change frequently. Compliance with these regulations requires utmost vigilance. Failure to comply can result in the imposition of significant penalties or revocation of Kaplan’s authority to operate in the applicable jurisdiction, each of which could have a material adverse effect on Kaplan’s operating results.
Kaplan International’s operations, institutions and programs in the United States may be subject to state-level regulation and oversight by state regulatory agencies, whose approval or exemption from approval is necessary to allow an institution to operate in the state. These agencies may establish standards for instruction, qualifications of faculty, location and nature of facilities, financial policies and responsibility, and other operational matters. Institutions that seek to admit international students are required to be federally certified and legally authorized to operate in the state in which the institution is physically located in order to be allowed to issue the relevant documentation to permit international students to obtain a visa.
A substantial portion of Kaplan International’s revenue comes from programs that prepare international students to study and travel in English-speaking countries, principally the U.S., the U.K., Australia and Singapore. Kaplan International’s ability to enroll students in these programs is directly dependent on its ability to comply with complex regulatory environments. For example, on June 23, 2016, the U.K. held a referendum in which voters approved a proposal that the U.K. leave the EU, commonly referred to as “Brexit.” The impact on Kaplan International from Brexit will depend, in part, on the outcome of future negotiations regarding the terms of the U.K.’s withdrawal from the EU, possibly including any transition period. The timing of the negotiations and their impact on recruitment of international students is uncertain. The outcome may disrupt the free movement of students and employees. It is possible that EU nationals’ ability to enter the U.K. for long- or short-term study will change or that changes in laws affecting EU nationals could also apply to international students presently covered by the Tier 4 (KI Pathways) or student visitor visa regime (KI English). It is also unclear how international student recruitment agents and prospective international students will view the U.K. as a study destination after the EU exit negotiations and the U.K.’s eventual departure from the EU. If the U.K. exit from the EU and related perceptions of the U.K. as a study destination have a significant negative impact on Kaplan’s ability to recruit international students, Kaplan’s results of operations and cash flows could be materially and adversely impacted.
On January 27, 2017, President Trump signed an executive order barring citizens from Syria, Iraq, Iran, Yemen, Libya, Somalia, and Sudan from entering the U.S. for a certain period of time. In December 2017, the U.S. Supreme Court permitted a modified version of the order to become effective with respect to citizens of Chad, Iran, Libya, Somalia, Syria and Yemen, together with North Korea and certain nationals from Venezuela. This order has been the subject of significant international press interest. Negative perceptions regarding travel to the U.S. could have a significant negative impact on Kaplan’s ability to recruit international students, and Kaplan’s business could be adversely and materially impacted.
In December 2017, the Australian government established a Royal Commission into Misconduct in the Banking Superannuation and Financial Services Industry. The Commission is expected to issue an interim report by September 30, 2018, and a final report by February 2019. This could impact the Kaplan Professional business in Australia as local financial services firms will devote resources and funds to responding to the Commission, diverting resources from training programs and other discretionary spending. The Commission could further make recommendations concerning new laws and regulatory requirements across the affected industries, which would further increase the compliance burden on affected firms and thus impact spending on training.
System Disruptions and Security Threats to the Company’s Information Technology Infrastructure Could Have a Material Adverse Effect on Its Businesses
Kaplan’s reputation and ability to attract and retain students is highly dependent on the performance and reliability of its information technology platforms with respect to its online and campus-based education offerings. Kaplan’s delivery of these programs could be negatively affected due to events beyond its control, including natural disasters and network and telecommunications failures. Any such computer system error or failure could result in a significant outage that materially disrupts Kaplan’s online and on-ground operations and could have a material adverse effect on Kaplan’s business.
The Company’s computer networks may also be vulnerable to unauthorized access, computer hackers, computer viruses and other security threats. Despite the Company’s efforts to prevent security breaches, including unauthorized access to student and patient data, personally identifiable information and information of certain counterparties that share information with the Company, its systems may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or information of certain counterparties that share information with the Company, or cause disruptions or malfunctions in operations. To the extent such vulnerabilities require remediation, such remedial measures could require significant resources and may not be implemented before such vulnerabilities are exploited. As the cybersecurity landscape evolves, we may also find it necessary to make significant further investments to protect data and infrastructure. Any of these events could have a material adverse effect on the Company’s business and results of operations.