Item 1.01. Entry into a Material Definitive Agreement.
As previously reported, on August 1, 2020, Zovio Inc (“Company”) and its wholly owned subsidiary, Ashford University, LLC, a California limited liability company (“AU LLC”), entered into a definitive Asset Purchase and Sale Agreement (the “Purchase Agreement”), by and among the Company, AU LLC, the Arizona Board of Regents, a body corporate, for and on behalf of the University of Arizona (the “University of Arizona”), and the University of Arizona Global Campus, a newly formed Arizona nonprofit corporation (“University of Arizona Global Campus”), pursuant to which the Company and AU LLC would sell Ashford University, a regionally-accredited, online university (the “University”), to University of Arizona Global Campus (the “Sale”).
In connection with the closing of the Sale (the “Closing”), the Company and University of Arizona Global Campus entered into a long-term strategic services agreement (the “Strategic Services Agreement”) pursuant to which the Company will provide recruiting, financial aid, counseling, institutional support, information technology, and academic support services to University of Arizona Global Campus. The Strategic Services Agreement has an initial term through June 30, 2036, subject to renewal options, although University of Arizona Global Campus has the right to terminate the Strategic Services Agreement after its fiscal year ending June 30, 2028 subject to the payment of a termination fee equal to one-hundred (100%) of the services fees paid to the Company in the trailing twelve (12) month period (payable half in cash and half in an unsecured note).
In return for providing services under the Strategic Services Agreement, University of Arizona Global Campus, after covering its direct costs of operations (which may not be increased by more than 2% per year), will pay to the Company services fees equal to the Company’s direct costs to provide the services plus an additional amount equal to 19.5% of University of Arizona Global Campus’s tuition and fees revenue. If, following its fiscal year ending June 30, 2028, University of Arizona Global Campus’s tuition and fees revenue is $440.0 million or less, then the Company’s revenue share percentage is subject to decrease on a sliding scale to between 18.1% and 15.5%, subject to increase back up to 19.5% if, in any subsequent fiscal year, University of Arizona Global Campus’s tuition and fees revenue again exceeds $440.0 million. In addition, the parties to the Strategic Services Agreement have agreed on certain minimum profit levels to be achieved by University of Arizona Global Campus after payment of the Company’s services fees of $0 for the period ending June 30, 2021, $0 for University of Arizona Global Campus’ fiscal year ending June 30, 2022, $12.5 million for the fiscal year ending June 30, 2023, $25.0 million for the fiscal years ending June 30, 2024, 2025 and 2026, and $10.0 million for each fiscal year thereafter through the remainder of the initial term; subject to certain limitations, the Company is required to adjust its fees in any year to the extent necessary for University of Arizona Global Campus to achieve such minimum levels. In addition, in accordance with the conditions of the WSCUC approval, the Strategic Services Agreement incorporates identified key performance indicators, all as mutually agreed upon the parties.
After the University of Arizona Global Campus fiscal year ending June 30, 2028, either party may terminate the Strategic Services Agreement if University of Arizona Global Campus achieves tuition and fees revenue of $400.0 million or less. Each party also has certain termination rights in connection with a material breach of the Strategic Services Agreement by the other party and upon certain other defined events.
On December 1, 2020, the parties to the Purchase Agreement entered into that certain Amendment No. 1 to the Purchase Agreement (“Amendment”) pursuant to which, among other things, the University of Arizona and University of Arizona Global Campus waived the closing condition regarding issuance of a pre-acquisition review notice by the U.S. Department of Education, the parties waived the closing condition regarding Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”) filings because the parties determined no HSR Act filings were required, and the parties agreed that the underlying cash collateral (“Cash Collateral”) on the surety bonds posted by the Company that are no longer required in connection with the operation of the University by the University of Arizona Global Campus would be returned to the Company. Under the terms of the Purchase Agreement, as amended, the Closing was subject to customary closing conditions for transactions in this sector, including the approval of the change in ownership of the University by the WASC Senior College and University Commission, the University’s institutional accrediting body (“WSCUC”). As previously disclosed, on November 12, 2020, WSCUC notified the Company and University of Arizona Global Campus that it had approved the change of control application filed to complete the Sale (subject to the satisfaction of various post-closing conditions). As a result, on December 1, 2020, the parties consummated the Sale, and University of Arizona Global Campus now owns and operates the University in affiliation with the University of Arizona, with a focus on expanding access to education for non-traditional adult learners.
The foregoing is a summary of the terms of the Strategic Services Agreement and the Amendment. Such summary does not purport to include all of the terms thereof and is subject to, and qualified in its entirety by, the full text of the Strategic Services Agreement and the Amendment, copies of which are filed herewith as Exhibits 10.1 and 10.2, respectively.