to any shareholder of the Company as to how such shareholder should vote with respect to the merger or any other matter.

Opinion of Evercore Group L.L.C. (Page [])

In connection with the merger, the Company retained Evercore Group L.L.C., which we refer to as Evercore, to act as a financial advisor to the board of directors. On February 6, 2016, at a meeting of the board of directors, Evercore rendered its oral opinion, subsequently confirmed by delivery of a written opinion, that, based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth in its opinion, as of February 6, 2016, the aggregate per share merger consideration to be received by each holder of the Company’s common stock was fair, from a financial point of view, to such holders.

The full text of Evercore’s written opinion, dated February 7, 2016, which sets forth, among other things, the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex E to this Proxy Statement and is incorporated by reference in its entirety into this Proxy Statement. You are urged to read Evercore’s opinion carefully and in its entirety. Evercore’s opinion was directed to the board of directors and addresses only the fairness, from a financial point of view, of the aggregate per share merger consideration to be received by holders of common stock (other than shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent and shares owned by the Company or any direct or indirect wholly owned subsidiary of the Company, in each case not held on behalf of third parties) in the

 

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merger. The opinion does not address any other aspect of the proposed merger and does not constitute a recommendation to the board of directors or to any other persons in respect of the proposed merger, including as to how any holder of shares of the Company’s common stock should vote or act in respect of the proposed merger. Evercore’s opinion does not address the relative merits of the proposed merger as compared to other business or financial strategies that might be available to the Company, nor does it address the underlying business decision of the Company to engage in the proposed merger.

Financing of the Merger (Page [])

The obligations of Parent and Merger Sub to complete the merger are not contingent upon the receipt by them of any debt financing. The funds needed by Parent and Merger Sub in connection with the merger and the other transactions contemplated by the merger agreement will be obtained through committed equity financing to be provided to Parent by Apollo Investment Fund VIII, L.P., Apollo Overseas Partners (Delaware 892) VIII, L.P., Apollo Overseas Partners (Delaware) VIII, L.P. and Apollo Overseas Partners VIII, L.P., affiliates of Apollo Management VIII, L.P., which we refer to collectively as the AGM investors, and Vistria Fund, LP, an affiliate of The Vistria Group, LP. Additional equity financing may be provided to Parent or Merger Sub by affiliates of Najafi Companies, LLC and other financing investors with relationships with Apollo Management VIII, L.P. or The Vistria Group, LP, but such additional equity financing would not relieve the AGM investors or Vistria Fund, LP of its obligations under the equity commitment letters delivered by such parties to Parent.

For further information with respect to the financing of the merger and the committed equity financing to be provided by the AGM investors and Vistria Fund, LP, see the section titled “The Merger—Financing of the Merger” beginning on page [●].

Interests of Certain Persons in the Merger (Page [])

In considering the recommendation of the board of directors with respect to the proposal to adopt the merger agreement, you should be aware that executive officers and directors of the Company may have certain interests in the merger that may be different from, or in addition to, the interests of the Company’s shareholders generally. The board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the shareholders of the Company. These interests include, but are not limited to, the following:

 

    accelerated vesting and cash-out of Company equity awards (including Company stock options, Company restricted stock units, Company performance stock units and Company deferred stock units) based upon the per share merger consideration;

 

    receipt of severance payments and benefits under the employment agreement for the chief executive officer of the Company or, for other executive officers, the Company’s Senior Executive Severance Pay Plan, in each case, upon qualifying terminations of employment after the effective time of the merger;

 

    accelerated vesting and payment of cash-based, long-term incentive awards held by certain of our executive officers at the effective time of the merger;

 

    accelerated vesting of and lapse of repayment obligation conditions on cash-based retention awards held by certain of our executive officers upon a qualifying termination of employment;

 

    payment of amounts previously deferred by certain executive officers under the Company’s Executive Deferred Compensation Program upon the effective time of the merger;

 

    the entitlement to indemnification benefits in favor of directors and officers of the Company;

 

    the entitlement to indemnification benefits in favor of certain shareholders of the Company, pursuant to the voting and support agreements, including Mr. Sperling, Ms. Shupp and Ms. Bishop;

 

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    the entitlement to payment of certain legal expenses in favor of the Apollo Class B Voting Stock Trust No. 1 and its trustees;

 

    the requirement that the Company keep in place a directors and officers insurance policy for at least six (6) years after the effective time of the merger; and

 

    the requirement, pursuant to the voting and support agreement with the Apollo Class B Voting Stock Trust No. 1, that the Company keep in place certain management liability insurance for at least six (6) years after the effective time of the merger for the benefit of the Apollo Class B Voting Stock Trust No. 1 and its trustees.

For further information with respect to the arrangements between the Company and its directors and executive officers, see the section titled “The Merger—Interests of Certain Persons in the Merger” beginning on page [●] and “Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers—Golden Parachute Compensation” beginning on page [●].

Material U.S. Federal Income Tax Consequences of the Merger (Page [])

The exchange of shares of our common stock for cash pursuant to the merger generally will be a taxable transaction to U.S. holders (as defined in “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” on page [●]) for U.S. Federal income tax purposes. Shareholders who are U.S. holders and who exchange their shares of our common stock in the merger for cash will generally recognize gain or loss in an amount equal to the difference, if any, between the amount of cash received with respect to such shares and their adjusted tax basis in their shares of our common stock. Backup withholding may also apply to the cash payments paid to a non-corporate U.S. holder pursuant to the merger unless the U.S. holder or other payee provides a taxpayer identification number, certifies that such number is correct and otherwise complies with the backup withholding rules. You should read “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page [●] for a more detailed discussion of the U.S. Federal income tax consequences of the merger. You should also consult your tax advisor for a complete analysis of the effect of the merger on your federal, state and local and/or foreign taxes.

Regulatory Approvals (Page [])

The Company, Parent and Merger Sub have made certain filings and taken other actions, and will continue to make filings and take actions, necessary to obtain approvals from all appropriate government and educational authorities in connection with the merger. Regulatory approvals from a number of accrediting agencies and state educational agencies that currently approve or accredit the schools owned by the Company and their educational programs are required to complete the merger, including approval from the Higher Learning Commission, which is the institutional accreditor for the University of Phoenix, Western International University, and the College for Financial Planning. The U.S. Department of Education must also issue an acceptable pre-acquisition review response without burdensome conditions, as defined in the merger agreement. Additionally, completion of the merger requires certain pre-closing educational consents from the applicable agencies in the United Kingdom, Australia and Germany. The Company has begun the process of notifying agencies and obtaining approvals and is continuing to take actions to obtain the required regulatory approvals prior to closing or, as appropriate, to confirm that approvals will not be required prior to closing.

Litigation Relating to the Merger (Page [])

In connection with the proposed merger, three class action lawsuits have been filed in the Superior Court of Maricopa County, Arizona against the Company, its directors, Parent and Merger Sub. The first such complaint was filed on February 25, 2016 (Casey v. Apollo Education Group, Inc., et al., Case No. CV2016-051605), the second such complaint was filed on February 26, 2016 (Miglio v. Apollo Education Group, Inc., et al., Case No. CV2016-003718) and the third such complaint was filed on February 29, 2016 (Blanchfield v. Apollo Education Group, Inc., et al., Case No. CV2016-001738). The complaints generally allege that the Company’s directors have violated their fiduciary duties by, among other things, failing to properly value the Company and failing to maximize the value of the Company to its public shareholders as well as by including purportedly preclusive deal

 

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protections in the merger agreement, and that the Company, Parent and Merger Sub aided and abetted such alleged breaches of fiduciary duties. 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. The action titled Blanchfield v. Apollo Education Group, Inc., et al. was voluntarily dismissed without prejudice on March 4, 2016.

In addition, a demand letter was received from a shareholder on March 1, 2016, which generally includes the same allegations and which demands that the Company’s directors remedy the alleged breaches of their fiduciary duties and, if not, states that the shareholder intends to file an action seeking relief.

All defendants deny any wrongdoing in connection with the proposed merger and plan to vigorously defend against all pending and any forthcoming claims.

The Merger Agreement (Page [])

Treatment of Common Stock and Common-Equity Awards (Page [])

 

    Common Stock. At the effective time of the merger, each share of our Class A common stock and Class B common stock issued and outstanding immediately prior to the effective time of the merger (other than excluded shares) will be converted into the right to receive an amount in cash equal to $9.50, which we refer to as the per share merger consideration, without interest and less any applicable withholding taxes. At the effective time of the merger, these shares will be canceled and will cease to exist, each excluded share will also be canceled and will cease to exist, and no consideration will be payable for such excluded shares.

 

    Stock Options. At the effective time of the merger, each outstanding option to purchase shares of our common stock (which we refer to as the Company stock options) under the Company 2000 Stock Incentive Plan as Amended and Restated (which we refer to as the Company stock plan), will, automatically and without any action on the part of the holder thereof, be canceled and will only entitle the holder of such Company stock option to receive (without interest), an amount in cash equal to the product of the total number of shares subject to such Company stock option, multiplied by the excess, if any, of the per share merger consideration over the exercise price of such Company stock option, less any tax withholdings. For the avoidance of doubt, any Company stock option which has an exercise price per share that is greater than or equal to the per share merger consideration will be canceled at the effective time of the merger for no consideration or payment.

 

    Restricted Stock Units. At the effective time of the merger, any vesting conditions applicable to each outstanding Company restricted stock unit under the Company stock plan (which we refer to as the Company restricted stock units), will, automatically and without any required action on the part of the holder thereof, accelerate in full, and each Company restricted stock unit will, automatically and without any required action on the part of the holder thereof, be canceled and will only entitle the holder of such Company restricted stock unit to receive (without interest), an amount in cash equal to the number of shares subject to such Company restricted stock unit multiplied by the per share merger consideration, less any tax withholdings.

 

   

Performance Stock Units. At the effective time of the merger, any vesting conditions applicable to each outstanding Company performance stock unit under the Company stock plan (which we refer to as the Company performance stock units), will, automatically and without any required action on the part of the holder thereof, accelerate only with respect to the number of shares determined in accordance with the terms and conditions set forth in the award agreement evidencing each such Company performance stock unit, and each Company performance stock unit will, automatically and without any required action on the part of the holder thereof, be canceled and will only entitle the holder of such Company performance stock unit to receive (without interest), an amount in cash equal to the number of vested shares subject to such Company performance stock unit immediately following the

 

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accelerated vesting described above multiplied by the per share merger consideration, less any tax withholdings.

 

    Deferred Stock Units. At the effective time of the merger, any vesting conditions applicable to each outstanding Company restricted stock unit subject to a deferral election (which we refer to as the Company deferred stock units) under the Company stock plan or the Company’s Deferral Election Program for Non-Employee Board Members will, automatically and without any required action on the part of the holder thereof, accelerate in full, and each Company deferred stock unit will, automatically and without any required action on the part of the holder thereof, be canceled and will only entitle the holder of such Company deferred stock unit to receive (without interest), an amount in cash equal to the number of shares subject to such Company deferred stock unit multiplied by the per share merger consideration, less any tax withholdings.

Solicitation of Acquisition Proposals; Board Recommendation Changes (Page [])

The merger agreement provides that from the date of the merger agreement until the effective time of the merger or the termination of the merger agreement in accordance with its terms, we are not permitted to, directly or indirectly, or announce any public intention to, initiate, solicit or knowingly encourage any inquiry or the making of any proposal that constitutes or could reasonably be expected to lead to an acquisition proposal from any person, or engage in discussions or negotiations regarding any acquisition proposal. Notwithstanding these restrictions, under certain circumstances, we may, prior to the time the merger agreement is adopted by our shareholders, respond to a written acquisition proposal or engage in discussions or negotiations with the person making such an acquisition proposal. At any time before the merger agreement is adopted by our shareholders, we may terminate the merger agreement if the board of directors determines in good faith and after consultation with the Company’s financial advisors and outside legal counsel that an acquisition proposal is a superior proposal and that such action would be inconsistent with the directors’ fiduciary duties under applicable law, in order to enter into an acquisition, merger or similar agreement, which we refer to as an alternative acquisition agreement, with respect to such superior proposal, so long as we comply with certain terms of the merger agreement, including negotiating revisions to the terms of the merger agreement with Parent (to the extent Parent desires to negotiate) for a period of five (5) business days (or a shorter period under certain circumstances) prior to such action and paying a termination fee to Parent. See “The Merger Agreement—Solicitation of Acquisition Proposals” beginning on page [●] and “The Merger Agreement—Termination Fees” beginning on page [●].

Conditions to the Merger (Page [])

The respective obligations of the Company, Parent and Merger Sub to consummate the merger are subject to the satisfaction or waiver of certain customary conditions, including the adoption of the merger agreement by our shareholders, receipt of certain antitrust regulatory approvals, the absence of any legal prohibitions, the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the merger agreement and the absence of a material adverse effect on the Company and its subsidiaries. The obligations of Parent and Merger Sub to consummate the merger are also subject to certain regulatory conditions, including with respect to the receipt of certain governmental and educational authority consents, and certain conditions regarding the finances and operations of the Company or the University of Phoenix prior to closing. See “The Merger Agreement—Conditions to the Merger” beginning on page [●].

Termination (Page [])

We and Parent may, by mutual written consent, terminate the merger agreement and abandon the merger at any time prior to the effective time of the merger, notwithstanding any adoption of the merger agreement by our shareholders.

 

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The merger agreement may also be terminated and the merger abandoned at any time prior to the effective time of the merger as follows:

 

    by either Parent or the Company, if:

 

    the merger has not been consummated by 5:00 pm Eastern time on February 1, 2017, which we refer to as the termination date, whether such date is before or after the date of adoption of the merger agreement by our shareholders; provided that this termination right will not be available to either the Company or Parent if it has breached in any material respect its obligations under the merger agreement and such breach is the principal reason for the failure of a condition to the consummation of the merger;

 

    we receive a written response from the U.S. Department of Education to the pre-acquisition review applications that requires us to post or maintain a letter of credit in excess of 10% of the Title IV Program funds received by the University of Phoenix in its prior fiscal year or includes any material limitation that would reasonably be expected to impair the ability of the surviving corporation to operate the University of Phoenix in substantially the manner in which it is currently operated; provided that Parent will not be entitled to exercise this termination right if the U.S. Department of Education has identified (1) any deficiencies with respect to the audited financial statements of Parent to be provided with the pre-acquisition review applications filed with the U.S. Department of Education or (2) any deficiency attributable to Parent or any of its affiliates as the sole basis for such letter of credit requirement or material limitation;

 

    our shareholders meeting has been held and completed and our shareholders have not approved the merger agreement at such meeting or postponement of such meeting, which we refer to as a shareholder vote termination event; or

 

    an order permanently restraining, enjoining or otherwise prohibiting consummation of the merger has become final and non-appealable (whether before or after the approval of the merger agreement by our shareholders);

 

    by Parent, if:

 

    the board of directors (i) withholds, withdraws, changes, qualifies, amends or modifies (or publicly proposes to do any of the foregoing) in a manner that is adverse to Parent or Merger Sub, or otherwise makes a public statement or proposal that is inconsistent with its recommendation that the Company’s shareholders approve the merger agreement; (ii) fails to include such recommendation in this proxy statement; (iii) approves, recommends or otherwise declares advisable (or proposes to do any of the foregoing, publicly or otherwise) an acquisition proposal other than the merger; (iv) fails to issue a press release reaffirming its recommendation that the Company’s shareholders approve the merger agreement within five (5) business days following a written request by Parent after the date on which an acquisition proposal or any material modification to an acquisition proposal is first published or sent, given or communicated to the shareholders of the Company; or (v) fails to recommend against any acquisition proposal that is a tender offer within ten (10) business days after the commencement of such tender offer, which we refer to as a change of recommendation termination event;

 

    there has been a breach of or failure to perform any representation, warranty, covenant or agreement made by the Company in the merger agreement, or any such representation or warranty becomes untrue after the date of the merger agreement, which breach or failure to be true would give rise to the failure of the condition to the closing of the merger relating to the accuracy of the representations and warranties of the Company or compliance by the Company with its obligations under the merger agreement, and such breach or failure to be true cannot be cured, or if curable, is not cured prior to the earlier of (i) thirty (30) days after written notice thereof is given by Parent to us; and (ii) the termination date, which we refer to as a Company breach termination event; or

 

   

subsequent to the date of the merger agreement, any U.S. Federal educational agency or governmental entity has notified us or the University of Phoenix in writing that it will take action

 

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with respect to certain ongoing investigations, if the finding of a violation would be reasonably likely to result in liability on us or the University of Phoenix of more than $500,000,000, which we refer to as a regulatory liability termination event.

 

    by the Company, if:

 

    at any time prior to the adoption of the merger agreement by our shareholders, (i) the board of directors or any committee thereof authorizes the Company, subject to the Company’s compliance with certain notice and other requirements described under “The Merger Agreement—Solicitation of Acquisition Proposals” beginning on page [●], to enter into an alternative acquisition agreement with respect to a superior proposal and (ii) the Company pays to Parent the termination fee discussed under “The Merger Agreement—Termination Fees” beginning on page [●], which we refer to as a superior proposal termination event; or

 

    there has been a breach of or failure to perform any representation, warranty, covenant or agreement made by Parent or Merger Sub in the merger agreement, or any such representation or warranty becomes untrue after the date of the merger agreement, which breach or failure to be true would give rise to the failure of the condition to the closing of the merger relating to the accuracy of the representations and warranties of Parent and Merger Sub or compliance by Parent and Merger Sub with their obligations under the merger agreement, and such breach or failure to be true cannot be cured, or if curable, is not cured prior to the earlier of (i) thirty (30) days after written notice thereof is given by us to Parent; and (ii) the termination date.

Termination Fees and Expenses Payable by the Company (Page [])

If the merger agreement is terminated under certain circumstances, we will be required to pay Parent a termination fee of 2.75% of the aggregate per share merger consideration that would have been payable to the Company’s shareholders upon closing of the merger, which we refer to as the termination fee. The termination fee would be payable if:

 

    a bona fide acquisition proposal has been made to the Company or any of the Company’s shareholders or any third party has publicly announced an intention (whether or not conditional) to make an acquisition proposal with respect to the Company or any of its subsidiaries, and thereafter the merger agreement is terminated by either Parent or the Company due to a shareholder vote termination event or by Parent due to a Company breach termination event and the Company enters into an alternative acquisition agreement or consummates an alternative proposal within twelve (12) months after such termination;

 

    the merger agreement is terminated by Parent due to a change of recommendation termination event; or

 

    the merger agreement is terminated by the Company due to a superior proposal termination event.

In the event that Parent or the Company terminates the merger agreement due to a shareholder vote termination event, we must pay up to $12,500,000 of the documented third-party fees and expenses incurred, paid or payable by Parent or any of its affiliates in connection with the authorization, preparation, negotiation, execution, performance, termination or abandonment of the merger agreement, the merger or the other transactions contemplated by the merger agreement, which we refer to as Parent expenses. The Company’s payment of Parent expenses is creditable against the termination fee that may subsequently become payable to Parent following a termination due to a shareholder vote termination event.

Reverse Termination Fee Payable by Parent (Page [])

In the event that Parent terminates the merger agreement due to a regulatory liability termination event, Parent must pay the Company a reverse termination fee of $25,000,000, which we refer to as the reverse termination fee.

 

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Remedies (Page [])

Except with respect to liability or damage resulting from a willful and material breach by Parent or Merger Sub of their respective representations, warranties, covenants or agreements in the merger agreement, if the merger agreement is terminated due to a regulatory liability termination event and the reverse termination fee is paid to us, the reverse termination fee will be our sole and exclusive remedy against Parent or Merger Sub for any liability or damage relating to or arising out of the merger agreement, the merger or the other transactions contemplated by the merger agreement.

Parent’s receipt of the termination fee and/or our reimbursement of the Parent expenses, as the case may be, in each case will constitute liquidated damages.

The parties are entitled to injunctions to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement in addition to any other remedy to which they are entitled at law or in equity. We are a third-party beneficiary to the equity commitment letters, entitling us to seek specific performance of Parent’s right to draw down the full proceeds of the equity financing pursuant to the terms and conditions of the equity commitment letters in order to fund the merger consideration or pay damages to us under certain circumstances.

Market Price of Class A Common Stock (Page [])

The closing price of our Class A common stock on the NASDAQ Stock Market, or the NASDAQ, on February 5, 2016, the last trading day prior to the public announcement of the execution of the merger agreement, was $6.95 per share of Class A common stock. On [●], 2016, the most recent practicable date before this proxy statement was mailed to our shareholders, the closing price for our Class A common stock on the NASDAQ was $[●] per share of Class A common stock. You are encouraged to obtain current market quotations for our Class A common stock in connection with voting your shares of common stock.

Voting and Support Agreements (Page [])

Concurrently with the execution of the merger agreement, each of the Apollo Class B Voting Stock Trust No. 1, Peter V. Sperling, the Peter Sperling Voting Stock Trust, the Aurora Foundation, the San Roque School Charitable Trust, the John Sperling Revocable Trust, the John Sperling 1994 Irrevocable Trust and Gregory W. Cappelli, in their respective capacities as shareholders of the Company, entered into a voting and support agreement with Parent, Merger Sub and the Company, pursuant to which such shareholders agreed, on the terms and subject to the conditions set forth in each such voting and support agreement, to vote all Class A common stock and Class B common stock owned by them (representing approximately 7.7% of the issued and outstanding Class A common stock and 100% of the issued and outstanding Class B common stock as of March 2, 2016) in favor of the adoption of the merger agreement and the approval of the transactions contemplated by the merger agreement, including the merger, and not to vote in favor of any alternative transactions or any other agreement, action or proposal, the purpose of which is or which would reasonably be expected to prevent or materially impede, interfere with, hinder, delay, discourage, inhibit, postpone or adversely affect the transactions contemplated by the merger agreement. Each such voting and support agreement will automatically terminate if the merger agreement is terminated in accordance with the termination provisions thereof.

Amendment to the Shareholder Agreement (Page [])

In order to facilitate the consummation of the merger and the other transactions contemplated by the merger agreement, concurrently with the execution and delivery of the merger agreement, the Company entered into an amendment to the Shareholder Agreement, dated as of September 7, 1994, as amended, which we refer to as the Shareholder Agreement, and the amendment to which we refer to as the Shareholder Agreement Amendment, among the holders of Class B common stock and the Company. Prior to the Shareholder Agreement Amendment, the Shareholder Agreement included provisions that would restrict the ability of the holders of Class B common stock to dispose of Class B common stock as required for the consummation of the merger and the other transactions contemplated by the merger agreement. Pursuant to the Shareholder Agreement Amendment, the parties to the Shareholder Agreement amended the Shareholder Agreement such that (i) neither the execution of

 

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the merger agreement, the merger nor any of the other transactions contemplated by the merger agreement, will constitute a sale, transfer or disposition of Class B common stock restricted by the Shareholder Agreement; and (ii) the Shareholder Agreement will not have any effect on the execution of the merger agreement, the merger or any of the other transactions contemplated by the merger agreement. The Shareholder Agreement Amendment also provides that the Shareholder Agreement will terminate as of the effective time of the merger. The Shareholder Agreement Amendment will be void, and the Shareholder Agreement will remain in full force and effect, if the merger agreement is terminated in accordance with the termination provisions thereof, or if the merger fails to close for any reason.

No Dissenters’ Rights (Page [])

Pursuant to § 10-1302(D) of the Arizona Business Corporation Act, which we refer to as the ABCA, holders of the Company’s Class A common stock will not be entitled to assert dissenters’ rights in connection with the merger because the Company’s Class A common stock was listed on the NASDAQ, a national securities exchange, on the record date. Pursuant to § 10-1321 of the ABCA, the holders of the Company’s Class B common stock will not be entitled to assert dissenters’ rights if they vote in favor of the approval and adoption of the merger agreement. Each holder of Class B common stock has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Delisting and Deregistration of Class A Common Stock (Page [])

If the merger is completed, our Class A common stock will be delisted from the NASDAQ and deregistered under the Exchange Act and we will no longer file periodic reports with the Securities and Exchange Commission on account of our Class A common stock.

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

The following questions and answers are intended to briefly address some commonly asked questions regarding the merger, the merger agreement, and the special meeting. These questions and answers may not address all questions that may be important to you as a Company shareholder. Please refer to the “Summary” beginning on page [] and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, which you should read carefully and in their entirety.

 

Q. What is the proposed merger transaction and what effects will it have on the Company?

 

A. The proposed transaction is the acquisition of the Company, by Parent, pursuant to the terms and subject to the conditions of the merger agreement. If the proposal to adopt the merger agreement is approved by holders of our Class A common stock, without par value, which we refer to as Class A common stock, and holders of our Class B common stock, without par value, which we refer to as Class B common stock, who we refer to collectively as our shareholders, and the other closing conditions under the merger agreement have been satisfied or waived, Merger Sub will merge with and into the Company, with the Company being the surviving corporation. We refer to this transaction as the merger. As a result of the merger, the Company will become a wholly owned direct or indirect subsidiary of Parent and will no longer be a publicly held corporation, and you, as a holder of our Class A common stock or Class B common stock, which we refer to collectively as our common stock or our shares, will no longer have any interest in our future earnings or growth. In addition, following the merger, our Class A common stock will be delisted from the NASDAQ and deregistered under the Exchange Act, and we will no longer file periodic reports with the Securities and Exchange Commission, which we refer to as the SEC, on account of our Class A common stock.

 

Q. What will I receive if the merger is completed?

 

A. In the merger, each outstanding share of our common stock (other than shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent and shares owned by the Company or any direct or indirect wholly owned subsidiary of the Company, in each case not held on behalf of third parties, which we refer to as an excluded share, and collectively, as excluded shares) will automatically be converted into the right to receive an amount in cash equal to $9.50, without interest and less any applicable withholding taxes.

 

Q. How does the per share merger consideration compare to the market price of our common stock prior to announcement of the merger?

 

A. The merger consideration of $9.50 per share represents a premium of approximately 37% to the closing price of our Class A common stock as of February 5, 2016, the last trading day prior to the public announcement of the execution of the merger agreement, and a premium of approximately 44% to the closing price of our Class A common stock on January 8, 2016, immediately prior to the announcement that the Company’s board of directors, which we refer to as the board of directors, was pursuing strategic alternatives.

 

Q. How does the board of directors recommend that I vote?

 

A. The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

 

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Q. When do you expect the merger to be completed?

 

A. We are working towards completing the merger as soon as possible. Assuming timely receipt of required regulatory approvals and the satisfaction or waiver of other closing conditions, including approval by our shareholders of the proposal to adopt the merger agreement, we anticipate that the merger will be completed by the end of calendar year 2016.

 

Q. What happens if the merger is not completed?

 

A. If the merger agreement is not approved by the shareholders of the Company or if the merger is not completed for any other reason, the shareholders of the Company will not receive any payment for their shares of our common stock in connection with the merger. Instead, the Company will remain an independent public company and our Class A common stock will continue to be listed and traded on the NASDAQ.

Additionally, if the merger is not completed, the merger agreement will be terminated. Depending on the circumstances surrounding the termination, it is possible that the Company will be required to pay Parent a termination fee of 2.75% of the aggregate per share merger consideration. It is also possible, if Parent terminates the agreement under certain circumstances, that Parent would be required to pay the Company a fee of $25,000,000. Moreover, in the event that either the Company or Parent terminates the merger agreement due to a shareholder vote termination event, the Company is required to reimburse Parent for up to $12,500,000 in documented third-party fees and expenses.

 

Q. What conditions must be satisfied to complete the merger?

 

A. There are several conditions which must be satisfied to complete the merger, including obtaining shareholder approval, obtaining regulatory approvals, satisfaction of certain performance conditions and the accuracy of certain representations and warranties contained in the merger agreement. You should read “The Merger Agreement—Conditions to the Merger” beginning on page [●] for a more detailed discussion of the conditions that must be satisfied to complete the merger.

 

Q. Is the merger expected to be taxable to me?

 

A. Yes. The exchange of shares of our common stock for cash pursuant to the merger generally will be a taxable transaction to U.S. holders (as defined in “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” on page [●]) for U.S. Federal income tax purposes. If you are a U.S. holder and you exchange your shares of our common stock in the merger for cash, you will generally recognize gain or loss in an amount equal to the difference, if any, between the amount of cash received with respect to such shares and your adjusted tax basis in such shares of our common stock. Backup withholding may also apply to the cash payments paid to a non-corporate U.S. holder pursuant to the merger unless the U.S. holder or other payee provides a taxpayer identification number, certifies that such number is correct and otherwise complies with the backup withholding rules. You should read “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page [●] for a more detailed discussion of the U.S. Federal income tax consequences of the merger. You should also consult your tax advisor for a complete analysis of the effect of the merger on your federal, state and local and/or foreign taxes.

 

Q. Why am I receiving this proxy statement and proxy card or voting instruction form?

 

A. You are receiving this proxy statement and proxy card or voting instruction form because you own shares of the Company’s common stock. This proxy statement describes matters on which we urge you to vote and is intended to assist you in deciding how to vote your shares of our common stock with respect to such matters.

 

Q. When and where is the special meeting?

 

A. The special meeting of the Class A and Class B shareholders of the Company will be held on [●], 2016 at [●], local Phoenix time, at [●].

 

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Q. What am I being asked to vote on at the special meeting?

 

A. You are being asked to consider and vote on a proposal to adopt the merger agreement that provides for the acquisition of the Company by Parent and to approve a proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

 

Q. Why am I being asked to consider and vote on a proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger?

 

A. Under SEC rules, we are required to seek a non-binding, advisory vote with respect to the compensation that may be paid or become payable to our named executive officers that is based on or otherwise relates to the merger, or “golden parachute” compensation. Although our Class A common stock is non-voting stock generally, the Company is providing shareholders with the opportunity to approve on a non-binding advisory basis, such merger-related compensation in accordance with Rule 14a-21(c) of the Exchange Act.

 

Q. What will happen if the Company’s shareholders do not approve the merger-related compensation proposal?

 

A. Approval of the compensation that may be paid or become payable to the Company’s named executive officers that is based on or otherwise relates to the merger is not a condition to completion of the merger. The vote is an advisory vote and will not be binding on the Company or the surviving corporation in the merger. Because the merger-related compensation to be paid to the named executive officers in connection with the merger is based on contractual arrangements with the named executive officers, such compensation may be payable, regardless of the outcome of this advisory vote, if the merger agreement is adopted (subject only to the contractual obligations applicable thereto).

 

Q. What vote is required for the Company’s shareholders to approve the proposal to adopt the merger agreement?

 

A. The adoption of the merger agreement requires the affirmative vote of both a majority of the votes entitled to be cast by the holders of the outstanding shares of our Class A common stock and the affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding shares of our Class B common stock. The approval of the holders of both our Class A common stock and Class B common stock is required for the adoption of the merger agreement. Although our Class A common stock is non-voting stock generally, the holders of Class A common stock are entitled to a special vote as a class on the merger agreement under applicable Arizona corporate law. Each holder of Class B common stock and certain holders of Class A common stock described under “The Voting and Support Agreements” beginning on page [●] have entered into voting and support agreements with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Because the affirmative vote required to approve the proposal to adopt the merger agreement is based upon the total number of outstanding shares of our Class A common stock and Class B common stock present in person or represented by proxy, if you fail to submit a proxy or vote in person at the special meeting, or abstain, or you do not provide your bank, brokerage firm or other nominee with instructions, as applicable, this will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

 

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Q. What vote of our shareholders is required to approve the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger?

 

A. Approving the merger-related compensation requires that the votes cast by the holders of the shares of our Class A common stock and Class B common stock, collectively, on such proposal in person or by proxy, at the special meeting, in favor of such proposal exceed the votes cast by such holders opposing such proposal.

Accordingly, abstentions and broker non-votes and shares not in attendance at the special meeting will not be counted in respect of, and will not have an effect on, the outcome of the proposal to approve the merger-related compensation.

 

Q. What vote of our shareholders is required to approve any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies?

 

A. Any proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement will be approved if the votes cast by the holders of our Class B common stock in person or by proxy, at the special meeting in favor of such proposal exceed the votes cast by such holders opposing such proposal. Each holder of Class B common stock has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Q. Do any of the Company’s directors or officers have interests in the merger that may differ from or be in addition to my interests as a shareholder?

 

A. In considering the recommendation of the board of directors with respect to the proposal to adopt the merger agreement, you should be aware that our directors and executive officers may have certain interests in the merger that may be different from, or in addition to, the interests of our shareholders generally. The board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the shareholders of the Company. See “The Merger—Interests of Certain Persons in the Merger” beginning on page [●] and “Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers” beginning on page [●].

 

Q. What is the difference between holding shares as a shareholder of record and as a beneficial owner?

 

A. If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered the shareholder of record with respect to those shares. As the shareholder of record, you have the right to vote, grant your voting rights directly to the Company or to a third party or to vote in person at the special meeting.

If your shares of our Class A common stock are held by a bank, broker, trustee or nominee, you are considered the beneficial owner of shares held in “street name”, and your bank, broker, trustee or nominee, or their intermediary, is considered the shareholder of record with respect to those shares. Your bank, broker, trustee or nominee should send you, as the beneficial owner, a package describing the procedure for voting your shares of our Class A common stock. You should follow the instructions provided by them to vote your shares of our Class A common stock. You are invited to attend the special meeting; however, you may not vote these shares of our Class A common stock in person at the special meeting unless you obtain a “legal proxy” from your bank, broker, trustee or nominee that holds your shares of our Class A common stock, giving you the right to vote the shares of our Class A common stock at the special meeting.

 

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Q. If my shares of Class A common stock are held in “street name” by my bank, brokerage firm or other nominee, will my bank, brokerage firm or other nominee vote my shares of common stock for me?

 

A. Your bank, brokerage firm or other nominee will only be permitted to vote your shares of our Class A common stock if you instruct your bank, brokerage firm or other nominee how to vote. You should follow the procedures provided by your bank, brokerage firm or other nominee regarding the voting of your shares of our Class A common stock. Banks, brokerage firms or other nominees who hold shares in street name for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokerage firms and other nominees are precluded from exercising their voting discretion with respect to approving non-routine matters, such as the proposal to adopt the merger agreement, and, as a result, absent specific instructions from the beneficial owner of such shares of our common stock, banks, brokerage firms or other nominees are not empowered to vote those shares of our common stock on non-routine matters. If you do not instruct your bank, brokerage firm or other nominee to vote your shares of our Class A common stock, your shares of our Class A common stock will not be voted, which we refer to as broker non-votes, and the effect will be the same as a vote “AGAINST” approval of the proposal to adopt the merger agreement, and your shares of our Class A common stock will not be voted and will not have an effect on the proposal to approve the merger-related compensation.

 

Q. Who can vote at the special meeting?

 

A. All of the holders of record of our common stock as of the close of business on [●], 2016, the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting. Each holder of our common stock is entitled to cast one vote for each share of our Class A common stock and one vote for each share of our Class B common stock on each matter properly brought before the special meeting for each share of our common stock that such holder owned as of the record date.

 

Q. How many votes do I have?

 

A. You are entitled to one (1) vote for each share of the Company Class A common stock and one (1) vote for each share of the Company Class B common stock held of record by you as of the record date, [●], 2016. As of the close of business on the record date, there were [●] outstanding shares of Company Class A common stock and 475,149 outstanding shares of Company Class B common stock.

 

Q. What is a quorum?

 

A. For purposes of the proposal to adopt the merger agreement, a majority of the votes entitled to be cast by the holders of our Class A common stock outstanding at the close of business on the record date, present in person or represented by proxy, at the special meeting constitutes a quorum of the Class A shareholders, and a majority of the shares of our Class B common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum of the Class B shareholders. For purposes of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger, a majority of the votes entitled to be cast by the holders of our Class A common stock and Class B common stock, collectively, outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum. For purposes of any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies, a majority of the votes entitled to be cast by the holders of our Class B common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum. Abstentions and broker non-votes are counted as present for the purpose of determining whether a quorum is present.

 

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Q. How do I vote?

 

A. Shareholder of Record. If you are a shareholder of record, you may have your shares of our common stock voted on matters presented at the special meeting in any of the following ways:

 

    In Person. You may attend the special meeting and cast your vote there.

 

    Via Our Internet Voting Site. If you received printed proxy materials, follow the instructions for Internet voting printed on your proxy card.

 

    By Telephone. Call the toll-free number specified on your proxy card. You can vote by telephone by following the instructions provided on the Internet voting site or, if you received printed proxy materials, by following the instructions provided on your proxy card.

 

    In Writing. You can vote by completing, signing, dating and returning the proxy card in the enclosed postage-paid envelope.

Beneficial Owner. If you are a beneficial owner, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee at the special meeting. To attend the special meeting in person (regardless of whether you intend to vote your shares in person at the special meeting), you must bring with you to the special meeting a valid photo identification and proof of your beneficial ownership. For more information, see the instructions under “The Special Meeting—Attendance” beginning on page [●] of this proxy statement.

IT IS IMPORTANT THAT YOU PROMPTLY VOTE YOUR SHARES OF OUR COMMON STOCK. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. SHAREHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES BY VOTING IN PERSON.

 

Q. How can I change or revoke my vote?

 

A. If you own shares in your own name, you may revoke any prior proxy or voting instructions, regardless of how your proxy or voting instructions were originally submitted, by:

 

    sending a written statement to that effect to our Corporate Secretary, which must be received by us before the special meeting;

 

    submitting a properly signed proxy card or voting instruction form dated a later date;

 

    submitting a later-dated proxy or providing new voting instructions via the Internet or by telephone; or

 

    attending the special meeting in person and voting your shares.

If you hold shares in street name, you should contact the intermediary for instructions on how to change your vote.

 

Q. What is a proxy?

 

A. A proxy is your legal designation of another person, referred to as a “proxy”, to vote your shares of our common stock. The written document describing the matters to be considered and voted on at the special meeting is called a “proxy statement”. The document used to designate a proxy to vote your shares of our common stock is called a “proxy card”.

 

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Q. If a shareholder gives a proxy, how are the shares of common stock voted?

 

A. Regardless of the method you choose to vote, the individuals named on the enclosed proxy card will vote your shares of our common stock in the way that you indicate. When completing the Internet or telephone processes or the proxy card, you may specify whether your shares of our common stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the special meeting.

If you own shares that are registered in your own name and return a signed proxy card or grant a proxy via the Internet or by telephone, but do not indicate how you wish your shares to be voted, the shares represented by your properly signed proxy will be voted “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

 

Q. How are votes counted?

 

A. For the proposal to adopt the merger agreement, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Abstentions and broker non-votes will have the same effect as votes “AGAINST” approval of the proposal to adopt the merger agreement.

For the proposal to approve the merger-related compensation, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Abstentions and broker non-votes will not be counted in respect of, and will not have an effect on, the proposal.

 

Q. What do I do if I receive more than one proxy or set of voting instructions?

 

A. If you received more than one proxy card, your shares are likely registered in different names or with different addresses or are in more than one account. You must separately vote the shares shown on each proxy card that you receive in order for all of your shares to be voted at the special meeting.

 

Q. What happens if I sell my shares of common stock before the special meeting?

 

A. The record date for shareholders entitled to vote at the special meeting is earlier than both the date of the special meeting and the consummation of the merger. If you transfer your shares of our common stock after the record date but before the special meeting, unless special arrangements (such as provision of a proxy) are made between you and the person to whom you transfer your shares and each of you notifies the Company in writing of such special arrangements, you will retain your right to vote such shares at the special meeting but will transfer the right to receive the per share merger consideration to the person to whom you transfer your shares.

 

Q. What happens if I sell my shares of common stock after the special meeting but before the effective time of the merger?

 

A. If you transfer your shares after the special meeting but before the effective time of the merger, you will have transferred the right to receive the per share merger consideration to the person to whom you transfer your shares. In order to receive the per share merger consideration, you must hold your shares of common stock through completion of the merger.

 

Q. Who will solicit and pay the cost of soliciting proxies?

 

A.

