Contingencies and Other Commitments

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

Contingencies and Other Commitments

CONTINGENCIES AND OTHER COMMITMENTS

Litigation, Legal and Other Matters.  The Company and its subsidiaries are subject to complaints and administrative proceedings and are defendants in various civil lawsuits that have arisen in the ordinary course of their businesses, including contract disputes; actions alleging negligence, libel, defamation and invasion of privacy; trademark, copyright and patent infringement; violations of employment laws and applicable wage and hour laws; and statutory or common law claims involving current and former students and employees. Although the outcomes of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company’s business, financial condition, results of operations or cash flows. However, based on currently available information, management believes it is reasonably possible that future losses from existing and threatened legal, regulatory and other proceedings in excess of the amounts recorded could reach approximately $15 million.

On September 3, 2015, Kaplan sold to ECA substantially all of the assets of the KHE Campuses. The transaction included the transfer of certain real estate leases that were guaranteed or purportedly guaranteed by Kaplan. ECA is currently in receivership, has terminated all of its higher education operations and has sold, or is in the process of selling or liquidating, its remaining assets (including New England College of Business). Additionally, the receiver has repudiated all of ECA’s real estate leases. Although ECA is required to indemnify Kaplan for any amounts Kaplan must pay due to ECA’s failure to fulfill its obligations under the real estate leases guaranteed by Kaplan, ECA’s current financial condition and the amount of secured and unsecured creditor claims outstanding against ECA make it unlikely that Kaplan will recover from ECA. In the second half of 2018, the Company recorded an estimated $17.5 million in losses on guarantor lease obligations in connection with this transaction in other non-operating expense. The Company recorded an additional estimated $1.1 million in non-operating expense in 2019, consisting of legal fees and lease costs. The Company continues to monitor the status of these obligations. Kaplan also may be liable to the current owners of KU and the KHE schools, respectively, related to the pre-sale conduct of the schools. Additionally, the pre-sale conduct of the schools could be the subject of future compliance reviews or lawsuits that could result in monetary liabilities or fines or other sanctions.

Her Majesty’s Revenue and Customs (HMRC), a department of the UK government responsible for the collection of taxes, has raised assessments against the Kaplan U.K. Pathways business for Value Added Tax (VAT) relating to 2017 and earlier years, which Kaplan has paid. In September 2017, in a case captioned Kaplan International Colleges UK Limited v. The Commissioners for Her Majesty’s Revenue and Customs, Kaplan challenged these assessments. The Company believes it has met all requirements under U.K. VAT law for a cost sharing group VAT exemption to apply and is entitled to recover the £18.6 million related to the assessments and subsequent payments that have been paid through December 31, 2019. Following a hearing held in January 2019 before the First Tier Tax Tribunal, all issues related to law in the case were referred to the Court of Justice of the European Union. In the third quarter of 2019, the Company recorded a full provision of £17.3 million against a receivable to expense due to developments in the case. Of this amount, £14.1 million relates to years 2014 to 2018. If the

Company ultimately prevails in this case, the provision will be reversed and a pre-tax credit will be recorded as a reduction to expense in the Company’s Consolidated Statement of Operations. The result of the Court of Justice case is expected by the fall of 2020. Depending on the judgment of the Court of Justice, the litigation may conclude or some issues may be returned to the UK First Tier Tribunal.

In March 2018, HMRC issued new VAT guidance indicating a change of policy in relation to certain aspects of a cost sharing exemption that could affect the U.K. Pathways business adversely if this guidance were to become law. As of December 31, 2019, this guidance had not yet been incorporated into U.K. law.

In a separate matter, a legal case was determined by the U.K. Supreme Court in 2019. This case could have reversed or amended the law and guidance permitting private providers to qualify as a “college of a university” and therefore receive the benefit of an exemption from charging its students VAT on tuition fees. However, the Supreme Court decided the case in the college’s favor. The result was more favorable to private providers working in collaboration with a university than the opposing view. The Supreme Court emphasized five key tests for a private provider to satisfy so that it could exempt its services as a “college of a university” even if it did not have a constitutional link to the university. Satisfying these tests would generally show that the college had a sufficiently close relationship with the university and its activities were sufficiently integrated with the university to constitute a “college of a university”. Although the new tests have now been incorporated into official HMRC guidance, it is not yet clear how HMRC will apply the Supreme Court judgment and the five key tests in practice.

On January 10, 2020, Kaplan Bournemouth Limited received an improvement notice from Bournemouth, Christchurch and Poole Council, a local government authority, under section 11 of the U.K. Housing Act 2004 in relation to its leased student residence in Bournemouth, U.K. This notice follows the Council’s assessment that a category 1 fire hazard exists at the property and requires certain remedial work to be undertaken at the property within a specified timetable. This work comprises a number of items, including the removal of aluminum composite material (ACM) cladding and high pressure laminate (HPL) cladding from the facade of the building. Kaplan Bournemouth Limited appealed the notice on January 31, 2020, to contest certain remedial requirements, although it will not contest the requirement for the removal of the ACM and HPL cladding. If Kaplan is not successful in its appeal, additional substantial work may be required in connection with the building.

Other Commitments. The Company’s broadcast subsidiaries are parties to certain agreements that commit them to purchase programming to be produced in future years. At December 31, 2019, such commitments amounted to approximately $28.8 million. If such programs are not produced, the Company’s commitment would expire without obligation.