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Item 1.01.
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Entry into a Material Definitive Agreement.
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On August 11, 2016, ITT Educational Services, Inc. (the “Company”) entered into a Standard Offer, Agreement and Escrow Instructions for Purchase of Real Estate (the “Purchase Agreement”) with New River Development, LLC (the “Buyer”), pursuant to which, subject to the satisfaction or waiver of certain contingencies, the Company will sell to the Buyer certain real property, consisting of a building totaling approximately 41,700 square feet and the related property located at 670 Carnegie Drive, San Bernardino, California (the “Property”), and the Company will lease back the Property for an initial term of 10 years.
The purchase price, less selling costs, of the Property will be approximately $6.9 million. The Buyer is required to deposit in escrow: (i) $180,000, which the Buyer has deposited as of the date of the filing of this Form 8-K, and (ii) approximately $6.7 million within 45 days after satisfaction or waiver of customary due diligence items and contingencies, which the Buyer has 30 days from August 11, 2016 to complete. The closing is also subject to the Buyer securing financing for a portion of the purchase price. If the Buyer notifies the Company in writing within 30 days from August 11, 2016 that the Buyer has failed to secure the required financing, the Purchase Agreement shall terminate and the Buyer’s deposit shall be returned to it. After satisfaction or waiver of the customary due diligence items and contingencies, the Buyer and the Company will have approximately 45 days to close on the sale of the Property. If the Buyer breaches the Purchase Agreement after the satisfaction or waiver of the customary due diligence items and contingencies, the Company will be entitled to receive the $180,000 held in escrow. The Company and the Buyer have entered into a lease agreement whereby the Company will lease the Property from the Buyer for an initial 10-year term and two, five-year options to extend the term of the lease. The effectiveness of the lease is contingent upon the Buyer and the Company closing on the sale of the Property.
Because the estimated fair value of the Property, less selling costs, exceeds the current carrying value of the Property, the Company does not expect to record an impairment charge if and when this transaction is closed, and the Company does not expect any gain on the sale to be significant. The Company does not expect this transaction to affect its operations of the ITT Technical Institute located on the Property.
Under the terms of the Financing Agreement, dated as of December 4, 2014 (as amended, the “Financing Agreement”), by and among the Company, the subsidiary guarantors party thereto, Cerberus Business Finance, LLC (“Cerberus”), as collateral agent and administrative agent, and the lenders party thereto, the Company may dispose of property under certain conditions so long as the net proceeds of such dispositions are used to make a prepayment on the Loans (as defined in the Financing Agreement), however the subsequent leaseback of the same property is prohibited without a waiver. On August 17, 2016, the Company entered into a Limited Waiver to the Financing Agreement (the “Limited Waiver”) with Cerberus that waives compliance with the provisions of the Financing Agreement solely to the extent necessary to permit the Company’s execution of the Purchase Agreement and consummation of the transactions contemplated by the Purchase Agreement (the “Transactions”), so long as the Company prepays the outstanding principal amount of the Loans in an amount equal to 100% of the Net Cash Proceeds (as defined in the Financing Agreement) received by the Company in connection with the Transactions in accordance with Section 2.05(b)(ii) of the Financing Agreement. The Company expects to make such prepayment in the estimated amount of approximately $6.5 million, plus a Prepayment Premium (as defined in the Financing Agreement) equal to 1% of the prepayment amount as required by the Financing Agreement, if and when the Transactions are closed.
The above summary of the Limited Waiver is qualified in its entirety by the full text of the Limited Waiver, a copy of which is attached hereto as Exhibit 10.1 and incorporated herein by reference.
