the ED, the Indiana Commission for Higher Education (ICHE) and HLC, which is the regional accreditor of both Purdue and KU, as well as certain other state educational agencies and accreditors of programs. ICHE approved the transaction on August 10, 2017, and confirmed that the new university will be considered by the state of Indiana to be a public postsecondary institution. HLC has indicated that it will review the application at its board meeting in late February 2018 after a full staff review. The parties also submitted a pre-acquisition application to the ED seeking approval for the change of control of KU. On September 13, 2017, the ED responded to the pre-acquisition application stating that as of such date it did not see any impediment to approval of the transaction subject to certain conditions on which its ultimate approval relies.
There can be no assurances that these regulatory approvals will be obtained on the currently contemplated timeline or at all. In addition, as a condition to granting these regulatory approvals, a regulatory authority may require changes to the agreement pursuant to which Kaplan will provide post-closing support services, and these changes may negatively impact Kaplan’s financial condition and results of operations. A material delay in obtaining such approvals may create uncertainty or otherwise have negative consequences, including adverse changes in our relationships with our students, vendors and faculty; adverse impacts on employee recruiting and retention efforts; and diversion of management’s attention and internal resources from ongoing business, any of which may materially and adversely affect our financial condition and results of operations. In addition, during the pendency of the transaction, Kaplan will be required to operate its business in the ordinary course of business consistent with past practice and will be restricted from taking certain actions with respect to its business. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied. Whether or not the proposed transfer to Purdue is consummated, while it is pending, Kaplan will continue to incur costs, fees, expenses and charges related to the proposed transfer of KU. Moreover, if the proposed transfer of KU is consummated, Kaplan may not be able to achieve the expected benefits of the proposed transaction and may be required to advance amounts to the new university, including any priority payment to the new university during the first five years following closing.
If the Proposed Transfer of Kaplan University Is Consummated, Kaplan Would Face Risks as a Third-Party Service Provider to a New University
If the proposed transfer of KU occurs and Kaplan acts as a third-party servicer to a new university, Kaplan will face risks associated with the operation of the new university, including adverse effects on Kaplan’s business and operations from a reduction or loss in Kaplan’s revenues under its service agreement if the new university loses or has limits placed on its Title IV eligibility, accreditation or state licensure or the new university is subject to fines, repayment obligations or other adverse actions due to non-compliance by the new university or Kaplan with Title IV, accreditor, or state agency requirements; the imposition on Kaplan of fines or repayment obligations to the ED or the termination or limitation on Kaplan’s eligibility to provide services to the new university if Kaplan fails to comply with statutory or regulatory requirements applicable to service providers; liability under the service agreement for non-compliance with federal, state or accreditation requirements arising from conduct by Kaplan; and liability for non-compliance with Title IV or other federal or state requirements occurring prior to the closing of the proposed transfer. In addition, Kaplan will face risks related to its business and operations in the event of weak student enrollment and other factors.
If the proposed transfer of KU does not occur, Kaplan will continue to face risks associated with the operations of KU. These risks include those risks noted below.
Failure to Comply With Statutory and Regulatory Requirements Could Result in Loss of Access to U.S. Federal Student Loans and Grants Under Title IV, a Requirement to Pay Fines or Monetary Liabilities or Other Sanctions
To maintain Title IV eligibility, KU must comply with the extensive statutory and regulatory requirements of the Higher Education Act and other laws and accrediting standards relating to its financial aid management, educational programs, financial strength, facilities, recruiting practices, representations made by the school and various other matters. Failure to comply with these requirements could result in the loss or limitation of the eligibility of KU to participate in Title IV programs; a requirement to pay fines or to repay Title IV program funds; a denial or refusal by the ED to consider a school’s application for renewal of its certification to participate in the Title IV programs or for approval to add a new campus or educational program; a requirement to submit a letter of credit; the placement of the institution on the heightened cash-monitoring or reimbursement method of payment; the placement of the institution on provisional certification; the imposition of civil or criminal penalties; or other sanctions. On December 17, 2015, KU received notice from the ED that it had been placed on provisional certification status until September 30, 2018. During the period of provisional certification, KU must obtain prior ED approval to open a new location, add an educational program, acquire another school or make any other significant change. Provisional certification status carries fewer due process protections than full certification. As a result, the ED may withdraw an institution’s provisional certification more easily than if it is fully certified. Provisional certification does not otherwise limit access to Title IV program funds by students attending the institution.