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September 13, 2017


Dr. Betty Vandenbosch President/ CEO

Kaplan University

550 West Van Buren Street Suite 700

Chicago , IL 60607

UPS Tracking Number

JZA879640299288088


Re: Preacquisition Review of the Proposed Change in Ownership Application of Kaplan University to be acquired by Purdue NewU, an Ind iana nonprofit public benefit corporation - OPE ID 00458600


Dear President Vandenbosch :


At your request, the Multi -Reg iona l and Foreign Schoo l Participat ion Division ("MRFSPD") of the

U.S. Department of Education ("Department"), Federal Student Aid has conducted a preacquisition re view (" Review") of the proposed Change in Ownersh ip Application of Kaplan University ("KU" or "the Institution" )-OP E ID 00458600. At the current time, KU is owned by Io wa College Acquisition , LLC (" ICA"), which is owned by Kapla n Higher Education, LLC (''KHE").


If consummated, the change in ownership ("CIO") will be accomplished pursuant to the terms of a Contribution and Transfer Agreement ("Transfer Agreement") between KHE, ICA, Purdue Universit y (" Purdue"), and Purdue NewU, Inc. (" NewU" ). NewU is a newly formed Indiana public benefit corporation which will acquire KU and its institutiona l assets and operations from KHE and lCA (the "Transaction") . Purdue is the sole member of NewU. The Transfer Agreement refers to Purdue and NewU collectively as the "Purdue Parties" and to KHE and ICA collectively as

"Con tri butor."


KU and Purdue have requested the Department' s approval of the Institution as a public inst itu tion once it becomes affiliated with Purdue as a result of the CJO.


A preacquisition review is unde11aken prior to a CJO so that the Depai1ment can preliminaiily advise an institution whether the Deparhnent has identified any problems with the institution ' s application or the proposed transaction, and to identify, to the extent feasible , any additional conditions that may be imposed in a Provisional Program Participation Agreement ("PPPA"). In the course of its

Re view, the Department reviewed the electronic application and suppo11ing documentation

submitted by KU on June 19, 2017, as well as additional suppo1iing documentation submitted by Purdue on June 22, 2017. The materials submitted by Purdue include a copy of the Transfer


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Agreement with exhibits (included a copy of the Transition and Operations Support A!:,rreement ("TOSA") with its own exhibits).


This letter sets out the results of the Department's Review of KU 's requested approvals for the CIO and public institution status as result of KU becoming an affiliate of Purdue. As explained below, the Department has preliminari ly concluded that, based on the info1mation and documents provided to date, it does not see any impediment to KU's request for approval of the CIO or its request for approval of public institution status ("Preliminary Dctenn ination" ). Please note however, that formal approvals of the CIO and public institu tion status are contingent on KU's compliance with the requirements of 34 C.F.R. § 600.20(g) and (h), the Departm e nt's review and approval of any submissions required by those regulatory provisions, and any further documentation and infonnation requested by the Departme nt following the CIO , including all documents related to the Transaction and KU's status as a public institution . Some of the items for further review are described below.

This Prelimina ry Determination is intended to provide KU with the Department's current view about the ClO and request for public institution status, but it is not binding on the Department.


  1. CHANGE IN OWNERSHIP AND REQUEST FOR PUBLIC INSTIT UT IO N STATUS


    1. Review of Information Provided to Date


      The Depa rtme nt regulatio ns identify certain covered tra nsactions for an institution that constitu te a change of o wnership which require the institution to apply for and obtain approval from the Department to continue participating in Title IV, HEA programs. These include in stances where an institut ion is sold, is merged with one or more eligible ins titutions, experiences a change in the ownership of the controlling stock, has a transfer of assets that comprise a substantial portion of the educational business of the ins titution , or has a change in status as a for-profit, nonprofit, or pubIic institution. 34 C.F.R. § 600.31(d). To establish eligibility and to continue participation in Title IV, HEA programs, an institution must demonstrate to the Department that, after the change, the institution qualifies to be certified to partic ipa te under 34 C.F.R. Part 668, Subpart B pursuant to 34 C. F.R. § 600.31(a)(3)(ii).