The Company has engaged Innisfree M&A Incorporated to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay Innisfree M&A Incorporated a fee of $50,000 and telephone charges. The Company has agreed to reimburse Innisfree M&A Incorporated for certain fees and expenses and will also indemnify Innisfree M&A Incorporated, its subsidiaries and their respective directors, officers, employees and agents against certain claims, liabilities, losses, damages and expenses. The Company may also reimburse banks, brokers or their agents for their expenses in forwarding proxy

 

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  materials to beneficial owners of our common stock. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

 

Q. What do I need to do now?

 

A. Even if you plan to attend the special meeting, after carefully reading and considering the information contained in this proxy statement, please vote promptly to ensure that your shares are represented at the special meeting. If you hold your shares of our common stock in your own name as the shareholder of record, you may submit a proxy to have your shares of our common stock voted at the special meeting in one of three ways: (i) using the Internet in accordance with the instructions set forth on the enclosed proxy card; (ii) calling the toll-free number specified on your proxy card; or (iii) completing, signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope. If you decide to attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. If you are a beneficial owner, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you.

 

Q. Should I send in my stock certificates now?

 

A. No. If the proposal to adopt the merger agreement is approved, you will be sent a letter of transmittal promptly, and in any event within three (3) business days, after the completion of the merger, describing how you may exchange your shares of our common stock for the per share merger consideration. If your shares of our Class A common stock are held in “street name” through a bank, brokerage firm or other nominee, you should contact your bank, brokerage firm or other nominee for instructions as to how to effect the surrender of your “street name” shares of our Class A common stock in exchange for the per share merger consideration. Please do NOT return your stock certificate(s) with your proxy.

 

Q. Am I entitled to exercise appraisal rights under the Arizona Business Corporation Act instead of receiving the per share merger consideration for my shares of common stock?

 

A. Pursuant to § 10-1302(D) of the Arizona Business Corporation Act, which we refer to as the ABCA, the holders of the Company’s Class A common stock will not be entitled to assert dissenters’ rights in connection with the merger because the Company’s Class A common stock was listed on the NASDAQ, a national securities exchange, on the record date. Pursuant to § 10-1321 of the ABCA, the holders of the Company’s Class B common stock will not be entitled to assert dissenters’ rights if they vote in favor of the approval and adoption of the merger agreement. Each holder of Class B common stock has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Q. Who can help answer any other questions I might have?

 

A. If you have additional questions about the merger, need assistance in submitting your proxy or voting your shares of our common stock, or need additional copies of the proxy statement or the enclosed proxy card, please contact Innisfree M&A Incorporated, our proxy solicitor, by calling toll-free at (888) 750-5834. Banks and brokers should call at (212) 750-5833.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement contains “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, and are subject to the safe harbor created thereby under the Private Securities Litigation Reform Act of 1995.

Statements about the Company and its business in this proxy, which are not statements of historical fact, including statements regarding the Company’s future strategy and plans and commentary regarding future results of operations and prospects, are forward-looking statements and are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current information and expectations and involve a number of risks and uncertainties. Actual plans implemented and actual results achieved may differ materially from those set forth in or implied by such statements due to various factors, including, without limitation: (i) the timing of the completion of the merger; (ii) the failure of Parent to obtain the necessary equity financing set forth in the equity commitment letters received in connection with the merger agreement or the failure of that financing to be sufficient to complete the merger and the transactions contemplated thereby; (iii) the inability to complete the merger due to the failure to obtain shareholder approval or the failure to satisfy other conditions to completion of the merger, including receipt of required regulatory approvals; (iv) the risk that regulatory agencies impose restrictions, limitations, costs, divestitures or other conditions in connection with providing regulatory approval of the merger; (v) the outcome of pending or potential litigation or governmental investigations; (vi) disruptions resulting from the proposed merger making it more difficult for the Company to maintain relationships with its students, customers, employees, suppliers and strategic partners; (vii) competitive responses to the proposed merger; (viii) unexpected costs, liabilities, charges or expenses resulting from the merger; (ix) the inability to obtain, renew or modify permits in a timely manner, or comply with government regulations; (x) the inability to retain key personnel of the Company or its subsidiaries; (xi) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement, including a termination of the merger agreement under circumstances that could require the Company to pay a termination fee; (xii) unexpected expenses or other challenges in integrating acquired businesses, student, consumer or regulatory impact arising from consummation of such acquisitions, and unexpected changes or developments in the acquired businesses; (xiii) diversion of management’s attention from ongoing business concerns; (xiv) limitations placed on the Company’s ability to operate its business by the merger agreement; (xv) the impact of increased competition from traditional public universities and proprietary educational institutions; (xvi) the impact of the initiatives to transform the University of Phoenix into a more-focused, higher-retaining and less-complex institution, including the near-term impact on enrollment; (xvii) the impact of the Company’s ongoing restructuring and cost-reduction initiatives; (xviii) impacts from actions taken by our regulators that could affect the University of Phoenix’s eligibility to participate in or the manner in which it participates in U.S. Federal and state student financial aid programs, including the recent requirement that all substantial changes be approved by the U.S. Department of Education in advance; (xix) further delay in the University of Phoenix’s pending recertification by the U.S. Department of Education for participation in Title IV student financial aid programs, or any limitations or qualifications imposed in connection with any recertification; (xx) the impact of any reduction in financial aid available to students, including active and retired military personnel, due to the U.S. government deficit reduction proposals, debt ceiling limitations, budget sequestration or otherwise; (xxi) changes in regulation of the U.S. education industry and eligibility of proprietary schools to participate in U.S. Federal student financial aid programs; (xxii) changes in the University of Phoenix’s enrollment or student mix; (xxiii) the impact on student enrollments of the announcement of the proposed merger and general economic conditions; (xxiv) the impact of third party claims that the Company’s products and services infringe their intellectual property rights; and (xxv) fluctuations in non-U.S. currencies that could impact reported operating results of foreign subsidiaries.

For a discussion of the various factors that may cause actual plans implemented and actual results achieved to differ materially from those set forth in the forward-looking statements, please refer to the risk factors and other disclosures contained in the Company’s Form 10-K for fiscal year 2015, filed with the Securities and Exchange Commission, which we refer to as the SEC, on October 22, 2015, Form 10-Q for the quarterly period

 

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ended November 30, 2015, filed with the SEC on January 11, 2016, and other filings with the SEC which are available at www.apollo.edu. 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 the Company or persons acting on the Company’s behalf. The Company undertakes 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, the Company cannot guarantee future results, events, levels of activity, performance, or achievements.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents referred to or incorporated by reference, the dates of those documents.

 

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PARTIES TO THE MERGER

Apollo Education Group, Inc.

Apollo Education Group, Inc., which we refer to as the Company, we, us or our, is one of the world’s largest private education providers, serving students since 1973. Through its subsidiaries, the Company offers undergraduate, graduate, professional development and other non-degree educational programs and services, online and on-campus, principally to working learners. Its educational programs and services are offered throughout the United States and in Europe, Australia, Latin America, Africa and Asia, as well as online throughout the world.

For more information about the Company and its subsidiaries, call (800) 990-APOL or visit the Company’s website at www.apollo.edu. Our website address is provided as an inactive textual reference only. The information contained on our website is not incorporated into, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the Securities and Exchange Commission, which we refer to as the SEC. See also “Where You Can Find More Information” beginning on page [●].

The Company’s Class A common stock is listed on the NASDAQ under the symbol “APOL”.

AP VIII Queso Holdings, L.P.

AP VIII Queso Holdings, L.P. is a Delaware limited partnership that is a subsidiary of funds affiliated with Apollo Management VIII, L.P. and Apollo Global Management, LLC. In addition to certain funds affiliated with Apollo Management VIII, L.P., which we refer to collectively as the AGM investors, Vistria Fund, LP, an affiliate of The Vistria Group, LP, has committed to purchase, or to cause one or more of its affiliates to purchase, a percentage of the equity interests of Parent prior to the effective time of the merger. AP VIII Queso Holdings, L.P. may assign all or part of its rights and obligations under the merger agreement to one or more affiliates, subject to the terms and conditions therein. We refer to AP VIII Queso Holdings, L.P. or its permitted assignee as “Parent” in this proxy statement. Prior to the closing of the merger, Najafi Companies, LLC and certain other financial investors with relationships with Apollo Management VIII, L.P. or The Vistria Group, LP may also commit to purchasing a certain percentage of the equity interests of Parent.

Socrates Merger Sub, Inc.

Socrates Merger Sub, Inc., which we refer to as Merger Sub, is an Arizona corporation. Merger Sub is a wholly owned subsidiary of Parent and was formed solely for the purpose of engaging in the merger and other related transactions. Merger Sub has not engaged in any business other than in connection with the merger and other related transactions. Upon the completion of the merger, Merger Sub will cease to exist and the Company will continue as the surviving corporation.

The Vistria Group

The Vistria Group is a Chicago, Illinois-based private investment firm focused on investing in middle market companies in the healthcare, education, and financial services sectors. Vistria’s team is comprised of experienced operating partners and private equity executives, committed to building innovative market leading companies.

Najafi Companies

Najafi Companies is an international private investment firm based in Phoenix, Arizona, targeting education, media, consumer products, internet services, and direct marketing sectors. The firm makes highly selective investments in companies with strong management teams across a variety of industries, often in areas undergoing rapid transformation.

 

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THE SPECIAL MEETING

Date, Time and Place of the Special Meeting

This proxy statement is being furnished to our holders of our Class A common stock, without par value, which we refer to as Class A common stock, and holders of our Class B common stock, without par value, which we refer to as Class B common stock, who we refer to collectively as our shareholders, as part of the solicitation of proxies by the Company’s board of directors, which we refer to as the board of directors, for use at the special meeting of our shareholders to be held on [●], 2016 at [●], local Phoenix time, at [●], or at any postponement or adjournment thereof.

Purpose of the Special Meeting

At the special meeting, holders of our Class A common stock and Class B common stock, which we refer to collectively as our common stock or our shares, will be asked to:

 

    consider and vote on a proposal to adopt the merger agreement (Proposal 1 on your proxy card);

 

    consider and vote on a proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger (Proposal 2 on your proxy card); and

 

    in the case of holders of our Class B common stock only, consider and vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

The board of directors recommends that you vote “FOR” each of the above proposals.

Both our Class A and Class B shareholders must approve the proposal to adopt the merger agreement in order for the merger to occur. If either our Class A shareholders or our Class B shareholders fails to approve the proposal to adopt the merger agreement, the merger will not occur. A copy of the merger agreement is attached as Annex A to this proxy statement, and incorporated herein by reference, which we encourage you to read carefully and in its entirety.

Record Date and Quorum

We have fixed the close of business on [●], 2016 as the record date for the special meeting, and only holders of record of the Company’s common stock on the record date are entitled to notice of, and to vote at (in person or by proxy), the special meeting. As of the close of business on the record date, there were [●] shares of our Class A common stock outstanding and entitled to vote, held by [●] holders of record and 475,149 shares of our Class B common stock outstanding and entitled to vote, held by three holders of record. You will have one vote on all matters properly coming before the special meeting for each share of our Class A common stock and Class B common stock that you owned on the record date.

For purposes of the proposal to adopt the merger agreement, a majority of the votes entitled to be cast by the holders of our Class A common stock outstanding at the close of business on the record date, present in person or represented by proxy, at the special meeting constitutes a quorum of the Class A shareholders, and a majority of the shares of our Class B common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum of the Class B shareholders. For purposes of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger, a majority of the votes entitled to be cast by the holders of our Class A common stock and Class B common stock, collectively, outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum. For purposes of any proposal to adjourn the

 

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special meeting, if necessary or appropriate, to solicit additional proxies, a majority of the votes entitled to be cast by the holders of our Class B common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum. Abstentions and broker non-votes (as described below) are counted as present for the purpose of determining whether a quorum is present.

In the event that a quorum is not present at the special meeting, the special meeting may be adjourned or postponed to solicit additional proxies. Any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies will be approved if the votes cast by the holders of our Class B common stock in person or by proxy at the special meeting in favor of such proposal exceed the votes cast by such holders opposing such proposal. Each holder of Class B common stock has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Attendance

Only shareholders of record, their duly authorized proxy holders, beneficial shareholders with proof of ownership and our guests may attend the special meeting. If you are a shareholder of record, please bring a valid photo identification to the special meeting. If your shares of our Class A common stock are held through a bank, brokerage firm or other nominee, please bring to the special meeting valid photo identification and proof of your beneficial ownership of our Class A common stock. Acceptable proof could include an account statement showing that you owned shares of the Company’s Class A common stock on the record date, [●], 2016. If you are the representative of a corporate or institutional shareholder, you must present valid photo identification along with proof that you are the representative of such shareholder.

Vote Required

Approval of the proposal to adopt the merger agreement requires the affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding shares of our Class A common stock and the affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding shares of our Class B common stock entitled to vote thereon. Although our Class A common stock is non-voting stock generally, the holders of Class A common stock are entitled to a special vote as a class on the merger agreement under applicable Arizona corporate law. Each holder of Class B common stock, and certain holders of Class A common stock described under “The Voting and Support Agreements” beginning on page [●], has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies. For the proposal to adopt the merger agreement, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Abstentions will not be counted as votes cast in favor of the proposal to adopt the merger agreement, but will count for the purpose of determining whether a quorum is present. If you fail to submit a proxy or to vote in person at the special meeting, or abstain, it will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

If your shares of our common stock are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered, with respect to those shares of our common stock, the “shareholder of record”. This proxy statement and proxy card have been sent directly to you by the Company.

If your shares of our Class A common stock are held through a bank, brokerage firm or other nominee, you are considered the “beneficial owner” of shares of our Class A common stock held in street name. In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee who is considered, with respect to those shares of our Class A common stock, the shareholder of record. As the

 

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beneficial owner, you have the right to direct your bank, brokerage firm or other nominee how to vote your shares by following their instructions for voting.

Banks, brokerage firms or other nominees who hold shares in street name for customers generally have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokerage firms and other nominees are precluded from exercising their voting discretion with respect to approving non-routine matters such as the proposal to adopt the merger agreement and, as a result, absent specific instructions from the beneficial owner of such shares of our Class A common stock, banks, brokerage firms or other nominees are not empowered to vote those shares of our Class A common stock on non-routine matters. These broker non-votes will be counted for purposes of determining a quorum, and will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

The proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger will be approved if the votes cast by the holders of our Class A common stock and Class B common stock, collectively, such proposal in person or by proxy, at the special meeting in favor of such proposal exceed the votes cast by such holders opposing such proposal. Although our Class A common stock is non-voting stock generally, the Company is providing shareholders with the opportunity to approve, on a non-binding, advisory basis, such merger-related compensation in accordance with Section 14A of the Securities Exchange Act of 1934 (as amended), which we refer to as the Exchange Act. For the proposal to approve the merger-related compensation, you may vote “FOR”, “AGAINST” or “ABSTAIN”. If you abstain or if you fail to submit a proxy or attend in person the special meeting, or if there are broker non-votes with respect to your shares of our common stock on the issue, as applicable, the shares of our common stock held by you or your broker will not be counted in respect of, and will not have an effect on, the proposal to approve the merger-related compensation.

Any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies will be approved if the votes cast by the holders of our Class B common stock in person or by proxy at the special meeting in favor of such proposal exceed the votes cast by such holders opposing such proposal. Each holder of Class B common stock has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

If you are a shareholder of record, you may have your shares of our common stock voted on matters presented at the special meeting in any of the following ways:

 

    by proxy—shareholders of record have a choice of voting by proxy:

 

    by telephone or over the Internet, by accessing the telephone number or website specified on the enclosed proxy card. The control number provided on your proxy card is designed to verify your identity when voting by telephone or by Internet. Please be aware that if you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible.

 

    by signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope; or

 

    in person—you may attend the special meeting and cast your vote there.

If you are a beneficial owner, you should receive instructions from your bank, brokerage firm or other nominee that you must follow in order to have your shares of our common stock voted. Those instructions will identify which of the above choices are available to you in order to have your shares voted. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee at the special meeting.

 

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Please refer to the instructions on your proxy or voting instruction card to determine the deadlines for voting over the Internet or by telephone. If you choose to submit a proxy by mailing a proxy card, your proxy card should be mailed in the accompanying prepaid reply envelope, and your proxy card must be filed with our Corporate Secretary by the time the special meeting begins. Please do not send in your stock certificates with your proxy card. When the merger is completed, a separate letter of transmittal will be mailed to you that will enable you to receive the per share merger consideration in exchange for your stock certificates.

If you vote by proxy, regardless of the method you choose to vote, the individuals named on the enclosed proxy card, and each of them, with full power of substitution, will vote your shares of our common stock in the way that you indicate. When completing the Internet or telephone processes or the proxy card, you may specify whether your shares of our common stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the special meeting.

If you properly sign your proxy card but do not mark the boxes showing how your shares of our common stock should be voted on a matter, the shares of our common stock represented by your properly signed proxy will be voted “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

If you have any questions or need assistance voting your shares, please contact Innisfree M&A Incorporated, our proxy solicitor, by calling toll-free at (888) 750-5834. Banks and brokers should call at (212) 750-5833.

IT IS IMPORTANT THAT YOU PROMPTLY VOTE YOUR SHARES OF OUR COMMON STOCK. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. SHAREHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES BY VOTING IN PERSON.

As of [●], 2016, the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, (i) [●] shares of our Class A common stock (not including any shares of our common stock deliverable upon exercise or conversion of any options, stock appreciation rights, restricted shares or phantom awards), representing approximately [●] percent of the outstanding shares of our Class A common stock; and (ii) [●] shares of our Class B common stock (not including any shares of our common stock deliverable upon exercise or conversion of any options, stock appreciation rights, restricted shares or phantom awards), representing approximately [●] percent of the outstanding shares of our Class B common stock.

As of March 2, 2016, the Apollo Class B Voting Stock Trust No. 1, Peter V. Sperling, the Peter Sperling Voting Stock Trust, the Aurora Foundation, the San Roque School Charitable Trust, the John Sperling Revocable Trust, the John Sperling 1994 Irrevocable Trust and Gregory W. Cappelli collectively beneficially owned and were entitled to vote 8,338,144 shares of our Class A common stock, representing approximately 7.7% of the outstanding shares of our Class A common stock, and 475,149 shares of our Class B common stock, representing 100% of the outstanding shares of our Class B common stock. Consistent with the terms of the voting and support agreements executed by such shareholders with Parent, Merger Sub and the Company, such shareholders intend to vote all of the shares of common stock held by them “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

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Proxies and Revocation

Any shareholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person by appearing at the special meeting. If your shares of our Class A common stock are held in “street name” through a bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your shares of our common stock using the instructions provided by your bank, brokerage firm or other nominee. If you fail to submit a proxy or to vote in person at the special meeting, or do not provide your bank, brokerage firm or other nominee with instructions, as applicable, your shares of our Class A common stock will not be voted on the proposal to adopt the merger agreement, which will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement, and your shares of our Class A common stock will not be counted in respect of, and will not have an effect on the proposal to approve, the merger-related compensation,

You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by voting again at a later date through any of the methods available to you, by giving written notice of revocation to our Corporate Secretary, which must be filed with the Corporate Secretary by the time the special meeting begins, or by attending the special meeting and voting in person. Written notice of revocation should be mailed to: 4025 South Riverpoint Parkway, Phoenix, Arizona 85040, MS CF-KX01, Attention: Corporate Secretary.

Adjournments

Although it is not currently expected, the special meeting may be adjourned for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement. Any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies will be approved if the votes cast by the holders of our Class B common stock in person or by proxy at the special meeting in favor of such proposal exceed the votes cast by such holders opposing such proposal. Each holder of Class B common stock has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies. Any adjournment of the special meeting for the purpose of soliciting additional proxies will allow the Company’s shareholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned.

Anticipated Date of Completion of the Merger

We are working towards completing the merger as soon as possible. Assuming receipt of required regulatory approvals and timely satisfaction or waiver of other closing conditions, including the approval by our shareholders of the proposal to adopt the merger agreement, we anticipate that the merger will be completed by the end of calendar year 2016. If our shareholders vote to approve the proposal to adopt the merger agreement, the merger will become effective as promptly as practicable following the satisfaction or waiver of the other conditions to the merger, subject to the terms of the merger agreement. See “The Merger Agreement—Closing and Effective Time of the Merger” beginning on page [●].

Rights of Shareholders Who Seek Appraisal

Pursuant to § 10-1302(D) of the Arizona Business Corporation Act, which we refer to as the ABCA, the holders of the Company’s Class A common stock will not be entitled to assert dissenters’ rights in connection with the merger because the Company’s Class A common stock was listed on the NASDAQ, a national securities exchange, on the record date. Pursuant to § 10-1321 of the ABCA, the holders of the Company’s Class B common stock will not be entitled to assert dissenters’ rights if they vote in favor of the approval and adoption of

 

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the merger agreement. Each holder of Class B common stock has entered into a voting and support agreement with the Company, Parent and Merger Sub, requiring each such holder to vote all of his or its shares of common stock in favor of the approval and adoption of the merger agreement and any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Solicitation of Proxies; Payment of Solicitation Expenses

The Company has engaged Innisfree M&A Incorporated to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay Innisfree M&A Incorporated a fee of $50,000 and telephone charges. The Company has agreed to reimburse Innisfree M&A Incorporated for certain fees and expenses and will also indemnify Innisfree M&A Incorporated, its subsidiaries and their respective directors, officers, employees and agents against certain claims, liabilities, losses, damages and expenses. The Company may also reimburse banks, brokers or their agents for their expenses in forwarding proxy materials to beneficial owners of our common stock. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

Questions and Additional Information

If you have more questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please contact Innisfree M&A Incorporated, our proxy solicitor, by calling toll-free at (888) 750-5834. Banks and brokers should call at (212) 750-5833.

 

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THE MERGER

This discussion of the merger is qualified in its entirety by reference to the merger agreement, which is attached to this proxy statement as Annex A and incorporated herein by reference. You should read the entire merger agreement carefully as it is the legal document that governs the merger.

The merger agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation in the merger, which we refer to as the surviving corporation, and will continue to do business following the consummation of the merger. As a result of the merger, the Company will cease to be a publicly traded company and will become a wholly owned direct or indirect subsidiary of Parent. If the merger is completed, you will not own any shares of the capital stock of the surviving corporation.

Merger Consideration

In the merger, each outstanding share of our Class A common stock, without par value, which we refer to as Class A common stock, and each outstanding share of our Class B common stock, without par value, which we refer to as Class B common stock, and together with Class A common stock, collectively, as our common stock or our shares, will automatically be converted into the right to receive an amount in cash equal to $9.50, which we refer to as the per share merger consideration, without interest and less any applicable withholding taxes other than shares of our common stock owned by (i) Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent; and (ii) the Company or any direct or indirect wholly owned subsidiary of the Company, in each case not held on behalf of third parties, which shares will be canceled without payment of any consideration therefor and will cease to exist.

Background of the Merger

The board of directors of the Company, which we refer to as the board of directors, and management of the Company, which we refer to as management, regularly review and assess strategic alternatives available to the Company to enhance shareholder value. As part of that review, the board of directors from time to time has considered exploring potential strategic alternatives, such as acquisitions, business combinations, dispositions, restructurings, spin-offs and recapitalizations and has evaluated the Company’s prospects in light of, among other factors, industry conditions, the regulatory environment for private education providers, the Company’s financial trends, performance and capital requirements and conditions in the capital markets. From time to time in preceding years, senior management of the Company, which we refer to as senior management, has had discussions with parties, including Apollo Management VIII, L.P., on behalf of its affiliated funds, which we refer to as AGM, about the possibility of investing in the Company or entering into a strategic transaction for the acquisition of all or part of the Company. During the two years preceding the commencement of the strategic review process, these approaches did not proceed to the point of entering into a confidentiality agreement or sharing non-public information with any such party. Based in part on these conversations, the board of directors was aware that, due to the challenging regulatory environment surrounding the proprietary education sector, discussed below, which has resulted in the loss of capital by investors in the sector, many financial investors have refused to consider investing in proprietary education and there is an extremely limited number of strategic investors with both the market capitalization to undertake an acquisition of the Company and the ability or willingness to withstand the additional regulatory challenges arising from such a transaction.

The proprietary education sector has been faced with a challenging regulatory environment since 2010. There has been substantial and continuing increased focus in recent years by members of the U.S. Congress, Federal agencies, regulatory bodies and accreditors, including the U.S. 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

 

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regarding various aspects of the education industry, and reports have been issued that are highly critical of proprietary educational institutions and include a number of recommendations to be considered by Congress in connection with the upcoming reauthorization of the Federal Higher Education Act. Beginning in the summer of 2010, the Senate Health, Education, Labor and Pensions Committee, which we refer to as the HELP Committee, held its initial hearings regarding various aspects of the proprietary education sector, including recruitment practices and the degree to which proprietary educational institutions’ revenue is composed of Title IV funding. The HELP Committee subsequently published its report, “The Return on the Federal Investment in For-Profit Education: Debt Without a Diploma”, in September of that year. In July 2012, the HELP Committee released another report, “For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success”, summarizing its two-year investigation of the proprietary higher education sector and identifying “significant weaknesses with the effectiveness of the current regulatory scheme in ensuring protections for students and taxpayers”. Since late 2013, various state attorneys general and Federal agencies have been investigating and filing lawsuits against several of the Company’s peers in the proprietary education sector, challenging their marketing practices and student loan programs. In addition, in October 2014, the U.S. Department of Education formed an inter-agency task force 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.

The proprietary education sector has also been dealing with changes in the regulation of the U.S. proprietary education industry and the eligibility of proprietary educational institutions to participate in U.S. Federal student financial aid programs. In July 2012, the U.S. Department of Education published draft regulations requiring educational programs to prepare students for “gainful employment in a recognized occupation” in order to maintain eligibility to participate in Title IV programs. The U.S. Department of Education published final gainful employment regulations, effective July 1, 2015, in October 2014. Under the final regulations, which apply on a program-by-program basis, students enrolled in a program will be eligible for Title IV student financial aid only if that program satisfies at least one of two tests relating to student debt service-to-earnings ratios. The gainful employment rules were designed to ensure that programs of study (and related student debt) are affordable. However, an institution’s ability to improve program affordability by simply reducing program tuition is constrained because such tuition reductions generally increase the percentage of tuition derived from Title IV program funds. Given that the “90/10” rule requires a proprietary educational institution to derive no more than 90% of its cash basis revenue, as defined in the rule, from Title IV program funds in order to maintain its eligibility to participate in Title IV student financial aid programs, proprietary educational institutions face competing pressure in complying with the gainful employment and 90/10 requirements. We expect that the challenging regulatory environment will continue for the proprietary education sector for the foreseeable future.

Since 2010, approximately $25 billion of the proprietary education sector’s market capitalization has eroded, and trading multiples of companies in the sector have deteriorated substantially. Publicly traded companies in the proprietary education sector have on average experienced declines in enrollments of over 45% and in revenue of over 50% since 2010, and they continue to experience declines in enrollments and revenue, including the filing of bankruptcy and non-bankruptcy recapitalizations by certain companies in the sector that have left public shareholders with losses that will not be recovered. The proprietary education sector faces intense and increasing competition as new entrants with new business models emerge (e.g., Massive Open Online Course Providers) and more importantly, a significant and increasing number of traditional non-profit institutions offer an increasing array of distance learning and other online education programs, including programs that are geared towards the needs of working learners, which is the Company’s primary domestic market. Traditional non-profit institutions benefit from the availability of direct and indirect government subsidies, government and foundation grants, large endowments, tax-deductible contributions and other financial resources not available to proprietary educational institutions, exemptions from tax liabilities and the lack of certain restrictions on operations that are only applicable to proprietary education providers, such as compliance with the 90/10 rule and gainful employment regulations. This trend has been accelerated by private companies that provide and/or

 

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manage online learning platforms for traditional four-year colleges and community colleges, and has contributed to the substantial decline in University of Phoenix enrollment over the past five years. According to a February 2016 report published by Babson Survey Research Group and Quahog Research Group, LLC entitled “Online Report Card – Tracking Online Education in the United States”, as of the fall of 2014, 70% of students enrolled in online courses exclusively were enrolled in online programs of traditional non-profit institutions. The same report stated that between the fall of 2012 and the fall of 2014, the non-profit sector experienced a 26% growth in distance learning (a gain of 196,054 students), while the proprietary sector experienced a decline of 10% for the same period (a loss of 101,045 students).

In 2012, the Company’s share price for its Class A common stock started to decline, resulting in a decline in the Company’s market capitalization that has only worsened over the period without any meaningful recovery. Since then, the Company has seen an increased presence of short-sellers trading in its Class A common stock and seeking to profit from the negative impacts of the challenging regulatory environment, press coverage and political activism surrounding the Company and the proprietary education sector.

Due to the increasingly challenging environment faced by companies in the proprietary education sector, including the Company, and amidst growing concerns of the board of directors regarding the current environment as well as the challenges of maintaining the brand and reputation of the University of Phoenix in the current environment, in December of 2014, the independent directors of the board of directors, which we refer to as the independent directors, instructed members of senior management to commence analyzing potential strategic alternatives for the Company. In response to similar concerns, in 2015, the management of the University of Phoenix developed and started to implement its most significant initiatives to date to stabilize enrollment with a plan to transform the University of Phoenix into a more focused, higher retaining and lower complexity institution, including implementing changes to certain programs, adjusting pricing and increasing scholarships to enhance affordability, reducing the number of cohort start dates and enhancing admissions criteria to increase the proportion of newly enrolled students who are better prepared for the rigors of college level coursework, and tailoring initial course sequences to match the academic capabilities of students when they first enroll. The management of the University of Phoenix and the Company believed that while these initiatives could negatively impact new enrollments in the short term, such initiatives could favorably impact student retention, graduation rates and costs to complete programs of study in the longer term.

In December 2014, the independent directors requested that members of senior management begin researching strategic alternatives that could potentially be undertaken by the Company in order to enhance value for the shareholders of the Company. In January 2015, members of senior management reviewed with the independent directors a high level summary of such strategic alternatives. In March 2015, the independent directors further discussed with members of senior management potential strategic alternatives available to the Company.

On March 25, 2015, a member of senior management met with representatives of Credit Suisse Securities (USA), LLC, which we refer to as Credit Suisse, to discuss a number of topics and had a brief discussion regarding the preliminary work done by members of senior management in its exploration of strategic alternatives for the Company. Representatives of Credit Suisse met with members of senior management on April 21, 2015 to further discuss potential strategic alternatives for the Company, and the Company asked representatives of Credit Suisse to start putting together a preliminary list of potential investors.

In May 2015, members of senior management began discussing with representatives of Credit Suisse preliminary steps for the Company to consider in its preparation to explore strategic alternatives, including a list of potential investors based on representatives of Credit Suisse’s professional judgment and knowledge of the marketplace. Members of senior management asked representatives of Credit Suisse to facilitate meetings with select potential investors.

On June 9, 2015, the board of directors held a meeting that members of senior management also attended. The board of directors authorized management to continue the strategic review and to retain outside advisors to

 

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prepare for and undertake discussions with potential investors interested in acquiring the whole Company, but instructed management to continue to evaluate other alternatives to a whole company sale as well. Thereafter, management retained Barclays Capital Inc., which we refer to as Barclays, and Credit Suisse as the Company’s financial advisors in connection with the evaluation of the Company’s business plans and the assessment of its financial and strategic alternatives. The board of directors selected Credit Suisse and Barclays because of their familiarity with the Company and their qualifications, reputation and experience in the valuation of businesses and securities, and their knowledge of the industry in which the Company conducts its businesses. As part of their investment banking activities, each of Credit Suisse and Barclays is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Robert S. Murley, currently the chair of the audit committee and finance committee of the board of directors, is a former senior executive of Credit Suisse and is currently serving as a senior advisor to Credit Suisse. Prior to engaging Credit Suisse, the board of directors determined that Mr. Murley’s position as a senior advisor to Credit Suisse does not create a conflict with respect to the engagement of Credit Suisse, as Mr. Murley is not entitled to receive any direct or indirect compensation from any fees paid to Credit Suisse by the Company.

Over the course of several months, at the direction of management, representatives of Barclays and Credit Suisse contacted 16 investment firms that Barclays and Credit Suisse believed could be interested in acquiring the Company, based on their professional judgment and knowledge of the marketplace. Barclays and Credit Suisse did not initially contact any potential strategic acquirors because management, in consultation with Barclays and Credit Suisse, determined that strategic acquirors were unlikely to have an interest in a transaction with the Company at that time because they would not have the financial capacity to acquire the Company or were beset by regulatory and liquidity issues that would be prohibitive of a transaction in the near term. 15 of the 16 potentially interested parties requested to enter into confidentiality agreements and received copies of a confidential information memorandum. Of these 15 parties, 11 parties expressed initial interest and received access to select financial and business diligence information, including an overview of the Company’s long range plan that was provided to the parties on July 15, 2015, and participated in meetings with members of senior management.

On July 7, 2015, the board of directors held a meeting that was also attended by certain members of management as well as representatives of Barclays and Sullivan & Cromwell LLP, the Company’s outside legal counsel, which we refer to as Sullivan & Cromwell. Representatives of Barclays reviewed the challenges facing the proprietary education sector generally, and certain particular challenges facing the Company, including declining enrollments and increasing regulatory challenges. The representatives of Barclays also reviewed certain benefits and challenges associated with various potential strategic alternatives. Representatives of Barclays noted that a potential counterparty would need to be able to finance an acquisition of the whole Company through equity, rather than debt, given the inability to place high levels of leverage on the Company due to regulatory and liquidity concerns, and reviewed examples of potential counterparties who had the capacity and willingness to consider an acquisition of the Company on such terms. After discussion, the board of directors determined based on the information presented regarding the various strategic alternatives that it was in the best interest of the Company to explore further the possibility of a sale of the whole Company and instructed management, Barclays and Credit Suisse to move forward in a possible sale process with the potentially interested parties that had indicated interest in acquiring the Company. The board of directors also authorized the finance committee of the board of directors, which we refer to as the finance committee, to act as a transaction committee, and directed the finance committee to include in its meetings, for purposes of the review of strategic alternatives, directors Roy Herberger and Darby Shupp, a trustee of the Apollo Class B Voting Stock Trust No. 1.

On or around July 11, 2015, Allen Weiss, a member of the board of directors, the audit committee, the nominating and governance committee and the finance committee, became aware of the potential involvement of AGM in the sale process and alerted members of senior management of his current role in providing services to an affiliate of AGM. After discussions with members of management and Sullivan & Cromwell during the course

 

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of the subsequent few days, the remaining directors determined that due to his affiliation with AGM, Mr. Weiss would be recused from those portions of board or finance committee meetings that involved discussions or deliberations regarding a potential sale of the Company and certain other matters related to the Company’s review of potential strategic alternatives so long as AGM remained in the process. From and after September 21, 2015, once the Company had received preliminary indications of interests from potential counterparties, including AGM, Mr. Weiss was recused from discussions of the finance committee and the board of directors to the extent such discussions pertained to a potential sale of the Company and did not receive any valuation materials directly related to the sale process or information concerning any potential counterparties.

On July 28, 2015, the Company received a broad civil investigative demand from the U.S. Federal Trade Commission relating to the Company’s advertising, marketing and sales practices.

On August 6, 2015, the Company received an investigative subpoena from the Office of the Attorney General of the State of California requiring the Company to produce documents and information regarding the business and practices of the University of Phoenix with respect to current and former military personnel.

On August 7, 2015, the finance committee held a meeting, at which members of senior management and representatives of Barclays and Sullivan & Cromwell were also in attendance, in order to receive an update from representatives of Barclays on the potential sale process and the anticipated timeline for a sale. The finance committee discussed the desirability of reaching a conclusion in the sale process prior to December 1, 2015, the deadline by which the Company believed the parties would be required to submit a change of control application for consideration at the June 2016 board meeting of the Higher Learning Commission, which we refer to as the HLC, so that in the event the board of directors elected to approve a transaction, the transaction would be able to close promptly.

On August 28, 2015, the finance committee held a meeting, at which members of senior management and representatives of Sullivan & Cromwell were also in attendance, in order to receive an update from management on the potential sale process, the anticipated timeline for a sale and the potentially interested parties. The finance committee, management and the representatives of Sullivan & Cromwell discussed, among other things, the key considerations behind selecting a prospective buyer from the group of interested parties, including their ability to finance the transaction.

On August 31, 2015, the Company granted the 11 parties that expressed initial interest access to an electronic data room containing preliminary business diligence materials.

In September 2015, Peter Sperling, Terri Bishop and Darby Shupp, members of the board of directors and the trustees of the Apollo Class B Voting Stock Trust No. 1, whom we refer to as the trustees, engaged Farella Braun + Martell LLP, which we refer to as Farella, as their outside legal counsel in respect of their roles as the trustees of the Apollo Class B Voting Stock Trust No. 1 in connection with the potential transaction. The Apollo Class B Voting Stock Trust No. 1 holds 51% of our voting stock and the approval of any change of control transaction by a majority of the trustees is required. In recognition that any potential buyer would likely expect to secure a voting and support agreement from the Apollo Class B Voting Stock Trust No. 1 with respect to which the trustees would require independent legal advice, the Company recommended that the trustees retain independent legal counsel and agreed to reimburse certain of the trustees’ legal expenses in connection with a potential sale process.

On September 2, 2015, after discussions with members of senior management, representatives of Barclays and Credit Suisse delivered instructions to each party that had executed a confidentiality agreement and expressed continued interest in acquiring the Company. Those instructions set forth procedures and guidelines for submitting one or more non-binding preliminary indications of interest to acquire the Company. Preliminary indications of interest were initially due by September 17, 2015, but this deadline was subsequently extended to

 

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September 21, 2015 in order to provide all parties with additional time to prepare more complete submissions following the provision to the bidders on September 16, 2015 of certain updated management projections for the Company for fiscal year 2016 that reflected downward revisions to the fiscal year 2016 numbers in the long range plan previously provided to bidders in July 2015. The preliminary management projections provided to bidders in September 2015 for fiscal year 2016 were the same as the management projections provided to the board of directors as part of their regular annual planning process conducted after the conclusion of the Company’s fiscal year 2015 on August 31. Two other parties, in addition to the 16 original potentially interested parties, executed confidentiality agreements after September 2, 2016, but withdrew from the process shortly after executing confidentiality agreements. During the month of September, several parties requested and received permission from the Company to bid jointly on the basis that they did not have sufficient financial capacity to acquire the whole Company by themselves.

On September 4, 2015, the finance committee held a meeting, at which members of senior management and representatives of Sullivan & Cromwell were also in attendance, in order to receive an update from management on the potential sale process. Members of senior management shared with the finance committee the anticipated transaction timeline, contemplating a signing on December 1, 2015 due to certain regulatory requirements that would require the Company to submit certain materials to applicable regulators in order to undergo a change of control transaction, and discussed with the finance committee the achievability of the anticipated timeline with the potential investors.

On September 11, 2015, the finance committee held a meeting, at which members of senior management and representatives of Barclays and Sullivan & Cromwell were also in attendance, in order to receive an update from management on the potential sale process. Representatives of Barclays also provided the finance committee with an update on discussions with potential counterparties.

In early September 2015, a representative from an investment firm that had not previously entered into a confidentiality agreement, which we refer to as Bidder 1, approached the Company and indicated that it would be interested in possibly engaging with the Company in a transaction. Bidder 1 entered into a confidentiality agreement with the Company on September 22, 2015, and thereafter met with members of senior management and was provided with access to financial and business diligence information and the electronic data room.

