Pursuant to the TOSA, Kaplan is not entitled to receive any reimbursement of costs incurred in providing support functions, or any fee, unless and until the new university has first covered all of its operating costs. In addition, during each of the new university’s first five years, prior to any payment to Kaplan, the new university is entitled to a priority payment of $10 million per year beyond costs, which will be paid out of the new university’s revenue. To the extent the new university’s revenue is insufficient to pay the $10 million per year priority payment, Kaplan is required to advance an amount to the new university to cover such insufficiency. In addition, if the new university achieves cost savings in its budgeted operating costs, then the new university may be entitled to a payment equal to 20 percent of such savings (Efficiency Payment). To the extent that there are sufficient revenues to pay the Efficiency Payment, pay the priority payment and to reimburse the new university for its direct expenses, Kaplan will receive reimbursement for Kaplan’s costs of providing the support activities in addition to a fee equal to 12.5 percent of the new university’s revenue.
The TOSA has a 30-year initial term, which will automatically renew for five-year periods unless terminated. After the sixth year, the new university has the right to terminate the agreement upon payment of a termination fee equal to 1.25 times the new university’s revenue for the preceding 12-month period (Buy-out Fee), which payment would be made pursuant to a 10-year note, and at the new university’s election, it may receive for no additional consideration certain assets used by Kaplan to provide the support activities pursuant to the TOSA. At the end of the 30-year term, if the new university does not renew the TOSA, the new university would be obligated to make a final payment of six times the fees paid or payable during the preceding 12-month period, which payment would be made pursuant to a 10-year note, and at the new university’s election, it may receive for no additional consideration certain assets used by Kaplan to provide the support activities pursuant to the TOSA.
Either party may terminate the TOSA at any time if the new university generates (i) $25 million in cash operating losses for three consecutive years or (ii) aggregate cash operating losses greater than $75 million at any point during the initial term. Operating loss is defined as the amount of revenue the new university generates minus the sum of (1) the new university’s and Kaplan’s respective costs in performing academic and support functions and (2) the $10 million priority payment to the new university in each of the first five years. Upon termination for any reason, the new university would retain the assets that Kaplan contributed pursuant to the Transfer Agreement. Each party also has certain termination rights in connection with a material default or material breach of the TOSA by the other party.
Under the agreement, Kaplan will indemnify Purdue for pre-closing liabilities of KU. The terms of the TOSA, including the fee structure, may be changed by agreement prior to closing.
The proposed transfer of KU is subject to various closing conditions, including, among others, regulatory approvals from the U.S. Department of Education (ED), the Indiana Commission for Higher Education (ICHE) and the Higher Learning Commission (HLC), which is the regional accreditor approved by the U.S. Secretary of Education 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 and peer 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, the details of which remain subject to change, on which its ultimate approval relies.The parties expect to be able to comply with all required conditions, but this may result in changes to the TOSA, including changes to the fee structure. The parties anticipate approval of this transaction by the end of the first quarter of 2018; however, there can be no assurance that the transaction will be consummated on the terms described above or at all, or that the required approvals will be obtained.
If the proposed transfer of KU is consummated, Kaplan will no longer own or operate KU or any other institution participating in student financial aid programs that have been created under Title IV of the U.S. Federal Higher Education Act of 1965, as amended (Higher Education Act). Consequently, Kaplan would no longer be responsible for operating KU. However, pursuant to the TOSA, Kaplan would be performing functions that fall within the ED definition of a third-party servicer and would, therefore, assume certain regulatory responsibilities that require approval by the ED. The ED requires that contracts between institutions and third-party servicers include agreements by the third-party servicer to: (1) comply with all statutory and regulatory provisions applicable to Title IV of the Higher Education Act; (2) refer to the ED Office of the Inspector General for investigation any information indicating reasonable cause to believe the institution might have engaged in fraud or other criminal misconduct in connection with the administration of Title IV; (3) be jointly and severally liable with the institution to the Secretary of the ED for any violation by the servicer of a statutory or regulatory provision applicable to Title IV; (4) confirm student eligibility prior to disbursement and calculate and return unearned Title IV funds if disbursing funds; and (5) return records and funds to the institution upon terminating the contract or ceasing to provide services. The third- party servicer arrangement between Kaplan and the new university would also be subject to information security requirements established by the Federal Trade Commission as well as all aspects of the Family Educational Rights and Privacy Act. As a third-party servicer, Kaplan may be required to undergo an annual compliance audit of its