      Under the Transfer Agreement, KU and its institutional assets will be contributed to NewU for $1. However, the Transfer Agreement and the TOSA also provide that the consideration for the transfer of KU to NewU is the execu tion of the TOSA by NewU. See, e.g., Transfer Agreement§ 3.1;

      TOSA at Recital F. Pursuant to the TOSA, the Contributor will provide suppo rt services to Nc wU in various administrative areas, including in the following: marketing; first year student advising;

      admissions s upport services; financial aid admi nistrat io n (student eligi bili ty, aid distribution, and Title IV compliance); international student recruitment; test preparation for standard licensur e or admission tests, etc. See TOSA § 2.4 for the full list of suppor t services to be providcd. 1


      Unde r the TOS A, Nc wU and Contributor arc paid their respective Academic Costs (New U) and

      Support Costs (Con tributor). TOS A Exhibit F at §1(b). The reafter, KU ' s revenue is spli t between


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      1 T he Departme nt reminds Co ntributo r that it must comply with the third party servicer require ments set forth in 34

      C.F.R. § 668.25. In the event that Contributor provides third party services to more than one institution. it must also comply with the third party servicer audit requirements. See 34 C.F.R. § 668.23(c)(2).

      Contribut or and NewU pursuant to a waterfall distribution schedul e appended as Exhibit F to the TOSA. See TOSA §9 (according to the rec itation in the TOSA, the distribution of revenues in order of prio riti es set fo1t h in the waterfall is " to provide financial protectio n and certain financial incentives to New University, while co mpensating Co ntii butor fairly for its original con tribut io n of the Institutional Assets") ("Distribution Waterfall" or " Dist ribution " ).


      For the first five years of the TOSA 30-ycar tenn ("Phase I"), the Distribution Waterfall includes quarterly payments to NewU and Contributor from the NcwU Revenue Account. There are three payments to NewU: unpaid Academic Costs; the NewU Efficiency Payment; and a$ IO millio n

      Prior ity Payment (ann ually for five years). After those payments are made to NewU, three payments are made to Contributor: unpa id Support Costs; the Contributor Efficiency Payment; and the

      Contributor Fee of 12.5 % of actual Revenues for the qua1ter (plus any accrued unpaid Contributor Fees).2 Any remaining funds are then distr ibuted to NewU. See TOSA Exhibit Fat §2(a)-(f).


      During the remaining 25 years (and any renewal tcnn) ("Phase II" ), the revenue is dis tii buted in the same manner (including the 12.5% Contributor Fee), except that the $10 million annual Priority Payment to NewU ceases, and NewU is entitled to a 1ewU Upfront Payment (to the extent of

      available cash) in the amount of I 0% of Remaining Revenue (as that tern, is described in TOSA Exhibit F at §3(b)).3


      The Depa1tment notes that pursuant to Section 2.4 of the Transfer Agreeme nt, except as expressly provided therein, none of the " Purdue Parties" (consist ing of Purdu e Unive rsity and NewU) will be assuming any liabilities of the Contributo r or KU (referred to in the Transfer Agreement as " ED

      Institution" ). The Transfer Agreement also specifically excludes liab ility of the Purdue Partie s for the Contributor 's breach of any Student Enrollment Contract that occurs prior to the Closing (as that term is defined in the Transfer Agreement). Sectio n 2.5 of the Transfer Agreement identifies in a very broad way the liabilities that are retained by the Contributor (i.e., KHE and ICA), including all liabil ities resultin g from the operation of KU prior to the clos ing date. Read together, these sections operate to attempt to relieve the Purdue Parties, including NewU , from any liabili ties arising from KU' s participation as a Title IV institution prior to the Closing date. As set forth below, the Depaiimcnt will not approve the CIO unle ss the Purdue Parties assume responsibility for both pre­ closing and post-closing educational liabilities . T he parties are not restricted in their ability to provide that KH E/ICA indemnify the Purdue Pa1tics for any or all of those liabili ties.

      KU currently participates in Title rv, HEA programs as a proprietary school. In April 2017, the State of Indiana enacted legislation expanding the definition of " Approved postsecondary education institution" to include a " postsecondary S EI affiliated institution." See Indiana Code Ann. 2 l -7- 13- 6(a)(5) and (b)(4). To be designated a "postsecondary SE! affiliated institution ," the institution , inter a/ia, mus t be organized as a public benefit corporation, be controlled by a state educatio na l

      i nstitution , and have its debts and liabiliti es backed by the control ling state inst itution. See Indiana Code Ann. 21-7- l 3-26.5(a) . The recent leg islation also allows a state educational institution to



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      2 T he Con1ributor Fee is based on '·actual Revenues." See TOSA Exhibit Fat 2(f)(Distributio n Waterfall) and TOSA Exhibil A at pa ge 8 (d efinition o f " Revcnues'' ).