By September 21, 2015, Barclays and Credit Suisse had received five preliminary indications of interest for an acquisition of the whole company. Some of the parties that had executed confidentiality agreements with the Company expressed potential interest in an acquisition of the Company’s educational programs based outside the U.S., which we refer to as the Global business, but declined to submit an indication of interest for the acquisition of the entire company. All of the indications of interest were for an all-cash acquisition of the Company, on a cash free, debt free basis at a range of between $12.00 to $16.00 per share, and several indications of interest assumed the use of debt financing in addition to equity financing to fund the purchase price. These preliminary valuations of the Company were based on the financial projections provided to the bidders in July and updated in mid-September. One of the five indications of interest indicated that the bidder could only commit to finance $100 million of the aggregate purchase price and would need to team up with another bidder or bidding group. The Vistria Group, LP, which we refer to as Vistria, had teamed up with a bidder that we refer to as Bidder A and also informally indicated to Barclays that it did not have the financial capacity to acquire the Company independently, but expressed interest in potentially teaming up with other bidders or bidding groups in the event that Bidder A was not selected to proceed in the process, provided that Vistria’s evaluation of any potential partnership with another bidder or bidding group would be independent of Vistria’s prior work with Bidder A.

On September 23, 2015, the finance committee held a meeting that was also attended by certain members of senior management and representatives of Sullivan & Cromwell and Barclays. Representatives of Barclays reviewed the five preliminary indications of interest that had been received and discussed the various bidders with the finance committee. After discussion, the finance committee determined, primarily based on the prices provided by the bidders in their indications of interest, that it would continue discussions with three bidding

 

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groups: AGM, a bidder that we refer to as Bidder B and a bidding group of three interested parties including Najafi.

After the September 23, 2015 meeting of the board of directors, at the finance committee’s direction, representatives of Barclays and Credit Suisse also had discussions with certain of the interested parties, including those that had not been selected to move forward in the sale process, to see if they were interested in partnering with other bidders, with a view to pairing parties that would have the financial capability and parties with knowledge of the proprietary education sector to be able to undertake the transaction and with a view to potentially increasing bid prices by, for example, pairing parties that were interested in acquiring different component parts of the Company. This resulted in Bidder B being teamed up with the bidding group that included Najafi, which we refer to collectively as Consortium C, and in AGM being teamed up with Vistria, which we refer to collectively as the consortium.

Also following the September 23, 2015 meeting of the board of directors, the Company made available to the remaining bidding groups certain non-public information of the Company in the electronic data room. Management and representatives of Barclays and Credit Suisse also responded to additional diligence requests from the remaining bidder groups.

On September 30, 2015, the board of directors held a meeting that was also attended by members of management and representatives of Barclays and Sullivan & Cromwell. Representatives of Barclays reviewed the status of discussions with the bidders and certain preliminary financial analyses of the Company. The board of directors also considered whether the Company had approached all parties likely to be interested in and capable of effecting an acquisition of the Company. Following this discussion, the board of directors requested that a director of the Company contact a director of Bidder D, a potential strategic counterparty, to inquire whether Bidder D may have any interest in a business combination transaction with the Company. In early October, following the director’s discussions with the director of Bidder D, the finance committee directed management to invite Bidder D to execute a mutual confidentiality agreement with the Company and exchange confidential information with a view to assessing whether the parties shared a mutual interest in a transaction. On October 20, 2015, Bidder D entered into a confidentiality agreement with the Company, and the parties subsequently shared select financial and business diligence information.

On October 1, 2015, the board of directors held a meeting at which the audit committee reviewed its report with the board of directors, including the issue, as had previously been discussed between members of management and the audit committee during a meeting of the audit committee on September 30, 2015, of the evaluation of a potential goodwill impairment due to the decline in the price of the Company’s Class A common stock. Prior to the filing of the Company’s annual report on Form 10-K on October 22, 2015, the Company determined it was not required to record a goodwill impairment at that time.

From October 6 to October 8, 2015, members of management held presentations for all bidders that were then actively engaged in the process on the operations, financial performance and strategic plans of the Company.

On October 7, 2015, the Company filed a report on Form 8-K announcing that the U.S. Department of Defense, which we refer to as the DOD, had placed the University of Phoenix on probationary status with respect to its participation in the Tuition Assistance Program for active duty military personnel, and that the DOD was considering whether to terminate the DOD Voluntary Education Partnership Memorandum of Understanding with the University which is the basis on which the University of Phoenix’s active duty military students participate in the Tuition Assistance Program. While on probationary status, currently eligible enrolled students were to remain eligible to participate in the Tuition Assistance Program, but newly enrolled or transfer students of the University of Phoenix would not be eligible. In addition, while on probationary status, the University of Phoenix would not be permitted to engage in various activities at military installations, including job training, career events, fairs and other sponsored events.

 

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On October 13, 2015, Bidder 1 withdrew from the process and declined to submit an indication of interest.

On October 16, 2015, the Company made an initial draft of a merger agreement available in the electronic data room.

On October 20, 2015, after discussion with directors and members of senior management, representatives of Barclays and Credit Suisse delivered letters to the consortium and Consortium C instructing them to submit definitive acquisition proposals, including a mark-up of the merger agreement, by November 2, 2015, but did not deliver a letter to Bidder D, as Bidder D had demonstrated limited interest in engaging in discussions or in submitting an acquisition proposal, notwithstanding Barclays’ and Credit Suisse’s attempts to engage with Bidder D’s financial advisor.

Also on October 20, 2015, the Global business entered into a definitive purchase agreement with Career Partner GmbH, which we refer to as CPG, one of the largest proprietary postsecondary education providers in Germany that provides on-campus and online bachelor and master programs in business and tourism, and corporate training programs, and its shareholders, pursuant to which a newly formed subsidiary of the Global business agreed to purchase all of the outstanding shares of CPG.

On October 22, 2015, the Company announced its earnings for the fourth quarter and fiscal year ended August 31, 2015, which fell short of its beginning of fiscal year 2015 guidance by over $230 million in revenue and by approximately $100 million in operating income. On October 28, 2015, the Company subsequently provided the remaining bidding groups, Consortium C and the consortium, with an updated long range plan for fiscal years 2016 through 2020, reflecting downward adjustments to the management projections previously provided to bidders in July and September.

On October 23, 2015, the finance committee held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell. A representative of Barclays updated the finance committee with respect to the status of discussions with the two remaining bidder groups, Consortium C and the consortium. Members of management also reviewed with the board of directors the request by certain bidders to initiate discussions with representatives of the U.S. Department of Education, given recent regulatory actions being taken with respect to the Company. The board of directors stated its belief that the Company had not yet established a sufficient relationship with any one potential bidder that it could use as a basis to approach regulators at this time and expressed concern that premature discussions with the regulators could adversely affect the Company’s relationship with its regulators in the event that the Company were to continue as a stand-alone company. Members of management also reviewed with the board of directors discussions among management of the Company and of the University of Phoenix regarding the engagement of a strategic consultant to assist the Company in its review of expenses at the corporate level and evaluation of cost-cutting initiatives in connection with the transformation plan of the University of Phoenix in the event the Company were to remain a standalone public company, with which the board of directors agreed. The Company retained the strategic consultant on December 11, 2015.

On October 30, 2015, the finance committee held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell. A representative of Barclays updated the finance committee with respect to the status of discussions with the two remaining bidder groups, noting that based on such discussions, both the consortium and Consortium C were expected to submit bids, but had indicated to Barclays that due to timing and issues with internal processes, neither group expected to be able to provide a complete mark-up of the merger agreement by November 2.

On November 2, 2015, the Company received non-binding offers for the acquisition of the Company from the consortium and Consortium C. Consortium C’s offer contemplated an all-cash transaction for a purchase price of $10.00 to $11.00 per share, and was accompanied by a partially revised draft merger agreement. The

 

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consortium’s offer contemplated an all-cash transaction for a purchase price of $9.75 per share and was accompanied by a list of key issues with respect to the draft merger agreement.

Later in the evening of November 2, 2015 and continuing on November 3, 2015, the finance committee held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell. Representatives of Barclays reviewed certain preliminary financial analyses of the Company and the non-binding offers received by the Company, noting that the decrease in value of the bids since the bidder groups’ initial indications of interest likely reflected the downward revisions to the long range plan on October 28, 2015 compared to the previously provided long range plan, and bidders’ perception of increased downside risk due to the heightened regulatory pressure faced by the Company, including the announcement that the U.S. Department of Defense was placing the University of Phoenix on probationary status. Representatives of Barclays and the members of the finance committee also discussed that given the limited visibility of the Company into the likelihood of occurrence and potential magnitude of the material risks to the Company’s performance in the unpredictable operating environment surrounding the Company and the associated challenges faced by management in accurately forecasting the Company’s performance and predicting the effectiveness of initiatives designed to improve the performance of the business and stabilize enrollment and revenue, Barclays would not rely on a discounted cash flow analysis of the Company or the financial projections of the Company for any period beyond the 2016 fiscal year for purposes of its analysis and fairness opinion. Representatives of Sullivan & Cromwell reviewed with the finance committee the terms of the revised draft merger agreement submitted by Consortium C and the key issues list submitted by the consortium. The finance committee determined that it was unable to determine which offer would provide greater certainty to closing, including with respect to the ability of each bidder group effectively to engage with regulators in connection with obtaining the necessary regulatory approvals for a sale of the Company. The finance committee determined to recommend to the board of directors to direct representatives of Barclays and Sullivan & Cromwell to obtain clarifications from each of the bidder groups on the financial and contractual terms of their bids in order to assess the certainty of closing of each bidder group’s bid. In addition, the finance committee requested that representatives of Barclays work with management to prepare additional financial analyses of the Company’s businesses, including the University of Phoenix and the Global business, with a view to further informing the board of directors’ evaluation of the purchase prices offered by the consortium and Consortium C in their non-binding offers.

On November 4, 2015, the board of directors held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell, at which the board of directors agreed to proceed in accordance with the recommendation of the finance committee to seek more information concerning the financial and contractual terms of the offers as well as the stand-alone valuation of the Company. At this meeting, representatives of Barclays and members of the board of directors discussed that given the limited visibility of the Company into the likelihood of occurrence and potential magnitude of the material risks to the Company’s performance in the unpredictable operating environment surrounding the Company and the associated challenges faced by management in accurately forecasting the Company’s performance and predicting the effectiveness of initiatives designed to improve the performance of the business and stabilize enrollment and revenue, Barclays would not rely on a discounted cash flow analysis of the Company or the financial projections of the Company for any period beyond the 2016 fiscal year for purposes of its analysis and fairness opinion.

On November 5, 2015, representatives of Barclays and Sullivan & Cromwell contacted each of the consortium and Consortium C to discuss and further clarify the terms proposed in their offers, including the terms related to certainty of closing with respect to financing and regulatory matters. On a call with representatives of Barclays and Sullivan & Cromwell on the morning of November 5, 2015, representatives of Consortium C confirmed that there would not be any condition to closing relating to the obtaining of financing, as the purchase price would consist of all equity. On a call with representatives of the consortium later that afternoon, representatives of the consortium represented that while the purchase price would consist of all equity financing, the closing of the transaction would be conditioned on the ability of the consortium to obtain a revolving credit facility for the Company at closing in an amount sufficient to support the liquidity of the Company going forward (including working capital requirements and any letter of credit required by the U.S.

 

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Department of Education), as the Company’s existing credit facility expires in April 2017 and the Company would need to obtain consent from the lenders thereunder prior to closing. Each bidder group expressed its inability to discuss certainty of closing with respect to regulatory approvals in greater detail before having had the opportunity to discuss the transaction with the applicable regulators.

On November 6, 2015, the finance committee held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell. The finance committee discussed the benefits and risks associated with both offers, including certainty of closing and the perceived ability of each bidder group to engage in effective discussions with regulators regarding approval of a sale. The finance committee expressed concern about the consortium’s proposal because of increased closing risk posed by the financing condition in connection with obtaining a new revolving credit facility. The finance committee also expressed concerns around risks to the Company’s liquidity in the event the Company remained a standalone company and needed to obtain a new revolving credit facility or renew the Company’s existing credit facility. The finance committee also discussed whether the purchase price being offered by either bidder group was in the best interests of shareholders. After further discussion with management and representatives of Barclays and Sullivan & Cromwell, the finance committee determined that, based on the higher proposed price by Consortium C, the greater certainty of closing due to the absence of any financing condition, whether to fund the purchase price or to obtain a revolving credit facility to establish liquidity for the Company post-closing, and the perceived ability of Consortium C to engage more effectively with regulators, Consortium C’s proposal was reasonably likely to become the most attractive proposal to acquire the Company and that the finance committee therefore would be willing to permit the Company to enter into a short-term exclusivity arrangement with Consortium C. The finance committee authorized representatives of Barclays and Sullivan & Cromwell to engage in discussions with the advisors to Consortium C on the terms of the exclusivity agreement and instructed such representatives to communicate that improvement to the proposed purchase price would be required in order for the finance committee to recommend the offer to the board of directors. Later that evening, representatives of Barclays informed the financial advisor to Consortium C of the finance committee’s decision. The finance committee also determined to retain a second independent financial advisor to perform additional financial analysis with respect to the valuation of the Company and, if requested, to render a fairness opinion with respect to a potential transaction to provide the board of directors with an additional independent view on the Company’s valuation.

In early November, after consulting with the finance committee, management contacted applicable regulators, including the HLC, to inquire whether such regulators would be willing to permit the Company additional time to submit certain materials necessary in order for the Company to undergo a change of control.

On November 8, 2015, the Company and the board of directors retained Evercore Group L.L.C., which we refer to as Evercore, as an additional financial advisor.

Later that evening, outside counsel to Consortium C provided an initial draft of an exclusivity agreement to Sullivan & Cromwell. Over the course of the following forty-eight hours, Sullivan & Cromwell and the outside counsel to Consortium C negotiated terms of the exclusivity agreement, including an expense reimbursement provision requested by Consortium C.

On November 9, 2015, based on a revised draft exclusivity agreement prepared by outside counsel to Consortium C, representatives of Sullivan & Cromwell became aware that Najafi no longer appeared to be a member of Consortium C. The following evening, advisors to Consortium C confirmed that Najafi was no longer a member of Consortium C due to discord among the members of Consortium C.

Between November 11 and November 13, 2015, representatives of Sullivan & Cromwell and Barclays contacted advisors to Consortium C in order to further engage on the draft exclusivity agreement, but were unable to engage substantively with the advisors.

 

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On November 13, 2015, the financial advisor to Consortium C informed representatives of Barclays that Consortium C was not willing to move forward with negotiating an exclusivity agreement or the transaction more generally unless the board of directors confirmed that Consortium C’s offer price of $10.00-$11.00 per share was acceptable, and the board of directors and the trustees confirmed their willingness to sell the Company to Consortium C for $10.00-$11.00 per share. Consortium C also noted that $11.00 would represent a best case with no risks identified in diligence.

Later that afternoon, the finance committee held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell, at which the finance committee was informed of Consortium C’s requirements to proceed in negotiations with the Company. The finance committee expressed concern regarding Consortium C’s internal discord and demonstrated inability to proceed expeditiously since the confirmation of its offer on November 5. After further discussion with members of management and representatives of Barclays and Sullivan & Cromwell, the finance committee directed Barclays to contact AGM to gauge its level of interest in continuing negotiations with the Company in light of the anticipated timing for the submission of certain regulatory filings in connection with a potential sale of the Company.

Following the finance committee meeting, representatives of Barclays contacted representatives of AGM, during which representatives of AGM indicated that AGM would be willing to move forward with the sale process without an exclusivity agreement or clarification of the board of directors’ willingness to sell the Company, and at what price, and that it would work with management and Barclays to perform additional due diligence on the Company and explore whether it could increase its proposed purchase price.

On November 17, 2015, Bidder A sent to Gregory Cappelli, the chief executive officer of the Company, a written expression of its interest to re-enter the sale process and its desire to be re-partnered with Vistria. Representatives of Barclays contacted Bidder A to inform them that they would be granted access to the electronic data room but that Bidder A would not be permitted to engage in discussions with Vistria at this time in order to ensure that Bidder A would make an independent determination on a proposed purchase price. On November 23, 2015, Barclays sent a formal process letter to Bidder A, including a date by which Bidder A would be required to submit a non-binding offer and revised draft merger agreement to the Company.

On November 20, 2015, the finance committee held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell. Representatives of Barclays reviewed with the finance committee their discussions with AGM and Bidder A.

On November 25, 2015, Bidder A withdrew from the process, citing significant declines in the Company’s forecasts and increasing uncertainty in the outlook for the University of Phoenix.

On December 4, 2015, the finance committee held a meeting that was also attended by certain members of management and representatives of Barclays, Evercore and Sullivan & Cromwell. Representatives of Barclays reviewed certain preliminary financial analyses of the Company, including preliminary financial analyses of different components of the Company’s businesses, including the University of Phoenix and the Global business. Following the completion of Barclays’ presentation to the finance committee, representatives of Evercore discussed the valuation methodologies used in their financial analysis of the Company, which included a selected peer group analysis, premiums paid analysis, research analyst price targets analysis, trading prices analysis, sum-of-the-parts analysis and sponsor ability-to-pay analysis. Representatives of Evercore also informed the finance committee that it would assign little or no weight to its discounted cash flow analysis of the Company, given the difficulty in the Company’s ability to forecast in the current environment.

On December 5, 2015, the board of directors held a meeting that was also attended by certain members of management and representatives of Barclays, Evercore and Sullivan & Cromwell. Management reviewed with the board of directors management’s liquidity projections for fiscal year 2016, assuming the Company was to

 

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remain a standalone public company. Management reiterated from prior discussions that the Company’s ability to utilize its liquidity was constrained by the U.S. Department of Education financial responsibility composite score requirements, also noting that the credit markets have been tightening for private education providers and that one of the Company’s largest lenders had informed management of its intent to cease providing credit to companies in the proprietary education sector. Management further stated that the tightening credit markets for the proprietary education sector, combined with the Company’s declining cash flows, will result in less capital being available to the Company and higher costs for the available capital, thus resulting in an expectation that the Company’s borrowing capacity will be lower than its current level upon the expiration of the Company’s revolving credit facility in 2017. Management also noted that, due to financial responsibility composite score requirements, the Company had only limited excess cash available to pursue any significant acquisitions, which foreclosed the possibility of meaningful additional inorganic growth for the Global business. Management also indicated that the Company may be required to record a goodwill impairment charge for the University of Phoenix as a result of the significant decline in the Company’s market capitalization, which will further reduce the Company’s financial responsibility composite score calculation. Representatives of Barclays then reviewed preliminary financial analyses of the Company, including preliminary financial analyses of different components of the Company’s businesses, including the University of Phoenix and the Global business. Representatives of Evercore discussed the valuation methodologies used in their financial analysis of the Company, which included a selected peer group analysis, premiums paid analysis, research analyst price targets analysis, trading prices analysis, sum-of-the-parts analysis and sponsor ability-to-pay analysis. Representatives of Evercore also informed the board of directors that it would assign little or no weight to its discounted cash flow analysis of the Company, given the difficulty in the Company’s ability to forecast in the current environment. The finance committee recommended to the board of directors to proceed with AGM in the process at a price in the range of $12.00 to $13.00 per share without any financing condition, whether to fund the purchase price or to obtain a revolving credit facility to establish liquidity for the Company post-closing, and the board of directors agreed to authorize proceeding in this manner. At the direction of the board of directors, representatives of Barclays informed AGM of the decision of the board of directors.

On December 7, 2015, Mr. Sperling received an unsolicited written letter from an investment firm, which we refer to as Firm F, expressing interest in acquiring BPP Holdings Limited, which we refer to as BPP. Firm F’s indication of interest was based on publicly available information, without any due diligence, and materially inaccurate assumptions with respect to the projected profitability of BPP. The board of directors instructed representatives of Barclays and Credit Suisse to engage with Firm F to clarify the terms of its proposal, which representatives of Barclays and Credit Suisse did shortly thereafter.

On December 8, 2015, representatives of AGM informed representatives of Barclays that AGM would be willing to negotiate an acquisition of the Company at a price of $10.00 per share and a targeted signing date of January 11, 2016, prior to the Company’s scheduled earnings release for the first quarter of fiscal year 2016 and the anticipated deadline of January 15 for the submission of certain regulatory filings in connection with a potential sale of the Company. AGM noted that the proposed purchase price reflected a significant risk adjustment for potential continued underperformance of the University of Phoenix relative to management’s projections due to the lack of actual leading indicators suggesting that the Company operational performance was consistent with management’s projections. AGM indicated that in the alternative, it would also be willing to revisit the possibility of acquiring the Company at a higher price in the future, subject to seeing financial results of the Company that reflect a positive trend in response to the implementation of the University of Phoenix’s turnaround strategy.

On December 9, 2015, the audit committee held a meeting at which the audit committee and certain members of management discussed, among other things, the Company’s forecasted financial responsibility composite score for fiscal year 2016. Management noted at this meeting that the Company may be required to record a goodwill impairment charge that would result in a reduction in the Company’s financial responsibility composite score (which is calculated annually as of fiscal year end). Management further noted that an impairment charge for the University of Phoenix goodwill, combined with potential additional charges or deterioration in the Company’s financial results during its fiscal year 2016, could result in the Company’s

 

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financial responsibility composite score falling below 1.5, which could result in the Company being required to post a letter of credit in favor of the U.S. Department of Education or the U.S. Department of Education potentially imposing heightened cash monitoring or other requirements pertaining to the disbursement of Title IV funds. In addition, a financial responsibility composite score below 1.5 would constitute an event of default under the Company’s revolving credit facility, thus rendering the revolving credit facility unavailable for the posting of any required letter of credit, and the Company would have no assurance that other financing sources would be available on terms acceptable to the Company or at all.

Also on December 9, 2015, the board of directors held a meeting that was attended by certain members of management and representatives of Barclays, Sullivan & Cromwell and Quarles & Brady LLP, outside counsel to the Company. Representatives of Barclays reviewed with the board of directors their discussions with AGM. The board of directors expressed concern that revisiting a possible sale in the future would not guarantee that AGM would increase the proposed purchase price and would expose the Company to significant continued execution risks and make it difficult if not impossible to meet a deadline required by regulators. The board of directors, however, reached a consensus that it would not move forward at this time with a sale of the entire Company to AGM at a price of $10.00 per share. The board of directors then discussed strategic alternatives to a possible sale of the entire Company, including the Company’s execution of its long-range plan and the University of Phoenix’s transformation plan and the possibility of reclassifying the Company’s dual-class share structure in connection with a private investment in public equity transaction to provide the Company with additional liquidity. The members of the board of directors expressed concern over the regulatory and political headwinds facing the Company and the continued decline of the Company’s share price.

The board of directors then turned to a discussion of the unsolicited indication of interest from Firm F regarding an acquisition of BPP. The board of directors discussed the impact of a sale of BPP on the Company, were it to remain a standalone public company, as BPP constitutes the majority of the Global business, including the likelihood that such a sale could strand the Company with significant costs relating to infrastructure or other shared services currently used for BPP, the limitations on the Company’s ability to build and grow the Global business, the possibility that the Company would exit from the Global business altogether and the ensuing impact on the long range plan and stability of the Company, given that the long range plan was supported in later years by the expected transition to profitability of the Global business and substantial longer term margin expansions captured through the shared infrastructure and expected synergies in the Global business. The directors also considered the effects of a sale of BPP on the strategic alternatives process, including the likelihood that the remainder of the Global business and/or the Company would become less marketable to potential investors. After discussion with members of management and representatives of Barclays and Sullivan & Cromwell, the board of directors concluded that a sale of BPP alone would significantly undermine the strategic rationale and value of the Global business, making it significantly more challenging for the Company to execute its strategies as a standalone company or to undertake strategic alternatives.

After an overnight recess, the board of directors continued its meeting on December 10, 2015. Citing their concern with the continuing regulatory and political pressures faced by the Company, the ability of the Company to execute its transformation plan, the adverse impact that the Company’s required public company disclosures have on the Company market price and enrollments, the liquidity issues that could be exacerbated by the exit of one or more lenders from the proprietary education sector and the unlikelihood of a substantial recovery of the share price over the next two to three years, the board of directors reached a consensus to move forward with AGM with respect to a transaction for a sale of the entire Company at a proposed purchase price of $11.00 per share with no financing condition, whether to fund the purchase price or to obtain a revolving credit facility to establish liquidity for the Company post-closing, subject to announcing a transaction prior to the Company’s earnings announcement scheduled for January 11, 2016, and to authorize the Company to enter into a short-term exclusivity arrangement with AGM on this basis. The board of directors also formed an ad hoc committee, which we refer to as the transition committee, consisting of Manuel Rivelo, Dana Born and Ms. Bishop, and authorized the transition committee to further explore alternatives to the sale process on a parallel track.

 

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Later that evening, representatives of Barclays informed AGM of the board of directors’ decision and engaged in numerous discussions with AGM over the next three days. Barclays also contacted Vistria, who had previously indicated a willingness to be teamed up with another potential bidder, provided that Vistria’s evaluation of any potential partnership with another bidder would be independent of Vistria’s prior work. Vistria indicated a willingness to partner again with AGM.

Also on December 10, 2015, Mr. Sperling and Mr. Langenbach received an unsolicited written letter from an investment firm, which we refer to as Firm G. Similar to the indication of interest from Firm F, Firm G’s indication of interest was also based on publicly available information, without any due diligence. After discussion, members of the board of directors concluded that their previous determination regarding the sale of BPP remained unchanged.

On December 13, 2015, representatives of the consortium informed representatives of Barclays that they would not accept the board of directors’ counter-offer and would not be willing to move forward at a price of $11.00 per share. However, representatives of the consortium indicated that the consortium would be willing to pursue an acquisition of the Company at a price of $10.50 per share. In that conversation, representatives of the consortium and Barclays did not discuss whether the Company would be required to obtain a credit facility for its post-closing liquidity needs prior to signing.

Also on December 13, 2015, the board of directors held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell, at which the board of directors reached a consensus to proceed with negotiating a potential sale of the Company with the consortium at a price of $10.50 per share. Later that evening, at the direction of the board of directors, representatives of Barclays informed the consortium of the directors’ decision and agreed to move forward in negotiating a sale of the Company, including the entry into an exclusivity agreement.

Beginning the week of December 13, 2015, certain members of the board of directors, including the trustees, and members of senior management engaged in meetings with senior members of AGM and Vistria to discuss certain aspects of a potential sale of the Company. Members of management and representatives of Barclays also engaged in discussions with the consortium and its advisors regarding business, legal, financial and regulatory due diligence of the Company.

On December 18, 2015, the Company entered into an exclusivity agreement with the consortium that provided for exclusivity until 5:00 p.m. on January 11, 2016, subject to automatic one-week extensions that could be terminated by either party with one day’s advance notice to the other party.

On December 21, 2015, the finance committee held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell. Representatives of Barclays reviewed with the finance committee the status of discussions with the consortium. Management discussed the upcoming earnings release for the first quarter of fiscal year 2016, including the fact that the Company was in the process of re-forecasting its projections for the next nine months and expected to make further downward revisions to management’s projections. Representatives of Barclays noted that while the updated projections had not yet been finalized or provided to the consortium, the consortium was generally aware based on its due diligence of the Company’s performance that there would be downward revisions reflected in the upcoming earnings release and that recent changes to the Company’s strategy as part of the University of Phoenix’s transformation plan, including changes in start dates and a reduction in affiliate marketing spend, had introduced greater uncertainty in relation to new enrollments. The Company provided the consortium with fully updated forecasts on December 31, 2015, which we refer to as the December Forecast, which reflected downward revisions to the previously provided long range plan.

Throughout the remainder of December and early January, representatives of Barclays and members of management continued to engage in discussions with the consortium and its advisors regarding business, legal, financial and regulatory due diligence of the Company.

 

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In the evening of December 23, 2015, Paul, Weiss, Rifkind, Wharton & Garrison LLP, outside counsel to the consortium, which we refer to as Paul Weiss, sent to Sullivan & Cromwell a partially revised draft merger agreement that did not include comments from the consortium’s outside regulatory counsel. The revised draft merger agreement also indicated that among other things, the consortium wished to discuss the availability at closing of a revolving credit facility to support the Company’s post-closing liquidity requirements (including working capital requirements and any letter of credit required by the U.S. Department of Education). Further, the revised draft merger agreement also requested that the trustees and certain members of management agree to vote in favor of the transaction. In subsequent conversations with Barclays, the consortium reiterated that it intended to proceed with an all-equity transaction to acquire the Company, but that a new revolving credit facility for the Company would need to be obtained by signing because, should the U.S. Department of Education impose a letter of credit requirement in connection with the change of control of the Company, in the absence of a revolving credit facility the consortium would be required to contribute additional equity to the Company to cash collateralize a letter of credit.

Beginning on December 24, 2015, with a view to eliminating the need for a closing condition related to securing a new revolving credit facility for the Company, representatives of Credit Suisse and members of management contacted eleven banks, including the three lead banks in the Company’s existing revolving credit facility, to obtain commitments for a new revolving credit facility prior to the targeted signing date of January 11, 2016. Management also analyzed options to cash collateralize a letter of credit for the Company using existing assets of the Company. Members of management and representatives of Barclays also discussed with the consortium the possibility of bringing Najafi into the process as a potential co-investor.

In the course of discussions near the end of December, the consortium informed representatives of Barclays and members of management of their increasing concern over the continued decline and underperformance of the business and the challenges faced by management in accurately forecasting the Company’s performance and predicting the effectiveness of initiatives designed to improve the performance of the business and stabilize enrollment and revenue.

On December 30, 2015, Sullivan & Cromwell sent to Paul Weiss a revised draft of the merger agreement.

On December 31, 2015, management gave presentations concerning the Company’s financial performance and certain other due diligence matters to potential lenders of the new post-closing revolving credit facility and requested feedback on the potential lenders’ willingness to participate in the new revolving credit facility. As the Company approached the targeted January 11, 2016 signing date, the Company learned that there was insufficient interest from the potential lenders in participating in the new revolving credit facility, with many of the banks indicating the challenges of lending into the proprietary education sector.

On January 4, 2016, the audit committee held a meeting that was attended by certain members of management, where management indicated that the Company would be recording a goodwill impairment charge for the first quarter of fiscal year 2016. On that same day, the finance committee also held a meeting that was attended by certain members of the board of directors, certain members of management and representatives of Barclays and Sullivan & Cromwell. Representatives of Barclays reviewed with the finance committee the status of discussions with the consortium, including updates on the status of management’s efforts to obtain commitments for a new revolving credit facility prior to January 11, 2016 and the possible inclusion of Najafi as a potential co-investor. The finance committee also reviewed the earnings to be released on January 11, which, among other things, indicated that the University of Phoenix expected to fall short of its projected revenue in fiscal year 2016 by more than $130 million. The finance committee expressed concerns regarding the challenges faced by management of the University of Phoenix in accurately predicting the effectiveness of initiatives designed to improve the performance of the business and stabilize enrollment and revenue. The finance committee also noted that further downward revisions to the expected performance of the University of Phoenix in fiscal year 2016 could have a negative impact on the Company’s share price, potentially increasing the risk of the imposition of further goodwill impairment charges and additional restructuring charges, each of which could

 

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put the Company at further risk of the U.S. Department of Education financial responsibility composite score falling below 1.5 for fiscal year 2016.

On January 6, 2016, AGM invited Najafi to join the consortium as a co-investor.

On January 7, 2016, the Company contacted applicable regulators, including the HLC, to inquire whether such regulators would be willing to permit the Company additional time to submit certain materials necessary in order for the Company to undergo a change of control.

On January 8, 2016, the board of directors held a meeting that was also attended by certain members of management and representatives of Barclays and Sullivan & Cromwell. Representatives of Barclays reviewed with the board of directors the status of negotiations with the consortium, including the impact of the state of the debt financing market for a new revolving credit facility on management’s efforts to obtain commitments by January 11, 2016. The members of the board of directors noted their concern as to whether lenders would be willing to replace the current revolving credit facility upon its expiration in April 2017, given that many of the lenders had declined the opportunity to participate in a new credit facility upon closing of an acquisition of the Company by the consortium, and that the Company may need to assume that its liquidity going forward would be based on current cash balances and future cash flows alone. The board of directors also noted that keeping the option of a potential sale of the Company open through February 5, the anticipated date by which the Company would need to submit certain regulatory filings in connection with a potential sale of the Company, would give the Company additional time to prepare and implement other strategic alternatives. The board of directors directed management and the Company’s advisors to continue negotiations with the banks and the consortium. The board of directors then considered and subsequently approved the adoption of an exclusive forum bylaw. After consulting with Sullivan & Cromwell regarding the Company’s legal obligations, the board of directors also decided to publicly announce the Company’s exploration of strategic alternatives, including a potential sale of the Company, on January 11, 2016.

Also on January 8, 2016, at management’s direction, representatives of Barclays made available to representatives of AGM a summary of earnings guidance for fiscal year 2016.

Before the market opened on January 11, 2016, the Company announced its earnings for the first quarter of fiscal year 2016, which included $73.4 million of goodwill impairment charges relating to the University of Phoenix and Western International University, primarily due to the recent substantial decline in the price of the Company’s Class A common stock. The Company also publicly issued guidance that had been lowered compared to the December Forecast, due to, among other things, significant deterioration in the University of Phoenix forecast in the 75 days leading up to earnings release and increased revenue downside risk due to the impact of lower new degreed enrollments, higher net drops, increased need for discounts, reduced course frequency and programmatic changes related to gainful employment regulations. Also before the market opened on January 11, the Company, on behalf of the board of directors, issued a press release disclosing the Company’s exploration of strategic alternatives, including a potential sale of the Company. Later that same day, the press began to report possible involvement of AGM as a potential buyer in the process, including speculation on the proposed purchase price.

On January 12, 2016, the press began to report possible involvement of Vistria as a co-investor with AGM.

Also on January 12, 2016, the Company received a letter from its shareholder First Pacific Advisors expressing disagreement with a potential sale of the Company.

Following the announcement of the strategic review on January 11, 2016, Barclays and Credit Suisse received unsolicited telephone calls and emails from five investment firms expressing interest in learning more about the Company and potentially engaging in discussions around a potential investment in the Company and an unsolicited expression of interest from an investment firm interested in learning more about the Global business and potentially engaging in discussions around a potential investment in or acquisition of either the Global business or BPP. The expressions of interest requested more information on the Company or certain parts of the

 

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Company and the state of the Company’s exploration of strategic alternatives, but did not offer specific terms or indicate that the parties were well-informed on the proprietary education sector in general or the Company specifically. The board of directors later discussed each of these expressions of interest with members of management, representatives of Barclays and representatives of Sullivan & Cromwell, after which the board of directors concluded that the potential counterparties would not have sufficient capital to acquire the Company and/or did not demonstrate sufficient levels of interest and willingness to submit a competitive acquisition proposal. None of the five investment firms contacted Barclays or Credit Suisse after the initial expression of interest.

Beginning the week of January 11, 2016, members of management and representatives of Credit Suisse again contacted lenders to discuss feedback and the possibility of obtaining commitments for a new revolving credit facility by February 1, 2016.

On January 15, 2016, the Company was informed by the U.S. Department of Defense that the University of Phoenix’s probationary status in respect of its participation in the Tuition Assistance Program for active duty military personnel had been lifted, effective immediately.

On January 19, 2016, the Company held its annual meeting of holders of Class A shares. Later that afternoon, the board of directors held a meeting at which members of management and representatives of Barclays, Credit Suisse, Evercore and Sullivan & Cromwell were also present. Representatives of Barclays and Sullivan & Cromwell reviewed the status of negotiations and discussions with the consortium, and representatives of Credit Suisse reviewed the status of the debt financing workstream, during which representatives of Credit Suisse noted the challenging state of the financing market. Mr. Cappelli then provided an update with respect to the work undertaken by the strategic consultant, in an effort to assist the Company in identifying potential cost savings and potential stand-alone restructuring alternatives, and the board of directors discussed the potential pros and cons of sharing the strategic consultant’s preliminary work with the consortium. After discussion, the board of directors directed management to share the strategic consultant’s preliminary work with the consortium because the consortium had indicated it needed to see if additional cost savings were available to be implemented prior to submitting its financial model to the banks potentially participating in the new revolving credit facility with a view to progressing the discussions with the banks regarding securing a new revolving credit facility. The board of directors also received an update from the transition committee regarding strategic alternatives available to the Company other than a sale of the Company, including a spin-off of the Global business or private investments in the Company by members of the consortium, and discussed the risks associated with such alternatives.

Also on January 19, 2016, the board of directors received a letter from Schroder Investment Management, a then approximately 14% holder of the Class A shares, that opposed the undertaking of a change of control transaction at the then-current market valuation of Class A shares.

On January 21, 2016, the strategic consultant completed the requested analysis and, at the direction of management, delivered its work product to an accounting firm conducting financial due diligence on behalf of the consortium. The consortium expressed its intention to update its financial model based on this information.

On January 26, 2016, the consortium informed representatives of Barclays that the consortium could not move forward with an acquisition at $10.50, citing as key reasons, among others, the declining performance of the Company (including recent downward revisions to the December Forecast), weakness in current leading indicators and enhanced liquidity risk. The consortium indicated that, however, it would be willing to support a transaction at $9.00 and, at that price, would be willing to take the risk of obtaining a new credit facility.

On January 27, 2016, the finance committee held a meeting at which members of management and representatives of Barclays, Evercore and Sullivan & Cromwell were also present. Representatives of Barclays reviewed the status of negotiations with the consortium, including the revised proposed purchase price.

 

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Representatives of Barclays conveyed the consortium’s explanation that the reduction in price was due to the Company’s repeated downward revisions to its forecasts (including guidance issued by the Company on January 11, 2016, that had been lowered compared to the December Forecast provided to the consortium), the lack of leading indicators for enrollment stabilization and the overall risk to the Company’s ability to achieve the projections set forth in the December Forecast. After extended discussion, the finance committee reached a consensus to make a counterproposal to the consortium at a price of $10.00 per share with no financing condition to closing, whether to fund the purchase price or to obtain a revolving credit facility to establish liquidity for the Company post-closing. Later that evening, representatives of Barclays informed the consortium of the finance committee’s counterproposal.

On January 28, 2016, the consortium provided a counteroffer to representatives of Barclays and Sullivan & Cromwell that outlined two potential offers: one at $9.00 per share and one at $9.50 per share. Each offer would include certain conditions to closing, such as the receipt of certain regulatory consents and the achievement of certain operational metrics by the Company and the University of Phoenix, but the offer with the $9.50 price included additional closing conditions, including securing a new revolving credit facility and achieving additional operational metrics. A representative of AGM communicated to a representative of Barclays that AGM was deeply concerned about the Company’s ability to secure a new revolving credit facility and that, absent such a facility, AGM could be required to contribute additional capital to the Company to back-stop a letter of credit as well as the Company’s liquidity needs more generally.

On or about January 29, 2016, Mr. Sperling and Dr. Herberger each sent a written response to Schroder Investment Management, acknowledging receipt of their letter and indicating that their position would be appropriately considered by the board of directors.

On January 29, 2016, representatives of Barclays and Sullivan & Cromwell discussed with representatives of the consortium the proposals offered by the consortium in order to clarify certain terms therein. Later that afternoon, the board of directors held a meeting at which members of management and representatives of Barclays, Evercore and Sullivan & Cromwell were also present and at which representatives of Barclays and Sullivan & Cromwell provided a detailed summary of the offers proposed by the consortium. Representatives of Sullivan & Cromwell noted in particular that despite the elimination of the risk of obtaining financing to support the liquidity of the Company post-closing in the $9.00 offer, both offers contained significant conditionality and would need to be further discussed and negotiated with the consortium with respect to specific risks. The board of directors emphasized the importance of obtaining greater certainty to closing, and requested that management set up a board of directors’ meeting on January 31, 2016, with members of management of the University of Phoenix the strategic consultant to present information concerning the Company’s ability to satisfy the operational performance conditions proposed by the consortium.

On January 31, 2016, the board of directors held a meeting at which members of management of the Company and of the University of Phoenix and representatives of the strategic consultant, Barclays, Evercore and Sullivan & Cromwell were also present. Members of management of the University of Phoenix reviewed with the board of directors their assessment of the then most current risk profile for the University of Phoenix, including risks that could result in further downward adjustments to management’s forecasts of the financial performance of the University of Phoenix. Members of management of the University of Phoenix also extensively discussed with the board of directors the operational metrics proposed by the consortium and with the strategic consultant on the cost savings plan, after which the board of directors reached a consensus to make a counteroffer to the consortium for $9.50 per share with no financing condition, whether to fund the purchase price or to obtain a revolving credit facility to establish liquidity for the Company post-closing, provided that the consortium could agree to less closing conditionality based on the operational conditions and would agree to enter into a definitive agreement to purchase the Company by February 5, 2016. Later that same evening, representatives from Barclays and Sullivan & Cromwell communicated the board of directors’ counterproposal to the consortium and its advisors.

 

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In the early morning of February 1, 2016, Sullivan & Cromwell sent to Paul Weiss a revised draft merger agreement reflecting the Company’s counteroffer. Also on February 1, 2016, representatives of Barclays and Sullivan & Cromwell and the consortium and its advisors engaged in numerous discussions and negotiations regarding the consortium’s proposed conditions to closing.

On February 2, 2016, representatives of the consortium informed representatives of Barclays that it could offer a price of $9.25 per share, with no financing condition, whether to fund the purchase price or to obtain a revolving credit facility to establish liquidity for the Company post-closing, Representatives of Barclays responded that the board of directors would not accept a price below $9.50 per share. Later that afternoon, the finance committee held a meeting at which members of management and representatives of Barclays, Evercore and Sullivan & Cromwell were also present. Representatives of Barclays reviewed the status of negotiations with the consortium.

Later that same evening, the advisors to the consortium sent a revised draft merger agreement to Sullivan & Cromwell. Over the course of the next two days, representatives of Barclays and Sullivan & Cromwell and the consortium and its advisors engaged in several discussions and negotiations regarding the merger agreement and other transaction agreements. Farella, Sullivan & Cromwell and Paul Weiss also negotiated the terms of the voting and support agreement to be entered into by the Apollo Class B Voting Stock Trust No. 1, and Sullivan & Cromwell and Paul Weiss negotiated the terms of the voting and support agreements to be entered into by the other parties.

In the early morning of February 4, 2016, Sullivan & Cromwell sent a revised draft of the merger agreement to Paul Weiss. Later that same morning, a representative of AGM inquired in discussions with management whether it would be productive for AGM to consider seeking internal approval to potentially increase the purchase price to $9.75 per share if the Company agreed to condition the closing of the sale of the Company on the consortium’s ability to obtain a revolving credit facility to support the Company’s liquidity post-closing, noting that the board of director’s counterproposal of January 31, 2016, did not include any financing condition. Over the course of the day, representatives of Barclays and Sullivan & Cromwell continued to negotiate the closing conditions with the consortium and its advisors.

Later in the evening of February 4, 2016, the board of directors held a meeting at which members of management and representatives of Barclays, Evercore and Sullivan & Cromwell were also present. Representatives of Barclays and Sullivan & Cromwell reviewed with the board of directors the current status of negotiations with the consortium and the terms and conditions of the draft merger agreement. After extensive discussion with its advisors, the board of directors reached a consensus to offer to the consortium two options, where the board of directors would agree to a price of $9.50 or $9.75 per share, depending on the level of closing conditionality, other than with respect to financing, whether to fund the purchase price or to obtain a revolving credit facility to establish liquidity for the Company post-closing, the risk of which would reside with the consortium in either case. Later that same evening, representatives of Barclays communicated the board of directors’ counterproposal to the consortium.

Also on February 4, 2016, the Company received a second investigative subpoena from the Office of the Attorney General of the State of California seeking the production of documents and information regarding a broad spectrum of the business and practices of the Company and its subsidiaries, including the University of Phoenix.

In the early morning of February 5, 2016, Paul Weiss circulated a revised draft of the merger agreement. Later that afternoon, the consortium agreed to a price of $9.50 per share, with no financing condition to closing, whether to fund the purchase price or to obtain a revolving credit facility to establish liquidity for the Company post-closing, and improved conditions with respect to regulatory and operational matters.

In the afternoon of February 5, 2016, the board of directors held a meeting at which members of management and representatives of Barclays, Evercore and Sullivan & Cromwell were also present. Representatives of Sullivan & Cromwell provided an update on the revised terms of the draft merger agreement.

 

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The board of directors engaged in an extensive discussion regarding the revised terms of the merger agreement, including the level of closing conditionality.

Over the course of February 5 and 6, 2016, representatives of Barclays and Sullivan & Cromwell continued to negotiate the closing conditions with the consortium and its advisors, and Sullivan & Cromwell and Paul Weiss continued to exchange drafts of the merger agreement and other transaction documents.

Also on February 5, 2016, the Company contacted applicable regulators, including the HLC, to inquire whether such regulators would be willing to permit the Company additional time to submit certain materials necessary in order for the Company to undergo a change of control.

In the afternoon of February 6, 2016, the board of directors held a meeting at which members of management and representatives of Barclays, Evercore and Sullivan & Cromwell were also present. Barclays rendered its oral opinion to the board of directors (which was subsequently confirmed by delivery of a written opinion dated February 7, 2016), that as of such date and based on and subject to the assumptions, qualifications and limitations set forth in its opinion, from a financial point of view, the consideration to be offered to the holders of the Company’s common stock (other than excluded shares) in the merger, taken in the aggregate, is fair to such holders. Evercore rendered its oral opinion to the board of directors (which was subsequently confirmed by delivery of a written opinion dated February 7, 2016), that, as of such date and based on and subject to the assumptions, qualifications and limitations set forth in its opinion, the consideration to be offered to the holders of the Company’s common stock (other than excluded shares) in the merger, taken in the aggregate, is fair, from a financial point of view, to such holders. Representatives of Sullivan & Cromwell provided an update on the revised terms of the draft merger agreement. The board of directors engaged in an extensive discussion regarding the proposed transaction, after which the board of directors determined that the merger agreement and the transactions contemplated by the merger agreement (including the merger) are fair to and in the best interests of the Company and its shareholders and approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement (including the merger), and resolved that the merger agreement be submitted for consideration by the shareholders of the Company at a meeting of shareholders, and recommended that the shareholders of the Company vote to adopt the merger agreement. The board of directors also approved the entry into the ancillary agreements to the merger agreement, including the voting and support agreement with the Apollo Class B Voting Stock Trust No. 1, which would obligate the Company to obtain prepaid management liability insurance policies on behalf of the trustees.

Thereafter on February 7, 2016, Parent, Merger Sub and the Company executed the merger agreement and the related documents, and prior to the market open on February 8, 2016, the Company and the consortium issued a joint press release announcing the execution of the merger agreement.

In March 2016, in discussions with representatives of Barclays, representatives of Firm F confirmed the termination of their offer of December 7, 2015 to acquire BPP and that Firm F had no further interest in acquiring BPP, even in the case where the merger agreement had been terminated.

Re asons for the Merger; Recommendation of the Company’s Board of Directors

The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement.

The board of directors, at a meeting held on February 6, 2016, determined that the merger agreement and the transactions contemplated by the merger agreement (including the merger) are fair to, and in the best interests of, the Company and its shareholders and approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement (including the merger), and resolved that the merger agreement be submitted for consideration by the shareholders of the Company at a special meeting of shareholders, and recommended that the shareholders of the Company vote to adopt the merger agreement. The board of directors consulted with the Company’s outside financial and legal advisors and senior management at

 

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various times and considered a number of factors, including the following principal factors (not in any order of relative importance) that the board of directors believes support its decision and the fairness of the proposed pricing:

Increasing Competition and Execution Risks of Long Range Plan

 

    the intense and increasing competition faced by the proprietary education sector, due to:

 

    the increased focus in recent years of traditional non-profit institutions on distance learning and online education offerings, including through developing online programs through partnerships with online program management companies;

 

    the benefits available to traditional non-profit educational institutions from (i) the availability of direct and indirect government subsidies, government and foundation grants, large endowments, tax-deductible contributions and other financial resources not available to proprietary educational institutions and (ii) the lack of certain restrictions on operations, such as compliance with the 90/10 rule and gainful employment regulations;

 

    the decline in the growth rate of the post-secondary student population;

 

    the material and continuing declines in enrollment, revenue and EBITDA of the University of Phoenix on average throughout the period since 2010;

 

    the uncertainties and execution and other risks associated with the Company’s long range plan, including both the risk that the Company will not be able to execute the long range plan as projected and the risk that, even if executed as projected, the long range plan could have unanticipated adverse impacts on the Company’s operational and financial performance. For example, the board of directors considered that the Company’s long range plan assumes that the significant cost reductions included in the plan are achievable without adversely impacting student enrollment and retention;

 

    the limited visibility of the Company into the likelihood of occurrence and potential magnitude of the material risks to the Company’s performance in the unpredictable operating environment surrounding the Company and the associated challenges faced by management in accurately forecasting the Company’s performance and predicting the effectiveness of initiatives designed to improve the performance of the business and stabilize enrollment and revenue (and the concomitant unreliability of a discounted cash flow analysis as a valuation methodology for the Company). For example, management of the Company revised its full-year net revenue guidance and full-year operating income guidance downward in each of the first three fiscal quarters of 2015, and the Company missed the guidance it had provided at the beginning of fiscal year 2015 for net revenue by over $230 million and for operating income by approximately $100 million. In addition, on January 11, 2016, the Company issued guidance that had been lowered compared to the December Forecast (as defined in “The Merger—Certain Company Forecasts” on page [●]);

 

    the long-running challenges faced by the Company in its efforts to keep pace with declining enrollments, especially in light of the extent of prior cost reduction initiatives, as the University of Phoenix has continually sought, but has been unsuccessful in achieving, enrollment stabilization;

 

    while the Company’s educational programs based outside the U.S., which we refer to as the Global business, continues to grow, it remains unprofitable and continues to be overshadowed by the size and overall declining performance of the University of Phoenix;

Regulatory Matters and Other Extrinsic Factors Impacting the Performance of the Company

 

    the operating environment for the proprietary education sector continues to present challenges for the Company that have had an adverse impact on the Company’s market valuation and may adversely impact the Company’s financial performance in the future. Recent actions taken against the Company include the following:

 

   

the U.S. Department of Defense placed the University of Phoenix on probation in October 2015, temporarily suspending the U.S. Department of Defense tuition assistance for new students. While the U.S. Department of Defense subsequently removed the University of Phoenix from

 

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probationary status, the Company remains subject to heightened monitoring for the next 12 months and an enhanced compliance review process during Federal Fiscal Year 2017, and further heightened monitoring requirements could impact the Company’s administration of U.S. Department of Defense tuition assistance for students;

 

    following the notice of probation from the U.S. Department of Defense described above, the Veterans Administration announced the commencement of the University of Phoenix annual compliance survey, with an accelerated schedule and increased scope relative to prior years, which was completed with no adverse action imposed against the University of Phoenix by the Veterans Administration;

 

    the Company has received from the FTC and California Attorney General investigatory demands for information, which may take many years to resolve and could result in continuing pressure on our share price; this ongoing regulatory pressure is illustrated by the second subpoena issued to the Company by the California Attorney General in February 2016 evidencing an expansion of the investigation beyond military students;

 

    the U.S. Department of Education has notified the University of Phoenix that for the duration of the month-to-month continuation of the University of Phoenix’s Program Participation Agreement, the original term of which expired in 2012 and has been pending renewal since then, the University of Phoenix must obtain prior approval from the U.S. Department of Education 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 of Phoenix upon notice to the U.S. Department of Education and without the U.S. Department of Education’s prior approval;

 

    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 educational institutions and include a number of recommendations that might be considered by Congress in connection with the upcoming reauthorization of the Federal Higher Education Act; and

 

    the U.S. Department of Education has formed an inter-agency task force involving multiple Federal agencies and departments including the Federal Trade Commission, the U.S. Departments of Justice, Treasury, Defense 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;

 

    changes in the interpretation or enforcement of certain regulations or the adoption of new regulations have resulted, and may continue to result, in operational changes that may, or continue to, adversely impact the Company’s financial performance, including the elimination of certain programs and other program and/or pricing changes to address the gainful employment regulations. These changes in the interpretation or enforcement of certain regulations or the adoption of new regulations may make it increasingly difficult to manage compliance with gainful employment regulations and the 90/10 rule;

 

    the Company’s regulatory profile is likely to remain very sensitive to any changes in political conditions, including the outcome of the 2016 U.S. presidential and Congressional elections;

 

    the challenges associated with implementing the Company’s transformation plan as a publicly traded company, because of the effect of the execution of such plan on near-term enrollment and retention levels and analysts’ perception of the same;

 

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    the challenges of maintaining the brand and reputation of the University of Phoenix in the current regulatory environment and the potential impact of the implementation of the Company’s transformation plan on the brand and reputation of the University of Phoenix and its ability to enroll and retain students;

 

    the increased presence in recent years of short-sellers trading in the Company’s Class A common stock and seeking to profit from the negative impacts of the challenging regulatory environment surrounding the Company and the proprietary education sector and the additional negative attention that may be placed on the Company by such short-sellers seeking to profit from any erosion of the Company’s brand perception, which could impact the Company’s ability to enroll and retain students;

 

    the decline of the Company’s revenue and adjusted EBITDA by approximately 51% and 81%, respectively, and of the share price of the Company’s Class A common stock by approximately 81%, since 2011;

Liquidity and Credit Issues

 

    the impact of one-time costs associated with the implementation of cost reduction measures on the Company’s cash balance (including, since 2010, approximately $417.4 million in restructuring expenses and $267.8 in restructuring payments);

 

    the Company recorded $73.4 million of goodwill impairment charges relating to the University of Phoenix and Western International University, primarily due to the recent substantial decline in the Company’s market capitalization. These impairment charges increase the Company’s fiscal year 2016 total operating expenses, which in turn will negatively impact the Company’s fiscal year 2016 U.S. Department of Education financial responsibility composite scores to be calculated as of August 31, 2016. If the Company’s cash balances, profitability and/or the price of the shares of Class A common stock continue to decline, including as a result of additional goodwill impairment charges, our fiscal year 2016 financial responsibility composite score as determined by the U.S. Department of Education could fall below 1.5, resulting in the possible consequences described below. Although management of the Company believes it could take certain measures to bolster its financial responsibility composite scores, if needed, these measures may require material modifications to its business and strategy that could have significant adverse effects on the Company’s future revenue and profitability;

 

    the credit markets have been tightening for private education providers and, in particular, certain lenders have advised the Company that they intend to reduce their exposure to the proprietary education sector or exit the sector entirely, which may result in less debt capital being available to the Company and higher costs for the available capital when the Company’s revolving credit facility, which provides additional liquidity for the Company, expires in April 2017;

 

    the unlikelihood that the Company will be able to access equity capital markets in the next few years, as the exploration of the sale process revealed that many financial investors declined to consider investing in the proprietary education sector;

 

    the cash on the Company’s balance sheet is not available for distribution to the Company’s shareholders, including for the purposes of a cash dividend or share repurchase, due to, among other reasons,

 

    the possibility that we will need to use cash on hand to fund operations if costs cannot be reduced to align with our lower enrollment and revenue or if we are unable to renew our revolving credit facility on acceptable terms or at all;

 

    the expectation that we will incur material charges associated with future restructuring activities, as costs may be further reduced to align with revenues and prevent further declines in revenues;

 

   

the need to maintain our U.S. Department of Education financial responsibility composite score. If we do not achieve a composite score of at least 1.0, in addition to being required to post a

 

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substantial letter of credit that may need to be cash collateralized if our revolving credit facility is unavailable for the posting of such letter of credit and we are unable to secure third party financing on terms acceptable to us or at all, and the potential imposition of other requirements as a condition to our continued participation in the Title IV student financial aid programs, we can be transferred from the “advance” system of payment of Title IV program funds to cash monitoring status or to the “reimbursement” system of payment, under which we may be required to disburse our own funds to students and document the students’ eligibility for Title IV program funds before receiving such funds from the U.S. Department of Education. If this were to occur, we would be unable to conduct our business as it is currently conducted; and

 

    the need to maintain available cash on the balance sheet in case our financial responsibility composite score falls below 1.5, which would result in a default under our revolving credit facility and which may further result in the U.S. Department of Education potentially imposing heightened cash monitoring or imposing other requirements pertaining to the disbursement of Title IV funds, potentially requiring a substantial letter of credit that may need to be cash collateralized if our revolving credit facility is unavailable for the posting of such letter of credit and we are unable to secure third party financing on terms acceptable to us or at all, and imposing other requirements as a condition to our continued participation in Title IV student financial aid programs;

 

    due to the tightening credit markets for the proprietary education sector, the Company’s declining cash flows, the possibility of additional goodwill impairment charges if the share price of the Company’s Class A common stock continues to decline and our U.S. Department of Education financial responsibility composite score requirements, the Company has limited excess cash available to pursue any significant acquisitions, which has foreclosed the possibility of meaningful additional inorganic growth for the Global business;

Process and Evaluation of Alternatives

 

    the Company conducted an extensive process to elicit interest from prospective buyers of the Company, which revealed that many financial investors declined to consider investing in the proprietary education sector and that there is an extremely limited number of strategic investors with both the market capitalization to undertake an acquisition of the Company and the ability to manage the regulatory challenges arising from such a transaction. In light of the extensive process that had been employed, the board of directors believed that it was unlikely that a more attractive proposal would be forthcoming from any other bidder (and, to date, no superior proposal has emerged from any other bidder or potential counterparty);

 

    the benefits that the Company and its advisors were able to obtain as a result of extensive negotiations with the consortium, including the low amount of the termination fee that would be paid by the Company if the board of directors terminates the merger agreement in order to enter into a superior proposal. The board of directors also considered that each of the voting and support agreements entered into between each holder of Class B common stock, certain holders of Class A common stock, the Company, Parent and Merger Sub terminates upon termination of the merger agreement;

 

   

the board of directors’ analyses of the possible alternatives to the merger, including maintaining the status quo, a sale to a third party, a sale of BPP, the Global business or the University of Phoenix, a spin-off of the Global business, a recapitalization transaction, a share buy-back, a private investment in the Company by one or more investors, the conversion of the University of Phoenix to a non-profit school or splitting the Company into a for-profit services company and a non-profit college, each of which alternatives the board of directors determined not to pursue in light of its belief that the merger is more favorable to the Company’s shareholders than such alternatives once the potential value to the Company’s shareholders of each alternative is risk-adjusted to reflect the execution, regulatory,

 

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liquidity and other risks associated with the applicable alternative. Among the matters considered by the board of directors in this regard were the following:

 

    the risks associated with a sale of BPP, including the impact of a sale of BPP on the Company, were it to remain a standalone public company, as BPP constitutes the majority of the Global business, including (i) the limitations on the Company’s ability to build and grow the Global business, (ii) the possibility that the Company would exit from the Global business altogether and (iii) the likelihood that such a sale could strand the Company with significant costs relating to infrastructure or other shared services currently used for BPP, all of which led the board of directors to conclude that a sale of BPP alone would likely significantly undermine the strategic rationale and value of the Global business, making it significantly more challenging for the Company to execute its strategies as a standalone company;

 

    the risks associated with a spin-off of the Global business, including the risk that investors could view the common stock of a spun-off Global business as being illiquid given the currently small size of the Global business relative to the Company’s overall businesses and the challenges in securing an attractive initial public offering valuation for the Global business while it is still transitioning to profitability, especially given the Company’s current market capitalization, as well as the Global business’ immediate need for additional capital after such a transaction in order to sustain its operations; and

 

    the risks associated with converting the University of Phoenix to a non-profit institution, including the challenges associated with obtaining tax and regulatory approvals for such a conversion within a reasonable amount of time and the difficulty of effectuating such a transaction in a manner that would be in the best interests of the holders of the Company’s Class A common stock;

Valuation and Financial Analyses

 

    the per share merger consideration represents a premium of approximately 44% to the closing price of the Company’s Class A common stock on January 8, 2016, immediately prior to the announcement that the board of directors, together with management, would conduct a review of strategic and financial alternatives, a premium of approximately 30% to the 30-day volume weighted average trading price of the Company’s Class A common stock for the period ended February 5, 2016, and a premium of approximately 37% to the closing price of the Company’s Class A common stock on February 5, 2016, the last trading day prior to the public announcement of the execution of the merger agreement on February 8, 2016;

 

    the all-cash per share merger consideration will provide our shareholders with immediate value for their shares of Company common stock, while avoiding substantial long-term execution, regulatory, liquidity and other risks;

 

    the financial analyses presented to the board of directors by Barclays and Evercore, as well as the opinions of Barclays and Evercore, each dated February 7, 2016, to the board of directors to the effect that, as of that date, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, from a financial point of view, the consideration to be offered to the holders of common stock (other than excluded shares) in the merger, taken in the aggregate, is fair to such holders, as more fully described below under “The Merger—Opinions of the Company’s Financial Advisors—Opinion of Barclays Capital Inc.” and “The Merger—Opinions of the Company’s Financial Advisors—Opinion of Evercore Group L.L.C.” beginning on pages [●] and [●], respectively;

Transaction Terms, Conditions and Certainty

 

    the holders of the Company’s Class A common stock would be entitled, under Arizona law, to consider and vote on the approval of the merger agreement and the transactions contemplated thereby, including the merger;

 

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    the likelihood that the merger would be completed based on, among other things (not in any order of relative importance):

 

    there is no financing condition to the completion of the merger in the merger agreement;

 

    the reputation of the members of the consortium;

 

    the ability of the members of the consortium to complete large acquisition transactions and their familiarity with the Company and the proprietary education industry; and

 

    the Company’s ability, under certain circumstances, to seek specific performance of the consortium’s obligations to fund their respective commitments under the equity commitment letters and of Parent and Merger Sub’s obligations to comply with the merger agreement;

 

    the ability of the board of directors to change, qualify, withhold, withdraw or modify its recommendation to shareholders concerning the transactions contemplated by the merger agreement; and

 

    the ability of the board of directors to terminate the merger agreement in order to enter into a superior proposal, subject to certain conditions (including certain rights of Parent to have an opportunity to match the superior proposal and the payment of the termination fee), as described under “The Merger Agreement—Solicitation of Acquisition Proposals” beginning on page [●] and “The Merger Agreement—Termination Fees” beginning on page [●], and the voting agreement terminates if the merger agreement is terminated.

*                                         *                                         *

The board of directors also considered a variety of potentially negative factors in its deliberations concerning the merger agreement and the merger, including the following (not in any order of relative importance):

 

    the merger would prevent the Company’s shareholders from having the opportunity to participate in the future performance of the Company’s assets and any potential future appreciation of the value of Company common stock;

 

    the closing price of the Company’s Class A common stock during the 52 weeks prior to the date of the merger agreement, including the 52-week high of $28.51 per share of Class A common stock;

 

    certain of the Company’s Class A shareholders have indicated that they do not believe that a sale of the Company at this time is in the best interests of the Company and its shareholders;

 

    the completion of the merger depends on, among other things, the satisfaction or waiver by the consortium of certain conditions relating to the operations of the University of Phoenix and the Company (see the section entitled “The Merger Agreement—Conditions to the Merger” beginning on page [●]);

 

    the announcement and pendency of the merger, or failure to complete the merger, may cause substantial harm to relationships with regulatory authorities, the Company’s employees, students, vendors and customers and may divert management and employee attention away from the day-to-day operation of the Company’s business;

 

    the restrictions on the conduct of the Company’s business prior to the completion of the merger, which, subject to specific exceptions, could delay or prevent the Company from undertaking certain actions or business opportunities that may arise that it would otherwise take with respect to the operations of the Company absent the pending completion of the merger;

 

    significant costs are involved in connection with entering into and completing the merger and substantial time and effort of management is required to complete the merger, potentially resulting in disruptions to the operation of the Company’s business;

 

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    the termination fee to be paid to Parent under the circumstances specified in the merger agreement, which as a percentage of the equity value of the Company is within a customary range for similar transactions, may discourage other parties that might otherwise have an interest in a business combination with, or an acquisition of, the Company (see the section entitled “The Merger Agreement—Termination Fees” beginning on page [●]);

 

    while the Company expects that the merger will be consummated, there can be no assurance that all conditions to the parties’ obligations to complete the merger agreement will be satisfied or waived, and, as a result, the merger may not be consummated;

 

    under certain circumstances specified in the merger agreement, Parent may terminate the merger agreement upon payment to the Company of a reverse termination fee (see the section entitled “The Merger Agreement—Termination” beginning on page [●]);

 

    the Company’s directors and executive officers may have interests in the merger that are different from, or in addition to, the Company’s shareholders (see the section entitled “The Merger—Interests of Certain Persons in the Merger” beginning on page [●]); and

 

    an all-cash transaction generally would be taxable to the Company’s shareholders that are U.S. holders for U.S. Federal income tax purposes.

The foregoing discussion of the information and factors considered by the board of directors is not intended to be exhaustive, but includes the material factors considered by the board of directors. In view of the variety of factors considered in connection with its evaluation of the merger, the board of directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given different weights to different factors. The board of directors did not undertake to make any specific determination as to whether any factor, or any particular aspect of any factor, supported or did not support its ultimate determination. The board of directors based its recommendation on the totality of the information presented.

Opinions of the Company’s Financial Advisors

The Company retained Barclays and Credit Suisse as the Company’s financial advisors to advise the Company and from time to time, the board of directors, with respect to the review of strategic alternatives for the Company, including a possible sale of the Company. In addition, the Company and the board of directors retained Evercore as an additional financial advisor to advise the board of directors with respect to the review of strategic alternatives for the Company, including a possible sale of the Company. Barclays, Credit Suisse and Evercore are collectively referred to in this proxy statement as the Company’s financial advisors.

Opinion of Barclays Capital Inc.

On February 6, 2016, in connection with the merger, Barclays rendered its oral opinion (which was subsequently confirmed in writing) to the board of directors that, as of such date and based upon and subject to the qualifications, limitations and assumptions stated in its opinion, from a financial point of view, the consideration to be offered to the holders of common stock (other than excluded shares) in the merger, taken in the aggregate, is fair to such holders.

The full text of Barclays’ written opinion, dated as of February 7, 2016, is attached as Annex D to this Proxy Statement. Barclays’ written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Barclays in rendering its opinion. Barclays’ opinion addresses only the fairness, from a financial point of view, as of the date of such opinion, to the holders of common stock (other than excluded shares) of the consideration to be offered to such holders in the merger, taken in the aggregate. Barclays did not express any view on, and Barclays’ opinion does not address, the allocation of the aggregate consideration payable pursuant to

 

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the merger agreement among the holders of Class A common stock and the holders of Class B common stock. You are encouraged to read the opinion carefully in its entirety. The following is a summary of Barclays’ opinion and the methodology that Barclays used to render its opinion. This summary is qualified in its entirety by reference to the full text of Barclays’ opinion.

Barclays’ opinion, the issuance of which was approved by Barclays’ Fairness Opinion Committee, is addressed to the board of directors, addresses only the fairness, from a financial point of view, as of February 7, 2016, of the consideration to be offered to the holders of common stock (other than excluded shares) in the merger, taken in the aggregate, and does not constitute a recommendation to any shareholder of the Company as to how such shareholder should vote with respect to the merger or any other matter. The terms of the merger were determined through arm’s-length negotiations between the Company and the consortium and were approved by the board of directors. Barclays did not recommend any specific form of consideration to the Company or that any specific form of consideration constituted the only appropriate consideration for the merger. Barclays was not requested to address, and its opinion does not in any manner address, (i) the Company’s underlying business decision to proceed with or effect the merger, (ii) the likelihood of the consummation of the merger or (iii) the long term financial viability of the Company. Barclays’ opinion did not address the relative merits of the merger as compared to any other transaction of business strategy in which the Company might engage. In addition, Barclays expressed no opinion on, and its opinion does not in any manner address, the fairness of the amount or the nature of any compensation to any officers, directors or employees of any parties to the merger, or any class of such persons, relative to the consideration to be offered to the holders of common stock (other than excluded shares) in the merger. No limitations were imposed by the board of directors upon Barclays with respect to the investigations made or procedures followed by it in rendering its opinion.

In arriving at its opinion, Barclays, among other things: reviewed and analyzed a draft of the merger agreement, dated as of February 6, 2016, and the specific terms of the merger; reviewed and analyzed certain publicly available information concerning the Company that Barclays believed to be relevant to its analysis, including certain press releases by the Company, the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2015, and the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2015; reviewed and analyzed financial and operating information with respect to the business, operations and prospects of the Company furnished to Barclays by the Company, including financial projections of the Company dated December 31, 2015 prepared by the management of the Company, which we refer to as management; reviewed and analyzed a trading history of the Company’s Class A common stock from February 5, 2011 through February 5, 2016 and a comparison of such trading history with those of other companies that Barclays deemed relevant; reviewed and analyzed a comparison of the historical financial results and present financial condition of the Company with those of other companies that Barclays deemed relevant; reviewed and analyzed published estimates of independent research analysts with respect to the future financial performance and price targets of the Company; reviewed and analyzed the regulatory environment of the sector in which the Company operates and its impact on the Company’s financial condition and operating performance; reviewed and analyzed the Company’s current and ongoing liquidity position and its impact on the Company’s ability to meet its current and ongoing cash requirements; reviewed and analyzed the financing alternatives available to the Company in the current operating and market environment; reviewed and analyzed the results of efforts to solicit indications of interest from third parties with respect to an acquisition of the Company or its assets; had discussions with the management of the Company concerning its business, operations, assets, liabilities, financial condition and prospects; and undertook such other studies, analyses and investigations as Barclays deemed appropriate.

In arriving at its opinion, Barclays assumed and relied upon the accuracy and completeness of the financial and other information used by Barclays without any independent verification of such information (and has not assumed responsibility or liability for any independent verification of such information). Barclays also relied upon the assurances of management of the Company that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial projections for the 2016 fiscal year of the Company, upon advice of the Company, Barclays assumed that such projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management

 

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of the Company as to the Company’s future financial performance and, at the direction of the board of directors, Barclays has relied upon such projections for purposes of its analysis and opinion. As discussed by Barclays and the board of directors, Barclays did not rely upon or utilize the financial projections for any period beyond the 2016 fiscal year for purposes of its analysis and opinion. In addition, as discussed with the board of directors, Barclays did not rely upon or utilize the July Forecast, the September Forecast or the October Forecast for purposes of its analysis and opinion. In arriving at its opinion, Barclays assumed no responsibility for and expressed no view as to any such projections or estimates or the assumptions on which they were based. In arriving at its opinion, Barclays did not conduct a physical inspection of the properties and facilities of the Company and did not make or obtain any evaluations or appraisals of the assets or liabilities of the Company. Barclays’ opinion was necessarily based upon market, economic and other conditions as they existed on, and could be evaluated as of, February 7, 2016. Barclays assumed no responsibility for updating or revising its opinion based on events or circumstances that may have occurred after, February 7, 2016.

In arriving at its opinion, Barclays assumed that the executed merger agreement would conform in all material respects to the last draft reviewed by Barclays. In addition, Barclays assumed the accuracy of the representations and warranties contained in the merger agreement and all agreements related thereto. Barclays also assumed, upon the advice of the Company, that all material governmental, regulatory, and third party approvals, consents and releases for the merger will be obtained within the constraints contemplated by the merger agreement and that the merger would be consummated in accordance with the terms of the merger agreement without waiver, modification or amendment of any material term, condition or agreement thereof. Barclays did not express any opinion as to any tax or other consequences that might result from the merger, nor did its opinion address any legal, tax, regulatory or accounting matters, as to which Barclays understood that the Company had obtained such advice as it deemed necessary from qualified professionals.

In connection with rendering its opinion, Barclays performed certain financial, comparative and other analyses as summarized below. In arriving at its opinion, Barclays did not ascribe a specific range of values to the common stock but rather made its determination as to fairness, from a financial point of view, of the consideration to be offered to the holders of common stock (other than excluded shares) in the merger, taken in the aggregate, on the basis of various financial and comparative analyses. The preparation of a fairness opinion is a complex process and involves various determinations as to the most appropriate and relevant methods of financial and comparative analyses and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to summary description.

In arriving at its opinion, Barclays did not attribute any particular weight to any single analysis or factor considered by it but rather made qualitative judgments as to the significance and relevance of each analysis and factor relative to all other analyses and factors performed and considered by it and in the context of the circumstances of the particular transaction. Accordingly, Barclays believes that its analyses must be considered as a whole, as considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying its opinion.

The following is a summary of the material financial analyses used by Barclays in preparing its opinion to the board of directors. Certain financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses used by Barclays, the tables must be read together with the text of each summary, as the tables alone do not constitute a complete description of the financial analyses. In performing its analyses, Barclays made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company or any other parties to the merger. None of the Company, Parent, Merger Sub, Barclays or any other person assumes responsibility if future results are materially different from those discussed. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of the businesses do not purport to be appraisals or reflect the prices at which the businesses may actually be sold.

 

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Selected Comparable Company Analysis

In order to assess how the public market values shares of similar publicly traded companies, Barclays reviewed and compared specific financial and operating data relating to the Company with selected companies that Barclays, based on its experience in the postsecondary education industry, deemed comparable to the Company. The selected comparable companies were:

 

    American Public Education

 

    Bridgepoint Education

 

    Career Education Corporation

 

    ITT Education

Barclays calculated and compared various financial multiples and ratios of the Company and the selected comparable companies. As part of its selected comparable company analysis, Barclays calculated and analyzed each of the following:

 

    The market value of common equity, the book value of any minority interest, plus short and long-term debt, less cash and cash equivalents and marketable securities), which we refer to as Enterprise Value, as a multiple of earnings before interest, taxes, depreciation and amortization, as adjusted for one-time or non-recurring items, which we refer to as Adjusted EBITDA, for the twelve-month period ended September 30, 2015, a ratio which we refer to as Enterprise Value / LTM Adjusted EBITDA;

 

    Enterprise Value as a multiple of estimated earnings before interest, taxes, depreciation and amortization, which we refer to as EBITDA, for the calendar year ending December 31, 2016, a ratio which we refer to as Enterprise Value / 2016 Estimated Unadjusted EBITDA;

 

    Enterprise Value as a multiple of estimated Adjusted EBITDA for the calendar year ending December 31, 2016, a ratio which we refer to as Enterprise Value / 2016 Estimated Adjusted EBITDA;

 

    Enterprise Value as a multiple of revenue for the twelve-month period ended September 30, 2015, a ratio which we refer to as Enterprise Value / LTM Revenue; and

 

    Enterprise Value as a multiple of estimated revenue for the calendar year ending December 31, 2016, a ratio which we refer to as Enterprise Value / 2016 Estimated Revenue.

All of these calculations were performed based on publicly available financial data and closing prices of the Class A common stock as of February 5, 2016, the last trading date prior to the delivery of Barclays’ opinion. The results of this selected comparable company analysis are summarized below:

 

     Enterprise
Value /
LTM
Adjusted
EBITDA
   Enterprise
Value /
2016
Estimated
Unadjusted
EBITDA
   Enterprise
Value /
2016
Estimated
Adjusted
EBITDA
   Enterprise
Value /
LTM
Revenue
   Enterprise
Value /
2016
Estimated
Revenue

Range

   1.5x-1.6x    1.8x-3.2x    1.8x-3.2x    0.21x-0.36x    0.24x-0.39x

Median

   1.5x    2.5x    2.5x    0.28x    0.31x

Company (Projections)

   0.8x    1.9x    0.9x    0.09x    0.1x

Barclays selected the comparable companies listed above because their business and operating profiles are reasonably similar to that of the Company. While none of the selected companies is perfectly comparable to the Company, Barclays selected those companies that it believes are most similar in terms of business model, performance and outlook to the Company. Barclays applied the ranges of multiples described above for the selected companies to the EBITDA, Adjusted EBITDA, and revenue derived from management’s projections

 

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included in the December Forecast to calculate a range of implied equity values of the Company. Barclays performed this analysis under three different scenarios for the Company’s capitalization:

 

  (1) the Company’s capitalization as of February 5, 2016;

 

  (2) the Company’s capitalization as of February 5, 2016 adjusted to exclude $200 million of the Company’s cash, which was estimated by management to be the minimum amount of cash required for net working capital purposes; and

 

  (3) the Company’s capitalization as of February 5, 2016 adjusted to exclude $200 million of the Company’s cash, which was estimated by management to be the minimum amount of cash required for net working capital purposes, and an additional $167 million of the Company’s cash that could be required to collateralize a letter of credit to the U.S. Department of Education in an amount equal to 10% of the Company’s Title IV cash receipts for the 2015 fiscal year.

This analysis yielded the following implied valuation ranges per Share (rounded to the nearest $1 increment), compared to the per share merger consideration of $9.50:

 

($ per Share)    2/5/2016
Capitalization
   2/5/2016 Capitalization
($200m NWC)
   2/5/2016 Capitalization
($200m NWC + $167m
LC)

Enterprise Value / LTM Adjusted EBITDA

   $9 - $9    $7 - $7    $6 - $6

Enterprise Value / 2016 Estimated Unadjusted EBITDA

   $7 - $8    $5 - $7    $4 - $5

Enterprise Value / 2016 Estimated Adjusted EBITDA

   $9 - $12    $7 - $10    $6 - $9

Enterprise Value / LTM Revenue

   $9 - $13    $8 - $11    $6 - $10

Enterprise Value / 2016 Estimated Revenue

   $10 - $12    $8 - $11    $6 - $9

In addition, as discussed with the board of directors, in arriving at its opinion, Barclays did not rely upon a precedent transactions analysis, as Barclays did not believe that there were any recent precedent transactions in the postsecondary education sector that were comparable to the merger. While Barclays did review premiums that were paid in completed transactions involving all U.S. based publicly traded target companies since January 1, 2010, as discussed with the board of directors, Barclays did not believe that this analysis was informative in light of the unique nature of the postsecondary education sector, the declining performance of the Company’s Class A common stock and the negative operating performance and outlook of the Company. In addition, as discussed with the board of directors, Barclays did not rely upon a discounted cash flow analysis, given the difficulty in the Company’s ability to forecast in the current environment, and as discussed above, Barclays did not rely upon or utilize financial projections for the Company for any period beyond the 2016 fiscal year for purposes of its analysis and opinion due to the Company’s limited operational visibility and history of underperformance / downward revisions to the Company’s forecasts.

General

Barclays is an internationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. The board of directors selected Barclays because of its familiarity with the Company and its qualifications, reputation and experience in the valuation of businesses and securities in connection with mergers and acquisitions generally, as well as substantial experience of its team in transactions comparable to the merger.

Barclays is acting as financial advisor to the Company in connection with the merger. As compensation for its services in connection with the merger, the Company agreed to pay Barclays an aggregate fee of

 

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$13,5000,000, of which $3,500,000 was paid upon the delivery of Barclays’ fairness opinion and $10,000,000 will be payable upon completion of the merger. In addition, the Company has agreed to reimburse Barclays for its reasonable and documented out-of-pocket expenses, including professional and legal fees and disbursements, incurred in connection with the merger up to $150,000 (excluding legal fees) without the Company’s prior written consent, and to indemnify Barclays, its affiliates and their respective directors, officers and employees for certain liabilities arising out of, its engagement. Barclays and its affiliates have performed various investment banking and financial services for the Company in the past and expect to perform such services in the future, and have received, and expect to receive, customary fees for such services. Specifically, Barclays and its affiliates have acted as a lender and documentation agent in the Company’s $625 million syndicated revolving credit facility in April 2012.

In addition, Barclays and its affiliates have performed in the past, and currently are performing, various investment banking and financial services for Apollo Management, L.P. and certain of its affiliates and its affiliated funds’ portfolio companies, including Parent, and expect to perform such services in the future, and have received and expect to receive, customary fees for such services. Specifically, Barclays and its affiliates have acted and are acting as (i) financial advisor to Apollo Management, L.P. and certain of its affiliates and its affiliated funds’ portfolio companies, including Parent, in connection with certain mergers and acquisition transactions; (ii) arranger, bookrunner and/or lender for Apollo Management, L.P. and certain of its affiliates and its affiliated funds’ portfolio companies, including Parent, in connection with the financing for various acquisition transactions; and (iii) underwriter, initial purchaser and placement agent for various equity and debt offerings undertaken by Apollo Management, L.P. and certain of its affiliates and its affiliated funds’ portfolio companies, including Parent. Barclays has disclosed to the board of directors that since January 1, 2010, Barclays and its affiliates have received compensation for investment banking and financial services provided to Apollo Management, L.P. and certain of its affiliates and its affiliated funds’ portfolio companies, including Parent, of approximately $262.1 million. Barclays and its affiliates have not performed investment banking and financial services for Vistria Fund, LP, Najafi Companies or Parent since 2010, but may perform such services in the future, and would expect to receive customary fees for such services.