      3 T he TOSA also includ es Tcm1ina tion fees and a Buy-Out o ption. See generally TOSA al *14. T he parties have also provided for a revenue-based payment to Contributo r in the event that cwU transfers any of 1he pur chased assets du ring the Te nn of the TOSA. Sec TOSA at * 13.2; TO S /\ Exhibit J (illus tratio n of trans fer me thodolog y).

      become a member of a postsecondary SEI affiliated educational institution that it controls. See Indiana Code Ann. 21-7-10-1, 21-27-10-5. Pursuant to the new legislation , NewU - the prospective owner of KU - has been organi ze d as an Indiana public benefit corporation , Purdue is the sole member of NewU, and Purdue (through its appointment of the NewU board) controls NewU. The legislation further provides that for "purposes of United States Department of Education regulations , a postsecondary SEI affiliated educational institution is subject to the administrative supervision and control of the executive branch by virtue of appointment by the governor of all or a majority of the trustees of a controlling state educational institutio n." Indiana Code Ann. 21-27-10-8. In addition , the controlling institution (here, Purdue) is considered to be a governmental entity equivalent to the state for purposes of the Department's regulations. Indiana Code Ann. 21-27-10-9. On August 11, 2017 , the State oflndiana Higher Education Commission approved the authorization of "Purdue NewU" (by that name and under its official name once selected) as a postsecondary state educational institution ("SEI") affiliated institution controlled by Purdue.


      Based on its preliminary review of the supporting documents submitted by Purdue and the representatio ns by representatives of Purdue and KHE, the Department has concluded that control of NewU /KU will not be retained by any entity or person who controls KHE or ICA.4 Purdue is the sole member of NewU, and the trustees of Purdue appoint the members of the NewU Board. See TOSA § 2.1. This conclusion is material to the Depart ment 's Preliminary Dete1111ination , and will need to be confirmed after the Transaction occurs. The issue of control might be viewed differently if a majo1ity of NewU board trustees have ties to KHE/ ICA, or other affiliates of Kaplan/Graham Holdings.


    2. The Department's Preliminary Determination


      Based on the facts as described above, the Department has not identified any known or present impediment to the CIO whereby KU and its institutional assets will be transfen-ed to NewU pursuant to the tenns of the Transfer Agreement and the TOSA. In addition, the Department has not identified any known or present impediment to Purdue and KU' s request for the Institution to become a public institution by virtue of its affiliation with Purdue. The Department' s determination as to KU' s public status is based upon the Indiana legislation discussed above, and is contingent upon the Indiana Commission of Higher Education's authorization of KU as a postsecondary SEI affiliated institution , and confinnation by the Purdue board of the complete control by Purdue over NewU/ KU. In addition , the Department' s Preliminary Dete1111ination s with regard to the CIO and KU' s public institution status are specifica lly based on the following, which will constitute material conditions for issuance of a PPPA:


      1. The CIO and public institutio n status are approved by all of KU' s federally recognized accrediting agencies.


      2. T he Department will require both Purdue Parties (Purdue a nd NewU) to sign the PPPA.


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        4 T he De partme nt unders tands that many of the academic e mployees of K U will co ntinue under the new owne rs h.ip , and support se rvices unde r the TOSA will be provided by KH E.

      3. NewU /KU has its debts and liabilities backed by Purdue, which constitutes an instrumentality of the State oflndiana for purposes of the Department' s regulations, in accordance with Indiana Code Ann. 21-7-13-26 .S(a) and 21-27- 10-9.


      4. Notw iths tanding any provisions to the contrary in any of the documents relating to the Transaction (including as described above in the Transfer Agreement), the Purdue Parties will assume responsibility for liabilities resulting from the operation of KU as an educational institut ion, whether they are known or unknown , and whether they accrue prior to, or after the closing of the Transaction ("Educational Liabilities"). Educational Liabilities include all liabilities relating to KU's participation in Title IV, HEA programs, as well as all liabilities relating to Student Enrollment Contracts. However, the Purdue Parties' assumption of the Educational Lia bilities does not limit or relieve KHE and ICA from their liability for pre-closing Educational Liabilities .


      5. By the elate that NewU/KU delivers the PPPA to the Department for countersignature, the institution will have been re-named to include "Purdue " in its name. Within 30 days of the PPPA delivery to the Department, all institutional assets, materials , and communications (to the extent that they contain "Kaplan" branding) must be re­ branded to include the name "Purdue."


      6. Within 10 days after the transmission of this pre-acquisition letter, and consistent with the Transaction documents and representations to the Department, Purdue and NewU must affinn by documentation to the Department that Purdu e exerts full control over NewU and its academic operations, including appointment of the members/trustees of NewU's board and continuing oversight by the Purdue board.