Barclays and its affiliates engage in a wide range of businesses from investment and commercial banking, lending, asset management and other financial and non-financial services. In the ordinary course of its business, Barclays and affiliates may actively trade and effect transactions in the equity, debt and/or other securities (and any derivatives thereof) and financial instruments (including loans and other obligations) of the Company, Apollo Management, L.P. and certain of its affiliates and its affiliated funds’ portfolio companies, Vistria Fund, LP and Najafi Companies for its own account and for the accounts of its customers and, accordingly, may at any time hold long or short positions and investments in such securities and financial instruments.

Opinion of Evercore Group L.L.C.

In connection with the merger, the Company retained Evercore Group L.L.C., which we refer to as Evercore, to act as a financial advisor to the board of directors. On February 6, 2016, at a meeting of the board of directors, Evercore rendered its oral opinion, subsequently confirmed by delivery of a written opinion that, based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth in its opinion, as of February 6, 2016, the aggregate per share merger consideration to be received by each holder of the Company’s common stock was fair, from a financial point of view, to such holders.

The full text of Evercore’s written opinion, dated February 7, 2016, which sets forth, among other things, the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex E to this Proxy Statement and is incorporated by reference in its entirety into this Proxy Statement. You are urged to read Evercore’s opinion carefully and in its entirety. Evercore’s opinion was directed to the board of directors and addresses only the fairness, from a financial point of view, of the aggregate per share merger consideration to be received by holders of common stock (other than shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent and shares owned by the Company or any direct or

 

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indirect wholly owned subsidiary of the Company, in each case not held on behalf of third parties) in the merger. The opinion does not address any other aspect of the proposed merger and does not constitute a recommendation to the board of directors or to any other persons in respect of the proposed merger, including as to how any holder of shares of the Company’s common stock should vote or act in respect of the proposed merger. Evercore’s opinion does not address the relative merits of the proposed merger as compared to other business or financial strategies that might be available to the Company, nor does it address the underlying business decision of the Company to engage in the proposed merger.

In connection with rendering its opinion and performing its related financial analysis, Evercore, among other things: reviewed certain publicly available business and financial information relating to the Company that Evercore deemed to be relevant, including publicly available research analysts’ estimates; reviewed certain non-public historical financial statements and other non-public historical financial and operating data relating to the Company prepared and furnished to Evercore by management of the Company; reviewed certain non-public historical and projected operating data relating to the Company, prepared and furnished to Evercore by management of the Company; discussed the past and current operations, financial projections and current financial condition of the Company with management of the Company (including their views on the risks and uncertainties of achieving such projections and the Company’s record of achieving its projections in the past); reviewed the reported prices and the historical trading activity of Class A common stock; compared the financial performance of the Company and its stock market trading multiples with those of certain other publicly traded companies Evercore deemed relevant; compared the financial performance of the Company and the valuation multiples relating to the merger with those of certain other transactions Evercore deemed relevant; reviewed a substantially final draft of the merger agreement, dated February 6, 2016; discussed the sales process with management and the Company’s financial advisors, Barclays and Credit Suisse; and performed such other analyses and examinations and considered such other factors Evercore deemed appropriate.

For purposes of its analysis and opinion, Evercore assumed and relied upon, without undertaking any independent verification of, the accuracy and completeness of all of the information publicly available, and all of the information supplied or otherwise made available to, discussed with, or reviewed by Evercore, and Evercore assumed no liability therefor. With respect to the projected financial data relating to the Company referred to above, and the risks associated with achieving those projections, Evercore assumed that, as of the time of their preparation, they were reasonably prepared on bases reflecting the best estimates available at such time and good faith judgments of management of the Company as to the future financial performance of the Company under the business assumptions reflected therein. For purposes of Evercore’s analysis, with the Company’s permission, Evercore utilized portions of the Company’s projections for fiscal year 2016 and fiscal year 2017 and otherwise assigned little or no weight to the remainder of the Company’s estimates. In addition, as discussed with the board of directors, Evercore (i) assigned little or no weight to its discounted cash flow analysis, given the difficulty in the Company’s ability to forecast in the current environment and (ii) assigned little or no weight to its precedent transaction analysis due to dramatic changes in the for-profit post-secondary education market environment.

For purposes of rendering its opinion, Evercore assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the merger agreement were true and correct, that each party would perform all of the covenants and agreements required to be performed by it under the merger agreement and that all conditions to the consummation of the merger, together with any of the other transactions contemplated by the merger agreement and the voting and support agreements, would be satisfied without material waiver or modification thereof. Evercore further assumed that all governmental, regulatory or other consents, approvals or releases necessary for the consummation of the merger, together with any of the other transactions contemplated by the merger agreement and the voting and support agreements, would be obtained without any material delay, limitation, restriction or condition that would have an adverse effect on the Company or the consummation of the merger, together with any of the other transactions contemplated by the merger agreement and the voting and support agreements, or materially reduce the benefits to the holders of the Company’s common stock of the merger, together with any of the other transactions contemplated by the merger agreement and the voting and support agreements.

 

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Evercore did not make nor assume any responsibility for making any independent valuation or appraisal of the assets or liabilities of the Company, nor was Evercore furnished with any such appraisals, nor did it evaluate the solvency or fair value of the Company under any state or federal laws relating to bankruptcy, insolvency or similar matters. Evercore’s opinion was necessarily based upon information made available to it as of the date of its opinion and financial, economic, market and other conditions as they existed and as could be evaluated on the date of its opinion. It should be understood that subsequent developments may affect Evercore’s opinion and that it does not have any obligation to update, revise or reaffirm its opinion.

Evercore was not asked to pass upon, and expressed no opinion with respect to, any matter other than the fairness to the holders of the Company’s common stock, from a financial point of view, of the aggregate per share merger consideration. Evercore did not express any view on, and its opinion did not address, the fairness of the merger to, or any consideration received in connection therewith by, the holders of any other securities, creditors or other constituencies of the Company, nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of the Company, or any class of such persons, whether relative to the aggregate per share merger consideration or otherwise.

Evercore assumed that any modification to the structure of the merger, together with any of the other transactions contemplated by the merger agreement and the voting and support agreements, would not vary in any respect material to its analysis. In arriving at its opinion, Evercore was not authorized to solicit, and did not solicit, interest from any third party with respect to the acquisition of any or all of the shares of the Company’s common stock or any business combination or other extraordinary transaction involving the Company. Evercore expressed no opinion in its opinion as to the price at which Class A common stock would trade at any time. Evercore’s opinion noted that Evercore is not a legal, regulatory, accounting or tax expert and that Evercore assumed the accuracy and completeness of assessments by the Company and its advisors with respect to legal, regulatory, accounting and tax matters.

Set forth below is a summary of the material financial analyses performed by Evercore and reviewed with the board of directors on February 6, 2016 in connection with rendering its opinion. The following summary, however, does not purport to be a complete description of the analyses performed by Evercore. The order of the analyses described and the results of these analyses do not represent relative importance or weight given to these analyses by Evercore. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data that existed on or before January 8, 2016 (the last trading day prior to January 11, 2016, the date on which the Company announced it was exploring strategic alternatives, including a change of control transaction), and is not necessarily indicative of current market conditions.

The following summary of financial analyses includes information presented in tabular format. These tables must be read together with the text of each summary in order to understand fully the financial analyses. The tables alone do not constitute a complete description of the financial analyses. Considering the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Evercore’s financial analyses.

Selected Peer Group Trading Analysis

Evercore reviewed and compared certain financial and operating information relating to the Company to corresponding information of two separate groups of selected publicly traded companies in the for-profit post-secondary education industry. Although none of the selected publicly traded companies is directly comparable to

 

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the Company, the companies were chosen because they have certain characteristics that are similar to those of the Company. The two groups of selected companies were as follows:

 

Post-Secondary Schools—Transitioning

  

Post-Secondary Schools—Stable

•    American Public Education

  

•    Capella Education

•    Bridgepoint Education

  

•    DeVry Education

•    Career Education

  

•    Strayer Education

•    ITT Educational Services

  

Evercore calculated and analyzed various financial multiples and ratios of the Company and the selected companies as follows:

Ratios of total enterprise value, or TEV (which represents market capitalization plus the total outstanding debt, preferred stock and minority interest, less cash and cash equivalents balances), to revenue per share, or RPS, which is commonly referred to as a TEV / revenue multiple, estimated for each of calendar years 2015 and 2016; and

Ratios of TEV, to earnings before interest, taxes, depreciation, and amortization, or EBITDA, which is commonly referred to as a TEV / EBITDA multiple, estimated for each of calendar years 2015 and 2016.

The multiples for each of the selected companies were calculated using the closing prices of the selected companies’ common stock on February 5, 2016, and were based on, and derived from, the selected companies’ publicly available filings and financial data provided by Wall Street research. The multiples for the Company were calculated using the closing price of the Company’s Class A common stock on February 5, 2016, and were based on, and derived from, publicly available information and the Company management forecast.

 

     Apollo
Education
Group, Inc.
     Post-Secondary
Schools—
Transitioning
     Post-Secondary
Schools—
Stable
 
     Management      Mean      Median      Mean      Median  

TEV / Revenue—CY2015E

     0.2x         0.3x         0.3x         0.8x         0.9x   

TEV / Revenue—CY2016E

     0.2x         0.3x         0.3x         0.8x         0.9x   

TEV / EBITDA—CY2015E

     2.1x         1.9x         1.9x         4.3x         4.6x   

TEV / EBITDA—CY2016E

     2.5x         2.6x         2.6x         4.1x         4.4x   

No company utilized in the peer group trading analysis is identical to the Company. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of the Company and other factors that could affect the public trading value of the companies to which the Company is being compared. In evaluating the companies in the two peer groups, Evercore made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company, such as the impact of competition on the Company and the industry generally, industry growth and the absence of any adverse material change in the financial conditions and prospects of the Company, the industry or the financial markets in general. Mathematical analysis, such as determining the mean, median or average, is not in itself a meaningful method of using peer group trading data.

 

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Peer group trading multiples were then applied to FY’16E values to arrive at implied price per share valuations:

 

       Apollo Education Group, Inc.  
     FY’16E
EBITDA
     Valuation  
            Low              High      

EBITDA Including Corporate Expenses

   $ 171       $ 342       $ 684   

CY’16E Valuation Multiple

        2.0      4.0

Implied Equity Value (Minus Net Debt and Non-controlling Interest)

      $ 707       $ 1,049   

Implied Price Per Share

      $ 6.18       $ 9.16   

Implied Price Per Share Including $200M Operating Cash Balance

      $ 7.92       $ 10.91   

Premiums Paid Analysis

Evercore performed an analysis of selected transactions to compare premiums paid in such transactions to the premium implied in the merger. While none of the companies that participated in the selected transactions is directly comparable to the Company and none of the transactions in the selected transactions analysis is directly comparable to the merger, the selected transactions do share certain characteristics as set forth below.

Evercore selected North American business combinations announced and completed in the preceding 10 years involving transaction equity values in the range of $500 million to $2.0 billion (excluding bankruptcies, all-stock merger of equals and transactions where the four (4) week premium exceeded 100%). For each of the selected transactions, Evercore analyzed the premium paid to the target stock price one day and one month prior to the announcement of the transaction. This analysis indicated the following implied mean, median, high and low premiums for the selected transactions:

 

     Implied Premium (10 years)  
     Mean     Median     High     Low  

One Day Prior

     29.4     25.9     352.0     0.1

One Month Prior

     32.5     30.2     100.0     0.3
     Implied Premium (January 1, 2013—
February 5, 2016 only)
 
     Mean     Median     High     Low  

One Day Prior

     30.9     26.0     105.7     2.5

One Month Prior

     34.0     30.5     100.0     2.9

 

     Implied Premium (10 years)  
     Top Quartile     50th-75th
Percentile
    Median     25th-50th
Percentile
    Bottom
Quartile
 

One Day Prior

     56.6     31.8     25.9     20.6     8.7

One Month Prior

     58.4     35.6     30.2     24.4     11.9
     Implied Premium (January 1, 2013—February 5, 2016 only)  
     Top Quartile     50th-75th
Percentile
    Median     25th-50th
Percentile
    Bottom
Quartile
 

One Day Prior

     59.2     32.1     26.0     22.0     11.2

One Month Prior

     60.9     37.3     30.5     25.5     13.3

 

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Based on this analysis, to calculate implied per share equity values for the Company’s common stock, Evercore used (1) the closing price of the Company’s Class A common stock on January 8, 2016 (one trading day prior to its announcement on January 11, 2016 that the Company is exploring strategic alternatives) and a premium range of 20.0%-30.0% and (2) the closing price of the Company’s Class A common stock on December 8, 2015 (1-month prior to the unaffected Closing Price on January 8, 2016) and a premium range of 25.0%-35.0%.

 

     Apollo Education Group, Inc.  
     Premium      Implied $ / Share  

Closing Price as of January 8, 2016

     20.0% - 30.0%       $ 7.91 - $8.57   

Closing Price as of December 8, 2015

     25.0% - 35.0%       $ 8.65 - $9.34   

Research Analyst Price Targets

Evercore analyzed research analyst estimates of potential future value for shares of the Company’s Class A common stock, or price targets, based on publicly available equity research published with respect to the Company.

As of February 5, 2016, the observed research analyst price targets for the Company’s Class A common stock were $8.00–$10.00 per share. Evercore discounted these price targets for 1 year at a 12% cost of equity as follows:

 

     Apollo Education
Group, Inc.
 

Target Range

   $ 7.14 - $8.93   

Trading Prices

Evercore reviewed ranges of trading prices of shares of the Company’s Class A common stock for the 52 weeks ended on February 5, 2016 and for the period since October 22, 2015, the date of its last earnings release prior to the date of the merger agreement.

As of July 1, 2015, the 52-week trading price ranges for the Company’s Class A common stock during these periods were as follows:

 

     Apollo Education
Group, Inc.
 

52-Week Trading Range

   $ 6.38 - $28.51   

Trading Range Since 10/22/15 Earnings Release

     $6.38 - $8.30   

Sum of the Parts

Evercore performed an analysis of the implied price per share based on the value of the Company’s core and international components, as forecasted by the Company for 2016 and 2017. In consultation with the Company, Evercore defined (i) Apollo’s core components as the University of Phoenix, Apollo Professional Development, and other segments; and (ii) Apollo’s international component as Apollo Global. This evaluation was conducted allocating corporate expenses under two separate scenarios. As indicated above, Evercore utilized portions of the Company’s projections for fiscal year 2016 and fiscal year 2017 and otherwise assigned little or no weight to the remainder of the Company’s estimates.

 

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  A. Corporate expenses fully allocated to EBITDA:

 

     CY
EBITDA
     Apollo Education Group, Inc.  
        Valuation  
            Low              High      

Apollo core components CY’16E EBITDA

   $ 152       $ 227       $ 531   

CY’16E Valuation Multiple

        1.5      3.5

Apollo international component CY’17E EBITDA

   $ 48       $ 310       $ 405   

CY’17E Valuation Multiple

        6.5      8.5
     

 

 

    

 

 

 

Total Sum of the Parts TEV

      $ 537       $ 936   

Implied Equity Value

(Minus Net Debt, Non-controlling Interest and One-time Separation Costs)

      $ 882       $ 1,281   

Implied Price Per Share

      $ 7.71       $ 11.19   

Implied Price Per Share

Including $200M Operating Cash Balance

      $ 9.46       $ 12.94   

 

  B. Corporate expenses unallocated and valued based upon weighted average CY’16E multiple based on contributions of Apollo’s core and international components to TEV before unallocated expenses:

 

     CY
EBITDA
     Apollo Education Group, Inc.  
        Valuation  
            Low              High      

Apollo core components CY’16E EBITDA

   $ 470       $ 706       $ 1,646   

CY’16E Valuation Multiple

        1.5      3.5

Apollo international component CY’17E EBITDA

   $ 74       $ 480       $ 628   

CY’17E Valuation Multiple (not applied to weighted average multiple)

        6.5      8.5

Implied CY’16E Valuation Multiple (applied to weighted average multiple)

        15.2      19.9
     

 

 

    

 

 

 

Unallocated Corporate Expenses

   ($ 341    ($ 805    ($ 1,544

Weighted Average CY’16E Valuation Multiple

        2.4      4.5
     

 

 

    

 

 

 

Total Sum of the Parts TEV

      $ 381       $ 730   

Implied Equity Value

        

(Minus Net Debt, Non-controlling Interest and One-time Separation Costs)

      $ 726       $ 1,076   

Implied Price Per Share

      $ 6.35       $ 9.40   

Implied Price Per Share

      $ 8.09       $ 11.15   

Including $200M Operating Cash Balance

        

Sponsor Ability-to-Pay Analysis

Evercore conducted a sponsor’s ability-to-pay analysis based on the management and research case forecasts. Evercore calculated and analyzed various financial multiples and sensitivities for cost of capital to determine a range for implied equity value per share which could be paid based on the following:

 

    Leverage of the transaction as a multiple of LTM EBITDA, and FY’20 Exit Multiple; and

 

    Required internal rate of return, or IRR, and FY’20 Exit Multiple.

 

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As indicated above, Evercore utilized portions of the Company’s projections for FY 2016 and FY 2017 and otherwise assigned little or no weight to the remainder of the Company’s estimates.

 

     Management Case  
     Transaction Leverage      IRR  
     Low (0.0x)      High (2.0x)      Low (20.0%)      High (30.0%)  

Low FY’20 EM (2.0x)

   $ 9.89       $ 11.95       $ 11.35       $ 8.72   

High FY’20 EM (6.0x)

   $ 16.99       $ 19.05       $ 19.91       $ 14.65   
     Research Case  
     Transaction Leverage      IRR  
     Low (0.0x)      High (2.0x)      Low (20.0%)      High (30.0%)  

Low FY’20 EM (2.0x)

   $ 5.24       $ 7.47       $ 5.75       $ 4.83   

High FY’20 EM (6.0x)

   $ 7.18       $ 9.41       $ 8.09       $ 6.45   

Miscellaneous

The foregoing summary of certain material financial analyses does not purport to be a complete description of the analyses or data presented by Evercore. In connection with the review of the merger by the board of directors, Evercore performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary described above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Evercore’s opinion. In arriving at its fairness determination, Evercore considered the results of all the analyses and did not draw, in isolation, conclusions from or with regard to any one analysis or factor considered by it for purposes of its opinion. Rather, Evercore made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all the analyses. In addition, Evercore may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis or combination of analyses described above should not be taken to be the view of Evercore with respect to the actual value of the Company’s Class A common stock. No company used in the above analyses as a comparison is directly comparable to the Company, and no transaction used is directly comparable to the merger. Further, Evercore’s analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies or transactions used, including judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company and its advisors.

Evercore prepared these analyses for the purpose of providing an opinion to the board of directors as to the fairness, from a financial point of view, of the merger consideration to the holders of the Company’s Class A common stock. These analyses do not purport to be appraisals or to necessarily reflect the prices at which the business or securities actually may be sold. Any estimates contained in these analyses are not necessarily indicative of actual future results, which may be significantly more or less favorable than those suggested by such estimates. Accordingly, estimates used in, and the results derived from, Evercore’s analyses are inherently subject to substantial uncertainty, and Evercore assumes no responsibility if future results are materially different from those forecasted in such estimates.

The issuance of the fairness opinion was approved by an opinion committee of Evercore.

Pursuant to the terms of Evercore’s engagement letter with the Company, the Company agreed to pay Evercore an opinion fee of $3,000,000. Of the opinion fee, a retainer fee of $250,000 was paid to Evercore upon execution of the engagement letter and a second retainer fee of $250,000 was paid one month following the

 

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execution of the engagement letter, and the remaining $2,500,000 of the opinion fee was paid upon delivery of Evercore’s fairness opinion to the board of directors. In addition, the Company has agreed to reimburse Evercore for its reasonable and documented out-of-pocket expenses up to $200,000 (including reasonable legal fees, expenses and disbursements), incurred in connection with, and to indemnify Evercore or its members, partners, officers, directors, advisors, representatives, employees, agents, affiliates or controlling persons for certain liabilities arising out of, its engagement.

Prior to this engagement, Evercore and its affiliates had not provided financial advisory services to the Company. During the two (2) year period prior to the date it delivered its fairness opinion, Evercore and its affiliates had maintained an active business relationship with affiliates of Apollo Global Management, LLC, an affiliate of Parent, and Evercore has disclosed to the board of directors that, pursuant to which, compensation was received by Evercore or its affiliates in an amount equal to approximately $24 million in the aggregate. Evercore may provide financial or other services to the Company, affiliates of the Company, or affiliates of Parent in the future and in connection with any such services may receive compensation. Evercore and its affiliates have not performed financial advisory services for Parent, The Vistria Group, LP or Najafi Companies during the two (2) year period prior to the date it delivered its fairness opinion, but may perform such services in the future, and would expect to receive customary fees for such services.

In the ordinary course of business, Evercore or its affiliates may actively trade the securities, or related derivative securities, or financial instruments of the Company, Parent and their respective affiliates, for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities or instruments.

The board of directors engaged Evercore to act as a financial advisor based on its qualifications, experience and reputation. Evercore is an internationally recognized investment banking firm and is regularly engaged in the valuation of businesses in connection with mergers and acquisitions, leveraged buyouts, competitive biddings, private placements and valuations for corporate and other purposes.

Certain Company Forecasts

The Company does not as a matter of course publicly disclose detailed financial forecasts due to the difficulty of predicting economic and market conditions and accurately forecasting the Company’s performance. However, in connection with its evaluation of the merger, the board of directors, the Company’s financial advisors and Parent and other potential counterparties were from time to time provided with non-public, unaudited financial forecasts prepared by management. These forecasts were prepared by management in good faith based on management’s reasonable best estimates and assumptions with respect to the Company’s future financial performance at the time they were prepared and speak only as of that time.

The summaries of these forecasts are not included in this proxy statement to induce any shareholder to vote in favor of the adoption of the merger agreement or any other proposals to be voted on at the special meeting, but because these forecasts were made available to the board of directors, the Company’s financial advisors and Parent, and from time to time, other potential counterparties, in connection with the merger. The inclusion of these forecasts should not be regarded as an indication that the Company, the board of directors, the Company’s financial advisors or Parent considered, or now considers, these forecasts to be a reliable prediction of future results or to support or fail to support your decision whether to vote for or against the proposal to adopt the merger agreement. No person has made or makes any representation or warranty to any shareholder regarding the information included in these forecasts.

While these forecasts were prepared in good faith by management, no assurance can be made regarding future events. These forecasts also reflect assumptions as of the time of their respective preparation as to certain business decisions that are subject to change. Although presented with numerical specificity, these forecasts are based upon a variety of estimates and numerous assumptions made by management with respect to, among other

 

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matters, industry performance, general business, economic, regulatory, market and financial conditions and other matters, including the factors described under the section titled “Cautionary Statement Regarding Forward-Looking Statements” on page [●], many of which are difficult to predict, are subject to significant economic and competitive uncertainties, and are beyond the Company’s control. In particular, management has limited visibility into the likelihood of the occurrence and potential magnitude of the material risks to the Company’s performance in the unpredictable operating environment surrounding the Company, and as a result faces challenges in being able to accurately forecast the Company’s performance and predict the effectiveness of initiatives designed to improve the performance of the business and stabilize enrollment and revenue. These forecasts also assume that the Company would continue to operate as a standalone company and do not reflect any impact of the merger. In addition, since these forecasts may cover multiple years, such information by its nature becomes less reliable with each successive year. As a result, there can be no assurance that the estimates and assumptions made in preparing these forecasts will prove accurate, that the projected results will be realized or that actual results will not be significantly higher or lower than projected results. These forecasts cannot, therefore, be considered a guaranty of future operating results, and this information should not be relied on as such.

These forecasts include certain financial measures which do not conform to U.S. Generally Accepted Accounting Principles, which we refer to as GAAP, including EBITDA, Adjusted EBITDA and Unadjusted EBITDA Less Capital Expenditures, as defined below. Management provided this information to the board of directors, the Company’s financial advisors, Parent and other potential counterparties because management believes it provides useful information because management believes these non-GAAP financial measures could be useful in evaluating the business, potential operating performance and cash flow of the Company. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as presented in this proxy statement may not be comparable to similarly titled amounts used by other companies in the industry. The footnotes to the tables below provide certain supplemental information with respect to the calculation of these non-GAAP financial measures.

These forecasts were not prepared with a view toward public disclosure, soliciting proxies or complying with GAAP, the published guidelines of the SEC regarding financial projections and forecasts or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial projections and forecasts. Neither the Company’s independent registered public accounting firm nor any other independent registered public accounting firm has examined, compiled or otherwise performed any procedures with respect to the prospective financial information contained in these forecasts and, accordingly, neither the Company’s independent registered public accounting firm nor any other independent registered public accounting firm has expressed any opinion or given any other form of assurance on such information or its achievability, and assumes no responsibility for, and disclaims any association with, the prospective financial information.

In July 2015, in connection with the merger, the Company prepared a set of financial forecasts and projections for the fiscal years ending August 31, 2016, 2017, 2018 and 2019, which we refer to as the July Forecast.

Subsequent to the preparation of the July Forecast, the Company also prepared its annual operating plan for the fiscal year ending August 31, 2016, which we refer to as the September Forecast. The September Forecast reflected downward revisions to the fiscal year 2016 numbers in the July Forecast to reflect the Company’s actual financial results and also reflected management’s revised view of the Company’s financial prospects as of September 2016. The September Forecast was subsequently provided to the board of directors as part of their regular annual planning process conducted after the conclusion of the Company’s fiscal year 2015 on August 31, 2015.

 

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In October 2015, in connection with the merger, the Company prepared updated projections for the fiscal years ending August 31, 2016, 2017, 2018, 2019 and 2020, which we refer to as the October Forecast. The October Forecast was revised downward to reflect the Company’s actual financial results and also reflected management’s revised view of the Company’s financial prospects as of October 2015.

In December 2015, in connection with the merger, the Company prepared updated projections for fiscal years ending August 31, 2016, 2017, 2018, 2019 and 2020, which we refer to as the December Forecast. The December Forecast was revised downward to reflect the Company’s actual financial results and also reflected management’s revised view of the Company’s financial prospects as of December 2015.

The following tables present in summary form certain measures used in each of the July Forecast, the September Forecast, the October Forecast and the December Forecast:

New Enrollments(1)

 

     2016E     2017E     2018E     2019E     2020E  

New Enrollments—July Forecast

     106,400        108,000        118,900        129,300        NA   

New Enrollments—September Forecast

     102,200        NA        NA        NA        NA   

% change from July Forecast

     (3.9 %)      —          —          —          —     

New Enrollments—October Forecast

     88,900        82,900        87,700        93,000        98,500   

% change from July Forecast

     (16.4 %)      (23.2 %)      (26.2 %)      (28.1 %)      —     

New Enrollments—December Forecast

     88,000        81,447        86,159        91,400        96,879   

% change from July Forecast

     (17.3 %)      (24.6 %)      (27.5 %)      (29.3 %)      (1.6 %)(2) 

 

(1) Represents new enrollments (as prepared for external purposes) at the University of Phoenix.
(2) % change from latest available forecast.

Total Revenue

 

     2016E     2017E     2018E     2019E     2020E  
     ($ in millions)  

Total Revenue—July Forecast

   $ 2,348      $ 2,360      $ 2,601      $ 3,045        NA   

Total Revenue—September Forecast

   $ 2,267        NA        NA        NA        NA   

% change from July Forecast

     (3.4 %)      —          —          —          —     

Total Revenue—October Forecast

   $ 2,224      $ 2,245      $ 2,308      $ 2,520      $ 2,837   

% change from July Forecast

     (5.2 %)      (4.9 %)      (11.3 %)      (17.2 %)      —     

Total Revenue—December Forecast(1)

   $ 2,177      $ 2,182      $ 2,230      $ 2,429      $ 2,731   

% change from July Forecast

     (7.2 %)      (7.5 %)      (14.3 %)      (20.2 %)      (3.7 %)(2) 

 

(1) Career Partner GmbH (acquired December 11, 2015) not included for consistency of comparison with July Forecast, September Forecast and October Forecast.
(2) % change from latest available forecast.

Adjusted EBITDA(1)

 

     2016E     2017E     2018E     2019E     2020E  
     ($ in millions)  

Adjusted EBITDA—July Forecast

   $ 265      $ 361      $ 508      $ 635        NA   

Adjusted EBITDA—September Forecast

   $ 268        NA        NA        NA        NA   

% change from July Forecast

     1.2     —          —          —          —     

Adjusted EBITDA—October Forecast

   $ 252      $ 302      $ 344      $ 442      $ 589   

% change from July Forecast

     (4.7 %)      (16.5 %)      (32.2 %)      (30.4 %)      —     

Adjusted EBITDA—December Forecast(2)(3)

   $ 238      $ 277      $ 315      $ 409      $ 552   

% change from July Forecast

     (10.0 %)      (23.4 %)      (38.1 %)      (35.5 %)      (6.4 %)(4) 

 

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(1) Adjusted to add back special items, including restructuring and impairment charges and acquisition-related expenses.
(2) Career Partner GmbH (acquired December 11, 2015) not included for consistency of comparison with July Forecast, September Forecast and October Forecast.
(3) Adjusted to add back certain legal expenses and merger-related expenses.
(4) % change from latest available forecast.

EBITDA

 

     2016E     2017E     2018E     2019E     2020E  
     ($ in millions)  

EBITDA—July Forecast

   $ 190      $ 345      $ 473      $ 635        NA   

EBITDA—September Forecast

   $ 226        NA        NA        NA        NA   

% change from July Forecast

     19.0     —          —          —          —     

EBITDA—October Forecast

   $ 174      $ 278      $ 327      $ 442      $ 589   

% change from July Forecast

     (8.4 %)      (19.4 %)      (30.9 %)      (30.4 %)      —     

EBITDA—December Forecast(1)

   $ 46      $ 253      $ 297      $ 409      $ 551   

% change from July Forecast

     (75.9 %)      (26.6 %)      (37.2 %)      (35.5 %)      (6.6 %)(2) 

 

(1) Career Partner GmbH (acquired December 11, 2015) not included for consistency of comparison with July Forecast, September Forecast and October Forecast.
(2) % change from latest available forecast.

Unadjusted EBITDA Less Capital Expenditures(1)

 

     2016E     2017E     2018E     2019E     2020E  
     ($ in millions)  

Unadjusted EBITDA Less Capital Expenditures—July Forecast

   $ 90      $ 262      $ 388      $ 567        NA   

Unadjusted EBITDA Less Capital Expenditures—September Forecast

   $ 101        NA        NA        NA        NA   

% change from July Forecast

     12.6     —          —          —          —     

Unadjusted EBITDA Less Capital Expenditures—October Forecast

   $ 68      $ 195      $ 255      $ 385      $ 546   

% change from July Forecast

     (24.1 %)      (25.5 %)      (34.3 %)      (32.0 %)      —     

Unadjusted EBITDA Less Capital Expenditures—December Forecast(2)

   ($ 47   $ 170      $ 226      $ 353      $ 507   

% change from July Forecast

     (152.0 %)      (35.0 %)      (41.9 %)      (37.7 %)      (7.1 %)(3) 

 

(1) Unadjusted EBITDA less Capital Expenditures is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income (or any other financial measures disclosed by the Company) as a measure of operating performance or cash flows or as a measure of liquidity. Unadjusted EBITDA less Capital Expenditures may not be consistent with the Company’s public disclosures related to cash flow.
(2) Career Partner GmbH (acquired December 11, 2015) not included for consistency of comparison with July Forecast, September Forecast and October Forecast.
(3) % change from latest available forecast.

While the July Forecast, the September Forecast and the October Forecast were made available to the Company’s financial advisors, as discussed with the board of directors, neither Barclays nor Evercore relied upon or utilized the July Forecast, the September Forecast or the October Forecast for purposes of their respective analyses and opinions. In addition, as discussed with the board of directors, Barclays did not rely upon or utilize

 

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these forecasts other than the December Forecast, and within the December Forecast, any period beyond the fiscal year ending August 31, 2016, for purposes of Barclays’ analysis and opinion discussed under the section “The Merger—Opinions of the Company’s Financial Advisors—Opinion of Barclays Capital Inc.” starting on page [●]. Also as discussed with the board of directors, Evercore utilized portions of the December Forecast for fiscal years ending August 31, 2016 and 2017 and otherwise assigned little or no weight to the remainder of the Company’s estimates for purposes of Evercore’s analysis and opinion discussed under the section titled “Opinions of the Company’s Financial Advisors—Opinion of Evercore Group L.L.C.” starting on page [●].

The following table presents in summary form the December Forecast for the Company for the fiscal years ending August 31, 2016 through 2020. The presentation of the December Forecast in the following table includes the impact of Career Partner GmbH, which was acquired by the Company on December 11, 2015:

 

     Fiscal Year Ending August 31,  
     2016E     2017E      2018E      2019E      2020E  
     ($ in millions, except enrollments)  

New Enrollments(1)

     88,000        81,447         86,159         91,400         96,879   

Average Enrollments(1)

     172,250        144,035         132,317         132,532         139,612   

Total Revenue

     2,209        2,230         2,287         2,495         2,806   

Total Expenses

     2,078        2,072         2,091         2,186         2,342   

EBITDA(2)

     52        262         305         420         563   

Adjusted EBITDA(3)

     249        286         322         420         563   

Capital Expenditures

     95        88         77         62         49   

Unadjusted EBITDA Less Capital Expenditures(4)

     (44     174         228         357         514   

 

(1) Represents new enrollments (as prepared for external purposes) and average enrollments (as prepared for external purposes) at the University of Phoenix.
(2) EBITDA is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income as a measure of operating performance or cash flows or as a measure of liquidity. For purposes of the December Forecast, EBITDA, as presented above, is defined as earnings before interest, taxes, depreciation and amortization.
(3) Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income as a measure of operating performance or cash flows or as a measure of liquidity. For purposes of the December Forecast, Adjusted EBITDA, as presented above, is defined as EBITDA, adjusted to add back special items, including restructuring, acquisition costs, goodwill impairment, certain legal and transaction expenses in connection with the merger and, for the fiscal year ending August 31, 2016, adjusted to give pro forma effect for the full year contribution of Career Partner GmbH, which was acquired by the Company on December 11, 2015.
(4) Unadjusted EBITDA Less Capital Expenditures is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income (or any other financial measures disclosed by the Company) as a measure of operating performance or cash flows or as a measure of liquidity. Unadjusted EBITDA less Capital Expenditures may not be consistent with the Company’s public disclosures related to cash flow.

 

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Reconciliations of non-GAAP financial measures used in the December Forecast to the most directly comparable GAAP measures are provided below:

 

     Fiscal Year Ending August 31,  
     2016E     2017E      2018E      2019E      2020E  
     ($ in millions)  

Operating Income

     (63     134         178         309         465   

Depreciation & Amortization

     115        128         126         110         99   

EBITDA

     52        262         305         420         563   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Restructuring

     100        24         18         —           —     

Acquisition Costs

     5        —           —           —           —     

Goodwill Impairment

     73        —           —           —           —     

Non-Recurring Legal Expenses

     13        —           —           —           —     

Merger-Related Expenses

     4        —           —           —           —     

CPG Full Year Impact(1)

     3        —           —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     249        286         322         420         563   

 

(1) Adjusted to give pro forma effect for the full year contribution of Career Partner GmbH, which was acquired by the Company on December 11, 2015.

On January 11, 2016, the Company publicly issued guidance that had been lowered compared to the December Forecast, due to, among other things, significant deterioration in the University of Phoenix forecast in the 75 days leading up to earnings release and increased revenue downside risk due to the impact of lower new degreed enrollments, higher net drops, increased need for discounts, reduced course frequency and programmatic changes related to gainful employment regulations.

Financing of the Merger

We anticipate that the total funds needed by Parent and Merger Sub to pay our shareholders and holders of equity awards the amounts due to them under the merger agreement, pay related fees and expenses in connection with the merger and repay or refinance the outstanding indebtedness of the Company that will come due as a result of the merger and, if necessary, post a letter of credit in favor of the U.S. Department of Education for up to 10% of the Title IV Program funds received by the University of Phoenix in the prior fiscal year, will be approximately $1,042,000,000.

We anticipate that the funds needed to pay the amounts described above will be obtained as follows:

 

    equity financing to be provided by Apollo Investment Fund VIII, L.P., Apollo Overseas Partners (Delaware 892) VIII, L.P., Apollo Overseas Partners (Delaware) VIII, L.P. and Apollo Overseas Partners VIII, L.P., affiliates of Apollo Management VIII, L.P., which we refer to collectively as the AGM investors, in an aggregate amount of up to $1,002,000,000, or other parties to whom they assign a portion of their respective commitments; and

 

    equity financing to be provided by Vistria Fund, LP, an affiliate of The Vistria Group, LP, in an aggregate amount of up to $40,000,000, or other parties to whom it assigns a portion of its commitment.

Parent has entered into equity commitment letters with the AGM investors and Vistria Fund, LP, each dated February 7, 2016, which we refer to as the equity commitment letters, pursuant to which the AGM investors and Vistria Fund, LP have committed, on the terms and subject to the conditions of the equity commitment letters and the merger agreement, equity financing in an aggregate amount of $1,042,000,000 or such lesser amount that, together with (i) any unrestricted cash on the consolidated balance sheet of the surviving corporation and its subsidiaries at the closing of the merger and (ii) any debt financing that may be obtained by Parent, would be

 

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sufficient for Parent to pay the aggregate per share merger consideration and make payments due in respect of Company equity awards on the terms and subject to the conditions set forth in the merger agreement.

The obligations of the AGM investors and Vistria Fund, LP to fund the equity financing is conditioned only upon (i) the satisfaction or waiver, on or before the closing, of all conditions precedent to Parent’s obligations to effect the merger (other than those conditions that by their nature cannot be satisfied until the closing date of the merger, but each of which will be capable of being satisfied on the closing date) and the other transactions contemplated by the merger agreement, as set forth in the merger agreement, and (ii) the substantially concurrent consummation of the merger on the terms and subject to the conditions of the merger agreement.

The Company is a third-party beneficiary to the equity commitment letters, entitling the Company to seek specific performance of the AGM investors and Vistria Fund, LP to fund their respective equity contributions in accordance with the terms and provisions of the merger agreement and the equity commitment letters. The Company is entitled to seek specific performance to cause Parent to draw down the full proceeds of the equity financing pursuant to the terms and conditions of the equity commitment letters in the event that (i) all conditions to the closing of the merger (other than those conditions that by their nature cannot be satisfied until the closing date of the merger, but each of which will be capable of being satisfied on the closing date) have been satisfied or waived at the time when the closing of the merger would have occurred and (ii) the Company has irrevocably confirmed in writing that all conditions precedent to Parent’s obligations to effect the merger have been satisfied or waived (other than those conditions that by their nature cannot be satisfied until the closing date of the merger, but each of which will be capable of being satisfied on the closing date) and that if specific performance is granted and the equity financing is funded, then the closing of the merger will occur. Additionally, the Company is entitled to seek specific performance to cause Parent to draw down the equity financing pursuant to the terms and conditions of the equity commitment letters in the event that the Company obtains a final and non-appealable judgment by a court finding the existence of a breach of the merger agreement by Parent and awarding money damages to the Company.