      7. Within 10 days after the transmission of this pre-acquisition letter , Purdue shall

        submit a detailed description of the 12.5% Contributor Fee payment to KHE/ICA provided for in the TOSA which demonstrates the plan for ensuring that students will be served first, and that all educational and operational expenses are being covered p1ior to any portion of the Contributor Fee being paid to KHE/ICA.


      8. The TOSA provides that the Contributor Fee accrues from year to year with interest on any unpaid portion (see TOSA Exhibit Fat §2). The Department will not approve the CIO if that provision is in effect, and will require the Contributor Fee to be capped on an annual basis to the extent of available cash during that fiscal year. It will not be allowed to accrue as an unpaid balance.


      9. Following the CIO, Purdue must submit consolidated financial statements to the Department that include NewU/KU.

        OPEID: 00458600

        Page 6 of9


  2. UNINTERRUPTED PARTICIPATION IN THE TITLE IV PROGRAMS PRIOR TO EXECUTION OF THE PROVISIONAL PROGRAM PARTICIPATION

    AGR EEMENT


    1. Requirements within 10 days following the Change of Ownership


      When a change in ownership occurs, the Department may continue the instit ution's participation on a provisional basis if the institut ion submits a " mate1i ally complete application," as described in 34

      C.F.R. § 600.20(g), that is received by the Depa11ment no later than IO business days after the date the change occuned. If a materially complete application is subm itted, the Department may consider offering the Institution a Temporary Provisional Program Participation Agreement ("TPPPA"), pending the Department' s and the Institution's execution of a new PPPA.


      To submit a materially complete application (34 C.F.R. § 600.20(g)(2)), an institution must submit the following5:




      Status

      l

      Complete elec tronic Application for Approval to Participat e in the Federal Student Aid programs;

      E-App Submitted on June 19, 2017. Need to s ubmit Section L (signature page) and any

      suppo11ing documentation that has not been submitt ed.

      2

      Copy of the Institution's state licenses or equivalent that:



      postsecondary education in the state(s) in which it is physically located;

      Must be submitted for all states where the Insti tution will have a physical location.

      3

      Copy of the accrediting agency( ies) approval that:



      Must be submitted from all federally-recognized accrediting agencies that provide accreditation to KU.


      Mus t also submit accrediting agency approval of the redesignation of the main

      location from Davenport, Iowa to Indianapolis, Indiana.

      4

      Audited financial s tatements of the institution's two most

      recently completed fiscal years that are prepared in accordance with the requirements of 34 C.F.R. § 668.23 . Under 34 C.F.R. § 668.23(d), these statements must be prepared on an accrual basis in accordance with generally

      These ha ve been submitted for FY 2015 and 2016.


      In add itio n, financial statements for FY 2017 must

      1. Was in effect on the day before the change in ownership; and

      2. Authorize d the Institution to provide a program of

      1. Was in effect on the day before the change in ownership and granted the Institution accreditation status; and

      2. Includes approval of the non-de!:-,rree p rograms it offers;


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      5 Th e D epartme nt has numbered each of the document reques ts seque ntiall y to facilitate NewU/KU's response.

      OPEID: 00458600

      Page 7 of 9



      accepted accounting principles ("GAAP"), and audited by an ind ependent auditor in accordance with generally

      accepted government auditing standards ("GAGAS"); and

      be submitted by June 30, 2018.

      5

      In accordance with 34 C.F.R. § 600.20(g)(2), a new owner is required to submit audited financia l statements of its two most recently completed fiscal years that are prepared and audited in accordance with the requirements of 34 C.F.R. § 668.23(d), including statements prepared in accordance with GAAP and audited in accordance with GAGAS.

      NewU has not been in existence for two years, nor does it appear that NewU can produce audited financial statements that demonstrate any substantial business experience to date.


      Because NewU/KU will have its debts and liabilities backed by Purdue, this requirement is

      waived.


    2. Continuation of the TPPPA


      In accordance with 34 C.F.R. § 600.20(h)(2)(iii), the TPPPA expires on the last day of the month following the month in which the CIO occuITed. At the Department's discretion, the TPPPA may be extended on a month-to-month basis only if, p1ior to the expiration date, an institution subm its:




      Status

      6

      A "same day" balance sheet showing the financial position ofNewU as of the date of the ownership change, that is

      prepared in accordance with GAAP and audited in accordance with GAGAS;

      Must be submitted.

      7

      Approval of the change in ownership from the state(s) in which the institution is located by the state agency that authorizes the institution to legally provide postsecondary education in that state;

      Must be submitted.