The obligations of the AGM investors and Vistria Fund, LP to fund under their respective equity commitment letters will expire upon the earliest to occur of (i) the valid termination of the merger agreement in accordance with its terms, (ii) the closing of the merger and (iii) the date that the Company or any of its affiliates asserts in any litigation any claim or other proceeding against the AGM investors and Vistria Fund, LP in connection with the equity commitment letters, the merger agreement, the voting and support agreements or any of the transactions contemplated thereby, except with respect to claims for specific performance or other equitable relief under and in accordance with the terms of the merger agreement, the equity commitment letters or the confidentiality agreements.

Additional equity financing may be provided to Parent or Merger Sub by affiliates of Najafi Companies, LLC and other financing investors with relationships with Apollo Management VIII, L.P. or The Vistria Group, LP, but such additional equity financing would not relieve the AGM investors or Vistria Fund, LP of their respective obligations under the equity commitment letters delivered by such parties to Parent.

Closing and Effective Time of Merger

The closing of the merger will occur at 9:00 a.m. Eastern time on the third (3rd) business day after the satisfaction or waiver of the last to occur of the conditions set forth in the merger agreement (other than those conditions that by their nature are to be satisfied at the closing), or on such other date as the Company and Parent may agree. If the last of such closing conditions is satisfied or waived on a date after the tenth (10th) day of a month, Parent may elect to delay closing to any date on or prior to the first (1st) business day of the subsequent month.

The merger will become effective at the time when the statement of merger (along with the Company’s Second Amended and Restated Articles of Incorporation) has been duly delivered to the Arizona Corporation Commission for filing in accordance with the relevant provisions of the Arizona Business Corporation Act,

 

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which we refer to as the ABCA, or at such later date and time as may be agreed by Parent and the Company in writing and specified in the statement of merger. Assuming timely satisfaction or waiver of the necessary closing conditions, we anticipate that the merger will be completed by the end of calendar year 2016.

Payment of Merger Consideration and Surrender of Stock Certificates

As soon as possible, and in any event within three (3) business days, after the date of the effective time of the merger, each holder of record of a certificate representing shares of our common stock (other than holders who solely hold excluded shares) will be sent a letter of transmittal and instructions describing how such record holder may surrender his, her or its shares of our common stock (or affidavits of loss in lieu thereof) in exchange for the per share merger consideration.

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

Any holder of book entry shares will not be required to deliver a certificate or an executed letter of transmittal to the paying agent to receive the per share merger consideration that such holder is entitled to receive. In lieu thereof, each holder of record of one or more book-entry shares whose shares of our common stock were converted into the right to receive the per share merger consideration will upon receipt by the paying agent of an “agent’s message” in customary form (or such other evidence, if any, as the paying agent may reasonably request), be entitled to receive the per share merger consideration in respect of each such share of our common stock and the book-entry shares of such holder will forthwith be canceled.

No interest will be paid or accrued on the cash payable as the per share merger consideration upon your surrender of your book-entry shares or certificates.

The Company, Parent, the surviving corporation and the paying agent will be entitled to deduct and withhold any applicable taxes from the per share merger consideration. Any sum that is withheld will be deemed to have been paid to the holder of shares with regard to whom it is withheld.

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the per share merger consideration, you will have to make an affidavit of the loss, theft or destruction of such certificate, and, if required by Parent, post a bond in such customary amount and upon such terms as may be reasonably required by Parent as indemnity against any claim that may be made against it, Merger Sub or the surviving corporation with respect to such lost, stolen or destroyed certificate. These procedures will be described in the letter of transmittal and instructions that you will receive, which you should read carefully and in their entirety.

Interests of Certain Persons in the Merger

In considering the recommendation of the board of directors with respect to the proposal to adopt the merger agreement, you should be aware that executive officers and directors of the Company may have certain interests in the merger that may be different from, or in addition to, the interests of the Company’s shareholders generally. The board of directors were aware of these interests and considered them at the time they evaluated and negotiated the merger agreement and the merger, and in recommending that the merger agreement be adopted by the shareholders of the Company. These interests are described below.

Treatment of Company Equity Awards

Company stock options, Company restricted stock units, Company performance stock units and Company deferred stock units held by the Company’s executive officers and directors immediately prior to the effective time of the merger will be vested and canceled in exchange for a cash payment in the same manner as those equity awards held by other employees of the Company. As described in the section titled “The Merger

 

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Agreement—Treatment of Common Stock and Company Equity Awards” beginning on page [●], such awards will generally be subject to the following treatment:

Stock Options. At the effective time of the merger, each outstanding Company stock option under the Company stock plan will, automatically and without any action on the part of the holder thereof, be canceled and will only entitle the holder of such Company stock option to receive (without interest), an amount in cash equal to the product of the total number of shares subject to such Company stock option, multiplied by the excess, if any, of the per share merger consideration over the exercise price of such Company stock option, less any tax withholdings. Any Company stock option which has an exercise price per share that is greater than or equal to the per share merger consideration will be canceled at the effective time of the merger for no consideration or payment.

Restricted Stock Units. At the effective time of the merger, any vesting conditions applicable to each outstanding Company restricted stock unit, will, automatically and without any required action on the part of the holder thereof, accelerate in full, and each Company restricted stock unit will, automatically and without any required action on the part of the holder thereof, be canceled and will only entitle the holder of such Company restricted stock unit to receive (without interest), an amount in cash equal to the number of shares subject to such Company restricted stock unit multiplied by the per share merger consideration, less any tax withholdings.

Performance Stock Units. At the effective time of the merger, any vesting conditions applicable to each outstanding Company performance stock unit, will, automatically and without any required action on the part of the holder thereof, accelerate only with respect to the number of shares determined in accordance with the terms and conditions set forth in the award agreement evidencing each such Company performance stock unit, and each Company performance stock unit will, automatically and without any required action on the part of the holder thereof, be canceled and will only entitle the holder of such Company performance stock unit to receive (without interest), an amount in cash equal to the number of vested shares subject to such Company performance stock unit immediately following the accelerated vesting described above multiplied by the per share merger consideration, less any tax withholdings.

Deferred Stock Units. At the effective time of the merger, any vesting conditions applicable to each outstanding Company deferred stock unit under the Company stock plan or the Company’s Deferral Election Program for Non-Employee Board Members will, automatically and without any required action on the part of the holder thereof, accelerate in full, and each Company deferred stock unit will, automatically and without any required action on the part of the holder thereof, be canceled and will only entitle the holder of such Company deferred stock unit to receive (without interest), an amount in cash equal to the number of shares subject to such Company deferred stock unit multiplied by the per share merger consideration, less any tax withholdings.

The following table sets forth for (i) each individual named executive officer, (ii) the three other executive officers (as a group) and (iii) the nine non-employee directors (as a group), the number of unvested Company stock options, unvested Company restricted stock units and unvested Company deferred stock units outstanding as of March 4, 2016 and the cash amounts payable (on a pre-tax basis) in respect of such Company equity awards at the effective time of the merger. None of our executive officers or directors held any unvested Company performance stock units as of the filing of this proxy. Depending on when the merger occurs, certain equity awards that are now unvested and included in the table below may vest pursuant to the terms of the equity awards based on the completion of continued service with the Company, independent of the merger. Neither Brian L. Swartz, our former Senior Vice President and Chief Financial Officer nor Joseph L. D’Amico, who most recently

 

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served as our Interim Chief Financial Officer have any outstanding equity awards in the Company as of March 4, 2016 and accordingly, have been excluded from the below table.

 

    Unvested
Company
Stock
Options

(#)
    Unvested
Company
Stock
Options

($)
    Unvested
Company
Restricted
Stock Units
(#)
    Unvested
Company
Restricted
Stock Units
($)
    Unvested
Company
Deferred
Stock Units
(#)
    Unvested
Company
Deferred
Stock Units
($)
    Estimated Total
Cash
Consideration
for Unvested
Company
Equity Awards

($)
 

Gregory W. Cappelli

    880,043        —          328,905      $ 3,124,598        —          —        $ 3,124,598   

Gregory J. Iverson

    18,526        —          180,878      $ 1,718,341        —          —        $ 1,718,341   

J. Mitchell Bowling

    236,564        —          191,623      $ 1,820,419        —          —        $ 1,820,419   

Sean B. Martin

    205,040        —          445,990      $ 4,236,905        —          —        $ 4,236,905   

Timothy P. Slottow

    55,488        —          75,438      $ 716,661        —          —        $ 716,661   

Other Executive Officers (as a group)(1)

    146,381        —          99,951      $ 949,535        91,060      $ 865,070      $ 1,814,605   

Non-Employee Directors (as a group)(2)

    —          —          77,358      $ 734,901        38,679      $ 367,451      $ 1,102,352   

 

(1) Includes equity holdings of the following non-employee directors of the Company: Terri C. Bishop, Frederick H. Newton and Peter V. Sperling.
(2) Includes equity holdings of the following non-employee directors of the Company: Dr. Dana H. Born, Matthew Carter, Richard H. Dozer, Dr. Roy A. Herberger, Dr. Ann Kirschner, Robert S. Murley, Manuel F. Rivelo, Darby E. Shupp and Allen R. Weiss.

Employment Agreement with Gregory W. Cappelli

Pursuant to his amended and restated employment agreement with the Company, Mr. Cappelli will be entitled to the severance payments and benefits set forth below if he terminates his employment for any reason within the thirty (30) day period beginning on the six (6) month anniversary of the closing of the merger, or is terminated by the Company without “cause” or resigns for “good reason” (as each such term is defined in the employment agreement).

 

    Cash severance equal to 200% of the sum of (i) annual base salary and (ii) the average of the annual bonus Mr. Cappelli earned for the three fiscal years preceding the fiscal year of his termination, paid in the form of salary continuation over the twelve (12) months following his termination; and

 

    A lump sum payment equal to eighteen (18) multiplied by the monthly COBRA premium for continued health care coverage under the Company’s group health plans, based on the level of coverage in effect on the date of termination for Mr. Cappelli and his spouse and dependents, as applicable.

In addition to the cash severance and payment in respect of COBRA health care coverage costs, upon experiencing a qualifying termination of employment Mr. Cappelli would be eligible to receive outplacement assistance, pursuant to the Company’s historical practice of providing such benefits to similarly situated executive employees.

Mr. Cappelli is required to execute an effective and enforceable general release of all claims against the Company as a condition to receiving the payments and benefits outlined above, and must also comply with non-competition and non-solicitation restrictions for a period of one (1) year following his termination. Based upon the Mr. Cappelli’s compensation levels as of the date of this proxy statement and assuming that the merger closed on March 4, 2016 and Mr. Cappelli experienced a qualifying termination in connection therewith, he would receive a cash severance payment of $3,423,400, along with the payment of $38,757 in respect of COBRA health care coverage costs and outplacement assistance (assuming that outplacement assistance services are provided at the expense of the Company for a period of six (6) months following the qualifying termination).

 

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The compensation and benefits payable to Mr. Cappelli under his employment agreement upon a qualifying termination are not subject to any change in control or other transaction-related enhancements. Accordingly, the closing of the merger will have no impact on the severance entitlements listed above.

Senior Executive Severance Pay Plan

Under the Company’s Senior Executive Severance Pay Plan, which we refer to as the Severance Plan, each of Messrs. Iverson, Bowling, Martin and Slottow, as well as our other executive officers, Ms. Bishop, Mr. Newton and Mr. Sperling will be entitled to the severance payments and benefits set forth below if terminated by the Company without “cause” (as such term is defined in the Severance Plan).

 

    Cash severance equal to the sum of (i) 150% (200% for Mr. Sperling) annual base salary and (ii) the average of the executive’s annual bonus earned for the three fiscal years preceding the fiscal year of his termination, paid in the form of salary continuation over the eighteen (18) months (24 months for Mr. Sperling), following the executive’s termination (which we refer to as the salary continuation period);

 

    A lump sum payment equal to the number of months in the salary continuation period multiplied by the difference in the monthly COBRA premium for continued coverage under the Company’s group health plans and active employee rates, based on the level of coverage in effect on the date of termination for the executive and the executive’s spouse and dependents, as applicable; and

 

    Outplacement assistance.

Under the Severance Plan, each of the executives is required to execute an effective and enforceable general release of all claims against the Company as a condition to receiving the payments and benefits thereunder, and must also comply with perpetual non-disparagement provisions and non-solicitation restrictions for the salary continuation period.

Pursuant to the offer letter entered into with Mr. Slottow in connection with his appointment as the President of University of Phoenix, in the event Mr. Slottow experiences a qualifying termination of employment prior to June 20, 2016, in addition to the severance benefits described above, Mr. Slottow will be entitled to receive six additional months of salary continuation payments, as well as payment in respect of 100% of the average of his annual bonus earned for the three fiscal years preceding the fiscal year of his termination.

Based upon the executives’ compensation levels as of the date of this proxy statement and assuming that the merger closed on March 4, 2016 and the executives experienced a qualifying termination in connection therewith, the amount of cash severance that would be payable, along with the payment in respect of COBRA health care coverage costs and the estimated value of outplacement assistance (assuming that outplacement assistance services are provided at the expense of the Company for a period of six months following the qualifying termination) are as follows: Mr. Iverson, $886,825 (plus $18,920 in respect of COBRA and outplacement assistance); Mr. Bowling, $1,162,405 (plus $23,053 in respect of COBRA and outplacement assistance); Mr. Martin, $1,198,395 (plus $27,331) in respect of COBRA and outplacement assistance); Mr. Slottow, $1,360,000 (plus $18,964 in respect of COBRA and outplacement assistance) and the three other executive officers (as a group) $4,228,928 (plus $42,726 in respect of COBRA and outplacement assistance).

The compensation and benefits payable to the executives under the Company’s Severance Plan upon a qualifying termination are not subject to any change in control or other transaction-related enhancements. Accordingly, the closing of the merger will have no impact on the executive officers’ severance entitlements listed above.

 

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Cash Long-Term Incentive Awards

Each of Messrs. Slottow and Newton hold cash-based long-term incentive awards previously granted by the Company, the unvested portion of which will become payable in a lump sum upon the effective time of the merger, subject to the executive’s delivery of an effective and enforceable general release of all claims against the Company. Assuming the effective time of the merger occurs on March 4, 2016, Mr. Slottow will receive lump sum payments of $168,750 and $275,000, representing the unvested portion of the long-term incentive awards granted to him in August 2014 and August 2015, respectively. Assuming the effective time of the merger occurs on March 4, 2016, Mr. Newton will receive a lump sum payment of $400,000 representing the unvested portion of his outstanding long-term incentive award.

Cash Retention Awards

Each of Messrs. Cappelli, Iverson, Bowling, Martin and Slottow hold cash-based long-term incentive awards previously granted by the Company, the unvested portion of which will become fully vested (at which time applicable repayment obligations will lapse) in the event the executive experiences a qualifying termination of employment. Assuming the effective time of the merger occurs on March 4, 2016, the executive experiences a qualifying termination of employment in connection therewith, and the executive delivers an effective and enforceable general release of all claims against the Company, the amount of the cash retention awards in which the executives will vest (and for which the repayment obligations will lapse) are as follows: Mr. Cappelli, $750,000; Mr. Iverson, $80,000; Mr. Bowling, $275,000; Mr. Martin, $210,000 and Mr. Slottow, $175,000.

Executive Deferred Compensation Program

All amounts previously deferred by our executive officers under the Company’s Executive Deferred Compensation Program will become payable upon the effective time of the merger. Messrs. Iverson, Slottow and Sperling are currently the only executive officers with deferrals under such program and upon the effective time of the merger, will receive payments of in $2,930,738 in the aggregate. Messrs. Iverson, Slottow and Sperling are each fully vested in their deferral balances under the Executive Deferral Compensation Program.

Funding of Non-Employee Director Deferral Election Program

Pursuant to the terms of the Amended and Restated Rabbi Trust Agreement for the Company’s Non-Employee Director Deferral Election Program, the Company is required to, as soon as possible, but no later than thirty (30) days following the effective time of the merger, make an irrevocable contribution to the trust in an amount no less than 100% but no more than 110% of the amount necessary to pay each participant or beneficiary the benefits to which he or she would be entitled as of the occurrence of the effective time of the merger.

Other Employee-Related Interests

In addition to the other rights and interests in the merger described in this section, the Company’s executive officers would receive the same benefits and would be covered by the same protections under the merger agreement as other employees of the Company. See the section entitled “The Merger Agreement—Employee Benefits Matters” beginning on page [●] for a description of the benefits to be provided to Company employees pursuant to the merger agreement.

Indemnification and Insurance

Director and Officer Liability

From and after the effective time of the merger, Parent and the surviving corporation will indemnify and hold harmless (including through the advancement of expenses as incurred) our and our subsidiaries’ present and former directors and officers against liabilities (including reasonable attorneys’ fees) incurred in connection with

 

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any claim, action, suit, proceeding or investigation, arising out of or related to such director’s or officer’s service as a director or officer of the Company or its subsidiaries (or services performed at our or our subsidiaries’ request) at or prior to the effective time of the merger (including in connection with the merger and the other transactions contemplated by the merger agreement and actions to enforce such indemnification or advancement rights), in each case, as provided in our articles of incorporation in effect as of February 7, 2016, to the fullest extent permitted by law.

For not less than six (6) years from and after the effective time of the merger, Parent will cause the surviving corporation to maintain in effect the provisions in the Company’s articles of incorporation and by-laws that are in effect as of February 7, 2016 regarding elimination of liability of directors, indemnification of officers and directors and advancement of expenses that are no less advantageous to the intended beneficiaries than the corresponding provisions currently in existence.

For not less than six (6) years from and after the effective time of the merger, we will (and Parent will cause the surviving corporation to) maintain for the benefit of the directors and officers of the Company and its subsidiaries as of February 7, 2016 and as of the effective time of the merger a “tail” insurance and indemnification policy. Alternatively, at or prior to the closing of the merger, we may, or at Parent’s request will, obtain prepaid policies with respect to directors and officers liability insurance, which policies will provide directors and officers with such coverage for an aggregate period of at least six (6) years following the effective time of the merger. Any such policies, whether a “tail” policy or a prepaid policy, must be substantially equivalent to and in any event not less favorable in the aggregate than the existing policies of the Company and its subsidiaries, or, with respect to the “tail” policy, if substantially equivalent insurance coverage is not available, the best available coverage. The annual premium of any such policy is subject to a cap of 300% of the last annual premium paid prior to February 7, 2016. The present and former directors and officers of the Company will have the right to enforce the provisions of the merger agreement relating to their indemnification.

Company Shareholder Liability

From and after the effective time of the merger, Parent will cause the surviving corporation to indemnify and hold harmless (including through the advancement of expenses as incurred) our shareholders who have entered into the voting and support agreements against liabilities (including reasonable attorneys’ fees) incurred in connection with any claim, action, suit, proceeding or investigation to the extent relating to the adoption and approval of the merger, the voting and support agreements and the transactions contemplated by the merger agreement and the voting and support agreements and actions to enforce such indemnification or advancement rights.

For not less than six (6) years from and after the effective time of the merger, we will (and Parent will cause the surviving corporation to) maintain for the benefit of the Apollo Class B Voting Stock Trust No. 1 and its trustees a “tail” management liability insurance policy that provides coverage for events occurring prior to the effective time of the merger. Alternatively, at or prior to the closing of the merger, we may, or at Parent’s request will, obtain prepaid policies with respect to management liability insurance, which policies will provide the Apollo Class B Voting Stock Trust No. 1 and its trustees with such coverage for an aggregate period of at least six (6) years following the effective time of the merger. Any such policies, whether a “tail” policy or a prepaid policy, must be substantially equivalent to and in any event not less favorable in the aggregate than the existing policies of the Company and its subsidiaries, or, with respect to the “tail” policy, if substantially equivalent insurance coverage is not available, the best available coverage. The annual premium of any such policy is subject to a cap of 300% of the last annual premium paid prior to February 7, 2016.

Material U.S. Federal Income Tax Consequences of the Merger

The following is a summary of the material U.S. Federal income tax consequences of the merger to U.S. holders (as defined below) whose shares of our common stock are converted into the right to receive cash in the merger. This summary does not purport to consider all aspects of U.S. Federal income taxation that might be

 

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relevant to our shareholders. For purposes of this discussion, we use the term “U.S. holder” to mean a beneficial owner of shares of our common stock that is, for U.S. Federal income tax purposes:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation (or other entity taxable as a corporation for U.S. Federal income tax purposes) created or organized under the laws of the United States or any of its political subdivisions;

 

    a trust that (i) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or

 

    an estate that is subject to U.S. Federal income tax on its income regardless of its source.

If a partnership (including an entity treated as a partnership for U.S. Federal income tax purposes) holds our common stock, the U.S. Federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the partner and the tax treatment of the partnership. A partner of a partnership holding our common stock should consult the partner’s tax advisor regarding the U.S. Federal income tax consequences of the merger to such partner.

This discussion is based on the Internal Revenue Code of 1986, as amended, which we refer to as the Code, its legislative history, existing and proposed regulations under the Code, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. The discussion applies only to beneficial owners who hold shares of our common stock as capital assets, and does not apply to shares of our common stock received in connection with the exercise of employee stock options or otherwise as compensation, shareholders who hold an equity interest, actually or constructively, in Parent or the surviving corporation after the merger, or to certain types of beneficial owners who may be subject to special rules (such as insurance companies, banks, tax-exempt organizations, financial institutions, broker-dealers, partnerships, S corporations or other pass-through entities, mutual funds, traders in securities who elect the mark-to-market method of accounting, shareholders subject to the alternative minimum tax, shareholders that have a functional currency other than the U.S. dollar or shareholders who hold our common stock as part of a hedge, straddle, wash sale, constructive sale or conversion transaction). This discussion also does not address the U.S. tax consequences to any shareholder who, for U.S. Federal income tax purposes, is a non-resident alien individual, foreign corporation, foreign partnership or foreign estate or trust, and does not address the receipt of cash in connection with the treatment of restricted stock units, performance stock units, company awards or any other matters relating to equity compensation or benefit plans (including the plans). This discussion does not address any aspect of state, local or foreign tax laws.

Exchange of Shares of Common Stock for Cash Pursuant to the Merger Agreement

The exchange of shares of our common stock for cash in the merger will be a taxable transaction for U.S. Federal income tax purposes. In general, a U.S. holder whose shares of our common stock are converted into the right to receive cash in the merger will recognize capital gain or loss for U.S. Federal income tax purposes equal to the difference, if any, between the amount of cash received with respect to such shares (determined before the deduction of any applicable withholding taxes, as described below in the section titled “Backup Withholding and Information Reporting”) and the U.S. holder’s adjusted tax basis in such shares. A U.S. holder’s adjusted tax basis will generally equal the price the U.S. holder paid for such shares. Gain or loss will be determined separately for each block of shares of our common stock (i.e., shares of common stock acquired at the same cost in a single transaction). Such capital gain or loss will be long-term capital gain or loss where the U.S. holder’s holding period for such shares of common stock is more than one (1) year at the effective time of the merger. Long-term capital gain of a non-corporate U.S. holder is generally taxed at preferential rates. There are limitations on the deductibility of capital losses. In addition, a 3.8% tax is imposed on all or a portion of the “net investment income” (within the meaning of the Code) of certain individuals and on the undistributed net investment income of certain estates and trusts. The 3.8% tax generally is imposed on the lesser of (1) the U.S.

 

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holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals is between $125,000 and $250,000, depending on the individual’s circumstances). For these purposes, “net investment income” generally will include any gain recognized on the receipt of cash for shares pursuant to the merger.

Backup Withholding and Information Reporting

A U.S. holder may be subject to information reporting. In addition, backup withholding of tax will apply at the statutory rate to cash payments to which a non-corporate U.S. holder is entitled under the merger agreement, unless the U.S. holder or other payee provides a taxpayer identification number, certifies that such number is correct, and otherwise complies with the backup withholding rules. Each of our U.S. holders should complete and sign, under penalty of perjury, the Substitute Form W-9 to be included as part of the letter of transmittal and return it to the paying agent, in order to provide the information and certification necessary to avoid backup withholding, unless an exemption applies and is established in a manner satisfactory to the paying agent.

Backup withholding is not an additional tax. Any amounts withheld from cash payments to a U.S. holder pursuant to the merger under the backup withholding rules will generally be allowable as a refund or a credit against such U.S. holder’s U.S. Federal income tax liability. U.S. holders are urged to consult their independent tax advisors as to qualifications for exemption from backup withholding and the procedure for obtaining the exemption.

The U.S. Federal income tax consequences described above are not intended to constitute a complete description of all tax consequences relating to the merger. Because individual circumstances may differ, each shareholder should consult the shareholder’s tax advisor regarding the applicability of the rules discussed above to the shareholder and the particular tax effects to the shareholder of the merger in light of such shareholder’s particular circumstances, the application of state, local and foreign tax laws, and, if applicable, the treatment of restricted stock units, performance stock units, company awards or any other matters relating to equity compensation or benefit plans (including the plans).

Regulatory Approvals

To complete the merger, the parties must make filings with and obtain authorizations, approvals or consents from antitrust authorities from various countries including South Africa, and such authorizations, approvals or consents must be in full force and effect.

As the Company and Parent have determined that no filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which we refer to as the HSR Act, is required in connection with the merger, the Company, Parent and Merger Sub have entered into a consent and waiver agreement pursuant to which the parties have consented to the waiver of any covenants and conditions set forth in the merger agreement to the extent related to any filings or the termination or expiration of the waiting period under the HSR Act.

Education Regulatory

The Company, Parent and Merger Sub have made certain filings and taken other actions, and will continue to make filings and take actions, necessary to obtain approvals from all appropriate government and educational authorities in connection with the merger.

Regulatory approvals from a number of accrediting agencies and state educational agencies that currently approve or accredit the schools owned by the Company and their educational programs are required to complete the merger, including approval from the Higher Learning Commission, which is the institutional accreditor for the University of Phoenix, Western International University, and the College for Financial Planning. Additionally, completion of the merger requires certain pre-closing educational consents from the applicable

 

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agencies in the United Kingdom, Australia and Germany. The Company has begun the process of notifying agencies and obtaining approvals and is continuing to take actions to obtain the required regulatory approvals prior to closing or, as appropriate, to confirm that approvals will not be required prior to closing.

The merger agreement requires that we submit pre-acquisition review applications to the U.S. Department of Education with respect to the University of Phoenix and Western International University no later than sixty (60) days prior to the closing date of the merger. To complete the merger, the Company must receive from the U.S. Department of Education written responses to its pre-acquisition review applications that do not contain any burdensome conditions, as defined in the merger agreement, with respect to the University of Phoenix, as defined in the merger agreement, and that meet other criteria (see “The Merger Agreement—Conditions to the Merger” beginning on page [●]).

There can be no assurance that all of the regulatory approvals described above, or any other regulatory approvals that might be required to consummate the merger, will be obtained and, if obtained, there can be no assurance as to the timing of any approvals, ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals. There can also be no assurance that the Department of Justice, the Federal Trade Commission or any other governmental entity or any private party (i) will not attempt to challenge the merger on antitrust grounds or (ii) will not seek to advocate for U.S. Department of Education conditions or restrictions with respect to the approval of the merger, or the denial of the merger, and, in each case, if any such challenge is made, there can be no assurance as to the result. For a description of the parties’ obligations with respect to regulatory approvals related to the merger, see “The Merger Agreement—Filings; Other Actions; Notification” beginning on page [●].

Litigation Relating to the Merger

In connection with the proposed merger, three class action lawsuits have been filed in the Superior Court of Maricopa County, Arizona against the Company, its directors, Parent and Merger Sub. The first such complaint was filed on February 25, 2016 (Casey v. Apollo Education Group, Inc., et al., Case No. CV2016-051605), the second such complaint was filed on February 26, 2016 (Miglio v. Apollo Education Group, Inc., et al., Case No. CV2016-003718) and the third such complaint was filed on February 29, 2016 (Blanchfield v. Apollo Education Group, Inc., et al., Case No. CV2016-001738). The complaints generally allege that the Company’s directors have violated their fiduciary duties by, among other things, failing to properly value the Company and failing to maximize the value of the Company to its public shareholders as well as by including purportedly preclusive deal protections in the merger agreement, and that the Company, Parent and Merger Sub aided and abetted such alleged breaches of fiduciary duties. 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. The action titled Blanchfield v. Apollo Education Group, Inc., et al. was voluntarily dismissed without prejudice on March 4, 2016.

In addition, a demand letter was received from a shareholder on March 1, 2016, which generally includes the same allegations and which demands that the Company’s directors remedy the alleged breaches of their fiduciary duties and, if not, states that the shareholder intends to file an action seeking relief.

All defendants deny any wrongdoing in connection with the proposed merger and plan to vigorously defend against all pending and any forthcoming claims.

Amendment to the Shareholder Agreement and Termination

In order to facilitate the consummation of the merger and the other transactions contemplated by the merger agreement, concurrently with the execution and delivery of the merger agreement, the Company entered into an amendment to the Shareholder Agreement dated as of September 7, 1994, as amended, which we refer to as the Shareholder Agreement, and the amendment to which we refer to as the Shareholder Agreement Amendment,

 

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with the holders of Class B common stock. Prior to the Shareholder Agreement Amendment, the Shareholder Agreement included provisions that would restrict the ability of the holders of Class B common stock to dispose of shares of Class B common stock as required for the consummation of the merger and the transactions contemplated by the merger agreement. Pursuant to the Shareholder Agreement Amendment, the parties to the Shareholder Agreement amended the Shareholder Agreement such that (i) neither the execution of the merger agreement, the merger nor any of the other transactions contemplated by the merger agreement, will constitute a sale, transfer or disposition of shares of Class B common stock restricted by the Shareholder Agreement, and (ii) the Shareholder Agreement will not have any effect on the execution of the merger agreement, the merger or any of the other transactions contemplated by the merger agreement. The Shareholder Agreement Amendment also provides that the Shareholder Agreement will terminate as of the effective time of the merger. The Shareholder Agreement Amendment will be void, and the Shareholder Agreement will remain in full force and effect, if the merger agreement is terminated in accordance with the termination provisions thereof, or if the merger fails to close for any reason.

 

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THE MERGER AGREEMENT

This section describes the material terms of the merger agreement. The description of the merger agreement in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the merger agreement, a copy of which is attached as Annex A and is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the merger agreement that is important to you. We encourage you to read the merger agreement carefully and in its entirety.

Explanatory Note Regarding the Merger Agreement

The merger agreement and this summary of its terms are included to provide you with information regarding its terms. Factual disclosures about the Company, contained in this proxy statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the merger agreement. The representations, warranties and covenants made in the merger agreement by the Company, Parent and Merger Sub were made solely to the parties to, and solely for the purposes of, the merger agreement and as of specific dates and were qualified and subject to important limitations agreed to by the Company, Parent and Merger Sub in connection with negotiating the terms of the merger agreement. In particular, in your review of the representations and warranties contained in the merger agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the merger agreement may have the right not to consummate the merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the merger agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to shareholders and reports and documents filed with the SEC and in some cases were qualified by the matters contained in the disclosure letter that the Company delivered in connection with the merger agreement, which disclosures were not reflected in the merger agreement. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the merger agreement. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts of the Company, Parent, Merger Sub or any of their respective subsidiaries or affiliates.

Effects of the Merger; Directors and Officers; Articles of Incorporation; By-laws

The merger agreement provides for the merger of Merger Sub with and into the Company upon the terms, and subject to the conditions, set forth in the merger agreement, and upon which the separate corporate existence of Merger Sub will cease. As the surviving corporation, the Company will continue to exist following the merger. Subject to amendments to the Company’s articles of incorporation and by-laws, the separate corporate existence of the Company, with all of its rights, privileges, immunities, powers and franchises, will continue unaffected by the merger. As a result of the merger, the surviving corporation will be a wholly owned direct or indirect subsidiary of Parent. The merger will have the effects specified in the Arizona Business Corporation Act, which we refer to as the ABCA.

The members of the board of directors of Merger Sub immediately prior to the effective time of the merger will, from and after the effective time of the merger, be the directors of the surviving corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the charter and the by-laws of the surviving corporation. The officers of the Company immediately prior to the effective time of the merger will, from and after the effective time of the merger, be the officers of the surviving corporation until their successors have been duly appointed or until their earlier death, resignation or removal in accordance with the charter and the by-laws of the surviving corporation.

 

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At the effective time of the merger, the articles of incorporation of the Company will be amended and restated to read as set forth in Exhibit A to the merger agreement, until changed or amended in accordance with its terms or by applicable law. The by-laws of the Merger Sub, in effect immediately prior to the effective time of the merger, as set forth in Exhibit B to the merger agreement, will be the by-laws of the surviving corporation, until changed or amended as provided therein or by applicable law.

Following the completion of the merger, our Class A common stock will be delisted from the NASDAQ, deregistered under the Exchange Act and cease to be publicly traded.

Closing and Effective Time of the Merger

The closing of the merger will occur at 9:00 a.m. Eastern time on the third (3rd) business day after the satisfaction or waiver of the last to occur of the conditions set forth in the merger agreement (other than those conditions that by their nature are to be satisfied at the closing), or on such other date as the Company and Parent may agree. If the last of such closing conditions is satisfied or waived on a date after the tenth day of a month, Parent may elect to delay closing to any date on or prior to the first (1st) business day of the subsequent month.

The merger will become effective at the time when the statement of merger (along with the Company’s Second Amended and Restated Articles of Incorporation) has been duly delivered to the Arizona Corporation Commission for filing in accordance with the relevant provisions of the ABCA, or at such later date and time as may be agreed by Parent and the Company in writing and specified in the statement of merger. Assuming timely satisfaction or waiver of the necessary closing conditions, we anticipate that the merger will be completed by the end of calendar year 2016.

Treatment of Common Stock and Stock-Based Awards

Common Stock

At the effective time of the merger, each share of our Class A common stock and Class B common stock, which we refer to collectively as our common stock or our shares, issued and outstanding immediately prior to the effective time of the merger (other than shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent and Shares owned by the Company or any direct or indirect wholly owned subsidiary of the Company, in each case not held on behalf of third parties, which we refer to as an excluded share and collectively, excluded shares) will be converted into the right to receive cash in an amount in cash equal to $9.50, which we refer to as the per share merger consideration, without interest and less any applicable withholding taxes. At the effective time of the merger, these shares will be canceled and will cease to exist, each excluded share will also be canceled and will cease to exist, and no consideration will be payable for such excluded shares.

Company Stock Options

At the effective time of the merger, each outstanding Company stock option, whether vested or unvested, will, automatically and without any action on the part of the holder thereof, be canceled and will only entitle the holder of such Company stock option to receive (without interest), no later than three (3) business days after the effective time of the merger, an amount in cash equal to the product of the total number of shares subject to such Company stock option, multiplied by the excess, if any, of the per share merger consideration over the exercise price of such Company stock option, less any tax withholdings. For the avoidance of doubt, any Company stock option which has an exercise price per share that is greater than or equal to the per share merger consideration will be canceled at the effective time of the merger for no consideration or payment.

 

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Company Restricted Stock Units

At the effective time of the merger, any vesting conditions applicable to each outstanding Company restricted stock unit, will, automatically and without any required action on the part of the holder thereof, accelerate in full, and each Company restricted stock unit will, automatically and without any required action on the part of the holder thereof, be canceled and will only entitle the holder of such Company restricted stock unit to receive (without interest), no later than three (3) business days after the effective time of the merger, an amount in cash equal to the number of shares subject to such Company restricted stock unit multiplied by the per share merger consideration, less any tax withholdings; provided, that, with respect to any Company restricted stock units that constitute non-qualified deferred compensation subject to Section 409A of the Code and that are not permitted to be paid at the effective time of the merger without triggering a tax or penalty under Section 409A of the Code, such payment will be made at the earliest time permitted under the Company stock plan and applicable award agreement that will not trigger a tax or penalty under Section 409A of the Code.

Company Performance Stock Units

At the effective time of the merger, any vesting conditions applicable to each outstanding Company performance stock unit, whether vested or unvested, will, automatically and without any required action on the part of the holder thereof, accelerate only with respect to the number of shares determined in accordance with the terms and conditions set forth in the award agreement evidencing each such Company performance stock unit, and each Company performance stock unit will, automatically and without any required action on the part of the holder thereof, be canceled and will only entitle the holder of such Company performance stock unit to receive (without interest), no later than three (3) business days after the effective time of the merger, an amount in cash equal to the number of vested shares subject to such Company performance stock unit immediately following the accelerated vesting described above multiplied by the per share merger consideration, less any tax withholdings; provided, that, with respect to any Company performance stock units that constitute non-qualified deferred compensation subject to Section 409A of the Code and that are not permitted to be paid at the effective time of the merger without triggering a tax or penalty under Section 409A of the Code, such payment will be made at the earliest time permitted under the Company stock plan and applicable award agreement that will not trigger a tax or penalty under Section 409A of the Code.

Company Deferred Stock Units

At the effective time of the merger, any vesting conditions applicable to each outstanding Company deferred stock unit, will, automatically and without any required action on the part of the holder thereof, accelerate in full, and each Company deferred stock unit will, automatically and without any required action on the part of the holder thereof, be canceled and will only entitle the holder of such Company deferred stock unit to receive (without interest), no later than three (3) business days after the effective time of the merger, an amount in cash equal to the number of shares subject to such Company deferred stock unit multiplied by the per share merger consideration, less any tax withholdings; provided, that, with respect to any Company deferred stock units that constitute non-qualified deferred compensation subject to Section 409A of the Code and that are not permitted to be paid at the effective time of the merger without triggering a tax or penalty under Section 409A of the Code, such payment will be made at the earliest time permitted under the Company stock plan and applicable award agreement that will not trigger a tax or penalty under Section 409A of the Code.

Exchange and Payment Procedures

Prior to the effective time of the merger, Parent will deposit, or will cause to be deposited, with the paying agent cash in immediately available funds in the amount necessary to make payment of the aggregate per share merger consideration to the holders of common stock (other than with respect to excluded shares).

Promptly, and in any event within three (3) business days, after the date of the effective time of the merger, each record holder of shares of our common stock (other than holders who solely hold excluded shares) will be

 

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sent a letter of transmittal and instructions describing how such record holder may surrender his, her or its shares of our common stock (or affidavits of loss in lieu thereof) in exchange for the applicable amount of per share merger consideration (less any tax withholdings).

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

Any holder of book-entry shares will not be required to deliver a certificate or an executed letter of transmittal to the paying agent to receive the per share merger consideration that such holder is entitled to receive as a result of the merger. In lieu thereof, each holder of record of one or more book-entry shares will upon receipt by the paying agent of an “agent’s message” in customary form or such other evidence, if any, as the paying agent may reasonably request, be entitled to receive in exchange for such book-entry shares, a cash amount in immediately available funds equal to the applicable amount of per share merger consideration (less any tax withholdings), and the book-entry shares surrendered will forthwith be canceled.

If you are a record holder of certificated shares of our common stock, you will not be entitled to receive the per share merger consideration until you deliver a letter of transmittal that is duly executed and in proper form to the paying agent, and you must also surrender your stock certificate or certificates (or affidavits of loss in lieu thereof) to the paying agent. In the event of a transfer of ownership of shares of our common stock that is not registered in the transfer records of the Company, payment may be made to a transferee if the certificate formerly representing such shares is presented to the paying agent, accompanied by all documents reasonably required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

No interest will be paid or accrued on the cash payable as the per share merger consideration upon your surrender of your book-entry shares or certificates.

Parent, the surviving corporation and the paying agent will be entitled to deduct and withhold any applicable taxes from the per share merger consideration. Any sum that is withheld will be deemed to have been paid to the holder of shares with regard to whom it is withheld.

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the per share merger consideration, you will have to make an affidavit of the loss, theft or destruction, and, if required by Parent, post a bond in such customary amount and upon such terms as may be reasonably required by Parent as indemnity against any claim that may be made against it, Merger Sub or the surviving corporation with respect to such lost, stolen or destroyed certificate. These procedures will be described in the letter of transmittal and instructions that you will receive, which you should read carefully and in their entirety.

From and after the effective time of the merger, there will be no transfers on the stock transfer books of the Company of the shares of our common stock that were outstanding immediately prior to the effective time of the merger. If, after the effective time of the merger, any certificate is presented to the surviving corporation, Parent or the paying agent for transfer, it will be canceled and exchanged for the cash amount in immediately available funds to which the holder of the certificate is entitled pursuant to the merger agreement.