      Documentation of the State of Indiana Commission of Higher Education's approval of the Institution's status as a postsecondary SEI affiliated institution has been received by the Department. Please submit any related approvals

      from the State of Indiana.

      8

      Approval of the change in ownership from the institution ' s

      accrediting agency(ies); and

      Must be submitted.


      In addition, must submit the accrediting agencies' approval of the Institution's public

      institution status.

      9

      lf the Institution is not exempt from the requirement under

      Must be submitted (not exempt).

      34 C.F.R. § 668.14(b)(15), a copy of its Default

      Management Plan.

      OPETD: 00458600

      Page 8 of9


      To the extent the above items have not already been provided, if NewU /KU fails to provide them by the stated expirat io n date of the TPPPA, the TPPPAs will expi re on that date, without further notice.


    3. Additional Documents and InformationRequired for Department's Review


      In addition to the foregoing documents, the NewU/ KU must also submit the following documents and info1mation (no later than the period desc1ibed in 34 C.F.R. § 600.20(h)(2)(iii)) for the Department to complete its review of the CIO and conversion to public institution status:


      10

      A copy of the agreement by which the CIO will be consummated, including any related documents or agreements;

      The executed Transfer Agreement was submitted to the Department on June



      22, 2017; please submit the



      executed TOSA. Submit



      any amendments to those



      agreements which are



      necessary to comply with



      the Department' s



      requirements set forth in



      this letter, and any other



      amendments.



      In addition, submit a copy



      of the closing index for the



      Transaction.

      11

      Copy of any af,rreements between the institution or its new

      owner and any entity that is owned by former employees, the fonner owner, board member of the new owner, or party related to either the new owner or the pre-CIO owner.

      Agreements include, but are not limited to: consulting, employment, leasing, and management services agreements; and

      If agreements other than the TOSA exist, please submit them.

      12

      The letter of public status in accordance with 34 C.F.R. §

      668.171 (c)(B).

      Must be submitted in eZ- Audit system.


      Unless and until the conversion to public institution status is approved by the Department, the parties are reminded that the Institution must continue to report its Title IV revenue percentages ("90/10 percentages") and its gainfu l employment data. The Department's procedures require a proprietary institution converting to another status to report its 90/10 percentages in the first fiscal year following the approval of the conversion. The Department has been advised that the Higher Leaming Commission ("HLC") will not be reviewing the CIO and conversion to public institution status until its February 28, 2018 commission meeting. Because of the timing, KU will submit its 90/10 audit for FYE December 31, 2017 to the Department on or before June 30, 2018. That audit will cover the last fiscal year prior to the HLC commission meeting. If the Department and HLC give final approval to the CIO and the conversion to public institution sta tus, and KU has a passing

      OPETD: 0 0458600

      Page 9 of 9


      90/ l0 audit for FY 2017 , no further 90/10 audits will be required. In reaching its decis io n to relieve KU of further 90/10 reporting if the FY 2017 90/10 audi t passes, the Depa rtment has considered

      KU ' s compliance with 90/10 ove r the last three years (FY 2014 (81.31%), 2015 (78.82%) and 2016 (76.71%)).


    4. Next Steps


Once the CIO takes place, NewU/KU must notify the Department within l O business days. Since KU has alrea dy submitted the electro nic preacquisition applica tion, please send this notificati o n and the other documentati o n required for a materia ll y complete application to Shein Dossa and Shari Mecca at Shein.Dossa @cd.gov and Shari.Mccca@ ed.gov . However , as soon as NewU changes the name of the In sti tution, a n updated applicat io n shou ld be submitted.


You are reminded of the recommendations the Department has provided to all institutions in the Federal Student Aid Handbook. If it has not already done so, KHE/ICA should provide the Purdue Parties with co pies of KU's existing Eligibility and Certification App roval Report (" ECAR"), institutional refund policy , return of Title lY funds policy, any requi red default management plan, program reviews, audited financia l s tatements (for at least the two most recently comp leted fiscal years), and compliance audits.


If you have any questions , please contact Shein Dossa at 215-656-6461 or Shari Mecca at

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646-428-3757.


Michael Frola Division Director


cc: Mitchell E. Daniels Jr., Pres ident - Purdue University

David J. Adams, General Co unsel , SY P, Kaplan Highe r Education and Professiona l Education (email: dadams@ka plan.edu)

Ste ven R. Schult z, Ch ief Legal Cou nsel, Purdue University (email: sclwlt5l @purdue.edu )