Any portion of the per share merger consideration deposited with the paying agent that remains unclaimed by our shareholders for one (1) year after the effective time of the merger will be delivered to the surviving corporation. Holders of our common stock (other than excluded shares) who have not complied with the above-described exchange and payment procedures may thereafter only look to the surviving corporation for payment of the per share merger consideration (less tax withholding) upon due surrender of its certificates (or affidavits of loss in lieu thereof) or book-entry shares, without any interest thereon.

 

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None of Parent, the surviving corporation, the paying agent or any other person will be liable to any former holder of shares of our common stock for any amount properly delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

Representations and Warranties

Representations and Warranties of the Company

We made customary representations and warranties in the merger agreement that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement, in the disclosure letter that the Company delivered in connection with the merger agreement, or in certain reports filed with the SEC. These representations and warranties relate to, among other things:

 

    due organization, existence and good standing and authority to carry on our business;

 

    our capitalization;

 

    the absence of encumbrances on our ownership of the equity interests of our subsidiaries;

 

    the absence of any preemptive or other outstanding rights, options, warrants, conversion rights, stock appreciation rights, phantom equity, profit participation rights, redemption rights, rights of first offer, rights of first refusal, repurchase rights, agreements, arrangements, calls, commitments or rights of any kind that obligate us or any of our subsidiaries to issue or sell any shares of the capital stock or other securities of the Company or any of our subsidiaries or any securities or obligations convertible into or exchangeable for securities of the Company or any of our subsidiaries;

 

    the absence of any bonds, debentures, notes or other obligations the holders of which have the right to vote with our shareholders on any matter;

 

    the absence of any contracts to which the Company or any of its subsidiaries is a party, relating to the voting or registration of, or restricting any person from purchasing, selling, pledging or otherwise disposing of (or from granting any option or similar right with respect to), any shares of the Company;

 

    the absence of certain obligations of the Company or any subsidiary to repurchase, redeem or otherwise acquire any outstanding shares or other securities or to declare, make or pay any dividends or distributions;

 

    the absence of certain obligations of the Company or any subsidiary to provide funds to, or make any investment in, any person;

 

    our joint ventures and detailed information relating thereto;

 

    our corporate power and authority to enter into, and consummate the transactions under, the merger agreement, and the enforceability of the merger agreement against us;

 

    the declaration of advisability of the merger agreement and the merger by the Company’s board of directors, which we refer to as the board of directors, and the approval of the merger agreement and the merger by the board of directors;

 

    the receipt of a fairness opinion from Barclays Capital Inc.;

 

    the receipt of a fairness opinion from Evercore Group L.L.C.;

 

    required governmental consents, approvals, notices and filings;

 

    the absence of violations of or conflicts with or that result in a default under the Company’s articles of incorporation, the Company’s by-laws, any resolution adopted by our shareholders or the board of directors, certain agreements, applicable law or governmental orders as a result of our entering into and performing under the merger agreement or the consummation of the merger and the transactions;

 

    our SEC filings since August 31, 2012 and the financial statements included therein;

 

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    compliance with the applicable listing and corporate governance rules and regulations of the NASDAQ and applicable provisions of the Sarbanes-Oxley Act of 2002;

 

    our disclosure controls and procedures and internal controls over financial reporting;

 

    the absence of a Company material adverse effect (as described below) since August 31, 2015;

 

    the conduct of business in the ordinary course since August 31, 2015;

 

    the absence of legal proceedings, investigations and governmental orders against us or our subsidiaries;

 

    the absence of settlements to which the Company or our subsidiaries are party or any of their assets or properties are bound;

 

    the absence of certain undisclosed liabilities;

 

    employee benefit plans;

 

    certain labor matters;

 

    compliance with applicable laws and licenses;

 

    compliance with anti-corruption and anti-money laundering laws;

 

    compliance with sanctions laws;

 

    material contracts and the absence of any default under any material contract;

 

    the absence of undisclosed affiliate arrangements required to be described under Item 404 of Regulation S-K under the Securities Act;

 

    real property;

 

    personal property and assets;

 

    the inapplicability of any anti-takeover law, anti-takeover provision in the Company’s articles of incorporation or by-laws or shareholder rights plan to the merger;

 

    environmental matters;

 

    tax matters;

 

    intellectual property;

 

    insurance policies;

 

    the absence of any undisclosed broker’s or finder’s fees;

 

    education regulatory matters; and

 

    privacy and data protection matters.

Material Adverse Effect

Many of our representations and warranties are qualified by, among other things, exceptions relating to the absence of a “material adverse effect”, which means any change, event or occurrence that, individually or in the aggregate, has a material adverse effect on the business, financial condition, assets, liabilities or results of operations of the Company and its subsidiaries, taken as a whole; provided that, none of the following, and no change, event or occurrence arising out of, resulting from or attributable to any of the following, will be taken into account in determining whether a “material adverse effect” has occurred or would reasonably be expected to occur:

 

    changes, events or occurrences arising out of, resulting from or attributable to:

 

   

subject to certain exceptions, the execution, delivery and performance of the merger agreement, the public announcement or pendency of the merger or any of the other transactions contemplated

 

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by the merger agreement and the voting and support agreements, including as a result of the identity of Parent, any of its co-investors, or any of its or their affiliates, in each case, including the effect thereof on the relationships of the Company or any of its subsidiaries with employees, contractors, students, suppliers, business partners, governmental entities and educational agencies;

 

    subject to certain exceptions, any actions taken at the written request of Parent in accordance with the terms, or in connection with the execution, delivery and performance, of the merger agreement;

 

    any litigation, action, suit, claim, charge, complaint, inquiry, investigation, examination, hearing, petition, arbitration, mediation or other proceeding, whether civil, criminal, administrative, investigative or otherwise and whether formal or informal, in law or in equity, relating to, arising from or in connection with, allegations of any breach of fiduciary duty relating to the approval by the board of directors of the merger or the transactions;

 

    any determination that more than 88% of the University of Phoenix’s revenues has been derived from Title IV Program funds for the stub period (or any reasonable expectation of such a determination); or

 

    any notification from any U.S. Federal education agency that it has found that the University of Phoenix failed to comply with the prohibitions in the Higher Education Act of 1965 or the University of Phoenix’s program participation agreement on the payment of any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or the award of financial aid to any persons responsible for or engaged in any student recruiting or admissions activity or the award of Title IV Program funds; or

 

    if the following changes, events or occurrences do not have a disproportionately adverse effect on the Company and its subsidiaries relative to other participants of similar size in the industries or geographic locations in which the Company and its subsidiaries operate:

 

    the general business or economic conditions in the United States or any foreign jurisdiction or any changes therein;

 

    the business or economic conditions generally affecting the post-secondary or proprietary education industry;

 

    any legal, regulatory, legislative, administrative or political conditions, or any changes or proposed changes in laws, or the interpretation, application or enforcement thereof;

 

    conditions affecting the securities, credit, financial or other capital markets generally, in each case, in the United States or any foreign jurisdiction in which the Company or any of its subsidiaries conducts business;

 

    changes in generally accepted accounting principles or any authoritative interpretation thereof; or

 

    any geopolitical conditions, the outbreak or escalation of hostilities, any acts of war, sabotage, terrorism or military actions, or any escalation or worsening of any such hostilities, acts of war, sabotage, terrorism or military actions threatened or underway, or epidemics, pandemics, earthquakes, hurricanes, tornadoes or other natural disasters or calamities; or

 

    changes, events or occurrences arising out of, resulting from or attributable to:

 

    any change in the market price, trading volume or credit rating of any of the Company’s Class A common stock;

 

    any failure, in and of itself, by the Company or its subsidiaries to meet any internal or publicly available projections, forecasts, estimates or predictions; or

 

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    in and of itself, any change in (i) the amount of cash and marketable securities of the Company and its subsidiaries, on a consolidated basis, (ii) the Company’s and its subsidiaries’ adjusted EBITDA, (iii) the University of Phoenix’s total degreed enrollments or (iv) the University of Phoenix’s revenues.

The exceptions set forth in the three (3) immediately preceding bullet points will not prevent or otherwise affect a determination that the underlying cause of the change, event or occurrence has resulted in, or contributed to, a material adverse effect.

Representations and Warranties of Parent and Merger Sub

The merger agreement also contains customary representations and warranties made by Parent and Merger Sub that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement and in the disclosure letter that Parent and Merger Sub delivered to the Company in connection with the merger agreement. The representations and warranties of Parent and Merger Sub relate to, among other things:

 

    their due organization, existence, good standing and authority to carry on their businesses;

 

    their corporate or similar power and authority to enter into, perform their obligations under, and consummate the transactions under, the merger agreement, and the enforceability of the merger agreement against them;

 

    required governmental consents, approvals, notices and filings;

 

    the absence of violations of, or conflicts with, their governing documents, applicable law and certain agreements as a result of entering into and performing under the merger agreement or the consummation of the merger and the transactions;

 

    the absence of legal proceedings and investigations against Parent and Merger Sub;

 

    Parent and Merger Sub having sufficient funds for the merger and all other obligations under the merger agreement;

 

    the capitalization of Merger Sub;

 

    Parent, Merger Sub and their affiliates not being or having been during the prior three (3) years an “interested shareholder”, as defined by the ABCA, of the Company;

 

    acknowledgement as to the absence of any Company representations and warranties with respect to any estimates, projections, forecasts, forward-looking statements or business plans provided by the Company;

 

    the absence of any undisclosed broker’s or finder’s fees; and

 

    education regulatory matters.

The representations and warranties in the merger agreement of each of the Company, Parent and Merger Sub will not survive the consummation of the merger or the termination of the merger agreement pursuant to its terms.

Conduct of Our Businesses Pending the Merger

Under the merger agreement, we have agreed that, subject to certain exceptions in the merger agreement and the disclosure letter we delivered in connection with the merger agreement or as required by law, between the date of the merger agreement and the effective time of the merger, unless Parent gives its prior written approval (which cannot be unreasonably withheld, delayed or conditioned), we and our subsidiaries will use our commercially reasonable best efforts to cause our businesses to be conducted in the ordinary course and to

 

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preserve our business organizations intact and maintain existing relations with students, suppliers, creditors, lessors, employees and business associates.

Subject to applicable law, certain exceptions set forth in the merger agreement and the disclosure letter that we delivered in connection with the merger agreement, we will not, and we will not permit our subsidiaries to, take any of the following actions without Parent’s written approval (which cannot be unreasonably withheld, delayed or conditioned for certain of the following actions):

 

    make changes to organizational documents;

 

    acquire equity interests in any corporation, partnership or other business organization or, other than in the ordinary course of business, any assets from any other person;

 

    transfer, sell, lease, license, assign, mortgage, pledge, surrender, encumber, divest, cancel, abandon or allow to lapse or expire or otherwise dispose of any material property or assets with a value or purchase price in excess of $5,000,000 in the aggregate (with customary exceptions);

 

    issue, sell, transfer, or authorize such activities with respect to the capital stock or other securities of the Company or any of its subsidiaries (including any options, warrants or other equity awards) subject to customary exceptions with respect to equity awards;

 

    grant any liens outside the ordinary course of business, other than certain permitted liens, on any properties or assets with a value in excess of $5,000,000 in the aggregate;

 

    make, forgive or cancel any loans, advances, guarantees or capital contributions to or investments in any person, other than to or in a wholly owned subsidiary of the Company, in excess of $5,000,000 in the aggregate;

 

    make any changes to accounting policies or principles;

 

    declare, set aside, make or pay any dividend or other distribution;

 

    reclassify, split, combine, subdivide or amend the terms of, or redeem, purchase or otherwise acquire, any of the Company’s equity interests, except in accordance with company equity awards outstanding;

 

    adopt a plan of liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization involving the Company or any of its subsidiaries;

 

    incur any capital expenditures or any related liabilities, except those budgeted by the Company’s program of capital expenditures and unbudgeted capital expenditures that do not exceed $500,000 individually or $4,000,000 in the aggregate;

 

    create, assume, or otherwise become liable for, incur, prepay, refinance or modify in any material respect the terms of, any indebtedness for borrowed money in excess of $5,000,000;

 

    enter into, amend or modify any interested party transactions;

 

    enter into certain material contracts or leases, or terminate, materially amend or waive any material rights under, any material contract or lease;

 

    enter into any new line of business outside of the post-secondary or proprietary education industry;

 

    terminate or fail to maintain in full force and effect, replace or renew substantially the same material insurance policies (or equivalent levels of insurance coverage);

 

    settle or compromise any proceeding against the Company or any of its subsidiaries that (i) requires payments by the Company or any of its subsidiaries in excess of $5,000,000 in the aggregate; (ii) grants injunctive or equitable relief against the Company or any of its subsidiaries; or (iii) involves the admission of any wrongdoing by the Company or any of its subsidiaries, other than to the extent such settlements of proceedings are disclosed, reflected or reserved against in the Company reports;

 

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    except as required by written agreements existing on February 7, 2016, or as otherwise required by law: (i) grant or provide any severance or termination payments or benefits to any current or former director, officer, employee or independent contractor of the Company or any of its subsidiaries; (ii) increase the compensation or benefits payable to any current or former director, officer, employee or independent contractor of the Company or any of its subsidiaries (except for employees who are designated as Grade 16 and below, increases of no more than 2% in the ordinary course of business); (iii) establish, adopt, amend, renew, announce or terminate any Company benefit plan, except in the ordinary course of business; (iv) amend the terms of any outstanding Company equity awards; (v) take any action to accelerate the vesting or payment, or fund or in any other way secure the payment, of compensation or benefits, except as otherwise provided in the merger agreement; (vi) materially change any actuarial or other assumptions used to calculate funding obligations under any Company benefit plan; (vii) forgive or grant any loans to directors, officers or employees of the Company or any of its subsidiaries; (viii) hire any employee or independent contractor, other than in the ordinary course of business for certain pay grades; or (ix) adopt, enter into, amend or terminate any collective bargaining agreement or other similar arrangement relating to unions or other organized employees;

 

    take any action that would result in any of the conditions to the merger not being satisfied or that could reasonably be expected to prevent or materially impede the ability of the Company to consummate the merger and the transactions;

 

    fail to prepare and timely file all tax returns in a manner consistent with past practice;

 

    make or revoke any material election with regard to taxes or file any material amended tax returns, or make any change in any tax accounting methods;

 

    (i) fail to notify Parent of any proceeding pending or threatened in writing against or with respect to the Company or any of its subsidiaries in respect of any tax matter or proceeding involving a material amount of tax, (ii) fail to provide Parent with information reasonably requested by Parent regarding such proceeding or (iii) settle or compromise any such proceeding;

 

    fail to terminate all contracts relating to the sharing, allocation or indemnification of taxes between the Company or any of its subsidiaries and any of their respective former affiliates (excluding any commercial contract that may include tax allocation or sharing provisions, but the primary purpose of which is unrelated to taxes);

 

    fail to take commercially reasonable steps to protect data security and reasonably proceed with data security improvements that have been planned and approved as of the date of the merger agreement; or

 

    agree, authorize or commit to do any of the foregoing.

The merger agreement is not intended to give Parent or Merger Sub, directly or indirectly, the right to control or direct our or our subsidiaries’ operations prior to the effective time of the merger, or to give us, directly or indirectly, the right to control or direct Parent’s or its affiliates’ operations. Prior to the effective time of the merger, each of Parent and we will exercise, consistent with the terms and conditions of the merger agreement, control and supervision over our and our subsidiaries’ respective operations.

Solicitation of Acquisition Proposals; Board Recommendation Changes

Except as permitted by the terms of the merger agreement described below, we have agreed in the merger agreement that the board of directors and each committee of the board of directors will not:

 

    withhold, withdraw, change, qualify, amend or modify (or publicly propose or resolve to do so), in a manner adverse to Parent or Merger Sub, or otherwise make any public statement or proposal inconsistent with, the board of directors’ recommendation that the holders of shares of Class A common stock and the holders of shares of Class B common stock approve the merger agreement, which we refer to as the Company recommendation;

 

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    fail to include the Company recommendation in the proxy statement;

 

    approve, recommend, or otherwise declare advisable or propose to approve, recommend or declare advisable (publicly or otherwise) any acquisition proposal other than the merger;

 

    fail to issue a press release that reaffirms the Company recommendation within five (5) business days of a written request by Parent following the date that any acquisition proposal or any material modification to such acquisition proposal is first communicated to our shareholders;

 

    fail to recommend against any acquisition proposal in a tender offer solicitation/recommendation statement within ten (10) business days after the commencement of such acquisition proposal; or

 

    subject to certain exceptions described below, cause or permit the Company to enter into any alternative acquisition agreement relating to any acquisition proposal.

From and after the date of the merger agreement until the effective time of the merger or termination of the merger agreement, except as permitted by the terms of the merger agreement described below, neither the Company nor any of our subsidiaries nor any of the officers and directors of the Company or our subsidiaries may, and we will instruct our and our subsidiaries’ employees, advisors and representatives not to, directly or indirectly, or announce any public intention to:

 

    initiate, solicit or knowingly encourage any inquiry or the making of any proposal or offer that constitutes an acquisition proposal;

 

    engage in, continue, knowingly facilitate or otherwise participate in any discussions or negotiations regarding, or provide any non-public information or data to any person relating to, any acquisition proposal;

 

    grant any waiver, amendment or release under any standstill, confidentiality or similar agreement or takeover statute;

 

    otherwise knowingly facilitate any effort or attempt to make an acquisition proposal; or

 

    resolve, endorse, recommend, agree or propose to do any of the foregoing.

However, at any time prior to the time our shareholders adopt the merger agreement, if we have received an unsolicited bona fide written acquisition proposal that did not result from any breach of our obligations described here, we may:

 

    contact the person making the acquisition proposal to clarify the terms and conditions of such acquisition proposal; and

 

    (i) provide information in response to a request by the person making such acquisition proposal if such person has executed an acceptable confidentiality agreement, and the Company promptly discloses any such information to Parent to the extent not previously provided (provided, that if the person making such acquisition proposal is a competitor of the Company or any of our subsidiaries, we may not provide any competitively sensitive non-public information to such person other than in accordance with “clean team” or other similar procedures reasonably designed to limit any material adverse effect on the Company or any of our subsidiaries as a result of the sharing of such information); or (ii) engage in any discussions or negotiations with the person who has made such acquisition proposal, if, in each case, the board of directors or any committee of the board of directors (A) determines in good faith after consultation with outside legal counsel that failure to take such action, in light of the acquisition proposal and the terms of the merger agreement, would be inconsistent with the directors’ fiduciary duties under applicable law and (B) determines in good faith after consultation with its financial advisor and outside legal counsel that such acquisition proposal either constitutes a superior proposal or is reasonably likely to result in a superior proposal.

 

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At any time prior to the time our shareholders adopt the merger agreement, if we have complied with the requirements described above regarding solicitation of acquisition proposals and have received a bona fide written acquisition proposal that was made in compliance with the requirements described above, the board of directors may effect a change of recommendation or take action to terminate the merger agreement in order to enter into an alternative acquisition agreement with respect to a superior proposal if, but only if:

 

    the board of directors determines, in good faith after consultation with the Company’s financial advisors and outside legal counsel, that such acquisition proposal constitutes a superior proposal and that failure to make a change of recommendation with respect to such superior proposal or to terminate the merger agreement would be inconsistent with its fiduciary obligations under applicable law;

 

    we notify Parent in writing that the board of directors intends to effect a change of recommendation or authorize the Company to terminate the merger agreement to enter into an alternative acquisition agreement, as applicable, specifying the identity of the person making such superior proposal, the material terms and conditions of such superior proposal and attaching the most current version of such agreement to such notice, at least five (5) business days prior to the taking of such action;

 

    during the notice period, we and our representatives negotiate in good faith with Parent and its representatives (to the extent Parent wishes to negotiate) to make such adjustments to the terms and conditions of the merger agreement so that such acquisition proposal no longer constitutes a superior proposal; and

 

    Parent has not, prior to the expiration of the notice period, made a binding written offer that the board of directors or any committee of the board of directors determines, in good faith after consultation with its financial advisors and outside legal counsel, is at least as favorable, from a financial point of view, to our shareholders as the superior proposal.

In the event of any material revision, amendment, update or supplement to the terms and conditions of such superior proposal, we will deliver a new superior proposal notice to Parent in accordance with the requirements described above and comply again with the requirements summarized above except that the notice period will be two (2) business days instead of five (5). We may not terminate the merger agreement to accept a superior proposal during any notice period.

Nothing in the provisions of the merger agreement relating to acquisition proposals prohibits us or any of our subsidiaries, or our or any of our subsidiaries’ respective boards of directors or any committee thereof, from taking and disclosing to our and their shareholders a position contemplated by Rule 14e-2(a) or Rule 14d-9 under the Exchange Act or from making any other disclosure to our shareholders if, in the board of directors’ reasonable determination in good faith after consultation with outside legal counsel, the failure to so disclose would be inconsistent with its obligations under applicable law.

An “acquisition proposal” means: any proposal or offer with respect to (i) any merger, joint venture, partnership, consolidation, dissolution, liquidation, tender offer, recapitalization, reorganization, share exchange, business combination or similar transaction involving the Company or any of its subsidiaries, (ii) any direct or indirect acquisition, in a single transaction or series of related transactions, of the outstanding equity interests of the Company or any successor thereto or parent entity thereof, (iii) any sale, exchange, transfer or other disposition of any assets or businesses of the Company and its subsidiaries by any person or (iv) any other transaction having a similar effect to those described in clause (i), (ii) or (iii), in each case, which if consummated would result in, any person or group of persons becoming the beneficial owner of, directly or indirectly, in one or a series of related transactions, 15% or more of the total voting power of any class of equity securities of the Company entitled to vote on a plan of merger, or 15% or more of the consolidated total assets (including, without limitation, equity securities of its subsidiaries) of the Company, in each case, other than the merger and the transactions.

A “superior proposal” means: an unsolicited bona fide acquisition proposal that would result in any person or group of persons becoming the beneficial owner, directly or indirectly, of more than 80% of the assets (on a

 

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consolidated basis) or more than 80% of the total voting power of the equity securities of the Company entitled to vote on a plan of merger that the board of directors or any committee thereof has determined in its good-faith judgment is (i) reasonably likely to be consummated in accordance with its terms and (ii) if consummated, would result in a transaction more favorable to the Company’s shareholders from a financial point of view than the transaction contemplated by the merger agreement, in each case taking into account all legal, financial and regulatory aspects of the proposal and the person making the proposal.

Shareholders Meeting

We are required to take all reasonable action necessary to convene and hold a meeting of our holders of Class A common stock and Class B common stock as promptly as practicable after the execution of the merger agreement, to consider and vote upon the approval of the merger agreement. The shareholders meeting may consist of separate meetings of the holders of Class A common stock and the holders of Class B common stock held on the same date. We may postpone or adjourn the shareholders meeting solely (i) with the written consent of Parent, (ii) in the absence of a quorum, (iii) to allow the minimum amount of additional time reasonably practicable for the filing or mailing of any supplement or amendment to the proxy statement that the board of directors has determined in good faith (after consultation with outside counsel) is necessary under applicable law and for such supplement or amendment to be disseminated and reviewed by our shareholders prior to the shareholders meeting, (iv) for a single period not to exceed ten (10) business days, to solicit additional proxies for the adoption of the merger agreement if necessary to obtain the approval of the merger or (v) for a single period not to exceed five (5) business days, if we have provided notice to Parent and Merger Sub of our intention to terminate the merger agreement in respect of a superior proposal. Unless the board of directors has made a change of recommendation as specifically permitted by the merger agreement (described under “The Merger Agreement—Solicitation of Acquisition Proposals; Board Recommendation Changes” beginning on page [●]), the board of directors will recommend and continue to recommend the approval of the merger agreement, take all lawful action to solicit from our shareholders proxies and votes in favor of approval of the merger agreement, and use commercially reasonable efforts to take all other actions necessary or advisable to secure the approval of the merger. We have also agreed to promptly advise Parent, at such times as Parent may reasonably request, as to the aggregate tally of the proxies received by the Company in respect of the approval of the merger agreement.

Filings; Other Actions; Notification

We and Parent will cooperate with each other and use (and cause our respective subsidiaries to use) our respective reasonable best efforts to take or cause to be taken all actions, and do or cause to be done all things, reasonably necessary, proper or advisable to satisfy the conditions to closing described under “The Merger Agreement—Conditions to the Merger” beginning on page [●] and to consummate and make effective the merger and the other transactions contemplated by the merger agreement as soon as practicable, including preparing and filing as promptly as practicable all documentation to effect all necessary applications, notices, reports and other filings and to obtain as promptly as practicable all consents, registrations, approvals, permits and authorizations from any third party or any governmental entity or educational agency in order to consummate the merger or any of the transactions contemplated by the merger agreement.

Subject to applicable laws and the terms and conditions set forth in the merger agreement, we and Parent:

 

    have agreed to furnish the other, upon request, with all information concerning itself, its subsidiaries, directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with any statement, filing, notice or application made by or on behalf of Parent, the Company or any of their respective subsidiaries to any third party or any governmental entity or educational agency in connection with the merger and the transactions;

 

   

will each have the right to review in advance and, to the extent reasonably practicable, will each consult with the other on and consider in good faith the views of the other in connection with, any filing, registration, notification to be made with, or written materials to be submitted to or

 

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communications with, any third party or any governmental entity or educational agency in connection with the merger and the transactions, including with respect to the information relating to Parent or the Company, and any of their respective subsidiaries, that appears in any such filing, registration, notification, submission or communication;

 

    have agreed that neither the Company nor Parent may, and neither the Company nor Parent may permit any of their respective representatives to, participate in any meeting or discussion with any governmental entity or educational agency in respect of any filing, investigation or other inquiry relating to the merger or the transactions unless it consults with the other party in advance and, to the extent permitted by such governmental entity or educational agency, gives the other party the opportunity to attend and participate;

 

    have agreed that Parent and its subsidiaries and representatives will not make any filing with or submit any written materials to, or participate in any meeting or discussion with, any governmental entity or educational agency in connection with the merger and the transactions, in each case without the Company’s prior approval; and

 

    have agreed to keep the other apprised of the status of matters relating to completion of the merger and the transactions.

In addition, each of the Company and Parent agrees to take or cause to be taken the following actions:

 

    the filing, as promptly as practicable, of the notices, reports and other filings required to be made in order to obtain the consents, authorizations, orders, registrations, permits and approvals required in connection with the consummation of the merger from certain governmental entities;

 

    the prompt provision to each and every governmental antitrust entity of non-privileged information and documents requested by any government antitrust entity or that are necessary, proper or advisable to permit consummation of the merger and the transactions;

 

    the filing of a pre-acquisition review application in respect of each Title IV Company school no later than sixty (60) days prior to the closing date, to the extent that such filing has not been made in respect of a Title IV Company school prior to the date of the merger agreement;

 

    the filing, as promptly as practicable, and in any event by the date of the merger agreement, of a materially complete change of control application with the Higher Learning Commission in respect of the University of Phoenix, Western International University and the College for Financial Planning;

 

    the prompt use of its reasonable best efforts to obtain the pre-closing educational consents, and such efforts will include the prompt filing of all required applications, notices, reports and other filings;

 

    in the event that the closing does not occur on or prior to December 31, 2016 or within thirty (30) days after the approval of the merger and the transactions by the Higher Learning Commission, any filings or other actions reasonably necessary to obtain an extension of such approval as necessary to permit the closing to occur prior to the termination date;

 

   

the prompt use of its reasonable best efforts to avoid the entry of any permanent, preliminary or temporary injunction or other order, decree, decision, determination or judgment that would delay, restrain, prevent, enjoin or otherwise prohibit consummation of the merger or the transactions, including the defense through litigation on the merits of any claim asserted in any court, agency or other proceeding by any person or entity, including any governmental entity or educational agency, seeking to delay, restrain, prevent, enjoin or otherwise prohibit, or to impose conditions that would delay, restrain, prevent, enjoin or otherwise prohibit, consummation of the merger or the transactions and the proffer and agreement by Parent of its willingness to sell, lease, license or otherwise dispose of, or hold separate pending such disposition, and promptly to effect the sale, lease, license, disposal and holding separate of, such assets, rights, product lines, licenses, categories of assets or businesses or other operations, or interests, of the Company, Parent or any of their respective subsidiaries (and the

 

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entry into agreements with, and submission to orders of, the relevant government antitrust entity giving effect thereto) if such action should be reasonably necessary or advisable to avoid, prevent, eliminate or remove the actual, anticipated or threatened commencement of any proceeding in any forum or issuance of any order, decree, decision, determination, judgment that would delay, restrain, prevent, enjoin or otherwise prohibit consummation of the merger or the transactions by any government antitrust entity or educational agency; and

 

    in the event that any permanent, preliminary or temporary injunction, decision, order, judgment, determination or decree is entered or issued, or becomes reasonably foreseeable to be entered or issued, in any proceeding or inquiry of any kind that would make consummation of the merger or the transactions in accordance with the terms of the merger agreement unlawful or that would delay, restrain, prevent, enjoin or otherwise prohibit consummation of the merger or the transactions, the prompt use of its reasonable best efforts to take any and all steps necessary to resist, vacate, modify, reverse, suspend, prevent, eliminate or remove such actual, anticipated or threatened injunction, decision, order, judgment, determination or decree so as to permit such consummation on a schedule as close as possible to that contemplated by the merger agreement.

Merger Sub agrees to take or cause to be taken the following actions:

 

    the filing of a pre-acquisition review application in respect of each Title IV Company school no later than sixty (60) days prior to the closing date, to the extent that such filing has not been made in respect of a Title IV Company school prior to the date of the merger agreement;

 

    the filing, as promptly as practicable, and in any event by the date of the merger agreement, of a materially complete change of control application with the Higher Learning Commission in respect of the University of Phoenix, Western International University and the College for Financial Planning;

 

    the prompt use of its reasonable best efforts to obtain the pre-closing educational consents, and such efforts will include the prompt filing of all required applications, notices, reports and other filings; and

 

    in the event that the closing does not occur on or prior to December 31, 2016 or within thirty (30) days after the approval of the merger and the transactions by the Higher Learning Commission, any filings or other actions reasonably necessary to obtain an extension of such approval as necessary to permit the closing to occur prior to the termination date.

As the Company and Parent have determined that no filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which we refer to as the HSR Act, is required in connection with the merger, the Company, Parent and Merger Sub have entered into a consent and waiver agreement pursuant to which the parties have consented to the waiver of any covenants and conditions set forth in the merger agreement to the extent related to any filings or the termination or expiration of the waiting period under the HSR Act.

Each of Parent, Merger Sub and the Company has further agreed that it will not, and will cause their respective subsidiaries and, in the case of the Company, its affiliates, not to, take any action that would reasonably be expected to materially delay, impair or impede the receipt of any regulatory approvals, educational consents or educational approvals required in connection with the merger, the transactions or the closing.

Nothing in the merger agreement would require or be construed to require us or our subsidiaries to proffer to, or agree to, incur any liabilities or any sale, divestiture, license, disposition or holding separate of, or any termination, prohibition, limitation, restriction or other action with respect to existing relationships, contracts, assets, product lines or businesses or interests therein of the Company or any of our subsidiaries unless the effectiveness of such action is conditioned upon the closing.

 

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Company Cooperation with Refinancing

The Company has agreed to use its reasonable best efforts to provide all cooperation reasonably requested by Parent in connection with any debt financing or debt facilities to be obtained, arranged or committed to on or prior to the closing date that are to be made available to the Company from and after the closing date. We refer to any such debt financing or debt facility, as a debt financing. This cooperation may include, among other things, cooperating with debt marketing efforts, assisting in preparation of a bank information memorandum and similar marketing documents, and providing financial information regarding the Company and its subsidiaries to assist Parent in connection with the preparation of pro forma financial information.

The Company has also agreed to use its reasonable best efforts to provide all cooperation reasonably requested by Parent in connection with the termination of its existing indebtedness and the procurement of customary payoff letters and lien releases in connection therewith.

Parent has agreed to reimburse the Company for all reasonable out-of-pocket costs and expenses incurred by the Company or its subsidiaries or their respective representatives in connection with their cooperation in connection with any debt financing or the termination of existing indebtedness and to indemnify and hold harmless the Company, its subsidiaries, and their respective representatives from and against all losses, liabilities and other amounts suffered or incurred by them in connection with the arrangement of any debt financing or the termination of existing indebtedness.

The obtaining of any debt financing is not a condition to the closing of the merger.

Employee Benefits Matters

Parent agrees that, during the period commencing at the effective time of the merger and ending one (1) year thereafter, Parent must provide, or will cause to be provided, to each employee of the Company and its subsidiaries who is employed as of immediately prior to the effective time of the merger (which we refer to as the continuing employees), (i) base salary or base wage that is no less favorable than the base salary or base wage provided by the Company and its subsidiaries to each such continuing employee immediately prior to the effective time of the merger and (ii) annual incentive opportunities (excluding equity or equity-based compensation, retention and change in control awards and payments under any employee benefit plan of the Company that is not in compliance with applicable law) that are no less than those provided by the Company and its subsidiaries to each such continuing employee immediately prior to the effective time of the merger. Parent agrees that, during the period commencing at the effective time of the merger and ending on December 31 of the calendar year in which the effective time of the merger occurs, Parent must provide, or will cause to be provided, to each continuing employee, retirement, health and welfare benefits that are substantially comparable in the aggregate to those provided by the Company and its subsidiaries immediately prior to the effective time. Parent agrees that, during the period commencing at the effective time of the merger and ending on December 31, 2016, Parent must provide, or will cause to be provided, to each continuing employee, severance benefits that are no less favorable than the severance benefits provided by the Company and its subsidiaries immediately prior to the effective time of the merger. For the avoidance of doubt, Parent’s obligations to provide the aforementioned compensation and benefits are, in each case, subject to such continuing employee remaining employed by the Company or its subsidiaries.

Parent must undertake commercially reasonable efforts to (i) cause any pre-existing conditions or limitations and eligibility waiting periods under any group health plans of Parent or its affiliates to be waived with respect to the continuing employees and their eligible dependents, (ii) give each continuing employee credit for the plan year in which the effective time of the merger occurs towards applicable deductibles and annual out-of-pocket limits for medical expenses incurred prior to the effective time of the merger for which payment has been made and (iii) give each continuing employee service credit for such continuing employee’s employment with the Company and its subsidiaries for purposes of vesting, benefit accrual and eligibility to participate under

 

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each applicable Parent benefit plan (including, without limitation, with respect to severance, vacation and other PTO entitlements), as if such service had been performed with Parent, except for benefit accrual under defined benefit pension plans, for purposes of qualifying for subsidized early retirement benefits or to the extent it would result in a duplication of benefits.

If the effective time of the merger occurs prior to the time when bonuses are paid with respect to the Company’s 2016 fiscal year, Parent agrees that the Company will be permitted to honor the terms of the Company’s annual cash incentive plans, as in effect on the date hereof, with respect to the determination and payment of annual cash bonuses thereunder.

As soon as reasonably practicable following the date of the merger agreement and in any event prior to the effective time of the merger and not later than the day immediately prior to the date on which the first offering period that is regularly scheduled to commence under the Company’s Third Amended and Restated Employee Stock Purchase Plan, which we refer to as the ESPP, after the date of the merger agreement, the Company must take all actions including obtaining any necessary determinations or resolutions of the board of directors or the compensation committee thereof if appropriate, amending the terms of the ESPP that may be necessary or required under the ESPP and applicable laws to (i) ensure that, except for the offering period in progress as of the date of the merger agreement (which we refer to as the final offering), no offering period under the ESPP will be authorized or commenced, (ii) if the closing occurs prior to the end of the final offering, provide each individual participating in the final offering with notice of the transactions contemplated by the merger agreement no later than ten (10) business days prior to the closing date, (iii) cause the final offering to end on the closing date, (iv) cause each ESPP participant’s accumulated contributions under the ESPP to be used to purchase shares in accordance with the ESPP as of the end of the final offering, (v) provide that the applicable purchase price for shares will not be decreased below the levels set forth in the ESPP as of the date of the merger agreement, (vi) cause the ESPP to terminate in its entirety at the effective time of the merger and (vii) ensure that no further rights are granted or exercised under the ESPP after the effective time of the merger.

Conditions to the Merger

The respective obligations of the Company, Parent and Merger Sub to consummate the merger are subject to the satisfaction or waiver at or prior to the closing of the merger of the following conditions:

 

    the merger agreement must have been duly approved by the holders of at least a majority of the outstanding shares of Class A common stock and the holders of at least a majority of the outstanding shares of Class B common stock entitled to vote thereon and the sole shareholder of Merger Sub;

 

    any consents, authorizations, orders, registrations, permits and approvals required to be made, obtained or given prior to the effective time of the merger pursuant to antitrust laws in South Africa must have been made, obtained or given and be in full force and effect;

 

    the Higher Learning Commission must have approved the change of control application with respect to each of the University of Phoenix, Western International University and the College for Financial Planning;

 

    we must have received written responses from the U.S. Department of Education with respect to our pre-acquisition review applications, which we refer to as U.S. Department of Education pre-acquisition review responses, in respect of the University of Phoenix and Western International University, and as part of the conditions we describe in this bullet, which we refer to as the U.S. Department of Education pre-acquisition review conditions, the U.S. Department of Education pre-acquisition review responses must not:

 

    include a statement of intention to not approve the post-closing eligibility of the University of Phoenix to participate in Title IV programs; or

 

    condition the post-closing approval of the University of Phoenix’s eligibility to participate in Title IV programs upon any of the following, which we refer to as burdensome conditions:

 

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    a requirement that we or the University of Phoenix post a letter of credit in excess of 10% of the Title IV program funds received by the University of Phoenix in its prior fiscal year (and the U.S. Department of Education must not have indicated in writing that financial responsibility composite score calculations for the succeeding fiscal years will result in material limitations that would impair the ability of the surviving corporation to operate the University of Phoenix in substantially the manner in which it is currently operated); or

 

    any material limitation that would reasonably be expected to impair, in a manner that would reasonably be expected to be materially adverse to the surviving corporation, the ability of the surviving corporation to operate the University of Phoenix in substantially the manner in which it is currently operated; provided that none of the following will be considered a material limitation:

 

    any customary limitations imposed by the U.S. Department of Education in connection with its approval of change of control transactions as set forth in the standard form of the Title IV provisional program participation agreement;

 

    certain post-closing conduct of business conditions relating to student recruiting, enrollment terms and transparency to students; and

 

    certain restrictions on the University of Phoenix’s ability to add or modify its educational programs, add locations or increase enrollments after closing;

provided that Parent will not be entitled to assert a burdensome condition (as defined in the merger agreement) as a failure to satisfy a condition to closing if the U.S. Department of Education has identified (1) any deficiencies with respect to the audited financial statements of Parent to be provided with the pre-acquisition review applications filed with the U.S. Department of Education or (2) any deficiency attributable to Parent or any of its affiliates as the sole basis for such burdensome condition;

 

    the University of Phoenix must not have derived more than 88% of its revenues from Title IV program funds, as determined in accordance with the U.S. Department of Education’s “90/10 Rule” as codified in U.S. Department of Education regulations for the reporting period ended on August 31, 2015 and for the period beginning on September 1, 2015 and ended on the last day of the month prior to the month in which closing occurs; provided that the calculation may be normalized to exclude any adverse effects with respect to the average number of new enrollments of active duty military personnel during the period during which the University of Phoenix was on probation with respect to its participation in the U.S. Department of Defense Tuition Assistance Program;

 

    we have (i) with respect to any pre-closing notices and consents required to be made with or obtained from educational agencies in the United States in connection with the merger, (A) made all such pre-closing notices required by the Accreditation Council for Business School and Programs, the Commission on Collegiate Nursing Education and the National Council for Accreditation of Teacher Education and the relevant state educational agencies in Arizona, Florida, Illinois and Washington and (B) obtained all such pre-closing consents required by the Higher Learning Commission, the Texas Higher Education Coordinating Board and at least two of the relevant state educational agencies in the District of Columbia, Kansas, Kentucky and Maryland without any conditions that would materially impair the ability to operate the business of the University of Phoenix, and (ii) obtained all pre-closing educational consents from the applicable agencies in the United Kingdom, Australia and Germany;

 

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    we have not received any written response that the post-closing consents required in connection with the merger by the relevant state educational agencies in Arizona, California, Florida, Georgia, North Carolina or Pennsylvania will not be provided in a timely manner or will include any conditions that would materially impair the ability to operate the business of the University of Phoenix;

 

    with respect to any of the pre- and post-closing notices and consents required by certain additional state educational agencies in connection with the merger, we must have (i) obtained any such pre-closing consent without any conditions that would materially impair the ability to operate the business of the University of Phoenix and (ii) not received any written response that any such post-closing consent will not be provided in a timely manner or will include any conditions that would materially impair the ability to operate the business of the University of Phoenix, such that the aggregate satisfied consents by such additional states pertain to at least ten percent (10%) of the total enrollments of the University of Phoenix as of the date of the merger agreement;

 

    no court, educational agency or other governmental entity of competent jurisdiction may have enacted, issued, promulgated, enforced or entered any order (whether temporary, preliminary or permanent) that is in effect and restrains, enjoins, makes illegal or otherwise prohibits consummation of the merger or any of the other transactions contemplated by the merger agreement; and

 

    no proceeding by any educational agency or other governmental agency that seeks to restrain, enjoin, make illegal or otherwise prohibit consummation of the merger or any of the other transactions contemplated by the merger agreement may be pending.

As the Company and Parent have determined that no filing under the HSR Act is required in connection with the merger, the Company, Parent and Merger Sub have entered into a consent and waiver agreement pursuant to which the parties have consented to the waiver of any covenants and conditions set forth in the merger agreement to the extent related to any filings or the termination or expiration of the waiting period under the HSR Act.

The obligations of Parent and Merger Sub to effect the merger are also subject to the satisfaction or waiver by Parent at or prior to the closing of the merger of the following additional conditions:

 

    our representations and warranties regarding our due organization, qualification and good standing, capital structure, corporate power and authority, evaluation of the merger and the other transactions contemplated by the merger agreement, the inapplicability of takeover statutes, the absence of anti-takeover provisions in our organizational documents, the absence of a shareholder rights plan and our disclosure of broker’s and finder’s fees, which we refer to as the Company fundamental representations, must be true and correct in all respects, as of the date of the merger agreement and as of the closing date, in each case other than any de minimis inaccuracies and, with respect to our representations and warranties regarding our capital structure, any failure to be so true and correct due to any share issuances following the date of the merger agreement that have been permitted in writing by Parent;

 

    our other representations and warranties (i) that are qualified by reference to a material adverse effect on the Company must be true and correct as of the date of the merger agreement and as of the closing date and (ii) that are not qualified by reference to a material adverse effect on the Company must be true and correct without regard to any materiality qualifications contained in such representations and warranties, except where the failure to be true and correct has not had, and would not be reasonably expected to have, individually or in the aggregate, a material adverse effect;

 

    we must have performed in all material respects all obligations required to be performed by us prior to the closing date under the merger agreement;

 

    no material adverse effect on the Company may have occurred since February 7, 2016;

 

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    we must have delivered to Parent a certificate signed by our chief executive officer certifying that all of the above conditions with respect to the representations and warranties and performance of the obligations of the Company have been satisfied; and

 

    as of a specified measurement date (such specified date to be determined based on the closing date):

 

    the Company and its subsidiaries’ consolidated cash balance must not have declined below a certain amount agreed upon by the parties for such date;

 

    the number of University of Phoenix new enrollments, which we referred to as New Degreed Enrollments in the merger agreement, must not have fallen short of the number of University of Phoenix new enrollments forecast for such date (which number is derived from the number of University of Phoenix new enrollments (as prepared for internal purposes) set forth in the December Forecast for fiscal year 2016 or 2017, as applicable) by more than 15%;

 

    the University of Phoenix revenues must not have fallen short of the amount of the University of Phoenix revenues forecast for such date (which number is derived from the amount of the University of Phoenix revenues set forth in the December Forecast for fiscal year 2016 or 2017, as applicable) by more than 10%; and

 

    the Company and its subsidiaries’ consolidated adjusted EBITDA must not have fallen short of the consolidated adjusted EBITDA forecast for such date (which number is derived from the number set forth in the December Forecast for fiscal year 2016 or 2017, as applicable) by more than $75 million.

Our obligation to effect the merger is also subject to the satisfaction or waiver by us at or prior to the closing of the merger of the following additional conditions:

 

    the representations and warranties of Parent and Merger Sub regarding their due organization, good standing and qualification, corporate power and authority and broker’s and finder’s fees, which we refer to as the Parent fundamental representations, must be true and correct in all respects, as of the date of the merger agreement and as of the closing date, in each case other than any de minimis inaccuracies;

 

    the other representations and warranties of Parent and Merger Sub must be true and correct as of the date of the merger agreement and as of the closing date without regard to any materiality qualifications contained in such representations and warranties, except where the failure to be true and correct has not, and would not reasonably be expected to, individually or in the aggregate, prevent, materially delay or materially impede the consummation of the merger and the other transactions contemplated by the merger agreement by Parent and Merger Sub;

 

    Parent and Merger Sub must have each performed in all material respects all obligations required to be performed by them prior to the closing date under the merger agreement; and

 

    Parent must have delivered to us a certificate signed on behalf of Parent by an executive officer of Parent certifying that all of the above conditions with respect to the representations and warranties and performance of the obligations of Parent and Merger Sub have been satisfied.

The conditions to each of the parties’ obligations to complete the merger are for the sole benefit of such party and may be waived by such party in whole or in part (to the extent permitted by applicable laws).

Termination

We and Parent may, by mutual written consent, terminate the merger agreement and abandon the merger at any time prior to the effective time of the merger, notwithstanding any adoption of the merger agreement by our shareholders.

 

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The merger agreement may also be terminated and the merger abandoned at any time prior to the effective time of the merger as follows:

 

    by either Parent or the Company, if:

 

    the merger has not been consummated by 5:00 pm Eastern time on February 1, 2017, which we refer to as the termination date, whether such date is before or after the date of adoption of the merger agreement by our shareholders; provided that this termination right will not be available to either the Company or Parent if it has breached in any material respect its obligations under the merger agreement and such breach is the principal cause or reason for the failure of a condition to the consummation of the merger;

 

    we receive a U.S. Department of Education pre-acquisition review response that does not satisfy the U.S. Department of Education pre-acquisition review conditions, and such failure to satisfy the U.S. Department of Education pre-acquisition review conditions is not curable prior to the termination date, which we refer to as a pre-acquisition review termination event; provided that if Parent does not exercise its right to terminate the merger agreement arising from the receipt of a U.S. Department of Education pre-acquisition review response that does not satisfy the U.S. Department of Education pre-acquisition review conditions within forty-five (45) days of our receipt of the first such unsatisfactory U.S. Department of Education Pre-acquisition Response, Parent will be deemed to have waived the U.S. Department of Education pre-acquisition review conditions and Parent’s right to terminate the merger agreement in connection with the unsatisfactory U.S. Department of Education pre-acquisition review response;

 

    our shareholders meeting has been held and completed and our shareholders have not approved the merger agreement at such meeting or postponement of such meeting, which we refer to as a shareholder vote termination event; or

 

    an order permanently restraining, enjoining or otherwise prohibiting consummation of the merger has become final and non-appealable (whether before or after the approval of the merger agreement by our shareholders);

 

    by Parent, if:

 

    the board of directors (i) withholds, withdraws, changes, qualifies, amends or modifies (or publicly proposes to do any of the foregoing) in a manner that is adverse to Parent or Merger Sub, or otherwise makes a public statement or proposal that is inconsistent with its recommendation that the Company’s shareholders approve the merger agreement; (ii) fails to include such recommendation in this proxy statement; (iii) approves, recommends or otherwise declares advisable (or proposes to do any of the foregoing, publicly or otherwise) an acquisition proposal other than the merger; (iv) fails to issue a press release reaffirming its recommendation that the Company’s shareholders approve the merger agreement within five (5) business days following a written request by Parent after the date on which an acquisition proposal or any material modification to an acquisition proposal is first published or sent, given or communicated to the shareholders of the Company; or (v) fails to recommend against any acquisition proposal that is a tender offer within ten (10) business days after the commencement of such tender offer, which we refer to as a change of recommendation termination event;

 

   

there has been a breach of or failure to perform any representation, warranty, covenant or agreement made by the Company in the merger agreement, or any such representation or warranty becomes untrue after the date of the merger agreement, which breach or failure to be true would give rise to the failure of the condition to the closing of the merger relating to the accuracy of the representations and warranties of the Company or compliance by the Company with its obligations under the merger agreement, and such breach or failure to be true cannot be cured, or if curable, is not cured prior to the earlier of (i) thirty (30) days after written notice thereof is given

 

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by Parent to us; and (ii) the termination date, which we refer to as a Company breach termination event; or

 

    subsequent to the date of the merger agreement, any U.S. Federal educational agency or governmental entity has notified us or the University of Phoenix in writing that it will take action with respect to certain ongoing investigations, if the finding of a violation would be reasonably likely to result in liability on us or the University of Phoenix of more than $500,000,000, which we refer to as a regulatory liability termination event.

 

    by the Company, if:

 

    at any time prior to the adoption of the merger agreement by our shareholders, (i) the board of directors authorizes the Company to enter into an alternative acquisition agreement with respect to a superior proposal; and (ii) we pay Parent or its designee the termination fee discussed under “The Merger Agreement—Termination Fees” beginning on page [●], which we refer to as a superior proposal termination event (provided that this right to terminate the merger agreement will not be available to us unless we have complied with certain notice and other requirements described under “The Merger Agreement—Solicitation of Acquisition Proposals” beginning on page [●]); or

 

    there has been a breach of or failure to perform any representation, warranty, covenant or agreement made by Parent or Merger Sub in the merger agreement, or any such representation or warranty becomes untrue after the date of the merger agreement, which breach or failure to be true would give rise to the failure of the condition to the closing of the merger relating to the accuracy of the representations and warranties of Parent and Merger Sub or compliance by Parent and Merger Sub with their obligations under the merger agreement, and such breach or failure to be true cannot be cured, or if curable, is not cured prior to the earlier of (i) thirty (30) days after written notice thereof is given by us to Parent; and (ii) the termination date.

Termination Fees

Termination Fees and Expenses Payable by the Company

If the merger agreement is terminated under certain circumstances, we will be required to pay Parent a termination fee of 2.75% of the aggregate per share merger consideration that would have been payable to the Company’s shareholders upon closing of the merger, which we refer to as the termination fee. The termination fee would be payable if:

 

    a bona fide acquisition proposal has been made to the Company or any of the Company’s shareholders or any third party has publicly announced an intention (whether or not conditional) to make an acquisition proposal with respect to the Company or any of its subsidiaries, and the merger agreement is terminated by either Parent or the Company due to a shareholder vote termination event or by Parent due to a Company breach termination event, and the Company enters into an alternative acquisition agreement or consummates an alternative proposal within twelve (12) months after such termination;

 

    the merger agreement is terminated by Parent due to a change of recommendation termination event; or

 

    the merger agreement is terminated by the Company due to a superior proposal termination event.

In the event that Parent or the Company terminates the merger agreement due to a shareholder vote termination event, we must pay up to $12,500,000 of the documented third-party fees and expenses incurred, paid or payable by Parent or any of its affiliates in connection with the authorization, preparation, negotiation, execution, performance, termination or abandonment of the merger agreement, the merger or the other transactions contemplated by the merger agreement, which we refer to as Parent expenses. The Company’s payment of Parent expenses is creditable against the termination fee that may subsequently be payable to Parent following a termination due to a shareholder vote termination event.

 

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Reverse Termination Fee Payable by Parent

In the event that Parent terminates the merger agreement due to a regulatory liability termination event, Parent must pay the Company a reverse termination fee of $25,000,000, which we refer to as the reverse termination fee.

Fees and Expenses

Expenses incurred in connection with the filing fees for Company required government approvals, the proxy statement and printing and mailing the proxy statement and any reasonable out-of-pocket expenses the Company incurs in connection with preparing and filing the proxy statement, holding a shareholder meeting, filing materials required for approvals by a governmental entity or educational agency and sharing of information to consummate the merger are to be paid by the parties as follows:

 

    In the event the merger is consummated, the expenses described above will be paid by Parent or the surviving corporation.

 

    In the event the merger is not consummated, the expenses described above will be paid:

 

    one-half by Parent and one-half by the Company, if the merger agreement is terminated by either party (i) upon the mutual written consent of the parties; (ii) due to the merger failing to be consummated by the termination date; (iii) due to a pre-acquisition review termination event; or (iv) as a result of a final and non-appealable order prohibiting consummation of the merger;

 

    by the Company, if the merger agreement is terminated (i) by either party as a result of the Company’s shareholders not approving the merger; (ii) by the Company to enter into an alternative acquisition agreement with respect to a superior proposal; or (iii) by Parent (a) due to the board of directors having made a change of recommendation, (b) due to the Company’s breach of a representation, warranty, covenant or agreement such that a condition to closing would not be satisfied and such breach was not curable or cured by the earlier of thirty (30) days after receiving written notice or the termination date, or (c) due to any U.S. Federal education agency or government entity notifying the Company or the University of Phoenix that it will take action with respect to certain ongoing investigations, which would reasonably be likely to result in liability on the Company or the University of Phoenix of more than $500,000,000; or

 

    by Parent, if the merger agreement is terminated by the Company due to Parent or Merger Sub’s breach of a representation, warranty, covenant or agreement such that a condition to closing would not be satisfied and such breach was not curable or cured by the earlier of thirty (30) days after receiving written notice or the termination date.

 

    All other costs and expenses incurred in connection with the merger agreement, the merger and the transactions contemplated by the merger agreement will be paid by the party incurring such expense.

Remedies

Except with respect to liability or damage resulting from a willful and material breach by Parent or Merger Sub of their respective representations, warranties, covenants or agreements in the merger agreement, if the merger agreement is terminated due to a regulatory liability termination event and the reverse termination fee is paid to us, the reverse termination fee will be our sole and exclusive remedy against Parent or Merger Sub for any liability or damage relating to or arising out of the merger agreement, the merger or the other transactions contemplated by the merger agreement.

Parent’s receipt of the termination fee and/or our reimbursement of the Parent expenses, as the case may be, in each case will constitute liquidated damages.

 

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The parties are entitled to injunctions to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement in addition to any other remedy to which they are entitled at law or in equity. We are a third-party beneficiary to the equity commitment letters, entitling us to seek specific performance of Parent’s right to draw down the full proceeds of the equity financing pursuant to the terms and conditions of the equity commitment letters in order to fund the merger consideration or pay damages to us under certain circumstances.

Indemnification; Directors’ and Officers’ Insurance

Director and Officer Liability

From and after the effective time of the merger, Parent and the surviving corporation will indemnify and hold harmless (including through the advancement of expenses as incurred) our and our subsidiaries’ present and former directors and officers against liabilities (including reasonable attorneys’ fees) incurred in connection with any claim, action, suit, proceeding or investigation, arising out of or related to such director’s or officer’s service as a director or officer of the Company or its subsidiaries (or services performed at our or our subsidiaries’ request) at or prior to the effective time of the merger (including in connection with the merger and the other transactions contemplated by the merger agreement and actions to enforce such indemnification or advancement rights), in each case, as provided in our articles of incorporation in effect as of February 7, 2016, to the fullest extent permitted by law.

For not less than six (6) years from and after the effective time of the merger, Parent will cause the surviving corporation to maintain in effect the provisions in the Company’s articles of incorporation and by-laws that are in effect as of February 7, 2016 regarding elimination of liability of directors, indemnification of officers and directors and advancement of expenses that are no less advantageous to the intended beneficiaries than the corresponding provisions currently in existence.

For not less than six (6) years from and after the effective time of the merger, we will (and Parent will cause the surviving corporation to) maintain for the benefit of the directors and officers of the Company and its subsidiaries as of February 7, 2016 and as of the effective time of the merger a “tail” insurance and indemnification policy. Alternatively, at or prior to the closing of the merger, we may, or at Parent’s request will, obtain prepaid policies with respect to directors’ and officers’ liability insurance, which policies will provide our directors and officers with such coverage for an aggregate period of at least six (6) years following the effective time of the merger. Any such policies, whether a “tail” policy or a prepaid policy, must be substantially equivalent to and in any event not less favorable in the aggregate than the existing policies of the Company and its subsidiaries, or, with respect to the “tail” policy, if substantially equivalent insurance coverage is not available, the best available coverage. The annual premium of any such policy is subject to a cap of 300% of the last annual premium paid prior to February 7, 2016. The present and former directors and officers of the Company will have the right to enforce the provisions of the merger agreement relating to their indemnification.

Amendment or Supplement

Subject to applicable law and the terms of the merger agreement, at any time prior to the effective time of the merger, the parties to the merger agreement may modify, supplement or amend the merger agreement by a written agreement authorized by the board of directors and executed and delivered by duly authorized officers of the respective parties; provided that after the required approval by the shareholders of the Company of the plan to adopt the merger agreement has been obtained, no amendment or waiver may be made without first obtaining any further approval of the shareholders of the Company required under applicable law.

Governing Law

Except to the extent the laws of the State of Arizona are mandatorily applicable to the merger and the other transactions contemplated by the merger agreement, the merger agreement is governed by and interpreted and

 

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construed in accordance with the laws of the State of New York without giving effect to any choice or conflict of law provision or rule.

Jurisdiction

The parties to the merger agreement have irrevocably agreed to submit themselves to the personal jurisdiction of the Supreme Court of the State of New York solely in connection with any matter based upon the interpretation and enforcement of the provisions of (and any claim or cause of action arising under or relating to) the merger agreement and documents referred to therein and in respect of the merger and the other transactions contemplated by the merger agreement (or, in the event the Supreme Court of the State of New York does not have subject matter jurisdiction over such matter, the United States District Court for the Southern District of New York).

 

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THE VOTING AND SUPPORT AGREEMENTS

This section describes the material terms of the voting and support agreements. The description of the voting and support agreements in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the voting and support agreements, copies of which are attached as Annex B and are incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the voting and support agreements that is important to you. We encourage you to read the voting and support agreements carefully and in their entirety.

Explanatory Note Regarding the Voting and Support Agreements

The voting and support agreements and this summary are included to provide you with information regarding their terms. The representations, warranties and covenants made in each voting and support agreement by Parent and the shareholder party thereto were made solely to the parties to, and solely for the purposes of, such voting and support agreement and as of specific dates and were qualified and subject to important limitations agreed to by the parties thereto in connection with negotiating the terms of the voting and support agreement. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts of Parent or the Company or any of their respective subsidiaries or affiliates.

Summary

On February 7, 2016, concurrently with the execution of the merger agreement, each of the Apollo Class B Voting Stock Trust No. 1, Peter V. Sperling, the Peter Sperling Voting Stock Trust, the Aurora Foundation, the San Roque School Charitable Trust, the John Sperling Revocable Trust, the John Sperling 1994 Irrevocable Trust and Gregory W. Cappelli, in their respective capacities as shareholders of the Company, entered into a voting and support agreement with Parent, Merger Sub and the Company, pursuant to which such shareholders agreed, on the terms and subject to the conditions set forth in each voting and support agreement, to vote all Class A common stock and Class B common stock owned by them (representing approximately 7.7% of the issued and outstanding Class A common stock and 100% of the issued and outstanding Class B common stock, as of March 2, 2016) in favor of the adoption of the merger agreement and the approval of the transactions contemplated by the merger agreement, including the merger, and not to vote in favor of any alternative transactions or any other agreement, action or proposal, the purpose of which is to prevent or materially impede, interfere with, hinder, delay, discourage, inhibit, postpone or adversely affect the transactions contemplated by the merger agreement.

From and after the effective time of the merger, Parent will cause the surviving corporation to indemnify and hold harmless (and Parent will cause the surviving corporation to advance expenses to) our shareholders who have entered into the voting and support agreements, other than Gregory W. Cappelli, against liabilities (including reasonable attorneys’ fees) incurred in connection with any claim, action, suit, proceeding or investigation to the extent relating to the adoption and approval of the merger, the voting and support agreements and the transactions contemplated by the merger agreement and the voting and support agreements and actions to enforce such indemnification or advancement rights.

For not less than six (6) years from and after the effective time of the merger, we will (and Parent will cause the surviving corporation to) maintain for the benefit of the Apollo Class B Voting Stock Trust No. 1 and its trustees a “tail” management liability insurance policy that provides coverage for events occurring prior to the effective time of the merger. Alternatively, at or prior to the closing of the merger, we may, or at Parent’s request will, obtain prepaid policies with respect to management liability insurance, which policies will provide the Apollo Class B Voting Stock Trust No. 1 and its trustees with such coverage for an aggregate period of at least six (6) years following the effective time of the merger. Any such policies, whether a “tail” policy or a prepaid policy, must be substantially equivalent to and in any event not less favorable in the aggregate than the existing

 

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policies of the Company and its subsidiaries, or, with respect to the “tail” policy, if substantially equivalent insurance coverage is not available, the best available coverage. The annual premium of any such policy is subject to a cap of 300% of the last annual premium paid prior to February 7, 2016.

Pursuant to the Class B Voting Trust voting agreement, the Apollo Class B Voting Stock Trust No. 1 also agrees to cooperate in the preparation of any regulatory filings required in connection with the merger and the other transactions contemplated by the merger agreement for which it is a required party.

Each voting and support agreement will automatically terminate upon the earliest to occur of (i) the time the merger becomes effective, (ii) the termination of the merger agreement in accordance with its terms, such as in connection with a superior proposal termination event, as described under “The Merger Agreement—Termination” beginning on page [●], and (iii) the mutual written consent of the parties to that voting and support agreement.

 

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THE REGULATORY SIDE LETTER AGREEMENTS

This section describes the material terms of the regulatory side letter agreements. This summary does not purport to be complete and may not contain all of the information about the regulatory side letter agreements that may be important to you.

Explanatory Note Regarding the Regulatory Side Letter Agreements

The regulatory side letter agreements and this summary are included to provide you with information regarding their terms. The agreements and covenants made in each regulatory side letter agreement by the parties thereto were made solely to the parties to, and solely for the purposes of, such regulatory side letter agreement and as of specific dates and were qualified and subject to important limitations agreed to by the parties thereto in connection with negotiating the terms of the regulatory side letter agreement. Investors should not rely on the agreements and covenants made in the regulatory side letter agreements or any description thereof as characterizations of the actual state of facts of Parent or the Company or any of their respective subsidiaries or affiliates.

Summary

Concurrently with the execution of the merger agreement, the Company entered into side letter agreements, dated February 7, 2016, with each of Apollo Management VIII, L.P., an affiliate of the AGM investors, and The Vistria Group, LP, an affiliate of Vistria Fund, LP. Pursuant to the regulatory side letter agreements, Apollo Management VIII, L.P. and The Vistria Group, LP have agreed, if requested by Parent, to make the following filings, or where appropriate join the corresponding filings of the Company, a Company subsidiary or Parent as a co-filing party: (1) U.S. Department of Education Pre-acquisition Review Applications in respect of each of the University of Phoenix and Western International University; (2) a change of control application with the Higher Learning Commission in respect of each of the University of Phoenix, Western International University and the College for Financing Planning; (3) any filings or submissions in connection with pre-closing and post-closing consents required to be obtained from any governmental entity or educational agency in connection with the merger; (4) a Notification and Report Form (with all required submissions in connection therewith) under the HSR Act; and (5) any filings that are required to be made under any competition law similar to the HSR Act in any other jurisdiction.

In addition, Apollo Management VIII, L.P.and The Vistria Group, LP have agreed to:

 

    promptly provide to any governmental entity with jurisdiction over enforcement of any applicable antitrust or competition laws non-privileged information and documents requested by such entity;

 

    promptly provide responses to any governmental entity’s or educational agency’s requests for additional information or documents in connection with any of the filings described in the paragraph above;

 

    subject to applicable law and as required by any governmental entity or educational agency, keep the parties to the merger agreement apprised of the status of the foregoing filings, including promptly furnishing the parties to the merger agreement with copies of notices or other communications received from any governmental entity or educational agency with respect to the foregoing filings, the merger agreement and the transactions contemplated by the merger agreement; and

 

    at the reasonable request of Parent, upon reasonable advance notice, cause their representatives to participate in any meeting, discussion, hearing or deposition with or before any governmental entity or educational agency to the extent related to the foregoing filings.

The obligations of each of Apollo Management VIII, L.P. and The Vistria Group, LP under the regulatory side letter agreements expire on the earliest of (i) receipt of all required approvals from the governmental entities

 

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and educational agencies referred to in the first paragraph above; (ii) the waiver by the parties to the merger agreement of certain conditions set forth therein with respect to the approvals of the governmental entities and educational agencies to the merger set forth in the first paragraph above; or (iii) the termination of the merger agreement in accordance with its terms.

Each party to the regulatory side letter agreements is entitled to injunctive relief to prevent breaches of the regulatory side letter agreements and to enforce specifically the terms of the regulatory side letter agreements, in addition to any other remedy to which such party is entitled at law or in equity.

As the Company and Parent have determined that no filing under the HSR Act is required in connection with the merger, the Company, Parent and Merger Sub have entered into a consent and waiver agreement pursuant to which the parties have consented to the waiver of any covenants and conditions set forth in the merger agreement to the extent related to any filings or the termination or expiration of the waiting period under the HSR Act. As a result, Apollo Management VIII, L.P. and The Vistria Group, LP will not be required to make or join any filings under the HSR Act in connection with the merger.

 

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ADVISORY VOTE ON MERGER-RELATED COMPENSATION FOR

THE COMPANY’S NAMED EXECUTIVE OFFICERS

Golden Parachute Compensation

This section sets forth the information required by Item 402(t) of Regulation S-K regarding the compensation for each named executive officer of the Company that is based on or otherwise relates to the merger. This compensation is referred to as “golden parachute” compensation by the applicable SEC disclosure rules, and in this section we use such term to describe the merger-related compensation payable to our named executive officers. The “golden parachute” compensation payable to these individuals is subject to a non-binding advisory vote of the Company’s shareholders, as described below in this section.

The estimated value of the payments and benefits that the Company’s named executive officers will receive in connection with the merger are quantified below in accordance with Item 402(t) of Regulation S-K. The estimated values are based on (i) per share merger consideration of $9.50, (ii) salary, target bonus levels and equity award holdings as of the date of this proxy statement, (iii) a merger closing assumed to occur on March 4, 2016 (the last practicable date determined in accordance with Item 402(t) of Regulation S-K) and (iv) a termination of each named executive officer by the Company without “cause” or by the executive for “good reason” on the closing date. Depending on when the merger occurs, certain equity awards that are now unvested and included in the table below may vest pursuant to the terms of the equity awards based on the completion of continued service with the Company, independent of the merger. In addition, the amounts indicated below are estimates based on multiple assumptions that may or may not actually occur, including assumptions described in this proxy statement, and do not reflect certain compensation actions that may occur before completion of the merger. As a result, the actual amounts, if any, to be received by a named executive officer may materially differ from the amounts set forth below. All dollar amounts have been rounded to the nearest whole dollar.

Golden Parachute Compensation

 

Name

   Cash ($)(1)      Equity ($)(2)      Perquisites/
Benefits ($)(3)
     Total ($)  

Gregory W. Cappelli

   $ 4,208,188       $ 3,124,598       $ 3,969       $ 7,336,755   

Gregory J. Iverson

   $ 981,776       $ 1,718,341       $ 3,969       $ 2,704,086   

Joseph L. D’Amico(4)

     —           —           —           —     

J. Mitchell Bowling

   $ 1,456,489       $ 1,820,419       $ 3,969       $ 3,280,877   

Sean B. Martin

   $ 1,431,757       $ 4,236,905       $ 3,969       $ 5,672,631   

Timothy P. Slottow

   $ 1,993,745       $ 716,661       $ 3,969       $ 2,714,375   

Brian L. Swartz(5)

     —           —           —           —     

 

(1) The amounts in this column reflect the (a) cash severance payments, (b) payments in respect of COBRA coverage costs, (c) cash-based long-term incentive awards and (d) cash-based retention awards that would become payable to each of Messrs. Cappelli, Iverson, Bowling, Martin and Slottow, as follows:

 

     Cash
Severance ($)(a)
     COBRA
Coverage

Payment ($)(b)
     Cash LTI
Award ($)(c)
     Cash
Retention

Award ($)(d)
     Total ($)  

Gregory W. Cappelli

   $ 3,423,400       $ 34,788         —         $ 750,000       $ 4,208,188   

Gregory J. Iverson

   $ 886,825       $ 14,951         —         $ 80,000       $ 981,776   

Joseph L. D’Amico

     —           —           —           —           —     

J. Mitchell Bowling

   $ 1,162,405       $ 19,084         —         $ 275,000       $ 1,456,489   

Sean B. Martin

   $ 1,198,395       $ 23,362         —         $ 210,000       $ 1,431,757   

Timothy P. Slottow

   $ 1,360,000       $ 14,995       $ 443,750       $ 175,000       $ 1,993,745   

Brian L. Swartz

     —           —           —           —           —     

 

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  (a) Pursuant to the terms of his amended and restated employment agreement with the Company, for Mr. Cappelli, represents double-trigger cash severance equal to 200% of the sum of (i) annual base salary and (ii) the average of the annual bonus Mr. Cappelli earned for the three fiscal years preceding the fiscal year of his termination, paid in the form of salary continuation over the 12 months following his termination. Pursuant to the terms of the Company’s Severance Plan, for each of Messrs. Iverson, Bowling, Martin and Slottow, represents double-trigger cash severance equal to the sum of (i) 150% annual base salary and (ii) the average of the executive’s annual bonus earned for the three fiscal years preceding the fiscal year of his termination, paid in the form of salary continuation over the 18 months following the executive’s termination. For Mr. Slottow, represents an additional six months of salary continuation payments and an additional payment equal to 100% of the average of the annual bonus earned by Mr. Slottow for the three fiscal years preceding the fiscal year of his termination, pursuant to the terms of his offer letter with University of Phoenix.
  (b) For Mr. Cappelli, represents a lump sum double-trigger payment equal to eighteen (18) multiplied by the monthly COBRA premium for continued coverage under the Company’s group health plans, based on the level of coverage in effect on the date of termination for Mr. Cappelli and his spouse and dependents, as applicable. For each of Messrs. Iverson, Bowling, Martin and Slottow, represents a lump sum double-trigger payment equal to eighteen (18) multiplied by the difference in the monthly COBRA premium for continued coverage under the Company’s group health plans and active employee rates, based on the level of coverage in effect on the date of termination for the executive and the executive’s spouse and dependents, as applicable.
  (c) Represents the unvested portion of cash-based long-term incentive awards previously granted to Mr. Slottow that will become payable upon the effective time of the merger as a single-trigger payment.
  (d) Represents the unvested portion of cash-based retention awards previously granted to each of Messrs. Cappelli, Bowling, Martin and Slottow that will become fully vested (and at which time the applicable repayment obligations will lapse) upon a qualifying termination of employment that occurs following the effective time of the merger.

The amounts payable in (a)-(d) above are, in each case, subject to the executive’s delivery of an effective and enforceable general release of all claims against the Company. For Mr. Cappelli, the amounts payable in (a) and (b) above are subject to his ongoing compliance with non-competition and non-solicitation restrictions for a period of 12 months following his termination of employment. For each of Messrs. Iverson, Bowling, Martin and Slottow, the amounts payable in (a) and (b) above are subject to the executive’s ongoing compliance with non-solicitation restrictions for the period during which he receives salary continuation payments, as well as compliance with perpetual non-disparagement requirements.

 

(2) The amounts in this column reflect single-trigger payments made in respect of unvested Company restricted stock units. Amounts do not reflect payments made on account of vested Company stock options or vested Company deferred stock units. As of the date of this proxy statement none of our named executive officers hold any Company performance units, and all Company stock options held by our named executive officers will be cancelled at the effective time of the merger for no consideration because such Company stock options have exercise prices that are greater than the per share merger consideration. Please see the section titled “The Merger Agreement—Treatment of Common Stock and Company Equity Awards” beginning on page [●] for a description of the treatment of outstanding equity awards in connection with the merger.
(3) The amounts in this column reflect the estimated value of six months of outplacement assistance services, which is a double-trigger entitlement provided at the Company’s expense to Mr. Cappelli pursuant to the Company’s historical practice of providing such benefits to similarly situated executive employees, and to Messrs. Iverson, Bowling, Martin and Slottow, pursuant to the terms of the Company’s Severance Plan.
(4) Mr. D’Amico’s employment with the Company terminated effective January 22, 2016.
(5) Mr. Swartz’s employment with the Company terminated effective May 15, 2015.

 

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Merger-Related Compensation Proposal

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and Rule 14a-21(c) of the Exchange Act, the Company is seeking a non-binding, advisory shareholder approval of the compensation of the Company’s named executive officers that is based on or otherwise relates to the merger as disclosed above in this section. The proposal gives the Company’s shareholders the opportunity to express their views on the merger-related compensation of the Company’s named executive officers.

Accordingly, the Company is requesting shareholders to adopt the following resolution, on a non-binding, advisory basis:

RESOLVED, that the compensation that may be paid or become payable to the Company’s named executive officers, in connection with the merger, and the agreements or understandings pursuant to which such compensation may be paid or become payable, in each case as disclosed pursuant to Item 402(t) of Regulation S-K in ‘Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers—Golden Parachute Compensation,’ are hereby APPROVED.”

Vote Required and the Company Board Recommendation

The vote on this proposal is a vote separate and apart from the vote to adopt the merger agreement. Accordingly, you may vote not to approve this proposal on merger-related named executive officer compensation and vote to adopt the merger agreement and vice versa. Because the vote is advisory in nature, it will not be binding on the Company, regardless of whether the merger agreement is adopted. Approval of the non-binding, advisory proposal with respect to the compensation that may be received by the Company’s named executive officers in connection with the merger is not a condition to completion of the merger, and failure to approve this advisory matter will have no effect on the vote to adopt the merger agreement. Because the merger-related named executive officer compensation to be paid in connection with the merger is based on contractual arrangements with the named executive officers, such compensation may be payable, regardless of the outcome of this advisory vote, if the merger agreement is adopted (subject only to the contractual conditions applicable thereto).

The advisory vote on the compensation that may be received by the Company’s named executive officers in connection with the merger will be approved if holders of a majority of the shares of our Class A common stock and Class B common stock, collectively, cast in person or by proxy, at the special meeting vote “FOR” such proposal.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE APPROVAL, ON A NON-BINDING ADVISORY BASIS, OF THE COMPENSATION THAT MAY BE RECEIVED BY THE COMPANY’S NAMED EXECUTIVE OFFICERS IN CONNECTION WITH THE MERGER.

 

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MARKET PRICE OF CLASS A COMMON STOCK

Our Class A common stock is listed for trading on the NASDAQ under the symbol “APOL”. The table below shows the high and low sales price of our Class A common stock, for the periods indicated, as reported on the NASDAQ.

 

     Class A Common Stock Price      Dividend
Per Share
 
           High                      Low             

FY 2014

  

First quarter

   $ 29.07       $ 18.50       $ 0.00   

Second quarter

   $ 35.92       $ 24.18       $ 0.00   

Third quarter

   $ 35.23       $ 26.05       $ 0.00   

Fourth quarter

   $ 32.10       $ 26.29       $ 0.00   

FY 2015

  

First quarter

   $ 31.44       $ 23.30       $ 0.00   

Second quarter

   $ 34.55       $ 24.82       $ 0.00   

Third quarter

   $ 28.53       $ 16.05       $ 0.00   

Fourth quarter

   $ 17.36       $ 10.20       $ 0.00   

FY 2016

  

First quarter

   $ 12.43       $ 6.83       $ 0.00   

Second quarter

   $ 8.94       $ 6.31       $ 0.00   

Third quarter

     [●]         [●]         [●]   

The closing price of our Class A common stock on the NASDAQ on January 8, 2016, immediately prior to the announcement that the Company’s board of directors was pursuing strategic alternatives was $6.59 per share. On [●], 2016, the most recent practicable date before this proxy statement was mailed to our shareholders, the closing price for our Class A common stock on the NASDAQ was $[●] per share. You are encouraged to obtain current market quotations for our Class A common stock in connection with voting your shares of Class A common stock.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below presents certain information regarding the beneficial ownership of shares of Class A common stock and Class B common stock as of March 2, 2016, by (i) each entity we know to own 5% or more of shares of Class A common stock or Class B common stock; (ii) each of our directors and named executive officers; and (iii) all of our directors and executive officers as a group.

We determined beneficial ownership in accordance with SEC rules and the information is not necessarily indicative of beneficial ownership for any other purpose. As defined by such rules, each entity or person is deemed to be a “beneficial owner” if the entity or person has or shares the power to vote or direct the voting of a security or the power to dispose or direct the disposition of such security. Except as specified below, each person or entity has sole voting and investment power with respect to their shares of Class A common stock or Class B common stock except to the extent that authority is shared by spouses under applicable law or as otherwise noted. The business address of each beneficial owner, except as otherwise noted, is in care of Apollo Education Group, Inc., 4025 South Riverpoint Parkway, Phoenix, Arizona 85040.

We determined the applicable ownership percentage for each beneficial owner based on 108,167,602 shares and 475,149 shares of our outstanding Class A and Class B common stock, respectively, as of March 2, 2016. Beneficial ownership representing less than 1% is denoted with an asterisk (*).

 

     Class A Common Stock      Class B Common Stock  

Name and Address of Beneficial Owner

   Shares
Beneficially
Owned(1)
(#)
    Percent
of Class
Owned
(%)
     Shares
Beneficially
Owned
(#)
    Percent
of Class
Owned
(%)
 

Directors and Executive Officers:

         

Peter V. Sperling

     2,155,905 (2)      2.0         232,068 (3)      48.8   

Gregory W. Cappelli

     1,297,314        1.2         —          —     

Sean B.W. Martin

     148,671 (4)      *         —          —     

Terri C. Bishop

     110,101 (5)      *        

J. Mitchell Bowling

     79,051        *         —          —     

Dr. Roy A. Herberger, Jr.

     75,859        *         —          —     

Dr. Ann Kirschner

     69,564 (6)      *         —          —     

Manuel F. Rivelo

     42,516        *         —          —     

Darby E. Shupp

     38,484        *         —          —     

Frederick H. Newton

     35,519          

Richard H. Dozer

     31,329        *         —          —     

Gregory J. Iverson

     30,549        *         —          —     

Allen R. Weiss

     30,076        *         —          —     

Robert S. Murley

     28,964        *         —          —     

Matthew Carter, Jr.

     26,653        *         —          —     

Dr. Dana H. Born

     9,939        *         —          —     

Timothy P. Slottow

     6,922        *         —          —     

All Executive Officers and Directors (17 persons)

     5,017,416        4.6         232,068        48.8   

Beneficial Owners of More than 5%:

         

Schroder Investment Management Group

     14,914,472 (7)      13.8         —          —     

31 Gresham Street

         

London, X0 EC2V 7QA

         

First Pacific Advisors, LLC

     10,132,310 (8)      9.4         —          —     

11601 Wilshire Blvd., Suite 1200

Los Angeles, CA 90025

         

John Sperling Revocable Trust(9)

     6,126,706        5.7         —          —     

Vanguard Group

100 Vanguard Blvd.

Malvern, PA 19355

     5,981,726 (10)      5.5        

Apollo Class B Voting Stock Trust No. 1(11)

     243,081 (12)      *         243,081        51.2   

 

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(1) Includes the following shares of our Class A common stock that each beneficial owner has the right to acquire within sixty (60) days of March 2, 2016:

 

Beneficial Owner

   Shares
(#)
 

Peter V. Sperling

     66,489   

Gregory W. Cappelli

     943,224